MERCANTILE LAW

I. NEGOTIABLE INSTRUMENTS LAW

A. COMPLETION AND DELIVERY
1. INSERTION OF DATE

BENJAMIN EVANGELISTA v. SCREENEX, INC., represented by ALEXANDER G. YU

G.R. No. 211564, November 20, 2017, First Division, SERENO, C.J.:

The acceptance of a check implies an undertaking of due diligence in presenting it for payment, and if
he from whom it is received sustains loss by want of such diligence, it will be held to operate as actual
payment of the debt or obligation for which it was given.

FACTS:

Screenex, Inc. represented by Alexander Yu issued two checks to Evangelista in September 1991
pursuant to a loan obtained by the latter. The first was a UCPB check for ₱1,000,000 and the
second, a Chinabank check for ₱500, 000. There were also vouchers of Screenex that were signed
by the accused evidencing that he received the 2 checks in acceptance of the loan granted to him.
In turn, Petitioner issued two open-dated UCPB checks both pay to the order of Screenex, Inc.
The checks issued by Evangelista were held in safekeeping by Philip Gotuaco, Sr, the father-in-
law of the Respondent. These were kept by him until his death in 2004.

In 2005, Petitioner was charged with a violation of BP 22 for the issuance of the two UCPB checks
for issuing to Respondent checks for value despite knowing that there were insufficient funds at
the time of its issuance, and when subsequently presented within 90 days from the date thereof,
was dishonored by the drawee bank for the reason “ACCOUNT CLOSED.” Despite receipt of notice
of such dishonor, the said accused failed to pay said payee the face amount of said checks or to
make arrangement for full payment thereof within 5 banking days after receiving notice.

The METC acquitted Petitioner for failure to prove the third element of BP 22 at the time of the
issuance of the check to the payee, the latter did not have sufficient funds in, or credit with, the
drawee bank for payment of the check in full upon its presentment. Here, there was a failure to
prove Evangelista’s receipt of the demand letter. Thus, there was a failure to establish prima facie
evidence of knowledge of the insufficiency of funds on the part of Evangelista. However, petitioner
was made liable to pay the corresponding civil obligation since the checks were in the creditor’s
possession, which is sufficient evidence of an unpaid debt.

The RTC affirmed the MeTC decision in toto as regards civil liability. In ruling against the
Respondent, the Court said that the alleged payment of Evangelista is an affirmative defense thathe
failed to discharge and that prescription has not settled yet as the 10-year period must be counted
from the time the right of action accrues as per Art. 1144 of the New Civil Code. Here, the reckoning
point of prescription has not yet been established since there was no evidence as to the date of
maturity of the loan obligation. The RTC also stressed that the right of action in this case is not
upon a written contract. Hence, Art. 1144 does not apply.

Evangelista filed a petition for review before the CA insisting that the lower court erred in finding
him liable to pay the sum with interest at 12% per annum from the date of filing until full payment.

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He further alleged that witness Yu was not competent to testify on the loan transaction; that the
insertion of the date on the checks without the knowledge of the accused was an alteration that
avoided the checks; and that the obligation had been extinguished by prescription.

The CA denied the petition. It held that (a) the reckoning time for the prescriptive period began
when the instrument was issued and the corresponding check returned by the bank to its
depositor; (b) the issue of prescription was raised for the first time on appeal with the RTC; (c) the
writing of the date on the check cannot be considered as an alteration, as the checks were undated,
so there was nothing to change to begin with; (d) the loan obligation was never denied by
petitioner, who claimed that it was settled in 1992, but failed to show any proof of payment.

ISSUE:

Whether or not Evangelista should be made liable to pay the civil liability.

RULING:

NO. The Court ruled in favor of Petitioner on 3 grounds: First, a check is discharged by any other
act which will discharge a simple contract for the payment of money. Second, prescription allows
the court to dismiss the case motu propio. And third, the delivery of the check produces the effect
of payment when through the fault of the creditor they have been impaired. On the first and second
grounds, the civil action deemed instituted with the criminal action in B.P. 22 cases is treated as an
"independent civil liability based on contract.

By definition, a check is a bill of exchange drawn on a bank payable on demand. It is a negotiable

instrument — written and signed by a drawer containing an unconditional order to pay on demand
a sum certain in money. It is an undertaking that the drawer will pay the amount indicated thereon.
Section 119 of the NIL, however, states that a negotiable instrument like a check may be
discharged by any other act which will discharge a simple contract for the payment of
money.

A check therefore is subject to prescription of actions upon a written contract, that is, the action
must be brought from the time the right of action accrues. Barring any extrajudicial or judicial
demand that may toll the 10-year prescription period and any evidence which may indicate any
other time when the obligation to pay is due, the cause of action based on a check is reckoned
from the date indicated on the check.

If the check is undated, however, as in the present petition, the cause of action is reckoned
from the date of the issuance of the check.This is pursuant to Section 17 of the NIL which
provides that an undated check is presumed dated as of the time of its issuance. The Court
also stressed that although the date on a check may be filled, this must be done strictly in
accordance with the authority given and within a reasonable time. Here, Yu, even assuming that
was authorized, failed to insert the dates within a reasonable time. The insertion was made
after more than 10 years from the issuance of the checks. Thus, the cause of action on the checks
has become stale, hence, time-barred. No written extrajudicial or judicial demand was shown to
have been made within 10 years which could have tolled the period. Prescription has set in which
allows the Court to dismiss the case motu propio. The dismissal may be made albeit this ground
has been raised belatedly for the first time on appeal.

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As regards the third ground, Art. 1249 of the Civil Code and Sec. 186 of the NIL requires the
presentment of checks within a reasonable time after their issuance. In Papa v. Valencia, it was
held that the acceptance of a check implies an undertaking of due diligence in presenting
it for payment, and if he from whom it is received sustains loss by want of such diligence,
it will be held to operate as actual payment of the debt or obligation for which it was
given. It has, likewise, been held that if no presentment is made at all, the drawer cannot be held
liable irrespective of loss or injury unless presentment is otherwise excused. This is in harmony
with Article 1249 of the Civil Code under which payment by way of check or other negotiable
instrument is conditioned on its being cashed, except when through the fault of the creditor, the
instrument is impaired. The payee of a check would be a creditor under this provision and if its
no-payment is caused by his negligence, payment will be deemed effected and the obligation for
which the check was given as conditional payment will be discharged.

In the present case, Respondent’s subsequent failure to encash the checks within a period of 10
years or more, not only resulted in the checks becoming stale but also had the effect of payment.
Petitioner is considered discharged from his obligation to pay and can no longer be pronounced
civilly liable for the amounts indicated thereon.

B. COMPLETION AND DELIVERY

1. COMPLETE BUT UNDELIVERED INSTRUMENTS

ASIA BREWERY, INC. AND CHARLIE S. GO v. EQUITABLE PCI BANK

(NOW BANCO DE ORO – EPCI, INC.)
G. R. No. 190432, April 25, 2017, First Division, SERENO, C.J.:

Where the instrument is no longer in the possession of a party whose signature appears thereon, a
valid and intentional delivery by him is presumed until the contrary is proved.

FACTS:

From September 1996 to July 1998, Asia Brewery Corp. issued 10 checks and 16 demand drafts
totaling ₱3.785Million with Charlie Go as payee and Allied Bank being the drawee bank. Almost all
the checks were crossed.

The checks and drafts fell into the hands of a certain Raymond Keh, then a Sales Accounting
Manager of Asia Brewery. Raymond Keh opened an account with the then PCIBank pretending to
be Charlie Co (the payee of the checks) where Raymond Keh deposited the checks and subsequently
withdrew the proceeds thereof. When PCIBank presented the checks for payment to Allied Bank,
it stamped this at the back of the stolen checks “endorsed by PCIBank. Ayala Branch, All Prior
Endorsement and/or Lack of Endorsement Guaranteed.”

In the RTC, Asia Brewery demanded that Equitable PCIBank be liable to pay them relying on the
decision of the Supreme Court in Associated Bank vs. CA which held that the possession of check
on a forged or unauthorized indorsement is wrongful, and when the money is collected on the
check, the bank can be held liable for money had and received.

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Equitable PCIBank on the other hand filed a Motion to Dismiss stating that Asia Brewery’s
complaint lacked a cause of action citing Development Bank of Rizal v. SimaWei which provided
that without the initial delivery of the instrument from the drawer to the payee, there can be no
liability on the instrument and that such delivery must be intended to give effect to the instrument.
The RTC agreed with Equitable PCIBank and dismissed the Complaint for lack of cause of action.

ISSUE:

Whether or not the conclusion of RTC that there was no delivery of the check enough to dismiss
the complaint.

RULING:

NO. For a dismissal due to lack of cause of action, the arguments raised by the parties require an
examination of evidence. Even a determination of whether there was “delivery” in the legal sense
necessitates a presentation of evidence. It was erroneous for the RTC to have concluded that there
was no delivery, just because the checks did not reach the payee, considering that Section 16 of the
Negotiable Instruments Law provides that:

Sec. 16. Delivery; when effectual; when presumed. - Every contract on a negotiable
instrument is incomplete and revocable until delivery of the instrument for the purpose of
giving effect thereto. As between immediate parties and as regards a remote party
other than a holder in due course, the delivery, in order to be effectual, must be made
either by or under the authority of the party making, drawing, accepting, or indorsing, as
the case may be; and, in such case, the delivery may be shown to have been conditional, or
for a special purpose only, and not for the purpose of transferring the property in the
instrument. But where the instrument is in the hands of a holder in due course, a valid
delivery thereof by all parties prior to him so as to make them liable to him is conclusively
presumed. And where the instrument is no longer in the possession of a party whose
signature appears thereon, a valid and intentional delivery by him is presumed until
the contrary is proved. (Emphasis supplied)

Hence, in order to resolve whether the Complaint lacked a cause of action, Equitable PCIBank must
present evidence to dispute the presumption that the signatories validly and intentionally delivered
the instrument. If the allegations in a complaint furnish sufficient basis on which suit may be
maintained, the complaint should not be dismissed regardless of the defenses that may be raised
by the defendants.

C. LIABILITIES OF PARTIES
1. WARRANTIES

BDO UNIBANK, INC. v. ENGR. SELWYN LAO doing business under the name and style
“SELWYN F. LAO CONSTRUCTION” and “WING A CONSTRUCTION and DEVELOPMENT
CORPORATION”, and INTERNATIONAL EXCHANGE BANK (now UNION BANK OF THE
PHILIPPINES).
G.R. No. 227005, June 19, 2017, Second Division, MENDOZA, J.:

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The drawer of the check has a right of action against the drawee bank for its failure to comply with its
duty as the drawee bank. The drawee bank, in turn, would have a right of action against the collecting
bank because of the falsity of its warranties as the collecting bank.

FACTS:

In 1999, Engr. Selwyn Lao entered into a contract with Everlink Pacific Ventures for the supply to
him of HGC sanitary wares. As payment for the contract, Engr. Lao issued a crossed check payable
to Everlink and drawn against his account with BDO Unibank.

Everlink failed to deliver the HGC sanitary wares despite the fact that the amount of the check he
issued payable Everlink was debited from his BDO account. Engr. Lao learned that the crossed
check was not deposited to the account of Everlink but was deposited to the Union Bank account
of New Wave Plastic owned by Mr. George Wu and with a certain Willy Antiporda as authorized
representative, Engr. Lao thus filed a collection case against against BDO Unibank, Everlink
Ventures (but was subsequently withdrawn since Everlink ceased existing as a corporation), and
George Wu and an amended complaint was filed to include Union Bank for allowing the deposit of
the crossed check (payable to Everlink) to the account of New Wave Plastic.

The trial court absolved BDO from any liability but ordered Union Bank to pay Engr. Lao the
amount of the crossed check which was deposited to the account of New Wave Plastic, stating that
said crossed check was irregularly deposited and encashed because said check was not even
endorsed by Everlink to New Wave Plastic. The trial court opined that Union Bank was negligent
in allowing the deposit of the check without proper endorsement.

On appeal to the Court of Appeals, the decision of the trial court was affirmed and modified
ordering BDO to pay Engr. Lao the amount of the crossed check and further directing Union Bank
to reimburse BDO the aforementioned amount.

ISSUE:

Whether or not BDO is liable to Engr. Lao for having allowed the payment of the crossed check
made to someone other than the named payee and is Union Bank in turn liable as a general endorser
when it presented the crossed check to BDO Universal Bank for payment.

RULING:

YES. In cases of unauthorized payment of checks to a person other than the payee named therein,
the drawee bank may be held liable to the drawer. The drawer in turn may seek reimbursement
from the collecting bank.

A drawee bank is under strict liability to pay the check only to the payee or to the payee’s order.
When the drawee bank pays a person other than the payee named in the check, its does not comply
with the terms of the check and violates its duty to charge the drawer’s account only for properly
payable items.

On the other hand, the liability of the collecting bank is anchored on its guarantees as the last
endorser of the check. Under Section 66 of the Negotiable Instruments Law, an endorser warrants

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“that the instrument is genuine and in all respects what it purports to be; that he has good title to
it; that all prior parties had capacity to contract; and that the instrument is at the time of his
endorsement valid and subsisting.”

The collecting bank generally suffer the loss because it has the duty to ascertain the genuineness of
all prior endorsements considering that the act of presenting the check for payment to the drawee
is an assertion that the party making the presentment has done its duty to ascertain the genuineness
of the endorsements.

BDO was liable for allowing payment to a party other than the named payee or the payee’s order
but in turn, Union Bank was clearly negligent when it allowed the check to be presented by, and
deposited in the account of New Wave Plastic, despite knowledge that it was not the payee named
therein. Further, it could not have escaped its attention that the subject checks were crossed checks.

Although the rule on the sequence of recovery of a forged or lacking endorsement check has been
deeply engrained in jurisprudence, exceptional circumstances would justify it simplification. In this
case, Engr. Lao was allowed to collect directly from Union Bank even if there was no privity of
contract between them (instead of from BDO Unibank with whom it has a contractual relationship)
since BDO Unibank was not made a party to the appeal.

To summarize, Engr. Lao, the drawer of the check, has a right of action against BDO Unibank for
its failure to comply with its duty as the drawee bank. BDO Unibank, in turn, would have a right of
action against Union Bank because of the falsity of its warranties as the collecting bank.
Considering, however, that BDO Unibank was not made a party in the appeal, it could no longer be
held liable to pay Engr. Lao. Thus, following the case of Associated Bank vs. Court of Appeals, the
proceedings for recovery must be simplified and Engr. Lao should be allowed to recover directly
from Union Bank.

D. NOTICE OF DISHONOR
1. FORM OF NOTICE

BANK of the PHILIPPINE ISLANDS v. MENDOZA

G.R. No. 198799, March 20, 2017, First Division, PERLAS-BERNABE, J.:

While the Best Evidence Rule under the Rules of Court require that the original copy of the document
must be presented whenever the content of the document is under inquiry, the rule admits of certain
exceptions, such as “when the original has been lost or destroyed, or cannot be produced in court,
without bad faith on the part of the offeror.”

FACTS:

BPI filed a Complaint for Sum of Money with Application for Writ of Attachment against
Respondents, alleging the following: (1) Respondents opened a foreign savings account with BPI
and deposited therein a total of USD 16, 264.00, partly in US Treasury Check, but upon lapse of the
thirty-day clearing period, later withdrew USD 16, 244.00 leaving USD 20 for bank charges (2) BPI
later received a notice from Bankers Trust Company New York that the subject check was
dishonored due to “amount altered,” evidenced by (a) electronic-mail advice from Bankers Trust

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and (b) a photocopy of the subject check with a notation of “endorsement cancelled” by Bankers
Trust as the original copy of the subject check was allegedly confiscated by the US government.

BPI claims that Respondents allowed BPI to apply proceeds of their time deposit account to their
outstanding obligation. Upon exhaustion of the time deposit account, Amado Mendoza gave BPI a
promissory note to make monthly payments. Nevertheless, Respondents failed to fulfill their
obligation despite repeated demands.

Respondents admitted the withdrawals but maintained that Amado Mendoza only affixed his
signature in the letter dated 18 July 1997 to acknowledge its receipt, but not to give his consent to
the application of the process of their time deposit account to their purported obligations to BPI.
Amado claims willingness to pay only upon presentation by BPI of proper and authenticated proof
of the dishonor of the subject check, absent which, BPI had no cause of action against himself or
his mother.

ISSUE:

Whether or not BPI failed to prove the dishonor of the subject check.

RULING:

NO. BPI was able to sufficiently prove dishonor of the subject check.

Under Rule 130, Section 3 of the Rules of Court, as per the Best Evidence Rule, while the original
copy of the document must be presented whenever the content of the document is under inquiry,
the rule admits of certain exceptions, in which case the original need not be presented, provided
the offeror proves: (a) the existence or due execution of the original; (b) the loss and destruction of
the original, or the reason for its non-production in court; and (c) the absence of bad faith on the
part of the offeror to which the unavailability of the original can be attributed.

BPI sufficiently complied with the requisites for application of the exception, considering that both
parties admitted to the existence or due execution of the subject check, the reason for non-
presentation of the original copy was justifiable as it was confiscated by the US government for
being an altered check, and no bad faith can be attributed to BPI for its failure to present the original
subject check.

As to the e-mail advice, while it was not properly authenticated in accordance with the Rules on
Electronic Evidence, being merely corroborative evidence, its admissibility or inadmissibility
should not diminish the probative value of the other evidence proving respondents’ obligation
towards BPI.

Records evince that BPI was able to satisfactorily prove by preponderance of evidence the existence
of respondents’ obligation in its favor. Amado Mendoza acknowledged the existence of the
obligation and expressed conformity thereto when he voluntarily: (a) affixed his signature in letters
wherein he acknowledged the dishonor of the subject check, and subsequently allowed BPI to apply
the proceeds of their US time deposit to offset their obligation to the bank; and (b) executed a
Promissory Note wherein he undertook to pay BPI in monthly installments until the remaining
balance of the obligation is fully paid.

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E. PRESENTMENT FOR ACCEPTANCE

1. DISHONOR BY NON-ACCEPTANCE

MANUEL UBAS SR. v. WILSON CHAN

G.R. No. 215910, February 6, 2017, First Division, PERLAS-BERNABE, J.:

If the plaintiff-creditor possesses and submits in evidence an instrument showing the indebtedness, a
presumption that the credit has not been satisfied arises in his favor. The defendant is required to
overcome the said presumption by presenting evidence to prove the fact of payment.

FACTS:

This is a Complaint for Sum of Money with Application for Writ of Attachment filed by petitioner
Manuel Ubas against respondent Wilson Chan in the RTC.

Petitioner Ubas claims that respondent Chan, doing business under the name ‘Unimaster’, bought
from him boulders, sand, gravel, and other construction materials but did not pay the P1.5 million
price for such when it became due and demandable. Respondent also refused to pay despite
repeated demands. Respondent Chan later give Ubas 3 bank checks which were all dishonored due
to a stop payment order. Petitioner thus filed the Complaint to the RTC.

The RTC ruled that petitioner had a cause of action against respondent as the latter failed to
overcome the disputable presumption that every party to an instrument acquired the same for a
valuable consideration under Sec. 24 of the Negotiable Instruments Law. Petitioner’s demand letter
was not disputed by respondent.

In the subsequent appeal, the CA reversed the RTC ruling and dismissed petitioner’s complaint for
lack of cause of action.

ISSUE:

Whether or not petitioner had a cause of action against respondent.

RULING:

YES, petitioner was able to establish his cause of action by preponderance of evidence.

Under Sec. 24 of the NIL, if the plaintiff-creditor possesses and submits in evidence an instrument
showing indebtedness, there is a presumption that the credit has not been satisfied in his favor.
The defendant can overcome the said presumption by presenting evidence to prove the fact of
payment.

In this case, however, respondent was not able to overcome the presumption of consideration under
Sec. 24 of the NIL and establish any affirmative defenses.

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First, the presumption arose after petitioner presented 3 dishonored checks which respondent
admitted to having signed. The engineer who allegedly lost the checks did not testify in court. It
would also be contrary to human experience if petitioner based his demand letter on checks which
he obtained unlawfully.

Second, the manner of payment does not alter the nature of the obligation. The juridical tie was
already established between the parties during the perfection stage of the contract.

As the subject checks are presumed to have been issued for valuable consideration and given the
privity of contract between the parties, petitioner’s cause of action was thus proven through
preponderance of evidence.

II. INSURANCE CODE

A. CONCEPT OF INSURANCE

JAIME T. GAISANO v. DEVELOPMENT INSURANCE and SURETY CORPORATION,

G.R. No. 190702, February 27, 2017, Third Division, JARDELEZA, J.:

The notice of the availability of the check, by itself, does not produce the effect of payment of the
premium.

FACTS:

On September 27, 1996, respondent issued a comprehensive commercial vehicle policy to petitioner
over the 1992 Mitsubishi Montero for a period of one year. Petitioner's company, Noah's Ark
immediately processed the payments and issued a check dated September 27, 1996 payable to
Trans-Pacific on the same day. The check represents payment for the policy, with ₱55,620.60 for
the premium and other charges over the vehicle. However, nobody from Trans-Pacific picked up
the check that day (September 27) because its president and general manager, Herradura, was
celebrating his birthday. Trans-Pacific informed Noah's Ark that its messenger would get the check
the next day, September 28.

In the evening of September 27, 1996, while under the official custody of Noah's Ark marketing
manager Pacquing as a service company vehicle, the vehicle was stolen in the vicinity of SM
Megamall. Oblivious of the incident, Trans-Pacific picked up the check the next day, September 28.
It issued an official receipt dated September 28, 1996, acknowledging the receipt of ₱55,620.60 for
the premium and other charges over the vehicle.

On October 1, 1996, Pacquing informed petitioner of the vehicle's loss. In its Answer, respondent
asserted that the non-payment of the premium rendered the policy ineffective. The premium was
received by the respondent only on October 2, 1996, and there was no known loss covered by the
policy to which the payment could be applied.

ISSUE:

Whether or not there is a binding insurance contract between petitioner and respondent.

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RULING:

NO. Insurance is a contract whereby one undertakes for a consideration to indemnify another
against loss, damage or liability arising from an unknown or contingent event. Just like any other
contract, it requires a cause or consideration. The consideration is the premium, which must be
paid at the time and in the way and manner specified in the policy. If not so paid, the policy will
lapse and be forfeited by its own terms.

The law, however, limits the parties' autonomy as to when payment of premium may be made for
the contract to take effect. The general rule in insurance laws is that unless the premium is paid,
the insurance policy is not valid and binding. Section 77 of the Insurance Code, applicable at the
time of the issuance of the policy, provides:

Sec. 77. An insurer is entitled to payment of the premium as soon as the thing insured is
exposed to the peril insured against. Notwithstanding any agreement to the contrary, no
policy or contract of insurance issued by an insurance company is valid and binding unless
and until the premium thereof has been paid, except in the case of a life or an industrial life
policy whenever the grace period provision applies.

There is no dispute that the check was delivered to and was accepted by respondent's agent, Trans-
Pacific, only on September 28, 1996. No payment of premium had thus been made at the time of
the loss of the vehicle on September 27, 1996. While petitioner claims that Trans-Pacific was
informed that the check was ready for pick-up on September 27, 1996, the notice of the availability
of the check, by itself, does not produce the effect of payment of the premium. Trans-Pacific could
not be considered in delay in accepting the check because when it informed petitioner that it will
only be able to pick-up the check the next day, petitioner did not protest to this, but instead allowed
Trans-Pacific to do so. Thus, at the time of loss, there was no payment of premium yet to make the
insurance policy effective.

Petitioner also failed to establish the fact of a grant by respondent of a credit term in his favor, or
that the grant has been consistent. While there was mention of a credit agreement between Trans-
Pacific and respondent, such arrangement was not proven and was internal between agent and
principal. Under the principle of relativity of contracts, contracts bind the parties who entered into
it. It cannot favor or prejudice a third person, even if he is aware of the contract and has acted with
knowledge.

We cannot sustain petitioner's claim that the parties agreed that the insurance contract is
immediately effective upon issuance despite non-payment of the premiums. Even if there is a waiver
of pre-payment of premiums, that in itself does not become an exception to Section 77, unless the
insured clearly gave a credit term or extension. This is the clear import of the fourth exception in
the UCPB General Insurance Co., Inc. To rule otherwise would render nugatory the requirement in
Section 77 that "notwithstanding any agreement to the contrary, no policy or contract of insurance
issued by an insurance company is valid and binding unless and until the premium thereof has been
paid, x x x."

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Moreover, the policy states that the insured's application for the insurance is subject to the payment
of the premium. There is no waiver of pre-payment, in full or in installment, of the premiums under
the policy. Consequently, respondent cannot be placed in estoppel.

Thus, we find that petitioner is not entitled to the insurance proceeds because no insurance policy
became effective for lack of premium payment. The consequence of this declaration is that
petitioner is entitled to a return of the premium paid for the vehicle in the amount of ₱55,620.60
under the principle of unjust enrichment.

B. CLASSES
1. FIRE

MALAYAN INSURANCE CO., INC. v. LIN

G.R. No. 207277, January 16, 2017, First Division, DEL CASTILLO, J.:

The findings of the trial court will not necessarily foreclose the administrative case before the
Insurance Commission, or vice versa.

FACTS:

Lin filed a complaint for collection of sum of money with Petitioners in the RTC. She alleged in her
complaint that she obtained various loans from RCBC that were secured by six warehouses which
were insured with Malayan against fire. However, the five warehouses were subsequently gutted by
fire. The Bureau of Fire Protection (BFP) issued a Fire Clearance Certification to her which stated
that the cause of fire was accidental. Despite the certification, her demand for payment of her
insurance claim was denied since the forensic investigators hired by Malayan claimed that the cause
of the fire was arson and not accidental.

Lin then sought assistance from the Insurance Commission (IC) which recommended that Malayan
pay Lin's insurance claim and/or accord great weight to the BFP's findings. However, Malayan still
denied or refused to pay her insurance claim. Lin thus prayed in the Civil Case that judgment be
rendered ordering petitioners to pay her insurance claim plus interest on the amounts due or owing
her.

After five months, Lin also filed before the IC an administrative case against Malayan. In this
administrative case, Lin claimed that since it had been conclusively found that the cause of the fire
was "accidental," the only issue left to be resolved is whether Malayan should be held liable for
unfair claim settlement practice under the Insurance Code due to its unjustified refusal to settle
her claim and that Malayan's license to operate as a non-life insurance company should be revoked
or suspended, until such time that it fully complies with the IC Resolution ordering it to accord
more weight to the BFP's findings.

Malayan filed a motion to dismiss the Civil Case based on forum shopping. It argued that the
administrative case was instituted to prompt or incite IC into ordering Malayan to pay her insurance
claim which means that Lin sought to obtain the same reliefs in the administrative case as in the
civil case.

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The RTC denied the motion to dismiss and held that there was no forum shopping as Lin was
seeking a relief in the administrative case which was distinct from the civil case. The CA upheld the
decision of the RTC.

ISSUE:

Whether Lin was guilty of forum shopping.

RULING:

NO. In the present case, petitioners basically insist that Lin committed willful and deliberate forum
shopping which warrants the dismissal of her civil case because it is not much different from the
administrative case in terms of the parties involved, the causes of action pleaded, and the reliefs
prayed for. Petitioners also posit that another ground warranting the dismissal of the civil case was
Lin's failure to notify the RTC about the pendency of the administrative case within five days from
the filing thereof.

These arguments will not avail.

The essence of forum shopping is the filing of multiple suits involving the same parties for the same
cause of action, either simultaneously or successively, for the purpose of obtaining a favorable
judgment. It exists where the elements of litis pendentia are present or where a final judgment in
one case will amount to res judicata in another.

"The settled rule is that criminal and civil cases are altogether different from administrative
matters, such that the disposition in the first two will not inevitably govern the third and vice
versa."In the context of the case at bar, matters handled by the IC are delineated as either regulatory
or adjudicatory, both of which have distinct characteristics.

Further, a civil case before the trial court involving recovery of payment of the insured's insurance
claim plus damages, can proceed simultaneously with an administrative case before the IC.

The findings of the trial court will not necessarily foreclose the administrative case before the [IC],
or [vice versa]. True, the parties are the same, and both actions are predicated on the same set of
facts, and will require identical evidence. But the issues to be resolved, the quantum of evidence,
the procedure to be followed, and the reliefs to be adjudged by these two bodies are different.

While the possibility that these two bodies will come up with conflicting resolutions on the same
issue is not far-fetched, the finding or conclusion of one would not necessarily be binding on the
other given the difference in the issues involved, the quantum of evidence required and the
procedure to be followed.

C. INSURABLE INTEREST

COMMUNICATION and INFORMATION SYSTEM v. MARK SENSING AUSTRALIA, et al

G.R. No. 192159, January 25, 2017, Third Division, JARDELEZA, J.:

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Reinsurance contracts are issued in favor of the direct insurer because the subject of such contracts
is the direct insurer's risk and not the risk assumed under the original policy. The requirement under
Section 4, Rule 57 of the Rules of Court that the applicant's bond be executed to the adverse party
necessarily pertains only to the attachment bond itself and not to any underlying reinsurance
contract. With or without reinsurance, the obligation of the surety to the party against whom the
writ of attachment is issued remains the same.

FACTS:

Petitioner Communication and Information Systems Corporation (CISC) and respondent Mark
Sensing Australia Pty. Ltd. (MSAPL) entered into a Memorandum of Agreement (MOA) dated
March 1, 2002 whereby MSAPL appointed CISC as "the exclusive AGENT of [MSAPL] to Philippine
Charity Sweepstakes Office (PCSO) during the [lifetime] of the recently concluded Memorandum
of Agreement entered into between [MSAPL], PCSO and other parties." The recent agreement
referred to in the MOA is the thermal paper and bet slip supply contract (the Supply Contract)
between PCSO, MSAPL, and three “other suppliers”, namely Lamco Paper Products Company,
Inc. (Lamco Paper), Consolidated Paper Products, Inc. (Consolidated Paper) and Trojan
Computer Forms Manufacturing Corporation (Trojan Computer Forms). As consideration for
CISC's services, MSAPL agreed to pay CISC a commission of 24.5% of future gross sales to PCSO,
exclusive of duties and taxes, for six years.

MSAPL eventually stopped remitting commissions to CISC, saying that Carolina de Jesus,
President of CISC, violated her authority when she negotiated the Supply Contract with PCSO
and three of MSAPL's competitors. According to MSAPL, it lost almost one-half of its business
with PCSO because the Supply Contract provided that MSAPL's business with PCSO shall be
limited to the latter's Luzon operations, with MSAPL supplying 70% of thermal rolls and 50% of
bet slips. MSAPL pointed out that it used to have a Build Operate Transfer (BOT) Agreement with
PCSO where it undertook to build a thermal paper and bet slip manufacturing facility to supply
all requirements of PCSO. However, PCSO unilaterally cancelled the BOT Agreement and granted
supply contracts to the three aforementioned “other suppliers” which led to litigation between
the parties. The suit was eventually settled when PCSO, MSAPL, and the three other suppliers
entered into the Supply Contract, which was submitted and approved by the RTC as a
compromise agreement. MSAPL felt shortchanged by CISC's efforts and thus decided to withhold
payment of commissions. Hence, CISC filed a complaint before the RTC for specific performance
against MSAPL, Mark Sensing Philippines, Inc. (MSPI), Atty. Ofelia Cajigal, and PCSO praying
that private respondents be ordered to comply with its obligations under the MOA and the
issuance of a writ of preliminary mandatory injunction and/or writ of attachment.

The RTC eventually approved the attachment bond. However, MSAPL filed an urgent motion to
recall and set aside the approval of the attachment bond, on the ground that the attachment bond
underwritten by Plaridel exceeded its retention limit under the Insurance Code. The RTC resolved
this by affirming the validity of the attachment bond. It held that Section 215 allows insurance
companies to insure a single risk in excess of retention limits provided that the excess amount is
ceded to reinsurers.
ISSUE:

Whether or not the RTC committed grave abuse of discretion when it approved the attachment
bond whose face amount exceeded the retention limit of the surety.

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RULING:

YES. Section 215 of theold Insurance Code, the law in force at the time Plaridel issued the
attachment bond, limits the amount of risk that insurance companies can retain to a maximum
of 20% of its net worth. However, in computing the retention limit, risks that have been ceded to
authorized reinsurers are ipso jure deducted. In mathematical terms, the amount of retained risk
is computed by deducting ceded/reinsured risk from insurable risk. If the resulting amount is
below 20% of the insurer's net worth, then the retention limit is not breached. In this case, both
the RTC and CA determined that, based on Plaridel's financial statement that was attached to its
certificate of authority issued by the Insurance Commission, its net worth is ₱289,
332,999.00. Plaridel's retention limit is therefore ₱57, 866,599.80, which is below the ₱113,
197,309.10 face value of the attachment bond.

However, it only retained an insurable risk of ₱17, 377,938.19 because the remaining amount of
₱98, 819,770.91 was ceded to 16 other insurance companies. Thus, the risk retained by Plaridel is
actually ₱40 Million below its maximum retention limit. Therefore, the approval of the
attachment bond by the RTC was in order. Contrary to MSAPL's contention that the RTC acted
with grave abuse of discretion, the RTC not only correctly applied the law but also acted
judiciously when it required Plaridel to submit proof of its reinsurance contracts after MSAPL
questioned Plaridel's capacity to underwrite the attachment bond. Apparently, MSAPL failed to
appreciate that by dividing the risk through reinsurance, Plaridel's attachment bond actually
became more reliable — as it is no longer dependent on the financial stability of one company —
and, therefore, more beneficial to MSAPL.

The Court reversed the CA’s findings that the reinsurance contracts issued to Plaridel failed to
comply with Section 4, Rule 57 of the Rules of Court requiring the bond to be executed to the
adverse party (thus, being improperly and insufficiently posted).

A contract of reinsurance is one by which an insurer (the "direct insurer" or "cedant") procures a
third person (the "reinsurer") to insure him against loss or liability by reason of such original
insurance. It is a separate and distinct arrangement from the original contract of insurance,
whose contracted risk is insured in the reinsurance agreement. The reinsurer's contractual
relationship is with the direct insurer, not the original insured, and the latter has no interest in
and is generally not privy to the contract of reinsurance. Put simply, reinsurance is the "insurance
of an insurance."

By its nature, reinsurance contracts are issued in favor of the direct insurer because the subject of
such contracts is the direct insurer's risk — in this case, Plaridel's contingent liability to MSAPL —
and not the risk assumed under the original policy. The requirement under Section 4, Rule 57 of
the Rules of Court that the applicant's bond be executed to the adverse party necessarily pertains
only to the attachment bond itself and not to any underlying reinsurance contract. With or without
reinsurance, the obligation of the surety to the party against whom the writ of attachment is issued
remains the same.

D. CLAIMS SETTLEMENT AND SUBROGATION

E. GUIDELINES ON CLAIMS SETTLEMENT

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1. SUBROGATION

LOADSTAR SHIPPING COMPANY, INCORPORATED and LOADSTAR INTERNATIONAL

SHIPPING COMPANY, INCORPORATED v. MALAYAN INSURANCE COMPANY,
INCORPORATED
G.R. No. 185565 (Resolution), April 26, 2017, Special Third Division, REYES, J.:

A subrogee steps into the shoes of the insured and can recover only if the insured likewise could have
recovered.

FACTS:

PASAR filed a claim against Malayan Insurance (“Malayan”) for the damages it suffered by reason
of seawater wettage of the 777.29 metric tons of copper concentrates loaded on Loadstar Shipping
Company (“Loadstar”). PASAR rejected the contaminated goods, claimed the value thereof from
Malayan but later bought back the goods which it had already rejected. In spite of no proof of loss,
Malayan paid the claim of PASAR in the amount of ₱33,934,948.75. Malayan contends that
in Delsan, the Court held that upon payment by the insurance company of the insurance claim,
the insurance company should be subrogated to the rights of the insured; it is not even necessary
to present the insurance policy because subrogation is a matter of equity. However, according to
Loadstar, Malayan cannot make them answerable since Malayan did not adduce proof of pecuniary
loss to PASAR.

ISSUE:

Whether or not Loadstar should reimburse Malayan for the amount it paid to PASAR.

RULING:

NO. Delsan involved the sinking of a vessel which took down with it the entire cargo of fuel it was
carrying.Here, PASAR did not simply reject the contaminated goods but bought back the goods
which it had already rejected. Malayan opted to cash in the situation by selling the contaminated
copper concentrates to the very same consignee who already rejected the goods as total loss.
Malayan and PASAR's extraneous actuations are inconsistent with the alleged fact of total
loss. Verily, Delsan cannot be applied given the contradistinctive circumstances obtaining in this
case. Further, Malayan was not able to prove the pecuniary loss suffered by PASAR for which the
latter was indemnified. This is in line with the principle that a subrogee steps into the shoes of the
insured and can recover only if the insured likewise could have recovered.

Nonetheless, the Court notes that the petitioners failed to comply with some of the terms of their
contract of affreightment with PASAR. It was stipulated that the vessel to be used must not exceed
25 years of age, yet the vessel was more than that age when the subject copper concentrates were
transported. Additionally, the petitioners failed to keep the cargo holds and hatches of the vessel
clean and fully secured as agreed upon, which resulted in the wettage of the cargo.

As common carriers, the petitioners are bound to observe extraordinary diligence in their vigilance
over the goods they transport, as required by the nature of their business and for reasons of public
policy. "Extraordinary diligence is that extreme measure of care and caution which persons of

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unusual prudence and circumspection use for securing and preserving their own property or
rights." When the copper concentrates delivered were contaminated with seawater, the petitioners
have failed to exercise extraordinary diligence in the carriage thereof.

In view of the foregoing, the Court deems it proper to award nominal damages to Malayan in the
amount of ₱1,769,374.725, * which is equivalent to six percent (6%) of the sum being claimed by
Malayan less the residual value of the copper concentrates sufficient as damages.

EQUITABLE INSURANCE CORPORATION v. TRANSMODAL INTERNATIONAL, INC.

G.R. No. 223592, August 7, 2017, Second Division, PERALTA, J.:

Petitioner was able to present as evidence the marine open policy that vested upon it, its rights as a
subrogee.

FACTS:

Sytengco Enterprises Corporation (Sytengco) hired respondent Transmodal International, Inc.

(Transmodal) to clear from the customs authorities and withdraw, transport, and deliver to its
warehouse, cargoes consisting of 200 cartons of gum Arabic with a total weight of 5,000 kilograms
valued at USD21,750.00.

The said cargoes arrived in Manila on August 14, 2004 and were brought to Ocean Links Container
Terminal Center, Inc. pending their release by the Bureau of Customs (BOC) and on September 2,
2004, respondent Transmodal withdrew the same cargoes and delivered them to Sytengco's
warehouse. It was noted in the delivery receipt that all the containers were wet. it was found that
the contents of the randomly opened 20 cartons were about 40% to 60% hardened, while 8 cartons
had marks of previous wetting.

Sytengco demanded from respondent Transmodal the payment of ₱1,457,424.00 as compensation

for total loss of shipment. On that same date, petitioner Equitable Insurance, as insurer of the
cargoes per Marine Open Policy No. MN-MRN-HO-000549 paid Sytengco's claim for ₱728,712.00.
On October 4, 2004, Sytengco then signed a subrogation receipt and loss receipt in favor of
petitioner Equitable Insurance. As such, petitioner Equitable Insurance demanded from respondent
Transmodal reimbursement of the payment given to Sytengco.

Thereafter, petitioner Equitable Insurance filed a complaint for damages invoking its right as
subrogee after paying Sytengco's insurance claim and averred that respondent Transmodal's fault
and gross negligence were the causes of the damages sustained by Sytengco's shipment.

ISSUE:

Whether or not petitioner’s subrogation is proper.

RULING:

YES, subrogation of the petitioner is proper.

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First of all, non-presentation of the insurance contract or policy was never raised as an issue before
the RTC. In fact, it is not among the issues agreed upon by the parties to be resolved during the
pre-trial. As we have said, the determination of issues during the pre-trial conference bars the
consideration of other questions, whether during trial or on appeal. The parties must disclose
during pre-trial all issues they intend to raise during the trial, except those involving privileged or
impeaching matters. The basis of the rule is simple. Petitioners are bound by the delimitation of
the issues during the pre-trial because they themselves agreed to the same.

Plaintiff was able to prove by substantial evidence their right to institute this action as subrogee of
the insured. Petitioner was able to present as evidence the marine open policy that vested upon it
its rights as a subrogee. On the other hand, the defendant did not present any evidence or witness
to bolster their defense and to contradict plaintiff’s allegation. It must be noted that subrogation is
designed to promote and to accomplish justice and is the mode which equity adopts to compel the
ultimate payment of a debt by one who injustice, equity and good conscience ought to pay.

III. TRANSPORTATION LAWS

A. COMMON CARRIERS
1. LIABILITIES OF COMMON CARRIERS

SPOUSES JESUS FERNANDO and ELIZABETH FERNANDO v. NORTHWEST AIRLINES, INC.

G.R. No. 212038 and G.R. No. 212043, February 8, 2017, PERALTA, J.:

Passengers are entitled to be protected against personal misconduct, injurious language, indignities
and abuses from the carrier’s employees. Any rude or discourteous conduct on the part of employees
towards a passenger gives the latter an action for damages against the carrier.

FACTS:

There were two incidents in this case.

First, the arrival at Los Angeles Airport on December 20, 2001.

Jesus Fernando was asked by the Immigration Officer to have his return ticket verified and validated
since the date reflected thereon is August 2001. So he approached a Linda Puntawongdaycha, a
Northwest personnel but the latter merely glanced at his ticket without checking its status with the
computer and peremptorily said that the ticket has been used and could not be considered as valid.
He gave Linda the number of his Elite Platinum World Perks Card for the latter to access the ticket
control record with the airline's computer for her to see that the ticket is still valid. But Linda
refused to check the validity of the ticket in the computer. As a result, the Immigration Officer
brought Jesus Fernando to the interrogation room of the INS where he was interrogated for more
than two (2) hours. When he was finally cleared by the Immigration Officer, he was granted only a
twelve (12)-day stay in the United States (US), instead of the usual six (6) months. Since Jesus
Fernando was granted only a twelve (12)-day stay in the US, his scheduled plans with his family as
well as his business commitments were disrupted.

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Second, the departure from the Los Angeles Airport on January 29, 2002.

When Jesus Fernando and his family reached the gate area where boarding passes need to be
presented, Northwest supervisor Linda Tang stopped them and demanded for the presentation of
their paper tickets (coupon type). They failed to present the same since, according to them,
Northwest issued electronic tickets (attached to the boarding passes) which they showed to the
supervisor. In the presence of the other passengers, Linda Tang rudely pulled them out of the
queue. Elizabeth Fernando explained to Linda Tang that the matter could be sorted out by simply
verifying their electronic tickets in her computer and all she had to do was click and punch in their
Elite Platinum World Perks Card number. But Linda Tang arrogantly told them that if they wanted
to board the plane, they should produce their credit cards and pay for their new tickets, otherwise
Northwest would order their luggage off-loaded from the plane. Exasperated and pressed for time,
the Fernandos rushed to the Northwest Airline Ticket counter to clarify the matter. To ensure that
the Fernandos would no longer encounter any problem with Linda Tang, Jeanne Meyer printed
coupon tickets for them who were then advised to rush back to the boarding gates since the plane
was about to depart. But when the Fernandos reached the boarding gate, the plane had already
departed. They were able to depart, instead, the day after.

ISSUE:

Whether or not there was breach of contract of carriage and whether it was done in a wanton,
malevolent or reckless manner amounting to bad faith.

RULING:

YES. Northwest committed a breach of contract "in failing to provide the spouses with the proper
assistance to avoid any inconvenience" and that the actuations of Northwest in both subject
incidents "fall short of the utmost diligence of a very cautious person expected of it." Considering
that the Fernandos are not just ordinary passengers but, in fact, frequent flyers of Northwest, the
latter should have been more courteous and accommodating to their needs so that the delay and
inconveniences they suffered could have been avoided. Northwest was remiss in its duty to provide
the proper and adequate assistance to them.

Further, the actuations of Northwest personnel in both subject incidents are constitutive of bad
faith. In ignoring Jesus Fernando's pleas to check the validity of the tickets in the computer, the
Northwest personnel exhibited an indifferent attitude without due regard for the inconvenience
and anxiety Jesus Fernando might have experienced. As to the second incident, there was likewise
fraud or bad faith on the part of Northwest when it did not allow the Fernandos to board their flight
for Manila on scheduled date, in spite of confirmed tickets in the presence of the other passengers,
Northwest personnel Linda Tang pulled the Fernandos out of the queue and asked for paper
tickets (coupon type). Even the matter could be sorted out by simply verifying their electronic
tickets in her computer and all she had to do was click and punch in their Elite Platinum World
Perks Card number, Tang refused to do so; she, instead, told them to pay for new tickets so they
could board the plane.

Passengers do not contract merely for transportation. They have a right to be treated by the carrier's
employees with kindness, respect, courtesy and due consideration. They are entitled to be protected
against personal misconduct, injurious language, indignities and abuses from such employees. So

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it is, that any rude or discourteous conduct on the part of employees towards a passenger gives the
latter an action for damages against the carrier.

Hence, moral damages and attorney's fees amounting to ₱3,000,000.00 and ten percent (10%) of
the damages are awarded, respectively. Exemplary damages in the amount of ₱2,000,000.00 is also
awarded.

JOSE SANICO and VICENTE CASTRO v. WERHERLINA P. COLIPANO

G.R. No. 209969, September 27, 2017, Second Division, CAGUIOA, J.:

Since the cause of action is based on a breach of a contract of carriage, the liability of the owner is
direct as the contract is between him and the passenger. The driver cannot be made liable as he is not
a party to the contract of carriage.

FACTS:

On December 25, 1993, Christmas Day, Colipano and her daughter were paying passengers in the
jeepney operated by Sanico, which was driven by Castro. Colipano claimed she was made to sit on
an empty beer case at the edge of the rear entrance/exit of the jeepney with her sleeping child on
her lap. And, at an uphill incline in the road to Carmen, Cebu, the jeepney slid backwards because
it did not have the power to reach the top. Colipano pushed both her feet against the step board to
prevent herself and her child from being thrown out of the exit, but because the step board was
wet, her left foot slipped and got crushed between the step board and a coconut tree which the
jeepney bumped, causing the jeepney to stop its backward movement. Colipano's leg was badly
injured and was eventually amputated. Sanico claimed however that the event was due to engine
failure, that he paid for all the hospital and medical expenses of Colipano, and that Colipano
eventually freely and voluntarily executed an Affidavit of Desistance and Release of Claim.

ISSUE:

Whether or not Sanico and Castro breached the contract of carriage with Colipano.

RULING:

Only Sanico breached the contract of carriage. Since the cause of action is based on a breach of a
contract of carriage, the liability of Sanico is direct as the contract is between him and Colipano.
Castro, being merely the driver of Sanico's jeepney, cannot be made liable as he is not a party to the
contract of carriage. Although he was driving the jeepney, he was a mere employee of Sanico, who
was the operator and owner of the jeepney. The obligation to carry Colipano safely to her
destination was with Sanico. In fact, the elements of a contract of carriage existed between Colipano
and Sanico: consent, as shown when Castro, as employee of Sanico, accepted Colipano as a
passenger when he allowed Colipano to board the jeepney, and as to Colipano, when she boarded
the jeepney; cause or consideration, when Colipano, for her part, paid her fare; and, object, the
transportation of Colipano from the place of departure to the place of destination.

Specific to a contract of carriage, the Civil Code requires common carriers to observe extraordinary
diligence in safely transporting their passengers. Article 1733 of the Civil Code states:

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ART. 1733. Common carriers, from the nature of their business and for reasons of
public policy, are bound to observe extraordinary diligence in the vigilance over the goods
and for the safety of the passengers transported by them, according to all the circumstances
of each case.

Such extraordinary diligence in the vigilance over the goods is further expressed in Articles 1734,
1735 and 1745, Nos. 5, 6, and 7, while the extraordinary diligence for the safety of the passengers is
further set forth in Articles 1755 and 1756.

This extraordinary diligence, following Article 1755 of the Civil Code, means that common carriers
have the obligation to carry passengers safely as far as human care and foresight can provide, using
the utmost diligence of very cautious persons, with due regard for all the circumstances.

In case of death of or injury to their passengers, Article 1756 of the Civil Code provides that common
carriers are presumed to have been at fault or negligent, and this presumption can be overcome
only by proof of the extraordinary diligence exercised to ensure the safety of the passengers.

Being an operator and owner of a common carrier, Sanico was required to observe extraordinary
diligence in safely transporting Colipano. When Colipano's leg was injured while she was a
passenger in Sanico's jeepney, the presumption of fault or negligence on Sanico's part arose and he
had the burden to prove that he exercised the extraordinary diligence required of him. He failed to
do this.

In Calalas v. Court of Appeals, the Court found that allowing the respondent in that case to be
seated in an extension seat, which was a wooden stool at the rear of the jeepney, "placed [the
respondent] in a peril greater than that to which the other passengers were exposed." The Court
further ruled that the petitioner in Calalas was not only "unable to overcome the presumption of
negligence imposed on him for the injury sustained by [the respondent], but also, the evidence
shows he was actually negligent in transporting passengers."

Calalas squarely applies here. Sanico failed to rebut the presumption of fault or negligence under
the Civil Code. More than this, the evidence indubitably established Sanico's negligence when
Castro made Colipano sit on an empty beer case at the edge of the rear entrance/exit of the jeepney
with her sleeping child on her lap, which put her and her child in greater peril than the other
passengers. As the CA correctly held:

For the driver, Vicente Castro, to allow a seat extension made of an empty case of
beer clearly indicates lack of prudence. Permitting Colipano to occupy an improvised seat
in the rear portion of the jeepney, with a child on her lap to boot, exposed her and her child
in a peril greater than that to which the other passengers were exposed. The use of an
improvised seat extension is undeniable, in view of the testimony of plaintiff's witness,
which is consistent with Colipano's testimonial assertion.

Further, the defense of engine failure, instead of exonerating Sanico, only aggravated his already
precarious position. The engine failure "hinted lack of regular check and maintenance to ensure
that the engine is at its best, considering that the jeepney regularly passes through a mountainous
area." This failure to ensure that the jeepney can safely transport passengers through its route which
required navigation through a mountainous area is proof of fault on Sanico's part.

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B. VIGILANCE OVER GOODS

1. DURATION OF LIABILITY

ORIENTAL ASSURANCE CORPORATION v. MANUEL ONG, doing business under the

business name of WESTERN PACIFIC TRANSPORT SERVICES and/or ASIAN TERMINALS,
INC.
G.R. No. 189524, October 11, 2017, Third Division, LEONEN, J.:

The consignee's claim letter that was received by the arrastre operator two (2) days after complete
delivery of the cargo constitutes substantial compliance with the time limitation for filing claims
under the Gate Pass and the Management Contract.

FACTS:

JEA Steel imported from South Korea 72 aluminum-zinc-alloy-coated steel sheets in coils. These
steel sheets were transported to Manila on board the vessel M/V Dooyang Glory. Upon arrival of
the vessel on June 10, 2002, the 72 coils were discharged and stored under the custody of the arrastre
contractor, Asian Terminals, Inc. (ATI). The coils were then loaded on the trucks of Ong and
delivered to JEA Steel's plant on June 14, 2002 and June 17, 2002. Eleven of these coils ''were found
to be in damaged condition, dented or their normal round shape deformed.

JEA Steel filed a claim with Oriental for the value of the 11 damaged coils. The consignee's claim
letter dated July 2, 2002 was received on July 4, 2002, or 17 days from last delivery of the coils to the
consignee. Oriental paid JEA Steel and subsequently demanded indemnity from Ong and ATI but
they refused to pay.

ATI, for its part, argues that Oriental's claim was barred for the latter's failure to file a notice of
claim within the 15-day period provided in the Gate Pass and in Article VII, Section 7.01 of the
Contract for Cargo Handling Services (Management Contract) between the Philippine Ports
Authority and ATI. ATI added that its liability, if any, should not exceed ₱5,000.00, pursuant to said
Section 7.01.

ISSUE:

Whether or not Oriental’s claim should be barred for the latter's failure to file a notice of claim
within the 15-day period provided in the Management Contract.

RULING:

NO. The consignee's claim letter is regarded as substantial compliance with the condition
precedent set forth in the Management Contract to hold the arrastre operator liable.

This Court adopts a reasonable interpretation of the stipulations in the Management Contract and
hold that petitioner's complaint is not time-barred.

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Under the express terms of the Management Contract, the consignee had thirty (30) days from
receipt of the cargo to request for a certificate of loss from the arrastre operator. Upon receipt of
such request, the arrastre operator would have 15 days to issue a certificate of loss, either actually
or constructively. From the date of issuance of the certificate of loss or where no certificate was
issued, from the expiration of the 15-day period, the consignee has 15 days within which to file a
formal claim with the arrastre operator.

In other words, the consignee had 45 to 60 days from the date of last delivery of the goods within
which to submit a formal claim to the arrastre operator. The consignee's claim letter was received
by respondent on July 4, 2002,or 17 days from the last delivery of the goods, still within the
prescribed 30-day period to request a certificate of loss, damage, or injury from the arrastre
operator.

This Court finds that whether the consignee files a claim letter or requests for a certificate of loss
or bad order examination, the effect would be the same, in that either would afford the arrastre
contractor knowledge that the shipment has been damaged and an opportunity to examine the
nature and extent of the injury. Under the Management Contract, the 30-day period is considered
reasonable for the contractor to make an investigation of a claim.

C. MARITIME COMMERCE
1. CARRIAGE OF GOODS BY SEA ACT
i. PERIOD OF PRESCRIPTION

PIONEER INSURANCE and SURETY CORPORATION v. APL CO., PTE. LTD.

G.R. No. 226345, August 2, 2017, Second Division, MENDOZA, J.:

Strictly applying the terms of the Bill of Lading, the one-year prescriptive period under the COGSA
should govern because the present case involves loss of goods or cargo.

FACTS:

Chillies Export House Limited, turned over to respondent APL Co. Pte. Ltd. (APL) 250 bags of chili
pepper for transport from the port of Chennai, India, to Manila. The shipment, with a total declared
value of $12,272.50, was loaded on board M/V Wan Hai 262. In turn, BSFIL Technologies, Inc.
(BSFIL), as consignee, insured the cargo with petitioner Pioneer Insurance and Surety Corporation.

The shipment arrived at the port of Manila and was temporarily stored at North Harbor, Manila.
Later, the bags of chili were withdrawn and delivered to BSFIL. Upon receipt thereof, it discovered
that 76 bags were wet and heavily infested with molds. The shipment was declared unfit for human
consumption and was eventually declared as a total loss.

As a result, BSFIL made a formal claim against APL and Pioneer Insurance. Pioneer Insurance paid
BSFIL ₱195,505.65 after evaluating the claim.Having been subrogated to all the rights and cause of
action of BSFIL, Pioneer Insurance sought payment from APL, but the latter refused. This prompted
Pioneer Insurance to file a complaint for sum of money against APL on February 1, 2013.

ISSUE:

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Whether or not the one year prescriptive period under the Carriage of Goods by Sea Act (COGSA)
applies.

RULING:

YES, the one year prescriptive period under COGSA applies in this case.

The cardinal rule in the interpretation of contracts is embodied in the first paragraph of
Article 1370 of the Civil Code: “if the terms of a contract are clear and leave no doubt upon
the intention of the contracting parties, the literal meaning of its stipulations shall
control.” The stipulations in the Bill of Lading between the parties are clear and unequivocal.

It was categorically stated in the Bill of Lading that the carrier shall in any event be discharged from
all liability whatsoever in respect of the goods, unless suit is brought in the proper forum within
nine (9) months after delivery of the goods or the date when they should have been delivered. The
same, however, is qualified in that when the said nine-month period is contrary to any law
compulsory applicable, the period prescribed by the said law shall apply.

The present case involves lost or damaged cargo, wherein the one-year prescriptive period under
the COGSA applies. A reading of the Bill of Lading between the parties reveals that the nine-month
prescriptive period is not applicable in all actions or claims. As an exception, the nine-month period
is inapplicable when there is a different period provided by a law for a particular claim or action.
Thus, it is readily apparent that the exception under the Bill of Lading became operative because
there was a compulsory law applicable which provides for a different prescriptive period. Hence,
strictly applying the terms of the Bill of Lading, the one-year prescriptive period under the COGSA
should govern because the present case involves loss of goods or cargo.

IV. THE CORPORATION CODE

A. CORPORATION
1. DEFINITION

JAMES IENT and MAHARLIKA SCHULZ v. TULLETT PREBON (PHILIPPINES), INC.

G.R. No. 189158 and G.R. No. 189530, January 11, 2017, First Division, LEONARDO-DE
CASTRO, J.:

The Corporation Code was intended as a regulatory measure, not primarily as a penal statute.

FACTS:

Petitioner Ient is a British national and the Chief Financial Officer of Tradition Asia Pacific Pte. Ltd.
(Tradition Asia) in Singapore. Petitioner Schulze is a Filipino/German who does Application
Support for Tradition Financial Services Ltd. in London (Tradition London).Tradition Asia and
Tradition London are subsidiaries of Compagnie Financiere Tradition and are part of the "Tradition
Group." The Tradition Group is allegedly the third largest group of Inter-dealer Brokers (IDB) in

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the world while the corporate organization, of which respondent Tullett is a part, is supposedly the
second largest.

Sometime in August 2008, in line with Tradition Group's motive of expansion and diversification
in Asia, petitioners Ient and Schulze were tasked with the establishment of a Philippine subsidiary
of Tradition Asia to be known as Tradition Financial Services Philippines, Inc. (Tradition
Philippines).Tradition Philippines was registered with the Securities and Exchange Commission
(SEC) on September 19, 2008 with petitioners Ient and Schulze, among others, named as
incorporators and directors in its Articles of Incorporation.

On October 15, 2008, Tullett, through one of its directors, Gordon Buchan, filed a Complaint-
Affidavitwith the City Prosecution Office of Makati City against the officers/employees of the
Tradition Group for violation of the Corporation Code. Impleaded as respondents in the Complaint-
Affidavit were petitioners Ient and Schulze, Jaime Villalon (Villalon), who was formerly President
and Managing Director of Tullett, Mercedes Chuidian (Chuidian), who was formerly a member of
Tullett's Board of Directors, and other John and Jane Does. Villalon and Chuidian were charged
with using their former positions in Tullett to sabotage said company by orchestrating the mass
resignation of its entire brokering staff in order for them to join Tradition Philippines. With respect
to Villalon, Tullett claimed that the former held several meetings between August 22 to 25, 2008
with members of Tullett's Spot Desk and brokering staff in order to convince them to leave the
company. Villalon likewise supposedly intentionally failed to renew the contracts of some of the
brokers.

The proceedings can be summed up as follows: Petitioners posit that Section 144 (Violations of this
Code) only applies to the provisions of the Corporation Code or its amendments "not otherwise
specifically penalized" by said statute and should not cover Sections 31 (Liability of Directors,
Trustees or Officers) and 34 (Disloyalty of a Director) which both prescribe the "penalties" for their
violation; namely, damages, accounting and restitution of profits. On the other hand, respondent
and the appellate court have taken the position that the term "penalized" under Section 144 should
be interpreted as referring to criminal penalty, such as fine or imprisonment, and that it could not
possibly contemplate "civil" penalties such as damages, accounting or restitution.

ISSUE:

Whether the application of Section 144 of the Corporation Code to Sections 31 and 34 of the same
statute will result to criminal liability in the event of violation of Sections 31 and 34.

RULING:

NO. Respondent urges this Court to strictly construe Section 144 as contemplating only penal
penalties. However, a perusal of Section 144 shows that it is not a purely penal provision. When it
is a corporation that commits a violation of the Corporation Code, it may be dissolved in
appropriate proceedings before the Securities and Exchange Commission. The involuntary
dissolution of an erring corporation is not imposed as a criminal sanction, but rather it is an
administrative penalty.

Giving a broad and flexible interpretation to the term "penalized" in Section 144 only has utility if
there are provisions in the Corporation Code that specify consequences other than "penal" or

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"criminal" for violation of, or non-compliance with, the tenets of the Code. Petitioners point to the
civil liability prescribed in Sections 31 and 34.

Also, quite apart that no legislative intent to criminalize Sections 31 and 34 was manifested in the
deliberations on the Corporation Code, it is noteworthy from the same deliberations that legislators
intended to codify the common law concepts of corporate opportunity and fiduciary obligations of
corporate officers as found in American jurisprudence into said provisions. In common law, the
remedies available in the event of a breach of director's fiduciary duties to the corporation are civil
remedies. If a director or officer is found to have breached his duty of loyalty, an injunction may be
issued or damages may be awarded. A corporate officer guilty of fraud or mismanagement may be
held liable for lost profits. A disloyal agent may also suffer forfeiture of his compensation. There is
nothing in the deliberations to indicate that drafters of the Corporation Code intended to deviate
from common law practice and enforce the fiduciary obligations of directors and corporate officers
through penal sanction aside from civil liability. On the contrary, there appears to be a concern
among the drafters of the Corporation Code that even the imposition of the civil sanctions under
Section 31 and 34 might discourage competent persons from serving as directors in corporations.

The Corporation Code was intended as a regulatory measure, not primarily as a penal statute.
Sections 31 to 34 in particular were intended to impose exacting standards of fidelity on corporate
officers and directors but without unduly impeding them in the discharge of their work with
concerns of litigation. Considering the object and policy of the Corporation Code to encourage the
use of the corporate entity as a vehicle for economic growth, we cannot espouse a strict construction
of Sections 31 and 34 as penal offenses in relation to Section 144 in the absence of unambiguous
statutory language and legislative intent to that effect. When Congress intends to criminalize
certain acts it does so in plain, categorical language, otherwise such a statute would be susceptible
to constitutional attack.

DY TEBAN TRADING, INC. v. DY

G.R. No. 185647, July 26, 2017, Third Division, JARDELEZA J.:

The fact that a particular branch which has been designated as a Special Commercial Court does not
shed the RTC's general jurisdiction over ordinary civil cases under the imprimatur of statutory law.

FACTS:

DTTI is a domestic closed corporation owned by the Dy siblings. Due to certain disagreements
relating to its management, DTTI instituted an action for injunction against Peter C. Dy, Johnny C.
Dy and Ramon C. Dy (respondents) before the RTC. This was docketed as an intra-corporate case.
Respondents, on the other hand, filed an action for dissolution of the corporation.

DTTI alleged that Johnny, an employee in its Montilla branch, had "squandered cash sales and
stocks" from the branch either for his personal benefit or that of Peter and Ramon. DTTI then
decided to close its Montilla branch and had the doors of the branch store welded shut. DTTI
claimed that respondents forcibly opened the branch store and have continuously deprived it of
the use of the same.

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Both actions were raffled to Branch 33 of the RTC, sitting as a commercial court, wherein the cases
were heard jointly. The action for the dissolution of the corporation was, however, eventually
dismissed due to the respondents' failure to pay the proper docket fees.

DTTI presented Lorencio Dy as a witness but he was not cross-examined by the Respondents
because of delays caused by its counsels. The trial was delayed when the presiding Judge died and
his cases were transferred to another Judge. Hearings were scheduled as the parties needed to clarify
with the Court whether the transfer of cases included intra-corporate disputes. However, these did
not push through and Lorencio's cross-examination by respondents was twice rescheduled.

The RTC then ruled that respondents have waived their right to cross-examine witness Lorencio
and eventually rendered its Decision, ruling in DTTI's favour based on its findings solely on
Lorencio's unchallenged testimony and the documentary evidence presented by DTTI.

Respondents then went to the CA which ruled that the RTC acted with grave abuse of discretion
when it issued its two orders. DTTI thus filed this petition for review on certiorari.

In their comment, respondents challenged the jurisdiction of the RTC in taking cognizance of the
action for injunction as an intra-corporate case. According to respondents, since the action for
injunction does not involve an intra-corporate dispute, the RTC, sitting as a commercial court,
lacked jurisdiction.

ISSUE:

Whether the action filed before the RTC was properly heard by the RTC acting as a special
commercial court.

RULING:

YES. A civil action for injunction is a suit brought for the purpose of enjoining the defendant from
the commission or continuance of a specific act. As a civil action, it falls within the general
jurisdiction of the RTCs. Section 5 of the Securities Regulation Code transferred the jurisdiction of
the Securities and Exchange Commission (SEC) over intra-corporate disputes to RTCs designated
by the Supreme Court as commercial courts.

Although the action for injunction does not involve an intra-corporate dispute because it does not
meet the relationship and the nature of the controversy tests, the Court disagrees with respondents'
contention that the RTC, sitting as a commercial court, had no jurisdiction over the civil action for
injunction filed by DTTI.

This matter has already been clarified by this Court in Gonzales v. GJH Land, Inc. where it was held
that:

“The fact that a particular branch which has been designated as a Special Commercial Court
does not shed the RTC's general jurisdiction over ordinary civil cases under the imprimatur
of statutory law. x x x The RTC's general jurisdiction over ordinary civil cases is therefore not
abdicated by an internal rule streamlining court procedure.”

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Thus, that DTTI's civil action for injunction was raffled to, and heard by, an RTC sitting as a
commercial court, is more an issue of procedure than one of jurisdiction. Gonzales, in fact, directs
that when an ordinary civil case is mistakenly raffled to a branch designated as a Special
Commercial Court, the remedy is to refer said case to the Executive Judge for re-docketing and re-
raffling among "all courts of the same RTC (including its designated special branches which, by
statute, are equally capable of exercising general jurisdiction same as regular branches), as provided
for under existing rules." In any case, we find that respondents have waived any objection on this
issue when they submitted to the authority of the RTC, asked for remedies therein, and participated
in the proceedings. They are not allowed to raise this question of procedural propriety only on
appeal.

B. NATIONALITY OF CORPORATIONS

JOSE M. ROY III v. CHAIRPERSON TERESITA HERBOSA,THE SECURITIES AND

EXCHANGE COMMISSION, AND PHILIPPINE LONG DISTANCE TELEPHONE COMPANY
G.R. No. 207246, April 18, 2017, En Banc, CAGUIOA, J.:

What the Constitution requires is full and legal beneficial ownership of 60 percent of the outstanding
capital stock, coupled with 60 percent of the voting rights which must rest in the hands of Filipino
nationals.

FACTS:

Jose M. Roy III filed a petition to reverse the Decision dated November 22, 2016(the Decision)
arguing that the Securities and Exchange Commission (SEC) committed grave abuse of discretion
in issuing Memorandum Circular No. 8, Series of 2013 (SEC MC No. 8) which provided that the term
'capital' in Section 11, Article XII of the 1987 Constitution refers only to shares of stock entitled to
vote in the election of directors. Roy argued that the Gamboa Resolution already modified the
Gamboa Decision. Hence, the 60-40 Filipino-foreign ownership requirement applies to "each class
of shares, regardless of differences in voting rights, privileges and restrictions."

ISSUE:

Whether or not SEC MC No. 8 was issued with grave abuse of discretion since the dispositive
portion of the Gamboa Decision was already modified by the Gamboa Resolution as to the proper
understanding of "capital"

RULING:

NO. The Gamboa Decision already held, in no uncertain terms, that what the Constitution requires
is "full and legal beneficial ownership of 60 percent of the outstanding capital stock, coupled with
60 percent of the voting rights xxx must rest in the hands of Filipino nationals xxx." And, precisely
that is what SEC-MC No. 8 provides, viz.: "xxx For purposes of determining compliance [with the
constitutional or statutory ownership], the required percentage of Filipino ownership shall be
applied to BOTH (a) the total number of outstanding shares of stock entitled to vote in the
election of directors; AND (b) the total number of outstanding shares of stock, whether or
not entitled to vote xxx."

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In construing "full beneficial ownership," the Implementing Rules and Regulations of the Foreign
Investments Act of 1991 (FIA-IRR) provides:

For stocks to be deemed owned and held by Philippine citizens or Philippine

nationals, mere legal title is not enough to meet the required Filipino equity. Full beneficial
ownership of the stocks, coupled with appropriate voting rights is essential. Thus, stocks,
the voting rights of which have been assigned or transferred to aliens cannot be considered
held by Philippine citizens or Philippine nationals.13

In turn, "beneficial owner" or "beneficial ownership" is defined in the Implementing Rules and
Regulations of the Securities Regulation Code (SRC-IRR) as:

Any person who, directly or indirectly, through any contract, arrangement,

understanding, relationship or otherwise, has or shares voting power (which includes the
power to vote or direct the voting of such security) and/or investment returns or power
(which includes the power to dispose of, or direct the disposition of such security).

Thus, the definition of "beneficial owner or beneficial ownership" in the SRC-IRR, which is in
consonance with the concept of "full beneficial ownership" in the FIA-IRR, is, as stressed in the
Decision, relevant in resolving only the question of who is the beneficial owner or has beneficial
ownership of each "specific stock" of the public utility company whose stocks are under
review. If the Filipino has the voting power of the "specific stock", i.e., he can vote the stock or
direct another to vote for him, or the Filipino has the investment power over the "specific
stock", i.e., he can dispose of the stock or direct another to dispose of it for him, or both, i.e., he
can vote and dispose of that "specific stock" or direct another to vote or dispose it for
him, then such Filipino is the "beneficial owner" of that "specific stock." Being considered
Filipino,that "specific stock" is then to be counted as part of the 60% Filipino ownership
requirement under the Constitution. The right to the dividends, jus fruendi - a right emanating
from ownership of that "specific stock" necessarily accrues to its Filipino "beneficial owner."

Once more, this is emphasized anew to disabuse any notion that the dividends accruing to any
particular stock are determinative of that stock's "beneficial ownership." Dividend declaration is
dictated by the corporation's unrestricted retained earnings. On the other hand, the corporation's
need of capital for expansion programs and special reserve for probable contingencies may limit
retained earnings available for dividend declaration. It bears repeating here that the Court in
the Gamboa Decision adopted the foregoing definition of the term "capital" in Section 11, Article XII
of the 1987 Constitution in express recognition of the sensitive and vital position of public utilities
both in the national economy and for national security, so that the evident purpose of the
citizenship requirement is to prevent aliens from assuming control of public utilities, which may
be inimical to the national interest. This purpose prescinds from the "benefits"/dividends that are
derived from or accorded to the particular stocks held by Filipinos vis-a-vis the stocks held by aliens.
So long as Filipinos have controlling interest of a public utility corporation, their decision to declare
more dividends for a particular stock over other kinds of stock is their sole prerogative - an act of
ownership that would presumably be for the benefit of the public utility corporation itself. Thus, as
explained in the Decision:

In this regard, it would be apropos to state that since Filipinos own at least 60% of
the outstanding shares of stock entitled to vote directors, which is what the Constitution

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precisely requires, then the Filipino stockholders control the corporation, i.e., they dictate
corporate actions and decisions, and they have all the rights of ownership including, but
not limited to, offering certain preferred shares that may have greater economic interest to
foreign investors as the need for capital for corporate pursuits (such as expansion), may be
good for the corporation that they own. Surely, these "true owners" will not allow any
dilution of their ownership and control if such move will not be beneficial to them.

C. CORPORATE JURIDICAL PERSONALITY

1. DOCTRINE OF SEPARATE JURIDICAL PERSONALITY
i. LIABILITY FOR TORTS AND CRIMES

JOSELITO HERNAND M. BUSTOS v. MILLIANS SHOE, INC., SPOUSES FERNANDO and

AMELIA CRUZ, and the REGISTER of DEEDS of MARIKINA CITY
G.R. No. 185024, April 4, 2017, First Division, SERENO, C.J.:

Being an officer or a stockholder of a corporation does not make one's property the property also of
the corporation.

FACTS:

Spouses Cruz are the registered owners of a parcel of land. The said parcel of land secured several
mortgage liens for the account of MSI since they are also the stockholders and/or officers of MSI, a
close corporation.

On 6 January 2004, the property was levied for non-payment of real estate taxes. The Notice of Levy
was annotated on the title on 8 January 2004. On 14 October 2004, the City Treasurer of Marikina
auctioned off the property, with petitioner emerging as the winning bidder. The Spouses had until
October 15, 2005 within which to redeem the parcel of land.

Meanwhile, notices of lis pendens were annotated on the title on 9 February 2005 indicating that
subject property was included in the rehabilitation proceedings for MSI; hence covered in the Stay
Order issued by the RTC dated 25 October 2004.

Petitioner moved for the exclusion of the subject property from the Stay Order. He claimed that
the lot belonged to the Spouses who were mere stockholders and officers of MSI. CA however ruled
that the subject property is answerable for the obligations of MSI since the spouses are stockholders
of a close corporation who, as such, are liable for its debts.

ISSUE:

Whether or not the properties owned by stockholders should be included in the inventory of assets
of a corporation under rehabilitation.

RULING:

NO. A corporation has a legal personality separate and distinct from that of people comprising it. By
virtue of that doctrine, stockholders of a corporation enjoy the principle of limited liability: the

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corporate debt is not the debt of the stockholder. Thus, being an officer or a stockholder of a
corporation does not make one's property the property also of the corporation.

In Situs Development Corp. v. Asiatrust Bank, it was held that the parcels of land mortgaged to
creditor banks were owned not by the corporation, but by the spouses who were its stockholders.
Applying the doctrine of separate juridical personality, we ruled that the parcels of land of the
spouses could not be considered part of the corporate assets that could be subjected to
rehabilitation proceedings.

In rehabilitation proceedings, claims of creditors are limited to demands of whatever nature or

character against a debtor or its property, whether for money or otherwise. In several cases, we
have already held that stay orders should only cover those claims directed against corporations or
their properties, against their guarantors, or their sureties who are not solidarily liable with them,
to the exclusion of accommodation mortgagors. To repeat, properties merely owned by
stockholders cannot be included in the inventory of assets of a corporation under rehabilitation.

SECURITIES and EXCHANGE COMMISSION v. PRICE RICHARDSON CORP., Et Al

G.R. No. 197032, July 26, 2017, Second Division, LEONEN, J.:

A corporation's personality is separate and distinct from its officers, directors, and shareholders. To
be held criminally liable for the acts of a corporation, there must be a showing that its officers,
directors, and shareholders actively participated in or had the power to prevent the wrongful act.

FACTS:

Price Richardson Corporation is a Philippine corporation duly incorporated under Philippine laws.
Its primary purpose is "to provide administrative services which includes but is not limited to
furnishing all necessary and incidental clerical, bookkeeping, mailing and billing services."

Its former employee, Avelino, executed a sworn affidavit, alleging that Price Richardson was
"engaged in boiler room operations, wherein the company sells non-existent stocks to investors
using high pressure sales tactics." Whenever this activity was discovered, the company would close
and emerge under a new company name. This information was corroborated by another former
employee named Rillo.

The NBI and SEC then applied for search warrants from the RTC which were granted and issued.
The search warrants were then served and Price Richardson's office equipment and documents were
seized.

The SEC filed before the DOJ its complaint against Price Richardson, and its directors,
incorporators, and Associated Persons for violating sections 26.3 and 28 of the SRC. The SEC alleged
that Price Richardson was neither licensed nor registered "to engage in the business of buying and
selling securities within the Philippines or act as salesman, or an associated person of any broker
or dealer." It also claimed that its Associated Persons should be liable for acting as brokers or
salesmen despite not being registered. Meanwhile, the incorporators and directors' liability was
based on being responsible "for the corporate management with the obligation to ensure that Price
Richardson operated within the bounds of law."

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Additionally, Price Richardson, et. al were also charged with Estafa under Article 315(1)(b) of the
RPC. The SEC averred that they obtained investors' confidence by comporting themselves as
legitimate stock brokers. Thus, when they failed to return the investments they received, their act
"constituted misappropriation with abuse of confidence.”

The State Prosecutor however issued a resolution which dismissed the SEC complaint for lack of
probable cause. As such, the SEC filed a petition for Review before the DOJ which affirmed the State
Prosecutor’s resolution. The SEC then filed a petition for Certiorari with the CA which affirmed the
DOJ’s decision. Hence, they filed a petition for review with the SC claiming that there was grave
abuse of discretion in finding that there was no probable cause.

ISSUE:

Whether there is probable cause to indict respondents for violation of Sections 26.3 and 28 of the
Securities Regulation Code and Article 315(1)(b) of the Revised Penal Code.

RULING:

YES. Petitioner provided sufficient bases to form a belief that a crime was possibly committed by
respondent Price Richardson. An examination of the records reveals that probable cause exists to
file an information against respondent Price Richardson for violating the laws.

Based on the Certification dated October 11, 2001 issued by the Market Regulation Department of
the SEC, respondent Price Richardson "has never been issued any secondary license to act as
broker/dealer in securities, investment house and dealer in government securities." Petitioner also
certified that respondent Price Richardson "is not, under any circumstances, authorized or licensed
to engage and/or solicit investments from clients."

The documents seized from respondent Price Richardson's office show possible sales of securities.
However, respondents Velarde-Albert and Resnick, who were Price Richardson’s Director for
Operations and Associated Person respectively, cannot be indicted for violations of the Securities
Regulation Code and the Revised Penal Code.

Despite this, petitioner failed to allege the specific acts of respondents Velarde-Albert and Resnick
that could be interpreted as participation in the alleged violations. There was also no showing,
based on the complaints, that they were deemed responsible for Price Richardson's violations.

A corporation's personality is separate and distinct from its officers, directors, and shareholders. To
be held criminally liable for the acts of a corporation, there must be a showing that its officers,
directors, and shareholders actively participated in or had the power to prevent the wrongful act.

D. CORPORATE JURIDICAL PERSONALITY

1. DOCTRINE OF PIERCING THE CORPORATE VEIL
i. GROUNDS FOR APPLICATION OF DOCTRINE

DUTCH MOVERS, INC., CESAR LEE and YOLANDA LEE v. EDILBERTO LEQUIN,
CHRISTOPHER R. SALVADOR, REYNALDO L. SINGSING, and RAFFY B. MASCARDO

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G.R. No. 210032, April 25, 2017, First Division, DEL CASTILLO, J.:

Piercing the veil of corporate fiction is allowed, and responsible persons may be impleaded, and be
held solidarily liable even after final judgment and on execution, provided that such persons
deliberately used the corporate vehicle to unjustly evade the judgment obligation, or resorted to fraud,
bad faith, or malice in evading their obligation.

FACTS:

An illegal dismissal Complaint was filed by Lequin. et. al against Dutch Movers, Inc. (DMI), and/or
Spouses Lee, its alleged President/Owner, and Manager respectively. NLRC ruled that they were
illegally dismissed. Pending the resolution of the Writ of Execution, Lequin. et. al filed a
Manifestation and Motion to Implead stating that upon investigation, they discovered that
DMI no longer operates. They, nonetheless, insisted that Spouses Lee — who managed and
operated DMI, and consistently represented to respondents that they were the owners of DMI —
continue to work at Toyota Alabang, which they also own and operate. They further averred that
the Articles of Incorporation (AOI) of DMI ironically did not include petitioners as its directors or
officers; and those named directors and officers were persons unknown to them. They likewise
claimed that per inquiry with the SEC and the DOLE, they learned that DMI did not file any notice
of business closure; and the creation and operation of DMI was attended with fraud making it
convenient for petitioners to evade their legal obligations to them.

ISSUE:

Whether or not the corporate fiction can be pierced even after the judgment against it has become
final and executory.

RULING:

YES. The veil of corporate fiction must be pierced and accordingly, petitioners should be held
personally liable for judgment awards because the peculiarity of the situation shows that they
controlled DMI; they actively participated in its operation such that DMI existed not as a separate
entity but only as business conduit of petitioners. As will be shown below, petitioners controlled
DMI by making it appear to have no mind of its own, and used DMI as shield in evading legal
liabilities, including payment of the judgment awards in favor of respondents.

Piercing the veil of corporate fiction is allowed, and responsible persons may be impleaded, and be
held solidarily liable even after final judgment and on execution, provided that such persons
deliberately used the corporate vehicle to unjustly evade the judgment obligation, or resorted to
fraud, bad faith, or malice in evading their obligation.

In this case, petitioners were impleaded from the inception of this case. They had ample
opportunity to debunk the claim that they illegally dismissed respondents, and that they should be
held personally liable for having controlled DMI and actively participated in its management, and
for having used it to evade legal obligations to respondents.

While it is true that one's control does not by itself result in the disregard of corporate fiction;
however, considering the irregularity in the incorporation of DMI, then there is sufficient basis to

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hold that such corporation was used for an illegal purpose, including evasion of legal duties to its
employees, and as such, the piercing of the corporate veil is warranted. The act of hiding behind
the cloak of corporate fiction will not be allowed in such situation where it is used to evade one's
obligations, which "equitable piercing doctrine was formulated to address and prevent."

Clearly, petitioners should be held liable for the judgment awards as they resorted to such scheme
to countermand labor laws by causing the incorporation of DMI but without any indication that
they were part thereof. While such device to defeat labor laws may be deemed ingenious and
imaginative, the Court will not hesitate to draw the line, and protect the right of workers to security
of tenure, including ensuring that they will receive the benefits they deserve when they fall victims
of illegal dismissal.

ROMMEL M. ZAMBRANO, et. alv. PHILIPPINE CARPET MANUFACTURING

CORPORATION, et. al,
G.R. No. 224099, June 21, 2017, Second Division, MENDOZA, J.:

Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital
stock of a corporation is not of itself sufficient ground for disregarding the separate corporate
personality.

FACTS:

Petitioners were employees of Philippine Carpet. On January 3, 2011, they were notified of the
termination of their employment effective February 3, 2011 on the ground of cessation of operation
due to serious business losses. They however argued that Philippine Carpet did not totally cease its
operations and that most of the job orders of Philippine Carpet were transferred to its wholly owned
subsidiary, Pacific Carpet. The lower courts ruled that the claim was unfounded because mere
ownership by a single stockholder or by another corporation of all or nearly all of the capital stock
of a corporation is not of itself sufficient ground for disregarding the separate corporate personality.

ISSUE:

Whether or not Pacific Carpet should be held liable for Philippine Carpet's obligations.

RULING:

NO. A corporation is an artificial being created by operation of law. It possesses the right of
succession and such powers, attributes, and properties expressly authorized by law or incident to
its existence. It has a personality separate and distinct from the persons composing it, as well as
from any other legal entity to which it may be related.

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

Hence, any application of the doctrine of piercing the corporate veil should be done with caution.
A court should be mindful of the milieu where it is to be applied. It must be certain that the

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corporate fiction was misused to such an extent that injustice, fraud, or crime was committed
against another, in disregard of rights. The wrongdoing must be clearly and convincingly
established; it cannot be presumed. Otherwise, an injustice that was never unintended may result
from an erroneous application

Although ownership by one corporation of all or a great majority of stocks of another corporation
and their interlocking directorates may serve as indicia of control, by themselves and without more,
these circumstances are insufficient to establish an alter ego relationship or connection between
Philippine Carpet on the one hand and Pacific Carpet on the other hand, that will justify the
puncturing of the latter's corporate cover.

This Court has declared that "mere ownership by a single stockholder or by another corporation of
all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding
the separate corporate personality." It has likewise ruled that the "existence of interlocking
directors, corporate officers and shareholders is not enough justification to pierce the veil of
corporate fiction in the absence of fraud or other public policy considerations."

It must be noted that Pacific Carpet was registered with the Securities and Exchange Commission
on January 29, 1999, such that it could not be said that Pacific Carpet was set up to evade Philippine
Carpet's liabilities. As to the transfer of Philippine Carpet's machines to Pacific Carpet, settled is
the rule that "where one corporation sells or otherwise transfers all its assets to another corporation
for value, the latter is not, by that fact alone, liable for the debts and liabilities of the transferor."

All told, the petitioners failed to present substantial evidence to prove their allegation that Pacific
Carpet is a mere alter ego of Philippine Carpet.

2. DOCTRINE OF PIERCING THE CORPORATE VEIL

i. TEST IN DETERMINING APPLICABILITY

CALIFORNIA MANUFACTURING COMPANY, INC. v. ADVANCED TECHNOLOGY SYSTEM,

INC.
G.R. No. 202454, April 25, 2017, First Division, SERENO, C.J.:

Mere ownership by a single stockholder of even all or nearly all of the capital stocks of a corporation,
by itself, is not sufficient ground to disregard the corporate veil.

FACTS:

CMCI is a domestic corporation engaged in the food and beverage manufacturing business.
Respondent ATSI is also a domestic corporation that fabricates and distributes food processing
machinery and equipment, spare parts, and its allied products.

In 2001, CMCI leased from ATSI a Prodopak machine. In 2003, ATSI filed a Complaint for Sum of
Money against CMCI to collect unpaid rentals. CMCI moved for the dismissal of the complaint on
the ground of extinguishment of obligation through legal compensation.

CMCI averred that ATSI was one and the same with Processing Partners and Packaging Corporation
(PPPC), which was a toll packer of CMCI products. To support its allegation, CMCI submitted

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copies of the Articles of Incorporation and General Information Sheets (GIS) of the two
corporations. CMCI pointed out that ATSI was even a stockholder of PPPC as shown in the latter's
GIS.

CMCI alleged that in 2000, PPPC agreed to transfer the processing of CMCI's product line from its
factory in Meycauayan to Malolos, Bulacan. Upon the request of PPPC, through its Executive Vice
President Felicisima Celones, CMCI advanced ₱4 million as mobilization fund. PPPC President and
Chief Executive Officer Francis Celones allegedly committed to pay the amount in 12 equal
instalments deductible from PPPC's monthly invoice to CMCI beginning in October 2000. CMCI
likewise claims that in a letter, Felicisima proposed to set off PPPC's obligation to pay the
mobilization fund with the rentals for the Prodopak machine.

CMCI argued that the proposal was binding on both PPPC and A TSI because Felicisima was an
officer and a majority stockholder of the two corporations.

ISSUE:

Whether or not the corporate veil must be pierced since the two corporations were mere alter egos
or business conduits of each other.

RULING:

NO. CMCI's alter ego theory rests on the alleged interlocking boards of directors and stock
ownership of the two corporations. This theory must however be rejected based on the settled rule
that mere ownership by a single stockholder of even all or nearly all of the capital stocks of a
corporation, by itself, is not sufficient ground to disregard the corporate veil.

The instrumentality or control test of the alter ego doctrine requires not mere majority or complete
stock control, but complete domination of finances, policy and business practice with respect to
the transaction in question. The corporate entity must be shown to have no separate mind, will, or
existence of its own at the time of the transaction. Here, there is no proof that PPPC controlled the
financial policies and business practices of ATSI.

Contrary to the claim of CMCI, none of the letters from the Spouses Celones tend to show that ATSI
was even remotely involved in the proposed offsetting of the outstanding debts of CMCI and PPPC.
Nothing supports CMCI's claim that it had been led to believe that ATSI and PPPC were one and
the same; or, that ATSI's collectible was intertwined with the business transaction of PPPC with
CMCI.

The fraud test, which is the second of the three-prong test to determine the application of the alter
ego doctrine, requires that the parent corporation's conduct in using the subsidiary corporation be
unjust, fraudulent or wrongful. Under the third prong, or the harm test, a causal connection
between the fraudulent conduct committed through the instrumentality of the subsidiary and the
injury suffered or the damage incurred by the plaintiff has to be established. None of these elements
have been demonstrated in this case.

LUIS JUAN VIRATA v. ALEJANDRO NG WEE

G.R. Nos. 220926, 221058, 221109, 221135 & 221218, July 5, 2017, Third Division, VELASCO, Jr. J.:

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The list of securities that require registration prior to offer, sale, or distribution are investment
contracts.An investment contract refers to a contract, transaction or scheme whereby a person
invests his money in a common enterprise and is led to expect profits primarily from the efforts of
others. It is presumed to exist whenever a person seeks to use the money or property of others on the
promise of profits.

An accommodation party lends his name to enable the accommodated party to obtain credit or to
raise money; he receives no part of the consideration for the instrument but assumes liability to the
other party or parties. Such party must meet all the following three requisites, viz: (1) he must be a
party to the instrument, signing as maker, drawer, acceptor, or indorser; (2) he must not receive value
therefor; and (3) he must sign for the purpose of lending his name or credit to some other person.

In a similar fashion, the accommodation party cum surety in a negotiable instrument is deemed an
original promisor and debtor from the beginning; he is considered in law as the same party as the
debtor in relation to whatever is adjudged touching the obligation of the latter since their liabilities
are so interwoven as to be inseparable.

Ascribing liability to a corporate director, trustee, or officer by invoking Sec. 31 of the Corporation
Code is distinct from the remedial concept of piercing the corporate veil. While Sec. 31 expressly lays
down specific instances wherein the mentioned personalities can be held liable in their personal
capacities, the doctrine of piercing the corporate veil, on the other hand, is an equitable remedy
resorted to only when the corporate fiction is used, among others, to defeat public convenience, justify
wrong, protect fraud or defend a crime.

FACTS:

Ng Wee was a valued client of Westmont Bank. He was enticed by the bank manager to make
money placements with Wincorp. Lured by representations that the "sans recourse" transactions
are safe, stable, high-yielding, and involve little to no risk, he placed investments therein. In
exchange, Wincorp issued Confirmation Advices informing him of the identity of the borrower with
whom they were matched, and the terms under which the said borrower would repay them.

Ng Wee's initial investments were matched with Hottick, the majority shares of which was owned
by Halim Saad. Halim Saad was then the controlling shareowner of UEM-MARA, which has
substantial interests in Cavitex. Hottick was extended a credit facility in consideration of securities
it issued in favor of Wincorp which included a suretyship agreement with Virata. Hottick fully
availed of the loan facility extended by Wincorp, but it defaulted in paying its outstanding
obligations when the Asian financial crisis struck.

As a result, Wincorp filed a collection suit against Hottick, Halim Saad, and NSC for the repayment
of the loan. A Writ of Preliminary Attachment was then issued against Halim Saad's properties,
which included the assets of UEM-MARA. However, the case and the Writ were subsequently
dropped by reason of a Settlement made between the parties because of the effort of Virata in
brokering a compromise and offering to be a guarantee of the loan in a Memorandum of Agreement.
Wincorp then executed a Waiver and Quitclaim in favor of Virata which released him from any
obligation from the Agreement. Apparently, the Memorandum of Agreement is a mere

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accommodation that is not meant to give rise to any legal obligation in Wincorp's favor as against
Virata.

Alarmed by the news of Hottick's default and financial distress, Ng Wee confronted Wincorp and
inquired about the status of his investments. Wincorp assured him that the losses from the Hottick
account will be absorbed by the company and that his investments would be transferred instead to
a new borrower account under the name of Power Merge, in which Petitioner Virata is the majority
stockholder. In view of these representations, Ng Wee continued making money placements.

In a special meeting of Wincorp's board of directors, the investment house resolved to file the
collection case against Halim Saad and Hottick, and also approved Power Merge's application for a
credit line, extending a credit facility to the latter with petitioner Virata's conformity. Subsequently,
Power Merge made a total of 6 drawdowns from the Credit Line Agreement given to it. Power Merge
then issued Promissory Notes in favor of Wincorp, either for itself or as agent for or on behalf of
certain investors, for each drawdown. After receiving the promissory notes from Power Merge,
Wincorp, in turn, issued Confirmation Advices to Ng Wee.

However, unknown to Ng Wee, additional contracts (Side Agreements) were likewise executed by
the two corporations absolving Power Merge of liability as regards the Promissory Notes it
issued. By virtue of these contracts, Wincorp was able to assign its rights to the uncollected Hottick
obligations and hold Power Merge papers instead.However, this also meant that if Power Merge
subsequently defaults in the payment of its obligations, it would refuse payment to its investors. By
reason of this, despite repeated demands, Ng Wee was not able to collect Power Merge's
outstanding obligation under the Confirmation Advices. This prompted Ng Wee to file a complaint
for sum of money in the RTC.

Ng Wee claimed that he fell prey to the intricate scheme of fraud and deceit that was hatched by
Wincorp and Power Merge. As he later discovered, Power Merge's default was inevitable from the
very start since it only had subscribed capital in the amount of ₱37,500,000.00, of which only
₱9,375,000.00 is actually paid up. He then attributed gross negligence, if not fraud and bad faith,
on the part of Wincorp and its directors for approving Power Merge's credit line application and its
subsequent increase to the amount of ₱2,500,000,000.00 despite its glaring inability to pay.

Wincorp officers Ong and Reyes were likewise impleaded for signing the Side Agreements that
would allow Power Merge to avoid paying its obligations to the investors.Ng Wee also sought to
pierce the separate juridical personality of Power Merge since Virata owns almost all of the
company's stocks. It was further alleged that Virata acquired interest in UEM-MARA using the
funds swindled from the Wincorp investors.

As an annex to the Complaint, Ng Wee cited a Cease and Desist Order issued by the SEC as it found
that the Confirmation Advices that Wincorp had been issuing to its investors takes the form of a
security that ought to have been registered before being offered to the public, and that the
investment house had also been advancing the payment of interest to the investors to cover up its
borrowers' insolvency

The RTC ruled in favour of Ng Wee and held the respondents to jointly and severally pay Ng Wee.
Upon appeal, the CA affirmed the decision of the RTC.

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ISSUES:

1. Whether Ng Wee was able to establish his cause/s of action against Wincorp and Power Merge.

2. Whether it is proper to pierce the veil of corporate fiction under the circumstances of the case.

RULING:

1. YES. Wincorp attempts to evade liability by hiding behind the "sans recourse" nature of the
transactions with Ng Wee. However, the argument deserves scant consideration.

Absent in the powers of an investment house is the authority to perform quasi-banking functions.
Even as a financial intermediary, investment houses are not allowed to engage in quasi-banking
functions, unless authorized by the Monetary Board through the issuance of a Certificate of
Authority.

The Omnibus Rules and Regulations for Investment Houses and Universal Banks Registered as
Underwriters defines "quasi-banking function " as the function of "borrowing funds for the
borrower's own account from 20 or more persons or corporate lenders at any one time, through the
issuance, endorsement or acceptance of debt instruments of any kind other than deposits which may
include but need not be limited to acceptances, promissory notes, participations, certificates of
assignment or similar instruments with recourse, trust certificates or of repurchase agreements for
purposes of relending or purchasing of receivables and other obligations.”

Given the definition, it would appear on paper that offering the "sans recourse" transactions does
not qualify as the performance of a quasi-banking function specifically because it is "sans
recourse" against Wincorp. However, the Court affirms the CA's finding that Wincorp engaged in
practices that rendered the transactions to be "with recourse" and, consequently, within the ambit
of quasi-banking rules.

First, Wincorp did not act as a mere financial intermediary between Ng Wee and Power Merge, but
effectively obtained the funds for its own account. With Power Merge as a conduit, Wincorp's
borrowings from its investors redounded to its benefit. This is bolstered by Wincorp's act of
executing the Side Agreements releasing Power Merge from its obligation to pay under its
Promissory Notes, exposing itself to liability to pay the same.

Second, the SEC found that Wincorp has sourced funds from 2,200 individuals with an average of
₱7,000,000,000.00 worth of commercial papers per month. This figure unquestionably exceeds
the "20 or more persons or corporate lenders" threshold.

Third, the Confirmation Advices that are marked "sans recourse" are actually "with recourse."
Wincorp's act of advancing the payment of interests when the corporate borrower is unable to pay
despite the borrowing being branded as without recourse, rendered it to be with recourse. Coupled
with the above-circumstances, offering the "sans recourse" transactions should then be categorized
as an exercise of a quasi-banking function.

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Further, the operations of Wincorp cannot be oversimplified as mere brokering of loans. As

discovered by the SEC and as ruled by the CA, Wincorp was, in reality, selling to the public
securities, i.e., shares in the Power Merge credit in the form of investment contracts.

As a general rule, securities are not to be sold or offered for sale or distribution without due
registration, and provided that information on the securities shall be made available to prospective
purchasers.

Included in the list of securities that require registration prior to offer, sale, or distribution are
investment contracts. An investment contract refers to a contract, transaction or scheme whereby
a person invests his money in a common enterprise and is led to expect profits primarily from the
efforts of others. It is presumed to exist whenever a person seeks to use the money or property of
others on the promise of profits.

In this jurisdiction, the Court employs the Howey test to determine whether or not the security
being offered takes the form of an investment contract. The following must concur for an
investment contract to exist: (1) a contract, transaction, or scheme; (2) an investment of money; (3)
investment is made in a common enterprise; (4) expectation of profits; and (5) profits arising
primarily from the efforts of others. Indubitably, all of the elements are present in the extant case.

First, Wincorp offered what it purported to be "sans recourse" transactions wherein the investment
house would allegedly match investors with pre-screened corporate borrowers in need of financial
assistance.

Second, Ng Wee invested the aggregate amount of ₱213,290,410.36 in the "sans

recourse" transactions through his trustees, as embodied in the Confirmation Advices.

Third, prior to being matched with a corporate borrower, all the monies infused by the investors
are pooled in an account maintained by Wincorp. This ensures that there are enough funds to meet
large drawdowns by single borrowers.

Fourth, the investors were induced to invest by Wincorp with promises of high yield. In Ng Wee's
case, his Confirmation Advices reveal that his funds were supposed to earn 13.5% at their respective
maturity dates.

Fifth, the profitability of the enterprise depended largely on whether or not Wincorp, on best effort
basis, would be able to match the investors with their approved corporate borrowers.

No error can then be attributed to the CA when it designated the "sans recourse" transactions as
investment contracts. No fault can also be ascribed to the appellate court in finding that Wincorp
virtually purchased and resold securities, and not just brokered a loan. The most telling
circumstance that negate Wincorp's claim of mere brokerage is the fact that it paid for the interest
payments due from the corporate borrowers that defaulted. This effectively estopped Wincorp from
denying liability from its investors in this case.

In dealing in securities, Wincorp was under legal obligation to comply with the statutory
registration and disclosure requirements. Under BP 178, otherwise known as the Revised Securities

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Act, which was still in force at the time material in this case, investment contracts are securities,
and their sale, transactions that are not exempt from these requirements.

Clearly then, because Wincorp had been successful in its scheme of passing off the "sans
recourse" transactions as mere brokering of loans, it managed to circumvent the registration and
disclosure requirements under BP 178, and managed to commit fraud in a massive scale against its
investors to the latter's damage and prejudice, for which Wincorp ought to be held liable.

On the other hand, Power Merge is liable to Ng Wee under its Promissory Notes while Virata is
also liable for the Promissory Notes even as an accommodation party.

A promissory note is a specie of negotiable instruments. Under Section 60 of the Negotiable

Instruments Law, the maker of a promissory note engages that he will pay it according to its tenor.
In this case, the Promissory Notes executed by Virata in behalf of Power Merge are couched in the
following wise:

PROMISSORY NOTE
For value received, I/We ____________________, hereby promise to pay WESTMONT
INVESTMENT CORPORATION (WINCORP), either for itself or as agent for and on behalf
of certain INVESTORS who have placed/invested funds with WINCORP the principal sum
of ________________ (__________), Philippine Currency, on _______ with interest rate of
___________ percent (___%) per annum, or equivalently the Maturity Amount of
______________ PESOS (______________)Philippine Currency.

It is crystal clear that Power Merge, through Virata, obligated itself to pay Wincorp and those who
invested through it the values stated in the Promissory Notes. The validity and due execution of the
Promissory Notes were not even contested.

On its face, Power Merge actually received the proceeds from the Credit Line Agreement. But even
if it was assumed for the sake of argument that Power Merge, through Virata, is a mere
accommodation party under the Promissory Notes, liability would still attach to them in favor of
the holder of the instrument for value.

An accommodation party lends his name to enable the accommodated party to obtain credit or to
raise money; he receives no part of the consideration for the instrument but assumes liability to the
other party or parties. Such party must meet all the following three requisites, viz: (1) he must be a
party to the instrument, signing as maker, drawer, acceptor, or indorser; (2) he must not receive
value therefor; and (3) he must sign for the purpose of lending his name or credit to some other
person.

The first element, that Power Merge, through Virata, executed the Promissory Notes as maker
cannot be disputed. Meanwhile, petitioners would have the Court hypothetically admit that they
did not receive the proceeds from the drawdowns, in satisfaction of the second requisite. And lastly,
this was allegedly done for the purpose of lending its name to conceal Wincorp's direct borrowing
from its clients.

In gratia argumenti that the above elements are established facts herein, liability will still attach to
the accommodation parties pursuant to Sec. 29 of the Negotiable Instruments Law.

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The basis for the liability under Section 29 is the underlying relation between the accommodated
party and the accommodation party, which is one of principal and surety. In a contract of surety, a
person binds himself solidarily liable with the principal debtor of an obligation. But though a
suretyship agreement is, in essence, accessory or collateral to a valid principal obligation, the
surety's liability to the creditor is immediate, primary, and absolute. He is directly and equally
bound with the principal.

In a similar fashion, the accommodation party cum surety in a negotiable instrument is deemed an
original promisor and debtor from the beginning; he is considered in law as the same party as the
debtor in relation to whatever is adjudged touching the obligation of the latter since their liabilities
are so interwoven as to be inseparable. It is beyond cavil then that Power Merge and Virata can be
held liable for the amounts stated in the Promissory Notes. Consequently, they are also liable for
the assignment to Ng Wee of portions thereof as embodied in the Confirmation Advices.

2. YES. Virata is liable for the obligations of Power Merge. The circumstances of Power Merge clearly
present an alter ego case that warrants the piercing of the corporate veil.

To elucidate, case law lays down a three-pronged test to determine the application of the alter-ego
theory, namely:

(1) Control, not mere majority or complete stock 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 plaintiffs legal right; and
(3) The aforesaid control and breach of duty must have proximately caused the injury or
unjust loss complained of.

In the present case, Virata not only owned majority of the Power Merge shares; he exercised
complete control thereof. He is not only the company president, he also owns 374,996 out of
375,000 of its subscribed capital stock. Meanwhile, the remainder was left for the nominal
incorporators of the business. The reported address of petitioner Virata and the principal office of
Power Merge are even one and the same. The clearest indication of all: Power Merge never operated
to perform its business functions, but for the benefit of Virata. Specifically, it was merely created to
fulfill his obligations under the Waiver and Quitclaim, the same obligations for his release from
liability arising from Hottick's default and non-payment.

Virata would later on use his control over the Power Merge corporation in order to fulfill his
obligation under the Waiver and Quitclaim. Impelled by the desire to settle the outstanding
obligations of Hottick under the terms of the settlement agreement, Virata effectively allowed
Power Merge to be used as Wincorp's pawn in avoiding its legal duty to pay the investors under the
failed investment scheme. Pursuant to the alter ego doctrine, petitioner Virata should then be made
liable for his and Power Merge's obligations.

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However, UEM-MARA cannot be held liable. UEM-MARA is an entity distinct and separate from
Power Merge, and it was not established that it was guilty in perpetrating fraud against the
investors. It was a non-party to the "sans recourse" transactions, the Credit Line Agreement, the
Side Agreements, the Promissory Notes, the Confirmation Advices, and to the other transactions
that involved Wincorp, Power Merge, and Ng Wee. There is then no reason to involve UEM-MARA
in the fray.

As regards to the liability of Reyes, it is said that basic is the rule that a corporation is invested by
law with a personality separate and distinct from that of the persons composing it as well as from
that of any other legal entity to which it may be related. As such, obligations incurred by the
corporation, acting through its directors, officers and employees, are its sole liabilities, and said
personalities are generally not held personally liable thereon. However, by way of exception, a
corporate director, a trustee or an officer, may be held solidarily liable with the corporation under
Sec. 31 of the Corporation Code.

Ascribing liability to a corporate director, trustee, or officer by invoking Sec. 31 of the Corporation
Code is distinct from the remedial concept of piercing the corporate veil. While Sec. 31 expressly
lays down specific instances wherein the mentioned personalities can be held liable in their
personal capacities, the doctrine of piercing the corporate veil, on the other hand, is an equitable
remedy resorted to only when the corporate fiction is used, among others, to defeat public
convenience, justify wrong, protect fraud or defend a crime.

Applying the doctrine, petitioner cannot escape liability by claiming that he was merely performing
his function as Vice-President for Operations and was duly authorized to sign the Side Agreements
in Wincorp's behalf. The Credit Line Agreement is patently contradictory if not irreconcilable with
the Side Agreements, which he executed on the same day as the representative for Wincorp. The
execution of the Side Agreements was the precursor to the fraud. Taken with Wincorp's subsequent
offer to its clients of the "sans recourse" transactions allegedly secured by the Promissory Notes, it
is a clear indicia of fraud for which Reyes must be held accountable.

On the other hand, the liabilities of Cua and the Cualopings are more straightforward. They admit
of approving the Credit Line Agreement and its subsequent Amendment during the special
meetings of the Wincorp board of directors, but interpose the defense that they did so because the
screening committee found the application to be above board. However, these defenses are
unavailing. The board of directors is expected to be more than mere rubber stamps of the
corporation and its subordinate departments. It wields all corporate powers bestowed by the
Corporation Code, including the control over its properties and the conduct of its business. Being
stewards of the company, the board is primarily charged with protecting the assets of the
corporation in behalf of its stakeholders.

Cua and the Cualopings failed to observe this fiduciary duty when they assented to extending a
credit line facility to Power Merge. The SEC discovered that Power Merge is Wincorp's largest
borrower. It was then incumbent upon the board of directors to have been more circumspect in
approving its credit line facility, and should have made an independent evaluation of Power Merge's
application before agreeing to expose it to a ₱2,500,000,00.00 risk.

It cannot also be ignored that prior to Power Merge's application for a credit facility, its controller
Virata had already transacted with Wincorp. Virata was a surety for the Hottick obligations that

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were still unpaid at that time. This means that at the time the Credit Line Agreement was executed
Virata still had direct obligations to Wincorp under the Hottick account. But instead of impleading
him in the collection suit against Hottick, Wincorp's board of directors effectively released Virata
from liability, and, ironically, granted him a credit facility on the very same day.

This only goes to show that even if Cua and the Cualopings are not guilty of fraud, they would
nevertheless still be liable for gross negligencein managing the affairs of the company, to the
prejudice of its clients and stakeholders. Under such circumstances, it becomes immaterial whether
or not they approved of the Side Agreements or authorized Reyes to sign the same since this could
have all been avoided if they were vigilant enough to disapprove the Power Merge credit
application. Neither can the business judgment ruleapply herein for it is elementary in corporation
law that the doctrine admits of exceptions: bad faith being one of them, gross negligence,
another. The CA then correctly held petitioners Cua and the Cualopings liable to respondent Ng
Wee in their personal capacity.

As regards to the liability of Estrella, he claims that he should be exempted from liability by the
trial court as he was not present during Wincorp's special board meetings where Power Merge's
credit line was approved and subsequently amended. However, no concrete evidence was ever
offered to confirm Estrella's alibi.

Neither can petitioner Estrella be permitted to raise the defense that he is a mere nominee of John
Anthony Espiritu, the then chairman of the Wincorp board of directors. It is of no moment that he
only had one nominal share in the corporation, which he did not even pay for, just as it is
inconsequential whether or not Estrella had been receiving compensation or honoraria for
attending the meetings of the board.

The practice of installing undiscerning directors cannot be tolerated, let alone allowed to
perpetuate. This must be curbed by holding accountable those who fraudulently and negligently
perform their duties as corporate directors.

The fact remains that petitioner Estrella accepted the directorship in the Wincorp board, along
with the obligations attached to the position, without question or qualification. The fiduciary duty
of a company director cannot conveniently be separated from the position he occupies on the
trifling argument that no monetary benefit was being derived therefrom. The gratuitous
performance of his duties and functions is not sufficient justification to do a poor job at steering
the company away from foreseeable pitfalls and perils.

VETERANS FEDERATION of the PHILIPPINES v. EDUARDO L. MONTENEJO, et al.

G.R. No. 184819, November 29, 2017, Third Division, VELASCO, Jr., J.:

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 that operation.
Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital
stock of a corporation is not of itself a sufficient reason for disregarding the fiction of separate
corporate personalities.

FACTS:

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Petitioner Veteran's Federation of the Philippines (VFP) is a national federation of associations of

Filipino war veterans. It was created by virtue of RA No. 2640. Through Proclamation No. 192, VFP
was able to obtain control and possession of a vast parcel of land located in Taguig. VFP developed
said land into an industrial complex, now known as the VFP Industrial Area (VFPIA). Respondent
VFP Management and Development Corporation (VMDC), on the other hand, is a private
management company organized in 1990 pursuant to the general incorporation law.

VFP entered into a management agreement with VMDC wherein VMDC was to assume exclusive
management and operation of the VFPIA in exchange for 40% of the lease rentals generated from
the area. For managing and operating VFPIA, VMDC hired its own personnel and employees.
Among those hired by VMDC were respondents Montejo et al.

Subsequently, VFP board passed a resolution terminating the management agreement. VMDC
conceded to the termination and eventually agreed to turn over VFPIA. Further, the President of
VMDC issued a memorandum informing the company's employees of the termination of their
services. The employees were then terminated and paid their separation pay.

Montejo et. al then filed before the LA a complaint for illegal dismissal. However, the LA ruled that
they were not illegally dismissed.

Upon appeal, the NLRC reversed the decision of the LA and ruled that they be paid full backwages,
separation pay in lieu of reinstatement, 13th month pay and service incentive leave pay (SILP). The
NLRC also ruled that VFP is solidarily liable with VMDC for any monetary award that may be found
due to Montenejo, et al.

Thus, VFP filed a petition for certiorari with the CA, which was eventually dismissed. Hence, this
appeal.

ISSUE:

Whether or not the decision of the NLRC and CA were correct.

RULING:

NO. Montenejo, et al. were dismissed as a result of the closure of VMDC. Contrary to the ruling of
the NLRC and the CA, there is ample support from the records to establish that VMDC did, in fact,
close its operations. VMDC's closure, more importantly, qualifies as a bona fide cessation of
operations or business.

The dismissals of Montenejo, et al. were, therefore, premised on an authorized cause. Being so, such
dismissals are valid and remain to be valid even though they suffer from a procedural defect.
Consequently, Montenejo, et al. are not entitled to the monetary awards (i.e., full backwages,
separation pay in lieu of reinstatement, 13th month pay, SILP and COLA) granted to them by the
NLRC, but only to nominal damages on top of the separation pay.

Further, the NLRC and the CA also erred in ruling that VFP may be held solidarily liable with VMDC
for any monetary award that may be found due to Montenejo, et al. We find that, contrary to the

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holding of the NLRC and the CA, the application of the doctrine of piercing the veil of corporate
fiction is not justified by the facts of this case.

The SC has laid down the following test to determine when it would be proper to apply the doctrine
of piercing the veil of corporate fiction:

1. Control, not mere majority or complete stock 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 that operation.

Further, Mere ownership by a single stockholder or by another corporation of all or nearly all of the
capital stock of a corporation is not of itself a sufficient reason for disregarding the fiction of
separate corporate personalities.

Moreover, to disregard the separate juridical personality of a corporation, the wrong-doing must
be clearly and convincingly established. It cannot be presumed.

Utilizing the foregoing standards, it becomes clear that the NLRC and the CA were mistaken in
their application of the doctrine to the case at bench. The sole circumstance used by both to justify
their disregard of the separate personalities of VFP and VMDC is the former's alleged status as the
majority stockholder of the latter.

INTERNATIONAL ACADEMY of MANAGEMENT and ECONOMICS (I/AME) LITTON and

COMPANY, INC. v. LITTON and COMPANY, INC.
G.R. No. 191525, December 13, 2017, First Division, SERENO, C.J.:

Piercing the corporate veil may apply to non-stock corporations and to natural persons.

In a Reverse Piercing Action, the plaintiff seeks to reach the assets of a corporation to satisfy claims
against a corporate insider. It has two (2) types: outsider reverse piercing and insider reverse piercing.
Outsider reverse piercing occurs when a party with a claim against an individual or corporation
attempts to be repaid with assets of a corporation owned or substantially controlled by the
defendant. In contrast, in insider reverse piercing, the controlling members will attempt to ignore the
corporate fiction in order to take advantage of a benefit available to the corporation, such as an
interest in a lawsuit or protection of personal assets.

FACTS:

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Atty. Emmanuel T. Santos (Santos), a lessee to two (2) buildings owned by Litton, owed the latter
rental arrears as well as his share of the payment of realty taxes. Consequently, Litton filed a
complaint for unlawful detainer against Santos before the MeTC. The MeTC ruled in Litton’s favor
and ordered Santos to vacate A.I.D. Building and Litton Apartments.

The sheriff of the MeTC of Manila levied on a piece of real property registered in the name of
International Academy of Management and Economics Incorporated (I/AME), in order to execute
the judgment against Santos. The annotations on the TCT indicated that such was "only up to the
extent of the share of Emmanuel T. Santos.” I/AME filed with Me TC a "Motion to Lift or Remove
Annotations Inscribed in TCT No. 187565 of the Register of Deeds of Makati City." I/AME claimed
that it has a separate and distinct personality from Santos; hence, its properties should not be made
to answer for the latter's liabilities.

ISSUE:

Whether the court should pierce the corporate veil of I/AME to answer for the liability of Santos?

RULING:

YES. The piercing of the corporate veil is premised on the fact that the corporation concerned must
had been properly served with summons or properly subjected to the jurisdiction of the court a
quo. Corollary thereto, it cannot be subjected to a writ of execution meant for another in violation
of its right to due process. There exists, however, an exception to this rule: if it is shown "by clear
and convincing proof that the separate and distinct personality of the corporation was purposefully
employed to evade a legitimate and binding commitment and perpetuate a fraud or like
wrongdoings.”

The resistance of the Court to offend the right to due process of a corporation that is a nonparty in
a main case, may disintegrate not only when its director, officer, shareholder, trustee or member is
a party to the main case, but when it finds facts which show that piercing of the corporate veil is
merited. Thus, as the Court has already ruled, a party whose corporation is vulnerable to piercing
of its corporate veil cannot argue violation of due process. This Court agrees with the CA that Santos
used I/AME as a means to defeat judicial processes and to evade his obligation to Litton. Thus, even
while I/AME was not impleaded in the main case and yet was so named in a writ of execution to
satisfy a court judgment against Santos, it is vulnerable to the piercing of its corporate veil.

The Court also noted that piercing the corporate veil may apply to non-stock corporations and to
natural persons as the court made no distinction regarding this in prior cases. As cited in Sula ng
Bayan, Inc. v. Araneta, Inc., "[t]he doctrine of alter ego is based upon the misuse of a corporation by
an individual for wrongful or inequitable purposes, and in such case the court merely disregards
the corporate entity and holds the individual responsible for acts knowingly and intentionally done
in the name of the corporation." This, Santos has done in this case. Santos formed I/AME, using the
non-stock corporation, to evade paying his judgment creditor, Litton.

Also, in this case, “Reverse Piercing of the Corporate Veil” applies. The Court discussed that we
borrow from American parlance what is called reverse piercing or reverse corporate piercing or
piercing the corporate veil "in reverse." As held in the U.S. Case, C.F. Trust, Inc., v. First Flight
Limited Partnership, "in a traditional veil-piercing action, a court disregards the existence of the

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corporate entity so a claimant can reach the assets of a corporate insider. In a Reverse Piercing
Action, however, the plaintiff seeks to reach the assets of a corporation to satisfy claims against a
corporate insider."

It has two (2) types: outsider reverse piercing and insider reverse piercing. Outsider reverse piercing
occurs when a party with a claim against an individual or corporation attempts to be repaid with
assets of a corporation owned or substantially controlled by the defendant.52 In contrast, in insider
reverse piercing, the controlling members will attempt to ignore the corporate fiction in order to
take advantage of a benefit available to the corporation, such as an interest in a lawsuit or protection
of personal assets.

This notwithstanding, the equitable remedy of reverse corporate piercing or reverse piercing was
not meant to encourage a creditor’s failure to undertake such remedies that could have otherwise
been available, to the detriment of other creditors. Reverse corporate piercing is an equitable
remedy which if utilized cavalierly, may lead to disastrous consequences for both stock and non-
stock corporations. We are aware that ordinary judgment collection procedures or other legal
remedies are preferred over that which would risk damage to third parties (for instance, innocent
stockholders or voluntary creditors) with unprotected interests in the assets of the beleaguered
corporation.

Thus, this Court would recommend the application of the current 1997 Rules on Civil Procedure on
Enforcement of Judgments. Under the current Rules of Court on Civil Procedure, when it comes to
satisfaction by levy, a judgment obligor is given the option to immediately choose which property
or part thereof may be levied upon to satisfy the judgment. If the judgment obligor does not exercise
the option, personal properties, if any, shall be first levied and then on real properties if the personal
properties are deemed insufficient to answer for the judgment.

In the instant case, it may be possible for this Court to recommend that Litton run after the other
properties of Santos that could satisfy the money judgment - first personal, then other real
properties other than that of the school. However, if we allow this, we frustrate the decades-old yet
valid MeTC judgment which levied on the real property now titled under the name of the school.
Moreover, this Court will unwittingly condone the action of Santos in hiding all these years behind
the corporate form to evade paying his obligation under the judgment in the court a quo. This we
cannot countenance without being a party to the injustice.

Thus, the reverse piercing of the corporate veil of I/AME to enforce the levy on execution of the
Makati real property where the school now stands is applied to this case.

E. CORPORATE POWERS
1. SPECIFIC POWERS, THEORY OF SPECIFIC CAPACITY
i. ULTRA VIRES ACTS
a. APPLICABILITY OF ULTRA VIRES DOCTRINE

OFFICE of the OMBUDSMAN v. ANTONIO Z. DE GUZMAN

G.R. No. 197886, October 4, 2017, Third Division, LEONEN, J.:

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The Postmaster General may only execute contracts for procurement of services with the Board of
Directors' approval. However, this lack of authority may be ratified through the Board of Directors'
silence or acquiescence. The ratification of the unauthorized act does not necessarily mean that the
contract is valid. If the contract is executed without complying with the laws on procurement, the
erring public official may be held administratively liable.

FACTS:

Sometime in 2001, the Philippine Postal Corporation (PPC) entered into a contract with Aboitiz Air
for the carriage of mail which would expire on December 31, 2002. After its expiry, PPC purchased
40 vehicles & hired 25 drivers whose contracts would expire on March 31, 2004.

The Central Mail Exchange Center of PPC submitted a recommendation that PPC would save ₱6M
per annum if deliveries to Luzon were outsourced instead. On April 29, 2004, the Board of Directors
of PPC held a Special Board Meeting where OIC De Guzman endorsed for approval the
recommendation to outsource mail delivery in Luzon. De Guzman sent a letter to Aboitiz Air
stating that “pending finalization of the renewal of our contract, you may now re-assume to undertake
the carriage of mail from and to Regions 1, 2, 5, & CAR starting 11 May 2004 until further notice.”

On October 20, 2005, Atty. Sim Oresca Mata, Jr. filed an administrative complaint with the Office
of the Ombudsman against De Guzman, alleging that the Aboitiz One contract renewal was done
without public bidding and that the rate per kilogram was unilaterally increased without the PPC
Board of Directors' approval. Ombudsman found De Guzman guilty of grave misconduct and
dishonesty. CA annulled the Decision for lack of merit.

ISSUE:

Whether or not Court of Appeals erred in absolving respondent De Guzman of his administrative
offenses for entering into a contract with a private entity for mail delivery in Luzon despite not
having prior approval from the Philippine Postal Corporation Board of Directors.

RULING:

The Board of Directors never actually took a vote on whether or not it should renew its contract
with Aboitiz One for the outsourcing of its mail deliveries. There was also no board resolution
issued after approving it. As there was no majority vote or a board resolution, respondent was not
authorized to enter into the contract.

A contract entered into by corporate officers who exceed their authority generally does not bind
the corporation except when the contract is ratified by the Board of Directors. There was no
evidence presented that the Board of Directors repudiated the contract dated May 7, 2004 with
Aboitiz One. Considering that the Board of Directors remained silent and the Postmaster
Generals continued to approve the payments to Aboitiz One, they are presumed to have
substantially ratified respondent's unauthorized acts. Therefore, respondent's action is
not considered ultra vires.

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However, the ratification of respondent's unauthorized acts does not necessarily mean that the May
7, 2004 contract was validly executed. To determine if respondent committed grave misconduct
when he entered into this contract, it must first be determined if public bidding was necessary.

The expiration of the mail carriage drivers' employment contracts is not a ‘calamitous event’
contemplated under Republic Act No. 9184, Section 53(b) allowing for a negotiated procurement
instead of a public bidding. The contracts were undertaken with a definite expiration date and was
not a sudden unexpected event.

Petitioner may have incorrectly characterized respondent's offense as grave misconduct and
dishonesty. There is no evidence that respondent deliberately resorted to negotiated procurement
to benefit himself or some other person. Neither is there evidence that respondent lied, cheated,
deceived, or defrauded when he directly resorted to negotiated procurement. Respondent should,
instead, be held administratively liable for gross neglect of duty.

He was aware that the employment contracts would expire but waited until the contracts actually
expired to recommend the use of outsourcing. Respondent had the duty to first secure the Board
of Directors' approval before entering into the contract with Aboitiz One. He went ahead and
executed the contract with Aboitiz One without ensuring that the procurement of its services by
the PPC would be done through the proper procedures and at the most advantageous price.
Accordingly, he is found guilty of gross neglect of duty.

Under Rule 10, Section 46(A)(2) of the Revised Rules on Administrative Cases, gross neglect of duty
is categorized as a grave offense punishable by dismissal from service.

F. CORPORATE POWERS
1. HOW EXERCISED
i. BY THE OFFICERS

ALEJANDRO D.C. ROQUE v. PEOPLE of the PHILIPPINES

G.R. No. 211108, June 7, 2017, Third Division, TIJAM, J.:

The revocation of BMTODA's registration does not automatically strip off Ongjoco of his right to
examine pertinent documents and records relating to such association.

FACTS:

Barangay Mulawin Tricycle Operators and Drivers Association, Inc. (BMTODA) became a
corporation duly registered with the SEC on 1993. Sometime in 2003, Ongjoco, a member of
BMTODA, sent a letter requesting copies of the Association's documents pursuant to his right to
examine records under Section 74 of the Corporation Code after learning that BMTODA's funds
were missing. However, the Secretary denied his request. He also learned that the incumbent
officers were holding office for 3 years already, in violation of the one-year period provided for in
BMTODA's by-laws. He requested from the President a copy of the list of its members with the
corresponding franchise numbers of their respective tricycle fees and the franchise fees paid by
each member, but the same was likewise denied. Thus, Ongjoco filed a Complaint against the
President and Secretary for violation of Section 74 in relation to Section 144 of the Corporation

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Code. The President and Secretary argue however that since the letters were received by them when
BMTODA's registration was already revoked, BMTODA ceased to exist as a corporation and they
cannot be held liable of the same.

ISSUE:

Can the President and Secretary be prosecuted under the penal provisions of the Corporation Code?

RULING:

YES. Ongjoco, as a member of BMTODA, had a right to examine documents and records pertaining
to said association. Ongjoco made a prior demand in writing for copy of pertinent records of
BMTODA from the President and Secretary. However, both of them refused to furnish Ongjoco
copies of such pertinent records. While it appears that the registration of BMTODA as a corporation
with the SEC was revoked on 2003, the letter-request of Ongjoco which was dated while BMTODA's
registration was revoked, was actually received by after the revocation was lifted. In any case, the
revocation of a corporation's Certificate of Registration does not automatically warrant the
extinction of the corporation itself such that its rights and liabilities are likewise altogether
extinguished. In the case of Clemente v. Court of Appeals, the Court explained that the termination
of the life of a juridical entity does not, by itself, cause the extinction or diminution of the rights
and liabilities of such entity nor those of its owners and creditors. Thus, the revocation of
BMTODA's registration does not automatically strip off Ongjoco of his right to examine pertinent
documents and records relating to such association.

ARTURO CALUBAD v. RICARCEN DEVELOPMENT CORPORATION

G.R. No. 202364, August 30, 2017, Third Division, LEONEN, J.:

Doctrine of apparent authority: When a corporation intentionally or negligently clothes its agent with
apparent authority to act in its behalf, it is estopped from denying its agent's apparent authority as
to innocent third parties who dealt with this agent in good faith.

FACTS:

Respondent Ricarcen Development Corporation is seeking the Annulment of a Real Estate

Mortgage and Extrajudicial Foreclosure of Mortgage and Sale with Damages against Marilyn
Soliman and petitioner Arturo Calubad.

Respondent Ricarcen is a domestic family corporation engaged in real estate. Marilyn, then acting
as the president of Ricarcen, took out a P5 million and P2 million loan from petitioner Calubad. The
loan was secured with a real estate mortgage on 2 lots owned by respondent-corporation. To prove
her authority, Marilyn presented a Board Resolution and Secretary Certificates authorizing her to
borrow money and use the parcel of land as security.

After Ricarcen failed to pay the loan, Calubad extrajudicially foreclosed the property and won as
the highest bidder in the auction sale. After confirming the sale of the property, Ricarcen fired
Marilyn. Respondent then filed a Complaint for Annulment of a Real Estate Mortgage and

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Extrajudicial Foreclosure of Mortgage and Sale with Damages in the RTC. It claimed that it never
authorized Marilyn to obtain loans or use the property as collateral.

The RTC ruled in favor of Ricarcen. The failure of Marilyn to present a SPA should have put
petitioner Calubad on guard. Subsequently, the Court of Appeals dismissed Calubad’s appeal and
affirmed the RTC decision.

ISSUE:

Whether or not respondent Ricarcen is estopped from denying the authority of its former president,
Marilyn, from entering into a contract of loan and mortgage with petitioner Calubad.

RULING:

YES, respondent is estopped from denying its agent’s actions while contracting with third persons
in good faith after such agent has been given the apparent authority to do so.

Based on law and jurisprudence, the two types of authorities conferred upon a corporate officer or
agent in dealing with third persons are – actual authority and apparent authority. Actual authority
may be express, which is the power given to the agent by the corporation, or implied, which is
measured by the agent’s acts ratified or whose benefits are accepted by the corporation.

In contrast, apparent authority, which is applicable in this case, is based on the principle of
estoppel. Under Art. 1431 of the Civil Code, an admission or representation is rendered conclusive
upon the person making it, and cannot be denied or disproved as against the person relying
thereon. The doctrine of apparent authority provides that even if no actual authority has been
conferred on an agent, his or her acts, as long as they are within his or her apparent scope of
authority, bind the principal. However, the principal's liability is limited to third persons who are
reasonably led to believe that the agent was authorized to act for the principal due to the principal's
conduct. This is determined by the acts of the principal which led the third party to believe that the
agent was acting in behalf of the said principal.

In this case, Ricarcen evidently gave Marilyn the scope of authority to act in its behalf. In particular,
Ricarcen received checks in its name for the loans and likewise paid and issued checks as payments
for the monthly interests of the mortgage loans. All the checks received by Calubad from Ricarcen
cleared.

Calubad, as an innocent third party dealing in good faith with Marilyn, should not be made to suffer
because of Ricarcen's negligence in conducting its own business affairs.

G. STOCKHOLDERS AND MEMBERS

1. REMEDIAL RIGHTS

BELO MEDICAL GROUP INC. v. JOSE SANTOS and VICTORIA BELO

G.R. No. 185894, August 30, 2017, Third Division, LEONEN, J.:

A conflict between two (2) stockholders of a corporation does not automatically render their dispute
as intra-corporate. The nature of the controversy must also be examined.

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FACTS:

Petitioner Belo Medical Group (BMG) filed a Complaint for Interpleader and Supplemental
Complaint for Declaratory Relief against respondents Jose Santos and Victoria Belo.

Respondent Santos filed a request to Belo Medical Group for an inspection of corporate records. He
claims that he is a registered shareholder and co-owner of Victoria Belo’s shares which he acquired
while they cohabited as husband and wife. His repeated attempts to inspect the corporate books
were all denied.

Belo claims that she paid for the shares and Santos only held the shares in his name in trust for her.
She further claims that Santos, allegedly a majority owner of Obagi Clinics, would be inspecting the
BMG records in bad faith as it was to obtain a competitor’s business information.

BMG thus filed a Complaint for Interpleader to protect its interest and compel respondents to
litigate their conflicting claims of ownership over the shares and the right of inspection. It later
filed a Supplemental Complaint seeking to bar Santos permanently from inspecting its books due
to his business interest in a competitor.

On the other hand, Santos filed a Motion to Dismiss the case.

The complaints were raffled to a special commercial court and thus classified as intra-corporate.
The trial court recognized the case as intra-corporate controversy but granted respondent Santos’
Motion to Dismiss.

ISSUE:

Whether or not the proceeding between the parties was an intra-corporate controversy.

RULING:

YES, the case for interpleader filed by BMG was essentially an intra-corporate controversy based on
the relationship test and the nature of controversy test.

Herein, it is necessary to determine whether an intra-corporate dispute exists as under A.M. No.
01-2-04-SC or the Interim Rules of Procedure Governing Intra-Corporate Controversies, such a
controversy (enumerated in Sec. 1[a]) would prohibit the filing of a motion to dismiss (prohibited
pleadings in Sec. 8).

The Court now uses both the relationship test and the nature of the controversy test to determine
if an intra-corporate controversy is present.

Relationship Test

Under the “relationship test discussed in Union Glass & Container Corp. v. SEC, the presence of any
of the following relationships between the parties would characterize it as intra-corporate:

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[a] Between the corporation, partnership or association and the public;

[b] Between the corporation, partnership or association and its stockholders, partners, members,
or officers;
[c] Between the corporation, partnership or association and the state in so far as its franchise,
permit or license to operate is concerned; and
[d] Among the stockholders, partners or associates themselves.

In this case, both Belo and Santos are named shareholders of BMG’s Articles of Incorporation. Since
the conflict involves two shareholders then it is clearly intra-corporate. Although the ownership of
stocks of Santos is questioned, the court continues to recognize him as a stockholder until a
decision is rendered on the true ownership of the 25 shares of stock in his name.

Nature of Controversy Test

In addition, DMRC Enterprises v. Este del Sol Mountain Reserve Inc. used the “nature of controversy
test” which looks into the conflict between the parties.

In this case, the intra-corporate dispute is evident in the Complaint for Interpleader wherein the
goal of both BMG and Belo is not just to determine the true owner of the shares of stock but
ultimately to stop Santos from inspecting the corporate books. Even if Santos is declared the owner,
BMG would then base his disqualification on bad faith.

Based on the facts of this case and applying the relationship and nature of the controversy tests, the
case is centered around a registered stockholder’s right to inspect corporate books and is therefore
an intra-corporate dispute. As such, Santos should not have been allowed to file a Motion to
Dismiss. The trial court should have treated the case as an intra-corporate dispute.

The dismissal of the intra-corporate case is thus reversed. The case is remanded to the commercial
court of origin for further proceedings.

H. STOCKHOLDERS AND MEMBERS

1. MEETINGS
i. REGULAR OR SPECIAL
a. NOTICE

LYDIA LAO v. YAO BIO LIM

G.R. No. 201306, August 9, 2017, Second Division, LEONEN, J.:

A pending case on the validity of the transfer of the shares of stock is not a ground for violating a final
order of a court or a quasi-judicial body (SEC) involving the inclusion of the stockholders whose shares
were subject of the pending case in regular stockholders meetings.

FACTS:

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Respondents Yao Bio Lim and Philip King herein dispute the election of the board of directors of
Philadelphia School Inc. and issuance of stock dividends and transfer of shares of stock made by
the rest of the stockholders, under the leadership of herein petitioners Lydia Lao and others.

Ong Y Seng (King’s father) authorized the transfer of his shares to King who was thus elected a
member of the PSI Board of Directors and eventually held the majority of the stocks. Yao Bio Lim
was assigned the shares of his siblings, which they all inherited from their father. A special
stockholders meeting was held in 1998 electing Yao Bio Lim as President and King as Vice-
President.

In 1999, another election was held as the petitioners herein did not find the transfer of shares from
King’s father (Ong Y Seng) to King, and the inheritance and subsequent assignment as valid. Thus,
petitioner was elected as President. However, this was nullified by the Securities and Exchange
Commission and the Regional Trial Court. The Court of Appeals upheld the execution order as well.

The second election in 2002 was again questioned by the respondents for not having complied with
the notice requirement in informing the respondents and for having defied the orders of the SEC
and RTC when it nullified the 1999 stockholders meeting. The petitioners failed to acknowledge
the voting rights of the respondents forcing King out of the meeting for they did not acknowledge
the transfer of the shares from his father to him.

The RTC nullified the 2002 meeting. The Court of Appeals affirmed the RTC decision. Thus, this
petition.

ISSUE:

Whether or not the Court of Appeals properly nullified the 2002 stockholders meeting for the
following reasons:
 Failure to comply with notice requirement per the Corporation Code Sec. 50 and the PSI’s
by-laws
 Failure to comply with the orders of SEC and RTC in acknowledging the voting rights of the
respondents

RULING:

YES, the Court held the CA properly nullified the 2002 stockholders meeting.

However, it disagreed with the CA that the Corporation Code’s Sec. 50 governs which requires a
two-week notice requirement, for Sec. 50 also provides that “regular meetings of stockholders of
members shall be annually held on a date fixed in the by-laws”.

It also disagreed with the CA as to its conclusion that it was a special meeting and not a regular
meeting, thus the notice requirement as required by the by-laws of PSI was not reached, because
there was an absence of a statement of the object/purpose of the special meeting.

[5] NOTICE OF MEETINGS: Notice of the meetings, which shall be written or printed, for
every regular or special meeting of the stockholders, shall be mailed or personally delivered
to each stockholder, at their respective addresses as they appear in the book of the

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corporation, not less than five (5) days prior to the date set for such meeting; and in case of
special meeting the notice shall state the object and purpose of the same . . .

The Supreme Court found instead, that the meeting was just a regular meeting, as the by-laws
provide that the meetings should be held on every 3rd Friday of March. The 2002 meeting was
indeed held on the 3rd Friday of March. Thus, the notice requirement which required a statement
of the purpose of the meeting was no longer required for it was merely a regular meeting.

However, the Supreme Court agreed that the 2002 meeting should still be null and void for it was
done in defiance of the orders of the SEC and RTC in the first case which nullified the 1999
stockholders meeting.

The SEC ordered that the 1997 General Information Sheet should be used as reference for the
stockholders names to be used in any of the stockholders meetings and elections, and the RTC later
ordered that the 1997 General information Sheet should also be the basis for the schedule of
stockholders and their respective shareholdings. The GIS shows that the shares the respondents
claim indeed belong to them. Thus, the failure of the petitioners to acknowledge the transfer of
shares from Ong Y. Seng to King, and the assignment of the shares from the siblings to Yao Bio Lim,
was a clear violation of the SEC and RTCs orders.

The petitioners assail that the imposition of 1997 GIS was improper because there was still a court
case pending with regard to the validity of the transfer of the shares. However, the Court
emphasized that petitioners cannot unilaterally disobey or disregard the orders of the SEC
and the RTC despite their own views of the correctness of propriety thereof. Despite the
pending litigation on the validity of the transfer of the shares, the Court found that petitioners were
still obliged to use the list of stockholders indicated in the GIS.

H. CAPITAL STRUCTURE
2. DISPOSITION AND ENCUMBRANCE OF SHARES
i. REQUISITES OF A VALID TRANSFER

DEVELOPMENT BANK of the PHILIPPINES v. STA. INES MELALE FOREST PRODUCTS

G.R. No. 193068
NATIONAL DEVELOPMENT CORPORATION v. STA. INES MELALE FOREST PRODUCTS
G.R. No. 193068, February 1, 2017, Second Division, LEONEN, J.:

A condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfilment and a debtor
loses the right to make use of the period when a condition is violated, making the obligation
immediately demandable.

FACTS:

Respondents Sta. Ines Melale Forest Products Corp, Cuenca Investment Corp., and Universal
Holdings Corp., Rodolfo Cuenca, and Manuel Tinio are among the stockholders of National Galleon
Shipping Corp. When Galleon experienced financial difficulties, it took out several loans from
financial institutions, its shareholders, and other entities. Petitioner DBP guaranteed the loans. In
return, Galleon and its stockholders (herein respondents) executed a Deed of Undertaking which

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obligated themselves to guarantee DBP’s potential liabilities. Galleon also secured a first mortgage
on its vessels.

However, Galleon was not able to recover financially. A Letter of Instruction (LOI) No. 1155 by then
Pres Marcos led to a Memorandum of Agreement (MOA) wherein 100% of the shares of Galleon
would be transferred to NDC in a purchase agreement amounting to P46.740 million.

The NDC took over but purchase agreement was never formally executed. Pres. Marcos then orders
the foreclosure of Galleon vessels to limit the government’s exposure to the corporation’s debts. A
Deed of Transfer was then executed for the transfer of the Galleon loan account from DBP to the
National Government. The RTC upheld the validity of the MOA and LOI.

Respondents filed a Complaint with Application of a TRO or Writ of Injunction with the RTC. They
alleged that NDC allegedly took complete control over Galleon prior to the signing of the share
purchase agreement.

The RTC ruled that the NDC is in estoppel as it prevented the execution of the share purchase
agreement. Meanwhile, respondents’ liability to DBP under the Deed was extinguished due to
novation.

The CA ruled that NDC is estopped from claiming that there was no agreement since it has already
been partially executed after NDC took control over the management of Galleon.

ISSUES:

1. Whether or not the MOA obligates NDC to purchase Galleon’s shares of stocks and pay the
advances made by respondents for Galleon.

2. Whether or not the MOA novated the Deed of Undertaking executed between DBP and
respondents.

RULING:

1. YES. Under the MOA, the parties agreed to an execution of a share purchase agreement to effect
the transfer of 100% of Galleon’s shareholdings to NDC within 60 days. The purchase price shall be
paid to the sellers after 5 years from the date of the share purchase agreement.

Based on the entirety of the MOA, there was a clear intention to transfer shares from respondents
to NDC to be executed only upon the compliance if the execution of the share purchase agreement.
The failure to execute the share purchase agreement was due to NDC’s delay in reviewing the
financial accounts submitted by Galleon’s stockholders

First, under Art. 1186 of the Civil Code, a condition is deemed fulfilled when the obligor voluntarily
prevents its fulfillment. As such, the execution of the share purchase agreement is considered
fulfilled with NDC as the new owner of 100% of Galleon’s shares of stock given the delay of the
former.

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Second, under Art. 1198(4), the debtor loses the right to make use of the period when a condition is
violated making the obligation immediately demandable.

2. NO, there was no sufficient showing of a valid novation that would release respondents from
liability to DBP as co-guarantors of Galleon.

Novation is never presumed. There must be an animus novandi, whether partial or total, which
would clearly and unequivocally show the agreement of the parties either expressly or by their acts.
In particular, there was no showing that Ongpin, though he was the concurrent head of DBP and
NDC at the time of the execution of the MOA, did not present proof of its authority from DBP to
to give consent to the substitution of NDC as a co-guarantor of DBP. Since there was no such animus
novandi in this case between the respondents, the latter are not discharged as Galleon’s co-
guarantors.

Respondents are declared liable to the NDC, DBP, and Asset Privatization Trust.

I. DISSOLITION AND LIQUIDATION

1. METHODS OF LIQUIDATION
i. BY MANAGEMENT COMMITTEE OR REHABILITATION RECEIVER

METROPOLITAN BANK and TRUST COMPANY v. LIBERTY CORRUGATED BOXES

MANUFACTURING CORP.
G.R. No. 184317, January 25, 2017, Second Division, LEONEN, J.:

A bank cannot contest the filing for Rehabilitation by a corporation using as grounds the fact that
the corporation’s debts have already matured.

FACTS:

Liberty Corrugated Boxes Manufacturing Corp. (Liberty) obtained various credit accommodations
and loan facilities from Metropolitan Bank and Trust Company (Metrobank) amounting to ₱19,
940,000. The loans were secured by a real estate mortgage over properties in Valenzuela City.

Liberty defaulted on the loans and on June 27, 2007 filed a Petition for Corporate Rehabilitation
before the RTC. Liberty claimed it could not meet its obligations to Metrobank because of the Asian
Financial Crisis and the serious sickness of its Founder and President, Ki Kiao Koc.

Metrobank argued that Liberty can no longer file a Petition for Rehabilitation considering the
phrase in Rule 4, Section 4 of the Interim rules which states “who foresees the impossibility of
meeting its debts when they respectively fall due” to be construed as meaning that an element of
foresight is required. Hence, if the debts are already due, rehabilitation would not be proper.

ISSUE:

Whether a corporation, whose debts have already matured, is qualified to file a Petition for
Rehabilitation under PD No. 902-A and Rule 4 of the Interim Rules.

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RULING:

YES. A corporation that may seek corporate rehabilitation is characterized not by its debt but by its
capacity to pay this debt. There is no reason why corporations with dents that may have already
matured should not be given the opportunity to recover and pay their debtors in an orderly fashion.
The opportunity to rehabilitate the affairs of an economic entity, regardless of the status of its debts,
redounds to the benefit of its creditors, owners, and to the economy in general. Rehabilitation,
rather than collection of debts from a company already near bankruptcy, is a better use of judicial
rewards.

Thus, the condition that triggers rehabilitation is not the maturation of a corporation’s debts by the
inability of the debtor to pay these debts.

LAND BANK of the PHILIPPINES v. WEST BAY COLLEGES, INC., PBR MANAGEMENT and
DEVELOPMENT CORP. and BCP TRADING CO., INC.
G.R. No. 211287, April 17, 2017, Third Division, REYES, J.:

A belated application of the insurance proceeds to the obligations of West Bay or PBR and BCP would
violate the Stay Order dated July 10, 2002 issued by the RTC.

FACTS:

West Bay Colleges, Inc. (West Bay) applied for interim financing with Land Bank of the Philippines
(Land Bank) in the amount of ₱125 Million for the construction of a school building. PBR
Management and Development Corp. (PBR) also availed of a ₱100Million term loan from Land Bank
for which West Bay acted as an accommodation mortgagor by executing a chattel mortgage over
its training vessel as security for PBR’s loan.

In November 2000 the training vessel mortgaged to Land Bank sank during Typhoon Seniang and
the net proceeds of the insurance coverage in the amount of ₱21,980,000.00 were released to Land
Bank. In 2002 West Bay, PBR and BCP Trading Corp. (BCP) experienced financial difficulties and
requested that Land Bank restructure their loans. Under their restructuring agreements with Land
Bank executed on May 10, 2002, Land Bank would reimburse West Bay with the insurance proceeds
that Land Bank previously received. However, on June 28, 2002 West Bay and PRB filed for
corporate rehabilitation with the RTC-Muntinlupa City.

While the rehabilitation proceedings were ongoing, Lank Bank was substituted by the Philippine
Distressed Asset Asia Pacific (PDAAP), with the latter objecting the applying the insurance
proceeds to the loan of PBR. West Bay filed an Urgent Motion with the RTC claiming that although
the RTC approved the rehabilitation plans authorizing the application of the insurance proceeds to
the obligations of West Bay, it was never implemented. The RTC decided in favor of Land Bank due
to the alleged failure of West Bay to comply with the terms of the restructuring agreement. On
appeal to the Court of Appeals, the Court of Appeals decided in favor of West Bay since Land Bank
failed to apply the proceeds of the insurance in the context of the restructured loan.

ISSUE:

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Whether West Bay is entitled to the reimbursement of the proceeds and if such right has been fully
established so as to be compellable by Mandamus.

RULING:

The Supreme Court decided in favor of West Bay and PBR. As correctly pointed out by the Court of
Appeals, despite several amendments to the rehabilitation plan which repeatedly provided for the
application of the insurance proceeds to the debts of West Bay, then to PBR and BCP, there is no
showing that Land Bank complied with the rehabilitation plan and applied the amount of the
insurance proceeds to the loans.

A belated application of the insurance proceeds to the obligations of West Bay or PBR and BCP
would violate the Stay Order dated July 10, 2002 issued by the RTC. Section 6 of Rule 4 of the 2000
Interim Rules of Procedure on Corporate Rehabilitation, which was in force at the time of the filing
of the petition for corporate rehabilitation, provides:

SEC. 6. Stay Order. — If the court finds the petition to be sufficient in form and
substance, it shall, not later than five (5) days from the filing of the petition, issue
an Order (a) appointing a Rehabilitation Receiver and fixing his bond; (b) staying
enforcement of all claims, whether for money or otherwise and whether such
enforcement is by court action or otherwise, against the debtor, its guarantors and
sureties not solidarily liable with the debtor; (c) prohibiting the debtor from selling,
encumbering, transferring, or disposing in any manner any of its properties except
in the ordinary course of business; (d) prohibiting the debtor from making any
payment of its liabilities outstanding as at the date of filing of the
petition; (e) prohibiting the debtor's suppliers of goods or services from
withholding supply of goods and services in the ordinary course of business for as
long as the debtor makes payments for the services and goods supplied after the
issuance of the stay order; (f) directing the payment in full of all administrative
expenses incurred after the issuance of the stay order; (g) fixing the initial hearing
on the petition not earlier than forty-five (45) days but not later than sixty (60) days
from the filing thereof; (h) directing the petitioner to publish the Order in a
newspaper of general circulation in the Philippines once a week for two (2)
consecutive weeks; (i) directing all creditors and all interested parties (including the
Securities and Exchange Commission) to file and serve on the debtor a verified
comment on or opposition to the petition, with supporting affidavits and
documents, not later than ten (10) days before the date of the initial hearing and
putting them on notice that their failure to do so will bar them from participating
in the proceedings; and (j) directing the creditors and interested parties to secure
from the court copies of the petition and its annexes within such time as to enable
themselves to file their comment on or opposition to the petition and to prepare for
the initial hearing of the petition.

BUREAU of INTERNAL REVENUE, ASSISTANT COMMISSIONER ALFREDO v. MISAJON,

GROUP SUPERVISOR ROLANDO M. BALBIDO, and EXAMINER REYNANTE DP.
MARTIREZ v.LEPANTO CERAMICS, INC.
G.R. No. 224764, April 24, 2017, First Division, PERLAS-BERNABE, J.:

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The acts of sending a notice of informal conference and a Formal Letter of Demand during the
rehabilitation period are in clear defiance of the Commencement Order.

FACTS:

Lepanto Ceramics, Inc. (LCI) filed a petition for corporate rehabilitation. Finding the same to be
sufficient in form and substance, the Rehabilitation Court issued a Commencement Order dated
January 13, 2012 which, inter alia: (a) declared LCI to be under corporate rehabilitation; (b)
suspended all actions or proceedings, in court or otherwise, for the enforcement of claims against
LCI; (c) prohibited LCI from making any payment of its outstanding liabilities as of even date,
except as may be provided under RA 10142; and (d) directed the BIR to file and serve on LCI its
comment or opposition to the petition, or its claims against LCI.

BIR - personally and by publication - was notified of the rehabilitation proceedings involving LCI
and the issuance of the Commencement Order related thereto. Despite the foregoing, the BIR,
through Misajon, et al., still opted to send LCI: (a) a notice of informal informing the latter of its
deficiency internal tax liabilities for the Fiscal Year ending June 30, 2010; and (b) a Formal Letter of
Demand requiring LCI to pay deficiency taxes in the amount of ₱567,5 l 9,348.39, notwithstanding
the written reminder coming from LCI's court-appointed receiver of the pendency of rehabilitation
proceedings concerning LCI and the issuance of a commencement order.

ISSUE:

Whether or not Misajon, et al. defied the Commencement Order, hence guilty for indirect
contempt.

RULING:

YES. The acts of sending a notice of informal conference and a Formal Letter of Demand are part
and parcel of the entire process for the assessment and collection of deficiency taxes from a
delinquent taxpayer, - an action or proceeding for the enforcement of a claim which should have
been suspended pursuant to the Commencement Order. Unmistakably, Misajon, et al.'s foregoing
acts are in clear defiance of the Commencement Order.

Petitioners' insistence that: (a) Misajon, et al. only performed such acts to toll the prescriptive
period for the collection of deficiency taxes; and (b) to cite them in indirect contempt would unduly
interfere with their function of collecting taxes due to the government, cannot be given any
credence. They could have easily tolled the running of such prescriptive period, and at the same
time, perform their functions as officers of the BIR, without defying the Commencement Order and
without violating the laudable purpose of RA 10142 by simply ventilating their claim before the
Rehabilitation Court. After all, they were adequately notified of the LCI's corporate rehabilitation
and the issuance of the corresponding Commencement Order. In sum, it was improper for
Misajon, et al. to collect, or even attempt to collect, deficiency taxes from LCI outside of the
rehabilitation proceedings concerning the latter, and in the process, willfully disregard the
Commencement Order lawfully issued by the Rehabilitation Court. Hence, the RTC Br. 35 correctly
cited them for indirect contempt.

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PEOPLE of the PHILIPPINES v. ERVIN Y. MATEO, EVELYN E. MATEO,

CARMELITA B. GALVEZ, ROMEO L. ESTEBAN, GALILEO J. SAPORSANTOS
and NENITA S. SAPORSANTOS, ERVIN Y. MATEO
G.R. No. 210612, October 9, 2017, Second Division, PERALTA, J.:

The prosecution of the officers of the corporation has no bearing on the pending rehabilitation of
the corporation, especially since they are charged in their individual capacities.

FACTS:

In March 2001, private complainant Herminio Alcid, Jr. Herminio Jr.) met Geraldine
Alejandro (Geraldine) who introduced herself as the head of the Business Center of MMG
International Holdings Co., Ltd. (MMG). Alejandro presented a brochure showing MMG’s
investments and businesses in order to encourage Herminio Jr. to invest. The Articles of
Partnership of the corporation, as evidence of its registration with the SEC was also shown. The
Articles of Partnership showed accused-appellant as a general partner who has contributed
₱49,750,000.00 to MMG while the other accused were shown to be limited partners who have
contributed ₱50,000.00 each. On April 20, 2022, Alcid decided to invest ₱50,000. Subsequently,
all the interests and principal were promptly paid, which induced him to make a bigger
investment of ₱200,000 with his father, Herminio Sr. Private complainant’s sister, Melanie was
also convinced to make a ₱50,000 investment with MMG.

The private complainants' investments were covered by a notarized Memorandum of

Agreement (MOA), signed by accused-appellant, which stipulated, among others, that MMG was
being represented by its President, herein accused-appellant, and that the investors will be
earning 2.5% monthly interest income and commissions from the capital they have invested.
Subsequently, the complainants received several post-dated checks covering their investments.
However, when they tried to deposit the checks, their banks informed them that these were
dishonored because MMG's accounts in the bank from which the checks were drawn were already
closed. Their demands for payment as well as those of other investors were left unheeded.

Therefore, private complainants and other investors filed a complaint with the SEC. There, they
discovered that MMG was not a registered issuer of securities. The SEC forwarded their complaint
to the City Prosecutor of Makati wherein the accused-appellant, together with Evelyn E.Mateo,
Carmelita B. Galvez, Romeo L. Esteban, Galileo J. Saporsantos and Nenita S. Saporsantos were
charged with the crime of syndicated estafa. The Informations were similarly worded, except as
to the dates of the commission of the crime. Amended Informations were then made to reflect
the following line “being partners, officers, employees and/or agents of MMG, International
Holdings Company, Ltd.” Similar cases for estafa and syndicated estafa, totalling 209, were also
filed against the accused. Among the accused, only accused-appellant was arrested and when
arraigned on February 19, 2004, he pleaded not guilty to all the charges.

The RTC found the accused-appellant to be guilty and the CA affirmed in toto. One of the issues
raised by the appellant is whether the suspension of all claims as an incident to MMG Group of
Companies’ corporate rehabilitation also contemplate the suspension of criminal charges filed
against accused-appellant as an officer of the distressed corporation.

ISSUE:

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Whether or not criminal charges against corporate officers will be suspended pending
rehabilitation procedure.

RULING:

NO. Citing the case of Rosario v. Co, the Court said:

There is no reason why criminal proceedings should be suspended during corporate rehabilitation,
more so, since the prime purpose of the criminal action is to punish the offender in order to deter
him and others from committing the same or similar offense, to isolate him from society, reform
and rehabilitate him or, in general, to maintain social order. As correctly observed in Rosario, it
would be absurd for one who has engaged in criminal conduct could escape punishment by the
mere filing of a petition for rehabilitation by the corporation of which he is an officer.

The prosecution of the officers of the corporation has no bearing on the pending rehabilitation of
the corporation, especially since they are charged in their individual capacities. Such being the case,
the purpose of the law for the issuance of the stay order is not compromised, since the appointed
rehabilitation receiver can still fully discharge his functions as mandated by law. It bears to stress
that the rehabilitation receiver is not charged to defend the officers of the corporation. If there is
anything that the rehabilitation receiver might be remotely interested in is whether the court also
rules that petitioners are civilly liable. Such a scenario, however, is not a reason to suspend the
criminal proceedings, because as aptly discussed in Rosario, should the court prosecuting the
officers of the corporation find that an award or indemnification is warranted, such award would
fall under the category of claims, the execution of which would be subject to the stay order issued
by the rehabilitation court.

J. OTHER CORPORATIONS

JOSELITO HERNAND M. BUSTOS v. MILLIANS SHOE, INC., SPOUSES FERNANDO AND

AMELIA CRUZ, and the REGISTER OF DEEDS OF MARIKINA CITY
G.R. No. 185024, April 4, 2017, First Division, SERENO, CJ.:

To be a close corporation, courts must look into the articles of incorporation to find provisions
expressly stating that (l) the number of stockholders shall not exceed 20; or (2) a preemption of shares
is restricted in favor of any stockholder or of the corporation; or (3) the listing of the corporate stocks
in any stock exchange or making a public offering of those stocks is prohibited.

FACTS:

Spouses Cruz are the registered owners of a parcel of land. The said parcel of land secured several
mortgage liens for the account of MSI since they are also the stockholders and/or officers of MSI, a
close corporation.

On 6 January 2004, the property was levied for non-payment of real estate taxes. The Notice of Levy
was annotated on the title on 8 January 2004. On 14 October 2004, the City Treasurer of Marikina
auctioned off the property, with petitioner emerging as the winning bidder. The Spouses had until
October 15, 2005 within which to redeem the parcel of land.

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Meanwhile, notices of lis pendens were annotated on the title on 9 February 2005 indicating that
subject property was included in the rehabilitation proceedings for MSI; hence covered in the Stay
Order issued by the RTC dated 25 October 2004.

Petitioner moved for the exclusion of the subject property from the Stay Order. He claimed that
the lot belonged to the Spouses who were mere stockholders and officers of MSI. He argued that
since he had won the bidding of the property on 14 October 2004, or before the annotation of the
title on 9 February 2005, the auctioned property could no longer be part of the Stay Order. CA
however ruled that the subject property is answerable for the obligations of MSI since the spouses
are stockholders of a close corporation who, as such, are liable for its debts.

ISSUE:

Whether or not the properties of Spouses Cruz are answerable for the obligations of MSI.

RULING:

NO. In San Juan Structural and Steel Fabricators. Inc. v. Court of Appeals, this Court held that a
narrow distribution of ownership does not, by itself, make a close corporation. Courts must look
into the articles of incorporation to find provisions expressly stating that (l) the number of
stockholders shall not exceed 20; or (2) a preemption of shares is restricted in favor of any
stockholder or of the corporation; or (3) the listing of the corporate stocks in any stock exchange
or making a public offering of those stocks is prohibited. Here, there is no basis for finding that MSI
is a close corporation.

Furthermore, we find that the CA seriously erred in concluding that "in a close corporation, the
stockholders and/or officers usually manage the business of the corporation and are subject to all
liabilities of directors, i.e. personally liable for corporate debts and obligations."

However, Section 97 of the Corporation Code only specifies that "the stockholders of the
corporation shall be subject to all liabilities of directors." Nowhere in that provision do we find any
inference that stockholders of a close corporation are automatically liable for corporate debts and
obligations.

Parenthetically, only Section 100, paragraph 5, of the Corporation Code explicitly provides for
personal liability of stockholders of close corporation, viz:

Sec. 100. Agreements by stockholders. -

xxxx
5. To the extent that the stockholders are actively engaged in the management or
operation of the business and affairs of a close corporation, the stockholders shall be held
to strict fiduciary duties to each other and among themselves. Said stockholders shall
be personally liable for corporate torts unless the corporation has obtained reasonably
adequate liability insurance. (Emphasis supplied)

As can be read in that provision, several requisites must be present for its applicability. None of
these were alleged in the case of Spouses Cruz. Neither did the RTC or the CA explain the factual

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circumstances for this Court to discuss the personally liability of respondents to their creditors
because of corporate torts.

K. MERGER AND CONSOLIDATIONS

1. DEFINITION AND CONCEPT

BANK of COMMERCE v.HEIRS of RODOLFO DELA CRUZ

G.R. No. 211519, August 14, 2017, Third Division, BERSAMIN, J.:

The terms of merger between two corporations, when determinative of their joint or respective
liabilities towards third parties, cannot be assumed. The party alleging the corporations’ joint
liabilities should establish the allegation. Otherwise, the liabilities of each of them shall be separate.

FACTS:

Plaintiff Dela Cruz is the sole owner and proprietor of the Mamertha General Merchandising
(Mamertha), an entity engaged in sugar trading. He maintained a bank account with defendant
Panasia in the name of Mamertha General Merchandising.

Dela Cruz discovered that Panasia allowed his son, Allan Dela Cruz to withdraw money from the
said bank account without his consent. Upon discovery, he immediately instructed Panasia not to
allow his son to make any withdrawals from his bank account and even sent a letter stating therein
that his son, Allan Dela Cruz is neither authorized to make any withdrawal from his bank account
nor sign any check drawn against the bank account unless with his written/expressed consent or
authority. However, Panasia still allowed Allan to withdraw from complainant’s bank account in
the total amount of₱56,223,066.07.

Dela Cruz demanded from Panasia the restoration of the said amount to his bank account, but
Panasia failed to do so. He then filed a compaint for collection of sum of money and damages with
prayer for a writ of preliminary injunction and/or temporary restraining order against Panasia.
Meanwhile, the Bank of Commerce demanded payment from Dela Cruz in the amount of ₱27,
150,000.00, which is the amount of the loan Dela Cruz obtained from Panasia. Panasia has been
acquired by Bank of Commerce pursuant to a Purchase and Sale Agreement entered into between
the two banks.

Dela Cruz now offers to compensate or set off his secured loan obligation with the amount of
unauthorized withdrawals Panasia permitted his son.

ISSUE:

Whether or not petitioner bank is solidarily liable with Panasia for the latter’s negligence.

RULING:

NO, petitioner bank is not solidarily liable with Panasia for the latter’s negligence. The case is
against petitioner is dismissed for lack of cause of action.

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Section 34, Rule 132 of the Rules of Court commands that “the court shall consider no evidence
which has not been formally offered,” and that “the purpose for which the evidence is offered must
be specified.”

The exclusion of the Sale and Purchase Agreement from the body of evidence for consideration in
the resolution of the case caused a void in the link between the petitioner and Panasia necessary to
support the pronouncement of the personal liability of the petitioner for the negligence on the part
of Panasia. Verily, without the Sale and Purchase Agreement being admitted in evidence,
implicating the petitioner in the negligence of Panasia had no factual basis for the simple reason
that there was no showing at all of the petitioner having specifically merged with Panasia and
thereby assumed the latter’s liabilities.

Dela Cruz did not establish that the petitioner had assumed Panasia’s liabilities. The allegations of
his amended complaint, being averments of ultimate facts, did not constitute proof of his cause of
action against the petitioner. The merger of petitioner and Panasia cannot be taken judicial notice
of by the courts. The principal guide in determining what facts may be assumed to be judicially
known is that of notoriety. It was overly presumptuous for the RTC to thereby assume the merger
because the element of notoriety as basis for taking judicial notice of the merger was loudly lacking.
2. EFFECTS AND LIMITATIONS

SUMIFRU (PHILIPPINES) CORPORATION (SURVIVING ENTITY IN A MERGER WITH

DAVAO FRUITS CORPORATION AND OTHER COMPANIES) v. BERNABE BAYA
G.R. No. 188269, April 17, 2017, First Division, PERLAS-BERNABE, J.:

One of the effects of a merger is that the surviving company shall inherit not only the assets, but also
the liabilities of the corporation it merged with.

FACTS:

Baya has been employed by AMSFC since 1985. As a supervisor, Baya joined the union of
supervisors, and eventually, formed AMS Kapalong Agrarian Reform Beneficiaries Multipurpose
Cooperative (AMSKARBEMCO), the basic agrarian reform organization of the regular employees
of AMSFC. In 1999, Baya was reassigned to a series of supervisory positions in AMSFC's sister
company, DFC, where he also became a member of the latter's supervisory union while at the same
time, remaining active at AMSKARBEMCO.

In October 2001, the Agrarian Reform beneficiaries held a referendum in order to choose as to which
group between AMSKARBEMCO or SAFFPAI, an association of pro-company beneficiaries, they
wanted to belong; 280 went to AMSKARBEMCO while 85 joined SAFFPAI.Baya was repeatedly
summoned, and was told that he would be putting himself in a "difficult situation" if he will not
shift his loyalty to SAFFPAI; this notwithstanding, Baya politely refused to betray his cooperative.
A few days later, Baya received a letter stating that his secondment with DFC has ended, thus,
ordering his return to AMSFC. However, upon Baya's return to AMSFC, he was informed that there
were no supervisory positions available; thus, he was assigned to different rank-and-file positions
instead. Baya's written request to be restored to a supervisory position was denied, prompting him
to file the instant complaint in 2002. In 2008, during the pendency of the case, Sumifru Corporation
(Sumifru) acquired DFC via merger. It was held that AMSFC and DFC constructively dismissed
Baya.

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ISSUE:

Whether or not Sumifru should be held solidarily liable with AMSFC's for Baya's monetary awards

RULING:

YES. Sumifru, as the surviving entity in its merger with DFC, must be held answerable for the latter's
liabilities, including its solidary liability with AMSFC arising herein.

Section 80 of the Corporation Code of the Philippines clearly states that one of the effects of a
merger is that the surviving company shall inherit not only the assets, but also the liabilities of the
corporation it merged with, to wit:

Section 80. Effects of merger or consolidation. - The merger or consolidation shall have the following
effects:

1. The constituent corporations shall become a single corporation which, in case of merger,
shall be the surviving corporation designated in the plan of merger; and, in case of
consolidation, shall be the consolidated corporation designated in the plan of consolidation;

2. The separate existence of the constituent corporations shall cease, except that of the
surviving or the consolidated corporation;

3. The surviving or the consolidated corporation shall possess all the rights, privileges,
immunities and powers and shall be subject to all the duties and liabilities of a corporation
organized under this Code;

4. The surviving or the consolidated corporation shall thereupon and thereafter possess all the
rights, privileges, immunities and franchises of each of the constituent corporations; and all
property, real or personal, and all receivables due on whatever account, including
subscriptions to shares and other choses in action, and all and every other interest of, or
belonging to, or due to each constituent corporation, shall be deemed transferred to and
vested in such surviving or consolidated corporation without further act or deed; and

5. The surviving or consolidated corporation shall be responsible and liable for all the liabilities
and obligations of each of the constituent corporations in the same manner as if such surviving
or consolidated corporation had itself incurred such liabilities or obligations; and any pending
claim, action or proceeding brought by or against any of such constituent corporations may be
prosecuted by or against the surviving or consolidated corporation. The rights of creditors or
liens upon the property of any of such constituent corporations shall not be impaired by such
merger or consolidation.

Verily, jurisprudence states that "in the merger of two existing corporations, one of the corporations
survives and continues the business, while the other is dissolved and all its rights, properties and
liabilities are acquired by the surviving corporation," as in this case.

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V. BANKING LAWS

A. THE NEW CENTRAL BANK ACT (R.A. NO. 7653)

1. THE BSP AND BANKS IN DISTRESS
i. RECEIVERSHIP

CU v. SMALL BUSINESS GUARANTEE AND FINANCE CORP

G.R. No. 211222, August 7, 2017, First Division, CAGUIOA, J.:

A criminal case for violation of BP 22 against a bank placed under receivership by the Monetary Board
may be dismissed for the demandability of the obligation to be performed has been suspended.

FACTS:

Golden 7 Bank (G7 Bank) was granted a credit line worth Php 50 million by respondent Small
Business Guarantee and Finance Corp. The bank’s officers, herein petitioner Fidel Cu, Allan Cu and
others were made signatories to the loan documents including the postdated checks which were
issued in payment for the drawdowns on the credit line.

BSP placed G7 Bank under receivership by the Philippine Deposit Insurance Corporation (PDIC).
PDIC eventually took over the bank’s premises, per the closure order issued by the Monetary Board.
In effect, the Deputy Receiver of PDIC took over the bank and issued a cease and desist order which
allowed PDIC to close all of G7 Bank’s deposit accounts with other banks.

The postdated checks issued by Cu the matured and when SB Corp deposited the same to its
account with the LBP Makati Branch, they were all dishonored for the reason that the account was
already closed. SB Corp sent demand letters to Cu, demanding payment. Despite such, Cu failed to
comply thus SB Corp filed a criminal complaint against Cu and others for violation of BP 22. A
petition for assistance in the liquidation of G7 Bank’s assets was then filed by PDIC in the Naga City
court.

The MeTC dismissed the BP 22 cases, and the dismissal was upheld by the RTC, by the reason that
the appointment of a receiver operates to suspend the authority of the bank and its officers to
intermeddle with its own property and transfer its assets to make do the payment with SB Corp.
The CA reversed the ruling, hence Cu’s petition.

ISSUE:

Whether the criminal case for BP 22 against the bank officers should be dismissed due to the order
for receivership and despite a subsequent pending petition for assistance for liquidation.

RULING:

YES, the SC found that both the MeTC and the RTC acted correctly when it ordered the dismissal
of the BP 22 cases against Cu. The Court found that:

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(1) the closure of G7 Bank, placing it under receivership per Monetary Board Orders and
the filing of the petition for assistance in the liquidation proceedings effectively
suspended the demandabililty of the loan, thus the BP 22 case cannot proceed and was
properly dismissed; and

(2) the filing of a petition for assistance in liquidation by PDIC as receiver as a result of the
Monetary Bank’s order for closure made it legally impossible for Cu to comply with his
obligation with SB Corp, thus the filing was clearly in bad faith

It applied the doctrine in the case of Gidwani v. People, in which the demandability of the payment
for the embroidery services rendered by the exporter was “suspended” by an SEC order, which
ordered the account from which the payments were to be drawn against, to be closed, after the
exporter filed a petition for declaration of a state of suspension of payments.

“In other words, the SEC Order also created a suspensive condition. When a contract is
subject to a suspensive condition, its birth takes place or its effectivity commences only if
and when the event that constitutes the condition happens or is fulfilled. Thus, at the time
the payee presented the September and October 1997 checks for encashment, it had no right
to do so, as there was yet no obligation due from the exporter, through its President.”

“Consequently, because there was a suspension of the exporter's obligations, its President
may not be held liable for civil obligations of the corporation covered by the bank checks at
the time this case arose. However, it must be emphasized that the President's non-liability
should not prejudice the right of the payee to pursue its claim through the remedies
available to it, subject to the SEC proceedings regarding the application for corporate
rehabilitation.”

The Court pointed out that that G7 Bank was placed under receivership prior to the demand of the
payments. This means that when SB Corp. deposited the postdated checks, it was surely aware that
G7 Bank was already under receivership and PDIC had already taken over the bank by virtue of the
Monetary Board’s closure thereof. SB Corp clearly acted in bad faith because it was aware that it
was legally impossible for Cu to fund those checks on the dates indicated therein, which were all
past G7 Bank’s closure because all the bank accounts of G7 Bank were closed by PDIC.

Further, the effect of a petition for assistance in the liquidation of a cloased bank is that it gives the
liquidation court the exclusive jurisdiction to adjudicate disputed claims against the closed bank,
assist in the individual liabilities of the stockholders, directors, and officers, and decide on all other
issues as may be material to implement the distribution plan adopted by the PDIC for general
application to all closed banks.

Considering the amount to be received by SB Corp was not yet determine as the liquidation
proceeding was still pending, the debtor’s obligation to pay or perform is suspended. This however,
does not preclude the proper filing of claims in the liquidation proceedings.

APEX BANCRIGHTS HOLDINGS, INC., LEAD BANCFUND HOLDINGS, et

al., v. BANGKO SENTRAL NG PILIPINAS and PHILIPPINE DEPOSIT INSURANCE
CORPORATION,
G.R. No. 214866, October 2, 2017, Second Division, PERLAS-BERNABE, J.:

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The Monetary Board may summarily and without need for prior hearing forbid the institution from
doing business in the Philippines and designate the Philippine Deposit Insurance Corporation as
receiver of the banking institution.

FACTS:

EIB, entered into a three-way merger with Urban Bank, Inc. (UBI) and Urbancorp Investments,
Inc. (UII) in an attempt to rehabilitate UBI which was then under receivership. However, EIB then
encountered its own financial difficulties and failed to overcome those thus leading to PDIC
placing it under receivership pursuant to Section 30 of RA 7653 or the New Central Bank Act.
Accordingly, PDIC took over EIB. PDIC submitted its initial receivership report to the Monetary
Board which contained its finding that EIB can be rehabilitated or permitted to resume
business; provided, that a bidding for its rehabilitation would be conducted, and that the
following conditions would be met: (a) there are qualified interested banks that will comply with
the parameters for rehabilitation of a closed bank, capital strengthening, liquidity, sustainability
and viability of operations, and strengthening of bank governance; and (b) all parties (including
creditors and stockholders) agree to the rehabilitation and the revised payment terms and
conditions of outstanding liabilities.

A public bidding was scheduled by PDIC, but the same failed as no bid was submitted. A re-
bidding was then set which also did not materialize as no bids were submitted. Thereafter, PDIC
informed BSP that EIB can hardly be rehabilitated and so the Monetary Board directed PDIC to
proceed with the liquidation.

Petitioners, who are stockholders representing the majority stock of EIB, filed a petition
for certiorari before the CA challenging the Resolution of Liquidation. In essence, petitioners
blame PDIC for the failure to rehabilitate EIB, contending that PDIC: (a) imposed unreasonable
and oppressive conditions which delayed or frustrated the transaction between BDO and
EIB; (b) frustrated EIB's efforts to increase its liquidity when PDIC disapproved EIB's proposal to
sell its MRT bonds to a private third party and, instead, required EIB to sell the same to
government entities; (c) imposed impossible and unnecessary bidding requirements;
and (d) delayed the public bidding which dampened investors' interest.

In defense, PDIC countered that petitioners were already estopped from assailing the placement of
EIB under receivership and its eventual liquidation since they had already surrendered full control
of the bank to the BSP. For its part, BSP maintained that it had ample factual and legal bases to
order EIB's liquidation.

The CA ruled in favor of the BSP noting that nothing in the Section 30 of RA 7653requires the
Monetary Board to make its own independent factual determination on the bank's viability before
ordering its liquidation. The law only provides that the Monetary Board "shall notify in writing
the board of directors of its findings and direct the receiver to proceed with the liquidation of the
institution," which it did in this case.

ISSUE:

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Whether or not the monetary board did not gravely abuse its discretion when it directed the
PDIC to proceed with the liquidation of EIB.

RULING:

NO. As per Section 30 (c) of RA 7653 on the Proceedings in Receivership and Liquidation provides
that “the Monetary Board may summarily and without need for prior hearing forbid the institution
from doing business in the Philippines and designate the Philippine Deposit Insurance Corporation
as receiver of the banking institution”.

The receiver shall immediately gather and take charge of all the assets and liabilities of the
institution, administer the same for the benefit of its creditors, and exercise the general powers of
a receiver under the Revised Rules of Court. If the receiver determines that the institution cannot
be rehabilitated or permitted to resume business in accordance with the next preceding paragraph,
the Monetary Board shall notify in writing the board of directors of its findings and direct the
receiver to proceed with the liquidation of the institution.

The actions of the Monetary Board taken under this section or under Section 29 of this Act shall be
final and executory and may not be restrained or set aside by the court except on petition
for certiorari on the ground that the action taken was in excess of jurisdiction or with such grave
abuse of discretion as to amount to lack or excess of jurisdiction.

It is settled that "the power and authority of the Monetary Board to close banks and liquidate them
thereafter when public interest so requires is an exercise of the police power of the State. Police
power, however, is subject to judicial inquiry. It may not be exercised arbitrarily or unreasonably
and could be set aside if it is either capricious, discriminatory, whimsical, arbitrary, unjust, or is
tantamount to a denial of due process and equal protection clauses of the Constitution."

Here, there was no grave abuse of discretion. In an attempt to forestall EIB's liquidation,
petitioners insist that the Monetary Board must first make its own independent finding that the
bank could no longer be rehabilitated — instead of merely relying on the findings of the PDIC —
before ordering the liquidation of a bank. Such position is untenable.

As correctly held by the CA, nothing in Section 30 of RA 7653 requires the BSP, through the
Monetary Board, to make an independent determination of whether a bank may still be
rehabilitated or not. As expressly stated in the afore-cited provision, once the receiver determines
that rehabilitation is no longer feasible, the Monetary Board is simply obligated to: (a) notify in
writing the bank's board of directors of the same; and (b) direct the PDIC to proceed with
liquidation.

B. GENERAL BANKING LAW OF 2000 (R.A. No. 8791)

1. DILIGENCE REQUIRED OF BANKS

SPOUSES CRISTINO and EDNA CARBONELL v. METROPOLITAN BANK and TRUST

COMPANY
G.R. No. 178467, April 26, 2017, Third Division, BERSAMIN, J.:

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A bank cannot be held liable for damages resulting from the delivery to a depositor of fake dollar bills
if the bank had observed the proper protocols and procedures in handling US dollar bills and in
selecting and supervising its employees.

FACTS:

The Spouses Carbonell purchased from Metro Bank – Pateros Branch 10 pieces of US100 bills that
they would use for a trip to Thailand. While in Bangkok, the Sps. Carbonell exchanged 5 of the
US$100 bills but one bill was rejected as being “no good.” Subsequently, the Sps. Carbonell bought
jewelry using the 4 remaining US$100 bills but the next day the jewelry shop owner returned the 4
bills claiming they were counterfeit.

Upon their return to the Philippines, the Spouses Carbonell confronted the Manager of Metro Bank-
Pateros Branch but the latter insisted that the dollar bills she released to them were genuine as they
had come from Metro Bank’s head office. The dollar bills were submitted to the Bangko Sentral ng
Pilipinas who certified that the bills were “near perfect genuine notes.”

Metro Bank exerted efforts to amicably settle the matter but the Sps. Carbonell refused to accept
any offers. The Spouses Carbonell filed a suit for damages in the RTC alleging the humiliation and
embarrassment they suffered in Bankgok due to the counterfeit dollar bills. The RTC decided in
favor of the Spouses Carbonell and which decision was affirmed by the CA.

ISSUE:

Whether or not Metro Bank failed to exercise the degree of diligence required in handling the affairs
of its clients such that it can be liable not just for simple negligence but for misrepresentation and
bad faith amounting the fraud when it released counterfeit dollar bills to its clients.

RULING:

NO. The CA and RTC both found that Metro Bank had exercised the diligence required by law in
observing their standard operating procedures, in taking the necessary precautions for handling
the US dollar bills in question, and in selecting and supervising its employees.

It is significant to note that the Bangko Sentral ng Pilipinas certified that the falsity of the US dollar
notes in question, which were “near perfect genuine notes,” could be detected only with extreme
difficulty even with the exercise of due diligence.

The relationship between the Spouses Carbonell and Metro Bank was that of creditor-debtor. Even
if the law imposed a high standard on Metro Bank by virtue of the fiduciary nature of its banking
business, bad faith or gross negligence amounting to bad faith was absent. Hence, there was simply
no legal basis for holding Metro Bank liable for moral and exemplary damages.

Holding Metro Bank liable for damages in favor of the Spouses Carbonell would be highly
unwarranted in the absence of proof of bad faith, malice or fraud. That Metro Bank formally
apologized to them and even offered to reinstate the US$500 to their account, as well as give them
the all-expense-paid round trip ticket to Hong Kong as means to assuage their inconvenience, did

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not necessarily mean it was liable. In civil cases, an offer of compromise is not an admission of
liability, and is inadmissible as evidence against the offeror.

Although the Spouses Carbonell suffered humiliation from their unwitting use of the counterfeit
US dollar bills, Metro Bank, by virtue of its having observed the proper protocols and procedures
in handling the US dollar bills involved, did not violate any legal duty towards the Spouses
Carbonell. Being neither guilty of negligence nor remiss in its exercise of the degree of diligence
required by law or the nature of its obligation as a banking institution, Metro Bank can not liable
for damages. Given the situation is one of damnum absque injuria, the Spouses Carbonell could not
be compensated for the alleged damages they sustained.

VI. INTELLECTUAL PROPERTY CODE

A. PATENTS
1. REMEDY OF THE TRUE AND ACTUAL INVENTOR

DIVINA PALAO v. FLORENTINO III INTERNATIONAL, INC.,

G.R. No. 186967, January 18, 2017, Second Division, LEONEN, J.:

The Intellectual Property Office’s (“IPO”) own Regulations on Inter Partes Proceedings (which
governs petitions for cancellations of a mark, patent, utility model, industrial design, opposition to
registration of a mark and compulsory licensing, and which were in effect when respondent filed its
appeal) specify that the Intellectual Property Office "shall not be bound by the strict technical rules of
procedure and evidence.”

FACTS:

Florentino filed a Petition for Cancellation of utility model for a certain type of ceramic tile
installation. It claimed that the utility model was not original, new, or patentable, as it had been
publicly known or used in the Philippines and had even been the subject of several publications.
It added that it, as well as many others, had been using the utility model well before Palao's
application for a patent. The Bureau of Legal Affairs of the IPO denied the petition.

Therefore, Florentino appealed to the Office of the Director General of the IPO but this was
reversed by the CA. This appeal's Verification and Certification of Non-Forum Shopping was
signed by Atty. John Labsky P. Maximo (Atty. Maximo) of the firm Balgos and Perez. However,
Florentino failed to attach to its appeal a secretary's certificate or board resolution authorizing
Balgos and Perez to sign the Verification and Certification of Non-Forum Shopping. Thus, the
Office of the Director General issued the Order requiring Florentino to submit proof that Atty.
Maximo or Balgos and Perez was authorized to sign the Verification and Certification of Non-
Forum Shopping.Florentino filed a Compliance and submitted a copy of the Certificate executed
on August 15, 2008 by Florentino's Corporate Secretary, Melanie Marie A. C. Zosa-Tan, supposedly
showing its counsel's authority to sign. However, the IPO still dismissed Florentino’s appeal,
noting that the certificate. pertained to an August 14, 2008 Resolution issued by Florentino's
Board of Directors and reasoned that the same Certificate failed to establish the authority of
Florentino's counsel to sign the Verification and Certification of Non-Forum Shopping as of the

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date of the filing of Florentino's appeal (i.e., on July 30, 2008). The CA reversed the decision of the
IPO faulting the Director General for an overly strict application of procedural rules.

ISSUE:

Whether or not a certification of non-forum shopping is required to be attached to the appeal made
before the Office of the Director General of the IPO.

RULING:

YES. However, technical rules of procedure must be liberally applied to administrative bodies.

Section 4(e) of the IPO’s Uniform Rules on appeal explicitly requires that a Certification of Non-
forum Shopping be attached to an Appeal Memorandum.

However, this requirement notwithstanding, the IPO’s own Regulations on Inter

Partes Proceedings (which governs petitions for cancellations of a mark, patent, utility model,
industrial design, opposition to registration of a mark and compulsory licensing, and which were
in effect when respondent filed its appeal) specify that the Intellectual Property Office "shall not
be bound by the strict technical rules of procedure and evidence" as enunciated in Sec. 6, Rule 2
of these Regulations. This rule is in keeping with the general principle that administrative bodies
are not strictly bound by technical rules of procedure.

In conformity with this liberality, Section 5(b) of the IPO’s Uniform Rules on Appeal expressly
enables appellants, who failed to comply with Section 4's formal requirements, to subsequently
complete their compliance:
Section 5. Action on the Appeal Memorandum. — The Director General shall:
a) Order the adverse party if any, to file comment to the appeal memorandum
within thirty (30) days from notice and/or order the Bureau Director to file comment
and/or transmit the records within thirty (30) days from notice; or
b) Order the appellant/appellants to complete the formal requirements mentioned in
Section 4 hereof;
c) Dismiss the appeal for being patently without merit, Provided, that the dismissal
shall be outright if the appeal is not filed within the prescribed period or for failure
of the appellant to pay the required fee within the period of appeal. (Emphasis
supplied)

Given these premises, it was an error for the Director General of the IPO to have been so rigid in
applying a procedural rule and dismissing respondent's appeal.Also, unlike in judicial proceedings,
what is involved here is a quasi-judicial proceeding that is "unfettered by the strict application of
the technical rules of procedure imposed in judicial proceedings.”As pointed out by the CA,
respondent's counsel, Balgos and Perez, has been representing respondent (and signing documents
for it) "since the original Petition for Cancellation of Letter Patent No. UM-7789 was filed." Thus,
its act of signing for respondent, on appeal before the Director General of the IPO, was not an
aberration. It was a mere continuation of what it had previously done.

NOTE: The Court considered it permissible to set aside, pro hac vice, the procedural defect.

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B. TRADEMARKS
1. NON-REGISTRABLE MARKS

SOCIETE DES PRODUITS, NESTLE, S.A. v. PUREGOLD PRICE CLUB, INC.

G.R. No. 217194, September 6, 2017, CARPIO, Acting C.J.:

The word "COFFEE" cannot be exclusively appropriated by either Nestle or Puregold since it is generic
or descriptive of the goods they seek to identify.

FACTS:

Puregold filed an application for the registration of the trademark "COFFEE MATCH" for use on
coffee, tea, cocoa, sugar, artificial coffee, flour and preparations made from cereals, bread, pastry
and confectionery, and honey. However, Nestle opposed the same alleging that it is the exclusive
owner of the "COFFEE-MATE" trademark and that there is confusing similarity between its
"COFFEE-MATE" trademark and Puregold's "COFFEE MATCH" application. Nestle alleged that
"COFFEE-MATE" has been declared an internationally well-known mark and Puregold's use of
"COFFEE MATCH" would indicate a connection with the goods covered in Nestle's "COFFEE-
MATE" mark because of its distinct similarity.

ISSUE:

Whether or not there is confusing similarity between COFFEE MATCH and COFFEE-MATE.

RULING:

NO. The word "COFFEE" is the common dominant feature between Nestle's mark "COFFEE-MATE"
and Puregold's mark "COFFEE MATCH." However, following Section 123, paragraph (h) of R.A.
8293 which prohibits exclusive registration of generic marks, the word "COFFEE" cannot be
exclusively appropriated by either Nestle or Puregold since it is generic or descriptive of the goods
they seek to identify. In Asia Brewery, Inc. v. Court of Appeals, this Court held that generic or
descriptive words are not subject to registration and belong to the public domain. Consequently,
we must look at the word or words paired with the generic or descriptive word, in this particular
case "-MATE" for Nestle's mark and "MATCH" for Puregold's mark, to determine the distinctiveness
and registrability of Puregold's mark "COFFEE MATCH."

We agree with the findings of the BLA-IPO and ODG-IPO. The distinctive features of both marks
are sufficient to warn the purchasing public which are Nestle's products and which are Puregold's
products. While both "-MATE" and "MATCH" contain the same first three letters, the last two
letters in Puregold's mark, "C" and "H," rendered a visual and aural character that made it easily
distinguishable from Nestle's mark. Also, the distinctiveness of Puregold's mark with two separate
words with capital letters "C" and "M" made it distinguishable from Nestle's mark which is one word
with a hyphenated small letter "-m" in its mark. In addition, there is a phonetic difference in
pronunciation between Nestle's "-MATE" and Puregold's "MATCH." As a result, the eyes and ears
of the consumer would not mistake Nestle's product for Puregold's product. Accordingly, this Court
sustains the findings of the BLA-IPO and ODG-IPO that the likelihood of confusion between
Nestle's product and Puregold's product does not exist and upholds the registration of Puregold's
mark.

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C. TRADEMARKS
1. TEST TO DETERMINE CONFUSING SIMILARITY BETWEEN MARKS
i. DOMINANCY TEST

MANG INASAL PHILIPPINES, INC. v. IFP MANUFACTURING CORPORATION

G.R. No. 221717, June 19, 2017, Third Division, VELASCO, JR., J.:

Given that the "INASAL" element is, at the same time, the dominant and most distinctive feature of
the Mang Inasal mark, the said element's incorporation in the OK Hotdog Inasal mark, thus, has
the potential to project the deceptive and false impression that the latter mark is somehow linked or
associated with the former mark.

FACTS:

IFP Manufacturing Corporation filed an application for the registration of the mark "OK Hotdog
Inasal Cheese Hotdog Flavor Mark" which it intended to use on one of its curl snack products. This
was opposed by Mang Inasal Philippines, Inc. arguing that it is prohibited under Section 123. (d)(iii)
of RA 8293. Mang Inasal explained that (1) The OK Hotdog Inasal mark is similar to the Mang Inasal
mark. Both marks feature the same dominant element-i.e., the word "INASAL"-printed and stylized
in the exact same manner, viz: a. In both marks, the word "INASAL" is spelled using the same font
style and red color; b. In both marks, the word "INASAL" is placed inside the same black outline
and yellow background; and c. In both marks, the word "INASAL" is arranged in the same staggered
format; and (2) That he goods that the OK Hotdog Inasal mark intend to identify are also closely
related to the services represented by the Mang Inasal mark (i.e., fast food restaurants).

ISSUES:

1. Whether or not "OK Hotdog Inasal Cheese Hotdog Flavor Mark" is confusingly similar with
the Mang Inasal mark?
2. Whether or not the curl snack product is related to the restaurant services represented by
the Mang Inasal mark, in such a way that it may lead to a confusion of business

RULING:

1. YES.Applying the dominancy test, we hold that the OK Hotdog Inasal mark is a colorable
imitation of the Mang Inasal mark.

First. The fact that the conflicting marks have exactly the same dominant element is key. It is
undisputed that the OK Hotdog Inasal mark copied and adopted as one of its dominant features
the "INASAL" element of the Mang Inasal mark. Given that the "INASAL" element is, at the same
time, the dominant and most distinctive feature of the Mang Inasal mark, the said element's
incorporation in the OK Hotdog Inasal mark, thus, has the potential to project the deceptive and
false impression that the latter mark is somehow linked or associated with the former mark.

Second. The differences between the two marks are trumped by the overall impression created by
their similarity. The mere fact that there are other elements in the OK Hotdog Inasal mark that are

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not present in the Mang Inasal mark actually does little to change the probable public perception
that both marks are linked or associated. It is worth reiterating that the OK Hotdog Inasal mark
actually brandishes a literal copy of the most recognizable feature of the Mang Inasal mark. We
doubt that an average buyer catching a casual glimpse of the OK Hotdog Inasal mark would pay
more attention to the peripheral details of the said mark than it would to the mark's more
prominent feature, especially when the same invokes the distinctive feature of another more
popular brand. All in all, we find that the OK Hotdog Inasal mark is similar to the Mang Inasal
mark.

2. YES. The Court took into account the specific kind of restaurant business that the petitioner is
engaged in, the reputation of the petitioner's mark, and the particular type of curls sought to be
marketed.

First. Petitioner uses the Mang Inasal mark in connection with its restaurant services that is
particularly known for its chicken inasal, i.e., grilled chicken doused in a
special inasal marinade. The inasal marinade is different from the typical barbeque marinade and
it is what gives the chicken inasal its unique taste and distinct orange color. Inasal refers to the
manner of grilling meat products using an inasal marinade.

Second. The Mang Inasal mark has been used for petitioner's restaurant business since 2003. The
restaurant started in Iloilo but has since expanded its business throughout the country. Currently,
the Mang Inasal chain of restaurants has a total of 464 branches scattered throughout the nation's
three major islands. It is, thus, fair to say that a sizeable portion of the population is knowledgeable
of the Mang Inasal mark.

Third. Respondent, on the other hand, seeks to market under the OK Hotdog Inasal mark curl snack
products which it publicizes as having a cheese hotdog inasal flavor.

Accordingly, it is the fact that the underlying goods and services of both marks deal
with inasal and inasal-flavored products which ultimately fixes the relations between such goods
and services. Given the foregoing circumstances and the aforesaid similarity between the marks in
controversy, we are convinced that an average buyer who comes across the curls marketed under
the OK Hotdog Inasal mark is likely to be confused as to the true source of such curls. To our mind,
it is not unlikely that such buyer would be led into the assumption that the curls are of petitioner
and that the latter has ventured into snack manufacturing or, if not, that the petitioner has supplied
the flavorings for respondent's product. Either way, the reputation of petitioner would be taken
advantage of and placed at the mercy of respondent.

C. TRADEMARKS
2. RIGHTS CONFERRED BY REGISTRATION

EMERALD GARMENT MANUFACTURING CORPORATION v. H.D. LEE COMPANY, INC.

G.R. No. 210693, June 7, 2017, Third Division, REYES, J.:

It is a fundamental principle in Philippine Trademark Law that only the owner of a trademark is
entitled to register a mark in his/her name.

FACTS:

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H.D. Lee filed before the IPO an application for the registration of the trademark, "LEE & OGIVE
CURVE DESIGN" on jeans and pants at the time of the pendency of Emerald’s application for the
registration of the marks "DOUBLE CURVE LINES" and "DOUBLE REVERSIBLE WAVE LINE (Back
Pocket Design)." Emerald opposed H.D. Lee's application arguing that the approval of such will
violate the exclusive use of its marks, "DOUBLE REVERSIBLE WAVE LINE," and "DOUBLE CURVE
LINES," which it has been using on a line of clothing apparel since October 1, 1973 and 1980,
respectively. Further, H.D. Lee’s "LEE & OGIVE CURVE DESIGN' is confusingly similar or identical
with the "DOUBLE CURVE LINES' previously registered in Emerald's name.

On February 27, 2009, the then Director of Bureau of Legal Affairs (BLA) denied H.D. Lee's
application. However, on appeal, the Director General rendered on August 10, 2012 a
Decision reversing the findings of the Director of BLA. This was affirmed by the CA. Hence, this
Petition.

ISSUE:

Whether or not the trademark "LEE & OGIVE CURVE DESIGN" can be registered.

RULING:

NO. Emerald's application for the registration of its mark "DOUBLE CURVE LINES" had been
resolved with finality by the IPO's Director of the Bureau of Legal Affairs. Well-settled is the
principle that a decision that has acquired finality becomes immutable and unalterable and
may no longer be modified in any respect even if the modification is meant to correct erroneous
conclusions of fact or law and whether it will be made by the court that rendered it or by the highest
court of the land.

In that case, IPO Director of the Bureau of Legal Affairs ruled that H.D. Lee established neither its
ownership of the mark "LEE & OGIVE CUR VE DESIGN' nor its international reputation. It is a
fundamental principle in Philippine Trademark Law that only the owner of a trademark is entitled
to register a mark in his/her name and that the actual use in commerce in the Philippines is a
prerequisite to the acquisition of ownership over a trademark. Emerald adopted and has been using
in commerce since October 1, 1973, the trademark "DOUBLE REVERSIBLE WAVE LINE" together
with its other registered marks up to the present. Thus, Emerald has become the owner of the mark
"DOUBLE REVERSIBLE WAVE LINE" through continuous commercial use thereof. Moreover, the
near resemblance or confusing similarity between the competing marks of the parties is further
heightened by the fact that both marks are used on identical goods, particularly, on jeans and pants
falling under Class 25.

C. TRADEMARKS
3. INFRINGEMENT AND REMEDIES
i. TRADEMARK INFRINGEMENT

SERI SOMBOONSAKDIKULv. ORLANE S.A.

G.R. No. 188996, February 1, 2017, Third Division, JARDELEZA, J.:

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There is no colorable imitation between the marks LOLANE and ORLANE which would lead to any
likelihood of confusion to the ordinary purchasers.

FACTS:

On September 23, 2003, petitioner filed an application for registration of the mark LOLANE with
the IPO for goods classified under Class 3 (personal care products) of the International
Classification of Goods. Orlane S.A. filed an opposition to petitioner's application, on the ground
that the mark LOLANE was similar to ORLANE in presentation, general appearance and
pronunciation, and thus would amount to an infringement of its mark. Respondent alleged that: (1)
it was the rightful owner of the ORLANE mark which was first used in 1948; (2) the mark was earlier
registered in the Philippines on July 26, 1967 under Registration No. 129961 for the following
goods: perfumes, toilet water, face powders, lotions, essential oils, cosmetics, lotions for the hair,
etc.

In his answer, petitioner denied that the LOLANE mark was confusingly similar to the mark
ORLANE. He averred that he was the lawful owner of the mark LOLANE which he has used for
various personal care products sold worldwide. He alleged that the first worldwide use of the mark
was in Vietnam on July 4, 1995. Petitioner also alleged that he had continuously marketed and
advertised Class 3 products bearing LOLANE mark in the Philippines and in different parts of the
world and that as a result, the public had come to associate the mark with him as provider of quality
personal care products.

ISSUE:

Whether there is confusing similarity between ORLANE and LOLANE which would bar the
registration of LOLANE before the IPO.

RULING:

NO. There is no colorable imitation between the marks LOLANE and ORLANE which would lead
to any likelihood of confusion to the ordinary purchasers. Hence, the mark LOLANE is entitled to
registration.

Based on the distinct visual and aural differences between LOLANE and ORLANE, we find that
there is no confusing similarity between the two marks.

The suffix LANE is not the dominant feature of petitioner's mark. Neither can it be considered as
the dominant feature of ORLANE which would make the two marks confusingly similar.

First, an examination of the appearance of the marks would show that there are noticeable
differences in the way they are written or printed. There are visual differences between LOLANE
and ORLANE since the mark ORLANE is in plain block upper case letters while the mark LOLANE
was rendered in stylized word with the second letter L and the letter A co-joined.

Second, as to the aural aspect of the marks, LOLANE and ORLANE do not sound alike. Appeals to
the ear in pronouncing ORLANE and LOLANE are dissimilar. The first syllables of each
mark, i.e., OR and LO do not sound alike, while the proper pronunciation of the last syllable LANE

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— "LEYN" for LOLANE and "LAN" for ORLANE, being of French origin, also differ. We take
exception to the generalizing statement of the Director General, which was affirmed by the CA, that
Filipinos would invariably pronounce ORLANE as "ORLEYN." This is another finding of fact which
has no basis, and thus, justifies our reversal of the decisions of the IPO Director General and the
CA. While there is possible aural similarity when certain sectors of the market would pronounce
ORLANE as "ORLEYN," it is not also impossible that some would also be aware of the proper
pronunciation — especially since, as respondent claims, its trademark ORLANE has been sold in
the market for more than 60 years and in the Philippines, for more than 40 years.

Respondent failed to show proof that the suffix LANE has registered in the mind of consumers that
such suffix is exclusively or even predominantly associated with ORLANE products. Notably and as
correctly argued by petitioner, the IPO previously allowed the registration of the mark GIN LANE
for goods also falling under Class 3, i.e. perfume, cologne, skin care preparations, hair care
preparations and toiletries.

W LAND HOLDINGS, INC. v. STARWOOD HOTELS and RESORTS WORLDWIDE, INC.

G.R. No. 222366, December 4, 2017, Second Division, PERLAS-BERNABE, J.:

Goodwill is no longer confined to the territory of actual market penetration; it extends to zones where
the marked article has been fixed in the public mind through advertising. Whether in the print,
broadcast or electronic communications medium, particularly on the Internet, advertising has paved
the way for growth and expansion of the product by creating and earning a reputation that crosses
over borders, virtually turning the whole world into one vast marketplace.

FACTS:

On December 2, 2005, Starwood filed before the IPO an application for registration of the
trademark "W" for use in its hotel business which was eventually granted. However, on April 20,
2006, W Land appliedfor the registration of its own "W" mark which thereby prompted Starwood
to oppose the same.The BLA ruled that W Land's "W" mark is confusingly similar with Starwood's
mark, which had an earlier filing date. Unperturbed, on May 29, 2009, W Land filed a Petition for
Cancellation of Starwood's mark for non-use under Section 151.1 of the Intellectual Property Code
of the Philippines. claiming that Starwood has failed to use its mark in the Philippines because it
has no hotel or establishment in the Philippines rendering the services covered by its registration;
and that Starwood's "W" mark application and registration barred its own "'W" mark application
and registration for use on real estate.

In its defense, Starwood denied having abandoned the subject mark on the ground of non-use,
asserting that it filed with the Director of Trademarks a notarized Declaration of Actual
Use (DAU) with evidence of use on December 2, 2008, which was not rejected. Starwood also
argued that it conducts hotel and leisure business both directly and indirectly through subsidiaries
and franchisees, and operates interactive websites for its W Hotels in order to accommodate its
potential clients worldwide. According to Starwood, apart from viewing agents, discounts,
promotions, and other marketing fields being offered by it, these interactive websites allow
Philippine residents to make reservations and bookings, which presuppose clear and convincing
use of the "W'' mark in the Philippines.

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The BLA ruled in W Land’s favor, and accordingly ordered the cancellation of Starwood's
registration for the "W" mark. The BLA found that the DAU and the attachments thereto submitted
by Starwood did not prove actual use of the "W" mark in the Philippines, considering that the
"evidences of use" attached to the DAU refer to hotel or establishments that are located abroad. In
this regard, the BLA opined that "the use of a trademark as a business tool and as contemplated
under [Section 151.1 (c) of RA 8293] refers to the actual attachment thereof to goods and services
that are sold or availed of and located in the Philippines." On the other hand, the IPO DG granted
Starwood’s appeal. It held that the absence of any hotel or establishment owned by Starwood in the
Philippines bearing the "W" mark should not be equated to the absence of its use in the country,
opining that Starwood's pieces of evidence, particularly its interactive website, indicate actual use
in the Philippines, citing Rule 205of the Trademark Regulations, as amended by IPO Office Order
No. 056-13. The CA affirmed the IPO DG ruling.

ISSUE:

Whether the Starwood’s “W” mark should be cancelled.

RULING:

NO. The IP Code and the Trademark Regulations have not specifically defined "use." However, it is
understood that the "use" which the law requires to maintain the registration of a mark must be
genuine, and not merely token. Based on foreign authorities, genuine use may be characterized as
a bona fide use which results or tends to result, in one way or another, into a commercial interaction
or transaction "in the ordinary course of trade.

The Trademark Regulations was amended by Office Order No. 056-13. Particularly, Rule 205 now
mentions certain items which "shall be accepted as proof of actual use of the mark". Particularly,
downloaded pages from the website of the applicant or registrant clearly showing that the
goods are being sold or the services are being rendered in the Philippines as well as for
online sale, receipts of sale of the goods or services rendered or other similar evidence of
use, showing that the goods are placed on the market or the services are available in the
Philippines or that the transaction took place in the Philippines have now been recognized
as permissible proofs of use. The amended rules also state that “the Director may, from time to
time, issue a list of acceptable evidence of use and those that will not be accepted by the
Office.”Based on the amended Trademark Regulations, it is apparent that the IPO has now given
due regard to the advent of commerce on the internet.

Goodwill is no longer confined to the territory of actual market penetration; it extends to zones
where the marked article has been fixed in the public mind through advertising. Whether in the
print, broadcast or electronic communications medium, particularly on the Internet, advertising
has paved the way for growth and expansion of the product by creating and earning a reputation
that crosses over borders, virtually turning the whole world into one vast marketplace.

"Use" as contemplated by law is genuine use - that is, a bona fide kind of use tending towards a
commercial transaction in the ordinary course of trade. Since the internet creates a borderless
marketplace, it must be shown that the owner has actually transacted, or at the very least,
intentionally targeted customers of a particular jurisdiction in order to be considered as having
used the trade mark in the ordinary course of his trade in that country. A showing of an actual

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commercial link to the country is therefore imperative. The use of the mark on an interactive
website, for instance, may be said to target local customers when they contain specific details
regarding or pertaining to the target State, sufficiently showing an intent towards realizing a within-
State commercial activity or interaction. These details may constitute a local contact phone
number, specific reference being available to local customers, a specific local webpage, whether
domestic language and currency is used on the website, and/or whether domestic payment
methods are accepted.

In this case, Starwood has proven that it owns Philippine registered domain names, provides a
phone numberfor Philippine consumers, the prices for its hotel accommodations and/or services
can be converted into the local currency or the Philippine Peso, among others. Taken together,
these facts and circumstances show that Starwood's use of its "W" mark through its interactive
website is intended to produce a discernable commercial effect or activity within the Philippines,
or at the very least, seeks to establish commercial interaction with local consumers. Accordingly,
Starwood's use of the "W" mark in its reservation services through its website constitutes use of the
mark sufficient to keep its registration in force.

Finally, it deserves pointing out that Starwood submitted in 2008 its DAU with evidence of use
which the IPO, through its Director of Trademarks and later by the IPO DG in the January 10, 2014
Decision, had accepted and recognized as valid. The Court finds no reason to disturb this
recognition.

D. COPYRIGHTS
1. BASIC PRINCIPLES

FERNANDO JUAN v.ROBERTO JUAN

GR No. 221372, August 23 2017, Second Division, PERALTA, J.:

Though there was prior use of the name subject of the case, the Court found that as the name is subject
of the copyright law, it being used in a prior musical composition, the law on trade names does not
apply.

FACTS:

Respondent Roberto U. Juan claimed that he began using the name and mark "Lavandera Ko" in his
laundry business on July 4, 1994. He then opened his laundry store at No. 119 Alfaro St., Salcedo St.,
Makati City in 1995. Thereafter, on March 17, 1997, the National Library issued to him a certificate
of copyright over said name and mark.

Over the years, the laundry business expanded with numerous franchise outlets in Metro Manila
and other provinces. Respondent Roberto then formed a corporation to handle the said business,
hence, Laundromatic Corporation (Laundromatic) was incorporated in 1997, while "Lavandera Ko"
was registered as a business name on November 13, 1998 with the Department of Trade and Industry
(DTI).

Thereafter, respondent Roberto discovered that his brother, petitioner Fernando was able to
register the name and mark "Lavandera Ko" with the Intellectual Property Office (IPO) on October

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18, 2001, the registration of which was filed on June 5, 1995. Respondent Roberto also alleged that a
certain Juliano Nacino (Juliano) had been writing the franchisees of the former threatening them
with criminal and civil cases if they did not stop using the mark and name "Lavandera Ko." It was
found out by respondent Roberto that petitioner Fernando had been selling his own franchises.

Thus, respondent Roberto filed a petition for injunction, unfair competition, infringement of
copyright, cancellation of trademark and name with/and prayer for TRO and Preliminary
Injunction with the Regional Trial Court.

The RTC ruled however that neither of the parties had a right to the exclusive use or appropriation
of the mark "Lavandera Ko" because the same was the original mark and work of a certain Santiago
S. Suarez (Santiago). According to the RTC, the mark in question was created by Suarez in 1942 in
his musical composition called, "Lavandera Ko" and both parties of the present case failed to prove
that they were the originators of the same mark.

Petitioner then appealed to CA but the CA dismissed the case due to technical grounds. Petitioner
thus filed this petition for certiorari.

ISSUE:

Whether or not a mark is the same as a copyright; thus, the RTC was proper when it ruled that
neither of the parties had a right to the exclusive use of the mark “Lavandera Ko” because they
failed to prove they were the originators of the same mark.

RULING:

NO. The RTC erred.

"Lavandera Ko," the mark in question in this case is being used as a trade name or specifically, a
service name since the business in which it pertains involves the rendering of laundry services.

As such, the basic contention of the parties is, who has the better right to use "Lavandera Ko" as a
service name because Section 165.2 of RA 8293 of the said law, guarantees the protection of trade
names and business names even prior to or without registration, against any unlawful act
committed by third parties. A cause of action arises when the subsequent use of any third party of
such trade name or business name would likely mislead the public as such act is considered
unlawful. Hence, the RTC erred in denying the parties the proper determination as to who
has the ultimate right to use the said trade name by ruling that neither of them has the
right or a cause of action, since "Lavandera Ko" is protected by a copyright, and not a trade
name.

By their very definitions, copyright and trade or service name are different. Copyright is the right
of literary property as recognized and sanctioned by positive law. An intangible, incorporeal right
granted by statute to the author or originator of certain literary or artistic productions, whereby he
is invested, for a limited period, with the sole and exclusive privilege of multiplying copies of the
same and publishing and selling them. Trade name, on the other hand, is any designation which
(a) is adopted and used by person to denominate goods which he markets, or services which he
renders, or business which he conducts, or has come to be so used by other, and (b) through its

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association with such goods, services or business, has acquired a special significance as the name
thereof, and (c) the use of which for the purpose stated in (a) is prohibited neither by legislative
enactment nor by otherwise defined public policy.

Section 172.1(f) provides that “musical compositions, with or without words” are original intellectual
creations in the literary and artistic domain that are protected from the moment of their creation.
As such, "Lavandera Ko," being a musical composition with words is protected under the copyright
law and not under the trademarks, service marks and trade names law.

However, the Court cannot take judicial notice of the said composition without it being presented
in evidence. Thus the Court remanded the case to the RTC for its proper disposition since the
Supreme Court cannot, based on the records and some of the issues raised by both parties such as
the cancellation of petitioner's certificate of registration issued by the Intellectual Property Office,
make a factual determination as to who has the better right to use the trade/business/service name,
"Lavandera Ko."

VII. SPECIAL LAWS

A. ANTI-MONEY LAUNDERING ACT (R.A. No. 9160, AS AMENDED BY R.A. No. 9194)
1. UNLAWFUL ACTIVITIES OR PREDICATE CRIMES

REPUBLIC OF THE PHILIPPINES, represented by the ANTI-MONEY LAUNDERING

COUNCIL v.JOCELYN I. BOLANTE, OWEN VINCENT D. BOLANTE, MA. CAROL D.
BOLANTE, ALEJO LAMERA, CARMEN LAMERA, EDNA CONSTANTINO, ARIEL C.
PANGANIBAN, KATHERINE G. BOMBEO, SAMUEL S. BOMBEO, MOLUGAN
FOUNDATION, SAMUEL G. BOMBEO, JR., and NATIONAL LIVELIHOOD DEVELOPMENT
CORPORATION (Formerly Livelihood Corporation)
G.R. No. 186717, April 17, 2017, First Division, SERENO, CJ.:

For the trial court to issue a bank inquiry order, it is necessary for the AMLC to be able to show specific
facts and circumstances that provide a link between an unlawful activity or a money laundering
offense, on the one hand, and the account or monetary instrument or property sought to be examined
on the other hand.

FACTS:

In April 2005, the Philippine National Bank (PNB) submitted to the Anti-Money Laundering
Council (AMLC) a series of suspicious transaction reports involving the accounts of Livelihood
LIVECOR, Molugan, and AGS. According to the reports, LIVECOR transferred to Molugan a total
amount of' ₱172.6 million in a span of 15 months from 2004 to 2005 and ₱40 million to AGS, which
received another ₱38 million from Molugan on the same day. Curiously, AGS returned the ₱38
million to Molugan also on the same day.

The transactions were reported '"suspicious" because they had no underlying legal or trade
obligation, purpose or economic justification; nor were they commensurate to the business or
financial capacity of Molugan and AGS, which were both lowly capitalized at ₱50,000 each.

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The AMLC issued Resolution No. 75 finding probable cause to believe that the accounts of
LIVECOR, Molugan and AGS - the subjects of the suspicious transaction reports submitted by PNB
- were related to what became known as the "fertilizer fund scam." However, the RTC found no
probable cause to believe that the deposits and investments of respondents were related to an
unlawful activity.

ISSUE:

Whether the RTC committed grave abuse of discretion in ruling that there exists no probable cause
to allow an inquiry into the total of 76 deposits and investments of respondents.

RULING:

NO. The RTC did not commit grave abuse of discretion. The court receiving the application for
inquiry order cannot simply take the AMLC's word that probable cause exists that the deposits or
investments are related to an unlawful activity. It will have to exercise its own determinative
function in order to be convinced of such fact.

For the trial court to issue a bank inquiry order, it is necessary for the AMLC to be able to show
specific facts and circumstances that provide a link between an unlawful activity or a money
laundering offense, on the one hand, and the account or monetary instrument or property sought
to be examined on the other hand. In this case, the RTC found the evidence presented by the AMLC
wanting. For its part, the latter insists that the RTC's determination was tainted with grave abuse
of discretion for ignoring the glaring existence of probable cause that the subject bank deposits and
investments were related to an unlawful activity.

As it stands, the evidence relied upon by the AMLC in 2006 was still the same evidence it used to
apply for a bank inquiry order in 2008. Regrettably, this evidence proved to be insufficient when
weighed against that presented by the respondents, who were given notice and the opportunity to
contest the issuance of the bank inquiry order.

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