FIRST DIVISION

[G.R. No. 142616. July 31, 2001]

PHILIPPINE NATIONAL BANK, petitioner, vs. RITRATO GROUP INC., RIATTO
INTERNATIONAL, INC., and DADASAN GENERAL MERCHANDISE,respondent.
DECISION
KAPUNAN, J.:
In a petition for review on certiorari under Rule 45 of the Revised Rules of Court,
petitioner seeks to annul and set aside the Court of Appeals' decision in C.A. G.R.
S.P. No. 55374 dated March 27, 2000, affirming the Order issuing a writ of
preliminary injunction of the Regional Trial Court of Makati, Branch 147, dated June
30, 1999, and its Order dated October 4, 1999, which denied petitioner's motion to
dismiss.
The antecedents of this case are as follows:
Petitioner Philippine National Bank is a domestic corporation organized and existing
under Philippine law. Meanwhile, respondents Ritratto Group, Inc., Riatto
International, Inc. and Dadasan General Merchandise are domestic corporations,
likewise, organized and existing under Philippine law.
On May 29, 1996, PNB International Finance Ltd. (PNB-IFL), a subsidiary company of
PNB, organized and doing business in Hong Kong, extended a letter of credit in favor
of the respondents in the amount of US$300,000.00 secured by real estate
mortgages constituted over four (4) parcels of land in Makati City. This credit facility
was later increased successively to US$1,140,000.00 in September 1996; to
US$1,290,000.00 in November 1996; to US$1,425,000.00 in February 1997; and
decreased to US$1,421,316.18 in April 1998. Respondents made repayments of the
loan incurred by remitting those amounts to their loan account with PNB-IFL in Hong
Kong.
However, as of April 30, 1998, their outstanding obligations stood at
US$1,497,274.70. Pursuant to the terms of the real estate mortgages, PNB-IFL,
through its attorney-in-fact PNB, notified the respondents of the foreclosure of all
the real estate mortgages and that the properties subject thereof were to be sold at
a public auction on May 27, 1999 at the Makati City Hall.
On May 25, 1999, respondents filed a complaint for injunction with prayer for the
issuance of a writ of preliminary injunction and/or temporary restraining order
before the Regional Trial Court of Makati.The Executive Judge of the Regional Trial
Court of Makati issued a 72-hour temporary restraining order. On May 28, 1999, the
case was raffled to Branch 147 of the Regional Trial Court of Makati. The trial judge
then set a hearing on June 8, 1999. At the hearing of the application for preliminary
injunction, petitioner was given a period of seven days to file its written opposition
to the application. On June 15, 1999, petitioner filed an opposition to the application
for a writ of preliminary injunction to which the respondents filed a reply. On June
25, 1999, petitioner filed a motion to dismiss on the grounds of failure to state a

cause of action and the absence of any privity between the petitioner and
respondents. On June 30, 1999, the trial court judge issued an Order for the
issuance of a writ of preliminary injunction, which writ was correspondingly issued
on July 14, 1999. On October 4, 1999, the motion to dismiss was denied by the trial
court judge for lack of merit.
Petitioner, thereafter, in a petition for certiorari and prohibition assailed the
issuance of the writ of preliminary injunction before the Court of Appeals. In the
impugned decision,[1] the appellate court dismissed the petition. Petitioner thus
seeks recourse to this Court and raises the following errors:
1.
THE COURT OF APPEALS PALPABLY ERRED IN NOT DISMISSING THE COMPLAINT A
QUO, CONSIDERING THAT BY THE ALLEGATIONS OF THE COMPLAINT, NO CAUSE OF
ACTION EXISTS AGAINST PETITIONER, WHICH IS NOT A REAL PARTY IN INTEREST
BEING A MERE ATTORNEY-IN-FACT AUTHORIZED TO ENFORCE AN ANCILLARY
CONTRACT.
2.
THE COURT OF APPEALS PALPABLY ERRED IN ALLOWING THE TRIAL COURT TO ISSUE
IN EXCESS OR LACK OF JURISDICTION A WRIT OF PRELIMINARY INJUNCTION OVER
AND BEYOND WHAT WAS PRAYED FOR IN THE COMPLAINT A QUO CONTRARY
TO CHIEF OF STAFF, AFP VS. GUADIZ, JR., 101 SCRA 827.[2]
Petitioner prays, inter alia, that the Court of Appeals' Decision dated March 27, 2000
and the trial court's Orders dated June 30, 1999 and October 4, 1999 be set aside
and the dismissal of the complaint in the instant case. [3]
In their Comment, respondents argue that even assuming arguendo that petitioner
and PNB-IFL are two separate entities, petitioner is still the party-in-interest in the
application for preliminary injunction because it is tasked to commit acts of
foreclosing respondents' properties.[4] Respondents maintain that the entire credit
facility is void as it contains stipulations in violation of the principle of mutuality of
contracts.[5] In addition, respondents justified the act of the court a quo in applying
the doctrine of "Piercing the Veil of Corporate Identity" by stating that petitioner is
merely an alter ego or a business conduit of PNB-IFL. [6]
The petition is impressed with merit.
Respondents, in their complaint, anchor their prayer for injunction on alleged invalid
provisions of the contract:
GROUNDS
I
THE DETERMINATION OF THE INTEREST RATES BEING LEFT TO THE SOLE
DISCRETION OF THE DEFENDANT PNB CONTRAVENES THE PRINICIPAL OF MUTUALITY
OF CONTRACTS.

II
THERE BEING A STIPULATION IN THE LOAN AGREEMENT THAT THE RATE OF
INTEREST AGREED UPON MAY BE UNILATERALLY MODIFIED BY DEFENDANT, THERE
WAS NO STIPULATION THAT THE RATE OF INTEREST SHALL BE REDUCED IN THE
EVENT THAT THE APPLICABLE MAXIMUM RATE OF INTEREST IS REDUCED BY LAW OR
BY THE MONETARY BOARD.[7]
Based on the aforementioned grounds, respondents sought to enjoin and restrain
PNB from the foreclosure and eventual sale of the property in order to protect their
rights to said property by reason of void credit facilities as bases for the real estate
mortgage over the said property.[8]
The contract questioned is one entered into between respondent and PNB-IFL, not
PNB. In their complaint, respondents admit that petitioner is a mere attorney-in-fact
for the PNB-IFL with full power and authority to, inter alia, foreclose on the
properties mortgaged to secure their loan obligations with PNB-IFL. In other words,
herein petitioner is an agent with limited authority and specific duties under a
special power of attorney incorporated in the real estate mortgage. It is not privy to
the loan contracts entered into by respondents and PNB-IFL.
The issue of the validity of the loan contracts is a matter between PNB-IFL, the
petitioner's principal and the party to the loan contracts, and the respondents. Yet,
despite the recognition that petitioner is a mere agent, the respondents in their
complaint prayed that the petitioner PNB be ordered to re-compute the rescheduling
of the interest to be paid by them in accordance with the terms and conditions in
the documents evidencing the credit facilities, and crediting the amount previously
paid to PNB by herein respondents.[9]
Clearly, petitioner not being a party to the contract has no power to re-compute the
interest rates set forth in the contract. Respondents, therefore do not have any
cause of action against petitioner.
The trial court, however, in its Order dated October 4, 1994, ruled that since PNB-IFL
is a wholly owned subsidiary of defendant Philippine National Bank, the suit against
the defendant PNB is a suit against PNB-IFL.[10] In justifying its ruling, the trial court,
citing the case of Koppel Phil Inc. vs. Yatco,[11] reasoned that the corporate entity
may be disregarded where a corporation is the mere alter ego, or business conduit
of a person or where the corporation is so organized and controlled and its affairs
are so conducted, as to make it merely an instrumentality, agency, conduit or
adjunct of another corporation.[12]
We disagree.
The general rule is that as a legal entity, a corporation has a personality distinct and
separate from its individual stockholders or members, and is not affected by the
personal rights, obligations and transactions of the latter. [13] The mere fact that a
corporation owns all of the stocks of another corporation, taken alone is not
sufficient to justify their being treated as one entity. If used to perform legitimate
functions, a subsidiary's separate existence may be respected, and the liability of

the parent corporation as well as the subsidiary will be confined to those arising in
their respective business. The courts may in the exercise of judicial discretion step
in to prevent the abuses of separate entity privilege and pierce the veil of corporate
entity.
We find, however, that the ruling in Koppel finds no application in the case at bar. In
said case, this Court disregarded the separate existence of the parent and the
subsidiary on the ground that the latter was formed merely for the purpose of
evading the payment of higher taxes. In the case at bar, respondents failed to show
any cogent reason why the separate entities of the PNB and PNB-IFL should be
disregarded.
While there exists no definite test of general application in determining when a
subsidiary may be treated as a mere instrumentality of the parent corporation,
some factors have been identified that will justify the application of the treatment of
the doctrine of the piercing of the corporate veil. The case of Garrett vs. Southern
Railway Co[14] is enlightening. The case involved a suit against the Southern Railway
Company. Plaintiff was employed by Lenoir Car Works and alleged that he sustained
injuries while working for Lenoir. He, however, filed a suit against Southern Railway
Company on the ground that Southern had acquired the entire capital stock of
Lenoir Car Works, hence, the latter corporation was but a mere instrumentality of
the former. The Tennessee Supreme Court stated that as a general rule the stock
ownership alone by one corporation of the stock of another does not thereby render
the dominant corporation liable for the torts of the subsidiary unless the separate
corporate existence of the subsidiary is a mere sham, or unless the control of the
subsidiary is such that it is but an instrumentality or adjunct of the dominant
corporation. Said court then outlined the circumstances which may be useful in the
determination of whether the subsidiary is but a mere instrumentality of the parentcorporation:
The Circumstances rendering the subsidiary an instrumentality. It is manifestly
impossible to catalogue the infinite variations of fact that can arise but there are
certain common circumstances which are important and which, if present in the
proper combination, are controlling.
These are as follows:
(a) The parent corporation owns all or most of the capital stock of the subsidiary.
(b) The parent and subsidiary corporations have common directors or officers.
(c) The parent corporation finances the subsidiary.
(d) The parent corporation subscribes to all the capital stock of the subsidiary or
otherwise causes its incorporation.
(e) The subsidiary has grossly inadequate capital.
(f) The parent corporation pays the salaries and other expenses or losses of the
subsidiary.

(g) The subsidiary has substantially no business except with the parent corporation
or no assets except those conveyed to or by the parent corporation.
(h) In the papers of the parent corporation or in the statements of its officers, the
subsidiary is described as a department or division of the parent corporation, or its
business or financial responsibility is referred to as the parent corporation's own.
(i) The parent corporation uses the property of the subsidiary as its own.
(j) The directors or executives of the subsidiary do not act independently in the
interest of the subsidiary but take their orders from the parent corporation.
(k) The formal legal requirements of the subsidiary are not observed.
The Tennessee Supreme Court thus ruled:
In the case at bar only two of the eleven listed indicia occur, namely, the ownership
of most of the capital stock of Lenoir by Southern, and possibly subscription to the
capital stock of Lenoir The complaint must be dismissed.
Similarly, in this jurisdiction, we have held that the doctrine of piercing the
corporate veil is an equitable doctrine developed to address situations where the
separate corporate personality of a corporation is abused or used for wrongful
purposes. The doctrine applies when the corporate fiction is used to defeat public
convenience, justify wrong, protect fraud or defend crime, or when it is made as a
shield to confuse the legitimate issues, or where a corporation is the mere alter
ego or business conduit of a person, or where the corporation is so organized and
controlled and its affairs are so conducted as to make it merely an instrumentality,
agency, conduit or adjunct of another corporation. [15]
In Concept Builders, Inc. v. NLRC,[16] we have laid the test in determining the
applicability of the doctrine of piercing the veil of corporate fiction, to wit:
1. Control, not mere majority or complete control, but complete domination, not
only of finances but of policy and business practice in respect to the transaction
attacked so that the corporate entity as to this transaction had at the time no
separate mind, will or existence of its own.
2. Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest and,
unjust act in contravention of plaintiff's legal rights; and,
3. The aforesaid control and breach of duty must proximately cause the injury or
unjust loss complained of.
The absence of any one of these elements prevents "piercing the corporate veil." In
applying the "instrumentality" or "alter ego" doctrine, the courts are concerned with
reality and not form, with how the corporation operated and the individual
defendant's relationship to the operation. [17]
Aside from the fact that PNB-IFL is a wholly owned subsidiary of petitioner PNB,
there is now showing of the indicative factors that the former corporation is a mere

instrumentality of the latter are present.Neither is there a demonstration that any of

the evils sought to be prevented by the doctrine of piercing the corporate veil
exist. Inescapably, therefore, the doctrine of piercing the corporate veil based on
the alter ego or instrumentality doctrine finds no application in the case at bar.
In any case, the parent-subsidiary relationship between PNB and PNB-IFL is not the
significant legal relationship involved in this case since the petitioner was not sued
because it is the parent company of PNB-IFL. Rather, the petitioner was sued
because it acted as an attorney-in-fact of PNB-IFL in initiating the foreclosure
proceedings. A suit against an agent cannot without compelling reasons be
considered a suit against the principal. Under the Rules of Court, every action must
be prosecuted or defended in the name of the real party-in-interest, unless
otherwise authorized by law or these Rules. [18] In mandatory terms, the Rules require
that "parties-in-interest without whom no final determination can be had, an action
shall be joined either as plaintiffs or defendants." [19] In the case at bar, the injunction
suit is directed only against the agent, not the principal.
Anent the issuance of preliminary injunction, the same must be lifted as it is a mere
provisional remedy but adjunct to the main suit. [20] A writ of preliminary injunction is
an ancillary or preventive remedy that may only be resorted to by a litigant to
protect or preserve his rights or interests and for no other purpose during the
pendency of the principal action. The dismissal of the principal action thus results in
the denial of the prayer for the issuance of the writ. Further, there is no showing
that respondents are entitled to the issuance of the writ. Section 3, Rule 58, of the
1997 Rules of Civil Procedure provides:
SEC. 3. Grounds for issuance of preliminary injunction.- A preliminary injunction may
be granted when it is established:
(a) That the applicant is entitled to the relief demanded, and the whole or part of
such relief consists in restraining the commission or continuance of the act or acts
complained of, or in requiring the performance of an act or acts, either for a limited
period or perpetually;
(b) That the commission, continuance or non-performance of the acts or acts
complained of during the litigation would probably work injustice to the applicant; or
(c) That a party, court, agency or a person is doing, threatening, or is attempting to
do, or is procuring or suffering to be done, some act or acts probably in violation of
the rights of the applicant respecting the subject of the action or proceeding, and
tending to render the judgment ineffectual.
Thus, an injunctive remedy may only be resorted to when there is a pressing
necessity to avoid injurious consequences which cannot be remedied under any
standard compensation.[21] Respondents do not deny their indebtedness. Their
properties are by their own choice encumbered by real estate mortgages. Upon the
non-payment of the loans, which were secured by the mortgages sought to be
foreclosed, the mortgaged properties are properly subject to a foreclosure
sale. Moreover, respondents questioned the alleged void stipulations in the contract
only when petitioner initiated the foreclosure proceedings. Clearly, respondents

have failed to prove that they have a right protected and that the acts against
which the writ is to be directed are violative of said right. [22] The Court is not
unmindful of the findings of both the trial court an the appellate court that there
may be serious grounds to nullify the provisions of the loan agreement. However, as
earlier discussed, respondents committed the mistake of filing the case against the
wrong party, thus, they must suffer the consequences of their error.
All told, respondents do not have a cause of action against the petitioner as the
latter is not privy to the contract the provisions of which private respondents seek
to declare void. Accordingly the case before the Regional Trial Court must be
dismissed and the preliminary injunction issued in connection therewith, must be
lifted.
IN VIEW OF THE FOREGOING, the petition is hereby GRANTED. The assailed
decision of the Court of Appeals is hereby REVERSED. The Orders dated June 30,
1999 and October 4, 1999 of the Regional Trial Court of Makati, Branch 147 in Civil
Case No. 99-1037 are hereby ANNULLED and SET ASIDE and the complaint in said
case DISMISSED.
SO ORDERED.
Pardo, and Ynares-Santiago, JJ., concur.
Davide, Jr., C.J., (Chairman), on official leave.
Puno, J., no part.
TRADERS ROYAL BANK V. CA
269 SCRA 15
FACTS:
Filriters through a Detached Agreement transferred ownership to Philfinance a
Central Bank Certificate of Indebtedness. It was only through one of its officers by
which the CBCI was conveyed without authorization from the company.
Petitioner and Philfinance later entered into a Repurchase agreement, on
which petitioner bought the CBCI from Philfinance. The latter agreed to
repurchase the CBCI but failed to do so. When the petitioner tried to have it
registered in its name in the CB, the latter didn't want to recognize the transfer.
HELD:
The CBCI is not a negotiable instrument. The instrument provides for a
promise to pay the registered owner Filriters. Very clearly, the instrument was only
payable to Filriters. It lacked the words of negotiability which should have
served as an expression of the consent that the instrument may be
transferred by negotiation.
The language of negotiability which characterize a negotiable paper as a
credit instrument is its freedom to circulate as a substitute for money. Hence,
freedom of negotiability is the touchstone relating to the protection of holders in

due course, and the freedom of negotiability is the foundation for the protection,
which the law throws around a holder in due course. This freedom in
negotiability is totally absent in a certificate of indebtedness as it merely
acknowledges to pay a sum of money to a specified person or entity for a
period of time.
The transfer of the instrument from Philfinance to TRB was merely an
assignment, and is not governed by the negotiable instruments law. The pertinent
question then iswas the transfer of the CBCI from Filriters to Philfinance
and subsequently from Philfinance to TRB, in accord with existing law, so as to
entitle TRB to have the CBCI registered in its name with the Central Bank?
Clearly shown in the record is the fact that Philfinances title over CBCI is
defective since it acquired the instrument from Filriters fictitiously. Although the
deed of assignment stated that the transfer was for value received, there was
really no consideration involved. What happened was Philfinance merely
borrowed CBCI from Filriters, a sister corporation. Thus, for lack of any
consideration, the assignment made is a complete nullity. Furthermore, the
transfer wasn't in conformity with the regulations set by the CB. Giving more
credence to rule that there was no valid transfer or assignment to petitioner.

Buenaflor Umali vs Court of Appeals

November 30, 2012

189 SCRA 529 Business Organization Corporation Law Piercing the Veil of
Corporate Fiction
Mauricia Castillo was the administratrix in charge over a parcel of land left be Felipe
Castillo. Said land was mortgaged to the Development Bank of the Philippines and
was about to be foreclosed but then Mauricias nephew, Santiago Rivera, proposed
that they convert the land into 4 subdivisions so that they can raise the necessary
money to avoid foreclosure. Mauricia agreed. Rivera sought to develop said land
through his company, Slobec Realty Corporation (SRC), of which he was also the
president. SRC then contracted with Bormaheco, Inc. for the purchase of one tractor.
Bormaheco agreed to sell the tractor on an installment basis. At the same time, SRC
mortgaged said tractor to Bormaheco as security just in case SRC will default. As
additional security, Mauricia and other family members executed a surety
agreement whereby in case of default in paying said tractor, the Insurance

Corporation of the Philippines (ICP) shall pay the balance. The surety bond
agreement between Mauricia and ICP was secured by Mauricias parcel of land
(same land to be developed).
SRC defaulted in paying said tractor. Bormaheco foreclosed the tractor but it wasnt
enough hence ICP paid the deficiency. ICP then foreclosed the property of Mauricia.
ICP later sold said property to Philippine Machinery Parts Manufacturing Corporation
(PMPMC). PMPMC then demanded Mauricia et al to vacate the premises of said
property.
While all this was going on, Mauricia died. Her successor-administratrix, Buenaflor
Umali, questioned the foreclosure made by ICP. Umali alleged that all the
transactions are void and simulated hence they were defrauded; that through
Bormahecos machinations, Mauricia was fooled into entering into a surety
agreement with ICP; that Bormaheco even made the premium payments to ICP for
said surety bond; that the president of Bormaheco is a director of PMPMC; that the
counsel who assisted in all the transactions, Atty. Martin De Guzman, was the legal
counsel of ICP, Bormaheco, and PMPMC.
ISSUE: Whether or not the veil of corporate fiction should be pierced.
HELD: No. There is no clear showing of fraud in this case. The mere fact that
Bormaheco paid said premium payments to ICP does not constitute fraud per se. As
it turned out, Bormaheco is an agent of ICP. SRC, through Rivera, agreed that part of
the payment of the mortgage shall be paid for the insurance. Naturally, when Rivera
was paying some portions of the mortgage to Bormaheco, Bormaheco is applying
some parts thereof for the payment of the premium and this was agreed upon
beforehand.
Further, piercing the veil of corporate fiction is not the proper remedy in order that
the foreclosure conducted by ICP be declared a nullity. The nullity may be attacked
directly without disregarding the separate identity of the corporations involved.
Further still, Umali et al are not enforcing a claim against the individual members of
the corporations. They are not claiming said members to be liable. Umali et al are
merely questioning the validity of the foreclosure.
The veil of corporate fiction cant be pierced also by the simple reason that the
businesses of two or more corporations are interrelated, absent sufficient showing
that the corporate entity was purposely used as a shield to defraud creditors and
third persons of their rights. In this case, there is no justification for disregarding
their separate personalities.

NATIONAL POWER CORPORATION V COURT OF APPEALS

G.R. No. 124378. MARCH 8, 2005
Facts:On 15 November 1973, the Office of the President of the Philippines issued
Memorandum Order No. 398 instructing the NPC to build the Agus Regulation Dam
at the mouth of Agus River in Lanao del Sur, at a normal maximum water level of

Lake Lanao at 702 meters elevation. Pursuant thereto, petitioner built and operated
the said dam in 1978. Private respondents Hadji Abdul Carim Abdullah, Caris
Abdullah, Hadji Ali Langco and Diamael Pangcatan own fishponds along the Lake
Lanao shore. In October and November of 1986, all the improvements were washed
away when the water level of the lake escalated and the subject lakeshore area was
flooded. Private respondents blamed the inundation on the Agus Regulation Dam
built and operated by the NPC in 1978. They theorized that NPC failed to increase
the outflow of water even as the water level of the lake rose due to the heavy rains.
Issue:Whether or not the Court of Appeals erred in affirming the trial courts verdict
that petitioner was legally answerable for the damages endured by the private
respondents.
Ruling:Memorandum Order No. 398 clothes the NPC with the power to build the
Agus Regulation Dam and to operate it for the purpose of generating energy. Twin to
such power are the duties: (1) to maintain the normal maximum lake elevation at
702 meters, and (2) to build benchmarks to warn the inhabitants in the area that
cultivation of land below said elevation is forbidden.
With respect to its job to maintain the normal maximum level of the lake at 702
meters, the Court of Appeals, echoing the trial court, observed with alacrity that
when the water level rises due to the rainy season, the NPC ought to release more
water to the Agus River to avoid flooding and prevent the water from going over the
maximum level. And yet, petitioner failed to do so, resulting in the inundation of the
nearby estates. Consequently, even assuming that the fishponds were erected
below the 702-meter level, NPC must, nonetheless, bear the brunt for such
damages inasmuch as it has the duty to erect and maintain the benchmarks
precisely to warn the owners of the neighboring properties not to build fishponds
below these marks. Without such points of reference, the inhabitants in said areas
are clueless whether or not their improvements are within the prohibited area.
Conversely, without such benchmarks, NPC has no way of telling if the fishponds,
subject matter of the present controversy, are indeed below the prescribed
maximum level of elevation. Due to NPCs negligence in the performance of its
duties, it shall be held liable for the resulting damages suffered by private
respondents.

Reference ng mga cases :

http://www.academia.edu/9613331/CASE_DIGESTS_IN_CONSTITUTIONAL_LAW_II_DU
E_PROCESS_STATE_PROSECUTORS_V_MUROS_4_BANCO_ESPANOL_VS_PALANCA