Theory of Concession

EN BANC

[G.R. No. L-23145. November 29, 1968.]

TESTATE ESTATE OF IDONAH SLADE PERKINS, deceased. RENATO D. TAYAG,

ancillary administrator-appellee, v. BENGUET CONSOLIDATED, INC., Oppositor-

Appellant.

Cirilo F. Asperillo, Jr., for ancillary administrator-appellee.

Ross, Salcedo, Del Rosario, Bito & Misa for Oppositor-Appellant.

SYLLABUS

1. REMEDIAL LAW; SPECIAL PROCEEDINGS; SETTLEMENT OF ESTATE; WHEN

ANCILLARY ADMINISTRATION IS PROPER. — The ancillary administration is proper,

whenever a person dies, leaving in a country other than that of his last domicile,

property to be administered in the nature of assets of the deceased liable for his

individual debts or to be distributed among his heirs (Johannes v. Harvey, 43 Phil.

175). Ancillary administration is necessary or the reason for such administration is

because a grant of administration does not ex proprio vigore have any effect beyond

the limits of the country in which it is granted. Hence, an administrator appointed in a

foreign state has no authority in the Philippines.

2. ID.; ID.; ID.; SCOPE OF POWER AND AUTHORITY OF AN ANCILLARY

ADMINISTRATOR. — No one could dispute the power of an ancillary administrator to

gain control and possession of all assets of the decedent within the jurisdiction of the

Philippines. Such a power is inherent in his duty to settle her estate and satisfy the

claims of local creditors (Rule 84, Sec. 3, Rules of Court. Cf Pavia v. De la Rosa, 8

Phil. 70; Liwanag v. Reyes, L-19159, Sept. 29, 1964; Ignacio v. Elchico, L-18937, May

16, 1967; etc.). It is a general rule universally recognized that administration, whether

principal or ancillary, certainly extends to the assets of a decedent found within the

state or country where it was granted, the corollary being "that an administrator

appointed in one state or country has no power over property in another state or

country" (Leon and Ghezzi v. Manufacturers Life Ins. Co., 90 Phil. 459).

3. ID.; ID.; ID.; ID.; CASE AT BAR. — Since, in the case at bar, there is a refusal,

persistently adhered to by the domiciliary administrator in New York, to deliver the

shares of stocks of appellant corporation owned by the decedent to the ancillary

administrator in the Philippines, there was nothing unreasonable or arbitrary in

considering them as lost and requiring the appellant to issue new certificates in lieu

thereof. Thereby, the task incumbent under the law on the ancillary administrator could

be discharged and his responsibility fulfilled. Any other view would result in the

compliance to a valid judicial order being made to depend on the uncontrolled

discretion of a party or entity.

4. CORPORATION LAW; CORPORATIONS; CONCEPT AND NATURE. — A

corporation is an artificial being created by operation of law (Sec. 2, Act No. 1459). A

corporation as known to Philippine jurisprudence is a creature without any existence

until it has received the imprimatur of the state acting according to law. It is logically

inconceivable therefore that it will have rights and privileges of a higher priority than

that of its creator. More than that, it cannot legitimately refuse to yield obedience to

acts of its state organs, certainly not excluding the judiciary, whenever called upon to

do so. A corporation is not in fact and in reality a person, but the law treats it as though

it were a person by process of fiction, or by regarding it as an artificial person distinct

and separate from its individual stockholders (1 Fletcher, Cyclopedia Corporations, pp.

19-20)

D E C I S I O N

FERNANDO, J.:

Confronted by an obstinate and adamant refusal of the domiciliary administrator, the

County Trust Company of New York, United States of America, of the estate of the

deceased Idonah Slade Perkins, who died in New York City on March 27, 1960, to

surrender to the ancillary administrator in the Philippines the stock certificates owned

by her in a Philippine corporation, Benguet Consolidated, Inc., to satisfy the legitimate

claims of local creditors, the lower court, then presided by the Honorable Arsenio

Santos, now retired, issued on May 18, 1964, an order of this tenor: "After considering

the motion of the ancillary administrator, dated February 11, 1964, as well as the

opposition filed by the Benguet Consolidated, Inc., the Court hereby (1) considers as

lost for all purposes in connection with the administration and liquidation of the

Philippine estate of Idonah Slade Perkins the stock certificates covering the 33,002

shares of stock standing in her name in the books of the Benguet Consolidated, Inc.,

(2) orders said certificates cancelled, and (3) directs said corporation to issue new

certificates in lieu thereof, the same to be delivered by said corporation to either the

incumbent ancillary administrator or to the Probate Division of this Court." 1

From such an order, an appeal was taken to this Court not by the domiciliary

administrator, the County Trust Company of New York, but by the Philippine

corporation, the Benguet Consolidated, Inc. The appeal cannot possibly prosper. The

order challenged represents a response and expresses a policy, to paraphrase

Frankfurter, arising out of a specific problem, addressed to the attainment of specific

ends by the use of specific remedies, with full and ample support from legal doctrines

of weight and significance.

The facts will explain why. As set forth in the brief of appellant Benguet Consolidated,

Inc., Idonah Slade Perkins, who died on March 27, 1960 in New York City, left among

others, two stock certificates covering 33,002 shares of appellant, the certificates being

in the possession of the County Trust Company of New York, which as noted, is the

domiciliary administrator of the estate of the deceased 2 Then came this portion of the

appellant’s brief: "On August 12, 1960, Prospero Sanidad instituted ancillary

administration proceedings in the Court of First Instance of Manila; Lazaro A. Marquez

was appointed ancillary administrator; and on January 22, 1963, he was substituted by

the appellee Renato D. Tayag. A dispute arose between the domiciliary administrator

in New York and the ancillary administrator in the Philippines as to which of them was

entitled to the possession of the stock certificates in question. On January 27, 1964,

the Court of First Instance of Manila ordered the domiciliary administrator, County Trust

Company, to `produce and deposit’ them with the ancillary administrator or with the

Clerk of Court. The domiciliary administrator did not comply with the order, and on

February 11, 1964, the ancillary administrator petitioned the court to "issue an order

declaring the certificate or certificates of stocks covering the 33,002 shares issued in

the name of Idonah Slade Perkins by Benguet Consolidated, Inc. be declared [or]

considered as lost." 3

It is to be noted further that appellant Benguet Consolidated, Inc. admits that "it is

immaterial" as far as it is concerned as to "who is entitled to the possession of the

stock certificates in question; appellant opposed the petition of the ancillary

administrator because the said stock certificates are in existence, they are today in the

possession of the domiciliary administrator, the County Trust Company, in New York,

U.S.A.. . . ." 4

It is its view, therefore, that under the circumstances, the stock certificates cannot be

declared or considered as lost. Moreover, it would allege that there was a failure to

observe certain requirements of its by-laws before new stock certificates could be

issued. Hence, its appeal.

As was made clear at the outset of this opinion, the appeal lacks merit. The challenged

order constitutes an emphatic affirmation of judicial authority sought to be emasculated

by the willful conduct of the domiciliary administrator in refusing to accord obedience to

a court decree. How, then, can this order be stigmatized as illegal?

As is true of many problems confronting the judiciary, such a response was called for

by the realities of the situation. What cannot be ignored is that conduct bordering on

willful defiance, if it had not actually reached it, cannot without undue loss of judicial

prestige, be condoned or tolerated. For the law is not so lacking in flexibility and

resourcefulness as to preclude such a solution, the more so as deeper reflection would

make clear its being buttressed by indisputable principles and supported by the

strongest policy considerations.

It can truly be said then that the result arrived at upheld and vindicated the honor of the

judiciary no less than that of the country. Through this challenged order, there is thus

dispelled the atmosphere of contingent frustration brought about by the persistence of

the domiciliary administrator to hold on to the stock certificates after it had, as admitted,

voluntarily submitted itself to the jurisdiction of the lower court by entering its

appearance through counsel on June 27, 1963, and filing a petition for relief from a

previous order of March 15, 1963. Thus did the lower court, in the order now on

appeal, impart vitality and effectiveness to what was decreed. For without it, what it had

been decided would be set at naught and nullified. Unless such a blatant disregard by

the domiciliary administrator, with residence abroad, of what was previously ordained

by a court order could be thus remedied, it would have entailed, insofar as this matter

was concerned, not a partial but a well-nigh complete paralysis of judicial authority.

1. Appellant Benguet Consolidated, Inc. did not dispute the power of the appellee

ancillary administrator to gain control and possession of all assets of the decedent

within the jurisdiction of the Philippines. Nor could it. Such a power is inherent in his

duty to settle her estate and satisfy the claims of local creditors. 5 As Justice Tuason

speaking for this Court made clear, it is a "general rule universally recognized" that

administration, whether principal or ancillary, certainly "extends to the assets of a

decedent found within the state or country where it was granted," the corollary being

"that an administrator appointed in one state or country has no power over property in

another state or country." 6

It is to be noted that the scope of the power of the ancillary administrator was, in an

earlier case, set forth by Justice Malcolm. Thus: "It is often necessary to have more

than one administration of an estate. When a person dies intestate owning property in

the country of his domicile as well as in a foreign country, administration is had in both

countries. That which is granted in the jurisdiction of decedent’s last domicile is termed

the principal administration, while any other administration is termed the ancillary

administration. The reason for the latter is because a grant of administration does not

ex proprio vigore have any effect beyond the limits of the country in which it is granted.

Hence, an administrator appointed in a foreign state has no authority in the

[Philippines]. The ancillary administration is proper, whenever a person dies, leaving in

a country other than that of his last domicile, property to be administered in the nature

of assets of the deceased liable for his individual debts or to be distributed among his

heirs." 7

It would follow then that the authority of the probate court to require that ancillary

administrator’s right to "the stock certificates covering the 33,002 shares .. standing in

her name in the books of [appellant] Benguet Consolidated, Inc.." be respected is

equally beyond question. For appellant is a Philippine corporation owing full allegiance

and subject to the unrestricted jurisdiction of local courts. Its shares of stock cannot

therefore be considered in any wise as immune from lawful court orders.

Our holding in Wells Fargo Bank and Union v. Collector of Internal Revenue 8 finds

application. "In the instant case, the actual situs of the shares of stock is in the

Philippines, the corporation being domiciled [here]." To the force of the above

undeniable proposition, not even appellant is insensible. It does not dispute it. Nor

could it successfully do so even if it were so minded.

2. In the face of such incontrovertible doctrines that argue in a rather conclusive

fashion for the legality of the challenged order, how does appellant Benguet

Consolidated, Inc. propose to carry the extremely heavy burden of persuasion of

precisely demonstrating the contrary? It would assign as the basic error allegedly

committed by the lower court its "considering as lost the stock certificates covering

33,002 shares of Benguet belonging to the deceased Idonah Slade Perkins, . . ." 9

More specifically, appellant would stress that the "lower court could not `consider as

lost’ the stock certificates in question when, as a matter of fact, his Honor the trial

Judge knew, and does know, and it is admitted by the appellee, that the said stock

certificates are in existence and are today in the possession of the domiciliary

administrator in New York." 10

There may be an element of fiction in the above view of the lower court. That certainly

does not suffice to call for the reversal of the appealed order. Since there is a refusal,

persistently adhered to by the domiciliary administrator in New York, to deliver the

shares of stocks of appellant corporation owned by the decedent to the ancillary

administrator in the Philippines, there was nothing unreasonable or arbitrary in

considering them as lost and requiring the appellant to issue new certificates in lieu

thereof. Thereby, the task incumbent under the law on the ancillary administrator could

be discharged and his responsibility fulfilled.

Any other view would result in the compliance to a valid judicial order being made to

depend on the uncontrolled discretion of the party or entity, in this case domiciled

abroad, which thus far has shown the utmost persistence in refusing to yield

obedience. Certainly, appellant would not be heard to contend in all seriousness that a

judicial decree could be treated as a mere scrap of paper, the court issuing it being

powerless to remedy its flagrant disregard.

It may be admitted of course that such alleged loss as found by the lower court did not

correspond exactly with the facts. To be more blunt, the quality of truth may be lacking

in such a conclusion arrived at. It is to be remembered however, again to borrow from

Frankfurter, "that fictions which the law may rely upon in the pursuit of legitimate ends

have played an important part in its development." 11

Speaking of the common law in its earlier period, Cardozo could state that fictions

"were devices to advance the ends of justice, [even if] clumsy and at times offensive."

12 Some of them have persisted even to the present, that eminent jurist, noting "the

quasi contract, the adopted child, the constructive trust, all of flourishing vitality, to

attest the empire of `as if’ today." 13 He likewise noted "a class of fictions of another

order, the fiction which is a working tool of thought, but which at times hides itself from

view till reflection and analysis have brought it to the light." 14

What cannot be disputed, therefore, is the at times indispensable role that fictions as

such played in the law. There should be then on the part of the appellant a further

refinement in the catholicity of its condemnation of such judicial technique. If ever an

occasion did call for the employment of a legal fiction to put an end to the anomalous

situation of a valid judicial order being disregarded with apparent impunity, this is it.

What is thus most obvious is that this particular alleged error does not carry

persuasion.

3. Appellant Benguet Consolidated, Inc. would seek to bolster the above contention by

its invoking one of the provisions of its by-laws which would set forth the procedure to

be followed in case of a lost, stolen or destroyed stock certificate; it would stress that in

the event of a contest or the pendency of an action regarding ownership of such

certificate or certificates of stock allegedly lost, stolen or destroyed, the issuance of a

new certificate or certificates would await the "final decision by [a] court regarding the

ownership [thereof]." 15

Such reliance is misplaced. In the first place, there is no such occasion to apply such a

by-law. It is admitted that the foreign domiciliary administrator did not appeal from the

order now in question. Moreover, there is likewise the express admission of appellant

that as far as it is concerned, "it is immaterial . . . who is entitled to the possession of

the stock certificates . . ." Even if such were not the case, it would be a legal absurdity

to impart to such a provision conclusiveness and finality. Assuming that a contrariety

exists between the above by-law and the command of a court decree, the latter is to be

followed.

It is understandable, as Cardozo pointed out, that the Constitution overrides a statute,

to which, however, the judiciary must yield deference, when appropriately invoked and

deemed applicable. It would be most highly unorthodox, however, if a corporate by-law

would be accorded such a high estate in the jural order that a court must not only take

note of it but yield to its alleged controlling force.

The fear of appellant of a contingent liability with which it could be saddled unless the

appealed order be set aside for its inconsistency with one of its by-laws does not

impress us. Its obedience to a lawful court order certainly constitutes a valid defense,

assuming that such apprehension of a possible court action against it could possibly

materialize. Thus far, nothing in the circumstances as they have developed gives

substance to such a fear. Gossamer possibilities of a future prejudice to appellant do

not suffice to nullify the lawful exercise of judicial authority.

4. What is more the view adopted by appellant Benguet Consolidated, Inc. is fraught

with implications at war with the basic postulates of corporate theory.

We start with the undeniable premise that, "a corporation is an artificial being created

by operation of law . . ." 16 It owes its life to the state, its birth being purely dependent

on its will. As Berle so aptly stated: "Classically, a corporation was conceived as an

artificial person, owing its existence through creation by a sovereign power. 17 As a

matter of fact, the statutory language employed owes much to Chief Justice Marshall,

who in the Dartmouth College decision, defined a corporation precisely as "an artificial

being invisible, intangible, and existing only in contemplation of law." 18

The well-known authority Fletcher could summarize the matter thus: "A corporation is

not in fact and in reality a person, but the law treats it as though it were a person by

process of fiction, or by regarding it as an artificial person distinct and separate from its

individual stockholders.. It owes its existence to law. It is an artificial person created by

law for certain specific purposes, the extent of whose existence, powers and liberties is

fixed by its charter." 19 Dean Pound’s terse summary, a juristic person, resulting from

an association of human beings granted legal personality by the state, puts the matter

neatly. 20

There is thus a rejection of Gierke’s genosssenchaft theory, the basic theme of which

to quote from Friedmann, "is the reality of the group as a social and legal entity,

independent of state recognition and concession." 21 A corporation as known to

Philippine jurisprudence is a creature without any existence until it has received the

imprimatur of the state acting according to law. It is logically inconceivable therefore

that it will have rights and privileges of a higher priority than that of its creator. More

than that, it cannot legitimately refuse to yield obedience to acts of its state organs,

certainly not excluding the judiciary, whenever called upon to do so.

As a matter of fact, a corporation once it comes into being, following American law still

of persuasive authority in our jurisdiction, comes more often within the ken of the

judiciary than the other two coordinate branches. It institutes the appropriate Court

Action to enforce its rights. Correlatively, it is not immune from judicial control in those

instances, where a duty under the law as ascertained in an appropriate legal

proceeding is cast upon it.

To assert that it can choose which court order to follow and which to disregard is to

confer upon it not autonomy which may be conceded but license which cannot be

tolerated. It is to argue that it may, when so minded, overrule the state, the source of its

very existence; it is to contend that what any of its governmental organs may lawfully

require could be ignored at will. So extravagant a claim cannot possibly merit approval.

5. One last point. In Viloria v. Administrator of Veterans Affairs, 22 it was shown that in

a guardianship proceeding then pending in a lower court, the United States Veterans

Administration filed a motion for the refund of a certain sum of money paid to the minor

under guardianship, alleging that the lower court had previously granted its petition to

consider the deceased father as not entitled to guerilla benefits according to a

determination arrived at by its main office in the United States. The motion was denied.

In seeking a reconsideration of such order, the Administrator relied on an American

federal statute making his decisions "final and conclusive on all questions of law or

fact" precluding any other American official to examine the matter anew, "except a

judge or judges of the United States court." 23 Reconsideration was denied, and the

Administrator appealed.

In an opinion by Justice J.B.L. Reyes, we sustained the lower court. Thus: "We are of

the opinion that the appeal should be rejected. The provisions of the U.S. Code,

invoked by the appellant, make the decisions of U.S. Veteran Administrator final and

conclusive when made on claims properly submitted to him for resolution; but they are

not applicable to the present case, where the Administrator is not acting as a judge but

as a litigant. There is a great difference between actions against the Administrator

(which must be filed strictly in accordance with the conditions that are imposed by the

Veterans’ Act, including the exclusive review by United States courts), and those

actions where the Veterans’ Administrator seeks a remedy from our courts and submits

to their jurisdiction by filing actions therein. Our attention has not been called to any law

or treaty that would make the findings of the Veterans’ Administrator, in actions where

he is a party, conclusive on our courts. That, in effect, would deprive our tribunals of

judicial discretion and render them mere subordinate instrumentalities of the Veterans’

Administrator."cralaw virtua1aw library

It is bad enough as the Viloria decision made patent for our judiciary to accept as final

and conclusive, determinations made by foreign governmental agencies. It is infinitely

worse if through the absence of any coercive power by our courts over juridical

persons within our jurisdiction, the force and effectivity of their orders could be made to

depend on the whim or caprice of alien entities. It is difficult to imagine of a situation

more offensive to the dignity of the bench or the honor of the country.

Yet that would be the effect, even if unintended, of the proposition to which appellant

Benguet Consolidated seems to be firmly committed as shown by its failure to accept

the validity of the order complained of; it seeks its reversal. Certainly we must at all

pains see to it that it does not succeed. The deplorable consequences attendant on

appellant prevailing attest to the necessity of a negative response from us. That is what

appellant will get.

That is all then that this case presents. It is obvious why the appeal cannot succeed. It

is always easy to conjure extreme and even oppressive possibilities. That is not

decisive. It does not settle the issue. What carries weight and conviction is the result

arrived at, the just solution obtained, grounded in the soundest of legal doctrines and

distinguished by its correspondence with what a sense of realism requires. For through

the appealed order, the imperative requirement of justice according to law is satisfied

and national dignity and honor maintained.

WHEREFORE, the appealed order of the Honorable Arsenio Santos, the Judge of the

Court of First Instance, dated May 18, 1964, is affirmed. With costs against oppositor-

appellant Benguet Consolidated, Inc.

EN BANC

[G.R. No. L-17295. July 30, 1962. ]

ANG PUE & COMPANY, ET AL., Plaintiffs-Appellants, v. SECRETARY OF

COMMERCE AND INDUSTRY, Defendant-Appellee.

Felicisimo E. Escaran, for Plaintiffs-Appellants.

Solicitor General, for Defendant-Appellee.

SYLLABUS

1. PARTNERSHIP; TO ORGANIZE NOT ABSOLUTE RIGHT. — To organize a

corporation or partnership that could claim a juridical personality of its own and transact

business as such, is not a matter of absolute right but a privilege which may be

enjoyed only under such terms as the state may deem necessary to impose.

2. ID.; ONLY FILIPINOS TO ENGAGE IN RETAIL BUSINESS; REP. ACT 1180

APPLICABLE TO EXISTING PARTNERSHIP. — The state through Congress had the

right to enact Republic Act No. 1180 providing that only Filipinos may engage in the

retail business and such provision was intended to apply to partnership owned by

foreigners already existing at the time of its enactment giving them the right to continue

engaging in their retail business until the expiration of their term of life.

3. ID.; AMENDMENT OF ARTICLES OF PARTNERSHIP TO EXTEND TERM AFTER

ENACTMENT OF THE LAW. — The agreement in the articles of partnership to extend

the term of its life is not a property right and it must be deemed subject to the law

existing at the time when the partners came to agree regarding the extension. In the

case at bar, when the partners amended the articles of partnership, the provisions of

Republic Act 1180 were already in force, and there can be not the slightest doubt that

the right claimed by appellants to extend the original term of their partnership to

another five years would be in violation of the clear intent and purpose of said Act.

D E C I S I O N

DIZON, J.:

Action for declaratory relief filed in the Court of First Instance of Iloilo by Ang Pue &

Company, Ang Pue and Tan Siong against the Secretary of Commerce and Industry to

secure judgment "declaring that plaintiffs could extend for five years the term of the

partnership pursuant to the provisions of plaintiffs’ Amendment to the Articles of Co-

partnership."cralaw virtua1aw library

The answer filed by the defendant alleged, in substance, that the extension for another

five years of the term of the plaintiffs’ partnership would be in violation of the provisions

of Republic Act No. 1180.

It appears that on May 1, 1953, Ang Pue and Tan Siong, both Chinese citizens,

organized the partnership Ang Pue & Company for a term of five years from May 1,

1953, extendible by their mutual consent. The purpose of the partnership was "to

maintain the business of general merchandising, buying and selling at wholesale and

retail, particularly of lumber, hardware and other construction materials for commerce,

either native or foreign." The corresponding articles of partnership (Exhibit B) were

registered in the Office of the Securities & Exchange Commission on June 16, 1953.

On June 19, 1954 Republic Act No. 1180 was enacted to regulate the retail business. It

provided, among other things, that, after its enactment, a partnership not wholly formed

by Filipinos could continue to engage in the retail business until the expiration of its

term:chanrob1es virtual 1aw library

On April 15, 1958 — prior to the expiration of the five-year term of the partnership Ang

Pue & Company, but after the enactment of Republic Act 1180 — the partners already

mentioned amended the original articles of partnership Exhibit B so as to extend the

term of life of the partnership to another five years. When the amended articles were

presented for registration in the Office of the Securities & Exchange Commission on

April 16, 1958, registration was refused upon the ground that the extension was in

violation of the aforesaid Act.

From the decision of the lower court dismissing the action, with costs, the plaintiffs

interposed this appeal.

The question before us is too clear to require an extended discussion. To organize a

corporation or a partnership that could claim a juridical personality of its own and

transact business as such, is not a matter of absolute right but a privilege which may

be enjoyed only under such terms as the State may deem necessary to impose. That

the State, through Congress, and in the manner provided by law, had the right to enact

Republic Act No. 1180 and to provide therein that only Filipinos and concerns wholly

owned by Filipinos may engage in the retail business can not be seriously disputed.

That this provision was clearly intended to apply to partnerships already existing at the

time of the enactment of the law is clearly shown by its provision giving them the right

to continue engaging in their retail business until the expiration of their term of life.

To argue that because the original articles of partnership provided that the partners

could extend the term of the partnership, the provisions of Republic Act 1180 cannot

adversely affect appellants herein, is to erroneously assume that the aforesaid

provision constitute a property right of which the partners can not be deprived without

due process or without their consent. The agreement contained therein must be

deemed subject to the law existing at the time when the partners come to agree

regarding the extension. In the present case, as already stated, when the partners

amended the articles of partnership, the provisions of Republic Act 1180 were already

in force, and there can be not the slightest doubt that the right claimed by appellants to

extend the original term of their partnership to another five years would be in violation

of the clear intent and purpose of the law aforesaid.

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

FIRST DIVISION

[G.R. No. 120138. September 5, 1997.]

MANUEL A. TORRES, JR., (Deceased), GRACIANO J. TOBIAS, RODOLFO L.

JOCSON, JR., MELVIN S. JURISPRUDENCIA, AUGUSTUS CESAR AZURA and

EDGARDO D. PABALAN, Petitioners, v. COURT OF APPEALS, SECURITIES AND

EXCHANGE COMMISSION, TORMIL REALTY & DEVELOPMENT CORPORATION,

ANTONIO P. TORRES, JR., MA. CRISTINA T. CARLOS, MA. LUISA T. MORALES

and DANTE D. MORALES, Respondents.

D E C I S I O N

KAPUNAN, J.:

In this petition for review on certiorari under Rule 45 of the Revised Rules of Court,

petitioners seek to annul the decision of the Court of Appeals in CA-G.R. SP. No.

31748 dated 23 May 1994 and its subsequent resolution dated 10 May 1995 denying

petitioners’ motion for reconsideration.chanrobles law library : red

The present case involves two separate but interrelated conflicts. The facts leading to

the first controversy are as follows:chanrob1es virtual 1aw library

The late Manuel A. Torres, Jr. (Judge Torres for brevity) was the majority stockholder

of Tormil Realty & Development Corporation while private respondents who are the

children of Judge Torres’ deceased brother Antonio A. Torres, constituted the minority

stockholders. In particular, their respective shareholdings and positions in the

corporation were as follows:chanrob1es virtual 1aw library

Name of Stockholder Number of Shares Percentage Position(s)

Manuel A. Torres, Jr. 100,120 57.21 Dir./Pres./Chair

Milagros P. Torres 33,430 19.10 Dir./Treasurer

Josefina P. Torres 8,290 4.73 Dir./Ass. Cor-Sec.

Ma. Cristina T. Carlos 8,290 4.73 Dir./Cor-Sec.

Antonio P. Torres, Jr. 8,290 4.73 Director

Ma. Jacinta P. Torres 8,290 4.73 Director

Ma. Luisa T. Morales 7,790 4.45 Director

Dante D. Morales 500 .28 Director 1

In 1984, Judge Torres, in order to make substantial savings in taxes, adopted an

"estate planning" scheme under which he assigned to Tormil Realty & Development

Corporation (Tormil for brevity) various real properties he owned and his shares of

stock in other corporations in exchange for 225,972 Tormil Realty shares. Hence, on

various dates in July and August of 1984, ten (10) deeds of assignment were executed

by the late Judge Torres:chanrob1es virtual 1aw library

ASSIGNMENT DATE PROPERLY ASSIGNED LOCATION SHARES TO BE

ISSUED

1. July 13, 1984 TCT 81834 Quezon City 13,252

TCT 144240 Quezon City

2. July 13, 1984 TCT 77008 Manila

TCT 65689 Manila 78,493

TCT 109200 Manila

3. July 13, 1984 TCT 374079 Makati 8,307

4. July 24, 1984 TCT 41527 Pasay

TCT 41528 Pasay 9,855

TCT 41529 Pasay

5. Aug. 06, 1984 El Hogar Filipino Stocks 2,000

6. Aug. 06, 1984 Manila Jockey Club Stocks 48,737

7. Aug. 07, 1984 San Miguel Corp. Stocks 50,283

8. Aug. 07, 1984 China Banking Corp. Stocks 6,300

9. Aug. 20, 1984 Ayala Corp. Stocks 7,468

10. Aug. 29, 1984 Ayala Fund Stocks 1,322

—————

225,972 2

—————

Consequently, the aforelisted properties were duly recorded in the inventory of assets

of Tormil Realty and the revenues generated by the said properties were

correspondingly entered in the corporation’s books of account and financial records.

Likewise, all the assigned parcels of land were duly registered with the respective

Register of Deeds in the name of Tormil Realty, except for the ones located in Makati

and Pasay City.

At the time of the assignments and exchange, however, only 225,000 Tormil Realty

shares remained unsubscribed, all of which were duly issued to and received by Judge

Torres (as evidenced by stock certificates nos. 17, 18, 19, 20, 21, 22, 23, 24 & 25). 3

Due to the insufficient number of shares of stock issued to Judge Torres and the

alleged refusal of private respondents to approve the needed increase in the

corporation’s authorized capital stock (to cover the shortage of 972 shares due to

Judge Torres under the "estate planning" scheme), on 11 September 1986, Judge

Torres revoked the two (2) deeds of assignment covering the properties in Makati and

Pasay City. 4

Noting the disappearance of the Makati and Pasay City properties from the

corporation’s inventory of assets and financial records private respondents, on 31

March 1987, were constrained to file a complaint with the Securities and Exchange

Commission (SEC) docketed as SEC Case No. 3153 to compel Judge Torres to deliver

to Tormil corporation the two (2) deeds of assignment covering the aforementioned

Makati and Pasay City properties which he had unilaterally revoked and to cause the

registration of the corresponding titles in the name of Tormil. Private respondents

alleged that following the disappearance of the properties from the corporation’s

inventory of assets, they found that on October 24, 1986, Judge Torres, together with

Edgardo Pabalan and Graciano Tobias, then General Manager and legal counsel,

respectively, of Tormil, formed and organized a corporation named "Torres-Pabalan

Realty and Development Corporation" and that as part of Judge Torres’ contr ibution to

the new corporation, he executed in its favor a Deed of Assignment conveying the

same Makati and Pasay City properties he had earlier transferred to Tormil.

The second controversy — involving the same parties — concerned the election of the

1987 corporate board of directors.

The 1987 annual stockholders meeting and election of directors of Tormil corporation

was scheduled on 25 March 1987 in compliance with the provisions of its by-laws.

Pursuant thereto, Judge Torres assigned from his own shares, one (1) share each to

petitioners Tobias, Jocson, Jurisprudencia, Azura and Pabalan. These assigned

shares were in the nature of "qualifying shares," for the sole purpose of meeting the

legal requirement to be able to elect them (Tobias and company) to the Board of

Directors as Torres’ nominees.

The assigned shares were covered by corresponding Tormil Stock Certificates Nos.

030, 029, 028, 027, 026 and at the back of each certificate the following inscription is

found:chanrob1es virtual 1aw library

The present certificate and/or the one share it represents, conformably to the purpose

and intention of the Deed of Assignment dated March 6, 1987, is not held by me under

any claim of ownership and I acknowledge that I hold the same merely as trustee of

Judge Manuel A. Torres, Jr. and for the sole purpose of qualifying me as Director;

(Signature of Assignee) 5

The reason behind the aforestated action was to remedy the "inequitable lopsided set-

up obtaining in the corporation, where, notwithstanding his controlling interest in the

corporation, the late Judge held only a single seat in the nine-member Board of

Directors and was, therefore, at the mercy of the minority, a combination of any two (2)

of whom would suffice to overrule the majority stockholder in the Board’s decision

making functions." 6

On 25 March 1987, the annual stockholders meeting was held as scheduled. What

transpired therein was ably narrated by Attys. Benito Cataran and Bayani De los

Reyes, the official representatives dispatched by the SEC to observe the proceedings

(upon request of the late Judge Torres) in their report dated 27 March

1987:chanrob1es virtual 1aw library

x x x

The undersigned arrived at 1:55 p.m. in the place of the meeting, a residential

bungalow in Urdaneta Village, Makati, Metro Manila. Upon arrival, Josefina Torres

introduced us to the stockholders namely: Milagros Torres, Antonio Torres, Jr., Ma.

Luisa Morales, Ma. Cristina Carlos and Ma. Jacinta Torres. Antonio Torres, Jr.

questioned our authority and personality to appear in the meeting claiming subject

corporation is a family and private firm. We explained that our appearance there was

merely in response to the request of Manuel Torres, Jr. and that SEC has jurisdiction

over all registered corporations. Manuel Torres, Jr., a septuagenarian, argued that as

holder of the major and controlling shares, he approved of our attendance in the

meeting.

At about 2:30 p.m., a group composed of Edgardo Pabalan, Atty. Graciano Tobias,

Atty. Rodolfo Jocson, Jr., Atty. Melvin Jurisprudencia, and Atty. Augustus Cesar Azura

arrived. Atty. Azura told the body that they came as counsels of Manuel Torres, Jr. and

as stockholders having assigned qualifying shares by Manuel Torres. Jr.

The stockholders’ meeting started at 2:45 p.m. with Mr. Pabalan presiding after

verbally authorized by Manuel Torres, Jr., the President and Chairman of the Board.

The secretary when asked about the quorum, said that there was more than a quorum.

Mr. Pabalan distributed copies of the president’s report and the financial statements.

Antonio Torres, Jr. requested time to study the said reports and brought out the

question of auditing the finances of the corporation which he claimed was approved

previously by the board. Heated arguments ensued which also touched on family

matters. Antonio Torres, Jr. moved for the suspension of the meeting but Manuel

Torres, Jr. voted for the continuation of the proceedings.

Mr. Pabalan suggested that the opinion of the SEC representatives be asked on the

propriety of suspending the meeting but Antonio Torres, Jr. objected reasoning out that

we were just observers.

When the Chairman called for the election of directors, the Secretary refused to write

down the names of nominees prompting Atty. Azura to initiate the appointment of Atty.

Jocson, Jr. as Acting Secretary.

Antonio Torres, Jr. nominated the present members of the Board. At this juncture,

Milagros Torres cried out and told the group of Manuel Torres, Jr. to leave the house.

Manuel Torres, Jr., together with his lawyers-stockholders went to the residence of Ma.

Jacinta Torres in San Miguel Village, Makati, Metro Manila. The undersigned joined

them since the group with Manuel Torres, Jr. the one who requested for S.E.C.

observers, represented the majority of the outstanding capital stock and still constituted

a quorum.

At the resumption of the meeting, the following were nominated and elected as

directors for the year 1987-1988:chanrob1es virtual 1aw library

1. Manuel Torres, Jr.

2. Ma. Jacinta Torres

3. Edgardo Pabalan

4. Graciano Tobias

5. Rodolfo Jocson, Jr.

6. Melvin Jurisprudencia

7. Augustus Cesar Azura

8. Josefina Torres

9. Dante Morales

After the election, it was resolved that after the meeting, the new board of directors

shall convene for the election of officers.

x x x 7

Consequently, on 10 April 1987, private respondents instituted a complaint with the

SEC (SEC Case No. 3161) praying in the main, that the election of petitioners to the

Board of Directors be annulled.

Private respondents alleged that the petitioners-nominees were not legitimate

stockholders of Tormil because the assignment of shares to them violated the minority

stockholders’ right of pre-emption as provided in the corporation’s articles and by-laws.

Upon motion of petitioners, SEC Cases Nos. 3153 and 3161 were consolidated for joint

hearing and adjudication.

On 6 March 1991, the Panel of Hearing Officers of the SEC rendered a decision in

favor of private respondents. The dispositive portion thereof states, thus:chanrob1es

virtual 1aw library

WHEREFORE, premises considered, judgment is hereby rendered as

follows:chanrob1es virtual 1aw library

1. Ordering and directing the respondents, particularly respondent Manuel A. Torres,

Jr., to turn over and deliver to TORMIL through its Corporate Secretary, Ma. Cristina T.

Carlos: (a) the originals of the Deeds of Assignment dated July 13 and 24, 1984

together with the owner’s duplicates of Transfer Certificates of Title Nos. 374079 of the

Registry of Deeds for Makati, and 41527, 41528 and 41529 of the Registry of Deeds

for Pasay City and/or to cause the formal registration and transfer of title in and over

such real properties in favor of TORMIL with the proper government agency; (b) all

corporate books of account, records and papers as may be necessary for the conduct

of a comprehensive audit examination, and to allow the examination and inspection of

such accounting books, papers and records by any or all of the corporate directors,

officers and stockholders and/or their duly authorized representatives or auditors;

2. Declaring as permanent and final the writ of preliminary injunction issued by the

Hearing Panel on February 13, 1989:chanrob1es virtual 1aw library

3. Declaring as null and void the election and appointment of respondents to the Board

of Directors and executive positions of TORMIL held on March 25, 1987, and all their

acts and resolutions made for and in behalf of TORMIL by authority of and pursuant to

such invalid appointment & election held on March 25, 1987;

4. Ordering the respondents jointly and severally, to pay the complainants the sum of

ONE HUNDRED THOUSAND PESOS (P100,000.00) as and by way of attorney’s fees.

Petitioners promptly appealed to the SEC en banc (docketed as SEC-AC No. 339).

Thereafter, on 3 April 1991, during the pendency of said appeal, petitioner Manuel A.

Torres, Jr. died. However, notice thereof was brought to the attention of the SEC not by

petitioners’ counsel but by private respondents in a Manifestation dated 24 April 1991.

On 8 June 1993, petitioners filed a Motion to Suspend Proceedings on grounds that no

administrator or legal representative of the late Judge Torres’ estate has yet been

appointed by the Regional Trial Court of Makati where Sp. Proc. No. M-1768 ("In the

Matter of the Issuance of the Last Will and Testament of Manuel A. Torres, Jr.") was

pending. Two similar motions for suspension were filed by petitioners on 28 June 1993

and 9 July 1993.

On 19 July 1993, the SEC en banc issued an Order denying petitioners’ aforecited

motions on the following ground:jgc:chanrobles.com.ph

"Before the filing of these motions, the Commission en banc had already completed all

proceedings and had likewise ruled on the merits of the appealed cases. Viewed in this

light, we thus feel that there is nothing left to be done except to deny these motions to

suspend proceedings." 10

On the same date, the SEC en banc rendered a decision, the dispositive portion of

which reads. thus:chanrob1es virtual 1aw library

WHEREFORE, premises considered, the appealed decision of the hearing panel is

hereby affirmed and all motions pending before us incident to this appealed case are

necessarily DISMISSED.

SO ORDERED. 11

Undaunted, on 10 August 1993, petitioners proceeded to plead its cause to the Court

of Appeals by way of a petition for review (docketed as CA-G.R. SP No. 31748).

On 23 May 1994, the Court of Appeals rendered a decision, the dispositive portion of

which states:jgc:chanrobles.com.ph

"WHEREFORE, the petition for review is DISMISSED and the appealed decision is

accordingly affirmed.

SO ORDERED. 12

From the said decision, petitioners filed a motion for reconsideration which was denied

in a resolution issued by the Court of Appeals dated 10 May 1995. 13

Insisting on their cause, petitioners filed the present petition for review alleging that the

Court of Appeals committed the following errors in its decision:chanrob1es virtual 1aw

library

(1)

WHEN IT RENDERED THE MAY 23, 1994 DECISION, WHICH IS A FULL LENGTH

DECISION, WITHOUT THE EVIDENCE AND THE ORIGINAL RECORD OF S.E.C.-AC

NO. 339 BEING PROPERLY BROUGHT BEFORE IT FOR REVIEW AND RE-

EXAMINATION, AN OMISSION RESULTING IN A CLEAR TRANSGRESSION OR

CURTAILMENT OF THE RIGHTS OF THE HEREIN PETITIONERS TO

PROCEDURAL DUE PROCESS;

(2)

WHEN IT SANCTIONED THE JULY 19, 1993 DECISION OF THE RESPONDENT

S.E.C., WHICH IS VOID FOR HAVING BEEN RENDERED WITHOUT THE PROPER

SUBSTITUTION OF THE DECEASED PRINCIPAL PARTY-RESPONDENT IN S.E.C.-

AC NO. 339 AND CONSEQUENTLY, FOR WANT OF JURISDICTION OVER THE

SAID DECEASED’S TESTATE ESTATE, AND MOREOVER, WHEN IT SOUGHT TO

JUSTIFY THE NON-SUBSTITUTION BY ITS APPLICATION OF THE CIVIL LAW

CONCEPT OF NEGOTIORUM GESTIO;

(3)

WHEN IT FAILED TO SEE, AS A CONSEQUENCE OF THE EVIDENCE AND THE

ORIGINAL RECORD OF S.E.C.-AC NO. 339 NOT HAVING ACTUALLY BEEN RE-

EXAMINED, THAT S.E.C. CASE NO. 3153 INVOLVED A SITUATION WHERE

PERFORMANCE WAS IMPOSSIBLE (AS CONTEMPLATED UNDER ARTICLE 1191

OF THE CIVIL CODE) AND WAS NOT A MERE CASE OF LESION OR

INADEQUACY OF CAUSE (UNDER ARTICLE 1355 OF THE CIVIL CODE) AS SO

ERRONEOUSLY CHARACTERIZED BY THE RESPONDENT S.E.C.; and,

(4)

WHEN IT FAILED TO SEE, AS A CONSEQUENCE OF THE EVIDENCE AND THE

ORIGINAL RECORD OF S.E.C.-AC NO. 339 NOT HAVING ACTUALLY BEEN

EXAMINED, THAT THE RECORDING BY THE LATE JUDGE MANUEL A. TORRES,

JR. OF THE QUESTIONED ASSIGNMENT OF QUALIFYING SHARES TO HIS

NOMINEES, WAS AFFIRMED IN THE STOCK AND TRANSFER BOOK BY AN

ACTING CORPORATE SECRETARY AND MOREOVER, THAT ACTUAL NOTICE OF

SAID ASSIGNMENT WAS TIMELY MADE TO THE OTHER STOCKHOLDERS. 14

We shall resolve the issues in seriatim.

I

Petitioners insist that the failure to transmit the original records to the Court of Appeals

deprived them of procedural due process. Without the evidence and the original

records of the proceedings before the SEC, the Court of Appeals, petitioners

adamantly state, could not have possibly made a proper appreciation and correct

determination of the issues, particularly the factual issues, they had raised on appeal.

Petitioners also assert that since the Court of Appeals allegedly gave due course to

their petition, the original records should have been forwarded to said court.

Petitioners anchor their argument on Secs. 8 and 11 of SC Circular 1-91 (dated 27

February 1991) which provides that:chanrob1es virtual 1aw library

8. WHEN PETITION GIVEN DUE COURSE. — The Court of Appeals shall give due

course to the petition only when it shows prima facie that the court, commission, board,

office or agency concerned has committed errors of fact or law that would warrant

reversal or modification of the order, ruling or decision sought to be reviewed. The

findings of fact of the court, commission, board, office or agency concerned when

supported by substantial evidence shall be final.

x x x

11. TRANSMITTAL OF RECORD. — Within fifteen (15) days from notice that the

petition has been given due course, the court, commission, board, office or agency

concerned shall transmit to the Court of Appeals the original or a certified copy of the

entire record of the proceeding under review. The record to be transmitted may be

abridged by agreement of all parties to the proceeding. The Court of Appeals may

require or permit subsequent correction or addition to the record.

Petitioners contend that the Court of Appeals had given due course to their petition as

allegedly indicated by the following acts:chanrobles.com.ph : virtual law library

a) it granted the restraining order applied for by the herein petitioners, and after

hearing, also the writ of preliminary injunction sought by them; under the original SC

Circular No. 1-91, a petition for review may be given due course at the onset

(paragraph 8) upon a mere prima facie finding of errors of fact or law having been

committed, and such prima facie finding is but consistent with the grant of the

extraordinary writ of preliminary injunction;

b) it required the parties to submit "simultaneous memoranda" in its resolution dated

October 15, 1993 (this is in addition to the comment required to be filed by the

respondents) and furthermore declared in the same resolution that the petition will be

decided "on the merits," instead of outrightly dismissing the same;

c) it rendered a full length decision, wherein: (aa) it expressly declared the respondent

S.E.C. as having erred in denying the pertinent motions to suspend proceedings; (bb) it

declared the supposed error as having become a non-issue when the respondent C.A.

"proceeded to hear (the) appeal" ; (cc) it formulated and applied its own theory of

negotiorum gestio in justifying the non-substitution of the deceased principal party in

S.E.C.-AC No. 339 and moreover, its theory of di minimis non curat lex (this, without

first determining the true extent of and the correct legal characterization of the so-

called "shortage" of Tormil shares; and, (dd) it expressly affirmed the assailed decision

of respondent S.E.C. 15

Petitioners’ contention is unmeritorious.

There is nothing on record to show that the Court of Appeals gave due course to the

petition. The fact alone that the Court of Appeals issued a restraining order and a writ

of preliminary injunction and required the parties to submit their respective memoranda

does not indicate that the petition was given due course. The office of an injunction is

merely to preserve the status quo pending the disposition of the case. The court can

require the submission of memoranda in support of the respective claims and positions

of the parties without necessarily giving due course to the petition. The matter of

whether or not to give due course to a petition lies in the discretion of the court.

It is worthy to mention that SC Circular No. 1-91 has been replaced by Revised

Administrative Circular No. 1-95 (which took effect on 1 June 1995) wherein the

procedure for appeals from quasi-judicial agencies to the Court of Appeals was

clarified thus:chanrob1es virtual 1aw library

10. Due course. — If upon the filing of the comment or such other pleadings or

documents as may be required or allowed by the Court of Appeals or upon the

expiration of the period for the filing thereof, and on the bases of the petition or the

record the Court of Appeals finds prima facie that the court or agency concerned has

committed errors of fact or law that would warrant reversal or modification of the award,

judgment, final order or resolution sought to be reviewed, it may give due course to the

petition; otherwise, it shall dismiss the same. The findings of fact of the court or agency

concerned, when supported by substantial evidence, shall be binding on the Court of

Appeals.

11. Transmittal of record. — Within fifteen (15) days from notice that the petition has

been given due course, the Court of Appeals may require the court or agency

concerned to transmit the original or a legible certified true copy of the entire record of

the proceeding under review. The record to be transmitted may be abridged by

agreement of all parties to the proceeding. The Court of Appeals may require or permit

subsequent correction of or addition to the record. (Underscoring ours.)

The aforecited circular now formalizes the correct practice and clearly states that in

resolving appeals from quasi judicial agencies, it is within the discretion of the Court of

Appeals to have the original records of the proceedings under review be transmitted to

it. In this connection, petitioners’ claim that the Court of Appeals could not have

decided the case on the merits without the records being brought before it is patently

lame. Indubitably, the Court of Appeals decided the case on the basis of the

uncontroverted facts and admissions contained in the pleadings, that is, the petition,

comment, reply, rejoinder, memoranda, etc. filed by the parties.

II

Petitioners contend that the decisions of the SEC and the Court of Appeals are null and

void for being rendered without the necessary substitution of parties (for the deceased

petitioner Manuel A. Torres, Jr.) as mandated by Sec. 17, Rule 3 of the Revised Rules

of Court, which provides as follows:chanrob1es virtual 1aw library

SEC. 17. Death of party. — After a party dies and the claim is not thereby

extinguished, the court shall order, upon proper notice, the legal representative of the

deceased to appear and to be substituted for the deceased, within a period of thirty

(30) days, or within such time as may be granted. If the legal representative fails to

appear within said time, the court may order the opposing party to procure the

appointment of a legal representative of the deceased within a time to be specified by

the court, and the representative shall immediately appear for and on behalf of the

interest of the deceased. The court charges involved in procuring such appointment, if

defrayed by the opposing party, may be recovered as costs. The heirs of the deceased

may be allowed to be substituted for the deceased, without requiring the appointment

of an executor or administrator and the court may appoint guardian ad litem for the

minor heirs.

Petitioners insist that the SEC en banc should have granted the motions to suspend

they filed based as they were on the ground that the Regional Trial Court of Makati,

where the probate of the late Judge Torres’ will was pending, had yet to appoint an

administrator or legal representative of his estate.

We are not unaware of the principle underlying the aforequoted provision:chanrob1es

virtual 1aw library

It has been held that when a party dies in an action that survives, and no order is

issued by the Court for the appearance of the legal representative or of the heirs of the

deceased to be substituted for the deceased, and as a matter of fact no such

substitution has ever been effected, the trial held by the court without such legal

representative or heirs, and the judgment rendered after such trial, are null and void

because the court acquired no jurisdiction over the persons of the legal representative

or of the heirs upon whom the trial and the judgment are not binding. 16

As early as 8 April 1988, Judge Torres instituted Special Proceedings No. M-1768

before the Regional Trial Court of Makati for the ante-mortem probate of his

holographic will which he had executed on 31 October 1986. Testifying in the said

proceedings, Judge Torres confirmed his appointment of petitioner Edgardo D.

Pabalan as the sole executor of his will and administrator of his estate. The

proceedings, however, were opposed by the same parties, herein private respondents

Antonio P. Torres, Jr., Ma. Luisa T. Morales and Ma. Cristina T. Carlos, 17 who are

nephew and nieces of Judge Torres, being the children of his late brother Antonio A.

Torres.

It can readily be observed therefore that the parties involved in the present controversy

are virtually the same parties fighting over the representation of the late Judge Torres’

estate. It should be recalled that the purpose behind the rule on substitution of parties

is the protection of the right of every party to due process. It is to ensure that the

deceased party would continue to be properly represented in the suit through the duly

appointed legal representative of his estate. In the present case, this purpose has been

substantially fulfilled (despite the lack of formal substitution) in view of the peculiar fact

that both proceedings involve practically the same parties. Both parties have been

fiercely fighting in the probate proceedings of Judge Torres’ holographic will for

appointment as legal representative of his estate. Since both parties claim interests

over the estate, the rights of the estate were expected to be fully protected in the

proceedings before the SEC en banc and the Court of Appeals. In either case,

whoever shall be appointed legal representative of Judge Torres’ estate (petitioner

Pabalan or private respondents) would no longer be a stranger to the present case, the

said parties having voluntarily submitted to the jurisdiction of the SEC and the Court of

Appeals and having thoroughly participated in the proceedings.

The foregoing rationale finds support in the recent case of Vda. de Salazar v. CA, 18

wherein the Court expounded thus:chanrob1es virtual 1aw library

The need for substitution of heirs is based on the right to due process accruing to every

party in any proceeding. The rationale underlying this requirement in case a party dies

during the pendency of proceedings of a nature not extinguished by such death, is that

. . . the exercise of judicial power to hear and determine a cause implicitly presupposes

in the trial court, amongst other essentials, jurisdiction over the persons of the parties.

That jurisdiction was inevitably impaired upon the death of the protestee pending the

proceedings below such that unless and until a legal representative is for him duly

named and within the jurisdiction of the trial court, no adjudication in the cause could

have been accorded any validity or binding effect upon any party, in representation of

the deceased, without trenching upon the fundamental right to a day in court which is

the very essence of the constitutionally enshrined guarantee of due process.

We are not unaware of several cases where we have ruled that a party having died in

an action that survives, the trial held by the court without appearance of the deceased’s

legal representative or substitution of heirs and the judgment rendered after such trial,

are null and void because the court acquired no jurisdiction over the persons of the

legal representatives or of the heirs upon whom the trial and the judgment would be

binding. This general rule notwithstanding, in denying petitioner’s motion for

reconsideration, the Court of Appeals correctly ruled that formal substitution of heirs is

not necessary when the heirs themselves voluntarily appeared, participated in the case

and presented evidence in defense of deceased defendant. Attending the case at

bench, after all, are these particular circumstances which negate petitioner’s belated

and seemingly ostensible claim of violation of her rights to due process. We should not

lose sight of the principle underlying the general rule that formal substitution of heirs

must be effectuated for them to be bound by a subsequent judgment. Such had been

the general rule established not because the rule on substitution of heirs and that on

appointment of a legal representative are jurisdictional requirements per se but

because non-compliance therewith results in the undeniable violation of the right to due

process of those who, though not duly notified of the proceedings, are substantially

affected by the decision rendered therein. . .

It is appropriate to mention here that when Judge Torres died on April 3, 1991, the

SEC en banc had already fully heard the parties and what remained was the evaluation

of the evidence and rendition of the judgment.

Further, petitioners filed their motions to suspend proceedings only after more than two

(2) years from the death of Judge Torres. Petitioners’ counsel was even remiss in his

duty under Sec. 16, Rule 3 of the Revised Rules of Court. 19 Instead, it was private

respondents who informed the SEC of Judge Torres’ death through a manifestation

dated 24 April 1991.

For the SEC en banc to have suspended the proceedings to await the appointment of

the legal representative by the estate was impractical and would have caused undue

delay in the proceedings and a denial of justice. There is no telling when the probate

court will decide the issue, which may still be appealed to the higher courts.

In any case, there has been no final disposition of the properties of the late Judge

Torres before the SEC. On the contrary, the decision of the SEC en banc as affirmed

by the Court of Appeals served to protect and preserve his estate. Consequently, the

rule that when a party dies, he should be substituted by his legal representative to

protect the interests of his estate in observance of due process was not violated in this

case in view of its peculiar situation where the estate was fully protected by the

presence of the parties who claim interests therein either as directors, stockholders or

heirs.

Finally, we agree with petitioners’ contention that the principle of negotiorum gestio 20

does not apply in the present case. Said principle explicitly covers abandoned or

neglected property or business.

III

Petitioners find legal basis for Judge Torres’ act of revoking the assignment of his

properties in Makati and Pasay City to Tormil corporation by relying on Art. 1191 of the

Civil Code which provides that:chanrob1es virtual 1aw library

ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one

of the obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the

obligation, with the payment of damages in either case. He may also seek rescission,

even after he has chosen fulfillment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing

the fixing of a period.

This is understood to be without prejudice to the rights of third persons who have

acquired the thing, in accordance with articles 1385 and 1388 and the Mortgage Law.

Petitioners’ contentions cannot be sustained. We see no justifiable reason to disturb

the findings of SEC, as affirmed by the Court of Appeals:chanrob1es virtual 1aw library

We sustain the ruling of respondent SEC in the decision appealed from (Rollo, pp. 45-

46) that —

. . . the shortage of 972 shares would not be valid ground for respondent Torres to

unilaterally revoke the deeds of assignment he had executed on July 13, 1984 and July

24, 1984 wherein he voluntarily assigned to TORMIL real properties covered by TCT

No. 374079 (Makati) and TCT No. 41527, 41528 and 41529 (Pasay) respectively.

A comparison of the number of shares that respondent Torres received from TORMIL

by virtue of the "deeds of assignment" and the stock certificates issued by the latter to

the former readily shows that TORMIL had substantially performed what was expected

of it. In fact, the first two issuances were in satisfaction to the properties being revoked

by respondent Torres. Hence, the shortage of 972 shares would never be a valid

ground for the revocation of the deeds covering Pasay and Quezon City properties.

In Universal Food Corp. v. CA, the Supreme Court held:chanrob1es virtual 1aw library

The general rule is that rescission of a contract will not be permitted for a slight or

carnal breach, but only for such substantial and fundamental breach as would defeat

the very object of the parties in making the agreement.

The shortage of 972 shares definitely is not substantial and fundamental breach as

would defeat the very object of the parties in entering into contract. Art. 1355 of the

Civil Code also provides: "Except in cases specified by law, lesion or inadequacy of

cause shall not invalidate a contract, unless there has been fraud, mistake or undue

influences." There being no fraud, mistake or undue influence exerted on respondent

Torres by TORMIL and the latter having already issued to the former of its 225,000

unissued shares, the most logical course of action is to declare as null and void the

deed of revocation executed by respondent Torres. (Rollo, pp. 45-46.) 21

The aforequoted Civil Code provision does not apply in this particular situation for the

obvious reason that a specific number of shares of stock (as evidenced by stock

certificates) had already been issued to the late Judge Torres in exchange for his

Makati and Pasay City properties. The records thus disclose:chanrob1es virtual 1aw

library

DATE OF PROPERTY LOCATION NO. OF SHARES ORDER OF

ASSIGNMENT ASSIGNED TO BE ISSUED COMPLIANCE*

1. July 13, 1984 TCT 81834 Quezon City 13,252 3rd

TCT 144240 Quezon City

2. July 13, 1984 TCT 77008 Manila

TCT 65689 Manila 78,493 2nd

TCT 102200 Manila

3. July 13, 1984 TCT 374079 Makati 8,307 1st

4. July 24, 1984 TCT 41527 Pasay

TCT 41528 Pasay 9,855 4th

TCT 41529 Pasay

5. August 06, 1984 El Hogar Filipino Stocks 2,000 7th

6. August 06, 1984 Manila Jockey Club Stocks 48,737 5th

7. August 07, 1984 San Miguel Corp. Stocks 50,238 8th

8. August 07, 1984 China Banking Corp. Stocks 6,300 6th

9. August 20, 1984 Ayala Corp. Stocks 7,468.2)

10. August 29, 1984 Ayala Fund Stocks 1,322.1) 9th

—————

TOTAL 225,972.3

* Order of stock certificate issuances by TORMIL to respondent Torres relative to the

Deeds of Assignment he executed sometime in July and August, 1984. 22 (Emphasis

ours.)

Moreover, we agree with the contention of the Solicitor General that the shortage of

shares should not have affected the assignment of the Makati and Pasay City

properties which were executed in 13 and 24 July 1984 and the consideration for which

have been duly paid or fulfilled but should have been applied logically to the last

assignment of property — Judge Torres’ Ayala Fund shares — which was executed on

29 August 1984. 23

Petitioners insist that the assignment of "qualifying shares" to the nominees of the late

Judge Torres (herein petitioners) does not partake of the real nature of a transfer or

conveyance of shares of stock as would call for the "imposition of stringent

requirements (with respect to the) recording of the transfer of said shares." Anyway,

petitioners add, there was substantial compliance with the abovestated requirement

since said assignments were entered by the late Judge Torres himself in the

corporation’s stock and transfer book on 6 March 1987, prior to the 25 March 1987

annual stockholders meeting and which entries were confirmed on 8 March 1987 by

petitioner Azura who was appointed Assistant Corporate Secretary by Judge Torres.

Petitioners further argue that:chanrob1es virtual 1aw library

10.10. Certainly, there is no legal or just basis for the respondent S.E.C. to penalize the

late Judge Torres by invalidating the questioned entries in the stock and transfer book,

simply because he initially made those entries (they were later affirmed by an acting

corporate secretary) and because the stock and transfer book was in his possession

instead of the elected corporate secretary, if the background facts herein-before

narrated and the serious animosities that then reigned between the deceased Judge

and his relatives are to be taken into account;

x x x

10.12. Indeed it was a practice in the corporate respondent, a family corporation with

only a measly number of stockholders, for the late judge to have personal custody of

corporate records; as president, chairman and majority stockholder, he had the

prerogative of designating an acting corporate secretary or to himself make the needed

entries, in instances where the regular secretary, who is a mere subordinate, is

unavailable or intentionally defaults, which was the situation that obtained immediately

prior to the 1987 annual stockholders meeting of Tormil, as the late Judge Torres had

so indicated in the stock and transfer book in the form of the entries now in question;

10.13. Surely, it would have been futile nay foolish for him to have insisted under those

circumstances, for the regular secretary, who was then part of a group ranged against

him, to make the entries of the assignments in favor of his nominees; 24

Petitioners’ contentions lack merit.

It is precisely the brewing family discord between Judge Torres and private

respondents — his nephew and nieces that should have placed Judge Torres on his

guard. He should have been more careful in ensuring that his actions (particularly the

assignment of qualifying shares to his nominees) comply with the requirements of the

law. Petitioners cannot use the flimsy excuse that it would have been a vain attempt to

force the incumbent corporate secretary to register the aforestated assignments in the

stock and transfer book because the latter belonged to the opposite faction. It is the

corporate secretary’s duty and obligation to register valid transfers of stocks and if said

corporate officer refuses to comply, the transferor-stockholder may rightfully bring suit

to compel performance. 25 In other words, there are remedies within the law that

petitioners could have availed of, instead of taking the law in their own hands, as the

cliché goes.chanrobles

Thus, we agree with the ruling of the SEC en banc as affirmed by the Court of

Appeals:chanrob1es virtual 1aw library

We likewise sustain respondent SEC when it ruled, interpreting Section 74 of the

Corporation Code, as follows (Rollo, p. 45):chanrob1es virtual 1aw library

In the absence of (any) provision to the contrary, the corporate secretary is the

custodian of corporate records. Corollarily, he keeps the stock and transfer book and

makes proper and necessary entries therein.

Contrary to the generally accepted corporate practice, the stock and transfer book of

TORMIL, was not kept by Ms. Maria Cristina T. Carlos, the corporate secretary but by

respondent Torres, the President and Chairman of the Board of Directors of TORMIL.

In contravention to the above cited provision, the stock and transfer book was not kept

at the principal office of the corporation either but at the place of respondent Torres.

These being the obtaining circumstances, any entries made in the stock and transfer

book on March 8, 1987 by respondent Torres of an alleged transfer of nominal shares

to Pabalan and Co. cannot therefore be given any valid effect. Where the entries made

are not valid, Pabalan and Co. cannot therefore be considered stockholders of record

of TORMIL. Because they are not stockholders, they cannot therefore be elected as

directors of TORMIL. To rule otherwise would not only encourage violation of clear

mandate of Sec. 74 of the Corporation Code that stock and transfer book shall be kept

in the principal office of the corporation but would likewise open the flood gates of

confusion in the corporation as to who has the proper custody of the stock and transfer

book and who are the real stockholders of records of a certain corporation as any

holder of the stock and transfer book, though not the corporate secretary, at pleasure

would make entries therein.

The fact that respondent Torres holds 81.28% of the outstanding capital stock of

TORMIL is of no moment and is not a license for him to arrogate unto himself a duty

lodged to (sic) the corporate secretary. 26

All corporations, big or small, must abide by the provisions of the Corporation Code.

Being a simple family corporation is not an exemption. Such corporations cannot have

rules and practices other than those established by law.

WHEREFORE, premises considered, the petition for review on certiorari is hereby

DENIED.

SO ORDERED.

Theory of Enterprise Entity

SECOND DIVISION

[G.R. No. 125469. October 27, 1997.]

PHILIPPINE STOCK EXCHANGE, INC., Petitioner, v. THE HONORABLE COURT

OF APPEALS, SECURITIES AND EXCHANGE COMMISSION and PUERTO AZUL

LAND, INC.,Respondents.

D E C I S I O N

TORRES, JR., J.:

The Securities and Exchange Commission is the government agency, under the direct

general supervision of the Office of the President, 1 with the immense task of enforcing

the Revised Securities Act, and all other duties assigned to it by pertinent laws. Among

its innumerable functions, and one of the most important, is the supervision of all

corporations, partnerships or associations, who are grantees of primary franchise

and/or a license or permit issued by the government to operate in the Philippines. 2

Just how far this regulatory authority extends, particularly, with regard to the Petitioner

Philippine Stock Exchange, Inc. is the issue in the case at bar.

In this Petition for Review on Certiorari, petitioner assails the resolution of the

respondent Court of Appeals, dated June 27, 1996, which affirmed the decision of the

Securities and Exchange Commission ordering the petitioner Philippine Stock

Exchange, Inc. to allow the private respondent Puerto Azul Land, Inc. to be listed in its

stock market, thus paving the way for the public offering of PALI’s shares.

The facts of the case are undisputed, and are hereby restated in sum.

The Puerto Azul Land, Inc. (PALI), a domestic real estate corporation, had sought to

offer its shares to the public in order to raise funds allegedly to develop its properties

and pay its loans with several banking institutions. In January, 1995, PALI was issued

a Permit to Sell its shares to the public by the Securities and Exchange Commission

(SEC). To facilitate the trading of its shares among investors, PALI sought to course

the trading of its shares through the Philippine Stock Exchange, Inc. (PSE), for which

purpose it filed with the said stock exchange an application to list its shares, with

supporting documents attached.

On February 8, 1996, the Listing Committee of the PSE, upon a perusal of PALI’s

application, recommended to the PSE’s Board of Governors the approval of PALI’s

listing application.

On February 14, 1996, before it could act upon PALI’s application, the Board of

Governors of the PSE received a letter from the heirs of Ferdinand E. Marcos, claiming

that the late President Marcos was the legal and beneficial owner of certain properties

forming part of the Puerto Azul Beach Hotel and Resort Complex which PALI claims to

be among its assets and that the Ternate Development Corporation, which is among

the stockholders of PALI, likewise appears to have been held and continue to be held

in trust by one Rebecco Panlilio for then President Marcos and now, effectively for his

estate, and requested PALI’s application to be deferred. PALI was requested to

comment upon the said letter.

PALI’s answer stated that the properties forming part of the Puerto Azul Beach Hotel

and Resort Complex were not claimed by PALI as its assets. On the contrary, the

resort is actually owned by Fantasia Filipina Resort, Inc. and the Puerto Azul Country

Club, entities distinct from PALI. Furthermore, the Ternate Development Corporation

owns only 1.20% of PALI. The Marcoses responded that their claim is not confined to

the facilities forming part of the Puerto Azul Hotel and Resort Complex, thereby

implying that they are also asserting legal and beneficial ownership of other properties

titled under the name of PALI.chanroblesvirtual|awlibrary

On February 20, 1996, the PSE wrote Chairman Magtanggol Gunigundo of the

Presidential Commission on Good Government (PCGG) requesting for comments on

the letters of the PALI and the Marcoses. On March 4, 1996, the PSE was informed

that the Marcoses received a Temporary Restraining Order on the same date,

enjoining the Marcoses from, among others, "further impeding, obstructing, delaying or

interfering in any manner by or any means with the consideration, processing and

approval by the PSE of the initial public offering of PALI." The TRO was issued by

Judge Martin S. Villarama, Executive Judge of the RTC of Pasig City in Civil Case No.

65561, pending in Branch 69 thereof.

In its regular meeting held on March 27, 1996, the Board of Governors of the PSE

reached its decision to reject PALI’s application, citing the existence of serious claims,

issues and circumstances surrounding PALI’s ownership over its assets that adversely

affect the suitability of listing PALI’s shares in the stock exchange.

On April 11, 1996, PALI wrote a letter to the SEC addressed to the then Acting

Chairman, Perfecto R. Yasay, Jr., bringing to the SEC’s attention the action taken by

the PSE in the application of PALI for the listing of its shares with the PSE, and

requesting that the SEC in the exercise of its supervisory and regulatory powers over

stock exchanges under Section 6(j) of P.D. No. 902-A, review the PSE’s action on

PALI’s listing application and institute such measures as are just and proper under the

circumstances.

On the same date, or on April 11, 1996, the SEC wrote to the PSE, attaching thereto

the letter of PALI and directing the PSE to file its comments thereto within five days

from its receipt and for its authorized representative to appear for an "inquiry" on the

matter. On April 22, 1996, the PSE submitted a letter to the SEC containing its

comments to the April 11, 1996 letter of PALI.

On April 24, 1996, the SEC rendered its Order, reversing the PSE’s decision. The

dispositive portion of the said order reads:jgc:chanrobles.com.ph

"WHEREFORE, premises considered, and invoking the Commissioner’s authority and

jurisdiction under Section 3 of the Revised Securities Act, in conjunction with Section 3,

6(j) and 6(m) of Presidential Decree No. 902-A, the decision of the Board of Governors

of the Philippine Stock Exchange denying the listing of shares of Puerto Azul Land,

Inc., is hereby set aside, and the PSE is hereby ordered to immediately cause the

listing of the PALI shares in the Exchange, without prejudice to its authority to require

PALI to disclose such other material information it deems necessary for the protection

of the investing public.

This Order shall take effect immediately.

SO ORDERED."cralaw virtua1aw library

PSE filed a motion for reconsideration of the said order on April 29, 1996, which was,

however denied by the Commission in its May 9, 1996 Order which

states:jgc:chanrobles.com.ph

"WHEREFORE, premises considered, the Commission finds no compelling reason to

reconsider its order dated April 24, 1996, and in the light of recent developments on the

adverse claim against the PALI properties, PSE should require PALI to submit full

disclosure of material facts and information to protect the investing public. In this

regard, PALI is hereby ordered to amend its registration statements filed with the

Commission to incorporate the full disclosure of these material facts and

information."cralaw virtua1aw library

Dissatisfied with this ruling, the PSE filed with the Court of Appeals on May 17, 1996 a

Petition for Review (with Application for Writ of Preliminary Injunction and Temporary

Restraining Order), assailing the above mentioned orders of the SEC, submitting the

following as errors of the SEC:chanrob1es virtual 1aw library

I. SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE OF DISCRETION IN

ISSUING THE ASSAILED ORDERS WITHOUT POWER, JURISDICTION, OR

AUTHORITY; SEC HAS NO POWER TO ORDER THE LISTING AND SALE OF

SHARES OF PALI WHOSE ASSETS ARE SEQUESTERED AND TO REVIEW AND

SUBSTITUTE DECISIONS OF PSE ON LISTING APPLICATIONS;

II. SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE OF DISCRETION IN

FINDING THAT PSE ACTED IN AN ARBITRARY AND ABUSIVE MANNER IN

DISAPPROVING PALI’S LISTING APPLICATION;

III. THE ASSAILED ORDERS OF SEC ARE ILLEGAL AND VOID FOR ALLOWING

FURTHER DISPOSITION OF PROPERTIES IN CUSTODIA LEGIS AND WHICH

FORM PART OF NAVAL/MILITARY RESERVATION; AND

IV. THE FULL DISCLOSURE OF THE SEC WAS NOT PROPERLY PROMULGATED

AND ITS IMPLEMENTATION AND APPLICATION IN THIS CASE VIOLATES THE

DUE PROCESS CLAUSE OF THE CONSTITUTION.

On June 4, 1996, PALI filed its Comment to the Petition for Review and subsequently,

a Comment and Motion to Dismiss. On June 10, 1996, PSE filed its Reply to Comment

and Opposition to Motion to Dismiss.chanroblesvirtuallawlibrary:red

On June 27, 1996, the Court of Appeals promulgated its Resolution dismissing the

PSE’s Petition for Review. Hence, this Petition by the PSE.

The appellate court had ruled that the SEC had both jurisdiction and authority to look

into the decision of the petitioner PSE, pursuant to Section 3 3 of the Revised

Securities Act in relation to Section 6(j) and 6(m) 4 of P.D. No. 902-A, and Section

38(b) 5 of the Revised Securities Act, and for the purpose of ensuring fair

administration of the exchange. Both as a corporation and as a stock exchange, the

petitioner is subject to public respondent’s jurisdiction, regulation and control.

Accepting the argument that the public respondent has the authority merely to

supervise or regulate, would amount to serious consequences, considering that the

petitioner is a stock exchange whose business is impressed with public interest. Abuse

is not remote if the public respondent is left without any system of control. If the

securities act vested the public respondent with jurisdiction and control over all

corporations; the power to authorize the establishment of stock exchanges; the right to

supervise and regulate the same; and the power to alter and supplement rules of the

exchange in the listing or delisting of securities, then the law certainly granted to the

public respondent the plenary authority over the petitioner; and the power of review

necessarily comes within its authority.

All in all, the court held that PALI complied with all the requirements for public listing,

affirming the SEC’s ruling to the effect that:jgc:chanrobles.com.ph

". . . the Philippine Stock Exchange has acted in an arbitrary and abusive manner in

disapproving the application of PALI for listing of its shares in the face of the following

considerations:chanrob1es virtual 1aw library

1. PALI has clearly and admittedly complied with the Listing Rules and full disclosure

requirements of the Exchange;

2. In applying its clear and reasonable standards on the suitability for listing of shares,

PSE has failed to justify why it acted differently on the application of PALI, as

compared to the IPOs of other companies similarly situated that were allowed listing in

the Exchange;

3. It appears that the claims and issues on the title to PALI’s properties were even less

serious than the claims against the assets of the other companies in that, the

assertions of the Marcoses that they are owners of the disputed properties were not

substantiated enough to overcome the strength of a title to properties issued under the

Torrens System as evidence of ownership thereof;

4. No action has been filed in any court of competent jurisdiction seeking to nullify

PALI’s ownership over the disputed properties, neither has the government instituted

recovery proceedings against these properties. Yet the import of PSE’s decision in

denying PALI’s application is that it would be PALI, not the Marcoses, that must go to

court to prove the legality of its ownership on these properties before its shares can be

listed."cralaw virtua1aw library

In addition, the argument that the PALI properties belong to the Military/Naval

Reservation does not inspire belief. The point is, the PALI properties are now titled. A

property loses its public character the moment it is covered by a title. As a matter of

fact, the titles have long been settled by a final judgment; and the final decree having

been registered, they can no longer be re-opened considering that the one year period

has already passed. Lastly, the determination of what standard to apply in allowing

PALI’s application for listing, whether the discretion method or the system of public

disclosure adhered to by the SEC, should be addressed to the Securities Commission,

it being the government agency that exercises both supervisory and regulatory

authority over all corporations.

On August 15, 1996, the PSE, after it was granted an extension, filed the instant

Petition for Review on Certiorari, taking exception to the rulings of the SEC and the

Court of Appeals. Respondent PALI filed its Comment to the petition on October 17,

1996. On the same date, the PCGG filed a Motion for Leave to file a Petition for

Intervention. This was followed up by the PCGG’s Petition for Intervention on October

21, 1996. A supplemental Comment was filed by PALI on October 25, 1997. The Office

of the Solicitor General, representing the SEC and the Court of Appeals, likewise filed

its Comment on December 26, 1996. In answer to the PCGG’s motion for leave to file

petition for intervention, PALI filed its Comment thereto on January 17, 1997, whereas

the PSE filed its own Comment on January 20, 1997.

On February 25, 1996, the PSE filed its Consolidated Reply to the comments of

respondent PALI (October 17, 1996) and the Solicitor General (December 26, 1996).

On May 16, 1997, PALI filed its Rejoinder to the said consolidated reply of PSE.

PSE submits that the Court of Appeals erred in ruling that the SEC had authority to

order the PSE to list the shares of PALI in the stock exchange. Under Presidential

Decree No. 902-A, the powers of the SEC over stock exchanges are more limited as

compared to its authority over ordinary corporations. In connection with this, the

powers of the SEC over stock exchanges under the Revised Securities Act are

specifically enumerated, and these do not include the power to reverse the decisions of

the stock exchange. Authorities are in abundance even in the United States, from

which the country’s security policies are patterned, to the effect of giving the Securities

Commission less control over stock exchanges, which in turn are given more leeway in

making the decision whether or not to allow corporations to offer their stock to the

public through the stock exchange. This is in accord with the "business judgment rule"

whereby the SEC and the courts are barred from intruding into business judgments of

corporations, when the same are made in good faith. The said rule precludes the

reversal of the decision of the PSE to deny PALI’s listing application, absent a showing

of bad faith on the part of the PSE. Under the listing rules of the PSE, to which PALI

had previously agreed to comply, the PSE retains the discretion to accept or reject

applications for listing. Thus, even if an issuer has complied with the PSE listing rules

and requirements, PSE retains the discretion to accept or reject the issuer’s listing

application if the PSE determines that the listing shall not serve the interests of the

investing public.

Moreover, PSE argues that the SEC has no jurisdiction over sequestered corporations,

nor with corporations whose properties are under sequestration. A reading of Republic

of the Philippines v. Sandiganbayan, G.R. No. 105205, 240 SCRA 376, would reveal

that the properties of PALI, which were derived from the Ternate Development

Corporation (TDC) and the Monte del Sol Development Corporation (MSDC), are under

sequestration by the PCGG, and subject of forfeiture proceedings in the

Sandiganbayan. This ruling of the Court is the "law of the case" between the Republic

and TDC and MSDC. It categorically declares that the assets of these corporations

were sequestered by the PCGG on March 10, 1986 and April 4, 1988.

It is, likewise, intimated that the Court of Appeals’ sanction that PALI’s ownership over

its properties can no longer be questioned, since certificates of title have been issued

to PALI and more than one year has since lapsed, is erroneous and ignores well

settled jurisprudence on land titles. That a certificate of title issued under the Torrens

System is a conclusive evidence of ownership is not an absolute rule and admits

certain exceptions. It is fundamental that forest lands or military reservations are non-

alienable. Thus, when a title covers a forest reserve or a government reservation, such

title is void.

PSE, likewise, assails the SEC’s and the Court of Appeals’ reliance on the alleged

policy of "full disclosure" to uphold the listing of PALI’s shares with the PSE, in the

absence of a clear mandate for the effectivity of such policy. As it is, the case records

reveal the truth that PALI did not comply with the listing rules and disclosure

requirements. In fact, PALI’s documents supporting its application contained

misrepresentations and misleading statements, and concealed material information.

The matter of sequestration of PALI’s properties and the fact that the same form part of

military/naval/forest reservations were not reflected in PALI’s application.

It is undeniable that the petitioner PSE is not an ordinary corporation, in that although it

is clothed with the markings of a corporate entity, it functions as the primary channel

through which the vessels of capital trade ply. The PSE’s relevance to the continued

operation and filtration of the securities transactions in the country gives it a distinct

color of importance such that government intervention in its affairs becomes justified, if

not necessary. Indeed, as the only operational stock exchange in the country today,

the PSE enjoys a monopoly of securities transactions, and as such, it yields an

immense influence upon the country’s economy.

Due to this special nature of stock exchanges, the country’s lawmakers have seen it

wise to give special treatment to the administration and regulation of stock exchanges.

6

These provisions, read together with the general grant of jurisdiction, and right of

supervision and control over all corporations under Sec. 3 of P.D. 902-A, give the SEC

the special mandate to be vigilant in the supervision of the affairs of stock exchanges

so that the interests of the investing public may be fully safeguarded.

Section 3 of Presidential Decree 902-A, standing alone, is enough authority to uphold

the SEC’s challenged control authority over the petitioner PSE even as it provides that

"the Commission shall have absolute jurisdiction, supervision, and control over all

corporations, partnerships or associations, who are the grantees of primary franchises

and/or a license or permit issued by the government to operate in the Philippines . . ."

The SEC’s regulatory authority over private corporations encompasses a wide margin

of areas, touching nearly all of a corporation’s concerns. This authority springs from the

fact that a corporation owes its existence to the concession of its corporate franchise

from the state.

The SEC’s power to look into the subject ruling of the PSE, therefore, may be implied

from or be considered as necessary or incidental to the carrying out of the SEC’s

express power to insure fair dealing in securities traded upon a stock exchange or to

ensure the fair administration of such exchange. 7 It is, likewise, observed that the

principal function of the SEC is the supervision and control over corporations,

partnerships and associations with the end in view that investment in these entities

may be encouraged and protected, and their activities pursued for the promotion of

economic development. 8

Thus, it was in the alleged exercise of this authority that the SEC reversed the decision

of the PSE to deny the application for listing in the stock exchange of the private

respondent PALI. The SEC’s action was affirmed by the Court of Appeals.

We affirm that the SEC is the entity with the primary say as to whether or not securities,

including shares of stock of a corporation, may be traded or not in the stock exchange.

This is in line with the SEC’s mission to ensure proper compliance with the laws, such

as the Revised Securities Act and to regulate the sale and disposition of securities in

the country. 9 As the appellate court explains:jgc:chanrobles.com.ph

"Paramount policy also supports the authority of the public respondent to review

petitioner’s denial of the listing. Being a stock exchange, the petitioner performs a

function that is vital to the national economy, as the business is affected with public

interest. As a matter of fact, it has often been said that the economy moves on the

basis of the rise and fall of stocks being traded. By its economic power, the petitioner

certainly can dictate which and how many users are allowed to sell securities thru the

facilities of a stock exchange, if allowed to interpret its own rules liberally as it may

please. Petitioner can either allow or deny the entry to the market of securities. To

repeat, the monopoly, unless accompanied by control, becomes subject to abuse;

hence, considering public interest, then it should be subject to government

regulation."cralaw virtua1aw library

The role of the SEC in our national economy cannot be minimized. The legislature,

through the Revised Securities Act, Presidential Decree No. 902-A, and other pertinent

laws, has entrusted to it the serious responsibility of enforcing all laws affecting

corporations and other forms of associations not otherwise vested in some other

government office. 10

This is not to say, however, that the PSE’s management prerogatives are under the

absolute control of the SEC. The PSE is, after all, a corporation authorized by its

corporate franchise to engage in its proposed and duly approved business. One of the

PSE’s main concerns, as such, is still the generation of profit for its stockholders.

Moreover, the PSE has all the rights pertaining to corporations, including the right to

sue and be sued, to hold property in its own name, to enter (or not to enter) into

contracts with third persons, and to perform all other legal acts within its allocated

express or implied powers.

A corporation is but an association of individuals, allowed to transact under an

assumed corporate name, and with a distinct legal personality. In organizing itself as a

collective body, it waives no constitutional immunities and perquisites appropriate to

such a body. 11 As to its corporate and management decisions, therefore, the state will

generally not interfere with the same. Questions of policy and of management are left

to the honest decision of the officers and directors of a corporation, and the courts are

without authority to substitute their judgment for the judgment of the board of directors.

The board is the business manager of the corporation, and so long as it acts in good

faith, its orders are not reviewable by the courts. 12

Thus, notwithstanding the regulatory power of the SEC over the PSE, and the resultant

authority to reverse the PSE’s decision in matters of application for listing in the

market, the SEC may exercise such power only if the PSE’s judgment is attended by

bad faith. In Board of Liquidators v. Kalaw, 13 it was held that bad faith does not simply

connote bad judgment or negligence. It imports a dishonest purpose or some moral

obliquity and conscious doing of wrong. It means a breach of a known duty through

some motive or interest of ill will, partaking of the nature of fraud.chanrobles.com :

virtual lawlibrary

In reaching its decision to deny the application for listing of PALI, the PSE considered

important facts, which, in the general scheme, brings to serious question the

qualification of PALI to sell its shares to the public through the stock exchange. During

the time for receiving objections to the application, the PSE heard from the

representative of the late President Ferdinand E. Marcos and his family who claim the

properties of the private respondent to be part of the Marcos estate. In time, the PCGG

confirmed this claim. In fact, an order of sequestration has been issued covering the

properties of PALI, and suit for reconveyance to the state has been filed in the

Sandiganbayan Court. How the properties were effectively transferred, despite the

sequestration order, from the TDC and MSDC to Rebecco Panlilio, and to the private

respondent PALI, in only a short span of time, are not yet explained to the Court, but it

is clear that such circumstances give rise to serious doubt as to the integrity of PALI as

a stock issuer. The petitioner was in the right when it refused application of PALI, for a

contrary ruling was not to the best interest of the general public. The purpose of the

Revised Securities Act, after all, is to give adequate and effective protection to the

investing public against fraudulent representations, or false promises, and the

imposition of worthless ventures. 14

It is to be observed that the U.S. Securities Act emphasized its avowed protection to

acts detrimental to legitimate business, thus:jgc:chanrobles.com.ph

"The Securities Act, often referred to as the "truth in securities" Act, was designed not

only to provide investors with adequate information upon which to base their decisions

to buy and sell securities, but also to protect legitimate business seeking to obtain

capital through honest presentation against competition from crooked promoters and to

prevent fraud in the sale of securities. (Tenth Annual Report, U.S. Securities &

Exchange Commission, p. 14).

As has been pointed out, the effects of such an act are chiefly (1) prevention of

excesses and fraudulent transactions, merely by requirement of that their details be

revealed; (2) placing the market during the early stages of the offering of a security a

body of information, which operating indirectly through investment services and expert

investors, will tend to produce a more accurate appraisal of a security. . . . Thus, the

Commission may refuse to permit a registration statement to become effective if it

appears on its face to be incomplete or inaccurate in any material respect, and

empower the Commission to issue a stop order suspending the effectiveness of any

registration statement which is found to include any untrue statement of a material fact

or to omit to state any material fact required to be stated therein or necessary to make

the statements therein not misleading. (Idem)."cralaw virtua1aw library

Also, as the primary market for securities, the PSE has established its name and

goodwill, and it has the right to protect such goodwill by maintaining a reasonable

standard of propriety in the entities who choose to transact through its facilities. It was

reasonable for the PSE, therefore, to exercise its judgment in the manner it deems

appropriate for its business identity, as long as no rights are trampled upon, and public

welfare is safeguarded.

In this connection, it is proper to observe that the concept of government absolutism is

a thing of the past, and should remain so.

The observation that the title of PALI over its properties is absolute and can no longer

be assailed is of no moment. At this juncture, there is the claim that the properties were

owned by TDC and MSDC and were transferred in violation of sequestration orders, to

Rebecco Panlilio and later on to PALI, besides the claim of the Marcoses that such

properties belong to the Marcos estate, and were held only in trust by Rebecco

Panlilio. It is also alleged by the petitioner that these properties belong to naval and

forest reserves, and therefore beyond private dominion. If any of these claims is

established to be true, the certificates of title over the subject properties now held by

PALI may be disregarded, as it is an established rule that a registration of a certificate

of title does not confer ownership over the properties described therein to the person

named as owner. The inscription in the registry, to be effective, must be made in good

faith. The defense of indefeasibility of a Torrens Title does not extend to a transferee

who takes the certificate of title with notice of a flaw.

In any case, for the purpose of determining whether PSE acted correctly in refusing the

application of PALI, the true ownership of the properties of PALI need not be

determined as an absolute fact. What is material is that the uncertainty of the

properties’ ownership and alienability exists, and this puts to question the qualification

of PALI’s public offering. In sum, the Court finds that the SEC had acted arbitrarily in

arrogating unto itself the discretion of approving the application for listing in the PSE of

the private respondent PALI, since this is a matter addressed to the sound discretion of

the PSE, a corporate entity, whose business judgments are respected in the absence

of bad faith.

The question as to what policy is, or should be relied upon in approving the registration

and sale of securities in the SEC is not for the Court to determine, but is left to the

sound discretion of the Securities and Exchange Commission. In mandating the SEC

to administer the Revised Securities Act, and in performing its other functions under

pertinent laws, the Revised Securities Act, under Section 3 thereof, gives the SEC the

power to promulgate such rules and regulations as it may consider appropriate in the

public interest for the enforcement of the said laws. The second paragraph of Section 4

of the said law, on the other hand, provides that no security, unless exempt by law,

shall be issued, endorsed, sold, transferred or in any other manner conveyed to the

public, unless registered in accordance with the rules and regulations that shall be

promulgated in the public interest and for the protection of investors by the

Commission. Presidential Decree No. 902-A, on the other hand, provides that the SEC,

as regulatory agency, has supervision and control over all corporations and over the

securities market as a whole, and as such, is given ample authority in determining

appropriate policies. Pursuant to this regulatory authority, the SEC has manifested that

it has adopted the policy of "full material disclosure" where all companies, listed or

applying for listing, are required to divulge truthfully and accurately, all material

information about themselves and the securities they sell, for the protection of the

investing public, and under pain of administrative, criminal and civil sanctions. In

connection with this, a fact is deemed material if it tends to induce or otherwise effect

the sale or purchase of its securities. 15 While the employment of this policy is

recognized and sanctioned by the laws, nonetheless, the Revised Securities Act sets

substantial and procedural standards which a proposed issuer of securities must

satisfy. 16 Pertinently, Section 9 of the Revised Securities Act sets forth the possible

Grounds for the Rejection of the registration of a security:jgc:chanrobles.com.ph

". . . The Commission may reject a registration statement and refuse to issue a permit

to sell the securities included in such registration statement if it finds that —

(1) The registration statement is on its face incomplete or inaccurate in any material

respect or includes any untrue statement of a material fact or omits to state a material

fact required to be stated therein or necessary to make the statements therein not

misleading; or

(2) The issuer or registrant —

(i) is not solvent or not in sound financial condition;

(ii) has violated or has not complied with the provisions of this Act, or the rules

promulgated pursuant thereto, or any order of the Commission;

(iii) has failed to comply with any of the applicable requirements and conditions that the

Commission may, in the public interest and for the protection of investors, impose

before the security can be registered;

(iv) has been engaged or is engaged or is about to engage in fraudulent transactions;

(v) is in any way dishonest or is not of good repute; or

(vi) does not conduct its business in accordance with law or is engaged in a business

that is illegal or contrary to government rules and regulations.

(3) The enterprise or the business of the issuer is not shown to be sound or to be

based on sound business principles;

(4) An officer, member of the board of directors, or principal stockholder of the issuer is

disqualified to be such officer, director or principal stockholder; or

(5) The issuer or registrant has not shown to the satisfaction of the Commission that

the sale of its security would not work to the prejudice of the public interest or as a

fraud upon the purchasers or investors." (Emphasis ours)

A reading of the foregoing grounds reveals the intention of the lawmakers to make the

registration and issuance of securities dependent, to a certain extent, on the merits of

the securities themselves, and of the issuer, to be determined by the Securities and

Exchange Commission. This measure was meant to protect the interests of the

investing public against fraudulent and worthless securities, and the SEC is mandated

by law to safeguard these interests, following the policies and rules therefore provided.

The absolute reliance on the full disclosure method in the registration of securities is,

therefore, untenable. As it is, the Court finds that the private respondent PALI, on at

least two points (nos. 1 and 5) has failed to support the propriety of the issue of its

shares with unfailing clarity, thereby lending support to the conclusion that the PSE

acted correctly in refusing the listing of PALI in its stock exchange. This does not

discount the effectivity of whatever method the SEC, in the exercise of its vested

authority, chooses in setting the standard for public offerings of corporations wishing to

do so. However, the SEC must recognize and implement the mandate of the law,

particularly the Revised Securities Act, the provisions of which cannot be amended or

supplanted by mere administrative issuance.

In resumé, the Court finds that the PSE has acted with justified circumspection,

discounting, therefore, any imputation of arbitrariness and whimsical animation on its

part. Its action in refusing to allow the listing of PALI in the stock exchange is justified

by the law and by the circumstances attendant to this

case.chanroblesvirtuallawlibrary:red

ACCORDINGLY, in view of the foregoing considerations, the Court hereby GRANTS

the Petition for Review on Certiorari. The Decisions of the Court of Appeals and the

Securities and Exchange Commission dated July 27, 1996 and April 24, 1996,

respectively, are hereby REVERSED and SET ASIDE, and a new Judgment is hereby

ENTERED, affirming the decision of the Philippine Stock Exchange to deny the

application for listing of the private respondent Puerto Azul Land, Inc.

SO ORDERED.

Artificial Being

THIRD DIVISION

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

PHILIPPINE NATIONAL BANK & NATIONAL SUGAR DEVELOPMENT

CORPORATION, Petitioners, v. ANDRADA ELECTRIC & ENGINEERING

COMPANY, Respondent.

D E C I S I O N

PANGANIBAN, J.:

Basic is the rule that a corporation has a legal personality distinct and separate from

the persons and entities owning it. The corporate veil may be lifted only if it has been

used to shield fraud, defend crime, justify a wrong, defeat public convenience, insulate

bad faith or perpetuate injustice. Thus, the mere fact that the Philippine National Bank

(PNB) acquired ownership or management of some assets of the Pampanga Sugar Mill

(PASUMIL), which had earlier been foreclosed and purchased at the resulting public

auction by the Development Bank of the Philippines (DBP), will not make PNB liable for

the PASUMIL’s contractual debts to Respondent.chanrob1es virtua1 1aw 1ibrary

Statement of the Case

Before us is a Petition for Review assailing the April 17, 2000 Decision 1 of the Court of

Appeals (CA) in CA-G.R. CV No. 57610. The decretal portion of the challenged

Decision reads as follows:jgc:chanrobles.com.ph

"WHEREFORE, the judgment appealed from is hereby AFFIRMED." 2

The Facts

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

follows:jgc:chanrobles.com.ph

"In its complaint, the plaintiff [herein respondent] alleged that it is a partnership duly

organized, existing, and operating under the laws of the Philippines, with office and

principal place of business at Nos. 794-812 Del Monte [A]venue, Quezon City, while

the defendant [herein petitioner] Philippine National Bank (herein referred to as PNB),

is a semi-government corporation duly organized, existing and operating under the

laws of the Philippines, with office and principal place of business at Escolta Street,

Sta. Cruz, Manila; whereas, the other defendant, the National Sugar Development

Corporation (NASUDECO in brief), is also a semi-government corporation and the

sugar arm of the PNB, with office and principal place of business at the 2nd Floor,

Sampaguita Building, Cubao, Quezon City; and the defendant Pampanga Sugar Mills

(PASUMIL in short), is a corporation organized, existing and operating under the 1975

laws of the Philippines, and had its business office before 1975 at Del Carmen,

Floridablanca, Pampanga; that the plaintiff is engaged in the business of general

construction for the repairs and/or construction of different kinds of machineries and

buildings; that on August 26, 1975, the defendant PNB acquired the assets of the

defendant PASUMIL that were earlier foreclosed by the Development Bank of the

Philippines (DBP) under LOI No. 311; that the defendant PNB organized the defendant

NASUDECO in September, 1975, to take ownership and possession of the assets and

ultimately to nationalize and consolidate its interest in other PNB controlled sugar mills;

that prior to October 29, 1971, the defendant PASUMIL engaged the services of

plaintiff for electrical rewinding and repair, most of which were partially paid by the

defendant PASUMIL, leaving several unpaid accounts with the plaintiff; that finally, on

October 29, 1971, the plaintiff and the defendant PASUMIL entered into a contract for

the plaintiff to perform the following, to wit —

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

‘(b) Construction of three (3) reinforced concrete foundation for three (3) units 350 KW

diesel engine generating set[s];

‘(c) Construction of three (3) reinforced concrete foundation for the 5,000 KW and

1,250 KW turbo generator sets;

‘(d) Complete overhauling and reconditioning tests sum for three (3) 350 KW diesel

engine generating set[s];

‘(e) Installation of turbine and diesel generating sets including transformer,

switchboard, electrical wirings and pipe provided those stated units are completely

supplied with their accessories;

‘(f) Relocating of 2,400 V transmission line, demolition of all existing concrete

foundation and drainage canals, excavation, and earth fillings — all for the total amount

of P543,500.00 as evidenced by a contract, [a] xerox copy of which is hereto attached

as Annex ‘A’ and made an integral part of this complaint;’

that aside from the work contract mentioned-above, the defendant PASUMIL required

the plaintiff to perform extra work, and provide electrical equipment and spare parts,

such as:chanrob1es virtual 1aw library

‘(a) Supply of electrical devices;

‘(b) Extra mechanical works;

‘(c) Extra fabrication works;

‘(d) Supply of materials and consumable items;

‘(e) Electrical shop repair;

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

‘(g) Supply of electrical equipment for machinery;

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

that out of the total obligation of P777,263.80, the defendant PASUMIL had paid only

P250,000.00, leaving an unpaid balance, as of June 27, 1973, amounting to

P527,263.80, as shown in the Certification of the chief accountant of the PNB, a

machine copy of which is appended as Annex ‘C’ of the complaint; that out of said

unpaid balance of P527,263.80, the defendant PASUMIL made a partial payment to

the plaintiff of P14,000.00, in broken amounts, covering the period from January 5,

1974 up to May 23, 1974, leaving an unpaid balance of P513,263.80; that the

defendant PASUMIL and the defendant PNB, and now the defendant NASUDECO,

failed and refused to pay the plaintiff their just, valid and demandable obligation; that

the President of the NASUDECO is also the Vice-President of the PNB, and this official

holds office at the 10th Floor of the PNB, Escolta, Manila, and plaintiff besought this

official to pay the outstanding obligation of the defendant PASUMIL, inasmuch as the

defendant PNB and NASUDECO now owned and possessed the assets of the

defendant PASUMIL, and these defendants all benefited from the works, and the

electrical, as well as the engineering and repairs, performed by the plaintiff; that

because of the failure and refusal of the defendants to pay their just, valid, and

demandable obligations, plaintiff suffered actual damages in the total amount of

P513,263.80; and that in order to recover these sums, the plaintiff was compelled to

engage the professional services of counsel, to whom the plaintiff agreed to pay a sum

equivalent to 25% of the amount of the obligation due by way of attorney’s fees.

Accordingly, the plaintiff prayed that judgment be rendered against the defendants

PNB, NASUDECO, and PASUMIL, jointly and severally to wit:chanrob1es virtual 1aw

library

‘(1) Sentencing the defendants to pay the plaintiffs the sum of P513,263.80, with

annual interest of 14% from the time the obligation falls due and demandable;

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

amount claim;

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

"The defendants PNB and NASUDECO filed a joint motion to dismiss the complaint

chiefly on the ground that the complaint failed to state sufficient allegations to establish

a cause of action against both defendants, inasmuch as there is lack or want of privity

of contract between the plaintiff and the two defendants, the PNB and NASUDECO,

said defendants citing Article 1311 of the New Civil Code, and the case law ruling in

Salonga v. Warner Barnes & Co., 88 Phil. 125; and Manila Port Service, Et. Al. v. Court

of Appeals, Et Al., 20 SCRA 1214.

"The motion to dismiss was by the court a quo denied in its Order of November 27,

1980; in the same order, that court directed the defendants to file their answer to the

complaint within 15 days.

"In their answer, the defendant NASUDECO reiterated the grounds of its motion to

dismiss, to wit:chanrob1es virtual 1aw library

‘That the complaint does not state a sufficient cause of action against the defendant

NASUDECO because: (a) NASUDECO is not . . . privy to the various electrical

construction jobs being sued upon by the plaintiff under the present complaint; (b) the

taking over by NASUDECO of the assets of defendant PASUMIL was solely for the

purpose of reconditioning the sugar central of defendant PASUMIL pursuant to martial

law powers of the President under the Constitution; (c) nothing in the LOI No. 189-A

(as well as in LOI No. 311) authorized or commanded the PNB or its subsidiary

corporation, the NASUDECO, to assume the corporate obligations of PASUMIL as that

being involved in the present case; and, (d) all that was mentioned by the said letter of

instruction insofar as the PASUMIL liabilities [were] concerned [was] for the PNB, or its

subsidiary corporation the NASUDECO, to make a study of, and submit [a]

recommendation on the problems concerning the same.’

"By way of counterclaim, the NASUDECO averred that by reason of the filing by the

plaintiff of the present suit, which it [labeled] as unfounded or baseless, the defendant

NASUDECO was constrained to litigate and incur litigation expenses in the amount of

P50,000.00, which plaintiff should be sentenced to pay. Accordingly, NASUDECO

prayed that the complaint be dismissed and on its counterclaim, that the plaintiff be

condemned to pay P50,000.00 in concept of attorney’s fees as well as exemplary

damages.

"In its answer, the defendant PNB likewise reiterated the grounds of its motion to

dismiss, namely: (1) the complaint states no cause of action against the defendant

PNB; (2) that PNB is not a party to the contract alleged in par. 6 of the complaint and

that the alleged services rendered by the plaintiff to the defendant PASUMIL upon

which plaintiff’s suit is erected, was rendered long before PNB took possession of the

assets of the defendant PASUMIL under LOI No. 189-A; (3) that the PNB take-over of

the assets of the defendant PASUMIL under LOI 189-A was solely for the purpose of

reconditioning the sugar central so that PASUMIL may resume its operations in time for

the 1974-75 milling season, and that nothing in the said LOI No. 189-A, as well as in

LOI No. 311, authorized or directed PNB to assume the corporate obligation/s of

PASUMIL, let alone that for which the present action is brought; (4) that PNB’s

management and operation under LOI No. 311 did not refer to any asset of PASUMIL

which the PNB had to acquire and thereafter [manage], but only to those which were

foreclosed by the DBP and were in turn redeemed by the PNB from the DBP; (5) that

conformably to LOI No. 311, on August 15, 1975, the PNB and the Development Bank

of the Philippines (DBP) entered into a ‘Redemption Agreement’ whereby DBP sold,

transferred and conveyed in favor of the PNB, by way of redemption, all its (DBP)

rights and interest in and over the foreclosed real and/or personal properties of

PASUMIL, as shown in Annex ‘C’ which is made an integral part of the answer; (6) that

again, conformably with LOI No. 311, PNB pursuant to a Deed of Assignment dated

October 21, 1975, conveyed, transferred, and assigned for valuable consideration, in

favor of NASUDECO, a distinct and independent corporation, all its (PNB) rights and

interest in and under the above ‘Redemption Agreement.’ This is shown in Annex ‘D’

which is also made an integral part of the answer; [7] that as a consequence of the said

Deed of Assignment, PNB on October 21, 1975 ceased to manage and operate the

above-mentioned assets of PASUMIL, which function was now actually transferred to

NASUDECO. In other words, so asserted PNB, the complaint as to PNB, had become

moot and academic because of the execution of the said Deed of Assignment; [8] that

moreover, LOI No. 311 did not authorize or direct PNB to assume the corporate

obligations of PASUMIL, including the alleged obligation upon which this present suit

was brought; and [9] that, at most, what was granted to PNB in this respect was the

authority to ‘make a study of and submit recommendation on the problems concerning

the claims of PASUMIL creditors,’ under sub-par. 5 LOI No. 311.

"In its counterclaim, the PNB averred that it was unnecessarily constrained to litigate

and to incur expenses in this case, hence it is entitled to claim attorney’s fees in the

amount of at least P50,000.00. Accordingly, PNB prayed that the complaint be

dismissed; and that on its counterclaim, that the plaintiff be sentenced to pay defendant

PNB the sum of P50,000.00 as attorney’s fees, aside from exemplary damages in such

amount that the court may seem just and equitable in the premises.

"Summons by publication was made via the Philippines Daily Express, a newspaper

with editorial office at 371 Bonifacio Drive, Port Area, Manila, against the defendant

PASUMIL, which was thereafter declared in default as shown in the August 7, 1981

Order issued by the Trial Court.

"After due proceedings, the Trial Court rendered judgment, the decretal portion of

which reads:chanrob1es virtual 1aw library

‘WHEREFORE, judgment is hereby rendered in favor of plaintiff and against the

defendant Corporation, Philippine National Bank (PNB) NATIONAL SUGAR

DEVELOPMENT CORPORATION (NASUDECO) and PAMPANGA SUGAR MILLS

(PASUMIL), ordering the latter to pay jointly and severally the former the

following:chanrob1es virtual 1aw library

‘1. The sum of P513,623.80 plus interest thereon at the rate of 14% per annum as

claimed from September 25, 1980 until fully paid;

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

‘3. Costs.

‘SO ORDERED.

‘Manila, Philippines, September 4, 1986.

‘(SGD) ERNESTO S. TENGCO

‘Judge ‘" 3

Ruling of the Court of Appeals

Affirming the trial court, the CA held that it was offensive to the basic tenets of justice

and equity for a corporation to take over and operate the business of another

corporation, while disavowing or repudiating any responsibility, obligation or liability

arising therefrom. 4

Hence, this Petition. 5

Issues

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

consideration:chanrob1es virtual 1aw library

"I

The Court of Appeals gravely erred in law in holding the herein petitioners liable for the

unpaid corporate debts of PASUMIL, a corporation whose corporate existence has not

been legally extinguished or terminated, simply because of petitioners[’] take-over of

the management and operation of PASUMIL pursuant to the mandates of LOI No. 189-

A, as amended by LOI No. 311.

"II

The Court of Appeals gravely erred in law in not applying [to] the case at bench the

ruling enunciated in Edward J. Nell Co. v. Pacific Farms, 15 SCRA 415." 6

Succinctly put, the aforesaid errors boil down to the principal issue of whether PNB is

liable for the unpaid debts of PASUMIL to Respondent.

This Court’s Ruling

The Petition is meritorious.

Main Issue:chanrob1es virtual 1aw library

Liability for Corporate Debts

As a general rule, questions of fact may not be raised in a petition for review under

Rule 45 of the Rules of Court. 7 To this rule, however, there are some exceptions

enumerated in Fuentes v. Court of Appeals. 8 After a careful scrutiny of the records

and the pleadings submitted by the parties, we find that the lower courts

misappreciated the evidence presented. 9 Overlooked by the CA were certain relevant

facts that would justify a conclusion different from that reached in the assailed

Decision. 10

Petitioners posit that they should not be held liable for the corporate debts of

PASUMIL, because their takeover of the latter’s foreclosed assets did not make them

assignees. On the other hand, respondent asserts that petitioners and PASUMIL

should be treated as one entity and, as such, jointly and severally held liable for

PASUMIL’s unpaid obligation.

As a rule, a corporation that purchases the assets of another will not be liable for the

debts of the selling corporation, provided the former acted in good faith and paid

adequate consideration for such assets, except when any of the following

circumstances is present: (1) where the purchaser expressly or impliedly agrees to

assume the debts, (2) where the transaction amounts to a consolidation or merger of

the corporations, (3) where the purchasing corporation is merely a continuation of the

selling corporation, and (4) where the transaction is fraudulently entered into in order to

escape liability for those debts. 11

Piercing the Corporate

Veil Not Warranted

A corporation is an artificial being created by operation of law. It possesses the right of

succession and such powers, attributes, and properties expressly authorized by law or

incident to its existence. 12 It has a personality separate and distinct from the persons

composing it, as well as from any other legal entity to which it may be related. 13 This

is basic.

Equally well-settled is the principle that the corporate mask may be removed or the

corporate veil pierced when the corporation is just an alter ego of a person or of

another corporation. 14 For reasons of public policy and in the interest of justice, the

corporate veil will justifiably be impaled 15 only when it becomes a shield for fraud,

illegality or inequity committed against third persons. 16

Hence, any application of the doctrine of piercing the corporate veil should be done

with caution. 17 A court should be mindful of the milieu where it is to be applied. 18 It

must be certain that the corporate fiction was misused to such an extent that injustice,

fraud, or crime was committed against another, in disregard of its rights. 19 The

wrongdoing must be clearly and convincingly established; it cannot be presumed. 20

Otherwise, an injustice that was never unintended may result from an erroneous

application. 21

This Court has pierced the corporate veil to ward off a judgment credit, 22 to avoid

inclusion of corporate assets as part of the estate of the decedent, 23 to escape liability

arising from a debt, 24 or to perpetuate fraud and/or confuse legitimate issues 25 either

to promote or to shield unfair objectives 26 or to cover up an otherwise blatant violation

of the prohibition against forum-shopping. 27 Only in these and similar instances may

the veil be pierced and disregarded. 28

The question of whether a corporation is a mere alter ego is one of fact. 29 Piercing the

veil of corporate fiction may be allowed only if the following elements concur: (1)

control — not mere stock control, but complete domination — not only of finances, but

of policy and business practice in respect to the transaction attacked, must have been

such that the corporate entity as to this transaction had at the time no separate mind,

will or existence of its own; (2) such control must have been used by the defendant to

commit a fraud or a wrong to perpetuate the violation of a statutory or other positive

legal duty, or a dishonest and an unjust act in contravention of plaintiff’s legal right; and

(3) the said control and breach of duty must have proximately caused the injury or

unjust loss complained of. 30

We believe that the absence of the foregoing elements in the present case precludes

the piercing of the corporate veil. First, other than the fact that petitioners acquired the

assets of PASUMIL, there is no showing that their control over it warrants the disregard

of corporate personalities. 31 Second, there is no evidence that their juridical

personality was used to commit a fraud or to do a wrong; or that the separate corporate

entity was farcically used as a mere alter ego, business conduit or instrumentality of

another entity or person. 32 Third, respondent was not defrauded or injured when

petitioners acquired the assets of PASUMIL. 33

Being the party that asked for the piercing of the corporate veil, respondent had the

burden of presenting clear and convincing evidence to justify the setting aside of the

separate corporate personality rule. 34 However, it utterly failed to discharge this

burden; 35 it failed to establish by competent evidence that petitioner’s separate

corporate veil had been used to conceal fraud, illegality or inequity. 36

While we agree with respondent’s claim that the assets of the National Sugar

Development Corporation (NASUDECO) can be easily traced to PASUMIL, 37 we are

not convinced that the transfer of the latter’s assets to petitioners was fraudulently

entered into in order to escape liability for its debt to Respondent. 38

A careful review of the records reveals that DBP foreclosed the mortgage executed by

PASUMIL and acquired the assets as the highest bidder at the public auction

conducted. 39 The bank was justified in foreclosing the mortgage, because the

PASUMIL account had incurred arrearages of more than 20 percent of the total

outstanding obligation. 40 Thus, DBP had not only a right, but also a duty under the

law to foreclose the subject properties. 41

Pursuant to LOI No. 189-A 42 as amended by LOI No. 311, 43 PNB acquired

PASUMIL’s assets that DBP had foreclosed and purchased in the normal course.

Petitioner bank was likewise tasked to manage temporarily the operation of such

assets either by itself or through a subsidiary corporation. 44

PNB, as the second mortgagee, redeemed from DBP the foreclosed PASUMIL assets

pursuant to Section 6 of Act No. 3135. 45 These assets were later conveyed to PNB

for a consideration, the terms of which were embodied in the Redemption Agreement

46 PNB, as successor-in-interest, stepped into the shoes of DBP as PASUMIL’s

creditor 47 By way of a Deed of Assignment, 48 PNB then transferred to NASUDECO

all its rights under the Redemption Agreement.

In Development Bank of the Philippines v. Court of Appeals, 49 we had the occasion to

resolve a similar issue. We ruled that PNB, DBP and their transferees were not liable

for Marinduque Mining’s unpaid obligations to Remington Industrial Sales Corporation

(Remington) after the two banks had foreclosed the assets of Marinduque Mining. We

likewise held that Remington failed to discharge its burden of proving bad faith on the

part of Marinduque Mining to justify the piercing of the corporate veil.

In the instant case, the CA erred in affirming the trial court’s lifting of the corporate

mask. 50 The CA did not point to any fact evidencing bad faith on the part of PNB and

its transferee. 51 The corporate fiction was not used to defeat public convenience,

justify a wrong, protect fraud or defend crime. 52 None of the foregoing exceptions was

shown to exist in the present case. 53 On the contrary, the lifting of the corporate veil

would result in manifest injustice. This we cannot allow.

No Merger or

Consolidation

Respondent further claims that petitioners should be held liable for the unpaid

obligations of PASUMIL by virtue of LOI Nos. 189-A and 311, which expressly

authorized PASUMIL and PNB to merge or consolidate. On the other hand, petitioners

contend that their takeover of the operations of PASUMIL did not involve any corporate

merger or consolidation, because the latter had never lost its separate identity as a

corporation.

A consolidation is the union of two or more existing entities to form a new entity called

the consolidated corporation. A merger, on the other hand, is a union whereby one or

more existing corporations are absorbed by another corporation that survives and

continues the combined business. 54

The merger, however, does not become effective upon the mere agreement of the

constituent corporations. 55 Since a merger or consolidation involves fundamental

changes in the corporation, as well as in the rights of stockholders and creditors, there

must be an express provision of law authorizing them. 56 For a valid merger or

consolidation, the approval by the Securities and Exchange Commission (SEC) of the

articles of merger or consolidation is required. 57 These articles must likewise be duly

approved by a majority of the respective stockholders of the constituent corporations.

58

In the case at bar, we hold that there is no merger or consolidation with respect to

PASUMIL and PNB. The procedure prescribed under Title IX of the Corporation Code

59 was not followed.

In fact, PASUMIL’s corporate existence, as correctly found by the CA, had not been

legally extinguished or terminated. 60 Further, prior to PNB’s acquisition of the

foreclosed assets, PASUMIL had previously made partial payments to respondent for

the former’s obligation in the amount of P777,263.80. As of June 27, 1973, PASUMIL

had paid P250,000 to respondent and, from January 5, 1974 to May 23, 1974, another

P14,000.

Neither did petitioner expressly or impliedly agree to assume the debt of PASUMIL

to Respondent. 61 LOI No. 11 explicitly provides that PNB shall study and submit

recommendations on the claims of PASUMIL’s creditors. 62 Clearly, the corporate

separateness between PASUMIL and PNB remains, despite respondent’s insistence to

the contrary. 63

WHEREFORE, the Petition is hereby GRANTED and the assailed Decision SET

ASIDE. No pronouncement as to costs.chanrob1es virtua1 1aw 1ibrary

SO ORDERED.

FIRST DIVISION [G.R. No. 48930. February 23, 1944. ] ANTONIO VAZQUEZ, Petitioner, v. FRANCISCO DE BORJA, Respondent. [G.R. No. 48931. February 23, 1944. ] FRANCISCO DE BORJA, Petitioner, v. ANTONIO VAZQUEZ, Respondent. SYLLABUS

1. CORPORATIONS; OFFICERS’ PERSONAL LIABILITY ON CONTRACTS. — It is

well known that a corporation is an artificial being invested by law with a personality of

its own, separate and distinct from that of its stockholders and from that of its officers

who manage and run its affairs. The mere fact that its personality is owing to a legal

fiction and that it necessarily has to act thru its agents, does not make the latter

personally liable on a contract duly entered into, or for an act lawfully performed, by

them for and in its behalf. The legal fiction by which the personality of a corporation is

created is a practical reality and necessity. Without it no corporate entities may exist

and no corporate business may be transacted. Such legal fiction may be disregarded

only when an attempt is made to use it as a cloak to hide an unlawful or fraudulent

purpose. No such thing has been alleged or proven in this case. It has not been

alleged nor even intimated that Vazquez personally benefited by the contract of sale in

question and that he is merely invoking the legal fiction to avoid personal liability.

Neither is it contended that he entered into said contract for the corporation in bad faith

and with intent to defraud the plaintiff. We find no legal and factual basis upon which to

hold him liable on the contract either principally or subsidiarily.

2. ID.; ID.; NEGLIGENCE. — The trial court found him guilty of negligence in the

performance of the contract and held him personally liable on that account. On the

other hand, the Court of Appeals found that he "no solamente obro con negligencia,

sino interviniendo culpa de su parte, por lo que de acuerdo con los arts. 1102, 1103 y

1902 del Codigo Civil, el debe ser responsable subsidiariamente del pago de la

cantidad objeto de la demanda." We think both the trial court and the Court of Appeals

erred in law in so holding. They have manifestly failed to distinguish a contractual from

an extracontractual obligation, or an obligation arising from contract from an obligation

arising from culpa aquiliana. The fault and negligence referred to in articles 1101-1104

of the Civil Code are those incidental to the fulfillment or nonfulfillment of a contractual

obligation; while the fault or negligence referred to in article 1902 is the culpa aquiliana

of the civil law, homologous but not identical to tort of the common law, which gives

rise to an obligation independently of any contract. (Cf. Manila R. R. Co. v. Cia.

Trasatlantica, 38 Phil., 875, 887-890; Cangco v. Manila R. R. Co., 38 Phil., 768.) The

fact that the corporation, acting thru Vazquez as its manager, was guilty of negligence

in the fulfillment of the contract, did not make Vazquez principally or even subsidiarily

liable for such negligence. Since it was the corporation’s contract, its nonfulfillment,

whether due to negligence or fault or to any other cause, made the corporation and not

its agent liable.

3. ID.; ID.; ID. — On the other hand, independently of the contract Vazquez by his fault

or negligence caused damage to the plaintiff, he would be liable to the latter under

article 1902 of the Civil Code. But then the plaintiff’s cause of action should be based

on culpa aquiliana and not on the contract alleged in his complaint herein; and

Vazquez’ liability would be principal and not merely subsidiary, as the Court of Appeals

has erroneously held.

4. ID.; ID.; ID.; NO CAUSE OF ACTION BASED ON "CULPA AQUILIANA" ALLEGED

IN COMPLAINT OR LITIGATED IN TRIAL COURT; NO JURISDICTION OVER THE

ISSUE. — No such cause of action was alleged in the complaint or tried by express or

implied consent of the parties by virtue of section 4 of Rule 17. Hence the trial court

had no jurisdiction over the issue and could not adjudicate upon it. (Reyes v. Diaz, G.

R. No. 48754.) Consequently it was error for the Court of Appeals to remand the case

to the trial court to try and decide such issue.

D E C I S I O N

OZAETA, J.:

This action was commenced in the Court of First Instance of Manila by Francisco de

Borja against Antonio Vazquez and Fernando Busuego to recover from them jointly

and severally the total sum of P4,702.70 upon three alleged causes of action, to wit:

First, that in or about the month of January, 1932, the defendants jointly and severally

obligated themselves to sell to the plaintiff 4,000 cavans of palay at P2.10 per cavan, to

be delivered during the month of February, 1932, the said defendants having

subsequently received from the plaintiff in virtue of said agreement the sum of P8,400;

that the defendants delivered to the plaintiff during the months of February, March, and

April, 1932, only 2,488 cavans of palay of the value of P5,224.80 and refused to deliver

the balance of 1,512 cavans of the value of P3,175.20 notwithstanding repeated

demands. Second, that because of defendants’ refusal to deliver to the plaintiff the said

1,512 cavans of palay within the period above mentioned, the plaintiff suffered

damages in the sum of P1,000. And, third, that on account of the agreement above

mentioned the plaintiff delivered to the defendants 4,000 empty sacks, of which they

returned to the plaintiff only 2,490 and refused to deliver to the plaintiff the balance of

1,510 sacks or to pay their value amounting to P377.50; and that on account of such

refusal the plaintiff suffered damages in the sum of P150.

The defendant Antonio Vazquez answered the complaint, denying having entered into

the contract mentioned in the first cause of action in his own individual and personal

capacity, either solely or together with his codefendant Fernando Busuego, and

alleging that the agreement for the purchase of 4,000 cavans of palay and the payment

of the price of P8,400 were made by the plaintiff with and to the Natividad-Vazquez

Sabani Development Co., Inc., a corporation organized and existing under the laws of

the Philippines, of which the defendant Antonio Vazquez was the acting manager at

the time the transaction took place. By way of counterclaim, the said defendant alleged

that he suffered damages in the sum of P1,000 on account of the filing of this action

against him by the plaintiff with full knowledge that the said defendant had nothing to

do whatever with any and all of the transactions mentioned in the complaint in his own

individual and personal capacity.

The trial court rendered judgment ordering the defendant Antonio Vazquez to pay to

the plaintiff the sum of P3,175.20 plus the sum of P377.50, with legal interest on both

sums, and absolving the defendant Fernando Busuego (treasurer of the corporation)

from the complaint and the plaintiff from the defendant Antonio Vazquez’ counterclaim.

Upon appeal to the Court of Appeals, the latter modified that judgment by reducing it to

the total sum of P3,314.78, with legal interest thereon and the costs. But by a

subsequent resolution upon the defendant’s motion for reconsideration, the Court of

Appeals set aside its judgment and ordered that the case be remanded to the court of

origin for further proceedings. The defendant Vazquez, not being agreeable to that

result, filed the present petition for certiorari (G.R. No. 48930) to review and reverse

the judgment of the Court of Appeals; and the plaintiff Francisco de Borja, excepting to

the resolution of the Court of Appeals whereby its original judgment was set aside and

the case was ordered remanded to the court of origin for further proceedings, filed a

cross-petition for certiorari (G.R. No. 48931) to maintain the original judgment of the

Court of Appeals.

The original decision of the Court of Appeals and its subsequent resolutions on

reconsideration read as follows:jgc:chanrobles.com.ph

"Es hecho no controvertido que el 25 de Febrero de 1932, el demandado-apelante

vendio al demandante 4,000 cavanes de palay al precio de P2.10 el cavan, de los

cuales, dicho demandante solamente recibio 2,583 cavanes; y que asimismo recibio

para su envase 4,000 sacos vacios. Esta probado que de dichos 4,000 sacos vacios

solamente se entregaron, 2,583 quedando en poder del demandado el resto, y cuyo

valor es el de P0.24 cada uno. Presentada la demanda contra los demandados

Antonio Vazquez y Fernando Busuego para el pago de la cantidad de P4,702.70, con

sus intereses legales desde el 1.0 de marzo de 1932 hasta su completeo pago y las

costas, el Juzgado de Primera Instancia de Manila fallo el asunto condenando a

Antonio Vazquez a pagar al demandante la cantidad de P3,175.20, mas la cantidad de

P377.50, con sus intereses legales, absolviendo al demandado Fernando Busuego de

la demanda y al demandante de la reconvencion de los demandados, sin especial

pronunciamiento en cuanto a las costas. De dicha decision apelo el demandado

Antonio Vazquez, apuntando como principal error el de que el habia sido condenado

personalmente, y no la corporacion por el representada.

"Segun la preponderancia de las pruebas, la venta hecha por Antonio Vazquez a favor

de Francisco de Borja de los 4,000 cavanes de palay fue en su capacidad de

Presidente interino y Manager de la corporacion Natividad-Vazquez Sabani

Development Co., Inc. Asi resulta del Exh. 1, que es la copia al carbon del recibo

otorgado por el demandado Vazquez, y cuyo original lo habia perdido el demandante,

segun el. Asi tambien consta en los libros de la corporacion arriba mencionada, puesto

que en los mismos se ha asentado tanto la entrada de los P8,400, precio del palay,

como su envio al gobierno en pago de los alquileres de la Hacienda Sabani. Asi mismo

lo admitio Francisco de Borja al abogado Sr. Jacinto Tomacruz, posterior presidente

de la corporacion sucesora en el arrendamiento de la Sabani Estate, cuando el solicito

sus buenos oficios para el cobro del precio del palay no entregado. Asi igualmente lo

declaro el que hizo entrega de parte del palay a Borja, Felipe Veneracion, cuyo

testimonio no ha sido refutado. Y asi se deduce de la misma demanda, cuando se

incluyo en ella a Fernando Busuego, tesorero de la Natividad-Vazquez Sabani

Development Co., Inc.

"Siendo esto asi, la principal responsable debe ser la Natividad- Vazquez Sabani

Development Co., Inc., que quedo insolvente y dejo de existir. El Juez sentenciador

declaro, sin embargo, al demandado Vazquez responsable del pago de la cantidad

reclamada por su negligencia al vender los referidos 4,000 cavanes de palay sin

averiguar antes si o no dicha cantidad existia en las bodegas de la corporacion.

"Resulta del Exh. 8 que despues de la venta de los 4,000 cavanes de palay a

Francisco de Borja, el mismo demandado vendio a Kwong Ah Phoy 1,500 cavanes al

precio de P2.00 el cavan, y decimos ’despues’ porque esta ultima venta aparece

asentada despues de la primera. Segun esto, el apelante no solamente obro con

negligencia, sino interviniendo culpa de su parte, por lo que de acuerdo con los arts.

1102, 1103 y 1902 del Codigo Civil, el debe ser responsable subsidiariamente del

pago de la cantidad objeto de la demanda.

"En meritos de todo lo expuesto, se confirma la decision apelada con la modificacion

de que el apelante debe pagar al apelado la suma de P2,975.70 como valor de los

1,417 cavanes de palay que dejo de entregar al demandante, mas la suma de P339.08

como importe de los 1,417 sacos vacios, que dejo de devolver, a razon de P0.24 el

saco, total P3,314.78, con sus intereses legales desde la interposicion de la demanda

y las costas de ambas instancias."cralaw virtua1aw library

"Vista la mocion de reconsideracion de nuestra decision de fecha 13 de Octubre de

1942, y alegandose en la misma que cuando el apelante vendio los 1,500 cavanes de

palay a Ah Phoy, la corporacion todavia tenia bastante existencia de dicho grano, y no

estando dicho extremo suficientemente discutido y probado, y pudiendo variar el

resultado del asunto, dejamos sin efecto nuestra citada decision, y ordenamos la

devolucion de la causa al Juzgado de origen para que reciba pruebas al efecto y dicte

despues la decision correspondiente."cralaw virtua1aw library

"Upon consideration of the motion of the attorney for the plaintiff-appellee in case CA-

G.R. No. 8676, Francisco de Borja v. Antonio Vazquez Et. Al., praying, for the reasons

therein given, that the resolution of December 22, 1942, be reconsidered: Considering

that said resolution remanding the case to the lower court is for the benefit of the

plaintiff-appellee to afford him opportunity to refute the contention of the defendant-

appellant Antonio Vazquez, motion denied."cralaw virtua1aw library

The action is on a contract, and the only issue pleaded and tried is whether the plaintiff

entered into the contract with the defendant Antonio Vazquez in his personal capacity

or as manager of the Natividad-Vazquez Sabani Development Co., Inc. The Court of

Appeals found that according to the preponderance of the evidence "the sale made by

Antonio Vazquez in favor of Francisco de Borja of 4,000 cavans of palay was in his

capacity as acting president and manager of the corporation Natividad-Vazquez

Sabani Development Co., Inc." That finding of fact is final and, it resolving the only

issue involved, should be determinative of the result.

The Court of Appeals doubly erred in ordering that the cause be remanded to the court

of origin for further trial to determine whether the corporation had sufficient stock of

palay at the time appellant sold 1,500 cavans of palay to Kwong Ah Phoy. First, if that

point was material to the issue, it should have been proven during the trial; and the

statement of the court that it had not been sufficiently discussed and proven was no

justification for ordering a new trial, which, by the way, neither party had solicited but

against which, on the contrary, both parties now vehemently protest. Second, the point

is, in any event, beside the issue, and this we shall now discuss in connection with the

original judgment of the Court of Appeals which the plaintiff cross-petitioner seeks to

maintain.

The action being on a contract, and it appearing from the preponderance of the

evidence that the party liable on the contract is the Natividad-Vazquez Sabani

Development Co., Inc., which is not a party herein, the complaint should have been

dismissed. Counsel for the plaintiff, in his brief as respondent, argues that altho by the

preponderance of the evidence the trial court and the Court of Appeals found that

Vazquez celebrated the contract in his capacity as acting president of the corporation

and altho it was the latter, thru Vazquez, with which the plaintiff had contracted and

which, thru Vazquez, had received the sum of P8,400 from Borja, and altho that was

true from the point of view of a legal fiction, "ello no impide que tambien sea verdad lo

alegado en la demanda de que la persona de Vazquez fue la que contrato con Borja y

que la misma persona de Vazquez fue quien recibio la suma de P8,400." But such

argument is invalid and insufficient to show that the president of the corporation is

personally liable on the contract duly and lawfully entered into by him in its behalf.

It is well known that a corporation is an artificial being invested by law with a

personality of its own, separate and distinct from that of its stockholders and from that

of its officers who manage and run its affairs. The mere fact that its personality is owing

to a legal fiction and that it necessarily has to act thru its agents, does not make the

latter personally liable on a contract duly entered into, or for an act lawfully performed,

by them for and in its behalf. The legal fiction by which the personality of a corporation

is created is a practical reality and necessity. Without it no corporate entities may exist

and no corporate business may be transacted. Such legal fiction may be disregarded

only when an attempt is made to use it as a cloak to hide an unlawful or fraudulent

purpose. No such thing has been alleged or proven in this case. It has not been

alleged nor even intimated that Vazquez personally benefited by the contract of sale in

question and that he is merely invoking the legal fiction to avoid personal liability.

Neither is it contended that he entered into said contract for the corporation in bad faith

and with intent to defraud the plaintiff. We find no legal and factual basis upon which to

hold him liable on the contract either principally or subsidiarily.

The trial court found him guilty of negligence in the performance of the contract and

held him personally liable on that account. On the other hand, the Court of Appeals

found that he "no solamente obro con negligencia, sino interviniendo culpa de su parte,

por lo que de acuerdo con los arts. 1102, 1103 y 1902 del Codigo Civil, el debe ser

responsable subsidiariamente del pago de la cantidad objeto de la demanda." We think

both the trial court and the Court of Appeals erred in law in so holding. They have

manifestly failed to distinguish a contractual from an extracontractual obligation, or an

obligation arising from contract from an obligation arising from culpa aquiliana. The

fault and negligence referred to in articles 1101-1104 of the Civil Code are those

incidental to the fulfillment or nonfulfillment of a contractual obligation; while the fault or

negligence referred to in article 1902 is the culpa aquiliana of the civil law, homologous

but not identical to tort of the common law, which gives rise to an obligation

independently of any contract. (Cf. Manila R. R. Co. v. Cia. Trasatlantica, 38 Phil., 875,

887-890; Cangco v. Manila R. R. Co., 38 Phil., 768.) The fact that the corporation,

acting thru Vazquez as its manager, was guilty of negligence in the fulfillment of the

contract, did not make Vazquez principally or even subsidiarily liable for such

negligence. Since it was the corporation’s contract, its nonfulfillment, whether due to

negligence or fault or to any other cause, made the corporation and not its agent

liable.

On the other hand, if independently of the contract Vazquez by his fault or negligence

caused damage to the plaintiff, he would be liable to the latter under article 1902 of the

Civil Code. But then the plaintiff’s cause of action should be based on culpa aquiliana

and not on the contract alleged in his complaint herein; and Vazquez’ liability would be

principal and not merely subsidiary, as the Court of Appeals has erroneously held. No

such cause of action was alleged in the complaint or tried by express or implied

consent of the parties by virtue of section 4 of Rule 17. Hence the trial court had no

jurisdiction over the issue and could not adjudicate upon it. (Reyes v. Diaz, G. R. No.

48754.) Consequently it was error for the Court of Appeals to remand the case to the

trial court to try and decide such issue.

It only remains for us to consider petitioner’s second assignment of error referring to

the lower courts’ refusal to entertain his counterclaim for damages against the

respondent Borja arising from the bringing of this action. The lower courts having

sustained plaintiff’s action, they naturally could not have entertained defendant’s

counterclaim for damages on account of the bringing of the action. The finding of the

Court of Appeals that according to the preponderance of the evidence the defendant

Vazquez celebrated the contract not in his personal capacity but as acting president

and manager of the corporation, does not warrant his contention that the suit against

him is malicious and tortious; and since we have to decide defendant’s counterclaim

upon the facts found by the Court of Appeals, we find no sufficient basis upon which to

sustain said counterclaim. Indeed, we feel that as a matter of moral justice we ought to

state here that the indignant attitude adopted by the defendant towards the plaintiff for

having brought this action against him is in our estimation not wholly right. Altho from

the legal point of view he was not personally liable for the fulfillment of the contract

entered into by him on behalf of the corporation of which he was the acting president

and manager, we think it was his moral duty towards the party with whom he

contracted in said capacity to see to it that the corporation represented by him fulfilled

the contract by delivering the palay it had sold, the price of which it had already

received. Recreant to such duty as a moral person, he has no legitimate cause for

indignation. We feel that under the circumstances he not only has no cause of action

against the plaintiff for damages but is not even entitled to costs.

The judgment of the Court of Appeals is reversed, and the complaint is hereby

dismissed, without any finding as to costs.

Yulo, C.J., Moran, Horrilleno, and Bocobo, JJ., concur.

Separate Opinions

PARAS, J., dissenting:chanrob1es virtual 1aw library

Upon the facts of this case as expressly or impliedly admitted in the majority opinion,

the plaintiff is entitled to a judgment against the defendant. The latter, as acting

president and manager of Natividad-Vazquez Sabani Development Co., Inc., and with

full knowledge of the then insolvent status of his company, agreed to sell to the plaintiff

4,000 cavans of palay. Notwithstanding the receipt from the plaintiff of the full purchase

price, the defendant delivered only 2,488 cavans and failed and refused to deliver the

remaining 1,512 cavans and a quantity of empty sacks, or their value. Such failure

resulted, according to the Court of First Instance of Manila and the Court of Appeals,

from his fault or negligence.

It is true that the cause of action made out by the complaint is technically based on a

contract between the plaintiff and Natividad- Vazquez Sabani Development Co., Inc.,

which is not a party to this case. Nevertheless, inasmuch as it was proven at the trial

that the defendant was guilty of fault in that he prevented the performance of the

plaintiff’s contract and also of negligence bordering on fraud which caused damage to

the plaintiff, the error of procedure should not be a hindrance to the rendition of a

decision in accordance with the evidence actually introduced by the parties, especially

when in such a situation we may order the necessary amendment of the pleadings, or

even consider them correspondingly amended.

As already stated, the corporation of which the defendant was acting president and

manager was, at the time he made the sale to the plaintiff, known to him to be

insolvent. As a matter of fact, said corporation was soon thereafter dissolved. There is

admitted damage on the part of the plaintiff, proven to have been inflicted by reason of

the fault or negligence of the defendant. In the interest of simple justice and to avoid

multiplicity of suits I am therefore impelled to consider the present action as one based

on fault or negligence and to sentence the defendant accordingly. Otherwise, he would

be allowed to profit by his own wrong under the protective cover of the corporate

existence of the company he represented. It cannot be pretended that any advantage

under the sale inured to the benefit of Natividad-Vazquez Sabani Development Co.,

Inc., and not of the defendant personally, since the latter undoubtedly owned a

considerable part of its capital.

FIRST DIVISION

[G.R. No. 119002. October 19, 2000.]

INTERNATIONAL EXPRESS TRAVEL & TOUR SERVICES, INC., Petitioner, v.

HON. COURT OF APPEALS, HENRI KAHN, PHILIPPINES FOOTBALL

FEDERATION,Respondents.

D E C I S I O N

KAPUNAN, J.:

On June 30 1989, petitioner International Express Travel and Tour Services, Inc.,

through its managing director, wrote a letter to the Philippine Football Federation

(Federation), through its president private respondent Henri Kahn, wherein the former

offered its services as a travel agency to the latter. 1

The offer was accepted.chanrob1es virtua1 1aw 1ibrary

Petitioner secured the airline tickets for the trips of the athletes and officials of the

Federation to the South East Asian Games in Kuala Lumpur as well as various other

trips to the People’s Republic of China and Brisbane. The total cost of the tickets

amounted to P449,654.83. For the tickets received, the Federation made two partial

payments, both in September of 1989, in the total amount of P176,467.50. 2

On 4 October 1989, petitioner wrote the Federation, through the private respondent a

demand letter requesting for the amount of P265,894.33. 3 On 30 October 1989, the

Federation, through the Project Gintong Alay, paid the amount of P31,603.00. 4

On 27 December 1989, Henri Kahn issued a personal check in the amount of P50,000

as partial payment for the outstanding balance of the Federation. 5 Thereafter, no

further payments were made despite repeated demands.chanrob1es virtua1 1aw

1ibrary

This prompted petitioner to file a civil case before the Regional Trial Court of Manila.

Petitioner sued Henri Kahn in his personal capacity and as President of the Federation

and impleaded the Federation as an alternative defendant. Petitioner sought to hold

Henri Kahn liable for the unpaid balance for the tickets purchased by the Federation on

the ground that Henri Kahn allegedly guaranteed the said obligation. 6

Henri Kahn filed his answer with counterclaim. While not denying the allegation that the

Federation owed the amount P207,524.20, representing the unpaid balance for the

plane tickets, he averred that the petitioner has no cause of action against him either in

his personal capacity or in his official capacity as president of the Federation. He

maintained that he; did not guarantee payment but merely acted as an agent of the

Federation which has a separate and distinct juridical personality. 7

On the other hand, the Federation failed to file its answer, hence, was declared in

default by the trial court. 8

In due course, the trial court rendered judgment and ruled in favor of the petitioner and

declared Henri Kahn personally liable for the unpaid obligation of the Federation. In

arriving at the said ruling, the trial court rationalized:chanrob1es virtual 1aw library

Defendant Henri Kahn would have been correct in his contentions had it been duly

established that defendant Federation is a corporation The trouble, however, is that

neither the plaintiff nor the defendant Henri Kahn has adduced any evidence proving

the corporate existence of the defendant Federation. In paragraph 2 of its complaint,

plaintiff asserted that "defendant Philippine Football Federation is a sports association .

. ." This has not been denied by defendant Henri Kahn in his Answer. Being the

President of defendant Federation, its corporate existence is within the personal

knowledge of defendant Henri Kahn. He could have easily denied specifically the

assertion of the plaintiff that it is a mere sports association if it were a domestic

corporation. But he did not.

x x x

A voluntary unincorporated association, like defendant Federation has no power to

enter into, or to ratify, a contract. The contract entered into by its officers or agents on

behalf of such association is not binding on, or enforceable against it. The officers or

agents are themselves personally liable.

x x x 9

The dispositive portion of the trial court’s decision reads:chanrob1es virtual 1aw library

WHEREFORE, judgment is rendered ordering defendant Henri Kahn to pay the plaintiff

the principal sum of P207,524.20, plus the interest thereon at the legal rate computed

from July 5, 1990, the date the complaint was filed, until the principal obligation is fully

liquidated; and another sum of P15,000.00 for attorney’s fees.chanrob1es virtua1 1aw

1ibrary

The complaint of the plaintiff against the Philippine Football Federation and the

counterclaims of the defendant Henri Kahn are hereby dismissed.

With the costs against defendant Henri Kahn. 10

Only Henri Kahn elevated the above decision to the Court of Appeals. On 21

December 1994, the respondent court rendered a decision reversing the trial court, the

decretal portion of said decision reads:chanrob1es virtual 1aw library

WHEREFORE, premises considered, the judgment appealed from is hereby

REVERSED and SET ASIDE and another one is rendered dismissing the complaint

against defendant Henri S. Kahn. 11

In finding for Henri Kahn, the Court of Appeals recognized the juridical existence of the

Federation. It rationalized that since petitioner failed to prove that Henri Kahn

guaranteed the obligation of the Federation, he should not be held liable for the same

as said entity has a separate and distinct personality from its officers.

Petitioner filed a motion for reconsideration and as an alternative prayer pleaded that

the Federation be held liable for the unpaid obligation. The same was denied by the

appellate court in its resolution of 8 February 1995, where it stated that:chanrob1es

virtua1 1aw 1ibrary

As to the alternative prayer for the Modification of the Decision by expressly declaring

in the dispositive portion thereof the Philippine Football Federation (PFF) as liable for

the unpaid obligation, it should be remembered that the trial court dismissed the

complaint against the Philippine Football Federation, and the plaintiff did not appeal

from this decision. Hence, the Philippine Football Federation is not a party to this

appeal and consequently, no judgment may be pronounced by this Court against the

PFF without violating the due process clause, let alone the fact that the judgment

dismissing the complaint against it, had already become final by virtue of the plaintiff’s

failure to appeal therefrom. The alternative prayer is therefore similarly DENIED. 12

Petitioner now seeks recourse to this Court and alleges that the respondent court

committed the following assigned errors: 13

A. THE, HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT

PETITIONER HAD DEALT WITH THE PHILIPPINE FOOTBALL FEDERATION (PFF)

AS A CORPORATE ENTITY AND IN NOT HOLDING THAT PRIVATE RESPONDENT

HENRI KAHN WAS THE ONE, WHO REPRESENTED THE PFF AS HAVING

CORPORATE PERSONALITY.

B. THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING PRIVATE

RESPONDENT HENRI KAHN PERSONALLY LIABLE FOR THE OBLIGATION OF

THE UNINCORPORATED PFF, HAVING NEGOTIATED WITH PETITIONER AND

CONTRACTED THE OBLIGATION IN BEHALF OF THE PFF, MADE A PARTIAL

PAYMENT AN ASSURED PETITIONER OF FULLY SETTLING THE OBLIGATION.

C. ASSUMING ARGUENDO THAT PRIVATE RESPONDENT KAHN IS NOT

PERSONALLY LIABLE, THE HONORABLE COURT OF APPEALS ERRED IN NOT

EXPRESSLY DECLARING IN ITS DECISION THAT THE PFF IS SOLELY LIABLE

FOR THE OBLIGATION.chanrob1es virtua1 1aw 1ibrary

The resolution of the case at bar hinges on the determination of the existence of the

Philippine Football Federation as a juridical person. In the assailed decision, the

appellate court recognized the existence of the Federation. In support of this, the CA

cited Republic Act 3135, otherwise known as the Revised Charter of the Philippine

Amateur Athletic Federation, and Presidential Decree No. 604 as the laws from which

said Federation derives its existence.chanrob1es virtua1 1aw 1ibrary

As correctly observed by the appellate court, both R.A. 3135 and P.D. No. 604

recognized the juridical existence of national sports associations. This may be gleaned

from the powers and functions granted to these associations. Section 14 of R.A. 3135

provides:chanrob1es virtual 1aw library

SECTION 14. Functions, powers and duties of Associations. — The National Sports’

Association shall have the following functions, powers and duties:chanrob1es virtual

1aw library

1. To adopt a constitution and by-laws for their internal organization and government.

2. To raise funds by donations benefits, and other means for their purposes.

3. To purchase, sell, lease or otherwise encumber property both real and personal, for

the accomplishment of their purpose;

4. To affiliate with international or regional sports’ Associations after due consultation

with the executive committee;

x x x

13. To perform such other acts as may be necessary for the proper accomplishment of

their purposes and not inconsistent with this Act.

Section 8 of P.D. 604, grants similar functions to these sports associations:chanrob1es

virtual 1aw library

SECTION. 8. Functions, Powers, and Duties of National Sports Association. — The

National sports associations shall have the following functions, powers, and

duties:chanrob1es virtual 1aw library

1. Adopt a Constitution and By-Laws for their internal organization and government

which shall be submitted to the Department and any amendment hereto shall take

effect upon approval by the Department: Provided, however, That no team, school,

club, organization or entity shall be admitted as a voting member of an association

unless 60 per cent of the athletes composing said team, school, club, organization or

entity are Filipino citizens.

2. Raise funds by donations, benefits, and other means for their purpose subject to the

approval of the Department;

3. Purchase, sell, lease, or otherwise encumber property, both real and personal, for

the accomplishment of their purpose;

4. Conduct local, interport, and international competitions, other than the Olympic and

Asian Games, for the promotion of their sport;

5. Affiliate with international or regional sports associations after due consultation with

the Department;

x x x

13. Perform such other functions as may be provided by law.

The above powers and functions granted to national sports associations clearly

indicate that these entities may acquire a juridical personality. The power to purchase,

sell, lease and encumber property are acts which may only be done by persons,

whether natural or artificial, with juridical capacity. However, while we agree with the

appellate court that national sports associations may be accorded corporate status,

such does not automatically take place by the mere passage of these laws.chanrob1es

virtua1 1aw 1ibrary

It is a basic postulate that before a corporation may acquire juridical personality, the

State must give its consent either in the form of a special law or a general enabling act.

We cannot agree with the view of the appellate court; and the private respondent that

the Philippine Football Federation came into existence upon the passage of these

laws. Nowhere can it be found in R.A. 3135 or P.D. 604 any provision creating the

Philippine Football Federation. These laws merely recognized the existence of national

sports associations and provided the manner by which these entities may acquire

juridical personality. Section 11 of R.A. 3135 provides:chanrob1es virtual 1aw library

SECTION 11. National Sports’ Association; organization and recognition. — A National

Association shall be organized for each individual sports in the Philippines in the

manner hereinafter provided to constitute the Philippine Amateur Athletic Federation.

Applications for recognition as a National Sports’ Association shall be filed with the

executive committee together with, among others, a copy of the constitution and by-

laws and a list of the members of the proposed association, and a filing fee of ten

pesos.

The Executive Committee shall give the recognition applied for if it is satisfied that said

association will promote the purposes of this Act and particularly section three thereof.

No application shall be held pending for more than three months after the filing thereof

without any action having been taken thereon by the executive committee. Should the

application be rejected, the reasons for such rejection shall be clearly stated in a

written communication to the applicant. Failure to specify the reasons for the rejection

shall not affect the application which shall be considered as unacted upon: Provided

however, That until the executive committee herein provided shall have been formed,

applications for recognition shall be passed upon by the duly elected members of the

present executive committee of the Philippine Amateur Athletic Federation. The said

executive committee shall be dissolved upon the organization of the executive

committee herein provided: Provided, further, That the functioning executive committee

is charged with the responsibility of seeing to it that the National Sports’ Associations

are formed and organized within six months from and after the passage of this

Act.chanrob1es virtua1 1aw 1ibrary

Section 7 of P.D. 604, similarly provides:chanrob1es virtual 1aw library

SECTION 7. National Sports Associations: — Application for accreditation or

recognition as a national sports association for each individual sport in the Philippines

shall be filed with the Department together with, among others, a copy of the

Constitution and By-Laws and a list of the members of the proposed association.

The Department shall give the recognition applied for if it is satisfied that the national

sports association to be organized will promote the objectives of this Decree and has

substantially complied with the rules and regulations of the Department: Provided, That

the Department may withdraw accreditation or recognition for violation of this Decree

and such rules and regulations formulated by it.

The Department shall supervise the national sports association: Provided, That the

latter shall have exclusive technical control over the development and promotion of the

particular sport for which they are organized.

Clearly the above cited provisions require that before an entity may be considered as a

national sports association, such entity must be recognized by the accrediting

organization, the Philippine, Amateur Athletic Federation under R.A. 3135, and the

Department of Youth and Sports Development under P.D. 604.

This fact of recognition, however, Henri Kahn failed to substantiate. In attempting to

prove the juridical existence of the Federation, Henri Kahn attached to his motion for

reconsideration before the trial court a copy of the constitution and by-laws of the

Philippine, Football Federation. Unfortunately, the same does not prove that said

Federation has indeed been recognized and accredited by either the Philippine

Amateur Athletic Federation or the Department of Youth and Sports Development.

Accordingly, we rule that the Philippine Football Federation is not a national sports

association within the purview of the aforementioned laws and does not have corporate

existence of its own.chanrob1es virtua1 1aw 1ibrary

Thus being said, it follows that private respondent Henry Kahn should be held liable for

the unpaid obligations of the unincorporated Philippine Football Federation. It is a

settled principal in corporation law that any person acting or purporting to act on behalf

of a corporation which has no valid existence assumes such privileges and becomes

personally liable for contract entered into or for other acts performed as such agent. 14

As president of the Federation, Henri Kahn is presumed to have known about the

corporate existence or non-existence of the Federation. We cannot subscribe to the

position taken by the appellate court that even assuming that the Federation was

defectively incorporated, the petitioner cannot deny the corporate existence of the

Federation because it had contracted and dealt with the Federation in such a manner

as to recognize and in effect admit its existence. 15 The doctrine of corporation by

estoppel is mistakenly applied by the respondent court to the petitioner. The application

of the doctrine applies to a third party only when he tries to escape liabilities on a

contract from which he has benefited on the irrelevant ground of defective

incorporation. 16 In the case at bar, the petitioner is not trying to escape liability from

the contract but rather is the one claiming from the contract.

WHEREFORE, the decision appealed from is REVERSED and SET ASIDE. The

decision of the Regional Trial Court of Manila, Branch 35, in Civil Case No. 90-53595 is

hereby REINSTATED.

SO ORDERED.

Right of Succession

EN BANC

G.R. No. 184517, October 08, 2013

SME BANK INC., ABELARDO P. SAMSON, OLGA SAMSON AND AURELIO

VILLAFLOR, JR., Petitioners, v. PEREGRIN T. DE GUZMAN, EDUARDO M.

AGUSTIN, JR., ELICERIO GASPAR, RICARDO GASPAR JR., EUFEMIA ROSETE,

FIDEL ESPIRITU, SIMEON ESPIRITU, JR., AND LIBERATO

MANGOBA, Respondents.

G.R. No. 186641, October 08, 2013

SME BANK INC., ABELARDO P. SAMSON, OLGA SAMSON AND AURELIO

VILLAFLOR, JR., Petitioners, v. ELICERIO GASPAR, RICARDO GASPAR, JR.,

EUFEMIA ROSETE, FIDEL ESPIRITU, SIMEON ESPIRITU, JR., AND LIBERATO

MANGOBA, Respondents.

D E C I S I O N

SERENO, C.J.:

Security of tenure is a constitutionally guaranteed right.1 Employees may not be

terminated from their regular employment except for just or authorized causes under

the Labor Code2and other pertinent laws. A mere change in the equity composition of a

corporation is neither a just nor an authorized cause that would legally permit the

dismissal of the corporation’s employees en masse.

Before this Court are consolidated Rule 45 Petitions for Review on Certiorari3 assailing

the Decision4 and Resolution5 of the Court of Appeals (CA) in CA-G.R. SP No. 97510

and its Decision6and Resolution7 in CA-G.R. SP No. 97942.

The facts of the case are as follows:chanroblesvirtualawlibrary

Respondent employees Elicerio Gaspar (Elicerio), Ricardo Gaspar, Jr. (Ricardo),

Eufemia Rosete (Eufemia), Fidel Espiritu (Fidel), Simeon Espiritu, Jr. (Simeon, Jr.), and

Liberato Mangoba (Liberato) were employees of Small and Medium Enterprise Bank,

Incorporated (SME Bank). Originally, the principal shareholders and corporate directors

of the bank were Eduardo M. Agustin, Jr. (Agustin) and Peregrin de Guzman, Jr. (De

Guzman).

In June 2001, SME Bank experienced financial difficulties. To remedy the situation, the

bank officials proposed its sale to Abelardo Samson (Samson).8cralawlibrary

Accordingly, negotiations ensued, and a formal offer was made to Samson. Through

his attorney-in-fact, Tomas S. Gomez IV, Samson then sent formal letters (Letter

Agreements) to Agustin and De Guzman, demanding the following as preconditions for

the sale of SME Bank’s shares of stock:chanroblesvirtualawlibrary

4. You shall guarantee the peaceful turn over of all assets as well as the peaceful

transition of management of the bank and shall terminate/retire the employees we

mutually agree upon, upon transfer of shares in favor of our group’s nominees;

x x x x

7. All retirement benefits, if any of the above officers/stockholders/board of directors

are hereby waived upon cosummation [sic] of the above sale. The retirement

benefits of the rank and file employees including the managers shall be honored

by the new management in accordance with B.R. No. 10, S. 1997.9

Agustin and De Guzman accepted the terms and conditions proposed by Samson and

signed the conforme portion of the Letter Agreements.10cralawlibrary

Simeon Espiritu (Espiritu), then the general manager of SME Bank, held a meeting with

all the employees of the head office and of the Talavera and Muñoz branches of SME

Bank and persuaded them to tender their resignations,11 with the promise that they

would be rehired upon reapplication. His directive was allegedly done at the behest of

petitioner Olga Samson.12cralawlibrary

Relying on this representation, Elicerio,13 Ricardo,14 Fidel,15 Simeon, Jr.,16 and

Liberato17 tendered their resignations dated 27 August 2001. As for Eufemia, the

records show that she first tendered a resignation letter dated 27 August 2001,18 and

then a retirement letter dated September 2001.19cralawlibrary

Elicerio,20 Ricardo,21 Fidel,22 Simeon, Jr.,23 and Liberato24 submitted application letters

on 11 September 2001. Both the resignation letters and copies of respondent

employees’ application letters were transmitted by Espiritu to Samson’s representative

on 11 September 2001.25cralawlibrary

On 11 September 2001, Agustin and De Guzman signified their conformity to the Letter

Agreements and sold 86.365% of the shares of stock of SME Bank to spouses

Abelardo and Olga Samson. Spouses Samson then became the principal shareholders

of SME Bank, while Aurelio Villaflor, Jr. was appointed bank president. As it turned out,

respondent employees, except for Simeon, Jr.,26 were not rehired. After a month in

service, Simeon, Jr. again resigned on October 2001.27cralawlibrary

Respondent-employees demanded the payment of their respective separation pays,

but their requests were denied.

Aggrieved by the loss of their jobs, respondent employees filed a Complaint before the

National Labor Relations Commission (NLRC)– Regional Arbitration Branch No. III and

sued SME Bank, spouses Abelardo and Olga Samson and Aurelio Villaflor (the

Samson Group) for unfair labor practice; illegal dismissal; illegal deductions;

underpayment; and nonpayment of allowances, separation pay and 13th month

pay.28 Subsequently, they amended their Complaint to include Agustin and De Guzman

as respondents to the case.29cralawlibrary

On 27 October 2004, the labor arbiter ruled that the buyer of an enterprise is not bound

to absorb its employees, unless there is an express stipulation to the contrary.

However, he also found that respondent employees were illegally dismissed, because

they had involuntarily executed their resignation letters after relying on representations

that they would be given their separation benefits and rehired by the new management.

Accordingly, the labor arbiter decided the case against Agustin and De Guzman, but

dismissed the Complaint against the Samson Group, as

follows:chanroblesvirtualawlibrary

WHEREFORE, premises considered, judgment is hereby rendered ordering

respondents Eduardo Agustin, Jr. and Peregrin De Guzman to pay complainants’

separation pay in the total amount of P339,403.00 detailed as

follows:chanroblesvirtualawlibrary Elicerio B. Gaspar

= P5,837.00

Ricardo B. Gaspar, Jr.

= P11,674.00

Liberato B. Mangoba

= P64,207.00

Fidel E. Espiritu

= P29,185.00

Simeon B. Espiritu, Jr.

= P26,000.00

Eufemia E. Rosete

= P202,510.00

All other claims including the complaint against Abelardo Samson, Olga Samson and

Aurelio Villaflor are hereby DISMISSED for want of merit.

SO ORDERED.30

Dissatisfied with the Decision of the labor arbiter, respondent employees, Agustin and

De Guzman brought separate appeals to the NLRC. Respondent employees

questioned the labor arbiter’s failure to award backwages, while Agustin and De

Guzman contended that they should not be held liable for the payment of the

employees’ claims.

The NLRC found that there was only a mere transfer of shares – and therefore, a mere

change of management – from Agustin and De Guzman to the Samson Group. As the

change of management was not a valid ground to terminate respondent bank

employees, the NLRC ruled that they had indeed been illegally dismissed. It further

ruled that Agustin, De Guzman and the Samson Group should be held jointly and

severally liable for the employees’ separation pay and backwages, as

follows:chanroblesvirtualawlibrary

WHEREFORE, premises considered, the Decision appealed from is

hereby MODIFIED. Respondents are hereby Ordered to jointly and severally pay the

complainants backwages from 11 September 2001 until the finality of this Decision,

separation pay at one month pay for every year of service, P10,000.00 and P5,000.00

moral and exemplary damages, and five (5%) percent attorney’s fees.

Other dispositions are AFFIRMED

SO ORDERED.31

On 28 November 2006, the NLRC denied the Motions for Reconsideration filed by

Agustin, De Guzman and the Samson Group.32cralawlibrary

Agustin and De Guzman filed a Rule 65 Petition for Certiorari with the CA, docketed as

CA-G.R. SP No. 97510. The Samson Group likewise filed a separate Rule 65 Petition

for Certiorariwith the CA, docketed as CA-G.R. SP No. 97942. Motions to consolidate

both cases were not acted upon by the appellate court.

On 13 March 2008, the CA rendered a Decision in CA-G.R. SP No. 97510 affirming

that of the NLRC. The fallo of the CA Decision reads:chanroblesvirtualawlibrary

WHEREFORE, in view of the foregoing, the petition is DENIED. Accordingly, the

Decision dated May 8, 2006, and Resolution dated November 28, 2006 of the National

Labor Relations Commission in NLRC NCR CA No. 043236-05 (NLRC RAB III-07-

4542-02) are hereby AFFIRMED.

SO ORDERED.33

Subsequently, CA-G.R. SP No. 97942 was disposed of by the appellate court in a

Decision dated 15 January 2008, which likewise affirmed that of the NLRC. The

dispositive portion of the CA Decision states:chanroblesvirtualawlibrary

WHEREFORE, premises considered, the instant Petition for Certiorari is denied, and

the herein assailed May 8, 2006 Decision and November 28, 2006 Resolution of the

NLRC are hereby AFFIRMED.

SO ORDERED.34

The appellate court denied the Motions for Reconsideration filed by the parties in

Resolutions dated 1 September 200835 and 19 February 2009.36cralawlibrary

The Samson Group then filed two separate Rule 45 Petitions questioning the CA

Decisions and Resolutions in CA-G.R. SP No. 97510 and CA-G.R. SP No. 97942. On

17 June 2009, this Court resolved to consolidate both Petitions.37cralawlibrary

THE ISSUES

Succinctly, the parties are asking this Court to determine whether respondent

employees were illegally dismissed and, if so, which of the parties are liable for the

claims of the employees and the extent of the reliefs that may be awarded to these

employees.

THE COURT’S RULING

The instant Petitions are partly meritorious.

I

Respondent employees were illegally dismissed.

As to Elicerio Gaspar, Ricardo Gaspar, Jr., Fidel Espiritu, Eufemia Rosete and

Liberato Mangoba

The Samson Group contends that Elicerio, Ricardo, Fidel, and Liberato voluntarily

resigned from their posts, while Eufemia retired from her position. As their resignations

and retirements were voluntary, they were not dismissed from their employment.38 In

support of this argument, it presented copies of their resignation and retirement

letters,39 which were couched in terms of gratitude.

We disagree. While resignation letters containing words of gratitude may indicate that

the employees were not coerced into resignation,40 this fact alone is not conclusive

proof that they intelligently, freely and voluntarily resigned. To rule that resignation

letters couched in terms of gratitude are, by themselves, conclusive proof that the

employees intended to relinquish their posts would open the floodgates to possible

abuse. In order to withstand the test of validity, resignations must be made voluntarily

and with the intention of relinquishing the office, coupled with an act of

relinquishment.41 Therefore, in order to determine whether the employees truly

intended to resign from their respective posts, we cannot merely rely on the tenor of

the resignation letters, but must take into consideration the totality of circumstances in

each particular case.

Here, the records show that Elicerio, Ricardo, Fidel, and Liberato only tendered

resignation letters because they were led to believe that, upon reapplication, they

would be reemployed by the new management.42 As it turned out, except for Simeon,

Jr., they were not rehired by the new management. Their reliance on the

representation that they would be reemployed gives credence to their argument that

they merely submitted courtesy resignation letters because it was demanded of them,

and that they had no real intention of leaving their posts. We therefore conclude that

Elicerio, Ricardo, Fidel, and Liberato did not voluntarily resign from their work; rather,

they were terminated from their employment.

As to Eufemia, both the CA and the NLRC discussed her case together with the cases

of the rest of respondent-employees. However, a review of the records shows that,

unlike her co-employees, she did not resign; rather, she submitted a letter indicating

that she was retiring from her former position.43cralawlibrary

The fact that Eufemia retired and did not resign, however, does not change our

conclusion that illegal dismissal took place.

Retirement, like resignation, should be an act completely voluntary on the part of the

employee. If the intent to retire is not clearly established or if the retirement is

involuntary, it is to be treated as a discharge.44cralawlibrary

In this case, the facts show that Eufemia’s retirement was not of her own volition. The

circumstances could not be more telling. The facts show that Eufemia was likewise

given the option to resign or retire in order to fulfill the precondition in the Letter

Agreements that the seller should “terminate/retire the employees [mutually agreed

upon] upon transfer of shares” to the buyers.45 Thus, like her other co-employees, she

first submitted a letter of resignation dated 27 August 2001.46 For one reason or

another, instead of resigning, she chose to retire and submitted a retirement letter to

that effect.47 It was this letter that was subsequently transmitted to the representative of

the Samson Group on 11 September 2001.48cralawlibrary

In San Miguel Corporation v. NLRC,49 we have explained that involuntary retirement is

tantamount to dismissal, as employees can only choose the means and methods of

terminating their employment, but are powerless as to the status of their employment

and have no choice but to leave the company. This rule squarely applies to Eufemia’s

case. Indeed, she could only choose between resignation and retirement, but was

made to understand that she had no choice but to leave SME Bank. Thus, we conclude

that, similar to her other co-employees, she was illegally dismissed from employment.

The Samson Group further argues50 that, assuming the employees were dismissed,

the dismissal is legal because cessation of operations due to serious business losses

is one of the authorized causes of termination under Article 283 of the Labor

Code.51cralawlibrary

Again, we disagree.

The law permits an employer to dismiss its employees in the event of closure of the

business establishment.52 However, the employer is required to serve written notices

on the worker and the Department of Labor at least one month before the intended

date of closure.53 Moreover, the dismissed employees are entitled to separation pay,

except if the closure was due to serious business losses or financial

reverses.54 However, to be exempt from making such payment, the employer must

justify the closure by presenting convincing evidence that it actually suffered serious

financial reverses.55cralawlibrary

In this case, the records do not support the contention of SME Bank that it intended to

close the business establishment. On the contrary, the intention of the parties to keep it

in operation is confirmed by the provisions of the Letter Agreements requiring Agustin

and De Guzman to guarantee the “peaceful transition of management of the bank” and

to appoint “a manager of [the Samson Group’s] choice x x x to oversee bank

operations.”

Even assuming that the parties intended to close the bank, the records do not show

that the employees and the Department of Labor were given written notices at least

one month before the dismissal took place. Moreover, aside from their bare assertions,

the parties failed to substantiate their claim that SME Bank was suffering from serious

financial reverses.

In fine, the argument that the dismissal was due to an authorized cause holds no

water.

Petitioner bank also argues that, there being a transfer of the business establishment,

the innocent transferees no longer have any obligation to continue employing

respondent employees,56 and that the most that they can do is to give preference to the

qualified separated employees; hence, the employees were validly

dismissed.57cralawlibrary

The argument is misleading and unmeritorious. Contrary to petitioner bank’s

argument, there was no transfer of the business establishment to speak of, but

merely a change in the new majority shareholders of the corporation.

There are two types of corporate acquisitions: asset sales and stock sales.58 In asset

sales, the corporate entity59 sells all or substantially all of its assets60 to another entity.

In stock sales, the individual or corporate shareholders61 sell a controlling block of

stock62 to new or existing shareholders.

In asset sales, the rule is that the seller in good faith is authorized to dismiss the

affected employees, but is liable for the payment of separation pay under the

law.63 The buyer in good faith, on the other hand, is not obliged to absorb the

employees affected by the sale, nor is it liable for the payment of their claims.64 The

most that it may do, for reasons of public policy and social justice, is to give preference

to the qualified separated personnel of the selling firm.65cralawlibrary

In contrast with asset sales, in which the assets of the selling corporation are

transferred to another entity, the transaction in stock sales takes place at the

shareholder level. Because the corporation possesses a personality separate and

distinct from that of its shareholders, a shift in the composition of its shareholders will

not affect its existence and continuity. Thus, notwithstanding the stock sale, the

corporation continues to be the employer of its people and continues to be liable for the

payment of their just claims. Furthermore, the corporation or its new majority

shareholders are not entitled to lawfully dismiss corporate employees absent a just or

authorized cause.

In the case at bar, the Letter Agreements show that their main object is the acquisition

by the Samson Group of 86.365% of the shares of stock of SME Bank.66 Hence, this

case involves a stock sale, whereby the transferee acquires the controlling shares of

stock of the corporation. Thus, following the rule in stock sales, respondent employees

may not be dismissed except for just or authorized causes under the Labor Code.

Petitioner bank argues that, following our ruling in Manlimos v. NLRC,67 even in cases

of stock sales, the new owners are under no legal duty to absorb the seller’s

employees, and that the most that the new owners may do is to give preference to the

qualified separated employees.68 Thus, petitioner bank argues that the dismissal was

lawful.

We are not persuaded.

Manlimos dealt with a stock sale in which a new owner or management group acquired

complete ownership of the corporation at the shareholder level.69 The employees of the

corporation were later “considered terminated, with their conformity”70 by the new

majority shareholders. The employees then re-applied for their jobs and were rehired

on a probationary basis. After about six months, the new management dismissed two

of the employees for having abandoned their work, and it dismissed the rest for

committing “acts prejudicial to the interest of the new management.”71cralawlibrary

Thereafter, the employees sought reinstatement, arguing that their dismissal was

illegal, since they “remained regular employees of the corporation regardless of the

change of management.”72cralawlibrary

In disposing of the merits of the case, we upheld the validity of the second termination,

ruling that “the parties are free to renew the contract or not [upon the expiration of the

period provided for in their probationary contract of employment].”73 Citing our

pronouncements in Central Azucarera del Danao v. Court of Appeals,74San Felipe Neri

School of Mandaluyong, Inc. v. NLRC,75 and MDII Supervisors & Confidential

Employees Association v. Presidential Assistant on Legal Affairs,76 we likewise upheld

the validity of the employees’ first separation from employment, pronouncing as

follows:chanroblesvirtualawlibrary

A change of ownership in a business concern is not proscribed by law. In Central

Azucarera del Danao vs. Court of Appeals, this Court stated:chanroblesvirtualawlibrary

There can be no controversy for it is a principle well- recognized, that it is within the

employer’s legitimate sphere of management control of the business to adopt

economic policies or make some changes or adjustments in their organization or

operations that would insure profit to itself or protect the investment of its stockholders.

As in the exercise of such management prerogative, the employer may merge or

consolidate its business with another, or sell or dispose all or substantially all of its

assets and properties which may bring about the dismissal or termination of its

employees in the process. Such dismissal or termination should not however be

interpreted in such a manner as to permit the employer to escape payment of

termination pay. For such a situation is not envisioned in the law. It strikes at the very

concept of social justice.

In a number of cases on this point, the rule has been laid down that the sale or

disposition must be motivated by good faith as an element of exemption from liability.

Indeed, an innocent transferee of a business establishment has no liability to the

employees of the transfer or to continue employer them. Nor is the transferee liable for

past unfair labor practices of the previous owner, except, when the liability therefor is

assumed by the new employer under the contract of sale, or when liability arises

because of the new owner’s participation in thwarting or defeating the rights of the

employees.chanrob1esvirtualawlibrary

Where such transfer of ownership is in good faith, the transferee is under no legal duty

to absorb the transferor’s employees as there is no law compelling such absorption.

The most that the transferee may do, for reasons of public policy and social justice, is

to give preference to the qualified separated employees in the filling of vacancies in the

facilities of the purchaser.

Since the petitioners were effectively separated from work due to a bona fide change of

ownership and they were accordingly paid their separation pay, which they freely and

voluntarily accepted, the private respondent corporation was under no obligation to

employ them; it may, however, give them preference in the hiring. x x x. (Citations

omitted)

We take this opportunity to revisit our ruling in Manlimos insofar as it applied a doctrine

on asset sales to a stock sale case. Central Azucarera del Danao, San Felipe Neri

School of Mandaluyong and MDII Supervisors & Confidential Employees

Association all dealt with asset sales, as they involved a sale of all or substantially all of

the assets of the corporation. The transactions in those cases were not made at the

shareholder level, but at the corporate level. Thus, applicable to those cases were the

rules in asset sales: the employees may be separated from their employment, but the

seller is liable for the payment of separation pay; on the other hand, the buyer in good

faith is not required to retain the affected employees in its service, nor is it liable for the

payment of their claims.

The rule should be different in Manlimos, as this case involves a stock sale. It is error

to even discuss transfer of ownership of the business, as the business did not actually

change hands. The transfer only involved a change in the equity composition of the

corporation. To reiterate, the employees are not transferred to a new employer, but

remain with the original corporate employer, notwithstanding an equity shift in

its majority shareholders. This being so, the employment status of the employees

should not have been affected by the stock sale. A change in the equity composition of

the corporate shareholders should not result in the automatic termination of the

employment of the corporation’s employees. Neither should it give the new majority

shareholders the right to legally dismiss the corporation’s employees, absent a just or

authorized cause.

The right to security of tenure guarantees the right of employees to continue in their

employment absent a just or authorized cause for termination. This guarantee

proscribes a situation in which the corporation procures the severance of the

employment of its employees – who patently still desire to work for the corporation –

only because new majority stockholders and a new management have come into the

picture. This situation is a clear circumvention of the employees’ constitutionally

guaranteed right to security of tenure, an act that cannot be countenanced by this

Court.

It is thus erroneous on the part of the corporation to consider the employees as

terminated from their employment when the sole reason for so doing is a change of

management by reason of the stock sale. The conformity of the employees to the

corporation’s act of considering them as terminated and their subsequent acceptance

of separation pay does not remove the taint of illegal dismissal. Acceptance of

separation pay does not bar the employees from subsequently contesting the legality

of their dismissal, nor does it estop them from challenging the legality of their

separation from the service.77cralawlibrary

We therefore see it fit to expressly reverse our ruling in Manlimos insofar as it upheld

that, in a stock sale, the buyer in good faith has no obligation to retain the employees

of the selling corporation; and that the dismissal of the affected employees is lawful,

even absent a just or authorized cause.

As to Simeon Espiritu, Jr.

The CA and the NLRC discussed the case of Simeon, Jr. together with that of the rest

of respondent-employees. However, a review of the records shows that the conditions

leading to his dismissal from employment are different. We thus discuss his

circumstance separately.

The Samson Group contends that Simeon, Jr., likewise voluntarily resigned from his

post.78 According to them, he had resigned from SME Bank before the share transfer

took place.79Upon the change of ownership of the shares and the management of the

company, Simeon, Jr. submitted a letter of application to and was rehired by the new

management.80 However, the Samson Group alleged that for purely personal reasons,

he again resigned from his employment on 15 October 2001.81cralawlibrary

Simeon, Jr., on the other hand, contends that while he was reappointed by the new

management after his letter of application was transmitted, he was not given a clear

position, his benefits were reduced, and he suffered a demotion in rank.82 These

allegations were not refuted by the Samson Group.

We hold that Simeon, Jr. was likewise illegally dismissed from his employment.

Similar to our earlier discussion, we find that his first courtesy resignation letter was

also executed involuntarily. Thus, it cannot be the basis of a valid resignation; and

thus, at that point, he was illegally terminated from his employment. He was, however,

rehired by SME Bank under new management, although based on his allegations, he

was not reinstated to his former position or to a substantially equivalent one.83 Rather,

he even suffered a reduction in benefits and a demotion in rank.84 These led to his

submission of another resignation letter effective 15 October 2001.85cralawlibrary

We rule that these circumstances show that Simeon, Jr. was constructively dismissed.

In Peñaflor v. Outdoor Clothing Manufacturing Corporation,86 we have defined

constructive dismissal as follows:chanroblesvirtualawlibrary

Constructive dismissal is an involuntary resignation by the employee due to the harsh,

hostile, and unfavorable conditions set by the employer and which arises when a clear

discrimination, insensibility, or disdain by an employer exists and has become

unbearable to the employee.87

Constructive dismissal exists where there is cessation of work, because “continued

employment is rendered impossible, unreasonable or unlikely, as an offer involving a

demotion in rank or a diminution in pay” and other benefits.88cralawlibrary

These circumstances are clearly availing in Simeon, Jr.’s case. He was made to resign,

then rehired under conditions that were substantially less than what he was enjoying

before the illegal termination occurred. Thus, for the second time, he involuntarily

resigned from his employment. Clearly, this case is illustrative of constructive

dismissal, an act prohibited under our labor laws.

II

SME Bank, Eduardo M. Agustin, Jr. and Peregrin de Guzman, Jr. are liable for

illegal dismissal.

Having ruled on the illegality of the dismissal, we now discuss the issue of liability and

determine who among the parties are liable for the claims of the illegally dismissed

employees.

The settled rule is that an employer who terminates the employment of its employees

without lawful cause or due process of law is liable for illegal dismissal.89cralawlibrary

None of the parties dispute that SME Bank was the employer of respondent

employees. The fact that there was a change in the composition of its shareholders did

not affect the employer-employee relationship between the employees and the

corporation, because an equity transfer affects neither the existence nor the liabilities

of a corporation. Thus, SME Bank continued to be the employer of respondent

employees notwithstanding the equity change in the corporation. This outcome is in

line with the rule that a corporation has a personality separate and distinct from that of

its individual shareholders or members, such that a change in the composition of its

shareholders or members would not affect its corporate liabilities.

Therefore, we conclude that, as the employer of the illegally dismissed employees

before and after the equity transfer, petitioner SME Bank is liable for the satisfaction of

their claims.

Turning now to the liability of Agustin, De Guzman and the Samson Group for illegal

dismissal, at the outset we point out that there is no privity of employment contracts

between Agustin, De Guzman and the Samson Group, on the one hand, and

respondent employees on the other. Rather, the employment contracts were between

SME Bank and the employees. However, this fact does not mean that Agustin, De

Guzman and the Samson Group may not be held liable for illegal dismissal as

corporate directors or officers. In Bogo-Medellin Sugarcane Planters Association, Inc.

v. NLRC,90 we laid down the rule as regards the liability of corporate directors and

officers in illegal dismissal cases, as follows:chanroblesvirtualawlibrary

Unless they have exceeded their authority, corporate officers are, as a general rule, not

personally liable for their official acts, because a corporation, by legal fiction, has a

personality separate and distinct from its officers, stockholders and members.

However, this fictional veil may be pierced whenever the corporate personality is used

as a means of perpetuating a fraud or an illegal act, evading an existing obligation, or

confusing a legitimate issue. In cases of illegal dismissal, corporate directors and

officers are solidarily liable with the corporation, where terminations of employment are

done with malice or in bad faith.91 (Citations omitted)

Thus, in order to determine the respective liabilities of Agustin, De Guzman and the

Samson Group under the afore-quoted rule, we must determine, first, whether they

may be considered as corporate directors or officers; and, second, whether the

terminations were done maliciously or in bad faith.

There is no question that both Agustin and De Guzman were corporate directors of

SME Bank. An analysis of the facts likewise reveals that the dismissal of the

employees was done in bad faith. Motivated by their desire to dispose of their shares of

stock to Samson, they agreed to and later implemented the precondition in the Letter

Agreements as to the termination or retirement of SME Bank’s employees. However,

instead of going through the proper procedure, the bank manager induced respondent

employees to resign or retire from their respective employments, while promising that

they would be rehired by the new management. Fully relying on that promise, they

tendered courtesy resignations or retirements and eventually found themselves

jobless. Clearly, this sequence of events constituted a gross circumvention of our labor

laws and a violation of the employees’ constitutionally guaranteed right to security of

tenure. We therefore rule that, as Agustin and De Guzman are corporate directors who

have acted in bad faith, they may be held solidarily liable with SME Bank for the

satisfaction of the employees’ lawful claims.

As to spouses Samson, we find that nowhere in the records does it appear that they

were either corporate directors or officers of SME Bank at the time the illegal

termination occurred, except that the Samson Group had already taken over as new

management when Simeon, Jr. was constructively dismissed. Not being corporate

directors or officers, spouses Samson were not in legal control of the bank and

consequently had no power to dismiss its employees.

Respondent employees argue that the Samson Group had already taken over and

conducted an inventory before the execution of the share purchase

agreement.92 Agustin and De Guzman likewise argued that it was at Olga Samson’s

behest that the employees were required to resign from their posts.93 Even if this

statement were true, it cannot amount to a finding that spouses Samson should be

treated as corporate directors or officers of SME Bank. The records show that it was

Espiritu who asked the employees to tender their resignation and or retirement letters,

and that these letters were actually tendered to him.94 He then transmitted these letters

to the representative of the Samson Group.95 That the spouses Samson had to ask

Espiritu to require the employees to resign shows that they were not in control of the

corporation, and that the former shareholders – through Espiritu – were still in charge

thereof. As the spouses Samson were neither corporate officers nor directors at the

time the illegal dismissal took place, we find that there is no legal basis in the present

case to hold them in their personal capacities solidarily liable with SME Bank for

illegally dismissing respondent employees, without prejudice to any liabilities that may

have attached under other provisions of law.

Furthermore, even if spouses Samson were already in control of the corporation at the

time that Simeon, Jr. was constructively dismissed, we refuse to pierce the corporate

veil and find them liable in their individual steads. There is no showing that his

constructive dismissal amounted to more than a corporate act by SME Bank, or that

spouses Samson acted maliciously or in bad faith in bringing about his constructive

dismissal.

Finally, as regards Aurelio Villaflor, while he may be considered as a corporate officer,

being the president of SME Bank, the records are bereft of any evidence that indicates

his actual participation in the termination of respondent employees. Not having

participated at all in the illegal act, he may not be held individually liable for the

satisfaction of their claims.

III

Respondent employees are entitled to separation pay, full backwages, moral

damages, exemplary damages and attorney’s fees.

The rule is that illegally dismissed employees are entitled to (1) either reinstatement, if

viable, or separation pay if reinstatement is no longer viable; and (2)

backwages.96cralawlibrary

Courts may grant separation pay in lieu of reinstatement when the relations between

the employer and the employee have been so severely strained; when reinstatement is

not in the best interest of the parties; when it is no longer advisable or practical to order

reinstatement; or when the employee decides not to be reinstated.97 In this case,

respondent employees expressly pray for a grant of separation pay in lieu of

reinstatement. Thus, following a finding of illegal dismissal, we rule that they are

entitled to the payment of separation pay equivalent to their one-month salary for every

year of service as an alternative to reinstatement.

Respondent employees are likewise entitled to full backwages notwithstanding the

grant of separation pay. In Santos v. NLRC,98 we explained that an award of

backwages restores the income that was lost by reason of the unlawful dismissal, while

separation pay "provide[s] the employee with 'the wherewithal during the period that he

is looking for another employment.'"99 Thus, separation pay is a proper substitute only

for reinstatement; it is not an adequate substitute for both reinstatement and

backwages.100 Hence, respondent employees are entitled to the grant of full

backwages in addition to separation pay.

As to moral damages, exemplary damages and attorney's fees, we uphold the

appellate court's grant thereof based on our finding that the forced resignations and

retirement were fraudulently done and attended by bad faith.

WHEREFORE, premises considered, the instant Petitions for Review are PARTIALLY

GRANTED.

The assailed Decision and Resolution of the Court of Appeals in CA G.R. SP No.

97510 dated 13 March 2008 and 1 September 2008, respectively, are

hereby REVERSED and SET ASIDEinsofar as it held Abelardo P. Samson, Olga

Samson and Aurelio Villaflor, Jr. solidarily liable for illegal dismissal.

The assailed Decision and Resolution of the Court of Appeals in CA-G.R. SP No.

97942 dated 15 January 2008 and 19 February 2009, respectively, are

likewise REVERSED and SET ASIDE insofar as it held Abelardo P. Samson, Olga

Samson and Aurelio Villaflor, Jr. solidarily liable for illegal dismissal.

We REVERSE our ruling in Manlimos v. NLRC insofar as it upheld that, in a stock sale,

the buyer in good faith has no obligation to retain the employees of the selling

corporation, and that the dismissal of the affected employees is lawful even absent a

just or authorized cause.

SO ORDERED.

SECOND DIVISION

[G.R. No. 185122 : August 16, 2010]

WENSHA SPA CENTER, INC. AND/OR XU ZHI JIE, PETITIONERS, VS. LORETA T.

YUNG, RESPONDENT.

D E C I S I O N

MENDOZA, J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court filed by an

employer who was charged before the National Labor Relations

Commission (NLRC) for dismissing an employee upon the advice of a Feng Shui

master. In this action, the petitioners assail the May 28, 2008 Decision1 and October

23, 2008 Resolution2 of the Court of Appeals (CA) in CA-G.R. SP No. 98855

entitled Loreta T. Yung v. National Labor Relations Commission, Wensha Spa Center,

Inc. and/or Xu Zhi Jie.

THE FACTS:

Wensha Spa Center, Inc. (Wensha) in Quezon City is in the business of sauna bath

and massage services. Xu Zhi Jie a.k.a. Pobby Co (Xu) is its president,3 respondent

Loreta T. Yung(Loreta) was its administrative manager at the time of her termination

from employment.

In her position paper,4 Loreta stated that she used to be employed by Manmen

Services Co., Ltd. (Manmen) where Xu was a client. Xu was apparently impressed by

Loreta's performance. After he established Wensha, he convinced Loreta to transfer

and work at Wensha. Loreta was initially reluctant to accept Xu's offer because her job

at Manmen was stable and she had been with Manmen for seven years. But Xu was

persistent and offered her a higher pay. Enticed, Loreta resigned from Manmen and

transferred to Wensha. She started working on April 21, 2004 as Xu's personal

assistant and interpreter at a monthly salary of P12,000.00.

Loreta introduced positive changes to Wensha which resulted in increased

business. This pleased Xu so that on May 18, 2004, she was promoted to the position

of Administrative Manager.5

Loreta recounted that on August 10, 2004, she was asked to leave her office because

Xu and a Feng Shui master were exploring the premises. Later that day, Xu asked

Loreta to go on leave with pay for one month. She did so and returned on September

10, 2004. Upon her return, Xu and his wife asked her to resign from Wensha because,

according to the Feng Shui master, her aura did not match that of Xu. Loreta refused

but was informed that she could no longer continue working at Wensha. That same

afternoon, Loreta went to the NLRC and filed a case for illegal dismissal against Xu

and Wensha.

Wensha and Xu denied illegally terminating Loreta's employment. They claimed that

two months after Loreta was hired, they received various complaints against her from

the employees so that on August 10, 2004, they advised her to take a leave of absence

for one month while they conducted an investigation on the matter. Based on the

results of the investigation, they terminated Loreta's employment on August 31, 2004

for loss of trust and confidence.6

The Labor Arbiter (LA) Francisco Robles dismissed Loreta's complaint for lack of merit.

He found it more probable that Loreta was dismissed from her employment due to

Wensha's loss of trust and confidence in her. The LA's decision7 partly reads:

However, this office has found it dubious and hard to believe the contentions made by

the complainant that she was dismissed by the respondents on the sole ground that

she is a "mismatch" in respondents' business as advised by an alleged Feng Shui

Master. The complainant herself alleged in her position paper that she has done

several improvements in respondents' business such as uplifting the morale and

efficiency of its employees and increasing respondents' clientele, and that respondent

Co was very much pleased with the improvements made by the complainant that she

was offered twice a promotion but she nevertheless declined. It would be against

human experience and contrary to business acumen to let go of someone, who was an

asset and has done so much for the company merely on the ground that she is a

"mismatch" to the business. Absent any proof submitted by the complainant, this office

finds it more probable that the complainant was dismissed due to loss of trust and

confidence.8

This ruling was affirmed by the NLRC in its December 29, 2006 Resolution,9 citing its

observation that Wensha was still considering the proper action to take on the day

Loreta left Wensha and filed her complaint. The NLRC added that this finding was

bolstered by Wensha's September 10, 2004 letter to Loreta asking her to come back to

personally clarify some matters, but she declined because she had already filed a

case.

Loreta moved for a reconsideration of the NLRC's ruling but her motion was

denied. Loreta then went to the CA on a petition for certiorari. The CA reversed the

ruling of the NLRC on the ground that it gravely abused its discretion in appreciating

the factual bases that led to Loreta's dismissal. The CA noted that there were

irregularities and inconsistencies in Wensha's position. The CA stated the following:

We, thus, peruse the affidavits and documentary evidence of the Private Respondents

and find the following: First, on the affidavits of their witnesses, it must be noted that

the same were mere photocopies. It was held that [T]he purpose of the rule in

requiring the production of the best evidence is the prevention of fraud, because if a

party is in possession of such evidence and withholds it, and seeks to substitute

inferior evidence in its place, the presumption naturally arise[s] that the better evidence

is withheld for fraudulent purposes which its production would expose and

defeat. Moreover, the affidavits were not executed under oath. The rule is that an

affiant must sign the document in the presence of and take his oath before a notary

public as evidence that the affidavit was properly made. Guided by these principles,

the affidavits cannot be assigned any weighty probative value and are mere scraps of

paper the contents of which are hearsay. Second, on the sales report and order slips,

which allegedly prove that Yung had been charging her food and drinks to Wensha, the

said pieces of evidence do not, however, bear Yung's name thereon or even her

signature. In fact, it does not state anyone's name, except that of Wensha. Hence, it

would simply be capricious to pinpoint, or impute, on Yung as the author in charging

such expenses to Wensha on the basis of hearsay evidence. Third, while the affidavit

of Wensha's Operations Manager, Princess delos Reyes (delos Reyes), may have

been duly executed under oath, she did not, however, specify the alleged infractions

that Yung committed. If at all, delos Reyes only made general statements on the

alleged complaints against Yung that were not even substantiated by any other piece

of evidence. Finally, the daily time records (DTRs) of Yung, which supposedly prove

her habitual tardiness, were mere photocopies that are not even signed by Wensha's

authorized representative, thus suspect, if not violative of the best evidence rule and,

therefore, incompetent evidence. x x x [Emphases appear in the original]

x x x x.

Finally, after the Private Respondents filed their position paper, they alleged mistake

on the part of their former counsel in stating that Yung was dismissed on August 31,

2004. Thus, they subsequently moved for the admission of their rejoinder. Notably,

however, the said rejoinder was dated October 4, 2004, earlier than the date when

their position paper was filed, which was on November 3, 2004. It is also puzzling that

their position paper was dated November 25, 2004, much later than its date of

filing. The irregularities are simply too glaring to be ignored. Nevertheless, the Private

Respondents' admission of Yung's termination on August 31, 2004 cannot be

retracted. They cannot use the mistake of their counsel as an excuse considering

that the position paper was verified by their Operations Manager, delos

Reyes, who attested to the truth of the contents therein.10[Emphasis supplied]

Hence, the fallo of the CA decision reads:

WHEREFORE, the instant petition is GRANTED. Wensha Spa Center, Inc. and Xu Zhi

Jie are ORDERED to, jointly and severally, pay Loreta T. Yung her full backwages,

other privileges, and benefits, or their monetary equivalent, corresponding to the period

of her dismissal from September 1, 2004 up to the finality of this decision, and

damages in the amounts of fifty thousand pesos (Php50,000.00) as moral damages,

twenty five thousand pesos (Php25,000.00) as exemplary damages, and twenty

thousand pesos (Php20,000.00) as attorney's fees. No costs.

SO ORDERED.11

Wensha and Xu now assail this ruling of the CA in this petition presenting the following:

V. GROUNDS FOR THE ALLOWANCE OF THE PETITION

5.1 The following are the reasons and arguments, which are purely questions of law

and some questions of facts, which justify the appeal by certiorari under Rule 45 of the

1997 Revised Rules of Civil Procedure, as amended, to this Honorable SUPREME

COURT of the assailed Decision and Resolution, to wit:

5.1.1 The Honorable COURT OF APPEALS gravely erred in reversing that factual

findings of the Honorable Labor Arbiter and the Honorable NLRC (Third Division)

notwithstanding recognized and established rule in our jurisdiction that findings of facts

of quasi-judicial agencies who have gained expertise on their respective subject

matters are given respect and finality;

5.1.2 The Honorable COURT OF APPEALS committed grave abuse of discretion and

serious errors when it ruled that findings of facts of the Honorable Labor Arbiter and the

Honorable NLRC are not supported by substantial evidence despite the fact that the

records clearly show that petitioner therein was not dismissed but is under

investigation, and that she is guilty of serious infractions that warranted her termination;

5.1.3 The Honorable COURT OF APPEALS grave[ly] erred when it ordered herein

petitioner to pay herein respondent her separation pay, in lieu of reinstatement, and full

backwages, as well as damages and attorney's fees;

5.1.4 The Honorable COURT OF APPEALS committed grave abuse of discretion and

serious errors when it held that petitioner XU ZHI JIE to be solidarily liable with

WENSHA, assuming that respondent was illegally dismissed;

5.2 The same need to be corrected as they would work injustice to the herein

petitioner, grave and irreparable damage will be done to him, and would pose

dangerous precedent.12

THE COURT'S RULING:

Loreta's security of tenure is guaranteed by the Constitution and the Labor Code. The

1987 Philippine Constitution provides in Section 18, Article II that the State shall protect

the rights of workers and promote their welfare. Section 3, Article XIII also provides

that all workers shall be entitled to security of tenure. Along that line, Article 3 of the

Labor Code mandates that the State shall assure the rights of workers to security of

tenure.

Under the security of tenure guarantee, a worker can only be terminated from his

employment for cause and after due process. For a valid termination by the employer:

(1) the dismissal must be for a valid cause as provided in Article 282, or for any of the

authorized causes under Articles 283 and 284 of the Labor Code; and (2) the

employee must be afforded an opportunity to be heard and to defend himself. A just

and valid cause for an employee's dismissal must be supported by substantial

evidence, and before the employee can be dismissed, he must be given notice and an

adequate opportunity to be heard.13 In the process, the employer bears the burden of

proving that the dismissal of an employee was for a valid cause. Its failure to

discharge this burden renders the dismissal unjustified and, therefore, illegal.14

As a rule, the factual findings of the court below are conclusive on Us in a petition for

review on certiorari where We review only errors of law. This case, however, is an

exception because the CA's factual findings are not congruent with those of the NLRC

and the LA.

According to Wensha in its position paper,15 it dismissed Loreta on August 31, 2004

after investigating the complaints against her. Wensha asserted that her dismissal was

a valid exercise of an employer's right to terminate a managerial employee for loss of

trust and confidence. It claimed that she caused the resignation of an employee

because of gossips initiated by her. It was the reason she was asked to take a leave of

absence with pay for one month starting August 10, 2004.16

Wensha also alleged that Loreta was "sowing intrigues in the company" which was

inimical to Wensha. She was also accused of dishonesty, serious breach of trust

reposed in her, tardiness, and abuse of authority.17

In its Rejoinder, Wensha changed its position claiming that it did not terminate Loreta's

employment on August 31, 2004. It even sent her a notice requesting her to report

back to work. She, however, declined because she had already filed her complaint.18

As correctly found by the CA, the cause of Loreta's dismissal is questionable. Loss of

trust and confidence to be a valid ground for dismissal must have basis and must be

founded on clearly established facts.19

The Court finds the LA ruling that states, "[a]bsent any proof submitted by the

complainant, this office finds it more probable that the complainant was dismissed due

to loss of trust and confidence,"20 to be utterly erroneous as it is contrary to the

applicable rules and pertinent jurisprudence. The onus of proving a valid dismissal

rests on the employer, not on the employee.21 It is the employer who bears the burden

of proving that its dismissal of the employee is for a valid or authorized cause

supported by substantial evidence. 22

According to the NLRC, "[p]erusal of the entire records show that complainant left the

respondents' premises when she was confronted with the infractions imputed against

her."23 This information was taken from the affidavit24 of Princess Delos Reyes (Delos

Reyes) which was dated March 21, 2005, not in Wensha's earlier position paper or

pleadings submitted to the LA. The affidavits25 of employees attached to Delos Reyes'

affidavit were all dated November 19, 2004 indicating that they were not yet executed

when the complaints against Loreta were supposedly being investigated in August

2004.

It is also noteworthy that Wensha's position paper related that because of the gossips

perpetrated by Loreta, a certain Oliva Gonzalo (Gonzalo) resigned from

Wensha. Because of the incident, Gonzalo, whose father was a policeman, "reportedly

got angry with complainant and of the management telling her friends at respondent

company that she would retaliate thus creating fear among those concerned."26 As a

result, Loreta was advised to take a paid leave of absence for one month while

Wensha conducted an investigation.

According to Loreta, however, the reason for her termination was her aura did not

match that of Xu and the work environment at Wensha. Loreta narrated:

On August 10, 2004 however, complainant was called by respondent Xu and told her

to wait at the lounge area while the latter and a Feng Shui Master were doing some

analysis of the office. After several hours of waiting, respondent Xu then told

complainant that according to the Feng Shui master her Chinese Zodiac sign is a

"mismatch" with that of the respondents; that complainant should not enter the

administrative office for a month while an altar was to be placed on the left side where

complainant has her table to allegedly correct the "mismatch" and that it is necessary

that offerings and prayers have to be made and said for about a month to correct the

alleged "jinx." Respondent Xu instructed complainant not to report to the office for a

month with assurance of continued and regular salary. She was ordered not to seek

employment elsewhere and was told to come back on the 10th of September 2004.27

Although she was a little confused, Loreta did as she was instructed and did not report

for work for a month. She returned to work on September 10, 2004. This is how

Loreta recounted the events of that day:

On September 10, 2004, in the morning, complainant reported to the office of

respondents. As usual, she punched-in her time card and signed in the logbook of the

security guard. When she entered the administrative office, some of its employees

immediately contacted respondent Xu. Respondent Xu then contacted complainant

thru her mobile phone and told her to leave the administrative office immediately and

instead to wait for him in the dining area.

xxx

Complainant waited for respondent Xu in the dining area. After waiting for about two

(2) hours, respondent Xu was nowhere. Instead, it was Jiang Xue Qin a.k.a Annie Co,

the Chinese wife of respondent Xu, who arrived and after a short conversation between

them, the former frankly told complainant that she has to resign allegedly she is a

mismatch to respondent Xu according to the Feng Shui master and therefore she does

not fit to work (sic) with the respondents. Surprised and shocked, complainant

demanded of Jiang Xue Qin to issue a letter of termination if it were the reason

therefor.

Instead of a termination letter issued, Jiang Xue Qin insisted for the complainant's

resignation. But when complainant stood her ground, Jian Xue Qin shouted invectives

at her and told to leave the office immediately.

Respondent Xu did not show up but talked to the complainant over the mobile phone

and convinced her likewise to resign from the company since there is no way to retain

her because her aura unbalanced the area of employment according to the Feng Shui,

the Chinese spiritual art of placement. Hearing this from no lees than respondent Xu,

complainant left the office and went straight to this Office and filed the present case on

September 10, 2004. xxx28

Loreta also alleged that in the afternoon of that day, September 10, 2004, a notice was

posted on the Wensha bulletin board that reads:

TO ALL EMPLOYEES OF WENSHA SPA CENTER

WE WOULD LIKE TO INFORM YOU THAT MS. LORIE TSE YUNG, FORMER

ADMINISTRATIVE OFFICER OF WENSHA SPA CENTER IS NO

LONGER CONNECTED TO THIS COMPANY STARTING TODAY SEPTEMBER 10,

2004.

ANY TRANSACTION MADE BY HER IS NO LONGER A LIABILITY OF THE

COMPANY.

(SGD.) THE MANAGEMENT [Italics were in red letters.]29

The Court finds Loreta's complaint credible. There is consistency in her pleadings and

evidence. In contrast, Wensha's pleadings and evidence, taken as a whole, suffer from

inconsistency. Moreover, the affidavits of the employees only pertain to petty matters

that, to the Court's mind, are not sufficient to support Wensha's alleged loss of trust

and confidence. To be a valid cause for termination of employment, the act or acts

constituting breach of trust must have been done intentionally, knowingly, and

purposely; and they must be founded on clearly established facts.

The CA decision is supported by evidence and logically flows from a review of the

records. Loreta's narration of the events surrounding her termination from employment

was simple and straightforward. Her claims are more credible than the affidavits which

were clearly prepared as an afterthought.

More importantly, the records are bereft of evidence that Loreta was duly informed of

the charges against her and that she was given the opportunity to respond to those

charges prior to her dismissal. If there were indeed charges against Loreta that

Wensha had to investigate, then it should have informed her of those charges and

required her to explain her side. Wensha should also have kept records of the

investigation conducted while Loreta was on leave. The law requires that two notices

be given to an employee prior to a valid termination: the first notice is to inform the

employee of the charges against her with a warning that she may be terminated from

her employment and giving her reasonable opportunity within which to explain her side,

and the second notice is the notice to the employee that upon due consideration of all

the circumstances, she is being terminated from her employment.30 This is a

requirement of due process and clearly, Loreta did not receive any of those required

notices.

We are in accord with the pronouncement of the CA that the reinstatement of Loreta to

her former position is no longer feasible in the light of the strained relations between

the parties. Reinstatement, under the circumstances, would no longer be practical as it

would not be in the interest of both parties. Under the law and jurisprudence, an

illegally dismissed employee is entitled to two reliefs - backwages and reinstatement,

which are separate and distinct. If reinstatement would only exacerbate the tension and

further ruin the relations of the employer and the employee, or if their relationship has

been unduly strained due to irreconcilable differences, particularly where the illegally

dismissed employee held a managerial or key position in the company, it would be

prudent to order payment of separation pay instead of reinstatement.31 In the case

of Golden Ace Builders v. Talde,32 We wrote:

Under the doctrine of strained relations, the payment of separation pay has been

considered an acceptable alternative to reinstatement when the latter option is no

longer desirable or viable. On the one hand, such payment liberates the employee from

what could be a highly oppressive work environment. On the other, the payment

releases the employer from the grossly unpalatable obligation of maintaining in its

employ a worker it could no longer trust.

In the case at bench, the CA, upon its own assessment, pronounced that the relations

between petitioners and the respondent have become strained because of her

dismissal anchored on dubious charges. The respondent has not contested the

finding. As she is not insisting on being reinstated, she should be paid separation pay

equivalent to one (1) month salary for every year of service.33 The CA, however, failed

to decree such award in the dispositive portion. This should be rectified.

Nevertheless, the Court finds merit in the argument of petitioner Xu that the CA erred

in ruling that he is solidarily liable with Wensha.

Elementary is the rule that a corporation is invested by law with a personality separate

and distinct from those of the persons composing it and from that of any other legal

entity to which it may be related. "Mere ownership by a single stockholder or by

another corporation of all or nearly all of the capital stock of a corporation is not of itself

sufficient ground for disregarding the separate corporate personality."34

In labor cases, corporate directors and officers may be held solidarily liable with the

corporation for the termination of employment only if done with malice or in bad

faith.35 Bad faith does not connote bad judgment or negligence; it imports a dishonest

purpose or some moral obliquity and conscious doing of wrong; it means breach of a

known duty through some motive or interest or ill will; it partakes of the nature of

fraud.36

In the subject decision, the CA concluded that petitioner Xu and Wensha are jointly and

severally liable to Loreta.37 We have read the decision in its entirety but simply failed to

come across any finding of bad faith or malice on the part of Xu. There is, therefore,

no justification for such a ruling. To sustain such a finding, there should be an

evidence on record that an officer or director acted maliciously or in bad faith in

terminating the services of an employee.38 Moreover, the finding or indication that the

dismissal was effected with malice or bad faith should be stated in the decision itself.39

WHEREFORE, the petition is PARTIALLY GRANTED. The decretal portion of the

May 28, 2008 Decision of the Court of Appeals, in CA-G.R. SP No. 98855, is

hereby MODIFIED to read as follows:

WHEREFORE, the petition is GRANTED. Wensha Spa Center, Inc. is hereby ordered

to pay Loreta T. Yung her full backwages, other privileges, and benefits, or their

monetary equivalent, and separation pay reckoned from the date of her dismissal,

September 1, 2004, up to the finality of this decision, plus damages in the amounts of

Fifty Thousand (P50,000.00) Pesos, as moral damages; Twenty Five Thousand

(P25,000.00) Pesos as exemplary damages; and Twenty Thousand (P20,000.00)

Pesos, as attorney's fees. No costs.

SO ORDERED.

Creature with enumerated powers, attributes, and properties

FIRST DIVISION

[G.R. NO. 152542 : July 8, 2004]

MONFORT HERMANOS AGRICULTURAL DEVELOPMENT CORPORATION, as

represented by MA. ANTONIA M. SALVATIERRA,Petitioner, v.ANTONIO B.

MONFORT III, MA. LUISA MONFORT ASCALON, ILDEFONSO B. MONFORT,

ALFREDO B. MONFORT, CARLOS M. RODRIGUEZ, EMILY FRANCISCA R.

DOLIQUEZ, ENCARNACION CECILIA R. PAYLADO, JOSE MARTIN M.

RODRIGUEZ and COURT OF APPEALS,Respondents.

[G.R. NO. 155472 : July 8, 2004]

ANTONIO B. MONFORT III, MA. LUISA MONFORT ASCALON, ILDEFONSO B.

MONFORT, ALFREDO B. MONFORT, CARLOS M. RODRIGUEZ, EMILY

FRANCISCA R. DOLIQUEZ, ENCARNACION CECILIA R. PAYLADO, JOSE

MARTIN M. RODRIGUEZ, Petitioners, v. HON. COURT OF APPEALS, MONFORT

HERMANOS AGRICULTURAL DEVELOPMENT CORPORATION, as represented

by MA. ANTONIA M. SALVATIERRA, and RAMON H. MONFORT, Respondents.

D E C I S I O N

YNARES-SANTIAGO, J.:

Before the Court are consolidated petitions for review of the decisions of the Court of

Appeals in the complaints for forcible entry and replevin filed by Monfort Hermanos

Agricultural Development Corporation (Corporation) and Ramon H. Monfort against the

children, nephews, and nieces of its original incorporators (collectively known as the

group of Antonio Monfort III).

The petition in G.R. No. 152542, assails the October 5, 2001 Decision1 of the Special

Tenth Division of the Court of Appeals in CA-G.R. SP No. 53652, which ruled that Ma.

Antonia M. Salvatierra has no legal capacity to represent the Corporation in the forcible

entry case docketed as Civil Case No. 534-C, before the Municipal Trial Court of Cadiz

City.On the other hand, the petition in G.R. No. 155472, seeks to set aside the June 7,

2002 Decision2 rendered by the Special Former Thirteenth Division of the Court of

Appeals in CA-G.R. SP No. 49251, where it refused to address, on jurisdictional

considerations, the issue of Ma. Antonia M. Salvatierras capacity to file a complaint for

replevin on behalf of the Corporation in Civil Case No. 506-C before the Regional Trial

Court of Cadiz City, Branch 60.

Monfort Hermanos Agricultural Development Corporation, a domestic private

corporation, is the registered owner of a farm, fishpond and sugar cane plantation

known as Haciendas San Antonio II, Marapara, Pinanoag and Tinampa-an, all situated

in Cadiz City.3 It also owns one unit of motor vehicle and two units of tractors.4 The

same allowed Ramon H. Monfort, its Executive Vice President, to breed and maintain

fighting cocks in his personal capacity at Hacienda San Antonio.5 ςrνll

In 1997, the group of Antonio Monfort III, through force and intimidation, allegedly took

possession of the 4 Haciendas, the produce thereon and the motor vehicle and

tractors, as well as the fighting cocks of Ramon H. Monfort.

In G.R. No. 155472:

On April 10, 1997, the Corporation, represented by its President, Ma. Antonia M.

Salvatierra, and Ramon H. Monfort, in his personal capacity, filed against the group of

Antonio Monfort III, a complaint6 for delivery of motor vehicle, tractors and 378 fighting

cocks, with prayer for injunction and damages, docketed as Civil Case No. 506-C,

before the Regional Trial Court of Negros Occidental, Branch 60.

The group of Antonio Monfort III filed a motion to dismiss contending, inter alia, that

Ma. Antonia M. Salvatierra has no capacity to sue on behalf of the Corporation

because the March 31, 1997 Board Resolution7 authorizing Ma. Antonia M. Salvatierra

and/or Ramon H. Monfort to represent the Corporation is void as the purported

Members of the Board who passed the same were not validly elected officers of the

Corporation.

On May 4, 1998, the trial court denied the motion to dismiss.8 The group of Antonio

Monfort III filed a petition for certiorari with the Court of Appeals but the same was

dismissed on June 7, 2002.9 The Special Former Thirteenth Division of the appellate

court did not resolve the validity of the March 31, 1997 Board Resolution and the

election of the officers who signed it, ratiocinating that the determination of said

question is within the competence of the trial court.

The motion for reconsideration filed by the group of Antonio Monfort III was

denied.10 Hence, they instituted a Petition for Review with this Court, docketed as G.R.

No. 155472.

In G.R. No. 152542:

On April 21, 1997, Ma. Antonia M. Salvatierra filed on behalf of the Corporation a

complaint for forcible entry, preliminary mandatory injunction with temporary restraining

order and damages against the group of Antonio Monfort III, before the Municipal Trial

Court (MTC) of Cadiz City.11 It contended that the latter through force and intimidation,

unlawfully took possession of the 4 Haciendas and deprived the Corporation of the

produce thereon.

In their answer,12 the group of Antonio Monfort III alleged that they are possessing and

controlling the Haciendas and harvesting the produce therein on behalf of the

corporation and not for themselves.They likewise raised the affirmative defense of lack

of legal capacity of Ma. Antonia M. Salvatierra to sue on behalf of the Corporation.

On February 18, 1998, the MTC of Cadiz City rendered a decision dismissing the

complaint.13 On appeal, the Regional Trial Court of Negros Occidental, Branch 60,

reversed the Decision of the MTCC and remanded the case for further

proceedings.14 ςrνll

Aggrieved, the group of Antonio Monfort III filed a Petition for Review with the Court of

Appeals.On October 5, 2001, the Special Tenth Division set aside the judgment of the

RTC and dismissed the complaint for forcible entry for lack of capacity of Ma. Antonia

M. Salvatierra to represent the Corporation.15 The motion for reconsideration filed by

the latter was denied by the appellate court.16 ςrνll

Unfazed, the Corporation filed a Petition for Review with this Court, docketed as G.R.

No. 152542 which was consolidated with G.R. No. 155472 per Resolution dated

January 21, 2004.17 ςrνll

The focal issue in these consolidated petitions is whether or not Ma. Antonia M.

Salvatierra has the legal capacity to sue on behalf of the Corporation.

The group of Antonio Monfort III claims that the March 31, 1997 Board Resolution

authorizing Ma. Antonia M. Salvatierra and/or Ramon H. Monfort to represent the

Corporation is void because the purported Members of the Board who passed the

same were not validly elected officers of the Corporation.

A corporation has no power except those expressly conferred on it by the Corporation

Code and those that are implied or incidental to its existence.In turn, a corporation

exercises said powers through its board of directors and/or its duly authorized officers

and agents.Thus, it has been observed that the power of a corporation to sue and be

sued in any court is lodged with the board of directors that exercises its corporate

powers.In turn, physical acts of the corporation, like the signing of documents, can be

performed only by natural persons duly authorized for the purpose by corporate by-

laws or by a specific act of the board of directors.18 ςrνll

Corollary thereto, corporations are required under Section 26 of the Corporation Code

to submit to the SEC within thirty (30) days after the election the names, nationalities

and residences of the elected directors, trustees and officers of the Corporation.In

order to keep stockholders and the public transacting business with domestic

corporations properly informed of their organizational operational status, the SEC

issued the following rules:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

x x x

2.A General Information Sheetshall be filed with this Commission within thirty (30)

days following the date of the annual stockholders meeting.No extension of said period

shall be allowed, except for very justifiable reasons stated in writing by the President,

Secretary, Treasurer or other officers, upon which the Commission may grant an

extension for not more than ten (10) days.

2.A.Should a director, trustee or officer die, resign or in any manner, cease to hold

office, the corporation shall report such fact to the Commission with fifteen (15) days

after such death, resignation or cessation of office.

3.If for any justifiable reason, the annual meeting has to be postponed, the company

should notify the Commission in writing of such postponement.

The General Information Sheet shall state, among others, the names of the

elected directors and officers, together with their corresponding position

title (Emphasis supplied)ςrαlαω lιbrαrÿ

In the instant case, the six signatories to the March 31, 1997 Board Resolution

authorizing Ma. Antonia M. Salvatierra and/or Ramon H. Monfort to represent the

Corporation, were: Ma. Antonia M. Salvatierra, President; Ramon H. Monfort,

Executive Vice President; Directors Paul M. Monfort, Yvete M. Benedicto and

Jaqueline M. Yusay; and Ester S. Monfort, Secretary.19However, the names of the last

four (4) signatories to the said Board Resolution do not appear in the 1996 General

Information Sheet submitted by the Corporation with the SEC.Under said General

Information Sheet the composition of the Board is as

follows:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

1.Ma. Antonia M. Salvatierra (Chairman) ;chanroblesvirtuallawlibrary

2.Ramon H. Monfort (Member);chanroblesvirtuallawlibrary

3.Antonio H. Monfort, Jr., (Member);chanroblesvirtuallawlibrary

4.Joaquin H. Monfort (Member);chanroblesvirtuallawlibrary

5.Francisco H. Monfort (Member) and

6.Jesus Antonio H. Monfort (Member). 20 ςrνll

There is thus a doubt as to whether Paul M. Monfort, Yvete M. Benedicto, Jaqueline M.

Yusay and Ester S. Monfort, were indeed duly elected Members of the Board legally

constituted to bring suit in behalf of the Corporation.21 ςrνll

In Premium Marble Resources, Inc. v. Court of Appeals ,22 the Court was confronted

with the similar issue of capacity to sue of the officers of the corporation who filed a

complaint for damages. In the said case, we sustained the dismissal of the complaint

because it was not established that the Members of the Board who authorized the filing

of the complaint were the lawfully elected officers of the corporation.Thus

The only issue in this case is whether or not the filing of the case for damages against

private respondent was authorized by a duly constituted Board of Directors of the

petitioner corporation.

Petitioner, through the first set of officers, viz., Mario Zavalla, Oscar Gan, Lionel

Pengson, Jose Ma. Silva, Aderito Yujuico and Rodolfo Millare, presented the Minutes

of the meeting of its Board of Directors held on April 1, 1982, as proof that the filing of

the case against private respondent was authorized by the Board. On the other hand,

the second set of officers, viz., Saturnino G. Belen, Jr., Alberto C. Nograles and Jose

L.R. Reyes, presented a Resolution dated July 30, 1986, to show that Premium did not

authorize the filing in its behalf of any suit against the private respondent International

Corporate Bank.

Later on, petitioner submitted its Articles of Incorporation dated November 6, 1979 with

the following as Directors: Mario C. Zavalla, Pedro C. Celso, Oscar B. Gan, Lionel

Pengson, and Jose Ma. Silva.

However, it appears from the general information sheet and the Certification issued by

the SEC on August 19, 1986 that as of March 4, 1981, the officers and members of the

board of directors of the Premium Marble Resources, Inc.

were:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

Alberto C. Nograles President/Director

Fernando D. Hilario Vice President/Director

Augusto I. Galace Treasurer

Jose L.R. Reyes Secretary/Director

Pido E. Aguilar Director

Saturnino G. Belen, Jr. Chairman of the Board.

While the Minutes of the Meeting of the Board on April 1, 1982 states that the newly

elected officers for the year 1982 were Oscar Gan, Mario Zavalla, Aderito Yujuico and

Rodolfo Millare, petitioner failed to show proof that this election was reported to the

SEC. In fact, the last entry in their General Information Sheet with the SEC, as of 1986

appears to be the set of officers elected in March 1981.

We agree with the finding of public respondent Court of Appeals, that in the absence of

any board resolution from its board of directors the [sic] authority to act for and in

behalf of the corporation, the present action must necessarily fail. The power of the

corporation to sue and be sued in any court is lodged with the board of directors that

exercises its corporate powers. Thus, the issue of authority and the invalidity of

plaintiff-appellants subscription which is still pending, is a matter that is also addressed,

considering the premises, to the sound judgment of the Securities & Exchange

Commission.

By the express mandate of the Corporation Code (Section 26), all corporations duly

organized pursuant thereto are required to submit within the period therein stated (30

days) to the Securities and Exchange Commission the names, nationalities and

residences of the directors, trustees and officers elected.

Sec. 26 of the Corporation Code provides,

thus:ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

Sec. 26.Report of election of directors, trustees and officers. Within thirty (30) days

after the election of the directors, trustees and officers of the corporation, the secretary,

or any other officer of the corporation, shall submit to the Securities

andExchangeCommission,the names, nationalities and residences of the

directors,trustees andofficerselected. xxx

Evidently, the objective sought to be achieved by Section 26 is to give the public

information, under sanction of oath of responsible officers, of the nature of business,

financial condition and operational status of the company together with information on

its key officers or managers so that those dealing with it and those who intend to do

business with it may know or have the means of knowing facts concerning the

corporations financial resources and business responsibility.

The claim, therefore, of petitioners as represented by Atty. Dumadag, that Zaballa, et

al., are the incumbent officers of Premium has not been fully substantiated.In the

absence of an authority from the board of directors, no person, not even the officers of

the corporation, can validly bind the corporation.

In the case at bar, the fact that four of the six Members of the Board listed in the 1996

General Information Sheet23 are already dead24 at the time the March 31, 1997 Board

Resolution was issued, does not automatically make the four signatories (i.e., Paul M.

Monfort, Yvete M. Benedicto, Jaqueline M. Yusay and Ester S. Monfort) to the said

Board Resolution (whose name do not appear in the 1996 General Information Sheet)

as among the incumbent Members of the Board.This is because it was not established

that they were duly elected to replace the said deceased Board Members.

To correct the alleged error in the General Information Sheet, the retained accountant

of the Corporation informed the SEC in its November 11, 1998 letter that the non-

inclusion of the lawfully elected directors in the 1996 General Information Sheet was

attributable to its oversight and not the fault of the Corporation.25 This belated attempt,

however, did not erase the doubt as to whether an election was indeed held.As

previously stated, a corporation is mandated to inform the SEC of the names and the

change in the composition of its officers and board of directors within 30 days after

election if one was held, or 15 days after the death, resignation or cessation of office of

any of its director, trustee or officer if any of them died, resigned or in any manner,

ceased to hold office.This, the Corporation failed to do.The alleged election of the

directors and officers who signed the March 31, 1997 Board Resolution was held on

October 16, 1996, but the SEC was informed thereof more than two years later, or on

November 11, 1998.The 4 Directors appearing in the 1996 General Information Sheet

died between the years 1984 1987,26 but the records do not show if such demise was

reported to the SEC.

What further militates against the purported election of those who signed the March 31,

1997 Board Resolution was the belated submission of the alleged Minutes of the

October 16, 1996 meeting where the questioned officers were elected.The issue of

legal capacity of Ma. Antonia M. Salvatierra was raised before the lower court by the

group of Antonio Monfort III as early as 1997, but the Minutes of said October 16, 1996

meeting was presented by the Corporation only in its September 29, 1999 Comment

before the Court of Appeals.27 Moreover, the Corporation failed to prove that the same

October 16, 1996 Minutes was submitted to the SEC.In fact, the 1997 General

Information Sheet28 submitted by the Corporation does not reflect the names of the 4

Directors claimed to be elected on October 16, 1996.

Considering the foregoing, we find that Ma. Antonia M. Salvatierra failed to prove that

four of those who authorized her to represent the Corporation were the lawfully elected

Members of the Board of the Corporation.As such, they cannot confer valid authority

for her to sue on behalf of the corporation.

The Court notes that the complaint in Civil Case No. 506-C, for replevin before the

Regional Trial Court of Negros Occidental, Branch 60, has 2 causes of action, i.e.,

unlawful detention of the Corporations motor vehicle and tractors, and the unlawful

detention of the of 387 fighting cocks of Ramon H. Monfort.Since Ramon sought

redress of the latter cause of action in his personal capacity, the dismissal of the

complaint for lack of capacity to sue on behalf of the corporation should be limited only

to the corporations cause of action for delivery of motor vehicle and tractors.In view,

however, of the demise of Ramon on June 25, 1999,29 substitution by his heirs is

proper.

WHEREFORE, in view of all the foregoing, the petition in G.R. No. 152542 is

DENIED.The October 5, 2001 Decision of the Special Tenth Division of the Court of

Appeals in CA-G.R. SP No. 53652, which set aside the August 14, 1998 Decision of

the Regional Trial Court of Negros Occidental, Branch 60 in Civil Case No. 822, is

AFFIRMED.

In G.R. No. 155472, the petition is GRANTED and the June 7, 2002 Decision rendered

by the Special Former Thirteenth Division of the Court of Appeals in CA-G.R. SP No.

49251, dismissing the petition filed by the group of Antonio Monfort III, is REVERSED

and SET ASIDE.

The complaint for forcible entry docketed as Civil Case No. 822 before the Municipal

Trial Court of Cadiz City is DISMISSED.In Civil Case No. 506-C with the Regional Trial

Court of Negros Occidental, Branch 60, the action for delivery of personal property filed

by Monfort Hermanos Agricultural Development Corporation is likewise

DISMISSED.With respect to the action filed by Ramon H. Monfort for the delivery of

387 fighting cocks, the Regional Trial Court of Negros Occidental, Branch 60, is

ordered to effect the corresponding substitution of parties.

No costs.

SO ORDERED.

Entitlement to Constitutional Guarantees

EN BANC

[G.R. No. L-19550. June 19, 1967.]

HARRY S. STONEHlLL, ROBERT P. BROOKS, JOHN J. BROOKS and KARL

BECK, Petitioners, v. HON. JOSE W. DIOKNO, in his capacity as SECRETARY OF

JUSTICE, JOSE LUKBAN, in his capacity as Acting Director of the National

Bureau of Investigation; SPECIAL PROSECUTORS PEDRO D. CENZON, EFREN I.

PLANA and MANUEL VILLAREAL, JR. and ASST. FISCAL MANASES G. REYES,

JUDGE AMADO ROAN, Municipal Court of Manila, JUDGE ROMAN CANSINO,

Municipal Court of Manila, JUDGE HERMOGENES CALUAG, Court of First

Instance of Rizal-Quezon City Branch, and JUDGE DAMIAN JIMENEZ, Municipal

Court of Quezon City, Respondents.

Paredes, Poblador, Cruz & Nazareno and Meer, Meer & Meer and Juan T . David,

for Petitioners.

Solicitor General Arturo A. Alafriz, Assistant Solicitor General Pacifico P. de

Castro, Assistant Solicitor General Frine C . Zaballero, Solicitor Camilo D.

Quiason and Solicitor C . Padua for Respondents.

SYLLABUS

1. CONSTITUTIONAL LAW; SEARCH AND SEIZURE; WHO MAY CONTEST

LEGALITY THEREOF CASE AT BAR. — It is well settled that the legality of a seizure

can be contested only by the party whose rights have been impaired thereby (Lewis v.

U.S., 6 F. 2d. 22) and that the objection to an unlawful search and seizure is purely

personal and cannot be availed of by third parties (In. re Dooley, 48 F. 2d. 121: Rouda

v. U.S., 10 F. 2d. 916; Lusco v. U.S., 287 F. 69; Ganci v. U.S., 287 F, 60; Moriz v. U.S.,

26 F. 2d. 444). Consequently, petitioner in the case at bar may not validly object to the

use in evidence against them of the document, papers, and things seized from the

offices and premises of the corporation adverted to, since the right to object to the

admission of said papers in evidence belongs exclusively to the corporations, to whom

the seized effects belong, and may not be invoked by the corporate officers in

proceedings against them in their individual capacity U.S., v. Gaas, 17 F. 2d. 997;

People v. Rubio, 57 Phil., 384).

2. ID.; ID.; REQUISITES FOR ISSUANCE OF SEARCH WARRANT. — Two points

must be stressed in connection with this constitutional mandate, namely: (1) that no

warrant issue but upon probable cause, to be determined by the judge in the manner

set forth in said provision; and (2) that the warrant shall particularly describe the things

to be seized. None of these requirements has been complied with in the contested

warrants. Indeed, the same were issued upon applications stating that the natural and

juridical persons therein named had committed a "violation of Central Bank Laws, Tariff

and Customs Laws, Internal Revenue (Code) and Revised Penal Code." In other

words, no specific offense had been alleged in said applications. The averments

thereof with respect to the offense committed were abstract. As a consequence, it was

impossible for the judges who issued the warrants to have found the existence of

probable cause, for the same presupposes the introduction of competent proof that the

party against whom it is sought has performed particular acts, or committed specific

omissions, violating a given provision of our criminal laws. As a matter of fact, the

applications involved in the case at bar do not allege any specific acts performed by

herein petitioners. It would be a legal heresy, of the highest order, to convict anybody

of a "violation of Central Bank Laws, Tariff and Customs Laws, Internal Revenue

(Code) and Revised Penal Code", — as alleged in aforementioned applications —

without reference to any determine provision of said laws or coders.

3. ID.; ID.; ID.; GENERAL WARRANTS ARE OUTLAWED BY THE CONSTITUTION.

— To uphold the validity of the warrants in question, would be to wipe out completely

one of the most fundamental rights guaranteed in our Constitution, for it would place

the sanctity of the domicile and the privacy of communication and correspondence at

the mercy of the victims, caprice or passion of peace officers. This is precisely the evil

sought to be remedied by the constitutional provision Sec. 1, par. 3 Art. III, Const.) —

to outlaw the so-called general warrants. It is not difficult to imagine what would

happen, in times of keen political strife, when the party in power feels that the minority

is likely to wrest it, even though by legal means. Such is the seriousness of the

irregularities committed in connection with the disputed search warrants, that this Court

deemed it fit to amend Section 3 of Rule 122 of the former Rules of Court, by providing

in its counterpart, under the Revised Rules of Court (Sec. 3, Rule 126) that "a search

warrant shall not issue but upon probable cause in connection with one specific

offense." Not satisfied with this qualification, the Court added thereto paragraph,

directing that "no search warrant shall issue for more than one specific offense."cralaw

virtua1aw library

4. ID.; ID.; ID.; ID.; CASE AT BAR. — The grave violation of the Constitution made in

the application for the contested search warrants was compounded by the description

therein made of the effects to be searched for and seized, to wit: "Books of accounts,

Financial records, vouchers, journals, correspondence, receipts, ledgers, portfolios,

credit journals, typewriters, and other documents and/or papers, showing all business

transactions including disbursement receipts, balance sheets and related profit and

loss statements." Thus, the warrants authorized the search for and seizure of records

pertaining to all business transactions petitioners herein, regardless of whether the

transaction were legal or illegal. The warrants sanctioned the seizure of all records of

the petitioners and the aforementioned corporations, whatever their nature, thus openly

contravening the explicit command of our Bill of Rights — that the things to be seized

be particularly described — as well as tending to defeat its major objective: the

elimination of general warrants.

5. ID.; ID.; ID.; NON-EXCLUSIONARY RULE CONTRAVENES THE

CONSTITUTIONAL PROHIBITIONS AGAINST UNREASONABLE SEARCH AND

SEIZURES. — Indeed, the non-exclusionary rule is contrary, not only to the letter, but

also to the spirit of the constitutional injunction against unreasonable searches and

seizures. To be sure, if the applicant for a search warrant has competent evidence to

establish probable cause of the commission of a given crime by the party against

whom the warrant is intended, then there is no reason why the applicant should not

comply with the requirements of the fundamental law. Upon the other hand, if he has

no such competent evidence, then it is not possible for the Judge to find that there is

probable cause and only possible for the Judge to find that there is probable cause and

hence, no justification for the issuance of the warrant. The only possible explanation

(not justification) for its issuance is the necessity of fishing evidence of the commission

of crime. crime. But when this fishing expedition is indicative of the absence of

evidence to establish a probable cause.

6. ID.; ID.; ID.; ID.; PROSECUTION OF THOSE WHO SECURE ILLEGAL SEARCH

WARRANT OR MAKE UNREASONABLE SEARCH OR SEIZURE IS NO EXCUSE. —

The theory that the criminal prosecution of those who secure an illegal search warrant

and/or make unreasonable searches or seizures would suffice to protect the

constitutional guarantee under consideration, overlooks the fact that violations thereof

are, in general, committed by agents of the party in power, for certainly, those

belonging to the minority could not possibly abuse a power they do not have.

Regardless of the handicap under which the minority usually but understandably finds

itself in prosecuting agents of the majority, one must not lose sight of the fact that the

psychological and moral effect of the possibility of securing their conviction, is watered

down by the pardoning power of the party for whose benefit the illegality had been

committed.

7. ID.; ID.; ID.; MONCADO DOCTRINE ABANDONED. — The doctrine adopted in the

Moncado case must be, as it is hereby, abandoned; the warrants for the search of 3

residences of petitioners, as specified in the Resolution of June 29, 1962, are null and

void; the searches and seizures therein made are illegal.

D E C I S I O N

CONCEPCION, C.J.:

Upon application of the officers of the government named on the margin 1 —

hereinafter referred to as Respondent-Prosecutors — several judges 2 — hereinafter

referred to as Respondent-Judges — issued, on different dates, 3 a total of 42 search

warrants against petitioners herein 4 and/or the corporations of which they were

officers, 5 directed to any peace officer, to search the persons above-named and/or the

premises of their offices, warehouses and/or residences, and to seize and take

possession of the following personal property to wit:jgc:chanrobles.com.ph

"Books of accounts, financial records, vouchers, correspondence, receipts, ledgers,

journals, portfolios, credit journals, typewriters, and other documents and/or papers

showing all business transactions including disbursements receipts, balance sheets

and profit and loss statements and Bobbins (cigarette wrappers)."cralaw virtua1aw

library

as "the subject of the offense; stolen or embezzled and proceeds or fruits of the

offense," or "used or intended to be used as the means of committing the offense,"

which is described in the applications adverted to above as "violation of Central Bank

Laws, Tariff and Customs Laws, Internal Revenue (Code) and the Revised Penal

Code."cralaw virtua1aw library

Alleging that the aforementioned search warrants are null and void, as contravening

the Constitution and the Rules of Court — because, inter alia: (1) they do not describe

with particularity the documents, books and things to be seized; (2) cash money, not

mentioned in the warrants, were actually seized; (3) the warrants were issued to fish

evidence against the aforementioned petitioners in deportation cases filed against

them; (4) the searches and seizures were made in an illegal manner; and (5) the

documents, papers and cash money seized were not delivered to the courts that

issued the warrants, to be disposed of in accordance with law — on March 20, 1962,

said petitioners filed with the Supreme Court this original action for certiorari,

prohibition, mandamus and injunction, and prayed that, pending final disposition of the

present case, a writ of preliminary injunction be issued restraining Respondent-

Prosecutors, their agents and or representatives from using the effects seized as

aforementioned, or any copies thereof, in the deportation cases already adverted to,

and that, in due course, thereafter, decision be rendered quashing the contested

search warrants and declaring the same null and void, and commanding the

respondents, their agents or representatives to return to petitioners herein, in

accordance with Section 3, Rule 67, of the Rules of Court, the documents, papers,

things and cash moneys seized or confiscated under the search warrants in question.

In their answer, respondents-prosecutors alleged 6 (1) that the contested search

warrants are valid and have been issued in accordance with law; (2) that the defects of

said warrants, if any, were cured by petitioners’ consent; and (3) that, in any event, the

effects seized are admissible in evidence against herein petitioners, regardless of the

alleged illegality of the aforementioned searches and seizures.

On March 22, 1962, this Court issued the writ of preliminary injunction prayed for in the

petition. However, by resolution dated June 29, 1962, the writ was partially lifted or

dissolved, insofar as the papers, documents and things seized from the offices of the

corporations above mentioned are concerned; but, the injunction was maintained as

regards the papers, documents and things found and seized in the residences of

petitioners herein. 7

Thus, the documents, papers, and things seized under the alleged authority of the

warrants in question may be split into (2) major groups, namely: (a) those found and

seized in the offices of the aforementioned corporations and (b) those found seized in

the residences of petitioners herein.

As regards the first group, we hold that petitioners herein have no cause of action to

assail the legality of the contested warrants and of the seizures made in pursuance

thereof, for the simple reason that said corporations have their respective personalities,

separate and distinct from the personality of herein petitioners, regardless of the

amount of shares of stock or of the interest of each of them in said corporations, and

whatever the offices they hold therein may be. 8 Indeed, it is well settled that the

legality of a seizure can be contested only by the party whose rights have been

impaired thereby, 9 and that the objection to an unlawful search and seizure is purely

personal and cannot be availed of by third parties. 10 Consequently, petitioners herein

may not validly object to the use in evidence against them of the documents, papers

and things seized from the offices and premises of the corporations adverted to above,

since the right to object to the admission of said papers in evidence belongs

exclusively to the corporations, to whom the seized effects belong, and may not be

invoked by the corporate officers in proceedings against them in their individual

capacity. 11 Indeed, it has been held:jgc:chanrobles.com.ph

". . . that the Government’s action in gaining possession of papers belonging to the

corporation did not relate to nor did it affect the personal defendants. If these papers

were unlawfully seized and thereby the constitutional rights of or any one were

invaded, they were the rights of the corporation and not the rights of the other

defendants. Next, it is clear that a question of the lawfulness of a seizure can be raised

only by one whose rights have been invaded. Certainly, such a seizure, if unlawful,

could not affect the constitutional rights of defendants whose property had not been

seized or the privacy of whose homes had not been disturbed; nor could they claim for

themselves the benefits of the Fourth Amendment, when its violation, if any, was with

reference to the rights of another. Remus v. United States (C.C.A.) 291 F. 501, 511. It

follows, therefore, that the question of the admissibility of the evidence based on an

alleged unlawful search and seizure does not extend to the personal defendants but

embraces only the corporation whose property was taken . . ." (A. Guckenheimer &

Bros. Co. v. United States, [1925] 3 F. 2d, 786, 789, Emphasis supplied.)

With respect to the documents, papers and things seized in the residences of

petitioners herein, the aforementioned resolution of June 29, 1962, denied the lifting of

the writ of preliminary injunction previously issued by this Court, 12 thereby, in effect,

restraining herein Respondent-Prosecutors from using them in evidence against

petitioners herein.

In connection with said documents, papers and things, two (2) important questions

need be settled, namely: (1) whether the search warrants in question, and the

searches and seizures made under the authority thereof, are valid or not; and (2) if the

answer to the preceding question is in the negative, whether said documents, papers

and things may be used in evidence against petitioners herein.

Petitioners maintain that the aforementioned search warrants are in the nature of

general warrants and that, accordingly, the seizures effected upon the authority thereof

are null and void. In this connection, the Constitution 13

provides:jgc:chanrobles.com.ph

"The right of the people to be secure in their persons, houses, papers, and effects

against unreasonable searches and seizures shall not be violated, and no warrants

shall issue but upon probable cause, to be determined by the judge after examination

under oath or affirmation of the complainant and the witnesses he may produce, and

particularly describing the place to be searched, and the persons or things to be

seized."cralaw virtua1aw library

Two points must be stressed in connection with this constitutional mandate, namely:

(1) that no warrant shall issue but upon probable cause, to be determined by the judge

in the manner set forth in said provision; and (2) that the warrant shall particularly

describe the things to be seized.

None of these requirements has been complied with in the contested warrants. Indeed,

the same were issued upon applications stating that the natural and juridical persons

therein named had committed a "violation of Central Bank Laws, Tariff and Customs

Laws, Internal Revenue (Code) and Revised Penal Code." In other words, no specific

offense had been alleged in said applications. The averments thereof with respect to

the offense committed were abstract. As a consequence, it was impossible for the

judges who issued the warrants to have found the existence of probable cause, for the

same presupposes the introduction of competent proof that the party against whom it is

sought has performed particular acts, or committed specific omissions, violating a

given provision of our criminal laws. As a matter of fact, the applications involved in this

case do not allege any specific acts performed by herein petitioners. It would be a legal

heresy, of the highest order, to convict anybody of a "violation of Central Bank Laws,

Tariff and Customs Laws, Internal Revenue (Code) and Revised Penal Code," — as

alleged in the aforementioned applications — without reference to any determinate

provision of said laws or codes.

To uphold the validity of the warrants in question would be to wipe out completely one

of the most fundamental rights guaranteed in our Constitution, for it would place the

sanctity of the domicile and the privacy of communication and correspondence at the

mercy of the whims, caprice or passion of peace officers. This is precisely the evil

sought to be remedied by the constitutional provision above quoted — to outlaw the so-

called general warrants. It is not difficult to imagine what would happen, in times of

keen political strife, when the party in power feels that the minority is likely to wrest it,

even though by legal means.

Such is the seriousness of the irregularities committed in connection with the disputed

search warrants, that this Court deemed it fit to amend Section 3 of Rule 122 of the

former Rules of Court 14 by providing in its counterpart, under the Revised Rules of

Court 15 that "a search warrant shall not issue upon probable cause in connection with

one specific offense." Not satisfied with this qualification, the Court added thereto a

paragraph, directing that "no search warrant shall issue for more than one specific

offense."cralaw virtua1aw library

The grave violation of the Constitution made in the application for the contested search

warrants was compounded by the description therein made of the effects to be

searched for and seized, to wit:jgc:chanrobles.com.ph

"Books of accounts, financial records, vouchers, journals, correspondence, receipts,

ledgers, portfolios, credit journals, typewriters, and other documents and/or papers

showing all business transactions including disbursement receipts, balance sheets and

related profit and loss statements."cralaw virtua1aw library

Thus, the warrants authorized the search for and seizure of records pertaining to all

business transactions of petitioners herein, regardless of whether the transactions

were legal or illegal. The warrants sanctioned the seizure of all records of the

petitioners and the aforementioned corporations, whatever their nature, thus openly

contravening the explicit command of our Bill of Rights — that the things to be seized

be particularly described — as well as tending to defeat its major objective: the

elimination of general warrants.

Relying upon Moncado v. People’s Court (80 Phil. 1), Respondent- Prosecutors

maintain that, even if the searches and seizures under consideration were

unconstitutional, the documents, papers and things thus seized are admissible in

evidence against petitioners herein. Upon mature deliberation, however, we are

unanimously of the opinion that the position taken in the Moncado case must be

abandoned. Said position was in line with the American common law rule, that the

criminal should not be allowed to go free merely "because the constable has

blundered," 16 upon the theory that the constitutional prohibition against unreasonable

searches and seizures is protected by means other than the exclusion of evidence

unlawfully obtained, 17 such as the common-law action for damages against the

searching officer, against the party who procured the issuance of the search warrant

and against those assisting in the execution of an illegal search, their criminal

punishment, resistance, without liability to an unlawful seizure, and such other legal

remedies as may be provided by other laws.

However, most common law jurisdictions have already given up this approach and

eventually adopted the exclusionary rule, realizing that this is the only practical means

of enforcing the constitutional injunction against unreasonable searches and seizures.

In the language of Judge Learned Hand:jgc:chanrobles.com.ph

"As we understand it, the reason for the exclusion of evidence competent as such,

which has been unlawfully acquired, is that exclusion is the only practical way of

enforcing the constitutional privilege. In earlier times the action of trespass against the

offending official may have been protection enough; but that is true no longer. Only in

case the prosecution which itself controls the seizing officials, knows that it cannot

profit by their wrong, will that wrong be repressed." 18

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

declared:jgc:chanrobles.com.ph

"If letters and private documents can thus be seized and held and used in evidence

against a citizen accused of an offense, the protection of the 4th Amendment, declaring

his rights to be secure against such searches and seizures, is of no value, and, so far

as those thus placed are concerned, might as well be stricken from the Constitution.

The efforts of the courts and their officials to bring the guilty to punishment,

praiseworthy as they are, are not to be aided by the sacrifice of those great principles

established by years of endeavor and suffering which have resulted in their

embodiment in the fundamental law of the land." 19

This view was, not only reiterated, but, also, broadened in subsequent decisions of the

same Federal Court. 20 After reviewing previous decisions thereon, said Court held, in

Mapp v. Ohio (supra.):jgc:chanrobles.com.ph

". . . Today we once again examine the Wolf’s constitutional documentation of the right

of privacy free from unreasonable state intrusion, and, after its dozen years on our

books, are led by it to close the only courtroom door remaining open to evidence

secured by official lawlessness in flagrant abuse of that basic right, reserved to all

persons as a specific guarantee against that very same unlawful conduct. We held that

all evidence obtained by searches and seizures in violation of the Constitution is, by

that same authority, inadmissible in a State court.

"Since the Fourth Amendment’s right of privacy has been declared enforceable against

the States through the Due Process Clause of the Fourteenth, it is enforceable against

them by the same sanction of exclusion as it used against the Federal Government.

Were it otherwise, then just as without the Weeks rule the assurance against

unreasonable federal searches and seizures would be ’a form of words’, valueless and

undeserving of mention in a perpetual charter of inestimable human liberties, so too,

’without that rule the freedom from state invasions of privacy would be so ephemeral

and so neatly severed from its conceptual nexus with the freedom from all brutish

means of coercing evidence as not to permit this Court’s high regard as a freedom

implicit in the concept of ordered liberty.’ At the time that the Court held in Wolf that the

Amendment was applicable to the States through the Due Process Clause, the cases

of this Court as we have seen, had steadfastly held that as to federal officers the

Fourth Amendment included the exclusion of the evidence seized in violation of its

provisions. Even Wolf ’stoutly adhered’ to that proposition. The right to privacy, when

conceded operatively enforceable against the States, was not susceptible of

destruction by avulsion of the sanction upon which its protection and enjoyment had

always been deemed dependent under the Boyd, Weeks and Silverthorne Cases.

Therefore, in extending the substantive protections of due process to all constitutionally

unreasonable searches — state or federal — it was logically and constitutionally

necessary that the exclusion doctrine — an essential part of the right to privacy — be

also insisted upon as an essential ingredient of the right newly recognized by the Wolf

Case. In short, the admission of the new constitutional right by Wolf could not

consistently tolerate denial of its most important constitutional privilege, namely, the

exclusion of the evidence which an accused had been forced to give by reason of the

unlawful seizure. To hold otherwise is to grant the right but in reality to withhold its

privilege and enjoinment. Only last year the Court itself recognized that the purpose of

the exclusionary rule ’is to deter — to compel respect for the constitutional guaranty in

the only effectively available way — by removing the incentive to disregard it.’ . . .

"The ignoble shortcut to conviction left open to the State tends to destroy the entire

system of constitutional restraints on which the liberties of the people rest. Having once

recognized that the right to privacy embodied in the Fourth Amendment is enforceable

against the States, and that the right to be secure against rude invasions of privacy by

state officers is, therefore constitutional in origin, we can no longer permit that right to

remain an empty promise. Because it is enforceable in the same manner and to like

effect as other basic rights secured by the Due Process Clause, we can no longer

permit it to be revocable at the whim of any police officer who, in the name of law

enforceable itself, chooses to suspend its enjoinment. Our decision, founded on reason

and truth, gives to the individual no more than that which the Constitution guarantees

him, to the police officer no less than that to which honest law enforcement is entitled,

and, to the courts, that judicial integrity so necessary in the true administration of

justice." (Emphasis ours.)

Indeed, the non-exclusionary rule is contrary, not only to the letter, but, also, to spirit of

the constitutional injunction against unreasonable searches and seizures. To be sure, if

the applicant for a search warrant has competent evidence to establish probable cause

of the commission of a given crime by the party against whom the warrant is intended,

then there is no reason why the applicant should not comply with the requirements of

the fundamental law. Upon the other hand, if he has no such competent evidence, then

it is not possible for the judge to find that there is probable cause, and, hence, no

justification for the issuance of the warrant. The only possible explanation (not

justification) for its issuance is the necessity of fishing evidence of the commission of a

crime. But, then, this fishing expedition is indicative of the absence of evidence to

establish a probable cause.

Moreover, the theory that the criminal prosecution of those who secure an illegal

search warrant and/or make unreasonable searches or seizures would suffice to

protect the constitutional guarantee under consideration, overlooks the fact that

violations thereof are, in general, committed by agents of the party in power, for,

certainly, those belonging to the minority could not possibly abuse a power they do not

have. Regardless of the handicap under which the minority usually — but,

understandably — finds itself in prosecuting agents of the majority, one must not lose

sight of the fact that the psychological and moral effect of the possibility 21 of securing

their conviction, is watered down by the pardoning, power of the party for whose

benefit the illegality had been committed.

In their Motion for Reconsideration and Amendment of the Resolution of this Court

dated June 29, 1962, petitioners allege that Room Nos. 81 and 91 of Carmen

Apartments, House No. 2008, Dewey Boulevard, House No. 1436, Colorado Street,

and Room No. 304 of the Army-Navy Club, should be included among the premises

considered in said Resolution as residences of herein petitioners, Harry S. Stonehill,

Robert P. Brook, John J. Brooks and Karl Beck, respectively, and that, furthermore, the

records, papers and other effects seized in the offices of the corporations above

referred to include personal belongings of said petitioners and other effects under their

exclusive possession and control, for the exclusion of which they have a standing

under the latest rulings of the federal courts of the United States. 22

We note, however, that petitioners’ theory, regarding their alleged possession of and

control over the aforementioned records, papers and effects, and the alleged

"personal" nature thereof, has been advanced, not in their petition or amended petition

herein, but in the Motion for Reconsideration and Amendment of the Resolution of

June 29, 1962. In other words, said theory would appear to be a readjustment of that

followed in said petitions, to suit the approach intimated in the Resolution sought to be

reconsidered and amended. Then, too, some of the affidavits or copies of alleged

affidavits attached to said motion for reconsideration, or submitted in support thereof,

contain either inconsistent allegations, or allegations inconsistent with the theory now

advanced by petitioners herein.

Upon the other hand, we are not satisfied that the allegations of said petitions and

motion for reconsideration, and the contents of the aforementioned affidavits and other

papers submitted in support of said motion, have sufficiently established the facts or

conditions contemplated in the cases relied upon by the petitioners, to warrant

application of the views therein expressed, should we agree thereto. At any rate, we do

not deem it necessary to express our opinion thereon, it being best to leave the matter

open for determination in appropriate cases in the future.

We hold, therefore, that the doctrine adopted in the Moncado case must be, as it is

hereby, abandoned; that the warrants for the search of three (3) residences of herein

petitioners, as specified in the Resolution of June 29, 1962 are null and void; that the

searches and seizures therein made are illegal; that the writ of preliminary injunction

heretofore issued, in connection with the documents, papers and other effects thus

seized in said residences of herein petitioners is hereby made permanent, that the

writs prayed for are granted, insofar as the documents, papers and other effects so

seized in the aforementioned residences are concerned; that the aforementioned

motion for Reconsideration and Amendment should be, as it is hereby, denied; and

that the petition herein is dismissed and the writs prayed for denied, as regards the

documents, papers and other effects seized in the twenty-nine (29) places, offices and

other premises enumerated in the same Resolution, without special pronouncement as

to costs.

It is so ordered.

Reyes, J .B.L., Dizon, Makalintal, Bengzon, J .P., Zaldivar and Sanchez, JJ., concur.

Separate Opinions

CASTRO, J., concurring and dissenting:chanrob1es virtual 1aw library

From my analysis of the opinion written by Chief Justice Roberto Concepcion and from

the import of the deliberations of the Court on this case, I gather the following distinct

conclusions:chanrob1es virtual 1aw library

1. All the search warrants served by the National Bureau of Investigation in this case

are general warrants and are therefore prescribed by, and in violation of, Paragraph 3

of Section 1 of Article III (Bill of Rights) of the Constitution;

2. All the searches and seizures conducted under the authority of the said search

warrants were consequently illegal;

3. The non-exclusionary rule enunciated in Moncado v. People, 80 Phil. 1, should be,

and is declared, abandoned;

4. The search warrants served at the three residences of the petitioners are expressly

declared null and void; the searches and seizures therein made are expressly declared

illegal; and the writ of preliminary injunction heretofore issued against the use of the

documents, papers and effects seized in the residences is made permanent; and

5. Reasoning that the petitioners have not in their pleadings satisfactorily demonstrated

that they have legal standing to move for the suppression of the documents, papers

and effects seized in the places other than the three residences adverted to above, the

opinion written by the Chief Justice refrains from expressly declaring as null and void

the search warrants served at such other places and as illegal the searches and

seizures made therein, and leaves "the matter open for determination in appropriate

cases in the future."cralaw virtua1aw library

It is precisely the position taken by the Chief Justice summarized in the immediately

preceding paragraph (numbered 5) with which I am not in accord.

I do not share his reluctance or unwillingness to expressly declare, at this time, the

nullity of the search warrants served at places other than the three residences, and the

illegality of the searches and seizures conducted under the authority thereof. In my

view even the exacerbating passions and prejudices inordinately generated by the

environmental political and moral developments of this case should not deter this Court

from forthrightly laying down the law - not only for this case but as well for future cases

and future generations. All the search warrants, without exception, in this case are

admittedly general, blanket and roving warrants and are therefore admittedly and

indisputably outlawed by the Constitution; and the searches and seizures made were

therefore unlawful. That the petitioners, let us assume in gratia argumenti, have no

legal standing to ask for the suppression of the papers, things and effects seized from

places other than their residences, to my mind, cannot in any manner affect, alter or

otherwise modify the intrinsic illegality of the search warrants and the intrinsic illegality

of the searches and seizures made thereunder. Whether or not the petitioners possess

legal standing, the said warrants are void and remain void, and the searches and

seizures were illegal and remain illegal. No inference can be drawn from the words of

the Constitution that "legal standing" or the lack of it is a determinant of the nullity or

validity of a search warrant or of the lawfulness or illegality of a search or seizure.

On the question of legal standing, I am of the conviction that, upon the pleadings

submitted to this Court, the petitioners have the requisite legal standing to move for the

suppression and return of the documents, papers and effects that were seized from

places other than their family residences.

Our constitutional provision on searches and seizures was derived almost verbatim

from the Fourth Amendment to the United States Constitution. In the many years of

judicial construction and interpretation of the said constitutional provision, our courts

have invariably regarded as doctrinal the pronouncements made on the Fourth

Amendment by federal courts, especially the Federal Supreme Court and the Federal

Circuit Courts of Appeals.

The U.S. doctrines and pertinent cases on standing to move for the suppression or

return of documents, papers and effects which are the fruits of an unlawful search and

seizure, may be summarized as follows: (a) ownership of documents, papers and

effects gives "standing" ; (b) ownership and/or control or possession — actual or

constructive — of premises searched gives "standing" ; and (c) the "aggrieved person"

doctrine where the search warrant and the sworn application for search warrant are

"primarily" directed solely and exclusively against the "aggrieved person", gives

"standing."cralaw virtua1aw library

An examination of the search warrants in this case will readily show that, excepting

three, all were directed against the petitioners personally. In some of them, the

petitioners were named personally, followed by the designation, "the President and/or

General Manager" of the particular corporation. The three warrants excepted named

three corporate defendants. But the "office/house/warehouse/premises" mentioned in

the said three warrants were also the same "office/house/warehouse/premises"

declared to be owned by or under the control of the petitioners in all the other search

warrants directed against the petitioners and/or "the President and/or General

Manager" of the particular corporation. (see pages 5-24 of Petitioners’ Reply of April 2,

1962). The searches and seizures were to be made, and were actually made, in the

"office/house warehouse/premises" owned by or under the control of the petitioners.

Ownership of matters seized gives "standing."cralaw virtua1aw library

Ownership of the properties seized alone entitles the petitioners to bring a motion to

return and suppress, and gives them standing as persons aggrieved by an unlawful

search and seizure regardless of their location at the time of seizure. Jones v. United

States, 362 U.S. 257, 261 (1960) (narcotics stored in the apartment of a friend of the

defendant); Henzel v. United States, 296 F 2d. 650, 652-53 (5th Cir. 1961) (personal

and corporate papers of corporation of which the defendant was president); United

States v. Jeffers, 342 U.S. 48 (1951) (narcotics seized in an apartment not belonging to

the defendant); Pielow v. United States, 8F. 2d 492, 493 (9th Cir. 1925) (books seized

from the defendant’s sister but belonging to the defendant); Cf. Villano v. United

States, 310 F. 2d 680, 683 (10th Cir. 1962) (papers seized in desk neither owned by

nor in exclusive possession of the defendant).

In a very recent case (decided by the U.S. Supreme Court on December 12, 1966), it

was held that under the constitutional provision against unlawful searches and

seizures, a person places himself or his property within a constitutionally protected

area, be it his home or his office, his hotel room or his

automobile:jgc:chanrobles.com.ph

"Where the argument falls is in its misapprehension of the fundamental nature and

scope of Fourth Amendment protection. What the Fourth Amendment protects is the

security a man relies upon when he places himself or his property within a

constitutionally protected area, be it his homes, or his office, his hotel room or his

automobile. There he is protected from unwarranted governmental intrusion. And when

he puts something in his filing cabinet, in his desk drawer, or in his pocket, he has the

right to know it will be secure from an unreasonable search or an unreasonable

seizure. So it was that the Fourth Amendment could not tolerate the warrantless search

of the hotel room in Jeffers, the purloining of the petitioner’s private papers in Gouled,

or the surreptitious electronic surveillance in Silverman. Countless other cases which

have come to this Court over the years have involved a myriad of differing factual

contexts in which the protections of the Fourth Amendment have been appropriately

invoked. No doubt the future will bring countless others. By nothing we say here or do

we either foresee or foreclose factual situations to which the Fourth Amendment may

be applicable." Hoffa v. U.S. 87 S. Ct. 408 (December 12, 1966) See also U.S. v.

Jeffers, 342 U.S. 48, 72 S. Ct. 93 (November 13, 1951). (Emphasis supplied).

Control of premises searches gives "standing."cralaw virtua1aw library

Independent of ownership or other personal interest in the records and documents

seized, the petitioners have standing to move for return and suppression by virtue of

their proprietary or leasehold interest in many of the premises searched. These

proprietary and leasehold interests have been sufficiently set forth in their motion for

reconsideration and need not be recounted here, except to emphasize that the

petitioners paid rent, directly or indirectly, for practically all the premises searched

(Room 91, 84 Carmen Apts.; Room 304, Army & Navy Club; Premises 2008, Dewey

Boulevard; 1436 Colorado Street); maintained personal offices within the corporate

offices (IBMS, USTC); had made improvements or furnished such offices; or had paid

for the filing cabinets in which the papers were stored (Room 204, Army & Navy Club);

and individually, or through their respective spouses, owned the controlling stock of the

corporations involved. The petitioners’ proprietary interest in most, if not all, of the

premises searched therefore independently gives them standing to move for the return

and suppression of the books, papers and effects seized therefrom.

In Jones v. United States, supra, the U.S. Supreme Court delineated the nature and

extent of the interest in the searched premises necessary to maintain a motion to

suppress. After reviewing what it considered to be the unduly technical standards of

the then prevailing circuit court decisions, the Supreme Court said (362 U.S.

266):jgc:chanrobles.com.ph

"We do not lightly depart from this course of decisions by the lower courts. We are

persuaded, however, that it is unnecessary and ill-advised to import into the law

surrounding the constitutional right to be free from unreasonable searches and

seizures subtle distinctions, developed and refined by the common law in evolving the

body of private property law, which, more than almost any other branch of law, has

been shaped by distinctions whose validity is largely historical. Even in the area from

which they derive, due consideration has led to the discarding of those distinctions in

the homeland of the common law. See Occupiers’ Liability Act, 1957, 5 and 6 Eliz. 2, c.

31, carrying out Law Reform Committee, Third Report, Cmd. 9305. Distinctions such as

those between ’lessee,’ ’licensee,’ ’invitee,’ and ’guest,’ often only of gossamer

strength, ought not be determinative in fashioning procedures ultimately referable to

constitutional safeguards." See also Chapman v. United States,354 U.S. 610, 616-17

(1961).

It has never been held that a person with requisite interest in the premises searched

must own the property seized in order to have standing in a motion to return and

suppress. In Alioto v. United States, 216 F. Supp. 48 (1963), a bookkeeper for several

corporations from whose apartment the corporate records were seized successfully

moved for their return. In United States v. Antonelli Fireworks Co., 53 F. Supp. 870,

873 (W. D. N. Y. 1943), the corporation’s president successfully moved for the return

and suppression as to him of both personal and corporate documents seized from his

home during the course of an illegal search:jgc:chanrobles.com.ph

"The lawful possession by Antonelli of documents and property, either his own or the

corporation’s, was entitled to protection against unreasonable search and seizure.

Under the circumstances in the case at bar, the search and seizure were unreasonable

and unlawful. The motion for the return of seized articles and the suppression of the

evidence so obtained should be granted." (Emphasis supplied)

Time was when only a person who had property interest in either the place searched or

the articles seized had the necessary standing to invoke the protection of the

exclusionary rule. But in MacDonald v. United States, 336 U.S. 461 (1948), Justice

Robert Jackson, joined by Justice Felix Frankfurter, advanced the view that "even a

guest may expect the shelter of the rooftree he is under against criminal intrusion." This

view finally became the official view of the U.S. Supreme Court and was articulated in

United States v. Jeffers, 342 U.S. 48 (1951). Nine years later, in 1960, in Jones v.

United States, 362 U.S. 257, 267, the U.S. Supreme Court went a step further. Jones

was a mere guest in the apartment unlawfully searched, but the Court nonetheless

declared that the exclusionary rule protected him as well. The concept of "person

aggrieved by an unlawful search and seizure" was enlarged to include "anyone

legitimately on premises where the search occurs."cralaw virtua1aw library

Shortly after the U.S. Supreme Court’s Jones decision, the U.S. Court of Appeals for

the Fifth Circuit held that the defendant organizer, sole stockholder and president of a

corporation had standing in a mail fraud prosecution against him to demand the return

and suppression of corporate property. Henzel v. United States, 296 F. 2d. 650, 652

(5th Cir. 1961), supra. The court concluded that the defendant had standing on two

independent grounds: First — he had a sufficient interest in the property seized, and

second — he had an adequate interest in the premises searched (just in the case at

bar). A postal inspector had unlawfully searched the corporation’s premises and had

seized most of the corporation’s books and records. Looking to Jones, the court

observed:jgc:chanrobles.com.ph

"Jones clearly tells us, therefore, what is not required to qualify one as a ’person

aggrieved by an unlawful search and seizure.’ It tells us that appellant should not have

been precluded from objecting to the Postal Inspector’s search and seizure of the

corporation’s books and records, merely because the appellant did not show ownership

or possession of the books and records or a substantial possessory interest in the

invaded premises . . ." Henzel v. United States, 296 F. 2d at 651.

Henzel was soon followed by Villano v. United States, 310 F. 2d 680, 683, (10th Cir.

1962). In Villano, police officers seized two notebooks from a desk in the defendant’s

place of employment; the defendant did not claim ownership of either; he asserted that

several employees (including himself) used the notebooks. The Court held that the

employee had a protected interest and that there also was an invasion of privacy. Both

Henzel and Villano considered also the fact that the search and seizure were "directed

at" the moving defendant. Henzel v. United States, 296 F. 2d at 682; Villano v. United

States, 310 F. 2d at 683.

In a case in which an attorney closed his law office, placed his files in storage and went

to Puerto Rico, the Court of Appeals for the Eighth Circuit recognized his standing to

move to quash as unreasonable search and seizure under the Fourth Amendment of

the U.S. Constitution a grand jury subpoena duces tecum directed to the custodian of

his files. The Government contended that the petitioner had no standing because the

books and papers were physically in the possession of the custodian, and because the

subpoena was directed against the custodian. The court rejected the contention,

holding that.

"Schwimmer legally had such possession, control and unrelinquished personal rights in

the books and papers as not to enable the question of unreasonable search and

seizure to be escaped through the mere procedural device of compelling a third-party

naked possessor to produce and deliver them." Schwimmer v. United. States, 232 F.

2d 855, 861 (8th Cir. 1956).

Aggrieved person doctrine where the search warrant is primarily directed against said

person gives "standing."cralaw virtua1aw library

The latest United States decision squarely in point is United States v. Birrell, 242 F.

Supp. 191 (1965, U.S.D.C., S.D.N.Y.). The defendant had stored with an attorney

certain files and papers, which attorney, by the name of Dunn, was not, at the time of

the seizing of the records, Birrell’s attorney. * Dunn, in turn, had stored most of the

records at his home in the country and on a farm which, according to Dunn’s affidavit,

was under his (Dunn’s) "control and management." The papers turned out to be

private, personal and business papers together with corporate books and records of

certain unnamed corporations in which Birrell did not even claim ownership. (All of

these type records were seized in the case at bar). Nevertheless, the search in Birrell

was held invalid by the court which held that even though Birrell did not own the

premises where the records were stored, he had "standing" to move for the return of all

the papers and properties seized. The court, relying on Jones v. U.S., supra; U.S. v.

Antonelli Fireworks Co., 53 F. Supp. 870, Aff’d 155 F. 2d 631; Henzel v. U.S., supra;

and Schwimmer v. U.S., supra, pointed out that.

"It is overwhelmingly established that the searches here in question were directed

solely and exclusively against Birrell. The only person suggested in the papers as

having violated the law was Birrell. The first "search warrant described the records as

having been used in committing a violation of Title 18, United States Code, Section

1341, by the use of the mails by one Lowell M. Birrell, . . .’ The second search warrant

was captioned: ’United States of America v. Lowell M. Birrell. (p. 198)

"Possession (actual or constructive), no less than ownership, gives standing to move to

suppress. Such was the rule even before Jones." (p. 199)

"If, as thus indicated, Birrell had at least constructive possession of the records stored

with Dunn, it matters not whether he had any interest in the premises searched." See

also Jeffers v. United States. 88 U.S. Appl. D.C. 58, 187 F. 2d 498 (1950), affirmed 342

U.S. 48, 72 S. Ct. 93, 96 L. Ed. 459 (1951).

The ruling in the Birrell case was reaffirmed on motion for reargument; the United

States did not appeal from this decision. The factual situation in Birrell is strikingly

similar to the case of the present petitioners; as in Birrell, many personal and corporate

papers were seized from premises not petitioners’ family residences; as in Birrell, the

searches were "PRIMARILY DIRECTED SOLELY AND EXCLUSIVELY" against the

petitioners. Still both types of documents were suppressed in Birrell because of the

illegal search. In the case at bar, the petitioners’ connection with the premises raided is

much closer than in Birrell.

Thus, the petitioners have full standing to move for the quashing of all the warrants

regardless of whether these were directed against residences in the narrow sense of

the word, as long as the documents were personal papers of the petitioners or (to the

extent that they were corporate papers) were held by them in a personal capacity or

under their personal control.

Prescinding from the foregoing, this Court, at all events, should order the return to the

petitioners all personal and private papers and effects seized, no matter where these

were seized, whether from their residences or corporate offices or any other place or

places. The uncontradicted sworn statements of the petitioners in their various

pleadings submitted to this Court indisputably show that amongst the things seized

from the corporate offices and other places were personal and private papers and

effects belonging to the petitioners.

If there should be any categorization of the documents, papers and things which were

the objects of the unlawful searches and seizures, I submit that the grouping should be:

(a) personal or private papers of the petitioners wherever they were unlawfully seized,

be it their family residences, offices, warehouses and/or premises owned and/or

controlled and/or possessed (actually or constructively) by them as shown in all the

search warrants and in the sworn applications filed in securing the void search

warrants, and (b) purely corporate papers belonging to corporations. Under such

categorization or grouping, the determination of which unlawfully seized papers,

documents and things are personal/private of the petitioners or purely corporate papers

will have to be left to the lower courts which issued the void search warrants in

ultimately effecting the suppression and/or return of the said documents.

And as unequivocally indicated by the authorities above cited, the petitioners likewise

have clear legal standing to move for the suppression of purely corporate papers as

"President and/or General Manager" of the corporations involved as specifically

mentioned in the void search warrants.

Finally, I must articulate my persuasion that although the cases cited in my disquisition

were criminal prosecutions, the great clauses of the constitutional proscription on illegal

searches and seizures do not withhold the mantle of their protection from cases not

criminal in origin or nature.

EN BANC [G.R. No. L-32409. February 27, 1971.] BACHE & CO. (PHIL.), INC. and FREDERICK E. SEGGERMAN, Petitioners, v. HON. JUDGE VIVENCIO M. RUIZ, MISAEL P. VERA, in his capacity as

Commissioner of Internal Revenue, ARTURO LOGRONIO, RODOLFO DE LEON, GAVINO VELASQUEZ, MIMIR DELLOSA, NICANOR ALCORDO, JOHN DOE, JOHN DOE, JOHN DOE, and JOHN DOE, Respondents. San Juan, Africa, Gonzales & San Agustin, for Petitioners. Solicitor General Felix Q. Antonio, Assistant Solicitor General Crispin V . Bautista, Solicitor Pedro A. Ramirez and Special Attorney Jaime M. Maza for Respondents. D E C I S I O N VILLAMOR, J.: This is an original action of certiorari, prohibition and mandamus, with prayer for a writ of preliminary mandatory and prohibitory injunction. In their petition Bache & Co. (Phil.), Inc., a corporation duly organized and existing under the laws of the Philippines, and its President, Frederick E. Seggerman, pray this Court to declare null and void Search Warrant No. 2-M-70 issued by respondent Judge on February 25, 1970; to order respondents to desist from enforcing the same and/or keeping the documents, papers and effects seized by virtue thereof, as well as from enforcing the tax assessments on petitioner corporation alleged by petitioners to have been made on the basis of the said documents, papers and effects, and to order the return of the latter to petitioners. We gave due course to the petition but did not issue the writ of preliminary injunction prayed for therein. The pertinent facts of this case, as gathered from record, are as follows:chanrob1es virtual 1aw library On February 24, 1970, respondent Misael P. Vera, Commissioner of Internal Revenue, wrote a letter addressed to respondent Judge Vivencio M. Ruiz requesting the issuance of a search warrant against petitioners for violation of Section 46(a) of the National Internal Revenue Code, in relation to all other pertinent provisions thereof, particularly Sections 53, 72, 73, 208 and 209, and authorizing Revenue Examiner Rodolfo de Leon, one of herein respondents, to make and file the application for search warrant which was attached to the letter. In the afternoon of the following day, February 25, 1970, respondent De Leon and his witness, respondent Arturo Logronio, went to the Court of First Instance of Rizal. They brought with them the following papers: respondent Vera’s aforesaid letter-request; an application for search warrant already filled up but still unsigned by respondent De Leon; an affidavit of respondent Logronio subscribed before respondent De Leon; a deposition in printed form of respondent Logronio already accomplished and signed by him but not yet subscribed; and a search warrant already accomplished but still unsigned by respondent Judge.

At that time respondent Judge was hearing a certain case; so, by means of a note, he instructed his Deputy Clerk of Court to take the depositions of respondents De Leon and Logronio. After the session had adjourned, respondent Judge was informed that the depositions had already been taken. The stenographer, upon request of respondent Judge, read to him her stenographic notes; and thereafter, respondent Judge asked respondent Logronio to take the oath and warned him that if his deposition was found to be false and without legal basis, he could be charged for perjury. Respondent Judge signed respondent de Leon’s application for search warrant and respondent Logronio’s deposition, Search Warrant No. 2-M-70 was then sign by respondent Judge and accordingly issued. Three days later, or on February 28, 1970, which was a Saturday, the BIR agents served the search warrant petitioners at the offices of petitioner corporation on Ayala Avenue, Makati, Rizal. Petitioners’ lawyers protested the search on the ground that no formal complaint or transcript of testimony was attached to the warrant. The agents nevertheless proceeded with their search which yielded six boxes of documents. On March 3, 1970, petitioners filed a petition with the Court of First Instance of Rizal praying that the search warrant be quashed, dissolved or recalled, that preliminary prohibitory and mandatory writs of injunction be issued, that the search warrant be declared null and void, and that the respondents be ordered to pay petitioners, jointly and severally, damages and attorney’s fees. On March 18, 1970, the respondents, thru the Solicitor General, filed an answer to the petition. After hearing, the court, presided over by respondent Judge, issued on July 29, 1970, an order dismissing the petition for dissolution of the search warrant. In the meantime, or on April 16, 1970, the Bureau of Internal Revenue made tax assessments on petitioner corporation in the total sum of P2,594,729.97, partly, if not entirely, based on the documents thus seized. Petitioners came to this Court. The petition should be granted for the following reasons:chanrob1es virtual 1aw library 1. Respondent Judge failed to personally examine the complainant and his witness. The pertinent provisions of the Constitution of the Philippines and of the Revised Rules of Court are:jgc:chanrobles.com.ph "(3) The right of the people to be secure in their persons, houses, papers and effects against unreasonable searches and seizures shall not be violated, and no warrants shall issue but upon probable cause, to be determined by the judge after examination under oath or affirmation of the complainant and the witnesses he may produce, and particularly describing the place to be searched, and the persons or things to be seized." (Art. III, Sec. 1, Constitution.) "SEC. 3. Requisites for issuing search warrant. — A search warrant shall not issue but upon probable cause in connection with one specific offense to be determined by the judge or justice of the peace after examination under oath or affirmation of the complainant and the witnesses he may produce, and particularly describing the place

to be searched and the persons or things to be seized. "No search warrant shall issue for more than one specific offense. "SEC. 4. Examination of the applicant. — The judge or justice of the peace must, before issuing the warrant, personally examine on oath or affirmation the complainant and any witnesses he may produce and take their depositions in writing, and attach them to the record, in addition to any affidavits presented to him." (Rule 126, Revised Rules of Court.) The examination of the complainant and the witnesses he may produce, required by Art. III, Sec. 1, par. 3, of the Constitution, and by Secs. 3 and 4, Rule 126 of the Revised Rules of Court, should be conducted by the judge himself and not by others. The phrase "which shall be determined by the judge after examination under oath or affirmation of the complainant and the witnesses he may produce," appearing in the said constitutional provision, was introduced by Delegate Francisco as an amendment to the draft submitted by the Sub-Committee of Seven. The following discussion in the Constitutional Convention (Laurel, Proceedings of the Philippine Constitutional Convention, Vol. III, pp. 755-757) is enlightening:jgc:chanrobles.com.ph "SR. ORENSE. Vamos a dejar compañero los piropos y vamos al grano. En los casos de una necesidad de actuar inmediatamente para que no se frusten los fines de la justicia mediante el registro inmediato y la incautacion del cuerpo del delito, no cree Su Señoria que causaria cierta demora el procedimiento apuntado en su enmienda en tal forma que podria frustrar los fines de la justicia o si Su Señoria encuentra un remedio para esto casos con el fin de compaginar los fines de la justicia con los derechos del individuo en su persona, bienes etcetera, etcetera. "SR. FRANCISCO. No puedo ver en la practica el caso hipottico que Su Señoria pregunta por la siguiente razon: el que solicita un mandamiento de registro tiene que hacerlo por escrito y ese escrito no aparecer en la Mesa del Juez sin que alguien vaya el juez a presentar ese escrito o peticion de sucuestro. Esa persona que presenta el registro puede ser el mismo denunciante o alguna persona que solicita dicho mandamiento de registro. Ahora toda la enmienda en esos casos consiste en que haya peticion de registro y el juez no se atendra solamente a sea peticion sino que el juez examiner a ese denunciante y si tiene testigos tambin examiner a los testigos. "SR. ORENSE. No cree Su Señoria que el tomar le declaracion de ese denunciante por escrito siempre requeriria algun tiempo?. "SR. FRANCISCO. Seria cuestio de un par de horas, pero por otro lado minimizamos en todo lo posible las vejaciones injustas con la expedicion arbitraria de los mandamientos de registro. Creo que entre dos males debemos escoger. el menor.

x x x

"MR. LAUREL. . . . The reason why we are in favor of this amendment is because we are incorporating in our constitution something of a fundamental character. Now, before a judge could issue a search warrant, he must be under the obligation to examine personally under oath the complainant and if he has any witness, the witnesses that he may produce . . ."cralaw virtua1aw library The implementing rule in the Revised Rules of Court, Sec. 4, Rule 126, is more emphatic and candid, for it requires the judge, before issuing a search warrant, to "personally examine on oath or affirmation the complainant and any witnesses he may produce . . ."cralaw virtua1aw library Personal examination by the judge of the complainant and his witnesses is necessary to enable him to determine the existence or non-existence of a probable cause, pursuant to Art. III, Sec. 1, par. 3, of the Constitution, and Sec. 3, Rule 126 of the Revised Rules of Court, both of which prohibit the issuance of warrants except "upon probable cause." The determination of whether or not a probable cause exists calls for the exercise of judgment after a judicial appraisal of facts and should not be allowed to be delegated in the absence of any rule to the contrary. In the case at bar, no personal examination at all was conducted by respondent Judge of the complainant (respondent De Leon) and his witness (respondent Logronio). While it is true that the complainant’s application for search warrant and the witness’ printed-form deposition were subscribed and sworn to before respondent Judge, the latter did not ask either of the two any question the answer to which could possibly be the basis for determining whether or not there was probable cause against herein petitioners. Indeed, the participants seem to have attached so little significance to the matter that notes of the proceedings before respondent Judge were not even taken. At this juncture it may be well to recall the salient facts. The transcript of stenographic notes (pp. 61-76, April 1, 1970, Annex J-2 of the Petition) taken at the hearing of this case in the court below shows that per instruction of respondent Judge, Mr. Eleodoro V. Gonzales, Special Deputy Clerk of Court, took the depositions of the complainant and his witness, and that stenographic notes thereof were taken by Mrs. Gaspar. At that time respondent Judge was at the sala hearing a case. After respondent Judge was through with the hearing, Deputy Clerk Gonzales, stenographer Gaspar, complainant De Leon and witness Logronio went to respondent Judge’s chamber and informed the Judge that they had finished the depositions. Respondent Judge then requested the stenographer to read to him her stenographic notes. Special Deputy Clerk Gonzales testified as follows:jgc:chanrobles.com.ph "A And after finishing reading the stenographic notes, the Honorable Judge requested or instructed them, requested Mr. Logronio to raise his hand and warned him if his deposition will be found to be false and without legal basis, he can be charged criminally for perjury. The Honorable Court told Mr. Logronio whether he affirms the facts contained in his deposition and the affidavit executed before Mr. Rodolfo de Leon. "Q And thereafter? "A And thereafter, he signed the deposition of Mr. Logronio.

"Q Who is this he? "A The Honorable Judge. "Q The deposition or the affidavit? "A The affidavit, Your Honor."cralaw virtua1aw library Thereafter, respondent Judge signed the search warrant. The participation of respondent Judge in the proceedings which led to the issuance of Search Warrant No. 2-M-70 was thus limited to listening to the stenographer’s readings of her notes, to a few words of warning against the commission of perjury, and to administering the oath to the complainant and his witness. This cannot be consider a personal examination. If there was an examination at all of the complainant and his witness, it was the one conducted by the Deputy Clerk of Court. But, as stated, the Constitution and the rules require a personal examination by the judge. It was precisely on account of the intention of the delegates to the Constitutional Convention to make it a duty of the issuing judge to personally examine the complainant and his witnesses that the question of how much time would be consumed by the judge in examining them came up before the Convention, as can be seen from the record of the proceedings quoted above. The reading of the stenographic notes to respondent Judge did not constitute sufficient compliance with the constitutional mandate and the rule; for by that manner respondent Judge did not have the opportunity to observe the demeanor of the complainant and his witness, and to propound initial and follow-up questions which the judicial mind, on account of its training, was in the best position to conceive. These were important in arriving at a sound inference on the all-important question of whether or not there was probable cause. 2. The search warrant was issued for more than one specific offense. Search Warrant No. 2-M-70 was issued for" [v]iolation of Sec. 46(a) of the National Internal Revenue Code in relation to all other pertinent provisions thereof particularly Secs. 53, 72, 73, 208 and 209." The question is: Was the said search warrant issued "in connection with one specific offense," as required by Sec. 3, Rule 126? To arrive at the correct answer it is essential to examine closely the provisions of the Tax Code referred to above. Thus we find the following:chanrob1es virtual 1aw library Sec. 46(a) requires the filing of income tax returns by corporations. Sec. 53 requires the withholding of income taxes at source. Sec. 72 imposes surcharges for failure to render income tax returns and for rendering false and fraudulent returns. Sec. 73 provides the penalty for failure to pay the income tax, to make a return or to

supply the information required under the Tax Code. Sec. 208 penalizes" [a]ny person who distills, rectifies, repacks, compounds, or manufactures any article subject to a specific tax, without having paid the privilege tax therefore, or who aids or abets in the conduct of illicit distilling, rectifying, compounding, or illicit manufacture of any article subject to specific tax . . .," and provides that in the case of a corporation, partnership, or association, the official and/or employee who caused the violation shall be responsible. Sec. 209 penalizes the failure to make a return of receipts, sales, business, or gross value of output removed, or to pay the tax due thereon. The search warrant in question was issued for at least four distinct offenses under the Tax Code. The first is the violation of Sec. 46(a), Sec. 72 and Sec. 73 (the filing of income tax returns), which are interrelated. The second is the violation of Sec. 53 (withholding of income taxes at source). The third is the violation of Sec. 208 (unlawful pursuit of business or occupation); and the fourth is the violation of Sec. 209 (failure to make a return of receipts, sales, business or gross value of output actually removed or to pay the tax due thereon). Even in their classification the six above-mentioned provisions are embraced in two different titles: Secs. 46(a), 53, 72 and 73 are under Title II (Income Tax); while Secs. 208 and 209 are under Title V (Privilege Tax on Business and Occupation). Respondents argue that Stonehill, Et. Al. v. Diokno, Et Al., L-19550, June 19, 1967 (20 SCRA 383), is not applicable, because there the search warrants were issued for "violation of Central Bank Laws, Internal Revenue (Code) and Revised Penal Code;" whereas, here Search Warrant No 2-M-70 was issued for violation of only one code, i.e., the National Internal Revenue Code. The distinction more apparent than real, because it was precisely on account of the Stonehill incident, which occurred sometime before the present Rules of Court took effect on January 1, 1964, that this Court amended the former rule by inserting therein the phrase "in connection with one specific offense," and adding the sentence "No search warrant shall issue for more than one specific offense," in what is now Sec. 3, Rule 126. Thus we said in Stonehill:jgc:chanrobles.com.ph "Such is the seriousness of the irregularities committed in connection with the disputed search warrants, that this Court deemed it fit to amend Section 3 of Rule 122 of the former Rules of Court that ‘a search warrant shall not issue but upon probable cause in connection with one specific offense.’ Not satisfied with this qualification, the Court added thereto a paragraph, directing that ‘no search warrant shall issue for more than one specific offense.’" 3. The search warrant does not particularly describe the things to be seized. The documents, papers and effects sought to be seized are described in Search Warrant No. 2-M-70 in this manner:jgc:chanrobles.com.ph "Unregistered and private books of accounts (ledgers, journals, columnars, receipts

and disbursements books, customers ledgers); receipts for payments received; certificates of stocks and securities; contracts, promissory notes and deeds of sale; telex and coded messages; business communications, accounting and business records; checks and check stubs; records of bank deposits and withdrawals; and records of foreign remittances, covering the years 1966 to 1970."cralaw virtua1aw library The description does not meet the requirement in Art III, Sec. 1, of the Constitution, and of Sec. 3, Rule 126 of the Revised Rules of Court, that the warrant should particularly describe the things to be seized. In Stonehill, this Court, speaking thru Mr. Chief Justice Roberto Concepcion, said:jgc:chanrobles.com.ph "The grave violation of the Constitution made in the application for the contested search warrants was compounded by the description therein made of the effects to be searched for and seized, to wit:chanrob1es virtual 1aw library ‘Books of accounts, financial records, vouchers, journals, correspondence, receipts, ledgers, portfolios, credit journals, typewriters, and other documents and/or paper showing all business transactions including disbursement receipts, balance sheets and related profit and loss statements.’ "Thus, the warrants authorized the search for and seizure of records pertaining to all business transactions of petitioners herein, regardless of whether the transactions were legal or illegal. The warrants sanctioned the seizure of all records of the petitioners and the aforementioned corporations, whatever their nature, thus openly contravening the explicit command of our Bill of Rights — that the things to be seized be particularly described — as well as tending to defeat its major objective: the elimination of general warrants."cralaw virtua1aw library While the term "all business transactions" does not appear in Search Warrant No. 2-M-70, the said warrant nevertheless tends to defeat the major objective of the Bill of Rights, i.e., the elimination of general warrants, for the language used therein is so all-embracing as to include all conceivable records of petitioner corporation, which, if seized, could possibly render its business inoperative. In Uy Kheytin, Et. Al. v. Villareal, etc., Et Al., 42 Phil. 886, 896, this Court had occasion to explain the purpose of the requirement that the warrant should particularly describe the place to be searched and the things to be seized, to wit:jgc:chanrobles.com.ph ". . . Both the Jones Law (sec. 3) and General Orders No. 58 (sec. 97) specifically require that a search warrant should particularly describe the place to be searched and the things to be seized. The evident purpose and intent of this requirement is to limit the things to be seized to those, and only those, particularly described in the search warrant — to leave the officers of the law with no discretion regarding what articles they shall seize, to the end that ‘unreasonable searches and seizures’ may not be made, — that abuses may not be committed. That this is the correct interpretation of

this constitutional provision is borne out by American authorities."cralaw virtua1aw library The purpose as thus explained could, surely and effectively, be defeated under the search warrant issued in this case. A search warrant may be said to particularly describe the things to be seized when the description therein is as specific as the circumstances will ordinarily allow (People v. Rubio; 57 Phil. 384); or when the description expresses a conclusion of fact — not of law — by which the warrant officer may be guided in making the search and seizure (idem., dissent of Abad Santos, J.,); or when the things described are limited to those which bear direct relation to the offense for which the warrant is being issued (Sec. 2, Rule 126, Revised Rules of Court). The herein search warrant does not conform to any of the foregoing tests. If the articles desired to be seized have any direct relation to an offense committed, the applicant must necessarily have some evidence, other than those articles, to prove the said offense; and the articles subject of search and seizure should come in handy merely to strengthen such evidence. In this event, the description contained in the herein disputed warrant should have mentioned, at least, the dates, amounts, persons, and other pertinent data regarding the receipts of payments, certificates of stocks and securities, contracts, promissory notes, deeds of sale, messages and communications, checks, bank deposits and withdrawals, records of foreign remittances, among others, enumerated in the warrant. Respondents contend that certiorari does not lie because petitioners failed to file a motion for reconsideration of respondent Judge’s order of July 29, 1970. The contention is without merit. In the first place, when the questions raised before this Court are the same as those which were squarely raised in and passed upon by the court below, the filing of a motion for reconsideration in said court before certiorari can be instituted in this Court is no longer a prerequisite. (Pajo, etc., Et. Al. v. Ago, Et Al., 108 Phil., 905). In the second place, the rule requiring the filing of a motion for reconsideration before an application for a writ of certiorari can be entertained was never intended to be applied without considering the circumstances. (Matutina v. Buslon, Et Al., 109 Phil., 140.) In the case at bar time is of the essence in view of the tax assessments sought to be enforced by respondent officers of the Bureau of Internal Revenue against petitioner corporation, On account of which immediate and more direct action becomes necessary. (Matute v. Court of Appeals, Et Al., 26 SCRA 768.) Lastly, the rule does not apply where, as in this case, the deprivation of petitioners’ fundamental right to due process taints the proceeding against them in the court below not only with irregularity but also with nullity. (Matute v. Court of Appeals, Et Al., supra.) It is next contended by respondents that a corporation is not entitled to protection against unreasonable search and seizures. Again, we find no merit in the contention. "Although, for the reasons above stated, we are of the opinion that an officer of a corporation which is charged with a violation of a statute of the state of its creation, or of an act of Congress passed in the exercise of its constitutional powers, cannot refuse to produce the books and papers of such corporation, we do not wish to be understood as holding that a corporation is not entitled to immunity, under the 4th Amendment,

against unreasonable searches and seizures. A corporation is, after all, but an association of individuals under an assumed name and with a distinct legal entity. In organizing itself as a collective body it waives no constitutional immunities appropriate to such body. Its property cannot be taken without compensation. It can only be proceeded against by due process of law, and is protected, under the 14th Amendment, against unlawful discrimination . . ." (Hale v. Henkel, 201 U.S. 43, 50 L. ed. 652.) "In Linn v. United States, 163 C.C.A. 470, 251 Fed. 476, 480, it was thought that a different rule applied to a corporation, the ground that it was not privileged from producing its books and papers. But the rights of a corporation against unlawful search and seizure are to be protected even if the same result might have been achieved in a lawful way." (Silverthorne Lumber Company, Et. Al. v. United States of America, 251 U.S. 385, 64 L. ed. 319.) In Stonehill, Et. Al. v. Diokno, Et Al., supra, this Court impliedly recognized the right of a corporation to object against unreasonable searches and seizures, thus:jgc:chanrobles.com.ph "As regards the first group, we hold that petitioners herein have no cause of action to assail the legality of the contested warrants and of the seizures made in pursuance thereof, for the simple reason that said corporations have their respective personalities, separate and distinct from the personality of herein petitioners, regardless of the amount of shares of stock or the interest of each of them in said corporations, whatever, the offices they hold therein may be. Indeed, it is well settled that the legality of a seizure can be contested only by the party whose rights have been impaired thereby, and that the objection to an unlawful search and seizure is purely personal and cannot be availed of by third parties. Consequently, petitioners herein may not validly object to the use in evidence against them of the documents, papers and things seized from the offices and premises of the corporations adverted to above, since the right to object to the admission of said papers in evidence belongs exclusively to the corporations, to whom the seized effects belong, and may not be invoked by the corporate officers in proceedings against them in their individual capacity . . ."cralaw virtua1aw library In the Stonehill case only the officers of the various corporations in whose offices documents, papers and effects were searched and seized were the petitioners. In the case at bar, the corporation to whom the seized documents belong, and whose rights have thereby been impaired, is itself a petitioner. On that score, petitioner corporation here stands on a different footing from the corporations in Stonehill. The tax assessments referred to earlier in this opinion were, if not entirely — as claimed by petitioners — at least partly — as in effect admitted by respondents — based on the documents seized by virtue of Search Warrant No. 2-M-70. Furthermore, the fact that the assessments were made some one and one-half months after the search and seizure on February 25, 1970, is a strong indication that the documents thus seized served as basis for the assessments. Those assessments should therefore not be enforced.

PREMISES CONSIDERED, the petition is granted. Accordingly, Search Warrant No. 2-M-70 issued by respondent Judge is declared null and void; respondents are permanently enjoined from enforcing the said search warrant; the documents, papers and effects seized thereunder are ordered to be returned to petitioners; and respondent officials the Bureau of Internal Revenue and their representatives are permanently enjoined from enforcing the assessments mentioned in Annex "G" of the present petition, as well as other assessments based on the documents, papers and effects seized under the search warrant herein nullified, and from using the same against petitioners in any criminal or other proceeding. No pronouncement as to costs. Concepcion, C.J., Dizon, Makalintal, Zaldivar, Fernando, Teehankee and Makasiar, JJ., concur. Reyes, J.B.L., J., concurs with Mr. Justice Barredo. Castro, J., concurs in the result.

Separate Opinions BARREDO, J., concurring:chanrob1es virtual 1aw library I concur. I agree with the ruling that the search warrants in question violates the specific injunction of Section 3, Rule 126 that "No search warrant shall issue for more than one specific offense." There is no question in my mind that, as very clearly pointed out by Mr. Justice Villamor, the phrase "for violation of Section 46 (a) of the National Internal Revenue Code in relation to all other pertinent provisions thereof, particularly Sections 53, 72, 73, 208 and 209" refers to more than one specific offense, considering that the violation of Section 53 which refers to withholding of income taxes at the sources, Section 208 which punishes pursuit of business or occupation without payment of the corresponding specific or privilege taxes, and Section 209 which penalizes failure to make a return of receipts sales, business or gross value output actually removed or to pay the taxes thereon in connection with Title V on Privilege Taxes on Business and Occupation can hardly be absorbed in a charge of alleged violation of Section 46(a), which merely requires the filing of income tax returns by corporations, so as to constitute with it a single offense. I perceive here the danger that the result of the search applied for may be used as basis not only for a charge of violating Section 46(a) but also and separately of Section 53, 208 and 209. Of course, it is to be admitted that Sections 72 and 73, also mentioned in the application, are really directly related to Section 46(a) because Section 72 provides for surcharges for failure to render, returns and for rendering false and fraudulent returns and Section 73 refers to the penalty for failure to file returns or to pay the corresponding tax. Taken together, they constitute one single offense penalized under Section 73. I am not and cannot be in favor of any scheme which amounts to an indirect means of achieving that which not allowed to be done directly. By merely saying that a party is being charged with violation of one

section of the code in relation to a number of other sections thereof which in truth have no clear or direct bearing with the first is to me condemnable because it is no less than a shotgun device which trenches on the basic liberties intended to be protected by the unequivocal limitations imposed by the Constitution and the Rules of Court on the privilege to secure a search warrant with the aggravating circumstance of being coupled with an attempt to mislead the judge before whom the application for its issuance is presented. I cannot close this brief concurrence without expressing my vehement disapproval of the action taken by respondent internal revenue authorities in using the documents and papers secured during the search, the legality of which was pending resolution by the court, as basis of an assessment, no matter how highly motivated such action might have been. This smacks of lack of respect, if not contempt for the court and is certainly intolerable. At the very least, it appears as an attempt to render the court proceedings moot and academic, and dealing as this case does with constitutionally protected rights which are part and parcel of the basic concepts of individual liberty and democracy, the government agents should have been the first ones to refrain from trying to make a farce of these court proceedings. Indeed, it is to be regretted that the government agents and the court have acted irregularly, for it is highly doubtful if it would be consistent with the sacredness of the rights herein found to have been violated to permit the filing of another application which complies with the constitutional requirements above discussed and the making of another search upon the return of the papers and documents now in their illegal possession. This could be an instance wherein taxes properly due the State will probably remain unassessed and unpaid only because the ones in charge of the execution of the laws did not know how to respect basic constitutional rights and liberties.

EN BANC

G.R. No. 75885 May 27, 1987

BATAAN SHIPYARD & ENGINEERING CO., INC. (BASECO), petitioner, vs. PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT, CHAIRMAN JOVITO SALONGA, COMMISSIONER MARY CONCEPCION BAUTISTA, COMMISSIONER RAMON DIAZ, COMMISSIONER RAUL R. DAZA, COMMISSIONER QUINTIN S. DOROMAL, CAPT. JORGE B. SIACUNCO, et al., respondents.

Apostol, Bernas, Gumaru, Ona and Associates for petitioner.

Vicente G. Sison for intervenor A.T. Abesamis.

NARVASA, J.:

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

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

a. The Basic Sequestration Order

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

RE: SEQUESTRATION ORDER

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

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

2. Baseco Quarry

3. Philippine Jai-Alai Corporation

4. Fidelity Management Co., Inc.

5. Romson Realty, Inc.

6. Trident Management Co.

7. New Trident Management

8. Bay Transport

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

You are hereby ordered:

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

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

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

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

b. Order for Production of Documents

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

1. Stock Transfer Book

2. Legal documents, such as:

2.1. Articles of Incorporation

2.2. By-Laws

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

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

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

2.6. Existing contracts with suppliers/contractors/others.

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

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

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

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

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

8. Updated schedule of Accounts Receivable and Accounts Payable.

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

10. Schedule of company investments and placements. 2

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

c. Orders Re Engineer Island

(1) Termination of Contract for Security Services

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

(2) Change of Mode of Payment of Entry Charges

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

d. Aborted Contract for Improvement of Wharf at Engineer Island

On July 9, 1986, a PCGG fiscal agent, S. Berenguer, entered into a contract in behalf of BASECO with Deltamarine Integrated Port Services, Inc., in virtue of which the latter undertook to introduce improvements costing approximately P210,000.00 on the BASECO wharf at Engineer Island, allegedly then in poor condition, avowedly to "optimize its utilization and in return maximize the revenue which would flow into the government coffers," in consideration of Deltamarine's being granted "priority in using the improved portion of the wharf ahead of anybody" and exemption "from the payment of any charges for the use of wharf including the area where it may install its bagging equipments" "until the improvement remains in a condition suitable for port operations." 5 It seems however that this contract was never consummated. Capt. Jorge B. Siacunco, "Head- (PCGG) BASECO Management Team," advised Deltamarine by letter dated July 30, 1986 that "the new management is not in a position to honor the said contract" and thus "whatever improvements * * (may be introduced) shall be deemed unauthorized * * and shall be at * * (Deltamarine's) own risk." 6

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

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

f. Order to Dispose of Scrap, etc.

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

g. The TAKEOVER Order

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

* * To provisionally takeover in the public interest or to prevent its disposal or dissipation, business enterprises and properties taken over by the government of the Marcos Administration or by entities

or persons close to former President Marcos, until the transactions leading to such acquisition by the latter can be disposed of by the appropriate authorities.

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

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

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

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

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

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

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

h. Termination of Services of BASECO Officers

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

2. Petitioner's Plea and Postulates

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

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

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

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

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

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

b. Re Order to Produce Documents

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

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

BASECO further contends that the PCGG had unduly interfered with its right of dominion and management of its business affairs by —

1) terminating its contract for security services with Fairways & Anchor, without the consent and against the will of the contracting parties; and amending the mode of payment of entry fees stipulated in its Lease Contract with National Stevedoring & Lighterage Corporation, these acts being in violation of the non-impairment clause of the constitution; 15

2) allowing PCGG Agent Silverio Berenguer to enter into an "anomalous contract" with Deltamarine Integrated Port Services, Inc., giving the latter free use of BASECO premises; 16

3) authorizing PCGG Agent, Mayor Melba Buenaventura, to manage and operate its rock quarry at Sesiman, Mariveles; 17

4) authorizing the same mayor to sell or dispose of its metal scrap, equipment, machinery and other materials; 18

5) authorizing the takeover of BASECO, Philippine Dockyard Corporation, and all their affiliated companies;

6) terminating the services of BASECO executives: President Hilario M. Ruiz; EVP Manuel S. Mendoza; GM Moises M. Valdez; Finance Mgr. Gilberto Pasimanero; Legal Dept. Mgr. Benito R. Cuesta I; 19

7) planning to elect its own Board of Directors; 20

8) allowing willingly or unwillingly its personnel to take, steal, carry away from petitioner's premises at Mariveles * * rolls of cable wires, worth P600,000.00 on May 11, 1986; 21

9) allowing "indiscriminate diggings" at Engineer Island to retrieve gold bars supposed to have been buried therein.22

3. Doubts, Misconceptions regarding Sequestration, Freeze and Takeover Orders

Many misconceptions and much doubt about the matter of sequestration, takeover and freeze orders have been engendered by misapprehension, or incomplete comprehension if not indeed downright ignorance of the law governing these remedies. It is needful that these misconceptions and doubts be dispelled so that uninformed and useless debates about them may be avoided, and arguments tainted b sophistry or intellectual dishonesty be quickly exposed and discarded. Towards this end, this opinion will essay an exposition of the law on the matter. In the process many of the objections raised by BASECO will be dealt with.

4. The Governing Law

a. Proclamation No. 3

The impugned executive orders are avowedly meant to carry out the explicit command of the Provisional Constitution, ordained by Proclamation No. 3, 23 that the President-in the exercise of legislative power which she was authorized to continue to wield "(until a legislature is elected and convened under a new Constitution" — "shall give priority to measures to achieve the mandate of the people," among others to (r)ecover ill-gotten properties amassed by the leaders and supporters of the previous regime and protect the interest of the people through orders of sequestration or freezing of assets or accounts." 24

b. Executive Order No. 1

Executive Order No. 1 stresses the "urgent need to recover all ill-gotten wealth," and postulates that "vast resources of the government have been amassed by former President Ferdinand E. Marcos, his immediate family, relatives, and close associates both here and abroad." 25 Upon these premises, the Presidential Commission on Good Government was created, 26 "charged with the task of assisting the President in regard to (certain specified) matters," among which was precisely-

* * The recovery of all in-gotten wealth accumulated by former President Ferdinand E. Marcos, his immediate family, relatives, subordinates and close associates, whether located in the Philippines or abroad, including the takeover or sequestration of all business enterprises and entities owned or controlled by them, during his administration, directly or through nominees, by taking undue advantage of their public office and/or using their powers, authority, influence, connections or relationship. 27

In relation to the takeover or sequestration that it was authorized to undertake in the fulfillment of its mission, the PCGG was granted "power and authority" to do the following particular acts, to wit:

1. To sequester or place or cause to be placed under its control or possession any building or office wherein any ill-gotten wealth or properties may be found, and any records pertaining thereto, in order to prevent their destruction, concealment or disappearance which would frustrate or hamper the investigation or otherwise prevent the Commission from accomplishing its task.

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

3. To enjoin or restrain any actual or threatened commission of acts by any person or entity that may render moot and academic, or frustrate or otherwise make ineffectual the efforts of the Commission to carry out its task under this order. 28

So that it might ascertain the facts germane to its objectives, it was granted power to conduct investigations; require submission of evidence by subpoenae ad testificandum and duces tecum; administer oaths; punish for contempt. 29 It was given power also to promulgate such rules and regulations as may be necessary to carry out the purposes of * * (its creation). 30

c. Executive Order No. 2

Executive Order No. 2 gives additional and more specific data and directions respecting "the recovery of ill-gotten properties amassed by the leaders and supporters of the previous regime." It declares that:

1) * * the Government of the Philippines is in possession of evidence showing that there are assets and properties purportedly pertaining to former Ferdinand E. Marcos, and/or his wife Mrs. Imelda Romualdez Marcos, their close relatives, subordinates, business associates, dummies, agents or nominees which had been or were acquired by them directly or indirectly, through or as a result of the improper or illegal use of funds or properties owned by the government of the Philippines or any of its branches, instrumentalities, enterprises, banks or financial institutions, or by taking undue advantage of their office, authority, influence, connections or relationship, resulting in their unjust enrichment and causing grave damage and prejudice to the Filipino people and the Republic of the Philippines:" and

2) * * said assets and properties are in the form of bank accounts, deposits, trust accounts, shares of stocks, buildings, shopping centers, condominiums, mansions, residences, estates, and other kinds of real and personal properties in the Philippines and in various countries of the world." 31

Upon these premises, the President-

1) froze "all assets and properties in the Philippines in which former President Marcos and/or his wife, Mrs. Imelda Romualdez Marcos, their close relatives, subordinates, business associates, dummies, agents, or nominees have any interest or participation;

2) prohibited former President Ferdinand Marcos and/or his wife * *, their close relatives, subordinates, business associates, duties, agents, or nominees from transferring, conveying, encumbering, concealing or dissipating said assets or properties in the Philippines and abroad, pending the outcome of appropriate proceedings in the Philippines to determine whether any such assets or properties were acquired by them through or as a result of improper or illegal use of or the conversion of funds belonging to the Government of the Philippines or any of its branches, instrumentalities, enterprises, banks or financial institutions, or by taking undue advantage of their official position, authority, relationship, connection or influence to unjustly enrich themselves at the expense and to the grave damage and prejudice of the Filipino people and the Republic of the Philippines;

3) prohibited "any person from transferring, conveying, encumbering or otherwise depleting or concealing such assets and properties or from assisting or taking part in their transfer, encumbrance, concealment or dissipation under pain of such penalties as are prescribed by law;" and

4) required "all persons in the Philippines holding such assets or properties, whether located in the Philippines or abroad, in their names as nominees, agents or trustees, to make full disclosure of the same to the Commission on Good Government within thirty (30) days from publication of * (the) Executive Order, * *. 32

d. Executive Order No. 14

A third executive order is relevant: Executive Order No. 14, 33 by which the PCGG is empowered, "with the assistance of the Office of the Solicitor General and other government agencies, * * to file and prosecute all cases investigated by it * * as may be warranted by its findings." 34 All such cases, whether civil or criminal, are to be filed "with the Sandiganbayanwhich shall have exclusive and original jurisdiction thereof." 35 Executive Order No. 14 also pertinently provides that civil suits for restitution, reparation of damages, or indemnification for consequential damages, forfeiture proceedings provided for under Republic Act No. 1379, or any other civil actions under the Civil Code or other existing laws, in connection with * * (said Executive Orders Numbered 1 and 2) may be filed separately from and proceed independently of any criminal proceedings and may be proved by a preponderance of evidence;" and that, moreover, the "technical rules of procedure and evidence shall not be strictly applied to* * (said)civil cases." 36

5. Contemplated Situations

The situations envisaged and sought to be governed are self-evident, these being:

1) that "(i)ll-gotten properties (were) amassed by the leaders and supporters of the previous regime";37

a) more particularly, that ill-gotten wealth (was) accumulated by former President Ferdinand E. Marcos, his immediate family, relatives, subordinates and close associates, * * located in the Philippines or abroad, * * (and) business enterprises and entities (came to be) owned or controlled by them, during * * (the Marcos) administration, directly or through nominees, by taking undue advantage of their public office and/or using their powers, authority, influence, Connections or relationship; 38

b) otherwise stated, that "there are assets and properties purportedly pertaining to former President Ferdinand E. Marcos,

and/or his wife Mrs. Imelda Romualdez Marcos, their close relatives, subordinates, business associates, dummies, agents or nominees which had been or were acquired by them directly or indirectly, through or as a result of the improper or illegal use of funds or properties owned by the Government of the Philippines or any of its branches, instrumentalities, enterprises, banks or financial institutions, or by taking undue advantage of their office, authority, influence, connections or relationship, resulting in their unjust enrichment and causing grave damage and prejudice to the Filipino people and the Republic of the Philippines"; 39

c) that "said assets and properties are in the form of bank accounts. deposits, trust. accounts, shares of stocks, buildings, shopping centers, condominiums, mansions, residences, estates, and other kinds of real and personal properties in the Philippines and in various countries of the world;" 40 and

2) that certain "business enterprises and properties (were) taken over by the government of the Marcos Administration or by entities or persons close to former President Marcos. 41

6. Government's Right and Duty to Recover All Ill-gotten Wealth

There can be no debate about the validity and eminent propriety of the Government's plan "to recover all ill-gotten wealth."

Neither can there be any debate about the proposition that assuming the above described factual premises of the Executive Orders and Proclamation No. 3 to be true, to be demonstrable by competent evidence, the recovery from Marcos, his family and his dominions of the assets and properties involved, is not only a right but a duty on the part of Government.

But however plain and valid that right and duty may be, still a balance must be sought with the equally compelling necessity that a proper respect be accorded and adequate protection assured, the fundamental rights of private property and free enterprise which are deemed pillars of a free society such as ours, and to which all members of that society may without exception lay claim.

* * Democracy, as a way of life enshrined in the Constitution, embraces as its necessary components freedom of conscience, freedom of expression, and freedom in the pursuit of happiness. Along with these freedoms are included economic freedom and freedom of enterprise within reasonable bounds and under proper control. * * Evincing much concern for the protection of property, the Constitution distinctly recognizes the preferred position which real estate has occupied in law for ages. Property is

bound up with every aspect of social life in a democracy as democracy is conceived in the Constitution. The Constitution realizes the indispensable role which property, owned in reasonable quantities and used legitimately, plays in the stimulation to economic effort and the formation and growth of a solid social middle class that is said to be the bulwark of democracy and the backbone of every progressive and happy country. 42

a. Need of Evidentiary Substantiation in Proper Suit

Consequently, the factual premises of the Executive Orders cannot simply be assumed. They will have to be duly established by adequate proof in each case, in a proper judicial proceeding, so that the recovery of the ill-gotten wealth may be validly and properly adjudged and consummated; although there are some who maintain that the fact-that an immense fortune, and "vast resources of the government have been amassed by former President Ferdinand E. Marcos, his immediate family, relatives, and close associates both here and abroad," and they have resorted to all sorts of clever schemes and manipulations to disguise and hide their illicit acquisitions-is within the realm of judicial notice, being of so extensive notoriety as to dispense with proof thereof, Be this as it may, the requirement of evidentiary substantiation has been expressly acknowledged, and the procedure to be followed explicitly laid down, in Executive Order No. 14.

b. Need of Provisional Measures to Collect and Conserve Assets Pending Suits

Nor may it be gainsaid that pending the institution of the suits for the recovery of such "ill-gotten wealth" as the evidence at hand may reveal, there is an obvious and imperative need for preliminary, provisional measures to prevent the concealment, disappearance, destruction, dissipation, or loss of the assets and properties subject of the suits, or to restrain or foil acts that may render moot and academic, or effectively hamper, delay, or negate efforts to recover the same.

7. Provisional Remedies Prescribed by Law

To answer this need, the law has prescribed three (3) provisional remedies. These are: (1) sequestration; (2) freeze orders; and (3) provisional takeover.

Sequestration and freezing are remedies applicable generally to unearthed instances of "ill-gotten wealth." The remedy of "provisional takeover" is peculiar to cases where "business enterprises and properties (were) taken over by the government of the Marcos Administration or by entities or persons close to former President Marcos."43

a. Sequestration

By the clear terms of the law, the power of the PCGG to sequester property claimed to be "ill-gotten" means to place or cause to be placed under its possession or control said property, or any building or office wherein any such property and any records pertaining thereto may be found, including "business enterprises and entities,"-for the purpose of preventing the destruction, concealment or dissipation of, and otherwise conserving and preserving, the same-until it can be determined, through appropriate judicial proceedings, whether the property was in truth will- gotten," i.e., acquired through or as a result of improper or illegal use of or the conversion of funds belonging to the Government or any of its branches, instrumentalities, enterprises, banks or financial institutions, or by taking undue advantage of official position, authority relationship, connection or influence, resulting in unjust enrichment of the ostensible owner and grave damage and prejudice to the State. 44 And this, too, is the sense in which the term is commonly understood in other jurisdictions. 45

b. "Freeze Order"

A "freeze order" prohibits the person having possession or control of property alleged to constitute "ill-gotten wealth" "from transferring, conveying, encumbering or otherwise depleting or concealing such property, or from assisting or taking part in its transfer, encumbrance, concealment, or dissipation." 46 In other words, it commands the possessor to hold the property and conserve it subject to the orders and disposition of the authority decreeing such freezing. In this sense, it is akin to a garnishment by which the possessor or ostensible owner of property is enjoined not to deliver, transfer, or otherwise dispose of any effects or credits in his possession or control, and thus becomes in a sense an involuntary depositary thereof. 47

c. Provisional Takeover

In providing for the remedy of "provisional takeover," the law acknowledges the apparent distinction between "ill gotten" "business enterprises and entities" (going concerns, businesses in actual operation), generally, as to which the remedy of sequestration applies, it being necessarily inferred that the remedy entails no interference, or the least possible interference with the actual management and operations thereof; and "business enterprises which were taken over by the government government of the Marcos Administration or by entities or persons close to him," in particular, as to which a "provisional takeover" is authorized, "in the public interest or to prevent disposal or dissipation of the enterprises." 48 Such a "provisional takeover" imports something more than sequestration or freezing, more than the placing of the business under physical possession and control, albeit without or with the least possible interference with the management and carrying on of the business itself. In a "provisional takeover," what is taken into custody is not only the physical assets of the business enterprise or entity, but the business operation as well. It is in fine the assumption of control not only over things, but over operations or on- going activities. But, to repeat, such a "provisional takeover" is allowed only as regards "business enterprises * * taken over by the government of the Marcos Administration or by entities or persons close to former President Marcos."

d. No Divestment of Title Over Property Seized

It may perhaps be well at this point to stress once again the provisional, contingent character of the remedies just described. Indeed the law plainly qualifies the remedy of take-over by the adjective, "provisional." These remedies may be resorted to only for a particular exigency: to prevent in the public interest the disappearance or dissipation of property or business, and conserve it pending adjudgment in appropriate proceedings of the primary issue of whether or not the acquisition of title or other right thereto by the apparent owner was attended by some vitiating anomaly. None of the remedies is meant to deprive the owner or possessor of his title or any right to the property sequestered, frozen or taken over and vest it in the sequestering agency, the Government or other person. This can be done only for the causes and by the processes laid down by law.

That this is the sense in which the power to sequester, freeze or provisionally take over is to be understood and exercised, the language of the executive orders in question leaves no doubt. Executive Order No. 1 declares that the sequestration of property the acquisition of which is suspect shall last "until the transactions leading to such acquisition * * can be disposed of by the appropriate authorities." 49 Executive Order No. 2 declares that the assets or properties therein mentioned shall remain frozen "pending the outcome of appropriate proceedings in the Philippines to determine whether any such assets or properties were acquired" by illegal means. Executive Order No. 14 makes clear that judicial proceedings are essential for the resolution of the basic issue of whether or not particular assets are "ill-gotten," and resultant recovery thereof by the Government is warranted.

e. State of Seizure Not To Be Indefinitely Maintained; The Constitutional Command

There is thus no cause for the apprehension voiced by BASECO 50 that sequestration, freezing or provisional takeover is designed to be an end in itself, that it is the device through which persons may be deprived of their property branded as "ill-gotten," that it is intended to bring about a permanent, rather than a passing, transitional state of affairs. That this is not so is quite explicitly declared by the governing rules.

Be this as it may, the 1987 Constitution should allay any lingering fears about the duration of these provisional remedies. Section 26 of its Transitory Provisions, 51 lays down the relevant rule in plain terms, apart from extending ratification or confirmation (although not really necessary) to the institution by presidential fiat of the remedy of sequestration and freeze orders:

SEC. 26. The authority to issue sequestration or freeze orders under Proclamation No. 3 dated March 25, 1986 in relation to the recovery of ill-gotten wealth shag remain operative for not more thaneighteen months after the ratification of this Constitution.

However, in the national interest, as certified by the President, the Congress may extend said period.

A sequestration or freeze order shall be issued only upon showing of a prima facie case. The order and the list of the sequestered or frozen properties shall forthwith be registered with the proper court. For orders issued before the ratification of this Constitution, the corresponding judicial action or proceeding shall be filed within six months from its ratification. For those issued after such ratification, the judicial action or proceeding shall be commenced within six months from the issuance thereof.

The sequestration or freeze order is deemed automatically lifted if no judicial action or proceeding is commenced as herein provided. 52

f. Kinship to Attachment Receivership

As thus described, sequestration, freezing and provisional takeover are akin to the provisional remedy of preliminary attachment, or receivership. 53 By attachment, a sheriff seizes property of a defendant in a civil suit so that it may stand as security for the satisfaction of any judgment that may be obtained, and not disposed of, or dissipated, or lost intentionally or otherwise, pending the action. 54 By receivership, property, real or personal, which is subject of litigation, is placed in the possession and control of a receiver appointed by the Court, who shall conserve it pending final determination of the title or right of possession over it. 55 All these remedies — sequestration, freezing, provisional, takeover, attachment and receivership — are provisional, temporary, designed for-particular exigencies, attended by no character of permanency or finality, and always subject to the control of the issuing court or agency.

g. Remedies, Non-Judicial

Parenthetically, that writs of sequestration or freeze or takeover orders are not issued by a court is of no moment. The Solicitor General draws attention to the writ of distraint and levy which since 1936 the Commissioner of Internal Revenue has been by law authorized to issue against property of a delinquent taxpayer. 56 BASECO itself declares that it has not manifested "a rigid insistence on sequestration as a purely judicial remedy * * (as it feels) that the law should not be ossified to a point that makes it insensitive to change." What it insists on, what it pronounces to be its "unyielding position, is that any change in procedure, or the institution of a new one, should conform to due process and the other prescriptions of the Bill of Rights of the Constitution." 57 It is, to be sure, a proposition on which there can be no disagreement.

h. Orders May Issue Ex Parte

Like the remedy of preliminary attachment and receivership, as well as delivery of personal property in replevinsuits, sequestration and provisional takeover writs may issue ex parte. 58 And as in preliminary attachment, receivership, and delivery of personality, no objection of any significance may be raised to the ex parte issuance of an order of sequestration, freezing or takeover, given its fundamental character of temporariness or conditionality; and taking account specially of the constitutionally expressed "mandate of the people to recover ill-gotten properties amassed by the leaders and supporters of the previous regime and protect the interest of the people;" 59 as well as the obvious need to avoid alerting suspected possessors of "ill-gotten wealth" and thereby cause that disappearance or loss of property precisely sought to be prevented, and the fact, just as self-evident, that "any transfer, disposition, concealment or disappearance of said assets and properties would frustrate, obstruct or hamper the efforts of the Government" at the just recovery thereof. 60

8. Requisites for Validity

What is indispensable is that, again as in the case of attachment and receivership, there exist a prima facie factual foundation, at least, for the sequestration, freeze or takeover order, and adequate and fair opportunity to contest it and endeavor to cause its negation or nullification. 61

Both are assured under the executive orders in question and the rules and regulations promulgated by the PCGG.

a. Prima Facie Evidence as Basis for Orders

Executive Order No. 14 enjoins that there be "due regard to the requirements of fairness and due process." 62Executive Order No. 2 declares that with respect to claims on allegedly "ill-gotten" assets and properties, "it is the position of the new democratic government that President Marcos * * (and other parties affected) be afforded fair opportunity to contest these claims before appropriate Philippine authorities." 63 Section 7 of the Commission's Rules and Regulations provides that sequestration or freeze (and takeover) orders issue upon the authority of at least two commissioners, based on theaffirmation or complaint of an interested party, or motu proprio when the Commission has reasonable grounds to believe that the issuance thereof is warranted. 64 A similar requirement is now found in Section 26, Art. XVIII of the 1987 Constitution, which requires that a "sequestration or freeze order shall be issued only upon showing of a prima facie case." 65

b. Opportunity to Contest

And Sections 5 and 6 of the same Rules and Regulations lay down the procedure by which a party may seek to set aside a writ of sequestration or freeze order, viz:

SECTION 5. Who may contend.-The person against whom a writ of sequestration or freeze or hold order is directed may request the

lifting thereof in writing, either personally or through counsel within five (5) days from receipt of the writ or order, or in the case of a hold order, from date of knowledge thereof.

SECTION 6. Procedure for review of writ or order.-After due hearing or motu proprio for good cause shown, the Commission may lift the writ or order unconditionally or subject to such conditions as it may deem necessary, taking into consideration the evidence and the circumstance of the case. The resolution of the commission may be appealed by the party concerned to the Office of the President of the Philippines within fifteen (15) days from receipt thereof.

Parenthetically, even if the requirement for a prima facie showing of "ill- gotten wealth" were not expressly imposed by some rule or regulation as a condition to warrant the sequestration or freezing of property contemplated in the executive orders in question, it would nevertheless be exigible in this jurisdiction in which the Rule of Law prevails and official acts which are devoid of rational basis in fact or law, or are whimsical and capricious, are condemned and struck down. 66

9. Constitutional Sanction of Remedies

If any doubt should still persist in the face of the foregoing considerations as to the validity and propriety of sequestration, freeze and takeover orders, it should be dispelled by the fact that these particular remedies and the authority of the PCGG to issue them have received constitutional approbation and sanction. As already mentioned, the Provisional or "Freedom" Constitution recognizes the power and duty of the President to enact "measures to achieve the mandate of the people to * * * (recover ill- gotten properties amassed by the leaders and supporters of the previous regime and protect the interest of the people through orders of sequestration or freezing of assets or accounts." And as also already adverted to, Section 26, Article XVIII of the 1987 Constitution67 treats of, and ratifies the "authority to issue sequestration or freeze orders under Proclamation No. 3 dated March 25, 1986."

The institution of these provisional remedies is also premised upon the State's inherent police power, regarded, as t lie power of promoting the public welfare by restraining and regulating the use of liberty and property," 68 and as "the most essential, insistent and illimitable of powers * * in the promotion of general welfare and the public interest," 69 and said to be co-extensive with self-protection and * * not inaptly termed (also) the'law of overruling necessity." " 70

10. PCGG not a "Judge"; General Functions

It should also by now be reasonably evident from what has thus far been said that the PCGG is not, and was never intended to act as, a judge. Its general function is to conduct investigations in order to collect evidenceestablishing instances of "ill-gotten

wealth;" issue sequestration, and such orders as may be warranted by the evidence thus collected and as may be necessary to preserve and conserve the assets of which it takes custody and control and prevent their disappearance, loss or dissipation; and eventually file and prosecute in the proper court of competent jurisdiction all cases investigated by it as may be warranted by its findings. It does not try and decide, or hear and determine, or adjudicate with any character of finality or compulsion, cases involving the essential issue of whether or not property should be forfeited and transferred to the State because "ill-gotten" within the meaning of the Constitution and the executive orders. This function is reserved to the designated court, in this case, the Sandiganbayan. 71 There can therefore be no serious regard accorded to the accusation, leveled by BASECO, 72 that the PCGG plays the perfidious role of prosecutor and judge at the same time.

11. Facts Preclude Grant of Relief to Petitioner

Upon these premises and reasoned conclusions, and upon the facts disclosed by the record, hereafter to be discussed, the petition cannot succeed. The writs of certiorari and prohibition prayed for will not be issued.

The facts show that the corporation known as BASECO was owned or controlled by President Marcos "during his administration, through nominees, by taking undue advantage of his public office and/or using his powers, authority, or influence, " and that it was by and through the same means, that BASECO had taken over the business and/or assets of the National Shipyard and Engineering Co., Inc., and other government-owned or controlled entities.

12. Organization and Stock Distribution of BASECO

BASECO describes itself in its petition as "a shiprepair and shipbuilding company * * incorporated as a domestic private corporation * * (on Aug. 30, 1972) by a consortium of Filipino shipowners and shipping executives. Its main office is at Engineer Island, Port Area, Manila, where its Engineer Island Shipyard is housed, and its main shipyard is located at Mariveles Bataan." 73 Its Articles of Incorporation disclose that its authorized capital stock is P60,000,000.00 divided into 60,000 shares, of which 12,000 shares with a value of P12,000,000.00 have been subscribed, and on said subscription, the aggregate sum of P3,035,000.00 has been paid by the incorporators. 74 The same articles Identify the incorporators, numbering fifteen (15), as follows: (1) Jose A. Rojas, (2) Anthony P. Lee, (3) Eduardo T. Marcelo, (4) Jose P. Fernandez, (5) Generoso Tanseco, (6) Emilio T. Yap, (7) Antonio M. Ezpeleta, (8) Zacarias Amante, (9) Severino de la Cruz, (10) Jose Francisco, (11) Dioscoro Papa, (12) Octavio Posadas, (13) Manuel S. Mendoza, (14) Magiliw Torres, and (15) Rodolfo Torres.

By 1986, however, of these fifteen (15) incorporators, six (6) had ceased to be stockholders, namely: (1) Generoso Tanseco, (2) Antonio Ezpeleta, (3) Zacarias Amante, (4) Octavio Posadas, (5) Magiliw Torres, and (6) Rodolfo Torres. As of this

year, 1986, there were twenty (20) stockholders listed in BASECO's Stock and Transfer Book. 75 Their names and the number of shares respectively held by them are as follows:

1. Jose A. Rojas 1,248 shares

2. Severino G. de la Cruz

1,248 shares

3. Emilio T. Yap 2,508 shares

4. Jose Fernandez 1,248 shares

5. Jose Francisco 128 shares

6. Manuel S. Mendoza 96 shares

7. Anthony P. Lee 1,248 shares

8. Hilario M. Ruiz 32 shares

9. Constante L. Fariñas 8 shares

10. Fidelity Management, Inc.

65,882 shares

11. Trident Management

7,412 shares

12. United Phil. Lines 1,240 shares

13. Renato M. Tanseco 8 shares

14. Fidel Ventura 8 shares

15. Metro Bay Drydock 136,370 shares

16. Manuel Jacela 1 share

17. Jonathan G. Lu 1 share

18. Jose J. Tanchanco 1 share

19. Dioscoro Papa 128 shares

20. Edward T. Marcelo 4 shares

TOTAL 218,819 shares.

13 Acquisition of NASSCO by BASECO

Barely six months after its incorporation, BASECO acquired from National Shipyard & Steel Corporation, or NASSCO, a government-owned or controlled corporation, the latter's shipyard at Mariveles, Bataan, known as the Bataan National Shipyard (BNS), and — except for NASSCO's Engineer Island Shops and certain equipment of the BNS, consigned for future negotiation — all its structures, buildings, shops, quarters, houses, plants, equipment and facilities, in stock or in transit. This it did in virtue of a "Contract of Purchase and Sale with Chattel Mortgage" executed on February 13, 1973. The price was P52,000,000.00. As partial payment thereof, BASECO delivered to NASSCO a cash bond of P11,400,000.00, convertible into cash within twenty-four (24) hours from completion of the inventory undertaken pursuant to the contract. The balance of P41,600,000.00, with interest at seven percent (7%) per annum, compounded semi-annually, was stipulated to be paid in equal semi-annual installments over a term of nine (9) years, payment to commence after a grace period of two (2) years from date of turnover of the shipyard to BASECO. 76

14. Subsequent Reduction of Price; Intervention of Marcos

Unaccountably, the price of P52,000,000.00 was reduced by more than one-half, to P24,311,550.00, about eight (8) months later. A document to this effect was executed on October 9, 1973, entitled "Memorandum Agreement," and was signed for NASSCO by Arturo Pacificador, as Presiding Officer of the Board of Directors, and David R. Ines, as General Manager. 77 This agreement bore, at the top right corner of the first page, the word "APPROVED" in the handwriting of President Marcos, followed by his usual full signature. The document recited that a down payment of P5,862,310.00 had been made by BASECO, and the balance of P19,449,240.00 was payable in equal semi-annual installments over nine (9) years after a grace period of two (2) years, with interest at 7% per annum.

15. Acquisition of 300 Hectares from Export Processing Zone Authority

On October 1, 1974, BASECO acquired three hundred (300) hectares of land in Mariveles from the Export Processing Zone Authority for the price of P10,047,940.00 of which, as set out in the document of sale, P2,000.000.00 was paid upon its execution, and the balance stipulated to be payable in installments. 78

16. Acquisition of Other Assets of NASSCO; Intervention of Marcos

Some nine months afterwards, or on July 15, 1975, to be precise, BASECO, again with the intervention of President Marcos, acquired ownership of the rest of the assets of NASSCO which had not been included in the first two (2) purchase documents. This was accomplished by a deed entitled "Contract of Purchase and Sale," 79 which, like the Memorandum of Agreement dated October 9, 1973 supra also bore at the upper right-hand corner of its first page, the handwritten notation of President Marcos reading, "APPROVED, July 29, 1973," and underneath it, his usual full

signature. Transferred to BASECO were NASSCO's "ownership and all its titles, rights and interests over all equipment and facilities including structures, buildings, shops, quarters, houses, plants and expendable or semi-expendable assets, located at the Engineer Island, known as the Engineer Island Shops, including all the equipment of the Bataan National Shipyards (BNS) which were excluded from the sale of NBS to BASECO but retained by BASECO and all other selected equipment and machineries of NASSCO at J. Panganiban Smelting Plant." In the same deed, NASSCO committed itself to cooperate with BASECO for the acquisition from the National Government or other appropriate Government entity of Engineer Island. Consideration for the sale was set at P5,000,000.00; a down payment of P1,000,000.00 appears to have been made, and the balance was stipulated to be paid at 7% interest per annum in equal semi annual installments over a term of nine (9) years, to commence after a grace period of two (2) years. Mr. Arturo Pacificador again signed for NASSCO, together with the general manager, Mr. David R. Ines.

17. Loans Obtained

It further appears that on May 27, 1975 BASECO obtained a loan from the NDC, taken from "the last available Japanese war damage fund of $19,000,000.00," to pay for "Japanese made heavy equipment (brand new)." 80 On September 3, 1975, it got another loan also from the NDC in the amount of P30,000,000.00 (id.). And on January 28, 1976, it got still another loan, this time from the GSIS, in the sum of P12,400,000.00. 81 The claim has been made that not a single centavo has been paid on these loans. 82

18. Reports to President Marcos

In September, 1977, two (2) reports were submitted to President Marcos regarding BASECO. The first was contained in a letter dated September 5, 1977 of Hilario M. Ruiz, BASECO president. 83 The second was embodied in a confidential memorandum dated September 16, 1977 of Capt. A.T. Romualdez. 84 They further disclose the fine hand of Marcos in the affairs of BASECO, and that of a Romualdez, a relative by affinity.

a. BASECO President's Report

In his letter of September 5, 1977, BASECO President Ruiz reported to Marcos that there had been "no orders or demands for ship construction" for some time and expressed the fear that if that state of affairs persisted, BASECO would not be able to pay its debts to the Government, which at the time stood at the not inconsiderable amount of P165,854,000.00. 85 He suggested that, to "save the situation," there be a "spin-off (of their) shipbuilding activities which shall be handled exclusively by an entirely new corporation to be created;" and towards this end, he informed Marcos that BASECO was —

* * inviting NDC and LUSTEVECO to participate by converting the NDC shipbuilding loan to BASECO amounting to P341.165M and assuming and converting a portion of BASECO's shipbuilding loans from REPACOM amounting to P52.2M or a total of P83.365M as NDC's equity contribution in the new corporation. LUSTEVECO will participate by absorbing and converting a portion of the REPACOM loan of Bay Shipyard and Drydock, Inc., amounting to P32.538M. 86

b. Romualdez' Report

Capt. A.T. Romualdez' report to the President was submitted eleven (11) days later. It opened with the following caption:

MEMORANDUM:

FOR : The President

SUBJECT: An Evaluation and Re-assessment of a Performance of a Mission

FROM: Capt. A.T. Romualdez.

Like Ruiz, Romualdez wrote that BASECO faced great difficulties in meeting its loan obligations due chiefly to the fact that "orders to build ships as expected * * did not materialize."

He advised that five stockholders had "waived and/or assigned their holdings inblank," these being: (1) Jose A. Rojas, (2) Severino de la Cruz, (3) Rodolfo Torres, (4) Magiliw Torres, and (5) Anthony P. Lee. Pointing out that "Mr. Magiliw Torres * * is already dead and Mr. Jose A. Rojas had a major heart attack," he made the following quite revealing, and it may be added, quite cynical and indurate recommendation, to wit:

* * (that) their replacements (be effected) so we can register their names in the stock book prior to the implementation of your instructions to pass a board resolution to legalize the transfers under SEC regulations;

2. By getting their replacements, the families cannot question us later on; and

3. We will owe no further favors from them. 87

He also transmitted to Marcos, together with the report, the following documents: 88

1. Stock certificates indorsed and assigned in blank with assignments and waivers; 89

2. The articles of incorporation, the amended articles, and the by-laws of BASECO;

3. Deed of Sales, wherein NASSCO sold to BASECO four (4) parcels of land in "Engineer Island", Port Area, Manila;

4. Transfer Certificate of Title No. 124822 in the name of BASECO, covering "Engineer Island";

5. Contract dated October 9, 1973, between NASSCO and BASECO re-structure and equipment at Mariveles, Bataan;

6. Contract dated July 16, 1975, between NASSCO and BASECO re-structure and equipment at Engineer Island, Port Area Manila;

7. Contract dated October 1, 1974, between EPZA and BASECO re 300 hectares of land at Mariveles, Bataan;

8. List of BASECO's fixed assets;

9. Loan Agreement dated September 3, 1975, BASECO's loan from NDC of P30,000,000.00;

10. BASECO-REPACOM Agreement dated May 27, 1975;

11. GSIS loan to BASECO dated January 28, 1976 of P12,400,000.00 for the housing facilities for BASECO's rank-and-file employees. 90

Capt. Romualdez also recommended that BASECO's loans be restructured "until such period when BASECO will have enough orders for ships in order for the company to meet loan obligations," and that —

An LOI may be issued to government agencies using floating equipment, that a linkage scheme be applied to a certain percent of BASECO's net profit as part of BASECO's amortization payments tomake it justifiable for you, Sir. 91

It is noteworthy that Capt. A.T. Romualdez does not appear to be a stockholder or officer of BASECO, yet he has presented a report on BASECO to President Marcos, and his report demonstrates intimate familiarity with the firm's affairs and problems.

19. Marcos' Response to Reports

President Marcos lost no time in acting on his subordinates' recommendations, particularly as regards the "spin-off" and the "linkage scheme" relative to "BASECO's amortization payments."

a. Instructions re "Spin-Off"

Under date of September 28, 1977, he addressed a Memorandum to Secretary Geronimo Velasco of the Philippine National Oil Company and Chairman Constante Fariñas of the National Development Company, directing them "to participate in the formation of a new corporation resulting from the spin-off of the shipbuilding component of BASECO along the following guidelines:

a. Equity participation of government shall be through LUSTEVECO and NDC in the amount of P115,903,000 consisting of the following obligations of BASECO which are hereby authorized to be converted to equity of the said new corporation, to wit:

1. NDC P83,865,000 (P31.165M loan & P52.2M Reparation)

2. LUSTEVECO P32,538,000 (Reparation)

b. Equity participation of government shall be in the form of non- voting shares.

For immediate compliance. 92

Mr. Marcos' guidelines were promptly complied with by his subordinates. Twenty-two (22) days after receiving their president's memorandum, Messrs. Hilario M. Ruiz, Constante L. Fariñas and Geronimo Z. Velasco, in representation of their respective corporations, executed a PRE-INCORPORATION AGREEMENT dated October 20, 1977. 93 In it, they undertook to form a shipbuilding corporation to be known as "PHIL-ASIA SHIPBUILDING CORPORATION," to bring to realization their president's instructions. It would seem that the new corporation ultimately formed was actually named "Philippine Dockyard Corporation (PDC)." 94

b. Letter of Instructions No. 670

Mr. Marcos did not forget Capt. Romualdez' recommendation for a letter of instructions. On February 14, 1978, he issued Letter of Instructions No. 670 addressed to the Reparations Commission REPACOM the Philippine National Oil Company (PNOC), the Luzon Stevedoring Company (LUSTEVECO), and the National Development Company

(NDC). What is commanded therein is summarized by the Solicitor General, with pithy and not inaccurate observations as to the effects thereof (in italics), as follows:

* * 1) the shipbuilding equipment procured by BASECO through reparations be transferred to NDC subject to reimbursement by NDC to BASECO (of) the amount of s allegedly representing the handling and incidental expenses incurred by BASECO in the installation of said equipment (so instead of NDC getting paid on its loan to BASECO, it was made to pay BASECO instead the amount of P18.285M); 2) the shipbuilding equipment procured from reparations through EPZA, now in the possession of BASECO and BSDI (Bay Shipyard & Drydocking, Inc.) be transferred to LUSTEVECO through PNOC; and 3) the shipbuilding equipment (thus) transferred be invested by LUSTEVECO, acting through PNOC and NDC, as the government's equity participation in a shipbuilding corporation to be established in partnership with the private sector.

xxx xxx xxx

And so, through a simple letter of instruction and memorandum, BASECO's loan obligation to NDC and REPACOM * * in the total amount of P83.365M and BSD's REPACOM loan of P32.438M were wiped out and converted into non-voting preferred shares. 95

20. Evidence of Marcos'

Ownership of BASECO

It cannot therefore be gainsaid that, in the context of the proceedings at bar, the actuality of the control by President Marcos of BASECO has been sufficiently shown.

Other evidence submitted to the Court by the Solicitor General proves that President Marcos not only exercised control over BASECO, but also that he actually owns well nigh one hundred percent of its outstanding stock.

It will be recalled that according to petitioner- itself, as of April 23, 1986, there were 218,819 shares of stock outstanding, ostensibly owned by twenty (20) stockholders. 96 Four of these twenty are juridical persons: (1) Metro Bay Drydock, recorded as holding 136,370 shares; (2) Fidelity Management, Inc., 65,882 shares; (3) Trident Management, 7,412 shares; and (4) United Phil. Lines, 1,240 shares. The first three corporations, among themselves, own an aggregate of 209,664 shares of BASECO stock, or 95.82% of the outstanding stock.

Now, the Solicitor General has drawn the Court's attention to the intriguing circumstance that found in Malacanang shortly after the sudden flight of President

Marcos, were certificates corresponding to more than ninety-five percent (95%) of all the outstanding shares of stock of BASECO, endorsed in blank, together with deeds of assignment of practically all the outstanding shares of stock of the three (3) corporations above mentioned (which hold 95.82% of all BASECO stock), signed by the owners thereof although not notarized. 97

More specifically, found in Malacanang (and now in the custody of the PCGG) were:

1) the deeds of assignment of all 600 outstanding shares of Fidelity Management Inc. — which supposedly owns as aforesaid 65,882 shares of BASECO stock;

2) the deeds of assignment of 2,499,995 of the 2,500,000 outstanding shares of Metro Bay Drydock Corporation — which allegedly owns 136,370 shares of BASECO stock;

3) the deeds of assignment of 800 outstanding shares of Trident Management Co., Inc. — which allegedly owns 7,412 shares of BASECO stock, assigned in blank; 98 and

4) stock certificates corresponding to 207,725 out of the 218,819 outstanding shares of BASECO stock; that is, all but 5 % — all endorsed in blank. 99

While the petitioner's counsel was quick to dispute this asserted fact, assuring this Court that the BASECO stockholders were still in possession of their respective stock certificates and had "never endorsed * * them in blank or to anyone else," 100 that denial is exposed by his own prior and subsequent recorded statements as a mere gesture of defiance rather than a verifiable factual declaration.

By resolution dated September 25, 1986, this Court granted BASECO's counsel a period of 10 days "to SUBMIT,as undertaken by him, * * the certificates of stock issued to the stockholders of * * BASECO as of April 23, 1986, as listed in Annex 'P' of the petition.' 101 Counsel thereafter moved for extension; and in his motion dated October 2, 1986, he declared inter alia that "said certificates of stock are in the possession of third parties, among whom being the respondents themselves * * and petitioner is still endeavoring to secure copies thereof from them." 102 On the same day he filed another motion praying that he be allowed "to secure copies of the Certificates of Stock in the name of Metro Bay Drydock, Inc., and of all other Certificates, of Stock of petitioner's stockholders in possession of respondents." 103

In a Manifestation dated October 10, 1986,, 104 the Solicitor General not unreasonably argued that counsel's aforestated motion to secure copies of the stock certificates "confirms the fact that stockholders of petitioner corporation are not in possession of * * (their) certificates of stock," and the reason, according to him, was "that 95% of said shares * * have been endorsed in blank and found in Malacañang after the former

President and his family fled the country." To this manifestation BASECO's counsel replied on November 5, 1986, as already mentioned, Stubbornly insisting that the firm's stockholders had not really assigned their stock. 105

In view of the parties' conflicting declarations, this Court resolved on November 27, 1986 among other things "to require * * the petitioner * * to deposit upon proper receipt with Clerk of Court Juanito Ranjo the originals of the stock certificates alleged to be in its possession or accessible to it, mentioned and described in Annex 'P' of its petition, (and other pleadings) * * within ten (10) days from notice." 106 In a motion filed on December 5, 1986, 107 BASECO's counsel made the statement, quite surprising in the premises, that "it will negotiate with the owners (of the BASECO stock in question) to allow petitioner to borrow from them, if available, the certificates referred to" but that "it needs a more sufficient time therefor" (sic). BASECO's counsel however eventually had to confess inability to produce the originals of the stock certificates, putting up the feeble excuse that while he had "requested the stockholders to allow * * (him) to borrow said certificates, * * some of * * (them) claimed that they had delivered the certificates to third parties by way of pledge and/or to secure performance of obligations, while others allegedly have entrusted them to third parties in view of last national emergency." 108 He has conveniently omitted, nor has he offered to give the details of the transactions adverted to by him, or to explain why he had not impressed on the supposed stockholders the primordial importance of convincing this Court of their present custody of the originals of the stock, or if he had done so, why the stockholders are unwilling to agree to some sort of arrangement so that the originals of their certificates might at the very least be exhibited to the Court. Under the circumstances, the Court can only conclude that he could not get the originals from the stockholders for the simple reason that, as the Solicitor General maintains, said stockholders in truth no longer have them in their possession, these having already been assigned in blank to then President Marcos.

21. Facts Justify Issuance of Sequestration and Takeover Orders

In the light of the affirmative showing by the Government that, prima facie at least, the stockholders and directors of BASECO as of April, 1986 109 were mere "dummies," nominees or alter egos of President Marcos; at any rate, that they are no longer owners of any shares of stock in the corporation, the conclusion cannot be avoided that said stockholders and directors have no basis and no standing whatever to cause the filing and prosecution of the instant proceeding; and to grant relief to BASECO, as prayed for in the petition, would in effect be to restore the assets, properties and business sequestered and taken over by the PCGG to persons who are "dummies," nominees or alter egos of the former president.

From the standpoint of the PCGG, the facts herein stated at some length do indeed show that the private corporation known as BASECO was "owned or controlled by former President Ferdinand E. Marcos * * during his administration, * * through nominees, by taking advantage of * * (his) public office and/or using * * (his) powers, authority, influence * *," and that NASSCO and other property of the government had been taken over by BASECO; and the situation justified the sequestration as well as

the provisional takeover of the corporation in the public interest, in accordance with the terms of Executive Orders No. 1 and 2, pending the filing of the requisite actions with the Sandiganbayan to cause divestment of title thereto from Marcos, and its adjudication in favor of the Republic pursuant to Executive Order No. 14.

As already earlier stated, this Court agrees that this assessment of the facts is correct; accordingly, it sustains the acts of sequestration and takeover by the PCGG as being in accord with the law, and, in view of what has thus far been set out in this opinion, pronounces to be without merit the theory that said acts, and the executive orders pursuant to which they were done, are fatally defective in not according to the parties affected prior notice and hearing, or an adequate remedy to impugn, set aside or otherwise obtain relief therefrom, or that the PCGG had acted as prosecutor and judge at the same time.

22. Executive Orders Not a Bill of Attainder

Neither will this Court sustain the theory that the executive orders in question are a bill of attainder. 110 "A bill of attainder is a legislative act which inflicts punishment without judicial trial." 111 "Its essence is the substitution of a legislative for a judicial determination of guilt." 112

In the first place, nothing in the executive orders can be reasonably construed as a determination or declaration of guilt. On the contrary, the executive orders, inclusive of Executive Order No. 14, make it perfectly clear that any judgment of guilt in the amassing or acquisition of "ill-gotten wealth" is to be handed down by a judicial tribunal, in this case, the Sandiganbayan, upon complaint filed and prosecuted by the PCGG. In the second place, no punishment is inflicted by the executive orders, as the merest glance at their provisions will immediately make apparent. In no sense, therefore, may the executive orders be regarded as a bill of attainder.

23. No Violation of Right against Self-Incrimination and Unreasonable Searches and Seizures

BASECO also contends that its right against self incrimination and unreasonable searches and seizures had been transgressed by the Order of April 18, 1986 which required it "to produce corporate records from 1973 to 1986 under pain of contempt of the Commission if it fails to do so." The order was issued upon the authority of Section 3 (e) of Executive Order No. 1, treating of the PCGG's power to "issue subpoenas requiring * * the production of such books, papers, contracts, records, statements of accounts and other documents as may be material to the investigation conducted by the Commission, " and paragraph (3), Executive Order No. 2 dealing with its power to "require all persons in the Philippines holding * * (alleged "ill-gotten") assets or properties, whether located in the Philippines or abroad, in their names as nominees, agents or trustees, to make full disclosure of the same * *." The contention lacks merit.

It is elementary that the right against self-incrimination has no application to juridical persons.

While an individual may lawfully refuse to answer incriminating questions unless protected by an immunity statute, it does not follow that a corporation, vested with special privileges and franchises, may refuse to show its hand when charged with an abuse ofsuchprivileges * * 113

Relevant jurisprudence is also cited by the Solicitor General. 114

* * corporations are not entitled to all of the constitutional protections which private individuals have. * *They are not at all within the privilege against self-incrimination, although this court more than once has said that the privilege runs very closely with the 4th Amendment's Search and Seizure provisions.It is also settled that an officer of the company cannot refuse to produce its records in its possession upon the plea that they will either incriminate him or may incriminate it." (Oklahoma Press Publishing Co. v. Walling, 327 U.S. 186; emphasis, the Solicitor General's).

* * The corporation is a creature of the state. It is presumed to be incorporated for the benefit of the public. It received certain special privileges and franchises, and holds them subject to the laws of the state and the limitations of its charter. Its powers are limited by law. It can make no contract not authorized by its charter. Its rights to act as a corporation are only preserved to it so long as it obeys the laws of its creation. There is a reserve right in the legislature to investigate its contracts and find out whether it has exceeded its powers. It would be a strange anomaly to hold that a state, having chartered a corporation to make use of certain franchises, could not, in the exercise of sovereignty, inquire how these franchises had been employed, and whether they had been abused, and demand the production of the corporate books and papers for that purpose. The defense amounts to this, that an officer of the corporation which is charged with a criminal violation of the statute may plead the criminality of such corporation as a refusal to produce its books. To state this proposition is to answer it. While an individual may lawfully refuse to answer incriminating questions unless protected by an immunity statute, it does not follow that a corporation, vested with special privileges and franchises may refuse to show its hand when charged with an abuse of such privileges. (Wilson v. United States, 55 Law Ed., 771, 780 [emphasis, the Solicitor General's])

At any rate, Executive Order No. 14-A, amending Section 4 of Executive Order No. 14 assures protection to individuals required to produce evidence before the PCGG

against any possible violation of his right against self-incrimination. It gives them immunity from prosecution on the basis of testimony or information he is compelled to present. As amended, said Section 4 now provides that —

xxx xxx xxx

The witness may not refuse to comply with the order on the basis of his privilege against self-incrimination; but no testimony or other information compelled under the order (or any information directly or indirectly derived from such testimony, or other information) may be used against the witness in any criminal case, except a prosecution for perjury, giving a false statement, or otherwise failing to comply with the order.

The constitutional safeguard against unreasonable searches and seizures finds no application to the case at bar either. There has been no search undertaken by any agent or representative of the PCGG, and of course no seizure on the occasion thereof.

24. Scope and Extent of Powers of the PCGG

One other question remains to be disposed of, that respecting the scope and extent of the powers that may be wielded by the PCGG with regard to the properties or businesses placed under sequestration or provisionally taken over. Obviously, it is not a question to which an answer can be easily given, much less one which will suffice for every conceivable situation.

a. PCGG May Not Exercise Acts of Ownership

One thing is certain, and should be stated at the outset: the PCGG cannot exercise acts of dominion over property sequestered, frozen or provisionally taken over. AS already earlier stressed with no little insistence, the act of sequestration; freezing or provisional takeover of property does not import or bring about a divestment of title over said property; does not make the PCGG the owner thereof. In relation to the property sequestered, frozen or provisionally taken over, the PCGG is a conservator, not an owner. Therefore, it can not perform acts of strict ownership; and this is specially true in the situations contemplated by the sequestration rules where, unlike cases of receivership, for example, no court exercises effective supervision or can upon due application and hearing, grant authority for the performance of acts of dominion.

Equally evident is that the resort to the provisional remedies in question should entail the least possible interference with business operations or activities so that, in the event that the accusation of the business enterprise being "ill gotten" be not proven, it may be returned to its rightful owner as far as possible in the same condition as it was at the time of sequestration.

b. PCGG Has Only Powers of Administration

The PCGG may thus exercise only powers of administration over the property or business sequestered or provisionally taken over, much like a court-appointed receiver, 115 such as to bring and defend actions in its own name; receive rents; collect debts due; pay outstanding debts; and generally do such other acts and things as may be necessary to fulfill its mission as conservator and administrator. In this context, it may in addition enjoin or restrain any actual or threatened commission of acts by any person or entity that may render moot and academic, or frustrate or otherwise make ineffectual its efforts to carry out its task; punish for direct or indirect contempt in accordance with the Rules of Court; and seek and secure the assistance of any office, agency or instrumentality of the government. 116 In the case of sequestered businesses generally (i.e., going concerns, businesses in current operation), as in the case of sequestered objects, its essential role, as already discussed, is that of conservator, caretaker, "watchdog" or overseer. It is not that of manager, or innovator, much less an owner.

c. Powers over Business Enterprises Taken Over by Marcos or Entities or Persons Close to him; Limitations Thereon

Now, in the special instance of a business enterprise shown by evidence to have been "taken over by the government of the Marcos Administration or by entities or persons close to former President Marcos," 117 the PCGG is given power and authority, as already adverted to, to "provisionally take (it) over in the public interest or to prevent * * (its) disposal or dissipation;" and since the term is obviously employed in reference to going concerns, or business enterprises in operation, something more than mere physical custody is connoted; the PCGG may in this case exercise some measure of control in the operation, running, or management of the business itself. But even in this special situation, the intrusion into management should be restricted to the minimum degree necessary to accomplish the legislative will, which is "to prevent the disposal or dissipation" of the business enterprise. There should be no hasty, indiscriminate, unreasoned replacement or substitution of management officials or change of policies, particularly in respect of viable establishments. In fact, such a replacement or substitution should be avoided if at all possible, and undertaken only when justified by demonstrably tenable grounds and in line with the stated objectives of the PCGG. And it goes without saying that where replacement of management officers may be called for, the greatest prudence, circumspection, care and attention - should accompany that undertaking to the end that truly competent, experienced and honest managers may be recruited. There should be no role to be played in this area by rank amateurs, no matter how wen meaning. The road to hell, it has been said, is paved with good intentions. The business is not to be experimented or played around with, not run into the ground, not driven to bankruptcy, not fleeced, not ruined. Sight should never be lost sight of the ultimate objective of the whole exercise, which is to turn over the business to the Republic, once judicially established to be "ill-gotten." Reason dictates that it is only under these conditions and circumstances that the supervision, administration and control of business enterprises provisionally taken over may legitimately be exercised.

d. Voting of Sequestered Stock; Conditions Therefor

So, too, it is within the parameters of these conditions and circumstances that the PCGG may properly exercise the prerogative to vote sequestered stock of corporations, granted to it by the President of the Philippines through a Memorandum dated June 26, 1986. That Memorandum authorizes the PCGG, "pending the outcome of proceedings to determine the ownership of * * (sequestered) shares of stock," "to vote such shares of stock as it may have sequestered in corporations at all stockholders' meetings called for the election of directors, declaration of dividends, amendment of the Articles of Incorporation, etc." The Memorandum should be construed in such a manner as to be consistent with, and not contradictory of the Executive Orders earlier promulgated on the same matter. There should be no exercise of the right to vote simply because the right exists, or because the stocks sequestered constitute the controlling or a substantial part of the corporate voting power. The stock is not to be voted to replace directors, or revise the articles or by-laws, or otherwise bring about substantial changes in policy, program or practice of the corporation except for demonstrably weighty and defensible grounds, and always in the context of the stated purposes of sequestration or provisional takeover, i.e., to prevent the dispersion or undue disposal of the corporate assets. Directors are not to be voted out simply because the power to do so exists. Substitution of directors is not to be done without reason or rhyme, should indeed be shunned if at an possible, and undertaken only when essential to prevent disappearance or wastage of corporate property, and always under such circumstances as assure that the replacements are truly possessed of competence, experience and probity.

In the case at bar, there was adequate justification to vote the incumbent directors out of office and elect others in their stead because the evidence showed prima facie that the former were just tools of President Marcos and were no longer owners of any stock in the firm, if they ever were at all. This is why, in its Resolution of October 28, 1986;118 this Court declared that —

Petitioner has failed to make out a case of grave abuse or excess of jurisdiction in respondents' calling and holding of a stockholders' meeting for the election of directors as authorized by the Memorandum of the President * * (to the PCGG) dated June 26, 1986, particularly, where as in this case, the government can, through its designated directors, properly exercise control and management over what appear to be properties and assets owned and belonging to the government itself and over which the persons who appear in this case on behalf of BASECO have failed to show any right or even any shareholding in said corporation.

It must however be emphasized that the conduct of the PCGG nominees in the BASECO Board in the management of the company's affairs should henceforth be guided and governed by the norms herein laid down. They should never for a moment allow themselves to forget that they are conservators, not owners of the business; they

are fiduciaries, trustees, of whom the highest degree of diligence and rectitude is, in the premises, required.

25. No Sufficient Showing of Other Irregularities

As to the other irregularities complained of by BASECO, i.e., the cancellation or revision, and the execution of certain contracts, inclusive of the termination of the employment of some of its executives, 119 this Court cannot, in the present state of the evidence on record, pass upon them. It is not necessary to do so. The issues arising therefrom may and will be left for initial determination in the appropriate action. But the Court will state that absent any showing of any important cause therefor, it will not normally substitute its judgment for that of the PCGG in these individual transactions. It is clear however, that as things now stand, the petitioner cannot be said to have established the correctness of its submission that the acts of the PCGG in question were done without or in excess of its powers, or with grave abuse of discretion.

WHEREFORE, the petition is dismissed. The temporary restraining order issued on October 14, 1986 is lifted.

Yap, Fernan, Paras, Gancayco and Sarmiento, JJ., concur.

Separate Opinions

TEEHANKEE, CJ., concurring:

I fully concur with the masterly opinion of Mr. Justice Narvasa. In the process of disposing of the issues raised by petitioner BASECO in the case at bar, it comprehensively discusses the laws and principles governing the Presidential Commission on Good Government (PCGG) and defines the scope and extent of its powers in the discharge of its monumental task of recovering the "ill-gotten wealth, accumulated by former President Ferdinand E. Marcos, his immediate family, relatives, subordinates and close associates, whether located in the Philippines or abroad (and) business enterprises and entities owned or controlled by them during I . . .(the Marcos) administration, directly or through nominees, by taking undue advantage of their public office and/or using their powers, authority, influence, connections or relationship." 1

The Court is unanimous insofar as the judgment at bar upholds the imperative need of recovering the ill-gotten properties amassed by the previous regime, which "deserves the fullest support of the judiciary and all sectors of society." 2 To quote the pungent language of Mr. Justice Cruz, "(T)here is no question that all lawful efforts should be taken to recover the tremendous wealth plundered from the people by the past regime in the most execrable thievery perpetrated in all history. No right-thinking Filipino can quarrel with this necessary objective, and on this score I am happy to concur with the ponencia." 3

The Court is likewise unanimous in its judgment dismissing the petition to declare unconstitutional and void Executive Orders Nos. 1 and 2 to annul the sequestration order of April 14, 1986. For indeed, the 1987 Constitution overwhelmingly adopted by the people at the February 2, 1987 plebiscite expressly recognized in Article XVIII, section 26 thereof 4 the vital functions of respondent PCGG to achieve the mandate of the people to recover such ill-gotten wealth and properties as ordained by Proclamation No. 3 promulgated on March 25, 1986.

The Court is likewise unanimous as to the general rule set forth in the main opinion that "the PCGG cannot exercise acts of dominion over property sequestered, frozen or provisionally taken over" and "(T)he PCGG may thus exercise only powers of administration over the property or business sequestered or provisionally taken over, much like a court-appointed receiver, such as to bring and defend actions in its own name; receive rents; collect debts due; pay outstanding debts; and generally do such other acts and things as may be necessary to fulfill its mission as conservator and administrator. In this context, it may in addition enjoin or restrain any actual or threatened commission of acts by any person or entity that may render moot and academic, or frustrate or otherwise make ineffectual its efforts to carry out its task; punish for direct or indirect contempt in accordance with the Rules of Court; and seek and secure the assistance of any office, agency or instrumentality of the government. In the case of sequestered businesses generally (i.e. going concerns, business in current operation), as in the case of sequestered objects, its essential role, as already discussed, is that of conservator, caretaker, 'watchdog' or overseer. It is not that of manager, or innovator, much less an owner." 5

Now, the case at bar involves one where the third and most encompassing and rarely invoked of provisional remedies, 6 the provisional takeover of the Baseco properties and business operations has been availed of by the PCGG, simply because the evidence on hand, not only prima facie but convincingly with substantial and documentary evidence of record establishes that the corporation known as petitioner BASECO "was owned or controlled by President Marcos 'during his administration, through nominees, by taking undue advantage of his public office and/or using his powers, authority, or influence;' and that it was by and through the same means, that BASECO had taken over the business and/or assets of the [government-owned] National Shipyard and Engineering Co., Inc., and other government-owned or controlled entities." The documentary evidence shows that petitioner BASECO (read Ferdinand E. Marcos) in successive transactions all directed and approved by the former President-in an orgy of what according to the PCGG's then chairman, Jovito Salonga, in his statement before the 1986 Constitutional Commission, "Mr. Ople once called 'organized pillage' "-gobbled up the government corporation National Shipyard & Steel Corporation NASSCO its shipyard at Mariveles, 300 hectares of land in Mariveles from the Export Processing Zone Authority, Engineer Island itself in Manila and its complex of equipment and facilities including structures, buildings, shops, quarters, houses, plants and expendable or semi-expendable assets and obtained huge loans of $19,000,000.00 from the last available Japanese war damage fund, P30,000,000.00 from the NDC and P12,400,000.00 from the GSIS. The sordid details are set forth in detail in Paragraphs 1 1 to 20 of the main opinion. They include confidential reports

from then BASECO president Hilario M. Ruiz and the deposed President's brother-in- law, then Captain (later Commodore) Alfredo Romualdez, who although not on record as an officer or stockholder of BASECO reported directly to the deposed President on its affairs and made the recommendations, all approved by the latter, for the gobbling up by BASECO of all the choice government assets and properties.

All this evidence has been placed of record in the case at bar. And petitioner has had all the time and opportunity to refute it, submittals to the contrary notwithstanding, but has dismally failed to do so. To cite one glaring instance: as stated in the main opinion, the evidence submitted to this Court by the Solicitor General "proves that President Marcos not only exercised control over BASECO, but also that he actually owns well nigh one hundred percent of its outstanding stock." It cites the fact that three corporations, evidently front or dummy corporations, among twenty shareholders, in name, of BASECO, namely Metro Bay Drydock, Fidelity Management, Inc. and Trident Management hold 209,664 shares or 95.82%, of BASECO's outstanding stock. Now, the Solicitor General points out further than BASECO certificates "corresponding to more than ninety-five percent (95%) of all the outstanding shares of stock of BASECO, endorsed in blank, together with deeds of assignment of practically all the outstanding shares of stock of the three (3) corporations above mentioned (which hold 95.82% of all BASECO stock), signed by the owners thereof although not notarized" 7 were found in Malacañang shortly after the deposed President's sudden flight from the country on the night of February 25, 1986. Thus, the main opinion's unavoidable conclusion that "(W)hile the petitioner's counsel was quick to dispute this asserted fact, assuring this Court that the BASECO stockholders were still in possession of their respective stock certificates and had 'never endorsed * * * them in blank or to anyone else,' that denial is exposed by his own prior and subsequent recorded statements as a mere gesture of defiance rattler than a verifiable factual declaration . . . . Under the circumstances, the Court can only conclude that he could not get the originals from the stockholders for the simple reason that as the Solicitor General maintains, said stockholders in truth no longer have them in their possession, these having already been assigned in blank to President Marcos." 8

With this strong unrebutted evidence of record in this Court, Justice Melencio-Herrera, joined by Justice Feliciano, expressly concurs with the main opinion upholding the commission's take-over, stating that "(I) have no objection to according the right to vote sequestered stock in case of a takeover of business actually belonging to the government or whose capitalization comes from public funds but which, somehow, landed in the hands of private persons, as in the case of BASECO." They merely qualify their concurrence with the injunction that such takeovers be exercised with "caution and prudence" pending the determination of "the true and real ownership" of the sequestered shares. Suffice it to say in this regard that each case has to be judged from the pertinent facts and circumstances and that the main opinion emphasizes sufficiently that it is only in the special instances specified in the governing laws grounded on the superior national interest and welfare and the practical necessity of preserving the property and preventing its loss or disposition that the provisional remedy of provisional take-over is exercised.

Here, according to the dissenting opinion, "the PCGG concludes that sequestered property is ill-gotten wealth and proceeds to exercise acts of ownership over said properties . . . . and adds that "the fact of ownership must be established in a proper suit before a court of justice"-which this Court has preempted with its finding that "in the context of the proceedings at bar, the actuality of the control by President Marcos of BASECO has been sufficiently shown."

But BASECO who has instituted this action to set aside the sequestration and take-over orders of respondent commission has chosen to raise these very issues in this Court. We cannot ostrich-like hide our head in the sand and say that it has not yet been established in the proper court that what the PCGG has taken over here aregovernment properties, as a matter of record and public notice and knowledge, like the NASSCO, its Engineer Island and Mariveles Shipyard and entire complex, which have been pillaged and placed in the name of the dummy or front company named BASECO but from all the documentary evidence of record shown by its street certificates all found in Malacanang should in reality read "Ferdinand E. Marcos" and/or his brother-in-law. Such take-over can in no way be termed "lawless usurpation," for the government does not commit any act of usurpation in taking over its own properties that have been channeled to dummies, who are called upon to prove in the proper court action what they have failed to do in this Court, that they have lawfully acquired ownership of said properties, contrary to the documentary evidence of record, which they must likewise explain away. This Court, in the exercise of its jurisdiction on certiorari and as the guardian of the Constitution and protector of the people's basic constitutional rights, has entertained many petitions on the part of parties claiming to be adversely affected by sequestration and other orders of the PCGG, This Court set the criterion that such orders should issue only upon showing of a prima facie case, which criterion was adopted in the 1987 Constitution. The Court's judgment cannot be faulted if much more than a prima facie has been shown in this case, which the faceless figures claiming to represent BASECO have failed to refute or disprove despite all the opportunity to do so.

The record plainly shows that petitioner BASECO which is but a mere shell to mask its real owner did not and could not explain how and why they received such favored and preferred treatment with tailored Letters of Instruction and handwritten personal approval of the deposed President that handed it on a silver platter the whole complex and properties of NASSCO and Engineer Island and the Mariveles Shipyard.

It certainly would be the height of absurdity and helplessness if this government could not here and now take over the possession and custody of its very own properties and assets that had been stolen from it and which it had pledged to recover for the benefit and in the greater interest of the Filipino people, whom the past regime had saddled with a huge $27-billion foreign debt that has since ballooned to $28.5-billion.

Thus, the main opinion correctly concludes that "(I)n the light of the affirmative showing by the Government that,prima facie at least, the stockholders and directors of BASECO as of April, 1986 were mere 'dummies,' nominees or alter egos of President Marcos; at any rate, that they are no longer owners of any shares of stock in the corporation, the

conclusion cannot be avoided that said stockholders and directors have no basis and no standing whatever to cause the filing and prosecution of the instant proceeding; and to grant relief to BASECO, as prayed for in the petition, would in effect be to restore the assets, properties and business sequestered and taken over by the PCGG to persons who are 'dummies' nominees or alter egos of the former President." 9

And Justice Padilla in his separate concurrence "called a spade a spade," citing the street certificates representing 95 % of BASECO's outstanding stock found in Malacañang after Mr. Marcos' hasty flight in February, 1986 and the extent of the control he exercised over policy decisions affecting BASECO and concluding that "Consequently, even ahead of judicial proceedings, I am convinced that the Republic of the Philippines, thru the PCGG, has the right and even the duty to take over full control and supervision of BASECO."

Indeed, the provisional remedies available to respondent commission are rooted in the police power of the State, the most pervasive and the least limitable of the powers of Government since it represents "the power of sovereignty, the power to govern men and things within the limits of its domain." 10 Police power has been defined as the power inherent in the State "to prescribe regulations to promote the health, morals, education, good order or safety, and general welfare of the people." 11 Police power rests upon public necessity and upon the right of the State and of the public to self-protection. 12 "Salus populi suprema est lex" or "the welfare of the people is the Supreme Law." 13 For this reason, it is co-extensive with the necessities of the case and the safeguards of public interest. 14 Its scope expands and contracts with changing needs. 15 "It may be said in a general way that the police power extends to all the great public needs. It may be put forth in aid of what is sanctioned by usage, or held by the prevailing morality or strong and preponderant opinion to be greatly and immediately necessary to the public welfare." 16 That the public interest or the general welfare is subserved by sequestering the purported ill-gotten assets and properties and taking over stolen properties of the government channeled to dummy or front companies is stating the obvious. The recovery of these ill-gotten assets and properties would greatly aid our financially crippled government and hasten our national economic recovery, not to mention the fact that they rightfully belong to the people. While as a measure of self-protection, if, in the interest of general welfare, police power may be exercised to protect citizens and their businesses in financial and economic matters, it may similarly be exercised to protect the government itself against potential financial loss and the possible disruption of governmental functions. 17 Police power as the power of self-protection on the part of the community bears the same relation to the community that the principle of self-defense bears to the individual. 18 Truly, it may be said that even more than self- defense, the recovery of ill-gotten wealth and of the government's own properties involves the material and moral survival of the nation, marked as the past regime was by the obliteration of any line between private funds and the public treasury and abuse of unlimited power and elimination of any accountability in public office, as the evidence of record amply shows.

It should be mentioned that the tracking down of the deposed President's actual ownership of the BASECO shares was fortuitously facilitated by the recovery of the

street certificates in Malacañang after his hasty flight from the country last year. This is not generally the case.

For example, in the ongoing case filed by the government to recover from the Marcoses valuable real estate holdings in New York and the Lindenmere estate in Long Island, former PCGG chairman Jovito Salonga has revealed that their names "do not appear on any title to the property. Every building in New York is titled in the name of a Netherlands Antilles corporation, which in turn is purportedly owned by three Panamanian corporations, with bearer shares. This means that the shares of this corporation can change hands any time, since they can be transferred, under the law of Panama, without previous registration on the books of the corporation. One of the first documents that we discovered shortly after the February revolution was a declaration of trust handwritten by Mr. Joseph Bernstein on April 4, 1982 on a Manila Peninsula Hotel stationery stating that he would act as a trustee for the benefit of President Ferdinand Marcos and would act solely pursuant to the instructions of Marcos with respect to the Crown Building in New York." 19

This is just to stress the difficulties of the tasks confronting respondent PCGG, which nevertheless has so far commendably produced unprecedented positive results. As stated by then chairman Salonga:

PCGG has turned over to the Office of the President around 2 billion pesos in cash, free of any lien. It has also delivered to the President-as a result of a compromise settlement-around 200 land titles involving vast tracks of land in Metro Manila, Rizal, Laguna, Cavite, and Bataan, worth several billion pesos. These lands are now available for low-cost housing projects for the benefit of the poor and the dispossessed amongst our people.

In the legal custody of the Commission as a result of sequestration proceedings, are expensive jewelry amounting to 310 million pesos, 42 aircraft amounting to 718 million pesos, vessels amounting to 748 million pesos, and shares of stock amounting to around 215 million pesos.

But, as I said, the bulk of the ill-gotten wealth is located abroad, not in the Philippines. Through the efforts of the PCGG, we have caused the freezing or sequestration of properties, deposits, and securities probably worth many billions of pesos in New York, New Jersey, Hawaii, California, and more importantly-in Switzerland. Due to favorable developments in Switzerland, we may expect, according to our Swiss lawyers, the first deliveries of the Swiss deposits in the foreseeable future, perhaps in less than a year's time. In New York, PCGG through its lawyers who render their services free of cost to the Philippine government, succeeded in getting injunctive relief against Mr. and Mrs. Marcos and their

nominees and agents. There is now an offer for settlement that is being studied and explored by our lawyers there.

If we succeed in recovering not an (since this is impossible) but a substantial part of the ill-gotten wealth here and in various countries of the world — something the revolutionary governments of China, Ethiopia, Iran and Nicaragua were not able to accomplish at all with respect to properties outside their territorial boundaries — the Presidential Commission on Good Government, which has undertaken the difficult and thankless task of trying to undo what had been done so secretly and effectively in the last twenty years, shall have more than justified its existence. 20

The misdeeds of some PCGG volunteers and personnel cited in the dissenting opinion do not detract at an from the PCGG's accomplishments, just as no one would do away with newspapers because of some undesirable elements. The point is that all such misdeeds have been subject to public exposure and as stated in the dissent itself, the erring PCGG representatives have been forthwith dismissed and replaced.

The magnitude of the tasks that confront respondent PCGG with its limited resources and staff support and volunteers should be appreciated, together with the assistance that foreign governments and lawyers have spontaneously given the commission.

A word about the PCGG's firing of the BASECO lawyers who filed the present petition challenging its questioned orders, filing a motion to withdraw the petition, after it had put in eight of its representatives as directors of the BASECO board of directors. This was entirely proper and in accordance with the Court's Resolution of October 28, 1986, which denied BASECO's motion for the issuance of a restraining order against such take-over and declared that "the government can, through its designated directors, properly exercise control and management over what appear to be properties and assets owned and belonging to the government itself and over which the persons who appear in this case on behalf of BASECO have failed to show any eight or even any shareholding in said corporation." In other words, these dummies or fronts cannot seek to question the government's right to recover the very properties and assets that have been stolen from it by using the very same stolen properties and funds derived therefrom. If they wish to pursue their own empty claim, they must do it on their own, after first establishing that they indeed have a lawful right and/or shareholding in BASECO.

Under the 1987 Constitution, the PCGG is called upon to file the judicial proceedings for forfeiture and recovery of the sequestered or frozen properties covered by its orders issued before the ratification of the Constitution on February 2, 1987, within six months from such ratification, or by August 2, 1987. (For those orders issued after such ratification, the judicial action or proceeding must be commenced within six months from the issuance thereof.) The PCGG has not really been given much time, considering the magnitude of its tasks. It is entitled to some forbearance, in availing of

the maximum time granted it for the filing of the corresponding judicial action with the Sandiganbayan.

PADILLA, J., concurring:

The majority opinion penned by Mr. Justice Narvasa maintains and upholds the valid distinction between acts of conservation and preservation of assets and acts of ownership. Sequestration, freeze and temporary take-over encompass the first type of acts. They do not include the second type of acts which are reserved only to the rightful owner of the assets or business sequestered or temporarily taken over.

The removal and election of members of the board of directors of a corporate enterprise is, to me, a clear act of ownership on the part of the shareholders of the corporation. Under ordinary circumstances, I would deny the PCGG the authority to change and elect the members of BASECO's Board of Directors. However, under the facts as disclosed by the records, it appears that the certificates of stock representing about ninety-five (95%) per cent of the total ownership in BASECO's capital stock were found endorsed in blank in Malacanang (presumably in the possession and control of Mr. Marcos) at the time he and his family fled in February 1986. This circumstance let alone the extent of the control Mr. Marcos exercised, while in power, over policy decisions affecting BASECO, entirely satisfies my mind that BASECO was owned and controlled by Mr. Marcos. This is calling a spade a spade. I am also entirely satisfied in my mind that Mr. Marcos could not have acquired the ownership of BASECO out of his lawfully-gotten wealth.

Consequently, even ahead of judicial proceedings, I am convinced that the Republic of the Philippines, through the PCGG, has the right and even the duty to take-over full control and supervision of BASECO.

MELENCIO-HERRERA, J., concurring:

I would like to qualify my concurrence in so far as the voting of sequestered stork is concerned.

The voting of sequestered stock is, to my mind, an exercise of an attribute of ownership. It goes beyond the purpose of a writ of sequestration, which is essentially to preserve the property in litigation (Article 2005, Civil Code). Sequestration is in the nature of a judicial deposit (ibid.).

I have no objection to according the right to vote sequestered stock in case of a take-over of business actually belonging to the government or whose capitalization comes from public funds but which, somehow, landed in the hands of private persons, as in the case of BASECO. To my mind, however, caution and prudence should be exercised in the case of sequestered shares of an on-going private business enterprise, specially the sensitive ones, since the true and real ownership of said shares is yet to be determined and proven more conclusively by the Courts.

It would be more in keeping with legal norms if forfeiture proceedings provided for under Republic Act No. 1379 be filed in Court and the PCGG seek judicial appointment as a receiver or administrator, in which case, it would be empowered to vote sequestered shares under its custody (Section 55, Corporation Code). Thereby, the assets in litigation are brought within the Court's jurisdiction and the presence of an impartial Judge, as a requisite of due process, is assured. For, even in its historical context, sequestration is a judicial matter that is best handled by the Courts.

I consider it imperative that sequestration measures be buttressed by judicial proceedings the soonest possible in order to settle the matter of ownership of sequestered shares and to determine whether or not they are legally owned by the stockholders of record or are "ill-gotten wealth" subject to forfeiture in favor of the State. Sequestration alone, being actually an ancillary remedy to a principal action, should not be made the basis for the exercise of acts of dominion for an indefinite period of time.

Sequestration is an extraordinary, harsh, and severe remedy. It should be confined to its lawful parameters and exercised, with due regard, in the words of its enabling laws, to the requirements of fairness, due process (Executive Order No. 14, palay 7, 1986), and Justice (Executive Order No. 2, March 12, 1986).

Feliciano, J., concur.

GUTIERREZ, JR., J., concurring and dissenting:

I concur, in part, in the erudite opinion penned for the Court by my distinguished colleague Mr. Justice Andres R. Narvasa. I agree insofar as it states the principles which must govern PCGG sequestrations and emphasizes the limitations in the exercise of its broad grant of powers.

I concur in the general propositions embodied in or implied from the majority opinion, among them:

(1) The efforts of Government to recover ill-gotten properties amassed by the previous regime deserve the fullest support of the judiciary and all sectors of society. I believe, however, that a nation professing adherence to the rule of law and fealty to democratic processes must adopt ways and means which are always within the bounds of lawfully granted authority and which meet the tests of due process and other Bill of Rights protections.

(2) Sequestration is intended to prevent the destruction, concealment, or dissipation of ill-gotten wealth. The object is conservation and preservation. Any exercise of power beyond these objectives is lawless usurpation.

(3) The PCGG exercises only such powers as are granted by law and not proscribed by the Constitution. The remedies it enforces are provisional and contingent. Whether

or not sequestered property is indeed ill-gotten must be-determined by a court of justice. The PCGG has absolutely no power to divest title over sequestered property or to act as if its findings are final.

(4) The PCGG does not own sequestered property. It cannot and must not exercise acts of ownership. To quote the majority opinion, "one thing is certain ..., the PCGG cannot exercise acts of dominion."

(5) The provisional takeover in a sequestration should not be indefinitely maintained. It is the duty of the PCGG to immediately file appropriate criminal or civil cases once the evidence has been gathered.

It is the difference between what the Court says and what the PCGG does which constrains me to dissent. Even as the Court emphasizes principles of due process and fair play, it has unfortunately validated ultra vires acts violative of those very same principles. While we stress the rules which must govern the PCGG in the exercise of its powers, the Court has failed to stop or check acts which go beyond the power of sequestration given by law to the PCGG.

We are all agreed in the Court that the PCGG is not a judge. It is an investigator and prosecutor. Sequestration is only a preliminary or ancillary remedy. There must be a principal and independent suit filed in court to establish the true ownership of sequestered properties. The factual premise that a sequestered property was ill-gotten by former President Marcos, his family, relatives, subordinates, and close associates cannot be assumed. The fact of ownership must be established in a proper suit before a court of justice.

But what has the Court, in effect, ruled?

Pages 21 to 33 of the majority opinion are dedicated to a statement of facts which conclusively and indubitably shows that BASECO is owned by President Marcos-and that it was acquired and vastly enlarged by the former President's taking undue advantage of his public office and using his powers, authority, or influence.

There has been no court hearing, no trial, and no presentation of evidence. All that we have is what the PCGG has given us. The petitioner has not even been allowed to see the evidence, much less refute it.

What the PCGG has gathered in the course of its seizures and investigations may be gospel truth. However, that truth must be properly established in a trial court, not unilaterally determined by the PCGG or declared by this Court in a special proceeding which only asks us to set aside or enjoin an illegal exercise of power. After this decision, there is nothing more for a trial court to ascertain. Certainly, no lower court would dare to arrive at findings contrary to this Court's conclusions, no matter how insistent we may be in labelling such conclusions as "prima facie." To me, this is the basic flaw in PCGG procedures that the Court is, today, unwittingly legitimating. Even

before the institution of a court case, the PCGG concludes that sequestered property is ill-gotten wealth and proceeds to exercise acts of ownership over said properties. It treats sequestered property as its own even before the oppositor-owners have been divested of their titles.

The Court declares that a state of seizure is not to be indefinitely maintained. This means that court proceedings to either forfeit the sequestered properties or clear the names and titles of the petitioners must be filed as soon as possible.

This case is a good example of disregard or avoidance of this requirement. With the kind of evidence which the PCGG professes to possess, the forfeiture case could have been filed simultaneously with the issuance of sequestration orders or shortly thereafter.

And yet, the records show that the PCGG appears to concentrate more on the means rather than the ends, in running the BASECO, taking over the board of directors and management, getting rid of security guards, disposing of scrap, entering into new contracts and otherwise behaving as if it were already the owner. At this late date and with all the evidence PCGG claims to have, no court case has been filed.

Among the interesting items elicited during the oral arguments or found in the records of this petition are:

(1) Upon sequestering BASECO, some PCGG personnel lost no time in digging up paved premises with jack hammers in a frantic search for buried gold bars.

(2) Two top PCGG volunteers charged each other with stealing properties under their custody. The PCGG had to step in, dismiss the erring representatives, and replace them with new ones.

(3) The petitioner claims that the lower bid of a rock quarry operator was accepted even as a higher and more favorable bid was offered. When the questionable deal was brought to our attention, the awardee allegedly raised his bid to the level of the better offer. The successful bidder later submitted a comment in intervention explaining his side. Whoever is telling the truth, the fact remains that multi-million peso contracts involving the operations of sequestered companies should be entered into under the supervision of a court, not freely executed by the PCGG even when the petitioner-owners question the propriety and integrity of those transactions.

(4) The PCGG replaced eight out of eleven members of the BASECO board of directors with its own men. Upon taking over full control of the corporation, the newly installed board reversed the efforts of the former owners to protect their interests. The new board fired the BASECO lawyers who instituted the instant petition. It then filed a motion to withdraw this very same petition we are now deciding. In other words, the "new owners" did not want the Supreme Court to continue poking into the legality of their acts. They moved to abort the petition filed with us.

Any suspicion of impropriety would have been avoided if the PCGG had filed the required court proceedings and exercised its acts of management and control under court supervision. The requirements of due process would have been met.

One other matter I wish to discuss in this separate opinion is PCGG's selection of eight out of the eleven members of the BASECO board of directors.

The election of the members of a board of directors is distinctly and unqualifiedly an act of ownership. When stockholders of a corporation elect or remove members of a board of directors, they exercise their right of ownership in the company they own, By no stretch of the imagination can the revamp of a board of directors be considered as a mere act of conserving assets or preventing the dissipation of sequestered assets. The broad powers of a sequestrator are more than enough to protect sequestered assets. There is no need and no legal basis to reach out further and exercise ultimate acts of ownership.

Under the powers which PCGG has assumed and wields, it can amend the articles and by-laws of a sequestered corporation, decrease the capital stock, or sell substantially all corporate assets without any effective check from the owners not yet divested of their titles or from a court of justice. The PCGG is tasked to preserve assets but when it exercises the acts of an owner, it could also very well destroy. I hope that the case of the Philippine Daily Express, a major newspaper closed by the PCGG, is an isolated example. Otherwise, banks, merchandizing firms, investment institutions, and other sensitive businesses will find themselves in a similar quandary.

I join the PCGG and all right thinking Filipinos in condemning the totalitarian acts which made possible the accumulation of ill-gotten wealth. I, however, dissent when authoritarian and ultra vires methods are used to recover that stolen wealth. One wrong cannot be corrected by the employment of another wrong.

I, therefore, vote to grant the petition. Pending the filing of an appropriate case in court, the PCGG must be enjoined from exercising any and all acts of ownership over the sequestered firm.

Bidin and Cortes, JJ., concur and dissent.

CRUZ, J., dissenting:

My brother Narvasa has written a truly outstanding decision that bespeaks a penetrating and analytical mind and a masterly grasp of the serious problem we are asked to resolve. He deserves and I offer him my sincere admiration.

There is no question that all lawful efforts should be taken to recover the tremendous wealth plundered from the people by the past regime in the most execrable thievery perpetrated in all history. No right-thinking Filipino can quarrel with this necessary objective, and on this score I am happy to concur with the ponencia.

But for all my full agreement with the basic thesis of the majority, I regret I find myself unable to support its conclusions in favor Of the respondent PCGG. My view is that these conclusions clash with the implacable principles of the free society. foremost among which is due process. This demands our reverent regard.

Due process protects the life, liberty and property of every person, whoever he may be. Even the most despicable criminal is entitled to this protection. Granting this distinction to Marcos, we are still not justified in depriving him of this guaranty on the mere justification that he appears to own the BASECO shares.

I am convinced and so submit that the PCGG cannot at this time take over the BASECO without any court order and exercise thereover acts of ownership without court supervision. Voting the shares is an act of ownership. Reorganizing the board of directors is an act of ownership. Such acts are clearly unauthorized. As the majority opinion itself stresses, the PCGG is merely an administrator whose authority is limited to preventing the sequestered properties from being dissipated or clandestinely transferred.

The court action prescribed in the Constitution is not inadequate and is available to the PCGG. The advantage of this remedy is that, unlike the ad libitum measures now being take it is authorized and at the same time also limitedby the fundamental law. I see no reason why it should not now be employed by the PCGG, to remove all doubts regarding the legality of its acts and all suspicions concerning its motives.

Separate Opinions

TEEHANKEE, CJ., concurring:

I fully concur with the masterly opinion of Mr. Justice Narvasa. In the process of disposing of the issues raised by petitioner BASECO in the case at bar, it comprehensively discusses the laws and principles governing the Presidential Commission on Good Government (PCGG) and defines the scope and extent of its powers in the discharge of its monumental task of recovering the "ill-gotten wealth, accumulated by former President Ferdinand E. Marcos, his immediate family, relatives, subordinates and close associates, whether located in the Philippines or abroad (and) business enterprises and entities owned or controlled by them during I . . .(the Marcos) administration, directly or through nominees, by taking undue advantage of their public office and/or using their powers, authority, influence, connections or relationship." 1

The Court is unanimous insofar as the judgment at bar upholds the imperative need of recovering the ill-gotten properties amassed by the previous regime, which "deserves the fullest support of the judiciary and all sectors of society." 2 To quote the pungent

language of Mr. Justice Cruz, "(T)here is no question that all lawful efforts should be taken to recover the tremendous wealth plundered from the people by the past regime in the most execrable thievery perpetrated in all history. No right-thinking Filipino can quarrel with this necessary objective, and on this score I am happy to concur with the ponencia." 3

The Court is likewise unanimous in its judgment dismissing the petition to declare unconstitutional and void Executive Orders Nos. 1 and 2 to annul the sequestration order of April 14, 1986. For indeed, the 1987 Constitution overwhelmingly adopted by the people at the February 2, 1987 plebiscite expressly recognized in Article XVIII, section 26 thereof 4 the vital functions of respondent PCGG to achieve the mandate of the people to recover such ill-gotten wealth and properties as ordained by Proclamation No. 3 promulgated on March 25, 1986.

The Court is likewise unanimous as to the general rule set forth in the main opinion that "the PCGG cannot exercise acts of dominion over property sequestered, frozen or provisionally taken over" and "(T)he PCGG may thus exercise only powers of administration over the property or business sequestered or provisionally taken over, much like a court-appointed receiver, such as to bring and defend actions in its own name; receive rents; collect debts due; pay outstanding debts; and generally do such other acts and things as may be necessary to fulfill its mission as conservator and administrator. In this context, it may in addition enjoin or restrain any actual or threatened commission of acts by any person or entity that may render moot and academic, or frustrate or otherwise make ineffectual its efforts to carry out its task; punish for direct or indirect contempt in accordance with the Rules of Court; and seek and secure the assistance of any office, agency or instrumentality of the government. In the case of sequestered businesses generally (i.e. going concerns, business in current operation), as in the case of sequestered objects, its essential role, as already discussed, is that of conservator, caretaker, 'watchdog' or overseer. It is not that of manager, or innovator, much less an owner." 5

Now, the case at bar involves one where the third and most encompassing and rarely invoked of provisional remedies, 6 the provisional takeover of the Baseco properties and business operations has been availed of by the PCGG, simply because the evidence on hand, not only prima facie but convincingly with substantial and documentary evidence of record establishes that the corporation known as petitioner BASECO "was owned or controlled by President Marcos 'during his administration, through nominees, by taking undue advantage of his public office and/or using his powers, authority, or influence;' and that it was by and through the same means, that BASECO had taken over the business and/or assets of the [government-owned] National Shipyard and Engineering Co., Inc., and other government-owned or controlled entities." The documentary evidence shows that petitioner BASECO (read Ferdinand E. Marcos) in successive transactions all directed and approved by the former President-in an orgy of what according to the PCGG's then chairman, Jovito Salonga, in his statement before the 1986 Constitutional Commission, "Mr. Ople once called 'organized pillage' "-gobbled up the government corporation National Shipyard & Steel Corporation NASSCO its shipyard at Mariveles, 300 hectares of land in Mariveles

from the Export Processing Zone Authority, Engineer Island itself in Manila and its complex of equipment and facilities including structures, buildings, shops, quarters, houses, plants and expendable or semi-expendable assets and obtained huge loans of $19,000,000.00 from the last available Japanese war damage fund, P30,000,000.00 from the NDC and P12,400,000.00 from the GSIS. The sordid details are set forth in detail in Paragraphs 1 1 to 20 of the main opinion. They include confidential reports from then BASECO president Hilario M. Ruiz and the deposed President's brother-in- law, then Captain (later Commodore) Alfredo Romualdez, who although not on record as an officer or stockholder of BASECO reported directly to the deposed President on its affairs and made the recommendations, all approved by the latter, for the gobbling up by BASECO of all the choice government assets and properties.

All this evidence has been placed of record in the case at bar. And petitioner has had all the time and opportunity to refute it, submittals to the contrary notwithstanding, but has dismally failed to do so. To cite one glaring instance: as stated in the main opinion, the evidence submitted to this Court by the Solicitor General "proves that President Marcos not only exercised control over BASECO, but also that he actually owns well nigh one hundred percent of its outstanding stock." It cites the fact that three corporations, evidently front or dummy corporations, among twenty shareholders, in name, of BASECO, namely Metro Bay Drydock, Fidelity Management, Inc. and Trident Management hold 209,664 shares or 95.82%, of BASECO's outstanding stock. Now, the Solicitor General points out further than BASECO certificates "corresponding to more than ninety-five percent (95%) of all the outstanding shares of stock of BASECO, endorsed in blank, together with deeds of assignment of practically all the outstanding shares of stock of the three (3) corporations above mentioned (which hold 95.82% of all BASECO stock), signed by the owners thereof although not notarized" 7 were found in Malacañang shortly after the deposed President's sudden flight from the country on the night of February 25, 1986. Thus, the main opinion's unavoidable conclusion that "(W)hile the petitioner's counsel was quick to dispute this asserted fact, assuring this Court that the BASECO stockholders were still in possession of their respective stock certificates and had 'never endorsed * * * them in blank or to anyone else,' that denial is exposed by his own prior and subsequent recorded statements as a mere gesture of defiance rattler than a verifiable factual declaration . . . . Under the circumstances, the Court can only conclude that he could not get the originals from the stockholders for the simple reason that as the Solicitor General maintains, said stockholders in truth no longer have them in their possession, these having already been assigned in blank to President Marcos." 8

With this strong unrebutted evidence of record in this Court, Justice Melencio-Herrera, joined by Justice Feliciano, expressly concurs with the main opinion upholding the commission's take-over, stating that "(I) have no objection to according the right to vote sequestered stock in case of a takeover of business actually belonging to the government or whose capitalization comes from public funds but which, somehow, landed in the hands of private persons, as in the case of BASECO." They merely qualify their concurrence with the injunction that such takeovers be exercised with "caution and prudence" pending the determination of "the true and real ownership" of the sequestered shares. Suffice it to say in this regard that each case has to be judged

from the pertinent facts and circumstances and that the main opinion emphasizes sufficiently that it is only in the special instances specified in the governing laws grounded on the superior national interest and welfare and the practical necessity of preserving the property and preventing its loss or disposition that the provisional remedy of provisional take-over is exercised.

Here, according to the dissenting opinion, "the PCGG concludes that sequestered property is ill-gotten wealth and proceeds to exercise acts of ownership over said properties . . . . and adds that "the fact of ownership must be established in a proper suit before a court of justice"-which this Court has preempted with its finding that "in the context of the proceedings at bar, the actuality of the control by President Marcos of BASECO has been sufficiently shown."

But BASECO who has instituted this action to set aside the sequestration and take-over orders of respondent commission has chosen to raise these very issues in this Court. We cannot ostrich-like hide our head in the sand and say that it has not yet been established in the proper court that what the PCGG has taken over here aregovernment properties, as a matter of record and public notice and knowledge, like the NASSCO, its Engineer Island and Mariveles Shipyard and entire complex, which have been pillaged and placed in the name of the dummy or front company named BASECO but from all the documentary evidence of record shown by its street certificates all found in Malacanang should in reality read "Ferdinand E. Marcos" and/or his brother-in-law. Such take-over can in no way be termed "lawless usurpation," for the government does not commit any act of usurpation in taking over its own properties that have been channeled to dummies, who are called upon to prove in the proper court action what they have failed to do in this Court, that they have lawfully acquired ownership of said properties, contrary to the documentary evidence of record, which they must likewise explain away. This Court, in the exercise of its jurisdiction on certiorari and as the guardian of the Constitution and protector of the people's basic constitutional rights, has entertained many petitions on the part of parties claiming to be adversely affected by sequestration and other orders of the PCGG, This Court set the criterion that such orders should issue only upon showing of a prima facie case, which criterion was adopted in the 1987 Constitution. The Court's judgment cannot be faulted if much more than a prima facie has been shown in this case, which the faceless figures claiming to represent BASECO have failed to refute or disprove despite all the opportunity to do so.

The record plainly shows that petitioner BASECO which is but a mere shell to mask its real owner did not and could not explain how and why they received such favored and preferred treatment with tailored Letters of Instruction and handwritten personal approval of the deposed President that handed it on a silver platter the whole complex and properties of NASSCO and Engineer Island and the Mariveles Shipyard.

It certainly would be the height of absurdity and helplessness if this government could not here and now take over the possession and custody of its very own properties and assets that had been stolen from it and which it had pledged to recover for the benefit

and in the greater interest of the Filipino people, whom the past regime had saddled with a huge $27-billion foreign debt that has since ballooned to $28.5-billion.

Thus, the main opinion correctly concludes that "(I)n the light of the affirmative showing by the Government that,prima facie at least, the stockholders and directors of BASECO as of April, 1986 were mere 'dummies,' nominees or alter egos of President Marcos; at any rate, that they are no longer owners of any shares of stock in the corporation, the conclusion cannot be avoided that said stockholders and directors have no basis and no standing whatever to cause the filing and prosecution of the instant proceeding; and to grant relief to BASECO, as prayed for in the petition, would in effect be to restore the assets, properties and business sequestered and taken over by the PCGG to persons who are 'dummies' nominees or alter egos of the former President." 9

And Justice Padilla in his separate concurrence "called a spade a spade," citing the street certificates representing 95 % of BASECO's outstanding stock found in Malacañang after Mr. Marcos' hasty flight in February, 1986 and the extent of the control he exercised over policy decisions affecting BASECO and concluding that "Consequently, even ahead of judicial proceedings, I am convinced that the Republic of the Philippines, thru the PCGG, has the right and even the duty to take over full control and supervision of BASECO."

Indeed, the provisional remedies available to respondent commission are rooted in the police power of the State, the most pervasive and the least limitable of the powers of Government since it represents "the power of sovereignty, the power to govern men and things within the limits of its domain." 10 Police power has been defined as the power inherent in the State "to prescribe regulations to promote the health, morals, education, good order or safety, and general welfare of the people." 11 Police power rests upon public necessity and upon the right of the State and of the public to self-protection. 12 "Salus populi suprema est lex" or "the welfare of the people is the Supreme Law." 13 For this reason, it is co-extensive with the necessities of the case and the safeguards of public interest. 14 Its scope expands and contracts with changing needs. 15 "It may be said in a general way that the police power extends to all the great public needs. It may be put forth in aid of what is sanctioned by usage, or held by the prevailing morality or strong and preponderant opinion to be greatly and immediately necessary to the public welfare." 16 That the public interest or the general welfare is subserved by sequestering the purported ill-gotten assets and properties and taking over stolen properties of the government channeled to dummy or front companies is stating the obvious. The recovery of these ill-gotten assets and properties would greatly aid our financially crippled government and hasten our national economic recovery, not to mention the fact that they rightfully belong to the people. While as a measure of self-protection, if, in the interest of general welfare, police power may be exercised to protect citizens and their businesses in financial and economic matters, it may similarly be exercised to protect the government itself against potential financial loss and the possible disruption of governmental functions. 17 Police power as the power of self-protection on the part of the community bears the same relation to the community that the principle of self-defense bears to the individual. 18 Truly, it may be said that even more than self- defense, the recovery of ill-gotten wealth and of the

government's own properties involves the material and moral survival of the nation, marked as the past regime was by the obliteration of any line between private funds and the public treasury and abuse of unlimited power and elimination of any accountability in public office, as the evidence of record amply shows.

It should be mentioned that the tracking down of the deposed President's actual ownership of the BASECO shares was fortuitously facilitated by the recovery of the street certificates in Malacañang after his hasty flight from the country last year. This is not generally the case.

For example, in the ongoing case filed by the government to recover from the Marcoses valuable real estate holdings in New York and the Lindenmere estate in Long Island, former PCGG chairman Jovito Salonga has revealed that their names "do not appear on any title to the property. Every building in New York is titled in the name of a Netherlands Antilles corporation, which in turn is purportedly owned by three Panamanian corporations, with bearer shares. This means that the shares of this corporation can change hands any time, since they can be transferred, under the law of Panama, without previous registration on the books of the corporation. One of the first documents that we discovered shortly after the February revolution was a declaration of trust handwritten by Mr. Joseph Bernstein on April 4, 1982 on a Manila Peninsula Hotel stationery stating that he would act as a trustee for the benefit of President Ferdinand Marcos and would act solely pursuant to the instructions of Marcos with respect to the Crown Building in New York." 19

This is just to stress the difficulties of the tasks confronting respondent PCGG, which nevertheless has so far commendably produced unprecedented positive results. As stated by then chairman Salonga:

PCGG has turned over to the Office of the President around 2 billion pesos in cash, free of any lien. It has also delivered to the President-as a result of a compromise settlement-around 200 land titles involving vast tracks of land in Metro Manila, Rizal, Laguna, Cavite, and Bataan, worth several billion pesos. These lands are now available for low-cost housing projects for the benefit of the poor and the dispossessed amongst our people.

In the legal custody of the Commission as a result of sequestration proceedings, are expensive jewelry amounting to 310 million pesos, 42 aircraft amounting to 718 million pesos, vessels amounting to 748 million pesos, and shares of stock amounting to around 215 million pesos.

But, as I said, the bulk of the ill-gotten wealth is located abroad, not in the Philippines. Through the efforts of the PCGG, we have caused the freezing or sequestration of properties, deposits, and securities probably worth many billions of pesos in New York, New

Jersey, Hawaii, California, and more importantly-in Switzerland. Due to favorable developments in Switzerland, we may expect, according to our Swiss lawyers, the first deliveries of the Swiss deposits in the foreseeable future, perhaps in less than a year's time. In New York, PCGG through its lawyers who render their services free of cost to the Philippine government, succeeded in getting injunctive relief against Mr. and Mrs. Marcos and their nominees and agents. There is now an offer for settlement that is being studied and explored by our lawyers there.

If we succeed in recovering not an (since this is impossible) but a substantial part of the ill-gotten wealth here and in various countries of the world-something the revolutionary governments of China, Ethiopia, Iran and Nicaragua were not able to accomplish at all with respect to properties outside their territorial boundaries-the Presidential Commission on Good Government, which has undertaken the difficult and thankless task of trying to undo what had been done so secretly and effectively in the last twenty years, shall have more than justified its existence. 20

The misdeeds of some PCGG volunteers and personnel cited in the dissenting opinion do not detract at an from the PCGG's accomplishments, just as no one would do away with newspapers because of some undesirable elements. The point is that all such misdeeds have been subject to public exposure and as stated in the dissent itself, the erring PCGG representatives have been forthwith dismissed and replaced.

The magnitude of the tasks that confront respondent PCGG with its limited resources and staff support and volunteers should be appreciated, together with the assistance that foreign governments and lawyers have spontaneously given the commission.

A word about the PCGG's firing of the BASECO lawyers who filed the present petition challenging its questioned orders, filing a motion to withdraw the petition, after it had put in eight of its representatives as directors of the BASECO board of directors. This was entirely proper and in accordance with the Court's Resolution of October 28, 1986, which denied BASECO's motion for the issuance of a restraining order against such take-over and declared that "the government can, through its designated directors, properly exercise control and management over what appear to be properties and assets owned and belonging to the government itself and over which the persons who appear in this case on behalf of BASECO have failed to show any eight or even any shareholding in said corporation." In other words, these dummies or fronts cannot seek to question the government's right to recover the very properties and assets that have been stolen from it by using the very same stolen properties and funds derived therefrom. If they wish to pursue their own empty claim, they must do it on their own, after first establishing that they indeed have a lawful right and/or shareholding in BASECO.

Under the 1987 Constitution, the PCGG is called upon to file the judicial proceedings for forfeiture and recovery of the sequestered or frozen properties covered by its orders issued before the ratification of the Constitution on February 2, 1987, within six months from such ratification, or by August 2, 1987. (For those orders issued after such ratification, the judicial action or proceeding must be commenced within six months from the issuance thereof.) The PCGG has not really been given much time, considering the magnitude of its tasks. It is entitled to some forbearance, in availing of the maximum time granted it for the filing of the corresponding judicial action with the Sandiganbayan.

PADILLA, J., concurring:

The majority opinion penned by Mr. Justice Narvasa maintains and upholds the valid distinction between acts of conservation and preservation of assets and acts of ownership. Sequestration, freeze and temporary take-over encompass the first type of acts. They do not include the second type of acts which are reserved only to the rightful owner of the assets or business sequestered or temporarily taken over.

The removal and election of members of the board of directors of a corporate enterprise is, to me, a clear act of ownership on the part of the shareholders of the corporation. Under ordinary circumstances, I would deny the PCGG the authority to change and elect the members of BASECO's Board of Directors. However, under the facts as disclosed by the records, it appears that the certificates of stock representing about ninety-five (95%) per cent of the total ownership in BASECO's capital stock were found endorsed in blank in Malacanang (presumably in the possession and control of Mr. Marcos) at the time he and his family fled in February 1986. This circumstance let alone the extent of the control Mr. Marcos exercised, while in power, over policy decisions affecting BASECO, entirely satisfies my mind that BASECO was owned and controlled by Mr. Marcos. This is calling a spade a spade. I am also entirely satisfied in my mind that Mr. Marcos could not have acquired the ownership of BASECO out of his lawfully-gotten wealth.

Consequently, even ahead of judicial proceedings, I am convinced that the Republic of the Philippines, through the PCGG, has the right and even the duty to take-over full control and supervision of BASECO.

MELENCIO-HERRERA, J., concurring:

I would like to qualify my concurrence in so far as the voting of sequestered stork is concerned.

The voting of sequestered stock is, to my mind, an exercise of an attribute of ownership. It goes beyond the purpose of a writ of sequestration, which is essentially to preserve the property in litigation (Article 2005, Civil Code). Sequestration is in the nature of a judicial deposit (ibid.).

I have no objection to according the right to vote sequestered stock in case of a take-over of business actually belonging to the government or whose capitalization comes from public funds but which, somehow, landed in the hands of private persons, as in the case of BASECO. To my mind, however, caution and prudence should be exercised in the case of sequestered shares of an on-going private business enterprise, specially the sensitive ones, since the true and real ownership of said shares is yet to be determined and proven more conclusively by the Courts.

It would be more in keeping with legal norms if forfeiture proceedings provided for under Republic Act No. 1379 be filed in Court and the PCGG seek judicial appointment as a receiver or administrator, in which case, it would be empowered to vote sequestered shares under its custody (Section 55, Corporation Code). Thereby, the assets in litigation are brought within the Court's jurisdiction and the presence of an impartial Judge, as a requisite of due process, is assured. For, even in its historical context, sequestration is a judicial matter that is best handled by the Courts.

I consider it imperative that sequestration measures be buttressed by judicial proceedings the soonest possible in order to settle the matter of ownership of sequestered shares and to determine whether or not they are legally owned by the stockholders of record or are "ill-gotten wealth" subject to forfeiture in favor of the State. Sequestration alone, being actually an ancillary remedy to a principal action, should not be made the basis for the exercise of acts of dominion for an indefinite period of time.

Sequestration is an extraordinary, harsh, and severe remedy. It should be confined to its lawful parameters and exercised, with due regard, in the words of its enabling laws, to the requirements of fairness, due process (Executive Order No. 14, palay 7, 1986), and Justice (Executive Order No. 2, March 12, 1986).

Feliciano, J., concur.

GUTIERREZ, JR., J., concurring and dissenting:

I concur, in part, in the erudite opinion penned for the Court by my distinguished colleague Mr. Justice Andres R. Narvasa. I agree insofar as it states the principles which must govern PCGG sequestrations and emphasizes the limitations in the exercise of its broad grant of powers.

I concur in the general propositions embodied in or implied from the majority opinion, among them:

(1) The efforts of Government to recover ill-gotten properties amassed by the previous regime deserve the fullest support of the judiciary and all sectors of society. I believe, however, that a nation professing adherence to the rule of law and fealty to democratic

processes must adopt ways and means which are always within the bounds of lawfully granted authority and which meet the tests of due process and other Bill of Rights protections.

(2) Sequestration is intended to prevent the destruction, concealment, or dissipation of ill-gotten wealth. The object is conservation and preservation. Any exercise of power beyond these objectives is lawless usurpation.

(3) The PCGG exercises only such powers as are granted by law and not proscribed by the Constitution. The remedies it enforces are provisional and contingent. Whether or not sequestered property is indeed ill-gotten must be-determined by a court of justice. The PCGG has absolutely no power to divest title over sequestered property or to act as if its findings are final.

(4) The PCGG does not own sequestered property. It cannot and must not exercise acts of ownership. To quote the majority opinion, "one thing is certain ..., the PCGG cannot exercise acts of dominion."

(5) The provisional takeover in a sequestration should not be indefinitely maintained. It is the duty of the PCGG to immediately file appropriate criminal or civil cases once the evidence has been gathered.

It is the difference between what the Court says and what the PCGG does which constrains me to dissent. Even as the Court emphasizes principles of due process and fair play, it has unfortunately validated ultra vires acts violative of those very same principles. While we stress the rules which must govern the PCGG in the exercise of its powers, the Court has failed to stop or check acts which go beyond the power of sequestration given by law to the PCGG.

We are all agreed in the Court that the PCGG is not a judge. It is an investigator and prosecutor. Sequestration is only a preliminary or ancillary remedy. There must be a principal and independent suit filed in court to establish the true ownership of sequestered properties. The factual premise that a sequestered property was ill-gotten by former President Marcos, his family, relatives, subordinates, and close associates cannot be assumed. The fact of ownership must be established in a proper suit before a court of justice.

But what has the Court, in effect, ruled?

Pages 21 to 33 of the majority opinion are dedicated to a statement of facts which conclusively and indubitably shows that BASECO is owned by President Marcos-and that it was acquired and vastly enlarged by the former President's taking undue advantage of his public office and using his powers, authority, or influence.

There has been no court hearing, no trial, and no presentation of evidence. All that we have is what the PCGG has given us. The petitioner has not even been allowed to see the evidence, much less refute it.

What the PCGG has gathered in the course of its seizures and investigations may be gospel truth. However, that truth must be properly established in a trial court, not unilaterally determined by the PCGG or declared by this Court in a special proceeding which only asks us to set aside or enjoin an illegal exercise of power. After this decision, there is nothing more for a trial court to ascertain. Certainly, no lower court would dare to arrive at findings contrary to this Court's conclusions, no matter how insistent we may be in labelling such conclusions as "prima facie." To me, this is the basic flaw in PCGG procedures that the Court is, today, unwittingly legitimating. Even before the institution of a court case, the PCGG concludes that sequestered property is ill-gotten wealth and proceeds to exercise acts of ownership over said properties. It treats sequestered property as its own even before the oppositor-owners have been divested of their titles.

The Court declares that a state of seizure is not to be indefinitely maintained. This means that court proceedings to either forfeit the sequestered properties or clear the names and titles of the petitioners must be filed as soon as possible.

This case is a good example of disregard or avoidance of this requirement. With the kind of evidence which the PCGG professes to possess, the forfeiture case could have been filed simultaneously with the issuance of sequestration orders or shortly thereafter.

And yet, the records show that the PCGG appears to concentrate more on the means rather than the ends, in running the BASECO, taking over the board of directors and management, getting rid of security guards, disposing of scrap, entering into new contracts and otherwise behaving as if it were already the owner. At this late date and with all the evidence PCGG claims to have, no court case has been filed.

Among the interesting items elicited during the oral arguments or found in the records of this petition are:

(1) Upon sequestering BASECO, some PCGG personnel lost no time in digging up paved premises with jack hammers in a frantic search for buried gold bars.

(2) Two top PCGG volunteers charged each other with stealing properties under their custody. The PCGG had to step in, dismiss the erring representatives, and replace them with new ones.

(3) The petitioner claims that the lower bid of a rock quarry operator was accepted even as a higher and more favorable bid was offered. When the questionable deal was brought to our attention, the awardee allegedly raised his bid to the level of the better offer. The successful bidder later submitted a comment in intervention explaining his

side. Whoever is telling the truth, the fact remains that multi-million peso contracts involving the operations of sequestered companies should be entered into under the supervision of a court, not freely executed by the PCGG even when the petitioner-owners question the propriety and integrity of those transactions.

(4) The PCGG replaced eight out of eleven members of the BASECO board of directors with its own men. Upon taking over full control of the corporation, the newly installed board reversed the efforts of the former owners to protect their interests. The new board fired the BASECO lawyers who instituted the instant petition. It then filed a motion to withdraw this very same petition we are now deciding. In other words, the "new owners" did not want the Supreme Court to continue poking into the legality of their acts. They moved to abort the petition filed with us.

Any suspicion of impropriety would have been avoided if the PCGG had filed the required court proceedings and exercised its acts of management and control under court supervision. The requirements of due process would have been met.

One other matter I wish to discuss in this separate opinion is PCGG's selection of eight out of the eleven members of the BASECO board of directors.

The election of the members of a board of directors is distinctly and unqualifiedly an act of ownership. When stockholders of a corporation elect or remove members of a board of directors, they exercise their right of ownership in the company they own, By no stretch of the imagination can the revamp of a board of directors be considered as a mere act of conserving assets or preventing the dissipation of sequestered assets. The broad powers of a sequestrator are more than enough to protect sequestered assets. There is no need and no legal basis to reach out further and exercise ultimate acts of ownership.

Under the powers which PCGG has assumed and wields, it can amend the articles and by-laws of a sequestered corporation, decrease the capital stock, or sell substantially all corporate assets without any effective check from the owners not yet divested of their titles or from a court of justice. The PCGG is tasked to preserve assets but when it exercises the acts of an owner, it could also very well destroy. I hope that the case of the Philippine Daily Express, a major newspaper closed by the PCGG, is an isolated example. Otherwise, banks, merchandizing firms, investment institutions, and other sensitive businesses will find themselves in a similar quandary.

I join the PCGG and all right thinking Filipinos in condemning the totalitarian acts which made possible the accumulation of ill-gotten wealth. I, however, dissent when authoritarian and ultra vires methods are used to recover that stolen wealth. One wrong cannot be corrected by the employment of another wrong.

I, therefore, vote to grant the petition. Pending the filing of an appropriate case in court, the PCGG must be enjoined from exercising any and all acts of ownership over the sequestered firm.

Bidin and Cortes, JJ., concur and dissent.

CRUZ, J., dissenting:

My brother Narvasa has written a truly outstanding decision that bespeaks a penetrating and analytical mind and a masterly grasp of the serious problem we are asked to resolve. He deserves and I offer him my sincere admiration.

There is no question that all lawful efforts should be taken to recover the tremendous wealth plundered from the people by the past regime in the most execrable thievery perpetrated in all history. No right-thinking Filipino can quarrel with this necessary objective, and on this score I am happy to concur with the ponencia.

But for all my full agreement with the basic thesis of the majority, I regret I find myself unable to support its conclusions in favor Of the respondent PCGG. My view is that these conclusions clash with the implacable principles of the free society. foremost among which is due process. This demands our reverent regard.

Due process protects the life, liberty and property of every person, whoever he may be. Even the most despicable criminal is entitled to this protection. Granting this distinction to Marcos, we are still not justified in depriving him of this guaranty on the mere justification that he appears to own the BASECO shares.

I am convinced and so submit that the PCGG cannot at this time take over the BASECO without any court order and exercise thereover acts of ownership without court supervision. Voting the shares is an act of ownership. Reorganizing the board of directors is an act of ownership. Such acts are clearly unauthorized. As the majority opinion itself stresses, the PCGG is merely an administrator whose authority is limited to preventing the sequestered properties from being dissipated or clandestinely transferred.

The court action prescribed in the Constitution is not inadequate and is available to the PCGG. The advantage of this remedy is that, unlike the ad libitum measures now being take it is authorized and at the same time also limitedby the fundamental law. I see no reason why it should not now be employed by the PCGG, to remove all doubts regarding the legality of its acts and all suspicions concerning its motives.

Corporate Social Responsibility

EN BANC

[G.R. No. 126297 : February 02, 2010]

PROFESSIONAL SERVICES, INC., PETITIONER, VS. THE COURT OF APPEALS

AND NATIVIDAD AND ENRIQUE AGANA, RESPONDENTS.

[G.R. NO. 126467]

NATIVIDAD [SUBSTITUTED BY HER CHILDREN MARCELINO AGANA III,

ENRIQUE AGANA, JR., EMMA AGANA-ANDAYA, JESUS AGANA AND RAYMUND

AGANA] AND ENRIQUE AGANA, PETITIONERS, VS. THE COURT OF APPEALS

AND JUAN FUENTES, RESPONDENTS.

[G.R. NO. 127590]

MIGUEL AMPIL, PETITIONER, VS. NATIVIDAD AND ENRIQUE AGANA,

RESPONDENTS.

R E S O L U T I O N

CORONA, J.:

With prior leave of court,1 petitioner Professional Services, Inc. (PSI) filed a second

motion for reconsideration2 urging referral thereof to the Court en banc and seeking

modification of the decision dated January 31, 2007 and resolution dated February 11,

2008 which affirmed its vicarious and direct liability for damages to respondents

Enrique Agana and the heirs of Natividad Agana (Aganas).

Manila Medical Services, Inc. (MMSI),3 Asian Hospital, Inc. (AHI),4 and Private Hospital

Association of the Philippines (PHAP)5 all sought to intervene in these cases invoking

the common ground that, unless modified, the assailed decision and resolution will

jeopardize the financial viability of private hospitals and jack up the cost of health care.

The Special First Division of the Court granted the motions for intervention of MMSI,

AHI and PHAP (hereafter intervenors),6 and referred en consulta to the Court en

banc the motion for prior leave of court and the second motion for reconsideration of

PSI.7

Due to paramount public interest, the Court en banc accepted the referral8 and heard

the parties on oral arguments on one particular issue: whether a hospital may be held

liable for the negligence of physicians-consultants allowed to practice in its premises.9

To recall the salient facts, PSI, together with Dr. Miguel Ampil (Dr. Ampil) and Dr. Juan

Fuentes (Dr. Fuentes), was impleaded by Enrique Agana and Natividad Agana (later

substituted by her heirs), in a complaint10 for damages filed in the Regional Trial Court

(RTC) of Quezon City, Branch 96, for the injuries suffered by Natividad when Dr. Ampil

and Dr. Fuentes neglected to remove from her body two gauzes11 which were used in

the surgery they performed on her on April 11, 1984 at the Medical City General

Hospital. PSI was impleaded as owner, operator and manager of the hospital.

In a decision12 dated March 17, 1993, the RTC held PSI solidarily liable with Dr. Ampil

and Dr. Fuentes for damages.13 On appeal, the Court of Appeals (CA), absolved Dr.

Fuentes but affirmed the liability of Dr. Ampil and PSI, subject to the right of PSI to

claim reimbursement from Dr. Ampil.14

On petition for review, this Court, in its January 31, 2007 decision, affirmed the CA

decision.15 PSI filed a motion for reconsideration16 but the Court denied it in a

resolution dated February 11, 2008.17

The Court premised the direct liability of PSI to the Aganas on the following facts and

law:

First, there existed between PSI and Dr. Ampil an employer-employee relationship as

contemplated in the December 29, 1999 decision in Ramos v. Court of Appeals18 that

"for purposes of allocating responsibility in medical negligence cases, an employer-

employee relationship exists between hospitals and their consultants."19 Although the

Court in Ramos later issued a Resolution dated April 11, 200220 reversing its earlier

finding on the existence of an employment relationship between hospital and doctor, a

similar reversal was not warranted in the present case because the defense raised by

PSI consisted of a mere general denial of control or responsibility over the actions of

Dr. Ampil.21

Second, by accrediting Dr. Ampil and advertising his qualifications, PSI created the

public impression that he was its agent.22 Enrique testified that it was on account of Dr.

Ampil's accreditation with PSI that he conferred with said doctor about his wife's

(Natividad's) condition.23 After his meeting with Dr. Ampil, Enrique asked Natividad to

personally consult Dr. Ampil.24 In effect, when Enrigue and Natividad engaged the

services of Dr. Ampil, at the back of their minds was that the latter was a staff member

of a prestigious hospital. Thus, under the doctrine of apparent authority applied

in Nogales, et al. v. Capitol Medical Center, et al.,25 PSI was liable for the negligence of

Dr. Ampil.

Finally, as owner and operator of Medical City General Hospital, PSI was bound by its

duty to provide comprehensive medical services to Natividad Agana, to exercise

reasonable care to protect her from harm,26 to oversee or supervise all persons who

practiced medicine within its walls, and to take active steps in fixing any form of

negligence committed within its premises.27 PSI committed a serious breach of its

corporate duty when it failed to conduct an immediate investigation into the reported

missing gauzes.28

PSI is now asking this Court to reconsider the foregoing rulings for these reasons:

I

The declaration in the 31 January 2007 Decision vis-á-vis the 11 February 2009

Resolution that the ruling in Ramos vs. Court of Appeals (G.R. No. 134354, December

29, 1999) that "an employer-employee relations exists between hospital and their

consultants" stays should be set aside for being inconsistent with or contrary to the

import of the resolution granting the hospital's motion for reconsideration in Ramos vs.

Court of Appeals (G.R. No. 134354, April 11, 2002), which is applicable to PSI since

the Aganas failed to prove an employer-employee relationship between PSI and Dr.

Ampil and PSI proved that it has no control over Dr. Ampil. In fact, the trial court has

found that there is no employer-employee relationship in this case and that the doctor's

are independent contractors.

II

Respondents Aganas engaged Dr. Miguel Ampil as their doctor and did not primarily

and specifically look to the Medical City Hospital (PSI) for medical care and support;

otherwise stated, respondents Aganas did not select Medical City Hospital (PSI) to

provide medical care because of any apparent authority of Dr. Miguel Ampil as its

agent since the latter was chosen primarily and specifically based on his qualifications

and being friend and neighbor.

III

PSI cannot be liable under doctrine of corporate negligence since the proximate cause

of Mrs. Agana's injury was the negligence of Dr. Ampil, which is an element of the

principle of corporate negligence.29

In their respective memoranda, intervenors raise parallel arguments that the Court's

ruling on the existence of an employer-employee relationship between private hospitals

and consultants will force a drastic and complex alteration in the long-established and

currently prevailing relationships among patient, physician and hospital, with

burdensome operational and financial consequences and adverse effects on all three

parties.30

The Aganas comment that the arguments of PSI need no longer be entertained for

they have all been traversed in the assailed decision and resolution.31

After gathering its thoughts on the issues, this Court holds that PSI is liable to the

Aganas, not under the principle of respondeat superior for lack of evidence of an

employment relationship with Dr. Ampil but under the principle of ostensible agency for

the negligence of Dr. Ampil and, pro hac vice, under the principle of corporate

negligence for its failure to perform its duties as a hospital.

While in theory a hospital as a juridical entity cannot practice medicine,32 in reality it

utilizes doctors, surgeons and medical practitioners in the conduct of its business of

facilitating medical and surgical treatment.33 Within that reality, three legal relationships

crisscross: (1) between the hospital and the doctor practicing within its premises; (2)

between the hospital and the patient being treated or examined within its premises and

(3) between the patient and the doctor. The exact nature of each relationship

determines the basis and extent of the liability of the hospital for the negligence of the

doctor.

Where an employment relationship exists, the hospital may be held vicariously liable

under Article 217634 in relation to Article 218035 of the Civil Code or the principle

of respondeat superior. Even when no employment relationship exists but it is shown

that the hospital holds out to the patient that the doctor is its agent, the hospital may

still be vicariously liable under Article 2176 in relation to Article 143136 and Article

186937 of the Civil Code or the principle of apparent authority.38 Moreover, regardless

of its relationship with the doctor, the hospital may be held directly liable to the patient

for its own negligence or failure to follow established standard of conduct to which it

should conform as a corporation.39

This Court still employs the "control test" to determine the existence of an employer-

employee relationship between hospital and doctor. In Calamba Medical Center, Inc. v.

National Labor Relations Commission, et al.40 it held:

Under the "control test", an employment relationship exists between a physician and a

hospital if the hospital controls both the means and the details of the process by which

the physician is to accomplish his task.

xx xx xx

As priorly stated, private respondents maintained specific work-schedules, as

determined by petitioner through its medical director, which consisted of 24-hour shifts

totaling forty-eight hours each week and which were strictly to be observed under pain

of administrative sanctions.

That petitioner exercised control over respondents gains light from the

undisputed fact that in the emergency room, the operating room, or any

department or ward for that matter, respondents' work is monitored through its

nursing supervisors, charge nurses and orderlies. Without the approval or

consent of petitioner or its medical director, no operations can be undertaken in

those areas. For control test to apply, it is not essential for the employer to

actually supervise the performance of duties of the employee, it being enough

that it has the right to wield the power. (emphasis supplied)

Even in its December 29, 1999 decision41 and April 11, 2002 resolution42 in Ramos, the

Court found the control test decisive.

In the present case, it appears to have escaped the Court's attention that both the RTC

and the CA found no employment relationship between PSI and Dr. Ampil, and that the

Aganas did not question such finding. In its March 17, 1993 decision, the RTC

found "that defendant doctors were not employees of PSI in its hospital, they being

merely consultants without any employer-employee relationship and in the capacity of

independent contractors."43 The Aganas never questioned such finding.

PSI, Dr. Ampil and Dr. Fuentes appealed44 from the RTC decision but only on the

issues of negligence, agency and corporate liability. In its September 6, 1996 decision,

the CA mistakenly referred to PSI and Dr. Ampil as employer-employee, but it was

clear in its discussion on the matter that it viewed their relationship as one of mere

apparent agency.45

The Aganas appealed from the CA decision, but only to question the exoneration of Dr.

Fuentes.46 PSI also appealed from the CA decision, and it was then that the issue of

employment, though long settled, was unwittingly resurrected.

In fine, as there was no dispute over the RTC finding that PSI and Dr. Ampil had no

employer-employee relationship, such finding became final and conclusive even to this

Court.47 There was no reason for PSI to have raised it as an issue in its petition. Thus,

whatever discussion on the matter that may have ensued was purely academic.

Nonetheless, to allay the anxiety of the intervenors, the Court holds that, in this

particular instance, the concurrent finding of the RTC and the CA that PSI was not the

employer of Dr. Ampil is correct. Control as a determinative factor in testing the

employer-employee relationship between doctor and hospital under which the hospital

could be held vicariously liable to a patient in medical negligence cases is a requisite

fact to be established by preponderance of evidence. Here, there was insufficient

evidence that PSI exercised the power of control or wielded such power over the

means and the details of the specific process by which Dr. Ampil applied his skills in

the treatment of Natividad. Consequently, PSI cannot be held vicariously liable for the

negligence of Dr. Ampil under the principle of respondeat superior.

There is, however, ample evidence that the hospital (PSI) held out to the patient

(Natividad)48 that the doctor (Dr. Ampil) was its agent. Present are the two factors that

determine apparent authority: first, the hospital's implied manifestation to the patient

which led the latter to conclude that the doctor was the hospital's agent; and second,

the patient's reliance upon the conduct of the hospital and the doctor, consistent with

ordinary care and prudence.49

Enrique testified that on April 2, 1984, he consulted Dr. Ampil regarding the condition of

his wife; that after the meeting and as advised by Dr. Ampil, he "asked [his] wife to go

to Medical City to be examined by [Dr. Ampil]"; and that the next day, April 3, he told

his daughter to take her mother to Dr. Ampil.50 This timeline indicates that it was

Enrique who actually made the decision on whom Natividad should consult and where,

and that the latter merely acceded to it. It explains the testimony of Natividad that she

consulted Dr. Ampil at the instigation of her daughter.51

Moreover, when asked what impelled him to choose Dr. Ampil, Enrique testified:

Atty. Agcaoili

On that particular occasion, April 2, 1984, what was your reason for choosing Dr. Ampil

to contact with in connection with your wife's illness?

A. First, before that, I have known him to be a specialist on that part of the body as a

surgeon, second, I have known him to be a staff member of the Medical City which is

aprominent and known hospital. And third, because he is a neighbor, I expect more

than the usual medical service to be given to us, than his ordinary

patients.52 (emphasis supplied)

Clearly, the decision made by Enrique for Natividad to consult Dr. Ampil was

significantly influenced by the impression that Dr. Ampil was a staff member of Medical

City General Hospital, and that said hospital was well known and prominent. Enrique

looked upon Dr. Ampil not as independent of but as integrally related to Medical City.

PSI's acts tended to confirm and reinforce, rather than negate, Enrique's view. It is of

record that PSI required a "consent for hospital care"53 to be signed preparatory to the

surgery of Natividad. The form reads:

Permission is hereby given to the medical, nursing and laboratory staff of the Medical

City General Hospital to perform such diagnostic procedures and to administer such

medications and treatments as may be deemed necessary or advisable by

the physicians of this hospital for and during the confinement of xxx. (emphasis

supplied)

By such statement, PSI virtually reinforced the public impression that Dr. Ampil was a

physician of its hospital, rather than one independently practicing in it; that the

medications and treatments he prescribed were necessary and desirable; and that the

hospital staff was prepared to carry them out.

PSI pointed out in its memorandum that Dr. Ampil's hospital affiliation was not the

exclusive basis of the Aganas' decision to have Natividad treated in Medical City

General Hospital, meaning that, had Dr. Ampil been affiliated with another hospital, he

would still have been chosen by the Aganas as Natividad's surgeon.54

The Court cannot speculate on what could have been behind the Aganas' decision but

would rather adhere strictly to the fact that, under the circumstances at that time,

Enrique decided to consult Dr. Ampil for he believed him to be a staff member of a

prominent and known hospital. After his meeting with Dr. Ampil, Enrique advised his

wife Natividad to go to the Medical City General Hospital to be examined by said

doctor, and the hospital acted in a way that fortified Enrique's belief.

This Court must therefore maintain the ruling that PSI is vicariously liable for the

negligence of Dr. Ampil as its ostensible agent.

Moving on to the next issue, the Court notes that PSI made the following admission in

its Motion for Reconsideration:

51. Clearly, not being an agent or employee of petitioner PSI, PSI [sic] is not liable for

Dr. Ampil's acts during the operation. Considering further that Dr. Ampil was personally

engaged as a doctor by Mrs. Agana, it is incumbent upon Dr. Ampil, as "Captain of the

Ship", and as the Agana's doctor to advise her on what to do with her situation vis-á-vis

the two missing gauzes. In addition to noting the missing gauzes, regular check-

ups were made and no signs of complications were exhibited during her stay at

the hospital, which could have alerted petitioner PSI's hospital to render and

provide post-operation services to and tread on Dr. Ampil's role as the doctor of

Mrs. Agana. The absence of negligence of PSI from the patient's admission up to

her discharge is borne by the finding of facts in this case. Likewise evident

therefrom is the absence of any complaint from Mrs. Agana after her discharge

from the hospital which had she brought to the hospital's attention, could have

alerted petitioner PSI to act accordingly and bring the matter to Dr. Ampil's

attention. But this was not the case. Ms. Agana complained ONLY to Drs. Ampil

and Fuentes, not the hospital. How then could PSI possibly do something to fix

the negligence committed by Dr. Ampil when it was not informed about it at

all.55(emphasis supplied)

PSI reiterated its admission when it stated that had Natividad Agana "informed the

hospital of her discomfort and pain, the hospital would have been obliged to act on

it."56

The significance of the foregoing statements is critical.

First, they constitute judicial admission by PSI that while it had no power to control the

means or method by which Dr. Ampil conducted the surgery on Natividad Agana, it had

the power to review or cause the review of what may have irregularly transpired

within its walls strictly for the purpose of determining whether some form of negligence

may have attended any procedure done inside its premises, with the ultimate end of

protecting its patients.

Second, it is a judicial admission that, by virtue of the nature of its business as well as

its prominence57 in the hospital industry, it assumed a duty to "tread on" the "captain of

the ship" role of any doctor rendering services within its premises for the purpose of

ensuring the safety of the patients availing themselves of its services and facilities.

Third, by such admission, PSI defined the standards of its corporate conduct under the

circumstances of this case, specifically: (a) that it had a corporate duty to Natividad

even after her operation to ensure her safety as a patient; (b) that its corporate duty

was not limited to having its nursing staff note or record the two missing gauzes and (c)

that its corporate duty extended to determining Dr. Ampil's role in it, bringing the matter

to his attention, and correcting his negligence.

And finally, by such admission, PSI barred itself from arguing in its second motion for

reconsideration that the concept of corporate responsibility was not yet in existence at

the time Natividad underwent treatment;58 and that if it had any corporate responsibility,

the same was limited to reporting the missing gauzes and did not include "taking an

active step in fixing the negligence committed."59 An admission made in the pleading

cannot be controverted by the party making such admission and is conclusive as to

him, and all proofs submitted by him contrary thereto or inconsistent therewith should

be ignored, whether or not objection is interposed by a party.60

Given the standard of conduct that PSI defined for itself, the next relevant inquiry is

whether the hospital measured up to it.

PSI excuses itself from fulfilling its corporate duty on the ground that Dr. Ampil

assumed the personal responsibility of informing Natividad about the two missing

gauzes.61 Dr. Ricardo Jocson, who was part of the group of doctors that attended to

Natividad, testified that toward the end of the surgery, their group talked about the

missing gauzes but Dr. Ampil assured them that he would personally notify the patient

about it.62 Furthermore, PSI claimed that there was no reason for it to act on the report

on the two missing gauzes because Natividad Agana showed no signs of

complications. She did not even inform the hospital about her discomfort.63

The excuses proffered by PSI are totally unacceptable.

To begin with, PSI could not simply wave off the problem and nonchalantly delegate to

Dr. Ampil the duty to review what transpired during the operation. The purpose of such

review would have been to pinpoint when, how and by whom two surgical gauzes were

mislaid so that necessary remedial measures could be taken to avert any jeopardy to

Natividad's recovery. Certainly, PSI could not have expected that purpose to be

achieved by merely hoping that the person likely to have mislaid the gauzes might be

able to retrace his own steps. By its own standard of corporate conduct, PSI's duty to

initiate the review was non-delegable.

While Dr. Ampil may have had the primary responsibility of notifying Natividad about

the missing gauzes, PSI imposed upon itself the separate and independent

responsibility of initiating the inquiry into the missing gauzes. The purpose of the first

would have been to apprise Natividad of what transpired during her surgery, while the

purpose of the second would have been to pinpoint any lapse in procedure that led to

the gauze count discrepancy, so as to prevent a recurrence thereof and to determine

corrective measures that would ensure the safety of Natividad. That Dr. Ampil

negligently failed to notify Natividad did not release PSI from its self-imposed separate

responsibility.

Corollary to its non-delegable undertaking to review potential incidents of negligence

committed within its premises, PSI had the duty to take notice of medical records

prepared by its own staff and submitted to its custody, especially when these bear

earmarks of a surgery gone awry. Thus, the record taken during the operation of

Natividad which reported a gauze count discrepancy should have given PSI sufficient

reason to initiate a review. It should not have waited for Natividad to complain.

As it happened, PSI took no heed of the record of operation and consequently did not

initiate a review of what transpired during Natividad's operation. Rather, it shirked its

responsibility and passed it on to others - to Dr. Ampil whom it expected to inform

Natividad, and to Natividad herself to complain before it took any meaningful step. By

its inaction, therefore, PSI failed its own standard of hospital care. It committed

corporate negligence.

It should be borne in mind that the corporate negligence ascribed to PSI is different

from the medical negligence attributed to Dr. Ampil. The duties of the hospital are

distinct from those of the doctor-consultant practicing within its premises in relation to

the patient; hence, the failure of PSI to fulfill its duties as a hospital corporation gave

rise to a direct liability to the Aganas distinct from that of Dr. Ampil.

All this notwithstanding, we make it clear that PSI's hospital liability based on

ostensible agency and corporate negligence applies only to this case, pro hac vice. It is

not intended to set a precedent and should not serve as a basis to hold hospitals liable

for every form of negligence of their doctors-consultants under any and all

circumstances. The ruling is unique to this case, for the liability of PSI arose from an

implied agency with Dr. Ampil and an admitted corporate duty to Natividad.64

Other circumstances peculiar to this case warrant this ruling,65 not the least of which

being that the agony wrought upon the Aganas has gone on for 26 long years, with

Natividad coming to the end of her days racked in pain and agony. Such wretchedness

could have been avoided had PSI simply done what was logical: heed the report of a

guaze count discrepancy, initiate a review of what went wrong and take corrective

measures to ensure the safety of Nativad. Rather, for 26 years, PSI hemmed and

hawed at every turn, disowning any such responsibility to its patient. Meanwhile, the

options left to the Aganas have all but dwindled, for the status of Dr. Ampil can no

longer be ascertained.66

Therefore, taking all the equities of this case into consideration, this Court believes P15

million would be a fair and reasonable liability of PSI, subject to 12% p.a. interest from

the finality of this resolution to full satisfaction.

WHEREFORE, the second motion for reconsideration is DENIED and the motions for

intervention are NOTED.

Professional Services, Inc. is ORDERED pro hac vice to pay Natividad (substituted by

her children Marcelino Agana III, Enrique Agana, Jr., Emma Agana-Andaya, Jesus

Agana and Raymund Agana) and Enrique Agana the total amount of P15 million,

subject to 12% p.a. interest from the finality of this resolution to full satisfaction.

No further pleadings by any party shall be entertained in this case.

Let the long-delayed entry of judgment be made in this case upon receipt by all

concerned parties of this resolution.

SO ORDERED.

Criminal Liability

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-28882 May 31, 1971

TIME, INC., petitioner,

vs.

HON. ANDRES REYES, as Judge of the Court of First Instance of Rizal, ELISEO

S. ZARI, as Deputy Clerk of Court, Branch VI, Court of First Instance of Rizal,

ANTONIO J. VILLEGAS and JUAN PONCE ENRILE, respondents.

Sycip, Salazar, Luna, Manalo & Feliciano for petitioner.

Angel C. Cruz Law Office for respondents.

REYES, J.B.L., J.:

Petition for certiorari and prohibition, with preliminary injunction, to annul certain orders

of the respondent Court of First Instance of Rizal, issued in its Civil Case No. 10403,

entitled "Antonio J. Villegas and Juan Ponce Enrile vs. Time, Inc., and Time-Life

International, Publisher of 'Time' Magazine (Asia Edition)", and to prohibit the said court

from further proceeding with the said civil case.

Upon petitioner's posting a bond of P1,000.00, this Court, as prayed for, ordered, on 15

April 1968, the issuance of a writ of preliminary injunction.

The petition alleges that petitioner Time, Inc., 1 is an American corporation with

principal offices at Rocketfeller Center, New York City, N. Y., and is the publisher of

"Time", a weekly news magazine; the petition, however, does not allege the petitioner's

legal capacity to sue in the courts of the Philippine. 2

In the aforesaid Civil Case No. 10403, therein plaintiffs (herein respondents) Antonio J.

Villegas and Juan Ponce Enrile seek to recover from the herein petitioner damages

upon an alleged libel arising from a publication of Time (Asia Edition) magazine, in its

issue of 18 August 1967, of an essay, entitled "Corruption in Asia", which, in part,

reads, as follows:

The problem of Manila's mayor, ANTONIO VILLEGAS, is a case in point. When it was

discovered last year that the mayor's coffers contained far more pesos than seemed

reasonable in the light of his income, an investigation was launched. Witnesses who

had helped him out under curious circumstance were asked to explain in court. One

government official admitted lending Villegas P30,000 pesos ($7,700) without interest

because he was the mayor's compadre. An assistant declared he had given Villegas

loans without collateral because he regarded the boss as my own son. A wealthy

Manila businessman testified that he had lent Villegas' wife 15,000 pesos because the

mayor was like a brother to me. With that, Villegas denounced the investigation as an

invasion of his family's privacy. The case was dismissed on a technicality, and Villegas

is still mayor. 3

More specifically, the plaintiffs' complaint alleges, inter alia that:

(4) Defendants, conspiring and confederating, published a libelous article,

publicly, falsely and maliciously imputing to Plaintiffs the commission of the crimes of

graft, corruption and nepotism; that said publication particularly referred to Plaintiff

Mayor Antonio J. Villegas as a case in point in connection with graft, corruption and

nepotism in Asia; that said publication without any doubt referred to co-plaintiff Juan

Ponce Enrile as the high government official who helped under curious circumstances

Plaintiff Mayor Antonio J. Villegas in lending the latter approximately P30,000.00

($7,700.00) without interest because he was the Mayor's compadre; that the purpose

of said Publications is to cause the dishonor, discredit and put in public contempt the

Plaintiffs, particularly Plaintiff Mayor Antonio J. Villegas.

On motion of the respondents-plaintiffs, the respondent judge, on 25 November 1967,

granted them leave to take the depositions "of Mr. Anthony Gonzales, Time-Life

international", and "Mr. Cesar B. Enriquez, Muller & Phipps (Manila) Ltd.", in

connection with the activities and operations in the Philippines of the petitioner, and, on

27 November 1967, issued a writ of attachment on the real and personal estate of

Time, Inc.

Petitioner received the summons and a copy of the complaint at its offices in New York

on 13 December 1967 and, on 27 December 1967, it filed a motion to dismiss the

complaint for lack of jurisdiction and improper venue, relying upon the provisions of

Republic Act 4363. Private respondents opposed the motion.

In an order dated 26 February 1968, respondent court deferred the determination of

the motion to dismiss until after trial of the case on the merits, the court having

considered that the grounds relied upon in the motion do not appear to be indubitable.

Petitioner moved for reconsideration of the deferment private respondents again

opposed.

On 30 March 1968, respondent judge issued an order re-affirming the previous order of

deferment for the reason that "the rule laid down under Republic Act. No. 4363,

amending Article 360 of the Revised Penal Code, is not applicable to actions against

non-resident defendants, and because questions involving harassment and

inconvenience, as well as disruption of public service do not appear indubitable. ..."

Failing in its efforts to discontinue the taking of the depositions, previously adverted to,

and to have action taken, before trial, on its motion to dismiss, petitioner filed the

instant petition for certiorari and prohibition.

The orders for the taking of the said depositions, for deferring determination of the

motion to dismiss, and for reaffirming the deferment, and the writ of attachment are

sought to be annulled in the petition..

There is no dispute that at the time of the publication of the allegedly offending essay,

private respondents Antonio Villegas and Juan Ponce Enrile were the Mayor Of the

City of Manila and Undersecretary of Finance and concurrently Acting Commissioner of

Customs, respectively, with offices in the City of Manila. The issues in this case are:

1. Whether or not, under the provisions of Republic Act No. 4363 the

respondent Court of First Instance of Rizal has jurisdiction to take cognizance of the

civil suit for damages arising from an allegedly libelous publication, considering that the

action was instituted by public officers whose offices were in the City of Manila at the

time of the publication; if it has no jurisdiction, whether or not its erroneous assumption

of jurisdiction may be challenged by a foreign corporation by writ of certiorari or

prohibition; and

2. Whether or not Republic Act 4363 is applicable to action against a foreign

corporation or non-resident defendant.

Provisions of Republic Act No. 4363, which are relevant to the resolution of the

foregoing issues, read, as follows:

Section 1. Article three hundred sixty of the Revised Penal Code, as amended

by Republic Act Numbered Twelve hundred and eighty-nine, is further amended to

read as follows:

'ART. 360. Persons responsible. — Any person who shall publish, exhibit, or

cause the publication or exhibition of any defamation in writing or by similar means,

shall be responsible for the same.

The author or editor of a book or pamphlet, or the editor or business manager of a daily

newspaper, magazine or serial publication, shall be responsible for the defamations

contained therein to the extent as if he were the author thereof.

The criminal and civil action for damages in cases of written defamations as provided

for in this chapter, shall be filed simultaneously or separately with the court of first

instance of the province or city where the libelous article is printed and first published

or where any of the offended parties actually resides at the time of the commission of

the offense; Provided, however, That where one of the offended parties is a public

officer whose office is in the City of Manila at the time of the commission of the offense,

the action shall be filed in the Court of First Instance of the City of Manila or of the city

or province where the libelous article is printed and first published, and in case such

public officer does not hold office in the City of Manila, the action shall be filed in the

Court of First Instance of the province or city where he held office at the time of the

commission of the offense or where the libelous article is printed and first published

and in case one of the offended parties is a private individual, the action shall be filed

in the Court of First Instance of the province or city where he actually resides at the

time of the commission of the offense or where the libelous matter is printed and first

published; Provided, further, That the civil action shall be filed in the same court where

the criminal action is filed and vice versa; Provided, furthermore, That the court where

the criminal action or civil action for damages is first filed, shall acquire jurisdiction to

the exclusion of other courts; And provided finally, That this amendment shall not apply

to cases of written defamations, the civil and/or criminal actions which have been filed

in court at the time of the effectivity of the law

xxx xxx xxx

xxx xxx xxx

Sec. 3. This Act shall take effect only if and when, within thirty days from its approval,

the newspapermen in the Philippines shall organize, and elect the members of, a

Philippine Press Council, a private agency of the said newspapermen, whose function

shall be to promulgate a Code of Ethics for them and the Philippine press investigate

violations thereof, and censure any newspaperman or newspaper guilty of any violation

of the said Code, and the fact that such Philippine Press Council has been organized

and its members have been duly elected in accordance herewith shall be ascertained

and proclaimed by the President of the Philippines.

Under the first proviso in section 1, the venue of a civil action for damages in cases of

written defamations is localized upon the basis of, first, whether the offended party or

plaintiff is a public officer or a private individual; and second, if he is a public officer,

whether his office is in Manila or not in Manila, at the time of the commission of the

offense. If the offended party is a public officer in the office in the City of Manila, the

proviso limits him to two (2) choices of venue, namely, in the Court of First instance of

the City of Manila or in the city or province where the libelous article is printed and first

published ..."

The complaint lodged in the court of Rizal by respondents does not allege that the

libelous article was printed and first published in the province of Rizal and, since the

respondents-plaintiffs are public officers with offices in Manila at the time of the

commission of the alleged offense, it is clear that the only place left for them wherein to

file their action, is the Court of First Instance of Manila.

The limitation of the choices of venue, as introduced into the Penal Code through its

amendments by Republic Act 4363, was intended "to minimize or limit the filing of out-

of-town libel suits" to protect an alleged offender from "hardships, inconveniences and

harassments" and, furthermore, to protect "the interest of the public service" where one

of the offended parties is a public officer." 4 The intent, of the law is clear: a libeled

public official might sue in the court of the locality where he holds office, in order that

the prosecution of the action should interfere as little as possible with the discharge of

his official duties and labors. The only alternative allowed him by law is to prosecute

those responsible for the libel in the place where the offending article was printed and

first published. Here, the law tolerates the interference with the libeled officer's duties

only for the sake of avoiding unnecessary harassment of the accused. Since the

offending publication was not printed in the Philippines, the alternative venue was not

open to respondent Mayor Villegas of Manila and Undersecretary of Finance Enrile,

who were the offended parties.

But respondents-plaintiffs argue that Republic Act No. 4363 is not applicable where the

action is against non-existent defendant, as petitioner Time, Inc., for several reasons.

They urge that, in enacting Republic Act No. 4363, Congress did not intend to protect

non-resident defendants as shown by Section 3, which provides for the effectivity of the

statute only if and when the "newspapermen in the Philippines" have organized a

"Philippine Press Council" whose function shall be to promulgate a Code of Ethics for

"them" and "the Philippine press"; and since a non-resident defendant is not in a

position to comply with the conditions imposed for the effectivity of the statute, such

defendant may not invoke its provisions; that a foreign corporation is not

inconvenienced by an out-of-town libel suit; that it would be absurd and incongruous, in

the absence of an extradition treaty, for the law to give to public officers with office in

Manila the second option of filing a criminal case in the court of the place where the

libelous article is printed and first published if the defendant is a foreign corporation

and that, under the "single publication" rule which originated in the United States and

imported into the Philippines, the rule was understood to mean that publications in

another state are not covered by venue statutes of the forum.

The implication of respondents' argument is that the law would not take effect as to

non-resident defendants or accused. We see nothing in the text of the law that would

sustain such unequal protection to some of those who may be charged with libel. The

official proclamation that a Philippine Press Council has been organized is made a pre-

condition to the effectivity of the entire Republic Act No. 4363, and no terms are

employed therein to indicate that the law can or will be effective only as to some, but

not all, of those that may be charged with libeling our public officers.

The assertion that a foreign corporation or a non-resident defendant is not

inconvenienced by an out-of-town suit is irrelevant and untenable, for venue and

jurisdiction are not dependent upon convenience or inconvenience to a party; and

moreover, venue was fixed under Republic Act No. 4363, pursuant to the basic policy

of the law that is, as previously stated, to protect the interest of the public service when

the offended party is a public officer, by minimizing as much as possible any

interference with the discharge of his duties.

That respondents-plaintiffs could not file a criminal case for libel against a non-resident

defendant does not make Republic Act No. 4363 incongruous of absurd, for such

inability to file a criminal case against a non-resident natural person equally exists in

crimes other than libel. It is a fundamental rule of international jurisdiction that no state

can by its laws, and no court which is only a creature of the state, can by its judgments

or decrees, directly bind or affect property or persons beyond the limits of the state. 5

Not only this, but if the accused is a corporation, no criminal action can lie against it, 6

whether such corporation or resident or non-resident. At any rate, the case filed by

respondents-plaintiffs is case for damages.

50 Am. Jur. 2d 659 differentiates the "multiple publication" and "single publication"

rules (invoked by private respondents) to be as follows:

The common law as to causes of action for tort arising out of a single publication was

to the effect that each communication of written or printed matter was a distinct and

separate publication of a libel contained therein, giving rise to a separate cause of

action. This rule ('multiple publication' rule) is still followed in several American

jurisdictions, and seems to be favored by the American Law Institute. Other

jurisdictions have adopted the 'single publication' rule which originated in New York,

under which any single integrated publication, such as one edition of a newspaper,

book, or magazine, or one broadcast, is treated as a unit, giving rise to only one cause

of action, regardless of the number of times it is exposed to different people. ...

These rules are not pertinent in the present scheme because the number of causes of

action that may be available to the respondents-plaintiffs is not here in issue. We are

here confronted by a specific venue statute, conferring jurisdiction in cases of libel

against Public officials to specified courts, and no other. The rule is that where a

statute creates a right and provides a remedy for its enforcement, the remedy is

exclusive; and where it confers jurisdiction upon a particular court, that jurisdiction is

likewise exclusive, unless otherwise provided. Hence, the venue provisions of Republic

Act No. 4363 should be deemed mandatory for the party bringing the action, unless the

question of venue should be waived by the defendant, which was not the case here.

Only thus can the policy of the Act be upheld and maintained. Nor is there any reason

why the inapplicability of one alternative venue should result in rendering the other

alternative, also inapplicable.

The dismissal of the present petition is asked on the ground that the petitioner foreign

corporation failed to allege its capacity to sue in the courts of the Philippines.

Respondents rely on section 69 of the Corporation law, which provides:

SEC. 69. No foreign corporation or corporations formed, organized, or existing under

any laws other than those of the Philippines shall be permitted to ... maintain by itself or

assignee any suit for the recovery of any debt, claim, or demand whatever, unless it

shall have the license prescribed in the section immediately preceding. ..." ...;

They also invoke the ruling in Marshall-Wells Co. vs. Elser & Co., Inc. 7 that no foreign

corporation may be permitted to maintain any suit in the local courts unless it shall

have the license required by the law, and the ruling in Atlantic Mutual Ins. Co., Inc. vs.

Cebu Stevedoring Co., Inc. 8 that "where ... the law denies to a foreign corporation the

right to maintain suit unless it has previously complied with a certain requirement, then

such compliance or the fact that the suing corporation is exempt therefrom, becomes a

necessary averment in the complaint." We fail to see how these doctrines can be a

propos in the case at bar, since the petitioner is not "maintaining any suit" but is merely

defending one against itself; it did not file any complaint but only a corollary defensive

petition to prohibit the lower court from further proceeding with a suit that it had no

jurisdiction to entertain.

Petitioner's failure to aver its legal capacity to institute the present petition is not fatal,

for ...

A foreign corporation may, by writ of prohibition, seek relief against the wrongful

assumption of jurisdiction. And a foreign corporation seeking a writ of prohibition

against further maintenance of a suit, on the ground of want of jurisdiction in which

jurisdiction is not bound by the ruling of the court in which the suit was brought, on a

motion to quash service of summons, that it has jurisdiction. 9

It is also advanced that the present petition is premature, since respondent court has

not definitely ruled on the motion to dismiss, nor held that it has jurisdiction, but only

argument is untenable. The motion to dismiss was predicated on the respondent

court's lack of jurisdiction to entertain the action; and the rulings of this Court are that

writs of certiorari or prohibition, or both, may issue in case of a denial or deferment of

action on such a motion to dismiss for lack of jurisdiction.

If the question of jurisdiction were not the main ground for this petition for review by

certiorari, it would be premature because it seeks to have a review of an interlocutory

order. But as it would be useless and futile to go ahead with the proceedings if the

court below had no jurisdiction this petition was given due course.' (San Beda vs. CIR,

51 O.G. 5636, 5638).

'While it is true that action on a motion to dismiss may be deferred until the trial and an

order to that effect is interlocutory, still where it clearly appears that the trial judge or

court is proceeding in excess or outside of its jurisdiction, the remedy of prohibition

would lie since it would be useless and a waste of time to go ahead with the

proceedings. (Philippine International Fair, Inc., et al. vs. Ibañez, et al., 50 Off. Gaz.

1036; Enrique v. Macadaeg, et al., 47 Off. Gaz. 1207; see also San Beda College vs.

CIR, 51 Off. Gaz. 5636.)' (University of Sto. Tomas v. Villanueva, L-13748, 30 October

1959.).

Similarly, in Edward J. Nell Co. vs. Cubacub, L-20843, 23 June 1965, 14 SCRA 419,

this Court held:

'.......................................................... It is a settledrule that the jurisdiction of a court

over the subject-matter is determined by the allegations in the complaint; and when a

motion to dismiss is filed for lack of jurisdiction those allegations are deemed admitted

for purposes of such motion, so that it may be resolved without waiting for the trial.

Thus it has been held that the consideration thereof may not be postponed in the hope

that the evidence may yield other qualifying or concurring data which would bring the

case under the court's jurisdiction.'

To the same effect are the rulings in: Ruperto vs. Fernando, 83 Phil. 943; Administrator

of Hacienda Luisita Estate vs. Alberto, L-12133, 21 October 1958.

Summing up, We hold:

(1) The under Article 360 of the Revised Penal Code, as amended by Republic

Act No. 4363, actions for damages by public officials for libelous publications against

them can only be filed in the courts of first instance ofthe city or province where the

offended functionary held office at the time ofthe commission of the offense, in case

the libelous article was first printed or published outside the Philippines.

(2) That the action of a court in refusing to rule, or deferring its ruling, on a

motion to dismiss for lack of jurisdiction over the subject matter, or for improper venue,

is in excess of jurisdiction and correctable by writ of prohibition or certiorari sued out in

the appellate Court, even before trial on the merits is had.

WHEREFORE, the writs applied for are granted: the respondent Court of First Instance

of Rizal is declared without jurisdiction to take cognizance of its Civil Case No. 10403;

and its orders issued in connection therewith are hereby annulled and set aside,.

Respondent court is further commanded to desist from further proceedings in Civil

case No. 10403 aforesaid. Costs against private respondents, Antonio J. Villegas and

Juan Ponce Enrile.

The writ of preliminary injunction heretofore issued by this Supreme Court is made

permanent.

Concepcion, C.J., Dizon, Makalintal, Fernando, Teehankee, Barredo, Villamor and

concur.

Castro, J., took no part.

Republic of the Philippines

SUPREME COURT

Manila

SECOND DIVISION

G.R. No. 170891 November 24, 2009

MANUEL C. ESPIRITU, JR., AUDIE LLONA, FREIDA F. ESPIRITU, CARLO F.

ESPIRITU, RAFAEL F. ESPIRITU, ROLANDO M. MIRABUNA, HERMILYN A.

MIRABUNA, KIM ROLAND A. MIRABUNA, KAYE ANN A. MIRABUNA, KEN RYAN A.

MIRABUNA, JUANITO P. DE CASTRO, GERONIMA A. ALMONITE and MANUEL C.

DEE, who are the officers and directors of BICOL GAS REFILLING PLANT

CORPORATION, Petitioners,

vs.

PETRON CORPORATION and CARMEN J. DOLOIRAS, doing business under the

name "KRISTINA PATRICIA ENTERPRISES," Respondents.

DECISION

ABAD, J.:

This case is about the offense or offenses that arise from the reloading of the liquefied

petroleum gas cylinder container of one brand with the liquefied petroleum gas of

another brand.

The Facts and the Case

Respondent Petron Corporation (Petron) sold and distributed liquefied petroleum gas

(LPG) in cylinder tanks that carried its trademark "Gasul."1 Respondent Carmen J.

Doloiras owned and operated Kristina Patricia Enterprises (KPE), the exclusive

distributor of Gasul LPGs in the whole of Sorsogon.2 Jose Nelson Doloiras (Jose)

served as KPE’s manager.

Bicol Gas Refilling Plant Corporation (Bicol Gas) was also in the business of selling

and distributing LPGs in Sorsogon but theirs carried the trademark "Bicol Savers Gas."

Petitioner Audie Llona managed Bicol Gas.

In the course of trade and competition, any given distributor of LPGs at times acquired

possession of LPG cylinder tanks belonging to other distributors operating in the same

area. They called these "captured cylinders." According to Jose, KPE’s manager, in

April 2001 Bicol Gas agreed with KPE for the swapping of "captured cylinders" since

one distributor could not refill captured cylinders with its own brand of LPG. At one

time, in the course of implementing this arrangement, KPE’s Jose visited the Bicol Gas

refilling plant. While there, he noticed several Gasul tanks in Bicol Gas’ possession. He

requested a swap but Audie Llona of Bicol Gas replied that he first needed to ask the

permission of the Bicol Gas owners. That permission was given and they had a swap

involving around 30 Gasul tanks held by Bicol Gas in exchange for assorted tanks held

by KPE.

KPE’s Jose noticed, however, that Bicol Gas still had a number of Gasul tanks in its

yard. He offered to make a swap for these but Llona declined, saying the Bicol Gas

owners wanted to send those tanks to Batangas. Later Bicol Gas told Jose that it had

no more Gasul tanks left in its possession. Jose observed on almost a daily basis,

however, that Bicol Gas’ trucks which plied the streets of the province carried a load of

Gasul tanks. He noted that KPE’s volume of sales dropped significantly from June to

July 2001.

On August 4, 2001 KPE’s Jose saw a particular Bicol Gas truck on the Maharlika

Highway. While the truck carried mostly Bicol Savers LPG tanks, it had on it one

unsealed 50-kg Gasul tank and one 50-kg Shellane tank. Jose followed the truck and

when it stopped at a store, he asked the driver, Jun Leorena, and the Bicol Gas sales

representative, Jerome Misal, about the Gasul tank in their truck. They said it was

empty but, when Jose turned open its valve, he noted that it was not. Misal and

Leorena then admitted that the Gasul and Shellane tanks on their truck belonged to a

customer who had them filled up by Bicol Gas. Misal then mentioned that his manager

was a certain Rolly Mirabena.

Because of the above incident, KPE filed a complaint3 for violations of Republic Act

(R.A.) 623 (illegally filling up registered cylinder tanks), as amended, and Sections 155

(infringement of trade marks) and 169.1 (unfair competition) of the Intellectual Property

Code (R.A. 8293). The complaint charged the following: Jerome Misal, Jun Leorena,

Rolly Mirabena, Audie Llona, and several John and Jane Does, described as the

directors, officers, and stockholders of Bicol Gas. These directors, officers, and

stockholders were eventually identified during the preliminary investigation.

Subsequently, the provincial prosecutor ruled that there was probable cause only for

violation of R.A. 623 (unlawfully filling up registered tanks) and that only the four Bicol

Gas employees, Mirabena, Misal, Leorena, and petitioner Llona, could be charged.

The charge against the other petitioners who were the stockholders and directors of

the company was dismissed.

Dissatisfied, Petron and KPE filed a petition for review with the Office of the Regional

State Prosecutor, Region V, which initially denied the petition but partially granted it on

motion for reconsideration. The Office of the Regional State Prosecutor ordered the

filing of additional informations against the four employees of Bicol Gas for unfair

competition. It ruled, however, that no case for trademark infringement was present.

The Secretary of Justice denied the appeal of Petron and KPE and their motion for

reconsideration.

Undaunted, Petron and KPE filed a special civil action for certiorari with the Court of

Appeals4 but the Bicol Gas employees and stockholders concerned opposed it,

assailing the inadequacy in its certificate of non-forum shopping, given that only Atty.

Joel Angelo C. Cruz signed it on behalf of Petron. In its Decision5 dated October 17,

2005, the Court of Appeals ruled, however, that Atty. Cruz’s certification constituted

sufficient compliance. As to the substantive aspect of the case, the Court of Appeals

reversed the Secretary of Justice’s ruling. It held that unfair competition does not

necessarily absorb trademark infringement. Consequently, the court ordered the filing

of additional charges of trademark infringement against the concerned Bicol Gas

employees as well.

Since the Bicol Gas employees presumably acted under the direct order and control of

its owners, the Court of Appeals also ordered the inclusion of the stockholders of Bicol

Gas in the various charges, bringing to 16 the number of persons to be charged, now

including petitioners Manuel C. Espiritu, Jr., Freida F. Espiritu, Carlo F. Espiritu, Rafael

F. Espiritu, Rolando M. Mirabuna, Hermilyn A. Mirabuna, Kim Roland A. Mirabuna,

Kaye Ann A. Mirabuna, Ken Ryan A. Mirabuna, Juanito P. de Castro, Geronima A.

Almonite, and Manuel C. Dee (together with Audie Llona), collectively, petitioners

Espiritu, et al. The court denied the motion for reconsideration of these employees and

stockholders in its Resolution dated January 6, 2006, hence, the present petition for

review6 before this Court.

The Issues Presented

The petition presents the following issues:

1. Whether or not the certificate of non-forum shopping that accompanied the petition

filed with the Court of Appeals, signed only by Atty. Cruz on behalf of Petron, complied

with what the rules require;

2. Whether or not the facts of the case warranted the filing of charges against the Bicol

Gas people for:

a) Filling up the LPG tanks registered to another manufacturer without the latter’s

consent in violation of R.A. 623, as amended;

b) Trademark infringement consisting in Bicol Gas’ use of a trademark that is

confusingly similar to Petron’s registered "Gasul" trademark in violation of section 155

also of R.A. 8293; and

c) Unfair competition consisting in passing off Bicol Gas-produced LPGs for Petron-

produced Gasul LPG in violation of Section 168.3 of R.A. 8293.

The Court’s Rulings

First. Petitioners Espiritu, et al. point out that the certificate of non-forum shopping that

respondents KPE and Petron attached to the petition they filed with the Court of

Appeals was inadequate, having been signed only by Petron, through Atty. Cruz.

But, while procedural requirements such as that of submittal of a certificate of non-

forum shopping cannot be totally disregarded, they may be deemed substantially

complied with under justifiable circumstances.7 One of these circumstances is where

the petitioners filed a collective action in which they share a common interest in its

subject matter or raise a common cause of action. In such a case, the certification by

one of the petitioners may be deemed sufficient.8

Here, KPE and Petron shared a common cause of action against petitioners Espiritu, et

al., namely, the violation of their proprietary rights with respect to the use of Gasul

tanks and trademark. Furthermore, Atty. Cruz said in his certification that he was

executing it "for and on behalf of the Corporation, and co-petitioner Carmen J.

Doloiras."9 Thus, the object of the requirement – to ensure that a party takes no

recourse to multiple forums – was substantially achieved. Besides, the failure of KPE to

sign the certificate of non-forum shopping does not render the petition defective with

respect to Petron which signed it through Atty. Cruz.10 The Court of Appeals,

therefore, acted correctly in giving due course to the petition before it.

Second. The Court of Appeals held that under the facts of the case, there is probable

cause that petitioners Espiritu, et al. committed all three crimes: (a) illegally filling up an

LPG tank registered to Petron without the latter’s consent in violation of R.A. 623, as

amended; (b) trademark infringement which consists in Bicol Gas’ use of a trademark

that is confusingly similar to Petron’s registered "Gasul" trademark in violation of

Section 155 of R.A. 8293; and (c) unfair competition which consists in petitioners

Espiritu, et al. passing off Bicol Gas-produced LPGs for Petron-produced Gasul LPG in

violation of Section 168.3 of R.A. 8293.

Here, the complaint adduced at the preliminary investigation shows that the one 50-kg

Petron Gasul LPG tank found on the Bicol Gas’ truck "belonged to [a Bicol Gas]

customer who had the same filled up by BICOL GAS."11 In other words, the customer

had that one Gasul LPG tank brought to Bicol Gas for refilling and the latter obliged.

R.A. 623, as amended,12 punishes any person who, without the written consent of the

manufacturer or seller of gases contained in duly registered steel cylinders or tanks,

fills the steel cylinder or tank, for the purpose of sale, disposal or trafficking, other than

the purpose for which the manufacturer or seller registered the same. This was what

happened in this case, assuming the allegations of KPE’s manager to be true. Bicol

Gas employees filled up with their firm’s gas the tank registered to Petron and bearing

its mark without the latter’s written authority. Consequently, they may be prosecuted for

that offense.

But, as for the crime of trademark infringement, Section 155 of R.A. 8293 (in relation to

Section 17013 ) provides that it is committed by any person who shall, without the

consent of the owner of the registered mark:

1. Use in commerce any reproduction, counterfeit, copy or colorable imitation of a

registered mark or the same container or a dominant feature thereof in connection with

the sale, offering for sale, distribution, advertising of any goods or services including

other preparatory steps necessary to carry out the sale of any goods or services on or

in connection with which such use is likely to cause confusion, or to cause mistake, or

to deceive; or

2. Reproduce, counterfeit, copy or colorably imitate a registered mark or a dominant

feature thereof and apply such reproduction, counterfeit, copy or colorable imitation to

labels, signs, prints, packages, wrappers, receptacles or advertisements intended to be

used in commerce upon or in connection with the sale, offering for sale, distribution, or

advertising of goods or services on or in connection with which such use is likely to

cause confusion, or to cause mistake, or to deceive.

KPE and Petron have to show that the alleged infringer, the responsible officers and

staff of Bicol Gas, used Petron’s Gasul trademark or a confusingly similar trademark on

Bicol Gas tanks with intent to deceive the public and defraud its competitor as to what it

is selling.14 Examples of this would be the acts of an underground shoe manufacturer

in Malabon producing "Nike" branded rubber shoes or the acts of a local shirt company

with no connection to La Coste, producing and selling shirts that bear the stitched

logos of an open-jawed alligator.

Here, however, the allegations in the complaint do not show that Bicol Gas painted on

its own tanks Petron’s Gasul trademark or a confusingly similar version of the same to

deceive its customers and cheat Petron. Indeed, in this case, the one tank bearing the

mark of Petron Gasul found in a truck full of Bicol Gas tanks was a genuine Petron

Gasul tank, more of a captured cylinder belonging to competition. No proof has been

shown that Bicol Gas has gone into the business of distributing imitation Petron Gasul

LPGs.

As to the charge of unfair competition, Section 168.3 (a) of R.A. 8293 (also in relation

to Section 170) describes the acts constituting the offense as follows:

168.3. In particular, and without in any way limiting the scope of protection against

unfair competition, the following shall be deemed guilty of unfair competition:

(a) Any person, who is selling his goods and gives them the general appearance of

goods of another manufacturer or dealer, either as to the goods themselves or in the

wrapping of the packages in which they are contained, or the devices or words

thereon, or in any other feature of their appearance, which would be likely to influence

purchasers to believe that the goods offered are those of a manufacturer or dealer,

other than the actual manufacturer or dealer, or who otherwise clothes the goods with

such appearance as shall deceive the public and defraud another of his legitimate

trade, or any subsequent vendor of such goods or any agent of any vendor engaged in

selling such goods with a like purpose;

Essentially, what the law punishes is the act of giving one’s goods the general

appearance of the goods of another, which would likely mislead the buyer into

believing that such goods belong to the latter. Examples of this would be the act of

manufacturing or selling shirts bearing the logo of an alligator, similar in design to the

open-jawed alligator in La Coste shirts, except that the jaw of the alligator in the former

is closed, or the act of a producer or seller of tea bags with red tags showing the

shadow of a black dog when his competitor is producing or selling popular tea bags

with red tags showing the shadow of a black cat.

Here, there is no showing that Bicol Gas has been giving its LPG tanks the general

appearance of the tanks of Petron’s Gasul. As already stated, the truckfull of Bicol Gas

tanks that the KPE manager arrested on a road in Sorsogon just happened to have

mixed up with them one authentic Gasul tank that belonged to Petron.

The only point left is the question of the liability of the stockholders and members of the

board of directors of Bicol Gas with respect to the charge of unlawfully filling up a steel

cylinder or tank that belonged to Petron. The Court of Appeals ruled that they should

be charged along with the Bicol Gas employees who were pointed to as directly

involved in overt acts constituting the offense.1avvphi1

Bicol Gas is a corporation. As such, it is an entity separate and distinct from the

persons of its officers, directors, and stockholders. It has been held, however, that

corporate officers or employees, through whose act, default or omission the

corporation commits a crime, may themselves be individually held answerable for the

crime.15

Jose claimed in his affidavit that, when he negotiated the swapping of captured

cylinders with Bicol Gas, its manager, petitioner Audie Llona, claimed that he would be

consulting with the owners of Bicol Gas about it. Subsequently, Bicol Gas declined the

offer to swap cylinders for the reason that the owners wanted to send their captured

cylinders to Batangas. The Court of Appeals seized on this as evidence that the

employees of Bicol Gas acted under the direct orders of its owners and that "the

owners of Bicol Gas have full control of the operations of the business."16

The "owners" of a corporate organization are its stockholders and they are to be

distinguished from its directors and officers. The petitioners here, with the exception of

Audie Llona, are being charged in their capacities as stockholders of Bicol Gas. But the

Court of Appeals forgets that in a corporation, the management of its business is

generally vested in its board of directors, not its stockholders.17 Stockholders are

basically investors in a corporation. They do not have a hand in running the day-to-day

business operations of the corporation unless they are at the same time directors or

officers of the corporation. Before a stockholder may be held criminally liable for acts

committed by the corporation, therefore, it must be shown that he had knowledge of

the criminal act committed in the name of the corporation and that he took part in the

same or gave his consent to its commission, whether by action or inaction.

The finding of the Court of Appeals that the employees "could not have committed the

crimes without the consent, [abetment], permission, or participation of the owners of

Bicol Gas"18 is a sweeping speculation especially since, as demonstrated above, what

was involved was just one Petron Gasul tank found in a truck filled with Bicol Gas

tanks. Although the KPE manager heard petitioner Llona say that he was going to

consult the owners of Bicol Gas regarding the offer to swap additional captured

cylinders, no indication was given as to which Bicol Gas stockholders Llona consulted.

It would be unfair to charge all the stockholders involved, some of whom were proved

to be minors.19 No evidence was presented establishing the names of the

stockholders who were charged with running the operations of Bicol Gas. The

complaint even failed to allege who among the stockholders sat in the board of

directors of the company or served as its officers.

The Court of Appeals of course specifically mentioned petitioner stockholder Manuel C.

Espiritu, Jr. as the registered owner of the truck that the KPE manager brought to the

police for investigation because that truck carried a tank of Petron Gasul. But the act

that R.A. 623 punishes is the unlawful filling up of registered tanks of another. It does

not punish the act of transporting such tanks. And the complaint did not allege that the

truck owner connived with those responsible for filling up that Gasul tank with Bicol

Gas LPG.

WHEREFORE, the Court REVERSES and SETS ASIDE the Decision of the Court of

Appeals in CA-G.R. SP 87711 dated October 17, 2005 as well as its Resolution dated

January 6, 2006, the Resolutions of the Secretary of Justice dated March 11, 2004 and

August 31, 2004, and the Order of the Office of the Regional State Prosecutor, Region

V, dated February 19, 2003. The Court REINSTATES the Resolution of the Office of

the Provincial Prosecutor of Sorsogon in I.S. 2001-9231 (inadvertently referred in the

Resolution itself as I.S. 2001-9234), dated February 26, 2002. The names of

petitioners Manuel C. Espiritu, Jr., Freida F. Espititu, Carlo F. Espiritu, Rafael F.

Espiritu, Rolando M. Mirabuna, Hermilyn A. Mirabuna, Kim Roland A. Mirabuna, Kaye

Ann A. Mirabuna, Ken Ryan A. Mirabuna, Juanito P. De Castro, Geronima A. Almonite

and Manuel C. Dee are ORDERED excluded from the charge.

SO ORDERED.

G. R. No. 164317 February 6, 2006

ALFREDO CHING, Petitioner,

vs.

THE SECRETARY OF JUSTICE, ASST. CITY PROSECUTOR ECILYN BURGOS-

VILLAVERT, JUDGE EDGARDO SUDIAM of the Regional Trial Court, Manila, Branch

52; RIZAL COMMERCIAL BANKING CORP. and THE PEOPLE OF THE

PHILIPPINES, Respondents.

D E C I S I O N

CALLEJO, SR., J.:

Before the Court is a petition for review on certiorari of the Decision1 of the Court of

Appeals (CA) in CA-G.R. SP No. 57169 dismissing the petition for certiorari, prohibition

and mandamus filed by petitioner Alfredo Ching, and its Resolution2 dated June 28,

2004 denying the motion for reconsideration thereof.

Petitioner was the Senior Vice-President of Philippine Blooming Mills, Inc. (PBMI).

Sometime in September to October 1980, PBMI, through petitioner, applied with the

Rizal Commercial Banking Corporation (respondent bank) for the issuance of

commercial letters of credit to finance its importation of assorted goods.3

Respondent bank approved the application, and irrevocable letters of credit were

issued in favor of petitioner. The goods were purchased and delivered in trust to PBMI.

Petitioner signed 13 trust receipts4 as surety, acknowledging delivery of the following

goods:

xxxx

Under the receipts, petitioner agreed to hold the goods in trust for the said bank, with

authority to sell but not by way of conditional sale, pledge or otherwise; and in case

such goods were sold, to turn over the proceeds thereof as soon as received, to apply

against the relative acceptances and payment of other indebtedness to respondent

bank. In case the goods remained unsold within the specified period, the goods were to

be returned to respondent bank without any need of demand. Thus, said "goods,

manufactured products or proceeds thereof, whether in the form of money or bills,

receivables, or accounts separate and capable of identification" were respondent

bank’s property.

When the trust receipts matured, petitioner failed to return the goods to respondent

bank, or to return their value amounting to P6,940,280.66 despite demands. Thus, the

bank filed a criminal complaint for estafa6 against petitioner in the Office of the City

Prosecutor of Manila.

After the requisite preliminary investigation, the City Prosecutor found probable cause

estafa under Article 315, paragraph 1(b) of the Revised Penal Code, in relation to

Presidential Decree (P.D.) No. 115, otherwise known as the Trust Receipts Law.

Thirteen (13) Informations were filed against the petitioner before the Regional Trial

Court (RTC) of Manila. The cases were docketed as Criminal Cases No. 86-42169 to

86-42181, raffled to Branch 31 of said court.

Petitioner appealed the resolution of the City Prosecutor to the then Minister of Justice.

The appeal was dismissed in a Resolution7 dated March 17, 1987, and petitioner

moved for its reconsideration. On December 23, 1987, the Minister of Justice granted

the motion, thus reversing the previous resolution finding probable cause against

petitioner.8 The City Prosecutor was ordered to move for the withdrawal of the

Informations.

This time, respondent bank filed a motion for reconsideration, which, however, was

denied on February 24, 1988.9 The RTC, for its part, granted the Motion to Quash the

Informations filed by petitioner on the ground that the material allegations therein did

not amount to estafa.10

In the meantime, the Court rendered judgment in Allied Banking Corporation v.

Ordoñez,11 holding that the penal provision of P.D. No. 115 encompasses any act

violative of an obligation covered by the trust receipt; it is not limited to transactions

involving goods which are to be sold (retailed), reshipped, stored or processed as a

component of a product ultimately sold. The Court also ruled that "the non-payment of

the amount covered by a trust receipt is an act violative of the obligation of the

entrustee to pay."12

On February 27, 1995, respondent bank re-filed the criminal complaint for estafa

against petitioner before the Office of the City Prosecutor of Manila. The case was

docketed as I.S. No. 95B-07614.

Preliminary investigation ensued. On December 8, 1995, the City Prosecutor ruled that

there was no probable cause to charge petitioner with violating P.D. No. 115, as

petitioner’s liability was only civil, not criminal, having signed the trust receipts as

surety.13 Respondent bank appealed the resolution to the Department of Justice

(DOJ) via petition for review, alleging that the City Prosecutor erred in ruling:

1. That there is no evidence to show that respondent participated in the

misappropriation of the goods subject of the trust receipts;

2. That the respondent is a mere surety of the trust receipts; and

3. That the liability of the respondent is only civil in nature.14

On July 13, 1999, the Secretary of Justice issued Resolution No. 25015 granting the petition and reversing the assailed resolution of the City Prosecutor. According to the Justice Secretary, the petitioner, as Senior Vice-President of PBMI, executed the 13 trust receipts and as such, was the one responsible for the offense. Thus, the execution of said receipts is enough to indict the petitioner as the official responsible for violation of P.D. No. 115. The Justice Secretary also declared that petitioner could not contend that P.D. No. 115 covers

only goods ultimately destined for sale, as this issue had already been settled in Allied Banking Corporation v. Ordoñez,16 where the Court

ruled that P.D. No. 115 is "not limited to transactions in goods which are to be sold (retailed), reshipped, stored or processed as a component of a product ultimately sold but covers failure to turn over the proceeds of the sale of entrusted goods, or to return said goods if unsold or not otherwise disposed of in accordance with the terms of the trust receipts." The Justice Secretary further stated that the respondent bound himself under the terms of the trust receipts not only as a corporate official of PBMI but also as its surety; hence, he could be proceeded against in two (2) ways: first, as surety as determined by the Supreme Court in its decision in Rizal Commercial Banking Corporation v. Court of Appeals;17 and second, as the corporate official responsible for the offense under P.D. No. 115, via criminal prosecution. Moreover, P.D. No. 115 explicitly allows the prosecution of corporate officers "without prejudice to the civil liabilities arising from the criminal offense." Thus, according to the Justice Secretary, following Rizal Commercial Banking Corporation, the civil liability imposed is clearly separate and distinct from the criminal liability of the accused under P.D. No. 115. Conformably with the Resolution of the Secretary of Justice, the City Prosecutor filed 13 Informations against petitioner for violation of P.D. No. 115 before the RTC of Manila. The cases were docketed as Criminal Cases No. 99-178596 to 99-178608 and consolidated for trial before Branch 52 of said court. Petitioner filed a motion for reconsideration, which the Secretary of Justice denied in a Resolution18 dated January 17, 2000. Petitioner then filed a petition for certiorari, prohibition and mandamus with the CA, assailing the resolutions of the Secretary of Justice on the following grounds: 1. THE RESPONDENTS ARE ACTING WITH AN UNEVEN HAND AND IN FACT, ARE ACTING OPPRESSIVELY AGAINST ALFREDO CHING WHEN THEY ALLOWED HIS PROSECUTION DESPITE THE FACT THAT NO EVIDENCE HAD BEEN PRESENTED TO PROVE HIS PARTICIPATION IN THE ALLEGED TRANSACTIONS. 2. THE RESPONDENT SECRETARY OF JUSTICE COMMITTED AN ACT IN GRAVE ABUSE OF DISCRETION AND IN EXCESS OF HIS JURISDICTION WHEN THEY CONTINUED PROSECUTION OF THE PETITIONER DESPITE THE LENGTH OF TIME INCURRED IN THE TERMINATION OF THE PRELIMINARY INVESTIGATION THAT SHOULD JUSTIFY THE DISMISSAL OF THE INSTANT CASE. 3. THE RESPONDENT SECRETARY OF JUSTICE AND ASSISTANT CITY PROSECUTOR ACTED IN GRAVE ABUSE OF DISCRETION AMOUNTING TO AN EXCESS OF JURISDICTION WHEN THEY CONTINUED THE PROSECUTION OF THE PETITIONER DESPITE LACK OF SUFFICIENT BASIS.19 In his petition, petitioner incorporated a certification stating that "as far as this Petition is concerned, no action or proceeding in the Supreme Court, the Court of Appeals or

different divisions thereof, or any tribunal or agency. It is finally certified that if the affiant should learn that a similar action or proceeding has been filed or is pending before the Supreme Court, the Court of Appeals, or different divisions thereof, of any other tribunal or agency, it hereby undertakes to notify this Honorable Court within five (5) days from such notice."20 In its Comment on the petition, the Office of the Solicitor General alleged that - A. THE HONORABLE SECRETARY OF JUSTICE CORRECTLY RULED THAT PETITIONER ALFREDO CHING IS THE OFFICER RESPONSIBLE FOR THE OFFENSE CHARGED AND THAT THE ACTS OF PETITIONER FALL WITHIN THE AMBIT OF VIOLATION OF P.D. [No.] 115 IN RELATION TO ARTICLE 315, PAR. 1(B) OF THE REVISED PENAL CODE. B. THERE IS NO MERIT IN PETITIONER’S CONTENTION THAT EXCESSIVE DELAY HAS MARRED THE CONDUCT OF THE PRELIMINARY INVESTIGATION OF THE CASE, JUSTIFYING ITS DISMISSAL. C. THE PRESENT SPECIAL CIVIL ACTION FOR CERTIORARI, PROHIBITION AND MANDAMUS IS NOT THE PROPER MODE OF REVIEW FROM THE RESOLUTION OF THE DEPARTMENT OF JUSTICE. THE PRESENT PETITION MUST THEREFORE BE DISMISSED.21 On April 22, 2004, the CA rendered judgment dismissing the petition for lack of merit, and on procedural grounds. On the procedural issue, it ruled that (a) the certification of non-forum shopping executed by petitioner and incorporated in the petition was defective for failure to comply with the first two of the three-fold undertakings prescribed in Rule 7, Section 5 of the Revised Rules of Civil Procedure; and (b) the petition for certiorari, prohibition and mandamus was not the proper remedy of the petitioner. On the merits of the petition, the CA ruled that the assailed resolutions of the Secretary of Justice were correctly issued for the following reasons: (a) petitioner, being the Senior Vice-President of PBMI and the signatory to the trust receipts, is criminally liable for violation of P.D. No. 115; (b) the issue raised by the petitioner, on whether he violated P.D. No. 115 by his actuations, had already been resolved and laid to rest in Allied Bank Corporation v. Ordoñez;22 and (c) petitioner was estopped from raising the City Prosecutor’s delay in the final disposition of the preliminary investigation because he failed to do so in the DOJ. Thus, petitioner filed the instant petition, alleging that:

I THE COURT OF APPEALS ERRED WHEN IT DISMISSED THE PETITION ON THE GROUND THAT THE CERTIFICATION OF NON-FORUM SHOPPING INCORPORATED THEREIN WAS DEFECTIVE. II THE COURT OF APPEALS ERRED WHEN IT RULED THAT NO GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WAS COMMITTED BY THE SECRETARY OF JUSTICE IN COMING OUT WITH THE ASSAILED RESOLUTIONS.23 The Court will delve into and resolve the issues seriatim. The petitioner avers that the CA erred in dismissing his petition on a mere technicality. He claims that the rules of procedure should be used to promote, not frustrate, substantial justice. He insists that the Rules of Court should be construed liberally especially when, as in this case, his substantial rights are adversely affected; hence, the deficiency in his certification of non-forum shopping should not result in the dismissal of his petition. The Office of the Solicitor General (OSG) takes the opposite view, and asserts that indubitably, the certificate of non-forum shopping incorporated in the petition before the CA is defective because it failed to disclose essential facts about pending actions concerning similar issues and parties. It asserts that petitioner’s failure to comply with the Rules of Court is fatal to his petition. The OSG cited Section 2, Rule 42, as well as the ruling of this Court in Melo v. Court of Appeals.24 We agree with the ruling of the CA that the certification of non-forum shopping petitioner incorporated in his petition before the appellate court is defective. The certification reads: It is further certified that as far as this Petition is concerned, no action or proceeding in the Supreme Court, the Court of Appeals or different divisions thereof, or any tribunal or agency. It is finally certified that if the affiant should learn that a similar action or proceeding has been filed or is pending before the Supreme Court, the Court of Appeals, or different divisions thereof, of any other tribunal or agency, it hereby undertakes to notify this Honorable Court within five (5) days from such notice.25 Under Section 1, second paragraph of Rule 65 of the Revised Rules of Court, the petition should be accompanied by a sworn certification of non-forum shopping, as provided in the third paragraph of Section 3, Rule 46 of said Rules. The latter provision reads in part:

SEC. 3. Contents and filing of petition; effect of non-compliance with requirements. — The petition shall contain the full names and actual addresses of all the petitioners and respondents, a concise statement of the matters involved, the factual background of the case and the grounds relied upon for the relief prayed for. xxx The petitioner shall also submit together with the petition a sworn certification that he has not theretofore commenced any other action involving the same issues in the Supreme Court, the Court of Appeals or different divisions thereof, or any other tribunal or agency; if there is such other action or proceeding, he must state the status of the same; and if he should thereafter learn that a similar action or proceeding has been filed or is pending before the Supreme Court, the Court of Appeals, or different divisions thereof, or any other tribunal or agency, he undertakes to promptly inform the aforesaid courts and other tribunal or agency thereof within five (5) days therefrom. xxx Compliance with the certification against forum shopping is separate from and independent of the avoidance of forum shopping itself. The requirement is mandatory. The failure of the petitioner to comply with the foregoing requirement shall be sufficient ground for the dismissal of the petition without prejudice, unless otherwise provided.26 Indubitably, the first paragraph of petitioner’s certification is incomplete and unintelligible. Petitioner failed to certify that he "had not heretofore commenced any other action involving the same issues in the Supreme Court, the Court of Appeals or the different divisions thereof or any other tribunal or agency" as required by paragraph 4, Section 3, Rule 46 of the Revised Rules of Court. We agree with petitioner’s contention that the certification is designed to promote and facilitate the orderly administration of justice, and therefore, should not be interpreted with absolute literalness. In his works on the Revised Rules of Civil Procedure, former Supreme Court Justice Florenz Regalado states that, with respect to the contents of the certification which the pleader may prepare, the rule of substantial compliance may be availed of.27 However, there must be a special circumstance or compelling reason which makes the strict application of the requirement clearly unjustified. The instant petition has not alleged any such extraneous circumstance. Moreover, as worded, the certification cannot even be regarded as substantial compliance with the procedural requirement. Thus, the CA was not informed whether, aside from the petition before it, petitioner had commenced any other action involving the same issues in other tribunals. On the merits of the petition, the CA ruled that the petitioner failed to establish that the Secretary of Justice committed grave abuse of discretion in finding probable cause against the petitioner for violation of estafa under Article 315, paragraph 1(b) of the Revised Penal Code, in relation to P.D. No. 115. Thus, the appellate court ratiocinated: Be that as it may, even on the merits, the arguments advanced in support of the petition are not persuasive enough to justify the desired conclusion that respondent Secretary of Justice gravely abused its discretion in coming out with his assailed

Resolutions. Petitioner posits that, except for his being the Senior Vice-President of the PBMI, there is no iota of evidence that he was a participes crimines in violating the trust receipts sued upon; and that his liability, if at all, is purely civil because he signed the said trust receipts merely as a xxx surety and not as the entrustee. These assertions are, however, too dull that they cannot even just dent the findings of the respondent Secretary, viz: "x x x it is apropos to quote section 13 of PD 115 which states in part, viz: ‘xxx If the violation or offense is committed by a corporation, partnership, association or other judicial entities, the penalty provided for in this Decree shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense.’ "There is no dispute that it was the respondent, who as senior vice-president of PBM, executed the thirteen (13) trust receipts. As such, the law points to him as the official responsible for the offense. Since a corporation cannot be proceeded against criminally because it cannot commit crime in which personal violence or malicious intent is required, criminal action is limited to the corporate agents guilty of an act amounting to a crime and never against the corporation itself (West Coast Life Ins. Co. vs. Hurd, 27 Phil. 401; Times, [I]nc. v. Reyes, 39 SCRA 303). Thus, the execution by respondent of said receipts is enough to indict him as the official responsible for violation of PD 115. "Parenthetically, respondent is estopped to still contend that PD 115 covers only goods which are ultimately destined for sale and not goods, like those imported by PBM, for use in manufacture. This issue has already been settled in the Allied Banking Corporation case, supra, where he was also a party, when the Supreme Court ruled that PD 115 is ‘not limited to transactions in goods which are to be sold (retailed), reshipped, stored or processed as a component or a product ultimately sold’ but ‘covers failure to turn over the proceeds of the sale of entrusted goods, or to return said goods if unsold or disposed of in accordance with the terms of the trust receipts.’ "In regard to the other assigned errors, we note that the respondent bound himself under the terms of the trust receipts not only as a corporate official of PBM but also as its surety. It is evident that these are two (2) capacities which do not exclude the other. Logically, he can be proceeded against in two (2) ways: first, as surety as determined by the Supreme Court in its decision in RCBC vs. Court of Appeals, 178 SCRA 739; and, secondly, as the corporate official responsible for the offense under PD 115, the present case is an appropriate remedy under our penal law. "Moreover, PD 115 explicitly allows the prosecution of corporate officers ‘without prejudice to the civil liabilities arising from the criminal offense’ thus, the civil liability imposed on respondent in RCBC vs. Court of Appeals case is clearly separate and distinct from his criminal liability under PD 115.’"28 Petitioner asserts that the appellate court’s ruling is erroneous because (a) the transaction between PBMI and respondent bank is not a trust receipt transaction; (b) he entered into the transaction and was sued in his capacity as PBMI Senior Vice-

President; (c) he never received the goods as an entrustee for PBMI, hence, could not have committed any dishonesty or abused the confidence of respondent bank; and (d) PBMI acquired the goods and used the same in operating its machineries and equipment and not for resale. The OSG, for its part, submits a contrary view, to wit: 34. Petitioner further claims that he is not a person responsible for the offense allegedly because "[b]eing charged as the Senior Vice-President of Philippine Blooming Mills (PBM), petitioner cannot be held criminally liable as the transactions sued upon were clearly entered into in his capacity as an officer of the corporation" and that [h]e never received the goods as an entrustee for PBM as he never had or took possession of the goods nor did he commit dishonesty nor "abuse of confidence in transacting with RCBC." Such argument is bereft of merit. 35. Petitioner’s being a Senior Vice-President of the Philippine Blooming Mills does not exculpate him from any liability. Petitioner’s responsibility as the corporate official of PBM who received the goods in trust is premised on Section 13 of P.D. No. 115, which provides: Section 13. Penalty Clause. The failure of an entrustee to turn over the proceeds of the sale of the goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust receipt or to return said goods, documents or instruments if they were not sold or disposed of in accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Article Three hundred and fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred and fifteen, as amended, otherwise known as the Revised Penal Code. If the violation or offense is committed by a corporation, partnership, association or other juridical entities, the penalty provided for in this Decree shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense. (Emphasis supplied) 36. Petitioner having participated in the negotiations for the trust receipts and having received the goods for PBM, it was inevitable that the petitioner is the proper corporate officer to be proceeded against by virtue of the PBM’s violation of P.D. No. 115.29 The ruling of the CA is correct. In Mendoza-Arce v. Office of the Ombudsman (Visayas),30 this Court held that the acts of a quasi-judicial officer may be assailed by the aggrieved party via a petition for certiorari and enjoined (a) when necessary to afford adequate protection to the constitutional rights of the accused; (b) when necessary for the orderly administration of justice; (c) when the acts of the officer are without or in excess of authority; (d) where the charges are manifestly false and motivated by the lust for vengeance; and (e) when there is clearly no prima facie case against the accused.31 The Court also declared that, if the officer conducting a preliminary investigation (in that case, the Office of the Ombudsman) acts without or in excess of his authority and resolves to file

an Information despite the absence of probable cause, such act may be nullified by a writ of certiorari.32 Indeed, under Section 4, Rule 112 of the 2000 Rules of Criminal Procedure,33 the Information shall be prepared by the Investigating Prosecutor against the respondent only if he or she finds probable cause to hold such respondent for trial. The Investigating Prosecutor acts without or in excess of his authority under the Rule if the Information is filed against the respondent despite absence of evidence showing probable cause therefor.34 If the Secretary of Justice reverses the Resolution of the Investigating Prosecutor who found no probable cause to hold the respondent for trial, and orders such prosecutor to file the Information despite the absence of probable cause, the Secretary of Justice acts contrary to law, without authority and/or in excess of authority. Such resolution may likewise be nullified in a petition for certiorari under Rule 65 of the Revised Rules of Civil Procedure.35 A preliminary investigation, designed to secure the respondent against hasty, malicious and oppressive prosecution, is an inquiry to determine whether (a) a crime has been committed; and (b) whether there is probable cause to believe that the accused is guilty thereof. It is a means of discovering the person or persons who may be reasonably charged with a crime. Probable cause need not be based on clear and convincing evidence of guilt, as the investigating officer acts upon probable cause of reasonable belief. Probable cause implies probability of guilt and requires more than bare suspicion but less than evidence which would justify a conviction. A finding of probable cause needs only to rest on evidence showing that more likely than not, a crime has been committed by the suspect.36 However, while probable cause should be determined in a summary manner, there is a need to examine the evidence with care to prevent material damage to a potential accused’s constitutional right to liberty and the guarantees of freedom and fair play37 and to protect the State from the burden of unnecessary expenses in prosecuting alleged offenses and holding trials arising from false, fraudulent or groundless charges.38 In this case, petitioner failed to establish that the Secretary of Justice committed grave abuse of discretion in issuing the assailed resolutions. Indeed, he acted in accord with law and the evidence. Section 4 of P.D. No. 115 defines a trust receipt transaction, thus: Section 4. What constitutes a trust receipt transaction. A trust receipt transaction, within the meaning of this Decree, is any transaction by and between a person referred to in this Decree as the entruster, and another person referred to in this Decree as entrustee, whereby the entruster, who owns or holds absolute title or security interests over certain specified goods, documents or instruments, releases the same to the possession of the entrustee upon the latter’s execution and delivery to the entruster of a signed document called a "trust receipt" wherein the entrustee binds himself to hold the designated goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation to turn

over to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receipt or the goods, documents or instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the trust receipt, or for other purposes substantially equivalent to any of the following: 1. In case of goods or documents, (a) to sell the goods or procure their sale; or (b) to manufacture or process the goods with the purpose of ultimate sale; Provided, That, in the case of goods delivered under trust receipt for the purpose of manufacturing or processing before its ultimate sale, the entruster shall retain its title over the goods whether in its original or processed form until the entrustee has complied fully with his obligation under the trust receipt; or (c) to load, unload, ship or otherwise deal with them in a manner preliminary or necessary to their sale; or 2. In the case of instruments a) to sell or procure their sale or exchange; or b) to deliver them to a principal; or c) to effect the consummation of some transactions involving delivery to a depository or register; or d) to effect their presentation, collection or renewal. The sale of goods, documents or instruments by a person in the business of selling goods, documents or instruments for profit who, at the outset of the transaction, has, as against the buyer, general property rights in such goods, documents or instruments, or who sells the same to the buyer on credit, retaining title or other interest as security for the payment of the purchase price, does not constitute a trust receipt transaction and is outside the purview and coverage of this Decree. An entrustee is one having or taking possession of goods, documents or instruments under a trust receipt transaction, and any successor in interest of such person for the purpose of payment specified in the trust receipt agreement.39 The entrustee is obliged to: (1) hold the goods, documents or instruments in trust for the entruster and shall dispose of them strictly in accordance with the terms and conditions of the trust receipt; (2) receive the proceeds in trust for the entruster and turn over the same to the entruster to the extent of the amount owing to the entruster or as appears on the trust receipt; (3) insure the goods for their total value against loss from fire, theft, pilferage or other casualties; (4) keep said goods or proceeds thereof whether in money or whatever form, separate and capable of identification as property of the entruster; (5) return the goods, documents or instruments in the event of non-sale or upon demand of the entruster; and (6) observe all other terms and conditions of the trust receipt not contrary to the provisions of the decree.40 The entruster shall be entitled to the proceeds from the sale of the goods, documents or instruments released under a trust receipt to the entrustee to the extent of the amount owing to the entruster or as appears in the trust receipt, or to the return of the goods, documents or instruments in case of non-sale, and to the enforcement of all other rights conferred on him in the trust receipt; provided, such are not contrary to the provisions of the document.41

In the case at bar, the transaction between petitioner and respondent bank falls under the trust receipt transactions envisaged in P.D. No. 115. Respondent bank imported the goods and entrusted the same to PBMI under the trust receipts signed by petitioner, as entrustee, with the bank as entruster. The agreement was as follows: And in consideration thereof, I/we hereby agree to hold said goods in trust for the said BANK as its property with liberty to sell the same within ____days from the date of the execution of this Trust Receipt and for the Bank’s account, but without authority to make any other disposition whatsoever of the said goods or any part thereof (or the proceeds) either by way of conditional sale, pledge or otherwise. I/we agree to keep the said goods insured to their full value against loss from fire, theft, pilferage or other casualties as directed by the BANK, the sum insured to be payable in case of loss to the BANK, with the understanding that the BANK is, not to be chargeable with the storage premium or insurance or any other expenses incurred on said goods. In case of sale, I/we further agree to turn over the proceeds thereof as soon as received to the BANK, to apply against the relative acceptances (as described above) and for the payment of any other indebtedness of mine/ours to the BANK. In case of non-sale within the period specified herein, I/we agree to return the goods under this Trust Receipt to the BANK without any need of demand. I/we agree to keep the said goods, manufactured products or proceeds thereof, whether in the form of money or bills, receivables, or accounts separate and capable of identification as property of the BANK.42 It must be stressed that P.D. No. 115 is a declaration by legislative authority that, as a matter of public policy, the failure of person to turn over the proceeds of the sale of the goods covered by a trust receipt or to return said goods, if not sold, is a public nuisance to be abated by the imposition of penal sanctions.43 The Court likewise rules that the issue of whether P.D. No. 115 encompasses transactions involving goods procured as a component of a product ultimately sold has been resolved in the affirmative in Allied Banking Corporation v. Ordoñez.44 The law applies to goods used by the entrustee in the operation of its machineries and equipment. The non-payment of the amount covered by the trust receipts or the non-return of the goods covered by the receipts, if not sold or otherwise not disposed of, violate the entrustee’s obligation to pay the amount or to return the goods to the entruster. In Colinares v. Court of Appeals,45 the Court declared that there are two possible situations in a trust receipt transaction. The first is covered by the provision which refers to money received under the obligation involving the duty to deliver it (entregarla) to the owner of the merchandise sold. The second is covered by the provision which refers to merchandise received under the obligation to return it (devolvera) to the owner.46 Thus, failure of the entrustee to turn over the proceeds of the sale of the goods covered by the trust receipts to the entruster or to return said

goods if they were not disposed of in accordance with the terms of the trust receipt is a crime under P.D. No. 115, without need of proving intent to defraud. The law punishes dishonesty and abuse of confidence in the handling of money or goods to the prejudice of the entruster, regardless of whether the latter is the owner or not. A mere failure to deliver the proceeds of the sale of the goods, if not sold, constitutes a criminal offense that causes prejudice, not only to another, but more to the public interest.47 The Court rules that although petitioner signed the trust receipts merely as Senior Vice-President of PBMI and had no physical possession of the goods, he cannot avoid prosecution for violation of P.D. No. 115. The penalty clause of the law, Section 13 of P.D. No. 115 reads: Section 13. Penalty Clause. The failure of an entrustee to turn over the proceeds of the sale of the goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust receipt or to return said goods, documents or instruments if they were not sold or disposed of in accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Article Three hundred and fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred and fifteen, as amended, otherwise known as the Revised Penal Code.1âwphi1 If the violation or offense is committed by a corporation, partnership, association or other juridical entities, the penalty provided for in this Decree shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense. The crime defined in P.D. No. 115 is malum prohibitum but is classified as estafa under paragraph 1(b), Article 315 of the Revised Penal Code, or estafa with abuse of confidence. It may be committed by a corporation or other juridical entity or by natural persons. However, the penalty for the crime is imprisonment for the periods provided in said Article 315, which reads: ARTICLE 315. Swindling (estafa). – Any person who shall defraud another by any of the means mentioned hereinbelow shall be punished by: 1st. The penalty of prision correccional in its maximum period to prision mayor in its minimum period, if the amount of the fraud is over 12,000 pesos but does not exceed 22,000 pesos; and if such amount exceeds the latter sum, the penalty provided in this paragraph shall be imposed in its maximum period, adding one year for each additional 10,000 pesos; but the total penalty which may be imposed shall not exceed twenty years. In such cases, and in connection with the accessory penalties which may be imposed and for the purpose of the other provisions of this Code, the penalty shall be termed prision mayor or reclusion temporal, as the case may be; 2nd. The penalty of prision correccional in its minimum and medium periods, if the amount of the fraud is over 6,000 pesos but does not exceed 12,000 pesos;

3rd. The penalty of arresto mayor in its maximum period to prision correccional in its minimum period, if such amount is over 200 pesos but does not exceed 6,000 pesos; and 4th. By arresto mayor in its medium and maximum periods, if such amount does not exceed 200 pesos, provided that in the four cases mentioned, the fraud be committed by any of the following means; xxx Though the entrustee is a corporation, nevertheless, the law specifically makes the officers, employees or other officers or persons responsible for the offense, without prejudice to the civil liabilities of such corporation and/or board of directors, officers, or other officials or employees responsible for the offense. The rationale is that such officers or employees are vested with the authority and responsibility to devise means necessary to ensure compliance with the law and, if they fail to do so, are held criminally accountable; thus, they have a responsible share in the violations of the law.48 If the crime is committed by a corporation or other juridical entity, the directors, officers, employees or other officers thereof responsible for the offense shall be charged and penalized for the crime, precisely because of the nature of the crime and the penalty therefor. A corporation cannot be arrested and imprisoned; hence, cannot be penalized for a crime punishable by imprisonment.49 However, a corporation may be charged and prosecuted for a crime if the imposable penalty is fine. Even if the statute prescribes both fine and imprisonment as penalty, a corporation may be prosecuted and, if found guilty, may be fined.50 A crime is the doing of that which the penal code forbids to be done, or omitting to do what it commands. A necessary part of the definition of every crime is the designation of the author of the crime upon whom the penalty is to be inflicted. When a criminal statute designates an act of a corporation or a crime and prescribes punishment therefor, it creates a criminal offense which, otherwise, would not exist and such can be committed only by the corporation. But when a penal statute does not expressly apply to corporations, it does not create an offense for which a corporation may be punished. On the other hand, if the State, by statute, defines a crime that may be committed by a corporation but prescribes the penalty therefor to be suffered by the officers, directors, or employees of such corporation or other persons responsible for the offense, only such individuals will suffer such penalty.51 Corporate officers or employees, through whose act, default or omission the corporation commits a crime, are themselves individually guilty of the crime.52 The principle applies whether or not the crime requires the consciousness of wrongdoing. It applies to those corporate agents who themselves commit the crime and to those, who, by virtue of their managerial positions or other similar relation to the corporation, could be deemed responsible for its commission, if by virtue of their relationship to the corporation, they had the power to prevent the act.53 Moreover, all parties active in promoting a crime, whether agents or not, are principals.54 Whether such officers or employees are benefited by their delictual acts is not a touchstone of their criminal liability. Benefit is not an operative fact.

In this case, petitioner signed the trust receipts in question. He cannot, thus, hide behind the cloak of the separate corporate personality of PBMI. In the words of Chief Justice Earl Warren, a corporate officer cannot protect himself behind a corporation where he is the actual, present and efficient actor.55 IN LIGHT OF ALL THE FOREGOING, the petition is DENIED for lack of merit. Costs against the petitioner. SO ORDERED.

Republic of the Philippines

SUPREME COURT

Manila

SECOND DIVISION

G.R. No. 199481 December 3, 2012

ILDEFONSO S. CRISOLOGO, Petitioner,

vs.

PEOPLE OF THE PHILIPPINES and CHINA BANKING CORPORATION,

Respondents.

D E C I S I O N

PERLAS-BERNABE, J.:

This Petition for Review on Certiorari1 under Rule 45 of the Rules of Court assails the

November 23, 2011 Decision2 of the Court of Appeals (CA) in CA-G.R. CV No. 80350,

which affirmed the December 4, 2002 Decision3 of the Regional Trial Courtt (RTC);

Manila, Branch 21. The RTC Decision acquitted petitioner Ildefonso S. Crisologo

(petitioner) of the charges for violation of Presidential Decree (P.D.) No. 115 (Trust

Receipts Law) in relation to Article 315 1(b) of the Revised Penal Code (RPC), but

adjudged him civilly liable under the subject letters of credit.

The Factual Antecedents

Sometime in January and February 1989, petitioner, as President of Novachemical

Industries, Inc. (Novachem), applied for commercial letters of credit from private

respondent China Banking Corporation (Chinabank) to finance the purchase of 1,6004

kgs. of amoxicillin trihydrate micronized from Hyundai Chemical Company based in

Seoul, South Korea and glass containers from San Miguel Corporation (SMC).

Subsequently, Chinabank issued Letters of Credit Nos. 89/03015 and DOM-330416 in

the respective amounts of US$114,400.007 (originally US$135,850.00)8 with a peso

equivalent of P2,139,119.809 and P1,712,289.90. After petitioner received the goods,

he executed for and in behalf of Novachem the corresponding trust receipt agreements

dated May 24, 1989 and August 31, 1989 in favor of Chinabank.

On January 28, 2004, Chinabank, through its Staff Assistant, Ms. Maria Rosario De

Mesa (Ms. De Mesa), filed before the City Prosecutor's Office of Manila a Complaint-

Affidavit10 charging petitioner for violation of P.D. No. 115 in relation to Article 315 1(b)

of the RPC for his purported failure to turn-over the goods or the proceeds from the

sale thereof, despite repeated demands. It averred that the latter, with intent to

defraud, and with unfaithfulness and abuse of confidence, misapplied, misappropriated

and converted the goods subject of the trust agreements, to its damage and prejudice.

In his defense, petitioner claimed that as a regular client of Chinabank, Novachem was

granted a credit line and letters of credit (L/Cs) secured by trust receipt agreements.

The subject L/Cs were included in the special term-payment arrangement mutually

agreed upon by the parties, and payable in installments. In the payment of its

obligations, Novachem would normally give instructions to Chinabank as to what

particular L/C or trust receipt obligation its payments would be applied. However, the

latter deviated from the special arrangement and misapplied payments intended for the

subject L/Cs and exacted unconscionably high interests and penalty charges.

The City Prosecutor found probable cause to indict petitioner as charged and filed the

corresponding informations before the RTC of Manila, docketed as Criminal Case Nos.

94-139613 and 94-139614.

The RTC Ruling

After due proceedings, the RTC rendered a Decision11 dated December 4, 2002

acquitting petitioner of the criminal charges for failure of the prosecution to prove his

guilt beyond reasonable doubt. It, however, adjudged him civilly liable to Chinabank,

without need for a separate civil action, for the amounts of P1,843,567.90 and

P879,166.81 under L/C Nos. 89/0301 and DOM-33041, respectively, less the payment

of P500,000.00 made during the preliminary investigation, with legal interest from the

filing of the informations on October 27, 1994 until full payment, and for the costs.

The CA Ruling

On appeal of the civil aspect, the CA affirmed12 the RTC Decision holding petitioner

civilly liable. It noted that petitioner signed the "Guarantee Clause" of the trust receipt

agreements in his personal capacity and even waived the benefit of excussion against

Novachem. As such, he is personally and solidarily liable with Novachem.

The Petition

In the instant petition, petitioner contends that the CA erred in declaring him civilly

liable under the subject L/Cs which are corporate obligations of Novachem, and that

the adjudged amounts were without factual basis because the obligations had already

been settled. He also questions the unilaterally-imposed interest rates applied by

Chinabank and, accordingly, prays for the application of the stipulated interest rate of

18% per annum (p.a.) on the corporation’s obligations. He further assails the authority

of Ms. De Mesa to prosecute the case against him sans authority from Chinabank's

Board of Directors.

The Court's Ruling

The petition is partly meritorious.

Section 13 of the Trust Receipts Law explicitly provides that if the violation or offense is

committed by a corporation, as in this case, the penalty provided for under the law shall

be imposed upon the directors, officers, employees or other officials or person

responsible for the offense, without prejudice to the civil liabilities arising from the

criminal offense.

In this case, petitioner was acquitted of the charge for violation of the Trust Receipts

Law in relation to Article 315 1(b)13 of the RPC. As such, he is relieved of the

corporate criminal liability as well as the corresponding civil liability arising therefrom.

However, as correctly found by the RTC and the CA, he may still be held liable for the

trust receipts and L/C transactions he had entered into in behalf of Novachem.

Settled is the rule that debts incurred by directors, officers, and employees acting as

corporate agents are not their direct liability but of the corporation they represent,

except if they contractually agree/stipulate or assume to be personally liable for the

corporation’s debts,14 as in this case.

The RTC and the CA adjudged petitioner personally and solidarily liable with

Novachem for the obligations secured by the subject trust receipts based on the finding

that he signed the guarantee clauses therein in his personal capacity and even waived

the benefit of excussion. However, a review of the records shows that petitioner signed

only the guarantee clauses of the Trust Receipt dated May 24, 198915 and the

corresponding Application and Agreement for Commercial Letter of Credit No. L/C No.

89/0301.16 With respect to the Trust Receipt17 dated August 31, 1989 and Irrevocable

Letter of Credit18 No. L/C No. DOM-33041 issued to SMC for the glass containers, the

second pages of these documents that would have reflected the guarantee clauses

were missing and did not form part of the prosecution's formal offer of evidence. In

relation thereto, Chinabank stipulated19 before the CA that the second page of the

August 31, 1989 Trust Receipt attached to the complaint before the court a quo would

serve as the missing page. A perusal of the said page, however, reveals that the same

does not bear the signature of the petitioner in the guarantee clause. Hence, it was

error for the CA to hold petitioner likewise liable for the obligation secured by the said

trust receipt (L/C No. DOM-33041). Neither was sufficient evidence presented to prove

that petitioner acted in bad faith or with gross negligence as regards the transaction

that would have held him civilly liable for his actions in his capacity as President of

Novachem.1âwphi1

On the matter of interest, while petitioner assailed the unilateral imposition of interest at

rates above the stipulated 18% p.a., he failed to submit a summary of the pertinent

dates when excessive interests were imposed and the purported over-payments that

should be refunded. Having failed to prove his affirmative defense, the Court finds no

reason to disturb the amount awarded to Chinabank. Settled is the rule that in civil

cases, the party who asserts the affirmative of an issue has the onus to prove his

assertion in order to obtain a favorable judgment. Thus, the burden rests on the debtor

to prove payment rather than on the creditor to prove non-payment.20

Lastly, the Court affirms Ms. De Mesa's capacity to sue on behalf of Chinabank despite

the lack of proof of authority to represent the latter. The Court noted that as Staff

Assistant of Chinabank, Ms. De Mesa was tasked, among others, to review

applications for L/Cs, verify the documents of title and possession of goods covered by

L/Cs, as well as pertinent documents under trust receipts (TRs); prepare/send/cause

the preparation of statements of accounts reflecting the outstanding balance under the

said L/Cs and/or TRs, and accept the corresponding payments; refer unpaid

obligations to Chinabank's lawyers and follow-up results thereon. As such, she was in

a position to verify the truthfulness and correctness of the allegations in the Complaint-

Affidavit. Besides, petitioner voluntarily submitted21 to the jurisdiction of the court a

quo and did not question Ms. De Mesa's authority to represent Chinabank in the instant

case until an adverse decision was rendered against him.

WHEREFORE, the assailed November 23, 2011 Decision of the Court of Appeals in

CA-G.R. CV No. 80350 is AFFIRMED with the modification absolving petitioner

lldefonso S. Crisologo from any civil liability to private respondent China Banking

Corporation with respect to the Trust Receipt dated August 31, 1989 and L/C No.

DOM-33041. The rest of the Decision stands.

SO ORDERED.

ESTELA M.PERLAS-BERNABE

Associate Justice

SECOND DIVISIO

JAIME U. GOSIACO, G.R. No. 173807

Petitioner,

Present:

QUISUMBING, J.,

- versus - Chairperson,

CARPIO MORALES,

TINGA,

VELASCO, JR., and

BRION, JJ.

LETICIA CHING and EDWIN

CASTA,

Respondents. Promulgated:

April 16, 2009

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

D E C I S I O N

TINGA, J.:

The right to recover due and demandable pecuniary obligations incurred by juridical

persons such as corporations cannot be impaired by procedural rules. Our rules of

procedure governing the litigation of criminal actions for violation of Batas Pambansa

Blg. 22 (B.P. 22) have given the appearance of impairing such substantive rights, and

we take the opportunity herein to assert the necessary clarifications.

Before us is a Rule 45 petition[1] which seeks the reversal of the Decision[2] of the

Court of Appeals in CA-GR No. 29488. The Court of Appeals' decision affirmed the

decision[3] of the Regional Trial Court of Pasig, Branch 68 in Criminal Case No.

120482. The RTC's decision reversed the decision[4] of the Metropolitan Trial Court of

San Juan, Branch 58 in Criminal Case No. 70445 which involved a charge of violation

of B.P. Blg. 22 against respondents Leticia Ching (Ching) and Edwin Casta (Casta).

On 16 February 2000, petitioner Jaime Gosiaco (petitioner) invested P8,000,000.00

with ASB Holdings, Inc. (ASB) by way of loan. The money was loaned to ASB for a

period of 48 days with interest at 10.5% which is equivalent to P112,000.00. In

exchange, ASB through its Business Development Operation Group manager Ching,

issued DBS checks no. 0009980577 and 0009980578 for P8,000,000.00 and

P112,000.00 respectively. The checks, both signed by Ching, were drawn against DBS

Bank Makati Head Office branch. ASB, through a letter dated 31 March 2000,

acknowledged that it owed petitioner the abovementioned amounts.[5]

Upon maturity of the ASB checks, petitioner went to the DBS Bank San Juan Branch to

deposit the two (2) checks. However, upon presentment, the checks were dishonored

and payments were refused because of a stop payment order and for insufficiency of

funds. Petitioner informed respondents, through letters dated 6 and 10 April 2000,[6]

about the dishonor of the checks and demanded replacement checks or the return of

the money placement but to no avail. Thus, petitioner filed a criminal complaint for

violation of B.P. Blg. 22 before the Metropolitan Trial Court of San Juan against the

private respondents.

Ching was arraigned and tried while Casta remained at large. Ching denied liability and

claimed that she was a mere employee of ASB. She asserted that she did not have

knowledge as to how much money ASB had in the banks. Such responsibility, she

claimed belonged to another department.

On 15 December 2000, petitioner moved[7] that ASB and its president, Luke Roxas, be

impleaded as party defendants. Petitioner, then, paid the corresponding docket fees.

However, the MTC denied the motion as the case had already been submitted for final

decision.[8]

On 8 February 2001, the MTC acquitted Ching of criminal liability but it did not absolve

her from civil liability. The MTC ruled that Ching, as a corporate officer of ASB, was

civilly liable since she was a signatory to the checks.[9]

Both petitioner and Ching appealed the ruling to the RTC. Petitioner appealed to the

RTC on the ground that the MTC failed to hold ASB and Roxas either jointly or

severally liable with Ching. On the other hand, Ching moved for a reconsideration

which was subsequently denied. Thereafter, she filed her notice of appeal on the

ground that she should not be held civilly liable for the bouncing checks because they

were contractual obligations of ASB.

On 12 July 2005, the RTC rendered its decision sustaining Ching's appeal. The RTC

affirmed the MTCs ruling which denied the motion to implead ASB and Roxas for lack

of jurisdiction over their persons. The RTC also exonerated Ching from civil liability and

ruled that the subject obligation fell squarely on ASB. Thus, Ching should not be held

civilly liable.[10]

Petitioner filed a petition for review with the Court of Appeals on the grounds that the

RTC erred in absolving Ching from civil liability; in upholding the refusal of the MTC to

implead ASB and Roxas; and in refusing to pierce the corporate veil of ASB and hold

Roxas liable.

On 19 July 2006, the Court of Appeals affirmed the decision of the RTC and stated that

the amount petitioner sought to recover was a loan made to ASB and not to Ching.

Roxas testimony further bolstered the fact that the checks issued by Ching were for

and in behalf of ASB. The Court of Appeals ruled that ASB cannot be impleaded in a

B.P. Blg. 22 case since it is not a natural person and in the case of Roxas, he was not

the subject of a preliminary investigation. Lastly, the Court of Appeals ruled that there

was no need to pierce the corporate veil of ASB since none of the requisites were

present.[11]

Hence this petition.

Petitioner raised the following issues: (1) is a corporate officer who signed a bouncing

check civilly liable under B.P. Blg. 22; (2) can a corporation be impleaded in a B.P. Blg.

22 case; and (3) is there a basis to pierce the corporate veil of ASB?

B.P. Blg. 22 is popularly known as the Bouncing Checks Law. Section 1 of B.P. Blg. 22

provides:

xxx xxx xxx

Where the check is drawn by a corporation, company or entity, the person or persons,

who actually signed the check in behalf of such drawer shall be liable under this Act.

B.P. Blg. 22 was enacted to address the rampant issuance of bouncing checks as

payment for pre-existing obligations. The circulation of bouncing checks adversely

affected confidence in trade and commerce. The State criminalized such practice

because it was deemed injurious to public interests[12] and was found to be pernicious

and inimical to public welfare.[13] B.P. Blg. 22 punishes the act of making and issuing

bouncing checks. It is the act itself of issuing the checks which is considered malum

prohibitum. The law is an offense against public order and not an offense against

property.[14] It penalizes the issuance of a check without regard to its purpose. It

covers all types of checks.[15] Even checks that were issued as a form of deposit or

guarantee were held to be within the ambit of B.P. Blg. 22.[16]

When a corporate officer issues a worthless check in the corporate name he may be

held personally liable for violating a penal statute.[17] The statute imposes criminal

penalties on anyone who with intent to defraud another of money or property, draws or

issues a check on any bank with knowledge that he has no sufficient funds in such

bank to meet the check on presentment.[18] Moreover, the personal liability of the

corporate officer is predicated on the principle that he cannot shield himself from

liability from his own acts on the ground that it was a corporate act and not his personal

act.[19] As we held in Llamado v. Court of Appeals:[20]

Petitioner's argument that he should not be held personally liable for the amount of the

check because it was a check of the Pan Asia Finance Corporation and he signed the

same in his capacity as Treasurer of the corporation, is also untenable. The third

paragraph of Section 1 of BP Blg. 22 states: Where the check is drawn by a

corporation, company or entity, the person or persons who actually signed the check in

behalf of such drawer shall be liable under this Act.

The general rule is that a corporate officer who issues a bouncing corporate check can

only be held civilly liable when he is convicted. In the recent case of Bautista v. Auto

Plus Traders Inc.,[21] the Court ruled decisively that the civil liability of a corporate

officer in a B.P. Blg. 22 case is extinguished with the criminal liability. We are not

inclined through this case to revisit so recent a precedent, and the rule of stare decisis

precludes us to discharge Ching of any civil liability arising from the B.P. Blg. 22 case

against her, on account of her acquittal in the criminal charge.

We recognize though the bind entwining the petitioner. The records clearly show that it

is ASB is civilly obligated to petitioner. In the various stages of this case, petitioner has

been proceeding from the premise that he is unable to pursue a separate civil action

against ASB itself for the recovery of the amounts due from the subject checks. From

this premise, petitioner sought to implead ASB as a defendant to the B.P. Blg. 22 case,

even if such case is criminal in nature.[22]

What supplied the notion to the petitioner that he was unable to pursue a separate civil

action against ASB? He cites the Revised Rules on Criminal Procedure, particularly the

provisions involving B.P. Blg. 22 cases, which state that:

Rule 111, Section 1Institution of criminal and civil action.

x x x

(b) The criminal action for violation of Batas Pambansa Blg. 22 shall be deemed to

include the corresponding civil action. No reservation to file such civil action separately

shall be allowed.

Upon filing of the aforesaid joint criminal and civil actions, the offended party shall pay

in full the filing fees based on the amount of the check involved, which shall be

considered as the actual damages claimed. Where the complainant or information also

seeks to recover liquidated, moral, nominal, temperate or exemplary damages, the

offended party shall pay the filing fees based on the amounts alleged therein. If the

amounts are not so alleged but any of these damages are subsequently awarded by

the court, the filing fees based on the amount awarded shall constitute a first lien on

the judgment.

Where the civil action has been filed separately and trial thereof has not yet

commenced, it may be consolidated with the criminal action upon application with the

court trying the latter case. If the application is granted, the trial of both actions shall

proceed in accordance with section 2 of this Rule governing consolidation of the civil

and criminal actions.[23]

We are unable to agree with petitioner that he is entitled to implead ASB in the B.P.

Blg. 22 case, or any other corporation for that matter, even if the Rules require the joint

trial of both the criminal and civil liability. A basic maxim in statutory construction is that

the interpretation of penal laws is strictly construed against the State and liberally

construed against the accused. Nowhere in B.P. Blg. 22 is it provided that a juridical

person may be impleaded as an accused or defendant in the prosecution for violations

of that law, even in the litigation of the civil aspect thereof.

Nonetheless, the substantive right of a creditor to recover due and demandable

obligations against a debtor-corporation cannot be denied or diminished by a rule of

procedure. Technically, nothing in Section 1(b) of Rule 11 prohibits the reservation of a

separate civil action against the juridical person on whose behalf the check was issued.

What the rules prohibit is the reservation of a separate civil

action against the natural person charged with violating B.P. Blg. 22, including such

corporate officer who had signed the bounced check.

In theory the B.P. Blg. 22 criminal liability of the person who issued the bouncing check

in behalf of a corporation stands independent of the civil liability of the corporation

itself, such civil liability arising from the Civil Code. B.P. Blg. 22 itself fused this criminal

liability of the signer of the check in behalf of the corporation with the corresponding

civil liability of the corporation itself by allowing the complainant to recover such civil

liability not from the corporation, but from the person who signed the check in its

behalf. Prior to the amendments to our rules on criminal procedure, it though clearly

was permissible to pursue the criminal liability against the signatory, while going after

the corporation itself for the civil liability.

However, with the insistence under the amended rules that the civil and criminal liability

attaching to the bounced check be pursued jointly, the previous option to directly

pursue the civil liability against the person who incurred the civil obligationthe

corporation itselfis no longer that clear. In theory, the implied institution of the civil case

into the criminal case for B.P. Blg. 22 should not affect the civil liability of the

corporation for the same check, since such implied institution concerns the civil liability

of the signatory, and not of the corporation.

Let us pursue this point further. B.P. Blg. 22 imposes a distinct civil liability on the

signatory of the check which is distinct from the civil liability of the corporation for the

amount represented from the check. The civil liability attaching to the signatory arises

from the wrongful act of signing the check despite the insufficiency of funds in the

account, while the civil liability attaching to the corporation is itself the very obligation

covered by the check or the consideration for its execution. Yet these civil liabilities are

mistaken to be indistinct. The confusion is traceable to the singularity of the amount of

each.

If we conclude, as we should, that under the current Rules of Criminal Procedure, the

civil action that is impliedly instituted in the B.P. Blg. 22 action is only the civil liability of

the signatory, and not that of the corporation itself, the distinctness of the cause of

action against the signatory and that against the corporation is rendered beyond

dispute. It follows that the actions involving these liabilities should be adjudged

according to their respective standards and merits. In the B.P. Blg. 22 case, what the

trial court should determine whether or not the signatory had signed the check with

knowledge of the insufficiency of funds or credit in the bank account, while in the civil

case the trial court should ascertain whether or not the obligation itself

is valid and demandable. The litigation of both questions could, in theory, proceed

independently and simultaneously without being ultimately conclusive on one or the

other.

It might be argued that under the current rules, if the signatory were made liable for the

amount of the check by reason of the B.P. Blg. 22 case, such signatory would have the

option of recovering the same amount from the corporation. Yet that prospect does not

ultimately satisfy the ends of justice. If the signatory does not have sufficient assets to

answer for the amount of the checka distinct possibility considering the occasional

large-scale transactions engaged in by corporations the corporation would not be

subsidiarily liable to the complainant, even if it in truth the controversy, of which the

criminal case is just a part, is traceable to the original obligation of the corporation.

While the Revised Penal Code imposes subsidiary civil liability to corporations for

criminal acts engaged in by their employees in the discharge of their duties, said

subsidiary liability applies only to felonies,[24] and not to crimes penalized by special

laws such as B.P. Blg. 22. And nothing in B.P. Blg. 22 imposes such subsidiary liability

to the corporation in whose name the check is actually issued. Clearly then, should the

check signatory be unable to pay the obligation incurred by the corporation, the

complainant would be bereft of remedy unless the right of action to collect on the

liability of the corporation is recognized and given flesh.

There are two prevailing concerns should civil recovery against the corporation be

pursued even as the B.P. Blg. 22 case against the signatory remains extant. First, the

possibility that the plaintiff might be awarded the amount of the check in both the B.P.

Blg. 22 case and in the civil action against the corporation. For obvious reasons, that

should not be permitted. Considering that petitioner herein has no chance to recover

the amount of the check through the B.P. Blg. 22 case, we need not contend with that

possibility through this case. Nonetheless, as a matter of prudence, it is best we refer

the matter to the Committee on Rules for the formulation of proper guidelines to

prevent that possibility.

The other concern is over the payment of filing fees in both the B.P. Blg. 22 case and

the civil action against the corporation. Generally, we see no evil or cause for distress if

the plaintiff were made to pay filing fees based on the amount of the check in both the

B.P. Blg. 22 case and the civil action. After all, the plaintiff therein made the deliberate

option to file two separate cases, even if the recovery of the amounts of the check

against the corporation could evidently be pursued through the civil action alone.

Nonetheless, in petitioners particular case, considering the previous legal confusion on

whether he is authorized to file the civil case against ASB, he should, as a matter of

equity, be exempted from paying the filing fees based on the amount of the checks

should he pursue the civil action against ASB. In a similar vein and for a similar reason,

we likewise find that petitioner should not be barred by prescription should he file the

civil action as the period should not run from the date the checks were issued but from

the date this decision attains finality. The courts should not be bound strictly by the

statute of limitations or the doctrine of laches when to do so, manifest wrong or

injustice would result.[25]

WHEREFORE, the petition is DENIED, without prejudice to the right of petitioner Jaime

U. Gosiaco to pursue an independent civil action against ASB Holdings Inc. for the

amount of the subject checks, in accordance with the terms of this decision. No

pronouncements as to costs.

Let a copy of this Decision be REFERRED to the Committee on Revision of the Rules

for the formulation of the formal rules of procedure to govern the civil action for the

recovery of the amount covered by the check against the juridical person which issued

it.

SO ORDERED.

DANTE O. TINGA

Associate Justice

FIRST DIVISION

[G.R. No. 129577-80. February 15, 2000]

PEOPLE OF THE PHILIPPINES, plaintiff-appellee, vs. BULU CHOWDURY, accused-

appellant.

D E C I S I O N

PUNO, J.:

In November 1995, Bulu Chowdury and Josephine Ong were charged before the

Regional Trial Court of Manila with the crime of illegal recruitment in large scale

committed as follows:

"That sometime between the period from August 1994 to October 1994 in the City of

Manila, Philippines and within the jurisdiction of this Honorable Court, the above-

named accused, representing themselves to have the capacity to contract, enlist and

transport workers for employment abroad, conspiring, confederating and mutually

helping one another, did then and there willfully, unlawfully and feloniously recruit the

herein complainants: Estrella B. Calleja, Melvin C. Miranda and Aser S. Sasis,

individually or as a group for employment in Korea without first obtaining the required

license and/or authority from the Philippine Overseas Employment Administration."[1]

They were likewise charged with three counts of estafa committed against private

complainants.[2] The State Prosecutor, however, later dismissed the estafa charges

against Chowdury[3] and filed an amended information indicting only Ong for the

offense.[4]

Chowdury was arraigned on April 16, 1996 while Ong remained at large. He pleaded

"not guilty" to the charge of illegal recruitment in large scale.[5]

Trial ensued.

The prosecution presented four witnesses: private complainants Aser Sasis, Estrella

Calleja and Melvin Miranda, and Labor Employment Officer Abbelyn Caguitla.

Sasis testified that he first met Chowdury in August 1994 when he applied with

Craftrade Overseas Developers (Craftrade) for employment as factory worker in South

Korea. Chowdury, a consultant of Craftrade, conducted the interview. During the

interview, Chowdury informed him about the requirements for employment. He told him

to submit his passport, NBI clearance, passport size picture and medical certificate. He

also required him to undergo a seminar. He advised him that placement would be on a

first-come-first-serve basis and urged him to complete the requirements immediately.

Sasis was also charged a processing fee of P25,000.00. Sasis completed all the

requirements in September 1994. He also paid a total amount of P16,000.00 to

Craftrade as processing fee. All payments were received by Ong for which she issued

three receipts.[6] Chowdury then processed his papers and convinced him to complete

his payment.[7]

Sasis further said that he went to the office of Craftrade three times to follow up his

application but he was always told to return some other day. In one of his visits to

Craftrades office, he was informed that he would no longer be deployed for

employment abroad. This prompted him to withdraw his payment but he could no

longer find Chowdury. After two unsuccessful attempts to contact him, he decided to

file with the Philippine Overseas Employment Administration (POEA) a case for illegal

recruitment against Chowdury. Upon verification with the POEA, he learned that

Craftrade's license had already expired and has not been renewed and that Chowdury,

in his personal capacity, was not a licensed recruiter.[8]

Calleja testified that in June 1994, she applied with Craftrade for employment as

factory worker in South Korea. She was interviewed by Chowdury. During the

interview, he asked questions regarding her marital status, her age and her province.

Toward the end of the interview, Chowdury told her that she would be working in a

factory in Korea. He required her to submit her passport, NBI clearance, ID pictures,

medical certificate and birth certificate. He also obliged her to attend a seminar on

overseas employment. After she submitted all the documentary requirements,

Chowdury required her to pay P20,000.00 as placement fee. Calleja made the

payment on August 11, 1994 to Ong for which she was issued a receipt.[9] Chowdury

assured her that she would be able to leave on the first week of September but it

proved to be an empty promise. Calleja was not able to leave despite several follow-

ups. Thus, she went to the POEA where she discovered that Craftrade's license had

already expired. She tried to withdraw her money from Craftrade to no avail. Calleja

filed a complaint for illegal recruitment against Chowdury upon advice of POEA's legal

counsel.[10]

Miranda testified that in September 1994, his cousin accompanied him to the office of

Craftrade in Ermita, Manila and introduced him to Chowdury who presented himself as

consultant and interviewer. Chowdury required him to fill out a bio-data sheet before

conducting the interview. Chowdury told Miranda during the interview that he would

send him to Korea for employment as factory worker. Then he asked him to submit the

following documents: passport, passport size picture, NBI clearance and medical

certificate. After he complied with the requirements, he was advised to wait for his visa

and to pay P25,000.00 as processing fee. He paid the amount of P25,000.00 to Ong

who issued receipts therefor.[11] Craftrade, however, failed to deploy him. Hence,

Miranda filed a complaint with the POEA against Chowdury for illegal recruitment.[12]

Labor Employment Officer Abbelyn Caguitla of the Licensing Branch of the POEA

testified that she prepared a certification on June 9, 1996 that Chowdury and his co-

accused, Ong, were not, in their personal capacities, licensed recruiters nor were they

connected with any licensed agency. She nonetheless stated that Craftrade was

previously licensed to recruit workers for abroad which expired on December 15, 1993.

It applied for renewal of its license but was only granted a temporary license effective

December 16, 1993 until September 11, 1994. From September 11, 1994, the POEA

granted Craftrade another temporary authority to process the expiring visas of

overseas workers who have already been deployed. The POEA suspended Craftrade's

temporary license on December 6, 1994.[13]

For his defense, Chowdury testified that he worked as interviewer at Craftrade from

1990 until 1994. His primary duty was to interview job applicants for abroad. As a mere

employee, he only followed the instructions given by his superiors, Mr. Emmanuel

Geslani, the agencys President and General Manager, and Mr. Utkal Chowdury, the

agency's Managing Director. Chowdury admitted that he interviewed private

complainants on different dates. Their office secretary handed him their bio-data and

thereafter he led them to his room where he conducted the interviews. During the

interviews, he had with him a form containing the qualifications for the job and he filled

out this form based on the applicant's responses to his questions. He then submitted

them to Mr. Utkal Chowdury who in turn evaluated his findings. He never received

money from the applicants. He resigned from Craftrade on November 12, 1994.[14]

Another defense witness, Emelita Masangkay who worked at the Accreditation Branch

of the POEA presented a list of the accredited principals of Craftrade Overseas

Developers[15] and a list of processed workers of Craftrade Overseas Developers from

1988 to 1994.[16]

The trial court found Chowdury guilty beyond reasonable doubt of the crime of illegal

recruitment in large scale. It sentenced him to life imprisonment and to pay a fine of

P100,000.00. It further ordered him to pay Aser Sasis the amount of P16,000.00,

Estrella Calleja, P20,000.00 and Melvin Miranda, P25,000.00. The dispositive portion

of the decision reads:

"WHEREFORE, in view of the foregoing considerations, the prosecution having proved

the guilt of the accused Bulu Chowdury beyond reasonable doubt of the crime of Illegal

Recruitment in large scale, he is hereby sentenced to suffer the penalty of life

imprisonment and a fine of P100,000.00 under Art. 39 (b) of the New Labor Code of

the Philippines. The accused is ordered to pay the complainants Aser Sasis the

amount of P16,000.00; Estrella Calleja the amount of P20,000.00; Melvin Miranda the

amount of P25,000.00."[17]

Chowdury appealed.

The elements of illegal recruitment in large scale are:

(1) The accused undertook any recruitment activity defined under Article 13 (b) or any

prohibited practice enumerated under Article 34 of the Labor Code;

(2) He did not have the license or authority to lawfully engage in the recruitment and

placement of workers; and

(3) He committed the same against three or more persons, individually or as a

group.[18]

The last paragraph of Section 6 of Republic Act (RA) 8042[19] states who shall be held

liable for the offense, thus:

"The persons criminally liable for the above offenses are the principals, accomplices

and accessories. In case of juridical persons, the officers having control, management

or direction of their business shall be liable."

The Revised Penal Code which supplements the law on illegal recruitment[20] defines

who are the principals, accomplices and accessories. The principals are: (1) those who

take a direct part in the execution of the act; (2) those who directly force or induce

others to commit it; and (3) those who cooperate in the commission of the offense by

another act without which it would not have been accomplished.[21] The accomplices

are those persons who may not be considered as principal as defined in Section 17 of

the Revised Penal Code but cooperate in the execution of the offense by previous or

simultaneous act.[22] The accessories are those who, having knowledge of the

commission of the crime, and without having participated therein, either as principals or

accomplices, take part subsequent to its commission in any of the following manner:

(1) by profiting themselves or assisting the offenders to profit by the effects of the

crime; (2) by concealing or destroying the body of the crime, or the effects or

instruments thereof, in order to prevent its discovery; and (3) by harboring, concealing,

or assisting in the escape of the principal of the crime, provided the accessory acts with

abuse of his public functions or whenever the author of the crime is guilty of treason,

parricide, murder, or an attempt at the life of the chief executive, or is known to be

habitually guilty of some other crime.[23]

Citing the second sentence of the last paragraph of Section 6 of RA 8042, accused-

appellant contends that he may not be held liable for the offense as he was merely an

employee of Craftrade and he only performed the tasks assigned to him by his

superiors. He argues that the ones who should be held liable for the offense are the

officers having control, management and direction of the agency.

As stated in the first sentence of Section 6 of RA 8042, the persons who may be held

liable for illegal recruitment are the principals, accomplices and accessories. An

employee of a company or corporation engaged in illegal recruitment may be held

liable as principal, together with his employer,[24] if it is shown that he actively and

consciously participated in illegal recruitment.[25] It has been held that the existence of

the corporate entity does not shield from prosecution the corporate agent who

knowingly and intentionally causes the corporation to commit a crime. The corporation

obviously acts, and can act, only by and through its human agents, and it is their

conduct which the law must deter. The employee or agent of a corporation engaged in

unlawful business naturally aids and abets in the carrying on of such business and will

be prosecuted as principal if, with knowledge of the business, its purpose and effect,

he consciously contributes his efforts to its conduct and promotion, however slight his

contribution may be.[26] The law of agency, as applied in civil cases, has no

application in criminal cases, and no man can escape punishment when he participates

in the commission of a crime upon the ground that he simply acted as an agent of any

party.[27] The culpability of the employee therefore hinges on his knowledge of the

offense and his active participation in its commission. Where it is shown that the

employee was merely acting under the direction of his superiors and was unaware that

his acts constituted a crime, he may not be held criminally liable for an act done for and

in behalf of his employer.[28]

The fundamental issue in this case, therefore, is whether accused-appellant knowingly

and intentionally participated in the commission of the crime charged.

We find that he did not.

Evidence shows that accused-appellant interviewed private complainants in the

months of June, August and September in 1994 at Craftrade's office. At that time, he

was employed as interviewer of Craftrade which was then operating under a temporary

authority given by the POEA pending renewal of its license.[29] The temporary license

included the authority to recruit workers.[30] He was convicted based on the fact that

he was not registered with the POEA as employee of Craftrade. Neither was he, in his

personal capacity, licensed to recruit overseas workers. Section 10 Rule II Book II of

the Rules and Regulation Governing Overseas Employment (1991) requires that every

change, termination or appointment of officers, representatives and personnel of

licensed agencies be registered with the POEA. Agents or representatives appointed

by a licensed recruitment agency whose appointments are not previously approved by

the POEA are considered "non-licensee " or "non-holder of authority" and therefore not

authorized to engage in recruitment activity.[31]

Upon examination of the records, however, we find that the prosecution failed to prove

that accused-appellant was aware of Craftrade's failure to register his name with the

POEA and that he actively engaged in recruitment despite this knowledge. The

obligation to register its personnel with the POEA belongs to the officers of the

agency.[32] A mere employee of the agency cannot be expected to know the legal

requirements for its operation. The evidence at hand shows that accused-appellant

carried out his duties as interviewer of Craftrade believing that the agency was duly

licensed by the POEA and he, in turn, was duly authorized by his agency to deal with

the applicants in its behalf. Accused-appellant in fact confined his actions to his job

description. He merely interviewed the applicants and informed them of the

requirements for deployment but he never received money from them. Their payments

were received by the agency's cashier, Josephine Ong. Furthermore, he performed his

tasks under the supervision of its president and managing director. Hence, we hold that

the prosecution failed to prove beyond reasonable doubt accused-appellant's

conscious and active participation in the commission of the crime of illegal recruitment.

His conviction, therefore, is without basis.

This is not to say that private complainants are left with no remedy for the wrong

committed against them. The Department of Justice may still file a complaint against

the officers having control, management or direction of the business of Craftrade

Overseas Developers (Craftrade), so long as the offense has not yet prescribed. Illegal

recruitment is a crime of economic sabotage which need to be curbed by the strong

arm of the law. It is important, however, to stress that the government's action must be

directed to the real offenders, those who perpetrate the crime and benefit from it.

IN VIEW WHEREOF, the assailed decision of the Regional Trial Court is REVERSED

and SET ASIDE. Accused-appellant is hereby ACQUITTED. The Director of the

Bureau of Corrections is ordered to RELEASE accused-appellant unless he is being

held for some other cause, and to REPORT to this Court compliance with this order

within ten (10) days from receipt of this decision. Let a copy of this Decision be

furnished the Secretary of the Department of Justice for his information and

appropriate action.

SO ORDERED.

Davide, Jr., C.J., (Chairman), Kapunan, Pardo, and Ynares-Santiago, JJ., concur.

Moral Damages

Republic of the Philippines

SUPREME COURT

Manila

FIRST DIVISION

G.R. No. 128690 January 21, 1999

ABS-CBN BROADCASTING CORPORATION, petitioner,

vs.

HONORABLE COURT OF APPEALS, REPUBLIC BROADCASTING CORP, VIVA

PRODUCTION, INC., and VICENTE DEL ROSARIO, respondents.

DAVIDE, JR., CJ.:

In this petition for review on certiorari, petitioner ABS-CBN Broadcasting Corp.

(hereafter ABS-CBN) seeks to reverse and set aside the decision 1 of 31 October 1996

and the resolution 2 of 10 March 1997 of the Court of Appeals in CA-G.R. CV No.

44125. The former affirmed with modification the decision 3 of 28 April 1993 of the

Regional Trial Court (RTC) of Quezon City, Branch 80, in Civil Case No. Q-92-12309.

The latter denied the motion to reconsider the decision of 31 October 1996.

The antecedents, as found by the RTC and adopted by the Court of Appeals, are as

follows:

In 1990, ABS-CBN and Viva executed a Film Exhibition Agreement (Exh. "A") whereby

Viva gave ABS-CBN an exclusive right to exhibit some Viva films. Sometime in

December 1991, in accordance with paragraph 2.4 [sic] of said agreement stating that.

1.4 ABS-CBN shall have the right of first refusal to the next twenty-four (24) Viva

films for TV telecast under such terms as may be agreed upon by the parties hereto,

provided, however, that such right shall be exercised by ABS-CBN from the actual offer

in writing.

Viva, through defendant Del Rosario, offered ABS-CBN, through its vice-president

Charo Santos-Concio, a list of three(3) film packages (36 title) from which ABS-CBN

may exercise its right of first refusal under the afore-said agreement (Exhs. "1" par, 2,

"2," "2-A'' and "2-B"-Viva). ABS-CBN, however through Mrs. Concio, "can tick off only

ten (10) titles" (from the list) "we can purchase" (Exh. "3" - Viva) and therefore did not

accept said list (TSN, June 8, 1992, pp. 9-10). The titles ticked off by Mrs. Concio are

not the subject of the case at bar except the film ''Maging Sino Ka Man."

For further enlightenment, this rejection letter dated January 06, 1992 (Exh "3" - Viva)

is hereby quoted:

6 January 1992

Dear Vic,

This is not a very formal business letter I am writing to you as I would like to express

my difficulty in recommending the purchase of the three film packages you are offering

ABS-CBN.

From among the three packages I can only tick off 10 titles we can purchase. Please

see attached. I hope you will understand my position. Most of the action pictures in the

list do not have big action stars in the cast. They are not for primetime. In line with this I

wish to mention that I have not scheduled for telecast several action pictures in out

very first contract because of the cheap production value of these movies as well as

the lack of big action stars. As a film producer, I am sure you understand what I am

trying to say as Viva produces only big action pictures.

In fact, I would like to request two (2) additional runs for these movies as I can only

schedule them in our non-primetime slots. We have to cover the amount that was paid

for these movies because as you very well know that non-primetime advertising rates

are very low. These are the unaired titles in the first contract.

1. Kontra Persa [sic]. 2. Raider Platoon. 3. Underground guerillas 4. Tiger Command 5. Boy de Sabog 6. Lady Commando 7. Batang Matadero 8. Rebelyon I hope you will consider this request of mine.

The other dramatic films have been offered to us before and have been rejected

because of the ruling of MTRCB to have them aired at 9:00 p.m. due to their very adult

themes.

As for the 10 titles I have choosen [sic] from the 3 packages please consider including

all the other Viva movies produced last year. I have quite an attractive offer to make.

Thanking you and with my warmest regards.

(Signed)

Charo Santos-Concio

On February 27, 1992, defendant Del Rosario approached ABS-CBN's Ms. Concio,

with a list consisting of 52 original movie titles (i.e. not yet aired on television) including

the 14 titles subject of the present case, as well as 104 re-runs (previously aired on

television) from which ABS-CBN may choose another 52 titles, as a total of 156 titles,

proposing to sell to ABS-CBN airing rights over this package of 52 originals and 52 re-

runs for P60,000,000.00 of which P30,000,000.00 will be in cash and P30,000,000.00

worth of television spots (Exh. "4" to "4-C" Viva; "9" -Viva).

On April 2, 1992, defendant Del Rosario and ABS-CBN general manager, Eugenio

Lopez III, met at the Tamarind Grill Restaurant in Quezon City to discuss the package

proposal of Viva. What transpired in that lunch meeting is the subject of conflicting

versions. Mr. Lopez testified that he and Mr. Del Rosario allegedly agreed that ABS-

CRN was granted exclusive film rights to fourteen (14) films for a total consideration of

P36 million; that he allegedly put this agreement as to the price and number of films in

a "napkin'' and signed it and gave it to Mr. Del Rosario (Exh. D; TSN, pp. 24-26, 77-78,

June 8, 1992). On the other hand, Del Rosario denied having made any agreement

with Lopez regarding the 14 Viva films; denied the existence of a napkin in which

Lopez wrote something; and insisted that what he and Lopez discussed at the lunch

meeting was Viva's film package offer of 104 films (52 originals and 52 re-runs) for a

total price of P60 million. Mr. Lopez promising [sic]to make a counter proposal which

came in the form of a proposal contract Annex "C" of the complaint (Exh. "1"·- Viva;

Exh. "C" - ABS-CBN).

On April 06, 1992, Del Rosario and Mr. Graciano Gozon of RBS Senior vice-president

for Finance discussed the terms and conditions of Viva's offer to sell the 104 films, after

the rejection of the same package by ABS-CBN.

On April 07, 1992, defendant Del Rosario received through his secretary, a handwritten

note from Ms. Concio, (Exh. "5" - Viva), which reads: "Here's the draft of the contract. I

hope you find everything in order," to which was attached a draft exhibition agreement

(Exh. "C''- ABS-CBN; Exh. "9" - Viva, p. 3) a counter-proposal covering 53 films, 52 of

which came from the list sent by defendant Del Rosario and one film was added by Ms.

Concio, for a consideration of P35 million. Exhibit "C" provides that ABS-CBN is

granted films right to 53 films and contains a right of first refusal to "1992 Viva Films."

The said counter proposal was however rejected by Viva's Board of Directors [in the]

evening of the same day, April 7, 1992, as Viva would not sell anything less than the

package of 104 films for P60 million pesos (Exh. "9" - Viva), and such rejection was

relayed to Ms. Concio.

On April 29, 1992, after the rejection of ABS-CBN and following several negotiations

and meetings defendant Del Rosario and Viva's President Teresita Cruz, in

consideration of P60 million, signed a letter of agreement dated April 24, 1992.

granting RBS the exclusive right to air 104 Viva-produced and/or acquired films (Exh.

"7-A" - RBS; Exh. "4" - RBS) including the fourteen (14) films subject of the present

case. 4

On 27 May 1992, ABS-CBN filed before the RTC a complaint for specific performance

with a prayer for a writ of preliminary injunction and/or temporary restraining order

against private respondents Republic Broadcasting Corporation 5 (hereafter RBS ),

Viva Production (hereafter VIVA), and Vicente Del Rosario. The complaint was

docketed as Civil Case No. Q-92-12309.

On 27 May 1992, RTC issued a temporary restraining order 6 enjoining private

respondents from proceeding with the airing, broadcasting, and televising of the

fourteen VIVA films subject of the controversy, starting with the film Maging Sino Ka

Man, which was scheduled to be shown on private respondents RBS' channel 7 at

seven o'clock in the evening of said date.

On 17 June 1992, after appropriate proceedings, the RTC issued an

order 7 directing the issuance of a writ of preliminary injunction upon ABS-CBN's

posting of P35 million bond. ABS-CBN moved for the reduction of the bond, 8 while

private respondents moved for reconsideration of the order and offered to put up a

counterbound. 9

In the meantime, private respondents filed separate answers with counterclaim. 10

RBS also set up a cross-claim against VIVA..

On 3 August 1992, the RTC issued an order 11 dissolving the writ of preliminary

injunction upon the posting by RBS of a P30 million counterbond to answer for

whatever damages ABS-CBN might suffer by virtue of such dissolution. However, it

reduced petitioner's injunction bond to P15 million as a condition precedent for the

reinstatement of the writ of preliminary injunction should private respondents be unable

to post a counterbond.

At the pre-trial 12 on 6 August 1992, the parties, upon suggestion of the court, agreed

to explore the possibility of an amicable settlement. In the meantime, RBS prayed for

and was granted reasonable time within which to put up a P30 million counterbond in

the event that no settlement would be reached.

As the parties failed to enter into an amicable settlement RBS posted on 1 October

1992 a counterbond, which the RTC approved in its Order of 15 October 1992. 13

On 19 October 1992, ABS-CBN filed a motion for reconsideration 14 of the 3 August

and 15 October 1992 Orders, which RBS opposed. 15

On 29 October 1992, the RTC conducted a pre-trial. 16

Pending resolution of its motion for reconsideration, ABS-CBN filed with the Court of

Appeals a petition 17 challenging the RTC's Orders of 3 August and 15 October 1992

and praying for the issuance of a writ of preliminary injunction to enjoin the RTC from

enforcing said orders. The case was docketed as CA-G.R. SP No. 29300.

On 3 November 1992, the Court of Appeals issued a temporary restraining order 18 to

enjoin the airing, broadcasting, and televising of any or all of the films involved in the

controversy.

On 18 December 1992, the Court of Appeals promulgated a decision 19 dismissing the

petition in CA -G.R. No. 29300 for being premature. ABS-CBN challenged the

dismissal in a petition for review filed with this Court on 19 January 1993, which was

docketed as G.R. No. 108363.

In the meantime the RTC received the evidence for the parties in Civil Case No. Q-192-

1209. Thereafter, on 28 April 1993, it rendered a decision 20 in favor of RBS and VIVA

and against ABS-CBN disposing as follows:

WHEREFORE, under cool reflection and prescinding from the foregoing, judgments is

rendered in favor of defendants and against the plaintiff.

(1) The complaint is hereby dismissed;

(2) Plaintiff ABS-CBN is ordered to pay defendant RBS the following:

a) P107,727.00, the amount of premium paid by RBS to the surety which issued

defendant RBS's bond to lift the injunction;

b) P191,843.00 for the amount of print advertisement for "Maging Sino Ka Man"

in various newspapers;

c) Attorney's fees in the amount of P1 million;

d) P5 million as and by way of moral damages;

e) P5 million as and by way of exemplary damages;

(3) For defendant VIVA, plaintiff ABS-CBN is ordered to pay P212,000.00 by

way of reasonable attorney's fees.

(4) The cross-claim of defendant RBS against defendant VIVA is dismissed.

(5) Plaintiff to pay the costs.

According to the RTC, there was no meeting of minds on the price and terms of the

offer. The alleged agreement between Lopez III and Del Rosario was subject to the

approval of the VIVA Board of Directors, and said agreement was disapproved during

the meeting of the Board on 7 April 1992. Hence, there was no basis for ABS-CBN's

demand that VIVA signed the 1992 Film Exhibition Agreement. Furthermore, the right

of first refusal under the 1990 Film Exhibition Agreement had previously been

exercised per Ms. Concio's letter to Del Rosario ticking off ten titles acceptable to them,

which would have made the 1992 agreement an entirely new contract.

On 21 June 1993, this Court denied 21 ABS-CBN's petition for review in G.R. No.

108363, as no reversible error was committed by the Court of Appeals in its challenged

decision and the case had "become moot and academic in view of the dismissal of the

main action by the court a quo in its decision" of 28 April 1993.

Aggrieved by the RTC's decision, ABS-CBN appealed to the Court of Appeals claiming

that there was a perfected contract between ABS-CBN and VIVA granting ABS-CBN

the exclusive right to exhibit the subject films. Private respondents VIVA and Del

Rosario also appealed seeking moral and exemplary damages and additional

attorney's fees.

In its decision of 31 October 1996, the Court of Appeals agreed with the RTC that the

contract between ABS-CBN and VIVA had not been perfected, absent the approval by

the VIVA Board of Directors of whatever Del Rosario, it's agent, might have agreed

with Lopez III. The appellate court did not even believe ABS-CBN's evidence that

Lopez III actually wrote down such an agreement on a "napkin," as the same was

never produced in court. It likewise rejected ABS-CBN's insistence on its right of first

refusal and ratiocinated as follows:

As regards the matter of right of first refusal, it may be true that a Film Exhibition

Agreement was entered into between Appellant ABS-CBN and appellant VIVA under

Exhibit "A" in 1990, and that parag. 1.4 thereof provides:

1.4 ABS-CBN shall have the right of first refusal to the next twenty-four (24) VIVA

films for TV telecast under such terms as may be agreed upon by the parties hereto,

provided, however, that such right shall be exercised by ABS-CBN within a period of

fifteen (15) days from the actual offer in writing (Records, p. 14).

[H]owever, it is very clear that said right of first refusal in favor of ABS-CBN shall still be

subject to such terms as may be agreed upon by the parties thereto, and that the said

right shall be exercised by ABS-CBN within fifteen (15) days from the actual offer in

writing.

Said parag. 1.4 of the agreement Exhibit "A" on the right of first refusal did not fix the

price of the film right to the twenty-four (24) films, nor did it specify the terms thereof.

The same are still left to be agreed upon by the parties.

In the instant case, ABS-CBN's letter of rejection Exhibit 3 (Records, p. 89) stated that

it can only tick off ten (10) films, and the draft contract Exhibit "C" accepted only

fourteen (14) films, while parag. 1.4 of Exhibit "A'' speaks of the next twenty-four (24)

films.

The offer of V1VA was sometime in December 1991 (Exhibits 2, 2-A. 2-B; Records, pp.

86-88; Decision, p. 11, Records, p. 1150), when the first list of VIVA films was sent by

Mr. Del Rosario to ABS-CBN. The Vice President of ABS-CBN, Ms. Charo Santos-

Concio, sent a letter dated January 6, 1992 (Exhibit 3, Records, p. 89) where ABS-

CBN exercised its right of refusal by rejecting the offer of VIVA.. As aptly observed by

the trial court, with the said letter of Mrs. Concio of January 6, 1992, ABS-CBN had lost

its right of first refusal. And even if We reckon the fifteen (15) day period from February

27, 1992 (Exhibit 4 to 4-C) when another list was sent to ABS-CBN after the letter of

Mrs. Concio, still the fifteen (15) day period within which ABS-CBN shall exercise its

right of first refusal has already expired. 22

Accordingly, respondent court sustained the award of actual damages consisting in the

cost of print advertisements and the premium payments for the counterbond, there

being adequate proof of the pecuniary loss which RBS had suffered as a result of the

filing of the complaint by ABS-CBN. As to the award of moral damages, the Court of

Appeals found reasonable basis therefor, holding that RBS's reputation was debased

by the filing of the complaint in Civil Case No. Q-92-12309 and by the non-showing of

the film "Maging Sino Ka Man." Respondent court also held that exemplary damages

were correctly imposed by way of example or correction for the public good in view of

the filing of the complaint despite petitioner's knowledge that the contract with VIVA

had not been perfected, It also upheld the award of attorney's fees, reasoning that with

ABS-CBN's act of instituting Civil Case No, Q-92-1209, RBS was "unnecessarily forced

to litigate." The appellate court, however, reduced the awards of moral damages to P2

million, exemplary damages to P2 million, and attorney's fees to P500, 000.00.

On the other hand, respondent Court of Appeals denied VIVA and Del Rosario's appeal

because it was "RBS and not VIVA which was actually prejudiced when the complaint

was filed by ABS-CBN."

Its motion for reconsideration having been denied, ABS-CBN filed the petition in this

case, contending that the Court of Appeals gravely erred in

I

. . . RULING THAT THERE WAS NO PERFECTED CONTRACT BETWEEN

PETITIONER AND PRIVATE RESPONDENT VIVA NOTWITHSTANDING

PREPONDERANCE OF EVIDENCE ADDUCED BY PETITIONER TO THE

CONTRARY.

II

. . . IN AWARDING ACTUAL AND COMPENSATORY DAMAGES IN FAVOR OF

PRIVATE RESPONDENT RBS.

III

. . . IN AWARDING MORAL AND EXEMPLARY DAMAGES IN FAVOR OF PRIVATE

RESPONDENT RBS.

IV

. . . IN AWARDING ATTORNEY'S FEES IN FAVOR OF RBS.

ABS-CBN claims that it had yet to fully exercise its right of first refusal over twenty-four

titles under the 1990 Film Exhibition Agreement, as it had chosen only ten titles from

the first list. It insists that we give credence to Lopez's testimony that he and Del

Rosario met at the Tamarind Grill Restaurant, discussed the terms and conditions of

the second list (the 1992 Film Exhibition Agreement) and upon agreement thereon,

wrote the same on a paper napkin. It also asserts that the contract has already been

effective, as the elements thereof, namely, consent, object, and consideration were

established. It then concludes that the Court of Appeals' pronouncements were not

supported by law and jurisprudence, as per our decision of 1 December 1995 in

Limketkai Sons Milling, Inc. v. Court of Appeals, 23 which cited Toyota Shaw, Inc. v.

Court of Appeals, 24 Ang Yu Asuncion v. Court of Appeals, 25 and Villonco Realty

Company v. Bormaheco. Inc. 26

Anent the actual damages awarded to RBS, ABS-CBN disavows liability therefor. RBS

spent for the premium on the counterbond of its own volition in order to negate the

injunction issued by the trial court after the parties had ventilated their respective

positions during the hearings for the purpose. The filing of the counterbond was an

option available to RBS, but it can hardly be argued that ABS-CBN compelled RBS to

incur such expense. Besides, RBS had another available option, i.e., move for the

dissolution or the injunction; or if it was determined to put up a counterbond, it could

have presented a cash bond. Furthermore under Article 2203 of the Civil Code, the

party suffering loss or injury is also required to exercise the diligence of a good father

of a family to minimize the damages resulting from the act or omission. As regards the

cost of print advertisements, RBS had not convincingly established that this was a loss

attributable to the non showing "Maging Sino Ka Man"; on the contrary, it was brought

out during trial that with or without the case or the injunction, RBS would have spent

such an amount to generate interest in the film.

ABS-CBN further contends that there was no clear basis for the awards of moral and

exemplary damages. The controversy involving ABS-CBN and RBS did not in any way

originate from business transaction between them. The claims for such damages did

not arise from any contractual dealings or from specific acts committed by ABS-CBN

against RBS that may be characterized as wanton, fraudulent, or reckless; they arose

by virtue only of the filing of the complaint, An award of moral and exemplary damages

is not warranted where the record is bereft of any proof that a party acted maliciously

or in bad faith in filing an action. 27 In any case, free resort to courts for redress of

wrongs is a matter of public policy. The law recognizes the right of every one to sue for

that which he honestly believes to be his right without fear of standing trial for damages

where by lack of sufficient evidence, legal technicalities, or a different interpretation of

the laws on the matter, the case would lose ground. 28 One who makes use of his own

legal right does no injury. 29 If damage results front the filing of the complaint, it is

damnum absque injuria. 30 Besides, moral damages are generally not awarded in

favor of a juridical person, unless it enjoys a good reputation that was debased by the

offending party resulting in social humiliation. 31

As regards the award of attorney's fees, ABS-CBN maintains that the same had no

factual, legal, or equitable justification. In sustaining the trial court's award, the Court of

Appeals acted in clear disregard of the doctrines laid down in Buan v. Camaganacan

32 that the text of the decision should state the reason why attorney's fees are being

awarded; otherwise, the award should be disallowed. Besides, no bad faith has been

imputed on, much less proved as having been committed by, ABS-CBN. It has been

held that "where no sufficient showing of bad faith would be reflected in a party' s

persistence in a case other than an erroneous conviction of the righteousness of his

cause, attorney's fees shall not be recovered as cost." 33

On the other hand, RBS asserts that there was no perfected contract between ABS-

CBN and VIVA absent any meeting of minds between them regarding the object and

consideration of the alleged contract. It affirms that the ABS-CBN's claim of a right of

first refusal was correctly rejected by the trial court. RBS insist the premium it had paid

for the counterbond constituted a pecuniary loss upon which it may recover. It was

obliged to put up the counterbound due to the injunction procured by ABS-CBN. Since

the trial court found that ABS-CBN had no cause of action or valid claim against RBS

and, therefore not entitled to the writ of injunction, RBS could recover from ABS-CBN

the premium paid on the counterbond. Contrary to the claim of ABS-CBN, the cash

bond would prove to be more expensive, as the loss would be equivalent to the cost of

money RBS would forego in case the P30 million came from its funds or was borrowed

from banks.

RBS likewise asserts that it was entitled to the cost of advertisements for the cancelled

showing of the film "Maging Sino Ka Man" because the print advertisements were put

out to announce the showing on a particular day and hour on Channel 7, i.e., in its

entirety at one time, not a series to be shown on a periodic basis. Hence, the print

advertisement were good and relevant for the particular date showing, and since the

film could not be shown on that particular date and hour because of the injunction, the

expenses for the advertisements had gone to waste.

As regards moral and exemplary damages, RBS asserts that ABS-CBN filed the case

and secured injunctions purely for the purpose of harassing and prejudicing RBS.

Pursuant then to Article 19 and 21 of the Civil Code, ABS-CBN must be held liable for

such damages. Citing Tolentino, 34 damages may be awarded in cases of abuse of

rights even if the act done is not illicit and there is abuse of rights were plaintiff

institutes and action purely for the purpose of harassing or prejudicing the defendant.

In support of its stand that a juridical entity can recover moral and exemplary damages,

private respondents RBS cited People v. Manero, 35 where it was stated that such

entity may recover moral and exemplary damages if it has a good reputation that is

debased resulting in social humiliation. it then ratiocinates; thus:

There can be no doubt that RBS' reputation has been debased by ABS-CBN's acts in

this case. When RBS was not able to fulfill its commitment to the viewing public to

show the film "Maging Sino Ka Man" on the scheduled dates and times (and on two

occasions that RBS advertised), it suffered serious embarrassment and social

humiliation. When the showing was canceled, late viewers called up RBS' offices and

subjected RBS to verbal abuse ("Announce kayo nang announce, hindi ninyo naman

ilalabas," "nanloloko yata kayo") (Exh. 3-RBS, par. 3). This alone was not something

RBS brought upon itself. it was exactly what ABS-CBN had planned to happen.

The amount of moral and exemplary damages cannot be said to be excessive. Two

reasons justify the amount of the award.

The first is that the humiliation suffered by RBS is national extent. RBS operations as a

broadcasting company is [sic] nationwide. Its clientele, like that of ABS-CBN, consists

of those who own and watch television. It is not an exaggeration to state, and it is a

matter of judicial notice that almost every other person in the country watches

television. The humiliation suffered by RBS is multiplied by the number of televiewers

who had anticipated the showing of the film "Maging Sino Ka Man" on May 28 and

November 3, 1992 but did not see it owing to the cancellation. Added to this are the

advertisers who had placed commercial spots for the telecast and to whom RBS had a

commitment in consideration of the placement to show the film in the dates and times

specified.

The second is that it is a competitor that caused RBS to suffer the humiliation. The

humiliation and injury are far greater in degree when caused by an entity whose

ultimate business objective is to lure customers (viewers in this case) away from the

competition. 36

For their part, VIVA and Vicente del Rosario contend that the findings of fact of the trial

court and the Court of Appeals do not support ABS-CBN's claim that there was a

perfected contract. Such factual findings can no longer be disturbed in this petition for

review under Rule 45, as only questions of law can be raised, not questions of fact. On

the issue of damages and attorneys fees, they adopted the arguments of RBS.

The key issues for our consideration are (1) whether there was a perfected contract

between VIVA and ABS-CBN, and (2) whether RBS is entitled to damages and

attorney's fees. It may be noted that the award of attorney's fees of P212,000 in favor

of VIVA is not assigned as another error.

I.

The first issue should be resolved against ABS-CBN. A contract is a meeting of minds

between two persons whereby one binds himself to give something or to render some

service to another 37 for a consideration. there is no contract unless the following

requisites concur: (1) consent of the contracting parties; (2) object certain which is the

subject of the contract; and (3) cause of the obligation, which is established. 38 A

contract undergoes three stages:

(a) preparation, conception, or generation, which is the period of negotiation and

bargaining, ending at the moment of agreement of the parties;

(b) perfection or birth of the contract, which is the moment when the parties

come to agree on the terms of the contract; and

(c) consummation or death, which is the fulfillment or performance of the terms

agreed upon in the contract. 39

Contracts that are consensual in nature are perfected upon mere meeting of the minds,

Once there is concurrence between the offer and the acceptance upon the subject

matter, consideration, and terms of payment a contract is produced. The offer must be

certain. To convert the offer into a contract, the acceptance must be absolute and must

not qualify the terms of the offer; it must be plain, unequivocal, unconditional, and

without variance of any sort from the proposal. A qualified acceptance, or one that

involves a new proposal, constitutes a counter-offer and is a rejection of the original

offer. Consequently, when something is desired which is not exactly what is proposed

in the offer, such acceptance is not sufficient to generate consent because any

modification or variation from the terms of the offer annuls the offer. 40

When Mr. Del Rosario of VIVA met with Mr. Lopez of ABS-CBN at the Tamarind Grill

on 2 April 1992 to discuss the package of films, said package of 104 VIVA films was

VIVA's offer to ABS-CBN to enter into a new Film Exhibition Agreement. But ABS-CBN,

sent, through Ms. Concio, a counter-proposal in the form of a draft contract proposing

exhibition of 53 films for a consideration of P35 million. This counter-proposal could be

nothing less than the counter-offer of Mr. Lopez during his conference with Del Rosario

at Tamarind Grill Restaurant. Clearly, there was no acceptance of VIVA's offer, for it

was met by a counter-offer which substantially varied the terms of the offer.

ABS-CBN's reliance in Limketkai Sons Milling, Inc. v. Court of

Appeals 41 and Villonco Realty Company v. Bormaheco, Inc., 42 is misplaced. In these

cases, it was held that an acceptance may contain a request for certain changes in the

terms of the offer and yet be a binding acceptance as long as "it is clear that the

meaning of the acceptance is positively and unequivocally to accept the offer, whether

such request is granted or not." This ruling was, however, reversed in the resolution of

29 March 1996, 43 which ruled that the acceptance of all offer must be unqualified and

absolute, i.e., it "must be identical in all respects with that of the offer so as to produce

consent or meeting of the minds."

On the other hand, in Villonco, cited in Limketkai, the alleged changes in the revised

counter-offer were not material but merely clarificatory of what had previously been

agreed upon. It cited the statement in Stuart v. Franklin Life Insurance Co. 44 that "a

vendor's change in a phrase of the offer to purchase, which change does not

essentially change the terms of the offer, does not amount to a rejection of the offer

and the tender of a counter-offer." 45 However, when any of the elements of the

contract is modified upon acceptance, such alteration amounts to a counter-offer.

In the case at bar, ABS-CBN made no unqualified acceptance of VIVA's offer. Hence,

they underwent a period of bargaining. ABS-CBN then formalized its counter-proposals

or counter-offer in a draft contract, VIVA through its Board of Directors, rejected such

counter-offer, Even if it be conceded arguendo that Del Rosario had accepted the

counter-offer, the acceptance did not bind VIVA, as there was no proof whatsoever that

Del Rosario had the specific authority to do so.

Under Corporation Code, 46 unless otherwise provided by said Code, corporate

powers, such as the power; to enter into contracts; are exercised by the Board of

Directors. However, the Board may delegate such powers to either an executive

committee or officials or contracted managers. The delegation, except for the executive

committee, must be for specific purposes, 47 Delegation to officers makes the latter

agents of the corporation; accordingly, the general rules of agency as to the bindings

effects of their acts would

apply. 48 For such officers to be deemed fully clothed by the corporation to exercise a

power of the Board, the latter must specially authorize them to do so. That Del Rosario

did not have the authority to accept ABS-CBN's counter-offer was best evidenced by

his submission of the draft contract to VIVA's Board of Directors for the latter's

approval. In any event, there was between Del Rosario and Lopez III no meeting of

minds. The following findings of the trial court are instructive:

A number of considerations militate against ABS-CBN's claim that a contract was

perfected at that lunch meeting on April 02, 1992 at the Tamarind Grill.

FIRST, Mr. Lopez claimed that what was agreed upon at the Tamarind Grill referred to

the price and the number of films, which he wrote on a napkin. However, Exhibit "C"

contains numerous provisions which, were not discussed at the Tamarind Grill, if Lopez

testimony was to be believed nor could they have been physically written on a napkin.

There was even doubt as to whether it was a paper napkin or a cloth napkin. In short

what were written in Exhibit "C'' were not discussed, and therefore could not have been

agreed upon, by the parties. How then could this court compel the parties to sign

Exhibit "C" when the provisions thereof were not previously agreed upon?

SECOND, Mr. Lopez claimed that what was agreed upon as the subject matter of the

contract was 14 films. The complaint in fact prays for delivery of 14 films. But Exhibit

"C" mentions 53 films as its subject matter. Which is which If Exhibits "C" reflected the

true intent of the parties, then ABS-CBN's claim for 14 films in its complaint is false or if

what it alleged in the complaint is true, then Exhibit "C" did not reflect what was agreed

upon by the parties. This underscores the fact that there was no meeting of the minds

as to the subject matter of the contracts, so as to preclude perfection thereof. For

settled is the rule that there can be no contract where there is no object which is its

subject matter (Art. 1318, NCC).

THIRD, Mr. Lopez [sic] answer to question 29 of his affidavit testimony (Exh. "D")

states:

We were able to reach an agreement. VIVA gave us the exclusive license to show

these fourteen (14) films, and we agreed to pay Viva the amount of P16,050,000.00 as

well as grant Viva commercial slots worth P19,950,000.00. We had already earmarked

this P16, 050,000.00.

which gives a total consideration of P36 million (P19,950,000.00 plus P16,050,000.00.

equals P36,000,000.00).

On cross-examination Mr. Lopez testified:

Q. What was written in this napkin?

A. The total price, the breakdown the known Viva movies, the 7 blockbuster

movies and the other 7 Viva movies because the price was broken down accordingly.

The none [sic] Viva and the seven other Viva movies and the sharing between the cash

portion and the concerned spot portion in the total amount of P35 million pesos.

Now, which is which? P36 million or P35 million? This weakens ABS-CBN's claim.

FOURTH. Mrs. Concio, testifying for ABS-CBN stated that she transmitted Exhibit "C"

to Mr. Del Rosario with a handwritten note, describing said Exhibit "C" as a "draft."

(Exh. "5" - Viva; tsn pp. 23-24 June 08, 1992). The said draft has a well defined

meaning.

Since Exhibit "C" is only a draft, or a tentative, provisional or preparatory writing

prepared for discussion, the terms and conditions thereof could not have been

previously agreed upon by ABS-CBN and Viva Exhibit "C'' could not therefore legally

bind Viva, not having agreed thereto. In fact, Ms. Concio admitted that the terms and

conditions embodied in Exhibit "C" were prepared by ABS-CBN's lawyers and there

was no discussion on said terms and conditions. . . .

As the parties had not yet discussed the proposed terms and conditions in Exhibit "C,"

and there was no evidence whatsoever that Viva agreed to the terms and conditions

thereof, said document cannot be a binding contract. The fact that Viva refused to sign

Exhibit "C" reveals only two [sic] well that it did not agree on its terms and conditions,

and this court has no authority to compel Viva to agree thereto.

FIFTH. Mr. Lopez understand [sic] that what he and Mr. Del Rosario agreed upon at

the Tamarind Grill was only provisional, in the sense that it was subject to approval by

the Board of Directors of Viva. He testified:

Q. Now, Mr. Witness, and after that Tamarind meeting ... the second meeting

wherein you claimed that you have the meeting of the minds between you and Mr. Vic

del Rosario, what happened?

A. Vic Del Rosario was supposed to call us up and tell us specifically the result

of the discussion with the Board of Directors.

Q. And you are referring to the so-called agreement which you wrote in [sic] a

piece of paper?

A. Yes, sir.

Q. So, he was going to forward that to the board of Directors for approval?

A. Yes, sir. (Tsn, pp. 42-43, June 8, 1992)

Q. Did Mr. Del Rosario tell you that he will submit it to his Board for approval?

A. Yes, sir. (Tsn, p. 69, June 8, 1992).

The above testimony of Mr. Lopez shows beyond doubt that he knew Mr. Del Rosario

had no authority to bind Viva to a contract with ABS-CBN until and unless its Board of

Directors approved it. The complaint, in fact, alleges that Mr. Del Rosario "is the

Executive Producer of defendant Viva" which "is a corporation." (par. 2, complaint). As

a mere agent of Viva, Del Rosario could not bind Viva unless what he did is ratified by

its Board of Directors. (Vicente vs. Geraldez, 52 SCRA 210; Arnold vs. Willets and

Paterson, 44 Phil. 634). As a mere agent, recognized as such by plaintiff, Del Rosario

could not be held liable jointly and severally with Viva and his inclusion as party

defendant has no legal basis. (Salonga vs. Warner Barner [sic] , COLTA , 88 Phil. 125;

Salmon vs. Tan, 36 Phil. 556).

The testimony of Mr. Lopez and the allegations in the complaint are clear admissions

that what was supposed to have been agreed upon at the Tamarind Grill between Mr.

Lopez and Del Rosario was not a binding agreement. It is as it should be because

corporate power to enter into a contract is lodged in the Board of Directors. (Sec. 23,

Corporation Code). Without such board approval by the Viva board, whatever

agreement Lopez and Del Rosario arrived at could not ripen into a valid contract

binding upon Viva (Yao Ka Sin Trading vs. Court of Appeals, 209 SCRA 763). The

evidence adduced shows that the Board of Directors of Viva rejected Exhibit "C" and

insisted that the film package for 140 films be maintained (Exh. "7-1" - Viva ). 49

The contention that ABS-CBN had yet to fully exercise its right of first refusal over

twenty-four films under the 1990 Film Exhibition Agreement and that the meeting

between Lopez and Del Rosario was a continuation of said previous contract is

untenable. As observed by the trial court, ABS-CBN right of first refusal had already

been exercised when Ms. Concio wrote to VIVA ticking off ten films, Thus:

[T]he subsequent negotiation with ABS-CBN two (2) months after this letter was sent,

was for an entirely different package. Ms. Concio herself admitted on cross-

examination to having used or exercised the right of first refusal. She stated that the list

was not acceptable and was indeed not accepted by ABS-CBN, (TSN, June 8, 1992,

pp. 8-10). Even Mr. Lopez himself admitted that the right of the first refusal may have

been already exercised by Ms. Concio (as she had). (TSN, June 8, 1992, pp. 71-75).

Del Rosario himself knew and understand [sic] that ABS-CBN has lost its rights of the

first refusal when his list of 36 titles were rejected (Tsn, June 9, 1992, pp. 10-11) 50

II

However, we find for ABS-CBN on the issue of damages. We shall first take up actual

damages. Chapter 2, Title XVIII, Book IV of the Civil Code is the specific law on actual

or compensatory damages. Except as provided by law or by stipulation, one is entitled

to compensation for actual damages only for such pecuniary loss suffered by him as he

has duly proved. 51 The indemnification shall comprehend not only the value of the

loss suffered, but also that of the profits that the obligee failed to obtain. 52 In contracts

and quasi-contracts the damages which may be awarded are dependent on whether

the obligor acted with good faith or otherwise, It case of good faith, the damages

recoverable are those which are the natural and probable consequences of the breach

of the obligation and which the parties have foreseen or could have reasonably

foreseen at the time of the constitution of the obligation. If the obligor acted with fraud,

bad faith, malice, or wanton attitude, he shall be responsible for all damages which

may be reasonably attributed to the non-performance of the obligation. 53 In crimes

and quasi-delicts, the defendant shall be liable for all damages which are the natural

and probable consequences of the act or omission complained of, whether or not such

damages has been foreseen or could have reasonably been foreseen by the

defendant. 54

Actual damages may likewise be recovered for loss or impairment of earning capacity

in cases of temporary or permanent personal injury, or for injury to the plaintiff's

business standing or commercial credit. 55

The claim of RBS for actual damages did not arise from contract, quasi-contract, delict,

or quasi-delict. It arose from the fact of filing of the complaint despite ABS-CBN's

alleged knowledge of lack of cause of action. Thus paragraph 12 of RBS's Answer with

Counterclaim and Cross-claim under the heading COUNTERCLAIM specifically

alleges:

12. ABS-CBN filed the complaint knowing fully well that it has no cause of action

RBS. As a result thereof, RBS suffered actual damages in the amount of

P6,621,195.32. 56

Needless to state the award of actual damages cannot be comprehended under the

above law on actual damages. RBS could only probably take refuge under Articles 19,

20, and 21 of the Civil Code, which read as follows:

Art. 19. Every person must, in the exercise of his rights and in the performance of his

duties, act with justice, give everyone his due, and observe honesty and good faith.

Art. 20. Every person who, contrary to law, wilfully or negligently causes damage to

another, shall indemnify the latter for tile same.

Art. 21. Any person who wilfully causes loss or injury to another in a manner that is

contrary to morals, good customs or public policy shall compensate the latter for the

damage.

It may further be observed that in cases where a writ of preliminary injunction is issued,

the damages which the defendant may suffer by reason of the writ are recoverable

from the injunctive bond. 57 In this case, ABS-CBN had not yet filed the required bond;

as a matter of fact, it asked for reduction of the bond and even went to the Court of

Appeals to challenge the order on the matter, Clearly then, it was not necessary for

RBS to file a counterbond. Hence, ABS-CBN cannot be held responsible for the

premium RBS paid for the counterbond.

Neither could ABS-CBN be liable for the print advertisements for "Maging Sino Ka

Man" for lack of sufficient legal basis. The RTC issued a temporary restraining order

and later, a writ of preliminary injunction on the basis of its determination that there

existed sufficient ground for the issuance thereof. Notably, the RTC did not dissolve the

injunction on the ground of lack of legal and factual basis, but because of the plea of

RBS that it be allowed to put up a counterbond.

As regards attorney's fees, the law is clear that in the absence of stipulation, attorney's

fees may be recovered as actual or compensatory damages under any of the

circumstances provided for in Article 2208 of the Civil Code. 58

The general rule is that attorney's fees cannot be recovered as part of damages

because of the policy that no premium should be placed on the right to litigate. 59 They

are not to be awarded every time a party wins a suit. The power of the court to award

attorney's fees under Article 2208 demands factual, legal, and equitable justification. 60

Even when claimant is compelled to litigate with third persons or to incur expenses to

protect his rights, still attorney's fees may not be awarded where no sufficient showing

of bad faith could be reflected in a party's persistence in a case other than erroneous

conviction of the righteousness of his cause. 61

As to moral damages the law is Section 1, Chapter 3, Title XVIII, Book IV of the Civil

Code. Article 2217 thereof defines what are included in moral damages, while Article

2219 enumerates the cases where they may be recovered, Article 2220 provides that

moral damages may be recovered in breaches of contract where the defendant acted

fraudulently or in bad faith. RBS's claim for moral damages could possibly fall only

under item (10) of Article 2219, thereof which reads:

(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.

Moral damages 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. 62 The award

is not meant to enrich the complainant at the expense of the defendant, but to enable

the injured party to obtain means, diversion, or amusements that will serve to obviate

then moral suffering he has undergone. It is aimed at the restoration, within the limits of

the possible, of the spiritual status quo ante, and should be proportionate to the

suffering inflicted. 63 Trial courts must then guard against the award of exorbitant

damages; they should exercise balanced restrained and measured objectivity to avoid

suspicion that it was due to passion, prejudice, or corruption on the part of the trial

court. 64

The award of moral damages cannot be granted in favor of a corporation because,

being an artificial person and having existence only in legal contemplation, it has no

feelings, no emotions, no senses, It cannot, therefore, experience physical suffering

and mental anguish, which call be experienced only by one having a nervous system.

65 The statement in People v. Manero 66 and Mambulao Lumber Co. v. PNB 67 that a

corporation may recover moral damages if it "has a good reputation that is debased,

resulting in social humiliation" is an obiter dictum. On this score alone the award for

damages must be set aside, since RBS is a corporation.

The basic law on exemplary damages is Section 5, Chapter 3, Title XVIII, Book IV of

the Civil Code. These are imposed by way of example or correction for the public good,

in addition to moral, temperate, liquidated or compensatory damages. 68 They are

recoverable in criminal cases as part of the civil liability when the crime was committed

with one or more aggravating circumstances; 69 in quasi-contracts, if the defendant

acted with gross negligence; 70 and in contracts and quasi-contracts, if the defendant

acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. 71

It may be reiterated that the claim of RBS against ABS-CBN is not based on contract,

quasi-contract, delict, or quasi-delict, Hence, the claims for moral and exemplary

damages can only be based on Articles 19, 20, and 21 of the Civil Code.

The elements of abuse of right under Article 19 are the following: (1) the existence of a

legal right or duty, (2) which is exercised in bad faith, and (3) for the sole intent of

prejudicing or injuring another. Article 20 speaks of the general sanction for all other

provisions of law which do not especially provide for their own sanction; while Article 21

deals with acts contra bonus mores, and has the following elements; (1) there is an act

which is legal, (2) but which is contrary to morals, good custom, public order, or public

policy, and (3) and it is done with intent to injure. 72

Verily then, malice or bad faith is at the core of Articles 19, 20, and 21. Malice or bad

faith implies a conscious and intentional design to do a wrongful act for a dishonest

purpose or moral obliquity. 73 Such must be substantiated by evidence. 74

There is no adequate proof that ABS-CBN was inspired by malice or bad faith. It was

honestly convinced of the merits of its cause after it had undergone serious

negotiations culminating in its formal submission of a draft contract. Settled is the rule

that the adverse result of an action does not per se make the action wrongful and

subject the actor to damages, for the law could not have meant to impose a penalty on

the right to litigate. If damages result from a person's exercise of a right, it is damnum

absque injuria. 75

WHEREFORE, the instant petition is GRANTED. The challenged decision of the Court

of Appeals in CA-G.R. CV No, 44125 is hereby REVERSED except as to unappealed

award of attorney's fees in favor of VIVA Productions, Inc.1âwphi1.nêt

No pronouncement as to costs.

SO ORDERED.

Melo, Kapunan, Martinez and Pardo JJ., concur.

FIRST DIVISION

[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.

D E C I S I O N

CARPIO, J.:

The Case

This petition for review[1] assails the 4 January 1999 Decision[2] 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 Decision[3] 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 documentary[4] 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 Center-Bicol 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 damages[7] 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

AMEC-BCCM, 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.

xx

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. xxx[9] (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

Answer[10] 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 Dismiss[11] 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 Decision[12] 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.

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 30[18] authorizes a separate

civil action to recover civil liability arising from a criminal offense. On the other hand,

Article 33[19] 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 19[20] of the Civil Code to justify its claim for damages. AMEC cites

Articles 2176[21] and 2180[22] of the Civil Code to hold FBNI solidarily liable with Rima

and Alegre.

I.

Whether the broadcasts are libelous

A libel[23] 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.

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 libelous

per se.

The broadcasts also violate the Radio Code[35] 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

and inaccurate and misleading information. x x x Furthermore, the station shall strive to

present balanced discussion of issues. x x x.

x x x

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 19[37] 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 21[38] 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 2219[43] 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.[46] Neither 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 2208[48] 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.

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 and supervision of its employees, particularly Rima and Alegre. FBNI

merely showed that it exercised diligence in the selection of its broadcasters without

introducing any evidence to prove that it observed the same diligence in the

supervision 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 and

supervising 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.

Davide, Jr., C.J., (Chairman), Quisumbing, Ynares-Santiago, and Azcuna, JJ., concur.

Republic of the Philippines

SUPREME COURT

Manila

SECOND DIVISION

G.R. No. 172428 November 28, 2008

HERMAN C. CRYSTAL, LAMBERTO C. CRYSTAL, ANN GEORGIA C. SOLANTE,

and DORIS C. MAGLASANG, as Heirs of Deceased SPOUSES RAYMUNDO I.

CRYSTAL and DESAMPARADOS C. CRYSTAL, petitioners,

vs.

BANK OF THE PHILIPPINE ISLANDS, respondent.

D E C I S I O N

TINGA, J.:

Before us is a Petition for Review1 of the Decision2 and Resolution3 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 Suretyship5 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 note6 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 note7 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 mortgage8 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 BPI’s 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 IBAA’s 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 CCCC’s properties first, stressing that they are mere guarantors of the

renewed loans. They also prayed that they be awarded moral and exemplary

damages, attorney’s 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 attorney’s 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 BPI-Makati 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 CCCC’s 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 BPI’s 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 BPI’s 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 IBAA’s offer to purchase the

mortgaged lot from them and to directly pay BPI out of the proceeds thereof to settle

the loan.20 BPI’s 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 BPI’s 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 surety’s 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, attorney’s 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 defendant’s 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 attorney’s 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 attorney’s 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 attorney’s 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.

DANTE O. TINGA

Associate Justice