corporation law cases 1.docx

7/30/2019 corporation law cases 1.docx

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Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-37331 March 18, 1933

FRED M. HARDEN, J.D. HIGHSMITH, and JOHN C. HART, in their own behalf and in that all otherstockholders of the Balatoc Mining Company, etc., plaintiffs-appellants,vs.BENGUET CONSOLIDATED MINING COMPANY, BALATOC MINING COMPANY, H. E. RENZ, JOHN W.JAUSSERMANN, and A. W. BEAM, defendants-appellees.

Gibbs and McDonough and Roman Ozaeta for appellants.DeWitt, Perkins and Brady for appellees.Ross, Lawrence and Selph for appellee Balatoc Mining Company.

STREET, J.:

This action was originally instituted in the Court of First Instance of the City of Manila by F. M. Harden, acting in hisown behalf and that of all other stockholders of the Balatoc Mining Co. who might join in the action and contribute tothe expense of the suit. With the plaintiff Harden two others, J. D. Highsmith and John C. Hart, subsequentlyassociated themselves. The defendants are the Benguet Consolidated Mining Co., the Balatoc Mining Co., H. E.Renz, John W. Haussermann, and A. W. Beam. The principal purpose of the original action was to annul a certificatecovering 600,000 shares of the stock of the Balatoc Mining Co., which have been issued to the Benguet ConsolidatedMining Co., and to secure to the Balatoc Mining Co., the restoration of a large sum of money alleged to have beenunlawfully collected by the Benguet Consolidated Mining Co., with legal interest, after deduction therefrom of theamount expended by the latter company under a contract between the two companies, bearing date of March 9,1927. The complaint was afterwards amended so as to include a prayer for the annulment of this contract. Shortlyprior to the institution of this lawsuit, the Benguet Consolidated Mining Co., transferred to H. E. Renz, as trustee, thecertificate for 600,000 shares of the Balatoc Mining Co. which constitute the principal subject matter of the action.This was done apparently to facilitate the splitting up to the shares in the course of the sale or distribution. To preventthis the plaintiffs, upon filing their original complaint, procured a preliminary injunction restraining the defendants, theiragents and servants, from selling, assigning or transferring the 600,000 shares of the Balatoc Mining Co., or any partthereof, and from removing said shares from the Philippine Islands. This explains the connection of Renz with thecase. The other individual defendants are made merely as officials of the Benguet Consolidated Mining Co. Uponhearing the cause the trial court dismissed the complaint and dissolved the preliminary injunction, with costs againstthe plaintiffs. From this judgment the plaintiffs appealed.

The facts which have given rise this lawsuit are simple, as the financial interests involve are immense. Briefly toldthese facts are as follows: The Benguet Consolidated Mining Co. was organized in June, 1903, as a sociedadanonimain conformity with the provisions of Spanish law; while the Balatoc Mining Co. was organized in December1925, as a corporation, in conformity with the provisions of the Corporation Law (Act No. 1459). Both entities wereorganized for the purpose of engaging in the mining of gold in the Philippine Islands, and their respective propertiesare located only a few miles apart in the subprovince of Benguet. The capital stock of the Balatoc Mining Co. consistsof one million shares of the par value of one peso (P1) each.

When the Balatoc Mining Co. was first organized the properties acquired by it were largely undeveloped; and the

original stockholders were unable to supply the means needed for profitable operation. For this reason, the board ofdirectors of the corporation ordered a suspension of all work, effective July 31, 1926. In November of the same year ageneral meeting of the company's stockholders appointed a committee for the purpose of interesting outside capital inthe mine. Under the authority of this resolution the committee approached A. W. Beam, then president and generalmanager of the Benguet Company, to secure the capital necessary to the development of the Balatoc property. As aresult of the negotiations thus begun, a contract, formally authorized by the management of both companies, wasexecuted on March 9, 1927, the principal features of which were that the Benguet Company was to proceed with thedevelopment and construct a milling plant for the Balatoc mine, of a capacity of 100 tons of ore per day, and with anextraction of at least 85 per cent of the gold content. The Benguet Company also agreed to erect an appropriatepower plant, with the aerial tramlines and such other surface buildings as might be needed to operate the mine. In


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return for this it was agreed that the Benguet Company should receive from the treasurer of the Balatoc Companyshares of a par value of P600,000, in payment for the first P600,000 be thus advanced to it by the Benguet Company.

The performance of this contract was speedily begun, and by May 31, 1929, the Benguet Company had spent uponthe development the sum of P1,417,952.15. In compensation for this work a certificate for six hundred thousandshares of the stock of the Balatoc Company has been delivered to the Benguet Company, and the excess value ofthe work in the amount of P817,952.15 has been returned to the Benguet Company in cash. Meanwhile dividends of

the Balatoc Company have been enriching its stockholders, and at the time of the filing of the complaint the value ofits shares had increased in the market from a nominal valuation to more than eleven pesos per share. While theBenguet Company was pouring its million and a half into the Balatoc property, the arrangements made between thetwo companies appear to have been viewed by the plaintiff Harden with complacency, he being the owner of manythousands of the shares of the Balatoc Company. But as soon as the success of the development had becomeapparent, he began this litigation in which he has been joined by two others of the eighty shareholders of the BalatocCompany.

Briefly, the legal point upon which the action is planted is that it is unlawful for the Benguet Company to hold anyinterest in a mining corporation and that the contract by which the interest here in question was acquired must beannulled, with the consequent obliteration of the certificate issued to the Benguet Company and the correspondingenrichment of the shareholders of the Balatoc Company.

When the Philippine Islands passed to the sovereignty of the United States, in the attention of the Philippine

Commission was early drawn to the fact that there is no entity in Spanish law exactly corresponding to the notion ofthe corporation in English and American law; and in the Philippine Bill, approved July 1, 1902, the Congress of theUnited States inserted certain provisions, under the head of Franchises, which were intended to control thelawmaking power in the Philippine Islands in the matter of granting of franchises, privileges and concessions. Theseprovisions are found in section 74 and 75 of the Act. The provisions of section 74 have been superseded by section28 of the Act of Congress of August 29, 1916, but in section 75 there is a provision referring to mining corporations,which still remains the law, as amended. This provisions, in its original form, reads as follows: "... it shall be unlawfulfor any member of a corporation engaged in agriculture or mining and for any corporation organized for any purposeexcept irrigation to be in any wise interested in any other corporation engaged in agriculture or in mining."

Under the guidance of this and certain other provisions thus enacted by Congress, the Philippine Commissionentered upon the enactment of a general law authorizing the creation of corporations in the Philippine Islands. Thisrather elaborate piece of legislation is embodied in what is called our Corporation Law (Act No. 1459 of the PhilippineCommission). The evident purpose of the commission was to introduce the American corporation into the Philippine

Islands as the standard commercial entity and to hasten the day when the sociedad anonimaof the Spanish lawwould be obsolete. That statute is a sort of codification of American corporate law.

For the purposes general description only, it may be stated that the sociedad anonimais something very much likethe English joint stock company, with features resembling those of both the partnership is shown in the fact thatsociedad, the generic component of its name in Spanish, is the same word that is used in that language to designateother forms of partnership, and in its organization it is constructed along the same general lines as the ordinarypartnership. It is therefore not surprising that for purposes of loose translation the expression sociedad anonimahasnot infrequently the other hand, the affinity of this entity to the American corporation has not escaped notice, and theexpression sociedad anonimais now generally translated by the word corporation. But when the word corporation isused in the sense ofsociedad anonimaand close discrimination is necessary, it should be associated with theSpanish expression sociedad anonimaeither in a parenthesis or connected by the word "or". This latter device wasadopted in sections 75 and 191 of the Corporation Law.

In drafting the Corporation Law the Philippine Commission inserted bodily, in subsection (5) of section 13 of that Act(No. 1459) the words which we have already quoted from section 75 of the Act of Congress of July 1, 1902(Philippine Bill); and it is of course obvious that whatever meaning originally attached to this provision in the Act ofCongress, the same significance should be attached to it in section 13 of our Corporation Law.

As it was the intention of our lawmakers to stimulate the introduction of the American Corporation into Philippine lawin the place of the sociedad anonima, it was necessary to make certain adjustments resulting from the continued co-existence, for a time, of the two forms of commercial entities. Accordingly, in section 75 of the Corporation Law, aprovision is found making the sociedad anonimasubject to the provisions of the Corporation Law "so far as suchprovisions may be applicable", and giving to the sociedades anonimaspreviously created in the Islands the option tocontinue business as such or to reform and organize under the provisions of the Corporation Law. Again, in section


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191 of the Corporation Law, the Code of Commerce is repealed in so far as it relates to sociedades anonimas. Thepurpose of the commission in repealing this part of the Code of Commerce was to compel commercial ent itiesthereafter organized to incorporate under the Corporation Law, unless they should prefer to adopt some form or otherof the partnership. To this provision was added another to the effect that existing sociedades anonimas, whichelected to continue their business as such, instead of reforming and reorganizing under the Corporation Law, shouldcontinue to be governed by the laws that were in force prior to the passage of this Act "in relation to their organizationand method of transacting business and to the rights of members thereof as between themselves, but their relations

to the public and public officials shall be governed by the provisions of this Act."

As already observed, the provision above quoted from section 75 of the Act Congress of July 1, 1902 (Philippine Bill),generally prohibiting corporations engaged in mining and members of such from being interested in any othercorporation engaged in mining, was amended by section 7 of Act No. 3518 of the Philippine Legislature, approved byCongress March 1, 1929. The change in the law effected by this amendment was in the direction of liberalization.Thus, the inhibition contained in the original provision against members of a corporation engaged in agriculture ormining from being interested in other corporations engaged in agriculture or in mining was so modified as merely toprohibit any such member from holding more than fifteen per centum of the outstanding capital stock of another suchcorporation. Moreover, the explicit prohibition against the holding by anycorporation (except for irrigation) of aninterest in any other corporation engaged in agriculture or in mining was so modified as to limit the restriction tocorporations organized for the purpose of engaging in agriculture or in mining.

As originally drawn, our Corporation Law (Act No. 1459) did not contain any appropriate clause directly penalizing the

act of a corporation, a member of a corporation , in acquiring an interest contrary to paragraph (5) of section 13 of theAct. The Philippine Legislature undertook to remedy this situation in section 3 of Act No. 2792 of the PhilippineLegislature, approved on February 18, 1919, but this provision was declared invalid by this court inGovernment of thePhilippine Islands vs. El Hogar Filipino(50 Phil., 399), for lack of an adequate title to the Act. Subsequently theLegislature reenacted substantially the same penal provision in section 21 of Act No. 3518, under a title sufficientlybroad to comprehend the subject matter. This part of Act No. 3518 became effective upon approval by the Governor-General, on December 3, 1928, and it was therefore in full force when the contract now in question was made.

This provision was inserted as a new section in the Corporation Law, forming section 1990 (A) of said Act as it nowstands. Omitting the proviso, which seems not to be pertinent to the present controversy, said provision reads asfollows:

SEC. 190 (A). Penalties. The violation of any of the provisions of this Act and its amendments nototherwise penalized therein, shall be punished by a fine of not more than five thousand pesos and by

imprisonment for not more than five years, in the discretion of the court. If the violation is committed by acorporation, the same shall, upon such violation being proved, be dissolved by quo warrantoproceedingsinstituted by the Attorney-General or by any provincial fiscal by order of said Attorney-General: . . . .

Upon a survey of the facts sketched above it is obvious that there are two fundamental questions involved in thiscontroversy. The first is whether the plaintiffs can maintain an action based upon the violation of law supposedlycommitted by the Benguet Company in this case. The second is whether, assuming the first question to be answeredin the affirmative, the Benguet Company, which was organized as a sociedad anonima, is a corporation within themeaning of the language used by the Congress of the United States, and later by the Philippine Legislature,prohibiting a mining corporation from becoming interested in another mining corporation. It is obvious that, if the firstquestion be answered in the negative, it will be unnecessary to consider the second question in this lawsuit.

Upon the first point it is at once obvious that the provision referred to was adopted by the lawmakers with a sole viewto the public policy that should control in the granting of mining rights. Furthermore, the penalties imposed in what is

now section 190 (A) of the Corporation Law for the violation of the prohibition in question are of such nature that theycan be enforced only by a criminal prosecution or by an action ofquo warranto. But these proceedings can bemaintained only by the Attorney-General in representation of the Government.

What room then is left for the private action which the plaintiffs seek to assert in this case? The defendant BenguetCompany has committed no civil wrong against the plaintiffs, and if a public wrong has been committed, the directorsof the Balatoc Company, and the plaintiff Harden himself, were the active inducers of the commission of that wrong.The contract, supposing it to have been unlawful in fact, has been performed on both sides, by the building of theBalatoc plant by the Benguet Company and the delivery to the latter of the certificate of 600,000 shares of the BalatocCompany. There is no possibility of really undoing what has been done. Nobody would suggest the demolition of themill. The Balatoc Company is secure in the possession of that improvement, and talk about putting the parties in


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status quo anteby restoring the consideration with interest, while the Balatoc Company remains in possession ofwhat it obtained by the use of that money, does not quite meet the case. Also, to mulct the Benguet Company inmany millions of dollars in favor of individuals who have not the slightest equitable right to that money in a propositionto which no court can give a ready assent.

The most plausible presentation of the case of the plaintiffs proceeds on the assumption that only one of thecontracting parties has been guilty of a misdemeanor, namely, the Benguet Company, and that the other party, the

Balatoc Company, is wholly innocent to participation in that wrong. The plaintiffs would then have us apply thesecond paragraph of article 1305 of the Civil Code which declares that an innocent party to an illegal contract mayrecover anything he may have given, while he is not bound to fulfill any promise he may have made. But, supposingthat the first hurdle can be safely vaulted, the general remedy supplied in article 1305 of the Civil Code cannot beinvoked where an adequate special remedy is supplied in a special law. It has been so held by this court in GoChioco vs. Martinez(45 Phil., 256, 280), where we refused to apply that article to a case of nullity arising upon ausurious loan. The reason given for the decision on this point was that the Usury Act, as amended, contains all theprovisions necessary for the effectuation of its purposes, with the result that the remedy given in article 1305 of theCivil Code is unnecessary. Much more is that idea applicable to the situation now before us, where the specialprovisions give ample remedies for the enforcement of the law by action in the name of the Government, and whereno civil wrong has been done to the party here seeking redress.

The view of the case presented above rest upon considerations arising upon our own statutes; and it would seem tobe unnecessary to ransack the American decisions for analogies pertinent to the case. We may observe, however,

that the situation involved is not unlike that which has frequently arisen in the United States under provisions of theNational Bank Act prohibiting banks organized under that law from holding real property. It has been uniformly heldthat a trust deed or mortgaged conveying property of this kind to a bank, by way of security, is valid until thetransaction is assailed in a direct proceeding instituted by the Government against the bank, and the illegality of suchtenure supplies no basis for an action by the former private owner, or his creditor, to annul the conveyance. (NationalBank vs. Matthews, 98 U. S., 621; Kerfoot vs. Farmers & M. Bank, 218 U. S., 281.) Other analogies point in the samedirection. (South & Ala. R. Ginniss vs. B. & M. Consol. etc. Mining Co., 29 Mont., 428; Holmes & Griggs Mfg. Co. vs.Holmes & Wessell Metal Co., 127 N. Y., 252; Oelbermann vs. N. Y. & N. R. Co., 77 Hun., 332.)

Most suggestive perhaps of all the cases in Compaia Azucarera de Carolina vs. Registrar (19 Porto Rico, 143), forthe reason that this case arose under a provision of the Foraker Act, a law analogous to our Philippine Bill. It appearsthat the registrar had refused to register two deeds in favor of the Compaia Azucarera on the ground that the landthereby conveyed was in excess of the area permitted by law to the company. The Porto Rican court reversed theruling of the registrar and ordered the registration of the deeds, saying:

Thus it may be seen that a corporation limited by the law or by its charter has until the State acts everypower and capacity that any other individual capable of acquiring lands, possesses. The corporation mayexercise every act of ownership over such lands; it may sue in ejectment or unlawful detainer and it maydemand specific performance. It has an absolute title against all the world except the State after a properproceeding is begun in a court of law. ... The Attorney General is the exclusive officer in whom is confidedthe right to initiate proceedings for escheat or attack the right of a corporation to hold land.

Having shown that the plaintiffs in this case have no right of action against the Benguet Company for the infraction oflaw supposed to have been committed, we forego cny discussion of the further question whether a sociedadanonimacreated under Spanish law, such as the Benguet Company, is a corporation within the meaning of theprohibitory provision already so many times mentioned. That important question should, in our opinion, be left until itis raised in an action brought by the Government.

The judgment which is the subject of his appeal will therefore be affirmed, and it is so ordered, with costs against theappellants.

Avancea, C.J., Villamor, Ostrand, Villa-Real, Abad Santos, Hull, Vickers, Imperial and Butte, JJ., concur.


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Manila

EN BANC

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

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

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

The answer filed by the defendant alleged, in substance, that the extension for another five years of the term of theplaintiffs' 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 thepartnership 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." Thecorresponding articles of partnership (Exhibit B) were registered in the Office of the Securities & ExchangeCommission on June 16, 1953.

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

On April 15, 1958 prior to the expiration of the five-year term of the partnership Ang Pue & Company, but after theenactment of the Republic Act 1180, the partners already mentioned amended the original articles of part ownership(Exhibit B) so as to extend the term of life of the partnership to another five years. When the amended articles were

presented for registration in the Office of the Securities & Exchange Commission on April 16, 1958, registration wasrefused 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 thatcould claim a juridical personality of its own and transact business as such, is not a matter of absolute right but aprivilege 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 providetherein that only Filipinos and concerns wholly owned by Filipinos may engage in the retail business can not beseriously disputed. That this provision was clearly intended to apply to partnership already existing at the time of theenactment of the law is clearly showing by its provision giving them the right to continue engaging in their retailbusiness until the expiration of their term or life.

To argue that because the original articles of partnership provided that the partners could extend the term of thepartnership, the provisions of Republic Act 1180 cannot be adversely affect appellants herein, is to erroneouslyassume that the aforesaid provision constitute a property right of which the partners can not be deprived without dueprocess or without their consent. The agreement contain therein must be deemed subject to the law existing at thetime when the partners came to agree regarding the extension. In the present case, as already stated, when thepartners amended the articles of partnership, the provisions of Republic Act 1180 were already in force, and therecan be not the slightest doubt that the right claimed by appellants to extend the original term of their partnership toanother 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.


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Manila

EN BANC

G.R. No. L-17160 November 29, 1965

PHILIPPINE PRODUCTS COMPANY, plaintiff-appellant,vs.PRIMATERIA SOCIETE ANONYME POUR LE COMMERCE EXTERIEUR: PRIMATERIA (PHILIPPINES) INC.,ALEXANDER G. BAYLIN and JOSE M. CRAME, defendants-appellees.

Jose A. Javier for plaintiff-appellant.Ibarra and Papa for defendants-appellees.

BENGZON, C.J.:

This is an action to recover from defendants, the sum of P33,009.71 with interest and attorney's fees of P8,000.00.

Defendant Primateria Societe Anonyme Pour Le Commerce Exterieur (hereinafter referred to as Primateria Zurich) isa foreign juridical entity and, at the time of the transactions involved herein, had its main office at Zurich, Switzerland.It was then engaged in "Transactions in international trade with agricultural products, particularly in oils, fats and oil -seeds and related products."

The record shows that:

On October 24, 1951, Primateria Zurich, through defendant Alexander B. Baylin, entered into an agreement withplaintiff Philippine Products Company, whereby the latter undertook to buy copra in the Philippines for the account ofPrimateria Zurich, during "a tentative experimental period of one month from date." The contract was renewed bymutual agreement of the parties to cover an extended period up to February 24, 1952, later extended to 1953. Duringsuch period, plaintiff caused the shipment of copra to foreign countries, pursuant to instructions from defendantPrimateria Zurich, thru Primateria (Phil.) Inc. referred to hereafter as Primateria Philippines acting by defendant

Alexander G. Baylin and Jose M. Crame, officers of said corporation. As a result, the total amount due to the plaintiffas of May 30, 1955, was P33,009.71.

At the trial, before the Manila court of first instance, it was proven that the amount due from defendant PrimateriaZurich, on account of the various shipments of copra, was P31,009.71, because it had paid P2,000.00 of the originalclaim of plaintiff. There is no dispute about accounting.

And there is no question that Alexander G. Baylin and Primateria Philippines acted as the duly authorized agents ofPrimateria Zurich in the Philippines. As far as the record discloses, Baylin acted indiscriminately in these transactionsin the dual capacities of agent of the Zurich firm and executive vice-president of Primateria Philippines, which alsoacted as agent of Primateria Zurich. It is likewise undisputed that Primateria Zurich had no license to transactbusiness in the Philippines.

For failure to file an answer within the reglementary period, defendant Primateria Zurich was declared in default.

After trial, judgment was rendered by the lower court holding defendant Primateria Zurich liable to the plaintiff for thesums of P31,009.71, with legal interest from the date of the filing of the complaint, and P2,000.00 as and forattorney's fees; and absolving defendants Primateria (Phil.), Inc., Alexander G. Baylin, and Jose M. Crame from anyand all liability.

Plaintiff appealed from that portion of the judgment dismissing its complaint as regards the three defendants.


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Manila

FIRST DIVISION

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

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

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

GANCAYCO, J.:

A corporation is an entity separate and distinct from its stockholders. While not in fact and in reality a person,the law treats a corporation as though it were a person by process of fiction or by regarding it as an artificialperson distinct and separate from its individual stockholders. 1

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

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

Feliciano Coprada, as President and Chairman of Akron, purchased thirteen trucks from private respondent onJanuary 25, 1978 for and in consideration of P525,000.00 as evidenced by a deed of absolute sale. 6 In a sideagreement of the same date, the parties agreed on a downpayment in the amount of P50,000.00 and that thebalance of P475,000.00 shall be paid within sixty (60) days from the date of the execution of the agreement.The parties also agreed that until said balance is fully paid, the down payment of P50,000.00 shall accrue asrentals of the 13 trucks; and that if Akron fails to pay the balance within the period of 60 days, then the balanceshall constitute as a chattel mortgage lien covering said cargo trucks and the parties may allow an extension of30 days and thereafter private respondent may ask for a revocation of the contract and the reconveyance of all

said trucks. 7

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


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

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

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

On June 17, 1978, Coprada wrote private respondent begging for a grace period of until the end of the monthto pay the balance of the purchase price; that he will update the rentals within the week; and in case he fails,then he will return the 13 units should private respondent elect to get back the same. 13 Private respondent,through counsel, wrote Akron on August 1, 1978 demanding the return of the 13 trucks and the payment ofP25,000.00 back rentals covering the period from June 1 to August 1, 1978. 14

Again, Coprada wrote private respondent on August 8, 1978 asking for another grace period of up to August31, 1978 to pay the balance, stating as well that he is expecting the approval of his loan application from acertain financing company, and that ten (10) trucks have been returned to Bagbag, Novaliches. 15 OnDecember 9, 1978, Coprada informed private respondent anew that he had returned ten (10) trucks to Bagbag

and that a resolution was passed by the board of directors confirming the deed of assignment to privaterespondent of P475,000 from the proceeds of a loan obtained by Akron from the State Investment House,Inc. 16

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

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

liability of Akron to private respondent.

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

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

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

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

c attorneys fees of P10,000.00, and

d costs of suit.

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


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

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

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

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

We reverse.

The environmental facts of this case show that there is no cogent basis to pierce the corporate veil of Akron

and hold petitioner personally liable for its obligation to private respondent. While it is true that in December,1977 petitioner was still a member of the board of directors of Akron and that he participated in the adoption ofa resolution authorizing the purchase of 13 trucks for the use in the brokerage business of Akron to be paid outof a loan to be secured from a lending institution, it does not appear that said resolution was intended todefraud anyone and more particularly private respondent. It was Coprada, President and Chairman of Akron,who negotiated with said respondent for the purchase of 13 cargo trucks on January 25, 1978. It was Copradawho signed a promissory note to guarantee the payment of the unpaid balance of the purchase price out of theproceeds of a loan he supposedly sought from the DBP. The word "WE' in the said promissory note must referto the corporation which Coprada represented in the execution of the note and not its stockholders or directors.Petitioner did not sign the said promissory note so he cannot be personally bound thereby.

Thus, if there was any fraud or misrepresentation that was foisted on private respondent in that there was aforthcoming loan from the DBP when it fact there was none, it is Coprada who should account for the same andnot petitioner.

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

As to the amendment of the articles of incorporation of Akron thereby changing its name to Akron TransportInternational, Inc., petitioner alleges that the change of corporate name was in order to include trucking andcontainer yard operations in its customs brokerage of which private respondent was duly informed in aletter. 19Indeed, the new corporation confirmed and assumed the obligation of the old corporation. There is noindication of an attempt on the part of Akron to evade payment of its obligation to private respondent.

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

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


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

WHEREFORE, the petition is GRANTED. The questioned resolution of the Intermediate Appellate Court datedFebruary 8,1984 is hereby set aside and its decision dated June 30,1983 setting aside the decision of the trialcourt dated October 28, 1980 insofar as petitioner is concemed is hereby reinstated and affirmed, withoutcosts.

SO ORDERED.


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THIRD DIVISION

[G.R. No. 105774. April 25, 2002]

GREAT ASIAN SALES CENTER CORPORATION and TAN CHONG

LIN,petitioners, vs. THE COURT OF APPEALS and BANCASIA

FINANCE AND INVESTMENT CORPORATION,respondents.

D E C I S I O N

CARPIO, J.:

The Case

Before us is a Petition for Review on Certiorari under Rule 45 of the Revised

Rules on Civil Procedure assailing the June 9, 1992 Decision [1]of the Court of

Appeals[2]in CA-G.R. CV No. 20167. The Court of Appeals affirmed the January 26,

1988 Decision[3]of the Regional Trial Court of Manila, Branch 52,[4]ordering

petitioners Great Asian Sales Center Corporation (Great Asian for brevity) and Tan

Chong Lin to pay, solidarily, respondent Bancasia Finance and Investment

Corporation (Bancasia for brevity) the amount ofP1,042,005.00. The Court of

Appeals affirmed the trial courts award of interest and costs of suit but delete d theaward of attorneys fees.

The Facts

Great Asian is engaged in the business of buying and selling general merchandise,

in particular household appliances. On March 17, 1981, the board of directors of

Great Asian approved a resolution authorizing its Treasurer and General Manager,Arsenio Lim Piat, Jr. (Arsenio for brevity) to secure a loan from Bancasia in an

amount not to exceed P1.0 million. The board resolution also authorized Arsenio tosign all papers, documents or promissory notes necessary to secure the loan. On

February 10, 1982, the board of directors of Great Asian approved a second resolution

authorizing Great Asian to secure a discounting line with Bancasia in an amount not

exceeding P2.0 million. The second board resolution also designated Arsenio as the

authorized signatory to sign all instruments, documents and checks necessary to

secure the discounting line.
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2nd Deed

Metrobank 030925 P68,722.00 March 19, 1982

030926 P45,230.00 March 19, 1982

Solidbank C-A097478 P140,000.00 March 23, 1982

Pacific Banking Corp. CC 769910 P58,867.00 April 1, 1982

3rd DeedPhil. Trust Company 060835 P21,228.00 April 21, 1982

060836 P22,187.00 April 28, 1982

Allied Banking Corp. 11251624 P41,773.00 April 22, 1982

11251625 P38,592.00 April 29, 1982

Pacific Banking Corp. 237984 P37,886.00 April 23, 1982

237988 P47,385.00 April 28, 1982

237985 P46,748.00 April 30, 1982

Security Bank & Trust Co. 22061 P88,676.00 April 30, 19824th Deed

Pacific Banking Corp. 860178 P200,000.00 March 18, 1982

After the drawee bank dishonored Check No. 097480 dated March 16,

1982, Bancasia referred the matter to its lawyer, Atty. Eladia Reyes, who sent by

registered mail to Tan Chong Lin a letter dated March 18, 1982, notifying him of the

dishonor and demanding payment from him. Subsequently, Bancasia sent by personal

delivery a letter dated June 16, 1982 to Tan Chong Lin, notifying him of the dishonor

of the fifteen checks and demanding payment from him. Neither Great Asian nor Tan

Chong Lin paid Bancasia the dishonored checks.

On May 21, 1982, Great Asian filed with the then Court of First Instance ofManila a petition for insolvency, verified under oath by its Corporate Secretary, Mario

Tan. Attached to the verified petition was a Schedule and Inventory of Liabilities

and Creditors of Great Asian Sales Center Corporation, listing Bancasia as one of the

creditors of Great Asian in the amount of P1,243,632.00.

On June 23, 1982, Bancasia filed a complaint for collection of a sum of money

against Great Asian and Tan Chong Lin. Bancasia impleaded Tan Chong Lin

because of the Surety Agreements he signed in favor of Bancasia. In its answer, Great

Asian denied the material allegations of the complaint claiming it was unfounded,

malicious, baseless, and unlawfully instituted since there was already a pending

insolvency proceedings, although Great Asian subsequently withdrew its petition forvoluntary insolvency. Great Asian further raised the alleged lack of authority of

Arsenio to sign the Deeds of Assignment as well as the absence of consideration and

consent of all the parties to the Surety Agreements signed by Tan Chong Lin.

Ruling of the Trial Court


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The trial court rendered its decision on January 26, 1988 with the following

findings and conclusions:

From the foregoing facts and circumstances, the Court finds that the plaintiff has

established its causes of action against the defendants. The Board Resolution (Exh.

T), dated March 17, 1981, authorizing Arsenio Lim Piat, Jr., general manager andtreasurer of the defendant Great Asian to apply and negotiate for a loan

accommodation or credit line with the plaintiff Bancasia in an amount not exceeding

One Million Pesos (P1,000,000.00), and the other Board Resolution approved on

February 10, 1982, authorizing Arsenio Lim Piat, Jr., to obtain for defendant Asian

Center a discounting line with Bancasia at prevailing discounting rates in an amount

not to exceed Two Million Pesos (P2,000,000.00), both of which were intended to

secure money from the plaintiff financing firm to finance the business operations of

defendant Great Asian, and pursuant to which Arsenio Lim Piat, Jr. was able to have

the aforementioned fifteen (15) checks totaling P1,042,005.00 discounted with the

plaintiff, which transactions were obviously known by the beneficiary thereof,

defendant Great Asian, as in fact, in its aforementioned Schedule and Inventory of

Liabilities and Creditors (Exh. DD, DD-1) attached to its Verified Petition for

Insolvency, dated May 12, 1982 (pp. 50-56), the defendant Great Asian admitted an

existing liability to the plaintiff, in the amount of P1,243,632.00, secured by it, by way

of financing accommodation, from the said financing institution Bancasia Finance

and Investment Corporation, plaintiff herein, sufficiently establish the liability of the

defendant Great Asian to the plaintiff for the amount of P1,042,005.00 sought to be

recovered by the latter in this case.[5]

xxx

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the

two (2) defendants ordering the latter, jointly and severally, to pay the former:

(a) The amount of P1,042,005.00, plus interest thereon at the legal rate

from the filing of the complaint until the same is fully paid;

(b) Attorneys fees equivalent to twenty per cent (20%) of the total amount

due; and

(c) The costs of suit.

SO ORDERED.[6]

Ruling of the Court of Appeals
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On appeal, the Court of Appeals sustained the decision of the lower court,deleting only the award of attorneys fees, as follows:

As against appellants bare denial of it, the Court is more inclined to accept the

appellees version, to the effect that the subject deeds of assignment arebut

individual transactions which -- being collectively evidentiary of the loanaccommodation and/or credit line it granted the appellant corporation -- should not be

taken singly and distinct therefrom. In addition to its plausibility, the proposition is,

more importantly, adequately backed by the documentary evidence on record. Aside

from the aforesaid Deeds of Assignment (Exhs. A, D, I, and R) and the Board

Resolutions of the appellant corporations Board of Directors (Exhs. T, U and

V), the appellee -- consistent with its theory -- interposed the Surety Agreements the

appellant Tan Chong Lin executed (Exhs. W and X), as well as the demand letters

it served upon the latter as surety (Exhs. Y and Z). It bears emphasis that the

second Resolution of the appellant corporations Board of Directors (Exh. V) even

closely coincides with the execution of the February 11, 1982 and March 5, 1982Deeds of Assignment (Exhs. I and R). Were the appellants posturings true, it

seems rather strange that the appellant Tan Chong Lin did not even protest or, at least,

make known to the appellee what he -- together with the appellant corporation --

represented to be a corporate larceny to which all of them supposedly fell prey. In the

petition for voluntary insolvency it filed, the appellant corporation, instead, indirectly

acknowledged its indebtedness in terms of financing accommodations to the appellee,

in an amount which, while not exactly matching the sum herein sought to be collected,

approximates the same (Exhs. CC, DD and DD-1).[7]

xxx

The appellants contend that the foregoing warranties enlarged or increased the

suretys risk, such that appellant Tan Chong Lin should be released from his liabilities

(pp. 37-44, Appellants Brief). Without saying more, the appellants position is,

however, soundly debunked by the undertaking expressed in the Comprehensive and

Continuing Surety Agreements (Exhs. W and X), to the effect that the xxx

surety/ies, jointly and severally among themselves and likewise with the principal,

hereby agree/s and bind/s himself to pay at maturity all the notes, drafts, bills of

exchange, overdrafts and other obligations which the principal may now or may

hereafter owe the creditor xxx. With the possible exception of the fixed ceiling for

the amount of loan obtainable, the surety undertaking in the case at bar is so

comprehensive as to contemplate each and every condition, term or warranty which

the principal parties may have or may be minded to agree on. Having affixed his

signature thereto, the appellant Tan Chong Lin is expected to have, at least, read and

understood the same.
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xxx

With the foregoing disquisition, the Court sees little or no reason to go into the

appellants remaining assignments of error, save the matter of attorneys fees. For

want of a statement of the rationale therefore in the body of the challenged decision,

the trial courts award of attorneys fees should be deleted and disallowed (Abrogarvs. Intermediate Appellate Court, 157 SCRA 57).

WHEREFORE, the decision appealed from is MODIFIED, to delete the trial courts

award of attorneys fees. The rest is AFFIRMED in toto.

SO ORDERED.[8]

The Issues

The petition is anchored on the following assigned errors:

1. The respondent Court erred in not holding that the proper parties against whom this actionfor collection should be brought are the drawers and indorser of the checks in question,

being the real parties in interest, and not the herein petitioners.

2. The respondent Court erred in not holding that the petitioner-corporation is discharged from

liability for failure of the private respondent to comply with the provisions of the Negotiable

Instruments Law on the dishonor of the checks.

3. The respondent Court erred in its appreciation and interpretation of the effect and legal

consequences of the signing of the deeds of assignment and the subsequent indorsement of

the checks by Arsenio Lim Piat, Jr. in his individual and personal capacity and without

stating or indicating the name of his supposed principal.

4. The respondent Court erred in holding that the assignment of the checks is a loanaccommodation or credit line accorded by the private respondent to petitioner-corporation,

and not a purchase and sale thereof.

5. The respondent Court erred in not holding that there was a material alteration of the risk

assumed by the petitioner-surety under his surety agreement by the terms, conditions,

warranties and obligations assumed by the assignor Arsenio Lim Piat, Jr. under the deeds of

assignment or receivables.

6. The respondent Court erred in holding that the petitioner-corporation impliedly admitted its

liability to private respondent when the former included the latter as one of its creditors in itspetition for voluntary insolvency, although no claim was filed and proved by the private

respondent in the insolvency court.

7. The respondent Court erred in holding the petitioners liable to private respondent on the

transactions in question.[9]

The issues to be resolved in this petition can be summarized into three:


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First Board Resolution

RESOLVED, that the Treasurer of the corporation, Mr. Arsenio Lim Piat, Jr., be

authorized as he is authorized to apply for and negotiate for a loan

accommodation or credit line in the amount not to exceed ONE MILLION

PESOS (P1,000,000.00), with Bancasia Finance and Investment Corporation, andlikewise to sign any and all papers, documents, and/or promissory notes in

connection with said loan accommodation or credit line, including the power to

mortgage such properties of the corporation as may be needed to effectuate the

same.[10](Emphasis supplied)

Second Board Resolution

RESOLVED that Great Asian Sales Center Corp. obtain adiscounting line with

BANCASIA FINANCE & INVESTMENT CORPORATION, at prevailing

discounting rates, in an amount not to exceed** TWO MILLION PESOS ONLY(P2,000,000),** Philippine Currency.

RESOLVED FURTHER, that the corporation secure such other forms of credit

lines with BANCASIA FINANCE & INVESTMENT CORPORATION in an

amount not to exceed** TWO MILLION PESOS ONLY (P2,000,000.00),**

PESOS, under such terms and conditions as the signatories may deem fit and

proper.

RESOLVED FURTHER, that the following persons be authorized individually,

jointly or collectively to sign, execute and deliver any and all instruments,documents, checks, sureties, etc. necessary or incidental to secure any of the

foregoing obligation:

(signed)

Specimen Signature

1. ARSENIO LIM PIAT, JR._

2. _______________________

3. _______________________

4. _______________________

PROVIDED FINALLY that this authority shall be valid, binding and effective untilrevoked by the Board of Directors in the manner prescribed by law, and that BANCASIA

FINANCE & INVESTMENT CORPORATION shall not be bound by any such revocation

until such time as it is noticed in writing of such revocation.[11](Emphasis supplied)


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The first board resolution expressly authorizes Arsenio, as Treasurer of Great

Asian, to apply for a loan accommodation or credit linewith Bancasia for not

more than P1.0 million. Also, the first resolution explicitly authorizes Arsenio to sign

any document, paper or promissory note, including mortgage deeds over properties of

Great Asian, to secure the loan or credit line from Bancasia.

The second board resolution expressly authorizes Great Asian to secure adiscounting linefrom Bancasia for not more than P2.0 million. The second board

resolution also expressly empowers Arsenio, as the authorized signatory of GreatAsian, to sign, execute and deliver any and all documents, checks x x x necessary

or incidental to secure the discounting line. The second board resolution

specifically authorizes Arsenio to secure the discounting line under such terms and

conditions as (he) x x x may deem fit and proper.

As plain as daylight, the two board resolutions clearly authorize Great Asian to

secure a loan ordiscounting line from Bancasia. The two board resolutions also

categorically designate Arsenio as the authorized signatory to sign and deliver all the

implementing documents, including checks, for Great Asian. There is no iota of

doubt whatsoever about the purpose of the two board resolutions, and about the

authority of Arsenio to act and sign for Great Asian. The second board resolution

even gave Arseniofull authority to agree with Bancasia on the terms and conditions

of the discounting line. Great Asian adopted the correct and proper board resolutions

to secure a loan or discounting line from Bancasia, and Bancasia had a right to rely on

the two board resolutions of Great Asian. Significantly, the two board resolutions

specifically refer to Bancasia as the financing institution from whom Great Asian will

secure the loan accommodation or discounting line.Armed with the two board resolutions, Arsenio signed the Deeds of Assignment

selling, and endorsing, the fifteen checks of Great Asian to Bancasia. On the face of

the Deeds of Assignment, the contracting parties are indisputably Great Asian and

Bancasia as the names of these entities are expressly mentioned therein as the assignor

and assignee, respectively. Great Asian claims that Arsenio signed the Deeds of

Assignment in his personal capacity because Arsenio signed above his printed name,

below which was the word Assignor, thereby making Arsenio the assignor. Great

Asian conveniently omits to state that the first paragraph of the Deeds expressly

contains the following words: the ASSIGNOR, Great Asian Sales Center, a

domestic corporation x x x herein represented by its Treasurer Arsenio Lim Piat,Jr. The assignor is undoubtedly Great Asian, represented by its Treasurer,

Arsenio. The only issue to determine is whether the Deeds of Assignment are indeed

the transactions the board of directors of Great Asian authorized Arsenio to sign under

the two board resolutions.


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Under the Deeds of Assignment, Great Asian sold fifteen postdated checks at a

discount, over three months, to Bancasia. The Deeds of Assignment uniformly state

that Great Asian,

x x x for valuable consideration received, does hereby SELL, TRANSFER,

CONVEY, and ASSIGN, unto the ASSIGNEE, BANCASIA FINANCE &INVESTMENT CORP., a domestic corporation x x x, the following ACCOUNTS

RECEIVABLES due and payable to it, having an aggregate face value of x x x.

The Deeds of Assignment enabled Great Asian to generate instant cash from its

fifteen checks, which were still not due and demandable then. In short, instead of

waiting for the maturity dates of the fifteen postdated checks, Great Asian sold the

checks to Bancasia at less than the total face value of the checks. In exchange for

receiving an amount less than the face value of the checks, Great Asian obtained

immediately much needed cash. Over three months, Great Asian entered into four

transactions of this nature with Bancasia, showing that Great Asian availed of adiscounting line with Bancasia.

In the financing industry, the term discounting line means a credit facility with a

financing company or bank, which allows a business entity to sell, on a continuing

basis, its accounts receivable at a discount.[12]The term discount means the sale of a

receivable at less than its face value. The purpose of a discounting line is to enable a

business entity to generate instant cash out of its receivables which are still to mature

at future dates. The financing company or bank which buys the receivables makes its

profit out of the difference between the face value of the receivable and the discounted

price. Thus, Section 3 (a) of the Financing Company Act of 1998 provides:

Financing companies are corporations x x x primarily organized for the purpose

ofextending credit facilities to consumers and to industrial, commercial or

agricultural enterprisesby discounting or factoring commercial papers

oraccounts receivable,orby buying and selling contracts, leases, chattel

mortgages, or other evidences of indebtedness, or by financial leasing of movableas well as immovable property. (Emphasis supplied)

This definition of financing companies is substantially the same definition as in the

old Financing Company Act (R.A. No. 5980).[13]

Moreover, Section 1 (h) of the New Rules and Regulations adopted by the

Securities and Exchange Commission to implement the Financing Company Act of

1998 states:

Discountingis a type of receivables financing whereby evidences of

indebtedness of a third party, such as installment contracts, promissory notes and
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similar instruments, are purchased by, orassigned to, a financing company in an

amount or for a consideration less than their face value. (Emphasis supplied)

Likewise, this definition of discounting is an exact reproduction of the definition of

discounting in the implementing rules of the old Finance Company Act.

Clearly, the discounting arrangements entered into by Arsenio under the Deeds of

Assignment were the very transactions envisioned in the two board resolutions of

Great Asian to raise funds for its business. Arsenio acted completely within the limits

of his authority under the two board resolutions. Arsenio did exactly what the board

of directors of Great Asian directed and authorized him to do.

Arsenio had all the proper and necessary authority from the board of directors of

Great Asian to sign the Deeds of Assignment and to endorse the fifteen postdated

checks. Arsenio signed the Deeds of Assignment as agent and authorized signatory of

Great Asian under an authority expressly granted by its board of directors. The

signature of Arsenio on the Deeds of Assignment is effectively also the signature ofthe board of directors of Great Asian, binding on the board of directors and on Great

Asian itself. Evidently, Great Asian shows its bad faith in disowning the Deeds of

Assignment signed by its own Treasurer, after receiving valuable consideration for the

checks assigned under the Deeds.

Second Issue: Breach of Contract by Great Asian

Bancasias complaint against Great Asian is founded on the latters breach ofcontract under the Deeds of Assignment. The Deeds of Assignment uniformly

stipulate[14]as follows:

If for any reason the receivables or any part thereof cannot be paid by the

obligor/s, the ASSIGNOR unconditionally and irrevocably agrees to pay the same,

assuming the liability to pay, by way of penalty three per cent (3%) of the total

amount unpaid, for the period of delay until the same is fully paid.

In case of any litigation which the ASSIGNEE may institute to enforce the terms of

this agreement, the ASSIGNOR shall be liable for all the costs, plus attorneys feesequivalent to twenty-five (25%) per cent of the total amount due. Further thereto, the

ASSIGNOR agrees that any and all actions which may be instituted relative hereto

shall be filed before the proper courts of the City of Manila, all other appropriate

venues being hereby waived.

The last Deed of Assignment[15]contains the following added stipulation:


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xxx Likewise, it is hereby understood that the warranties which the ASSIGNOR

hereby made are deemed part of the consideration for this transaction, such that any

violation of any one, some, or all of said warranties shall be deemed as deliberate

misrepresentation on the part of the ASSIGNOR. In such event, the monetary

obligation herein conveyed unto the ASSIGNEE shall be conclusively deemed

defaulted, giving rise to the immediate responsibility on the part of the ASSIGNOR tomake good said obligation, and making the ASSIGNOR liable to pay the penalty

stipulated hereinabove as if the original obligor/s of the receivables actually defaulted.xxx

Obviously, there is one vital suspensive condition in the Deeds of

Assignment. That is, in case the drawers fail to pay the checks on maturity, Great

Asian obligated itself to pay Bancasia the full face value of the dishonored checks,

including penalty and attorneys fees. The failure of the drawers to pay the checks is

a suspensive condition,[16]the happening of which gives rise to Bancasias right to

demand payment from Great Asian. This conditional obligation of Great Asian arises

from its written contracts with Bancasia as embodied in the Deeds of

Assignment. Article 1157 of the Civil Code provides that -

Obligations arise from:

(1) Law;

(2) Contracts;

(3) Quasi-contracts;

(4) Acts or omissions punished by law; and

(5) Quasi-delicts.

By express provision in the Deeds of Assignment, Great Asian unconditionally

obligated itself to pay Bancasia the full value of the dishonored checks. In short,

Great Asian sold the postdated checks onwith recourse basis against itself. This is an

obligation that Great Asian is bound to faithfully comply because it has the force of

law as between Great Asian and Bancasia. Article 1159 of the Civil Code further

provides that -

Obligations arising from contracts have the force of law between the contracting

parties and should be complied with in good faith.

Great Asian and Bancasia agreed on this specific with recourse stipulation,

despite the fact that the receivables were negotiable instruments with the endorsement

of Arsenio. The contracting parties had the right to adopt the with

recourse stipulation which is separate and distinct from the warranties of an endorser

under the Negotiable Instruments Law. Article 1306 of the Civil Code provides that


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The contracting parties may establish such stipulations, clauses, terms and conditions

as they may deem convenient, provided they are not contrary to law, morals, good

customs, public order, or public policy.

The explicit with recourse stipulation against Great Asian effectively enlarges, by

agreement of the parties, the liability of Great Asian beyond that of a mere endorser ofa negotiable instrument. Thus, whether or not Bancasia gives notice of dishonor to

Great Asian, the latter remains liable to Bancasia because of the with

recourse stipulation which is independent of the warranties of an endorser under the

Negotiable Instruments Law.

There is nothing in the Negotiable Instruments Law or in the Financing Company

Act (old or new), that prohibits Great Asian and Bancasia parties from adopting

the with recourse stipulation uniformly found in the Deeds of Assignment. Instead of

being negotiated, a negotiable instrument may be assigned.[17]Assignment of a

negotiable instrument is actually the principal mode of conveying accounts receivableunder the Financing Company Act. Since in discounting of receivables the assignee is

subrogated as creditor of the receivable, the endorsement of the negotiable instrument

becomes necessary to enable the assignee to collect from the drawer. This is

particularly true with checks because collecting banks will not accept checks unless

endorsed by the payee. The purpose of the endorsement is merely to facilitate

collection of the proceeds of the checks.

The purpose of the endorsement is not to make the assignee finance company a

holder in due course because policy considerations militate against according finance

companies the rights of a holder in due course.[18]Otherwise, consumers who purchase

appliances on installment, giving their promissory notes or checks to the seller, will

have no defense against the finance company should the appliances later turn out to be

defective. Thus, the endorsement does not operate to make the finance company a

holder in due course. For its own protection, therefore, the finance company usually

requires the assignor, in a separate and distinct contract, to pay the finance company

in the event of dishonor of the notes or checks.

As endorsee of Great Asian, Bancasia had the option to proceed against Great

Asian under the Negotiable Instruments Law. Had it so proceeded, the NegotiableInstruments Law would have governed Bancasias cause of action. Bancasia,

however, did not choose this route. Instead, Bancasia decided to sue Great Asian forbreach of contract under the Civil Code, a right that Bancasia had under the

express with recourse stipulation in the Deeds of Assignment.

The exercise by Bancasia of its option to sue for breach of contract under the Civil

Code will not leave Great Asian holding an empty bag. Great Asian, after paying

Bancasia, is subrogated back as creditor of the receivables. Great Asian can then
http://sc.judiciary.gov.ph/jurisprudence/2002/apr2002/105774.htm#_edn17http://sc.judiciary.gov.ph/jurisprudence/2002/apr2002/105774.htm#_edn17http://sc.judiciary.gov.ph/jurisprudence/2002/apr2002/105774.htm#_edn17http://sc.judiciary.gov.ph/jurisprudence/2002/apr2002/105774.htm#_edn18http://sc.judiciary.gov.ph/jurisprudence/2002/apr2002/105774.htm#_edn18http://sc.judiciary.gov.ph/jurisprudence/2002/apr2002/105774.htm#_edn18http://sc.judiciary.gov.ph/jurisprudence/2002/apr2002/105774.htm#_edn18http://sc.judiciary.gov.ph/jurisprudence/2002/apr2002/105774.htm#_edn17


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passed to Bancasia, which must now, according to Great Asian, sue the drawers and

indorser of the check who are the parties primarily liable on the checks. Great Asian

forgets that under the Deeds of Assignment, Great Asian expressly undertook to pay

the full value of the checks in case of dishonor. Again, we reiterate that this

obligation of Great Asian is separate and distinct from its warranties as indorser under

the Negotiable Instruments Law.

Great Asian is, however, correct in saying that the assignment of the checks is a

sale, or more properly a discounting, of the checks and not a loan

accommodation. However, it is precisely because the transaction is a sale or a

discounting of receivables, embodied in separate Deeds of Assignment, that the

relevant provisions of the Civil Code are applicable and not the Negotiable

Instruments Law.

At any rate, there is indeed a fine distinction between a discounting line and a loan

accommodation. If the accounts receivable, like postdated checks, are sold for a

consideration less than their face value, the transaction is one of discounting, and is

subject to the provisions of the Financing Company Act. The assignee is immediately

subrogated as creditor of the accounts receivable. However, if the accounts receivable

are merely used as collateral for the loan, the transaction is only a simple loan, and the

lender is not subrogated as creditor until there is a default and the collateral is

foreclosed.

In summary, Great Asians four contracts assigning its fifteen postdated checks to

Bancasia expressly stipulate the suspensive condition that in the event the drawers of

the checks fail to pay, Great Asian itself will pay Bancasia. Since the common

condition in the contracts had transpired, an obligation on the part of Great Asianarose from the four contracts, and that obligation is to pay Bancasia the full value ofthe checks, including the stipulated penalty and attorneys fees.

Third Issue: The liability of surety Tan Chong Lin

Tan Chong Lin, the President of Great Asian, is being sued in his personal

capacity based on the Surety Agreements he signed wherein he solidarily held himself

liable with Great Asian for the payment of its debts to Bancasia. The Surety

Agreements contain the following common condition:

Upon failure of the Principal to pay at maturity, with or without demand, any of the

obligations above mentioned, or in case of the Principals failure promptly to respond

to any other lawful demand made by the Creditor, its successors, administrators or

assigns, both the Principal and the Surety/ies shall be considered in default and the

Surety/ies agree/s to pay jointly and severally to the Creditor all outstanding


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obligations of the Principal, whether due or not due, and whether held by the Creditor

as Principal or agent, and it is agreed that a certified statement by the Creditor as to

the amount due from the Principal shall be accepted by the Surety/ies as correct andfinal for all legal intents and purposes.

Indisputably, Tan Chong Lin explicitly and unconditionally bound himself to payBancasia, solidarily with Great Asian, if the drawers of the checks fail to pay on due

date. The condition on which Tan Chong Lins obligation hinged had happened. As

surety, Tan Chong Lin automatically became liable for the entire obligation to the

same extent as Great Asian.

Tan Chong Lin, however, contends that the following warranties in the Deeds of

Assignment enlarge or increase his risks under the Surety Agreements:

The ASSIGNOR warrants:

1. the soundness of the receivables herein assigned;

2. that said receivables are duly noted in its books and are supported by

appropriate documents;

3. that said receivables are genuine, valid and subsisting;

4. that said receivables represent bona fide sale of goods, merchandise, and/or

services rendered in the ordinary course of its business transactions;

5. that the obligors of the receivables herein assigned are solvent;

6. that it has valid and genuine title to and indefeasible right to dispose of said

accounts;

7. that said receivables are free from all liens and encumbrances;

8. that the said receivables are freely and legally transferable, and that the

obligor/s therein will not interpose any objection to this assignment, and has

in fact given his/their consent hereto.

Tan Chong Lin maintains that these warranties in the Deeds of Assignment

materially altered his obligations under the Surety Agreements, and therefore he is

released from any liability to Bancasia. Under Article 1215 of the Civil Code, what

releases a solidary debtor is a novation, compensation, confusion or remission of thedebt made by the creditor with any of the solidary debtors. These warranties,

however, are the usual warranties made by one who discounts receivables with a


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financing company or bank. The Surety Agreements, written on the letter head ofBancasia Finance & Investment Corporation, uniformly state that Great Asian

Sales Center x x x has obtained and/or desires to obtain loans, overdrafts, discounts

and/or other forms of creditsfrom Bancasia. Tan Chong Lin was clearly on notice

that he was holding himself as surety of Great Asian which was discounting postdated

checks issued by its buyers of goods and merchandise. Moreover, Tan Chong Lin, asPresident of Great Asian, cannot feign ignorance of Great Asians business activities

or discounting transactions with Bancasia. Thus, the warranties do not increase or

enlarge the risks of Tan Chong Lin under the Surety Agreements. There is, moreover,

no novation of the debt of Great Asian that would warrant release of the surety.

In any event, the provisions of the Surety Agreements are broad enough to include

the obligations of Great Asian to Bancasia under the warranties. The first Surety

Agreement states that:

x x xherein Surety/ies, jointly and severally among themselves and likewise withprincipal, herebyagree/s and bind/s himself/themselves to pay at maturity all the

notes, drafts, bills of exchange, overdraft and other obligations of every kind whichthe Principal may now or may hereafter owe the Creditor, including extensions or

renewals thereof in the sum *** ONE MILLION ONLY*** PESOS (P1,000,000.00),

Philippine Currency, plus stipulated interest thereon at the rate of sixteen percent

(16%) per annum, or at such increased rate of interest which the Creditor may charge

on the Principals obligations or renewals or the reduced amount thereof, plus all the

costs and expenses which the Creditor may incur in connection therewith.

x x x

Upon failure of the Principal to pay at maturity, with or without demand, any of the

obligations above mentioned, or in case of the Principals failure promptly torespond to any other lawful demand made by the Creditor, its successors,

administrators or assigns, both the Principal and the Surety/ies shall be considered in

default and the Surety/ies agree/s to pay jointly and severally to the Creditor all

outstanding obligations of the Principal, whether due or not due, and whether held

by the Creditor as Principal or agent, and it is agreed that a certified statement by the

Creditor as to the amount due from the Principal shall be accepted by the Surety/ies as

correct and final for all legal intents and purposes. (Emphasis supplied)

The second Surety Agreement contains the following provisions:

x x xherein Surety/ies, jointly and severally among themselves and likewise with

PRINCIPAL, herebyagree and bind themselves to pay at maturity all the notes,

drafts, bills of exchange, overdraft and other obligations of every kind which the


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annum, and only from the time it filed the complaint because the records do not show

that Bancasia made a written demand on Great Asian prior to filing the

complaint.[26]Bancasia made an extrajudicial demand on Tan Chong Lin, the surety,

but not on the principal debtor, Great Asian.

WHEREFORE, the assailed Decision of the Court of Appeals in CA-G.R. CVNo. 20167 is AFFIRMED with MODIFICATION. Petitioners are ordered to pay,

solidarily, private respondent the following amounts: (a) P1,042,005.00 plus 3%

penalty thereon, (b) interest on the total outstanding amount in item (a) at the legal

rate of 12% per annum from the filing of the complaint until the same is fully paid, (c)attorneys fees equivalent to 25% of the total amount in item (a), including interest at

12% per annum on the outstanding amount of the attorneys fees from the finality of

this judgment until the same is fully paid, and (c) costs of suit.

SO ORDERED.


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Republic of the Philippines

SUPREME COURTManila

FIRST DIVISION

G.R. No. 116631 October 28, 1998

MARSH THOMSON, petitioner,vs.COURT OF APPEALS and THE AMERICAN CHAMPER OF COMMERCE OF THE PHILIPPINES,INC,respondents.

QUISUMBING, J.:

This is a petition for review on certiorariseeking the reversal of the Decision 1 of the Court of Appeals on May 19,1994, disposing as follows:

WHEREFORE, THE DECISION APPEALED FROM IS HEREBY SET ASIDE. ANOTHERJUDGMENT IS ENTERED ORDERING DEFENDANT-APPELLEE MARSH THOMSON TOTRANSFER THE SAID MPC [Manila Polo Club] SHARE TO THE NOMINEE OF THE

APPELLANT.

The facts of the case are:

Petitioner Marsh Thomson (Thomson) was the Executive Vice-President and, later on, the Management Consultant

of private respondent, the American Chamber of Commerce of the Philippines, Inc. (AmCham) for over ten years,1979-1989.

While petitioner was still working with private respondent, his superior, A. Lewis Burridge, retired as AmCham'sPresident. Before Burridge decided to return to his home country, he wanted to transfer his proprietary share in theManila Polo Club (MPC) to petitioner. However, through the intercession of Burridge, private respondent paid for theshare but had it listed in petitioner's name. This was made clear in an employment advice dated January 13, 1986,wherein petitioner was informed by private respondent as follows:

xxx xxx xxx

11. If you so desire, the Chamber is willing to acquire for your use amembership in the Manila Polo Club. The timing of such acquisition shallbe subject to the discretion of the Board based on the Chamber's

financial position. All dues and other charges relating to suchmembership shall be for your personal account. If the membership isacquired in your name, you would execute such documents asnecessary to acknowledge beneficial ownership thereof by theChamber. 2

xxx xxx xxx


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The foregoing considered judgment is rendered as follows:

1) The ownership of the contested Manila Polo Club share is adjudicated in favorof defendant Marsh Thomson; and;

2) Defendant shall pay plaintiff the sum of P300,000.00

Because both parties thru their respective faults have somehow contributed to the birth ofthis case, each shall bear the incidental expenses incurred. 14

In said decision, the trial court awarded the MPC share to defendant (petitioner now) on the ground that the Articlesof Incorporation and By-laws of Manila Polo Club prohibit artificial persons, such as corporations, to be clubmembers, ratiocinating in this manner:

An assessment of the evidence adduced by both parties at the trial will show clearly that it was theintention of the parties that a membership to Manila Polo Club was to be secured by plaintiff [hereinprivate respondent] for defendant's [herein petitioner] use. The latter was to execute the necessarydocuments to acknowledge ownership of the Polo membership in favor of plaintiff. (Exh. C par 9)However, when the parties parted ways in disagreement and with some degree of bitterness, thedefendant had second thoughts and decided to keep the membership for himself. This is evident

from the exhibits (E & G) where defendant asked that he retained the Polo Club membership uponreimbursement of its purchase price; and where he showed his "profound disappointment, both atthe previous Board's unfair action, and at what I consider to be harsh terms, after my long years ofdedication to the Chamber's interest."

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