siRepublic of the Philippines

Supreme Court
Manila
THIRD DIVISION

DONNINA C. HALLEY, G.R. No. 157549

Petitioner,
Present:

CARPIO MORALES, Chairperson,

BRION,
-versus- BERSAMIN,
VILLARAMA, JR., and
SERENO, JJ.

Promulgated:
PRINTWELL, INC.,
Respondent. May 30, 2011
x-----------------------------------------------------------------------------------------x

DECISION

BERSAMIN, J:

Stockholders of a corporation are liable for the debts of the corporation up to the
extent of their unpaid subscriptions. They cannot invoke the veil of corporate
identity as a shield from liability, because the veil may be lifted to avoid defrauding
corporate creditors.

Weaffirm with modification the decisionpromulgated on August 14,

[1]
2002, whereby the Court of Appeals(CA) upheld thedecision of the Regional Trial
Court, Branch 71, in Pasig City (RTC),[2]ordering the defendants (including the
petitioner)to pay to Printwell, Inc. (Printwell) the principal sum of P291,342.76 plus
interest.
 Antecedents

The petitioner wasan incorporator and original director of Business Media

Philippines, Inc. (BMPI), which, at its incorporation on November 12, 1987, [3]had
an authorized capital stock of P3,000,000.00 divided into 300,000 shares each with
a par value of P10.00,of which 75,000 were initially subscribed, to wit:

Subscriber No. of shares Total subscription Amount paid

Donnina C. Halley 35,000 P 350,000.00 P87,500.00
Roberto V. Cabrera, Jr. 18,000 P 180,000.00 P45,000.00
Albert T. Yu 18,000 P 180,000.00 P45,000.00
Zenaida V. Yu 2,000 P 20,000.00 P5,000.00
Rizalino C. Vineza 2,000 P 20,000.00 P5,000.00
TOTAL 75,000 P750,000.00 P187,500.00

Printwellengaged in commercial and industrial printing.BMPI commissioned

Printwell for the printing of the magazine Philippines, Inc. (together with wrappers
and subscription cards) that BMPI published and sold. For that purpose,
Printwell extended 30-day credit accommodations to BMPI.

In the period from October 11, 1988 until July 12, 1989, BMPI placedwith
Printwell several orders on credit, evidenced byinvoices and delivery receipts
totalingP316,342.76.Considering that BMPI paidonlyP25,000.00,Printwell
suedBMPIon January 26, 1990 for the collection of the unpaid balance
of P291,342.76 in the RTC.[4]

On February 8, 1990,Printwell amended thecomplaint in order to implead as

defendants all the original stockholders and incorporators to recover on theirunpaid
subscriptions, as follows:[5]

Name Unpaid Shares

Donnina C. Halley P 262,500.00
Roberto V. Cabrera, Jr. P135,000.00
Albert T. Yu P135,000.00
Zenaida V. Yu P15,000.00
Rizalino C. Vieza P15,000.00
TOTAL P 562,500.00
The defendants filed a consolidated answer,[6]averring that they all had paid their
subscriptions in full; that BMPI had a separate personality from those of its
stockholders; thatRizalino C. Vieza had assigned his fully-paid up sharesto a certain
Gerardo R. Jacinto in 1989; andthat the directors and stockholders of BMPI had
resolved to dissolve BMPI during the annual meetingheld on February 5, 1990.

To prove payment of their subscriptions, the defendantstockholderssubmitted in

evidenceBMPI official receipt (OR) no. 217, OR no. 218, OR no. 220,OR no. 221,
OR no. 222, OR no. 223, andOR no. 227,to wit:

Receipt No. Date Name Amount

217 November 5, 1987 Albert T. Yu P 45,000.00
218 May 13, 1988 Albert T. Yu P 135,000.00
220 May 13, 1988 Roberto V. Cabrera, Jr. P 135,000.00
221 November 5, 1987 Roberto V. Cabrera, Jr. P 45,000.00
222 November 5, 1987 Zenaida V. Yu P 5,000.00
223 May 13, 1988 Zenaida V. Yu P 15,000.00
227 May 13, 1988 Donnina C. Halley P 262,500.00

In addition, the stockholderssubmitted other documentsin evidence, namely:(a) an

audit report dated March 30, 1989 prepared by Ilagan, Cepillo & Associates
(submitted to the SEC and the BIR);[7](b) BMPIbalance sheet[8] and income
statement[9]as of December 31, 1988; (c) BMPI income tax return for the year 1988
(stamped received by the BIR);[10](d) journal vouchers;[11](e) cash deposit
slips;[12] and(f)Bank of the Philippine Islands (BPI) savings account passbookin the
name of BMPI.[13]

Ruling of the RTC

On November 3, 1993, the RTC rendereda decision in favor of Printwell, rejecting

the allegation of payment in full of the subscriptions in view of an irregularity in the
issuance of the ORs and observingthat the defendants had used BMPIs corporate
personality to evade payment and create injustice, viz:
 The claim of individual defendants that they have fully paid their
subscriptions to defend[a]nt corporation, is not worthy of consideration, because:

a) in the case of defendants-spouses Albert and Zenaida Yu, it will be noted

that the alleged payment made on May 13, 1988 amounting to P135,000.00,
is covered by Official Receipt No. 218 (Exh. 2), whereas the alleged
payment made earlier on November 5, 1987, amounting to P5,000.00, is
covered by Official Receipt No. 222 (Exh. 3). This is cogent proof that said
receipts were belatedly issued just to suit their theory since in the ordinary
course of business, a receipt issued earlier must have serial
numbers lower than those issued on a later date. But in the case at bar, the
receipt issued on November 5, 1987 has serial numbers (222) higher than
those issued on a later date (May 13, 1988).

b) The claim that since there was no call by the Board of Directors of
defendant corporation for the payment of unpaid subscriptions will not be a
valid excuse to free individual defendants from liability. Since the
individual defendants are members of the Board of Directors of
defendantcorporation, it was within their exclusive power to prevent the
fulfillment of the condition, by simply not making a call for the payment of
the unpaid subscriptions. Their inaction should not work to their benefit and
unjust enrichment at the expense of plaintiff.
Assuming arguendo that the individual defendants have paid their unpaid
subscriptions, still, it is very apparent that individual defendants merely used the
corporate fiction as a cloak or cover to create an injustice; hence, the alleged
separate personality of defendant corporation should be disregarded (Tan Boon Bee
& Co., Inc. vs. Judge Jarencio, G.R. No. 41337, 30 June 1988).[14]
Applying the trust fund doctrine, the RTC declared the defendant stockholders liable
to Printwell pro rata, thusly:

Defendant Business Media, Inc. is a registered corporation (Exhibits A, A-1

to A-9), and, as appearing from the Articles of Incorporation, individual defendants
have the following unpaid subscriptions:
Names Unpaid Subscription
Donnina C. Halley P262,500.00
Roberto V. Cabrera, Jr. 135.000.00
Albert T. Yu 135,000.00
Zenaida V. Yu 15,000.00
Rizalino V. Vineza 15,000.00
--------------------
Total P562,500.00

and it is an established doctrine that subscriptions to the capital stock of a

corporation constitute a fund to which creditors have a right to look for satisfaction
of their claims (Philippine National Bank vs. Bitulok Sawmill, Inc., 23 SCRA 1366)
and, in fact, a corporation has no legal capacity to release a subscriber to its capital
 stock from the obligation to pay for his shares, and any agreement to this effect is
invalid (Velasco vs. Poizat, 37 Phil. 802).

The liability of the individual stockholders in the instant case shall be pro-
rated as follows:

Names Amount
Donnina C. Halley P149,955.65
Roberto V. Cabrera, Jr. 77,144.55
Albert T. Yu 77,144.55
Zenaida V. Yu 8,579.00
Rizalino V. Vineza 8,579.00
------------------
Total P321,342.75[15]

The RTC disposed as follows:

WHEREFORE, judgment is hereby rendered in favor of plaintiff and against
defendants, ordering defendants to pay to plaintiff the amount of P291,342.76, as
principal, with interest thereon at 20% per annum, from date of default, until fully
paid, plus P30,000.00 as attorneys fees, plus costs of suit.

Defendants counterclaims are ordered dismissed for lack of merit.

SO ORDERED.[16]

Ruling of the CA

All the defendants, except BMPI, appealed.

Spouses Donnina and Simon Halley, andRizalinoVieza defined the following

errors committed by the RTC, as follows:

I.
THE TRIAL COURT ERRED IN HOLDING APPELLANTS-STOCKHOLDERS
LIABLE FOR THE LIABILITIES OF THE DEFENDANT CORPORATION.

II.
ASSUMING ARGUENDO THAT APPELLANTS MAY BE LIABLE TO THE
EXTENT OF THEIR UNPAID SUBSCRIPTION OF SHARES OF STOCK, IF
ANY, THE TRIAL COURT NONETHELESS ERRED IN NOT FINDING THAT
APPELLANTS-STOCKHOLDERS HAVE, AT THE TIME THE SUIT WAS
FILED, NO SUCH UNPAID SUBSCRIPTIONS.
On their part, Spouses Albert and Zenaida Yu averred:

I.
THE RTC ERRED IN REFUSING TO GIVE CREDENCE AND WEIGHT TO
DEFENDANTS-APPELLANTS SPOUSES ALBERT AND ZENAIDA YUS
EXHIBITS 2 AND 3 DESPITE THE UNREBUTTED TESTIMONY THEREON
BY APPELLANT ALBERT YU AND THE ABSENCE OF PROOF
CONTROVERTING THEM.

II.
THE RTC ERRED IN HOLDING DEFENDANTS-APPELLANTS SPOUSES
ALBERT AND ZENAIDA YU PERSONALLY LIABLE FOR THE
CONTRACTUAL OBLIGATION OF BUSINESS MEDIA PHILS., INC.
DESPITE FULL PAYMENT BY SAID DEFENDANTS-APPELLANTS OF
THEIR RESPECTIVE SUBSCRIPTIONS TO THE CAPITAL STOCK OF
BUSINESS MEDIA PHILS., INC.

Roberto V. Cabrera, Jr. argued:

I.
IT IS GRAVE ERROR ON THE PART OF THE COURT A QUO TO APPLY
THE DOCTRINE OF PIERCING THE VEIL OF CORPORATE PERSONALITY
IN ABSENCE OF ANY SHOWING OF EXTRA-ORDINARY
CIRCUMSTANCES THAT WOULD JUSTIFY RESORT THERETO.

II.
IT IS GRAVE ERROR ON THE PART OF THE COURT A QUO TO RULE
THAT INDIVIDUAL DEFENDANTS ARE LIABLE TO PAY THE PLAINTIFF-
APPELLEES CLAIM BASED ON THEIR RESPECTIVE SUBSCRIPTION.
NOTWITHSTANDING OVERWHELMING EVIDENCE SHOWING FULL
SETTLEMENT OF SUBSCRIBED CAPITAL BY THE INDIVIDUAL
DEFENDANTS.

On August 14, 2002, the CA affirmed the RTC, holding that the defendants resort to
the corporate personality would createan injustice becausePrintwell would thereby
be at a loss against whom it would assert the right to collect, viz:

Settled is the rule that when the veil of corporate fiction is used as a means of
perpetrating fraud or an illegal act or as a vehicle for the evasion of an existing
obligation, the circumvention of statutes, the achievements or perfection of
monopoly or generally the perpetration of knavery or crime, the veil with which the
 law covers and isolates the corporation from the members or stockholders who
compose it will be lifted to allow for its consideration merely as an aggregation of
individuals (First Philippine International Bank vs. Court of Appeals, 252 SCRA
259). Moreover, under this doctrine, the corporate existence may be disregarded
where the entity is formed or used for non-legitimate purposes, such as to evade a
just and due obligations or to justify wrong (Claparols vs. CIR, 65 SCRA 613).

In the case at bench, it is undisputed that BMPI made several orders on credit from
appellee PRINTWELL involving the printing of business magazines, wrappers and
subscription cards, in the total amount of P291,342.76 (Record pp. 3-5, Annex A)
which facts were never denied by appellants stockholders that they owe appellee
the amount of P291,342.76. The said goods were delivered to and received by
BMPI but it failed to pay its overdue account to appellee as well as the interest
thereon, at the rate of 20% per annum until fully paid. It was also during this time
that appellants stockholders were in charge of the operation of BMPI despite the
fact that they were not able to pay their unpaid subscriptions to BMPI yet greatly
benefited from said transactions. In view of the unpaid subscriptions, BMPI failed
to pay appellee of its liability, hence appellee in order to protect its right can collect
from the appellants stockholders regarding their unpaid subscriptions. To deny
appellee from recovering from appellants would place appellee in a limbo on where
to assert their right to collect from BMPI since the stockholders who are appellants
herein are availing the defense of corporate fiction to evade payment of its
obligations.[17]

Further, the CA concurred with the RTC on theapplicability of thetrust fund

doctrine, under which corporate debtors might look to the unpaid subscriptions for
the satisfaction of unpaid corporate debts, stating thus:

It is an established doctrine that subscription to the capital stock of a corporation

constitute a fund to which creditors have a right to look up to for satisfaction of
their claims, and that the assignee in insolvency can maintain an action upon any
unpaid stock subscription in order to realize assets for the payment of its debts (PNB
vs. Bitulok Sawmill, 23 SCRA 1366).

Premised on the above-doctrine, an inference could be made that the funds, which
consists of the payment of subscriptions of the stockholders, is where the creditors
can claim monetary considerations for the satisfaction of their claims. If these funds
which ought to be fully subscribed by the stockholders were not paid or remain an
unpaid subscription of the corporation then the creditors have no other recourse to
collect from the corporation of its liability. Such occurrence was evident in the case
at bar wherein the appellants as stockholders failed to fully pay their unpaid
subscriptions, which left the creditors helpless in collecting their claim due to
insufficiency of funds of the corporation. Likewise, the claim of appellants that they
already paid the unpaid subscriptions could not be given weight because said
payment did not reflect in the Articles of Incorporations of BMPI that the unpaid
 subscriptions were fully paid by the appellants stockholders. For it is a rule that a
stockholder may be sued directly by creditors to the extent of their unpaid
subscriptions to the corporation (Keller vs. COB Marketing, 141 SCRA 86).

Moreover, a corporation has no power to release a subscription or its capital stock,

without valuable consideration for such releases, and as against creditors, a
reduction of the capital stock can take place only in the manner and under the
conditions prescribed by the statute or the charter or the Articles of Incorporation.
(PNB vs. Bitulok Sawmill, 23 SCRA 1366).[18]

The CAdeclared thatthe inconsistency in the issuance of the ORs rendered the claim
of full payment of the subscriptions to the capital stock unworthy of consideration;
andheld that the veil of corporate fiction could be pierced when it was used as a
shield to perpetrate a fraud or to confuse legitimate issues, to wit:

Finally, appellants SPS YU, argued that the fact of full payment for the unpaid
subscriptions was incontrovertibly established by competent testimonial and
documentary evidence, namely Exhibits 1, 2, 3 & 4, which were never disputed by
appellee, clearly shows that they should not be held liable for payment of the said
unpaid subscriptions of BMPI.

The reliance is misplaced.

We are hereby reproducing the contents of the above-mentioned exhibits, to

wit:

Exh: 1 YU Official Receipt No. 217 dated November 5, 1987 amounting

to P45,000.00 allegedly representing the initial payment of subscriptions of
stockholder Albert Yu.
Exh: 2 YU Official Receipt No. 218 dated May 13, 1988 amounting
to P135,000.00 allegedly representing full payment of balance of
subscriptions of stockholder Albert Yu. (Record p. 352).
Exh: 3 YU Official Receipt No. 222 dated November 5, 1987 amounting
to P5,000.00 allegedly representing the initial payment of subscriptions of
stockholder Zenaida Yu.
Exh: 4 YU Official Receipt No. 223 dated May 13, 1988 amounting
to P15,000.00 allegedly representing the full payment of balance of
subscriptions of stockholder Zenaida Yu. (Record p. 353).

Based on the above exhibits, we are in accord with the lower courts findings
that the claim of the individual appellants that they fully paid their subscription to
the defendant BMPI is not worthy of consideration, because, in the case of
appellants SPS. YU, there is an inconsistency regarding the issuance of the official
 receipt since the alleged payment made on May 13, 1988 amounting to P135,000.00
was covered by Official Receipt No. 218 (Record, p. 352), whereas the alleged
payment made earlier on November 5, 1987 amounting to P5,000.00 is covered by
Official Receipt No. 222 (Record, p. 353). Such issuance is a clear indication that
said receipts were belatedly issued just to suit their claim that they have fully paid
the unpaid subscriptions since in the ordinary course of business, a receipt is issued
earlier must have serial numbers lower than those issued on a later date. But in the
case at bar, the receipt issued on November 5, 1987 had a serial number (222)
higher than those issued on May 13, 1988 (218). And even assuming arguendo that
the individual appellants have paid their unpaid subscriptions, still, it is very
apparent that the veil of corporate fiction may be pierced when made as a shield to
perpetuate fraud and/or confuse legitimate issues. (Jacinto vs. Court of Appeals,
198 SCRA 211).[19]

Spouses Halley and Vieza moved for a reconsideration, but the CA denied
their motion for reconsideration.

Issues

Only Donnina Halley has come to the Court to seek a further review, positing
the following for our consideration and resolution, to wit:

I.
THE COURT OF APPEALS ERRED IN AFFIRMING IN TOTO THE DECISION
THAT DID NOTSTATE THE FACTS AND THE LAW UPON WHICH THE
JUDGMENT WAS BASED BUT MERELY COPIED THE CONTENTS OF
RESPONDENTS MEMORANDUM ADOPTING THE SAME AS THE REASON
FOR THE DECISION

II.
THE COURT OF APPEALS ERRED IN AFFIRMING THE DECISION OF THE
REGIONAL TRIAL COURT WHICH ESSENTIALLY ALLOWED THE
PIERCING OF THE VEIL OF CORPORATE FICTION

III.
THE HONORABLE COURT OF APPEALS ERRED IN APPLYING THE
TRUST FUND DOCTRINE WHEN THE GROUNDS THEREFOR HAVE NOT
BEEN SATISFIED.
On the first error, the petitioner contends that the RTC lifted verbatim from the
memorandum of Printwell; and submits that the RTCthereby violatedthe
requirement imposed in Section 14, Article VIII of the Constitution[20] as well as in
Section 1,Rule 36 of the Rules of Court,[21]to the effect that a judgment or final order
of a court should state clearly and distinctly the facts and the law on which it is based.
The petitioner claims that the RTCs violation indicated that the RTC did not analyze
the case before rendering its decision, thus denying her the opportunity to analyze
the decision; andthat a suspicion of partiality arose from the fact that the RTC
decision was but a replica of Printwells memorandum.She cites Francisco v.
Permskul,[22] in which the Court has stated that the reason underlying the
constitutional requirement, that every decision should clearly and distinctly state the
facts and the law on which it is based, is to inform the reader of how the court has
reached its decision and thereby give the losing party an opportunity to study and
analyze the decision and enable such party to appropriately assign the errors
committed therein on appeal.

On the second and third errors, the petitioner maintains that the CA and the RTC
erroneously pierced the veil of corporate fiction despite the absence of cogent proof
showing that she, as stockholder of BMPI, had any hand in transacting with
Printwell; thatthe CA and the RTC failed to appreciate the evidence that she had
fully paid her subscriptions; and the CA and the RTCwrongly relied on the articles
of incorporation in determining the current list of unpaid subscriptions despite
the articles of incorporationbeing at best reflectiveonly of the pre-incorporation
status of BMPI.

As her submissions indicate, the petitioner assails the decisions of the CA on: (a) the
propriety of disregarding the separate personalities of BMPI and its stockholdersby
piercing the thin veil that separated them; and (b) the application of the trust fund
doctrine.

Ruling

The petition for review fails.

 I
The RTC did not violate
the Constitution and the Rules of Court

The contention of the petitioner, that the RTC merely copied the
memorandum of Printwell in writing its decision, and did not analyze the records on
its own, thereby manifesting a bias in favor of Printwell, is unfounded.

It is noted that the petition for review merely generally alleges that starting
from its page 5, the decision of the RTC copied verbatim the allegations of herein
Respondents in its Memorandum before the said court, as if the Memorandum was
the draft of the Decision of the Regional Trial Court of Pasig, [23]but fails to specify
either the portions allegedly lifted verbatim from the memorandum, or why she
regards the decision as copied. The omission renders thepetition for review
insufficient to support her contention, considering that the mere similarityin
language or thought between Printwells memorandum and the trial courts
decisiondid not necessarily justify the conclusion that the RTC simply lifted
verbatim or copied from thememorandum.

It is to be observed in this connection that a trial or appellate judge may

occasionally viewa partys memorandum or brief as worthy of due consideration
either entirely or partly. When he does so, the judgemay adopt and incorporatein his
adjudicationthe memorandum or the parts of it he deems suitable,and yet not be
guilty of the accusation of lifting or copying from the memorandum.[24] This
isbecause ofthe avowed objective of the memorandum to contribute in the proper
illumination and correct determination of the controversy.Nor is there anything
untoward in the congruence of ideas and views about the legal issues between
himself and the party drafting the memorandum.The frequency of similarities in
argumentation, phraseology, expression, and citation of authorities between the
decisions of the courts and the memoranda of the parties, which may be great or
small, can be fairly attributable tothe adherence by our courts of law and the legal
profession to widely knownor universally accepted precedents set in earlier judicial
actions with identical factual milieus or posing related judicial dilemmas.
 We also do not agree with the petitioner that the RTCs manner of writing the
decisiondeprivedher ofthe opportunity to analyze its decisionas to be able to assign
errors on appeal. The contrary appears, considering that she was able to impute and
assignerrors to the RTCthat she extensively discussed in her appeal in the CA,
indicating her thorough analysis ofthe decision of the RTC.

Our own readingof the trial courts decision persuasively shows that the RTC
did comply with the requirements regarding the content and the manner of writing a
decision prescribed in the Constitution and the Rules of Court. The decision of the
RTC contained clear and distinct findings of facts, and stated the applicablelaw and
jurisprudence, fully explaining why the defendants were being held liable to the
plaintiff. In short, the reader was at once informed of the factual and legal reasons
for the ultimate result.

II
Corporate personality not to be used to foster injustice

Printwell impleaded the petitioner and the other stockholders of BMPI for two
reasons, namely: (a) to reach the unpaid subscriptions because it appeared that such
subscriptions were the remaining visible assets of BMPI; and (b) to avoid
multiplicity of suits.[25]

The petitionersubmits that she had no participation in the transaction between

BMPI and Printwell;that BMPI acted on its own; and that shehad no hand in
persuading BMPI to renege on its obligation to pay. Hence, she should not be
personally liable.

We rule against the petitioners submission.

Although a corporation has a personality separate and distinct from those of

its stockholders, directors, or officers,[26]such separate and distinct personality is
merely a fiction created by law for the sake of convenience and to promote the ends
of justice.[27]The corporate personality may be disregarded, and the individuals
composing the corporation will be treated as individuals, if the corporate entity is
being used as a cloak or cover for fraud or illegality;as a justification for a wrong;
as an alter ego, an adjunct, or a business conduit for the sole benefit of the
stockholders.[28] As a general rule, a corporation is looked upon as a legal entity,
unless and until sufficient reason to the contrary appears. Thus,the courts always
presume good faith, andfor that reason accord prime importance to the separate
personality of the corporation, disregarding the corporate personality only after the
wrongdoing is first clearly and convincingly established.[29]It thus behooves the
courts to be careful in assessing the milieu where the piercing of the corporate veil
shall be done.[30]

Although nowhere in Printwells amended complaint or in the testimonies

Printwell offered can it be read or inferred from that the petitioner was instrumental
in persuading BMPI to renege onits obligation to pay; or that sheinduced Printwell
to extend the credit accommodation by misrepresenting the solvency of BMPI
toPrintwell, her personal liability, together with that of her co-defendants,
remainedbecause the CA found her and the other defendant stockholders to be in
charge of the operations of BMPI at the time the unpaid obligation was transacted
and incurred, to wit:
In the case at bench, it is undisputed that BMPI made several orders on credit
from appellee PRINTWELL involving the printing of business magazines,
wrappers and subscription cards, in the total amount of P291,342.76 (Record pp. 3-
5, Annex A) which facts were never denied by appellants stockholders that they
owe(d) appellee the amount of P291,342.76. The said goods were delivered to and
received by BMPI but it failed to pay its overdue account to appellee as well as the
interest thereon, at the rate of 20% per annum until fully paid. It was also during
this time that appellants stockholders were in charge of the operation of BMPI
despite the fact that they were not able to pay their unpaid subscriptions to BMPI
yet greatly benefited from said transactions. In view of the unpaid subscriptions,
BMPI failed to pay appellee of its liability, hence appellee in order to protect its
right can collect from the appellants stockholders regarding their unpaid
subscriptions. To deny appellee from recovering from appellants would place
appellee in a limbo on where to assert their right to collect from BMPI since the
stockholders who are appellants herein are availing the defense of corporate fiction
to evade payment of its obligations.[31]

It follows, therefore, that whether or not the petitioner persuaded BMPI to

renege on its obligations to pay, and whether or not she induced Printwell to transact
with BMPI were not gooddefensesin the suit.

III
 Unpaid creditor may satisfy its claim from
unpaid subscriptions;stockholders must
prove full payment oftheir subscriptions

Both the RTC and the CA applied the trust fund doctrineagainst the defendant
stockholders, including the petitioner.

The petitionerargues, however,that the trust fund doctrinewas

inapplicablebecause she had already fully paid her subscriptions to the capital stock
of BMPI. She thus insiststhat both lower courts erred in disregarding the evidence
on the complete payment of the subscription, like receipts, income tax returns, and
relevant financial statements.

The petitioners argumentis devoid of substance.

The trust fund doctrineenunciates a

xxx rule that the property of a corporation is a trust fund for the payment of
creditors, but such property can be called a trust fund only by way of analogy or
metaphor. As between the corporation itself and its creditors it is a simple debtor,
and as between its creditors and stockholders its assets are in equity a fund for the
payment of its debts.[32]

The trust fund doctrine, first enunciated in the American case of Wood v.
Dummer,[33]was adopted in our jurisdiction in Philippine Trust Co. v.
Rivera,[34]where thisCourt declared that:

It is established doctrine that subscriptions to the capital of a corporation

constitute a fund to which creditors have a right to look for satisfaction of their
claims and that the assignee in insolvency can maintain an action upon any unpaid
stock subscription in order to realize assets for the payment of its debts. (Velasco
vs. Poizat, 37 Phil., 802) xxx[35]

We clarify that the trust fund doctrineis not limited to reaching the
stockholders unpaid subscriptions. The scope of the doctrine when the corporation
is insolvent encompasses not only the capital stock, but also other property and assets
generally regarded in equity as a trust fund for the payment of corporate debts.[36]All
assets and property belonging to the corporation held in trust for the benefit of
creditors thatwere distributed or in the possession of the stockholders, regardless of
full paymentof their subscriptions, may be reached by the creditor in satisfaction of
its claim.

Also, under the trust fund doctrine,a corporation has no legal capacity to
release an original subscriber to its capital stock from the obligation of paying for
his shares, in whole or in part,[37] without a valuable consideration,[38] or fraudulently,
to the prejudice of creditors.[39]The creditor is allowed to maintain an action upon
any unpaid subscriptions and thereby steps into the shoes of the corporation for the
satisfaction of its debt.[40]To make out a prima facie case in a suit against
stockholders of an insolvent corporation to compel them to contribute to the payment
of its debts by making good unpaid balances upon their subscriptions, it is only
necessary to establish that thestockholders have not in good faith paid the par value
of the stocks of the corporation.[41]

The petitionerposits that the finding of irregularity attending the issuance of

the receipts (ORs) issued to the other stockholders/subscribers should not affect her
becauseher receipt did not suffer similar irregularity.

Notwithstanding that the RTC and the CA did not find any irregularity in the
OR issued in her favor,we still cannot sustain the petitioners defense of full payment
of her subscription.

In civil cases, theparty who pleads payment has the burden of proving it, that
even where the plaintiff must allege nonpayment, the general rule is that the burden
rests on the defendant to prove payment, rather than on the plaintiff to prove
nonpayment. In other words, the debtor bears the burden of showing with legal
certainty that the obligation has been discharged by payment.[42]

Apparently, the petitioner failed to discharge her burden.

A receipt is the written acknowledgment of the fact of payment in money or

other settlement between the seller and the buyer of goods, thedebtor or thecreditor,
or theperson rendering services, and theclient or thecustomer.[43]Althougha receipt is
the best evidence of the fact of payment, it isnot conclusive, but merely
presumptive;nor is it exclusive evidence,considering thatparole evidence may also
establishthe fact of payment.[44]

The petitioners ORNo. 227,presentedto prove the payment of the balance of

her subscription, indicated that her supposed payment had beenmade by means of a
check. Thus, to discharge theburden to prove payment of her subscription, she had
to adduce evidence satisfactorily proving that her payment by check wasregardedas
payment under the law.

Paymentis defined as the delivery of money.[45]Yet, because a check is not

money and only substitutes for money, the delivery of a check does not operate as
payment and does not discharge the obligation under a judgment.[46] The delivery of
a bill of exchange only produces the fact of payment when the bill has been
encashed.[47]The following passage fromBank of Philippine Islands v. Royeca[48]is
enlightening:

Settled is the rule that payment must be made in legal tender. A check is not
legal tender and, therefore, cannot constitute a valid tender of payment. Since
a negotiable instrument is only a substitute for money and not money, the
delivery of such an instrument does not, by itself, operate as payment. Mere
delivery of checks does not discharge the obligation under a judgment. The
obligation is not extinguished and remains suspended until the payment by
commercial document is actually realized.

To establish their defense, the respondents therefore had to present

proof, not only that they delivered the checks to the petitioner, but also that
the checks were encashed. The respondents failed to do so. Had the checks been
actually encashed, the respondents could have easily produced the cancelled
checks as evidence to prove the same. Instead, they merely averred that they
believed in good faith that the checks were encashed because they were not
notified of the dishonor of the checks and three years had already lapsed since
they issued the checks.

Because of this failure of the respondents to present sufficient proof of

payment, it was no longer necessary for the petitioner to prove non-payment,
particularly proof that the checks were dishonored. The burden of evidence is
shifted only if the party upon whom it is lodged was able to adduce preponderant
evidence to prove its claim.

Ostensibly, therefore, the petitioners mere submission of the receipt issued in

exchange of the check did not satisfactorily establish her allegation of full payment
of her subscription. Indeed, she could not even inform the trial court about the
identity of her drawee bank,[49]and about whether the check was cleared and its
amount paid to BMPI.[50]In fact, she did not present the check itself.

Theincome tax return (ITR) and statement of assets and liabilities of BMPI,
albeit presented, had no bearing on the issue of payment of the subscription because
they did not by themselves prove payment. ITRsestablish ataxpayers liability for
taxes or a taxpayers claim for refund. In the same manner, the deposit slips and
entries in the passbook issued in the name of BMPI were hardly relevant due to their
not reflecting the alleged payments.

It is notable, too, that the petitioner and her co-stockholders did not support
their allegation of complete payment of their respective subscriptions with the stock
and transfer book of BMPI. Indeed, books and records of a corporation (including
the stock and transfer book) are admissible in evidence in favor of or against the
corporation and its members to prove the corporate acts, its financial status and other
matters (like the status of the stockholders), and are ordinarily the best evidence of
corporate acts and proceedings.[51]Specifically, a stock and transfer book is necessary
as a measure of precaution, expediency, and convenience because it provides the
only certain and accurate method of establishing the various corporate acts and
transactions and of showing the ownership of stock and like matters. [52]That she
tendered no explanation why the stock and transfer book was not presented warrants
the inference that the book did not reflect the actual payment of her subscription.

Nor did the petitioner present any certificate of stock issued by BMPI to her.
Such a certificate covering her subscription might have been a reliable evidence of
full payment of the subscriptions, considering that under Section 65 of
the Corporation Code a certificate of stock issues only to a subscriber who has fully
paid his subscription. The lack of any explanation for the absence of a stock
certificate in her favor likewise warrants an unfavorable inference on the issue of
payment.

Lastly, the petitioner maintains that both lower courts erred in relying on
the articles of incorporationas proof of the liabilities of the stockholders subscribing
to BMPIs stocks, averring that the articles of incorporationdid not reflect the latest
subscription status of BMPI.
 Although the articles of incorporation may possibly reflect only the pre-
incorporation status of a corporation, the lower courts reliance on that document to
determine whether the original subscribersalready fully paid their subscriptions or
not was neither unwarranted nor erroneous. As earlier explained, the burden of
establishing the fact of full payment belonged not to Printwell even if it was the
plaintiff, but to the stockholders like the petitioner who, as the defendants,
averredfull payment of their subscriptions as a defense. Their failure to substantiate
their averment of full payment, as well as their failure to counter the reliance on the
recitals found in the articles of incorporation simply meant their failure or inability
to satisfactorily prove their defense of full payment of the subscriptions.

To reiterate, the petitionerwas liablepursuant to the trust fund doctrine for the
corporate obligation of BMPI by virtue of her subscription being still unpaid.
Printwell, as BMPIs creditor,had a right to reachher unpaid subscription in
satisfaction of its claim.

IV
Liability of stockholders for corporate debts isup
to the extentof their unpaid subscription

The RTC declared the stockholders pro rata liable for the debt(based on the
proportion to their shares in the capital stock of BMPI); and held the
petitionerpersonally liable onlyin the amount of P149,955.65.

We do not agree. The RTC lacked the legal and factual support for its
prorating the liability. Hence, we need to modify the extent of the petitioners
personal liability to Printwell. The prevailing rule is that a stockholder is personally
liable for the financial obligations of the corporation to the extent of his unpaid
subscription.[53]In view ofthe petitioners unpaid subscription being
worth P262,500.00, shewas liable up to that amount.

Interest is also imposable on the unpaid obligation. Absent any stipulation,

interest is fixed at 12% per annum from the date the amended complaint was filed
on February 8, 1990 until the obligation (i.e., to the extent of the petitioners personal
liability of P262,500.00) is fully paid.[54]

Lastly, we find no basis togrant attorneys fees, the award for which must be
supported by findings of fact and of law as provided under Article 2208 of the Civil
Code[55]incorporated in the body of decision of the trial court. The absence of the
requisite findings from the RTC decision warrants the deletion of the attorneys fees.

ACCORDINGLY, we deny the petition for review on certiorari;and affirm

with modification the decision promulgated on August 14, 2002by ordering the
petitionerto pay to Printwell, Inc. the sum of P262,500.00, plus interest of 12% per
annum to be computed from February 8, 1990 until full payment.

The petitioner shall paycost of suit in this appeal.

SO ORDERED.

LUCAS P. BERSAMIN
Associate Justice

WE CONCUR:

CONCHITA CARPIOMORALES
Associate Justice
Chairperson

ARTURO D. BRION MARTIN S. VILLARAMA

Associate Justice Associate Justice
 MARIA LOURDES P. A. SERENO
Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation
before the case was assigned to the writer of the opinion of the Courts Division.

CONCHITA CARPIO MORALES

Associate Justice
Chairperson

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, and the Division
Chairpersons Attestation, I certify that the conclusions in the above Decision had
been reached in consultation before the case was assigned to the writer of the opinion
of the Courts Division.

RENATO C. CORONA
Chief Justice

[1]
Penned by Associate Justice Mercedes Gozo-Dadole, with Associate Justices Salvador J. Valdez, Jr. and Amelita
G. Tolentino concurring, rollo, pp. 36-49.
[2]
Entitled Printwell, Inc. v. Business Media Phils., Inc., Donnina C. Halley and Simon Halley, Roberto V. Cabrera,
Jr., Albert T. Yu, Zenaida V. Yu, and Rizalino C. Vineza, rollo, pp. 222-230.
[3]
Id., p. 109.
[4]
Records, pp. 6-7.
[5]
Id., pp. 12-16.
[6]
Id., pp. 25-28.
[7]
Id., p. 253.
[8]
Id., p. 254.
[9]
Id., p. 255.
[10]
Id., pp. 256-259.
[11]
Id., pp. 260-265.
[12]
Id., pp. 266-272.
[13]
Id., pp. 273-276.
[14]
Id., pp. 369-370.
[15]
Id., pp. 368-369
[16]
Records, p. 371.
[17]
Rollo, p. 45.
[18]
Id., pp. 46-47.
[19]
Rollo, pp. 47-49.
[20]
Section 14. No decision shall be rendered by any court without expressing therein clearly and distinctly the facts
and the law on which it is based.
xxx
[21]
Section 1. Rendition of judgments and final orders.A judgment or final order determining the merits of the case
shall be in writing personally and directly prepared by the judge, stating clearly and distinctly the facts and the law
on which it is based, signed by him, and filed with the clerk of the court.
[22]
G.R. No. 81006, May 12, 1989, 173 SCRA 324.
[23]
Rollo, p. 23.
[24]
See, for instance, Bank of the Philippine Islands v. Leobrera, G.R. No. 137147, January 29, 2002, 375 SCRA 81,
86 (where the Court declared that although it was not good practice, there was nothing illegal in the act of the trial
court completely copying the memorandum submitted by a party provided that the decision clearly and distinctly
stated sufficient findings of fact and the law on which it was based).
[25]
Rollo, p. 55.
[26]
Section 2, Corporation Code; Article 44 (3), Civil Code; Francisco Motors Corporation v. Court of Appeals, G.R.
No. 100812, June 25, 1999, 309 SCRA 72, 82.
[27]
Prudential Bank v. Alviar, G.R. No. 150197, July 28, 2005, 464 SCRA 353, 362; Martinez v. Court of Appeals,
G.R. No. 131673, September 10, 2004, 438 SCRA 130, 149-150.
[28]
Light Rail Transit Authority v. Venus, Jr., G.R. No. 163782, March 24, 2006, 485 SCRA 361, 372;R&E Transport,
Inc. v. Latag, G.R. No. 155214, February 13, 2004, 422 SCRA 698; Secosa v. Heirs of Erwin Suarez Francisco, G.R.
No. 160039, June 29, 2004, 433 SCRA 273;Gochan v. Young, G.R. No. 131889, March 12, 2001, 354 SCRA 207,
222; Development Bank of the Philippines v. Court of Appeals, G.R. No. 110203, May 9, 2001, 357 SCRA 626; Del
Rosario v. National Labor Relations Commission, G.R. No. 85416, July 24, 1990, 187 SCRA 777, 780.
[29]
Solidbank Corporation v. Mindanao Ferroalloy Corporation, G.R. No. 153535, July 28, 2005, 464 SCRA 409,
424-425; Construction & Development Corporation of the Philippines v. Cuenca, G.R. No. 163981, August 12, 2005,
466 SCRA 714, 727; Matuguina Integrated Wood Products, Inc. v. Court of Appeals, G.R. No. 98310, October 24,
1996, 263 SCRA 490, 509.
[30]
Francisco Motors Corporation v. Court of Appeals, supra, note 26.
[31]
Rollo, p. 45.
[32]
42A, Words and Phrases, Trust Fund Doctrine, p. 445, citing McIver v. Young Hardware Co., 57 S.E. 169, 171,
144 N.C. 478, 119 Am. St. Rep. 970; Gallagher v. Asphalt Co. of America, 55 A. 259, 262, 65 N.J. Eq. 258.
[33]
3 Mason 308, Fed Cas. No. 17, 944.
[34]
44 Phil 469 (1923).
[35]
Id., p. 470.
[36]
Villanueva, Philippine Corporate Law (2001), pp. 558, citing Chicago Rock Island & Pac. R.R. Co. v. Howard, 7
Wall., 392, 19 L. Ed. 117; Sawyer v. Hoag, 17 Wall 610, 21 L. Ed. 731; and Pullman v. Upton, 96 U.S. 328, 24 L. Ed.
818.
[37]
Velasco v. Poizat, 37 Phil 802, 808 (1918).
[38]
Philippine Trust v. Rivera, supra, note 34, pp. 470-471.
[39]
Fogg v. Blair, 139 US 118 (1891).
[40]
See Velasco v. Poizat, 37 Phil 802, 806 (1918).
[41]
Tierney v. Ledden, 121 NW 1050.
[42]
Alonzo v. San Juan, G.R. No. 137549, February 11, 2005, 451 SCRA 45, 55-56; Union Refinery Corporation v.
Tolentino, Sr., G.R. No. 155653, September 30, 2005, 471 SCRA 613, 621.
[43]
Commissioner of Internal Revenue v. Manila Mining Corporation, G.R. No. 153204, August 31, 2005, 468 SCRA
571, 590.
[44]
Philippine National Bank v. Court of Appeals, G.R. No. 116181, April 17, 1996, 256 SCRA 491, 335-336; Towne
& City Development Corporation v. Court of Appeals, G.R. No. 135043, July 14, 2004, 434 SCRA 356, 361-362.
[45]
Art. 1232, Civil Code.
[46]
Philippine Airlines, Inc. v. Court of Appeals, G.R. No. 49188, January 30, 1990, 181 SCRA 557, 568.
[47]
Art. 1249, Civil Code.
[48]
G.R. No. 176664, July 21, 2008, 559 SCRA 207, 217-219 (underscoring supplied for emphasis).
[49]
See TSN dated November 6, 1991, p. 4.
[50]
TSN dated November 6, 1991, p. 4.
[51]
Bitong v. Court of Appeals (Fifth Division), G.R. No. 123553, July 13, 1998, 292 SCRA 503, 523.
[52]
Lanuza v. Court of Appeals, G.R. No. 131394, March 28, 2005, 454 SCRA 54, 67.
[53]
Edward A. Keller & Co., Ltd., v. COB Group Marketing, Inc., G.R. No. L-68907, January 16, 1986, 141 SCRA
86, 93 citing Vda. De Salvatierra v. Hon. Garlitos etc, and Refuerzo, 103 Phil, 757, 763 (1958).
[54]
See Eastern Shipping Lines, Inc. v. Court of Appeals, G.R. No. 97412, July 12, 1994, 234 SCRA 78.
[55]
Bunyi v. Factor, G.R. No. 172547, June 30, 2009, 591 SCRA 350, 363; Lapanday Agricultural and Development
Corporation (LADECO) v. Angala, G.R. No. 153076, June 21, 2007, 525 SCRA 229; Pajuyo v. Court of Appeals,
G.R. No. 146364, June 3, 2004, 430 SCRA 492, 524.

Republic of the Philippines

Supreme Court
Manila

THIRD DIVISION

OFFICE OF THE PRESIDENT G.R. No. 183445

and PRESIDENTIAL ANTI-

GRAFT COMMISSION,
Present:
Petitioners,
 PERALTA, J., Acting Chairperson,

BERSAMIN,

ABAD,

- versus - MENDOZA, and

SERENO, JJ.

CALIXTO R. CATAQUIZ, Promulgated:

Respondent. September 14, 2011

x --------------------------------------------------------------------------------------- x

DECISION

MENDOZA, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the
Rules of Court assailing the January 31, 2008 Decision[1] and the June 23, 2008
Resolution[2]of the Court of Appeals (CA) in CA-G.R. SP No. 88736 entitled Calixto
R. Cataquiz v. Office of the President and Concerned Employees of the
LLDA (CELLDA), which reversed and set aside the Amended Resolution[3] dated
February 10, 2005 of the Office of the President (OP).
 The Facts

Respondent Calixto R. Cataquiz (Cataquiz) was appointed as General

Manager of the Laguna Lake Development Authority (LLDA) on April 16, 2001.[4]

On April 1, 2003, a majority of the members of the Management Committee

and the rank-and-file employees of the LLDA submitted to then Department of
Environment and Natural Resources (DENR) Secretary Elisea G. Gozun (Secretary
Gozun) their Petition for the Ouster of Cataquiz as LLDA General Manager[5] on the
grounds of corrupt and unprofessional behavior and management incompetence.

In response, Secretary Gozun ordered the formation of an investigating team

to conduct an inquiry into the allegations against Cataquiz. The results of the fact-
finding activity were submitted in a Report[6] dated May 21, 2003 in which it was
determined that respondent may be found guilty for acts prejudicial to the best
interest of the government and for violations of several pertinent laws and
regulations. Consequently, the investigating team recommended that the case be
forwarded to the Presidential Anti-Graft Commission (PAGC) for proper
investigation.

In her Memorandum[7] for the President dated May 23, 2003, Secretary Gozun
reported that there is prima facie evidence to support some accusations against
Cataquiz which may be used to pursue an administrative or criminal case against
him. It was further noted that respondent lost his leadership credibility. In light of
these, she recommended that Cataquiz be relieved from his position and that he be
investigated by PAGC.
 On June 6, 2003, in a letter[8] to then President Gloria Macapagal-
Arroyo (President Arroyo), the Concerned Employees of the Laguna Lake
Development Authority (CELLDA), a duly organized employees union of the
LLDA, expressed their support for the petition to oust Cataquiz and likewise called
for his immediate replacement.

Thereafter, CELLDA formally filed its Affidavit Complaint[9] dated

September 5, 2003 before PAGC charging Cataquiz with violations of Republic
Act (R.A.) No. 3019 (The Anti-Graft and Corrupt Practices Act), Executive
Order (E.O.) No. 292 (The Administrative Code) and R.A. No. 6713 (Code of
Conduct and Ethical Standards for Public Officials and Employees), to wit:

Violation of Section 3(e) of Republic Act 3019 in relation to Section 46 b(8)

and (27), Chapter VI, Book V of EO 292.

a. That respondent directly transacted with 35 fishpen operators and

authorized [the] payment of fishpen fees based on negotiated prices
in violation of LLDA Board Resolution No. 28, Series of 1996 as
alleged.

b. That respondent allegedly approved additional fishpen areas in

the Lake without the approval of the Board and in violation of the
existing Zoning and Management Plan (ZOMAP) of the Laguna de
Bay that allows a carrying capacity of 10,000 hectares [of] fishpen
structures in the lake based on scientific and technical studies.

c. That respondent allegedly condoned or granted reductions of fines

and penalties imposed by the Public Hearing Committee, the duly
authorized adjudicatory body of the LLDA. The condonation was
allegedly without the concurrence of LLDA Board of Directors.

d. That respondent allegedly caused the dismissal of some cases

pending with the LLDA without the concurrence of the Public
Hearing Committee.
 e. That on June 4, 2002, respondent allegedly appropriated and
disbursed the amount of Five Hundred Thousand Pesos
(₱500,000.00) from LLDA funds and confidential funds without any
authority from the Department of Budget and Management.

f. That respondent allegedly contracted the services of several

consultants without prior written concurrence from the Commission
on Audit.

g. That on December 19, 2001, respondent allegedly appropriated and

disbursed LLDA funds for the grant of gifts to indigent residents of
San Pedro, Laguna. Said appropriation is not within the approved
budget neither was it sanctioned by the Board of Directors, as
alleged.

h. That respondent allegedly allowed a Taiwanese company identified

as Phil-Tai Fishing and Trade Company to occupy and utilize certain
portions of LLDA facilities located at Km. 70, Barangay Bangyas,
Calauan, Laguna without any contract nor authority from the LLDA
Board.

i. That respondent allegedly authorized the direct procurement of fish

breeders from Delacon Realty and Development Corporation
without the required bidding in accordance with COA rules and
regulations.

Violation of Section 7(d) of Republic Act 6713:

a. That respondent allegedly solicited patronage from regulated
industries in behalf of RVQ Productions, Inc. for the promotion of its
film entry to the 2002 Metro Manila Film Festival entitled Home
Alone the Riber.

Violation of Section 5(a) of Republic Act 6713:

a. That respondent allegedly failed to act promptly and expeditiously

on official documents, requests, papers or letters sent by the public
or those which have been processed and completed staff work for his
appropriate action.[10]
 On December 5, 2003, PAGC issued a Resolution[11] recommending to the
President that the penalty of dismissal from the service with the accessory penalties
of disqualification for re-employment in the public service and forfeiture of
government retirement benefits be imposed upon Cataquiz.

Thereafter, on December 8, 2003, Cataquiz was replaced by Fatima A.S.

Valdez, who then assumed the position of Officer-in-Charge/General Manager and
Chief Operating Officer of the LLDA by virtue of a letter of appointment
dated December 3, 2003 issued by President Arroyo.[12]

In its Decision[13] dated June 29, 2004, the OP adopted by reference the
findings and recommendations of PAGC. The dispositive portion thereof reads:

WHEREFORE, as recommended by the PAGC, respondent Calixto

R. Cataquiz, is hereby DISMISSED FROM THE SERVICE, with the
accessory penalties of disqualification from re-employment to government
service and forfeiture of retirement benefits, effective immediately upon
receipt of this order.

SO ORDERED.

Aggrieved, Cataquiz filed his Motion for Reconsideration and/or for New
[14]
Trial dated August 4, 2004, arguing that: (1) prior to the issuance by the PAGC
of its Resolution and by the OP of its Decision, he was already removed from office,
thereby making the issue moot and academic; and (2) he cannot be found guilty for
violating a resolution which was foreign to the charges against him or for acts which
did not constitute sufficient cause for his removal in office, as shown by acts and
documents which subsequently became available to him, entitling him to a new trial.
 On February 10, 2005, the OP issued an Amended Resolution,[15] imposing on
Cataquiz the penalties of disqualification from re-employment in the government
service and forfeiture of retirement benefits, in view of the fact that the penalty of
dismissal was no longer applicable to him because of his replacement as General
Manager of the LLDA.

Cataquiz elevated his case to the CA via a petition for review[16] dated March
2, 2005, raising the same issues presented in his Motion for Reconsideration and/or
New Trial before the OP.

The CA promulgated its Decision on January 31, 2008, which reversed and
set aside the Amended Resolution of the OP. In so resolving, the CA reasoned that
the accessory penalties of disqualification from employment in the government
service and forfeiture of retirement benefits could no longer be imposed because the
principal penalty of dismissal was not enforced, following the rule that the accessory
penalty follows the principal penalty. The CA also agreed with Cataquiz that he
could not be held liable for a violation of Board Resolution No. 68 of the LLDA,
which when examined, was found not to be related to fishpen awards. If at all, the
applicable rule would be Board Resolution No. 28, as suggested by Cataquiz
himself. Said resolution though would be an invalid basis because it was not
approved by the President pursuant to Section 4(k) of R.A. No. 4850 (An Act
Creating the Laguna Lake Development Authority). Finally, the CA found that the
offenses charged against Cataquiz under R.A. No. 4850 constituted acts that were
within his authority as general manager of the LLDA to perform.
 Not in conformity, the OP and the PAGC (petitioners) filed this petition for
review.

After the submission of respondents comment[17] and the petitioners

reply,[18] Cataquiz filed an Urgent Motion for Judicial Notice[19] dated August 13,
2009 urging the Court to take judicial notice of the Resolution[20] rendered by the
Office of the Ombudsman (Ombudsman) on November 30, 2004 which
recommended the dismissal of the charges against him for violation of R.A. No.
3019.

The Issues

Petitioners cite the following errors as grounds for the allowance of the petition:

I.

The Court of Appeals gravely erred when it reversed in toto the findings of the
OP and PAGC without stating clearly and distinctly the reasons therefor,
which is contrary to the Constitution and the Rules of Court; the findings of
the Court of Appeals are conclusions without citation of specific evidence on
which they are based.

II.

The Court of Appeals erred because its judgment is based on a

misapprehension of facts;

III.
 The Court of Appeals erred when it went beyond the issues of the case;

IV.

The findings of the Court of Appeals are contrary to the findings of the OP,
PAGC and DENR Fact Finding Committee, [and]

V.

The OP and PAGC correctly found respondent to be unfit in public service,

thus it did not err in imposing the accessory penalties of disqualification from
employment in the government service and forfeiture of retirement benefits.[21]

Cataquiz, on the other hand, submits the following arguments in his

Memorandum:[22]

I.

The dismissal by the Ombudsman of the cases against the respondent

under the same set of facts further constitute the law of the case between the
parties which necessitates the dismissal of this appeal and further supports the
correctness of the decision of the Court of Appeals.

II.

The Court of Appeals did not commit any error when it reversed the
amended resolution of the petitioner Office of the President.[23]

The issues can be condensed into four essential questions:

(1) Whether the CA made an incorrect determination of the facts of the case
warranting review of its factual findings by the Court;
(2) Whether the dismissal by the Ombudsman of the charges against Cataquiz serves
as a bar to the decision of the OP;

(3) Whether Cataquiz can be made to suffer the accessory penalties of

disqualification from re-employment in the public service and forfeiture of
government retirement benefits, despite his dismissal from the LLDA prior to the
issuance by the PAGC and the OP of their decision and resolution, respectively; and

(4) Whether Cataquiz can be charged with a violation of Board Resolution No. 28,
despite the clerical error made by the PAGC in indicating the Board Resolution
number to be No. 68.

The Courts Ruling

The Court finds merit in the petition.

Findings of fact of the appellate court

can be reviewed

As a general rule, only questions of law can be raised in a petition for review
on certiorari under Rule 45 of the Rules of Court.[24] Since this Court is not a trier of
facts, findings of fact of the appellate court are binding and conclusive upon this
Court.[25] There are, however, several recognized exceptions to this rule, namely:
 (1) When the conclusion is a finding grounded entirely on speculation,
surmises and conjectures;

(2) When the inference made is manifestly mistaken, absurd or impossible;

(3) Where there is a grave abuse of discretion;

(4) When the judgment is based on a misapprehension of facts;

(5) When the findings of fact are conflicting;

(6) When the Court of Appeals, in making its findings, went beyond the
issues of the case, and the same is contrary to the admissions of both
appellant and appellee;

(7) When the findings are contrary to those of the trial court;

(8) When the findings of fact are conclusions without citation of specific
evidence on which they are based;

(9) When the facts set forth in the petition as well as in the petitioners main
and reply briefs, are not disputed by the respondents; and

(10) When the findings of fact of the Court of Appeals are premised on the
supposed absence of evidence and contradicted by the evidence on
record.[26] [Emphases supplied]

In this case, the findings of the CA are contrary to those of PAGC which
recommended Cataquiz dismissal for violating Section 3(e) of R.A. No. 3019, in
relation to Section 46(b)(27), Chapter 6, Subtitle A, Title I, Book V of E.O.
292. Likewise, the Investigating Team of the DENR also agreed that there exists
evidence that could sustain a finding of respondents violation of several laws and
regulations.

The result of PAGCs investigation, however, was simply brushed aside by the
CA, without citing any evidence on which its findings were based. In ignoring the
meticulous discussion of PAGCs conclusions and in absolving Cataquiz from any
wrongdoing, the CA cavalierly declared as follows:
 The petitioner likewise presented to us in support of his petition the
argument that he had sufficient authority to do what had been complained
against him. We have examined the charges against the provisions of R.A.
No. 4850 and we found that the said acts could be sustained because they
were within his powers as general manager of the Laguna Lake
Development Authority as implied from express powers granted to him by
the law. Moreover, the records of the Authority show that transactions
resulting into contracts in the Authoritys trading activities have been done
by previous general managers of the Authority even without prior approval
by the board. Ordinary corporate practices likewise point out to the fact that
a general manager, having the general management and control of its
business and affairs, has implied and apparent authority to do acts or make
any contracts in its behalf falling within the scope of the ordinary and usual
business of the company, especially so when, relative to a contract that the
petitioner had entered into with Phil-Tai Fishing and Trade Company, the
Office of the Government Corporate Counsel had formally acceded
thereto.[27]

As plain as that, without any analysis of the evidence on record or a comprehensive

discussion on how the decision was arrived at, the CA absolved Cataquiz of the acts
he was accused of committing during his service as General Manager of the LLDA.

Section 14, Article VIII of the 1987 Constitution mandates that decisions must
clearly and distinctly state the facts and the law on which it is based. Decisions of
courts must be able to address the issues raised by the parties through the
presentation of a comprehensive analysis or account of factual and legal findings of
the court.[28] It is evident that the CA failed to comply with these
requirements. PAGC, in its Resolution dated December 5, 2003, discussing each of
the twelve allegations against Cataquiz, determined that he should be dismissed from
the government service and that he could be held liable under Section 3(e) of R.A.
No. 3019, in relation to Section 46(b)(27), Chapter 6, Subtitle A, Title I, Book V of
E.O. No. 292, to wit:

R.A. No. 3019

 Section 3. Corrupt practices of public officers. In addition to acts or
omissions of public officers already penalized by existing law, the following
shall constitute corrupt practices of any public officer and are hereby
declared to be unlawful:

(e) Causing any undue injury to any party, including

the Government, or giving any private party any unwarranted
benefits, advantage or preference in the discharge of his
official administrative or judicial functions through manifest
partiality, evident bad faith or gross inexcusable negligence.
This provision shall apply to officers and employees of offices
or government corporations charged with the grant of licenses
or permits or other concessions.

E.O. No. 292

Section 46. Discipline: General Provisions.

xxx

(b) The following shall be grounds for disciplinary

action:

xxx

(27) Conduct prejudicial to the best

interest of the service

The one-paragraph pronouncement of the CA that Cataquiz had authority to

perform the acts complained of is grossly insufficient to overturn the determination
by PAGC that he should be punished for acts prejudicial to the LLDA committed
during his service as General Manager of the said agency. It should be emphasized
that findings of fact of administrative agencies will not be interfered with and shall
be considered binding and conclusive upon this Court provided that there is
substantial evidence to support such findings.[29] Substantial evidence has been
defined as that amount of relevant evidence which a reasonable mind might accept
as adequate to justify a conclusion[30] or evidence commonly accepted by reasonably
prudent men in the conduct of their affairs.[31]
 After a diligent review of the evidence presented and the pleadings filed, this
Court finds that there is substantial evidence to justify the conclusion of PAGC that
Cataquiz should be punished with the penalty of dismissal, along with its accessory
penalties, for committing acts prejudicial to the best interest of the government and
for giving undue advantage to a private company in the award of fishpens. Thus, the
PAGC was correct when it wrote:

I.

[I]n the first allegation, respondent Cataquiz impliedly admitted his

direct transaction with 35 fishpen operators and the payment of fishpen
fees without conducting a public bidding. In respondents defense, he raised
the invalidity of Board Resolution No. 68 [sic] which provides for guidelines
in public bidding for fishpen areas. Respondent argued that Board
Resolution No. 68 [sic] is an unreasonable exercise of the Boards legislative
power since public bidding has never been intended by RA 4850, the
enabling law of LLDA.

The Commission finds the contention of the respondent bereft of

merit. Section 25-A of RA 4850 authorizes the Board to formulate,
prescribe, amend and repeal rules and regulations to govern the conduct of
business of the Authority and it is the function of the respondent in his
capacity as General Manager to implement and administer the policies,
programs and projects approved by the Board pursuant to Section 26 (b) of
RA 4850. While it is true that a Board Resolution draws life from the
enabling statute, the Commission cannot find any inconsistency between
the former and the latter. The Board Resolution No. 68 [sic] is still within
the bounds of RA 4850 and is germane to its purpose in promoting a
balanced growth of the Laguna Lake. Thus, the validity of the questioned
Resolution stands. It becomes now the duty of the respondent to implement
the Resolution and not to question its legality nor disregard it.

In the case at hand, respondents act of not giving credence to the

Board Resolution resulted to undue prejudice to the best interest of the
public service considering that the Authority incurred Revenue loss from
the direct transaction of respondent Cataquiz amounting to Seven Hundred
Fifty Five Thousand Seven Hundred Pesos ₱755,700.00.

The presumption that the official duty has been regularly performed
was overcome by the fact that the government was deprived of much needed
revenue as a result of the act committed by respondent Cataquiz.
 xxxx

III.

The Commission finds that the act of respondent Cataquiz in

condoning penalties and reducing the fines imposed by the Public Hearing
Committee (PHC) of the LLDA has no basis in law. The premise of the
respondent citing Section 26 (b) giving him the executive prerogative and
Section 4 (a) justifying the condonation and reduction is misplaced. A
careful examination of the aforementioned provisions would reveal that
Section 26 (b) does not vest the respondent the executive prerogative. Said
provision gives him the authority to execute and administer the policies,
plans, programs and projects approved by the Board. There is no showing
that the condonation of penalties and reduction of fines has been approved
by the Board. Section 26 (b) is clear in its terms that before respondent
executes any policy, program or project, the same has to be approved by the
Board. Thus, there is no executive prerogative to speak of.

The Commission agrees with the contention of the complainant that

Section 4 (d) refers to additional power and function of the Authority and
not to the respondent. Of equal importance is that Section 4 (d) does not
confer him the authority to condone penalties nor reduce fines. Said
provision is referring to Orders requiring the discontinuance of
pollution. When the law is clear it needs no further interpretation.

The contention of respondent Cataquiz that there is nothing in

Section 25-A that states that the approval of the Board is necessary has no
leg to stand on. Same provision gives the Board the implied power to do
such other acts and perform such other functions as may be necessary to
carry out the provisions of this Charter.

In relation to this is Section 31 of RA 4850 that gives the Board the

authority to create such other divisions and positions as may be deemed
necessary for the efficient, economic and effective conduct of the activity of
the Authority.

The findings of the PHC, although a recommendatory body, must be

accorded great respect. The penalties imposed by the PHC cannot be
substituted by the respondent without any basis and the latter cannot
simply claim that he has the sole authority to condone penalties and reduce
fines.
 Evidently respondents act of condonation of penalties and reduction
of fines was uncalled for. Thus, his act resulted to undue prejudice to the
best interest of the service and will set a dangerous precedent to the justice
system of the government.

IV.

In the same vein, the dismissal of the pending case against Twenty
First Century Resources Inc. by the respondent has no basis in law. Section
26 of RA 4850 clearly enumerates the powers and functions of respondent,
to wit:

xxx.

a. Submit for consideration of the Board the policies and

measures which he believes to be necessary to carry out the
purposes and provisions of this Act;

b. Execute and administer the policies, plan, programs and

projects approved by the Board;

c. Direct and supervise the operation and internal

administration of the Authority. The General Manager
may delegate certain administrative responsibilities to
other officers of the Authority subject to the rules and
regulations of the Board;

d. Appoint officials and employees below the rank of division

heads to positions in the approved budget upon written
recommendation of the division head concerned using as
guide the standard set forth in the Authoritys merit
system;

e. Submit quarterly reports to the Board on personnel

selection, placement and training;
 f. Submit to the NEDA an annual report and such other
reports as may be required, including the details of the
annual and supplemental budgets of the Authority;

g. Perform such other functions as may be provided by law.

From the aforementioned section, nowhere can the Commission find

any grant of power to adjudicate in favor of respondent Cataquiz and the
latter cannot hide under the cloak of managerial prerogative absent any law
that justifies his act of dismissing the case. To reiterate, the dismissal of the
case against Twenty First Century is an act clearly prejudicial to the best
interest of the service. Consequently, the Authority was deprived of a
committed service to the government and this fact cannot be overlooked
upon by the Commission.

xxxx

VI.

The contract of service for consultancy duly signed by the respondent and
the legal consultants of LLDA is not in accordance with Section 212 of the
Government Accounting and Auditing Manual (GAAM) 86 which provides
that:

Payment of public funds of retainer fees of private law

practitioners who are so hired and employed without the prior
written concurrence and acquiescence by the Solicitor
General of the Government Corporate Counsel, as the case
may be, as well as the written concurrence of the Commission
on Audit, shall be disallowed in audit and the same shall be a
personal liability of the official concerned.

The contention of the respondent that the LLDA Administrative

Section failed to advise him regarding the requisites laid down by law
cannot stand. Occupying an executive position, respondent is required to
exercise diligence in the highest degree in the performance of his
duties. Respondent cannot pass responsibility to other Division which in
the first place, he has supervision and control of, pursuant to Section 31 of
RA 4850. Supervision as defined is the overseeing or the power or authority
of an officer to see that subordinate officers perform their duties. If the
latter fail or neglect to fulfill them, the former may take such action or step
as prescribed by law to make them perform their duties. Control on the
other hand, is the power of an officer to alter or modify or nullify or set aside
what a subordinate officer has done in the performance of his duties and to
substitute the judgment of the former for that of the latter. There is
therefore a given authority to the respondent by law to regulate the acts of
the Administrative Division and respondent cannot simply evade
responsibility by invoking the shortcomings of his subordinates. In signing
the contract, without verifying compliance of existing laws, respondent falls
short of the required competence expected of him in the performance of his
official functions. Incompetence, has been defined as lack of ability, legal
qualification or fitness to discharge the required duty; want of physical or
intellectual or moral fitness.

xxxx

VIII.

The Commission finds that the transaction entered into by the

respondent and Phil-Tai Fishing and Trade Company is violative of Section
3 (e) of RA 3019. The elements of Section 3 (e) are as follows:

1. The accused is a public officer discharging official

administrative, or judicial functions or private persons in
conspiracy with them;

2. The public officer committed the prohibited act during the

performance of his official duty or in relation to his public
position;

3. The public officer acted with manifest partiality, evident

bad faith or gross inexcusable negligence; and

4. His action caused undue injury to the Government or any

private party or gave any party any unwarranted benefit,
advantage or preference.
 Applying the first element, respondent Cataquiz is a public officer
within the legal term of RA 3019 which provides that Public officer includes
elective and appointive officials and employees, permanent or temporary,
whether in the classified or unclassified or exempt from service receiving
compensation, even nominal from the government xxx. Clearly, respondent
is a public officer discharging official functions in transacting with Phil-Tai
to occupy and utilize portions of LLDA facilities locate (sic) at Km. 70 Brgy.
Bangyas, Calauan, Laguna.

Relating to the second element in the instant case, respondent in the

exercise of his official duties allowed Phil-Tai to use the LLDA facility
without the concurrence of the Board of Directors of LLDA where the
corporate powers of the Authority lies as explicitly provided in Section 16 of
RA 4850.

Applying the third element, respondent Cataquiz acted with manifest

partiality when by reason of his office he allowed Phil-Tai to occupy the
LLDA facility without any contract and without the approval of the Board of
Directors. The privilege granted was by virtue of a joint venture proposal
which was never authorized by the Board as admitted by the respondent in
his position paper. In fact the proposal is still awaiting resolution from the
board. Partiality is synonymous with bias which excites a disposition to see
and report matters as they are wished for rather than as they are.

Manifest means obvious to the understanding, evident to the mind,

not obscure or hidden and is synonymous with open, clear, visible,
unmistakable, indubitable, indisputable, evident and self-evident.

There was manifest partiality when respondent Cataquiz entered a

transaction with Phil-Tai disregarding the requirements set forth by RA
4850 which requires the approval of the Board. Worse, the joint venture
proposal by Phil-Tai which was accepted by the respondent took place
without any contract at all. The contention of the respondent that Phil-Tai
is only given the authority to conduct a preliminary study and including the
technical survey and Pilot testing at the aforesaid facility for the purpose of
determining its structural integrity and commercial viability cannot prevail
over the records available at hand.

The findings of DENR officials in their ocular inspection on May 13,

2003 would disclose that Phil-Tai is in actual possession of the LLDA
facility and personally witnessed the actual harvesting of tilapia from the
fishpond owned by LLDA. The report of DENR officials contains that the act
of the respondent is prejudicial to the interest of the government mainly
because there was no contract executed between LLDA and Phil-Tai.

Moreover, the Memorandum from the Division Chief III Jose K.

Cario III of the Community Development Division would reveal that Phil-
Tai is introducing exotic aquatic species in one of the earthen ponds at
LLDA Calauan Complex. RA 8550 otherwise known as the Philippine
Fisheries Code of 1998 provides that the introduction of foreign crustaceans
such as crayfish in Philippine waters without a sound ecological, biological
and environmental justification based on scientific studies is
prohibited. There is, therefore, an unwarranted act by Phil-Tai which is
prejudicial to the government.

Applying the fourth element in the case at bar, respondent Cataquiz

gave Phil-Tai unwarranted benefit, advantage or preference when he
entertained the joint venture proposal without any consideration. In fact, as
stated in respondents position paper, LLDA was assured by Phil-Tai that in
the event the agreement does not materialize, it will remove all its
equipment without damage to the LLDA aqua culture facilities. Be it noted
that the assurance was not made in writing.

Respondent refused to discern the adverse consequences of the joint

venture proposal considering that no available remedy was left to the
government in case of untoward incidents that may arise. The transaction
entered into is at most unenforceable because the agreements therein was
(sic) not put into writing. The transaction cannot be tolerated by the
Commission and the unwarranted benefit that Phil-Tai is enjoying deserves
much consideration because it puts the government into a very
disadvantageous situation.

xxxx

X.

The Commission finds that the promotion of the film entry of RVQ
Productions by respondent Cataquiz does not offend Section 7 (d) of RA
6713 which provides as follows:

Public officials and employees shall not solicit or

accept, directly or indirectly, any gift, gratuity, favor,
entertainment, loan or anything of monetary value from any
person in the course of their official duties, or in connection
with any operation being regulated by, or any transaction
which may be affected by the functions of their office.
 There was no undue solicitation of patronage of the film considering
that the tickets sold are voluntary participation of interested employees. In
fact, no monetary consideration was received nor accepted by the
respondent.

Of important consideration, however, is the use of government

vehicles in the delivery of movie tickets and the collection of payments
thereof to different industrial establishments. Respondent Cataquiz in his
official capacity as the General Manager of LLDA, approved the use of
government vehicles and drivers for the promotion of the movie.

The impropriety of using government property in favor of a (sic)

RVQ Production, a private entity cannot be countenanced as this is
prejudicial to the best interest of the service. The very purpose of the use of
the government property has not been properly served. [32] [Underscoring
supplied]

xxxx

The dismissal of the criminal case against

Respondent does not bar the finding

of administrative liability.

Cataquiz claims that the dismissal by the Ombudsman of the case against him
constitutes the law of the case between him and the OP which necessitates the
dismissal of the petition before this Court.

At the outset, the Court would like to highlight the fact that Cataquiz never
raised this issue before the CA, despite having had ample time to do so. The records
show that the Ombudsman promulgated its resolution on November 30, 2004, more
than three months prior to the filing by the respondent of his petition before the CA
on March 2, 2005.[33] Nevertheless, he only chose to mention this after the CA had
rendered its decision and after the submission of his comment on the petition at
bench. This is evidently a desperate effort on his part to strengthen his position and
support the decision of the CA exonerating him from any administrative
liability. The Court has consistently ruled that issues not previously ventilated
cannot be raised for the first time on appeal.[34] Otherwise, to consider such issues
and arguments belatedly raised by a party would be tantamount to a blatant disregard
of the basic principles of fair play, justice and due process.[35] Therefore, this issue
does not merit the attention of the Court.

Even if the Court were to overlook this procedural lapse, Cataquiz argument
would still fail. The Ombudsman Resolution dated November 30,
2004 recommending the dismissal of the charges against him pertains only to the
criminal case against him and not the administrative case, which is the subject matter
of the case at bench. As can be gleaned from the Resolution, the charges referred to
by the Ombudsman were for respondents alleged violation of Section 3(b) and (c) of
R.A. No. 3019 or for malversation of public funds and fraud against the public
treasury.[36]

It is a basic rule in administrative law that public officials are under a three-
fold responsibility for a violation of their duty or for a wrongful act or omission,
such that they may be held civilly, criminally and administratively liable for the same
act.[37] Obviously, administrative liability is separate and distinct from penal and
civil liability.[38] In the case of People v. Sandiganbayan,[39]the Court elaborated on
the difference between administrative and criminal liability:

The distinct and independent nature of one proceeding from the

other can be attributed to the following: first, the difference in the quantum
of evidence required and, correlatively, the procedure observed and
sanctions imposed; and second, the principle that a single act may offend
against two or more distinct and related provisions of law, or that the same
act may give rise to criminal as well as administrative liability.[40]
Accordingly, the dismissal of the criminal case by the Ombudsman does not
foreclose administrative action against Cataquiz.[41] His absolution from criminal
liability is not conclusive upon the OP, which subsequently found him to be
administratively liable. The pronouncement made by the Ombudsman cannot serve
to protect the respondent from further administrative prosecution. A contrary ruling
would be unsettling as it would undermine the very purpose of administrative
proceedings, that is, to protect the public service and uphold the time-honored
principle that a public office is a public trust.[42]

Respondent can be imposed with

the accessory penalties.

Removal or resignation from office is not a bar to a finding of administrative

liability.[43] Despite his removal from his position, Cataquiz can still be held
administratively liable for acts committed during his service as General Manager of
the LLDA and he can be made to suffer the corresponding penalties. The subsequent
finding by the OP that Cataquiz is guilty of the charges against him with the
imposition of the penalty of dismissal and its corresponding accessory penalties is
valid.

It cannot be disputed that Cataquiz was a presidential appointee.[44] As such,

he was under the direct disciplining authority of the President who could legitimately
have him dismissed from service. This is pursuant to the well-established principle
that the Presidents power to remove is inherent in his power to appoint.[45] Therefore,
it is well within the authority of the President to order the respondents dismissal.
Cataquiz argues that his removal has rendered the imposition of the principal penalty
of dismissal impossible. Consequently, citing the rule that the accessory follows the
principal, he insists that the accessory penalties may no longer be imposed on him.[46]

The respondent is mistaken.

In the case of In Re: Complaint of Mrs. Corazon S. Salvador against Spouses

Noel and Amelia Serafico,[47] despite the resignation from government service by the
employee found guilty of grave misconduct, disgraceful and immoral conduct and
violation of the Code of Conduct for Court Personnel, thereby making the imposition
of the penalty of dismissal impossible, this Court nevertheless imposed the accessory
penalties of forfeiture of benefits with prejudice to re-employment in any branch or
instrumentality of government.

Similarly instructive is the case of Pagano v. Nazarro, Jr.[48] where the Court
held that:

The instant case is not moot and academic, despite the petitioners
separation from government service. Even if the most severe of
administrative sanctions that of separation from service may no longer be
imposed on the petitioner, there are other penalties which may be imposed
on her if she is later found guilty of administrative offenses charged against
her, namely, the disqualification to hold any government office and the
forfeiture of benefits.[49]

Based on the foregoing, it is clear that the accessory penalties of disqualification

from re-employment in public service and forfeiture of government retirement
benefits can still be imposed on the respondent, notwithstanding the impossibility of
effecting the principal penalty of dismissal because of his removal from office.
PAGCs typographical error

can be corrected.

One of the charges against Cataquiz is for directly transacting with 35 fishpen
operators and authorizing payment of fishpen fees based on negotiated prices, in
contravention of the directive of Board Resolution No. 28, which requires the
conduct of a public bidding. The PAGC Resolution dated December 5, 2003,
recommending the dismissal of Cataquiz erroneously indicated that he violated
Board Resolution No. 68, instead of No. 28.[50] The CA then sustained his contention
that he could not be found guilty for violating Board Resolution No. 68 of the LLDA
because such resolution was not related to fishpen awards and that his right to due
process was violated when the OP found him guilty of violating the said
resolution. It further added that even if the respondent was charged with acting in
contravention with Board Resolution No. 28, the said resolution would be invalid
for not having been duly approved by the President.

Petitioners, however, claim that it was merely a typographical or clerical error on

the part of PAGC which was unfortunately adopted by the OP. [51] Cataquiz
apparently will not be unduly prejudiced by the correction of the PAGC resolution.
In the counter-affidavit he filed before the PAGC, he was able to exhaustively argue
against the allegation that he had violated Board Resolution No. 28.[52] Hence, he
cannot feign ignorance of the true charges against him.

In this regard, the Court agrees with the petitioners.

 It is clear from the pleadings submitted before PAGC particularly in the
Affidavit Complaint filed by CELLDA against Cataquiz and in the Counter-
Affidavit submitted by the latter that the resolution referred to as having been
violated by the respondent was Board Resolution No. 28, and not No. 68, as was
erroneously indicated in the PAGC Resolution. Thus, pursuant to the rule that the
judgment should be in accordance with the allegations and the evidence
presented,[53] the typographical error contained in the PAGC Resolution can be
amended. Clerical errors or any ambiguity in a decision can be rectified even after
the judgment has become final by reference to the pleadings filed by the parties and
the findings of fact and conclusions of law by the court.[54]

A careful perusal of the PAGCs discussion on the violation of the questioned board
resolution discloses that PAGC was undoubtedly referring to Board Resolution No.
28 which approved the policy guidelines for public bidding of the remaining free
fishpen areas in Laguna de Bay, and not Resolution No. 68 which had nothing at all
to do with fishpen awards. Therefore, the reference to Board Resolution No. 68,
instead of Board Resolution No. 28, in the PAGC Resolution is unmistakably a
typographical error on the part of PAGC but, nonetheless, rectifiable.

Moreover, the respondents counter-affidavit shows that he had knowledge of

the fact that he was being charged with violation of Board Resolution No. 28. He
even argued that the said resolution was an invalid and illegal administrative
rule. His position was that the resolution issued by the Board of Directors of LLDA
was an unreasonable exercise of its legislative power because the enabling law of
LLDA, R.A. No. 4850, did not require the public bidding of free fishpen
areas.[55] Then, in his motion for reconsideration before the OP, he argued that the
resolution was invalid because it was never approved by the President, contrary to
Section 4(k) of R.A. No. 4850 (as amended by Presidential Decree No. 813) which
provides:
 (K) For the purpose of effectively regulating and monitoring
activities in Laguna de Bay. The Authority shall have exclusive jurisdiction
to issue new permit for the use of the lake waters for any projects or
activities in/or affecting the said lake including navigation, construction,
and operation of fishpens, fish enclosures, fish corrals and the like, and to
impose necessary safeguards for lake quality control and management and
to collect necessary fees for said activities and projects: Provided, That the
fees collected for fisheries may be shared between the Authority and other
government agencies and political subdivisions in such proportion as may
be determined by the President of the Philippines upon recommendation of
the Authoritys Board: Provided further, That the Authoritys Board may
determine new areas of fishery development or activities which it may place
under the supervision of the Bureau of Fisheries and Aquatic Resources
taking into account the overall development plans and programs for Laguna
de Bay and related bodies of water: Provided, finally, That the Authority
shall subject to the approval of the President of the Philippines promulgate
such rules and regulations which shall govern fisheries development
activities in Laguna de Bay which shall take into consideration among others
the following: socio-economic amelioration of bona-fide resident fishermen
whether individually or collectively in the form of cooperatives, lakeshore
town development, a master plan for fish construction and operation,
communal fishing ground for lakeshore town residents, and preference to
lakeshore town residents in hiring laborers for fishery projects. [Emphasis
supplied]

Regrettably, the CA sustained the respondents argument. A careful

examination of the abovementioned law shows that presidential approval is only
required for rules and regulations which shall govern fisheries development
activities in Laguna de Bay. The question then is whether Board Resolution No. 28
falls under that category of rules subject to approval by the President. The answer is
in the negative.

The Revised Laguna de Bay Zoning and Management Plan[56] allocated

10,000 hectares of the lake surface areas for fishpen operators. In the event that the
area would not be fully occupied after all qualified operators had been assigned their
respective fishpen areas, the residual free areas would be opened for bidding to other
prospective qualified applicants. Accordingly, Board Resolution No. 28 simply set
forth the guidelines for the public bidding of the remaining free fishpen areas in
Laguna de Bay.[57] It did not require presidential approval because it did not regulate
any fisheries development activities. Hence, the questioned resolution cannot be
declared invalid on the basis of the CAsratiocination that the resolution lacked the
approval of the President.

WHEREFORE, the petition is GRANTED. The Decision of the Court of

Appeals is REVERSED and SET ASIDE and another judgment entered reinstating
the June 29, 2004 Decision of the Office of the President, as amended by
its February 10, 2005 Amended Resolution.

SO ORDERED.

JOSE CATRAL MENDOZA

Associate Justice
 WE CONCUR:

DIOSDADO M. PERALTA

Associate Justice

Acting Chairperson

LUCAS P. BERSAMIN ROBERTO A. ABAD

Associate Justice Associate Justice

MARIA LOURDES P. A. SERENO

 Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in
consultation before the case was assigned to the writer of the opinion of the Courts
Division.

DIOSDADO M. PERALTA

Associate Justice

Acting Chairperson, Third Division

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution and the Division
Chairpersons Attestation, I certify that the conclusions in the above Decision had
been reached in consultation before the case was assigned to the writer of the opinion
of the Courts Division.

RENATO C. CORONA
Chief Justice


Designated as additional member per Raffle dated September 12, 2011.

Designated as additional member of the Third Division per Special Order No. 1028 dated June 21, 2011.
[1]
Rollo, pp. 68-76. Penned by Associate Justice Agustin S. Dizon and concurred in by Associate Justice Amelita G.
Tolentino and Associate Justice Lucenito N. Tagle.
[2]
Id. at 80-81.
[3]
Id. at 77-79.
[4]
Id. at 69.
[5]
Id. at 82.
[6]
Id. at 102-114.
[7]
Id. at 99.
[8]
Id. at 127.
[9]
Id. at 116-126.
[10]
Id. at 171-173.
[11]
Id. at 168-192.
[12]
Id. at 196.
[13]
Id. at 193-194.
[14]
Id. at 195-213.
[15]
Id. at 77-79.
[16]
Id. at 214-229.
[17]
Id. at 541-561.
[18]
Id. at 573-585.
[19]
Id. at 589-591.
[20]
Id. at 592-613.
[21]
Id. at 38.
[22]
Id. at 623-657.
[23]
Id. at 635.
[24]
Modesto v. Urbina, G.R. No. 189859, October 18, 2010, 633 SCRA 383, 391.
[25]
Magno v. Francisco, G.R. No. 168959, March 25, 2010, 616 SCRA 402, 414.
[26]
Modesto v. Urbina, supra note 24, citing Ontimare, Jr. v. Elep, 515 Phil. 237 (2006).
[27]
Rollo, p. 75.
[28]
Velarde v. Social Justice Society, G.R. No. 159357, April 28, 2004, 428 SCRA 283, 307, citing Madrid v. Court
of Appeals, 388 Phil. 366 (2000).
[29]
Salazar v. de Leon, G.R. No. 127965, January 20, 2009, 576 SCRA 447, 462, citing Perez v. Cruz, 452 Phil. 597,
607 (2003).
[30]
Rules of Court, Rule 133, Section 5.
[31]
Office of the Ombudsman (Visayas) v. Zaldarriaga, G.R. No. 175349, June 22, 2010, 621 SCRA 373, 380,
citing Ombudsman v. Jurado, G.R. 154155, August 6, 2008, 561 SCRA 135, 154; Go v. Office of the Ombudsman,
460 Phil. 14, 35 (2003).
[32]
Rollo, pp. 180-191.
[33]
Id. at 592-613 and 214-229.
[34]
Bank of the Philippine Islands v. Shemberg Biotech Corporation, G.R. No. 162291, August 11, 2010, 628 SCRA
70, 76, citing Rasdas v. Estenor, 513 Phil. 664 (2005).
[35]
Madrid v. Mapoy, G. R. No. 150887, August 14, 2009, 596 SCRA 14, 28.
[36]
Rollo, p. 592.
[37]
Tecson v. Sandiganbayan, 376 Phil. 191, 198 (1999).
[38]
Id. at 199; Veloso v. Sandiganbayan, G.R. No. 89043-65, July 16, 1990, 187 SCRA 504.
[39]
G.R. No. 164577, July 5, 2010, 623 SCRA 147.
[40]
Id. at 161, citing Paredes v. CA, G.R. No. 169534, July 30, 2007, 528 SCRA 577.
[41]
Office of the Court Administrator v. Enriquez, A.M. No. P-89-290, January 29, 1993, 218 SCRA 1, 10.
[42]
Ferrer v. Sandiganbayan, G.R. No. 161067, March 14, 2008, 548 SCRA 460, 468, citing Valencia v.
Sandiganbayan, G.R. No. 141336, June 29, 2004, 433 SCRA 88.
[43]
Muring, Jr. v. Gatcho, A.M. No. CA-05-19-P, August 31, 2006, 500 SCRA 330, 349.
[44]
Republic Act No. 4850 (1966), Sec. 16.
[45]
Larin v. Executive Secretary, 345 Phil. 961, 974 (1997), citing Const. (1987), Art. VII, Sec. 16.
[46]
Rollo, p. 651.
[47]
A.M. No. 2008-20-SC, March 15, 2010, 615 SCRA 186.
[48]
G.R. No. 149072, September 21, 2007, 533 SCRA 622.
[49]
Id. at 628.
[50]
Rollo, p. 180.
[51]
Id. at 692.
[52]
Id. at 133.
[53]
Locsin v. Paredes, 63 Phil. 87, 91 (1936).
[54]
Reinsurance Company of the Orient, Inc. v. Court of Appeals, G.R. No. L-61250, June 3, 1991, 198 SCRA 19, 29,
citing Filipino Legion Corporation v. Court of Appeals, 155 Phil. 616 (1974).
[55]
Rollo, p. 133.
[56]
Approved on January 25, 1996 under LLDA Board Resolution No. 5, Series of 1996.
[57]
Rollo, p. 266.

FIRST DIVISION

PAUL LEE TAN, ANDREW G.R. No. 153468

LIUSON, ESTHER WONG,
STEPHEN CO, JAMES TAN, Present:
JUDITH TAN, ERNESTO
TANCHI JR., EDWIN NGO, PANGANIBAN, CJ.,Chairperson,
VIRGINIA KHOO, SABINO YNARES-SANTIAGO,
PADILLA JR., EDUARDO P. AUSTRIA-MARTINEZ,
LIZARES and GRACE CALLEJO, SR., and
CHRISTIAN HIGH SCHOOL, CHICO-NAZARIO, JJ.
Petitioners,
- versus -
PAUL SYCIP and MERRITTO
LIM, Promulgated:
Respondents. August 17, 2006
x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x

DECISION

PANGANIBAN, CJ.:
 For stock corporations, the quorum referred to in Section 52 of the
Corporation Code is based on the number of outstanding voting stocks. For
nonstock corporations, only those who are actual, living members
with voting rights shall be counted in determining the existence of a quorum
during members meetings.Dead members shall not be counted.
The Case

The present Petition for Review on Certiorari[1] under Rule 45 of the

Rules of Court seeks the reversal of the January 23[2] and May 7,

2002,[3]Resolutions of the Court of Appeals (CA) in CA-GR SP No.

68202. The first assailed Resolution dismissed the appeal filed by

petitioners with the CA.Allegedly, without the proper authorization of the

other petitioners, the Verification and Certification of Non-Forum

Shopping were signed by only one of them -- Atty. Sabino Padilla Jr. The

second Resolution denied reconsideration.

The Facts

Petitioner Grace Christian High School (GCHS) is a nonstock, non-profit

educational corporation with fifteen (15) regular members, who also
constitute the board of trustees.[4] During the annual members meeting
held on April 6, 1998, there were only eleven (11)[5] living member-
trustees, as four (4) had already died. Out of the eleven, seven
(7)[6] attended the meeting through their respective proxies. The meeting
was convened and chaired by Atty. Sabino Padilla Jr. over the objection
of Atty. Antonio C. Pacis, who argued that there was no quorum.[7] In the
meeting, Petitioners Ernesto Tanchi, Edwin Ngo, Virginia Khoo, and
Judith Tan were voted to replace the four deceased member-trustees.
When the controversy reached the Securities and Exchange Commission
(SEC), petitioners maintained that the deceased member-trustees should
not be counted in the computation of the quorum because, upon their
death, members automatically lost all their rights (including the right to
vote) and interests in the corporation.
SEC Hearing Officer Malthie G. Militar declared the April 6,
1998 meeting null and void for lack of quorum. She held that the basis for
determining the quorum in a meeting of members should be their number
as specified in the articles of incorporation, not simply the number
of living members.[8] She explained that the qualifying phrase entitled to
vote in Section 24[9] of the Corporation Code, which provided the basis
for determining a quorum for the election of directors or trustees, should
be read together with Section 89.[10]
The hearing officer also opined that Article III (2)[11] of the By-Laws
of GCHS, insofar as it prescribed the mode of filling vacancies in the
board of trustees, must be interpreted in conjunction with Section 29[12] of
the Corporation Code. The SEC en banc denied the appeal of petitioners
and affirmed the Decision of the hearing officer in toto.[13] It found to be
untenable their contention that the word members, as used in Section
52[14] of the Corporation Code, referred only to the living members of a
nonstock corporation.[15]

As earlier stated, the CA dismissed the appeal of petitioners, because

the Verification and Certification of Non-Forum Shopping had been
signed only by Atty. Sabino Padilla Jr. No Special Power of Attorney had
been attached to show his authority to sign for the rest of the petitioners.

Hence, this Petition.[16]

Issues

Petitioners state the issues as follows:

Petitioners principally pray for the resolution of the legal question of whether
or not in NON-STOCK corporations, dead members should still be counted
in determination of quorum for purposed of conducting the Annual Members
Meeting.

Petitioners have maintained before the courts below that the DEAD members
should no longer be counted in computing quorum primarily on the ground
that members rights are personal and non-transferable as provided in
Sections 90 and 91 of the Corporation Code of the Philippines.

The SEC ruled against the petitioners solely on the basis of a 1989 SEC
Opinion that did not even involve a non-stock corporation as petitioner
GCHS.
The Honorable Court of Appeals on the other hand simply refused to
resolve this question and instead dismissed the petition for review on a
technicality the failure to timely submit an SPA from the petitioners
authorizing their co-petitioner Padilla, their counsel and also a
 petitioner before the Court of Appeals, to sign the petition on behalf of the
rest of the petitioners.

Petitioners humbly submit that the action of both the SEC and the Court of
Appeals are not in accord with law particularly the pronouncements of this
Honorable Court in Escorpizo v. University of Baguio (306 SCRA
497), Robern Development Corporation v. Quitain (315 SCRA 150,)
and MC Engineering, Inc. v. NLRC, (360 SCRA 183). Due course should
have been given the petition below and the merits of the case decided in
petitioners favor.[17]

In sum, the issues may be stated simply in this wise: 1) whether the CA
erred in denying the Petition below, on the basis of a defective
Verification and Certification; and 2) whether dead members should still
be counted in the determination of the quorum, for purposes of conducting
the annual members meeting.
The Courts Ruling

The present Petition is partly meritorious.

Procedural Issue:
Verification and Certification
of Non-Forum Shopping

The Petition before the CA was initially flawed, because the

Verification and Certification of Non-Forum Shopping were signed by
only one, not by all, of the petitioners; further, it failed to show proof that
the signatory was authorized to sign on behalf of all of
them. Subsequently, however, petitioners submitted a Special Power of
Attorney, attesting that Atty. Padilla was authorized to file the action on
their behalf.[18]
In the interest of substantial justice, this initial procedural lapse may
be excused. [19] There appears to be no intention to circumvent the need
for proper verification and certification, which are aimed at assuring the
truthfulness and correctness of the allegations in the Petition for Review
and at discouraging forum shopping.[20] More important, the substantial
merits of petitioners case and the purely legal question involved in the
Petition should be considered special circumstances[21] or compelling
reasons that justify an exception to the strict requirements of the
verification and the certification of non-forum shopping.[22]
Main Issue:
Basis for Quorum

Generally, stockholders or members meetings are called for the purpose

of electing directors or trustees[23] and transacting some other business
calling for or requiring the action or consent of the shareholders or
members,[24] such as the amendment of the articles of incorporation and
bylaws, sale or disposition of all or substantially all corporate assets,
consolidation and merger and the like, or any other business that may
properly come before the meeting.
Under the Corporation Code, stockholders or members periodically elect
the board of directors or trustees, who are charged with the management
of the corporation.[25] The board, in turn, periodically elects officers to
carry out management functions on a day-to-day basis. As owners,
though, the stockholders or members have residual powers over
fundamental and major corporate changes.
While stockholders and members (in some instances) are entitled to
receive profits, the management and direction of the corporation are
lodged with their representatives and agents -- the board of directors or
trustees.[26] In other words, acts of management pertain to the board; and
those of ownership, to the stockholders or members. In the latter case, the
board cannot act alone, but must seek approval of the stockholders or
members.[27]
Conformably with the foregoing principles, one of the most important
rights of a qualified shareholder or member is the right
to vote -- either personally or by proxy -- for the directors or trustees who
are to manage the corporate affairs.[28] The right to choose the persons
who will direct, manage and operate the corporation is significant,
because it is the main way in which a stockholder can have a voice in the
management of corporate affairs, or in which a member in a nonstock
corporation can have a say on how the purposes and goals of the
corporation may be achieved.[29]Once the directors or trustees are elected,
the stockholders or members relinquish corporate powers to the board in
accordance with law.

In the absence of an express charter or statutory provision to the contrary,

the general rule is that every member of a nonstock corporation, and every
legal owner of shares in a stock corporation, has a right to be present and
to vote in all corporate meetings. Conversely, those who are not
stockholders or members have no right to vote.[30] Voting may be
expressed personally, or through proxies who vote in their representative
capacities.[31] Generally, the right to be present and to vote in a meeting is
determined by the time in which the meeting is held.[32]

Section 52 of the Corporation Code states:

Section 52. Quorum in Meetings. Unless otherwise provided for in this Code
or in the by-laws, a quorum shall consist of the stockholders representing a
majority of the outstanding capital stock or a majority of the members in the
case of non-stock corporations.

In stock corporations, the presence of a quorum is ascertained and counted

on the basis of the outstanding capital stock, as defined by the Code thus:
SECTION 137. Outstanding capital stock defined. The term outstanding capital
stock as used in this Code, means the total shares of stock issued under
binding subscription agreements to subscribers or stockholders, whether or
not fully or partially paid, except treasury shares. (Underscoring supplied)

The Right to Vote in

Stock Corporations

The right to vote is inherent in and incidental to the ownership of

corporate stocks.[33] It is settled that unissued stocks may not be voted or
considered in determining whether a quorum is present in a stockholders
meeting, or whether a requisite proportion of the stock of the corporation
is voted to adopt a certain measure or act. Only stock actually issued and
outstanding may be voted.[34] Under Section 6 of the Corporation Code,
each share of stock is entitled to vote, unless otherwise provided in the
articles of incorporation or declared delinquent[35] under Section 67 of the
Code.

Neither the stockholders nor the corporation can vote or represent shares
that have never passed to the ownership of stockholders; or, having so
passed, have again been purchased by the corporation.[36] These shares are
not to be taken into consideration in determining majorities. When the law
speaks of a
given proportion of the stock, it must be construed to mean the shares that
have passed from the corporation, and that may be voted.[37]

Section 6 of the Corporation Code, in part, provides:

Section 6. Classification of shares. The shares of stock of stock corporations may

be divided into classes or series of shares, or both, any of which classes or
series of shares may have such rights, privileges or restrictions as may be
stated in the articles of incorporation: Provided, That no share may be
deprived of voting rights except those classified and issued as preferred or
redeemable shares, unless otherwise provided in this Code: Provided,
further, that there shall always be a class or series of shares which have
complete voting rights.

xxxxxxxxx

Where the articles of incorporation provide for non-voting shares in the cases
allowed by this Code, the holders of such shares shall nevertheless be entitled
to vote on the following matters:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all
or substantially all of the corporation property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another
corporation or other corporations;
7. Investment of corporate funds in another corporation or business
in accordance with this Code; and
8. Dissolution of the corporation.

Except as provided in the immediately preceding paragraph, the vote necessary to

approve a particular corporate act as provided in this Code shall be deemed
to refer only to stocks with voting rights.
 Taken in conjunction with Section 137, the last paragraph of Section
6 shows that the intention of the lawmakers was to base the quorum
mentioned in Section 52 on the number of outstanding voting stocks.[38]

The Right to Vote in

Nonstock Corporations

In nonstock corporations, the voting rights attach to

membership.[39] Members vote as persons, in accordance with the law and
the bylaws of the corporation. Each member shall be entitled to one vote
unless so limited, broadened, or denied in the articles of incorporation or
bylaws.[40] We hold that when the principle for determining the quorum
for stock corporations is applied by analogy to nonstock corporations,
only those who are actual members with voting rights should be counted.

Under Section 52 of the Corporation Code, the majority of the

members representing the actual number of voting rights, not
the number or numerical constant that may originally be specified in the
articles of incorporation, constitutes the quorum.[41]

The March 3, 1986 SEC Opinion[42] cited by the hearing officer uses
the phrase majority vote of the members; likewise Section 48 of the
Corporation Code refers to 50 percent of 94 (the number of
registered members of the association mentioned therein) plus one. The
best evidence of who are the present members of the corporation is the
membership book; in the case of stock corporations, it is the stock and
transfer book.[43]

Section 25 of the Code specifically provides that a majority of

the directors or trustees, as fixed in the articles of incorporation, shall
constitute a quorum for the transaction of corporate business (unless the
articles of incorporation or the bylaws provide for a greater majority). If
the intention of the lawmakers was to base the quorum in the meetings of
stockholders or members on their absolute number as fixed in the articles
of incorporation, it would have expressly specified so. Otherwise, the
only logical conclusion is that the legislature did not have that intention.

Effect of the Death

of a Member or Shareholder

Having thus determined that the quorum in a members meeting is to

be reckoned as the actual number of members of the corporation, the next
question to resolve is what happens in the event of the death of one of
them.
In stock corporations, shareholders may generally transfer their
shares. Thus, on the death of a shareholder, the executor or administrator
duly appointed by the Court is vested with the legal title to the stock and
entitled to vote it. Until a settlement and division of the estate is effected,
the stocks of the decedent are held by the administrator or executor.[44]

On the other hand, membership in and all rights arising from a nonstock
corporation are personal and non-transferable, unless the articles of
incorporation or the bylaws of the corporation provide otherwise. [45] In
other words, the determination of whether or not dead members are
entitled to exercise their voting rights (through their executor or
administrator), depends on those articles of incorporation or bylaws.

Under the By-Laws of GCHS, membership in the corporation shall,

among others, be terminated by the death of the member.[46] Section 91 of
the Corporation Code further provides that termination extinguishes all
the rights of a member of the corporation, unless otherwise provided in
the articles of incorporation or the bylaws.
Applying Section 91 to the present case, we hold that dead members who
are dropped from the membership roster in the manner and for the cause
provided for in the By-Laws of GCHS are not to be counted in
determining the requisite vote in corporate matters or the requisite quorum
for the annual members meeting. With 11 remaining members, the
quorum in the present case should be 6. Therefore, there being a quorum,
the annual members meeting, conducted with six[47] members present,
was valid.

Vacancy in the
Board of Trustees

As regards the filling of vacancies in the board of trustees, Section 29 of

the Corporation Code provides:
SECTION 29. Vacancies in the office of director or trustee. -- Any
vacancy occurring in the board of directors or trustees other than by removal
by the stockholders or members or by expiration of term, may be filled by
the vote of at least a majority of the remaining directors or trustees, if still
constituting a quorum; otherwise, said vacancies must be filled by the
stockholders in a regular or special meeting called for that purpose. A
director or trustee so elected to fill a vacancy shall be elected only for the
unexpired term of his predecessor in office.

Undoubtedly, trustees may fill vacancies in the board, provided that

those remaining still constitute a quorum. The phrase may be filled in
Section 29 shows that the filling of vacancies in the board by the
remaining directors or trustees constituting a quorum is merely
permissive, not mandatory.[48]Corporations, therefore, may choose how
vacancies in their respective boards may be filled up -- either by the
remaining directors constituting a quorum, or by the stockholders or
members in a regular or special meeting called for the purpose.[49]

The By-Laws of GCHS prescribed the specific mode of filling up existing

vacancies in its board of directors; that is, by a majority vote of the
remaining members of the board.[50]

While a majority of the remaining corporate members were present,

however, the election of the four trustees cannot be legally upheld for the
obvious reason that it was held in an annual meeting of the members, not
of the board of trustees. We are not unmindful of the fact that the members
of GCHS themselves also constitute the trustees, but we cannot ignore the
GCHS bylaw provision, which specifically prescribes that vacancies in
the board must be filled up by the remaining trustees. In other words, these
remaining member-trustees must sit as a board in order to validly elect
the new ones.
Indeed, there is a well-defined distinction between a corporate act to be
done by the board and that by the constituent members of the
corporation. The board of trustees must act, not individually or separately,
but as a body in a lawful meeting. On the other hand, in their annual
meeting, the members may be represented by their respective proxies, as
in the contested annual members meeting of GCHS.

WHEREFORE, the Petition is partly GRANTED. The assailed

Resolutions of the Court of Appeals are hereby REVERSED AND SET
ASIDE. The remaining members of the board of trustees of Grace
Christian High School (GCHS) may convene and fill up the vacancies in
the board, in accordance with this Decision. No pronouncement as to costs
in this instance.

SO ORDERED.

ARTEMIO V. PANGANIBAN
Chief Justice
Chairperson, First Division

W E C O N C U R:

CONSUELO YNARES-SANTIAGO MA. ALICIA AUSTRIA-MARTINEZ

Associate Justice Associate Justice

ROMEO J. CALLEJO, SR. MINITA V. CHICO-NAZARIO

Associate Justice Associate Justice

CERTIFICATION
 Pursuant to Section 13, Article VIII of the Constitution, I certify that
the conclusions in the above Decision were reached in consultation before
the case was assigned to the writer of the opinion of the Courts Division.

ARTEMIO V. PANGANIBAN
Chief Justice

[1]
Dated June 25, 2002; rollo, pp. 10-24.
[2]
Annex A of the Petition; rollo, p. 35. Penned by Justice B.A. Adefuin-de la Cruz
(Division chair) and concurred in by Justices Wenceslao I. Agnir Jr. and Josefina
Guevara-Salonga.
[3]
Annex B of the Petition; rollo, p. 37.
[4]
Art. II (1), Amended By-Laws of GCHS, provides:
1. Number The regular members of the Corporation shall be fifteen (15) in number and
they shall constitute the Board of Trustees. Associate, non-voting members may
be admitted upon such terms as the Board of Trustees may
determine. (Memorandum for petitioners, p. 2; rollo, p. 92.)
[5]
Petitioners James Tan, Paul Lee Tan, Andrew Liuson, Esther Wong, Stephen Co;
Respondents Paul Sycip and Merritto Lim and four others not parties in this Petition
John Tan, Claro Ben Lim, Wang Ta Peng and Anita So. (Memorandum for
petitioners, p. 2; rollo, p. 92.)
[6]
Wang Ta Peng, Esther Wong, Stephen Co and James L. Tan, represented by Atty. Sabino
Padilla; Paul Lee Tan and Andrew Liuson, represented by Atty. Eduardo P. Lizares;
and Anita So, represented by Atty. Antonio C. Pacis. (Id.; id. at 92-93)
[7]
See Decision dated June 21, 2000, SEC Case No. 08-98-6065, p. 2; rollo, p. 40.
[8]
Id. at 4-6; id. at 42-43.
[9]
Section 24. Election of directors or trustees. At all elections of directors or trustees,
there must be present, either in person or by representative authorized to act by
written proxy, the owners of a majority of the outstanding capital stock, or if there
be no capital stock, a majority of the members entitled to vote. x x x. Any meeting
of the stockholders or members called for an election may adjourn from day to day
or from time to time but not sine die or indefinitely if, for any reason, no election is
held, or if there are not present or represented by proxy, at the meeting, the owners
of a majority of the outstanding capital stock, or if there be no capital stock, a
majority of the member entitled to vote. (Underscoring supplied)
[10]
Section 89. Right to vote. The right of the members of any class or classes to vote may
be limited, broadened or denied to the extent specified in the articles of
 incorporation or the by-laws. Unless so limited, broadened or denied, each member,
regardless of class, shall be entitled to one vote.
Unless otherwise provided in the articles of incorporation or the by-laws, a member may
vote by proxy in accordance with the provisions of this Code.
Voting by mail or other similar means by members of non-stock corporations may be
authorized by the by-laws of non-stock corporations with the approval of, and under
such conditions which may be prescribed by, the Securities and Exchange
Commission.
[11]
Article III (2). Vacancies Any vacancy in the Board of Trustees shall be filled by a
majority vote of the remaining members of the Board. (Cited in Decision, SEC Case
No. 08-98-6065, p. 6; rollo, p. 43.)
[12]
Section 29. Vacancies in the office of director or trustee. Any vacancy occurring in the
board of directors or trustees other than by removal by the stockholders or members
or by expiration of term, may be filled by the vote of at least a majority of the
remaining directors or trustees, if still constituting a quorum; otherwise, said
vacancies must be filled by the stockholders in a regular or special meeting called
for that purpose. x x x. (Underscoring supplied)
[13]
See SEC Order dated July 6, 2001, Annex D of Petition; rollo, pp. 46-51.
[14]
Section 52. Quorum in meetings. Unless otherwise provided for in this Code or in the
by-laws, a quorum shall consist of the stockholders representing a majority of the
outstanding capital stock or a majority of the members in the case of non-stock
corporations. (Underscoring supplied)
[15]
SEC Order dated July 6, 2001, p. 3; rollo, p. 48.
[16]
To resolve old cases, the Court created the Committee on Zero Backlog of Cases
on January 26, 2006. Consequently, the Court resolved to prioritize the adjudication
of long-pending cases by redistributing them among all the justices. This case was
recently re-raffled and assigned to the undersigned ponente for study and report.
[17]
Petitioners Memorandum, pp. 6-7; rollo, pp. 96-97.
[18]
Ateneo De Naga University v. Manalo, 458 SCRA 325, May 9, 2005; Vicar
International Construction, Inc. v. FEB Leasing and Finance Corporation, 456
SCRA 588, April 22, 2005;Alternative Center for Organizational Reforms and
Development, Inc. (ACORD) v. Zamora, 459 SCRA 578, June 8, 2005.
[19]
Estares v. Court of Appeals, 459 SCRA 604, June 8, 2005; Torres v. Specialized
Packaging Development Corporation, 433 SCRA 455, July 6, 2004; National Steel
Corp. v. CA, 436 Phil. 656, August 29, 2002; Sy Chin v. Court of Appeals, 399 Phil.
442, November 23, 2000.
[20]
Pilipinas Shell Petroleum Corporation v. John Bordman Ltd. of Iloilo, Inc., GR No.
159831, October 14, 2005.
[21]
In certain exceptional circumstances, the Court has allowed the relaxation of the rule
requiring verification and certification of non-forum shopping. LDP Marketing,
Inc., v. Monter, GR No. 159653, January 25, 2006 citing Uy v. Land Bank of the
Philippines, 336 SCRA 419, July 24, 2000, Roadway Express, Inc. v. Court of
Appeals, et al., 264 SCRA 696, November 21, 1996, and Loyola v. Court of
 Appeals, et al., 245 SCRA 477, June 29, 1995; Ateneo De Naga University v.
Manalo, 458 SCRA 325, May 9, 2005.
[22]
Uy v. Land Bank of the Philippines, supra.
[23]
CORPORATION CODE, Sec. 24.
[24]
See CORPORATION CODE, Secs. 6, 16, 24, 28-30, 32, 34, 38, 40, 42-44, 46, 48, 77,
118-120.
[25]
CORPORATION CODE, Sec. 23.
Sec. 23. The board of directors or trustees. Unless otherwise provided in this
Code, the corporate powers of all corporations formed under this Code shall be exercised,
all business conducted and all property of such corporations controlled and held by the
board of directors or trustees to be elected from among the holders of stocks, or where there is no
stock, from among the members of the corporation x x x.
[26]
J. CAMPOS, JR. AND M.C. CAMPOS, THE CORPORATION CODE 341, Vol. I
(1990); see also Ramirez v. Orientalist Co., 38 Phil. 634 (1918).
[27]
J. CAMPOS, JR. AND M.C. CAMPOS, supra at 490.
[28]
5 FLETCHER CYCLOPEDIA OF THE LAW OF PRIVATE CORPORATIONS 116
(1976).
[29]
J. CAMPOS, JR. AND M.C. CAMPOS, supra note 26 at 436.
[30]
5 FLETCHER CYCLOPEDIA OF THE LAW OF PRIVATE CORPORATIONS 127
(1976).
[31]
Id.
[32]
Id.
[33]
R. LOPEZ, THE CORPORATION CODE OF THE PHILS. 396, Vol. I (1994).
[34]
5 FLETCHER CYCLOPEDIA OF THE LAW OF PRIVATE CORPORATIONS
77 (1976).
[35]
Section 71. Effect of delinquency. No delinquent stock shall be voted for or be entitled to
vote or to representation at any stockholders meeting. x x x.
[36]
Section 9. Treasury shares. Treasury shares are shares of stock which have been issued
and fully paid for but subsequently reacquired by the issuing corporation by
purchase, redemption, donation or through some other lawful means. x x x.
Section 57. Voting right for treasury shares. Treasury shares shall have no voting right as
long as such stock remains in the Treasury.
[37]
90 ALR 316.
[38]
J. CAMPOS, JR. AND M.C. CAMPOS, supra note 26 at 423.
[39]
R. LOPEZ, supra note 33 at 965.
[40]
CORPORATION CODE, Sec. 89.
[41]
In Noremac, Inc. v. Centre Hill Court, Inc., (178 SE 877, March 14, 1935) the
management and control of the corporation were vested in lot owners who were
members of the corporation, by virtue of their ownership; and the bylaws provided
that a quorum should consist of members representing a majority of the lots,
numbered from 1 to 30, inclusive; but the number of lots was later reduced to 29 so
the Court said that the majority of members representing actual number of lots was
a quorum.
The landmark case Avelino v. Cuenca (83 Phil. 17, March 4, 1949) can be used by
analogy. In that case, the Supreme Court said that [t]here is a difference between a
majority of all the members of the House and a majority of the House, which
requires less number than the first.
In this case, the law refers to the majority of the members and not the majority of all the
members. Thus, we can use the same reasoning that the majority of the members
requires a lesser number than the majority of all the members.
[42]
See the Decision dated June 21, 2000, SEC Case No. 08-98-6065, pp. 3-4; rollo, pp. 41-
42.
[43]
R. LOPEZ, supra note 33 at 973.
[44]
SEC Letter-Opinion to Ms. Rosevelinda E. Calingasan, et al., (R. Lopez) May 14,
1993; CORPORATION CODE, Sec. 55.
[45]
CORPORATION CODE, Sec. 90.
[46]
See Petition, p. 11 (citing Art. III, Amended By-Laws of GCHS on Termination of
Membership); rollo, p. 20.
[47]
Excluding Atty. Antonio C. Pacis (proxy for Anita So), who left the meeting in protest
of the alleged lack of quorum.
[48]
SEC Letter-Opinion to Mr. Noe S. Andaya (R. Lopez) September 20, 1990.
[49]
J. CAMPOS, JR. AND M.C. CAMPOS, supra note 26 at 465.
[50]
Article III (2), By-laws of GCHS (cited in the Decision dated June 21, 2000, SEC Case
No. 08-98-6065, p. 6); rollo, p. 43.

G.R. No. 84197 July 28, 1989

PIONEER INSURANCE & SURETY CORPORATION, petitioner,

vs.
THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY EQUIPMENT, INC.,
(BORMAHECO), CONSTANCIO M. MAGLANA and JACOB S. LIM, respondents.

G.R. No. 84157 July 28, 1989

JACOB S. LIM, petitioner,

vs.
COURT OF APPEALS, PIONEER INSURANCE AND SURETY CORPORATION, BORDER
MACHINERY and HEAVY EQUIPMENT CO., INC,, FRANCISCO and MODESTO CERVANTES
and CONSTANCIO MAGLANA, respondents.

Eriberto D. Ignacio for Pioneer Insurance & Surety Corporation.

Sycip, Salazar, Hernandez & Gatmaitan for Jacob S. Lim.

Renato J. Robles for BORMAHECO, Inc. and Cervanteses.

Leonardo B. Lucena for Constancio Maglana.

GUTIERREZ, JR., J.:

The subject matter of these consolidated petitions is the decision of the Court of Appeals in CA-G.R.
CV No. 66195 which modified the decision of the then Court of First Instance of Manila in Civil Case
No. 66135. The plaintiffs complaint (petitioner in G.R. No. 84197) against all defendants
(respondents in G.R. No. 84197) was dismissed but in all other respects the trial court's decision
was affirmed.

The dispositive portion of the trial court's decision reads as follows:

WHEREFORE, judgment is rendered against defendant Jacob S. Lim requiring Lim

to pay plaintiff the amount of P311,056.02, with interest at the rate of 12% per annum
compounded monthly; plus 15% of the amount awarded to plaintiff as attorney's fees
from July 2,1966, until full payment is made; plus P70,000.00 moral and exemplary
damages.

It is found in the records that the cross party plaintiffs incurred additional
miscellaneous expenses aside from Pl51,000.00,,making a total of P184,878.74.
Defendant Jacob S. Lim is further required to pay cross party plaintiff, Bormaheco,
the Cervanteses one-half and Maglana the other half, the amount of Pl84,878.74 with
interest from the filing of the cross-complaints until the amount is fully paid; plus
moral and exemplary damages in the amount of P184,878.84 with interest from the
filing of the cross-complaints until the amount is fully paid; plus moral and exemplary
damages in the amount of P50,000.00 for each of the two Cervanteses.

Furthermore, he is required to pay P20,000.00 to Bormaheco and the Cervanteses,

and another P20,000.00 to Constancio B. Maglana as attorney's fees.

xxx xxx xxx

WHEREFORE, in view of all above, the complaint of plaintiff Pioneer against

defendants Bormaheco, the Cervanteses and Constancio B. Maglana, is dismissed.
Instead, plaintiff is required to indemnify the defendants Bormaheco and the
Cervanteses the amount of P20,000.00 as attorney's fees and the amount of
P4,379.21, per year from 1966 with legal rate of interest up to the time it is paid.

Furthermore, the plaintiff is required to pay Constancio B. Maglana the amount of

P20,000.00 as attorney's fees and costs.

No moral or exemplary damages is awarded against plaintiff for this action was filed
in good faith. The fact that the properties of the Bormaheco and the Cervanteses
were attached and that they were required to file a counterbond in order to dissolve
the attachment, is not an act of bad faith. When a man tries to protect his rights, he
should not be saddled with moral or exemplary damages. Furthermore, the rights
exercised were provided for in the Rules of Court, and it was the court that ordered it,
in the exercise of its discretion.

No damage is decided against Malayan Insurance Company, Inc., the third-party

defendant, for it only secured the attachment prayed for by the plaintiff Pioneer. If an
insurance company would be liable for damages in performing an act which is clearly
within its power and which is the reason for its being, then nobody would engage in
 the insurance business. No further claim or counter-claim for or against anybody is
declared by this Court. (Rollo - G.R. No. 24197, pp. 15-16)

In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the airline business as owner-
operator of Southern Air Lines (SAL) a single proprietorship.

On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered into and
executed a sales contract (Exhibit A) for the sale and purchase of two (2) DC-3A Type aircrafts and
one (1) set of necessary spare parts for the total agreed price of US $109,000.00 to be paid in
installments. One DC-3 Aircraft with Registry No. PIC-718, arrived in Manila on June 7,1965 while
the other aircraft, arrived in Manila on July 18,1965.

On May 22, 1965, Pioneer Insurance and Surety Corporation (Pioneer, petitioner in G.R. No. 84197)
as surety executed and issued its Surety Bond No. 6639 (Exhibit C) in favor of JDA, in behalf of its
principal, Lim, for the balance price of the aircrafts and spare parts.

It appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco), Francisco and
Modesto Cervantes (Cervanteses) and Constancio Maglana (respondents in both petitions)
contributed some funds used in the purchase of the above aircrafts and spare parts. The funds were
supposed to be their contributions to a new corporation proposed by Lim to expand his airline
business. They executed two (2) separate indemnity agreements (Exhibits D-1 and D-2) in favor of
Pioneer, one signed by Maglana and the other jointly signed by Lim for SAL, Bormaheco and the
Cervanteses. The indemnity agreements stipulated that the indemnitors principally agree and bind
themselves jointly and severally to indemnify and hold and save harmless Pioneer from and against
any/all damages, losses, costs, damages, taxes, penalties, charges and expenses of whatever kind
and nature which Pioneer may incur in consequence of having become surety upon the bond/note
and to pay, reimburse and make good to Pioneer, its successors and assigns, all sums and amounts
of money which it or its representatives should or may pay or cause to be paid or become liable to
pay on them of whatever kind and nature.

On June 10, 1965, Lim doing business under the name and style of SAL executed in favor of
Pioneer as deed of chattel mortgage as security for the latter's suretyship in favor of the former. It
was stipulated therein that Lim transfer and convey to the surety the two aircrafts. The deed (Exhibit
D) was duly registered with the Office of the Register of Deeds of the City of Manila and with the
Civil Aeronautics Administration pursuant to the Chattel Mortgage Law and the Civil Aeronautics Law
(Republic Act No. 776), respectively.

Lim defaulted on his subsequent installment payments prompting JDA to request payments from the
surety. Pioneer paid a total sum of P298,626.12.

Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel mortgage before the
Sheriff of Davao City. The Cervanteses and Maglana, however, filed a third party claim alleging that
they are co-owners of the aircrafts,

On July 19, 1966, Pioneer filed an action for judicial foreclosure with an application for a writ of
preliminary attachment against Lim and respondents, the Cervanteses, Bormaheco and Maglana.

In their Answers, Maglana, Bormaheco and the Cervanteses filed cross-claims against Lim alleging
that they were not privies to the contracts signed by Lim and, by way of counterclaim, sought for
damages for being exposed to litigation and for recovery of the sums of money they advanced to Lim
for the purchase of the aircrafts in question.
After trial on the merits, a decision was rendered holding Lim liable to pay Pioneer but dismissed
Pioneer's complaint against all other defendants.

As stated earlier, the appellate court modified the trial court's decision in that the plaintiffs complaint
against all the defendants was dismissed. In all other respects the trial court's decision was affirmed.

We first resolve G.R. No. 84197.

Petitioner Pioneer Insurance and Surety Corporation avers that:

RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT

DISMISSED THE APPEAL OF PETITIONER ON THE SOLE GROUND THAT
PETITIONER HAD ALREADY COLLECTED THE PROCEEDS OF THE
REINSURANCE ON ITS BOND IN FAVOR OF THE JDA AND THAT IT CANNOT
REPRESENT A REINSURER TO RECOVER THE AMOUNT FROM HEREIN
PRIVATE RESPONDENTS AS DEFENDANTS IN THE TRIAL COURT. (Rollo - G.
R. No. 84197, p. 10)

The petitioner questions the following findings of the appellate court:

We find no merit in plaintiffs appeal. It is undisputed that plaintiff Pioneer had

reinsured its risk of liability under the surety bond in favor of JDA and subsequently
collected the proceeds of such reinsurance in the sum of P295,000.00. Defendants'
alleged obligation to Pioneer amounts to P295,000.00, hence, plaintiffs instant action
for the recovery of the amount of P298,666.28 from defendants will no longer
prosper. Plaintiff Pioneer is not the real party in interest to institute the instant action
as it does not stand to be benefited or injured by the judgment.

Plaintiff Pioneer's contention that it is representing the reinsurer to recover the

amount from defendants, hence, it instituted the action is utterly devoid of merit.
Plaintiff did not even present any evidence that it is the attorney-in-fact of the
reinsurance company, authorized to institute an action for and in behalf of the latter.
To qualify a person to be a real party in interest in whose name an action must be
prosecuted, he must appear to be the present real owner of the right sought to be
enforced (Moran, Vol. I, Comments on the Rules of Court, 1979 ed., p. 155). It has
been held that the real party in interest is the party who would be benefited or injured
by the judgment or the party entitled to the avails of the suit (Salonga v. Warner
Barnes & Co., Ltd., 88 Phil. 125, 131). By real party in interest is meant a present
substantial interest as distinguished from a mere expectancy or a future, contingent,
subordinate or consequential interest (Garcia v. David, 67 Phil. 27; Oglleaby v.
Springfield Marine Bank, 52 N.E. 2d 1600, 385 III, 414; Flowers v. Germans, 1 NW
2d 424; Weber v. City of Cheye, 97 P. 2d 667, 669, quoting 47 C.V. 35).

Based on the foregoing premises, plaintiff Pioneer cannot be considered as the real
party in interest as it has already been paid by the reinsurer the sum of P295,000.00
— the bulk of defendants' alleged obligation to Pioneer.

In addition to the said proceeds of the reinsurance received by plaintiff Pioneer from
its reinsurer, the former was able to foreclose extra-judicially one of the subject
airplanes and its spare engine, realizing the total amount of P37,050.00 from the sale
of the mortgaged chattels. Adding the sum of P37,050.00, to the proceeds of the
reinsurance amounting to P295,000.00, it is patent that plaintiff has been overpaid in
 the amount of P33,383.72 considering that the total amount it had paid to JDA totals
to only P298,666.28. To allow plaintiff Pioneer to recover from defendants the
amount in excess of P298,666.28 would be tantamount to unjust enrichment as it has
already been paid by the reinsurance company of the amount plaintiff has paid to
JDA as surety of defendant Lim vis-a-vis defendant Lim's liability to JDA. Well settled
is the rule that no person should unjustly enrich himself at the expense of another
(Article 22, New Civil Code). (Rollo-84197, pp. 24-25).

The petitioner contends that-(1) it is at a loss where respondent court based its finding that petitioner
was paid by its reinsurer in the aforesaid amount, as this matter has never been raised by any of the
parties herein both in their answers in the court below and in their respective briefs with respondent
court; (Rollo, p. 11) (2) even assuming hypothetically that it was paid by its reinsurer, still none of the
respondents had any interest in the matter since the reinsurance is strictly between the petitioner
and the re-insurer pursuant to section 91 of the Insurance Code; (3) pursuant to the indemnity
agreements, the petitioner is entitled to recover from respondents Bormaheco and Maglana; and (4)
the principle of unjust enrichment is not applicable considering that whatever amount he would
recover from the co-indemnitor will be paid to the reinsurer.

The records belie the petitioner's contention that the issue on the reinsurance money was never
raised by the parties.

A cursory reading of the trial court's lengthy decision shows that two of the issues threshed out were:

xxx xxx xxx

1. Has Pioneer a cause of action against defendants with respect to so much of its
obligations to JDA as has been paid with reinsurance money?

2. If the answer to the preceding question is in the negative, has Pioneer still any
claim against defendants, considering the amount it has realized from the sale of the
mortgaged properties? (Record on Appeal, p. 359, Annex B of G.R. No. 84157).

In resolving these issues, the trial court made the following findings:

It appearing that Pioneer reinsured its risk of liability under the surety bond it had
executed in favor of JDA, collected the proceeds of such reinsurance in the sum of
P295,000, and paid with the said amount the bulk of its alleged liability to JDA under
the said surety bond, it is plain that on this score it no longer has any right to collect
to the extent of the said amount.

On the question of why it is Pioneer, instead of the reinsurance (sic), that is suing
defendants for the amount paid to it by the reinsurers, notwithstanding that the cause
of action pertains to the latter, Pioneer says: The reinsurers opted instead that the
Pioneer Insurance & Surety Corporation shall pursue alone the case.. . . . Pioneer
Insurance & Surety Corporation is representing the reinsurers to recover the amount.'
In other words, insofar as the amount paid to it by the reinsurers Pioneer is suing
defendants as their attorney-in-fact.

But in the first place, there is not the slightest indication in the complaint that Pioneer
is suing as attorney-in- fact of the reinsurers for any amount. Lastly, and most
important of all, Pioneer has no right to institute and maintain in its own name an
action for the benefit of the reinsurers. It is well-settled that an action brought by an
 attorney-in-fact in his own name instead of that of the principal will not prosper, and
this is so even where the name of the principal is disclosed in the complaint.

Section 2 of Rule 3 of the Old Rules of Court provides that 'Every

action must be prosecuted in the name of the real party in interest.'
This provision is mandatory. The real party in interest is the party who
would be benefitted or injured by the judgment or is the party entitled
to the avails of the suit.

This Court has held in various cases that an attorney-in-fact is not a

real party in interest, that there is no law permitting an action to be
brought by an attorney-in-fact. Arroyo v. Granada and Gentero, 18
Phil. Rep. 484; Luchauco v. Limjuco and Gonzalo, 19 Phil. Rep. 12;
Filipinos Industrial Corporation v. San Diego G.R. No. L- 22347,1968,
23 SCRA 706, 710-714.

The total amount paid by Pioneer to JDA is P299,666.29. Since Pioneer has
collected P295,000.00 from the reinsurers, the uninsured portion of what it paid to
JDA is the difference between the two amounts, or P3,666.28. This is the amount for
which Pioneer may sue defendants, assuming that the indemnity agreement is still
valid and effective. But since the amount realized from the sale of the mortgaged
chattels are P35,000.00 for one of the airplanes and P2,050.00 for a spare engine, or
a total of P37,050.00, Pioneer is still overpaid by P33,383.72. Therefore, Pioneer has
no more claim against defendants. (Record on Appeal, pp. 360-363).

The payment to the petitioner made by the reinsurers was not disputed in the appellate court.
Considering this admitted payment, the only issue that cropped up was the effect of payment made
by the reinsurers to the petitioner. Therefore, the petitioner's argument that the respondents had no
interest in the reinsurance contract as this is strictly between the petitioner as insured and the
reinsuring company pursuant to Section 91 (should be Section 98) of the Insurance Code has no
basis.

In general a reinsurer, on payment of a loss acquires the same rights by subrogation

as are acquired in similar cases where the original insurer pays a loss (Universal Ins.
Co. v. Old Time Molasses Co. C.C.A. La., 46 F 2nd 925).

The rules of practice in actions on original insurance policies are in general

applicable to actions or contracts of reinsurance. (Delaware, Ins. Co. v. Pennsylvania
Fire Ins. Co., 55 S.E. 330,126 GA. 380, 7 Ann. Con. 1134).

Hence the applicable law is Article 2207 of the new Civil Code, to wit:

Art. 2207. If the plaintiffs property has been insured, and he has received indemnity
from the insurance company for the injury or loss arising out of the wrong or breach
of contract complained of, the insurance company shall be subrogated to the rights of
the insured against the wrongdoer or the person who has violated the contract. If the
amount paid by the insurance company does not fully cover the injury or loss, the
aggrieved party shall be entitled to recover the deficiency from the person causing
the loss or injury.
Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines, Inc. v. Heald Lumber Co.
(101 Phil. 1031 [1957]) which we subsequently applied in Manila Mahogany Manufacturing
Corporation v. Court of Appeals (154 SCRA 650 [1987]):

Note that if a property is insured and the owner receives the indemnity from the
insurer, it is provided in said article that the insurer is deemed subrogated to the
rights of the insured against the wrongdoer and if the amount paid by the insurer
does not fully cover the loss, then the aggrieved party is the one entitled to recover
the deficiency. Evidently, under this legal provision, the real party in interest with
regard to the portion of the indemnity paid is the insurer and not the insured.
(Emphasis supplied).

It is clear from the records that Pioneer sued in its own name and not as an attorney-in-fact of the
reinsurer.

Accordingly, the appellate court did not commit a reversible error in dismissing the petitioner's
complaint as against the respondents for the reason that the petitioner was not the real party in
interest in the complaint and, therefore, has no cause of action against the respondents.

Nevertheless, the petitioner argues that the appeal as regards the counter indemnitors should not
have been dismissed on the premise that the evidence on record shows that it is entitled to recover
from the counter indemnitors. It does not, however, cite any grounds except its allegation that
respondent "Maglanas defense and evidence are certainly incredible" (p. 12, Rollo) to back up its
contention.

On the other hand, we find the trial court's findings on the matter replete with evidence to
substantiate its finding that the counter-indemnitors are not liable to the petitioner. The trial court
stated:

Apart from the foregoing proposition, the indemnity agreement ceased to be valid
and effective after the execution of the chattel mortgage.

Testimonies of defendants Francisco Cervantes and Modesto Cervantes.

Pioneer Insurance, knowing the value of the aircrafts and the spare parts involved,
agreed to issue the bond provided that the same would be mortgaged to it, but this
was not possible because the planes were still in Japan and could not be mortgaged
here in the Philippines. As soon as the aircrafts were brought to the Philippines, they
would be mortgaged to Pioneer Insurance to cover the bond, and this indemnity
agreement would be cancelled.

The following is averred under oath by Pioneer in the original complaint:

The various conflicting claims over the mortgaged properties have

impaired and rendered insufficient the security under the chattel
mortgage and there is thus no other sufficient security for the claim
sought to be enforced by this action.

This is judicial admission and aside from the chattel mortgage there is no other
security for the claim sought to be enforced by this action, which necessarily means
that the indemnity agreement had ceased to have any force and effect at the time
this action was instituted. Sec 2, Rule 129, Revised Rules of Court.

Prescinding from the foregoing, Pioneer, having foreclosed the chattel mortgage on
the planes and spare parts, no longer has any further action against the defendants
as indemnitors to recover any unpaid balance of the price. The indemnity agreement
was ipso jure extinguished upon the foreclosure of the chattel mortgage. These
defendants, as indemnitors, would be entitled to be subrogated to the right of Pioneer
should they make payments to the latter. Articles 2067 and 2080 of the New Civil
Code of the Philippines.

Independently of the preceding proposition Pioneer's election of the remedy of

foreclosure precludes any further action to recover any unpaid balance of the price.

SAL or Lim, having failed to pay the second to the eight and last installments to JDA
and Pioneer as surety having made of the payments to JDA, the alternative remedies
open to Pioneer were as provided in Article 1484 of the New Civil Code, known as
the Recto Law.

Pioneer exercised the remedy of foreclosure of the chattel mortgage both by

extrajudicial foreclosure and the instant suit. Such being the case, as provided by the
aforementioned provisions, Pioneer shall have no further action against the
purchaser to recover any unpaid balance and any agreement to the contrary is void.'
Cruz, et al. v. Filipinas Investment & Finance Corp. No. L- 24772, May 27,1968, 23
SCRA 791, 795-6.

The operation of the foregoing provision cannot be escaped from through the
contention that Pioneer is not the vendor but JDA. The reason is that Pioneer is
actually exercising the rights of JDA as vendor, having subrogated it in such rights.
Nor may the application of the provision be validly opposed on the ground that these
defendants and defendant Maglana are not the vendee but indemnitors. Pascual, et
al. v. Universal Motors Corporation, G.R. No. L- 27862, Nov. 20,1974, 61 SCRA 124.

The restructuring of the obligations of SAL or Lim, thru the change of their maturity
dates discharged these defendants from any liability as alleged indemnitors. The
change of the maturity dates of the obligations of Lim, or SAL extinguish the original
obligations thru novations thus discharging the indemnitors.

The principal hereof shall be paid in eight equal successive three

months interval installments, the first of which shall be due and
payable 25 August 1965, the remainder of which ... shall be due and
payable on the 26th day x x x of each succeeding three months and
the last of which shall be due and payable 26th May 1967.

However, at the trial of this case, Pioneer produced a memorandum executed by

SAL or Lim and JDA, modifying the maturity dates of the obligations, as follows:

The principal hereof shall be paid in eight equal successive three

month interval installments the first of which shall be due and payable
4 September 1965, the remainder of which ... shall be due and
payable on the 4th day ... of each succeeding months and the last of
which shall be due and payable 4th June 1967.
 Not only that, Pioneer also produced eight purported promissory notes bearing
maturity dates different from that fixed in the aforesaid memorandum; the due date of
the first installment appears as October 15, 1965, and those of the rest of the
installments, the 15th of each succeeding three months, that of the last installment
being July 15, 1967.

These restructuring of the obligations with regard to their maturity dates, effected
twice, were done without the knowledge, much less, would have it believed that
these defendants Maglana (sic). Pioneer's official Numeriano Carbonel would have it
believed that these defendants and defendant Maglana knew of and consented to
the modification of the obligations. But if that were so, there would have been the
corresponding documents in the form of a written notice to as well as written
conformity of these defendants, and there are no such document. The consequence
of this was the extinguishment of the obligations and of the surety bond secured by
the indemnity agreement which was thereby also extinguished. Applicable by
analogy are the rulings of the Supreme Court in the case of Kabankalan Sugar Co. v.
Pacheco, 55 Phil. 553, 563, and the case of Asiatic Petroleum Co. v. Hizon David, 45
Phil. 532, 538.

Art. 2079. An extension granted to the debtor by the creditor without

the consent of the guarantor extinguishes the guaranty The mere
failure on the part of the creditor to demand payment after the debt
has become due does not of itself constitute any extension time
referred to herein, (New Civil Code).'

Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-563, M.F. Stevenson & Co.,
Ltd., v. Climacom et al. (C.A.) 36 O.G. 1571.

Pioneer's liability as surety to JDA had already prescribed when Pioneer paid the
same. Consequently, Pioneer has no more cause of action to recover from these
defendants, as supposed indemnitors, what it has paid to JDA. By virtue of an
express stipulation in the surety bond, the failure of JDA to present its claim to
Pioneer within ten days from default of Lim or SAL on every installment, released
Pioneer from liability from the claim.

Therefore, Pioneer is not entitled to exact reimbursement from these defendants thru
the indemnity.

Art. 1318. Payment by a solidary debtor shall not entitle him to

reimbursement from his co-debtors if such payment is made after the
obligation has prescribed or became illegal.

These defendants are entitled to recover damages and attorney's fees from Pioneer
and its surety by reason of the filing of the instant case against them and the
attachment and garnishment of their properties. The instant action is clearly
unfounded insofar as plaintiff drags these defendants and defendant Maglana.'
(Record on Appeal, pp. 363-369, Rollo of G.R. No. 84157).

We find no cogent reason to reverse or modify these findings.

Hence, it is our conclusion that the petition in G.R. No. 84197 is not meritorious.
We now discuss the merits of G.R. No. 84157.

Petitioner Jacob S. Lim poses the following issues:

l. What legal rules govern the relationship among co-investors whose agreement was
to do business through the corporate vehicle but who failed to incorporate the entity
in which they had chosen to invest? How are the losses to be treated in situations
where their contributions to the intended 'corporation' were invested not through the
corporate form? This Petition presents these fundamental questions which we
believe were resolved erroneously by the Court of Appeals ('CA'). (Rollo, p. 6).

These questions are premised on the petitioner's theory that as a result of the failure of respondents
Bormaheco, Spouses Cervantes, Constancio Maglana and petitioner Lim to incorporate, a de
facto partnership among them was created, and that as a consequence of such relationship all must
share in the losses and/or gains of the venture in proportion to their contribution. The petitioner,
therefore, questions the appellate court's findings ordering him to reimburse certain amounts given
by the respondents to the petitioner as their contributions to the intended corporation, to wit:

However, defendant Lim should be held liable to pay his co-defendants' cross-claims
in the total amount of P184,878.74 as correctly found by the trial court, with interest
from the filing of the cross-complaints until the amount is fully paid. Defendant Lim
should pay one-half of the said amount to Bormaheco and the Cervanteses and the
other one-half to defendant Maglana. It is established in the records that defendant
Lim had duly received the amount of Pl51,000.00 from defendants Bormaheco and
Maglana representing the latter's participation in the ownership of the subject
airplanes and spare parts (Exhibit 58). In addition, the cross-party plaintiffs incurred
additional expenses, hence, the total sum of P 184,878.74.

We first state the principles.

While it has been held that as between themselves the rights of the stockholders in a
defectively incorporated association should be governed by the supposed charter
and the laws of the state relating thereto and not by the rules governing partners
(Cannon v. Brush Electric Co., 54 A. 121, 96 Md. 446, 94 Am. S.R. 584), it is
ordinarily held that persons who attempt, but fail, to form a corporation and who carry
on business under the corporate name occupy the position of partners inter se
(Lynch v. Perryman, 119 P. 229, 29 Okl. 615, Ann. Cas. 1913A 1065). Thus, where
persons associate themselves together under articles to purchase property to carry
on a business, and their organization is so defective as to come short of creating a
corporation within the statute, they become in legal effect partners inter se, and their
rights as members of the company to the property acquired by the company will be
recognized (Smith v. Schoodoc Pond Packing Co., 84 A. 268,109 Me. 555; Whipple
v. Parker, 29 Mich. 369). So, where certain persons associated themselves as a
corporation for the development of land for irrigation purposes, and each conveyed
land to the corporation, and two of them contracted to pay a third the difference in the
proportionate value of the land conveyed by him, and no stock was ever issued in the
corporation, it was treated as a trustee for the associates in an action between them
for an accounting, and its capital stock was treated as partnership assets, sold, and
the proceeds distributed among them in proportion to the value of the property
contributed by each (Shorb v. Beaudry, 56 Cal. 446). However, such a relation does
not necessarily exist, for ordinarily persons cannot be made to assume the relation of
partners, as between themselves, when their purpose is that no partnership shall
 exist (London Assur. Corp. v. Drennen, Minn., 6 S.Ct. 442, 116 U.S. 461, 472, 29
L.Ed. 688), and it should be implied only when necessary to do justice between the
parties; thus, one who takes no part except to subscribe for stock in a proposed
corporation which is never legally formed does not become a partner with other
subscribers who engage in business under the name of the pretended corporation,
so as to be liable as such in an action for settlement of the alleged partnership and
contribution (Ward v. Brigham, 127 Mass. 24). A partnership relation between certain
stockholders and other stockholders, who were also directors, will not be implied in
the absence of an agreement, so as to make the former liable to contribute for
payment of debts illegally contracted by the latter (Heald v. Owen, 44 N.W. 210, 79
Iowa 23). (Corpus Juris Secundum, Vol. 68, p. 464). (Italics supplied).

In the instant case, it is to be noted that the petitioner was declared non-suited for his failure to
appear during the pretrial despite notification. In his answer, the petitioner denied having received
any amount from respondents Bormaheco, the Cervanteses and Maglana. The trial court and the
appellate court, however, found through Exhibit 58, that the petitioner received the amount of
P151,000.00 representing the participation of Bormaheco and Atty. Constancio B. Maglana in the
ownership of the subject airplanes and spare parts. The record shows that defendant Maglana gave
P75,000.00 to petitioner Jacob Lim thru the Cervanteses.

It is therefore clear that the petitioner never had the intention to form a corporation with the
respondents despite his representations to them. This gives credence to the cross-claims of the
respondents to the effect that they were induced and lured by the petitioner to make contributions to
a proposed corporation which was never formed because the petitioner reneged on their agreement.
Maglana alleged in his cross-claim:

... that sometime in early 1965, Jacob Lim proposed to Francisco Cervantes and
Maglana to expand his airline business. Lim was to procure two DC-3's from Japan
and secure the necessary certificates of public convenience and necessity as well as
the required permits for the operation thereof. Maglana sometime in May 1965, gave
Cervantes his share of P75,000.00 for delivery to Lim which Cervantes did and Lim
acknowledged receipt thereof. Cervantes, likewise, delivered his share of the
undertaking. Lim in an undertaking sometime on or about August 9,1965, promised
to incorporate his airline in accordance with their agreement and proceeded to
acquire the planes on his own account. Since then up to the filing of this answer, Lim
has refused, failed and still refuses to set up the corporation or return the money of
Maglana. (Record on Appeal, pp. 337-338).

while respondents Bormaheco and the Cervanteses alleged in their answer, counterclaim, cross-
claim and third party complaint:

Sometime in April 1965, defendant Lim lured and induced the answering defendants
to purchase two airplanes and spare parts from Japan which the latter considered as
their lawful contribution and participation in the proposed corporation to be known as
SAL. Arrangements and negotiations were undertaken by defendant Lim. Down
payments were advanced by defendants Bormaheco and the Cervanteses and
Constancio Maglana (Exh. E- 1). Contrary to the agreement among the defendants,
defendant Lim in connivance with the plaintiff, signed and executed the alleged
chattel mortgage and surety bond agreement in his personal capacity as the alleged
proprietor of the SAL. The answering defendants learned for the first time of this
trickery and misrepresentation of the other, Jacob Lim, when the herein plaintiff
chattel mortgage (sic) allegedly executed by defendant Lim, thereby forcing them to
 file an adverse claim in the form of third party claim. Notwithstanding repeated oral
demands made by defendants Bormaheco and Cervanteses, to defendant Lim, to
surrender the possession of the two planes and their accessories and or return the
amount advanced by the former amounting to an aggregate sum of P 178,997.14 as
evidenced by a statement of accounts, the latter ignored, omitted and refused to
comply with them. (Record on Appeal, pp. 341-342).

Applying therefore the principles of law earlier cited to the facts of the case, necessarily, no de facto
partnership was created among the parties which would entitle the petitioner to a reimbursement of
the supposed losses of the proposed corporation. The record shows that the petitioner was acting on
his own and not in behalf of his other would-be incorporators in transacting the sale of the airplanes
and spare parts.

WHEREFORE, the instant petitions are DISMISSED. The questioned decision of the Court of
Appeals is AFFIRMED.

SO ORDERED.

FIRST DIVISION

[G.R. No. 124535. September 28, 2001]

THE RURAL BANK OF LIPA CITY, INC., THE OFFICERS AND

DIRECTORS, BERNARDO BAUTISTA, JAIME CUSTODIO,
OCTAVIO KATIGBAK, FRANCISCO CUSTODIO, and JUANITA
BAUTISTA OF THE RURAL BANK OF LIPA CITY, INC., petitioners,
vs. HONORABLE COURT OF APPEALS, HONORABLE
COMMISSION EN BANC, SECURITIES AND EXCHANGE
COMMISSION, HONORABLE ENRIQUE L. FLORES, JR., in his
capacity as Hearing Officer, REYNALDO VILLANUEVA, SR.,
AVELINA M. VILLANUEVA, CATALINO VILLANUEVA, ANDRES
GONZALES, AURORA LACERNA, CELSO LAYGO, EDGARDO
REYES, ALEJANDRA TONOGAN and ELENA USI, respondents.

DECISION
YNARES-SANTIAGO, J.:

Before us is a petition for review on certiorari assailing the Decision of the Court of Appeals
dated February 27, 1996, as well as the Resolution dated March 29, 1996, in CA-G.R. SP No.
38861.
The instant controversy arose from a dispute between the Rural Bank of Lipa City,
Incorporated (hereinafter referred to as the Bank), represented by its officers and members of its
Board of Directors, and certain stockholders of the said bank. The records reveal the following
antecedent facts:
Private respondent Reynaldo Villanueva, Sr., a stockholder of the Rural Bank of Lipa City,
executed a Deed of Assignment,[1] wherein he assigned his shares, as well as those of eight (8)
other shareholders under his control with a total of 10,467 shares, in favor of the stockholders of
the Bank represented by its directors Bernardo Bautista, Jaime Custodio and Octavio
Katigbak. Sometime thereafter, Reynaldo Villanueva, Sr. and his wife, Avelina, executed an
Agreement[2] wherein they acknowledged their indebtedness to the Bank in the amount of Four
Million Pesos (P4,000,000.00), and stipulated that said debt will be paid out of the proceeds of the
sale of their real property described in the Agreement.
At a meeting of the Board of Directors of the Bank on November 15, 1993, the Villanueva
spouses assured the Board that their debt would be paid on or before December 31 of that same
year; otherwise, the Bank would be entitled to liquidate their shareholdings, including those under
their control. In such an event, should the proceeds of the sale of said shares fail to satisfy in full
the obligation, the unpaid balance shall be secured by other collateral sufficient therefor.
When the Villanueva spouses failed to settle their obligation to the Bank on the due date, the
Board sent them a letter[3] demanding: (1) the surrender of all the stock certificates issued to them;
and (2) the delivery of sufficient collateral to secure the balance of their debt amounting to
P3,346,898.54. The Villanuevas ignored the banks demands, whereupon their shares of stock were
converted into Treasury Stocks. Later, the Villanuevas, through their counsel, questioned the
legality of the conversion of their shares.[4]
On January 15, 1994, the stockholders of the Bank met to elect the new directors and set of
officers for the year 1994. The Villanuevas were not notified of said meeting. In a letter dated
January 19, 1994, Atty. Amado Ignacio, counsel for the Villanueva spouses, questioned the
legality of the said stockholders meeting and the validity of all the proceedings therein. In reply,
the new set of officers of the Bank informed Atty. Ignacio that the Villanuevas were no longer
entitled to notice of the said meeting since they had relinquished their rights as stockholders in
favor of the Bank.
Consequently, the Villanueva spouses filed with the Securities and Exchange Commission
(SEC), a petition for annulment of the stockholders meeting and election of directors and officers
on January 15, 1994, with damages and prayer for preliminary injunction[5], docketed as SEC Case
No. 02-94-4683. Joining them as co-petitioners were Catalino Villanueva, Andres Gonzales,
Aurora Lacerna, Celso Laygo, Edgardo Reyes, Alejandro Tonogan, and Elena Usi. Named
respondents were the newly-elected officers and directors of the Rural Bank, namely: Bernardo
Bautista, Jaime Custodio, Octavio Katigbak, Francisco Custodio and Juanita Bautista.
The Villanuevas main contention was that the stockholders meeting and election of officers
and directors held on January 15, 1994 were invalid because: (1) they were conducted in violation
of the by-laws of the Rural Bank; (2) they were not given due notice of said meeting and election
notwithstanding the fact that they had not waived their right to notice; (3) they were deprived of
their right to vote despite their being holders of common stock with corresponding voting rights;
(4) their names were irregularly excluded from the list of stockholders; and (5) the candidacy of
petitioner Avelina Villanueva for directorship was arbitrarily disregarded by respondent Bernardo
Bautista and company during the said meeting.
 On February 16, 1994, the SEC issued a temporary restraining order enjoining the
respondents, petitioners herein, from acting as directors and officers of the Bank, and from
performing their duties and functions as such.[6]
In their joint Answer,[7] the respondents therein raised the following defenses:
1) The petitioners have no legal capacity to sue;
2) The petition states no cause of action;
3) The complaint is insufficient;
4) The petitioners claims had already been paid, waived, abandoned, or otherwise extinguished;
5) The petitioners are estopped from challenging the conversion of their shares.
Petitioners, respondents therein, thus moved for the lifting of the temporary restraining order
and the dismissal of the petition for lack of merit, and for the upholding of the validity of the
stockholders meeting and election of directors and officers held on January 15, 1994. By way of
counterclaim, petitioners prayed for actual, moral and exemplary damages.
On April 6, 1994, the Villanuevas application for the issuance of a writ of preliminary
injunction was denied by the SEC Hearing Officer on the ground of lack of sufficient basis for the
issuance thereof.However, a motion for reconsideration[8] was granted on December 16, 1994,
upon finding that since the Villanuevas have not disposed of their shares, whether voluntarily or
involuntarily, they were still stockholders entitled to notice of the annual stockholders meeting
was sustained by the SEC. Accordingly, a writ of preliminary injunction was issued enjoining the
petitioners from acting as directors and officers of the bank.[9]
Thereafter, petitioners filed an urgent motion to quash the writ of preliminary
injunction,[10] challenging the propriety of the said writ considering that they had not yet received
a copy of the order granting the application for the writ of preliminary injunction.
With the impending 1995 annual stockholders meeting only nine (9) days away, the
Villanuevas filed an Omnibus Motion[11] praying that the said meeting and election of officers
scheduled on January 14, 1995 be suspended or held in abeyance, and that the 1993 Board of
Directors be allowed, in the meantime, to act as such. One (1) day before the scheduled
stockholders meeting, the SEC Hearing Officer granted the Omnibus Motion by issuing a
temporary restraining order preventing petitioners from holding the stockholders meeting and
electing the board of directors and officers of the Bank.[12]
A petition for Certiorari and Annulment with Damages was filed by the Rural Bank, its
directors and officers before the SEC en banc,[13] naming as respondents therein SEC Hearing
Officer Enrique L. Flores, Jr., and the Villanuevas, erstwhile petitioners in SEC Case No. 02-94-
4683. The said petition alleged that the orders dated December 16, 1994 and January 13, 1995,
which allowed the issuance of the writ of preliminary injunction and prevented the bank from
holding its 1995 annual stockholders meeting, respectively, were issued by the SEC Hearing
Officer with grave abuse of discretion amounting to lack or excess of jurisdiction. Corollarily, the
Bank, its directors and its officers questioned the SEC Hearing Officers right to restrain the
stockholders meeting and election of officers and directors considering that the Villanueva spouses
and the other petitioners in SEC Case No. 02-94-4683 were no longer stockholders with voting
rights, having already assigned all their shares to the Bank.
 In their Comment/Opposition, the Villanuevas and other private respondents argued that the
filing of the petition for certiorari was premature and there was no grave abuse of discretion on the
part of the SEC Hearing Officer, nor did he act without or in excess of his jurisdiction.
On June 7, 1995, the SEC en banc denied the petition for certiorari in an Order,[14] which
stated:

In the case now before us, petitioners could not show any proof of despotic or
arbitrary exercise of discretion committed by the hearing officer in issuing the assailed
orders save and except the allegation that the private respondents have already
transferred their stockholdings in favor of the stockholders of the Bank. This,
however, is the very issue of the controversy in the case a quo and which, to our mind,
should rightfully be litigated and proven before the hearing officer. This is so because
of the undisputed fact the (sic) private respondents are still in possession of the stock
certificates evidencing their stockholdings and as held by the Supreme Court
in Embassy Farms, Inc. v. Court of Appeals, et al., 188 SCRA 492, citing Nava v.
Peers Marketing Corp., the non-delivery of the stock certificate does not make the
transfer of the shares of stock effective. For an effective transfer of stock, the mode of
transfer as prescribed by law must be followed.

We likewise find that the provision of the Corporation Code cited by the herein
petitioner, particularly Section 83 thereof, to support the claim that the private
respondents are no longer stockholders of the Bank is misplaced. The said law applies
to acquisition of shares of stock by the corporation in the exercise of a stockholders
right of appraisal or when the said stockholder opts to dissent on a specific corporate
act in those instances provided by law and demands the payment of the fair value of
his shares. It does not contemplate a transfer whereby the stockholder, in the exercise
of his right to dispose of his shares (jus disponendi) sells or assigns his stockholdings
in favor of another person where the provisions of Section 63 of the same Code
should be complied with.

The hearing officer, therefore, had a basis in issuing the questioned orders since the
private respondents rights as stockholders may be prejudiced should the writ of
injunction not be issued. The private respondents are presumably stockholders of the
Bank in view of the fact that they have in their possession the stock certificates
evidencing their stockholdings. Until proven otherwise, they remain to be such and
the hearing officer, being the one directly confronted with the facts and pieces of
evidence in the case, may issue such orders and resolutions which may be necessary
or reasonable relative thereto to protect their rights and interest in the meantime that
the said case is still pending trial on the merits.

A subsequent motion for reconsideration[15] was likewise denied by the SEC en banc in a
Resolution[16] dated September 29, 1995.
 A petition for review was thus filed before the Court of Appeals, which was docketed as CA-
G.R. SP No. 38861, assailing the Order dated June 7, 1995 and the Resolution dated September
29, 1995 of the SEC en banc in SEC EB No. 440. The ultimate issue raised before the Court of
Appeals was whether or not the SEC en banc erred in finding:

1. That the Hon. Hearing Officer in SEC Case No. 02-94-4683 did not commit any
grave abuse of discretion that would warrant the filing of a petition for certiorari;

2. That the private respondents are still stockholders of the subject bank and further
stated that it does not contemplate a transfer whereby the stockholders, in the exercise
of his right to dispose of his shares (Jus Disponendi) sells or assigns his stockholdings
in favor of another person where the provisions of Sec. 63 of the same Code should be
complied with; and

3. That the private respondents are presumably stockholders of the bank in view of the
fact that they have in their possession the stock certificates evidencing their
stockholdings.

On February 27, 1996, the Court of Appeals rendered the assailed Decision[17] dismissing the
petition for review for lack of merit. The appellate court found that:

The public respondent is correct in holding that the Hearing Officer did not commit
grave abuse of discretion. The officer, in exercising his judicial functions, did not
exercise his judgment in a capricious, whimsical, arbitrary or despotic manner. The
questioned Orders issued by the Hearing Officer were based on pertinent law and the
facts of the case.

Section 63 of the Corporation Code states: x x x Shares of stock so issued are personal
property and may be transferred by delivery of the certificate or certificates indorsed
by the owner x x x. No transfer, however, shall be valid, except as between the
parties, until the transfer is recorded in the books of the corporation so as to show the
names of the parties to the transaction, the date of the transfer, the number of the
certificate or certificates and the number of shares transferred.

In the case at bench, when private respondents executed a deed of assignment of their
shares of stocks in favor of the Stockholders of the Rural Bank of Lipa City,
represented by Bernardo Bautista, Jaime Custodio and Octavio Katigbak, title to such
shares will not be effective unless the duly indorsed certificate of stock is delivered to
them. For an effective transfer of shares of stock, the mode and manner of transfer as
prescribed by law should be followed. Private respondents are still presumed to be the
owners of the shares and to be stockholders of the Rural Bank.

We find no reversible error in the questioned orders.

 Petitioners motion for reconsideration was likewise denied by the Court of Appeals in an
Order[18] dated March 29, 1996.
Hence, the instant petition for review seeking to annul the Court of Appeals decision dated
February 27, 1996 and the resolution dated March 29, 1996. In particular, the decision is
challenged for its ruling that notwithstanding the execution of the deed of assignment in favor of
the petitioners, transfer of title to such shares is ineffective until and unless the duly indorsed
certificate of stock is delivered to them. Moreover, petitioners faulted the Court of Appeals for not
taking into consideration the acts of disloyalty committed by the Villanueva spouses against the
Bank.
We find no merit in the instant petition.
The Court of Appeals did not err or abuse its discretion in affirming the order of the SEC en
banc, which in turn upheld the order of the SEC Hearing Officer, for the said rulings were in
accordance with law and jurisprudence.
The Corporation Code specifically provides:

SECTION 63. Certificate of stock and transfer of shares. The capital stock of stock
corporations shall be divided into shares for which certificates signed by the president
or vice president, countersigned by the secretary or assistant secretary, and sealed with
the seal of the corporation shall be issued in accordance with the by-laws. Shares of
stocks so issued are personal property and may be transferred by delivery of the
certificate or certificates indorsed by the owner or his attorney-in-fact or other person
legally authorized to make the transfer. No transfer, however, shall be valid, except as
between the parties, until the transfer is recorded in the books of the corporation so as
to show the names of the parties to the transaction, the date of the transfer, the number
of the certificate or certificates and the number of shares transferred.

No shares of stock against which the corporation holds any unpaid claim shall be
transferable in the books of the corporation. (Underscoring ours)

Petitioners argue that by virtue of the Deed of Assignment,[19] private respondents had
relinquished to them any and all rights they may have had as stockholders of the Bank. While it
may be true that there was an assignment of private respondents shares to the petitioners, said
assignment was not sufficient to effect the transfer of shares since there was no endorsement of
the certificates of stock by the owners, their attorneys-in-fact or any other person legally authorized
to make the transfer. Moreover, petitioners admit that the assignment of shares was not coupled
with delivery, the absence of which is a fatal defect. The rule is that the delivery of the stock
certificate duly endorsed by the owner is the operative act of transfer of shares from the lawful
owner to the transferee.[20] Thus, title may be vested in the transferee only by delivery of the duly
indorsed certificate of stock.[21]
We have uniformly held that for a valid transfer of stocks, there must be strict compliance
with the mode of transfer prescribed by law.[22] The requirements are: (a) There must be delivery
of the stock certificate; (b) The certificate must be endorsed by the owner or his attorney-in-fact
or other persons legally authorized to make the transfer; and (c) To be valid against third parties,
the transfer must be recorded in the books of the corporation. As it is, compliance with any of these
requisites has not been clearly and sufficiently shown.
It may be argued that despite non-compliance with the requisite endorsement and delivery,
the assignment was valid between the parties, meaning the private respondents as assignors and
the petitioners as assignees. While the assignment may be valid and binding on the petitioners and
private respondents, it does not necessarily make the transfer effective. Consequently, the
petitioners, as mere assignees, cannot enjoy the status of a stockholder, cannot vote nor be voted
for, and will not be entitled to dividends, insofar as the assigned shares are
concerned. Parenthetically, the private respondents cannot, as yet, be deprived of their rights as
stockholders, until and unless the issue of ownership and transfer of the shares in question is
resolved with finality.
There being no showing that any of the requisites mandated by law[23] was complied with, the
SEC Hearing Officer did not abuse his discretion in granting the issuance of the preliminary
injunction prayed for by petitioners in SEC Case No. 02-94-4683 (herein private
respondents). Accordingly, the order of the SEC en banc affirming the ruling of the SEC Hearing
Officer, and the Court of Appeals decision upholding the SEC en banc order, are valid and in
accordance with law and jurisprudence, thus warranting the denial of the instant petition for
review.
To enable the shareholders of the Rural Bank of Lipa City, Inc. to meet and elect their
directors, the temporary restraining order issued by the SEC Hearing Officer on January 13, 1995
must be lifted.However, private respondents shall be notified of the meeting and be allowed to
exercise their rights as stockholders thereat.
While this case was pending, Republic Act No. 8799[24] was enacted, transferring to the courts
of general jurisdiction or the appropriate Regional Trial Court the SECs jurisdiction over all cases
enumerated under Section 5 of Presidential Decree No. 902-A.[25] One of those cases enumerated
is any controversy arising out of intra-corporate or partnership relations, between and among
stockholders, members, or associates, between any and/or all of them and the corporation,
partnership or association of which they are stockholders, members or associates, respectively;
and between such corporation, partnership or association and the state insofar as it concerns their
individual franchise or right to exist as such entity. The instant controversy clearly falls under this
category of cases which are now cognizable by the Regional Trial Court.
Pursuant to Section 5.2 of R.A. No. 8799, this Court designated specific branches of the
Regional Trial Courts to try and decide cases formerly cognizable by the SEC. For the Fourth
Judicial Region, specifically in the Province of Batangas, the RTC of Batangas City, Branch 32 is
the designated court.[26]
WHEREFORE, in view of all the foregoing, the instant petition for review on certiorari is
DENIED. The Decision and Resolution of the Court of Appeals in CA-G.R. SP No. 38861 are
hereby AFFIRMED. The case is ordered REMANDED to the Regional Trial Court of Batangas
City, Branch 32, for proper disposition. The temporary restraining order issued by the SEC
Hearing Officer dated January 13, 1995 is ordered LIFTED.
SO ORDERED.
 Davide, Jr., C.J., (Chairman), Kapunan, and Pardo, JJ., concur.
Puno, J., in the result.

[1]
Dated February 5, 1993; Annex V, Rollo, pp. 123-124.
[2]
Dated November 10, 1993; Annex W, Rollo, p. 127.
[3]
Dated January 5, 1994.
[4]
Dated January 14, 1994.
[5]
Annex A, Rollo, pp. 21-26.
[6]
Annex B, Rollo, pp. 29-30.
[7]
Annex D, Rollo, pp. 33-47.
[8]
Annex G, Rollo, pp. 57-62.
[9]
Annex I, Rollo, p. 65.
[10]
Annex J, Rollo, pp. 66-70.
[11]
Annex M, Rollo, pp. 73-75.
[12]
Order dated January 13, 1995, Annex Q, Rollo, pp. 104-105.
[13]
Docketed as Case No. EB-440, Rollo, pp. 83-99.
[14]
Annex S, Rollo, pp. 112-115.
[15]
Annex T, Rollo, pp. 116-120.
[16]
Annex U, Rollo, p. 122.
[17]
Annex Y, Rollo, pp. 129-137.
[18]
Annex D, Rollo, pp. 138-139.
[19]
Annex V, dated February 15, 1993; Rollo, pp. 123-124.
[20]
Bitong v. Court of Appeals, 292 SCRA 503, 528 (1998).
[21]
Rivera v. Florendo, 144 SCRA 643, 656-657 (1986).
[22]
Nava v. Peers Marketing Corp., 74 SCRA 65, 69 (1976).
[23]
The Corporation Code, Section 63.
[24]
Otherwise known as The Securities Regulation Code which took effect in the year 2000.
[25]
Section 5.2 of R.A. 8799.
[26]
En Banc Resolution, A.M. No. 00-11-03-SC, promulgated November 21, 2000.

FIRST DIVISION

[G.R. No. 141994. January 17, 2005]

FILIPINAS BROADCASTING NETWORK, INC., petitioner, vs. AGO
MEDICAL AND EDUCATIONAL CENTER-BICOL CHRISTIAN
COLLEGE OF MEDICINE, (AMEC-BCCM) and ANGELITA F.
AGO, respondents.

DECISION
CARPIO, J.:

The Case

This petition for review[1] assails the 4 January 1999 Decision[2] and 26 January 2000
Resolution of the Court of Appeals in CA-G.R. CV No. 40151. The Court of Appeals
affirmed with modification the 14 December 1992 Decision [3] of the Regional Trial Court
of Legazpi City, Branch 10, in Civil Case No. 8236. The Court of Appeals held Filipinas
Broadcasting Network, Inc. and its broadcasters Hermogenes Alegre and Carmelo Rima
liable for libel and ordered them to solidarily pay Ago Medical and Educational Center-
Bicol Christian College of Medicine moral damages, attorneys fees and costs of suit.

The Antecedents

Expos is a radio documentary[4] program hosted by Carmelo Mel Rima (Rima) and
Hermogenes Jun Alegre (Alegre).[5] Expos is aired every morning over DZRC-AM which
is owned by Filipinas Broadcasting Network, Inc. (FBNI). Expos is heard over Legazpi
City, the Albay municipalities and other Bicol areas.[6]
In the morning of 14 and 15 December 1989, Rima and Alegre exposed various
alleged complaints from students, teachers and parents against Ago Medical and
Educational Center-Bicol Christian College of Medicine (AMEC) and its administrators.
Claiming that the broadcasts were defamatory, AMEC and Angelita Ago (Ago), as Dean
of AMECs College of Medicine, filed a complaint for damages [7] against FBNI, Rima and
Alegre on 27 February 1990. Quoted are portions of the allegedly libelous broadcasts:

JUN ALEGRE:

Let us begin with the less burdensome: if you have children taking medical course
at AMEC-BCCM, advise them to pass all subjects because if they fail in any
subject they will repeat their year level, taking up all subjects including those
they have passed already. Several students had approached me stating that they had
consulted with the DECS which told them that there is no such regulation. If [there] is
no such regulation why is AMEC doing the same?

xxx
Second: Earlier AMEC students in Physical Therapy had complained that the
course is not recognized by DECS. xxx

Third: Students are required to take and pay for the subject even if the subject
does not have an instructor - such greed for money on the part of AMECs
administration. Take the subject Anatomy: students would pay for the subject upon
enrolment because it is offered by the school. However there would be no instructor
for such subject. Students would be informed that course would be moved to a later
date because the school is still searching for the appropriate instructor.

xxx

It is a public knowledge that the Ago Medical and Educational Center has survived
and has been surviving for the past few years since its inception because of funds
support from foreign foundations. If you will take a look at the AMEC premises youll
find out that the names of the buildings there are foreign soundings. There is a
McDonald Hall. Why not Jose Rizal or Bonifacio Hall? That is a very concrete and
undeniable evidence that the support of foreign foundations for AMEC is substantial,
isnt it? With the report which is the basis of the expose in DZRC today, it would be
very easy for detractors and enemies of the Ago family to stop the flow of support of
foreign foundations who assist the medical school on the basis of the latters purpose.
But if the purpose of the institution (AMEC) is to deceive students at cross purpose
with its reason for being it is possible for these foreign foundations to lift or suspend
their donations temporarily.[8]

xxx

On the other hand, the administrators of AMEC-BCCM, AMEC Science High

School and the AMEC-Institute of Mass Communication in their effort to
minimize expenses in terms of salary are absorbing or continues to accept
rejects. For example how many teachers in AMEC are former teachers of Aquinas
University but were removed because of immorality? Does it mean that the present
administration of AMEC have the total definite moral foundation from catholic
administrator of Aquinas University. I will prove to you my friends, that AMEC is a
dumping ground, garbage, not merely of moral and physical misfits. Probably
they only qualify in terms of intellect. The Dean of Student Affairs of AMEC is
Justita Lola, as the family name implies. She is too old to work, being an old woman.
Is the AMEC administration exploiting the very [e]nterprising or compromising and
undemanding Lola? Could it be that AMEC is just patiently making use of Dean
Justita Lola were if she is very old. As in atmospheric situation zero visibility the
plane cannot land, meaning she is very old, low pay follows. By the way, Dean Justita
Lola is also the chairman of the committee on scholarship in AMEC. She had retired
from Bicol University a long time ago but AMEC has patiently made use of her.

xxx

MEL RIMA:

xxx My friends based on the expose, AMEC is a dumping ground for moral and
physically misfit people. What does this mean? Immoral and physically misfits as
teachers.

May I say Im sorry to Dean Justita Lola. But this is the truth. The truth is this, that
your are no longer fit to teach. You are too old. As an aviation, your case is zero
visibility. Dont insist.

xxx Why did AMEC still absorb her as a teacher, a dean, and chairman of the
scholarship committee at that. The reason is practical cost saving in salaries, because
an old person is not fastidious, so long as she has money to buy the ingredient of
beetle juice. The elderly can get by thats why she (Lola) was taken in as Dean.

xxx

xxx On our end our task is to attend to the interests of students. It is likely that the
students would be influenced by evil. When they become members of society
outside of campus will be liabilities rather than assets. What do you expect from a
doctor who while studying at AMEC is so much burdened with unreasonable
imposition? What do you expect from a student who aside from peculiar problems
because not all students are rich in their struggle to improve their social status are
even more burdened with false regulations. xxx[9] (Emphasis supplied)

The complaint further alleged that AMEC is a reputable learning institution. With the
supposed exposs, FBNI, Rima and Alegre transmitted malicious imputations, and as
such, destroyed plaintiffs (AMEC and Ago) reputation. AMEC and Ago included FBNI as
defendant for allegedly failing to exercise due diligence in the selection and supervision
of its employees, particularly Rima and Alegre.
On 18 June 1990, FBNI, Rima and Alegre, through Atty. Rozil Lozares, filed an
Answer[10] alleging that the broadcasts against AMEC were fair and true. FBNI, Rima and
Alegre claimed that they were plainly impelled by a sense of public duty to report the
goings-on in AMEC, [which is] an institution imbued with public interest.
Thereafter, trial ensued. During the presentation of the evidence for the defense, Atty.
Edmundo Cea, collaborating counsel of Atty. Lozares, filed a Motion to Dismiss [11] on
FBNIs behalf. The trial court denied the motion to dismiss. Consequently, FBNI filed a
separate Answer claiming that it exercised due diligence in the selection and supervision
of Rima and Alegre. FBNI claimed that before hiring a broadcaster, the broadcaster
should (1) file an application; (2) be interviewed; and (3) undergo an apprenticeship and
training program after passing the interview. FBNI likewise claimed that it always reminds
its broadcasters to observe truth, fairness and objectivity in their broadcasts and to refrain
from using libelous and indecent language. Moreover, FBNI requires all broadcasters to
pass the Kapisanan ng mga Brodkaster sa Pilipinas (KBP) accreditation test and to
secure a KBP permit.
On 14 December 1992, the trial court rendered a Decision[12] finding FBNI and Alegre
liable for libel except Rima. The trial court held that the broadcasts are libelous per se.
The trial court rejected the broadcasters claim that their utterances were the result of
straight reporting because it had no factual basis. The broadcasters did not even verify
their reports before airing them to show good faith. In holding FBNI liable for libel, the trial
court found that FBNI failed to exercise diligence in the selection and supervision of its
employees.
In absolving Rima from the charge, the trial court ruled that Rimas only participation
was when he agreed with Alegres expos. The trial court found Rimas statement within
the bounds of freedom of speech, expression, and of the press. The dispositive portion
of the decision reads:

WHEREFORE, premises considered, this court finds for the plaintiff. Considering
the degree of damages caused by the controversial utterances, which are not
found by this court to be really very serious and damaging, and there being no
showing that indeed the enrollment of plaintiff school dropped, defendants
Hermogenes Jun Alegre, Jr. and Filipinas Broadcasting Network (owner of the radio
station DZRC), are hereby jointly and severally ordered to pay plaintiff Ago Medical
and Educational Center-Bicol Christian College of Medicine (AMEC-BCCM) the
amount of P300,000.00 moral damages, plus P30,000.00 reimbursement of attorneys
fees, and to pay the costs of suit.

SO ORDERED. [13] (Emphasis supplied)

Both parties, namely, FBNI, Rima and Alegre, on one hand, and AMEC and Ago, on
the other, appealed the decision to the Court of Appeals. The Court of Appeals affirmed
the trial courts judgment with modification. The appellate court made Rima solidarily liable
with FBNI and Alegre. The appellate court denied Agos claim for damages and attorneys
fees because the broadcasts were directed against AMEC, and not against her. The
dispositive portion of the Court of Appeals decision reads:

WHEREFORE, the decision appealed from is hereby AFFIRMED, subject to the

modification that broadcaster Mel Rima is SOLIDARILY ADJUDGED liable with
FBN[I] and Hermo[g]enes Alegre.

SO ORDERED.[14]
 FBNI, Rima and Alegre filed a motion for reconsideration which the Court of Appeals
denied in its 26 January 2000 Resolution.
Hence, FBNI filed this petition.[15]

The Ruling of the Court of Appeals

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

Issues

FBNI raises the following issues for resolution:

I. WHETHER THE BROADCASTS ARE LIBELOUS;

II. WHETHER AMEC IS ENTITLED TO MORAL DAMAGES;

III. WHETHER THE AWARD OF ATTORNEYS FEES IS PROPER; and

 IV. WHETHER FBNI IS SOLIDARILY LIABLE WITH RIMA AND ALEGRE
FOR PAYMENT OF MORAL DAMAGES, ATTORNEYS FEES AND
COSTS OF SUIT.

The Courts Ruling

We deny the petition.

This is a civil action for damages as a result of the allegedly defamatory remarks of
Rima and Alegre against AMEC.[17] While AMEC did not point out clearly the legal basis
for its complaint, a reading of the complaint reveals that AMECs cause of action is based
on Articles 30 and 33 of the Civil Code. Article 30 [18] authorizes a separate civil action to
recover civil liability arising from a criminal offense. On the other hand, Article
33[19] particularly provides that the injured party may bring a separate civil action for
damages in cases of defamation, fraud, and physical injuries. AMEC also invokes Article
19[20] of the Civil Code to justify its claim for damages. AMEC cites Articles 2176 [21] and
2180[22] of the Civil Code to hold FBNI solidarily liable with Rima and Alegre.

I.
Whether the broadcasts are libelous

A libel[23] is a public and malicious imputation of a crime, or of a vice or defect, real or

imaginary, or any act or omission, condition, status, or circumstance tending to cause the
dishonor, discredit, or contempt of a natural or juridical person, or to blacken the memory
of one who is dead.[24]
There is no question that the broadcasts were made public and imputed to AMEC
defects or circumstances tending to cause it dishonor, discredit and contempt. Rima and
Alegres remarks such as greed for money on the part of AMECs administrators; AMEC
is a dumping ground, garbage of xxx moral and physical misfits; and AMEC students who
graduate will be liabilities rather than assets of the society are libelous per se. Taken as
a whole, the broadcasts suggest that AMEC is a money-making institution where
physically and morally unfit teachers abound.
However, FBNI contends that the broadcasts are not malicious. FBNI claims that
Rima and Alegre were plainly impelled by their civic duty to air the students gripes. FBNI
alleges that there is no evidence that ill will or spite motivated Rima and Alegre in making
the broadcasts. FBNI further points out that Rima and Alegre exerted efforts to obtain
AMECs side and gave Ago the opportunity to defend AMEC and its administrators. FBNI
concludes that since there is no malice, there is no libel.
FBNIs contentions are untenable.
Every defamatory imputation is presumed malicious.[25] Rima and Alegre failed to
show adequately their good intention and justifiable motive in airing the supposed gripes
of the students. As hosts of a documentary or public affairs program, Rima and Alegre
should have presented the public issues free from inaccurate and misleading
information.[26] Hearing the students alleged complaints a month before the expos, [27] they
had sufficient time to verify their sources and information. However, Rima and Alegre
hardly made a thorough investigation of the students alleged gripes. Neither did they
inquire about nor confirm the purported irregularities in AMEC from the Department of
Education, Culture and Sports. Alegre testified that he merely went to AMEC to verify his
report from an alleged AMEC official who refused to disclose any information. Alegre
simply relied on the words of the students because they were many and not because
there is proof that what they are saying is true.[28] This plainly shows Rima and Alegres
reckless disregard of whether their report was true or not.
Contrary to FBNIs claim, the broadcasts were not the result of straight reporting.
Significantly, some courts in the United States apply the privilege of neutral reportage in
libel cases involving matters of public interest or public figures. Under this privilege, a
republisher who accurately and disinterestedly reports certain defamatory statements
made against public figures is shielded from liability, regardless of the republishers
subjective awareness of the truth or falsity of the accusation.[29] Rima and Alegre cannot
invoke the privilege of neutral reportage because unfounded comments abound in the
broadcasts. Moreover, there is no existing controversy involving AMEC when the
broadcasts were made. The privilege of neutral reportage applies where the defamed
person is a public figure who is involved in an existing controversy, and a party to that
controversy makes the defamatory statement.[30]
However, FBNI argues vigorously that malice in law does not apply to this case.
Citing Borjal v. Court of Appeals,[31] FBNI contends that the broadcasts fall within the
coverage of qualifiedly privileged communications for being commentaries on matters of
public interest. Such being the case, AMEC should prove malice in fact or actual malice.
Since AMEC allegedly failed to prove actual malice, there is no libel.
FBNIs reliance on Borjal is misplaced. In Borjal, the Court elucidated on the doctrine
of fair comment, thus:

[F]air commentaries on matters of public interest are privileged and constitute a valid
defense in an action for libel or slander. The doctrine of fair comment means that
while in general every discreditable imputation publicly made is deemed false,
because every man is presumed innocent until his guilt is judicially proved, and every
false imputation is deemed malicious, nevertheless, when the discreditable imputation
is directed against a public person in his public capacity, it is not necessarily
actionable. In order that such discreditable imputation to a public official may be
actionable, it must either be a false allegation of fact or a comment based on a
false supposition. If the comment is an expression of opinion, based on
established facts, then it is immaterial that the opinion happens to be mistaken, as
long as it might reasonably be inferred from the facts.[32] (Emphasis supplied)

True, AMEC is a private learning institution whose business of educating students is

genuinely imbued with public interest. The welfare of the youth in general and AMECs
students in particular is a matter which the public has the right to know. Thus, similar to
the newspaper articles in Borjal, the subject broadcasts dealt with matters of public
interest. However, unlike in Borjal, the questioned broadcasts are not based
on established facts. The record supports the following findings of the trial court:

xxx Although defendants claim that they were motivated by consistent reports of
students and parents against plaintiff, yet, defendants have not presented in court, nor
even gave name of a single student who made the complaint to them, much less
present written complaint or petition to that effect. To accept this defense of
defendants is too dangerous because it could easily give license to the media to malign
people and establishments based on flimsy excuses that there were reports to them
although they could not satisfactorily establish it. Such laxity would encourage
careless and irresponsible broadcasting which is inimical to public interests.

Secondly, there is reason to believe that defendant radio broadcasters, contrary to the
mandates of their duties, did not verify and analyze the truth of the reports before they
aired it, in order to prove that they are in good faith.

Alegre contended that plaintiff school had no permit and is not accredited to offer
Physical Therapy courses. Yet, plaintiff produced a certificate coming from DECS
that as of Sept. 22, 1987 or more than 2 years before the controversial broadcast,
accreditation to offer Physical Therapy course had already been given the plaintiff,
which certificate is signed by no less than the Secretary of Education and Culture
herself, Lourdes R. Quisumbing (Exh. C-rebuttal). Defendants could have easily
known this were they careful enough to verify. And yet, defendants were very
categorical and sounded too positive when they made the erroneous report that
plaintiff had no permit to offer Physical Therapy courses which they were offering.

The allegation that plaintiff was getting tremendous aids from foreign foundations like
Mcdonald Foundation prove not to be true also. The truth is there is no Mcdonald
Foundation existing. Although a big building of plaintiff school was given the name
Mcdonald building, that was only in order to honor the first missionary in Bicol of
plaintiffs religion, as explained by Dr. Lita Ago. Contrary to the claim of defendants
over the air, not a single centavo appears to be received by plaintiff school from the
aforementioned McDonald Foundation which does not exist.

Defendants did not even also bother to prove their claim, though denied by Dra. Ago,
that when medical students fail in one subject, they are made to repeat all the other
subject[s], even those they have already passed, nor their claim that the school charges
laboratory fees even if there are no laboratories in the school. No evidence was
presented to prove the bases for these claims, at least in order to give semblance of
good faith.
As for the allegation that plaintiff is the dumping ground for misfits, and immoral
teachers, defendant[s] singled out Dean Justita Lola who is said to be so old, with zero
visibility already. Dean Lola testified in court last Jan. 21, 1991, and was found to be
75 years old. xxx Even older people prove to be effective teachers like Supreme Court
Justices who are still very much in demand as law professors in their late years.
Counsel for defendants is past 75 but is found by this court to be still very sharp and
effective. So is plaintiffs counsel.

Dr. Lola was observed by this court not to be physically decrepit yet, nor mentally
infirmed, but is still alert and docile.

The contention that plaintiffs graduates become liabilities rather than assets of our
society is a mere conclusion. Being from the place himself, this court is aware that
majority of the medical graduates of plaintiffs pass the board examination easily and
become prosperous and responsible professionals.[33]

Had the comments been an expression of opinion based on established facts, it is

immaterial that the opinion happens to be mistaken, as long as it might reasonably be
inferred from the facts.[34] However, the comments of Rima and Alegre were not backed
up by facts. Therefore, the broadcasts are not privileged and remain libelous per se.
The broadcasts also violate the Radio Code[35] of the Kapisanan ng mga Brodkaster
sa Pilipinas, Ink. (Radio Code). Item I(B) of the Radio Code provides:

B. PUBLIC AFFAIRS, PUBLIC ISSUES AND COMMENTARIES

1. x x x

4. Public affairs program shall present public issues free from personal
bias, prejudice and inaccurate and misleading information. x x x
Furthermore, the station shall strive to present balanced discussion of
issues. x x x.

xxx

7. The station shall be responsible at all times in the supervision of public

affairs, public issues and commentary programs so that they conform to
the provisions and standards of this code.

8. It shall be the responsibility of the newscaster, commentator, host and

announcer to protect public interest, general welfare and good order in the
presentation of public affairs and public issues.[36](Emphasis supplied)
 The broadcasts fail to meet the standards prescribed in the Radio Code, which lays
down the code of ethical conduct governing practitioners in the radio broadcast industry.
The Radio Code is a voluntary code of conduct imposed by the radio broadcast industry
on its own members. The Radio Code is a public warranty by the radio broadcast industry
that radio broadcast practitioners are subject to a code by which their conduct are
measured for lapses, liability and sanctions.
The public has a right to expect and demand that radio broadcast practitioners live
up to the code of conduct of their profession, just like other professionals. A professional
code of conduct provides the standards for determining whether a person has acted justly,
honestly and with good faith in the exercise of his rights and performance of his duties as
required by Article 19[37] of the Civil Code. A professional code of conduct also provides
the standards for determining whether a person who willfully causes loss or injury to
another has acted in a manner contrary to morals or good customs under Article 21 [38] of
the Civil Code.
II.
Whether AMEC is entitled to moral damages

FBNI contends that AMEC is not entitled to moral damages because it is a

corporation.[39]
A juridical person is generally not entitled to moral damages because, unlike a natural
person, it cannot experience physical suffering or such sentiments as wounded feelings,
serious anxiety, mental anguish or moral shock.[40] The Court of Appeals cites Mambulao
Lumber Co. v. PNB, et al.[41] to justify the award of moral damages. However, the Courts
statement in Mambulao that a corporation may have a good reputation which, if
besmirched, may also be a ground for the award of moral damages is an obiter dictum.[42]
Nevertheless, AMECs claim for moral damages falls under item 7 of Article 2219 [43] of
the Civil Code. This provision expressly authorizes the recovery of moral damages in
cases of libel, slander or any other form of defamation. Article 2219(7) does not qualify
whether the plaintiff is a natural or juridical person. Therefore, a juridical person such as
a corporation can validly complain for libel or any other form of defamation and claim for
moral damages.[44]
Moreover, where the broadcast is libelous per se, the law implies damages.[45] In such
a case, evidence of an honest mistake or the want of character or reputation of the party
libeled goes only in mitigation of damages.[46] Neither in such a case is the plaintiff
required to introduce evidence of actual damages as a condition precedent to the
recovery of some damages.[47] In this case, the broadcasts are libelous per se. Thus,
AMEC is entitled to moral damages.
However, we find the award of P300,000 moral damages unreasonable. The record
shows that even though the broadcasts were libelous per se, AMEC has not suffered any
substantial or material damage to its reputation. Therefore, we reduce the award of moral
damages from P300,000 to P150,000.
 III.
Whether the award of attorneys fees is proper

FBNI contends that since AMEC is not entitled to moral damages, there is no basis
for the award of attorneys fees. FBNI adds that the instant case does not fall under the
enumeration in Article 2208[48] of the Civil Code.
The award of attorneys fees is not proper because AMEC failed to justify satisfactorily
its claim for attorneys fees. AMEC did not adduce evidence to warrant the award of
attorneys fees. Moreover, both the trial and appellate courts failed to explicitly state in
their respective decisions the rationale for the award of attorneys fees.[49] In Inter-Asia
Investment Industries, Inc. v. Court of Appeals,[50] we held that:

[I]t is an accepted doctrine that the award thereof as an item of damages is the
exception rather than the rule, and counsels fees are not to be awarded every time a
party wins a suit. The power of the court to award attorneys fees under Article
2208 of the Civil Code demands factual, legal and equitable justification, without
which the award is a conclusion without a premise, its basis being improperly left
to speculation and conjecture. In all events, the court must explicitly state in the text
of the decision, and not only in the decretal portion thereof, the legal reason for the
award of attorneys fees.[51](Emphasis supplied)

While it mentioned about the award of attorneys fees by stating that it lies within the
discretion of the court and depends upon the circumstances of each case, the Court of
Appeals failed to point out any circumstance to justify the award.
IV.
Whether FBNI is solidarily liable with Rima and Alegre
for moral damages, attorneys fees
and costs of suit

FBNI contends that it is not solidarily liable with Rima and Alegre for the payment of
damages and attorneys fees because it exercised due diligence in the selection and
supervision of its employees, particularly Rima and Alegre. FBNI maintains that its
broadcasters, including Rima and Alegre, undergo a very regimented process before they
are allowed to go on air. Those who apply for broadcaster are subjected to interviews,
examinations and an apprenticeship program.
FBNI further argues that Alegres age and lack of training are irrelevant to his
competence as a broadcaster. FBNI points out that the minor deficiencies in the KBP
accreditation of Rima and Alegre do not in any way prove that FBNI did not exercise the
diligence of a good father of a family in selecting and supervising them. Rimas
accreditation lapsed due to his non-payment of the KBP annual fees while Alegres
accreditation card was delayed allegedly for reasons attributable to the KBP Manila
Office. FBNI claims that membership in the KBP is merely voluntary and not required by
any law or government regulation.
 FBNIs arguments do not persuade us.
The basis of the present action is a tort. Joint tort feasors are jointly and severally
liable for the tort which they commit.[52] Joint tort feasors are all the persons who
command, instigate, promote, encourage, advise, countenance, cooperate in, aid or abet
the commission of a tort, or who approve of it after it is done, if done for their
benefit.[53] Thus, AMEC correctly anchored its cause of action against FBNI on Articles
2176 and 2180 of the Civil Code.
As operator of DZRC-AM and employer of Rima and Alegre, FBNI is solidarily liable
to pay for damages arising from the libelous broadcasts. As stated by the Court of
Appeals, recovery for defamatory statements published by radio or television may be had
from the owner of the station, a licensee, the operator of the station, or a person who
procures, or participates in, the making of the defamatory statements.[54] An employer and
employee are solidarily liable for a defamatory statement by the employee within the
course and scope of his or her employment, at least when the employer authorizes or
ratifies the defamation.[55] In this case, Rima and Alegre were clearly performing their
official duties as hosts of FBNIs radio program Expos when they aired the broadcasts.
FBNI neither alleged nor proved that Rima and Alegre went beyond the scope of their
work at that time. There was likewise no showing that FBNI did not authorize and ratify
the defamatory broadcasts.
Moreover, there is insufficient evidence on record that FBNI exercised due diligence
in the selection and supervision of its employees, particularly Rima and Alegre. FBNI
merely showed that it exercised diligence in the selection of its broadcasters without
introducing any evidence to prove that it observed the same diligence in
the supervision of Rima and Alegre. FBNI did not show how it exercised diligence in
supervising its broadcasters. FBNIs alleged constant reminder to its broadcasters to
observe truth, fairness and objectivity and to refrain from using libelous and indecent
language is not enough to prove due diligence in the supervision of its broadcasters.
Adequate training of the broadcasters on the industrys code of conduct, sufficient
information on libel laws, and continuous evaluation of the broadcasters performance are
but a few of the many ways of showing diligence in the supervision of broadcasters.
FBNI claims that it has taken all the precaution in the selection of Rima and Alegre
as broadcasters, bearing in mind their qualifications. However, no clear and convincing
evidence shows that Rima and Alegre underwent FBNIs regimented process of
application. Furthermore, FBNI admits that Rima and Alegre had deficiencies in their KBP
accreditation,[56] which is one of FBNIs requirements before it hires a broadcaster.
Significantly, membership in the KBP, while voluntary, indicates the broadcasters strong
commitment to observe the broadcast industrys rules and regulations. Clearly, these
circumstances show FBNIs lack of diligence in selecting and supervising Rima and
Alegre. Hence, FBNI is solidarily liable to pay damages together with Rima and Alegre.
WHEREFORE, we DENY the instant petition. We AFFIRM the Decision of 4 January
1999 and Resolution of 26 January 2000 of the Court of Appeals in CA-G.R. CV No.
40151 with the MODIFICATION that the award of moral damages is reduced
from P300,000 to P150,000 and the award of attorneys fees is deleted. Costs against
petitioner.
 SO ORDERED.
Davide, Jr., C.J., (Chairman), Quisumbing, Ynares-Santiago, and Azcuna,
JJ., concur.

[1] Under Rule 45 of the 1997 Rules of Civil Procedure.

[2] Penned by Associate Justice Oswaldo D. Agcaoili, with Associate Justices Corona Ibay-Somera and
Mariano M. Umali concurring.
[3] Penned by Judge Antonio A. Arcangel.
[4] As AMEC and Ago alleged in their Memorandum in the trial court. Records, p. 243.
[5] Alegre substituted Larry (Plaridel) Brocales who was absent then.
[6] Records, p. 2.
[7] Docketed as Civil Case No. 8236.
[8] Exhibit A-2, Exhibits Folder, pp. 21-22.
[9] Exhibit A-3, Exhibits Folder, pp. 23-25.
[10] Records, pp. 28-30.
[11] Ibid., pp. 147-155.
[12] Rollo, pp. 52-68.
[13] Ibid., pp. 67-68.
[14] Ibid., p. 48.
[15] Rima and Alegre did not join the instant petition.
[16] Rollo, p. 45.
[17] In Lopez, etc., et al. v. CA, et al., 145 Phil. 219 (1970), the Court stated the following:
It was held in Lu Chu Sing v. Lu Tiong Gui, that the repeal of the old Libel Law (Act No. 277) did
not abolish the civil action for libel. A libel was defined in that Act as a malicious defamation,
expressed either in writing, printing, or by signs or pictures, or the like, ***, tending to blacken the
memory of one who is dead or to impeach the honesty, virtue, or reputation, or publish the alleged
or natural defects of one who is alive, and thereby expose him to public hatred, contempt, or
ridicule. There was an express provision in such legislation for a tort or quasi-delict action arising
from libel. There is reinforcement to such a view in the new Civil Code providing for the recovery of
moral damages for libel, slander or any other form of defamation. (Emphasis supplied)
[18] Art. 30. When a separate civil action is brought to demand civil liability arising from a criminal offense,
and no criminal proceedings are instituted during the pendency of the civil case, a preponderance
of evidence shall likewise be sufficient to prove the act complained of.
[19] Art. 33. In cases of defamation, fraud, and physical injuries, a civil action for damages, entirely separate
and distinct from the criminal action, may be brought by the injured party. Such civil action shall
proceed independently of the criminal prosecution, and shall require only a preponderance of
evidence.
[20] Art. 19. Every person must, in the exercise of his rights and in the performance of his duties, act with
justice, give everyone his due, and observe honesty and good faith.
[21]Art. 2176. Whoever by act or omission causes damage to another, there being fault or negligence, is
obliged to pay for the damage done. Such fault or negligence, if there is no pre-existing contractual
relation between the parties, is called a quasi-delict and is governed by the provisions of this
Chapter.
[22] Art. 2180. The obligation imposed by article 2176 is demandable not only for ones own acts or omissions,
but also for those of persons for whom one is responsible.
xxx
The owners and managers of an establishment or enterprise are likewise responsible for
damages caused by their employees in the service of the branches in which the latter are employed
or on the occasion of their functions.
Employers shall be liable for the damages caused by their employees and household
helpers acting within the scope of their assigned tasks, even though the former are not engaged in
any business or industry.
xxx
[23] Should be difamaciόn as stated in Lu Chu Sing and Lu Tian Chiong v. Lu Tiong Gui, 76 Phil. 669 (1946).
[24] Article 353 of the Revised Penal Code.
[25] Article 354 of the Revised Penal Code provides:
Art. 354. Requirement of publicity. Every defamatory imputation is presumed to be malicious, even if it be
true, if no good intention and justifiable motive for making it is shown, except in the following cases:
1. A private communication made by any person to another in the performance of any legal, moral or
social duty; and
2. A fair and true report, made in good faith, without any comments or remarks, of any judicial, legislative
or other official proceedings which are not of confidential nature, or of any statement, report or speech
delivered in said proceedings, or of any other act performed by public officers in the exercise of their
functions.
[26] Radio Code of the Kapisanan ng mga Brodkaster sa Pilipinas, Ink., Exhibit 4.
[27] TSN, 22 April 1991, pp. 15, 18-19. Rima, however, testified that he and Alegre made the exposs after
three or four days from the time the students approached them. (TSN, 26 September 1992, pp. 47-
48).
[28] TSN, 22 April 1991, p. 18.
[29] 50 Am Jur. 2d, Libel and Slander 313.
[30] Ibid.
[31] 361 Phil. 1 (1999).
[32] Ibid.
[33] Rollo, pp. 65-67.
[34] Borjal v. Court of Appeals, supra note 31.
[35] 1989 Revised Edition, Exhibit 4.
[36] Ibid.
[37] Supra note 20.
[38] Article 21 of the Civil Code provides: Any person who wilfully causes loss or injury to another in a manner
that is contrary to morals, good customs or public policy shall compensate the latter for the damage.
[39] Rollo, p. 28.
[40] People v. Manero, Jr., G.R. Nos. 86883-85, 29 January 1993, 218 SCRA 85.
[41] 130 Phil. 366 (1968). See also People v. Manero, Jr., G.R. Nos. 86883-85, 29 January 1993, 218 SCRA
85.
[42] ABS-CBN Broadcasting Corp. v. CA, 361 Phil. 499 (1999).
[43] Article 2219(7) of the Civil Code provides: Moral damages may be recovered in the following and
analogous cases: x x x (7) Libel, slander or any other form of defamation; x x x.
[44] See Yap, et al. v. Carreon, 121 Phil. 883 (1965), where the appellants included Philippine Harvardian
College which was an educational institution.
[45] See Phee v. La Vanguardia, 45 Phil. 211 (1923). See also Jimenez v. Reyes, 27 Phil. 52 (1914).
[46] Phee v. La Vanguardia, 45 Phil. 211 (1923).
[47] Ibid. Article 2216 of the Civil Code also provides that No proof of pecuniary loss is necessary in order
that moral, xxx damages may be adjudicated. The assessment of such damages, except liquidated
ones, is left to the discretion of the court, according to the circumstances of each case.
[48] Art. 2208. In the absence of stipulation, attorneys fees and expenses of litigation, other than judicial
costs, cannot be recovered, except:
(1) When exemplary damages are awarded;
(2) When the defendants act or omission has compelled the plaintiff to litigate with third persons or to
incur expenses to protect his interest;
(3) In criminal cases of malicious prosecution against the plaintiff;
(4) In case of a clearly unfounded civil action or proceeding against the plaintiff;
(5) Where the defendant acted in gross and evident bad faith in refusing to satisfy the plaintiffs plainly
valid, just and demandable claim;
(6) In actions for legal support;
(7) In actions for the recovery of wages of household helpers, laborers and skilled workers;
(8) In actions for indemnity under workmens compensation and employers liability laws;
(9) In a separate civil action to recover civil liability arising from a crime;
(10) When at least double judicial costs are awarded;
(11) In any other case where the court deems it just and equitable that attorneys fees and expenses of
litigation should be recovered.
In all cases, the attorneys fees and expenses of litigation must be reasonable.
[49] Koa v. Court of Appeals, G.R. No. 84847, 5 March 1993, 219 SCRA 541 citing Central Azucarera de
Bais v. Court of Appeals, G.R. No. 87597, 3 August 1990, 188 SCRA 328. See also Abrogar v.
Intermediate Appellate Court, No. L-67970, 15 January 1988, 157 SCRA 57.
[50] G.R. No. 125778, 10 June 2003, 403 SCRA 452.
[51] Ibid. See PNB v. CA, 326 Phil. 504 (1996). See also ABS-CBN Broadcasting Corp. v. CA, 361 Phil. 499
(1999).
[52] Worcester v. Ocampo, 22 Phil. 42 (1912).
[53] Ibid.
[54] 50 Am. Jur. 2d, Libel and Slander 370.
[55] Ibid., 358.
[56] Rollo, p. 31.

THIRD DIVISION

[G.R. No. 125778. June 10, 2003]

INTER-ASIA INVESTMENTS INDUSTRIES, INC., petitioner, vs. COURT

OF APPEALS and ASIA INDUSTRIES, INC., respondents.

DECISION
CARPIO-MORALES, J.:

The present petition for review on certiorari assails the Court of Appeals Decision[1] of
January 25, 1996 and Resolution[2] of July 11, 1996.
The material facts of the case are as follows:
On September 1, 1978, Inter-Asia Industries, Inc. (petitioner), by a Stock Purchase
Agreement[3] (the Agreement), sold to Asia Industries, Inc. (private respondent) for and in
consideration of the sum of P19,500,000.00 all its right, title and interest in and to all the
outstanding shares of stock of FARMACOR, INC. (FARMACOR).[4] The Agreement was
signed by Leonides P. Gonzales and Jesus J. Vergara, presidents of petitioner and
private respondent, respectively.[5]
Under paragraph 7 of the Agreement, petitioner as seller made warranties and
representations among which were (iv.) [t]he audited financial statements of FARMACOR
at and for the year ended December 31, 1977... and the audited financial statements of
FARMACOR as of September 30, 1978 being prepared by S[ycip,] G[orres,] V[elayo and
Co.]... fairly present or will present the financial position of FARMACOR and the results
of its operations as of said respective dates; said financial statements show or will show
all liabilities and commitments of FARMACOR, direct or contingent, as of said respective
dates . . .; and (v.) [t]he Minimum Guaranteed Net Worth of FARMACOR as of September
30, 1978 shall be Twelve Million Pesos (P12,000,000.00).[6]
The Agreement was later amended with respect to the Closing Date, originally set up
at 10:00 a.m. of September 30, 1978, which was moved to October 31, 1978, and to the
mode of payment of the purchase price.[7]
The Agreement, as amended, provided that pending submission by SGV of
FARMACORs audited financial statements as of October 31, 1978, private respondent
may retain the sum of P7,500,000.00 out of the stipulated purchase price of
P19,500,000.00; that from this retained amount of P7,500,000.00, private respondent
may deduct any shortfall on the Minimum Guaranteed Net Worth of P12,000,000.00;[8] and
that if the amount retained is not sufficient to make up for the deficiency in the Minimum
Guaranteed Net Worth, petitioner shall pay the difference within 5 days from date of
receipt of the audited financial statements.[9]
Respondent paid petitioner a total amount of P 12,000,000.00: P5,000,000.00 upon
the signing of the Agreement, and P7,000,000.00 on November 2, 1978.[10]
From the STATEMENT OF INCOME AND DEFICIT attached to the financial
report[11] dated November 28, 1978 submitted by SGV, it appears that FARMACOR had,
for the ten months ended October 31, 1978, a deficit of P11,244,225.00. [12] Since the
stockholders equity amounted to P10,000,000.00, FARMACOR had a net worth
deficiency of P1,244,225.00. The guaranteed net worth shortfall thus amounted to
P13,244,225.00 after adding the net worth deficiency of P1,244,225.00 to the Minimum
Guaranteed Net Worth of P12,000,000.00.
The adjusted contract price, therefore, amounted to P6,225,775.00 which is the
difference between the contract price of P19,500,000.00 and the shortfall in the
guaranteed net worth of P13,224,225.00. Private respondent having already paid
petitioner P12,000,000.00, it was entitled to a refund of P5,744,225.00.
Petitioner thereafter proposed, by letter[13] of January 24, 1980, signed by its president,
that private respondents claim for refund be reduced to P4,093,993.00, it promising to
pay the cost of the Northern Cotabato Industries, Inc. (NOCOSII) superstructures in the
amount of P759,570.00. To the proposal respondent agreed. Petitioner, however,
weiched on its promise. Petitioners total liability thus stood at P4,853,503.00
(P4,093,993.00 plus P759,570.00)[14] exclusive of interest.[15]
On April 5, 1983, private respondent filed a complaint[16] against petitioner with the
Regional Trial Court of Makati, one of two causes of action of which was for the recovery
of above-said amount of P4,853,503.00[17] plus interest.
Denying private respondents claim, petitioner countered that private respondent
failed to pay the balance of the purchase price and accordingly set up a counterclaim.
Finding for private respondent, the trial court rendered on November 27, 1991 a
Decision,[18] the dispositive portion of which reads:

WHEREFORE, judgment is rendered in favor of plaintiff and against defendant (a)

ordering the latter to pay to the former the sum of P4,853,503.00 plus interest
[19]

thereon at the legal rate from the filing of the complaint until fully paid, the sum of
P30,000.00 as attorneys fees and the costs of suit; and (b) dismissing the
counterclaim.

SO ORDERED.

On appeal to the Court of Appeals, petitioner raised the following errors:

THE TRIAL COURT ERRED IN HOLDING THE DEFENDANT LIABLE UNDER
THE FIRST CAUSE OF ACTION PLEADED BY THE PLAINTIFF.

THE TRIAL COURT ERRED IN AWARDING ATTORNEYS FEES AND IN

DISMISSING THE COUNTERCLAIM.

THE TRIAL COURT ERRED IN RENDERING JUDGMENT IN FAVOR OF THE

PLAINTIFF, THE ALLEGED BREACH OF WARRANTIES AND
REPRESENTATION NOT HAVING BEEN SHOWN, MUCH LESS
ESTABLISHED BY THE PLAINTIFF. [20]

By Decision of January 25, 1996, the Court of Appeals affirmed the trial courts
decision. Petitioners motion for reconsideration of the decision having been denied by the
Court of Appeals by Resolution of July 11, 1996, the present petition for review on
certiorari was filed, assigning the following errors:
I

THE RESPONDENT COURT ERRED IN NOT HOLDING THAT THE LETTER

OF THE PRESIDENT OF THE PETITIONER IS NOT BINDING ON THE
PETITIONER BEING ULTRA VIRES.

II

THE LETTER CAN NOT BE AN ADMISSION AND WAIVER OF THE

PETITIONER AS A CORPORATION.

III

THE RESPONDENT COURT ERRED IN NOT DECLARING THAT THERE IS

NO BREACH OF WARRANTIES AND REPRESENTATION AS ALLEGED BY
THE PRIVATE RESPONDENT.

IV

THE RESPONDENT COURT ERRED IN ORDERING THE PETITIONER TO

PAY ATTORNEYS FEES AND IN SUSTAINING THE DISMISSAL OF THE
COUNTERCLAIM. (Underscoring in the original)
18

Petitioner argues that the January 24, 1980 letter-proposal (for the reduction of
private respondents claim for refund upon petitioners promise to pay the cost of NOCOSII
superstructures in the amount of P759,570.00) which was signed by its president has no
legal force and effect against it as it was not authorized by its board of directors, it citing
the COrporation Law which provides that unless the act of the president is authorized by
the board of directors, the same is not binding on it.
 This Court is not persuaded.
The January 24, 1980 letter signed by petitioners president is valid and binding. The
case of Peoples Aircargo and Warehousing Co., Inc. v. Court of Appeals19 instructs:

The general rule is that, in the absence of authority from the board of directors,
no person, not even its officers, can validly bind a corporation. A corporation is a
juridical person, separate and distinct from its stockholders and members, having x x
x powers, attributes and properties expressly authorized by law or incident to its
existence.

Being a juridical entity, a corporation may act through its board of directors, which
exercises almost all corporate powers, lays down all corporate business policies and is
responsible for the efficiency of management, as provided in Section 23 of the
Corporation Code of the Philippines:

SEC. 23. The Board of Directors or Trustees. - Unless otherwise provided in this
Code, the corporate powers of all corporations formed under this Code shall be
exercised, all business conducted and all property of such corporations controlled and
held by the board of directors or trustees x x x.

Under this provision, the power and responsibility to decide whether the corporation
should enter into a contract that will bind the corporation is lodged in the board,
subject to the articles of incorporation, bylaws, or relevant provisions of
law. However, just as a natural person may authorize another to do certain acts
for and on his behalf, the board of directors may validly delegate some of its
functions and powers to officers, committees or agents. The authority of such
individuals to bind the corporation is generally derived from law, corporate
bylaws or authorization from the board, either expressly or impliedly by habit,
custom or acquiescence in the general course of business, viz:

A corporate officer or agent may represent and bind the corporation in transactions
with third persons to the extent that [the] authority to do so has been conferred upon
him, and this includes powers as, in the usual course of the particular business, are
incidental to, or may be implied from, the powers intentionally conferred, powers
added by custom and usage, as usually pertaining to the particular officer or agent,
and such apparent powers as the corporation has caused person dealing with the
officer or agent to believe that it has conferred.

xxx

[A]pparent authority is derived not merely from practice. Its existence may be
ascertained through (1) the general manner in which the corporation holds out an
officer or agent as having the power to act or, in other words the apparent authority to
act in general, with which it clothes him; or (2) the acquiescence in his acts of a
particular nature, with actual or constructive knowledge thereof, within or
beyond the scope of his ordinary powers.
It requires presentation of evidence of similar act(s) executed either in
its favor or in favor of other parties. It is not
the quantity of similar acts whichestablishes apparent authority, but
the vesting of a corporate officer with power to bind the corporation.

x x x (Emphasis and underscoring supplied)

As correctly argued by private respondent, an officer of a corporation who is

authorized to purchase the stock of another corporation has the implied power to perform
all other obligations arising therefrom, such as payment of the shares of stock. By allowing
its president to sign the Agreement on its behalf, petitioner clothed him with apparent
capacity to perform all acts which are expressly, impliedly and inherently stated therein.[21]
Petitioner further argues that when the Agreement was executed on September 1,
1978, its financial statements were extensively examined and accepted as correct by
private respondent, hence, it cannot later be disproved by resorting to some scheme such
as future financial auditing;[22] and that it should not be bound by the SGV Report because
it is self-serving and biased, SGV having been hired solely by private respondent, and the
alleged shortfall of FARMACOR occurred only after the execution of the Agreement.
This Court is not persuaded either.
The pertinent provisions of the Agreement read:

7. Warranties and Representations - (a) SELLER warrants and represents as

follows:

xxx

(iv) The audited financial statements of FARMACOR as at and for the year
ended December 31, 1977 and
the audited financial statements of FARMACOR as at September 30,
1978 beingprepared by SGV pursuant to paragraph 6(b) fairly pres
ent or will present the financial position of FARMACOR and the
results of its operations as of said respective dates; said financial
statements show or will show all liabilities and commitments of
FARMACOR, direct or contingent, as of said respective dates; and
the receivables set forth in said financial statements are fully due and
collectible, free and clear of any set-offs, defenses, claims and other
impediments to their collectibility.
 (v) The Minimum Guaranteed Net Worth of FARMACOR as of
September 30, 1978 shall be Twelve Million Pesos (P12,000,000.00),
Philippine Currency.

x x x (Underscoring in the original; emphasis supplied) [23]

True, private respondent accepted as correct the financial statements submitted to it

when the Agreement was executed on September 1, 1978. But
petitioner expressly warranted that the SGV Reports fairly present or will present the
financial position of FARMACOR. By such warranty, petitioner is estopped from claiming
that the SGV Reports are self-serving and biased.
As to the claim that the shortfall occurred after the execution of the Agreement, the
declaration of Emmanuel de Asis, supervisor in the Accounting Division of SGV and head
of the team which conducted the auditing of FARMACOR, that the period covered by the
audit was from January to October 1978 shows that the period before the Agreement
was entered into (on September 1, 1978) was covered.[24]
As to petitioners assigned error on the award of attorneys fees which, it argues, is
bereft of factual, legal and equitable justification, this Court finds the same well-taken.

On the matter of attorneys fees, it is an accepted doctrine that the award thereof as an
item of damages is the exception rather than the rule, and counsels fees are not to be
awarded every time a party wins a suit. The power of the court to award
attorneys fees under Article 2208 of the Civil Code demands
factual, legal and equitable justification, without which the award is
a conclusion without a premise, its basis being improperly left
to speculation and conjecture. In all events, the court must explicitly state in the
text of the decision, and not only in the decretal portion thereof, the legal reason
for the award of attorneys fees. [25]

x x x (Emphasis and underscoring supplied; citations omitted)

WHEREFORE, the instant petition is PARTLY GRANTED. The assailed decision of

the Court of Appeals affirming that of the trial court is modified in that the award of
attorneys fees in favor of private respondent is deleted. The decision is affirmed in other
respects.
SO ORDERED.
Puno, (Chairman), Panganiban, Sandoval-Gutierrez, and Corona, JJ., concur.

[1]
Rollo at 29-42.
[2]
Id. at 44-45.
[3]
Records at 9-23.
[4]
Id. at 10-11.
[5]
Id. at 22.
[6]
Id. at 16-17.
[7]
Exhibits G-1, G-2, G-3; Records at 586-593.
[8]
Ibid.
[9]
Records at 12.
[10]
Rollo, at 12 and 82.
[11]
Records at 322-327.
[12]
Id. at 324-325.
[13]
Exhibit G-6; Records at 598-604.
[14]
P4,853,503.00 is the amount prayed for in the complaint but it is noted that the total amount of these
figures is P4,853,563.00.
[15]
Id. at 13; Records at 4.
[16]
Records at 1-25.
[17]
See footnote 14.
[18]
Id. at 757-760.
[19]
See footnote 14. Plaintiff did not move to reconsider the amount adjudged to it.
[20]
Rollo at 14.
18
Id at 15.
19
297 SCRA 170 (1998).
[21]
Rollo at 92-93.
[22]
Id. at 21.
[23]
Records at 17-18.
[24]
Transcript of Stenographic Notes, July 27, 1988 at 5.
[25]
Central Azucarera de Bais v. CA, 188 SCRA 328 (1990).

FIRST DIVISION

[G.R. No. 137592. December 12, 2001]

ANG MGA KAANIB SA IGLESIA NG DIOS KAY KRISTO HESUS, H.S.K.

SA BANSANG PILIPINAS, INC. petitioner, vs. IGLESIA NG DIOS
 KAY CRISTO JESUS, HALIGI AT SUHAY NG
KATOTOHANAN, respondent.

DECISION
YNARES-SANTIAGO, J.:

This is a petition for review assailing the Decision dated October 7, 1997[1] and the Resolution
dated February 16, 1999[2] of the Court of Appeals in CA-G.R. SP No. 40933, which affirmed the
Decision of the Securities and Exchange and Commission (SEC) in SEC-AC No. 539.[3]
Respondent Iglesia ng Dios Kay Cristo Jesus, Haligi at Suhay ng Katotohanan (Church of
God in Christ Jesus, the Pillar and Ground of Truth),[4] is a non-stock religious society or
corporation registered in 1936. Sometime in 1976, one Eliseo Soriano and several other members
of respondent corporation disassociated themselves from the latter and succeeded in registering on
March 30, 1977 a new non-stock religious society or corporation, named Iglesia ng Dios Kay
Kristo Hesus, Haligi at Saligan ng Katotohanan.
On July 16, 1979, respondent corporation filed with the SEC a petition to compel the Iglesia
ng Dios Kay Kristo Hesus, Haligi at Saligan ng Katotohanan to change its corporate name, which
petition was docketed as SEC Case No. 1774. On May 4, 1988, the SEC rendered judgment in
favor of respondent, ordering the Iglesia ng Dios Kay Kristo Hesus, Haligi at Saligan ng
Katotohanan to change its corporate name to another name that is not similar or identical to any
name already used by a corporation, partnership or association registered with the
Commission.[5] No appeal was taken from said decision.
It appears that during the pendency of SEC Case No. 1774, Soriano, et al., caused the
registration on April 25, 1980 of petitioner corporation, Ang Mga Kaanib sa Iglesia ng Dios Kay
Kristo Hesus, H.S.K., sa Bansang Pilipinas. The acronym H.S.K. stands for Haligi at Saligan ng
Katotohanan.[6]
On March 2, 1994, respondent corporation filed before the SEC a petition, docketed as SEC
Case No. 03-94-4704, praying that petitioner be compelled to change its corporate name and be
barred from using the same or similar name on the ground that the same causes confusion among
their members as well as the public.
Petitioner filed a motion to dismiss on the ground of lack of cause of action. The motion to
dismiss was denied. Thereafter, for failure to file an answer, petitioner was declared in default and
respondent was allowed to present its evidence ex parte.
On November 20, 1995, the SEC rendered a decision ordering petitioner to change its
corporate name. The dispositive portion thereof reads:

PREMISES CONSIDERED, judgment is hereby rendered in favor of the petitioner

(respondent herein).

Respondent Mga Kaanib sa Iglesia ng Dios Kay Kristo Jesus (sic), H.S.K. sa Bansang
Pilipinas (petitioner herein) is hereby MANDATED to change its corporate name to
another not deceptively similar or identical to the same already used by the
Petitioner, any corporation, association, and/or partnership presently registered with
the Commission.

Let a copy of this Decision be furnished the Records Division and the Corporate
and Legal Department [CLD] of this Commission for their records, reference and/or
for whatever requisite action, if any, to be undertaken at their end.

SO ORDERED.[7]

Petitioner appealed to the SEC En Banc, where its appeal was docketed as SEC-AC No.
539. In a decision dated March 4, 1996, the SEC En Banc affirmed the above decision, upon a
finding that petitioner's corporate name was identical or confusingly or deceptively similar to that
of respondents corporate name.[8]
Petitioner filed a petition for review with the Court of Appeals. On October 7, 1997, the Court
of Appeals rendered the assailed decision affirming the decision of the SEC En Banc. Petitioners
motion for reconsideration was denied by the Court of Appeals on February 16, 1992.
Hence, the instant petition for review, raising the following assignment of errors:
I

THE HONORABLE COURT OF APPEALS ERRED IN CONCLUDING THAT

PETITIONER HAS NOT BEEN DEPRIVED OF ITS RIGHT TO
PROCEDURAL DUE PROCESS, THE HONORABLE COURT OF APPEALS
DISREGARDED THE JURISPRUDENCE APPLICABLE TO THE CASE AT
BAR AND INSTEAD RELIED ON TOTALLY INAPPLICABLE
JURISPRUDENCE.
II

THE HONORABLE COURT OF APPEALS ERRED IN ITS INTEPRETATION

OF THE CIVIL CODE PROVISIONS ON EXTINCTIVE PRESCRIPTION,
THEREBY RESULTING IN ITS FAILURE TO FIND THAT THE
RESPONDENT'S RIGHT OF ACTION TO INSTITUTE THE SEC CASE HAS
SINCE PRESCRIBED PRIOR TO ITS INSTITUTION.
III

THE HONORABLE COURT OF APPEALS FAILED TO CONSIDER AND

PROPERLY APPLY THE EXCEPTIONS ESTABLISHED BY
JURISPRUDENCE IN THE APPLICATION OF SECTION 18 OF THE
CORPORATION CODE TO THE INSTANT CASE.
IV
 THE HONORABLE COURT OF APPEALS FAILED TO PROPERLY
APPRECIATE THE SCOPE OF THE CONSTITUTIONAL GUARANTEE ON
RELIGIOUS FREEDOM, THEREBY FAILING TO APPLY THE SAME TO
PROTECT PETITIONERS RIGHTS.[9]

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

Corporate Name. --- No corporate name may be allowed by the Securities and
Exchange Commission if the proposed name is identical or deceptively or confusingly
similar to that of any existing corporation or to any other name already protected by
law or is patently deceptive, confusing or is contrary to existing laws. When a change
in the corporate name is approved, the Commission shall issue an amended certificate
of incorporation under the amended name.

Corollary thereto, the pertinent portion of the SEC Guidelines on Corporate Names states:

(d) If the proposed name contains a word similar to a word already used as part of the
firm name or style of a registered company, the proposed name must contain two
other words different from the name of the company already registered;

Parties organizing a corporation must choose a name at their peril; and the use of a name
similar to one adopted by another corporation, whether a business or a nonprofit organization, if
misleading or likely to injure in the exercise of its corporate functions, regardless of intent, may
be prevented by the corporation having a prior right, by a suit for injunction against the new
corporation to prevent the use of the name.[18]
Petitioner claims that it complied with the aforecited SEC guideline by adding not only two
but eight words to their registered name, to wit: Ang Mga Kaanib" and "Sa Bansang Pilipinas,
Inc., which, petitioner argues, effectively distinguished it from respondent corporation.
The additional words Ang Mga Kaanib and Sa Bansang Pilipinas, Inc. in petitioners name
are, as correctly observed by the SEC, merely descriptive of and also referring to the members,
or kaanib, of respondent who are likewise residing in the Philippines. These words can hardly
serve as an effective differentiating medium necessary to avoid confusion or difficulty in
distinguishing petitioner from respondent. This is especially so, since both petitioner and
respondent corporations are using the same acronym --- H.S.K.;[19] not to mention the fact that both
are espousing religious beliefs and operating in the same place. Parenthetically, it is well to
mention that the acronym H.S.K. used by petitioner stands for Haligi at Saligan ng
Katotohanan.[20]
Then, too, the records reveal that in holding out their corporate name to the public, petitioner
highlights the dominant words IGLESIA NG DIOS KAY KRISTO HESUS, HALIGI AT SALIGAN
NG KATOTOHANAN, which is strikingly similar to respondent's corporate name, thus making it
even more evident that the additional words Ang Mga Kaanib and Sa Bansang Pilipinas, Inc., are
merely descriptive of and pertaining to the members of respondent corporation.[21]
Significantly, the only difference between the corporate names of petitioner and respondent
are the words SALIGAN and SUHAY. These words are synonymous --- both mean ground,
foundation or support. Hence, this case is on all fours with Universal Mills Corporation v.
Universal Textile Mills, Inc.,[22] where the Court ruled that the corporate names Universal Mills
Corporation and Universal Textile Mills, Inc., are undisputably so similar that even under the test
of reasonable care and observation confusion may arise.
Furthermore, the wholesale appropriation by petitioner of respondent's corporate name cannot
find justification under the generic word rule. We agree with the Court of Appeals conclusion that
a contrary ruling would encourage other corporations to adopt verbatim and register an existing
and protected corporate name, to the detriment of the public.
The fact that there are other non-stock religious societies or corporations using the names
Church of the Living God, Inc., Church of God Jesus Christ the Son of God the Head, Church of
God in Christ & By the Holy Spirit, and other similar names, is of no consequence. It does not
authorize the use by petitioner of the essential and distinguishing feature of respondent's registered
and protected corporate name.[23]
We need not belabor the fourth issue raised by petitioner. Certainly, ordering petitioner to
change its corporate name is not a violation of its constitutionally guaranteed right to religious
freedom. In so doing, the SEC merely compelled petitioner to abide by one of the SEC guidelines
in the approval of partnership and corporate names, namely its undertaking to manifest its
willingness to change its corporate name in the event another person, firm, or entity has acquired
a prior right to the use of the said firm name or one deceptively or confusingly similar to it.
WHEREFORE, in view of all the foregoing, the instant petition for review is DENIED. The
appealed decision of the Court of Appeals is AFFIRMED in toto.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Kapunan, and Pardo, JJ., concur.
Puno, J., on official leave.

[1]
Rollo, pp. 57-68; penned Mr. Justice Cancio C. Garcia and concurred in by Mesdames Justices Delilah Vidallion-
Magtolis and Marina L. Buzon.
[2]
Ibid., pp. 54-55.
[3]
Ibid., pp. 70-73.
[4]
Official English translation; see Rollo, p. 252.
[5]
Rollo, pp. 419-424.
[6]
Ibid., p. 430.
[7]
Ibid., pp. 78-79.
[8]
Ibid., pp. 70-73.
[9]
Ibid., pp. 18-19.
[10]
195 SCRA 418 [1991].
[11]
Apex Mining, Inc. v. Court of Appeals, et al., 319 SCRA 456, 465 [1999].
[12]
Legarda v. Court of Appeals, supra.
[13]
Rollo, p. 75.
[14]
Ibid., p. 71.
[15]
Salonga, et al., v. Court of Appeals, et al., 269 SCRA 534, 546 [1997].
[16]
Aldovino, et al., v. Alunan III, et al., 230 SCRA 825,833 [1994].
[17]
R.E. Agpalo, Comments on the Corporation Code of the Philippines, 74, (Fifth Edition, 1993), citing Universal
Mills Corporation v. Universal Textile Mills, Inc., 78 SCRA 62 (1977).
[18]
Philips Export B.V.V. Court of Appeals, et al., 206 SCRA 457, 467 [1992]; citing American Gold Stars Mothers,
Inc., National Gold Star Mothers, Inc., 89 App DC 269, 191 F 2d 488, 27 ALR 2d 948.
[19]
Rollo, p. 292.
[20]
Ibid., p. 430.
[21]
Rollo, pp. 487-491.
[22]
Supra.
[23]
Philips Export B.V.V. Court of Appeals, et al., supra.

EN BANC

[G. R. No. 107789. April 30, 2003]

REPUBLIC OF THE PHILIPPINES (PRESIDENTIAL COMMISSION ON

GOOD GOVERNMENT), petitioner, vs. THE HONORABLE
SANDIGANBAYAN (THIRD DIVISION) and VICTOR
AFRICA, respondents.
EROCOM INVESTORS AND MANAGERS, INC., BENITO NIETO,
CARLOS NIETO, MANUEL NIETO III, RAMON NIETO, ROSARIO
ARELLANO, VICTORIA LEGARDA, ANGELA LOBREGAT, MA.
RITA DE LOS REYES, CARMEN TUAZON and RAFAEL
VALDEZ, intervenors.

[G. R. No. 147214. April 30, 2003]

VICTOR AFRICA, petitioner, vs. THE HONORABLE SANDIGANBAYAN

and THE PRESIDENTIAL COMMISSION ON GOOD
GOVERNMENT, respondents.

RESOLUTION
CARPIO-MORALES, J.:

These consolidated cases, the first for Certiorari, Mandamus and Prohibition, and the
second for Review on Certiorari although it is actually one for Certiorari, stem from a
Resolution of November 13, 1992 issued by the Sandiganbayan in Civil Case No.
0130,[1] on motion of Victor Africa (Africa) who prayed that said court order the calling and
holding of the Eastern Telecommunications, Philippines, Inc. (ETPI) annual stockholders
meeting for 1992 under the [c]ourts control and supervision and prescribed guidelines.
 It is gathered that on August 7, 1991, the Presidential Commission on Good
Government (PCGG) conducted an ETPI stockholders meeting during which a PCGG
controlled board of directors was elected. A special stockholders meeting was later
convened by the registered ETPI stockholders wherein another set of board of directors
was elected, as a result of which two sets of such board and officers were elected.
Africa, a stockholder of ETPI, alleging that the PCGG had since January 29, 1988
been illegally exercising the rights of stockholders of ETPI, [2] especially in the election of
the members of the board of directors, filed the above-said motion before the
Sandiganbayan.
The PCGG did not object to Africas motion provided that:

1. An Order be issued upholding the right of PCGG to vote all the Class A
shares of ETPI.

2. In the alternative, in the remote event that PCGGs right to vote the
sequestered shares be not upheld, an Order be issued:

a. Disregarding the Stock and Transfer Book and Booklet of Stock

Certificates of ETPI in determining who can vote the shares in an
Annual Stockholders Meeting of ETPI,

b. Allowing PCGG to vote twenty-three and 90/100 percent (23.9%) of

the total subscription in ETPI, and

c. Directing the amendment of the Articles of Incorporation and By-laws

of ETPI providing for the minimum safeguards for the
conservation of assets x x x prior to the calling of a stockholders
meeting. [3]

By the assailed Resolution of November 13, 1992, [4] the Sandiganbayan resolved
Africas motion, the dispositive portion of which reads:

WHEREFORE, it is ordered that an annual stockholders meeting of the Eastern

Telecommunications, Philippines, Inc. (ETPI), for 1992 be held on Friday, November
27, 1992, at 2:00 oclock in the afternoon, at the ETPI Board Room, Telecoms Plaza,
7th Floor, 316 Gil J. Puyat Avenue, Makati, Metro Manila. The Executive Clerk of
Court of this Division shall issue the call and notice of annual stockholders meeting of
ETPI addressed to all the duly registered/recorded stockholders of ETPI. The
stockholders meeting shall be conducted under the supervision and control of this
Court, through Mr. Justice Sabino R. de Leon, Jr. In accordance with the Supreme
Court ruling in Cojuangco et al vs. Azcuna, et al., supra, only the registered owners,
their duly authorized representatives or their proxies may vote their corresponding
shares.

The following minimum safeguards must be set in place and carefully maintained
until final judicial resolution of the question of whether or not the sequestered shares
of stock (or in a proper case the underlying assets of the corporation concerned)
constitute ill-gotten wealth:

a. An independent comptroller must be appointed by the Board of Directors

upon nomination of the PCGG as conservator. The comptroller shall not
be removable (nor shall his position be abolished or his compensation
changed) without the consent of the conservator. The comptroller shall,
in addition to his other functions as such, have charge of internal audit.

b. The corporate secretary must be acceptable to the conservator. If the

corporate secretary ceases to be acceptable to the conservator, a new one
must be appointed by the Board of Directors upon nomination of the
conservator.

c. The external auditors of the corporation must be independent and must be

acceptable to the conservator. The independent external auditors shall
not be changed without the consent of the conservator.

d. The conservator must be represented in the Board of Directors and in the

Executive (or equivalent) and Audit Committees of the corporation
involved and of its majority-owned subsidiaries or affiliates. The
representative of the conservator must be a full director (not merely an
honorary or ex-officio director) with the right to vote and all other rights
and duties of a member of the Board of Directors under the Corporation
Code. The conservators representative shall not be removed from the
Board of Directors (or the mentioned Committees) without the consent
of the conservator. The conservator shall, however, have the right to
remove and change its representative at any time, and the new
representative shall be promptly elected to the Board and its mentioned
Committees.

e. All transactions involving the disbursement of corporate funds in excess

of P5 million must have the prior approval of the director representing
the conservator, in order to be valid and effective.

f. The incurring of debt by the corporation, whether in the form of bonds,

debentures, commercial paper or any other form, in excess of P5 million,
 must have the prior approval of the director representing the conservator,
in order to be valid and effective.

g. The disposition of a substantial part of assets of the corporation (substantial

meaning in excess of P5 million) shall require the prior approval of the
director representing the conservator, in order to be valid and effective.

h. The above safeguards must be written into the articles of incorporation and
by-laws of the company involved. In other words, the articles of
incorporation and by-laws of the company must be amended so as to
incorporate the above safeguards.

i. Any amendment of the articles of incorporation or by-laws of the company

that will modify in any way any of the above safeguards, shall need the
prior approval of the director representing the conservator.

SO ORDERED. (Underscoring supplied)

[5]

Assailing the foregoing resolution, the PCGG filed before this Court the herein first
petition, docketed as G. R. No. 107789, anchored upon the following grounds:
I

RESPONDENT SANDIGANBAYAN ACTED WITH GRAVE ABUSE OF

DISCRETION IN RULING THAT THE REGISTERED STOCKHOLDERS OF
ETPI HAD THE RIGHT TO VOTE IN SPITE OF (A) THE RULING OF THIS
HONORABLE COURT IN PCGG V. SEC AND AFRICA (G. R. NO. 82188) AND
(B) A CLEAR SHOWING THAT ETPIS STOCK AND TRANSFER BOOK WAS
ALTERED AND CANNOT BE USED AS THE BASIS TO DETERMINE WHO
CAN VOTE IN A STOCKHOLDERS MEETING.

II

RESPONDENT SANDIGANBAYAN GRAVELY ABUSED ITS DISCRETION

AND EXCEEDED ITS JURISDICTION WHEN IT HELD THAT PCGG CANNOT
VOTE AT LEAST 23.9% OF THE OUTSTANDING CAPITAL STOCK OF ETPI.

III

WITHOUT DUE CARE AND IN RECKLESS DISREGARD OF THE INTERESTS

OF THE REPUBLIC, RESPONDENT SANDIGANBAYAN GRAVELY ABUSED
ITS DISCRETION IN ORDERING THE HOLDING OF A STOCKHOLDERS
MEETING IN ETPI WITHOUT FIRST SETTING IN PLACE BY AMENDING
THE ARTICLES AND BY-LAWS OF ETPI TO INCORPORATE THE
SAFEGUARDS PRESCRIBED BY THIS HONORABLE COURT IN COJUANGCO
V. ROXAS.

IV

THE SANDIGANBAYAN ACTED IN EXCESS OF ITS AUTHORITY AND/OR

WITH GRAVE ABUSE OF DISCRETION IN APPOINTING (A) ITS OWN
DIVISION CLERK OF COURT TO PERFORM THE DUTIES OF A CORPORATE
SECRETARY, AND (B) ITS OWN JUSTICE SABINO DE LEON, JR. TO
CONTROL AND SUPERVISE THE STOCKHOLDERS MEETING. (Underscoring [6]

in the original)

By Resolution of November 26, 1992, this Court enjoined the Sandiganbayan from
(a) implementing its Resolution of November 13, 1992, and (b) holding the stockholders
meeting of ETPI scheduled on November 27, 1992, at 2:00 p.m.
On December 7, 1992, Aerocom Investors and Managers, Inc. (AEROCOM), Benito
Nieto, Carlos Nieto, Manuel Nieto III, Ramon Nieto, Rosario Arellano, Victoria Legarda,
Angela Lobregat, Ma. Rita de los Reyes, Carmen Tuazon and Rafael Valdez, all
stockholders of record of ETPI, filed a motion to intervene in G. R. No. 107789. Their
motion was granted by this Court by Resolution of January 14, 1993.
After the parties submitted their respective memoranda, the PCGG, in early 1995,
filed a VERY URGENT PETITION FOR AUTHORITY TO HOLD SPECIAL
STOCKHOLDERS MEETING FOR [THE] SOLE PURPOSE OF INCREASING [ETPIs]
AUTHORIZED CAPITAL STOCK, it claiming that the increase in authorized capital stock
was necessary in light of the requirements laid down by Executive Order No. 109 [7] and
Republic Act No. 7975.[8]
By Resolution of May 7, 1996,[9] this Court resolved to refer the PCGGs very urgent
petition to hold the special stockholders meeting to the Sandiganbayan for reception of
evidence and resolution.
In compliance therewith, the Sandiganbayan issued a Resolution of December 13,
1996,[10] which is being assailed in the herein second petition, granting the PCGG authority
to cause the holding of a special stockholders meeting of ETPI for the sole purpose of
increasing ETPIs authorized capital stock and to vote therein the sequestered Class A
shares of stock. . . . In said Resolution, the Sandiganbayan held that there was an urgent
necessity to increase ETPIs authorized capital stock; there existed a prima facie factual
foundation for the issuance of the writ of sequestration covering the Class A shares of
stock; and the PCGG was entitled to vote the sequestered shares of stock.
The PCGG-controlled ETPI board of directors thus authorized the ETPI Chair and
Corporate Secretary to call the special stockholders meeting. Notices were sent to those
entitled to vote for a meeting on March 17, 1997. The meeting was held as scheduled
and the increase in ETPIs authorized capital stock from P250 Million to P2.6 Billion was
unanimously approved.[11]
 On April 1, 1997, Africa filed before this Court a motion to cite the PCGG and its
accomplices in contempt and to nullify the stockholders meeting called/conducted by
PCGG and its accomplices, he contending that only this Court, and not the
Sandiganbayan, has the power to authorize the PCGG to call a stockholders meeting and
vote the sequestered shares. Africa went on to contend that, assuming that the
Sandiganbayan had such power, its Resolution of December 13, 1996 authorizing the
PCGG to hold the stockholders meeting had not yet become final because the motions
for reconsideration of said resolution were still pending. Further, Africa alleged that he
was not given notice of the meeting, and the PCGG had no right to vote the sequestered
Class A shares.
A motion for leave to intervene relative to Africas Motion to Cite the PCGG and its
Accomplices in Contempt was filed by ETPI. This Court granted the motion for leave but
ETPI never filed any pleading relative to Africas motion to cite the PCGG in contempt.
By Resolution of February 16, 2001, the Sandiganbayan finally resolved to deny the
motions for reconsideration of its Resolution of December 13, 1996, prompting Africa to
file on April 6, 2001 before this Court the herein second petition,[12] docketed as G. R. No.
147214, challenging the Sandiganbayan Resolutions of December 13, 1996 (authorizing
the holding of a stockholders meeting to increase ETPIs authorized capital stock and to
vote therein the sequestered Class A shares of stock) and February 16, 2001 (denying
reconsideration of the December 13, 1996 Resolution).
In his petition in G. R. No. 147214, Africa alleged that the Sandiganbayan committed
grave abuse of discretion when, by the assailed Resolutions,

a. IT DID NOT ACKNOWLEDGE THE NON-SEQUESTERED STATUS

OF THE SHARES [OF SMALL STOCHHOLDERS OF WHICH HE IS
ONE AND AEROCOM AND POLYGON] AND/OR OWNERS
THEREOF[;] [AND]

b. IT DID NOT ACCORD TO THE NON-SEQUESTERED

SHARES/OWNERS THE RIGHTS APPURTENANT TO A
STOCKHOLDER[.]

He thus prayed that this Court set aside the questioned Resolutions permitting the PCGG
to vote the non-sequestered ETPI Class A shares and nullify the votes the PCGG had
cast in the stockholders meeting held on March 17, 1997.
By Resolution of February 24, 2003,[13] this Court ordered the consolidation of G. R.
No. 147214 with G. R. No. 107789, now the subject of the present Resolution.
I
The first issue to be resolved is whether the PCGG can vote the sequestered ETPI
Class A shares in the stockholders meeting for the election of the board of directors. The
leading case on the matter is Bataan Shipyard & Engineering Co., Inc. v. Presidential
Commission on Good Government[14] where this Court defined the powers of the PCGG
as follows:

a. PCGG May Not Exercise Acts of Ownership

One thing is certain, and should be stated at the outset: the PCGG cannot exercise acts
of dominion over property sequestered, frozen or provisionally taken over. As already
earlier stressed with no little insistence, the act of sequestration[,] freezing or
provisional takeover of property does not import or bring about a divestment of title
over said property; [it] does not make the PCGG the owner thereof. In relation to the
property sequestered, frozen or provisionally taken over, the PCGG is a conservator,
not an owner. Therefore, it can not perform acts of strict ownership; and this is
specially true in the situations contemplated by the sequestration rules where, unlike
cases of receivership, for example, no court exercises effective supervision or can
upon due application and hearing, grant authority for the performance of acts of
dominion.

Equally evident is that resort to the provisional remedies in question should entail the
least possible interference with business operations or activities so that, in the event
that the accusation of the business enterprise being ill-gotten be not proven, it may be
returned to its rightful owner as far as possible in the same condition as it was at the
time of sequestration.

b. PCGG Has Only Powers of Administration

The PCGG may thus exercise only powers of administration over the property or
business sequestered or provisionally taken over, much like a court-appointed
receiver, such as to bring and defend actions in its own name; receive rents; collect
debts due; pay outstanding debts due; and generally do such other acts and things as
may be necessary to fulfill its mission as conservator and administrator. In this
context, it may in addition enjoin or restrain any actual or threatened commission of
acts by any person or entity that may render moot and academic, or frustrate or
otherwise make ineffectual its efforts to carry out its task; punish for direct or indirect
contempt in accordance with the Rules of Court; and seek and secure the assistance of
any office, agency or instrumentality of the government. In the case of sequestered
businesses generally (i.e., going concerns, businesses in current operation), as in the
case of sequestered objects, its essential role, as already discussed, is that of
conservator, caretaker, watchdog or overseer.It is not that of manager, or innovator,
much less an owner.

c. Powers over Business Enterprises Taken Over by Marcos or Entities or Persons

Close to him; Limitations Thereon
Now, in the special instance of a business enterprise shown by evidence to have been
taken over by the government of the Marcos Administration or by entities or persons
close to former President Marcos, the PCGG is given power and authority, as already
adverted to, to provisionally take (it) over in the public interest or to prevent * * (its)
disposal or dissipation; and since the term is obviously employed in reference to going
concerns, or business enterprises in operation, something more than mere physical
custody is connoted; the PCGG may in this case exercise some measure of control in
the operation, running, or management of the business itself. But even in this special
situation, the intrusion into management should be restricted to the minimum degree
necessary to accomplish the legislative will, which is to prevent the disposal or
dissipation of the business enterprise. There should be no hasty, indiscriminate,
unreasoned replacement or substitution of management officials or change of policies,
particularly in respect of viable establishments. In fact, such a replacement or
substitution should be avoided if at all possible, and undertaken only when justified by
demonstrably tenable grounds and in line with the stated objectives of the PCGG. And
it goes without saying that where replacement of management officers may be called
for, the greatest prudence, circumspection, care and attention should accompany that
undertaking to the end that truly competent, experienced and honest managers may be
recruited. There should be no role to be played in this area by rank amateurs, no
matter how well meaning. The road to hell, it has been said, is paved with good
intentions. The business is not to be experimented or played around with, not run into
the ground, not driven to bankruptcy, not fleeced, not ruined. Sight should never be
lost x x x of the ultimate objective of the whole exercise, which is to turn over the
business to the Republic, once judicially established to be ill-gotten. Reason dictates
that it is only under these conditions and circumstances that the supervision,
administration and control of business enterprises provisionally taken over may
legitimately be exercised.

d. Voting of Sequestered Stock; Conditions Therefor

So, too, it is within the parameters of these conditions and circumstances that the
PCGG may properly exercise the prerogative to vote sequestered stock of
corporations, granted to it by the President of the Philippines through a Memorandum
dated June 26, 1986. That Memorandum authorizes the PCGG, pending the outcome
of proceedings to determine the ownership of * * (sequestered) shares of stock, to
vote such shares of stock as it may have sequestered in corporations at all
stockholders meetings called for the election of directors, declaration of dividends,
amendment of the Articles of Incorporation, etc. The Memorandum should be
construed in such a manner as to be consistent with, and not contradictory to the
Executive Orders earlier promulgated on the same matter. There should be no exercise
of the right to vote simply because the right exists, or because the stocks sequestered
constitute the controlling or a substantial part of the corporate voting power. The stock
is not to be voted to replace directors, or revise the articles or by-laws, or otherwise
bring about substantial changes in policy, program or practice of the corporation
except for demonstrably weighty and defensible grounds, and always in the context of
the stated purposes of sequestration or provisional takeover, i.e., to prevent the
dispersion or undue disposal of the corporate assets. Directors are not to be voted out
simply because the power to do so exists. Substitution of directors is not to be done
without reason or rhyme, should indeed be shunned if at all possible, and undertaken
only when essential to prevent disappearance or wastage of corporate property, and
always under such circumstances as to assure that replacements are truly possessed of
competence, experience and probity.

In the case at bar, there was adequate justification to vote the incumbent directors out
of office and elect others in their stead because the evidence showed prima facie that
the former were just tools of President Marcos and were no longer owners of any
stock in the firm, if they ever were at all. This is why, in its Resolution of October 28,
1986[,] this Court declared that

Petitioner has failed to make out a case of grave abuse or excess of jurisdiction in
respondents calling and holding of a stockholders meeting for the election of directors
as authorized by the Memorandum of the President * * (to the PCGG) dated June 26,
1986, particularly, where as in this case, the government can, through its designated
directors, properly exercise control and management over what appear to be properties
and assets owned and belonging to the government itself and over which the persons
who appear in this case on behalf of BASECO have failed to show any right or even
any shareholding in said corporation.

It must however be emphasized that the conduct of the PCGG nominees in the
BASECO Board in the management of the companys affairs should henceforth be
guided and governed by the norms herein laid down. They should never for a moment
allow themselves to forget they are conservators, not owners of the business; they are
fiduciaries, trustees, of whom the highest degree of diligence and rectitude is, in the
premises, required. (Italics in the original)

The PCGG cannot thus vote sequestered shares, except when there are
demonstrably weighty and defensible grounds or when essential to prevent
disappearance or wastage of corporate property.[15]
The principle laid down in Baseco was further enhanced in the subsequent cases
of Cojuungco v. Calpo[16] and Presidential Commission on Good Government v.
Cojuangco, Jr.,[17]where this Court developed a two-tiered test in determining whether the
PCGG may vote sequestered shares:
The issue of whether PCGG may vote the sequestered shares in SMC necessitates a
determination of at least two factual matters:

1. whether there is prima facie evidence showing that the said shares are ill-gotten and
thus belong to the state; and

2. whether there is an immediate danger of dissipation thus necessitating their

continued sequestration and voting by the PCGG while the main issue pends with the
Sandiganbayan. [18]

The two-tiered test, however, does not apply in cases involving funds of public
character. In such cases, the government is granted the authority to vote said shares,
namely:

(1) Where government shares are taken over by private persons or entities who/which
registered them in their own names, and

(2) Where the capitalization or shares that were acquired with public funds somehow
landed in private hands. [19]

This Court, in Republic v. Cocofed,[20] explained:

The [public character] exceptions are based on the common-sense principle that legal
fiction must yield to truth; that public property registered in the names of non-owners
is affected with trust relations; and that the prima facie beneficial owner should be
given the privilege of enjoying the rights flowing from the prima facie fact of
ownership.

In Baseco, a private corporation known as the Bataan Shipyard and Engineering Co.
was placed under sequestration by the PCGG. Explained the Court:

The facts show that the corporation known as BASECO was owned and controlled by
President Marcos during his administration, through nominees, by taking undue
advantage of his public office and/or using his powers, authority, or influence, and
that it was by and through the same means, that BASECO had taken over the business
and/or assets of the National Shipyard and Engineering Co., Inc., and other
government-owned or controlled entities.

Given this factual background, the Court discussed PCGGs right over BASECO in the
following manner:

Now, in the special instance of a business enterprise shown by evidence to have been
taken over by the government of the Marcos Administration or by entities or persons
close to former President Marcos, the PCGG is given power and authority, as already
adverted to, to provisionally take (it) over in the public interest or to prevent * * (its)
disposal or dissipation; and since the term is obviously employed in reference to going
concerns, or business enterprises in operation, something more than mere physical
custody is connoted; the PCGG may in this case exercise some measure of control in
the operation, running, or management of the business itself.

Citing an earlier Resolution, it ruled further:

Petitioner has failed to make out a case of grave abuse of excess of jurisdiction in
respondents calling and holding of a stockholders meeting for the election of directors
as authorized by the Memorandum of the President * * (to the PCGG) dated June 26,
1986, particularly, where as in this case, the government can, through its designated
directors, properly exercise control and management over what appear to be
properties and assets owned and belonging to the government itself and over which
the persons who appear in this case on behalf of BASECO have failed to show any
right or even any shareholding in said corporation. (Italics supplied)

The Court granted PCGG the right to vote the sequestered shares because they
appeared to be assets belonging to the government itself. The Concurring Opinion of
Justice Ameurfina A. Melencio-Herrera, in which she was joined by Justice
Florentino P. Feliciano, explained this principle as follows:

I have no objection to according the right to vote sequestered stock in case of a take-
over of business actually belonging to the government or whose capitalization comes
from public funds but which, somehow, landed in the hands of private persons, as in
the case of BASECO. To my mind, however, caution and prudence should
be exercised in the case of sequestered shares of an on-going private business
enterprise, specially the sensitive ones, since the true and real ownership of said
shares is yet to be determined and proven more conclusively by the Courts. (Italics
supplied)

The exception was cited again by the Court in Cojuanco-Roxas in this wise:

The rule in this jurisdiction is, therefore, clear. The PCGG cannot perform acts of
strict ownership of sequestered property. It is a mere conservator. It may not vote the
shares in a corporation and elect the members of the board of directors. The only
conceivable exception is in a case of a takeover of a business belonging to the
government or whose capitalization comes from public funds, but which landed in
private hands as in BASECO. (Italics supplied)
The public character test was reiterated in many subsequent cases; most recently,
in Antiporda v. Sandiganbayan. Expressly citing Cojuanco-Roxas, this Court said that
in determining the issue of whether the PCGG should be allowed to vote sequestered
shares, it was crucial to find out first whether this were purchased with public funds,
as follows:

It is thus important to determine first if the sequestered corporate shares came from
public funds that landed in private hands.

This Court summed up the rule in the determination of whether the PCGG has the
right to vote sequestered shares as follows:

In short, when sequestered shares registered in the names of private individuals or

entities are alleged to have been acquired with ill-gotten wealth, then the two-tiered
test is applied. However, when the sequestered shares in the name of private
individuals or entities are shown, prima facie, to have been (1) originally government
shares, or (2) purchased with public funds or those affected with public interest, then
the two-tiered test does not apply. Rather, the public character exception in Baseco v.
PCGG and Conjuanco Jr. v. Roxas prevail; that is, the government shall vote the
shares.

The PCGG contends, however, that it is entitled to vote the sequestered shares in
the election of the board of directors, it invoking this Courts alleged finding in PCGG et
al. v. Securities and Exchange Commission, et al.[21] that Africa had dissipated ETPIs
assets, thus:

Under a consultancy contract, Polygon Investors and Managers, Inc. with Jose L.
Africa as Chairman and Victor Africa as President, earned from ETPI as of 1987,
more than P57 million. Likewise in 1987, ETPI paid to Jose L. Africa P1,200,000.00
as professional fees and Manuel Nieto, Jr. another P1,200,000.00 as allowances. [22]

The PCGGs contention is misleading, This Court made no finding in PCGG v. SEC et
al. that Africa dissipated ETPIs assets. Precisely this Court issued a Resolution of July
28, 1988 in the same case to clarify, upon motion of Africa, that the narration of facts
found in the decision therein did not constitute a finding of facts:

The categorical statement in the decision of June 30, 1988 that the relevant
background facts of the case culled from Petitioners Urgent Consolidated Petition was
not without a reason or purpose. Precisely this statement was made to impress upon
the parties that the narration of facts is just that a narration, without necessarily
judging its truth or veracity. Being based on mere allegations, properly
controverted, it is not a finding of facts, but more of a presentation of the
complete picture of events which led to the sequestration of Eastern
Telecommunications, Philippines, Inc. as well as to the instant petition. This
Court, it must be remembered, is not a trier of facts, and particularly so in this case
where the facts narrated are precisely the facts in litigation before the
Sandiganbayan. (Emphasis supplied.)

Unfortunately, the Sandiganbayan, in its impugned Resolution of November 13, 1992,

skirted the question of whether there is evidence of dissipation of ETPI assets, holding
instead that:

The issue as to whether the B[enedicto]A[frica]N[ieto] group had dissipated funds of

ETPI during its administration of ETPI is a matter which is not in issue
herein. Dissipation by the PCGG Board of Directors is also charged by the BAN
group. An investigation of the anomalies charged by one against the other may be
taken up in another case. [23]

And it further held that the PCGG could not vote the sequestered shares as only the
owners of the shares of stock of subject corporation, their duly authorized representatives
or their proxies, may vote the said shares,[24] relying on this Courts ruling in Cojuangco, Jr.
v. Roxas[25] that:

The rule in this jurisdiction is, therefore, clear. The PCGG cannot perform acts of
strict ownership of sequestered property. It is a mere conservator. It may not vote the
shares in a corporation and elect members of the board of directors. The only
conceivable exception is in a case of a takeover of a business belonging to the
government or whose capitalization comes from public funds, but which landed in
private hands as in BASECO.

In short, the Sandiganbayan held that the public character exception does not apply,
in which case it should have proceeded to apply the two-tiered test. This it failed to do.
The questions thus remain if there is prima facie evidence showing that the subject
shares are ill-gotten and if there is imminent danger of dissipation. This Court is not,
however, a trier of facts, hence, it is not in a position to rule on the correctness of the
PCGGs contention. Consequently, this issue must be remanded to the Sandiganbayan
for resolution.
II
On the PCGGs submission that the Stock and Transfer Book should not be used as
the basis for determining the voting rights of the shareholders because some entries
therein were altered by substitution: This Court sees no grave abuse of discretion on the
part of the Sandiganbayan in ruling that:

The charge that there were alterations by substitution in the Stock and Transfer Book
is not a matter which should preclude the Stock and Transfer Book from being the
basis or guide to determine who the true owners of the shares of stock in ETPI are. If
there be any substitution or alterations, the anomaly, if at all, may be explained by the
corporate secretary who made the entries therein. At any rate, the accuracy of the
Stock and Transfer Book may be checked by comparing the entries therein with the
issued stock certificates. The fact is that any transfer of stock or issuance thereof
would necessitate an alteration of the record by substitution. Any anomaly in any
entry which may deprive a person or entity of its right to vote may generate a
controversy personal to the corporation and the stockholder and should not affect the
issue as to whether it is the PCGG or the shareholder who has the right to vote. In
other words, should there be a stockholder who feels aggrieved by any alteration by
substitution in the Stock and Transfer Book, said stockholder may object thereto at the
proper time and before the stockholders meeting. [26]

Whether the ETPI Stock and Transfer Book was falsified and whether such
falsification deprives the true owners of the shares of their right to vote are thus issues
best settled in a different proceeding instituted by the real parties-in-interest.
III
On the PCGGs submission that the Sandiganbayan gravely abused its discretion
when it held that it cannot vote at least 23.9% of the outstanding capital stock of ETPI,
which percentage is broken down as follows:

Shares ceded to the government by virtue

of the Benedicto compromise - 12.8%

Shares represented by some stock

certificates found in Malacanang (at least) - 3.1%

Shares held and admitted by Manuel Nieto

to belong to then President Marcos - 8.0%

The PCGG alleges that the 12.8% indicated above represents 51% of the combined
shareholdings of Roberto S. Benedicto and his controlled corporations amounting to
12.8% of the total equity of ETPI which was ceded to the Republic; the 3.1% represents
the shares covered by the ETPI stock certificates endorsed in blank found in Malacaang,
now in its (PCGGs) possession, which it submits it may, under Section 34 of the
Negotiable Instruments Law,[27] take title thereto and vote the same in the stockholders
meeting; and the 8% represents the shares of Manuel H. Nieto, Jr. which, so it avers, he,
in an Affidavit of May 28, 1986, admitted actually belong to former President Marcos:

5. That in relation to and simultaneously with the board meeting of PHILCOMSAT,

on March 21, 1986, I declared my concurrence in the disclosures made on the
participation of Mr. Ferdinand E. Marcos and associates in the companies covered by
the sequestration order dated March 14, 1986 i.e., 39,926.2% (sic) of the total
subscribed capital stock of Philippine Overseas Telecommunications Corporation and
40% of the individual shareholdings of Jose L. Africa, Manuel H. Nieto, Jr., &
Roberto S. Benedicto in Eastern Telecommunications Philippines, Inc. [28]

On the question of whether the PCGG can vote all the above shares, the
Sandiganbayan, finding in the affirmative, held in its Resolution of November 13, 1992:

Considering the Compromise Agreement entered into by the PCGG and Roberto S.
Benedicto in Civil Case No. 009 wherein Roberto S. Benedicto assigned and
transferred to the Government 12.8% of the shares of stock of ETPI, which
Compromise Agreement was made the basis of a judgment of this Court, it is only
proper that the PCGG may vote these shares in the stockholders meeting after said
judgment shall have become final and executory. Besides, before the PCGG can vote
these shares, the transfer to the State of the shares of stock must be entered in the
Stock and Transfer Book, the entries therein being the only basis for which the
stockholder may vote the said shares.

The same ruling is made in respect to the shares of stock represented by stock
certificates found in Malacaang (3.1%) and the shares of stock allegedly admitted by
Manuel H. Nieto to belong to former President Ferdinand E. Marcos
(8.0%). (Underscoring supplied)
[29]

The Sandiganbayan clearly made no ruling proscribing the PCGG from voting the
shares representing 12.8% of ETPIs outstanding capital stock, the only requirement it
imposed being that the transfer of the shares be registered in the Stock and Transfer
Book and that, in the case of the Benedicto shares, the Compromise Agreement be final
and executory.
In requiring that the transfer of the Benedicto shares be first recorded in ETPIs Stock
and Transfer Book before the PCGG may vote them, the Sandiganbayan committed no
grave abuse of discretion. For Section 63 of the Corporation Code provides:

Sec. 63. Certificate of stock and transfer of shares. The capital stock of stock
corporations shall be divided into shares for which the certificates signed by the
president or vice president, countersigned by the secretary or assistant secretary, and
sealed with the seal of the corporation shall be issued in accordance with the by-
laws. Shares of stock so issued are personal property and may be transferred by the
delivery of the certificate or certificates endorsed by the owner or his attorney-in-fact
or other person legally authorized to make the transfer. No transfer, however, shall be
valid, except as between the parties to the transaction, the date of the transfer, the
number of the certificate or certificates and the number of shares transferred.

x x x.
 Explaining why registration is a prerequisite for the voting of shares, this Court,
in Batangas Laguna Tayabas Bus Company, Inc., v. Bitanga,[30] discoursed:

Indeed, until registration is accomplished, the transfer, though valid between the
parties, cannot be effective as against the corporation. Thus, the unrecorded transferee
x x x cannot vote nor be voted for. The purpose of registration, therefore, is two-
fold: to enable the transferee to exercise all the rights of a stockholder, including the
right to vote and to be voted for, and to inform the corporation of any change in share
ownership so that it can ascertain the persons entitled to the rights and subject to the
liabilities of a stockholder. Until challenged in a proper proceeding, a stockholder of
record has a right to participate in any meeting; his vote can be properly counted to
determine whether a stockholders resolution was approved, despite the claim of the
alleged transferee. On the other hand, a person who has purchased stock, and who
desires to be recognized as a stockholder for the purpose of voting, must secure such a
standing by having the transfer recorded on the corporate books. Until the transfer is
registered, the transferee is not a stockholder but an outsider.

Whether the PCGG needs to await the finality of the judgment [31] based on the
Republic-Benedicto compromise agreement is now moot since it is not disputed that it
had long become final and executory. Accordingly, the PCGG may vote in its name the
shares ceded to the Republic by Benedicto pursuant to the said agreement once they are
registered in its name.
With respect to the PCGGs submission that under Section 34 of the Negotiable
Instruments Law, it may take title to the shares represented by the blank stock certificates
found in Malacanang and vote the same, the same is untenable. The PCGG assumes
that stock certificates are negotiable. They are not.

x x x [A]lthough a stock certificate is sometimes regarded as quasi-negotiable, in the

sense that it may be transferred by delivery, it is well settled that the instrument is
non-negotiable, because the holder thereof takes it without prejudice to such rights or
defenses as the registered owner or creditor may have under the law, except insofar as
such rights or defenses are subject to the limitations imposed by the principles
governing estoppel. [32]

That the PCGG found the stock certificates endorsed in blank does not necessarily
make it the owner of the shares represented therein. Their true ownership has to be
ascertained in a proper proceeding. Similarly, the ownership of the Nieto shares has yet
to be adjudicated. That they allegedly belong to former President Marcos does not make
the PCGG its owner. The PCGG must, in an appropriate proceeding, first establish that
they truly belong to the former President and that they were ill- gotten. Pending final
judgment over the ownership of these shares, the PCGG may not register and vote the
Nieto and the Malacaang shares in its name. If the Sandiganbayan finds, however, that
there is evidence of dissipation of these shares, the PCGG may vote the same as
conservator thereof.
 IV
On the PCGGs imputation of grave abuse of discretion upon the Sandiganbayan for
ordering the holding of a stockholders meeting to elect the ETPI board of directors without
first setting in place, through the amendment of the articles of incorporation and the by-
laws of ETPI, the safeguards prescribed in Cojuangco, Jr. v. Roxas:[33] This Court laid
down those safeguards because of the obvious need to reconcile the rights of the
stockholder whose shares have been sequestered and the duty of the conservator to
preserve what could be ill-gotten wealth.

It is through the right to vote that the stockholder participates in the management of
the corporation. The right to vote, unlike the rights to receive dividends and
liquidating distributions, is not a passive thing because management or administration
is, under the Corporation Code, vested in the board of directors, with certain reserved
powers residing in the stockholders directly. The board of directors and executive
committee (or management committee) and the corporate officers selected by the
board may make it very difficult if not impossible for the PCGG to carry out its duties
as conservator if the Board or officers do not cooperate, are hostile or antagonistic to
the conservators objectives.

Thus, it is necessary to achieve a balancing of or a reconciliation between the

stockholders right to vote and the conservators statutory duty to recover and in the
process thereof, to conserve assets, thought to be ill-gotten wealth, until final judicial
determination of the character of such assets or until a final compromise agreement
between the parties is reached.

There are, in the main, two (2) types of situations that need to be addressed. The first
situation arises where the sequestered shares of stock constitute a distinct minority of
the voting shares of the corporation involved, such that the registered owners of such
sequestered shares would in any case be able to vote in only a minority of the Board of
Directors of the corporation. The second situation arises where the sequestered shares
of stock constitute a majority of the voting shares of the corporation concerned, such
that the registered owners of such shares of stock would in any case be entitled to
elect a majority of the Board of Directors of the corporation involved.

Turning to the first situation, the Court considers and so holds that in order to enable
the PCGG to perform its functions as conservator of the sequestered shares of stock
pending final determination by the courts as to whether or not the same constitute ill-
gotten wealth or a final compromise agreement between the parties, the PCGG must
be represented in the Board of Directors of the corporation and to its majority-owned
subsidiaries or affiliates and in the Executive Committee (or its equivalent) and the
Audit Committee thereof, in at least an ex officio (i.e., non-voting) capacity. The
PCGG representative must have a right of full access to and inspection of (including
the right to obtain copies of) the books, records and all other papers of the corporation
relating to its business, as well as a right to receive copies of reports to the Board of
Directors, its Executive (or equivalent) and Audit Committees. By such representation
and rights of full access, the PCGG must be able so to observe and monitor the
carrying out of the business of the corporation as to discover in a timely manner any
move or effort on the part of the registered owners of the sequestered stock alone or in
concert with other shareholders, to conceal, waste and dissipate the assets of the
corporation, or the sequestered shares themselves, and seasonably to bring such move
or effort to the attention of the Sandiganbayan for appropriate action.

In the second situation above referred to, the Court considers and so holds that the
following minimum safeguards must be set in place and carefully maintained until
final judicial resolution of the question of whether or not the sequestered shares of
stock (or, in a proper case, the underlying assets of the corporation concerned)
constitute ill-gotten wealth or until a final compromise agreement between the parties
is reached:

a. An independent comptroller must be appointed by the Board of Directors upon

nomination of the PCGG as conservator. The comptroller shall not be removable (nor
shall his position be abolished or his compensation changed) without the consent of
the conservator. The comptroller shall, in addition to his other functions as such, have
charge of internal audit.

b. The corporate secretary must be acceptable to the conservator. If the corporate

secretary ceases to be acceptable to the conservator, a new one must be appointed by
the Board of Directors upon nomination of the conservator.

c. The external auditors of the corporation must be independent and must be

acceptable to the conservator. The independent external auditors shall not be changed
without the consent of the conservator.

d. The conservator must be represented in the Board of Directors and in the Executive
(or equivalent) and Audit Committees of the corporation involved and of its majority-
owned subsidiaries or affiliates.The representative of the conservator must be a full
director (not merely an honorary or ex officio director) with the right to vote and all
other rights and duties of a member of the Board of Directors under the Corporation
Code. The conservators representative shall not be removed from the Board of
Directors (or the mentioned Committees) without the consent of the conservator. The
conservator shall, however, have the right to remove and change its representative at
any time, and the new representative shall be promptly elected to the Board and its
mentioned Committees.
e. All transactions involving the disbursement of corporate funds in excess of P5
million must have the prior approval of the director representing the conservator, in
order to be valid and effective.

f. The incurring of debt by the corporation, whether in the form of bonds, debentures,
commercial paper or any other form, in excess of P5 million, must have the prior
approval of the director representing the conservator, in order to be valid and
effective.

g. The disposition of a substantial part of assets of the corporation (substantial

meaning in excess of P5 million) shall require the prior approval of the director
representing the conservator, in order to be valid and effective.

h. The above safeguards must be written into the articles of incorporation and by-laws
of the company involved. In other words, the articles of incorporation and by-laws of
the company must be amended so as to incorporate the above safeguards.

i. Any amendment of the articles of incorporation or by-laws of the company that will
modify in any way any of the above safeguards, shall need the prior approval of the
director representing the conservator.

The amount of P5,000,000.00 referred to in paragraphs (e), (f) and (g) above is
intended merely to be indicative. The precise amount may differ depending upon the
size of the corporation involved and the reasonable operating requirements of its
business.

Whether a particular case falls within the first or the second type of situation
described above, the following safeguards are indispensably necessary:

1. The sequestered shares and any stock dividends pertaining to such shares, may not
be sold, transferred, alienated, mortgaged, or otherwise disposed of and no such sale,
transfer or other disposition shall be registered in the books of the corporation,
pending final judicial resolution of the question of ill-gotten wealth or a final
compromise agreement between the parties; and

2. Dividend and liquidating distributions shall not be delivered to the registered

stockholders of the sequestered shares, including stock dividends pertaining to such
shares, but shall instead be deposited in an escrow, interest-bearing, account in a first
class bank or banks, acceptable to the Sandiganbayan, to be held by such banks for the
benefit of whoever is held by final judicial decision or final compromise agreement, to
be entitled to the shares involved. (Italics in the original)
 There is nothing in the Cojuangco case that would suggest that the above measures
should be incorporated in the articles and by-laws before a stockholders meeting for the
election of the board of directors is held. The PCGG nonetheless insists that those
measures should be written in the articles and by-laws before such meeting, otherwise,
the [Marcos] cronies will elect themselves or their representatives, control the corporation,
and for an appreciable period of time, have every opportunity to disburse funds, destroy
or alter corporate records, and dissipate assets. That could be a possibility, but the
peculiar circumstances of this case require that the election of the board of directors first
be held before the articles of incorporation are amended. Section 16 of the Corporation
Code requires the majority vote of the board of directors to amend the articles of
incorporation:

Sec. 16. Amendment of Articles of Incorporation. Unless otherwise prescribed by this

Code or by special law, and for legitimate purposes, any provision or matter stated in
the articles of incorporation may be amended by a majority vote of the board of
directors or trustees and the vote or written assent of the stockholders representing at
least two-thirds (2/3) of the outstanding capital stock, without prejudice to the
appraisal right of dissenting stockholders in accordance with the provisions of this
Code, or the vote or written assent of at least two thirds (2/3) of the members if it be a
non-stock corporation.

x x x. (Emphasis supplied)

At the time Africa filed his motion for the holding of the annual stockholders meeting,
there were two sets of ETPI directors, one controlled by the PCGG and the other by the
registered stockholders. Which of them is the legitimate board of directors? Which of
them may rightfully vote to amend the articles of incorporation and integrate the
safeguards laid down in Cojuangco? It is essential, therefore, to cure this aberration of
two boards of directors sitting in a single corporation before the articles of incorporation
are amended to set in place the Cojuangco safeguards.
The danger of the so-called Marcos cronies taking control of the corporation and
dissipating its assets is, of course, a legitimate concern of the PCGG, charged as it is with
the duties of a conservator. Nevertheless, such danger may be averted by the
substantially contemporaneous amendment of the articles after the election of the
board. This Court said as much in Cojuangco:

The Court is aware that the implementation of some of the above safeguards may
require agreement between the registered stockholders and the PCGG as well as
action on the part of the Securities and Exchange Commission. The Court, therefore,
directs petitioners and the PCGG to effect the implementation of this decision under
the supervision and control of the Sandiganbayan so that the right to vote the
sequestered shares and the installation and operation of the safeguards above-specified
may be exercised and effected in a substantially contemporaneous manner and with all
deliberate dispatch.
 V
As for the PCGGs contention that the Sandiganbayan gravely abused its discretion
in ordering the Division Clerk of Court to call the stockholders meeting and in appointing
then Sandiganbayan Associate Justice Sabino de Leon, Jr. to control and supervise the
same, it is impressed with merit.
The Clerk of Court, who is already saddled with judicial responsibilities, need not be
burdened with the additional duties of a corporate secretary. Moreover, the Clerk of Court
may not have the requisite knowledge and expertise to discharge the functions of a
corporate secretary. It is not thus surprising to find the PCGG complaining that:

x x x ETPIs By-laws provide:

Sec. 4. Notice of Meeting. Except as otherwise provided by law, written or printed

notice of all annual and special meetings of stockholders, stating the place and time of
the meeting and the general nature of the business to be considered, shall be
transmitted by personal delivery, registered air-mail, telegraph, or cable to each
stockholder of record entitled to vote thereat at his address last known to the Secretary
of the Company, at least ten (10) days before the date of the meeting, if an annual
meeting, or at least five (5) days before the date of the meeting, if a special meeting.

Here, respondent Victor Africa filed a Motion dated March 30, 1992 asking the
Sandiganbayan to issue the call and Notice of Annual Stockholders Meeting in ETPI
because under ETPIs By-laws such meeting should be held in the month of May. x x
x. In the Resolution dated November 13, 1992, the Sandiganbayan granted the Motion
and authorized its Division Clerk of Court to issue such Notice
of Annual Stockholders Meeting. However, for inexplicable reasons, the Division
Clerk of Court issued a Notice of Special Stockholders Meeting x x x which requires
only a prior 5-day notice, instead of a notice of (Delayed) Annual Stockholders
Meeting which requires a prior 10-day notice.

Instead of sending the Notices to each stockholder at his recorded address, the
Division Clerk of Court whimsically sent all the Notices meant for the Class B
stockholders to Atty. Eduardo de los Angeles (who returned the Notices because he
was not authorized to receive such Notices). According to him x x x, he does not
know some of the Class B stockholders for whom notices were sent to him. As a
result, at this late stage, no proper notice has been sent to Class B stockholders. Yet,
the Sandiganbayan has scheduled and is dead set to supervise a stockholders meeting
on November 27, 1992. This clearly violates the substantial rights of the Class B
stockholders who own 40% of ETPI. Under the Articles of Incorporation x x x and
By-laws x x x of ETPI, Class B stockholders are entitled to vote two members of the
Board of Directors. Unless properly notified, most of the Class B stockholders who
reside in the United Kingdom (and whose shares are not sequestered) will not be able
to exercise their right to vote. (Underscoring in the original)
[34]

The appointment of a sitting member of the Sandiganbayan is particularly unsound

for, as the PCGG points out:

x x x. What then is the reason for him to attend and supervise the meeting? To observe
so that he can later testify in the court where he himself sits in the court which will
eventually decide any controversy which may arise from the meeting? [35]

Obviously, under such situation, the justice so appointed would be compelled to

inhibit himself from any judicial controversy arising from the stockholders
meeting.[36] Worse, if he were to preside at the meeting and rule upon the objections that
may be raised by some stockholders, the Sandiganbayan would be faced with the
anomaly[37] of eventually reviewing the decisions rendered by a member of its court during
the stockholders meeting.
This Court appreciates the quandary that the Sandiganbayan faced when it ordered
its Division Clerk of Court to call the meeting: ETPI has two sets of officers and,
presumably, two corporate secretaries. And given the stakes involved, the stockholders
meeting would be contentious, to say the least, hence, the need for an impartial referee
to supervise and control the meeting.
Happily, the case of Board of Directors and Election Committee of SMB Workers
Savings and Loan Asso., Inc. v. Tan, etc., et al.[38] provides a solution to the
Sandiganbayans dilemma.There, this Court upheld the creation of a committee
empowered to call, conduct and supervise the election of the board of directors:

As regards the creation of a committee of three vested with the authority to call,
conduct and supervise the election, and the appointment thereto of Cndido C. Viernes
as chairman and representative of the court and one representative each from the
parties, the Court in the exercise of its equity jurisdiction may appoint such
committee, it having been shown that the Election Committee that conducted the
election annulled by the respondent court if allowed to act as such may jeopardize the
rights of the respondents.

In a proper proceeding a court of equity may direct the holding of a stockholders

meeting under the control of a special master, and the action taken at such a meeting
will not be set aside because of a wrongful use of the courts interlocutory decree,
where not brought to the attention of the court prior to the meeting. (18 C.J.S. 1270.)

A court of equity may, on showing of good reason, appoint a master to conduct and
supervise an election of directors when it appears that a fair election cannot otherwise
be had. Such a court cannot make directions contrary to statute and public policy with
respect to the conduct of such election. (19 C.J.S. 41)
This Court also approved a similar action by the Securities and Exchange Commission
in Sales v. Securities and Exchange Commission.[39]
Such a committee composed of impartial persons knowledgeable in corporate
proceedings would provide the needed expertise and objectivity in the calling and the
holding of the meeting without compromising the Sandiganbayan or its officers. The
appointment of the committee members and the delineation of the scope of the duties of
the committee may be made pursuant to an agreement by the parties or in accordance
with the provisions of Rule 9 (Management Committee) of the Interim Rules of Procedure
for Intra-Corporate Controversies insofar as they are applicable.
VI
And now, Africas motion to cite the PCGG and its accomplices in contempt for calling
and holding a stockholders meeting to increase ETPIs authorized capital stock without
this Courts authority and despite the pendency of motions for reconsideration of the
Sandiganbayan Resolution of December 13, 1996 granting the PCGG authority to cause
the holding of such meeting. In the same motion, Africa asks this Court to nullify the March
17, 1997 stockholders meeting which increased ETPIs authorized capital stock on the
grounds that he, an ETPI stockholder, was not notified of the meeting, and the PCGG
voted the sequestered ETPI shares despite the absence of evidence of dissipation of
assets. Intervenor AEROCOM has shared Africas assertions.
As earlier stated, this Court, by Resolution of May 7, 1996, referred the PCGGs VERY
URGENT MOTION FOR RECONSIDERATION TO HOLD SPECIAL STOCKHOLDERS
MEETING . . . to the Sandiganbayan for reception of evidence and resolution. The
dispositive portion of said Resolution reads:

Taking account of all the foregoing, the Court Resolved to REFER the VERY
URGENT PETITION FOR AUTHORITY TO HOLD SPECIAL STOCKHOLDERS
MEETING FOR SOLE PURPOSE OF INCREASING EASTERNS AUTHORIZED
CAPITAL STOCK to the Sandiganbayan for reception of evidence and
resolution WITH ALL DELIBERATE DISPATCH but no longer than sixty (60) days
from notice hereof of the factual issues raised by the parties as herein set out, and
such others, factual or otherwise as are relevant, in order to decide the basic
question in this proceeding of the necessity and propriety of the holding of the special
stockholders meeting of EASTERN for the sole purpose of increasing ** (its)
authorized capital stock and the exercise by the PCGG of the right to vote at said
meeting. (Emphasis supplied)
[40]

Clearly, when the PCGGs VERY URGENT PETITION TO HOLD SPECIAL

STOCKHOLDERS MEETING . . . was referred to the Sandiganbayan, this Court gave the
latter full authority to decide the issue of whether a stockholders meeting should be
held. Implicit in this authority was the power to grant (or deny) the petition. There is thus
no need for the parties to seek this Courts imprimatur to hold the same.
Africas motion must thus be denied.
 Even assuming arguendo that the holding of the meeting was contemptuous because
the December 13, 1996 Sandiganbayan Resolution had not yet attained finality, it was
the Sandiganbayan, and not this Court, which was contemned. Consequently, it is the
Sandiganbayan, and not this Court, which has jurisdiction over the motion to declare the
PCGG and its accomplices in contempt.

In whatever context it may arise, contempt of court involves the doing of an act, or the
failure to do an act, in such a manner as to create an affront to the court and the
sovereign dignity with which it is clothed. As a matter of practical judicial
administration, jurisdiction has been felt properly to rest in only one tribunal at a time
with respect to a given controversy. Partly because of administrative considerations,
and partly to visit the full personal effect of the punishment on a contemnor, the rule
has been that no other court than the one contemned will punish a given contempt.

The rationale that is usually advanced for the general rule that the power to punish for
contempt rests with the court contemned is that contempt proceedings are sui
generic and are triable only by the court against whose authority the contempts are
charged; the power to punish for contempt exists for the purpose of enabling a court to
compel due decorum and respect in its presence and due obedience to its judgments,
orders and processes; and in order that a court may compel obedience to its orders, it
must have the right to inquire whether there has been any disobedience thereof, for to
submit the question of disobedience to another tribunal would operate to deprive the
proceeding of half its efficiency.[41]

The above rule is not of course absolute as it admits exception when the entire case
has already been appealed [in which case] jurisdiction to punish for contempt rests with
the appellate court where the appeal completely transfers to proceedings thereto or where
there is a tendency to affect the status quo or otherwise interfere with the jurisdiction of
the appellate court.[42] This exception does not, however, apply to Africas motion since at
the time he filed it on April 1, 1997 before this Court, his petition in G. R. No. L-147214
assailing the December 17, 1996 Resolution of the Sandiganbayan had not yet been filed.
The motion to nullify the March 17, 1997 stockholders meeting must likewise be
denied for lack of jurisdiction. Such motion is but an incident to Sandiganbayan Civil
Case No. 0130.[43]As such, jurisdiction over it pertains exclusively and originally to the
Sandiganbayan.

Under Section 2 of the Presidents Executive Order No. 14 issued on May 7, 1986, all
cases of the Commission regarding the Funds, Moneys, Assets, and Properties
Illegally Acquired or Misappropriated by Former President Ferdinand Marcos, Mrs.
Imelda Romualdez Marcos, their Close Relatives, Subordinates, Business Associates,
Dummies, Agents, or Nominees whether civil or criminal are lodged within the
exclusive and original jurisdiction of the Sandiganbayan and all incidents arising
from, incidental to, or related to, such cases necessarily fall likewise under the
Sandiganbayans exclusive and original jurisdiction, subject to review on certiorari
exclusively by the Supreme Court. [44]

This is another reason for the denial of the motion to cite the PCGG and its
accomplices in contempt.
VII
FINALLY, the question on the validity of the PCCGs voting the Class A shares to
increase the authorized capital stock of ETPI.
In his petition in G. R. No. 147214, Africa faults the Sandiganbayan for failing to
acknowledge, in its Resolution of February 16, 2001, the Decisions of this Court declaring
that his shares in ETPI[45] and those of AEROCOM[46] and POLYGON (Polygon Investors
& Managers, Inc.)[47] were not sequestered. Hence, so he contends, they, and not the
PCGG, should have been allowed to vote their respective shares during the meeting.
Two matters require clarification at this point. First, that this Court rendered decisions
holding that the shares of Africa, AEROCOM and POLYGON are not or are no longer
sequestered is of little consequence since the decisions were promulgated after the
Sandiganbayan issued its resolution granting the PCGG authority to call and hold the
stockholders meeting to increase the authorized capital stock. At that time, the shares
were presumed to have been regularly sequestered. The more fundamental question that
confronts this Court is: Was the PCGG entitled to vote the sequestered shares in the
stockholders meeting of March 17, 1997?
Second, the PCGG correctly argues that Africa has no cause of action to claim on
behalf of AEROCOM and POLYGON that these two companies are entitled to vote their
respective shares in the stockholders meeting to increase ETPIs authorized capital
stock. The claim is personal to AEROCOM and POLYGON. Nevertheless, this does not
preclude Africa from invoking his own right as a small stockholder of ETPI to vote in the
stockholders meeting for the purpose of increasing ETPIs authorized capital stock. The
PCGG maintains, however, that it is entitled to vote said shares because this Court, by
its claim, recognized in PCGG v. SEC, supra, that ETPIs assets were being dissipated by
the BAN (Benedicto, Africa, Nieto) Group, thus:

Under the Management of Cable and Wireless ETPI grew and prospered. But when
its dividends, which were paid in dollars to the BAN Group, began to run into
millions, said group also started to intervene in the corporations operations and
management. Requests for employment of family relatives and high salaries for them
were made. The BAN Group likewise placed the majority of their individual
stockholdings in three separate companies, namely: Aerocom Investors, Universal
Molasses, and Polygon, so that in 1986, the ownership of the Class A stocks of the
corporation was as follows:

Roberto S. Benedicto - 3.3 percent

Universal Molasses Corp. - 16.6 percent
 Manuel Nieto, Jr. - 2.2 percent
Nieto's relatives - 3.3 percent
Aerocom Investors and
Managers Inc. - 17.5 percent
Jose Africa - 2.2 percent
Africa's relatives - .3 percent
Polygon Investors and
Managers Inc. - 17.5 percent

By the end of 1987, the initial capital of P1M of the BAN Group, its corporations and
relatives had grown to the astronomical sum of P784,185,198.00. Cash dividends paid
to them as of 1986 had amounted to P225,845,000.00 even as
another P180,000,000.00 is due them for 1987, for a grand total of P405,845,000.00.
In 1984, cash dividends to the BAN Group, et al. in the amount of $1M were remitted
to the United States.

Under a consultancy contract, Polygon Investors and Managers with Jose L. Africa as
Chairman and his son, Victor Africa as President, earned from ETPI as of 1987 more
than P57M. Likewise in 1987, ETPI paid to Jose L. Africa P1,200,000.00 as
professional fees and Manuel H. Nieto, Jr., another P1,200,000.00 as allowances. [48]

As stated early on, however, the foregoing narration does not constitute a finding of fact.
The PCGG further submits that the Sandiganbayan found prima facie evidence for
the issuance of the writ of sequestration covering the Class A shares of ETPI. Such
reliance on the Sandiganbayans ruling is misplaced because the issue is not whether
there is prima facie evidence to warrant sequestration of the shares, but whether there
is prima facie evidence showing that the shares are ill-gotten and whether there is
evidence of dissipation of assets to warrant the voting by the PCGG of sequestered
shares. As to the latter issue, the Sandiganbayan held in the affirmative in this wise:

x x x [T]he propriety and legality of allowing the PCGG to cause the holding of a
stockholders meeting of the ETPI for the purpose of electing a new Board of Directors
or effecting changes in the policy, program and practices of said corporation (except
for the specified purpose of amending the right of first refusal clause in ETPIs Articles
of Incorporation and By Laws) and impliedly to vote the sequestered shares of stocks
has been upheld by the Supreme Court in the case of PCGG vs. SEC, PCGG vs.
Sandiganbayan, et al., G.R. No. 82188, promulgated June 30, 1988 x x
x. (Underscoring supplied)
[49]

The Sandiganbayan proceeded to quote the following pronouncement of this Court

in PCGG v. SEC:
But while We find the Sandiganbayan to have acted properly in enjoining
the PCGG from holding the stockholders meeting for the specified purpose of
amending the right of first refusal clause in ETPI's Articles of Incorporation and By-
Laws, We find the general injunction imposed by it on the PCGG to desist and refrain
from calling a stockholders meeting for the purpose of electing a new Board of
Directors of effecting substantial changes in the policy, program or practice of the
corporation to be too broad as to taint said order with grave abuse of discretion. Said
order completely ties the hands of the PCGG, rendering it virtually helpless in the
exercise of its power of conserving and preserving the assets of the
corporation. Indeed, of what use is the PCGG if it cannot even do this? x x
x. (Underscoring and italics supplied)
[50]

The Sandiganbayan, however, misread this Courts ruling in the said SEC case. One
of the issues raised therein was whether the Sandiganbayan committed grave abuse of
discretion in enjoining the PCGG from calling and holding stockholders meetings and
voting the sequestered ETPI shares for the purpose of deleting the right of first
refusal clause in ETPIs articles of incorporation. In its therein assailed Order, the
Sandiganbayan temporarily restrained the PCGG from calling and/or holding
stockholders meetings and voting the sequestered shares thereat for the purpose
of amending the articles or by-laws of ETPI, or otherwise effecting substantial
changes in policy, programs or practices of said corporation.
Clearly, the temporary restraining order was too broad. The Sandiganbayan should
have limited itself to restraining the calling and holding of the stockholders meeting and
voting the shares for the sole purpose of amending the right of first refusal clause. It was
thus necessary for this Court to make the underscored ruling above. No declaration
therein was made that in all instances the PCGG may vote the sequestered shares to
effect substantial changes in ETPI policy, programs or practices. In lifting the injunction
on that aspect, this Court merely recognized that situations may arise wherein only
through an act of strict ownership can the PCGG be able to prevent the dissipation of the
assets of the sequestered corporation or business.[51]
Moreover, if, as the Sandiganbayan assumed, this Court had come to a conclusion
in the SEC case that the BAN Group was guilty of dissipation and that, consequently, the
PCGG was entitled to vote the sequestered shares, this Court would not have bothered,
in its Resolution of May 7, 1996, to direct said court to decide whether the PCGG has the
right to vote in the stockholders meeting for the purpose of increasing ETPIs authorized
capital stock.[52]
This Court notes that, like in Africas motion to hold a stockholders meeting (to elect
a board of directors), the Sandiganbayan, in the PCGGs petition to hold a stockholders
meeting (to amend the articles of incorporation to increase the authorized capital stock),
again failed to apply the two-tiered test. On such determination hinges the validity of the
votes cast by the PCGG in the stockholders meeting of March 17, 1997. This lapse by
the Sandiganbayan leaves this Court with no other choice but to remand these questions
to it for proper determination.
 IN SUM, this Court rules that:
(1) The PCGG cannot vote sequestered shares to elect the ETPI Board of Directors
or to amend the Articles of Incorporation for the purpose of increasing the authorized
capital stock unless there is a prima facie evidence showing that said shares are ill-gotten
and there is an imminent danger of dissipation.
(2) The ETPI Stock and Transfer Book should be the basis for determining which
persons have the right to vote in the stockholders meeting for the election of the ETPI
Board of Directors.
(3) The PCGG is entitled to vote the shares ceded to it by Roberto S. Benedicto and
his controlled corporations under the Compromise Agreement, provided that the shares
are first registered in the name of the PCGG. The PCGG may not register the transfer of
the Malacaang and the Nieto shares in the ETPI Stock and Transfer Book; however, it
may vote the same as conservator provided that the PCGG satisfies the two-tiered test
devised by the Court in Cojuangco v. Calpo, supra.
(4) The safeguards laid down in the case of Cojuangco v. Roxas shall be incorporated
in the ETPI Articles of Incorporation substantially contemporaneous to, but not before, the
election of the ETPI Board of Directors.
(5) Members of the Sandiganbayan shall not participate in the stockholders meeting
for the election of the ETPI Board of Directors. Neither shall a Clerk of Court be appointed
to call such meeting and issue notices thereof. The Sandiganbayan shall appoint, or the
parties may agree to constitute, a committee of competent and impartial persons to call,
send notices and preside at the meeting for the election of the ETPI Board of Directors;
and
(6) This Court has no jurisdiction over the motion to cite the PCGG and its
accomplices in contempt and to nullify the stockholders meeting of March 17, 1997.
WHEREFORE, this Court Resolved to REFER the petitions at bar to the
Sandiganbayan for reception of evidence to determine whether there is a prima
facie evidence showing that the sequestered shares in question are ill-gotten and there
is an imminent danger of dissipation to entitle the PCGG to vote them in a stockholders
meeting to elect the ETPI Board of Directors and to amend the ETPI Articles of
Incorporation for the sole purpose of increasing the authorized capital stock of ETPI.
The Sandiganbayan shall render a decision thereon within sixty (60) days from receipt
of this Resolution and in conformity herewith.
The motion to cite the PCGG and its accomplices and to nullify the ETPI Stockholders
Meeting of March 17, 1997 filed by Victor Africa is DENIED for lack of jurisdiction.
SO ORDERED.
Davide, Jr., C.J., Bellosillo, Puno, Ynares-Santiago, Sandoval-Gutierrez, Carpio,
Austria-Martinez, Corona, and Callejo, Sr., JJ., concur.
Vitug, J., in the result.
Panganiban, J., No part, former counsel of a party.
Quisumbing, J., abroad on official business.
 Azcuna, J., No part.

[1]
Entitled Victor Africa v. Presidential Commission on Good Government, involving a petition for certiorari,
with prayer for a temporary restraining order/preliminary injunction, filed by Victor Africa. The
petition seeks to nullify the Orders of the PCGG dated August 5, 1991 and August 9, 1991, directing
Africa to account for his sequestered shares in ETPI and to cease and desist from exercising voting
rights on the sequestered shares in the special stockholders meeting to be held on August 12,
1991, from representing himself as a director, officer, employee or agent of ETPI, and from
participating, directly or indirectly in the management of ETPI. (Rollo, G. R. No. 107789, p. 453).
[2]
Id. at 83.
[3]
Id. at 104-105.
[4]
Id. at 39-47.
[5]
Id. at 45-47.
[6]
Id. at 11-12.
[7]
POLICY TO IMPROVE THE PROVISION OF LOCAL EXCHANGE CARRIER SERVICE.
[8]
AN ACT TO PROMOTE AND GOVERN THE DEVELOPMENT OF PHILIPPINE
TELECOMMUNICATIONS AND THE DELIVERY OF PUBLIC TELECOMMUNICATIONS
SERVICES.
[9]
Rollo, G. R. No. 107780, pp. 958-963.
[10]
Rollo, G. R. No. 107789, pp. 962-963.
[11]
Id. at 1124-1125.
[12]
Rollo, G.R. No. 147214, pp. 17-32.
[13]
Rollo, G. R. No. 147214, p. 319.
[14]
150 SCRA 181 (1987).
[15] Vide San Miguel Corporation v. Kahn, 176 SCRA 447, 464 (1989); Republic v. Sandiganbayan, 200
SCRA 530 (1991), holding that the PCGGs authority to vote sequestered shares must be conceded
only where there is evident necessity for such voting in order to prevent the disposal and dissipation
of the sequestered assets.
[16]
G. R. No. 115352, June 10, 1993.
[17]
302 SCRA 217 (1999).
[18]
Ibid.
[19]
Republic v. Cocofed, G. R. Nos. 147062-64, December 14, 2001.
[20]
Ibid.
[21] G. R. No. 82188, June 30, 1988. The decision, penned by then Associate Justice Marcelo Fernan, was
concurred in by thirteen justices (Yap, C .J., Narvasa, Melencio-Herrera, Cruz, Paras, Feliciano,
Gancayco, Padilla, Bidin, Sarmiento, Cortes, Grio-Aquino and Medialdea, JJ.); one justice
(Gutierrez, Jr., J.) was on leave. For easy reference, the decision, which is not found in either
the Philippine Reports or in the Supreme Court Reports Annotated, is reproduced in full
below:
Assailed in this consolidated petition for certiorari, mandamus and prohibition with prayer for preliminary
injunction and/or temporary restraining order as having been issued with grave abuse of discretion
and in excess of jurisdiction are two restraining orders issued by [1] the Securities and Exchange
Commission Hearing Panel on March 3, 1988 in SEC Case No. 3297 entitled Victor Africa and
Rafael C. Valdez, Complainants, versus Eduardo M. Villanueva, et al., Respondents enjoining the
respondents therein as members of the Board of Directors of Eastern Telecommunications
Philippines, Inc. [ETPI] from holding the stockholders meeting scheduled on March 4, 1988; and
[2] the Sandiganbayan on March 4, 1988 in SB Civil Case No. 0009 entitled Republic of the
Philippines, Plaintiff, versus Jose L. Africa, et al., Defendants, enjoining the PCGG, its
Commissioners, nominated Directors and/or Corporate Officers, employees, nominees, agents
and/or representatives x x x from calling and/or holding stockholders meetings and voting (the)
sequestered shares thereat for the purpose of amending the Articles or By-laws of ETPI, or
otherwise effecting substantial changes in policy, programs or practices of said corporation. (Annex
U, Petition, p. 192, Rollo) The temporary restraining order dated March 4, 1988 was subsequently
replaced by a writ of preliminary injunction on March 25, 1988. (Annex B, Petitioners Urgent
Manifestation and Motion dated March 29, 1988)
The relevant background facts of the case culled from Petitioners URGENT CONSOLIDATED
PETITION are as follows: Until 1974, Eastern Telecommunications of the Philippines [ETPI] was a
wholly-owned subsidiary of Cable and Wireless, Ltd., operating under the name Eastern Extension
Australasia and China Telegraph Company Ltd. [EEATC] by virtue of a royal decree from Spain,
renewed in 1952 by the Philippine Government. In the late 1966, EEATC attempted to win a
contract for the establishment of a satellite earth station but the contract was awarded by then
President Ferdinand E. Marcos to a previously unknown corporation, the Philippine Overseas
Telecoms Corporation [POTC], controlled by Messrs. Ilusorio, Poblador, Nieto, Benedicto and
Reyes. Thereafter, desiring to obtain the franchise for the establishment of a tropospheric scatter
system communications with Taiwan, but aware that it could not possibly do so without a strong
Filipino partner, EEATC entered into a business alliance with POTC enabling them to obtain a
franchise and the needed government approvals.
Despite this alliance, Cable & Wireless was uneasy about its tenure in the Philippines, in view of the then
forthcoming expiration of the Laurel-Langley Act, which expiration would require American
corporations to reorganize themselves into 60/40 corporations with majority Filipino ownership.
In March 1974, EEATC Philippine representative M.C. Bane was called to a conference at Camp Crame
with the then Secretary of National Defense. Present at the meeting were representatives of RCA
and Globe Mackay, who together with M.C. Bane, were told that they had until July of 1974 within
which to reorganize their respective corporations into a 60/40 corporation in favor of Filipino
ownership and that failing to do so, the Philippine Government would take the necessary action.
With the deadline fast approaching, EEATC re-opened negotiations with POTC, which at that time had
undergone rapid changes resulting in Nieto, Jr. becoming its controlling figure and Atty. Jose L.
Africa as its negotiating representative. During the negotiations, Atty. Africa was quick to point out
that EEATC was to deal only with the BAN Group [Benedicto, Africa and Nieto] allegedly at the
express wish of then President Marcos.
The figure eventually arrived at for EEATC's assets was P10M of which P6M was to be the input of
the BAN Group. However, upon Atty. Africa's information that the BAN Group could put up
only P1M a compromise was suggested for the new corporation to raise a bank loan from which
Cable and Wireless could be paid for the assets to be acquired. After a series of negotiations, it
was agreed that a loan of P7M was to be arranged and BAN would contribute P3M while Cable
and Wireless would contribute P2M, thus establishing a 60/40 relationship in a new corporation.
Despite this agreement, Africa again informed Cable and Wireless that the BAN Group could raise
only P1M and asked whether it would be possible for Cable and Wireless to lend the group P2M
repayable over a period of three [3] years. Seeing no other alternative, Cable and Wireless agreed
to this arrangement. The loan document was drawn up while Nieto, Jr. secured the signature of
then President Marcos on Presidential Decree No. 489 transferring the franchise of EEATC to the
new corporation, Eastern Telecommunications of the Philippines, Inc. [ETPI].
Under the Management of Cable and Wireless ETPI grew and prospered. But when its dividends, which
were paid in dollars to the BAN Group, began to run into millions, said group also started to
intervene in the corporations operations and management. Requests for employment of family
relatives and high salaries for them were made. The BAN Group likewise placed the majority of
their individual stockholdings in three separate companies, namely: Aerocom Investors, Universal
Molasses, and Polygon, so that in 1986, the ownership of the Class A stocks of the corporation
was as follows:
Roberto S. Benedicto - 3.3 percent
Universal Molasses Corp. - 16.6 percent
Manuel Nieto, Jr. - 2.2 percent
Nieto's relatives - 3.3 percent
Aerocom Investors and Managers Inc. - 17.5 percent
Jose Africa - 2.2 percent
Africas relatives - .3 percent
Polygon Investors and Managers Inc. - 17.5 percent
By the end of 1987, the initial capital of P1M of the BAN Group, its corporations and relatives had grown to
the astronomical sum of P784,185,198.00. Cash dividends paid to them as of 1986 had amounted
to P225,845,000.00 even as another P180,000,000.00 is due them for 1987, for a grand total
of P405,845,000.00. In 1984, cash dividends to the BAN Group, et al. in the amount of $1M were
remitted to the United States.
Under a consultancy contract, Polygon Investors and Managers with Jose L. Africa as Chairman and his
son, Victor Africa as President, earned from ETPI as of 1987 more than P57M. Likewise in
1987, ETPI paid to Jose L. Africa P1,200,000.00 as professional fees and Manuel H. Nieto, Jr.,
another P1,200,000.00 as allowances.
On a prima facie finding that the three owned corporations, Aerocom, Universal and Polygon are Marcos-
owned firms, the PCGG, on March 14, 1986 sequestered the company ETPI and on July 22,
1987 PCGG filed with the Sandiganbayan Civil Case No. 0009 for Reconveyance, Reversion,
Accounting, Restitution of the ill-gotten ETPI shares and damages in connection therewith. The
sequestration order was partially lifted with respect to the Class B shares which belonged to Cable
and Wireless.
The root cause of the present controversy is the PCGG Resolution dated January 28, 1988 which ordered
the reconvening and resumption of the annual stockholders meeting of the Eastern
Telecommunications Philippines, Inc. on 29 January 1988 at 2:00 P.M. at the principal office of the
corporation. The meeting was originally scheduled for 4 January 1988, but had to be and was duly
adjourned the same day.
A copy of this resolution, contained in a letter addressed to the Chairman and Corporate Secretary
of ETPI was received by respondent Victor Africa as Corporation Secretary of ETPI at 11:11 A.M.
of January 29, 1988. At 2:00 P.M. of the same day, the reconvened stockholders meeting was held
over the objection interposed by said respondent Victor Africa as corporate secretary and
stockholder of ETPI, on the manner the meeting was called. In said stockholders meeting
petitioners Eduardo M. Villanueva, as PCGG nominee, and Roman Mabanta and Eduardo de los
Angeles as nominees of the foreign investors, Cable and Wireless Ltd. and Jose L. Africa [who was
absent] were elected members of the Board of Directors. Immediately thereafter, the elected
directors present held an organizational meeting, in turn, electing Eduardo Villanueva as President
and General Manager, petitioners Ramon Desuasido, Almario Velasco and Ranulfo Payos as
Acting Corporate Secretary, Acting Treasurer and Acting Assistant Corporate Secretary,
respectively. The Board of Directors further resolved to hold a Board meeting on February 8, 1988.
At the February 8, 1988 meeting, the Board of Directors resolved, among others, to propose amendments
to ETPIs Articles of Incorporation to abrogate the right of first refusal clause embodied in Article 10
thereof and to call for a special stockholders meeting in February 29, 1988 for the purpose of
ratifying the proposed amendment.
On February 15, 1988, respondents Victor Africa and Rafael C. Valdez, as alleged erstwhile Corporate
Secretary and Director, respectively, of ETPI, filed before the Securities and Exchange
Commission [SEC] a verified complaint with prayer for preliminary injunction, docketed therein
as SEC Case No. 3297, assailing the legality of the Board of Directors' and Corporate Officers
elections at the reconvened stockholders meeting on January 29, 1988, the Board meetings of
January 29 and February 8, 1988 as well as all the acts done by the Board during said meetings.
During the pendency of the application for preliminary injunction, respondents Victor Africa and Rafael
Valdez filed an urgent motion for a temporary restraining order to enjoin the Board of Directors from
proceeding with the special stockholders meeting on February 29, 1988. This motion was opposed
by therein respondents Mabanta and delos Angeles.
On February 26, 1988, by way of special appearance, the office of the Solicitor General filed an omnibus
motion for the PCGG to intervene and for the dismissal of the case in so far as Villanueva, Velasco,
Payos and Desuasido were concerned, claiming that they were PCGG nominees/designees, and
therefore beyond the jurisdiction of the SEC.
At the hearing on February 29, 1988, therein respondent de los Angeles agreed to defer the February 29
meeting but at the resumption of the hearing on March 1, 1988, therein petitioners reiterated their
urgent motion for a temporary restraining order, manifesting that the meeting of February 29, 1988
was merely adjourned to March 4, 1988.
On March 3, 1988, after marathon hearings on the application for a temporary restraining order, the hearing
panel of the SEC issued the assailed order, effective for twenty (20) days, on the grounds that the
said stockholders meeting on March 4, 1988 x x x is not really that urgent and to afford the Panel
sufficient time to deliberate on the matter without rendering the act sought to be enjoined academic.
(p. 190, Rollo)
Also on March 3, 1988, respondents Jose Africa and Manuel H. Nieto, Jr. as stockholders of ETPI filed in
Civil Case No. 0009 of the Sandiganbayan a motion for injunction with prayer for a temporary
restraining order to enjoin the PCGG, its Commissioners, nominated Directors and/or Corporate
Officers, employees, nominees, agents and/or representatives from calling or holding meetings of
the stockholders and the Board of Directors, managing the corporation, controlling its policies,
running its day-to-day business, etc. The following day, March 4, 1988, the Sandiganbayan issued
the second assailed temporary restraining order. Hence, this petition, PCGG maintaining that both
the SEC and Sandiganbayan acted with grave abuse of discretion and in excess of jurisdiction in
issuing said temporary restraining orders, the SEC for having done so without first resolving its
motion for intervention and for dismissal of the case; and the Sandiganbayan for taking cognizance
of the motion, thereby intervening with the PCGG's executive and administrative jurisdiction.
Without giving due course to the petition, the Court set the case for hearing on March 17, 1988. At said
hearing, We required the parties to file their memoranda on the applicability of the case of Bataan
Shipyard & Engineering, Co., Inc. vs. Presidential Commission on Good Government [150 SCRA
181] to the petition at bar. All parties complied with this order.
We shall deal first with the SEC case. By its own terms, the temporary restraining order issued in SEC Case
No. 3297 was effective only for twenty (20) days. The same has therefore already expired,
rendering the challenge against it moot and academic. This, notwithstanding, the Court has decided
to delve deeper into the SEC case to correct a blatant jurisdictional defect and thus save the parties
unnecessary waste of time and effort as well as to avoid multiplicity of suits and promote the orderly
administration of justice.
On the basis of the allegations in the complaint filed by respondent Victor Africa and Rafael Valdez
in SEC Case No. 3297, it would appear that the complaint being lodged before the SEC pertained
 primarily to an intra-corporate controversy. The respondents named therein are the individual
members of the Board of Directors and the Corporate Officers of ETPI and the acts sought to be
nullified or enjoined were the supposedly illegal corporate acts of these individuals. Conveniently
omitted are the information that certain stocks of the corporation are under sequestration by
the PCGG and that some individually named respondents are PCGG nominees or designees. The
lone reference to PCGG is found in paragraph 5 of the complaint alleging the receipt by Victor
Africa of a letter from PCGG Chairman Ramon A. Diaz ordering a stockholders meeting on the 29th
of January, 1988 at 2:00 P.M. at the principal office of the Corporation and the allegation that this
notice was in violation of the provision in the corporations By-laws regarding notice of meetings. By
this clever presentation of the antecedent facts, the SEC was misled into taking cognizance of the
complaint, and in view of the forthcoming special stockholders meeting being sought to be enjoined,
the Hearing Panel was constrained to issue the assailed temporary restraining order if only to
maintain the status quo and thus prevent the case from becoming moot and academic.
Under these circumstances, the issuance of the temporary restraining order would have been legal and
proper. What, to our mind, taints the same with grave abuse of discretion was the fact that at the
time of the issuance of the assailed temporary restraining order, there were certain information
already within the knowledge of the Hearing Panel. For it must be remembered that as early as
February 26, 1988, the Office of the Solicitor General had filed a motion for intervention and for
dismissal of the case for lack of jurisdiction. If on the basis of the complaint filed by respondents
Victor Africa and Rafael Valdez, it was not readily discernible that it was the legality of the PCGGs
resolution of January 29, 1988 that has to be determined as the order which gave rise to the chain
of events sought to be nullified or enjoined, the disclosure in the motion to intervene that some of
the individual respondents in SEC Case No. 3297 are PCGG nominees or designees should have
made it clear to the Hearing Panel that the PCGG was the real party in interest. The Hearing Panel
should have then realized that there exists an element in the case which effectively removes it from
the jurisdiction of the Commission, i.e., the presence of the PCGG, which as another quasi-judicial
body is a co-equal entity over which actions the SEC has no power of control.
In one of the valedictory decisions of Mr. Chief Justice Claudio Teehankee, this Court finally laid to rest the
question of the proper forum before which actions to challenge the PCGG's acts or orders in
sequestration cases may be instituted. Thus:
x x x Executive Order No. 14 xxx specifically provides in Section 2 that The Presidential Commission on
Good Government shall file such cases whether civil or criminal, with the Sandiganbayan which
shall have exclusive and original jurisdiction thereof. Necessarily, those who wish to question or
challenge the Commission's acts or orders in such case must seek recourse in the same court, the
Sandiganbayan, which is vested exclusive and original jurisdiction. The Sandiganbayans decisions
and final orders are in turn subject to review on certiorari exclusively by this Court. (Presidential
Commission on Good Government v. Hon. Emmanuel Pea, etc., et al., G.R. No. 77663, April 12,
1988)
The root cause of the SEC controversy being undeniably the PCGG's resolution calling for a stockholders
meeting of the partially sequestered ETPI, the challenge thereto is properly cognizable by the
Sandiganbayan. The other respondents in this petition, Messrs. Jose Africa and Manuel H. Nieto,
Jr., were in a sense more perceptive in filing a motion for injunction in Civil Case No. 0009 pending
before the Sandiganbayan.
In the face of this glaring lack of jurisdiction, it follows that had the temporary restraining order issued
in SEC Case No. 3297 not lost its effectivity functus officio, the same would have been set aside.
But, as earlier intimated, the case does not end here. SEC Case No. 3297 should further be
ordered dismissed for lack of jurisdiction.
We come now to the second assailed temporary restraining order dated March 4, 1988 issued by the
Sandiganbayan in Civil Case No. 0009, which was replaced on March 29, 1988 with a writ of
preliminary injunction, and which injunction was reiterated on May 2, 1988. (Annex A, Third Urgent
Motion to Resolve Urgent Consolidated Petition) The main objection interposed by the PCGG to
 the issuance of these orders is that they were in effect an intervention by the Sandiganbayan with
the PCGG's discretionary executive and administrative jurisdiction.
Verily, the PCGG is vested with executive and administrative jurisdiction over sequestered corporations,
business enterprises and properties. The powers granted to the PCGG, no matter how broad they
appear, however, must be exercised pursuant to its pronounced objective of provisionally taking
over in the public interest or to prevent its disposal or dissipation business enterprises and
properties taken over by the government of the Marcos administration or entities or persons close
to the former President Marcos x x x. (Sec. 3[b], Executive Order No. 1) It is with this objective in
mind that in the leading case of BASECO vs. PCGG, supra this Court laid down certain guidelines
on what acts may or may not be done by the PCGG with regard to said sequestered properties or
businesses. We tried to cover as wide a range of activities in said case as possible but We realize
that We cannot even attempt to encompass all situations. Each case must be decided on the basis
of its factual antecedents and merits, but always with reference to the objectives for which
the PCGG was created. In like manner should the PCGG's acts and orders be measured. Acts or
orders transgressing this parameter are certainly tainted with abuse of discretion which the
Sandiganbayan, the court vested with exclusive and original jurisdiction over case involving
the PCGG, may correct. Otherwise, PCGG would be above the law.
In the case at bar, the stockholders meeting enjoined by the SEC and the Sandiganbayan was called
specifically for the purpose of ratifying the proposed amendment to delete from ETPIs Articles of
Incorporation and By-Laws the right of first refusal clause. The question that must now be resolved
is whether the PCGG may be permitted to vote the sequestered shares to effect this change.
The right of first refusal is primarily an attribute of ownership. Conversely, a waiver thereof is an act of
ownership. To allow the PCGG to vote the sequestered shares for this purpose would be
sanctioning its exercise of an act of strict ownership. To our mind, though, it is not so much the
nature of the act proposed to be done by the PCGG that is essential, but rather, the purpose for
doing so. The prime consideration should be: is the act proposed to be done by the PCGG merely
an act of administration or an act of strict ownership essential to the pursuit of its objectives? For it
cannot be totally discounted that situations may arise wherein only through an act of strict
ownership can the PCGG be able to prevent the dissipation of the assets of the sequestered
corporation or business. Fortunately, this is not one of them. For while We commend the purported
objective of the PCGG for trying to amend the right of first refusal clause to enable it to sell the
sequestered shares to the public, We cannot see our way clear as to how this move could help
prevent the dissipation of the corporations assets, particularly when it has its own representatives
in the Board of Directors, who can effectively provide such measures and safeguards to prevent
such dissipation. Moreover, to sell the sequestered shares at this time when the issue of ownership
is still pending before the Sandiganbayan and the exact equity proportion thereof is still uncertain,
would not only be premature, but would also expose the would-be buyers to great risks.
But while We find the Sandiganbayan to have acted properly in enjoining the PCGG from holding the
stockholders meeting for the specified purpose of amending the right of first refusal clause in ETPI's
Articles of Incorporation and By-Laws, We find the general injunction imposed by it on the PCGG to
desist and refrain from calling a stockholders meeting for the purpose of electing a new Board of
Directors of effecting substantial changes in the policy, program or practice of the corporation to be
too broad as to taint said order with grave abuse of discretion. Said order completely ties the hands
of the PCGG, rendering it virtually helpless in the exercise of its power of conserving and preserving
the assets of the corporation. Indeed, of what use is the PCGG if it cannot even do this? The
injunction issued by the Sandiganbayan must be lifted with qualifications as it was lifted in our
resolution dated May 24, 1988.
As to the charge of forum-shopping imputed to private respondents, We give the latter the benefit of the
doubt considering that there are two separate sets of petitioners in the SEC and Sandiganbayan
cases and the lack of a definite ruling, at the time of the filing of the petitions in SEC and
Sandiganbayan, as to which is the proper forum in cases of this nature.
WHEREFORE. the temporary restraining order issued in SEC Case No. 3297 is hereby declared a nullity
and SEC Case No. 3297 is ordered dismissed for lack of jurisdiction. The writs of preliminary
injunction dated March 25 and May 2, 1988 issued by the Sandiganbayan in Civil Case No. 0009
are lifted except in so far as they enjoin petitioners from holding a stockholders meeting for the
purpose of deleting from ETPI's Articles of Incorporation and By-Laws the right of first refusal
clause. No pronouncement as to costs.
SO ORDERED.
[22]
Vide Note 16.
[23]
Rollo, G. R. No. 107789, pp. 44-45.
[24]
Id. at 43.
[25]
195 SCRA 797 (1991).
[26]
Rollo, G. R. No. 107789, p 44.
[27]
Sec. 34. Special indorsement; indorsement in blank. A special indorsement specifies the person to
whom, or to whose order, the instrument is to be payable, and the indorsement of such indorsee is
necessary to the further negotiation of the instrument. An indorsement in blank specifies no
indorsee and an instrument so indorsed is payable to bearer, and may be negotiated by delivery.
[28]
Rollo, G. R. No. 107789, pp. 20-21.
[29]
Id. at 45.
[30] 362 SCRA 635 (2001).
[31]
Vide Republic v. Sandiganbayan, 226 SCRA 314 (1993).
[32]
De los Santos and Astraquillo v. Republic, 96 Phil 577 (1955).
[33]
Vide Note 20.
[34]
Rollo, G.R. No. 107789, pp 29-30.
[35]
Id. at 32.
[36]
The Code of Judicial Conduct provides:
Rule 3.12. A judge should take no part in a proceeding where the judges impartiality might reasonably be
questioned. These cases include, among others, proceedings where:
(a) the judge has personal knowledge of disputed evidentiary facts concerning the proceeding; x x x.
[37]
Vide Manila Electric Co. v. Pasay Transportation Co., 57 Phil. 600 (1932).
[38] 105 Phil. 426 (1959). Vide also 5 Fletcher Cyc Corp (Perm Ed) 2074; 18A Am Jur 2d, Corporations
1166.
[39] 169 SCRA 109 (1989). There, this Court agreed with the Solicitor Generals submission that:
x x x Respondent Commission had to address itself to the controversy by issuing its questioned order dated
June 13, 1980, directing the holding of the annual stockholders meeting of Sipalay Mining for the
year 1980 as mandated in its by-laws, and creating a committee to supervise and control the
conduct of the proceedings to insure an orderly stockholders meeting and forestall possible
controversy in the sending of notices, processing and validation of proxies and closing of the stock
and transfer book. Certainly, the Commission cannot be faulted, much less can it be said that it
exceeded its jurisdiction, for having taken all proper measures to insure that an orderly meeting
and election are held in Sipalay Mining in the light of the issues raised in SEC Case No. 1751
pending before the Commission.
[40]
Rollo, G. R. No. 107789, pp. 962-963.
[41]
People v. Godoy, 243 SCRA 64 (1995).
[42]
Ibid.
[43]
Vide Note 1.
[44]
Presidential Commission on Good Government v. Pea, 159 SCRA 556 (1988). Vide also Republic v.
Sandiganbayan, 173 SCRA 72 (1989); Africa v. PCGG, 205 SCRA 38 (1992); Republic v.
Sandiganbayan, 199 SCRA 39 (1991).
[45]
Vide Republic of the Philippines v. Sandiganbayan, 266 SCRA 515 (1997).
[46]
Vide Presidential Commission on Good Government v. Sandiganbayan, 290 SCRA 639
(1998); Presidential Commission on Good Government v. Sandiganbayan, 339 SCRA 263 (2000).
[47]
Vide Presidential Commission on Good Government v. Sandiganbayan, 339 SCRA 263 (2000).
[48]
Vide Note 16.
[49]
Rollo G. R. No.147214, p. 53.
[50]
Vide Note 16.
[51]
Vide Note 15.
[52]
Vide Note 9.

SPECIAL SECOND DIVISION

[G.R. No. 144476. April 8, 2003]

ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L. ONG,

WILLIAM T. ONG, WILLIE T. ONG, and JULIE ONG
ALONZO, petitioners, vs. DAVID S. TIU, CELY Y. TIU, MOLY YU
GAW, BELEN SEE YU, D. TERENCE Y. TIU, JOHN YU, LOURDES
C. TIU, INTRALAND RESOURCES DEVELOPMENT CORP.,
MASAGANA TELAMART, INC., REGISTER OF DEEDS OF PASAY
CITY, and the SECURITIES AND EXCHANGE
COMMISSION, respondents.

[G.R. No. 144629. April 8, 2003]

DAVID S. TIU, CELY Y. TIU, MOLY YU GAW, BELEN SEE YU, D.

TERENCE Y. TIU, JOHN YU, LOURDES C. TIU, and INTRALAND
RESOURCES DEVELOPMENT CORP., petitioners, vs. ONG
 YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L. ONG,
WILLIAM T. ONG, WILLIE T. ONG, and JULIA ONG
ALONZO, respondents.

RESOLUTION
CORONA, J.:

Before us are the (1) motion for reconsideration, dated March 15, 2002, of petitioner
movants Ong Yong, Juanita Tan Ong, Wilson Ong, Anna Ong, William Ong, Willie Ong
and Julia Ong Alonzo (the Ongs); (2) motion for partial reconsideration, dated March 15,
2002, of petitioner movant Willie Ong seeking a reversal of this Courts Decision, [1] dated
February 1, 2002, in G.R. Nos. 144476 and 144629 affirming with modification the
decision[2] of the Court of Appeals, dated October 5, 1999, which in turn upheld, likewise
with modification, the decision of the SEC en banc, dated September 11, 1998; and (3)
motion for issuance of writ of execution of petitioners David S. Tiu, Cely Y. Tiu, Moly Yu
Gow, Belen See Yu, D. Terence Y. Tiu, John Yu and Lourdes C. Tiu (the Tius) of our
February 1, 2002 Decision.
A brief recapitulation of the facts shows that:
In 1994, the construction of the Masagana Citimall in Pasay City was threatened with
stoppage and incompletion when its owner, the First Landlink Asia Development
Corporation (FLADC), which was owned by the Tius, encountered dire financial
difficulties. It was heavily indebted to the Philippine National Bank (PNB) for P190
million. To stave off foreclosure of the mortgage on the two lots where the mall was being
built, the Tius invited Ong Yong, Juanita Tan Ong, Wilson T. Ong, Anna L. Ong, William
T. Ong and Julia Ong Alonzo (the Ongs), to invest in FLADC. Under the Pre-Subscription
Agreement they entered into, the Ongs and the Tius agreed to maintain equal
shareholdings in FLADC: the Ongs were to subscribe to 1,000,000 shares at a par value
of P100.00 each while the Tius were to subscribe to an additional 549,800 shares
at P100.00 each in addition to their already existing subscription of 450,200
shares. Furthermore, they agreed that the Tius were entitled to nominate the Vice-
President and the Treasurer plus five directors while the Ongs were entitled to nominate
the President, the Secretary and six directors (including the chairman) to the board of
directors of FLADC. Moreover, the Ongs were given the right to manage and operate the
mall.
Accordingly, the Ongs paid P100 million in cash for their subscription to 1,000,000
shares of stock while the Tius committed to contribute to FLADC a four-storey building
and two parcels of land respectively valued at P20 million (for 200,000 shares), P30
million (for 300,000 shares) and P49.8 million (for 49,800 shares) to cover their additional
549,800 stock subscription therein. The Ongs paid in another P70 million[3] to FLADC
and P20 million to the Tius over and above their P100 million investment, the total sum
of which (P190 million) was used to settle the P190 million mortgage indebtedness of
FLADC to PNB.
 The business harmony between the Ongs and the Tius in FLADC, however, was
shortlived because the Tius, on February 23, 1996, rescinded the Pre-Subscription
Agreement. The Tius accused the Ongs of (1) refusing to credit to them the FLADC
shares covering their real property contributions; (2) preventing David S. Tiu and Cely Y.
Tiu from assuming the positions of and performing their duties as Vice-President and
Treasurer, respectively, and (3) refusing to give them the office spaces agreed upon.
According to the Tius, the agreement was for David S. Tiu and Cely S. Tiu to assume
the positions and perform the duties of Vice-President and Treasurer, respectively, but
the Ongs prevented them from doing so. Furthermore, the Ongs refused to provide them
the space for their executive offices as Vice-President and Treasurer. Finally, and most
serious of all, the Ongs refused to give them the shares corresponding to their property
contributions of a four-story building, a 1,902.30 square-meter lot and a 151 square-meter
lot. Hence, they felt they were justified in setting aside their Pre-Subscription Agreement
with the Ongs who allegedly refused to comply with their undertakings.
In their defense, the Ongs said that David S. Tiu and Cely Y. Tiu had in fact assumed
the positions of Vice-President and Treasurer of FLADC but that it was they who refused
to comply with the corporate duties assigned to them. It was the contention of the Ongs
that they wanted the Tius to sign the checks of the corporation and undertake their
management duties but that the Tius shied away from helping them manage the
corporation. On the issue of office space, the Ongs pointed out that the Tius did in fact
already have existing executive offices in the mall since they owned it 100% before the
Ongs came in. What the Tius really wanted were new offices which were anyway
subsequently provided to them. On the most important issue of their alleged failure to
credit the Tius with the FLADC shares commensurate to the Tius property contributions,
the Ongs asserted that, although the Tius executed a deed of assignment for the 1,902.30
square-meter lot in favor of FLADC, they (the Tius) refused to pay P 570,690 for capital
gains tax and documentary stamp tax. Without the payment thereof, the SEC would not
approve the valuation of the Tius property contribution (as opposed to cash contribution).
This, in turn, would make it impossible to secure a new Transfer Certificate of Title (TCT)
over the property in FLADCs name. In any event, it was easy for the Tius to simply pay
the said transfer taxes and, after the new TCT was issued in FLADCs name, they could
then be given the corresponding shares of stocks. On the 151 square-meter property, the
Tius never executed a deed of assignment in favor of FLADC. The Tius initially claimed
that they could not as yet surrender the TCT because it was still being reconstituted by
the Lichaucos from whom the Tius bought it. The Ongs later on discovered that FLADC
had in reality owned the property all along, even before their Pre-Subscription Agreement
was executed in 1994. This meant that the 151 square-meter property was at that time
already the corporate property of FLADC for which the Tius were not entitled to the
issuance of new shares of stock.
The controversy finally came to a head when this case was commenced [4] by the Tius
on February 27, 1996 at the Securities and Exchange Commission (SEC), seeking
confirmation of their rescission of the Pre-Subscription Agreement. After hearing, the
SEC, through then Hearing Officer Rolando G. Andaya, Jr., issued a decision on May 19,
1997 confirming the rescission sought by the Tius, as follows:
WHEREFORE, judgment is hereby rendered confirming the rescission of the Pre-
Subscription Agreement, and consequently ordering:

(a) The cancellation of the 1,000,000 shares subscription of the individual defendants in
FLADC;
(b) FLADC to pay the amount of P170,000,000.00 to the individual defendants
representing the return of their contribution for 1,000,000 shares of FLADC;
( c) The plaintiffs to submit with (sic) the Securities and Exchange Commission amended
articles of incorporation of FLADC to conform with this decision;
(d) The defendants to surrender to the plaintiffs TCT Nos. 132493, 132494, 134066
(formerly 15587), 135325 and 134204 and any other title or deed in the name of
FLADC, failing in which said titles are declared void;
(e) The Register of Deeds to issue new certificates of titles in favor of the plaintiffs and
to cancel the annotation of the Pre-Subscription Agreement dated 15 August 1994 on
TCT No. 134066 (formerly 15587);
(f) The individual defendants, individually and collectively, their agents and
representatives, to desist from exercising or performing any and all acts pertaining to
stockholder, director or officer of FLADC or in any manner intervene in the
management and affairs of FLADC;
(g) The individual defendants, jointly and severally, to return to FLADC interest payment
in the amount of P8,866,669.00 and all interest payments as well as any payments
on principal received from the P70,000,000.00 inexistent loan, plus the legal rate of
interest thereon from the date of their receipt of such payment until fully paid;
(h) The plaintiff David Tiu to pay individual defendants the sum of P20,000,000.00
representing his loan from said defendants plus legal interest from the date of receipt
of such amount.

SO ORDERED. [5]

On motion of both parties, the above decision was partially reconsidered but only
insofar as the Ongs P70 million was declared not as a premium on capital stock but an
advance (loan) by the Ongs to FLADC and that the imposition of interest on it was
correct.[6]
Both parties appealed[7] to the SEC en banc which rendered a decision on September
11, 1998, affirming the May 19, 1997 decision of the Hearing Officer. The SEC en
banc confirmed the rescission of the Pre-Subscription Agreement but reverted to
classifying the P70 million paid by the Ongs as premium on capital and not as a loan or
advance to FLADC, hence, not entitled to earn interest.[8]
On appeal, the Court of Appeals (CA) rendered a decision on October 5, 1999, thus:

WHEREFORE, the Order dated September 11, 1998 issued by the Securities and
Exchange Commission En Banc in SEC AC CASE NOS. 598 and 601 confirming the
rescission of the Pre-Subscription Agreement dated August 15, 1994 is hereby
AFFIRMED, subject to the following MODIFICATIONS:

1. The Ong and Tiu Groups are ordered to liquidate First Landlink Asia
Development Corporation in accordance with the following cash and
property contributions of the parties therein.

(a) Ong Group P100,000,000.00 cash contribution for one (1) million
shares in First Landlink Asia Development Corporation at a par
value of P100.00 per share;

(b) Tiu Group:

1) P45,020,000.00 original cash contribution for 450,200 shares in

First Landlink Asia Development Corporation at a par value of
P100.00 per share;

2) A four-storey building described in Transfer Certificate of Title

No. 15587 in the name of Intraland Resources and Development
Corporation valued at P20,000,000.00 for 200,000 shares in
First Landlink Asia Development Corporation at a par value of
P100.00 per share;

3) A 1,902.30 square-meter parcel of land covered by Transfer

Certificate of Title No. 15587 in the name of Masagana Telamart,
Inc. valued at P30,000,000.00 for 300,000 shares in First Landlink
Asia Development Corporation at a par value of P100.00 per
share.

2) Whatever remains of the assets of the First Landlink Asia Development

Corporation and the management thereof is (sic) hereby ordered
transferred to the Tiu Group.

3) First Landlink Asia Development Corporation is hereby ordered to pay

the amount of P70,000,000.00 that was advanced to it by the Ong
Group upon the finality of this decision. Should the former incur in
delay in the payment thereof, it shall pay the legal interest thereon
pursuant to Article 2209 of the New Civil Code.

4) The Tius are hereby ordered to pay the amount of P20,000,000.00

loaned them by the Ongs upon the finality of this decision. Should the
 former incur in delay in the payment thereof, it shall pay the legal
interest thereon pursuant to Article 2209 of the New Civil Code.

SO ORDERED. [9]

An interesting sidelight of the CA decision was its description of the rescission made
by the Tius as the height of ingratitude and as pulling a fast one on the Ongs. The CA
moreover found the Tius guilty of withholding FLADC funds from the Ongs and diverting
corporate income to their own MATTERCO account.[10] These were findings later on
affirmed in our own February 1, 2002 Decision which is the subject of the instant motion
for reconsideration.[11]
But there was also a strange aspect of the CA decision. The CA concluded that both
the Ongs and the Tius were in pari delicto (which would not have legally entitled them to
rescission) but, for practical considerations, that is, their inability to work together, it was
best to separate the two groups by rescinding the Pre-Subscription Agreement, returning
the original investment of the Ongs and awarding practically everything else to the Tius.
Their motions for reconsideration having been denied, both parties filed separate
petitions for review before this Court.
In their petition docketed as G.R. No. 144476, Ong et al. vs. Tiu et al., the Ongs
argued that the Tius may not properly avail of rescission under Article 1191 of the Civil
Code considering that the Pre-Subscription Agreement did not provide for reciprocity of
obligations; that the rights over the subject matter of the rescission (capital assets and
properties) had been acquired by a third party (FLADC); that they did not commit a
substantial and fundamental breach of their agreement since they did not prevent the Tius
from assuming the positions of Vice-President and Treasurer of FLADC, and that the
failure to credit the 300,000 shares corresponding to the 1,902.30 square-meter property
covered by TCT No. 134066 (formerly 15587) was due to the refusal of the Tius to pay
the required transfer taxes to secure the approval of the SEC for the property contribution
and, thereafter, the issuance of title in FLADCs name. They also argued that the
liquidation of FLADC may not legally be ordered by the appellate court even for so called
practical considerations or even to prevent further squabbles and numerous litigations,
since the same are not valid grounds under the Corporation Code. Moreover, the Ongs
bewailed the failure of the CA to grant interest on their P70 million and P20 million
advances to FLADC and David S. Tiu, respectively, and to award costs and damages.
In their petition docketed as G.R. No. 144629, Tiu et al. vs. Ong et al., the Tius, on
the other hand, contended that the rescission should have been limited to the restitution
of the parties respective investments and not the liquidation of FLADC based on the
erroneous perception by the court that: the Masagana Citimall was threatened with
incompletion since FLADC was in financial distress; that the Tius invited the Ongs to
invest in FLADC to settle its P190 million loan from PNB; that they violated the Pre-
Subscription Agreement when it was the Lichaucos and not the Tius who executed the
deed of assignment over the 151 square-meter property commensurate to 49,800 shares
in FLADC thereby failing to pay the price for the said shares;that they did not turn over to
the Ongs the entire amount of FLADC funds; that they were diverting rentals from lease
contracts due to FLADC to their own MATTERCO account; that the P70 million paid by
the Ongs was an advance and not a premium on capital; and that, by rescinding the Pre-
Subscription Agreement, they wanted to wrestle away the management of the mall and
prevent the Ongs from enjoying the profits of their P190 million investment in FLADC.
On February 1, 2002, this Court promulgated its Decision (the subject of the instant
motions), affirming the assailed decision of the Court of Appeals but with the following
modifications:
1. the P20 million loan extended by the Ongs to the Tius shall earn interest at twelve
percent (12%) per annum to be computed from the time of judicial demand which is
from April 23, 1996;
2. the P70 million advanced by the Ongs to the FLADC shall earn interest at ten percent
(10%) per annum to be computed from the date of the FLADC Board Resolution which
is June 19, 1996; and
3. the Tius shall be credited with 49,800 shares in FLADC for their property contribution,
specifically, the 151 sq. m. parcel of land.
This Court affirmed the fact that both the Ongs and the Tius violated their respective
obligations under the Pre-Subscription Agreement. The Ongs prevented the Tius from
assuming the positions of Vice-President and Treasurer of the corporation. On the other
hand, the Decision established that the Tius failed to turn over FLADC funds to the Ongs
and that the Tius diverted rentals due to FLADC to their MATTERCO
account. Consequently, it held that rescission was not possible since both parties were
in pari delicto. However, this Court agreed with the Court of Appeals that the remedy of
specific performance, as espoused by the Ongs, was not practical and sound either and
would only lead to further squabbles and numerous litigations between the parties.
On March 15, 2002, the Tius filed before this Court a Motion for Issuance of a Writ of
Execution on the grounds that: (a) the SEC order had become executory as early as
September 11, 1998 pursuant to Sections 1 and 12, Rule 43 of the Rules of Court; (b) any
further delay would be injurious to the rights of the Tius since the case had been pending
for more than six years; and (c) the SEC no longer had quasi-judicial jurisdiction under
RA 8799 (Securities Regulation Code). The Ongs filed their opposition, contending that
the Decision dated February 1, 2002 was not yet final and executory; that no good reason
existed to issue a warrant of execution; and that, pursuant to Section 5.2 of RA 8799, the
SEC retained jurisdiction over pending cases involving intra-corporate disputes already
submitted for final resolution upon the effectivity of the said law.
Aside from their opposition to the Tius Motion for Issuance of Writ of Execution, the
Ongs filed their own Motion for Reconsideration; Alternatively, Motion for Modification (of
the February 1, 2002 Decision) on March 15, 2002, raising two main points: (a) that
specific performance and not rescission was the proper remedy under the premises; and
(b) that, assuming rescission to be proper, the subject decision of this Court should be
modified to entitle movants to their proportionate share in the mall.
On their first point (specific performance and not rescission was the proper remedy),
movants Ong argue that their alleged breach of the Pre-Subscription Agreement was, at
most, casual which did not justify the rescission of the contract. They stress that providing
appropriate offices for David S. Tiu and Cely Y. Tiu as Vice-President and Treasurer,
respectively, had no bearing on their obligations under the Pre-Subscription Agreement
since the said obligation (to provide executive offices) pertained to FLADC itself. Such
obligation arose from the relations between the said officers and the corporation and not
any of the individual parties such as the Ongs. Likewise, the alleged failure of the Ongs
to credit shares of stock in favor of the Tius for their property contributions also pertained
to the corporation and not to the Ongs. Just the same, it could not be done in view of the
Tius refusal to pay the necessary transfer taxes which in turn resulted in the inability to
secure SEC approval for the property contributions and the issuance of a new TCT in the
name of FLADC.
Besides, according to the Ongs, the principal objective of both parties in entering into
the Pre-Subscription Agreement in 1994 was to raise the P190 million desperately
needed for the payment of FLADCs loan to PNB. Hence, in this light, the alleged failure
to provide office space for the two corporate officers was no more than an inconsequential
infringement. For rescission to be justified, the law requires that the breach of contract
should be so substantial or fundamental as to defeat the primary objective of the parties
in making the agreement. At any rate, the Ongs claim that it was the Tius who were guilty
of fundamental violations in failing to remit funds due to FLADC and diverting the same
to their MATTERCO account.
The Ongs also allege that, in view of the findings of the Court that both parties were
guilty of violating the Pre-Subscription Agreement, neither of them could resort to
rescission under the principle of pari delicto. In addition, since the cash and other
contributions now sought to be returned already belong to FLADC, an innocent third party,
said remedy may no longer be availed of under the law.
On their second point (assuming rescission to be proper, the Ongs should be given
their proportionate share of the mall), movants Ong vehemently take exception to the
second item in the dispositive portion of the questioned Decision insofar as it decreed
that whatever remains of the assets of FLADC and the management thereof (after
liquidation) shall be transferred to the Tius. They point out that the mall itself, which would
have been foreclosed by PNB if not for their timely investment of P190 million in 1994
and which is now worth about P1 billion mainly because of their efforts, should be included
in any partition and distribution. They (the Ongs) should not merely be given interest on
their capital investments. The said portion of our Decision, according to them, amounted
to the unjust enrichment of the Tius and ran contrary to our own pronouncement that the
act of the Tius in unilaterally rescinding the agreement was the height of ingratitude and
an attempt to pull a fast one as it would prevent the Ongs from enjoying the fruits of
their P190 million investment in FLADC. It also contravenes this Courts assurance in the
questioned Decision that the Ongs and Tius will have a bountiful return of their respective
investments derived from the profits of the corporation.
Willie Ong filed a separate Motion for Partial Reconsideration dated March 8, 2002,
pointing out that there was no violation of the Pre-Subscription Agreement on the part of
the Ongs;that, after more than seven years since the mall began its operations, rescission
had become not only impractical but would also adversely affect the rights of innocent
parties; and that it would be highly inequitable and unfair to simply return the P100 million
investment of the Ongs and give the remaining assets now amounting to about P1 billion
to the Tius.
The Tius, in their opposition to the Ongs motion for reconsideration, counter that the
arguments therein are a mere re-hash of the contentions in the Ongs petition for review
and previous motion for reconsideration of the Court of Appeals decision. The Tius
compare the arguments in said pleadings to prove that the Ongs do not raise new issues,
and, based on well-settled jurisprudence,[12] the Ongs present motion is therefore pro-
forma and did not prevent the Decision of this Court from attaining finality.
On January 29, 2003, the Special Second Division of this Court held oral arguments
on the respective positions of the parties. On February 27, 2003, Dr. Willie Ong and the
rest of the movants Ong filed their respective memoranda. On February 28, 2003, the
Tius submitted their memorandum.
We grant the Ongs motions for reconsideration.
This is not the first time that this Court has reversed itself on a motion for
reconsideration. In Philippine Consumers Foundation, Inc. vs. National
Telecommunications Commission,[13]this Court, through then Chief Justice Felix V.
Makasiar, said that its members may and do change their minds, after a re-study of the
facts and the law, illuminated by a mutual exchange of views.[14] After a thorough re-
examination of the case, we find that our Decision of February 1, 2002 overlooked certain
aspects which, if not corrected, will cause extreme and irreparable damage and prejudice
to the Ongs, FLADC and its creditors.
The procedural rule on pro-forma motions pointed out by the Tius should not be
blindly applied to meritorious motions for reconsideration. As long as the same adequately
raises a valid ground[15] (i.e., the decision or final order is contrary to law), this Court has
to evaluate the merits of the arguments to prevent an unjust decision from attaining
finality. In Security Bank and Trust Company vs. Cuenca,[16] we ruled that a motion for
reconsideration is not pro-forma for the reason alone that it reiterates the arguments
earlier passed upon and rejected by the appellate court. We explained there that a
movant may raise the same arguments, if only to convince this Court that its ruling was
erroneous. Moreover, the rule (that a motion is pro-forma if it only repeats the arguments
in the previous pleadings) will not apply if said arguments were not squarely passed upon
and answered in the decision sought to be reconsidered. In the case at bar, no ruling was
made on some of the petitioner Ongs arguments. For instance, no clear ruling was made
on why an order distributing corporate assets and property to the stockholders would not
violate the statutory preconditions for corporate dissolution or decrease of authorized
capital stock. Thus, it would serve the ends of justice to entertain the subject motion for
reconsideration since some important issues therein, although mere repetitions, were not
considered or clearly resolved by this Court.
Going now to the merits, we resolve whether the Tius could legally rescind the Pre-
Subscription Agreement. We rule that they could not.
FLADC was originally incorporated with an authorized capital stock of 500,000 shares
with the Tius owning 450,200 shares representing the paid-up capital. When the Tius
invited the Ongs to invest in FLADC as stockholders, an increase of the authorized capital
stock became necessary to give each group equal (50-50) shareholdings as agreed upon
in the Pre-Subscription Agreement. The authorized capital stock was thus increased from
500,000 shares to 2,000,000 shares with a par value of P100 each, with the Ongs
subscribing to 1,000,000 shares and the Tius to 549,800 more shares in addition to their
450,200 shares to complete 1,000,000 shares. Thus, the subject matter of the contract
was the 1,000,000 unissued shares of FLADC stock allocated to the Ongs. Since these
were unissued shares, the parties Pre-Subscription Agreement was in fact a subscription
contract as defined under Section 60, Title VII of the Corporation Code:

Any contract for the acquisition of unissued stock in an existing corporation or a

corporation still to be formed shall be deemed a subscription within the meaning of
this Title, notwithstanding the fact that the parties refer to it as a purchase or some
other contract (Italics supplied).

A subscription contract necessarily involves the corporation as one of the contracting

parties since the subject matter of the transaction is property owned by the corporation
its shares of stock. Thus, the subscription contract (denominated by the parties as a Pre-
Subscription Agreement) whereby the Ongs invested P100 million for 1,000,000 shares
of stock was, from the viewpoint of the law, one between the Ongs and FLADC, not
between the Ongs and the Tius. Otherwise stated, the Tius did not contract in their
personal capacities with the Ongs since they were not selling any of their own shares to
them. It was FLADC that did.
Considering therefore that the real contracting parties to the subscription agreement
were FLADC and the Ongs alone, a civil case for rescission on the ground of breach of
contract filed by the Tius in their personal capacities will not prosper. Assuming it had
valid reasons to do so, only FLADC (and certainly not the Tius) had the legal personality
to file suit rescinding the subscription agreement with the Ongs inasmuch as it was the
real party in interest therein. Article 1311 of the Civil Code provides that contracts take
effect only between the parties, their assigns and heirs Therefore, a party who has not
taken part in the transaction cannot sue or be sued for performance or for cancellation
thereof, unless he shows that he has a real interest affected thereby. [17]
In their February 28, 2003 Memorandum, the Tius claim that there are two contracts
embodied in the Pre-Subscription Agreement: a shareholders agreement between the
Tius and the Ongs defining and governing their relationship and a subscription contract
between the Tius, the Ongs and FLADC regarding the subscription of the parties to the
corporation. They point out that these two component parts form one whole agreement
and that their terms and conditions are intrinsically related and dependent on each other.
Thus, the breach of the shareholders agreement, which was allegedly the consideration
for the subscription contract, was also a breach of the latter.
Aside from the fact that this is an entirely new angle never raised in any of their
previous pleadings until after the oral arguments on January 29, 2003, we find this
argument too strained for comfort. It is obviously intended to remedy and cover up the
Tius lack of legal personality to rescind an agreement in which they were personally not
parties-in-interest. Assuming arguendo that there were two sub-agreements embodied in
the Pre-Subscription Agreement, this Court fails to see how the shareholders agreement
between the Ongs and Tius can, within the bounds of reason, be interpreted as the
consideration of the subscription contract between FLADC and the Ongs. There was
nothing in the Pre-Subscription Agreement even remotely suggesting such alleged
interdependence. Be that as it may, however, the Tius are nevertheless not the proper
parties to raise this point because they were not parties to the subscription contract
between FLADC and the Ongs. Thus, they are not in a position to claim that the
shareholders agreement between them and the Ongs was what induced FLADC and the
Ongs to enter into the subscription contract. It is the Ongs alone who can say that. Though
FLADC was represented by the Tius in the subscription contract, FLADC had a separate
juridical personality from the Tius. The case before us does not warrant piercing the veil
of corporate fiction since there is no proof that the corporation is being used as a cloak or
cover for fraud or illegality, or to work injustice.[18]
The Tius also argue that, since the Ongs represent FLADC as its management,
breach by the Ongs is breach by FLADC. This must also fail because such an argument
disregards the separate juridical personality of FLADC.
The Tius allege that they were prevented from participating in the management of the
corporation. There is evidence that the Ongs did prevent the rightfully elected Treasurer,
Cely Tiu, from exercising her function as such. The records show that the President,
Wilson Ong, supervised the collection and receipt of rentals in the Masagana
Citimall;[19] that he ordered the same to be deposited in the bank; [20] and that he held on to
the cash and properties of the corporation.[21] Section 25 of the Corporation Code prohibits
the President from acting concurrently as Treasurer of the corporation. The rationale
behind the provision is to ensure the effective monitoring of each officers separate
functions.
However, although the Tius were adversely affected by the Ongs unwillingness to let
them assume their positions, rescission due to breach of contract is definitely the wrong
remedy for their personal grievances. The Corporation Code, SEC rules and even the
Rules of Court provide for appropriate and adequate intra-corporate remedies,
other than rescission, in situations like this. Rescission is certainly not one of them,
specially if the party asking for it has no legal personality to do so and the requirements
of the law therefor have not been met.A contrary doctrine will tread on extremely
dangerous ground because it will allow just any stockholder, for just about any real or
imagined offense, to demand rescission of his subscription and call for the distribution of
some part of the corporate assets to him without complying with the requirements of the
Corporation Code.
Hence, the Tius, in their personal capacities, cannot seek the ultimate and
extraordinary remedy of rescission of the subject agreement based on a less than
substantial breach of subscription contract. Not only are they not parties to the
subscription contract between the Ongs and FLADC; they also have other available and
effective remedies under the law.
All this notwithstanding, granting but not conceding that the Tius possess the legal
standing to sue for rescission based on breach of contract, said action will nevertheless
still not prosper since rescission will violate the Trust Fund Doctrine and the procedures
for the valid distribution of assets and property under the Corporation Code.
The Trust Fund Doctrine, first enunciated by this Court in the 1923 case of Philippine
Trust Co. vs. Rivera,[22] provides that subscriptions to the capital stock of a corporation
constitute a fund to which the creditors have a right to look for the satisfaction of their
claims.[23] This doctrine is the underlying principle in the procedure for the distribution of
capital assets, embodied in the Corporation Code, which allows the distribution of
corporate capital only in three instances: (1) amendment of the Articles of Incorporation
to reduce the authorized capital stock,[24] (2) purchase of redeemable shares by the
corporation, regardless of the existence of unrestricted retained earnings, [25] and (3)
dissolution and eventual liquidation of the corporation. Furthermore, the doctrine is
articulated in Section 41 on the power of a corporation to acquire its own shares [26] and in
Section 122 on the prohibition against the distribution of corporate assets and property
unless the stringent requirements therefor are complied with.[27]
The distribution of corporate assets and property cannot be made to depend on the
whims and caprices of the stockholders, officers or directors of the corporation, or even,
for that matter, on the earnest desire of the court a quo to prevent further squabbles and
future litigations unless the indispensable conditions and procedures for the protection of
corporate creditors are followed. Otherwise, the corporate peace laudably hoped for by
the court will remain nothing but a dream because this time, it will be the creditors turn to
engage in squabbles and litigations should the court order an unlawful distribution in
blatant disregard of the Trust Fund Doctrine.
In the instant case, the rescission of the Pre-Subscription Agreement will effectively
result in the unauthorized distribution of the capital assets and property of the corporation,
thereby violating the Trust Fund Doctrine and the Corporation Code, since rescission of
a subscription agreement is not one of the instances when distribution of capital assets
and property of the corporation is allowed.
Contrary to the Tius allegation, rescission will, in the final analysis, result in the
premature liquidation of the corporation without the benefit of prior dissolution in
accordance with Sections 117, 118, 119 and 120 of the Corporation Code. [28] The Tius
maintain that rescinding the subscription contract is not synonymous to corporate
liquidation because all rescission will entail would be the simple restoration of the status
quo ante and a return to the two groups of their cash and property contributions. We wish
it were that simple. Very noticeable is the fact that the Tius do not explain why rescission
in the instant case will not effectively result in liquidation. The Tius merely refer in cavalier
fashion to the end-result of rescission (which incidentally is 100% favorable to them) but
turn a blind eye to its unfair, inequitable and disastrous effect on the corporation, its
creditors and the Ongs.
In their Memorandum dated February 28, 2003, the Tius claim that rescission of the
agreement will not result in an unauthorized liquidation of the corporation because their
case is actually a petition to decrease capital stock pursuant to Section 38 of the
Corporation Code. Section 122 of the law provides that (e)xcept by decrease of capital
stock, no corporation shall distribute any of its assets or property except upon lawful
dissolution and after payment of all its debts and liabilities. The Tius claim that their case
for rescission, being a petition to decrease capital stock, does not violate the liquidation
procedures under our laws. All that needs to be done, according to them, is for this Court
to order (1) FLADC to file with the SEC a petition to issue a certificate of decrease of
capital stock and (2) the SEC to approve said decrease. This new argument has no merit.
The Tius case for rescission cannot validly be deemed a petition to decrease capital
stock because such action never complied with the formal requirements for decrease of
capital stock under Section 33 of the Corporation Code. No majority vote of the board of
directors was ever taken. Neither was there any stockholders meeting at which the
approval of stockholders owning at least two-thirds of the outstanding capital stock was
secured. There was no revised treasurers affidavit and no proof that said decrease will
not prejudice the creditors rights. On the contrary, all their pleadings contained were
alleged acts of violations by the Ongs to justify an order of rescission.
Furthermore, it is an improper judicial intrusion into the internal affairs of the
corporation to compel FLADC to file at the SEC a petition for the issuance of a certificate
of decrease of stock. Decreasing a corporations authorized capital stock is an
amendment of the Articles of Incorporation. It is a decision that only the stockholders and
the directors can make, considering that they are the contracting parties thereto. In this
case, the Tius are actually not just asking for a review of the legality and fairness of a
corporate decision. They want this Court to make a corporate decision for FLADC. We
decline to intervene and order corporate structural changes not voluntarily agreed upon
by its stockholders and directors.
Truth to tell, a judicial order to decrease capital stock without the assent of FLADCs
directors and stockholders is a violation of the business judgment rule which states that:

xxx xxx xxx (C)ontracts intra vires entered into by the board of directors are binding
upon the corporation and courts will not interfere unless such contracts are so
unconscionable and oppressive as to amount to wanton destruction to the rights of the
minority, as when plaintiffs aver that the defendants (members of the board), have
concluded a transaction among themselves as will result in serious injury to the
plaintiffs stockholders.[29]

The reason behind the rule is aptly explained by Dean Cesar L. Villanueva, an
esteemed author in corporate law, thus:

Courts and other tribunals are wont to override the business judgment of the board
mainly because, courts are not in the business of business, and the laissez faire rule or
the free enterprise system prevailing in our social and economic set-up dictates that it
is better for the State and its organs to leave business to the businessmen; especially
so, when courts are ill-equipped to make business decisions. More importantly, the
social contract in the corporate family to decide the course of the corporate business
has been vested in the board and not with courts. [30]
 Apparently, the Tius do not realize the illegal consequences of seeking rescission
and control of the corporation to the exclusion of the Ongs. Such an act infringes on the
law on reduction of capital stock. Ordering the return and distribution of the Ongs capital
contribution without dissolving the corporation or decreasing its authorized capital stock
is not only against the law but is also prejudicial to corporate creditors who enjoy absolute
priority of payment over and above any individual stockholder thereof.
Stripped to its barest essentials, the issue of rescission in this case is not difficult to
understand. If rescission is denied, will injustice be inflicted on any of the parties? The
answer is no because the financial interests of both the Tius and the Ongs will remain
intact and safe within FLADC. On the other hand, if rescission is granted, will any of the
parties suffer an injustice?Definitely yes because the Ongs will find themselves out in the
streets with nothing but the money they had in 1994 while the Tius will not only enjoy a
windfall estimated to be anywhere from P450 million to P900 million [31] but will also take
over an extremely profitable business without much effort at all.
Another very important point follows. The Court of Appeals and, later on, our Decision
dated February 1, 2002, stated that both groups were in pari delicto, meaning, that both
the Tius and the Ongs committed breaches of the Pre-Subscription Agreement. This may
be true to a certain extent but, judging from the comparative gravity of the acts separately
committed by each group, we find that the Ongs acts were relatively tame vis--vis those
committed by the Tius in not surrendering FLADC funds to the corporation and diverting
corporate income to their own MATTERCO account. The Ongs were right in not issuing
to the Tius the shares corresponding to the four-story building and the 1,902.30 square-
meter lot because no title for it could be issued in FLADCs name, owing to the Tius refusal
to pay the transfer taxes. And as far as the 151 square-meter lot was concerned, why
should FLADC issue additional shares to the Tius for property already owned by the
corporation and which, in the final analysis, was already factored into the shareholdings
of the Tius before the Ongs came in?
We are appalled by the attempt by the Tius, in the words of the Court of Appeals, to
pull a fast one on the Ongs because that was where the problem precisely started. It is
clear that, when the finances of FLADC improved considerably after the equity infusion
of the Ongs, the Tius started planning to take over the corporation again and exclude the
Ongs from it. It appears that the Tius refusal to pay transfer taxes might not have really
been at all unintentional because, by failing to pay that relatively small amount which they
could easily afford, the Tius should have expected that they were not going to be given
the corresponding shares. It was, from every angle, the perfect excuse for blackballing
the Ongs. In other words, the Tius created a problem then used that same problem as
their pretext for showing their partners the door. In the process, they stood to be rewarded
with a bonanza of anywhere between P450 million to P900 million in assets (from an
investment of only P45 million which was nearly foreclosed by PNB), to the extreme and
irreparable damage of the Ongs, FLADC and its creditors.
After all is said and done, no one can close his eyes to the fact that the Masagana
Citimall would not be what it has become today were it not for the timely infusion of P190
million by the Ongs in 1994. There are no ifs or buts about it.
 Without the Ongs, the Tius would have lost everything they originally invested in said
mall. If only for this and the fact that this Resolution can truly pave the way for both groups
to enjoy the fruits of their investments assuming good faith and honest intentions we
cannot allow the rescission of the subject subscription agreement. The Ongs
shortcomings were far from serious and certainly less than substantial; they were in fact
remediable and correctable under the law. It would be totally against all rules of justice,
fairness and equity to deprive the Ongs of their interests on petty and tenuous grounds.
WHEREFORE, the motion for reconsideration, dated March 15, 2002, of petitioners
Ong Yong, Juanita Tan Ong, Wilson Ong, Anna Ong, William Ong, Willie Ong and Julie
Ong Alonzo and the motion for partial reconsideration, dated March 15, 2002, of petitioner
Willie Ong are hereby GRANTED. The Petition for Confirmation of the Rescission of the
Pre-Subscription Agreement docketed as SEC Case No. 02-96-5269 is hereby
DISMISSED for lack of merit. The unilateral rescission by the Tius of the subject Pre-
Subscription Agreement, dated August 15, 1994, is hereby declared as null and void.
The motion for the issuance of a writ of execution, dated March 15, 2002, of
petitioners David S. Tiu, Cely Y. Tiu, Moly Yu Gow, Belen See Yu, D. Terence Y. Tiu,
John Yu and Lourdes C. Tiu is hereby DENIED for being moot.
Accordingly, the Decision of this Court, dated February 1, 2002, affirming with
modification the decision of the Court of Appeals, dated October 5, 1999, and the SEC en
banc, dated September 11, 1998, is hereby REVERSED.
Costs against the petitioner Tius.
SO ORDERED.
Bellosillo, (Chairman), Quisumbing, and Callejo, Sr., JJ., concur.

[1]
Ong Yong, et.al vs. Tiu, et. al, G.R. No. 144476; Tiu, et.al. vs. Ong Yong, et.al., G.R. No. 144629.
[2]
Rollo of G.R. No. 144476, pp. 111-135.
[3]
The testimony of Wilson Ong, never refuted by the Tius, was that the parties original agreement was to
increase FLADCs authorized capital stock from P50 million to P340 million (which explains the
Ongs 50% share of P170 million). Later on, the parties decided to downgrade the proposed new
authorized capital stock to only P200 million but the Ongs decided to leave the overpayment of P70
million in FLADC to help pay off the loan to PNB. (TSN at the SEC, January 29, 1997 cited in CA
Rollo, pp. 429-452; TSN at the SEC, February 6, 1997 cited in CA Rollo, pp. 485-489).
[4]
Docketed as SEC Case No. 02-96-5269.
[5]
Rollo of G.R. No. 144476, pp. 114-116.
[6]
Ibid., pp. 116-117.
[7]
Docketed as SEC Cases Nos. 598 and 601.
[8]
Rollo of G.R. No. 144476, pp. 117-118.
[9]
Ibid., pp. 133-135.
[10]
CA Decision dated October 5, 1999, p. 18; CA Records, p. 1045; Penned by Associate Justice Ramon
A. Barcelona and concurred in by Associate Justices Mariano M. Umali and Edgardo P. Cruz. Then
Associate Justice Demetrio G. Demetria dissented while also then Associate Justice Conchita
Carpio Morales concurred and dissented.
[11]
Supreme Court Decision dated February 1, 2002, pp. 34-35; Rollo, pp. 299-300.
[12]
Estrada vs. Sto. Domingo, 28 SCRA 890 [1969]; Cruz vs. Tuazon & Co., Inc., 76 SCRA 543
[1977]; Llanter vs. Court of Appeals, 105 SCRA 609 [1981]; Luzon Brokerage Co., Inc. vs. Maritime
Building Co., Inc., 86 SCRA 305 [1978].
[13]
131 SCRA 200 [1984].
[14]
Id at 221.
[15]
See Section 1, Rule 37 of the 1997 Rules of Civil Procedure.
[16]
G.R. No. 138544, October 3, 2000 citing Guerra Enterprises vs. CFI, 32 SCRA 314 [1970].
[17]
Sustiguer vs. Tamayo, 176 SCRA 579 [1989] citing Marimperio Compania Naviera vs. Court of Appeals,
156 SCRA 368 [1987].
[18]
Boyer-Roxas vs. Court of Appeals, 211 SCRA 470 [1992].
[19]
TSN, December 11, 1996, pp. 699-702, Rollo, pp. 705-706.
[20]
TSN, December 17, 1996, pp. 28-34; Rollo, pp. 699-702.
[21]
TSN, January 17, 1997, pp. 92-93; Rollo, pp. 705-706.
[22]
44 Phil 469 [1923].
[23]
Id; Garcia vs. Lim Chu Sing, 59 Phil. 562 [1934]; Boman Environmental Devt. Corp. vs. Court of Appeals,
167 SCRA 540 [1988].
[24]
Section 38 of the Corporation Code provides for the process to be followed for reduction of the authorized
capital stock. First, a proposal to decrease capital stock must be approved by a majority vote of the
board of directors and affirmed by stockholders who own 2/3 of the outstanding capital stock in a
meeting duly called for that purpose. Written notice of the time and place of the meeting on the
proposed decrease in the capital stock must be served to each of the stockholders at his place of
residence as shown in the corporate books. Thereafter, the SEC shall approve the certificate of
decrease of capital stock only if the same is accompanied by a new treasurers affidavit stating that
25% of the authorized capital stock has been subscribed while 25% of the subscribed capital stock
has been paid-up, and also if said decrease will not prejudice the rights of corporate creditors.
[25]
Section 8 of the Corporation Code provides that :
SEC. 8. Redeemable shares Redeemable shares may be issued by the corporation when expressly so
provided in the articles of incorporation. They may be purchased or taken up by the corporation
upon the expiration of a fixed period, regardless of the existence of unrestricted retained earnings
in the books of the corporation, and upon such other terms and conditions as may be stated in the
articles of incorporation, which terms and conditions must also be stated in the certificate of stock
representing said shares.
Section 5, par. 5, SEC Rules Governing Redeemable and Treasury Shares provides that redeemable
shares may be redeemed regardless of the existence of unrestricted retained earning, provided
that the corporation has, after such redemption, assets in its books to cover debts and liabilities of
capital stock. Therefore, redemption, according to SEC Opinion, January 23, 1985, may not be
made where the corporation is insolvent or if such redemption would cause insolvency or inability
of the corporation to meet its debts as they mature. (cited in Hector De Leon, The Corporation Code
of the Philippines, 1999 Ed., pp. 96-97).
[26]
Section 41 of the Corporation Code provides that:
Sec. 41. Power to acquire own shares. A stock corporation shall have the power to purchase or acquire its
own shares for a legitimate corporate purpose or purposes, including but not limited to the following
cases: Provided, That the corporation has unrestricted retained earnings in its books to cover the
shares to be purchased or acquired:
(1) To eliminate fractional shares arising out of stock dividends;
(2) To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a
delinquency sale, and to purchase delinquent shares sold during said sale; and
(3) To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions
of this Code.(Italics supplied)
[27]
xxx xxx xxx
Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute
any of its assets or property except upon lawful dissolution and after payment of all its debts and
liabilities.
[28]
Sections 117, 118, 119, and 120 of the Corporation Code provide that:
SEC. 117. Methods of dissolution. - A corporation formed or organized under the provisions of this Code
may be dissolved voluntarily or involuntarily. (n)
SEC. 118. Voluntary dissolution where no creditors are affected. - If dissolution of a corporation does not
prejudice the rights of any creditor having a claim against it, the dissolution may be effected by
majority vote of the board of directors or trustees, and by a resolution duly adopted by the
affirmative vote of the stockholders owning at least two thirds (2/3) of the outstanding capital or of
at least two-thirds (2/3) of the members at a meeting to be held upon call of the directors or trustees
after publication of the notice of time, place and object of the meeting for three (3) consecutive
weeks in a newspaper published in the place where the principal office of said corporation is
located; and if no newspaper is published in such place, then in a newspaper of general circulation
in the Philippines, after sending such notice to each stockholder or member either by registered
mail or by personal delivery at least thirty (30) days prior to said meeting. A copy of the resolution
authorizing the dissolution shall be certified by a majority of the board of directors or trustees and
countersigned by the secretary of the corporation. The Securities and Exchange Commission shall
thereupon issue the certificate of dissolution. (62a)
SEC. 119. Voluntary dissolution where creditors are affected. - Where the dissolution of a corporation may
prejudice the rights of any creditor, the petition for dissolution shall be filed with the Securities and
Exchange Commission. The petition shall be signed by a majority of its board of directors or
trustees or other officers having the management of its affairs, verified by its president or secretary
or one of its directors or trustees, and shall set forth all claims and demands against it, and that its
dissolution was resolved upon by the affirmative vote of the stockholders representing at least two-
thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the members, at a
meeting of its stockholders or members called for that purpose.
If the petition is sufficient in form and substance, the Commission shall, by an order reciting the purpose of
the petition, fix a date on or before which objections thereto may be filed by any person, which date
shall not be less than thirty (30) days nor more than sixty (60) days after the entry of the
order. Before such date, a copy of the order shall be published at least once a week for three (3)
consecutive weeks in a newspaper of general circulation published in municipality or city where the
principal office of the corporation is situated, or if there be no such newspaper, then in a newspaper
of general circulation in the Philippines, and a similar copy shall be posted for three (3) consecutive
weeks in three (3) public places in such municipality or city.
Upon five (5) days notice, given after the date on which the right to file objections as fixed in the order has
expired, the Commission shall proceed to hear the petition and try any issue made by the objections
filed; and if no such objection is sufficient, and the material allegations of the petition are true, it
shall render judgment dissolving the corporation and directing such disposition of its assets as
 justice requires, and may appoint a receiver to collect such assets and pay the debts of the
corporation. (Rule 104, RCa)
SEC. 120. Dissolution by shortening corporate term. - A voluntary dissolution may be effected by amending
the articles of incorporation to shorten the corporate term pursuant to the provisions of this Code. A
copy of the amended articles of incorporation shall be submitted to the Securities and Exchange
Commission in accordance with this Code. Upon approval of the amended articles of incorporation
or the expiration of the shortened term, as the case may be, the corporation shall be deemed
dissolved without any further proceedings, subject to the provisions of this Code on liquidation. (n)
[29]
Gamboa vs. Victoriano, 90 SCRA 40 [1979].
[30]
Cesar L. Villanueva, Philippine Corporate Law, 1998 Ed., p. 228.
[31]
Estimates of FLADCs current net worth cited during the oral arguments on January 29, 2003 ranged from
P450 million to P1 billion.

SECOND DIVISION
VALLEY GOLF & COUNTRY G.R. No. 158805
CLUB, INC.,
Petitioner, Present:

QUISUMBING, J.,
Chairperson,
CARPIO MORALES,
- versus - TINGA,
VELASCO, JR., and
BRION, JJ.
ROSA O. VDA. DE CARAM,
Respondent. Promulgated:
April 16, 2009

x----------------------------------------------------------------------------x

DECISION
TINGA, J.:
May a non-stock corporation seize and dispose of the membership share of a fully-
paid member on account of its unpaid debts to the corporation when it is authorized
to do so under the corporate by-laws but not by the Articles of Incorporation? Such
is the central issue raised in this petition, which arose after petitioner Valley Golf &
Country Club (Valley Golf) sold the membership share of a member who had been
delinquent in the payment of his monthly dues.

I.

The facts that preceded this petition are simple. Valley Golf & Country Club (Valley
Golf) is a duly constituted non-stock, non-profit corporation which operates a golf
course. The members and their guests are entitled to play golf on the said course and
otherwise avail of the facilities and privileges provided by Valley Golf.[1] The
shareholders are likewise assessed monthly membership dues.

In 1961, the late Congressman Fermin Z. Caram, Jr. (Caram),[2] the husband of the
present respondent, subscribed to purchased and paid for in full one share (Golf
Share) in the capital stock of Valley Golf. He was issued Stock Certificate No. 389
dated 26 January 1961 for the Golf Share.[3] The Stock Certificate likewise indicates
a par value of P9,000.00.

Valley Golf would subsequently allege that beginning 25 January 1980, Caram
stopped paying his monthly dues, which were continually assessed until 31 June
1987. Valley Golf claims to have sent five (5) letters to Caram concerning his
delinquent account within the period from 27 January 1986 until 3 May 1987, all
forwarded to
P.O. Box No. 1566, Makati Commercial Center Post Office, the mailing address
which Caram allegedly furnished Valley Golf.[4] The first letter informed Caram that
his account as of 31 December 1985 was delinquent and that his club privileges were
suspended pursuant to Section 3, Article VII of the by-laws of Valley Golf.[5] Despite
such notice of delinquency, the second letter, dated 26 August 1986, stated that
should Carams account remain unpaid for 45 days, his name would be included in
the delinquent list to be posted on the clubs bulletin board.[6] The third letter,
dated 25 January 1987, again informed Caram of his delinquent account and the
suspension of his club privileges.[7] The fourth letter, dated 7 March 1987, informed
Caram that should he fail to settle his delinquencies, then totaling P7,525.45, within
ten (10) days from receipt thereof Valley Golf would exercise its right to sell the
Golf Share to satisfy the outstanding amount, again pursuant to the provisions of the
by-laws.[8] The final letter, dated 3 May 1987, issued a final deadline until 31 May
1987 for Caram to settle his account, or otherwise face the sale of the Golf Share to
satisfy the claims of Valley Golf.[9]

The Golf Share was sold at public auction on 11 June 1987 for P25,000.00
after the Board of Directors had authorized the sale in a meeting on 11 April 1987,
and the Notice of Auction Sale was published in the 6 June 1987 edition of
the Philippine Daily Inquirer.[10]

As it turned out, Caram had died on 6 October 1986. Respondent initiated intestate
proceedings before the Regional Trial Court (RTC) of Iloilo City, Branch 35, to
settle her husbands estate.[11] Unaware of the pending controversy over the Golf
Share, the Caram family and the RTC included the same as part of Carams estate.
The RTC approved a project of partition of Carams estate on 29 August 1989. The
Golf Share was adjudicated to respondent, who paid the corresponding estate tax
due, including that on the Golf Share.

It was only through a letter dated 15 May 1990 that the heirs of Caram learned of
the sale of the Golf Share following their inquiry with Valley Golf about the share.
After a series of correspondence, the Caram heirs were subsequently informed, in a
letter dated 15 October 1990, that they were entitled to the refund of P11,066.52 out
of the proceeds of the sale of the Golf Share, which amount had been in the custody
of Valley Golf since 11 June 1987.[12]

Respondent filed an action for reconveyance of the share with damages before the
Securities and Exchange Commission (SEC) against Valley Golf.[13] On 15
November 1996, SEC Hearing Officer Elpidio S. Salgado rendered a decision in
favor of respondent, ordering Valley Golf to convey ownership of the Golf Share or
in the alternative to issue one fully paid share of stock of Valley Golf the same class
as the Golf Share to respondent. Damages totaling P90,000.00 were also awarded to
respondent.[14]

The SEC hearing officer noted that under Section 67, paragraph 2 of the Corporation
Code, a share stock could only be deemed delinquent and sold in an extrajudicial
sale at public auction only upon the failure of the stockholder to pay the unpaid
subscription or balance for the share. The section could not have applied in Carams
case since he had fully paid for the Golf Share and he had been assessed not for the
share itself but for his delinquent club dues. Proceeding from the foregoing premises,
the SEC hearing officer concluded that the auction sale had no basis in law and was
thus a nullity.

The SEC hearing officer did entertain Valley Golfs argument that the sale of the Golf
Share was authorized under the by-laws. However, it was ruled that pursuant to
Section 6 of the Corporation Code, a provision creating a lien upon shares of stock
for unpaid debts, liabilities, or assessments of stockholders to the corporation, should
be embodied in the Articles of Incorporation, and not merely in the by-laws, because
Section 6 (par.1) prescribes that the shares of stock of a corporation may have such
rights, privileges and restrictions as may be stated in the articles of
incorporation.[15] It was observed that the Articles of Incorporation of Valley Golf
did not impose any lien, liability or restriction on the Golf Share or, for that matter,
even any conditionality that the Golf Share would be subject to assessment of
monthly dues or a lien on the share for non-payment of such dues.[16] In the same
vein, it was opined that since Section 98 of the Corporation Code provides that
restrictions on transfer of shares should appear in the articles of incorporation, by-
laws and the certificate of stock to be valid and binding on any purchaser in good
faith, there was more reason to apply the said rule to club delinquencies to constitute
a lien on golf shares.[17]

The SEC hearing officer further held that the delinquency in monthly club dues was
merely an ordinary debt enforceable by judicial action in a civil case. The decision
generally affirmed respondents assertion that Caram was not properly notified of the
delinquencies, citing Carams letter dated 7 July 1978 to Valley Golf about the
change in his mailing address. He also noted that Valley Golf had sent most of the
letters after Carams death. In all, the decision concluded that the sale of the Golf
Share was effectively a deprivation of property without due process of law.

On appeal to the SEC en banc,[18] said body promulgated a decision[19] on 9 May

2000, affirming the hearing officers decision in toto. Again, the SEC found that
Section 67 of the Corporation Code could not justify the sale of the Golf Share since
it applies only to unpaid subscriptions and not to delinquent membership dues. The
SEC also cited a general rule, formulated in American jurisprudence, that a
corporation has no right to dispose of shares of stock for delinquent assessments,
dues, service fees and other unliquidated charges unless there is an express grant to
do so, either by the statute itself or by the charter of a corporation. [20] Said rule, taken
in conjunction with Section 6 of the Corporation Code, militated against the validity
of the sale of the Golf Share, the SEC stressed. In view of these premises, which
according to the SEC entailed the nullity of the sale, the body found it unnecessary
to rule on whether there was valid notice of the sale at public auction.

Valley Golf elevated the SECs decision to the Court of Appeals by way of a petition
for review.[21] On 4 April 2003, the appellate court rendered a decision[22] affirming
the decisions of the SEC and the hearing officer, with modification consisting of the
deletion of the award of attorneys fees. This time, Valley Golfs central argument
was that its by-laws, rather than Section 67 of the Corporation Code, authorized the
auction sale of the Golf Share. Nonetheless, the Court of Appeals found that the by-
law provisions cited by Valley Golf are of doubtful validity, as they purportedly
conflict with Section 6 of the Code, which mandates that rights privileges or
restrictions attached to a share of stock should be stated in the articles of
incorporation.[23] It noted that what or who had become delinquent was was Mr.
Caram himself and not his golf share, and such being the case, the unpaid account
should have been filed as a money claim in the proceedings for the settlement of his
estate, instead of the petitioner selling his golf share to satisfy the account.[24]

The Court of Appeals also adopted the findings of the hearing officer that the notices
had not been properly served on Caram or his heirs, thus effectively depriving
respondent of property without due process of law. While it upheld the award of
damages, the appellate court struck down the award of attorneys fees since there was
no discussion on the basis of such award in the body of the decisions of both the
hearing officer and the SEC.[25]
There is one other fact of note, mentioned in passing by the SEC hearing
officer[26] but ignored by the SEC en banc and the Court of Appeals. Valley Golfs
third and fourth demand letters dated 25 January 1987 and 7 March 1987,
respectively, were both addressed to Est. of Fermin Z. Caram, Jr. The abbreviation
Est. can only be taken to refer to Estate. Unlike the first two demand letters, the third
and fourth letters were sent after Caram had died on 6 October 1986. However, the
fifth and final demand letter, dated 3 May 1987 or twenty-eight (28) days before the
sale, was again addressed to Fermin Caram himself and not to his estate, as if he
were still alive. The foregoing particular facts are especially significant to our
disposition of this case.

II.

In its petition before this Court, Valley Golf concedes that Section 67 of the
Corporation Code, which authorizes the auction sale of shares with delinquent
subscriptions, is not applicable in this case. Nonetheless, it argues that the by-laws
of Valley Golf authorizes the sale of delinquent shares and that the by-laws constitute
a valid law or contractual agreement between the corporation and its stockholders or
their respective successors. Caram, by becoming a member of Valley Golf, bound
himself to observe its by-laws which constitutes the rules and regulations or private
laws enacted by the corporation to regulate, govern and control its own actions,
affairs and concerns and its stockholders or members and directors and officers with
relation thereto and among themselves in their relation to it.[27] It also points out that
the by-laws itself had duly passed the SECs scrutiny and approval.

Valley Golf further argues that it was error on the part of the Court of Appeals to
rely, as it did, upon Section 6 of the Corporation Code to nullify the subject
provisions of the By-Laws.[28] Section 6 referrs to restrictions on the shares of stock
which should be stated in the articles of incorporation, as differentiated from liens
which under the by-laws would serve as basis for the auction sale of the share. Since
Section 6 refers to restrictions and not to liens, Valley Golf submits that liens are
excluded from the ambit of the provision. It further proffers that assuming that liens
and restrictions are synonymous, Section 6 itself utilizes the permissive word may,
thus evincing the non-mandatory character of the requirement that restrictions or
liens be stated in the articles of incorporation.

Valley Golf also argues that the Court of Appeals erred in relying on the factual
findings of the hearing officer, which are allegedly replete with errors and
contradictions. Finally, it assails the award of moral and exemplary damages.

III.

As found by the SEC and the Court of Appeals, the Articles of Incorporation of
Valley Golf does not contain any provision authorizing the corporation to create any
lien on a members Golf Share as a consequence of the members unpaid assessments
or dues to Valley Golf. Before this Court, Valley Golf asserts that such a provision
is contained in its by-laws. We required the parties to submit a certified copy of the
by-laws of Valley Golf in effect as of 11 June 1987.[29] In compliance, Valley Golf
submitted a copy of its by-laws, originally adopted on 6 June 1958[30] and amended
on 26 November 1986.[31] The amendments bear no relevance to the issue of
delinquent membership dues. The relevant provisions, found in Article VIII entitled
Club Accounts, are reproduced below:

Section 1. Lien.The Club has the first lien on the share of the stockholder who has,
in his/her/its name, or in the name of an assignee, outstanding accounts and
liabilities in favor of the Club to secure the payment thereof.

xxx

Section 3. The account of any member shall be presented to such member every
month. If any statement of accounts remains unpaid for a period forty-five (45) days
after cut-off date, said member maybe (sic) posted as deliqnuent (sic). No
 delinquent member shall be entitled to enjoy the privileges of such membership for
the duration of the deliquency (sic). After the member shall have been posted as
delinquent, the Board may order his/her/its share sold to satisfy the claims of the
club; after which the member loses his/her/its rights and privileges permanently.
No member can be indebted to the Club at any time any amount in excess of the
credit limit set by the Board of Directors from time to time. The unpaid account
referred to here includes non-payment of dues, charges and other assessments and
non-payment for subscriptions.[32]

To bolster its cause, Valley Golf proffers the proposition that by virtue of the by-law
provisions a lien is created on the shares of its members to ensure payment of dues,
charges and other assessments on the members. Both the SEC and the Court of
Appeals debunked the tenability or applicability of the proposition through two
common thrusts.

Firstly, they correctly noted that the procedure under Section 67 of the Corporation
Code for the stock corporations recourse on unpaid subscriptions is inapt to a non-
stock corporation vis--vis a members outstanding dues. The basic factual backdrops
in the two situations are disperate. In the latter, the member has fully paid for his
membership share, while in the former, the stockholder has not yet fully paid for the
share or shares of stock he subscribed to, thereby authorizing the stock corporation
to call on the unpaid subscription, declare the shares delinquent and subject the
delinquent shares to a sale at public auction.[33]

Secondly, the two bodies below concluded that following Section 6 of the
Corporation Code, which provides:

The shares of stock of stock corporation may be divided into classes or series of shares, or
both, any of which classes or series of shares may have such rights, privileges or
restrictions as may be stated in the articles of incorporation x x x [34]
the lien on the Golf Share in favor of Valley Golf is not valid, as the power to
constitute such a lien should be provided in the articles of incorporation, and not
merely in the by-laws.

However, there is a specific provision under the Title XI, on Non-Stock Corporations
of the Corporation Code dealing with termination of membership. Section 91 of the
Corporation Code provides:

SEC. 91. Termination of membership.Membership shall be terminated in the manner

and for the causes provided in the articles of incorporation or the by-laws.
Termination of membership shall have the effect of extinguishing all rights of a
member in the corporation or in its property, unless otherwise provided in the
articles of incorporation or the by-laws. (Emphasis supplied)

Clearly, the right of a non-stock corporation such as Valley Golf to expel a member
through the forfeiture of the Golf Share may be established in the by-laws alone, as
is the situation in this case. Thus, both the SEC and the appellate court are wrong in
holding that the establishment of a lien and the loss of the Golf Share consequent to
the enforcement of the lien should have been provided for in the articles of
incorporation.

IV.

Given that the cause for termination of membership in a non-stock corporation may
be established through the by-laws alone and need not be set forth in the articles of
incorporation, is there any cause to invalidate the lien and the subsequent sale of the
Golf Share by Valley Golf?
 Former SEC Chairperson, Rosario Lopez, in her commentaries on the
Corporation Code, explains the import of Section 91 in a manner relevant to this
case:

The prevailing rule is that the provisions of the articles of incorporation or by-laws
of termination of membership must be strictly complied with and applied to the
letter. Thus, an association whose member fails to pay his membership due and
annual due as required in the by-laws, and which provides for the termination or
suspension of erring members as well as prohibits the latter from intervening in any
manner in the operational activities of the association, must be observed because
by-laws are self-imposed private laws binding on all members, directors and
officers of the corporation.[35]

Examining closely the relevant by-law provisions of Valley Golf,[36] it appears that
termination of membership may occur when the following successive conditions are
met: (1) presentation of the account of the member; (2) failure of the member to
settle the account within forty-five days after the cut-off date; (3) posting of the
member as delinquent; and (4) issuance of an order by the board of directors that the
share of the delinquent member be sold to satisfy the claims of Valley Golf. These
conditions found in by-laws duly approved by the SEC warrant due respect and we
are disinclined to rule against the validity of the by-law provisions.

At the same time, two points warrant special attention.

A.

Valley Golf has sought to accomplish the termination of Carams membership

through the sale of the Golf Share, justifying the sale through the constitution of a
lien on the Golf Share under Section 1, Article VIII of its by-laws. Generally in
theory, a non-stock corporation has the power to effect the termination of a member
without having to constitute a lien on the membership share or to undertake the
elaborate process of selling the same at public auction. The articles of incorporation
or the by-laws can very well simply provide that the failure of a member to pay the
dues on time is cause for the board of directors to terminate membership. Yet Valley
Golf was organized in such a way that membership is adjunct to ownership of a share
in the club; hence the necessity to dispose of the share to terminate membership.

Share ownership introduces another dimension to the casethe reality that termination
of membership may also lead to the infringement of property rights. Even though
Valley Golf is a non-stock corporation, as evinced by the fact that it is not authorized
to distribute to the holder of its shares dividends or allotments of the surplus profits
on the basis of shares held,[37] the Golf Share has an assigned value reflected on the
certificate of membership itself.[38] Termination of membership in Valley Golf does
not merely lead to the withdrawal of the rights and privileges of the member to club
properties and facilities but also to the loss of the Golf Share itself for which the
member had fully paid.

The claim of Valley Golf is limited to the amount of unpaid dues plus incremental
costs. On the other hand, Carams loss may encompass not only the amount he had
paid for the share but also the price it would have fetched in the market at the time
his membership was terminated.

There is an easy way to remedy what is obviously an unfair situation. Taking the
same example, Valley Golf seizes the share, sells it to itself or a third person
for P100.000.00, then refunds P99,000.00 back to the delinquent member. On its
face, such a mechanism obviates the inequity of the first example, and assures that
the loss sustained by the delinquent member is commensurate to the actual debt
owed to Valley Golf. After all, applying civil law concepts, the pecuniary injury
sustained by Valley Golf attributable to the delinquent member is only to the extent
of the unpaid debt, and it would be difficult to foresee what right under law Valley
Golf would have to the remainder of the sales proceeds.
A refund mechanism may disquiet concerns of undue loss of property rights
corresponding to termination of membership. Yet noticeably, the by-laws of Valley
Golf does not require the Club to refund to the discharged member the remainder of
the proceeds of the sale after the outstanding obligation is extinguished. After
petitioner had filed her complaint though, Valley Golf did inform her that the heirs
of Caram are entitled to such refund.

B.

Let us now turn to the other significant concern.

The by-laws does not provide for a mode of notice to the member before the board
of directors puts up the Golf Share for sale, yet the sale marks the termination of
membership. Whatever semblance of a notice that is afforded is bare at best,
ambiguous at most. The member is entitled to receive a statement of account every
month; however, the mode by which the member is to receive such notice is not
elaborated upon. If the member fails to pay within 45 days from the due date, Valley
Golf is immediately entitled to have the member posted as delinquent. While the
assignation of delinquent status is evident enough, it is not as clear what the word
posted entails. Connotatively, the word could imply the physical posting of the
notice of delinquency within the club premises, such as a bulletin board, which we
recognize is often the case. Still, the actual posting modality is uncertain from the
language of the by-laws.

The moment the member is posted as delinquent, Valley Golf is immediately

enabled to seize the share and sell the same, thereby terminating membership in the
club. The by-laws does not require any notice to the member from the time
delinquency is posted to the day the sale of the share is actually held. The setup is to
the extreme detriment to the member, who upon being notified that the lien on his
share is due for execution would be duly motivated to settle his accounts to foreclose
such possibility.

Does the Corporation Code permit the termination of membership without due
notice to the member? The Code itself is silent on that matter, and the argument can
be made that if no notice is provided for in the articles of incorporation or in the by-
laws, then termination may be effected without any notice at all. Support for such an
argument can be drawn from our ruling in Long v. Basa,[39] which pertains to a
religious corporation that is also a non-stock
corporation.[40] Therein, the Court upheld the expulsion of church members despite
the absence of any provision on prior notice in the by-laws, stating that the members
had waived such notice by adhering to those by-laws[,] became members of the
church voluntarily[,] entered into its covenant and subscribed to its rules [and by]
doing so, they are bound by their consent.[41]

However, a distinction should be made between membership in a religious

corporation, which ordinarily does not involve the purchase of ownership shares,
and membership in a non-stock corporation such as Valley Golf, where the purchase
of an ownership share is a condition sine qua non. Membership in Valley Golf
entails the acquisition of a property right. In turn, the loss of such property right
could also involve the application of aspects of civil law, in addition to the provisions
of the Corporation Code. To put it simply, when the loss of membership in a non-
stock corporation also entails the loss of property rights, the manner of deprivation
of such property right should also be in accordance with the provisions of the Civil
Code.
It has been held that a by-law providing that if a member fails to pay dues for a year,
he shall be deemed to have relinquished his membership and may be excluded from
the rooms of the association and his certificate of membership shall be sold at
auction, and any surplus of the proceeds be paid over him, does not ipso
facto terminate the membership of one whose dues are a year in arrears; the remedy
given for non-payment of dues is not exclusive because the corporation, so long as
he remains a member, may sue on his agreement and collect them.[42]

V.

With these foregoing concerns in mind, were the actions of Valley Golf concerning
the Golf Share and membership of Caram warranted? We believe not.

It may be conceded that the actions of Valley Golf were, technically speaking, in
accord with the provisions of its by-laws on termination of membership, vaguely
defined as these are. Yet especially since the termination of membership in Valley
Golf is inextricably linked to the deprivation of property rights over the Golf Share,
the emergence of such adverse consequences make legal and equitable standards
come to fore.

The commentaries of Lopez advert to an SEC Opinion dated 29 September

1987 which we can cite with approval. Lopez cites:

[I]n order that the action of a corporation in expelling a member for cause may be
valid, it is essential, in the absence of a waiver, that there shall be a hearing or trial
of the charge against him, with reasonable notice to him and a fair opportunity to
be heard in his defense. (Fletcher Cyc. Corp., supra) If the method of trial is not
regulated by the by-laws of the association, it should at least permit substantial
justice. The hearing must be conducted fairly and openly and the body of persons
 before whom it is heard or who are to decide the case must be unprejudiced. (SEC
opinion dated September 29, 1987, Bacalaran-Sucat Drivers Association)

It is unmistakably wise public policy to require that the termination of membership

in a non-stock corporation be done in accordance with substantial justice. No matter
how one may precisely define such term, it is evident in this case that the termination
of Carams membership betrayed the dictates of substantial justice.

Valley Golf alleges in its present petition that it was notified of the death of
Caram only in March of 1990,[43] a claim which is reiterated in its Reply to
respondents Comment.[44] Yet this claim is belied by the very demand letters sent by
Valley Golf to Carams mailing address. The letters dated 25 January 1987 and 7
March 1987, both of which were sent within a few months after Carams death are
both addressed to Est. of Fermin Z. Caram, Jr.; and the abbreviation [e]st. can only
be taken to refer to estate. This is to be distinguished from the two earlier letters,
both sent prior to Carams death on 6 October 1986, which were addressed to Caram
himself. Inexplicably, the final letter dated 3 May 1987 was again addressed to
Caram himself, although the fact that the two previous letters were directed at the
estate of Caram stands as incontrovertible proof that Valley Golf had known of
Carams death even prior to the auction sale.

Interestingly, Valley Golf did not claim before the Court of Appeals that they had
learned of Carams death only after the auction sale. It also appears that Valley Golf
had conceded before the SEC that some of the notices it had sent were addressed to
the estate of Caram, and not the decedent himself.[45]
What do these facts reveal? Valley Golf acted in clear bad faith when it sent the final
notice to Caram under the pretense they believed him to be still alive, when in fact
they had very well known that he had already died. That it was in the final notice
that Valley Golf had perpetrated the duplicity is especially blameworthy, since it
was that notice that carried the final threat that his Golf Share would be sold at public
auction should he fail to settle his account on or before 31 May 1987.

Valley Golf could have very well addressed that notice to the estate of Caram,
as it had done with the third and fourth notices. That it did not do so signifies that
Valley Golf was bent on selling the Golf Share, impervious to potential
complications that would impede its intentions, such as the need to pursue the claim
before the estate proceedings of Caram. By pretending to assume that Caram was
then still alive, Valley Golf would have been able to capitalize on his previous
unresponsiveness to their notices and proceed in feigned good faith with the sale.
Whatever the reason Caram was unable to respond to the earlier notices, the fact
remains that at the time of the final notice, Valley Golf knew that Caram, having
died and gone, would not be able to settle the obligation himself, yet they
persisted in sending him notice to provide a color of regularity to the resulting
sale.

That reason alone, evocative as it is of the absence of substantial justice in the sale
of the Golf Share, is sufficient to nullify the sale and sustain the rulings of the SEC
and the Court of Appeals.

Moreover, the utter and appalling bad faith exhibited by Valley Golf in sending out
the final notice to Caram on the deliberate pretense that he was still alive could bring
into operation Articles Articles 19, 20 and 21 under the Chapter on Human Relations
of the Civil Code.[46] These provisions enunciate a general obligation under law for
every person to act fairly and in good faith towards one another. Non-stock
corporations and its officers are not exempt from that obligation.
 VI.

Another point. The by-laws of Valley Golf is discomfiting enough in that it fails to
provide any formal notice and hearing procedure before a members share may be
seized and sold. The Court would have been satisfied had the by-laws or the articles
of incorporation established a procedure which assures that the member would in
reality be actually notified of the pending accounts and provide the opportunity for
such member to settle such accounts before the membership share could be seized
then sold to answer for the debt. As we have emphasized, membership in Valley
Golf and many other like-situated non-stock corporations actually involves the
purchase of a membership share, which is a substantially expensive property. As a
result, termination of membership does not only lead to loss of bragging rights, but
the actual deprivation of property.

The Court has no intention to interfere with how non-stock corporations should run
their daily affairs. The Court also respects the fact that membership is non-stock
corporations is a voluntary arrangement, and that the member who signs up is bound
to adhere to what the articles of incorporation or the by-laws provide, even if
provisions are detrimental to the interest of the member. At the same time, in the
absence of a satisfactory procedure under the articles of incorporation or the by-laws
that affords a member the opportunity to defend against the deprivation of significant
property rights in accordance with substantial justice, the terms of the by-laws or
articles of incorporation will not suffice. There will be need in such case to refer to
substantive law. Such a flaw attends the articles of incorporation and by-laws of
Valley Golf. The Court deems it judicious to refer to the protections afforded by the
Civil Code, with respect to the preservation, maintenance, and defense from loss of
property rights.
The arrangement provided for in the afore-quoted by-laws of Valley Golf whereby
a lien is constituted on the membership share to answer for subsequent obligations
to the corporation finds applicable parallels under the Civil Code. Membership
shares are considered as movable or personal property,[47] and they can be
constituted as security to secure a principal obligation, such as the dues and fees.
There are at least two contractual modes under the Civil Code by which personal
property can be used to secure a principal obligation. The first is through a contract
of pledge,[48] while the second is through a chattel mortgage.[49] A pledge would
require the pledgor to surrender possession of the thing pledged, i.e., the membership
share, to the pledge in order that the contract of pledge may be constituted.[50]

Is delivery of the share cannot be effected, the suitable security transaction is the
chattel mortgage. Under Article 2124 of the Civil Code, movables may be the object
of a chattel mortgage. The Chattel mortgage is governed by Act No. 1508, otherwise
known The Chattel Mortgage Law,[51] and the Civil Code.

In this case, Caram had not signed any document that manifests his agreement
to constitute his Golf Share as security in favor of Valley Golf to answer for his
obligations to the club. There is no document we can assess that it is substantially
compliant with the form of chattel mortgages under Section 5 of Act No. 1508. The
by-laws could not suffice for that purpose since it is not designed as a bilateral
contract between Caram and Valley Golf, or a vehicle by which Caram expressed
his consent to constitute his Golf Share as security for his account with Valley Golf.

VII.
We finally turn to the matter of damages. The award of damages sustained by the
Court of Appeals was for moral damages in the sum of P50,000.00 and exemplary
damages in the sum of P10,000.00. Both awards should be sustained. In pretending
to give actual notice to Caram despite full knowledge that he was in fact dead, Valley
Golf exhibited utter bad faith.

The award of moral damages was based on a finding by the hearing officer
that Valley Golf had considerably besmirched the reputation and good credit
standing of the plaintiff and her family, such justification having foundation under
Article 2217 of the Civil Code. No cause has been submitted to detract from such
award. In addition, exemplary damages were awarded to [Valley Golf] defendant
from repeating similar acts in the future and to protect the interest of its stockholders
and by way of example or correction for the public good. Such conclusion is in
accordance with Article 2229 of the Civil Code, which establishes liability for
exemplary damages.

WHEREFORE, the petition is DENIED. Costs against petitioners.

SO ORDERED.

DANTE O. TINGA Associate

Justice
WE CONCUR:

LEONARDO A. QUISUMBING
Associate Justice
Chairperson

CONCHITA CARPIO MORALES PRESBITERO J. VELASCO, JR.

Associate Justice Associate Justice

ARTURO D. BRION
Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in
consultation before the case was assigned to the writer of the opinion of the
Courts Division.
LEONARDO A. QUISUMBING
Associate Justice
Chairperson, Second Division

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, and the Division
Chairpersons Attestation, it is hereby certified that the conclusions in the above
Decision had been reached in consultation before the case was assigned to the
writer of the opinion of the Courts Division.

REYNATO S. PUNO
Chief Justice

[1]
Rollo, p. 8.
[2]
A former representative from Iloilo.
[3]
SEC records, p. 61.
[4]
Rollo, p. 60.
[5]
Id. at 82.
[6]
Id. at 83.
[7]
Id. at 84.
[8]
Id. at 85.
[9]
Id. at 86.
[10]
Id. at 59.
[11]
Id. at 30.
 [12]
Id. at 59.
[13]
Docketed as SEC Case No. 4160.
[14]
P50,000.00 in moral damages, P10,000.00 in exemplary damages, and P30,000.00 in litigation expenses
and attorneys fees. Rollo, pp. 80-81.
[15]
Id. at 76. Cited as authority for this holding was a textbook on Philippine Corporation Law (H. DE LEON,
THE CORPORATION CODE OF THE PHILIPPINES, p. 464 [1989 ed.]), which in turn cited an SEC Opinion
dated 13 April 1981.
[16]
Id.
[17]
Id. at 76.
[18]
Docketed as SEC-AC No. 595.
[19]
Signed by SEC Chair[person] Lilia R. Bautista, and Associate Commissioners Fe Eloisa C. Gloria, Edijer
A. Martinez and Rosalinda U. Casiguran. See rollo, p. 63.
[20]
Rollo, pp. 61-62. Primary citation was made to another local textbook (R. Lopez, The Corporation Code
of the Philippines, Vol. II, 1994 Ed.), which in turn cited Schutch v. Farmers Union Milling and Grain Co., 116 Neb.
14; 22 CRA (NS) 1015; and 18 AM. JUR., 2 Ed 880.
[21]
Docketed as CA-G.R. SP No. 59083.
[22]
Penned by Justice Salvador J. Valdez, Jr., and concurred in by Justices Bienvenido L. Reyes and Danilo
B. Pine.
[23]
Rollo, p. 34.
[24]
Id. at 35.
[25]
Id. at 37.
[26]
Id. at 74.
[27]
Id. at 15.
[28]
Id. at 16.
[29]
Id. at 168.
[30]
Id. at 182.
[31]
Id. at 174.
[32]
Id. at 181-182.
[33]
See also CORPORATION CODE, Sec. 68.
[34]
CORPORATION CODE, Sec. 6.
[35]
R. LOPEZ, III THE CORPORATION CODE OF THE PHILIPPINES (1994 ed.), at 976; citingsEC
Opinion dated 16 June 1992, Mr. Emerito Sematano.
 [36]
Supra note 32.
[37]
See CORPORATION CODE, Sec. 3.
[38]
Carams Certificate, issue din 1961, bore a stated par value of Nine Thousand Pesos. See Records, p.
61. According to respondent, as of 1999, the club share was being traded at 1.2 Million Pesos. Id. at 62.
[39]
G.R. Nos. 134693-94, 27 September 2001, 366 SCRA 113.
[40]
See CORPORATION CODE, Sec. 109.
[41]
Supra note 39.

[42]
R. AGPALO, COMMENTS ON THE CORPORATION CODE OF THE PHILIPPINES, p. 390; citing
SEC Opinion dated 10 March 1987. The SEC Quarterly Bulletin, Vol. XXI, No. 1, March 1987, pp. 14-15.
[43]
Rollo, p. 10.
[44]
Likewise, at the time of said sale, petitioner had no knowledge of Mr. Carams recent death, nor did it
receive any notice thereof from Mr. Carams heirs or his estate administrator. See id. at 157.

[45]
The decision of the SEC Hearing Officer, in narrating the version of facts as presented by Valley Golf in
its Answer, states: That defendant had dutifully informed the late Congressman Fermin Caram, Jr. during his lifetime
about the unpaid accounts with defendant and that the estate of the late Fermin Caram, Jr. was likewise informed that
the share of the deceased had been posted delinquent See rollo, p. 71.
[46]
Art. 19. Every person must in the exercise of his rights and in the performance of his duties, act with
justice, give everyone his due, and observe honesty and good faith.

Art. 20. Every person who, contrary to law, willfully or negligently causes damage to another, shall
indemnify the latter for the same.

Art. 21. Any person who willfully causes loss or injury to another in a manner that is contrary to morals,
good customs or public policy shall compensate the latter for the damage.
[47]
See CIVIL CODE, Art. 414.
[48]
See CIVIL CODE, Art. 2085 in relation to Arts. 2093 & 2095.
[49]
See CIVIL CODE, Art. 2124.
[50]
See CIVIL CODE, Art. 2093.
[51]
Act No. 1508, as amended.

EN BANC
WILSON P. GAMBOA, G.R. No. 176579

Petitioner,
Present:

- versus -

CORONA, C.J.,

FINANCE SECRETARY CARPIO,

MARGARITO B. TEVES,
FINANCE UNDERSECRETARY VELASCO, JR.,
JOHN P. SEVILLA, AND
COMMISSIONER RICARDO LEONARDO-DE CASTRO,
ABCEDE OF THE PRESIDENTIAL
COMMISSION ON GOOD BRION,
GOVERNMENT (PCGG) IN
THEIR CAPACITIES AS CHAIR PERALTA,
AND MEMBERS,
BERSAMIN,
RESPECTIVELY, OF THE
PRIVATIZATION COUNCIL, DEL CASTILLO,
CHAIRMAN ANTHONI SALIM OF ABAD,
FIRST PACIFIC CO., LTD. IN HIS
CAPACITY AS DIRECTOR OF VILLARAMA, JR.,
METRO PACIFIC ASSET
HOLDINGS INC., CHAIRMAN PEREZ,
MANUEL V. PANGILINAN OF
PHILIPPINE LONG DISTANCE MENDOZA, and
TELEPHONE COMPANY (PLDT)
IN HIS CAPACITY AS SERENO, JJ.
MANAGING DIRECTOR OF
FIRST PACIFIC CO., LTD.,
PRESIDENT NAPOLEON L.
NAZARENO OF PHILIPPINE
LONG DISTANCE TELEPHONE
COMPANY, CHAIR FE BARIN OF
THE SECURITIES EXCHANGE
COMMISSION, and PRESIDENT
 FRANCIS LIM OF THE
PHILIPPINE STOCK EXCHANGE,

Respondents.

PABLITO V. SANIDAD and Promulgated:

ARNO V. SANIDAD,

Petitioners-in-Intervention. June 28, 2011

x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

CARPIO, J.:
 The Case

This is an original petition for prohibition, injunction, declaratory relief and

declaration of nullity of the sale of shares of stock of Philippine Telecommunications
Investment Corporation (PTIC) by the government of the Republic of the Philippines
to Metro Pacific Assets Holdings, Inc. (MPAH), an affiliate of First Pacific Company
Limited (First Pacific).

The Antecedents

The facts, according to petitioner Wilson P. Gamboa, a stockholder of Philippine

Long Distance Telephone Company (PLDT), are as follows:1

On 28 November 1928, the Philippine Legislature enacted Act No. 3436 which
granted PLDT a franchise and the right to engage in telecommunications business. In
1969, General Telephone and Electronics Corporation (GTE), an American company
and a major PLDT stockholder, sold 26 percent of the outstanding common shares of
PLDT to PTIC. In 1977, Prime Holdings, Inc. (PHI) was incorporated by several
persons, including Roland Gapud and Jose Campos, Jr. Subsequently, PHI became the
owner of 111,415 shares of stock of PTIC by virtue of three Deeds of Assignment
executed by PTIC stockholders Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the
111,415 shares of stock of PTIC held by PHI were sequestered by the Presidential
Commission on Good Government (PCGG). The 111,415 PTIC shares, which
represent about 46.125 percent of the outstanding capital stock of PTIC, were later
declared by this Court to be owned by the Republic of the Philippines. 2

In 1999, First Pacific, a Bermuda-registered, Hong Kong-based investment firm,

acquired the remaining 54 percent of the outstanding capital stock of PTIC. On 20
November 2006, the Inter-Agency Privatization Council (IPC) of the Philippine
Government announced that it would sell the 111,415 PTIC shares, or 46.125 percent
of the outstanding capital stock of PTIC, through a public bidding to be conducted on
4 December 2006. Subsequently, the public bidding was reset to 8 December 2006,
and only two bidders, Parallax Venture Fund XXVII (Parallax) and Pan-Asia Presidio
Capital, submitted their bids. Parallax won with a bid of P25.6 billion or US$510
million.

Thereafter, First Pacific announced that it would exercise its right of first refusal as a
PTIC stockholder and buy the 111,415 PTIC shares by matching the bid price of
Parallax. However, First Pacific failed to do so by the 1 February 2007 deadline set by
IPC and instead, yielded its right to PTIC itself which was then given by IPC until 2
March 2007 to buy the PTIC shares. On 14 February 2007, First Pacific, through its
subsidiary, MPAH, entered into a Conditional Sale and Purchase Agreement of the
111,415 PTIC shares, or 46.125 percent of the outstanding capital stock of PTIC, with
the Philippine Government for the price of P25,217,556,000 or US$510,580,189. The
sale was completed on 28 February 2007.

Since PTIC is a stockholder of PLDT, the sale by the Philippine Government of

46.125 percent of PTIC shares is actually an indirect sale of 12 million shares or about
6.3 percent of the outstanding common shares of PLDT. With the sale, First Pacifics
common shareholdings in PLDT increased from 30.7 percent to 37 percent,
thereby increasing the common shareholdings of foreigners in PLDT to about
81.47 percent. This violates Section 11, Article XII of the 1987 Philippine
Constitution which limits foreign ownership of the capital of a public utility to not
more than 40 percent.3

On the other hand, public respondents Finance Secretary Margarito B. Teves,

Undersecretary John P. Sevilla, and PCGG Commissioner Ricardo Abcede allege the
following relevant facts:

On 9 November 1967, PTIC was incorporated and had since engaged in the business
of investment holdings. PTIC held 26,034,263 PLDT common shares, or 13.847
percent of the total PLDT outstanding common shares. PHI, on the other hand, was
incorporated in 1977, and became the owner of 111,415 PTIC shares or 46.125
percent of the outstanding capital stock of PTIC by virtue of three Deeds of
Assignment executed by Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the
111,415 PTIC shares held by PHI were sequestered by the PCGG, and subsequently
declared by this Court as part of the ill-gotten wealth of former President Ferdinand
Marcos. The sequestered PTIC shares were reconveyed to the Republic of the
Philippines in accordance with this Courts decision4 which became final
and executory on 8 August 2006.

The Philippine Government decided to sell the 111,415 PTIC shares, which represent
6.4 percent of the outstanding common shares of stock of PLDT, and designated the
Inter-Agency Privatization Council (IPC), composed of the Department of Finance
and the PCGG, as the disposing entity. An invitation to bid was published in seven
different newspapers from 13 to 24 November 2006. On 20 November 2006, a pre-bid
conference was held, and the original deadline for bidding scheduled on 4 December
2006 was reset to 8 December 2006. The extension was published in nine different
newspapers.

During the 8 December 2006 bidding, Parallax Capital Management LP emerged as

the highest bidder with a bid of P25,217,556,000. The government notified First
Pacific, the majority owner of PTIC shares, of the bidding results and gave First
Pacific until 1 February 2007 to exercise its right of first refusal in accordance with
PTICs Articles of Incorporation. First Pacific announced its intention to match
Parallaxs bid.

On 31 January 2007, the House of Representatives (HR) Committee on Good

Government conducted a public hearing on the particulars of the then impending sale
of the 111,415 PTIC shares. Respondents Teves and Sevilla were among those who
attended the public hearing. The HR Committee Report No. 2270 concluded that: (a)
the auction of the governments 111,415 PTIC shares bore due diligence, transparency
and conformity with existing legal procedures; and (b) First Pacifics intended
acquisition of the governments 111,415 PTIC shares resulting in First Pacifics
100% ownership of PTIC will not violate the 40 percent constitutional limit on
foreign ownership of a public utility since PTIC holds only 13.847 percent of the
total outstanding common shares of PLDT.5 On 28 February 2007, First Pacific
completed the acquisition of the 111,415 shares of stock of PTIC.
Respondent Manuel V. Pangilinan admits the following facts: (a) the IPC conducted a
public bidding for the sale of 111,415 PTIC shares or 46 percent of the outstanding
capital stock of PTIC (the remaining 54 percent of PTIC shares was already owned by
First Pacific and its affiliates); (b) Parallax offered the highest bid amounting
to P25,217,556,000; (c) pursuant to the right of first refusal in favor of PTIC and its
shareholders granted in PTICs Articles of Incorporation, MPAH, a First Pacific
affiliate, exercised its right of first refusal by matching the highest bid offered for
PTIC shares on 13 February 2007; and (d) on 28 February 2007, the sale was
consummated when MPAH paid IPC P25,217,556,000 and the government delivered
the certificates for the 111,415 PTIC shares. Respondent Pangilinan denies the other
allegations of facts of petitioner.

On 28 February 2007, petitioner filed the instant petition for prohibition, injunction,
declaratory relief, and declaration of nullity of sale of the 111,415 PTIC shares.
Petitioner claims, among others, that the sale of the 111,415 PTIC shares would result
in an increase in First Pacifics common shareholdings in PLDT from 30.7 percent to
37 percent, and this, combined with Japanese NTT DoCoMos common shareholdings
in PLDT, would result to a total foreign common shareholdings in PLDT of 51.56
percent which is over the 40 percent constitutional limit.6 Petitioner asserts:

If and when the sale is completed, First Pacifics equity in PLDT will go up
from 30.7 percent to 37.0 percent of its common or voting- stockholdings,
x x x. Hence, the consummation of the sale will put the two largest foreign
investors in PLDT First Pacific and Japans NTT DoCoMo, which is the worlds
largest wireless telecommunications firm, owning 51.56 percent of PLDT
common equity. x x x With the completion of the sale, data culled from the
official website of the New York Stock Exchange (www.nyse.com) showed that
those foreign entities, which own at least five percent of common equity, will
collectively own 81.47 percent of PLDTs common equity. x x x

x x x as the annual disclosure reports, also referred to as Form 20-

K reports x x x which PLDT submitted to the New York Stock
Exchange for the period 2003-2005, revealed that First Pacific and
several other foreign entities breached the constitutional limit of
40 percent ownership as early as 2003. x x x7
Petitioner raises the following issues: (1) whether the consummation of the then
impending sale of 111,415 PTIC shares to First Pacific violates the constitutional limit
on foreign ownership of a public utility; (2) whether public respondents committed
grave abuse of discretion in allowing the sale of the 111,415 PTIC shares to First
Pacific; and (3) whether the sale of common shares to foreigners in excess of 40
percent of the entire subscribed common capital stock violates the constitutional limit
on foreign ownership of a public utility.8

On 13 August 2007, Pablito V. Sanidad and Arno V. Sanidad filed a Motion for Leave
to Intervene and Admit Attached Petition-in-Intervention. In the Resolution of 28
August 2007, the Court granted the motion and noted the Petition-in-Intervention.

Petitioners-in-intervention join petitioner Wilson Gamboa x x x in seeking, among

others, to enjoin and/or nullify the sale by respondents of the 111,415 PTIC shares to
First Pacific or assignee. Petitioners-in-intervention claim that, as PLDT subscribers,
they have a stake in the outcome of the controversy x x x where the Philippine
Government is completing the sale of government owned assets in [PLDT],
unquestionably a public utility, in violation of the nationality restrictions of the
Philippine Constitution.

The Issue

This Court is not a trier of facts. Factual questions such as those raised by
petitioner,9 which indisputably demand a thorough examination of the evidence of the
parties, are generally beyond this Courts jurisdiction. Adhering to this well-settled
principle, the Court shall confine the resolution of the instant controversy solely on
the threshold and purely legal issue of whether the term capital in Section 11,
Article XII of the Constitution refers to the total common shares only or to the total
outstanding capital stock (combined total of common and non-voting preferred shares)
of PLDT, a public utility.
 The Ruling of the Court

The petition is partly meritorious.

Petition for declaratory relief treated as petition for mandamus

At the outset, petitioner is faced with a procedural barrier. Among the remedies
petitioner seeks, only the petition for prohibition is within the original jurisdiction of
this court, which however is not exclusive but is concurrent with the Regional Trial
Court and the Court of Appeals. The actions for declaratory relief,10 injunction, and
annulment of sale are not embraced within the original jurisdiction of the Supreme
Court. On this ground alone, the petition could have been dismissed outright.

While direct resort to this Court may be justified in a petition for prohibition, 11 the
Court shall nevertheless refrain from discussing the grounds in support of the petition
for prohibition since on 28 February 2007, the questioned sale was consummated
when MPAH paid IPC P25,217,556,000 and the government delivered the certificates
for the 111,415 PTIC shares.

However, since the threshold and purely legal issue on the definition of the term
capital in Section 11, Article XII of the Constitution has far-reaching implications to
the national economy, the Court treats the petition for declaratory relief as one for
mandamus.12

In Salvacion v. Central Bank of the Philippines,13 the Court treated the petition for
declaratory relief as one for mandamus considering the grave injustice that would
result in the interpretation of a banking law. In that case, which involved the crime of
rape committed by a foreign tourist against a Filipino minor and the execution of the
final judgment in the civil case for damages on the tourists dollar deposit with a local
bank, the Court declared Section 113 of Central Bank Circular No. 960, exempting
foreign currency deposits from attachment, garnishment or any other order or process
of any court, inapplicable due to the peculiar circumstances of the case. The Court
held that injustice would result especially to a citizen aggrieved by a foreign guest like
accused x x x that would negate Article 10 of the Civil Code which provides that in
case of doubt in the interpretation or application of laws, it is presumed that the
lawmaking body intended right and justice to prevail. The Court therefore required
respondents Central Bank of the Philippines, the local bank, and the accused to
comply with the writ of execution issued in the civil case for damages and to release
the dollar deposit of the accused to satisfy the judgment.

In Alliance of Government Workers v. Minister of Labor,14 the Court similarly

brushed aside the procedural infirmity of the petition for declaratory relief and treated
the same as one for mandamus. In Alliance, the issue was whether the government
unlawfully excluded petitioners, who were government employees, from the
enjoyment of rights to which they were entitled under the law. Specifically, the
question was: Are the branches, agencies, subdivisions, and instrumentalities of the
Government, including government owned or controlled corporations included among
the four employers under Presidential Decree No. 851 which are required to pay their
employees x x x a thirteenth (13th) month pay x x x ? The Constitutional principle
involved therein affected all government employees, clearly justifying a relaxation of
the technical rules of procedure, and certainly requiring the interpretation of the
assailed presidential decree.

In short, it is well-settled that this Court may treat a petition for declaratory relief as
one for mandamus if the issue involved has far-reaching implications. As this Court
held in Salvacion:

The Court has no original and exclusive jurisdiction over a petition for
declaratory relief. However, exceptions to this rule have been
recognized. Thus, where the petition has far-reaching implications and
raises questions that should be resolved, it may be treated as one for
mandamus.15 (Emphasis supplied)
In the present case, petitioner seeks primarily the interpretation of the term capital in
Section 11, Article XII of the Constitution. He prays that this Court declare that the
term capital refers to common shares only, and that such shares constitute the sole
basis in determining foreign equity in a public utility. Petitioner further asks this Court
to declare any ruling inconsistent with such interpretation unconstitutional.

The interpretation of the term capital in Section 11, Article XII of the Constitution has
far-reaching implications to the national economy. In fact, a resolution of this issue
will determine whether Filipinos are masters, or second class citizens, in their own
country. What is at stake here is whether Filipinos or foreigners will have effective
control of the national economy. Indeed, if ever there is a legal issue that has far-
reaching implications to the entire nation, and to future generations of Filipinos, it is
the threshhold legal issue presented in this case.

The Court first encountered the issue on the definition of the term capital in Section
11, Article XII of the Constitution in the case of Fernandez v. Cojuangco, docketed as
G.R. No. 157360.16 That case involved the same public utility (PLDT) and
substantially the same private respondents. Despite the importance and novelty of the
constitutional issue raised therein and despite the fact that the petition involved a
purely legal question, the Court declined to resolve the case on the merits, and instead
denied the same for disregarding the hierarchy of courts.17 There, petitioner Fernandez
assailed on a pure question of law the Regional Trial Courts Decision of 21 February
2003 via a petition for review under Rule 45. The Courts Resolution, denying the
petition, became final on 21 December 2004.

The instant petition therefore presents the Court with another opportunity to finally
settle this purely legal issue which is of transcendental importance to the national
economy and a fundamental requirement to a faithful adherence to our Constitution.
The Court must forthwith seize such opportunity, not only for the benefit of the
litigants, but more significantly for the benefit of the entire Filipino people, to ensure,
in the words of the Constitution, a self-reliant and independent national
economy effectively controlled by Filipinos.18 Besides, in the light of vague and
confusing positions taken by government agencies on this purely legal issue, present
and future foreign investors in this country deserve, as a matter of basic fairness, a
categorical ruling from this Court on the extent of their participation in the capital of
public utilities and other nationalized businesses.
Despite its far-reaching implications to the national economy, this purely legal issue
has remained unresolved for over 75 years since the 1935 Constitution. There is no
reason for this Court to evade this ever recurring fundamental issue and delay again
defining the term capital, which appears not only in Section 11, Article XII of the
Constitution, but also in Section 2, Article XII on co-production and joint venture
agreements for the development of our natural resources,19 in Section 7, Article XII
on ownership of private lands,20 in Section 10, Article XII on the reservation of
certain investments to Filipino citizens,21 in Section 4(2), Article XIV on the
ownership of educational institutions,22 and in Section 11(2), Article XVI on the
ownership of advertising companies.23

Petitioner has locus standi

There is no dispute that petitioner is a stockholder of PLDT. As such, he has the right
to question the subject sale, which he claims to violate the nationality requirement
prescribed in Section 11, Article XII of the Constitution. If the sale indeed violates the
Constitution, then there is a possibility that PLDTs franchise could be revoked, a dire
consequence directly affecting petitioners interest as a stockholder.

More importantly, there is no question that the instant petition raises matters of
transcendental importance to the public. The fundamental and threshold legal issue in
this case, involving the national economy and the economic welfare of the Filipino
people, far outweighs any perceived impediment in the legal personality of the
petitioner to bring this action.

In Chavez v. PCGG,24 the Court upheld the right of a citizen to bring a suit on matters
of transcendental importance to the public, thus:
In Taada v. Tuvera, the Court asserted that when the issue concerns a public right and the
object of mandamus is to obtain the enforcement of a public duty, the people are regarded
as the real parties in interest; and because it is sufficient that petitioner is a citizen and as
such is interested in the execution of the laws, he need not show that he has any legal or
special interest in the result of the action. In the aforesaid case, the petitioners sought to
enforce their right to be informed on matters of public concern, a right then recognized in
Section 6, Article IV of the 1973 Constitution, in connection with the rule that laws in order to be
valid and enforceable must be published in the Official Gazette or otherwise effectively
promulgated. In ruling for the petitioners legal standing, the Court declared that the right they
sought to be enforced is a public right recognized by no less than the fundamental law of the
land.

Legaspi v. Civil Service Commission, while reiterating Taada, further declared that when a
mandamus proceeding involves the assertion of a public right, the requirement of personal
interest is satisfied by the mere fact that petitioner is a citizen and, therefore, part of the
general public which possesses the right.

Further, in Albano v. Reyes, we said that while expenditure of public funds may not have been
involved under the questioned contract for the development, management and operation of the
Manila International Container Terminal, public interest [was] definitely involved considering
the important role [of the subject contract] . . . in the economic development of the country
and the magnitude of the financial consideration involved. We concluded that, as a
consequence, the disclosure provision in the Constitution would constitute sufficient authority
for upholding the petitioners standing. (Emphasis supplied)

Clearly, since the instant petition, brought by a citizen, involves matters of

transcendental public importance, the petitioner has the requisite locus standi.

Definition of the Term Capital in

Section 11, Article XII of the 1987 Constitution

Section 11, Article XII (National Economy and Patrimony) of the 1987 Constitution
mandates the Filipinization of public utilities, to wit:
 Section 11. No franchise, certificate, or any other form of authorization for
the operation of a public utility shall be granted except to citizens of the
Philippines or to corporations or associations organized under the laws of
the Philippines, at least sixty per centum of whose capital is owned by such
citizens; nor shall such franchise, certificate, or authorization be exclusive in
character or for a longer period than fifty years. Neither shall any such
franchise or right be granted except under the condition that it shall be subject
to amendment, alteration, or repeal by the Congress when the common good so
requires. The State shall encourage equity participation in public utilities by the
general public. The participation of foreign investors in the governing body of
any public utility enterprise shall be limited to their proportionate share in its
capital, and all the executive and managing officers of such corporation or
association must be citizens of the Philippines. (Emphasis supplied)

The above provision substantially reiterates Section 5, Article XIV of the 1973
Constitution, thus:

Section 5. No franchise, certificate, or any other form of authorization for

the operation of a public utility shall be granted except to citizens of the
Philippines or to corporations or associations organized under the laws of
the Philippines at least sixty per centum of the capital of which is owned by
such citizens, nor shall such franchise, certificate, or authorization be exclusive
in character or for a longer period than fifty years. Neither shall any such
franchise or right be granted except under the condition that it shall be subject
to amendment, alteration, or repeal by the National Assembly when the public
interest so requires. The State shall encourage equity participation in public
utilities by the general public. The participation of foreign investors in the
governing body of any public utility enterprise shall be limited to their
proportionate share in the capital thereof. (Emphasis supplied)
The foregoing provision in the 1973 Constitution reproduced Section 8, Article XIV
of the 1935 Constitution, viz:

Section 8. No franchise, certificate, or any other form of authorization for

the operation of a public utility shall be granted except to citizens of the
Philippines or to corporations or other entities organized under the laws of
the Philippines sixty per centum of the capital of which is owned by
citizens of the Philippines, nor shall such franchise, certificate, or
authorization be exclusive in character or for a longer period than fifty years.
No franchise or right shall be granted to any individual, firm, or corporation,
except under the condition that it shall be subject to amendment, alteration, or
repeal by the Congress when the public interest so requires. (Emphasis
supplied)

Father Joaquin G. Bernas, S.J., a leading member of the 1986 Constitutional

Commission, reminds us that the Filipinization provision in the 1987 Constitution is
one of the products of the spirit of nationalism which gripped the 1935 Constitutional
Convention.25 The 1987 Constitution provides for the Filipinization of public utilities
by requiring that any form of authorization for the operation of public utilities should
be granted only to citizens of the Philippines or to corporations or associations
organized under the laws of the Philippines at least sixty per centum of whose capital
is owned by such citizens. The provision is [an express] recognition of the sensitive
and vital position of public utilities both in the national economy and for national
security.26 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.27 This specific provision explicitly reserves to Filipino citizens control of
public utilities, pursuant to an overriding economic goal of the 1987 Constitution: to
conserve and develop our patrimony28 and ensure a self-reliant and independent
national economy effectively controlled by Filipinos.29

Any citizen or juridical entity desiring to operate a public utility must therefore meet
the minimum nationality requirement prescribed in Section 11, Article XII of the
Constitution. Hence, for a corporation to be granted authority to operate a public
utility, at least 60 percent of its capital must be owned by Filipino citizens.
The crux of the controversy is the definition of the term capital. Does the term capital
in Section 11, Article XII of the Constitution refer to common shares or to the total
outstanding capital stock (combined total of common and non-voting preferred
shares)?

Petitioner submits that the 40 percent foreign equity limitation in domestic public
utilities refers only to common shares because such shares are entitled to vote and it is
through voting that control over a corporation is exercised. Petitioner posits that the
term capital in Section 11, Article XII of the Constitution refers to the ownership of
common capital stock subscribed and outstanding, which class of shares alone, under
the corporate set-up of PLDT, can vote and elect members of the board of directors. It
is undisputed that PLDTs non-voting preferred shares are held mostly by Filipino
citizens.30 This arose from Presidential Decree No. 217,31 issued on 16 June 1973 by
then President Ferdinand Marcos, requiring every applicant of a PLDT telephone line
to subscribe to non-voting preferred shares to pay for the investment cost of installing
the telephone line.32

Petitioners-in-intervention basically reiterate petitioners arguments and adopt

petitioners definition of the term capital.33 Petitioners-in-intervention allege that the
approximate foreign ownership of common capital stock of PLDT x x x already
amounts to at least 63.54% of the total outstanding common stock, which means that
foreigners exercise significant control over PLDT, patently violating the 40 percent
foreign equity limitation in public utilities prescribed by the Constitution.

Respondents, on the other hand, do not offer any definition of the term capital in
Section 11, Article XII of the Constitution. More importantly, private
respondents Nazareno and Pangilinan of PLDT do not dispute that more than 40
percent of the common shares of PLDT are held by foreigners.

In particular, respondent Nazarenos Memorandum, consisting of 73 pages, harps

mainly on the procedural infirmities of the petition and the supposed violation of the
due process rights of the affected foreign common shareholders.
Respondent Nazareno does not deny petitioners allegation of foreigners dominating
the common shareholdings of PLDT. Nazarenostressed mainly that the petition seeks
to divest foreign common shareholders purportedly exceeding 40% of the total
common shareholdings in PLDT of their ownership over their shares. Thus, the
foreign natural and juridical PLDT shareholders must be impleaded in this suit so that
they can be heard.34 Essentially, Nazareno invokes denial of due process on behalf of
the foreign common shareholders.

While Nazareno does not introduce any definition of the term capital, he states
that among the factual assertions that need to be established to counter
petitioners allegations is the uniform interpretation by government agencies
(such as the SEC), institutions and corporations (such as the Philippine National
Oil Company-Energy Development Corporation or PNOC-EDC) of including
both preferred shares and common shares in controlling interest in view of
testing compliance with the 40% constitutional limitation on foreign ownership
in public utilities.35

Similarly, respondent Manuel V. Pangilinan does not define the term capital in
Section 11, Article XII of the Constitution. Neither does he refute petitioners claim of
foreigners holding more than 40 percent of PLDTs common shares. Instead,
respondent Pangilinan focuses on the procedural flaws of the petition and the alleged
violation of the due process rights of foreigners. Respondent Pangilinan emphasizes in
his Memorandum (1) the absence of this Courts jurisdiction over the petition; (2)
petitioners lack of standing; (3) mootness of the petition; (4) non-availability of
declaratory relief; and (5) the denial of due process rights. Moreover,
respondent Pangilinan alleges that the issue should be whether owners of shares in
PLDT as well as owners of shares in companies holding shares in PLDT may be
required to relinquish their shares in PLDT and in those companies without any law
requiring them to surrender their shares and also without notice and trial.

Respondent Pangilinan further asserts that Section 11, [Article XII of the
Constitution] imposes no nationality requirement on the shareholders of the
utility company as a condition for keeping their shares in the utility
company. According to him, Section 11 does not authorize taking one persons
property (the shareholders stock in the utility company) on the basis of another partys
alleged failure to satisfy a requirement that is a condition only for that other partys
retention of another piece of property (the utility company being at least 60%
Filipino-owned to keep its franchise).36

The OSG, representing public respondents Secretary Margarito Teves, Undersecretary

John P. Sevilla, Commissioner Ricardo Abcede, and Chairman Fe Barin, is likewise
silent on the definition of the term capital. In its Memorandum37 dated 24 September
2007, the OSG also limits its discussion on the supposed procedural defects of the
petition, i.e. lack of standing, lack of jurisdiction, non-inclusion of interested parties,
and lack of basis for injunction. The OSG does not present any definition or
interpretation of the term capital in Section 11, Article XII of the Constitution. The
OSG contends that the petition actually partakes of a collateral attack on PLDTs
franchise as a public utility, which in effect requires a full-blown trial where all the
parties in interest are given their day in court.38

Respondent Francisco Ed Lim, impleaded as President and Chief Executive Officer of

the Philippine Stock Exchange (PSE), does not also define the term capital and seeks
the dismissal of the petition on the following grounds: (1) failure to state a cause of
action against Lim; (2) the PSE allegedly implemented its rules and required all listed
companies, including PLDT, to make proper and timely disclosures; and (3) the reliefs
prayed for in the petition would adversely impact the stock market.

In the earlier case of Fernandez v. Cojuangco, petitioner Fernandez who claimed to be

a stockholder of record of PLDT, contended that the term capital in the 1987
Constitution refers to shares entitled to vote or the common shares. Fernandez
explained thus:

The forty percent (40%) foreign equity limitation in public utilities prescribed
by the Constitution refers to ownership of shares of stock entitled to vote, i.e.,
common shares, considering that it is through voting that control is being
exercised. x x x
Obviously, the intent of the framers of the Constitution in imposing limitations
and restrictions on fully nationalized and partially nationalized activities is for
Filipino nationals to be always in control of the corporation undertaking said
activities. Otherwise, if the Trial Courts ruling upholding respondents
arguments were to be given credence, it would be possible for the ownership
structure of a public utility corporation to be divided into one percent (1%)
common stocks and ninety-nine percent (99%) preferred stocks. Following the
Trial Courts ruling adopting respondents arguments, the common shares can be
owned entirely by foreigners thus creating an absurd situation wherein
foreigners, who are supposed to be minority shareholders, control the public
utility corporation.

xxxx

Thus, the 40% foreign ownership limitation should be interpreted to apply to

both the beneficial ownership and the controlling interest.

xxxx

Clearly, therefore, the forty percent (40%) foreign equity limitation in public
utilities prescribed by the Constitution refers to ownership of shares of stock
entitled to vote, i.e., common shares. Furthermore, ownership of record of
shares will not suffice but it must be shown that the legal and beneficial
ownership rests in the hands of Filipino citizens. Consequently, in the case of
petitioner PLDT, since it is already admitted that the voting interests of
foreigners which would gain entry to petitioner PLDT by the acquisition of
SMART shares through the Questioned Transactions is equivalent to 82.99%,
and the nominee arrangements between the foreign principals and the Filipino
owners is likewise admitted, there is, therefore, a violation of Section 11,
Article XII of the Constitution.

Parenthetically, the Opinions dated February 15, 1988 and April 14, 1987 cited
by the Trial Court to support the proposition that the meaning of the word
capital as used in Section 11, Article XII of the Constitution allegedly refers to
 the sum total of the shares subscribed and paid-in by the shareholder and it
allegedly is immaterial how the stock is classified, whether as common or
preferred, cannot stand in the face of a clear legislative policy as stated in the
FIA which took effect in 1991 or way after said opinions were rendered, and as
clarified by the above-quoted Amendments. In this regard, suffice it to state
that as between the law and an opinion rendered by an administrative agency,
the law indubitably prevails. Moreover, said Opinions are merely advisory and
cannot prevail over the clear intent of the framers of the Constitution.

In the same vein, the SECs construction of Section 11, Article XII of the
Constitution is at best merely advisory for it is the courts that finally determine
what a law means.39

On the other hand, respondents therein, Antonio O. Cojuangco, Manuel V. Pangilinan,

Carlos A. Arellano, Helen Y. Dee, Magdangal B. Elma, Mariles Cacho-Romulo,
Fr. Bienvenido F. Nebres, Ray C. Espinosa, Napoleon L. Nazareno, Albert F. Del
Rosario, and Orlando B. Vea, argued that the term capital in Section 11, Article XII of
the Constitution includes preferred shares since the Constitution does not distinguish
among classes of stock, thus:

16. The Constitution applies its foreign ownership limitation on the corporations
capital, without distinction as to classes of shares. x x x

In this connection, the Corporation Code which was already in force at the time
the present (1987) Constitution was drafted defined outstanding capital stock as
follows:

Section 137. Outstanding capital stock defined. The term outstanding capital
stock, as used in this Code, means the total shares of stock issued under binding
 subscription agreements to subscribers or stockholders, whether or not fully or
partially paid, except treasury shares.

Section 137 of the Corporation Code also does not distinguish between
common and preferred shares, nor exclude either class of shares, in determining
the outstanding capital stock (the capital) of a corporation. Consequently,
petitioners suggestion to reckon PLDTs foreign equity only on the basis of
PLDTs outstanding common shares is without legal basis. The language of the
Constitution should be understood in the sense it has in common use.

xxxx

17. But even assuming that resort to the proceedings of the Constitutional
Commission is necessary, there is nothing in the Record of the Constitutional
Commission (Vol. III) which petitioner misleadingly cited in the Petition
x x x which supports petitioners view that only common shares should form the
basis for computing a public utilitys foreign equity.

xxxx

18. In addition, the SEC the government agency primarily responsible for
implementing the Corporation Code, and which also has the responsibility of
ensuring compliance with the Constitutions foreign equity restrictions as
regards nationalized activities x x x has categorically ruled that both common
and preferred shares are properly considered in determining outstanding capital
stock and the nationality composition thereof.40

We agree with petitioner and petitioners-in-intervention. The term capital in Section

11, Article XII of the Constitution refers only to shares of stock entitled to vote in the
election of directors, and thus in the present case only to common shares,41 and not to
the total outstanding capital stock comprising both common and non-voting preferred
shares.
The Corporation Code of the Philippines42 classifies shares as common or preferred,
thus:

Sec. 6. Classification of shares. - The shares of stock of stock corporations may

be divided into classes or series of shares, or both, any of which classes or
series of shares may have such rights, privileges or restrictions as may be stated
in the articles of incorporation: Provided, That no share may be deprived of
voting rights except those classified and issued as preferred or redeemable
shares, unless otherwise provided in this Code: Provided, further, That there
shall always be a class or series of shares which have complete voting rights.
Any or all of the shares or series of shares may have a par value or have no par
value as may be provided for in the articles of incorporation: Provided,
however, That banks, trust companies, insurance companies, public utilities,
and building and loan associations shall not be permitted to issue no-par value
shares of stock.

Preferred shares of stock issued by any corporation may be given preference in

the distribution of the assets of the corporation in case of liquidation and in the
distribution of dividends, or such other preferences as may be stated in the
articles of incorporation which are not violative of the provisions of this Code:
Provided, That preferred shares of stock may be issued only with a stated par
value. The Board of Directors, where authorized in the articles of incorporation,
may fix the terms and conditions of preferred shares of stock or any series
thereof: Provided, That such terms and conditions shall be effective upon the
filing of a certificate thereof with the Securities and Exchange Commission.

Shares of capital stock issued without par value shall be deemed fully paid and
non-assessable and the holder of such shares shall not be liable to the
corporation or to its creditors in respect thereto: Provided; That shares without
par value may not be issued for a consideration less than the value of five
(P5.00) pesos per share: Provided, further, That the entire consideration
received by the corporation for its no-par value shares shall be treated as capital
and shall not be available for distribution as dividends.

A corporation may, furthermore, classify its shares for the purpose of insuring
compliance with constitutional or legal requirements.

Except as otherwise provided in the articles of incorporation and stated in the

certificate of stock, each share shall be equal in all respects to every other
share.
 Where the articles of incorporation provide for non-voting shares in the cases
allowed by this Code, the holders of such shares shall nevertheless be entitled
to vote on the following matters:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;

3. Sale, lease, exchange, mortgage, pledge or other disposition of all or

substantially all of the corporate property;

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;

6. Merger or consolidation of the corporation with another corporation or

other corporations;

7. Investment of corporate funds in another corporation or business in

accordance with this Code; and

8. Dissolution of the corporation.

Except as provided in the immediately preceding paragraph, the vote necessary

to approve a particular corporate act as provided in this Code shall be deemed
to refer only to stocks with voting rights.

Indisputably, one of the rights of a stockholder is the right to participate in the control
or management of the corporation.43 This is exercised through his vote in the election
of directors because it is the board of directors that controls or manages the
corporation.44 In the absence of provisions in the articles of incorporation denying
voting rights to preferred shares, preferred shares have the same voting rights as
common shares. However, preferred shareholders are often excluded from
any control, that is, deprived of the right to vote in the election of directors and on
other matters, on the theory that the preferred shareholders are merely investors in the
corporation for income in the same manner as bondholders.45 In fact, under the
Corporation Code only preferred or redeemable shares can be deprived of the right to
vote.46 Common shares cannot be deprived of the right to vote in any corporate
meeting, and any provision in the articles of incorporation restricting the right of
common shareholders to vote is invalid.47

Considering that common shares have voting rights which translate to control, as
opposed to preferred shares which usually have no voting rights, the term capital in
Section 11, Article XII of the Constitution refers only to common shares. However, if
the preferred shares also have the right to vote in the election of directors, then the
term capital shall include such preferred shares because the right to participate in the
control or management of the corporation is exercised through the right to vote in the
election of directors. In short, the term capital in Section 11, Article XII of the
Constitution refers only to shares of stock that can vote in the election of
directors.

This interpretation is consistent with the intent of the framers of the Constitution to
place in the hands of Filipino citizens the control and management of public utilities.
As revealed in the deliberations of the Constitutional Commission, capital refers to the
voting stock or controlling interest of a corporation, to wit:

MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or

Filipino equity and foreign equity; namely, 60-40 in Section 3, 60-40 in Section
9 and 2/3-1/3 in Section 15.

MR. VILLEGAS. That is right.

MR. NOLLEDO. In teaching law, we are always faced with this question:
Where do we base the equity requirement, is it on the authorized capital stock,
on the subscribed capital stock, or on the paid-up capital stock of a corporation?
Will the Committee please enlighten me on this?
MR. VILLEGAS. We have just had a long discussion with the members of the
team from the UP Law Center who provided us a draft. The phrase that is
contained here which we adopted from the UP draft is 60 percent of voting
stock.

MR. NOLLEDO. That must be based on the subscribed capital stock, because
unless declared delinquent, unpaid capital stock shall be entitled to vote.

MR. VILLEGAS. That is right.

MR. NOLLEDO. Thank you.

With respect to an investment by one corporation in another corporation, say, a

corporation with 60-40 percent equity invests in another corporation which is
permitted by the Corporation Code, does the Committee adopt the grandfather
rule?

MR. VILLEGAS. Yes, that is the understanding of the Committee.

MR. NOLLEDO. Therefore, we need additional Filipino capital?

MR. VILLEGAS. Yes.48

xxxx

MR. AZCUNA. May I be clarified as to that portion that was accepted by

the Committee.
MR. VILLEGAS. The portion accepted by the Committee is the deletion of the
phrase voting stock or controlling interest.

MR. AZCUNA. Hence, without the Davide amendment, the committee report
would read: corporations or associations at least sixty percent of whose
CAPITAL is owned by such citizens.

MR. VILLEGAS. Yes.

MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60

percent of the capital to be owned by citizens.

MR. VILLEGAS. That is right.

MR. AZCUNA. But the control can be with the foreigners even if they are
the minority. Let us say 40 percent of the capital is owned by them, but it is
the voting capital, whereas, the Filipinos own the nonvoting shares. So we
can have a situation where the corporation is controlled by foreigners
despite being the minority because they have the voting capital. That is the
anomaly that would result here.

MR. BENGZON. No, the reason we eliminated the word stock as stated in
the 1973 and 1935 Constitutions is that according to Commissioner
Rodrigo, there are associations that do not have stocks. That is why we say
CAPITAL.

MR. AZCUNA. We should not eliminate the phrase controlling interest.

 MR. BENGZON. In the case of stock corporations, it is
assumed.49 (Emphasis supplied)

Thus, 60 percent of the capital assumes, or should result in, controlling interest in the
corporation. Reinforcing this interpretation of the term capital, as referring to
controlling interest or shares entitled to vote, is the definition of a Philippine national
in the Foreign Investments Act of 1991,50 to wit:

SEC. 3. Definitions. - As used in this Act:

a. The term Philippine national shall mean a citizen of the Philippines; or a

domestic partnership or association wholly owned by citizens of the
Philippines; or a corporation organized under the laws of the Philippines of
which at least sixty percent (60%) of the capital stock
outstanding and entitled to vote is owned and held by citizens of the
Philippines; or a corporation organized abroad and registered as doing business
in the Philippines under the Corporation Code of which one hundred percent
(100%) of the capital stock outstanding and entitled to vote is wholly owned by
Filipinos or a trustee of funds for pension or other employee retirement or
separation benefits, where the trustee is a Philippine national and at least sixty
percent (60%) of the fund will accrue to the benefit of Philippine
nationals: Provided, That where a corporation and its non-Filipino stockholders
own stocks in a Securities and Exchange Commission (SEC) registered
enterprise, at least sixty percent (60%) of the capital stock outstanding and
entitled to vote of each of both corporations must be owned and held by
citizens of the Philippines and at least sixty percent (60%) of the members of
the Board of Directors of each of both corporations must be citizens of the
Philippines, in order that the corporation, shall be considered a Philippine
national. (Emphasis supplied)
In explaining the definition of a Philippine national, the Implementing Rules and
Regulations of the Foreign Investments Act of 1991 provide:

b. Philippine national shall mean a citizen of the Philippines or a domestic

partnership or association wholly owned by the citizens of the Philippines; or a
corporation organized under the laws of the Philippines of which at least
sixty percent [60%] of the capital stock outstanding and entitled to vote is
owned and held by citizens of the Philippines; or a trustee of funds for
pension or other employee retirement or separation benefits, where the trustee
is a Philippine national and at least sixty percent [60%] of the fund will accrue
to the benefit of the Philippine nationals; Provided,that where a corporation its
non-Filipino stockholders own stocks in a Securities and Exchange
Commission [SEC] registered enterprise, at least sixty percent [60%] of the
capital stock outstanding and entitled to vote of both corporations must be
owned and held by citizens of the Philippines and at least sixty percent [60%]
of the members of the Board of Directors of each of both corporation must be
citizens of the Philippines, in order that the corporation shall be considered a
Philippine national. The control test shall be applied for this purpose.

Compliance with the required Filipino ownership of a corporation shall be

determined on the basis of outstanding capital stock whether fully paid or
not, but only such stocks which are generally entitled to vote are
considered.

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.

Individuals or juridical entities not meeting the aforementioned

qualifications are considered as non-Philippine nationals. (Emphasis
supplied)
Mere legal title is insufficient to meet the 60 percent Filipino-owned capital required
in the Constitution. Full beneficial ownership of 60 percent of the outstanding capital
stock, coupled with 60 percent of the voting rights, is required. The legal and
beneficial ownership of 60 percent of the outstanding capital stock must rest in the
hands of Filipino nationals in accordance with the constitutional mandate. Otherwise,
the corporation is considered as non-Philippine national[s].

Under Section 10, Article XII of the Constitution, Congress may reserve to citizens of
the Philippines or to corporations or associations at least sixty per centum of whose
capital is owned by such citizens, or such higher percentage as Congress
may prescribe, certain areas of investments. Thus, in numerous laws Congress has
reserved certain areas of investments to Filipino citizens or to corporations at least
sixty percent of the capital of which is owned by Filipino citizens. Some of these laws
are: (1) Regulation of Award of Government Contracts or R.A. No. 5183; (2)
Philippine Inventors Incentives Act or R.A. No. 3850; (3) Magna Carta for Micro,
Small and Medium Enterprises or R.A. No. 6977; (4) Philippine Overseas Shipping
Development Act or R.A. No. 7471; (5) Domestic Shipping Development Act of 2004
or R.A. No. 9295; (6) Philippine Technology Transfer Act of 2009 or R.A. No. 10055;
and (7) Ship Mortgage Decree or P.D. No. 1521. Hence, the term capital in Section
11, Article XII of the Constitution is also used in the same context in numerous
lawsreserving certain areas of investments to Filipino citizens.

To construe broadly the term capital as the total outstanding capital stock, including
both common and non-voting preferred shares, grossly contravenes the intent and
letter of the Constitution that the State shall develop a self-reliant and independent
national economy effectively controlled by Filipinos. A broad definition unjustifiably
disregards who owns the all-important voting stock, which necessarily equates to
control of the public utility.

We shall illustrate the glaring anomaly in giving a broad definition to the term capital.
Let us assume that a corporation has 100 common shares owned by foreigners and
1,000,000 non-voting preferred shares owned by Filipinos, with both classes of share
having a par value of one peso (P1.00) per share. Under the broad definition of the
term capital, such corporation would be considered compliant with the 40 percent
constitutional limit on foreign equity of public utilities since the overwhelming
majority, or more than 99.999 percent, of the total outstanding capital stock is Filipino
owned. This is obviously absurd.

In the example given, only the foreigners holding the common shares have voting
rights in the election of directors, even if they hold only 100 shares. The foreigners,
with a minuscule equity of less than 0.001 percent, exercise control over the public
utility. On the other hand, the Filipinos, holding more than 99.999 percent of the
equity, cannot vote in the election of directors and hence, have no control over the
public utility. This starkly circumvents the intent of the framers of the Constitution, as
well as the clear language of the Constitution, to place the control of public utilities in
the hands of Filipinos. It also renders illusory the State policy of an independent
national economy effectively controlled by Filipinos.

The example given is not theoretical but can be found in the real world, and in fact
exists in the present case.

Holders of PLDT preferred shares are explicitly denied of the right to vote in the
election of directors. PLDTs Articles of Incorporation expressly state that the holders
of Serial Preferred Stock shall not be entitled to vote at any meeting of the
stockholders for the election of directors or for any other purpose or otherwise
participate in any action taken by the corporation or its stockholders, or to receive
notice of any meeting of stockholders.51
On the other hand, holders of common shares are granted the exclusive right to vote in
the election of directors. PLDTs Articles of Incorporation52 state that each holder of
Common Capital Stock shall have one vote in respect of each share of such stock held
by him on all matters voted upon by the stockholders, and the holders of Common
Capital Stock shall have the exclusive right to vote for the election of directors
and for all other purposes.53

In short, only holders of common shares can vote in the election of directors, meaning
only common shareholders exercise control over PLDT. Conversely, holders of
preferred shares, who have no voting rights in the election of directors, do not have
any control over PLDT. In fact, under PLDTs Articles of Incorporation, holders of
common shares have voting rights for all purposes, while holders of preferred shares
have no voting right for any purpose whatsoever.

It must be stressed, and respondents do not dispute, that foreigners hold a majority
of the common shares of PLDT. In fact, based on PLDTs 2010 General Information
Sheet (GIS),54which is a document required to be submitted annually to the Securities
and Exchange Commission,55 foreigners hold 120,046,690 common shares of PLDT
whereas Filipinos hold only 66,750,622 common shares.56 In other words, foreigners
hold 64.27% of the total number of PLDTs common shares, while Filipinos hold only
35.73%. Since holding a majority of the common shares equates to control, it is clear
that foreigners exercise control over PLDT. Such amount of control unmistakably
exceeds the allowable 40 percent limit on foreign ownership of public utilities
expressly mandated in Section 11, Article XII of the Constitution.

Moreover, the Dividend Declarations of PLDT for 2009,57 as submitted to the SEC,
shows that per share the SIP58 preferred shares earn a pittance in dividends compared
to the common shares. PLDT declared dividends for the common shares at P70.00 per
share, while the declared dividends for the preferred shares amounted to a
measly P1.00 per share.59 So the preferred shares not only cannot vote in the election
of directors, they also have very little and obviously negligible dividend earning
capacity compared to common shares.
As shown in PLDTs 2010 GIS,60 as submitted to the SEC, the par value of PLDT
common shares is P5.00 per share, whereas the par value of preferred shares is P10.00
per share. In other words, preferred shares have twice the par value of common shares
but cannot elect directors and have only 1/70 of the dividends of common shares.
Moreover, 99.44% of the preferred shares are owned by Filipinos while foreigners
own only a minuscule 0.56% of the preferred shares.61 Worse, preferred shares
constitute 77.85% of the authorized capital stock of PLDT while common shares
constitute only 22.15%.62 This undeniably shows that beneficial interest in PLDT is
not with the non-voting preferred shares but with the common shares, blatantly
violating the constitutional requirement of 60 percent Filipino control and Filipino
beneficial ownership in a public utility.

The legal and beneficial ownership of 60 percent of the outstanding capital stock must
rest in the hands of Filipinos in accordance with the constitutional mandate. Full
beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60
percent of the voting rights, is constitutionally required for the States grant of
authority to operate a public utility. The undisputed fact that the PLDT preferred
shares, 99.44% owned by Filipinos, are non-voting and earn only 1/70 of the
dividends that PLDT common shares earn, grossly violates the constitutional
requirement of 60 percent Filipino control and Filipino beneficial ownership of a
public utility.

In short, Filipinos hold less than 60 percent of the voting stock, and earn less
than 60 percent of the dividends, of PLDT. This directly contravenes the express
command in Section 11, Article XII of the Constitution that [n]o franchise, certificate,
or any other form of authorization for the operation of a public utility shall be granted
except to x x xcorporations x x x organized under the laws of the Philippines, at least
sixty per centum of whose capital is owned by such citizens x x x.

To repeat, (1) foreigners own 64.27% of the common shares of PLDT, which class of
shares exercises the sole right to vote in the election of directors, and thus exercise
control over PLDT; (2) Filipinos own only 35.73% of PLDTs common shares,
constituting a minority of the voting stock, and thus do not exercise control over
PLDT; (3) preferred shares, 99.44% owned by Filipinos, have no voting rights; (4)
preferred shares earn only 1/70 of the dividends that common shares earn; 63 (5)
preferred shares have twice the par value of common shares; and (6) preferred shares
constitute 77.85% of the authorized capital stock of PLDT and common shares only
22.15%. This kind of ownership and control of a public utility is a mockery of the
Constitution.

Incidentally, the fact that PLDT common shares with a par value of P5.00 have a
current stock market value of P2,328.00 per share,64 while PLDT preferred shares
with a par value of P10.00 per share have a current stock market value ranging from
only P10.92 to P11.06 per share,65 is a glaring confirmation by the market that control
and beneficial ownership of PLDT rest with the common shares, not with the
preferred shares.

Indisputably, construing the term capital in Section 11, Article XII of the Constitution
to include both voting and non-voting shares will result in the abject surrender of our
telecommunications industry to foreigners, amounting to a clear abdication of the
States constitutional duty to limit control of public utilities to Filipino citizens. Such
an interpretation certainly runs counter to the constitutional provision reserving
certain areas of investment to Filipino citizens, such as the exploitation of natural
resources as well as the ownership of land, educational institutions and advertising
businesses. The Court should never open to foreign control what the Constitution has
expressly reserved to Filipinos for that would be a betrayal of the Constitution and of
the national interest. The Court must perform its solemn duty to defend and uphold
the intent and letter of the Constitution to ensure, in the words of the Constitution, a
self-reliant and independent national economy effectively controlled by Filipinos.

Section 11, Article XII of the Constitution, like other provisions of the Constitution
expressly reserving to Filipinos specific areas of investment, such as the development
of natural resources and ownership of land, educational institutions and advertising
business, is self-executing. There is no need for legislation to implement these self-
executing provisions of the Constitution. The rationale why these constitutional
provisions are self-executing was explained in Manila Prince Hotel v. GSIS,66 thus:

x x x Hence, unless it is expressly provided that a legislative act is necessary to

enforce a constitutional mandate, the presumption now is that all provisions of
the constitution are self-executing. If the constitutional provisions are treated as
requiring legislation instead of self-executing, the legislature would have the
power to ignore and practically nullify the mandate of the fundamental law.
 This can be cataclysmic. That is why the prevailing view is, as it has always
been, that

. . . in case of doubt, the Constitution should be considered self-executing rather

than non-self-executing. . . . Unless the contrary is clearly intended, the
provisions of the Constitution should be considered self-executing, as a
contrary rule would give the legislature discretion to determine when, or
whether, they shall be effective. These provisions would be subordinated to
the will of the lawmaking body, which could make them entirely meaningless
by simply refusing to pass the needed implementing statute. (Emphasis
supplied)

In Manila Prince Hotel, even the Dissenting Opinion of then Associate

Justice Reynato S. Puno, later Chief Justice, agreed that constitutional provisions are
presumed to be self-executing. Justice Puno stated:

Courts as a rule consider the provisions of the Constitution as self-executing,

rather than as requiring future legislation for their enforcement. The reason is
not difficult to discern. For if they are not treated as self-executing, the
mandate of the fundamental law ratified by the sovereign people can be
easily ignored and nullified by Congress. Suffused with wisdom of the ages
is the unyielding rule that legislative actions may give breath to
constitutional rights but congressional inaction should not suffocate them.
 Thus, we have treated as self-executing the provisions in the Bill of Rights on
arrests, searches and seizures, the rights of a person under custodial
investigation, the rights of an accused, and the privilege against self-
incrimination. It is recognized that legislation is unnecessary to enable courts to
effectuate constitutional provisions guaranteeing the fundamental rights of life,
liberty and the protection of property. The same treatment is accorded to
constitutional provisions forbidding the taking or damaging of property for
public use without just compensation. (Emphasis supplied)

Thus, in numerous cases,67 this Court, even in the absence of implementing

legislation, applied directly the provisions of the 1935, 1973 and 1987 Constitutions
limiting land ownership to Filipinos. In Soriano v. Ong Hoo,68 this Court ruled:

x x x As the Constitution is silent as to the effects or consequences of a sale by

a citizen of his land to an alien, and as both the citizen and the alien have
violated the law, none of them should have a recourse against the other, and it
should only be the State that should be allowed to intervene and determine
what is to be done with the property subject of the violation. We have said that
what the State should do or could do in such matters is a matter of public
policy, entirely beyond the scope of judicial authority. (Dinglasan, et al. vs. Lee
Bun Ting, et al., 6 G. R. No. L-5996, June 27, 1956.) While the legislature has
not definitely decided what policy should be followed in cases of violations
against the constitutional prohibition, courts of justice cannot go beyond
by declaring the disposition to be null and void as violative of the
Constitution. x x x (Emphasis supplied)

To treat Section 11, Article XII of the Constitution as not self-executing would mean
that since the 1935 Constitution, or over the last 75 years, not one of the constitutional
provisions expressly reserving specific areas of investments to corporations, at least
60 percent of the capital of which is owned by Filipinos, was enforceable. In short, the
framers of the 1935, 1973 and 1987 Constitutions miserably failed to effectively
reserve to Filipinos specific areas of investment, like the operation by corporations of
public utilities, the exploitation by corporations of mineral resources, the ownership
by corporations of real estate, and the ownership of educational institutions. All the
legislatures that convened since 1935 also miserably failed to enact legislations to
implement these vital constitutional provisions that determine who will effectively
control the national economy, Filipinos or foreigners. This Court cannot allow such an
absurd interpretation of the Constitution.

This Court has held that the SEC has both regulatory and adjudicative
functions.69 Under its regulatory functions, the SEC can be compelled by mandamus
to perform its statutory duty when it unlawfully neglects to perform the same. Under
its adjudicative or quasi-judicial functions, the SEC can be also be compelled by
mandamus to hear and decide a possible violation of any law it administers or
enforces when it is mandated by law to investigate such violation.

Under Section 17(4)70 of the Corporation Code, the SEC has the regulatory function to
reject or disapprove the Articles of Incorporation of any corporation where the
required percentage of ownership of the capital stock to be owned by citizens of
the Philippines has not been complied with as required by existing laws or the
Constitution. Thus, the SEC is the government agency tasked with the statutory duty
to enforce the nationality requirement prescribed in Section 11, Article XII of the
Constitution on the ownership of public utilities. This Court, in a petition for
declaratory relief that is treated as a petition for mandamus as in the present case, can
direct the SEC to perform its statutory duty under the law, a duty that the SEC has
apparently unlawfully neglected to do based on the 2010 GIS that respondent PLDT
submitted to the SEC.

Under Section 5(m) of the Securities Regulation Code,71 the SEC is vested with the
power and function to suspend or revoke, after proper notice and hearing, the
franchise or certificate of registration of corporations, partnerships or
associations, upon any of the grounds provided by law. The SEC is mandated
under Section 5(d) of the same Code with the power and function to investigate
x x x the activities of persons to ensure compliance with the laws and regulations
that SEC administers or enforces. The GIS that all corporations are required to submit
to SEC annually should put the SEC on guard against violations of the nationality
requirement prescribed in the Constitution and existing laws. This Court can compel
the SEC, in a petition for declaratory relief that is treated as a petition for mandamus
as in the present case, to hear and decide a possible violation of Section 11, Article
XII of the Constitution in view of the ownership structure of PLDTs voting shares, as
admitted by respondents and as stated in PLDTs 2010 GIS that PLDT submitted to
SEC.

WHEREFORE, we PARTLY GRANT the petition and rule 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, and thus in the present case only to common
shares, and not to the total outstanding capital stock (common and non-voting
preferred shares). Respondent Chairperson of the Securities and Exchange
Commission is DIRECTED to apply this definition of the term capital in determining
the extent of allowable foreign ownership in respondent Philippine Long Distance
Telephone Company, and if there is a violation of Section 11, Article XII of the
Constitution, to impose the appropriate sanctions under the law.

SO ORDERED.

ANTONIO T. CARPIO

Associate Justice

WE CONCUR:
 I join the dissent of Mr. Justice Velasco
RENATO C. CORONA

Chief Justice

I dissent TERESITA J. LEONARDO-

(Please see Dissenting Opinion)
PRESBITERO J. VELASCO, JR. DE CASTRO

Associate Justice Associate Justice

ARTURO D. BRION DIOSDADO M. PERALTA

Associate Justice Associate Justice

 LUCAS P. BERSAMIN MARIANO C. DEL CASTILLO

Associate Justice Associate Justice

See my dissenting opinion MARTIN S. VILLARAMA, JR.

ROBERTO A. ABAD
Associate Justice
Associate Justice

JOSE PORTUGAL PEREZ JOSE C. MENDOZA

Associate Justice Associate Justice

MARIA LOURDES P. A. SERENO

 Associate Justice

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions
in the above Decision had been reached in consultation before the case was assigned
to the writer of the opinion of the Court.

RENATO C. CORONA

Chief Justice

1 Rollo (Vol. I) , pp. 15-103, (Vol. II), pp. 762-768.

2 See Cojuangco v. Sandiganbayan, G.R. No. 183278, 24 April 2009, 586 SCRA 790.

3 Section 11, Article XII of the 1987 Constitution provides:

ARTICLE XII
NATIONAL ECONOMY AND PATRIMONY
 xxxx

Section 11. No franchise, certificate, or any other form of authorization for the operation of a public utility
shall be granted except to citizens of the Philippines or to corporations or associations organized under the
laws of the Philippines, at least sixty per centum of whose capital is owned by such citizens; nor shall such
franchise, certificate, or authorization be exclusive in character or for a longer period than fifty years.
Neither shall any such franchise or right be granted except under the condition that it shall be subject to
amendment, alteration, or repeal by the Congress when the common good so requires. The State shall
encourage equity participation in public utilities by the general public. The participation of foreign
investors in the governing body of any public utility enterprise shall be limited to their proportionate share
in its capital, and all the executive and managing officers of such corporation or association must be
citizens of the Philippines.

4 Yuchengco v. Sandiganbayan, G.R. No. 149802, 20 January 2006, 479 SCRA 1.

5 Rollo, (Vol. II), p. 806.

6 Rollo (Vol. I), p. 23.

7 Id. at 23-24, 26.

8 Id. at 41.

9 Id.

10 Governed by Rule 63 of the Rules of Court. Section 1, Rule 63 of the Rules of Court states:

RULE 63

Declaratory Relief and Similar Remedies

Section 1. Who may file petition. Any person interested under a deed, will, contract or other written instrument, or
whose rights are affected by a statute, executive order or regulation, ordinance, or any other governmental regulation
may, before breach or violation thereof bring an action in the appropriate Regional Trial Court to determine any
question of construction or validity arising, and for a declaration of his rights or duties, thereunder. (Bar Matter No.
803, 17 February 1998)

11 Section 2, Rule 65 of the Rules of Court provides:

SEC. 2. Petition for prohibition. When the proceedings of any tribunal, corporation, board, officer, or
person, whether exercising judicial, quasi-judicial or ministerial functions, are without or in excess of its or
his jurisdiction, or with grave abuse of discretion amounting to lack or excess of jurisdiction, and there is
no appeal or any other plain, speedy and adequate remedy in the ordinary course of law, a person aggrieved
thereby may file a verified petition in the proper court, alleging the facts with certainty and praying that
judgment be rendered commanding the respondent to desist from further proceedings in the action or matter
specified therein, or otherwise granting such incidental relief as law and justice may require.
xxxx

12 Section 3, Rule 65 of the Rules of Court states:

SEC. 3. Petition for mandamus. When any tribunal, corporation, board, officer or person unlawfully
neglects the performance of an act which the law specifically enjoins as a duty resulting from an office,
trust, or station, or unlawfully excludes another from the use and enjoyment of a right or office to which
such other is entitled, and there is no other plain, speedy and adequate remedy in the ordinary course of
law, the person aggrieved thereby may file a verified petition in the proper court, alleging the facts with
certainty and praying that judgment be rendered commanding the respondent, immediately or at some other
time to be specified by the court, to do the act required to be done to protect the rights of the petitioner and
to pay the damages sustained by the petitioner by reason of the wrongful acts of the respondent.

xxxx

13 343 Phil. 539 (1997).

14 209 Phil. 1 (1983), citing Nacionalista Party v. Angelo Bautista, 85 Phil. 101, and Aquino v. Commission on
Elections, 62 SCRA 275.

15 Supra note 13.

16 Adverted to in respondent Nazarenos Memorandum dated 27 September 2007. Rollo, p. 929. Nazareno stated: In
fact, in Fernandez v. Cojuangco, which raised markedly similar issues, the Honorable Court refused to entertain the
Petition directly filed with it and dismissed the same for violating the principle of hierarchy of courts.

17 In a Resolution dated 9 June 2003.

18 Section 19, Article II, Constitution.

19Section 2. All lands of the public domain, waters, minerals, coal, petroleum, and other mineral oils, all
forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other natural resources
are owned by the State. With the exception of agricultural lands, all other natural resources shall not be
alienated. The exploration, development, and utilization of natural resources shall be under the full control
and supervision of the State. The State may directly undertake such activities, or it may enter into co-
production, joint venture, or production-sharing agreements with Filipino citizens, or corporations
or associations at least sixty per centum of whose capital is owned by such citizens. Such agreements
may be for a period not exceeding twenty-five years, renewable for not more than twenty-five years, and
under such terms and conditions as may be provided by law. In cases of water rights for irrigation, water
supply fisheries, or industrial uses other than the development of water power, beneficial use may be the
measure and limit of the grant.

The State shall protect the nations marine wealth in its archipelagic waters, territorial sea, and exclusive
economic zone, and reserve its use and enjoyment exclusively to Filipino citizens.
 The Congress may, by law, allow small-scale utilization of natural resources by Filipino citizens, as well as
cooperative fish farming, with priority to subsistence fishermen and fish- workers in rivers, lakes, bays, and
lagoons.

The President may enter into agreements with foreign-owned corporations involving either technical or
financial assistance for large-scale exploration, development, and utilization of minerals, petroleum, and
other mineral oils according to the general terms and conditions provided by law, based on real
contributions to the economic growth and general welfare of the country. In such agreements, the State
shall promote the development and use of local scientific and technical resources.

The President shall notify the Congress of every contract entered into in accordance with this provision, within thirty
days from its execution.

20 Section 7. Save in cases of hereditary succession, no private lands shall be transferred or conveyed except
to individuals, corporations, or associations qualified to acquire or hold lands of the public domain.

21Section 10. The Congress shall, upon recommendation of the economic and planning agency, when
the national interest dictates, reserve to citizens of the Philippines or to corporations or associations
at least sixty per centumof whose capital is owned by such citizens, or such higher percentage as
Congress may prescribe, certain areas of investments. The Congress shall enact measures that will
encourage the formation and operation of enterprises whose capital is wholly owned by Filipinos.

In the grant of rights, privileges, and concessions covering the national economy and patrimony, the State
shall give preference to qualified Filipinos.

The State shall regulate and exercise authority over foreign investments within its national jurisdiction and
in accordance with its national goals and priorities.

22Section 4(2), Article XIV of the 1987 Constitution provides: Educational institutions, other than those
established by religious groups and mission boards, shall be owned solely by citizens of the
Philippines or corporations or associations at least sixty per centum of the capital of which is owned
by such citizens. The Congress may, however, require increased Filipino equity participation in all
educational institutions.

The control and administration of educational institutions shall be vested in citizens of the Philippines.

xxxx

23Section 11(2), Article XVI of the 1987 Constitution provides: The advertising industry is impressed with
public interest, and shall be regulated by law for the protection of consumers and the promotion of the
general welfare.
Only Filipino citizens or corporations or associations at least seventy per centum of the capital of which is
owned by such citizens shall be allowed to engage in the advertising industry.

The participation of foreign investors in the governing body of entities in such industry shall be limited to their
proportionate share in the capital thereof, and all the executive and managing officers of such entities must be
citizens of the Philippines.

24 G.R. No. 130716, 9 December 1998, 299 SCRA 744 cited in Chavez v. Public Estates Authority, 433 Phil. 506
(2002). See also David v. Macapagal-Arroyo, G.R. No. 171396, 3 May 2006, 489 SCRA 160; Santiago v.
Commission on Elections, G.R. No. 127325, 19 March 1997, 270 SCRA 106; Kilosbayan, Inc. v. Guingona, Jr.,
G.R. No. 113375, 5 May 1994, 232 SCRA 110 (1994).

25 Bernas, The Constitution of the Republic of the Philippines, p. 452, citing Smith, Bell and Co. v. Natividad, 40
Phil. 136, 148 (1919); Luzon Stevedoring Corporation v. Anti-Dummy Board, 46 SCRA 474, 490 (1972).

26 Id.

27 De Leon, Hector, Philippine Constitutional Law (Principles and Cases), Volume 2, 1999 Ed., p. 848.

28 Preamble, 1987 Constitution; De Leon, Hector, Philippine Constitutional Law (Principles and Cases), Volume 2,
1999 Ed., p. 788.

29 Section 19, Article II, Constitution.

30 http://www.pldt.com.ph/investor/shareholder/Documents/GIS_2010_%28as%20of %207.2.10%29_final.pdf

31 ESTABLISHING BASIC POLICIES FOR THE TELEPHONE INDUSTRY, AMENDING FOR THE
PURPOSE THE PERTINENT PROVISIONS OF COMMONWEALTH ACT NO. 146, AS AMENDED,
OTHERWISE KNOWN AS THE PUBLIC SERVICE ACT, AS AMENDED, AND ALL INCONSISTENT
LEGISLATIVE AND MUNICIPAL FRANCHISE OF THE PHILIPPINE LONG DISTANCE TELEPHONE
COMPANY UNDER ACT NO. 3436, AS AMENDED, AND ALL INCONSISTENT LEGISLATIVE AND
MUNICIPAL FRANCHISES INCLUDING OTHER EXISTING LAWS.

32 Upon approval by the National Telecommunications Commission, this mandatory requirement to subscribe to
non-voting preferred shares was made optional starting 22 April 2003. See PLDT 20- F 2005 filing with the United
States Securities and Exchange Commission
at http://www.wikinvest.com/stock/Philippine_Long_Distance_Telephone Company_(PHI)/ Filing/20-
F/25/F2923101. See also Philippine Consumers Foundation, Inc. v. NTC and PLDT, G.R. No. L-63318, 18 April
1984, on the origin and rationale of the SIP.

33 Rollo (Vol. I), pp. 414-451.

34 Rollo (Vol. II), p. 991.

35 Id. at 951.

36 Id. at 838.

37 Id. at 898-923.
38 Rollo (Vol. II), p. 913.

39 Rollo (G.R. No. 157360), pp. 55-62.

40 Rollo (G.R. No. 157360), pp. 1577-1583.

41 In PLDTs case, the preferred stock is non-voting, except as specifically provided by law.

(http://www.pldt.com.ph/investor/Documents/a2d211230ec3436eab66b41d3d107cfc4Q2004FSwi thopinion.pdf)

42 Batas Pambansa Blg. 68.

43 As stated in the Corporation Code.

44 See http://www.congress.gov.ph/download/researches/rrb_0303_5.pdf

45 See http://www.congress.gov.ph/download/researches/rrb_0303_5.pdf

46 Section 6, BP Blg. 68 or The Corporation Code.

47 Agpalo, Ruben E., Comments on the Corporation Code of the Philippines, 2001 Second Edition, p. 36.

48 Record of the Constitutional Commission, Vol. III, pp. 255-256.

49 Id. at 360.

50 Republic Act No. 7042 entitled AN ACT TO PROMOTE FOREIGN INVESTMENTS, PRESCRIBE THE
PROCEDURES FOR REGISTERING ENTERPRISES DOING BUSINESS IN THE PHILIPPINES AND FOR
OTHER PURPOSES.

51 Rollo (G.R. No. 157360), Vol. I, p. 348.

It must be noted that under PLDTs Articles of Incorporation, the PLDT Board of Directors is expressly authorized to
determine, among others, with respect to each series of Serial Preferred Stock:

xxxx

(b) the dividend rate, if any, on the shares of such series (which, if and to the extent the Board of Directors,
in its sole discretion, shall deem appropriate under the circumstances, shall be fixed considering the rate of
return on similar securities at the time of issuance of such shares), the terms and conditions upon which and
the periods with respect to which dividends shall be payable, whether and upon what conditions such
dividends shall be cumulative and, if cumulative, the date or dates from which dividends shall accumulate;

c. whether or not the shares of such series shall be redeemable, the limitations with respect to such
redemption, the time or times when and the manner in which such shares shall be redeemable (including
the manner of selecting shares of such series for redemption if less than all shares are to be redeemed) and
the price or prices at which such shares shall be redeemable, which may not be less than (i) the par value
 thereof plus (ii) accrued and unpaid dividends thereon, nor more than (i) 110% of the par value thereof plus
(ii) accrued and unpaid dividends thereon;

d. whether or not the shares of such series shall be subject to the operation of a
purchase, retirement or sinking fund, and, if so, whether and upon what conditions such
purchase, retirement or sinking fund shall be cumulative or non-cumulative, the extent to
which and the manner in which such fund shall be applied to the purchase or redemption
of the shares of such series for retirement or to other corporate purposes and the terms
and provisions relative to the operation thereof;

(e) the rights to which the holders of shares of such series shall be entitled upon the voluntary or
involuntary liquidation, dissolution, distribution of assets or winding up of the corporation, which rights
may vary depending on whether such liquidation, dissolution, distribution or winding up is voluntary or
involuntary, and if voluntary, may vary at different dates, provided, however, that the amount which the
holders of shares of such series shall be entitled to receive in the event of any voluntary or involuntary
liquidation, dissolution, distribution of assets or winding up of the corporation

Further, the holders of Serial Preferred Stock shall be entitled to receive, when, as and if declared by the
Board of Directors out of funds legally available therefore, preferential cash dividends at the rate, under the
terms and conditions, for the periods and on the dates fixed by the resolution or resolutions of the Board of
Directors, x x x and no more, before any dividends on the Common Capital Stock (other than dividends
payable in Common Capital Stock) shall be paid or set apart for payment with respect to the same dividend
period. All shares of Preferred Stock of all series shall be of equal rank, preference and priority as to
dividends irrespective of whether or not the rates of dividends to which the same shall be entitled shall be
the same and, when the stated dividends are not paid in full, the shares of all series of Serial Preferred
Stock shall share ratably in the payment of dividends including accumulations, if any, in accordance with
the sums which would be payable on such shares if all dividends were declared and paid in full, provided,
however, that any two or more series of Serial Preferred Stock may differ from each other as to the
existence and extent of the right to cumulative dividends as aforesaid.

52 Rollo (G.R. No. 157360), Vol. I, p. 339-355. Adopted on 21 November 1995 and approved on 18 February 1997.

53 The other rights, limitations and preferences of common capital stock are as follows:

1. After the requirements with respect to preferential dividends on the Serial Preferred Stock shall have
been met and after the corporation shall have complied with all the requirements, if any, with respect to the
setting aside of sums as purchase, retirement or sinking funds, then and not otherwise the holders of the
Common Capital Stock shall be entitled to receive such dividends as may be declared from time to time by
the Board of Directors out of funds legally available therefor.

2. After distribution in full of the preferential amounts to be distributed to the holders of Serial Preferred
Stock in the event of the voluntary or involuntary liquidation, dissolution, distribution of assets or winding
up of the corporation, the holders of the Common Capital Stock shall be entitled to receive all the
 remaining assets of the corporation of whatever kind available for distribution to stockholders ratably in
proportion to the number of shares of the Common Capital Stock held by them, respectively.

xxxx

4. The ownership of shares of Common Capital Stock shall not entitle the owner thereof to any right (other
than such right, if any, as the Board of Directors in its discretion may from time to time grant) to subscribe
for or to purchase or to have offered to him for subscription or purchase any shares of any class of preferred
stock of the corporation.

54 http://www.pldt.com.ph/investor/shareholder/Documents/GIS_2010_%28as%20of %207.2.10%29_final.pdf

55 http://www.sec.gov.ph/index.htm?GIS_Download

56 http://www.pldt.com.ph/investor/shareholder/Documents/GIS_2010_%28as%20of %207.2.10%29_final.pdf

57 http://www.pldt.com.ph/investor/Documents/2009%20Dividend%20Declarations_Update %2012082009.pdf. Se
e also http://www.pldt.com.ph/investor/Documents/disclosures_03-01- 2011.pdf

58 Subscription Investment Plan. See PD No. 217.

59 This is the result of the preferred shares being denominated 10% preferred, which means each preferred share
will earn an annual dividend equal to 10% of its par value of P10, which amounts to P1. Once this dividend is paid
to holders of preferred shares, the rest of the retained earnings can be paid as dividends to the holders of common
shares.
See http://www.pldt.com.ph/investor/Documents/2009%20Dividend%20Declarations_Update %2012082009.pdf

In 2011, PLDT declared dividends for the common shares at P78.00 per share.
(http://www.pldt.com.ph/investor/Documents/disclosures_03-01-2011.pdf)

60 http://www.pldt.com.ph/investor/shareholder/Documents/GIS_2010_(as%20of %207.2.10)_final.pdf

61 Id. Based on PLDTs 2010 GIS, the paid-up capital of PLDT (as of Record Date 12 April 2010) consists of the
following:

Filipino (preferred): 403,410,355

Foreigners (preferred): 2,287,207

Total: 405,697,562

62 Based on par value, as stated in PLDTs 2010 GIS sbumitted to the SEC. See
http://www.pldt.com.ph/investor/shareholder/Documents/GIS_2010_%28as%20of
%207.2.10%29_final.pdf (accessed 23 May 2011).

Authorized capital stock of PLDT is broken down as follows:

Common shares: 234,000,000

Preferred shares: 822,500,000

Total: 1,056,000,000

63 For the year 2009.

64 http://www.pse.com.ph/ (accessed 31 May 2011)

65 http://www.pse.com.ph/html/Quotations/2011/stockQuotes_05272011.pdf (accessed 27 May 2011)

66 335 Phil. 82 (1997).

67Krivenko v. Register of Deeds, 79 Phil. 461 (1947); Rellosa v. Gaw Chee Hun, 93 Phil. 827
(1953); Vasquez v. Li Seng Giap, 96 Phil. 447 (1955); Soriano v. Ong Hoo, 103 Phil. 829
(1958); Philippine Banking Corporation v. Lui She, 128 Phil. 53 (1967); Frenzel v. Catito, 453 Phil. 885
(2003).

68 Id.

69 Securities and Exchange Commission v. Court of Appeals, et al., 316 Phil. 903 (1995). The Court ruled in this
case:

The Securities and Exchange Commission (SEC) has both regulatory and adjudicative functions.

Under its regulatory responsibilities, the SEC may pass upon applications for, or may suspend or
revoke (after due notice and hearing), certificates of registration of corporations, partnerships and
associations (excluding cooperatives, homeowners associations, and labor unions); compel legal and
regulatory compliances; conduct inspections; and impose fines or other penalties for violations of the
Revised Securities Act, as well as implementing rules and directives of the SEC, such as may be warranted.

Relative to its adjudicative authority, the SEC has original and exclusive jurisdiction to hear and decide
controversies and cases involving -

a. Intra-corporate and partnership relations between or among the corporation, officers and stockholders
and partners, including their elections or appointments;
 b. State and corporate affairs in relation to the legal existence of corporations, partnerships and
associations or to their franchise; and

c. Investors and corporate affairs particularly in respect of devices and schemes, such as fraudulent
practices, employed by directors, officers, business associates, and/or other stockholders, partners, or
members of registered firms; x x x

x x x x (Emphasis supplied)

70SEC. 17. Grounds when articles of incorporation or amendment may be rejected or disapproved. The
Securities and Exchange Commission may reject the articles of incorporation or disapprove any
amendment thereto if the same is not in compliance with the requirements of this Code: Provided, That the
Commission shall give the incorporators a reasonable time within which to correct or modify the
objectionable portions of the articles or amendment. The following are grounds for such rejection or
disapproval:

xxx

(4) That the required percentage of ownership of the capital stock to be owned by citizens of the
Philippines has not been complied with as required by existing laws or the Constitution. (Emphasis
supplied)

71 Republic Act No. 8799. Section 5 of R.A. No. 8799 provides:

Section 5. Powers and Functions of the Commission. 5.1. The Commission shall act with transparency and
shall have the powers and functions provided by this Code, Presidential Decree No. 902-A, the Corporation
Code, the Investment Houses Law, the Financing Company Act and other existing laws. Pursuant thereto
the Commission shall have, among others, the following powers and functions:

(a) Have jurisdiction and supervision over all corporations, partnerships or associations who are the grantees of
primary franchises and/or a license or a permit issued by the Government;

xxx

(c) Approve, reject, suspend, revoke or require amendments to registration statements, and registration and
licensing applications;

xxx

(f) Impose sanctions for the violation of laws and the rules, regulations and orders, issued pursuant thereto;

xxx

(i) Issue cease and desist orders to prevent fraud or injury to the investing public;
xxx

(m) Suspend, or revoke, after proper notice and hearing the franchise or certificate of registration of corporations,
partnership or associations, upon any of the grounds provided by law; and

(n) Exercise such other powers as may be provided by law as well as those which may be implied from, or
which are necessary or incidental to the carrying out of, the express powers granted the Commission to
achieve the objectives and purposes of these laws.

G.R. No. 154618 April 14, 2004

AGILENT TECHNOLOGIES SINGAPORE (PTE) LTD., petitioner,

vs.
INTEGRATED SILICON TECHNOLOGY PHILIPPINES CORPORATION, TEOH KIANG HONG,
TEOH KIANG SENG, ANTHONY CHOO, JOANNE KATE M. DELA CRUZ, JEAN KAY M. DELA
CRUZ and ROLANDO T. NACILLA, respondents.

DECISION

YNARES-SANTIAGO, J.:

This petition for review assails the Decision dated August 12, 2002 of the Court of Appeals in CA-
G.R. SP No. 66574, which dismissed Civil Case No. 3123-2001-C and annulled and set aside the
Order dated September 4, 2001 issued by the Regional Trial Court of Calamba, Laguna, Branch 92.

Petitioner Agilent Technologies Singapore (Pte.), Ltd. ("Agilent") is a foreign corporation,

which, by its own admission, is not licensed to do business in the Philippines.1 Respondent
Integrated Silicon Technology Philippines Corporation ("Integrated Silicon") is a private domestic
corporation, 100% foreign owned, which is engaged in the business of manufacturing and
assembling electronics components.2 Respondents Teoh Kiang Hong, Teoh Kiang Seng and
Anthony Choo, Malaysian nationals, are current members of Integrated Silicon’s board of
directors, while Joanne Kate M. dela Cruz, Jean Kay M. dela Cruz, and Rolando T. Nacilla are its
former members.3

The juridical relation among the various parties in this case can be traced to a 5-year Value Added
Assembly Services Agreement ("VAASA"), entered into on April 2, 1996 between Integrated
Silicon and the Hewlett-Packard Singapore (Pte.) Ltd., Singapore Components Operation
("HP-Singapore").4 Under the terms of the VAASA, Integrated Silicon was to locally
manufacture and assemble fiber optics for export to HP-Singapore. HP-Singapore, for its part,
was to consign raw materials to Integrated Silicon; transport machinery to the plant of
Integrated Silicon; and pay Integrated Silicon the purchase price of the finished
products.5 The VAASA had a five-year term, beginning on April 2, 1996, with a provision for
annual renewal by mutual written consent.6 On September 19, 1999, with the consent of
Integrated Silicon,7 HP-Singapore assigned all its rights and obligations in the VAASA to
Agilent.8

On May 25, 2001, Integrated Silicon filed a complaint for "Specific Performance and
Damages" against Agilent and its officers Tan Bian Ee, Lim Chin Hong, Tey Boon Teck and
Francis Khor, docketed as Civil Case No. 3110-01-C. It alleged that Agilent breached the parties’
oral agreement to extend the VAASA. Integrated Silicon thus prayed that defendant be
ordered to execute a written extension of the VAASA for a period of five years as earlier
assured and promised; to comply with the extended VAASA; and to pay actual, moral,
exemplary damages and attorney’s fees.9

On June 1, 2001, summons and a copy of the complaint were served on Atty. Ramon
Quisumbing, who returned these processes on the claim that he was not the registered agent of
Agilent. Later, he entered a special appearance to assail the court’s jurisdiction over the
person of Agilent.

On July 2, 2001, Agilent filed a separate complaint against Integrated Silicon, (officers) Teoh
Kang Seng, Teoh Kiang Gong, Anthony Choo, Joanne Kate M. dela Cruz, Jean Kay M. dela Cruz
and Rolando T. Nacilla,10 for "Specific Performance, Recovery of Possession, and Sum of
Money with Replevin, Preliminary Mandatory Injunction, and Damages", before the Regional
Trial Court, Calamba, Laguna, Branch 92, docketed as Civil Case No. 3123-2001-C. Agilent prayed
that a writ of replevin or, in the alternative, a writ of preliminary mandatory injunction, be
issued ordering defendants to immediately return and deliver to plaintiff its equipment,
machineries and the materials to be used for fiber-optic components which were left in the
plant of Integrated Silicon. It further prayed that defendants be ordered to pay actual and
exemplary damages and attorney’s fees.11

Respondents filed a Motion to Dismiss in Civil Case No. 3123-2001-C,12 on the grounds of lack
of Agilent’s legal capacity to sue;13 litis pendentia;14 forum shopping;15 and failure to state a
cause of action.16

On September 4, 2001, the trial court denied the Motion to Dismiss and granted petitioner
Agilent’s application for a writ of replevin.17

Without filing a motion for reconsideration, respondents filed a petition for certiorari with the
Court of Appeals.18

In the meantime, upon motion filed by respondents, Judge Antonio S. Pozas of Branch 92 voluntarily
inhibited himself in Civil Case No. 3123-2001-C. The case was re-raffled and assigned to Branch 35,
the same branch where Civil Case No. 3110-2001-C is pending.

On August 12, 2002, the Court of Appeals granted respondents’ petition for certiorari, set
aside the assailed Order of the trial court [denied the Motion to Dismiss and granted
petitioner Agilent’s application for a writ of replevin] dated September 4, 2001, and ordered the
dismissal of Civil Case No. 3123-2001-C.

Hence, the instant petition raising the following errors:

I.

THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN NOT DISMISSING

RESPONDENTS’ PETITION FOR CERTIORARI FOR RESPONDENTS’ FAILURE TO FILE A
MOTION FOR RECONSIDERATION BEFORE RESORTING TO THE REMEDY OF CERTIORARI.

II.

THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN ANNULLING AND SETTING

ASIDE THE TRIAL COURT’S ORDER DATED 4 SEPTEMBER 2001 AND ORDERING THE
DISMISSAL OF CIVIL CASE NO. 3123-2001-C BELOW ON THE GROUND OF LITIS PENDENTIA,
ON ACCOUNT OF THE PENDENCY OF CIVIL CASE NO. 3110-2001-C.

III.

THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN ANNULLING AND SETTING

ASIDE THE TRIAL COURT’S ORDER DATED 4 SEPTEMBER 2001 AND ORDERING THE
DISMISSAL OF CIVIL CASE NO. 3123-2001-C BELOW ON THE GROUND OF FORUM
SHOPPING, ON ACCOUNT OF THE PENDENCY OF CIVIL CASE NO. 3110-2001-C.

IV.

THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN ORDERING THE DISMISSAL

OF CIVIL CASE NO. 323-2001-C BELOW INSTEAD OF ORDERING IT CONSOLIDATED WITH
CIVIL CASE NO. 3110-2001-C.19

The two primary issues raised in this petition: (1) whether or not the Court of Appeals
committed reversible error in giving due course to respondents’ petition, notwithstanding the
failure to file a Motion for Reconsideration of the September 4, 2001 Order; and (2) whether or
not the Court of Appeals committed reversible error in dismissing Civil Case No. 3123-2001-
C.

We find merit in the petition.

The Court of Appeals, citing the case of Malayang Manggagawa sa ESSO v. ESSO Standard
Eastern, Inc.,20 held that the lower court had no jurisdiction over Civil Case No. 3123-2001-C
because of the pendency of Civil Case No. 3110-2001-C and, therefore, a motion for reconsideration
was not necessary before resort to a petition for certiorari. This was error.

Jurisdiction is fixed by law. Batas Pambansa Blg. 129 vests jurisdiction over the subject matter of
Civil Case No. 3123-2001-C in the RTC.21

The Court of Appeals’ ruling that the assailed Order issued by the RTC of Calamba, Branch 92, was
a nullity for lack of jurisdiction due to litis pendentia and forum shopping, has no legal basis. The
pendency of another action does not strip a court of the jurisdiction granted by law.

The Court of Appeals further ruled that a Motion for Reconsideration was not necessary in view of
the urgent necessity in this case. We are not convinced. In the case of Bache and Co. (Phils.), Inc. v.
Ruiz,22 relied on by the Court of Appeals, it was held that "time is of the essence in view of the tax
assessments sought to be enforced by respondent officers of the Bureau of Internal Revenue
against petitioner corporation, on account of which immediate and more direct action becomes
necessary." Tax assessments in that case were based on documents seized by virtue of an illegal
search, and the deprivation of the right to due process tainted the entire proceedings with illegality.
Hence, the urgent necessity of preventing the enforcement of the tax assessments was patent.
Respondents, on the other hand, cite the case of Geronimo v. Commission on Elections,23 where the
urgent necessity of resolving a disqualification case for a position in local government warranted the
expeditious resort to certiorari. In the case at bar, there is no analogously urgent circumstance which
would necessitate the relaxation of the rule on a Motion for Reconsideration.
Indeed, none of the exceptions for dispensing with a Motion for Reconsideration is present here.
None of the following cases cited by respondents serves as adequate basis for their procedural
lapse.

In Vigan Electric Light Co., Inc. v. Public Service Commission,24 the questioned order was null and
void for failure of respondent tribunal to comply with due process requirements; in Matanguihan v.
Tengco,25 the questioned order was a patent nullity for failure to acquire jurisdiction over the
defendants, which fact the records plainly disclosed; and in National Electrification Administration v.
Court of Appeals,26 the questioned orders were void for vagueness. No such patent nullity is evident
in the Order issued by the trial court in this case. Finally, while urgency may be a ground for
dispensing with a Motion for Reconsideration, in the case of Vivo v. Cloribel,27 cited by respondents,
the slow progress of the case would have rendered the issues moot had a motion for reconsideration
been availed of. We find no such urgent circumstance in the case at bar.

Respondents, therefore, availed of a premature remedy when they immediately raised the
matter to the Court of Appeals on certiorari; and the appellate court committed reversible
error when it took cognizance of respondents’ petition instead of dismissing the same
outright.

We come now to the substantive issues of the petition.

Litis pendentia is a Latin term which literally means "a pending suit." It is variously referred to in
some decisions as lis pendens and auter action pendant. While it is normally connected with the
control which the court has on a property involved in a suit during the continuance proceedings, it is
more interposed as a ground for the dismissal of a civil action pending in court.

Litis pendentia as a ground for the dismissal of a civil action refers to that situation wherein another
action is pending between the same parties for the same cause of action, such that the second
action becomes unnecessary and vexatious. For litis pendentia to be invoked, the concurrence of
the following requisites is necessary:

(a) identity of parties or at least such as represent the same interest in both actions;

(b) identity of rights asserted and reliefs prayed for, the reliefs being founded on the same
facts; and

(c) the identity in the two cases should be such that the judgment that may be rendered in
one would, regardless of which party is successful, amount to res judicata in the other.28

The Court of Appeals correctly appreciated the identity of parties in Civil Cases No. 3123-2001-C
and 3110-2001-C. Well-settled is the rule that lis pendens requires only substantial, and not
absolute, identity of parties.29 There is substantial identity of parties when there is a
community of interest between a party in the first case and a party in the second case, even if
the latter was not impleaded in the first case.30 The parties in these cases are vying (fighting)
over the interests of the two opposing corporations; the individuals are only incidentally
impleaded, being the natural persons purportedly accused of violating these corporations’
rights.

Likewise, the fact that the positions of the parties are reversed, i.e., the plaintiffs in the first case
are the defendants in the second case or vice versa, does not negate the identity of parties
for purposes of determining whether the case is dismissible on the ground of litis
pendentia.31
The identity of parties notwithstanding, litis pendentia does not obtain in this case because of the
absence of the second and third requisites. The rights asserted in each of the cases involved are
separate and distinct; there are two subjects of controversy presented for adjudication; and two
causes of action are clearly involved. The fact that respondents instituted a prior action for
"Specific Performance and Damages" is not a ground for defeating the petitioners’ action for
"Specific Performance, Recovery of Possession, and Sum of Money with Replevin,
Preliminary Mandatory Injunction, and Damages."

In Civil Case No. 3110-2001-C filed by respondents, the issue is whether or not there was a breach
of an oral promise to renew of the VAASA. The issue in Civil Case No. 3123-2001-C, filed by
petitioner, is whether petitioner has the right to take possession of the subject properties. Petitioner’s
right of possession is founded on the ownership of the subject goods, which ownership is not
disputed and is not contingent on the extension or non-extension of the VAASA. Hence, the replevin
suit can validly be tried even while the prior suit is being litigated in the Regional Trial Court.

****Possession of the subject properties is not an issue in Civil Case No. 3110-2001-C.

The reliefs sought by respondent Integrated Silicon therein are as follows:

(1) execution of a written extension or renewal of the VAASA;
(2) compliance with the extended VAASA; and
(3) payment of overdue accounts, damages, and attorney’s fees.
The reliefs sought by petitioner Agilent in Civil Case No. 3123-2001-C, on the other hand, are as
follows:
(1) issuance of a Writ of Replevin or Writ of Preliminary Mandatory Injunction;
(2) recovery of possession of the subject properties;
(3) damages and attorney’s fees.

Concededly, some items or pieces of evidence may be admissible in both actions. It cannot be said,
however, that exactly the same evidence will support the decisions in both, since the legally
significant and controlling facts in each case are entirely different. Although the VAASA figures
prominently in both suits, Civil Case No. 3110-2001-C is premised on a purported breach of an oral
obligation to extend the VAASA, and damages arising out of Agilent’s alleged failure to comply with
such purported extension. Civil Case No. 3123-2001-C, on the other hand, is premised on a breach
of the VAASA itself, and damages arising to Agilent out of that purported breach.

It necessarily follows that the third requisite for litis pendentia is also absent. The following are the
elements of res judicata:

(a) The former judgment must be final;

(b) The court which rendered judgment must have jurisdiction over the parties and the
subject matter;

(c) It must be a judgment on the merits; and

(d) There must be between the first and second actions identity of parties, subject matter,
and cause of action.32

In this case, any judgment rendered in one of the actions will not amount to res judicata in the other
action. There being different causes of action, the decision in one case will not constitute res judicata
as to the other.
Of course, a decision in one case may, to a certain extent, affect the other case. This, however, is
not the test to determine the identity of the causes of action. Whatever difficulties or inconvenience
may be entailed if both causes of action are pursued on separate remedies, the proper solution is
not the dismissal order of the Court of Appeals. The possible consolidation of said cases, as well
as stipulations and appropriate modes of discovery, may well be considered by the court
below to subserve not only procedural expedience but, more important, the ends of justice.33

We now proceed to the issue of forum shopping.???????

The test for determining whether a party violated the rule against forum-shopping was laid down in
the case of Buan v. Lopez.34 Forum shopping exists where the elements of litis pendentia are
present, or where a final judgment in one case will amount to res judicata in the final other.
There being no litis pendentia in this case, a judgment in the said case will not amount to res
judicata in Civil Case No. 3110-2001-C, and respondents’ contention on forum shopping must
likewise fail.

We are not unmindful of the afflictive consequences that may be suffered by both petitioner and
respondents if replevin is granted by the trial court in Civil Case No. 3123-2001-C. If respondent
Integrated Silicon eventually wins Civil Case No. 3110-2001-C, and the VAASA’s terms are
extended, petitioner corporation will have to comply with its obligations thereunder, which would
include the consignment of properties similar to those it may recover by way of replevin in Civil Case
No. 3123-2001-C. However, petitioner will also suffer an injustice if denied the remedy of replevin,
resort to which is not only allowed but encouraged by law.

Respondents argue that since Agilent is an unlicensed foreign corporation doing business in
the Philippines, it lacks the legal capacity to file suit.35 The assailed acts of petitioner Agilent,
purportedly in the nature of "doing business" in the Philippines, are the following:

(1) mere entering into the VAASA, which is a "service contract";36

(2) appointment of a full-time representative in Integrated Silicon, to "oversee and supervise

the production" of Agilent’s products;37

(3) the appointment by Agilent of six full-time staff members, who were permanently
stationed at Integrated Silicon’s facilities in order to inspect the finished goods for
Agilent;38 and

(4) Agilent’s participation in the management, supervision and control of Integrated

Silicon,39 including instructing Integrated Silicon to hire more employees to meet Agilent’s
increasing production needs,40 regularly performing quality audit, evaluation and supervision
of Integrated Silicon’s employees,41 regularly performing inventory audit of raw materials to
be used by Integrated Silicon, which was also required to provide weekly inventory updates
to Agilent,42 and providing and dictating Integrated Silicon on the daily production schedule,
volume and models of the products to manufacture and ship for Agilent.43

A foreign corporation without a license is not ipso facto incapacitated from bringing an
action in Philippine courts. A license is necessary only if a foreign corporation is
"transacting" or "doing business" in the country. The Corporation Code provides:

Sec. 133. Doing business without a license. — No foreign corporation transacting business
in the Philippines without a license, or its successors or assigns, shall be permitted to
maintain or intervene in any action, suit or proceeding in any court or administrative agency
 of the Philippines; but such corporation may be sued or proceeded against before Philippine
courts or administrative tribunals on any valid cause of action recognized under Philippine
laws.

The aforementioned provision prevents an unlicensed foreign corporation "doing business" in the
Philippines from accessing our courts.

In a number of cases, however, we have held that an unlicensed foreign corporation doing
business in the Philippines may bring suit in Philippine courts against a Philippine citizen or
entity who had contracted with and benefited from said corporation.44 Such a suit is premised
on the doctrine of estoppel. A party is estopped from challenging the personality of a
corporation after having acknowledged the same by entering into a contract with it. This
doctrine of estoppel to deny corporate existence and capacity applies to foreign as well as
domestic corporations.45 The application of this principle prevents a person contracting with
a foreign corporation from later taking advantage of its noncompliance with the statutes
chiefly in cases where such person has received the benefits of the contract.46

The principles regarding the right of a foreign corporation to bring suit in Philippine courts
may thus be condensed in four statements: (1) if a foreign corporation does business in the
Philippines without a license, it cannot sue before the Philippine courts;47 (2) if a foreign
corporation is not doing business in the Philippines, it needs no license to sue before
Philippine courts on an isolated transaction or on a cause of action entirely independent of
any business transaction48; (3) if a foreign corporation does business in the Philippines
without a license, a Philippine citizen or entity which has contracted with said corporation
may be estopped from challenging the foreign corporation’s corporate personality in a suit
brought before Philippine courts;49 and (4) if a foreign corporation does business in the
Philippines with the required license, it can sue before Philippine courts on any transaction.

The challenge to Agilent’s legal capacity to file suit hinges on whether or not it is doing business
in the Philippines. However, there is no definitive rule on what constitutes "doing", "engaging in", or
"transacting" business in the Philippines, as this Court observed in the case of Mentholatum v.
Mangaliman.50 The Corporation Code itself is silent as to what acts constitute doing or
transacting business in the Philippines.

Jurisprudence has it, however, that the term "implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the performance of acts or works or the
exercise of some of the functions normally incident to or in progressive prosecution of the
purpose and subject of its organization."51

In Mentholatum,52 this Court discoursed on the two general tests to determine whether or not
a foreign corporation can be considered as "doing business" in the Philippines. The first of
these is the substance test, thus:53

The true test [for doing business], however, seems to be whether the foreign
corporation is continuing the body of the business or enterprise for which it was
organized or whether it has substantially retired from it and turned it over to another.

The second test is the continuity test, expressed thus:54

The term [doing business] implies a continuity of commercial dealings and

arrangements, and contemplates, to that extent, the performance of acts or works or
 the exercise of some of the functions normally incident to, and in the progressive
prosecution of, the purpose and object of its organization.

Although each case must be judged in light of its attendant circumstances, jurisprudence has
evolved several guiding principles for the application of these tests. For instance, considering that it
transacted with its Philippine counterpart for seven years, engaging in futures contracts, this Court
concluded that the foreign corporation in Merrill Lynch Futures, Inc. v. Court of Appeals and Spouses
Lara,55 was doing business in the Philippines. In Commissioner of Internal Revenue v. Japan Airlines
("JAL"),56 the Court held that JAL was doing business in the Philippines, i.e., its commercial dealings
in the country were continuous – despite the fact that no JAL aircraft landed in the country – as it
sold tickets in the Philippines through a general sales agent, and opened a promotions office here as
well.

In General Corp. of the Phils. v. Union Insurance Society of Canton and Fireman’s Fund
Insurance,57 a foreign insurance corporation was held to be doing business in the Philippines, as it
appointed a settling agent here, and issued 12 marine insurance policies. We held that these
transactions were not isolated or casual, but manifested the continuity of the foreign corporation’s
conduct and its intent to establish a continuous business in the country. In Eriks PTE Ltd. v. Court of
Appeals and Enriquez,58 the foreign corporation sold its products to a Filipino buyer who ordered the
goods 16 times within an eight-month period. Accordingly, this Court ruled that the corporation was
doing business in the Philippines, as there was a clear intention on its part to continue the body of its
business here, despite the relatively short span of time involved. Communication Materials and
Design, Inc., et al. v. Court of Appeals, ITEC, et al.59 and Top-Weld Manufacturing v. ECED, IRTI, et
al.60 both involved the License and Technical Agreement and Distributor Agreement of foreign
corporations with their respective local counterparts that were the primary bases for the Court’s
ruling that the foreign corporations were doing business in the Philippines.61 In particular, the Court
cited the highly restrictive nature of certain provisions in the agreements involved, such that, as
stated in Communication Materials, the Philippine entity is reduced to a mere extension or
instrument of the foreign corporation. For example, in Communication Materials, the Court deemed
the "No Competing Product" provision of the Representative Agreement therein restrictive.62

The case law definition has evolved into a statutory definition, having been adopted with some
qualifications in various pieces of legislation. The Foreign Investments Act of 1991 (the "FIA";
Republic Act No. 7042, as amended), defines "doing business" as follows:

Sec. 3, par. (d). The phrase "doing business" shall include soliciting orders,

service contracts,

opening offices, whether called "liaison" offices or branches;

appointing representatives or distributors domiciled in the Philippines or

who in any calendar year stay in the country for a period or periods totaling one
hundred eighty (180) days or more;

participating in the management, supervision or control of any domestic business,

firm, entity, or corporation in the Philippines; and

any other act or acts that imply a continuity of commercial dealings or arrangements,
and contemplate to that extent the performance of acts or works, or the exercise of
 some of the functions normally incident to, and in the progressive prosecution of,
commercial gain or of the purpose and object of the business organization.

An analysis of the relevant case law, in conjunction with Section 1 of the

Implementing Rules and Regulations of the FIA (as amended by Republic Act No.
8179), would demonstrate that the acts enumerated in the VAASA do not constitute
"doing business" in the Philippines.

Section 1 of the Implementing Rules and Regulations of the FIA (as amended by
Republic Act No. 8179) provides that the following shall not be deemed "doing
business":

(1) Mere investment as a shareholder by a foreign entity in domestic

corporations duly registered to do business, and/or the exercise of rights as
such investor;

(2) Having a nominee director or officer to represent its interest in such

corporation;

(3) Appointing a representative or distributor domiciled in the Philippines

which transacts business in the representative’s or distributor’s own name and
account;

(4) The publication of a general advertisement through any print or broadcast

media;

(5) Maintaining a stock of goods in the Philippines solely for the purpose of
having the same processed by another entity in the Philippines;

(6) Consignment by a foreign entity of equipment with a local company to be

used in the processing of products for export;

(7) Collecting information in the Philippines; and

(8) Performing services auxiliary to an existing isolated contract of sale which

are not on a continuing basis, such as installing in the Philippines machinery it
has manufactured or exported to the Philippines, servicing the same, training
domestic workers to operate it, and similar incidental services.

By and large, to constitute "doing business", the activity to be undertaken in the

Philippines is one that is for profit-making.63

By the clear terms of the VAASA, Agilent’s activities in the Philippines were confined to (1)
maintaining a stock of goods in the Philippines solely for the purpose of having the same
processed by Integrated Silicon; and (2) consignment of equipment with Integrated Silicon to
be used in the processing of products for export. As such, we hold that, based on the
evidence presented thus far, Agilent cannot be deemed to be "doing business" in the
Philippines. Respondents’ contention that Agilent lacks the legal capacity to file suit is
therefore devoid of merit. As a foreign corporation not doing business in the Philippines, it
needed no license before it can sue before our courts.
Finally, as to Agilent’s purported failure to state a cause of action against the individual respondents,
we likewise rule in favor of petitioner. A Motion to Dismiss hypothetically admits all the allegations in
the Complaint, which plainly alleges that these individual respondents had committed or permitted
the commission of acts prejudicial to Agilent. Whether or not these individuals had divested
themselves of their interests in Integrated Silicon, or are no longer members of Integrated Silicon’s
Board of Directors, is a matter of defense best threshed out during trial.

WHEREFORE, PREMISES CONSIDERED, the petition is GRANTED. The Decision of the Court of
Appeals in CA-G.R. SP No. 66574 dated August 12, 2002, which dismissed Civil Case No. 3123-
2001-C,

is REVERSED and SET ASIDE. The Order dated September 4, 2001 issued by the Regional Trial
Court of Calamba, Laguna, Branch 92, in Civil Case No. 3123-2001-C, is REINSTATED. Agilent’s
application for a Writ of Replevin is GRANTED.

No pronouncement as to costs.

SO ORDERED.

Davide, Jr., Panganiban, Carpio, and Azcuna, JJ., concur.

Footnotes

1 Rollo, p. 4.

2 Id., p. 93.

3 Id., pp. 93-94.

4 Id., p. 112.

5 Id., pp. 112-122.

6 Id., p. 112.

7 Id., pp. 135-36.

8 Id.

9 CA Records, pp. 405-407.

10 Rollo, p. 137.

11 Id., pp. 149-150.

12 Id., p. 253.
13 Id., pp. 255-60.

14 Id., pp. 260-61.

15 Id., pp. 261-63.

16 Id., pp. 263-64.

17 Id., p. 43.

18 Id., p. 98.

19 Id., p. 24.

20 122 Phil. 147 (1965), at 155.

21 Batas Pambansa Blg. 129, sec. 19.

22 148 Phil. 794, 812 (1971).

23 G.R. No. L-52413, 26 September 1981, 107 SCRA 614.

24 119 Phil. 304 (1964).

25 G.R. No. L-27781, 28 January 1980, 95 SCRA 478.

26 G.R. No. L-32490, 29 December 1983, 126 SCRA 394.

27 G.R. No. L-23239, 23 November 1966, 18 SCRA 713.

28 Northcott & Co. v. Villa-Abrille, 41 Phil. 462 (1921).

29 Santos v. Court of Appeals, G.R. No. 101818, 21 September 1993, 226 SCRA 630, 637.

30 Santos v. Court of Appeals, supra, citing Anticamara v. Ong, 82 SCRA 337 (1978).

31 Yu v. Court of Appeals, G.R. No. 106818, 27 May 1994, 232 SCRA 594.

32 Saura v. Saura, Jr., 372 Phil. 337 (1999).

33 Ramos v. Ebarle, G.R. No. L-49833, 15 February 1990, 182 Phil. 245.

34 229 Phil. 65 (1986).

35 Rollo, pp. 1739-1744.

36 Id., pp. 508-510.

37 Id., p. 510.
38 Id., pp. 510-511.

39 Id., p. 511.

40 Id.

41 Id., p. 512.

42 Id.

43 Id.

44 Merrill Lynch Futures v. Court of Appeals, G.R. No. 97816, 24 July 1992, 211 SCRA 824.

45 Georg Grotjahn GMBH v. Isnani, G.R. No. 109272, 10 August 1994, 235 SCRA 216.

Merrill Lynch Futures v. Court of Appeals, supra, citing Sherwood v. Alvis, 83 Ala. 115, 3
46

So 307, limited and distinguished in Dudley v. Collier, 84 Ala 431, 6 So. 304; Spinney v.
Miller, 114 Iowa 210, 86 NW 317.

47 Corporation Code, sec. 133.

48 Eastboard Navigation, Ltd. v. Juan Ysmael & Company, Inc., 102 Phil. 1 (1957).

Merrill Lynch Futures v. Court of Appeals, supra, citing Sherwood vs. Alvis, 83 Ala. 115, 3
49

So 307, limited and distinguished in Dudley v. Collier, 84 Ala 431, 6 So. 304; Spinney v.
Miller, 114 Iowa 210, 86 NW 317.

50 72 Phil. 524 (1941).

51 Columbia Pictures, Inc., et al. v. Court of Appeals, 329 Phil. 875 (1996).

52 72 Phil. 524 (1941).

53 See Villanueva, Philippine Corporate Law 596, et seq. (1998 ed.).

54 Id.

55 G.R. No. 97816, 24 July 1992, 211 SCRA 824.

56 G.R. No. 60714, 4 October 1991, 202 SCRA 450.

57 87 Phil. 313 (1950).

58 335 SCRA 229 (1997).

59 329 Phil. 487 (1996).

60 G.R. No. L-44944, 9 August 1985, 138 SCRA 118.

 61According to the Court in Communication Materials, it was persuaded to conclude that the
foreign corporation was doing business in the Philippines, as this was "the inevitable result
after a scrutiny of the different contracts and agreements entered into" by the foreign
corporation.

62

63 C. Villanueva, Philippine Corporate Law 590 (1998 ed.).

Republic of the Philippines

Supreme Court
Manila

SECOND DIVISION

METROPOLITAN BANK and G.R. No. 180974

TRUST COMPANY,
Petitioner,
Present:

- versus - CARPIO, J., Chairperson,

BRION,
PEREZ
CENTRO DEVELOPMENT SERENO, and
CORPORATION, CHONGKING REYES, JJ.
KEHYENG, MANUEL CO
KEHYENG and QUIRINO Promulgated:
KEHYENG,
Respondents. June 13, 2012

x--------------------------------------------------x

DECISION

SERENO, J.:
The present Petition for Review[1] assails the Court of Appeals (CA)
Decision[2] promulgated on 30 August 2007 and Resolution[3] dated 26 November

2007 in CA-G.R. CV No. 80778. The antecedent facts follow.

On 20 March 1990, in a special meeting of the board of directors of

respondent Centro Development Corporation (Centro), its president Go Eng Uy

was authorized to mortgage its properties and assets to secure the medium-term loan
of ₱84 million of Lucky Two Corporation and Lucky Two Repacking. The
properties and assets consisted of a parcel of land with a building and improvements
located at Salcedo St., Legaspi Village, Makati City, and covered by Transfer
Certificate of Title (TCT) Nos. 139880 and 139881. This authorization was
subsequently approved on the same day by the stockholders.[4] Maria Jacinta V. Go,

the corporate secretary, issued a Secretarys Certificate stating:

I, MARIA JACINTA V. GO, Filipino citizen, of legal age, married and with
office address at Second Floor, CENTRO building, 180 Salcedo Street, Legaspi
Village, Makati, Metro Manila, after being first duly sworn, depose and say:
xxx xxx xxx
2) That at a special meeting of the Board of Directors of the aforesaid
corporation duly called and held on March 20, 1990 and wherein a quorum was
present, the following resolution was unanimously approved pursuant to the
Minutes of the Special Meeting of the Stockholders of Centro Development
Corporation dated March 16, 1990;
RESOLUTION:
RESOLVED, as it is hereby resolved, that the President, GO ENG UY, of
Centro Development Corporation, be as he is hereby authorized to mortgage and
use as collateral the real estate property of the Corporation identified as a parcel of
land with building and improvements located at Salcedo St., Legaspi Village,
Makati, Metro Manila covered by Transfer Certificate of Title Nos. 139880 and
139881 to secure the medium-term loan of LUCKY TWO CORPORATION, a
 corporation duly organized and existing under the Philippine laws, and LUCKY
TWO REPACKING, a single proprietorship with principal office at Concepcion,
Tarlac, with the Bank of the Philippine Islands for EIGHTY FOUR (84) MILLION
PESOS, Philippine Currency (₱84,000,000.00);

RESOLVED FURTHER, that said GO ENG UY, be as he is hereby

authorized to sign all papers and documents needed and necessary to carry into
effect the aforesaid purpose or undertaking for the benefit and to the credit of Lucky
Two Corporation and Lucky Two Repacking.

Thus, on 21 March 1990, respondent Centro, represented by Go Eng Uy,

executed a Mortgage Trust Indenture (MTI) with the Bank of the Philippines
Islands (BPI).[5]Under the MTI, respondent Centro, together with its affiliates

Lucky Two Corporation and Lucky Two Repacking or Go Eng Uy, expressed
its desire to obtain from time to time loans and other credit accommodations
from certain creditors for corporate and other business purposes.[6] To secure

these obligations from different creditors, respondent Centro constituted a

continuing mortgage on all or substantially all of its properties and assets
enumerated above unto and in favor of BPI, the trustee. Should respondent

Centro or any of its affiliates fail to pay their obligations when due, the trustee
shall cause the foreclosure of the mortgaged property.

Thereafter, the mortgage was duly recorded with the Registry of Deeds of

Makati City.[7]

On 31 March 1993, 3 years after Centro and BPI amended the MTI to

allow an additional loan of ₱36 million and to include San Carlos Milling
Company, Inc. (San Carlos) as a borrower in addition to Centro, Lucky Two
Corp. and Lucky Two Repacking.[8] Then, on 28 July 1994, Centro and BPI

again amended the MTI for another loan of ₱24 million, bringing the total

obligation to ₱144 million.[9]

Meanwhile, respondent Centro, represented by Go Eng Uy, approached

petitioner Metropolitan Bank and Trust Company (Metrobank) sometime in

1994 and proposed that the latter assume the role of successor-trustee of the
existing MTI. After petitioner Metrobank agreed to the proposal, the board of
directors of respondent Centro allegedly resolved on 12 August 1994 to

constitute petitioner as successor-trustee of BPI.[10]

Thereafter, on 27 September 1994,[11] petitioner and respondent Centro

executed the assailed MTI,[12] amending the previous agreements by appointing

the former as the successor-trustee of BPI. It is worth noting that this MTI did

not amend the amount of the total obligations(144 million) covered by the
previous MTIs.

It was only sometime in 1998 that respondents herein, Chongking

Kehyeng, Manuel Co Kehyeng and Quirino Kehyeng, allegedly discovered that

the properties of respondent Centro had been mortgaged, and that the MTI
that had been executed appointing petitioner(metro bank) as trustee. Notably,
respondent Chongking Kehyeng had been a member of the board of directors of
Centro since 1989, while the two other respondents, Manuel Co Kehyeng and
Quirino Keyheng, had been stockholders since 1987. Respondents Kehyeng were
minority stockholders who owned thirty percent (30%) of the outstanding
capital stock of respondent Centro.

On different dates, 4 September 1998, 9 September 1998 and 2 October 1998,

the Kehyengs allegedly questioned the mortgage of the properties through

letters addressed to Go Eng Uy and Jacinta Go.[13] They alleged that they were
not aware of any board or stockholders meeting held on 12 August 1994, when

petitioner was appointed as successor-trustee of BPI in the MTI. Respondents

demanded a copy of the minutes of the meeting held on that date, but received

no response.

Thereafter, on 14 October 1998 and 19 November 1998, the Kehyengs

allegedly wrote to petitioner, informing it that they were not aware of the 12 August

1994 board of directors meeting. Petitioner did not respond to the letters.[14]

Meanwhile, during the period April 1998 to December 1998, San Carlos

obtained loans in the total principal amount of ₱812,793,513.23 from petitioner

Metrobank.[15]

San Carlos failed to pay these outstanding obligations despite demand.

Thus, petitioner (metrobank), as trustee of the MTI, enforced the conditions
thereof and initiated foreclosure proceedings, denominated as Foreclosure No. S-
04-11, on the mortgaged properties. On 22 June 2000, petitioner Metrobank filed
a Petition for Extrajudicial Foreclosure of Mortgage with the executive judge of
the Regional Trial Court (RTC) of Makati City. Petitioner alleged that the total

amount of the Promissory Notes that San Carlos executed in favor of the former
amounted to ₱812,793,513.23. As of 30 April 2000, the total outstanding

obligation, inclusive of interests and penalties, was ₱1,178,961,181.45. [16]

We note that there are no documents in the records evidencing the

amendment of the MTI to accommodate these additional obligations. As of 27
September 1994, the date of the last amendment as borne out by the records, the

total outstanding obligation reflected in the MTI amounted to only ₱144

million. The latest MTI merely referred to the amendments made on 31 March
1993 and 28 July 1994.

Before the scheduled foreclosure date, on 3 August 2000, respondents

herein filed a Complaint for the annulment of the 27 September 1994 MTI with

a prayer for a temporary restraining order (TRO) and preliminary injunction

at Branch 138 of the RTC of Makati City. Docketed as Civil Case No. 00-942, the

Complaint was against petitioner, Go Eng Uy, Alexander V. Go, Ramon V. Go,
Maria Jacinta Go and Enriqueto Magpantay.

The bone of contention in Civil Case No. 00-942 was that since the

mortgaged properties constituted all or substantially all of the corporate assets,

the amendment of the MTI failed to meet the requirements of Section 40 of the
Corporation Code on notice and voting requirements. Under this provision, in
order for a corporation to mortgage all or substantially all of its properties and
assets, it should be authorized by the vote of its stockholders representing at
least 2/3 of the outstanding capital stock in a meeting held for that purpose.

Furthermore, there must be a written notice of the proposed action and of the
time and place of the meeting. Thus, respondents alleged, the representation of
Go Eng Uy that he was authorized by the board of directors and/or
stockholders of Centro was false.

On 15 December 2003, after trial on the merits, the RTC dismissed the
Complaint.[17] It held that the evidence presented by respondents was

insufficient to support their claim that there were no meetings held authorizing
the mortgage of Centros properties. It noted that the stocks of respondents

Kehyeng constituted only 30% of the outstanding capital stock, while the Go
family owned the majority 70%, which represented more than the 2/3 vote
required by Section 40 of the Corporation Code. The trial court ruled that
respondents Kehyeng, particularly Chongking Kehyeng, who sat in the board
of directors, should have done periodic inquiries and verifications of documents
pertaining to corporate properties. The RTC also held that laches had attached,

considering that eight (8) years had lapsed before respondents questioned the
mortgage executed in 1990.

The trial court also noted the absence of evidence showing the steps
respondents had taken to seek redress for the alleged misrepresentations of Go Eng
Uy and Maria Jacinta Go. On the other hand, the court found that no neglect could

be imputed to petitioner for relying on the Secretarys Certificate, which

apparently established Go Eng Uys authority to mortgage Centros properties
and assets.

Respondents subsequently filed an appeal with the CA docketed as CA-

G.R. CV No. 80778. On 26 February 2004, they filed an Urgent Motion for the

Issuance of a Temporary Restraining Order and Writ of Preliminary

Injunction seeking to restrain petitioner, the clerk of court, the ex-officio sheriff
of the RTC, and their agents from foreclosing and selling at public auction on
4 and 22 March 2004 the mortgaged properties subject of Civil Case No. 00-942.

On 3 March 2004, a TRO was issued by the CA effective for a period of sixty
(60) days, unless earlier set aside by a resolution.[18]

On 19 May 2004, the CA issued a Resolution[19] in CA-G.R. CV No. 80778

denying the application for the issuance of a writ of preliminary injunction.

Not giving up, on 27 May 2004, again, respondents Centro and San Carlos
filed a Complaint docketed as Civil Case No. 04-612 at Branch 56 of the RTC of

Makati City. They prayed for the nullification of the foreclosure proceedings

and prayed for the issuance of a TRO/injunction. Centro and San Carlos
alleged that the total obligation due was only ₱657,000,000 and not

₱812,793,513.23; that the sale of the San Carlos properties found in Negros
Occidental fully satisfied their outstanding obligations; and that the action to
foreclose the Makati properties was illegal and void.[20]
 While Civil Case No. 04-612 was pending, the clerk of court and the ex-

officio sheriff of the RTC of Makati City held an auction sale of the disputed

property, during which petitioner (metrobank) was adjudged as the highest

bidder for ₱344,700,000. A Certificate of Sale was accordingly issued on 3 June
2004, which states:[21]
On June 2, 2004, a public auction sale was conducted and
METROPOLITAN BANK & TRUST CO. submitted a bid for the sale to him/it of
the mortgaged property in the amount of ₱344,700,000 xxx, which was the highest
bid hence declared as the winning bidder and being the creditor he/it did not
delivery or pay cash/monies to the Clerk of Court and Ex-Officio Sheriff the bid
price of ₱344,700,000 xxx and the selling price was credited as partial/full
satisfaction of indebtedness secured by the mortgage.
In consideration thereof, the Certificate of Sale was issued in favor of
METROPOLITAN BANK& TRUST CO. of Metrobank Plaza, Sen. Gil Puyat
Ave., Makati.
This sale is subject to redemption in the manner provided by law.

Because of this development, the Complaint in Civil Case No. 04-612 was
amended, and Centro and San Carlos, then, prayed for the issuance of a writ of

injunction to prevent the registration of the Certificate of Sale and the

subsequent transfer to petitioner of the title to the properties. However, Branch

56 of the RTC of Makati City subsequently denied the application.

Respondent Centro thereafter filed before the CA a Petition for Certiorari

docketed as CA-G.R. SP No. 84447. The Petition assailed the Order of the RTC in

Civil Case No. 04-612.

 During this time, CA-G.R. CV No. 80778, which involved the legality of

the MTI, was still pending.

On 30 August 2007, the CA promulgated the assailed Decision in CA-G.R.

CV No. 80778. The appellate court first determined whether the requirements

of Section 40 of the Corporation Code on the sale of all or substantially all of

the corporations property were complied with. Based on the 18 August 1994

Secretarys Certificate, the CA found that only a quorum was present during
the stockholders meeting on 12 August 1994. The appellate court thus held that

the 2/3 vote required by Section 40 was not met. It ruled that the minority
stockholders were deprived of their right to dissent from or to approve the
proposed mortgage, considering that they had not been notified in writing of

the meeting in which the corporate action was to be discussed.

The CA also considered the testimony of Perla Saballe, an officer of petitioner

Metrobank, who opined that the term quorum meant only the majority of the

stockholders.

Furthermore, the appellate court held that petitioner was duty-bound to

ensure that respondent Centro submitted proof that the proposed corporate

action had been duly approved by a vote of the stockholders representing 2/3 of
the outstanding capital stock.
 Regarding the issue of whether laches had already attached, the CA ruled
that the MTI could not be ratified, considering that the requirements of the

Corporation Code were not complied with.

Thus, the dispositive portion of the CA Decision in CA-G.R. CV No. 80778

reads:[22]

WHEREFORE, the Appeal is PARTIALLY

GRANTED. The Judgment dated 15 December 2003 of the Regional Trial Court of
Makati City, Branch 138, is REVERSED and SET ASIDE insofar as the dismissal
of the Complaint for Annulment of Trust Indenture Agreement is concerned. The
Trust Indenture executed on 27 September 1994 is hereby
declared NULL and VOID. Accordingly, the foreclosure of the mortgage and the
sale at public auction involving the subject properties are declared of no force and
effect. The certificates of title issued in the name of Metropolitan Bank and Trust
Company are CANCELLED.
Conformably with the foregoing discussion, the appellants prayer for
damages is hereby DENIED.
SO ORDERED.

On 14 September 2007, a different Division of the CA rendered a

Decision[23] denying the Petition in CA-G.R. SP No. 84447. That Petition had
questioned the Decision of Branch 56 of the RTC of Makati City denying a Petition
to enjoin the foreclosure of the mortgaged properties on the ground that respondents

Centro and San Carlos had failed to show any clear right of the RTC to issue an
injunctive writ. The CA further ruled that the foreclosure of the property

became a matter of right on the part of petitioner because of respondents failure

to pay the loans due.

 On 26 November 2007, the CA in CA-G.R. CV No. 80778 rendered the

assailed Resolution denying petitioners Motion for Reconsideration.

Hence, this Petition.

Contention of the petitioner:

Petitioner contends that the stockholders Resolution No. 005, s. 1994 did
not constitute a new mortgage in favor of petitioner. Instead, the stockholders
merely amended the existing MTI by appointing petitioner as the new trustee
for the MTI, which was already existing and held by BPI. Thus, there was no

need to secure a 2/3 vote from the stockholders. Petitioner posits that the
authority to mortgage the properties was granted in 1990, upon the execution
of the first MTI between respondent Centro and BPI.

Further, petitioner alleges that respondents do not deny or question the

previous MTI and its subsequent amendments. It further alleges that the

constituted mortgage under the MTI was duly annotated with the Registry of

Deeds of Makati City.

Petitioner also maintains that the CA erred in interpreting the phrase at

which meeting a quorum was present contained in the Secretarys Certificate

dated 18 August 1994. The bank points out that the phrase indicates that at
least a quorum was present, rather than that only a quorum was present. Thus,
the Secretarys Certificate did not in any way limit the number of those actually
present.

Additionally, petitioner argues that Perla Saballe, whose testimony was

considered by the CA, was not a competent witness to interpret the directors
Resolution. Allegedly, she was never present during the meetings of Centro

regarding the present issue, and she was not in a position to answer the
questions propounded to her in relation to the requirements of Section 40 of the
Corporation Code.

Moreover, petitioner cites the CA Decision in CA-G.R. SP No. 84447,

which upheld the validity of the foreclosure of the mortgage. It also challenges
the CA ruling that the former failed to exercise due diligence in transacting with

respondent Centro. Finally, petitioner insists that laches attached when

respondents failed to question the MTI and the stockholders Resolution at the
earliest possible time.

Contention of the respondent.On the other hand, respondents contend

that, based on the Pre-Trial Brief and the Amended Pre-Trial Order, petitioner
admitted that the subject properties were mortgaged under the MTI of 27 September

1994, and not under that of 21 March 1990.

Second, on the issue of whether the 2/3 voting requirement was met,

respondents claim that petitioner cannot impugn the testimony of its own
officer and witness, Perla Saballe, on the interpretation of the term quorum as
referred to in the Secretarys Certificate dated 18 August 1994.

Respondents also allege that petitioner failed to controvert the testimony

of Chongking Kehyeng, a member and vice-chairperson of the board of

directors, that he was unaware of any stockholders meeting ever being held,

and that he and the other Kehyengs were not informed of that meeting.
Respondents further insist that petitioner was negligent when it merely relied on

the Secretarys Certificate, instead of exercising due diligence to ensure that all
legal requirements had been complied with under the MTI. On the issue of

laches, respondents contend that it was not raised before the trial court, and is
thus improperly invoked in the present Petition. Nevertheless, they allegedly

undertook a number of measures to question the transactions between petitioner and

CENTRO. Moreover, they argue that the MTI, being null and void, cannot be given
effect through laches.

The Courts Ruling

In summary, this Court is tasked to resolve the following issues:

1. Whether the requirements of Section 40 of the Corporation Code

was complied with in the execution of the MTI;

2. Whether petitioner was negligent or failed to exercise due

diligence;
 3. Whether laches has already attached, such that respondents can
no longer question the MTI.

We shall first discuss the issue of laches.

#3. Laches is defined as the failure or neglect for an unreasonable and

unexplained length of time to do that which, by exercising due diligence, could
or should have been done earlier; it is negligence or omission to assert a right
within a reasonable time, warranting a presumption that the party entitled to

assert it either has abandoned it or declined to assert it.[24]

In the case at bar, the RTC in Civil Case No. 00-942 held that laches

attached when respondents allowed eight (8) years to pass before questioning
the mortgage, which was constituted in 1990. Thus, the trial court said:

As it appears now, the mortgage on the land and building of Centro was first
constituted in 1990 in favor of [the] Bank of the Philippine Islands. Individual
plaintiffs stated that discovery of the mortgage was sometime in 1998, (par. 6,
Affidavit of Chongking Kehyeng). He was in the Board of Directors of Centro and
he holds office at the fourth floor of the building on the mortgaged property. There
is evidence that the holding of meetings of the Board of Directors was irregular and
purely reportorial.
Considering that as shown by planitiffs evidence, conduct of business in
Centro was informal, vigilance over its property was required from all individual
plaintiffs, particularly plaintiff Chongking Kehyeng who sits in the Board of
Directors. Periodic inquiries and verification of documents pertaining to corporate
properties should have been done and the existence of the mortgage was verifiable.
A simple inquiry about the status of the title, information on the title number and
actual verification with the Register of Deeds a task which can be accomplished in
an hour or two will provide information about the existence of the mortgage. None
of the individual plaintiffs did this.
The inaction of the plaintiffs for which no explanation was submitted resulted
in the acquisition of rights by the defendant Bank adverse to them. Such neglect,
 taken in conjunction with the lapse of time of about eight (8) years operates as a
bar.[25]

A perusal of the TCTs[26] of the subject properties would reveal that only
the values of the mortgage securing the loans totalling ₱144 million were

annotated, based on the MTIs executed on 21 March 1990, 31 March 1993 and
28 July 1994. As for the last annotation, it only stated that petitioner was the
successor-trustee to all obligations due to the creditors. Respondents, in their
Complaint, did not question these mortgages constituted by the MTIs executed
on 21 March 1990, 31 March 1993 and 28 July 1994, respectively. What they
questioned was the additional loans granted to San Carlos after the execution of the
27 September 1994 MTI and the foreclosure of the mortgage resulting from the
nonpayment of San Carlos obligations. Thus, contrary to the finding of the trial

court, only four years had lapsed from the execution of the 27 September 1994
MTI when respondents questioned the mortgage allegedly constituted to cover
these loans.

Furthermore, as mentioned earlier, the TCTs were not accordingly annotated

to cover these additional loans. Also, the mortgage of the property securing all

the loans were not disclosed in Centros financial statements for the years 1991
to 1998.[27] Thus, absent any proof that the individual respondents were notified
of the stockholders meeting on 12 August 1994 or that they were present during
the meeting, these respondents could not have been informed of the alleged
additional loans and the corresponding mortgage constituted over the
properties.

It cannot therefore be said that laches had attached and that respondents
were already barred from assailing the MTI in 1998. We now proceed to discuss
the validity of the challenged MTI.

The 18 August 1994 Secretarys Certificate issued by Maria Jacinta V. Go

reads as follows:[28]

I, JACINTA V. GO, Corporate Secretary of CENTRO DEVELOPMENT

CORPORATION, a corporation duly organized and existing under our laws with principal
office located at the 2ndFloor Centro Buidling, 180 Salcedo St., Legaspi Village, Makati,
Metro Manila, do hereby certify that during a special meeting of the board of Directors of
the Corporation held at its main office in Makati, Metro Manila on August 12, 1994, at
3:00 p.m., at which meeting a quorum was present, the following resolution was approved
and adopted:
Resolution No. 005, s. 1994
APPOINTING METROBANK TRUST BANKING GROUP AS
THE NEW TRUSTEE FOR THE EXISTING MTI OF CDC REAL
ESTATE PROPERTY
RESOLVED, AS IT IS HEREBY RESOLVED, that in connection
with the existing Mortgage Trust Indenture of real estate property covered
by Transfer Certificate of Title Nos. 139880 and 139881 situated at 180
Salcedo St., Legaspi Village, Makati, Metro Manila, with an area of 1,608
square meters more or less, the Corporation be [sic], as it is hereby
authorized, to appoint Metrobank Trust Banking Group (Metrobank) as the
new trustee for the existing mortgage trust indenture presently held by the
Bank of the Philippines Islands;
RESOLVED FURTHER, that the President, Mr. Go Eng Uy be, as
he is hereby, authorized and empowered to sign the Real Estate Mortgage
and all documents/instruments with the said bank, for and in behalf of the
Company which are necessary and pertinent thereto;
 RESOLVED FINALLY, that any resolution or resolutions
heretofore adopted by this Board, inconsistent with the provisions hereof
be, as they hereby are amended and/or revoked accordingly.
That at the meeting of the Stockholders of said corporation held on August
12, 1994 at 4:00 p.m., at which meeting a quorum was present and acting
throughout, the following resolution was unanimously approved:

STOCKHOLDERS RESOLUTION
RESOLVED, that the stockholders approve, ratify and confirm, as
they have hereby approved, ratified and confirmed, the board resolution
dated August 12, 1994 appointing Metrobank Trust Banking Group as the
new trustee, presently held by the Bank of the Philippine Islands, for the
existing MTI of real estate property covered by Transfer Certificate of Title
Nos. 139880 and 139881 situated at 180 Salcedo St., Legaspi Village,
Makati, Metro Manila with an area of 1,608 square meters, and that the
President, Mr. Go Eng Uy[,] to sign the Real Estate Mortgage and all
documents/ instruments with the said bank, for and in behalf of the
Company which are necessary and pertinent thereto; xxx.

Reading carefully the Secretarys Certificate, it is clear that the main

purpose of the directors Resolution was to appoint petitioner as the new trustee
of the previously executed and amended MTI. Going through the original and
the revised MTI, we find no substantial amendments to the provisions of the
contract. We agree with petitioner that the act of appointing a new trustee of
the MTI was a regular business transaction. The appointment necessitated only
a decision of at least a majority of the directors present at the meeting in which
there was a quorum, pursuant to Section 25 of the Corporation Code.

The second paragraph of the directors Resolution No. 005, s. 1994, which
empowered Go Eng Uy to sign the Real Estate Mortgage and all
documents/instruments with the said bank, for and in behalf of the Company which
are necessary and pertinent thereto, must be construed to mean that such power was
limited by the conditions of the existing mortgage, and not that a new mortgage was

thereby constituted.

Moreover, it is worthy to note that respondents do not assail the previous

MTI executed with BPI. They do not question the validity of the mortgage

constituted over all or substantially all of respondent Centros assets pursuant

to the 21 March 1994 MTI in the amount of ₱84 million. Nor do they question
the additional loans increasing the value of the mortgage to ₱144 million; or the

use of Centros properties as collateral for the loans of San Carlos, Lucky Two
Corporation, and Lucky Two Repacking.

Thus, Section 40[29] of the Corporation Code finds no application in the

present case, as there was no new mortgage to speak of under the assailed
directors Resolution.

Nevertheless, while we uphold the validity of the stockholders Resolution

appointing Metrobank as successor-trustee, this is not to say that we uphold the

validity of the extrajudicial foreclosure of the mortgage.

After a careful review of the records of this case, we find that petitioner
failed to establish its right to be entitled to the proceeds of the MTI.
 There is no evidence that petitioner, as creditor or as trustee, had a cause
of action to move for the extrajudicial foreclosure of the subject properties

mortgaged under the MTI.

The conditions of the MTI are very clear. Section 3.3 of the MTI provides: [30]

It is the intent of the COMPANY that the BORROWERS will obtain additional
loans or credit accommodations from certain other banking or financial institutions in
accordance with arrangements made by the BORROWERS with the CREDITORS.

ALL OBLIGATIONS covered by this INDENTURE shall be evidenced by

a Mortgage Participation Certificate in the form of Schedule II hereof, the
issuance of which by the TRUSTEE to the participating CREDITOR/S shall be
in accordance with Section 7 of this INDENTURE, provided the aggregate LOAN
VALUES of the COLLATERAL, based on the latest appraisal thereof, are not
exceeded. (Emphasis supplied.)

Section 1.11 of the MTI defines a Mortgage Participation Certificate (MPC)

as a certificate issued by the trustee to a creditor pursuant to the MTI, representing
an aliquot interest in the mortgage created by the MTI. The face amount of the MPC

is the value in money of its holders participation or interest in the mortgaged

property.

To address the gaps in the facts as presented by the parties and by the lower
courts, we issued a Resolution[31] on 5 September 2011. We required petitioner to
submit, among others, all amendments to the MTI and all the MPCs issued.
Petitioner failed to comply with this directive. For one reason or another, instead of

submitting MPCs evidencing its interest in the MTI, it submitted to this Court
documents referring to different instruments altogether. [32] Petitioner should have
been more careful in complying with this Courts Orders.

More glaring is the fact that the assailed MTI is not even referred to in the
Promissory Notes executed by petitioner in favor of San Carlos, evidencing the loans
extended by the latter to the former. This omission violated Section 1.13 of the MTI,

which requires that a promissory note must be covered by an outstanding MPC and
secured by the lien of the MTI. The Promissory Notes reveal the following:[33]
Promissory Note No. Date Amount Collateral
111333.69288.00.999 20 April 1998 ₱328,000,000 Others Not
specified
111333.70316.00.999 19 October 1998 ₱97,859,472.03 Unsecured
111333.70359.00.999 30 October 1998 ₱82,849,981.44 Others Not
specified
111333.70464.000.99 17 November 1998 ₱98,114,959.13 Others Not
specified
111333.70502.000.99 25 November 1998 ₱40,150,059.85 Others Not
specified
111333.70618.000.99 9 December 1998 ₱39,673,569.58 Others Not
specified
111333.70642.000.99 17 December 1998 ₱126,145,471.20 Others Not
specified

Petitioner thus miserably failed to prove that it was entitled to the benefits of

the MTI.

Even if we assume that petitioner was indeed a creditor protected by the

MTI, we find that, as trustee and as creditor, it failed to comply with the MTIs

conditions for granting additional loans to San Carlos additions that brought
the total loan amount to ₱1,178,961,181.45 when it did not amend the MTI to
accommodate the additional loans in excess of ₱144 million.

In its application for an extrajudicial foreclosure of Centros properties,

petitioner states:[34]

We have the honor to request your good Office to conduct/undertake

extrajudicial foreclosure sale proceedings under Act No. 3135, as amended, and other
applicable laws, on the properties covered by the Mortgage Trust Indenture, dated
March 21, 1990, as amended on March 31, 1993 and further amended on July 28, 1994
executed by the Mortgagor, CENTRO DEVELOPMENT CORPORATION, in favor of
the Former Trustee, BANK OF THE PHILIPPINE ISLANDS and Trust Indenture,
dated September 27, 1994, also executed by the Mortgagor, CENTRO
DEVELOPMENT CORPORATION, in favor of
the Mortgagee/Trustee, METROPOLITAN BANK AND TRUST COMPANY-TRUST
BANKING GROUP, to secure among others, several obligations of SAN CARLOS
MILLING CO., INC. under various Promissory Notes, with a total principal amount
of EIGHT HUNDRED TWELVE MILLION SEVEN HUNDRED NINETY-
THREE THOUSAND FIVE HUNDRED THIRTEEN PESOS AND TWENTY-
THREE CENTAVOS (₱812,793,513.23), for breach of the terms and conditions of
the said Trust Indenture. (Emphasis in the original.)

However, Section 9.4 of the 27 September 1994 MTI clearly states:[35]

The written consent of the COMPANY, the TRUSTEE and all the
CREDITORS shall be required for any amendment of the terms and conditions
of this INDENTURE. Additional loans which will be covered by the
INDENTURE shall require the written consent of the MAJORITY
CREDITORS and shall be within the loan value stipulated in Section 1.8 [36] of
this INDENTURE. (Emphasis supplied.)

The fact that the foreclosure of the mortgaged property was undertaken
pursuant to the 27 September 1994 MTI is an indication that the parties had failed
to amend it accordingly.
 Because the 27 September 1994 MTI was not amended to secure the loan
granted to the debtors, petitioner could not have applied for an extrajudicial

foreclosure on the basis of all the Promissory Notes granted to San Carlos.
Instead, petitioner could have only applied for the foreclosure of the property
corresponding to ₱144 million, which was the maximum amount embodied in

the 27 September 1994 MTI. In other words, as an accommodation debtor,

Centros properties may not be liable for San Carlos debts beyond this
maximum amount, pursuant to the MTI executed with petitioner. In Caltex

Philippines v. Intermediate Appellate Court,[37] we likewise held that the value of

the mortgage should be limited only to the amount provided by the contract
between the parties.

Section 4 of Rule 68 of the Rules of Court provides:

Disposition of proceeds of sale - The amount realized from the foreclosure sale
of the mortgaged property shall, after deducting the costs of the sale, be paid to the
person foreclosing the mortgage, and when there shall be any balance or residue, after
paying off the mortgage debt due, the same shall be paid to junior encumbrancers in
the order of their priority, to be ascertained by the court, or if there be no such
encumbrancers or there be a balance or residue after payment to them, then to the
mortgagor or his duly authorized agent, or to the person entitled to it.

While it is true that some of the documents required by this Court to be

submitted by the parties were not presented at the trial stage, when the legal issues
raised begs the reception of that evidence especially considering that a case, like the
present one has been pending for more than a decade then the Court may require the
parties to submit such evidence in the interest of justice. This is clearly provided
under Rule 45, Section 7 of the Rules of Court.[38]

On a final note, Republic Act No. 8971, or the General Banking Law of 2000,
recognizes the vital role of banks in providing an environment conducive to the
sustained development of the national economy and the fiduciary nature of banking;

thus, the law requires banks to have high standards of integrity and performance.
The fiduciary nature of banking requires banks to assume a degree of diligence
higher than that of a good father of a family.[39] In the case at bar, petitioner itself
was negligent in the conduct of its business when it extended unsecured loans to the
debtors. Worse, it was in serious breach of its duty as the trustee of the MTI. It was
not able to protect the interests of the parties and was even instrumental in violating

the terms of the MTI, to the detriment of the parties thereto. Thus, petitioner has only
itself to blame for being left with insufficient recourse against petitioner under the
assailed MTI.

WHEREFORE, in view of the foregoing, the Petition is hereby PARTLY

GRANTED. The Mortgage Trust Indenture is declared VALID. Nonetheless, for
reasons stated herein, the Decision of the Court of Appeals in CA-G.R. CV No.

80778, declaring the foreclosure proceedings in Foreclosure No. S-04-011 over TCT
Nos. 139880 and 139881 of no force and effect, is AFFIRMED. Likewise, the
cancellation of the Certificates of Title in the name of petitioner Metropolitan Bank
and Trust Company and the denial of the payment of damages are also AFFIRMED.
 SO ORDERED.

MARIA LOURDES P. A. SERENO

Associate Justice

WE CONCUR:

ANTONIO T. CARPIO
Senior Associate Justice
Chairperson

ARTURO D. BRION JOSE PORTUGAL PEREZ

Associate Justice Associate Justice

BIENVENIDO L. REYES
Associate Justice

CERTIFICATION
I certify that the conclusions in the above Decision had been reached in consultation
before the case was assigned to the writer of the opinion of the Courts Division.

ANTONIO T. CARPIO
Senior Associate Justice
(Per Section 12, R.A. 296,
The Judiciary Act of 1948, as amended)

[1]
Rollo, pp. 47-82.
[2]
Penned by Associate Justice Japar B. Dimaampao, with Associate Justices Mario L. Guaria III and Romeo F. Barza
concurring; rollo, pp. at 84-99.
[3]
Rollo, pp. 101-102.
[4]
Id. at 141.
[5]
Id. at 110-130.
[6]
First WHEREAS clause of the MTI.
[7]
Rollo, pp. 1109-1114.
[8]
Id. at 131-135.
[9]
Id. at 136-138. The pertinent provision of the Supplemental Indenture provides:
SECTION 1 GRANT OF ADDITIONAL MORTGAGE
1.1 The Company does hereby establish and constitute in favor of the Trustee, acting in behalf and
for the benefit of all the Creditors secured by the Indenture, as amended by this Supplemental
Indenture, a continuing first real estate mortgage and security interest in and to the land, building
and other improvements covered by Transfer Certificates of Title Nos. 139880 and 139881 of the
Registry of Deeds for the Province of Rizal, to secure the amount of PESOS: TWENTY FOUR
MILLION (₱24,000,000), Philippine Currency, in addition to the existing mortgage obligation
of ₱120,000,000 or an aggregate total mortgage obligation of ₱144,000,000.
[10]
Rollo, pp. 139-140.
[11]
The MTI itself is undated, but the parties and the lower courts refer to the document according to the date when it
was notarized, that is, on 27 September 1994.
[12]
Rollo, pp. 142-168.
[13]
Appellants Brief, rollo, pp. 228-229.
[14]
Id. at 229.
[15]
Rollo, pp. 1042-1056.
[16]
Id. at 1115-1119.
[17]
Id. at 169-174.
[18]
Id. at. 595.
[19]
Id. at 595-599.
[20]
Id. at 188-189.
[21]
Id. at 1130.
[22]
Rollo, pp. 98-99.
[23]
Id. at 182-197; penned by Associate Justice Ramon M. Bato, Jr., with Associate Justices Andres B. Reyes, Jr. and
Jose C. Mendoza concurring.
[24]
Municipality of Carcar v. Court of First Instance of Cebu, 204 Phil.719 (1982).
[25]
Rollo, p. 174.
[26]
Id. at 1109-1114.
[27]
Id. at 924-969.
[28]
Id. at 139-140.
[29]
Sec. 40. Sale or other disposition of assets. - Subject to the provisions of existing laws on illegal combinations and
monopolies, a corporation may, by a majority vote of its board of directors or trustees, sell, lease, exchange, mortgage,
pledge or otherwise dispose of all or substantially all of its property and assets, including its goodwill, upon such terms
and conditions and for such consideration, which may be money, stocks, bonds or other instruments for the payment
of money or other property or consideration, as its board of directors or trustees may deem expedient, when authorized
by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or in case of non-
stock corporation, by the vote of at least to two-thirds (2/3) of the members, in a stockholders or members meeting
duly called for the purpose. Written notice of the proposed action and of the time and place of the meeting shall be
addressed to each stockholder or member at his place of residence as shown on the books of the corporation and
deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting
stockholder may exercise his appraisal right under the conditions provided in this Code.
A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if
thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for
which it was incorporated.
After such authorization or approval by the stockholders or members, the board of directors or trustees may,
nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage, pledge or other disposition of property
and assets, subject to the rights of third parties under any contract relating thereto, without further action or approval
by the stockholders or members.
Nothing in this section is intended to restrict the power of any corporation, without the authorization by the
stockholders or members, to sell, lease, exchange, mortgage, pledge or otherwise dispose of any of its property and
assets if the same is necessary in the usual and regular course of business of said corporation or if the proceeds of the
sale or other disposition of such property and assets be appropriated for the conduct of its remaining business.
In non-stock corporations where there are no members with voting rights, the vote of at least a majority of
the trustees in office will be sufficient authorization for the corporation to enter into any transaction authorized by this
section.
[30]
Rollo, p. 147.
[31]
Id, at 916.
[32]
Rollo, pp. 1139-1160. Petitioner submitted these four MPCs:
1. MPC No. 1, series of 1998 for ₱6.4 million was issued pursuant to a MTI dated 23 March 1998 referring
to a loan extended by Solidbank Corporation to San Carlos in the amount of ₱105.5 million.
2. MPC No. 2, series of 1998 for ₱6.4 million was issued pursuant to a MTI dated 23 March 1998 referring
to a loan extended by United Coconut Planters Bank to San Carlos in the amount of ₱105.5 million.
3. MPC No. 3, series of 1998 for ₱2.2 million was issued pursuant to a MTI dated 23 March 1998 referring
to a loan extended by China Banking Corporation to San Carlos in the amount of ₱105.5 million.
4. MPC No. 4, series of 1998 for ₱642 million was issued pursuant to a MTI dated 23 March 1998 referring
to a loan extended by petitioner to San Carlos in the amount of ₱642 million.
Petitioner also submitted Deeds of Assignment whereby creditors of San Carlos assigned to the former on 8
and 22 June 2001, respectively, the latters rights to the loans. However, these deeds referred to an MTI dated 17 July
1991.
[33]
Rollo, pp. 1042-1056.
[34]
Id. at 1036.
[35]
Id. at 161.
[36]
LOAN VALUE shall mean, with respect to the real properties, 70% of the aggregate sound value thereof used as
collateral under this Indenture.
Note that under Section 1.15 of the MTI, sound value is meanwhile defined as the cost of reproduction of the collateral,
less depreciation (or in the case of land, the fair market value thereof), as determined by an independent appraiser
mutually acceptable to the debtor, the trustee and the majority creditors, in accordance with generally accepted
principles of appraisal of the Republic of the Philippines; rollo, p. 143.
[37]
257 Phil. 753 (1989).
[38]
SECTION 7. Pleadings and documents that may be required; sanctions. For purposes of determining whether the
petition should be dismissed or denied pursuant to Section 5 of this Rule, or where the petition is given due course
under Section 8 hereof, the Supreme Court may require or allow the filing of such pleadings, briefs, memoranda or
documents as it may deem necessary within such periods and under such conditions as it may consider appropriate,
and impose the corresponding sanctions in case of non-filing or unauthorized filing of such pleadings and documents
or non-compliance with the conditions therefor.
[39]
Philippine Banking Corp. v. Court of Appeals, 464 Phil. 614 (2004).

THIRD DIVISION

SOLIDBANK CORPORATION (now G.R. No. 159460

known as FIRST METRO INVESTMENT
CORPORATION),
Petitioner,

- versus -

ERNESTO U. GAMIER, ELENA R.

CONDEVILLAMAR, JANICE L.
ARRIOLA and OPHELIA C. DE
GUZMAN,
Respondents.

x- - - - - - - - - - - - - - - - - - - - - - - - - -x

SOLIDBANK CORPORATION and/or G.R. No. 159461

its successor-in-interest, FIRST METRO
INVESTMENT CORPORATION, Present:
DEOGRACIAS
N. VISTAN AND CARPIO MORALES, J.,
EDGARDO MENDOZA, JR., Chairperson,
Petitioners, BRION,
BERSAMIN,
VILLARAMA, JR., and
- versus - SERENO, JJ.

SOLIDBANK UNION AND ITS

DISMISSED OFFICERS AND Promulgated:
MEMBERS, namely: EVANGELINE J.
GABRIEL, TERESITA C. LUALHATI,
ISAGANI P. MAKISIG, REY S. PASCUA, November 15, 2010
EVELYN A. SIA, MA. VICTORIA M.
VIDALLON, AUREY A. ALJIBE, REY
ANTHONY M. AMPARADO, JOSE A.
ANTENOR, AUGUSTO
D. ARANDIA, JR., JANICE L. ARRIOLA,
RUTH SHEILA MA. BAGADIONG,
STEVE D. BERING, ALAN ROY I.
BUYCO, MANALO T. CABRERA,
RACHE M. CASTILLO, VICTOR O.
CHUA, VIRGILIO Y. CO, JR.,
LEOPOLDO S. DABAY, ARMAND V.
DAYANG-HIRANG, HUBERT V.
DIMAGIBA, MA. LOURDES CECILIA B.
EMPARADOR, FELIX D. ESTACIO, JR.,
JULIETA T. ESTRADA, MARICEL G.
EVALLA, JOSE G. GUISADIO, JOSE
RAINARIO C. LAOANG, ALEXANDER
A. MARTINEZ, JUAN ALEX C.
NAMBONG, JOSEPHINE M. ONG,
ARMANDO B. OROZCO, ARLENE R.
RODRIGUEZ, NICOMEDES P. RUIZO,
JR., DON A. SANTANA, ERNESTO R.
SANTOS, JR., EDNA M. SARONG,
GREGORIO S. SECRETARIO, ELLEN
M. SORIANO, ROSIE C. UY, ARVIN
D.VALENCIA, FERMIN JOSSEPH B.
VENTURA, JR., EMMANUEL C.
YAPTANCO, ERNESTO C. ZUNIGA,
ARIEL S. ABENDAN, EMMA R.
ABENDAN, PAULA AGNES A.
ANGELES, JACQUILINE B.
BAQUIRAN, JENNIFER S. BARCENAS,
ALVIN E. BARICANOSA, GEORGE
MAXIMO P. BARQUEZ, MA. ELENA G.
BELLO, RODERICK M. BELLO,
MICHAEL MATTHEW B. BILLENA,
LEOPE L. CABENIAN, NEPTALI A.
CADDARAO, FERDINAND MEL
S. CAPULING, MARGARETTE
B. CORDOVA, MA. EDNA V. DATOR,
RANIEL C. DAYAO, RAGCY L. DE
GUZMAN, LUIS E. DELOS SANTOS,
CARMINA
M. DEGALA, EPHRAIM RALPH A.
DELFIN, KAREN
M. DEOCERA, CAROLINA C. DIZON,
MARCHEL S. ESQUEJJO, JOCELYN
I.ESTROBO, MINERVA S. FALLARME,
HERNANE C.FERMOCIL, RACHEL B.
FETIZANAN, SAMUEL A.
FLORENTINO, MENCHIE
R.FRANCISCO, ERNESTO U. GAMIER,
MACARIO RODOLFO N. GARCIA,
JOEL S. GARMINO, LESTER MARK Z.
GATCHALIAN, MA. JINKY
P. GELERA, MA. TERESA G.
GONZALES, GONZALO G. GUINIT,
EMILY H. GUINO-O, FERDINAND S.
HABIJAN, JUN G.
HERNANDEZ, LOURDES D. IBEAS, MA.
ANGELA L. JALANDONI, JULIE T.
JORNACION, MANUEL C. LIM,
MA. LOURDES A. LIM, EMERSON V.
LUNA, NOLASCO
B. MACATANGAY, NORMAN C.
MANACO, CHERRY LOU B.
MANGROBANG, MARASIGAN G.
EDMUNDO, ALLEN M. MARTINEZ,
EMELITA C.MONTANO, ARLENE P.
NOBLE, SHIRLEY A. ONG, LOTIZ E.
ORTIZ LUIS, PABLITO M. PALO,
MARY JAINE D. PATINO, GEOFFREY
 T. PRADO, OMEGA MELANIE M.
QUINTANO, ANES A. RAMIREZ,
RICARDO D. RAMIREZ, DANIEL O.
RAQUEL, RAMON B.
REYES, SALVACION N. ROGADO,
ELMOR R. ROMANA, JR., LOURDES U.
SALVADOR,ELMER S. SAYLON,
BENHARD E. SIMBULAN, MA. TERESA
S. SOLIS, MA. LOURDES ROCEL E.
SOLIVEN, EMILY C. SUY AT, EDGAR
ALLAN P. TACSUAN, RAYMOND N.
TANAY, JOCELYN Y. TAN,
CANDIDO G. TISON, MA. THERESA O.
TISON, EVELYN T. UYLANGCO,
CION E. YAP, MA. OPHELIA C.
DE GUZMAN, MA. HIDELISA P. IRA,
RAYMUND MARTIN A. ANGELES,
MERVIN S. BAUTISTA, ELENA R.
CONDEVILLAMAR, CHERRY T. CO,
LEOPOLDO V. DE LA ROSA,
DOROTEO S. FROILAN, EMMANUEL
B. GLORIA, JULIETEL JUBAC AND
ROSEMARIE L. TANG,
Respondents.
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x

DECISION

VILLARAMA, JR., J.:

The consolidated petitions before us seek to reverse and set aside the
Decision[1] dated March 10, 2003 of the Court of Appeals (CA) in CA-G.R. SP Nos.
67730 and 70820 which denied the petitions for certiorari filed by Solidbank
Corporation (Solidbank) and ordered the reinstatement of the above-named
individual respondents to their former positions.

The Antecedents
Sometime in October 1999, petitioner Solidbank and respondent Solidbank
Employees Union (Union) were set to renegotiate the economic provisions of their
1997-2001 Collective Bargaining Agreement (CBA) to cover the remaining two
years thereof. Negotiations commenced on November 17, 1999 but seeing that an
agreement was unlikely, the Union declared a deadlock on December 22, 1999 and
filed a Notice of Strike on December 29, 1999.[2] During the collective bargaining
negotiations, some Union members staged a series of mass actions. In view of the
impending actual strike, then Secretary of Labor and Employment Bienvenido E.
Laguesma assumed jurisdiction over the labor dispute, pursuant to Article 263 (g) of
the Labor Code, as amended. The assumption order dated January 18, 2000 directed
the parties to cease and desist from committing any and all acts that might exacerbate
the situation.[3]

In his Order[4] dated March 24, 2000, Secretary Laguesma resolved all economic and
non-economic issues submitted by the parties, as follows:
WHEREFORE, premises considered, judgment is hereby issued:

a. Directing Solidbank Corporation and Solidbank Union to conclude their

Collective Bargaining Agreement for the years 2000 and 2001,
incorporating the dispositions above set forth;

b. Dismissing the unfair labor practice charge against Solidbank Corporation;

c. Directing Solidbank to deduct or check-off from the employees lump sum

payment an amount equivalent to seven percent (7%) of their economic
benefits for the first (1st) year, inclusive of signing bonuses, and to remit
or turn over the said sum to the Unions authorized representative,
subject to the requirements of check-off;

d. Directing Solidbank to recall the show-cause memos issued to employees

who participated in the mass actions if such memos were in fact issued.

SO ORDERED.[5]

Dissatisfied with the Secretarys ruling, the Union officers and members decided to
protest the same by holding a rally infront of the Office of the Secretary of Labor
and Employment in Intramuros, Manila, simultaneous with the filing of their motion
for reconsideration of the March 24, 2000 Order. Thus, on April 3, 2000, an
overwhelming majority of employees, including the individual respondents, joined
the mass leave and protest action at the Department of Labor and Employment
(DOLE) office while the banks provincial branches in Cebu, Iloilo, Bacolod and
Naga followed suit and boycotted regular work.[6] The union members also picketed
the banks Head Office in Binondo on April 6, 2000, and Paseo de Roxas branch
on April 7, 2000.

As a result of the employees concerted actions, Solidbanks business

operations were paralyzed. On the same day, then President of Solidbank,
Deogracias N. Vistan, issued a memorandum[7] addressed to all employees calling
their absence from work and demonstration infront of the DOLE office as an illegal
act, and reminding them that they have put their jobs at risk as they will be asked to
show cause why they should not be terminated for participating in the union-
instigated concerted action. The employees work abandonment/boycott lasted for
three days, from April 3 to 5, 2000.

On the third day of the concerted work boycott (April 5, 2000), Vistan issued
another memorandum,[8] this time declaring that the bank is prepared to take back
employees who will report for work starting April 6, 2000 provided these employees
were/are not part of those who led or instigated or coerced their co-employees into
participating in this illegal act. Out of the 712 employees who took part in the three-
day work boycott, a total of 513 returned to work and were accepted by the bank. The
remaining 199 employees insisted on defying Vistans directive, which included
herein respondents Ernesto U. Gamier, Elena R. Condevillamar, Janice L. Arriola
and Ophelia C. De Guzman. For their failure to return to work, the said 199
employees were each issued a show-cause memo directing them to submit a written
explanation within twenty-four (24) hours why they should not be dismissed for the
illegal strike x x x in defiance of x x x the Assumption Order of the Secretary of
Labor x x x resulting [to] grave and irreparable damage to the Bank, and placing
them under preventive suspension.[9]

The herein 129 individual respondents were among the 199 employees who
were terminated for their participation in the three-day work boycott and protest
action. On various dates in June 2000, twenty-one (21) of the individual respondents
executed Release, Waiver and Quitclaim in favor of Solidbank.[10]

On May 8, 2000, Secretary Laguesma denied the motions for reconsideration

filed by Solidbank and the Union.[11]

The Union filed on May 11, 2000 a Motion for Clarification of certain
portions of the Order dated March 24, 2000, and on May 19, 2000 it filed a Motion
to Resolve the Supervening Issue of Termination of 129 Striking
Employees. On May 26, 2000, Secretary Laguesma granted the first motion by
clarifying that the contract-signing bonus awarded in the new CBA should likewise
be based on the adjusted pay. However, the Unions second motion was denied,[12] as
follows:
This Office cannot give due course to the Unions second motion. The labor
dispute arising from the termination of the Bank employees is an issue that ought
to be entertained in a separate case. The assumption order of January 18,
2000 covered only the bargaining deadlock between the parties and the alleged
violation of the CBA provision on regularization. We have already resolved both
the deadlock and the CBA violation issues. The only motion pending before us is
the motion for clarification, which we have earlier disposed of in this Order. Thus,
the only option left is for the Union to file a separate case on the matter.[13]

In the meantime, the Monetary Board on July 28, 2000 approved the request
of Metropolitan Bank and Trust Company (Metrobank) to acquire the existing non-
real estate assets of Solidbank in consideration of assumption by Metrobank of the
liabilities of Solidbank, and to integrate the banking operations of Solidbank with
Metrobank.Subsequently, Solidbank was merged with First Metro Investment
Corporation, and Solidbank, the surviving corporation, was renamed the First Metro
Investment Corporation (FMIC).[14] By August 31, 2000, Solidbank ceased banking
operations after surrendering its expanded banking license to the Bangko Sentral ng
Pilipinas. Petitioners duly filed a Termination Report with the DOLE and granted
separation benefits to the banks employees.[15]

Respondents Gamier, Condevillamar, Arriola and De Guzman filed separate

complaints for illegal dismissal, moral and exemplary damages and attorneys fees
on April 28, May 15 and May 29, 2000, respectively (NLRC NCR Case Nos. [S]30-
04-01891-00, 30-05-03002-00 and 30-05-02253-00). The cases were consolidated
before Labor Arbiter Potenciano S. Caizares, Jr. Respondent Union joined by the
129 dismissed employees filed a separate suit against petitioners for illegal
dismissal, unfair labor practice and damages (NLRC NCR Case No. 30-07-02920-
00 assigned to Labor Arbiter Luis D. Flores).

Labor Arbiters Rulings

In his Decision dated November 14, 2000, Labor Arbiter Potenciano S.

Caizares, Jr. dismissed the complaints of Gamier, Condevillamar, Arriola and De
Guzman. It was held that their participation in the illegal strike violated the Secretary
of Labors return to work order upon the latters assumption of the labor dispute and
after directing the parties to execute their new CBA.[16]

On March 16, 2001, Labor Arbiter Luis D. Flores rendered a decision[17] in

favor of respondents Union and employees, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered
declaring complainants dismissal as illegal and unjustified and ordering the
respondents Solidbank Corporation and/or its successor-in-interest First Metro
Investment Corporation and/or Metropolitan Bank and Trust Company and/or
Deogracias Vistan and/or Edgardo Mendoza to reinstate complainants to their
former positions. Concomitantly, said respondents are hereby ordered to jointly and
severally pay the complainants their full backwages and other employees benefits
from the time of their dismissal up to the date of their actual reinstatement; payment
of ten (10%) percent attorneys fees; payment of ONE HUNDRED FIFTY
THOUSAND PESOS (P150,000.00) each as moral damages and ONE HUNDRED
THOUSAND PESOS (P100,000.00) each as exemplary damages which are
computed, at the date of this decision in the amount of THIRTY THREE MILLION
SEVEN HUNDRED NINETY FOUR THOUSAND TWO HUNDRED TWENTY
TWO PESOS and 80/100 (P33,794,222.80), by the Computation and Examination
Unit of this branch and becomes an integral part of this Decision.

SO ORDERED. [18]

Respondents Gamier, Condevillamar, Arriola and De Guzman appealed the

decision of Labor Arbiter Caizares, Jr. to the National Labor Relations Commission
(NLRC NCR CA No 027342-01). Petitioners likewise appealed from the decision
of Labor Arbiter Flores (NLRC NCR CA No. 028510-01).

Rulings of the NLRC

On July 23, 2001, the NLRCs Second Division rendered a Decision[19] reversing the
decision of Labor Arbiter Flores, as follows:
WHEREFORE, premises considered, the decision of the Labor Arbiter is
hereby VACATED and SET ASIDE and a new one entered dismissing the
complaint for illegal dismissal and unfair labor practice for lack of merit. As
equitable relief, respondents are hereby ordered to pay complainants separation
benefits as provided under the CBA at least one (1) month pay for every year of
service whichever is higher.

SO ORDERED.[20]
The Second Division ruled that the mass action held by the bank employees on April
3, 2000 infront of the Office of the Secretary of Labor was not a legitimate exercise
of the employees freedom of speech and assembly. Such was a strike as defined
under Article 212 (o) of the Labor Code, as amended, which does not distinguish as
to whom the action of the employees is directed against, nor the place/location where
the concerted action of the employees took place. Complainants Gamier,
Condevillamar, Arriola and De Guzman did not report for work and picketed the
DOLE premises on April 3, 2000; they continuously refused to report back to work
until April 7, 2000 when they were issued a Notice of Termination. It was stressed
that the mass action of the bank employees was an incident of a labor dispute, and
hence the concerted work abandonment was a prohibited activity contemplated
under Article 264 (a) of the Labor Code, as amended, upon assumption of
jurisdiction by the Secretary of Labor. Citing this Courts ruling in the case
of Telefunken Semiconductors Employees Union-FFW v. Court of Appeals,[21] the
Second Division found there was just and valid cause for the dismissal of
complainants.[22]

On the charge of forum shopping with respect to twenty-one (21) individual

complainants who have voluntarily settled their claims against Solidbank, the said
cases not having been dismissed by the Labor Arbiter despite proper motion,[23] the
Second Division found that complainants admitted in their Answer that the said
employees preferred to pursue their own independent action against the bank and
their names were stricken out from the original complaint; hence, the Labor Arbiter
erred in granting relief to said employees. Nevertheless, it held that the complaint
will not be dismissed on this ground as the issue of forum shopping should have
been raised in the proceedings before the Labor Arbiter.[24]

Respondents filed a motion for reconsideration while the petitioners filed a partial
motion for reconsideration. Both motions were denied under
[25]
Resolution dated September 28, 2001.

As to respondents appeal, the NLRCs Third Division by Decision[26] dated January

31, 2002, reversed the decision of Labor Arbiter Caizares, Jr., as follows:
WHEREFORE, the decision appealed from is hereby SET ASIDE and a
new one entered finding the respondent Solidbank Corporation liable for the illegal
dismissal of complainants Ernesto U. Gamier, Elena P. Condevillamar, Janice L.
Arriola and Maria Ophelia C. de Guzman, and ordering the respondent bank to
reinstate the complainants to their former positions without loss of seniority rights
and to pay full backwages reckoned from the time of their illegal dismissal up to
the time of their actual/payroll reinstatement. Should reinstatement not be feasible,
 respondent bank is further ordered to pay complainants their separation pay in
accordance with the provisions of the subsisting Collective Bargaining Agreement.

All other claims are DISMISSED for lack of merit.

SO ORDERED.[27]

The Third Division held that the protest action staged by the banks employees
before the DOLE did not amount to a strike but rather an exercise of their right to
express frustration and dissatisfaction over the decision rendered by the Secretary of
Labor. Hence, it cannot be concluded that the activity is per se illegal or violative of
the assumption order considering that at the time, both parties had pending motions
for reconsideration of the Secretarys decision. Moreover, it was found that Gamier,
Condevillamar, Arriola and De Guzman were not fully investigated on the charge
that they had instigated or actively participated in an illegal activity; neither was it
shown that the explanations submitted by them were considered by the
management. Since said employees had presented evidence of plausible and
acceptable reasons for their absence at the workplace at the time of the protest action,
their termination based on such alleged participation in the protest action was
unjustified.[28]

Respondents filed a partial motion while the petitioners filed a motion for
reconsideration of the Decision dated January 31, 2002. Both motions were denied
under Resolution[29] dated March 8, 2002.

On November 20, 2001, petitioners filed a petition for certiorari before the
CA assailing the July 23, 2001 Decision and Resolution dated September 28, 2001
of the NLRCs Second Division insofar as it ordered the payment of separation
benefits to the 129 terminated employees of Solidbank who participated in the mass
action/strike (CA-G.R. SP No. 67730).[30]

On May 23, 2002, petitioners filed a separate petition in the CA (CA-G.R. SP

No. 70820) seeking the reversal of the January 31, 2002 Decision and Resolution
dated March 8, 2002 of the NLRCs Third Division and praying for the following
reliefs: (1) immediate issuance of a TRO and writ of preliminary injunction to
restrain/enjoin the NLRC from issuing a writ of execution in NLRC CA No. 027342-
01; (2) the petition be consolidated with CA-G.R. SP No. 67730 before the
Thirteenth Division and CA-G.R. SP No. 68054 before the Third Division, or if
consolidation is no longer possible, that the petition be resolved independently of
the aforesaid cases; and (3) granting the petition by annulling and setting aside the
January 31, 2002 Decision of the NLRC, and reinstating the November 14, 2000
Decision of Labor Arbiter Caizares, Jr.[31]

On August 9, 2002, petitioners filed a Manifestation before the Fifteenth

Division (CA-G.R. SP No. 67730) attaching thereto a copy of the Decision[32] (dated
July 26, 2002) rendered by the CAs Special Third Division in CA-G.R. SP No.
68998, a petition for certiorari separately filed by Metrobank which also sought to
annul and set aside the July 23, 2001 Decision of the NLRCs Second Division insofar
as it ordered the payment of separation benefits to the dismissed employees of
Solidbank. In the said decision, the CAs Fourteenth Division gave due course to the
petition of Metrobank and affirmed the July 23, 2001 decision of the NLRC but
reversed and set aside the portion of the decision ordering the payment of separation
benefits.[33]

On September 11, 2002, respondents filed an Omnibus Motion and Counter-

Manifestation arguing that petitioners Manifestation constitutes a judicial admission
that Metrobank engaged in forum shopping; it was thus prayed that CA-G.R. SP No.
68998 be consolidated with CA-G.R. SP No. 67730, the latter having a lower case
number.Further, respondents attached a copy of the Decision [34] dated August 29,
2002 rendered by the CAs Second Division in CA-G.R. SP No. 68054, the petition
separately filed by the Union and the 129 terminated employees of Solidbank from
the July 23, 2001 Decision of the NLRCs Second Division. The CAs Second
Division granted the petition in CA-G.R. SP No. 68054 and reinstated the March 16,
2001 Decision of Labor Arbiter Flores.

CA-G.R. SP Nos. 67730 and 70820 were consolidated before the Twelfth
Division.

Court of Appeals Ruling

On March 10, 2003, the CA rendered its Decision[35] the dispositive portion of which
reads:
WHEREFORE, the twin petitions are hereby DENIED. The dismissal of
private respondents are hereby declared to be illegal. Consequently, petitioner is
ordered to reinstate private respondents to their former position, consonant with the
Decision of this Court in CA-G.R. SP No. 68054.

SO ORDERED.[36]
First, on the issue of forum shopping, the CA found that while there were indeed two
cases filed respecting the same matter of illegality of the dismissal of certain
employees of Solidbank, it appears that the individual complainants have no hand in
initiating the case before the Labor Arbiter for which the Union filed the complaint
in behalf of its members. Hence, the individual complainants cannot be said to have
deliberately or consciously sought two different fora for the same issues and causes
of action. Petitioners, moreover, failed to call the attention of the Labor Arbiter as
to the fact of filing of similar complaints by four employees.

As to the nature of the mass action resorted to by the employees of Solidbank,

the CA ruled that it was a legitimate exercise of their right to free expression, and
not a strike proscribed when the Secretary of Labor assumed jurisdiction over the
impass between Solidbank and the Union in the collective bargaining
negotiations. The CA thus reasoned:
while conceding that the aggregated acts of the private respondents may have
resulted in a stoppage of work, such was the necessary result of the exercise of a
Constitutional right. It is beyond cavil that the mass action was done, not to exert
any undue pressure on the petitioner with regard to wages or other economic
demands, but to express dissatisfaction over the decision of the Labor
Secretary subsequent to his assumption of jurisdiction. Surely, this is one
course of action that is not enjoined even when a labor dispute is placed under
the assumption of the said Labor Secretary. To allow an act of the Labor
Secretary one man in the Executive Department to whittle down a freedom
guaranteed by the Bill of Rights would be to place upon that freedom a limitation
never intended by the several framers of our Constitution. In effect, it would make
a right enshrined in the Fundamental Law that was ratified by the Sovereign People,
subordinate to a prerogative granted by the Labor Code, a statutory enactment made
by mere representatives of the People. This anomaly We cannot allow.

xxxx

Was private respondents act of massing in front of

the DOLE Building calculated by them to cause work stoppage, or were they
merely airing their grievance over the ruling of the Labor Secretary in exercise of
their civil liberties? Who can divine the motives of their hearts? But when two
different interpretations are possible, the courts must lean towards that which gives
meaning and vitality to the Bill of Rights. x x x[37] (Emphasis supplied.)

On April 2, 2003, petitioners filed a motion for reconsideration but this was denied
by the CA in its Resolution[38] dated August 7, 2003.
 The Petitions

G.R. No. 159460

Petitioners argued that the CA erred in holding that the mass action of April
3, 2000 infront of the Office of the Secretary of Labor was not a strike considering
that it had all the elements of a strike and the respondents judicially admitted that it
was a strike. The CA deemed the mass action as an exercise of the respondents
freedom of expression but such constitutional right is not absolute and subject to
certain well-defined exceptions. Moreover, a mass action of this nature is considered
a strike and not an exercise of ones freedom of expression, considering further that
the Secretarys Order dated January 18, 2000 is a valid exercise of police power.

Petitioners assail the CA in not considering the damage and prejudice caused
to the bank and its clients by respondents illegal acts. Respondents mass actions
crippled banking operations. Over-the-counter transactions were greatly
undermined. Checks for clearing were significantly delayed. On-line transactions
were greatly hampered, causing inestimable damage to the nationwide network of
automated teller machines. Respondent Unions actions clearly belie its allegation
that its mass action was merely intended to protest and express their dissatisfaction
with the Secretarys Order dated March 24, 2000.

In view of the illegal strike conducted in violation of the Secretarys

assumption order, petitioners maintain that the dismissal of respondents was not
illegal, as consistently ruled by this Court in many cases. Even
granting arguendo that their termination was illegal, the CA erred in ordering the
reinstatement of respondents and holding that Solidbank, FMIC and Metrobank are
solidarily liable to the respondents. Lastly, the CA erred in not finding that
respondents were guilty of forum shopping as respondents claim that they did not
know the Union had filed a complaint was unbelievable under the circumstances. [39]

G.R. No. 159461

Petitioners contend that the CA erred in ruling that the dismissal of respondents
Gamier, Condevillamar, Arriola and De Guzman was illegal, considering that this
was not an issue raised in the petition for certiorari before the appellate court. What
was raised by petitioners was only the propriety of the award of separation pay by
the NLRC which in fact declared their dismissal to be valid and legal.
 Petitioners maintain that respondents are not entitled to separation pay even if
the dismissal was valid because they committed serious misconduct and/or illegal
act in defying the Secretarys assumption order. Moreover, the CA also erred in
disregarding the Release, Waiver and Quitclaim executed by twenty-one (21)
individual respondents who entered into a compromise agreement with
Solidbank.[40]

Issues

The fundamental issues to be resolved in this controversy are: (1) whether the protest
rally and concerted work abandonment/boycott staged by the respondents violated
the Order dated January 18, 2000 of the Secretary of Labor; (2) whether the
respondents were validly terminated; and (3) whether the respondents are entitled to
separation pay or financial assistance.

Our Ruling

Article 212 of the Labor Code, as amended, defines strike as any temporary
stoppage of work by the concerted action of employees as a result of an industrial or
labor dispute. A labor dispute includes any controversy or matter concerning terms
and conditions of employment or the association or representation of persons in
negotiating, fixing, maintaining, changing or arranging the terms and conditions of
employment, regardless of whether or not the disputants stand in the proximate
relation of employers and employees.[41] The term strike shall comprise not
only concerted work stoppages, but also slowdowns, mass leaves, sitdowns,
attempts to damage, destroy or sabotage plant equipment and facilities and similar
activities.[42] Thus, the fact that the conventional term strike was not used by the
striking employees to describe their common course of action is inconsequential,
since the substance of the situation, and not its appearance, will be deemed to be
controlling.[43]

After a thorough review of the records, we hold that the CA patently erred in
concluding that the concerted mass actions staged by respondents cannot be
considered a strike but a legitimate exercise of the respondents right to express their
dissatisfaction with the Secretarys resolution of the economic issues in the
deadlocked CBA negotiations with petitioners. It must be stressed that the concerted
action of the respondents was not limited to the protest rally infront of the DOLE
Office on April 3, 2000. Respondent Unionhad also picketed the Head Office and
Paseo de Roxas Branch. About 712 employees, including those in the provincial
branches, boycotted and absented themselves from work in a concerted fashion for
three continuous days that virtually paralyzed the employers banking
operations. Considering that these mass actions stemmed from a bargaining
deadlock and an order of assumption of jurisdiction had already been issued by the
Secretary of Labor to avert an impending strike, there is no doubt that the concerted
work abandonment/boycott was the result of a labor dispute.

In Toyota Motor Phils. Corp. Workers Association (TMPCWA) v. National Labor

Relations Commission,[44] petitioners union and members held similar protest rallies
infront of the offices of BLR and DOLE Secretary and at the company plants. We
declared that said mass actions constituted illegal strikes:
Petitioner Union contends that the protests or rallies conducted on February
21 and 23, 2001 are not within the ambit of strikes as defined in the Labor Code,
since they were legitimate exercises of their right to peaceably assemble and
petition the government for redress of grievances. Mainly relying on the doctrine
laid down in the case of Philippine Blooming Mills Employees Organization v.
Philippine Blooming Mills Co., Inc., it argues that the protest was not directed
at Toyota but towards the Government (DOLE and BLR). It explains that the
protest is not a strike as contemplated in the Labor Code. The Union points out that
in Philippine Blooming Mills Employees Organization, the mass action staged in
Malacaang to petition the Chief Executive against the abusive behavior of some
police officers was a proper exercise of the employees right to speak out and to
peaceably gather and ask government for redress of their grievances.

The Unions position fails to convince us.

While the facts in Philippine Blooming Mills Employees Organization are

similar in some respects to that of the present case, the Union fails to realize one
major difference: there was no labor dispute in Philippine Blooming Mills
Employees Organization. In the present case, there was an on-going labor
dispute arising from Toyotas refusal to recognize and negotiate with
the Union, which was the subject of the notice of strike filed by
the Union on January 16, 2001. Thus, the Unions reliance on Philippine
Blooming Mills Employees Organization is misplaced, as it cannot be considered a
precedent to the case at bar.

xxxx

Applying pertinent legal provisions and jurisprudence, we rule that the

protest actions undertaken by the Union officials and members on February 21 to
23, 2001 are not valid and proper exercises of their right to assemble and ask
government for redress of their complaints, but are illegal strikes in breach of the
Labor Code. The Unions position is weakened by the lack of permit from the City
 of Manila to hold rallies. Shrouded as demonstrations, they were in reality
temporary stoppages of work perpetrated through the concerted action of the
employees who deliberately failed to report for work on the convenient excuse
that they will hold a rally at the BLR and DOLE offices in Intramuros, Manila,
on February 21 to 23, 2001. x x x (Emphasis supplied.)

Moreover, it is explicit from the directive of the Secretary in his January 18, 2000
Order that the Union and its members shall refrain from committing any and all acts
that might exacerbate the situation,[45] which certainly includes concerted
actions. For all intents and purposes, therefore, the respondents staged a strike
ultimately aimed at realizing their economic demands. Whether such pressure was
directed against the petitioners or the Secretary of Labor, or both, is of no
moment. All the elements of strike are evident in the Union-instigated mass actions.

The right to strike, while constitutionally recognized, is not without legal

constrictions.[46] Article 264 (a) of the Labor Code, as amended, provides:
Art. 264. Prohibited activities. (a) x x x

No strike or lockout shall be declared after assumption of jurisdiction by

the President or the Secretary or after certification or submission of the dispute
to compulsory or voluntary arbitration or during the pendency of cases involving
the same grounds for the strike or lockout.

x x x x (Emphasis supplied.)

The Court has consistently ruled that once the Secretary of Labor assumes
jurisdiction over a labor dispute, such jurisdiction should not be interfered with by
the application of the coercive processes of a strike or lockout.[47] A strike that is
undertaken despite the issuance by the Secretary of Labor of an assumption order
and/or certification is a prohibited activity and thus illegal.[48]

Article 264 (a) of the Labor Code, as amended, also considers it a prohibited
activity to declare a strike during the pendency of cases involving the same grounds
for the same strike.[49] There is no dispute that when respondents conducted their
mass actions on April 3 to 6, 2000, the proceedings before the Secretary of Labor
were still pending as both parties filed motions for reconsideration of the March 24,
2000 Order. Clearly, respondents knowingly violated the aforesaid provision by
holding a strike in the guise of mass demonstration simultaneous with concerted
work abandonment/boycott.
 Notwithstanding the illegality of the strike, we cannot sanction petitioners act
of indiscriminately terminating the services of individual respondents who admitted
joining the mass actions and who have refused to comply with the offer of the
management to report back to work on April 6, 2000. The liabilities of individual
respondents must be determined under Article 264 (a) of the Labor Code, as
amended:
Art. 264. Prohibited activities. x x x

xxxx

Any worker whose employment has been terminated as a consequence of

an unlawful lockout shall be entitled to reinstatement with full back wages. Any
union officer who knowingly participates in an illegal strike and any worker
or union officer who knowingly participates in the commission of illegal acts
during a strike may be declared to have lost his employment status: Provided,
That mere participation of a worker in a lawful strike shall not constitute
sufficient ground for termination of his employment, even if a replacement had
been hired by the employer during such lawful strike.

xxxx

The foregoing shows that the law makes a distinction between union officers and
members. For knowingly participating in an illegal strike or participating in the
commission of illegal acts during a strike, the law provides that a union officer may
be terminated from employment. The law grants the employer the option of
declaring a union officer who participated in an illegal strike as having lost his
employment. It possesses the right and prerogative to terminate the union officers
from service.[50]

However, a worker merely participating in an illegal strike may not be terminated

from employment. It is only when he commits illegal acts during a strike that he may
be declared to have lost employment
[51]
status. We have held that the responsibility of union officers, as main players in
an illegal strike, is greater than that of the members and, therefore, limiting the
penalty of dismissal only for the former for participation in an illegal strike is in
order.[52] Hence, with respect to respondents who are union officers, the validity of
their termination by petitioners cannot be questioned. Being fully aware that the
proceedings before the Secretary of Labor were still pending as in fact they filed a
motion for reconsideration of the March 24, 2000 Order, they cannot invoke good
faith as a defense.[53]
For the rest of the individual respondents who are union members, the rule is that an
ordinary striking worker cannot be terminated for mere participation in an illegal
strike.There must be proof that he or she committed illegal acts during a strike. In
all cases, the striker must be identified. But proof beyond reasonable doubt is not
required. Substantial evidence available under the attendant circumstances, which
may justify the imposition of the penalty of dismissal, may suffice. Liability for
prohibited acts is to be determined on an individual basis.[54]

Petitioners have not adduced evidence on such illegal acts committed by each of the
individual respondents who are union members. Instead, petitioners simply point to
their admitted participation in the mass actions which they knew to be illegal, being
in violation of the Secretarys assumption order. However, the acts which were held
to be prohibited activities are the following:
where the strikers shouted slanderous and scurrilous words against the owners
of the vessels; where the strikers used unnecessary and obscene language or epithets
to prevent other laborers to go to work, and circulated libelous statements against
the employer which show actual malice; where the protestors used abusive and
threatening language towards the patrons of a place of business or against co-
employees, going beyond the mere attempt to persuade customers to withdraw their
patronage; where the strikers formed a human cordon and blocked all the ways and
approaches to the launches and vessels of the vicinity of the workplace and
perpetrated acts of violence and coercion to prevent work from being performed;
and where the strikers shook their fists and threatened non-striking employees with
bodily harm if they persisted to proceed to the workplace. x x x[55]

The dismissal of herein respondent-union members are therefore unjustified in the

absence of a clear showing that they committed specific illegal acts during the mass
actions and concerted work boycott.

Are these dismissed employees entitled to backwages and separation pay?

The award of backwages is a legal consequence of a finding of illegal

dismissal. Assuming that respondent-union members have indeed reported back to
work at the end of the concerted mass actions, but were soon terminated by
petitioners who found their explanation unsatisfactory, they are not entitled to
backwages in view of the illegality of the said strike. Thus, we held in G & S
Transport Corporation v. Infante[56]--
 It can now therefore be concluded that the acts of respondents do not merit
their dismissal from employment because it has not been substantially proven that
they committed any illegalact while participating in the illegal strike. x x x

xxxx

With respect to backwages, the principle of a fair days wage for a fair days
labor remains as the basic factor in determining the award thereof. If there is no
work performed by the employee there can be no wage or pay unless, of
course, the laborer was able, willing and ready to work but was illegally locked
out, suspended or dismissed or otherwise illegally prevented from working. While
it was found that respondents expressed their intention to report back to work, the
latter exception cannot apply in this case. In Philippine Marine Officers Guild v.
Compaia Maritima, as affirmed in Philippine Diamond Hotel and Resort v. Manila
Diamond Hotel Employees Union, the Court stressed that for this exception to
apply, it is required that the strike be legal, a situation that does not obtain in
the case at bar. (Emphasis supplied.)

Under the circumstances, respondents reinstatement without backwages suffices for

the appropriate relief. But since reinstatement is no longer possible, given the lapse
of considerable time from the occurrence of the strike, not to mention the fact that
Solidbank had long ceased its banking operations, the award of separation pay of
one (1) month salary for each year of service, in lieu of reinstatement, is in
order.[57] For the twenty-one (21) individual respondents who executed quitclaims in
favor of the petitioners, whatever amount they have already received from the
employer shall be deducted from their respective separation pay.

Petitioners contended that in view of the blatant violation of the Secretarys

assumption order by the striking employees, the award of separation pay is unjust
and unwarranted.That respondent-members themselves knowingly participated in
the illegal mass actions constitutes serious misconduct which is a just cause under
Article 282 for terminating an employee.

We are not persuaded.

As we stated earlier, the Labor Code protects an ordinary, rank-and-file union

member who participated in such a strike from losing his job, provided that he did
not commit an illegal act during the strike.[58] Article 264 (e) of the Labor Code, as
amended, provides for such acts which are generally prohibited during concerted
actions such as picketing:
 No person engaged in picketing shall commit any act of violence, coercion
or intimidation or obstruct the free ingress to or egress from the employers
premises for lawful purposes, or obstruct public thoroughfares. (Emphasis
supplied.)

Petitioners have not adduced substantial proof that respondent-union members

perpetrated any act of violence, intimidation, coercion or obstruction of company
premises and public thoroughfares. It did not submit in evidence photographs, police
reports, affidavits and other available evidence.

As to the issue of solidary liability, we hold that Metrobank cannot be held

solidarily liable with Solidbank for the claims of the latters dismissed
employees. There is no showing that Metrobank is the successor-in-interest of
Solidbank. Based on petitioners documentary evidence, Solidbank was merged with
FMIC, with Solidbank as the surviving corporation, and was later renamed as FMIC.
While indeed Solidbanks banking operations had been integrated with Metrobank,
there is no showing that FMIC has ceased business operations. FMIC as successor-
in-interest of Solidbank remains solely liable for the sums herein adjudged against
Solidbank.

Neither should individual petitioners Vistan and Mendoza be held solidarily

liable for the claims adjudged against petitioner Solidbank. Article 212 (e)[59] does
not state that corporate officers are personally liable for the unpaid salaries or
separation pay of employees of the corporation. The liability of corporate officers
for corporate debts remains governed by Section 31[60] of the Corporation Code.

It is basic that a corporation is invested by law with a personality separate and

distinct from those of the persons composing it as well as from that of any other legal
entity to which it may be related. Mere ownership by a single stockholder or by
another corporation of all or nearly all of the capital stock of a corporation is not of
itself sufficient ground for disregarding the separate corporate personality.[61] In
labor cases, in particular, the Court has held corporate directors and officers
solidarily liable with the corporation for the termination of employment of corporate
employees done with malice or in bad faith.[62] Bad faith is never presumed.[63] Bad
faith does not simply connote bad judgment or negligence -- it imports a dishonest
purpose or some moral obliquity and conscious doing of wrong. It means a breach
of a known duty through some motive or interest or ill-will that partakes of the nature
of fraud.[64]
 Respondents have not satisfactorily proven that Vistan and Mendoza acted
with malice, ill-will or bad faith. Hence, said individual petitioners are not liable for
the separation pay of herein respondents-union members.

WHEREFORE, the petitions are PARTLY GRANTED. The Decision

dated March 10, 2003 of the Court of Appeals in CA-G.R. SP Nos. 67730 and 70820
is hereby SET ASIDE. Petitioner Solidbank Corporation (now FMIC) is
hereby ORDERED to pay each of the above-named individual respondents, except
union officers who are hereby declared validly dismissed, separation pay equivalent
to one (1) month salary for every year of service. Whatever sums already received
from petitioners under any release, waiver or quitclaim shall be deducted from the
total separation pay due to each of them.

The NLRC is hereby directed to determine who among the individual

respondents are union members entitled to the separation pay herein awarded, and
those union officers who were validly dismissed and hence excluded from the said
award.

No costs.

SO ORDERED.

MARTIN S. VILLARAMA, JR.

Associate Justice

WE CONCUR:

CONCHITA CARPIO MORALES

Associate Justice
Chairperson

LUCAS P. BERSAMIN
Associate Justice
ARTURO D. BRION
 Associate Justice

MARIA LOURDES P. A. SERENO

Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation
before the case was assigned to the writer of the opinion of the Courts Division.

CONCHITA CARPIO MORALES

Associate Justice
Chairperson, Third Division

CERTIFICATION

Pursuant to Section 13, Article VIII of the 1987 Constitution and the Division
Chairpersons Attestation, I certify that the conclusions in the above Decision had
been reached in consultation before the case was assigned to the writer of the opinion
of the Courts Division.

RENATO C. CORONA
Chief Justice
[1]
Rollo, Vol. I, pp. 128-142. Penned by Associate Justice Romeo A. Brawner (deceased) and concurred in by
Associate Justices Bienvenido L. Reyes and Danilo B. Pine.
[2]
Id. at 214.
[3]
Id. at 212-213.
[4]
Id. at 214-220.
[5]
Id. at 219-220.
[6]
Id. at 224.
[7]
Id. at 246.
[8]
Id. at 247-248.
[9]
Id. at 249 and 294.
[10]
Id. at 871, 914-954.
[11]
Id. at 254-255.
[12]
Id. at 903-904.
[13]
Id. at 904.
[14]
Id. at 256-282.
[15]
Id. at 48-49, 1074.
[16]
Id. at 312-313.
[17]
Id. at 609-626.
[18]
Id. at 625-626.
[19]
Id. at 633-647. Penned by Commissioner Victoriano R. Calaycay and concurred in by Presiding Commissioner
Raul T. Aquino and Commissioner Angelita A. Gacutan.
[20]
Id. at 646.
[21]
G.R. Nos. 143013-14, December 18, 2000, 348 SCRA 565.
[22]
Rollo, Vol. I, pp. 643-646.
[23]
Id. at 864-886.
[24]
Id. at 642-643.
[25]
Id. at 650-654.
[26]
Id. at 403-418. Penned by Commissioner Ireneo B. Bernardo and concurred in by Presiding Commissioner Lourdes
C. Javier and Commissioner Tito F. Genilo.
[27]
Id. at 417-418.
[28]
Id. at 413-417.
[29]
Id. at 420-421.
[30]
CA rollo (CA-G.R. SP No. 67730), pp. 2-43.
[31]
CA rollo (CA-G.R. SP No. 70820), pp. 2-43.
[32]
CA rollo (CA-G.R. SP No. 67730), pp. 457-467. Penned by Associate Justice Bernardo P. Abesamis and concurred
in by Associate Justices Josefina Guevara-Salonga and Amelita G. Tolentino.
[33]
Id. at 467.
[34]
Id. at 480-491. Penned by Associate Justice Rodrigo V. Cosico and concurred in Associate Justices Buenaventura
J. Guerrero and Perlita J. Tria Tirona.
[35]
Supra note 1.
[36]
Id. at 141.
[37]
Id. at 139-141.
[38]
Id. at 144-145.
[39]
Rollo, Vol. II, pp. 1729-1730.
[40]
Id. at 1730-1730-A.
[41]
Gold City Integrated Port Service, Inc. v. National Labor Relations Commission, G.R. Nos. 103560 &
103599, July 6, 1995, 245 SCRA 627, 635-636.
[42]
Samahang Manggagawa sa Sulpicio Lines, Inc.-NAFLU v. Suplicio Lines, Inc.,G.R. No. 140992, March 25, 2004,
426 SCRA 319, 326, citing Sec. 2, P.D. No. 823, as amended by P.D. No. 849.
[43]
Bangalisan v. Hon. CA, 342 Phil. 586, 594 (1997) cited in Gesite v. Court of Appeals, G.R. Nos. 123562-65,
November 25, 2004, 444 SCRA 51, 57.
[44]
G.R. Nos. 158786 & 158789, October 19, 2007, 537 SCRA 171, 200-202.
[45]
Supra note 3.
[46]
Philcom Employees Union v. Philippine Global Communications, G.R. No. 144315, July 17, 2006, 495 SCRA
214, 244.
[47]
Telefunken Semiconductors Employees Union-FFW v. Court of Appeals, supra note 21 at 582.
[48]
Philcom Employees Union v. Philippine Global Communications, supra note 46 at 243. See also Philippine
Airlines, Inc. v. Brillantes, G.R. No. 119360, October 10, 1997, 280 SCRA 515, 516, citing Phil. Airlines, Inc. v.
Secretary of Labor and Employment, G.R. No. 88210, January 23, 1991, 193 SCRA 223; Union of Filipro
Employees v. Nestle Philippines, Inc., G.R. Nos. 88710-13, December 19, 1990, 192 SCRA 396; Federation of
Free Workers v. Inciong, G.R. No. 49983, April 20, 1992, 208 SCRA 157; and St. Scholasticas College v.
Torres, G.R. No. 100158, June 29, 1992, 210 SCRA 565.
[49]
Philcom Employees Union v. Philippine Global Communications, id. at 246.
[50]
Steel Corporation of the Philippines v. SCP Employees Union-National Federation of Labor Unions, G.R. Nos.
169829-30, April 16, 2008, 551 SCRA 594, 612, citing Santa Rosa Coca-Cola Plant Employees Union v. Coca-
Cola Bottlers Phils, Inc., G.R. Nos. 164302-03, January 24, 2007, 512 SCRA 437, 458-459 and Stamford
Marketing Corp. v. Julian, G.R. No. 145496, February 24, 2004, 423 SCRA 633, 648.
[51]
Id.
[52]
Nissan Motors Philippines, Inc. v. Secretary of Labor and Employment, G.R. Nos. 158190-91, 158276 and 158283,
June 21, 2006, 491 SCRA 604, 624, citing Association of Independent Unions in the Philippines v. NLRC, G.R.
No. 120505, March 25, 1999, 305 SCRA 219.
[53]
See Sukhothai Cuisine and Restaurant v. Court of Appeals, G.R. No. 150437, July 17, 2006, 495 SCRA 336, 348,
citing First City Interlink Transportation Co., Inc. v. Sec. Confesor, 338 Phil. 635, 644 (1997).
[54]
Id. at 355-356, citing Samahang Manggagawa sa Sulpicio Lines, Inc.-NAFLU v. Sulpicio Lines, Inc., supra note
42 at 328 and Asso. of Independent Unions in the Phil. v. NLRC, 364 Phil. 697, 708-709 (1999).
[55]
Id. at 351, citing United Seamens Union of the Phil. v. Davao Shipowners Association, Nos. L-18778 and L-
18779, August 31, 1967, 20 SCRA 1226, 1240; Cromwell Commercial Employees and Laborers Union (PTUC)
v. Court of Industrial Relations, No. L-19778, September 30, 1964, 12 SCRA 124, 132; Liberal Labor Union v.
Phil. Can Co., 91 Phil. 72, 78 (1952); Linn v. United Plan Guard Workers, 15 L.Ed 2d 582; 31 AM. JUR. 245, p.
954; 116 A.L.R. 477, 505; 32 A.L.R. 756; 27 A.L.R. 375; cited in 2 C.A. AZUCENA, THE LABOR CODE
WITH COMMENTS AND CASES p. 500 (1999) and Asso. of Independent Unions in the Phil. v. NLRC, id. at
706-707.
[56]
G.R. No. 160303, September 13, 2007, 533 SCRA 288, 301-302.
[57]
Id. at 304.
[58]
Id. at 300.
[59]
Art. 212. x x x
xxxx
(e) Employer includes any person acting in the interest of an employer, directly or indirectly. The term shall not
include any labor organization or any of its officers or agents except when acting as employer.
[60]
SEC. 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and knowingly vote for or
assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing
the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such
 directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the
corporation, its stockholders or members and other persons.
xxxx
[61]
Carag v. National Labor Relations Commission, G.R. No. 147590, April 2, 2007, 520 SCRA 28, 55.
[62]
Malayang Samahan ng mga Manggagawa sa M. Greenfield v. Ramos, G.R. No. 113907, April 20, 2001, 357
SCRA 77, 93-94.
[63]
See McLeod v. NLRC, G.R. No. 146667, January 23, 2007, 512 SCRA 222, 246, citing Lim v. Court of Appeals,
380 Phil. 60 (2000) and Del Rosario v. National Labor Relations Commission, G.R. No. 85416, July 24, 1990,
187 SCRA 777.
[64]
Ford Philippines, Inc. v. Court of Appeals, G.R. No. 99039, February 3, 1997, 267 SCRA 320, 328.
Republic of the Philippines
SUPREME COURT
Manila

EN BANC

PHILIPPINE COCONUT G.R. Nos. 177857-58

, PRODUCERS FEDERATION, INC.
(COCOFED), MANUEL V. DEL
ROSARIO, DOMINGO P. ESPINA,
SALVADOR P. BALLARES,
JOSELITO A. MORALEDA,
PAZ M. YASON,
VICENTE A. CADIZ,
CESARIA DE LUNA TITULAR, and
RAYMUNDO C. DE VILLA,
Petitioners,
- versus -

REPUBLIC OF THE PHILIPPINES,

Respondent,

WIGBERTO E. TAADA,
OSCAR F. SANTOS,
SURIGAO DEL SUR FEDERATION
OF AGRICULTURAL
COOPERATIVES (SUFAC) and
MORO FARMERS ASSOCIATION
OF ZAMBOANGA DEL SUR
(MOFAZS), represented by
ROMEO C. ROYANDOYAN,
Intervenors.
x------------------------------------------------x
DANILO S. URSUA, G.R. No. 178193
Petitioner,

- versus -

REPUBLIC OF THE PHILIPPINES,

Respondent,
x------------------------------------------------x

Present:

CORONA, C.J.,
CARPIO,*
VELASCO, JR.,
LEONARDO-DE CASTRO,*
BRION,**
PERALTA,*
BERSAMIN,
DEL CASTILLO,
ABAD,
VILLARAMA, JR.,
PEREZ,
MENDOZA,
SERENO,
REYES, and
PERLAS-BERNABE, JJ.
Promulgated:

January 24, 2012

x-----------------------------------------------------------------------------------------x

DECISION

VELASCO, JR., J.:

The Case

Cast against a similar backdrop, these consolidated petitions for review

under Rule 45 of the Rules of Court assail and seek to annul certain issuances of the
Sandiganbayan in its Civil Case No. 0033-A entitled, Republic of the Philippines,
Plaintiff, v. Eduardo M. Cojuangco, Jr., et al., Defendants, COCOFED, et al.,
BALLARES, et al., Class Action Movants, and Civil Case No. 0033-F entitled, Republic
of the Philippines, Plaintiff, v. Eduardo M. Cojuangco, Jr., et al., Defendants. Civil
Case (CC) Nos. 0033-A and 0033-F are the results of the splitting into eight (8)
amended complaints of CC No. 0033 entitled, Republic of the Philippines v. Eduardo
Cojuangco, Jr., et al., a suit for recovery of ill-gotten wealth commenced by the
Presidential Commission on Good Government (PCGG), for the Republic of the
Philippines (Republic), against Ferdinand E. Marcos and several individuals, among
them, Ma. Clara Lobregat (Lobregat) and petitioner Danilo S. Ursua (Ursua).
Lobregat and Ursua occupied, at one time or another, directorial or top
management positions in either the Philippine Coconut Producers Federation, Inc.
(COCOFED) or the Philippine Coconut Authority (PCA), or both.[1] Each of the eight
(8) subdivided complaints correspondingly impleaded as defendants only the
alleged participants in the transaction/s subject of the suit, or who are averred as
owner/s of the assets involved.

The original complaint, CC No. 0033, as later amended to make the

allegations more specific, is described in Republic v. Sandiganbayan[2] (one of
several ill-gotten suits of the same title disposed of by the Court) as revolving
around the provisional take over by the PCGG of COCOFED, Cocomark, and Coconut
Investment Company and their assets and the sequestration of shares of stock in
United Coconut Planters Bank (UCPB) allegedly owned by, among others, over a
million coconut farmers, and the six (6) Coconut Industry Investment Fund (CIIF)
corporations,[3] referred to in some pleadings as CIIF oil mills and the fourteen (14)
CIIF holding companies[4] (hereafter collectively called CIIF companies), so-called
for having been either organized, acquired and/or funded as UCPB subsidiaries with
the use of the CIIF levy. The basic complaint also contained allegations about the
alleged misuse of the coconut levy funds to buy out the majority of the outstanding
shares of stock of San Miguel Corporation (SMC).

More particularly, in G.R. Nos. 177857-58, class action petitioners COCOFED

and a group of purported coconut farmers and COCOFED members
(hereinafter COCOFED et al. collectively)[5] seek the reversal of the following
judgments and resolutions of the anti-graft court insofar as these issuances are
adverse to their interests:

1) Partial Summary Judgment[6] dated July 11, 2003, as reiterated in a

resolution[7] of December 28, 2004, denying COCOFEDs motion for reconsideration, and
the May 11, 2007resolution denying COCOFEDs motion to set case for trial and declaring
the partial summary judgment final and appealable,[8] all issued in Civil Case No. 0033-A;
and
 2) Partial Summary Judgment[9] dated May 7, 2004, as also reiterated in a
resolution[10] of December 28, 2004, and the May 11, 2007 resolution[11] issued in Civil
Case No. 0033-F.The December 28, 2004 resolution denied COCOFEDs Class Action
Omnibus Motion therein praying to dismiss CC Case No. 0033-F on jurisdictional ground
and alternatively, reconsideration and to set case for trial. The May 11, 2007 resolution
declared the judgment final and appealable.

For convenience, the partial summary judgment (PSJ) rendered on July 11,
2003 in CC No. 0033-A shall hereinafter be referred to as PSJ-A, and that issued on
May 7, 2004 in CC 0033-F, as PSJ-F. PSJ-A and PSJ-F basically granted the Republics
separate motions for summary judgment.

On June 5, 2007, the court a quo issued a Resolution in CC No. 0033-A, which
modified PSJ-A by ruling that no further trial is needed on the issue of ownership
of the subject properties. Likewise, on May 11, 2007, the said court issued a
Resolution in CC No. 0033-F amending PSJ-F in like manner.
On the other hand, petitioner Ursua, in G.R. No. 178193, limits his petition
for review on PSJ-A to the extent that it negates his claims over shares of stock in
UCPB.

Taada, et al. have intervened[12] in G.R. Nos. 177857-58 in support of the

governments case.

Another petition was filed and docketed as G.R. No. 180705. It involves
questions relating to Eduardo M. Cojuangco, Jr.s (Cojuangco, Jr.s) ownership of the
UCPB shares, which he allegedly received as option shares, and which is one of the
issues raised in PSJ-A.[13] G.R. No. 180705 was consolidated with G.R. Nos. 177857-
58 and 178193. On September 28, 2011, respondent Republic filed a Motion to
Resolve G.R. Nos. 177857-58 and 178193.[14] On January 17, 2012, the Court issued
a Resolution deconsolidating G.R. Nos. 177857-58 and 178193 from G.R. No.
180705. This Decision is therefore separate and distinct from the decision to be
rendered in G.R. No. 180705.

The Facts

The relevant facts, as culled from the records and as gathered from
Decisions of the Court in a batch of coco levy and illegal wealth cases, are:

In 1971, Republic Act No. (R.A.) 6260 was enacted creating the Coconut
Investment Company (CIC) to administer the Coconut Investment Fund (CIF),
which, under Section 8[15] thereof, was to be sourced from a PhP 0.55 levy on the
sale of every 100 kg. of copra. Of the PhP 0.55 levy of which the copra seller was,
or ought to be, issued COCOFUND receipts, PhP 0.02 was placed at the disposition
of COCOFED, the national association of coconut producers declared by
the Philippine Coconut Administration(PHILCOA, now PCA[16]) as having the largest
membership.[17]

The declaration of martial law in September 1972 saw the issuance of several
presidential decrees (P.Ds.) purportedly designed to improve the coconut industry
through the collection and use of the coconut levy fund. While coming generally
from impositions on the first sale of copra, the coconut levy fund came under
various names, the different establishing laws and the stated ostensible purpose
for the exaction explaining the differing denominations. Charged with the duty of
collecting and administering the Fund was PCA.[18] Like COCOFED with which it had
a legal linkage,[19] the PCA, by statutory provisions scattered in different coco levy
decrees, had its share of the coco levy.[20]

The following were some of the issuances on the coco levy, its collection and
utilization, how the proceeds of the levy will be managed and by whom, and the
purpose it was supposed to serve:
 1. P.D. No. 276 established the Coconut Consumers Stabilization Fund (CCSF)
and declared the proceeds of the CCSF levy as trust fund,[21] to be utilized to
subsidize the sale of coconut-based products, thus stabilizing the price of edible
oil.[22]

2. P.D. No. 582 created the Coconut Industry Development Fund (CIDF) to
finance the operation of a hybrid coconut seed farm.

3. Then came P.D. No. 755 providing under its Section 1 the following:

It is hereby declared that the policy of the State is to provide readily

available credit facilities to the coconut farmers at a preferential rates; that this
policy can be expeditiously and efficiently realized by the implementation of the
Agreement for the Acquisition of a Commercial Bank for the benefit of Coconut
Farmers executed by the [PCA]; and that the [PCA] is hereby authorized to
distribute, for free, the shares of stock of the bank it acquired to the coconut farmers.

Towards achieving the policy thus declared, P.D. No. 755, under its Section
2, authorized PCA to utilize the CCSF and the CIDF collections to acquire a
commercial bank and deposit the CCSF levy collections in said bank, interest
free, the deposit withdrawable only when the bank has attained a certain level of
sufficiency in its equity capital. The same section also decreed that all levies PCA is
authorized to collect shall not be considered as special and/or fiduciary funds or
form part of the general funds of the government within the contemplation of P.D.
No. 711.[23]

4. P.D. No. 961 codified the various laws relating to the development of
coconut/palm oil industries.

5. The relevant provisions of P.D. No. 961, as later amended by P.D. No. 1468
(Revised Coconut Industry Code), read:
 ARTICLE III

Levies

Section 1. Coconut Consumers Stabilization Fund Levy. The [PCA] is hereby

empowered to impose and collect the Coconut Consumers Stabilization Fund Levy .

Section 5. Exemption. The [CCSF] and the [CIDF] as well as all disbursements as
herein authorized, shall not be construed as special and/or fiduciary funds, or as part of
the general funds of the national government within the contemplation of PD 711; the
intention being that said Fund and the disbursements thereof as herein authorized for
the benefit of the coconut farmers shall be owned by them in their private capacities: .
(Emphasis supplied.)

6. Letter of Instructions No. (LOI) 926, Series of 1979, made reference to the
creation, out of other coco levy funds, of the Coconut Industry Investment Fund
(CIIF) in P.D. No. 1468 and entrusted a portion of the CIIF levy to UCPB for
investment, on behalf of coconut farmers, in oil mills and other private
corporations, with the following equity ownership structure:[24]

Section 2. Organization of the Cooperative Endeavor. The [UCPB], in its capacity as the
investment arm of the coconut farmers thru the [CIIF] is hereby directed to invest, on
behalf of the coconut farmers, such portion of the CIIF in private corporations under the
following guidelines:

a) The coconut farmers shall own or control at least (50%) of the outstanding
voting capital stock of the private corporation [acquired] thru the CIIF and/or corporation
owned or controlled by the farmers thru the CIIF . (Words in bracket added.)
 Through the years, a part of the coconut levy funds went directly or indirectly
to various projects and/or was converted into different assets or investments.[25] Of
particular relevance to this case was their use to acquire the First United
Bank (FUB), later renamed UCPB, and the acquisition by UCPB, through the CIIF
companies, of a large block of SMC shares. [26]

Apropos the intended acquisition of a commercial bank for the purpose

stated earlier, it would appear that FUB was the bank of choice which the Pedro
Cojuangco group (collectively, Pedro Cojuangco) had control of. The plan, then, was
for PCA to buy all of Pedro Cojuangcos shares in FUB. However, as later events
unfolded, a simple direct sale from the seller (Pedro) to PCA did not ensue as it was
made to appear that Cojuangco, Jr. had the exclusive option to acquire the formers
FUB controlling interests. Emerging from this elaborate, circuitous arrangement
were two deeds; the first, simply denominated as Agreement,[27] dated May
1975,[28] entered into by and between Cojuangco, Jr., for and in his behalf and in
behalf of certain other buyers, and Pedro Cojuangco, purportedly accorded
Cojuangco, Jr. the option to buy 72.2% of FUBs outstanding capital stock, or
137,866 shares (the option shares, for brevity), at PhP 200 per share.

The second but related contract, dated May 25, 1975, was denominated
as Agreement for the Acquisition of a Commercial Bank for the Benefit of the
Coconut Farmers of the Philippines.[29] It had PCA,[30] for itself and for the benefit of
the coconut farmers, purchase from Cojuangco, Jr. the shares of stock subject of
the First Agreement for PhP 200 per share. As additional consideration for PCAs
buy-out of what Cojuangco, Jr. would later claim to be his exclusive and personal
option,[31] it was stipulated that, from PCA, Cojuangco, Jr. shall receive equity in
FUB amounting to 10%, or 7.22%, of the 72.2%, or fully paid shares.

Apart from the aforementioned 72.2%, PCA purchased from other FUB
shareholders 6,534 shares.
 While the 64.98% portion of the option shares (72.2% 7.22% = 64.98%)
ostensibly pertained to the farmers, the corresponding stock certificates
supposedly representing the farmers equity were in the name of and delivered to
PCA.[32] There were, however, shares forming part of the aforesaid 64.98% portion,
which ended up in the hands of non-farmers.[33] The remaining 27.8% of the FUB
capital stock were not covered by any of the agreements.

Under paragraph 8 of the second agreement, PCA agreed to expeditiously

distribute the FUB shares purchased to such coconut farmers holding registered
COCOFUND receipts on equitable basis.

As found by the Sandiganbayan, the PCA appropriated, out of its own fund,
an amount for the purchase of the said 72.2% equity, albeit it would later
reimburse itself from the coconut levy fund.[34]

As of June 30, 1975, the list of FUB stockholders shows PCA with 129,955
shares.[35]

Shortly after the execution of the PCA Cojuangco, Jr. Agreement, President
Marcos issued, on July 29, 1975, P.D. No. 755 directing, as earlier narrated, PCA to
use the CCSF and CIDF to acquire a commercial bank to provide coco farmers
with readily available credit facilities at preferential rate, and PCA to distribute, for
free, the bank shares to coconut farmers.

Then came the 1986 EDSA event. One of the priorities of then President
Corazon C. Aquinos revolutionary government was the recovery of ill-gotten wealth
reportedly amassed by the Marcos family and close relatives, their nominees and
associates. Apropos thereto, she issued Executive Order Nos. (E.Os.) 1, 2 and 14, as
amended by E.O. 14-A, all Series of 1986. E.O. 1 created the PCGG and provided it
with the tools and processes it may avail of in the recovery efforts;[36] E.O. No. 2
asserted that the ill-gotten assets and properties come in the form of shares of
stocks, etc.; while E.O. No. 14 conferred on the Sandiganbayan exclusive and
original jurisdiction over ill-gotten wealth cases, with the proviso that technical
rules of procedure and evidence shall not be applied strictly to the civil cases filed
under the E.O. Pursuant to these issuances, the PCGG issued numerous orders of
sequestration, among which were those handed out, as earlier mentioned, against
shares of stock in UCPB purportedly owned by or registered in the names of (a)
more than a million coconut farmers and (b) the CIIF companies, including the SMC
shares held by the CIIF companies. On July 31, 1987, the PCGG instituted before the
Sandiganbayan a recovery suit docketed thereat as CC No. 0033.

After the filing and subsequent amendments of the complaint in CC

0033, Lobregat, COCOFED et al., and Ballares et al., purportedly representing over
a million coconut farmers, sought and were allowed to
[37]
intervene. Meanwhile, the following incidents/events transpired:

1. On the postulate, inter alia, that its coco-farmer members own at least
51% of the outstanding capital stock of UCPB, the CIIF companies, etc.,
COCOFED et al., on November 29, 1989, filed Class Action Omnibus
Motion praying for the lifting of the orders of sequestration referred to above and
for a chance to present evidence to prove the coconut farmers ownership of the
UCPB and CIIF shares. The plea to present evidence was denied;

2. Later, the Republic moved for and secured approval of a motion for
separate trial which paved the way for the subdivision of the causes of action in CC
0033, each detailing how the assets subject thereof were acquired and the key roles
the principal played;

3. Civil Case 0033, pursuant to an order of the Sandiganbayan would be

subdivided into eight complaints, docketed as CC 0033-A to CC 0033-H.[38]

Lobregat, Ballares et al., COCOFED, et al., on the strength of their authority to

intervene in CC 0033, continued to participate in CC 0033-A where one of the issues raised
was the misuse of the names/identities of the over a million coconut farmers;[39]

4. On February 23, 2001, Lobregat, COCOFED, Ballares et al., filed a Class Action
Omnibus Motion to enjoin the PCGG from voting the sequestered UCPB shares and the
SMC shares registered in the names of the CIIF companies. The Sandiganbayan, by Order
 of February 28, 2001, granted the motion, sending the Republic to come to this Court on
certiorari, docketed as G.R. Nos. 147062-64, to annul said order; and

5. By Decision of December 14, 2001, in G.R. Nos. 147062-64 (Republic

v. COCOFED), [40] the Court declared the coco levy funds as prima facie public funds. And
purchased as the sequestered UCPB shares were by such funds, beneficial ownership
thereon and the corollary voting rights prima facie pertain, according to the Court, to the
government.

The instant proceedings revolve around CC 0033-A (Re: Anomalous Purchase

and Use of [FUB] now [UCPB])[41] and CC 0033-F (Re: Acquisition of San Miguel
Corporation Shares of Stock), the first case pivoting mainly on the series of
transactions culminating in the alleged anomalous purchase of 72.2% of FUBs
outstanding capital stock and the transfer by PCA of a portion thereof to private
individuals. COCOFED, et al. and Ballares, et al. participated in CC No. 0033-A as
class action movants.

Petitioners COCOFED et al.[42] and Ursua[43] narrate in their petitions how the
farmers UCPB shares in question ended up in the possession of those as hereunder
indicated:

1) The farmers UCPB shares were originally registered in the name of PCA for the

eventual free distribution thereof to and registration in the individual names of the

coconut farmers in accordance with PD 755 and the IRR that PCA shall issue;

2) Pursuant to the stock distribution procedures set out in PCA Administrative

Order No. 1, s. of 1975, (PCA AO 1),[44] farmers who had paid to the CIF under RA 6260 and
registered their COCOFUND (CIF) receipts with PCA were given their corresponding UCPB
stock certificates. As of June 1976, the cut-off date for the extended registration, only 16
million worth of COCOFUND receipts were registered, leaving over 50 million shares
undistributed;
 3) PCA would later pass Res. 074-78, s. of 1978, to allocate the 50 million
undistributed shares to (a) farmers who were already recipients thereof and (b)
qualified farmers to be identified by COCOFED after a national census.
4) As of May 1981, some 15.6 million shares were still held by and registered in
the name of COCOFED in behalf of coconut farmers for distribution immediately after the
completion of the national census, to all those determined by the PCA to
be bonafide coconut farmers, but who have not received the bank shares;[45] and

5) Prior to June 1986, a large number of coconut farmers opted to sell all/part of
their UCPB shares below their par value. This prompted the UCPB Board to authorize the
CIIF companies to buy these shares. Some 40.34 million common voting shares of UCPB
ended up with these CIIF companies albeit initially registered in the name of UCPB.

On the other hand, the subject of CC 0033-F are two (2) blocks of SMC shares
of stock, the first referring to shares purchased through and registered in the name
of the CIIF holding companies. The purported ownership of the second block of
SMC shares is for the nonce irrelevant to the disposition of this case. During the
time material, the CIIF block of SMC shares represented 27% of the outstanding
capital stock of SMC.

Civil Case No. 0033-A

After the pre-trial, but before the Republic, as plaintiff a quo, could present,
as it committed to, a list of UCPB stockholders as of February 25, 1986,[46] among
other evidence, COCOFED, et al., on the premise that the sequestered farmers
UCPB shares are not unlawfully acquired assets, filed in April 2001 their Class Action
Motion for a Separate Summary Judgment. In it, they prayed for a judgment
dismissing the complaint in CC 0033-A, for the reason that the over than a million
unimpleaded coconut farmers own the UCPB shares. In March 2002, they
filed Class Action Motion for Partial Separate Trial on the issue of whether said
UCPB shares have legitimately become the private property of the million coconut
farmers.
 Correlatively, the Republic, on the strength of the December 14, 2001 ruling
in Republic v. COCOFED[47] and on the argument, among others, that the claim of
COCOFED and Ballares et al. over the subject UCPB shares is based solely on the
supposed COCOFUND receipts issued for payment of the R.A. 6260 CIF levy, filed
a Motion for Partial Summary Judgment [RE: COCOFED, et al. and Ballares, et al.]
dated April 22, 2002, praying that a summary judgment be rendered declaring:

a. That Section 2 of [PD] 755, Section 5, Article III of P.D. 961 and Section 5, Article III of
P.D. No. 1468 are unconstitutional;

b. That (CIF) payments under (R.A.) No. 6260 are not valid and legal bases for ownership
claims over UCPB shares; and

c. That COCOFED, et al., and Ballares, et al. have not legally and validly obtained title
over the subject UCPB shares.

After an exchange of pleadings, the Republic filed its sur-rejoinder praying

that it be conclusively held to be the true and absolute owner of the coconut levy
funds and the UCPB shares acquired therefrom.[48]
A joint hearing on the separate motions for summary judgment to determine
what material facts exist with or without controversy followed.[49] By
Order[50] of March 11, 2003, the Sandiganbayan detailed, based on this Courts
ruling in related cases, the parties manifestations made in open court and the
pleadings and evidence on record, the facts it found to be without substantial
controversy, together with the admissions and/or extent of the admission made by
the parties respecting relevant facts, as follows:

As culled from the exhaustive discussions and manifestations of the parties in open court
of their respective pleadings and evidence on record, the facts which exist without any
substantial controversy are set forth hereunder, together with the admissions and/or the
extent or scope of the admissions made by the parties relating to the relevant facts:
1. The late President Ferdinand E. Marcos was President for two terms . . . and, during the
second term, declared Martial Law through Proclamation No. 1081 dated September 21,
1972.

2. On January 17, 1973, [he] issued Proclamation No. 1102 announcing the ratification of
the 1973 Constitution.

3. From January 17, 1973 to April 7, 1981, [he] . . .exercised the powers and prerogative
of President under the 1935 Constitution and the powers and prerogative of President . .
. the 1973 Constitution.

[He] promulgated various [P.D.s], among which were P.D. No. 232, P.D. No. 276, P.D. No.
414, P.D. No. 755, P.D. No. 961 and P.D. No. 1468.

4. On April 17, 1981, amendments to the 1973 Constitution were effected and, on June
30, 1981, [he], after being elected President, reassumed the title and exercised the
powers of the President until 25 February 1986.

5. Defendants Maria Clara Lobregat and Jose R. Eleazar, Jr. were [PCA] Directors during
the period 1970 to 1986.

6. Plaintiff admits the existence of the following agreements which are attached as
Annexes A and B to the Opposition dated October 10, 2002 of defendant Eduardo M.
Cojuangco, Jr. to the above-cited Motion for Partial Summary Judgment:

a) Agreement made and entered into this ______ day of May, 1975 at Makati,
Rizal, Philippines, by and between:

PEDRO COJUANGCO, Filipino, x x x, for and in his own behalf and in

behalf of certain other stockholders of First United Bank listed in Annex A
attached hereto (hereinafter collectively called the SELLERS);

and
 EDUARDO COJUANGCO, JR., Filipino, x x x, represented in this act by his
duly authorized attorney-in-fact, EDGARDO J. ANGARA, for and in his own behalf
and in behalf of certain other buyers, (hereinafter collectively called the BUYERS);

WITNESSETH: That

WHEREAS, the SELLERS own of record and beneficially a total of 137,866

shares of stock, with a par value of P100.00 each, of the common stock of the
First United Bank (the Bank), a commercial banking corporation existing under
the laws of the Philippines;

WHEREAS, the BUYERS desire to purchase, and the SELLERS are willing
to sell, the aforementioned shares of stock totaling 137,866 shares (hereinafter
called the Contract Shares) owned by the SELLERS due to their special relationship
to EDUARDO COJUANGCO, JR.;

NOW, THEREFORE, for and in consideration of the premises and the

mutual covenants herein contained, the parties agree as follows:

1. Sale and Purchase of Contract Shares

Subject to the terms and conditions of this Agreement, the SELLERS

hereby sell, assign, transfer and convey unto the BUYERS, and the BUYERS hereby
purchase and acquire, the Contract Shares free and clear of all liens and
encumbrances thereon.

2. Contract Price

The purchase price per share of the Contract Shares payable by the
BUYERS is P200.00 or an aggregate price of P27,573,200.00 (the Contract Price).

3. Delivery of, and payment for, stock certificates

Upon the execution of this Agreement, (i) the SELLERS shall deliver to
the BUYERS the stock certificates representing the Contract Shares, free and
clear of all liens, encumbrances, obligations, liabilities and other burdens in
favor of the Bank or third parties, duly endorsed in blank or with stock powers
sufficient to transfer the shares to bearer; and (ii) BUYERS shall deliver to the
SELLERS P27,511,295.50 representing the Contract Price less the amount of
stock transfer taxes payable by the SELLERS, which the BUYERS undertake to
remit to the appropriate authorities. (Emphasis added.)

4. Representation and Warranties of Sellers

The SELLERS respectively and independently of each other represent

and warrant that:

(a) The SELLERS are the lawful owners of, with good marketable title to,
the Contract Shares and that (i) the certificates to be delivered pursuant thereto
have been validly issued and are fully paid and no-assessable; (ii) the Contract
Shares are free and clear of all liens, encumbrances, obligations, liabilities and
other burdens in favor of the Bank or third parties

This representation shall survive the execution and delivery of this

Agreement and the consummation or transfer hereby contemplated.

(b) The execution, delivery and performance of this Agreement by the

SELLERS does not conflict with or constitute any breach of any provision in any
agreement to which they are a party or by which they may be bound.

(c) They have complied with the condition set forth in Article X of the
Amended Articles of Incorporation of the Bank.

5. Representation of BUYERS .

6. Implementation

The parties hereto hereby agree to execute or cause to be executed

such documents and instruments as may be required in order to carry out the
intent and purpose of this Agreement.

7. Notices .
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands at the
place and on the date first above written.

PEDRO COJUANGCO EDUARDO COJUANGCO, JR.

(on his own behalf and in (on his own behalf and in behalf

behalf of the other Sellers of the other Buyers)

listed in Annex A hereof) (BUYERS)

(SELLERS)

By:

EDGARDO J. ANGARA

Attorney-in-Fact

b) Agreement for the Acquisition of a Commercial Bank for the Benefit of the
Coconut Farmers of the Philippines, made and entered into this 25th day of May
1975 at Makati, Rizal, Philippines, by and between:

EDUARDO M. COJUANGCO, JR., x x x, hereinafter referred to as the

SELLER;

and

PHILIPPINE COCONUT AUTHORITY, a public corporation created by

Presidential Decree No. 232, as amended, for itself and for the benefit of the
coconut farmers of the Philippines, (hereinafter called the BUYER)

WITNESSETH: That

WHEREAS, on May 17, 1975, the Philippine Coconut Producers

Federation (PCPF), through its Board of Directors, expressed the desire of the
coconut farmers to own a commercial bank which will be an effective instrument
to solve the perennial credit problems and, for that purpose, passed a resolution
requesting the PCA to negotiate with the SELLER for the transfer to the coconut
farmers of the SELLERs option to buy the First United Bank (the Bank) under such
terms and conditions as BUYER may deem to be in the best interest of the
coconut farmers and instructed Mrs. Maria Clara Lobregat to convey such request
to the BUYER;

WHEREAS, the PCPF further instructed Mrs. Maria Clara Lobregat to

make representations with the BUYER to utilize its funds to finance the purchase
of the Bank;

WHEREAS, the SELLER has the exclusive and personal option to buy
144,400 shares (the Option Shares) of the Bank, constituting 72.2% of the present
outstanding shares of stock of the Bank, at the price of P200.00 per share, which
option only the SELLER can validly exercise;

WHEREAS, in response to the representations made by the coconut

farmers, the BUYER has requested the SELLER to exercise his personal option for
the benefit of the coconut farmers;

WHEREAS, the SELLER is willing to transfer the Option Shares to the

BUYER at a price equal to his option price of P200 per share;

WHEREAS, recognizing that ownership by the coconut farmers of a

commercial bank is a permanent solution to their perennial credit problems, that
it will accelerate the growth and development of the coconut industry and that
the policy of the state which the BUYER is required to implement is to achieve
vertical integration thereof so that coconut farmers will become participants in,
and beneficiaries of, the request of PCPF that it acquire a commercial bank to be
owned by the coconut farmers and, appropriated, for that purpose, the sum of
P150 Million to enable the farmers to buy the Bank and capitalize the Bank to
such an extension as to be in a position to adopt a credit policy for the coconut
farmers at preferential rates;

WHEREAS, x x x the BUYER is willing to subscribe to additional shares

(Subscribed Shares) and place the Bank in a more favorable financial position to
extend loans and credit facilities to coconut farmers at preferential rates;

NOW, THEREFORE, for and in consideration of the foregoing premises

and the other terms and conditions hereinafter contained, the parties hereby
declare and affirm that their principal contractual intent is (1) to ensure that the
coconut farmers own at least 60% of the outstanding capital stock of the Bank;
and (2) that the SELLER shall receive compensation for exercising his personal and
exclusive option to acquire the Option Shares, for transferring such shares to the
coconut farmers at the option price of P200 per share, and for performing the
management services required of him hereunder.

1. To ensure that the transfer to the coconut farmers of the Option

Shares is effected with the least possible delay and to provide for the faithful
performance of the obligations of the parties hereunder, the parties hereby
appoint the Philippine National Bank as their escrow agent (the Escrow Agent).

Upon execution of this Agreement, the BUYER shall deposit with the
Escrow Agent such amount as may be necessary to implement the terms of this
Agreement.

2. As promptly as practicable after execution of this Agreement, the

SELLER shall exercise his option to acquire the Option Share and SELLER shall
immediately thereafter deliver and turn over to the Escrow Agent such stock
certificates as are herein provided to be received from the existing stockholders
of the Bank by virtue of the exercise on the aforementioned option.

3. To ensure the stability of the Bank and continuity of management and

credit policies to be adopted for the benefit of the coconut farmers, the parties
undertake to cause the stockholders and the Board of Directors of the Bank to
authorize and approve a management contract between the Bank and the SELLER
under the following terms:

(a) The management contract shall be for a period of five (5) years,
renewable for another five (5) years by mutual agreement of the SELLER
and the Bank;

(b) The SELLER shall be elected President and shall hold office at the
pleasure of the Board of Directors. While serving in such capacity, he
shall be entitled to such salaries and emoluments as the Board of
Directors may determine;

(c) The SELLER shall recruit and develop a professional management

team to manage and operate the Bank under the control and supervision
of the Board of Directors of the Bank;
 (d) The BUYER undertakes to cause three (3) persons designated by the
SELLER to be elected to the Board of Directors of the Bank;

(e) The SELLER shall receive no compensation for managing the Bank,
other than such salaries or emoluments to which he may be entitled by
virtue of the discharge of his function and duties as President,
provided and

(f) The management contract may be assigned to a management

company owned and controlled by the SELLER.

4. As compensation for exercising his personal and exclusive option to

acquire the Option Shares and for transferring such shares to the coconut
farmers, as well as for performing the management services required of him,
SELLER shall receive equity in the Bank amounting, in the aggregate, to 95,304
fully paid shares in accordance with the procedure set forth in paragraph 6 below;

5. In order to comply with the Central Bank program for increased

capitalization of banks and to ensure that the Bank will be in a more favorable
financial position to attain its objective to extend to the coconut farmers loans
and credit facilities, the BUYER undertakes to subscribe to shares with an
aggregate par value of P80,864,000 (the Subscribed Shares). The obligation of the
BUYER with respect to the Subscribed Shares shall be as follows:

(a) The BUYER undertakes to subscribe, for the benefit of the coconut
farmers, to shares with an aggregate par value of P15,884,000 from the
present authorized but unissued shares of the Bank; and

(b) The BUYER undertakes to subscribe, for the benefit of the coconut
farmers, to shares with an aggregate par value of P64,980,000 from the
increased capital stock of the Bank, which subscriptions shall be deemed
made upon the approval by the stockholders of the increase of the
authorized capital stock of the Bank from P50 Million to P140 Million.

The parties undertake to declare stock dividends of P8 Million out of the

present authorized but unissued capital stock of P30 Million.

6. To carry into effect the agreement of the parties that the SELLER shall
receive as his compensation 95,304 shares:
 (a) .

(b) With respect to the Subscribed Shares, the BUYER undertakes, in

order to prevent the dilution of SELLERs equity position, that it shall cede
over to the SELLER 64,980 fully-paid shares out of the Subscribed
Shares. Such undertaking shall be complied with in the following
manner: .

7. The parties further undertake that the Board of Directors and

management of the Bank shall establish and implement a loan policy for the Bank
of making available for loans at preferential rates of interest to the coconut
farmers .

8. The BUYER shall expeditiously distribute from time to time the shares
of the Bank, that shall be held by it for the benefit of the coconut farmers of the
Philippines under the provisions of this Agreement, to such, coconut farmers
holding registered COCOFUND receipts on such equitable basis as may be
determine by the BUYER in its sound discretion.

9. .

10. To ensure that not only existing but future coconut farmers shall be
participants in and beneficiaries of the credit policies, and shall be entitled to the
benefit of loans and credit facilities to be extended by the Bank to coconut
farmers at preferential rates, the shares held by the coconut farmers shall not be
entitled to pre-emptive rights with respect to the unissued portion of the
authorized capital stock or any increase thereof.

11. After the parties shall have acquired two-thirds (2/3) of the
outstanding shares of the Bank, the parties shall call a special stockholders
meeting of the Bank:

(a) To classify the present authorized capital stock of P50,000,000

divided into 500,000 shares, with a par value of P100.00 per share into:
361,000 Class A shares, with an aggregate par value of P36,100,000 and
139,000 Class B shares, with an aggregate par value of P13,900,000. All
of the Option Shares constituting 72.2% of the outstanding shares, shall
 be classified as Class A shares and the balance of the outstanding shares,
constituting 27.8% of the outstanding shares, as Class B shares;

(b) To amend the articles of incorporation of the Bank to effect the

following changes:

(i) change of corporate name to First United Coconut Bank;

(ii) replace the present provision restricting the transferability

of the shares with a limitation on ownership by any individual
or entity to not more than 10% of the outstanding shares of the
Bank;

(iii) provide that the holders of Class A shares shall not be

entitled to pre-emptive rights with respect to the unissued
portion of the authorized capital stock or any increase thereof;
and

(iv) provide that the holders of Class B shares shall be absolutely

entitled to pre-emptive rights, with respect to the unissued
portion of Class B shares comprising part of the authorized
capital stock or any increase thereof, to subscribe to Class B
shares in proportion t the subscriptions of Class A shares, and
to pay for their subscriptions to Class B shares within a period
of five (5) years from the call of the Board of Directors.

(c) To increase the authorized capital stock of the Bank from P50 Million
to P140 Million.;

(d) To declare a stock dividend of P8 Million payable to the SELLER, the

BUYER and other stockholders of the Bank out of the present authorized
but unissued capital stock of P30 Million;

(e) To amend the by-laws of the Bank accordingly; and

(f) To authorize and approve the management contract provided in paragraph 2

above.
 The parties agree that they shall vote their shares and take all the
necessary corporate action in order to carry into effect the foregoing provisions
of this paragraph 11 .

12. It is the contemplation of the parties that the Bank shall achieve a
financial and equity position to be able to lend to the coconut farmers at
preferential rates.

In order to achieve such objective, the parties shall cause the Bank to adopt a
policy of reinvestment, by way of stock dividends, of such percentage of the
profits of the Bank as may be necessary.

13. The parties agree to execute or cause to be executed such

documents and instruments as may be required in order to carry out the intent
and purpose of this Agreement.

IN WITNESS WHEREOF,

PHILIPPINE COCONUT AUTHORITY

(BUYER)

By:

EDUARDO COJUANGCO, JR. MARIA CLARA L. LOBREGAT

(SELLER)

7. Defendants Lobregat, et al. and COCOFED, et al. and Ballares, et al. admit that the
(PCA) was the other buyers represented by . Cojuangco, Jr. in the May 1975 Agreement
entered into between Pedro Cojuangco (on his own behalf and in behalf of other sellers
listed in Annex A of the agreement) and Cojuangco, Jr. (on his own behalf and in behalf of
the other buyers).Defendant Cojuangco insists he was the only buyer under the aforesaid
Agreement.
8. ..

9. Defendants Lobregat, et al., and COCOFED, et al., and Ballares, et al. admit that in
addition to the 137,866 FUB shares of Pedro Cojuangco, et al. covered by the Agreement,
other FUB stockholders sold their shares to PCA such that the total number of FUB shares
purchased by PCA increased from 137,866 shares to 144,400 shares, the OPTION SHARES
referred to in the Agreement of May 25, 1975. Defendant Cojuangco did not make said
admission as to the said 6,534 shares in excess of the 137,866 shares covered by the
Agreement with Pedro Cojuangco.

10. Defendants Lobregat, et al. and COCOFED, et al. and Ballares, et al. admit that the
Agreement, described in Section 1 of Presidential Decree (P.D.) No. 755 dated July 29,
1975 as the Agreement for the Acquisition of a Commercial Bank for the Benefit of
Coconut Farmers executed by the Philippine Coconut Authority and incorporated in
Section 1 of P.D. No. 755 by reference, refers to the AGREEMENT FOR THE ACQUISITION
OF A COMMERCIAL BANK FOR THE BENEFIT OF THE COCONUT FARMERS OF THE
PHILIPPINES dated May 25, 1975 between defendant Eduardo M. Cojuangco, Jr. and the
[PCA] (Annex B for defendant Cojuangcos OPPOSITION TO PLAINTIFFS MOTION FOR
PARTIAL SUMMARY JUDGMENT [RE: EDUARDO M. COJUANGCO, JR.] dated September
18, 2002).

Plaintiff refused to make the same admission.

11. the Court takes judicial notice that P.D. No. 755 was published [in] volume 71 of the
Official Gazette but the text of the agreement was not so published with P.D. No. 755.

12. Defendants Lobregat, et al. and COCOFED, et al. and Ballares, et al. admit that the
PCA used public funds, in the total amount of P150 million, to purchase the FUB shares
amounting to 72.2% of the authorized capital stock of the FUB, although the PCA was
later reimbursed from the coconut levy funds and that the PCA subscription in the
increased capitalization of the FUB, which was later renamed the (UCPB), came from the
said coconut levy funds.

13. Pursuant to the May 25, 1975 Agreement, out of the 72.2% shares of the
authorized and the increased capital stock of the FUB (later UCPB), entirely paid
for by PCA, 64.98% of the shares were placed in the name of the PCA for the
benefit of the coconut farmers and 7,22% were given to defendant Cojuangco. The
remaining 27.8% shares of stock in the FUB which later became the UCPB were
not covered by the two (2) agreements referred to in item no. 6, par. (a) and (b)
above.

There were shares forming part of the aforementioned 64.98% which were later sold or
transferred to non-coconut farmers.

14. Under the May 27, 1975 Agreement, defendant Cojuangcos equity in the FUB (now
UCPB) was ten percent (10%) of the shares of stock acquired by the PCA for the benefit
of the coconut farmers.

15. That the fully paid 95.304 shares of the FUB, later the UCPB, acquired by defendant
Cojuangco, Jr. pursuant to the May 25, 1975 Agreement were paid for by the PCA in
accordance with the terms and conditions provided in the said Agreement.

16. Defendants Lobregat, et al. and COCOFED, et al. and Ballares, et al. admit that the
affidavits of the coconut farmers (specifically, Exhibit 1-Farmer to 70-Farmer) uniformly
state that:

a. they are coconut farmers who sold coconut products;

b. in the sale thereof, they received COCOFUND receipts pursuant to R.A. No.
6260;

c. they registered the said COCOFUND receipts; and

d. by virtue thereof, and under R.A. No. 6260, P.D. Nos. 755, 961 and 1468, they
are allegedly entitled to the subject UCPB shares.

but subject to the following qualifications:

a. there were other coconut farmers who received UCPB shares although they did
not present said COCOFUND receipt because the PCA distributed the
unclaimed UCPB shares not only to those who already received their
UCPB shares in exchange for their COCOFUND receipts but also to the
coconut farmers determined by a national census conducted pursuant to
PCA administrative issuances;

b. [t]here were other affidavits executed by Lobregat, Eleazar, Ballares and

Aldeguer relative to the said distribution of the unclaimed UCPB shares;
and
 c. the coconut farmers claim the UCPB shares by virtue of their compliance not
only with the laws mentioned in item (d) above but also with the relevant
issuances of the PCA such as, PCA Administrative Order No. 1, dated
August 20, 1975 (Exh. 298-Farmer); PCA Resolution No. 033-78
dated February 16, 1978.

The plaintiff did not make any admission as to the foregoing qualifications.

17. Defendants Lobregat, et al. and COCOFED, et al. and Ballares, et al. claim that the
UCPB shares in question have legitimately become the private properties of the 1,405,366
coconut farmers solely on the basis of their having acquired said shares in compliance
with R.A. No. 6260, P.D. Nos. 755, 961 and 1468 and the administrative issuances of the
PCA cited above.

18. ..

On July 11, 2003, the Sandiganbayan issued the assailed PSJ-A finding for the
Republic, the judgment accentuated by (a) the observation that COCOFED has all
along manifested as representing over a million coconut farmers and (b) a
declaration on the issue of ownership of UCPB shares and the unconstitutionality
of certain provisions of P.D. No. 755 and its implementing regulations. On the
matter of ownership in particular, the anti-graft court declared that the 64.98%
sequestered Farmers UCPB shares, plus other shares paid by PCA
are conclusively owned by the Republic. In its pertinent parts, PSJ-A, resolving the
separate motions for summary judgment in seriatim with separate dispositive
portions for each, reads:

WHEREFORE, in view of the foregoing, we rule as follows:

A. Re: CLASS ACTION MOTION FOR A SEPARATE SUMMARY JUDGMENT dated April 11,
2001 filed by Defendant Maria Clara L. Lobregat, COCOFED, et al., and Ballares, et al.
 The Class Action Motion for Separate Summary Judgment dated April 11,
2001 filed by defendant Maria Clara L. Lobregat, COCOFED, et al. and Ballares, et al., is
hereby DENIED for lack of merit.

B. Re: MOTION FOR PARTIAL SUMMARY JUDGMENT (RE: COCOFED, ET AL. AND
BALLARES, ET AL.) dated April 22, 2002 filed by Plaintiff.

1. a. Section 1 of P.D. No. 755, taken in relation to Section 2 of the same P.D., is
unconstitutional: (i) for having allowed the use of the CCSF to benefit directly
private interest by the outright and unconditional grant of absolute
ownership of the FUB/UCPB shares paid for by PCA entirely with the CCSF to
the undefined coconut farmers, which negated or circumvented the national
policy or public purpose declared by P.D. No. 755 to accelerate the growth
and development of the coconut industry and achieve its vertical integration;
and (ii) for having unduly delegated legislative power to the PCA.

b. The implementing regulations issued by PCA, namely, Administrative Order No.

1, Series of 1975 and Resolution No. 074-78 are likewise invalid for their
failure to see to it that the distribution of shares serve exclusively or at least
primarily or directly the aforementioned public purpose or national policy
declared by P.D. No. 755.

2. Section 2 of P.D. No. 755 which mandated that the coconut levy funds shall not
be considered special and/or fiduciary funds nor part of the general funds of the
national government and similar provisions of Sec. 5, Art. III, P.D. No. 961 and Sec.
5, Art. III, P.D. No. 1468 contravene the provisions of the Constitution,
particularly, Art. IX (D), Sec. 2; and Article VI, Sec. 29 (3).

3. Lobregat, COCOFED, et al. and Ballares, et al. have not legally and validly
obtained title of ownership over the subject UCPB shares by virtue of P.D. No.
755, the Agreement dated May 25, 1975 between the PCA and defendant
Cojuangco, and PCA implementing rules, namely, Adm. Order No. 1, s. 1975 and
Resolution No. 074-78.

4. The so-called Farmers UCPB shares covered by 64.98% of the UCPB shares of
stock, which formed part of the 72.2% of the shares of stock of the former FUB
and now of the UCPB, the entire consideration of which was charged by PCA to
 the CCSF, are hereby declared conclusively owned by, the Plaintiff Republic of the
Philippines.

C. Re: MOTION FOR PARTIAL SUMMARY JUDGMENT (RE: EDUARDO M. COJUANGCO,

JR.) dated September 18, 2002 filed by Plaintiff.

1. Sec. 1 of P.D. No. 755 did not validate the Agreement between PCA and defendant
Eduardo M. Cojuangco, Jr. dated May 25, 1975 nor did it give the Agreement the
binding force of a law because of the non-publication of the said Agreement.

2. Regarding the questioned transfer of the shares of stock of FUB (later UCPB) by
PCA to defendant Cojuangco or the so-called Cojuangco UCPB shares which cost
the PCA more than Ten Million Pesos in CCSF in 1975, we declare, that the transfer
of the following FUB/UCPB shares to defendant Eduardo M. Cojuangco, Jr. was
not supported by valuable consideration, and therefore null and void:

a. The 14,400 shares from the Option Shares;

b. Additional Bank Shares Subscribed and Paid by PCA, consisting of:

1. Fifteen Thousand Eight Hundred Eighty-Four (15,884) shares out of the

authorized but unissued shares of the bank, subscribed and paid by
PCA;

2. Sixty Four Thousand Nine Hundred Eighty (64,980) shares of the

increased capital stock subscribed and paid by PCA; and

3. Stock dividends declared pursuant to paragraph 5 and paragraph 11 (iv)

(d) of the Agreement.

3. The above-mentioned shares of stock of the FUB/UCPB transferred to defendant

Cojuangco are hereby declared conclusively owned by the Republic of
the Philippines.
 4. The UCPB shares of stock of the alleged fronts, nominees and dummies of
defendant Eduardo M. Cojuangco, Jr. which form part of the 72.2% shares of the
FUB/UCPB paid for by the PCA with public funds later charged to the coconut levy
funds, particularly the CCSF, belong to the plaintiff Republic of the Philippines as
their true and beneficial owner.

Let trial of this Civil Case proceed with respect to the issues which have not been
disposed of in this Partial Summary Judgment. For this purpose, the plaintiffs
Motion Ad Cautelam to Present Additional Evidence dated March 28, 2001 is
hereby GRANTED.

From PSJ-A, Lobregat moved for reconsideration which COCOFED, et al. and
Ballares, et al. adopted. All these motions were denied in the extended assailed
Resolution[51] of December 28, 2004.

Civil Case No. 0033-F

Here, the Republic, after filing its pre-trial brief, interposed a Motion for
Judgment on the Pleadings and/or for [PSJ] (Re: Defendants CIIF Companies, 14
Holding Companies and COCOFED, et al.) praying that, in light of the parties
submissions and the supervening ruling in Republic v. COCOFED[52] which left
certain facts beyond question, a judgment issue:

1) Declaring Section 5 of Article III of P.D. No. 961 (Coconut Industry Code) and Section
5 of Article III of P.D. No. 1468 (Revised Coconut Industry Code) to be
unconstitutional;

2) Declaring that CIF payments under RA No. 6260 are not valid and legal bases for
ownership claims over the CIIF companies and, ultimately, the CIIF block of SMC
shares; and
 3) Ordering the reconveyance of the CIIF companies, the 14 holding companies, and the
27% CIIF block of San Miguel Corporation shares of stocks in favor of the government
and declaring the ownership thereof to belong to the government in trust for all the
coconut farmers.

At this juncture, it may be stated that, vis--vis CC 0033-F, Gabay Foundation,

Inc. sought but was denied leave to intervene. But petitioners COCOFED, et al.
moved and were allowed to intervene[53] on the basis of their claim that COCOFED
members beneficially own the block of SMC shares held by the CIIF companies, at
least 51% of whose capitol stock such members own. The claim, as the OSG
explained, arose from the interplay of the following: (a) COCOFED et al.s alleged
majority ownership of the CIIF companies under Sections 9[54] and 10[55] of P.D. No.
1468, and (b) their alleged entitlement to shares in the CIIF companies by virtue of
their supposed registration of COCOFUND receipts allegedly issued to COCOFED
members upon payment of the R.A. 6260 CIF levy.[56]

Just as in CC No. 0033-A, the Sandiganbayan also conducted a hearing in CC

No. 0033-F to determine facts that appeared without substantial controversy as
culled from the records and, by Order[57] of February 23, 2004, outlined those facts.
On May 7, 2004, the Sandiganbayan, in light of its ruling in CC No. 0033-A
and disposing of the issue on ownership of the CIIF oil and holding companies and
their entire block of subject SMC shares, issued the assailed PSJ-F also finding for
the Republic, the fallo of which pertinently reading:

WHEREFORE, in view of the foregoing, we hold that:

The Motion for Partial Summary Judgment (Re: Defendants CIIF Companies, 14
Holding Companies and Cocofed et al.) filed by Plaintiff is hereby GRANTED.
ACCORDINGLY, THE CIIF COMPANIES, namely:

1. Southern Luzon Coconut Oil Mills (SOLCOM);

2. Cagayan de Oro Oil Co., Inc. (CAGOIL);

 3. Iligan Coconut Industries, Inc. (ILICOCO);

4. San Pablo Manufacturing Corp. (SPMC);

5. Granexport Manufacturing Corp. (GRANEX); and

6. Legaspi Oil Co., Inc. (LEGOIL),

AS WELL AS THE 14 HOLDING COMPANIES, NAMELY:

1. Soriano Shares, Inc.;

2. ACS Investors, Inc.;

3. Roxas Shares, Inc.;

4. Arc Investors, Inc.;

5. Toda Holdings, Inc.;

6. AP Holdings, Inc.;

7. Fernandez Holdings, Inc.;

8. SMC Officers Corps, Inc.;

9. Te Deum Resources, Inc.;

10. Anglo Ventures, Inc.;

11. Randy Allied Ventures, Inc.;

12. Rock Steel Resources, Inc.;

13. Valhalla Properties Ltd., Inc.; and

14. First Meridian Development, Inc.

AND THE CIIF BLOCK OF SAN MIGUEL CORPORATION (SMC) SHARES OF STOCK TOTALLING
33,133,266 SHARES AS OF 1983 ARE DECLARED OWNED BY THE GOVERNMENT IN TRUST
FOR ALL THE COCONUT FARMERS GOVERNMENT AND ORDERDED RECONVEYED TO THE
GOVERNMENT.[58] (Emphasis and capitalization in the original; underscoring added.)

Let the trial of this Civil Case proceed with respect to the issues which have not been
disposed of in this Partial Summary Judgment, including the determination of whether
 the CIIF Block of SMC Shares adjudged to be owned by the Government represents 27%
of the issued and outstanding capital stock of SMC according to plaintiff or to 31.3% of
said capital stock according to COCOFED, et al and Ballares, et al.

SO ORDERED.

Expressly covered by the declaration and the reconveyance directive are all
dividends declared, paid and issued thereon as well as any increments thereto
arising from, but not limited to, exercise of pre-emptive rights.

On May 26, 2004, COCOFED et al., filed an omnibus motion (to dismiss for
lack of subject matter jurisdiction or alternatively for reconsideration and to set
case for trial), but this motion was denied per the Sandiganbayans Resolution[59] of
December 28, 2004.

On May 11, 2007, in CC 0033-A, the Sandiganbayan issued a

Resolution[60] denying Lobregats and COCOFEDs separate motions to set the case
for trial/hearing, noting that there is no longer any point in proceeding to trial when
the issue of their claim of ownership of the sequestered UCPB shares and related
sub-issues have already been resolved in PSJ-A.

For ease of reference, PSJ-A and PSJ-F each originally decreed trial or further
hearing on issues yet to be disposed of. However, the Resolution[61] issued on June
5, 2007in CC 0033-A and the Resolution[62] of May 11, 2007 rendered in CC 0033-F
effectively modified the underlying partial summary judgments by deleting that
portions on the necessity of further trial on the issue of ownership of (1) the
sequestered UCPB shares, (2) the CIIF block of SMC shares and (3) the CIIF
companies. As the anti-graft court stressed in both resolutions, the said issue of
ownership has been finally resolved in the corresponding PSJs.[63]
 Hence, the instant petitions.

The Issues

COCOFED et al., in G.R. Nos. 177857-58, impute reversible error on the

Sandiganbayan for (a) assuming jurisdiction over CC Nos. 0033-A and 0033-F
despite the Republics failure to establish below the jurisdictional facts, i.e., that the
sequestered assets sought to be recovered are ill-gotten in the context of E.O. Nos.
1, 2, 14 and 14-A; (b) declaring certain provisions of coco levy issuances
unconstitutional; and (c) denying the petitioners plea to prove that the sequestered
assets belong to coconut farmers. Specifically, petitioners aver:

I. The Sandiganbayan gravely erred when it refused to acknowledge that it did not
have subject matter jurisdiction over the ill-gotten wealth cases because the
respondent Republic failed to prove, and did not even attempt to prove, the
jurisdictional fact that the sequestered assets constitute ill-gotten wealth of former
President Marcos and Cojuangco. Being without subject matter jurisdiction over
the ill-gotten wealth cases, a defect previously pointed out and repeatedly assailed
by COCOFED, et al., the assailed PSJs and the assailed Resolutions are all null and
void.

A. Insofar as the ill-gotten wealth cases are concerned, the Sandiganbayans

subject matter jurisdiction is limited to the recovery of ill-gotten wealth as
defined in Eos 1, 2, 14 and 14-A.Consistent with that jurisdiction, the
subdivided complaints in the ill-gotten wealth cases expressly alleged that
the sequestered assets constitutes ill-gotten wealth of former President
Marcos and Cojuangco, having been filed pursuant to, and in connection
with, Eos 1, 2, 14 and 14-A, the Sandiganbayan gravely erred, if not
exceeded its jurisdiction, when it refused to require the respondent Republic
to prove the aforesaid jurisdictional fact.

B. . Having no evidence on record to prove the said jurisdictional fact, the

Sandiganbayan gravely erred, if not grossly exceeded its statutory
jurisdiction, when it rendered the assailed PSJs instead of dismissing the ill-
gotten wealth cases.

C. Under Section 1 of Rule 9 of the Rules of Court, lack of jurisdiction over

the subject matter may be raised at any stage of the proceedings. In any
event, in pursuing its intervention in the ill-gotten wealth cases, COCOFED,
et al precisely questioned the Sandiganbayans subject matter jurisdiction,
 asserted that the jurisdictional fact does not exist, moved to dismiss the ill-
gotten wealth cases and even prayed that the writs of sequestration over the
sequestered assets be lifted. In concluding that those actions constitute an
invocation of its jurisdiction, the Sandiganbayan clearly acted whimsically,
capriciously and in grave abuse of its discretion.

II. Through the assailed PSJs and the assailed Resolutions, the Sandiganbayan declared
certain provisions of the coconut levy laws as well as certain administrative issuances of
the PCA as unconstitutional. In doing so, the Sandiganbayan erroneously employed, if not
grossly abused, its power of judicial review.

A. the Sandiganbayan gravely erred, if not brazenly exceeded its statutory

jurisdiction and abused the judicial powers, when it concluded that the public
purpose of certain coconut levy laws was not evident, when it thereupon
formulated its own public policies and purposes for the coconut levy laws and at
the same time disregarded the national policies specifically prescribed therein.

B. In ruling that it is not clear or evident how the means employed by the [coconut
levy] laws would serve the avowed purpose of the law or can serve a public
purpose, the Sandiganbayan erroneously examined, determined and evaluated
the wisdom of such laws, a constitutional power within the exclusive province of
the legislative department.

C. The Sandiganbayan gravely erred in declaring Section 1 of PD 755, PCA [AO] 1

and PCA Resolution No. 074-78 constitutionally infirm by reason of alleged but
unproven and unsubstantiated flaws in their implementation.

D. The Sandiganbayan gravely erred in concluding that Section 1 of PD 755

constitutes an undue delegation of legislative power insofar as it authorizes the
PCA to promulgate rules and regulations governing the distribution of the UCPB
shares to the coconut farmers. Rather, taken in their proper context, Section 1 of
PD 755 was complete in itself, [and] prescribed sufficient standards that
circumscribed the discretion of the PCA.

More importantly, this Honorable Court has, on three (3) separate occasions,
rejected respondent Republics motion to declare the coconut levy laws
unconstitutional. The Sandiganbayan gravely erred, if not acted in excess of its
jurisdiction, when it ignored the settled doctrines of law of the case and/or stare
 decisis and granted respondent Republics fourth attempt to declare the coconut
levy laws unconstitutional, despite fact that such declaration of
unconstitutionality was not necessary to resolve the ultimate issue of ownership
involved in the ill-gotten wealth cases.

III. In rendering the assailed PSJs and thereafter refusing to proceed to trial on the merits,
on the mere say-so of the respondent Republic, the Sandiganbayan committed gross and
irreversible error, gravely abused its judicial discretion and flagrantly exceeded
its jurisdiction as it effectively sanctioned the taking of COCOFED, et al.s property by the
respondent Republic without due process of law and through retroactive application of
the declaration of unconstitutionality of the coconut levy laws, an act that is not only
illegal and violative of the settled Operative Fact Doctrine but, more importantly,
inequitable to the coconut farmers whose only possible mistake, offense or misfortune
was to follow the law.

A. .

1. In the course of the almost twenty (20) years that the ill-gotten wealth
cases were pending, COCOFED, et al. repeatedly asked to be allowed to
present evidence to prove that the true, actual and beneficial owners of the
sequestered assets are the coconut farmers and not Cojuangco, an alleged
crony of former President Marcos. The Sandiganbayan grievously erred and
clearly abused its judicial discretion when it repeatedly and continuously
denied COCOFED, et al. the opportunity to present their evidence to disprove
the baseless allegations of the Ill-Gotten Wealth Cases that the sequestered
assets constitute ill-gotten wealth of Cojuangco and of former President
Marcos, an error that undeniably and illegally deprived COCOFED, et al of
their constitutional right to be heard.

2. The Sandiganbayan erroneously concluded that the Assailed PSJs and

Assailed Resolutions settled the ultimate issue of ownership of the
Sequestered Assets and, more importantly, resolved all factual and legal
issues involved in the ill-gotten wealth cases. Rather, as there are triable
issues still to be resolved, it was incumbent upon the Sandiganbayan to
receive evidence thereon and conduct trial on the merits.

3. Having expressly ordered the parties to proceed to trial and thereafter

decreeing that trial is unnecessary as the Assailed PSJs were final and
appealable judgments, the Sandiganbayan acted whimsically, capriciously
 and contrary to the Rules of Court, treated the parties in the ill-gotten wealth
cases unfairly, disobeyed the dictate of this Honorable Court and, worse,
violated COCOFED, et als right to due process and equal protection of the
laws.

B. The Sandiganbayan gravely erred if not grossly abused its discretion when it
repeatedly disregarded, and outrightly refused to recognize, the operative facts
that existed as well as the rights that vested from the time the coconut levy laws
were enacted until their declaration of unconstitutionality in the assailed PSJs. As
a result, the assailed PSJs constitute a proscribed retroactive application of the
declaration of unconstitutionality, a taking of private property, and an
impairment of vested rights of ownership, all without due process of
law.[64]Otherwise stated, the assailed PSJs and the assailed Resolutions effectively
penalized the coconut farmers whose only possible mistake, offense or
misfortune was to follow the laws that were then legal, valid and constitutional.

IV. The voluminous records of these ill-gotten wealth cases readily reveal the various
dilatory tactics respondent Republic resorted to. As a result, despite the lapse of almost
twenty (20) years of litigation, the respondent Republic has not been required to, and has
not even attempted to prove, the bases of its perjurious claim that the sequestered assets
constitute ill-gotten wealth of former President Marcos and his crony, Cojuangco. In
tolerating respondent Republics antics for almost twenty (20) years, the Sandiganbayan
so glaringly departed from procedure and thereby flagrantly violated COCOFED, et al.s
right to speedy trial.

In G.R. No. 178193, petitioner Ursua virtually imputes to the Sandiganbayan

the same errors attributed to it by petitioners in G.R. Nos. 177857-58.[65] He
replicates as follows:

The Sandiganbayan decided in a manner not in accord with the Rules of Court and
settled jurisprudence in rendering the questioned PSJ as final and appealable
thereafter taking the sequestered assets from their owners or record without
presentation of any evidence, thus, the questioned PSJ and the questioned
Resolutions are all null and void.
 A. The Sandiganbayans jurisdiction insofar as the ill-gotten wealth
cases are concerned, is limited to the recovery of ill-gotten wealth
as defined in Executive Orders No. 1, 2, 14 and 14-A.

B. The Sandiganbayan should have decided to dismiss the case or

continue to receive evidence instead of ruling against the
constitutionality of some coconut levy laws and PCA issuances
because it could decide on other grounds available to it.

II

The Sandiganbayan gravely erred when it declared PD. 755, Section 1 and 2,
Section 5, Article 1 of PD 961, and Section 5 of Art. III of PD 1468 as well as
administrative issuances of the PCA as unconstitutional in effect, it abused it power
of judicial review.

A. The Sandiganbayan gravely erred in concluding that the purpose

of PD 755 Section 1 and 2, Section 5, Article 1 of PD 961, and
Section 5 of Art. III of PD 1468 is not evident. It then proceeded to
formulated its own purpose thereby intruding into the wisdom of the
legislature in enacting [t]he law.

B. The Sandiganbayan gravely erred in declaring Section 1 of PD

755, PCA [AO] No. 1 and PCA Resolution No. 074-78
unconstitutional due to alleged flaws in their implementation.

C. The Sandiganbayan gravely erred in concluding that Section 1 of

PD No. 755 constitutes an undue delegation of legislative power
insofar as it authorizes the PCA to promulgate rules and regulations
governing the distribution of the UCPB shares to the coconut
farmers. Section 1 of PD 755 was complete in itself, prescribed
sufficient standards that circumscribed the discretion of the PCA
and merely authorized the PCA to fill matters of detail an execution
through promulgated rules and regulations.

III

The coconut levy laws, insofar as they allowed the PCA to promulgate rules and
regulations governing the distribution of the UCPB to the coconut farmers, do not
constitute an undue delegation of legislative power as they were complete in
themselves and prescribed sufficient standards that circumscribed the discretion of
the PCA.

IV
 Assuming ex-gratia argumenti that the coconut levy laws are unconstitutional, still,
the owners thereof cannot be deprived of their property without due process of law
considering that they have in good faith acquired vested rights over the sequestered
assets.
In sum, the instant petitions seek to question the decisions of the
Sandiganbayan in both CC Nos. 0033-A and 0033-F, along with the preliminary
issues of objection. We shall address at the outset, (1) the common preliminary
questions, including jurisdictional issue, followed by (2) the common primary
contentious issues (i.e. constitutional questions), and (3) the issues particular to each
case.

The Courts Ruling

The Sandiganbayan has jurisdiction over the subject

matter ofthe subdivided amended complaints.

The primary issue, as petitioners COCOFED, et al. and Ursua put forward, boils
down to the Sandiganbayans alleged lack of jurisdiction over the subject matter of
the amended complaints. Petitioners maintain that the jurisdictional facts necessary
to acquire jurisdiction over the subject matter in CC No. 0033-A have yet to be
established. In fine, the Republic, so petitioners claim, has failed to prove the ill-
gotten nature of the sequestered coconut farmers UCPB shares. Accordingly, the
controversy is removed from the subject matter jurisdiction of the Sandiganbayan
and necessarily any decision rendered on the merits, such as PSJ-A and PSJ-F, is
void.

To petitioners, it behooves the Republic to prove the jurisdictional facts

warranting the Sandiganbayans continued exercise of jurisdiction over ill-gotten
wealth cases. Citing Manila Electric Company [Meralco] v. Ortaez,[66] petitioners
argue that the jurisdiction of an adjudicatory tribunal exercising limited jurisdiction,
like the Sandiganbayan, depends upon the facts of the case as proved at the trial and
not merely upon the allegation in the complaint.[67] Cited too is PCGG v.
Nepumuceno,[68] where the Court held:
 The determinations made by the PCGG at the time of issuing sequestration
orders cannot be considered as final determinations; that the properties or entities
sequestered or taken-over in fact constitute ill-gotten wealth according to [E.O.]
No. 1 is a question which can be finally determined only by a court the
Sandiganbayan. The PCGG has the burden of proving before the Sandiganbayan
that the assets it has sequestered or business entity it has provisionally taken-over
constitutes ill-gotten wealth within the meaning of [E.O.] No. 1 and Article No.
XVIII (26) of the 1987 Constitution.

Petitioners above posture is without merit.

Justice Florenz D. Regalado explicates subject matter jurisdiction:

16. Basic is the doctrine that the jurisdiction of a court over the subject-matter of
an action is conferred only by the Constitution or the law and that the Rules of
Court yield to substantive law, in this case, the Judiciary Act and B.P. Blg. 129,
both as amended, and of which jurisdiction is only a part. Jurisdiction cannot be
acquired through, or waived, enlarged or diminished by, any act or omission of the
parties; neither can it be conferred by the acquiescence of the court. Jurisdiction
must exist as a matter of law. Consequently, questions of jurisdiction may be raised
for the first time on appeal even if such issue was not raised in the lower court.

17. Nevertheless, in some case, the principle of estoppel by laches has been availed
to bar attacks on jurisdiction.[69]

It is, therefore, clear that jurisdiction over the subject matter is conferred by law. In
turn, the question on whether a given suit comes within the pale of a statutory
conferment is determined by the allegations in the complaint, regardless of whether
or not the plaintiff will be entitled at the end to recover upon all or some of the claims
asserted therein.[70]We said as much in Magay v. Estiandan:[71]

[J]urisdiction over the subject matter is determined by the allegations of the

complaint, irrespective of whether or not the plaintiff is entitled to recover upon all
or some of the claims asserted therein-a matter that can be resolved only after and
as a result of the trial. Nor may the jurisdiction of the court be made to depend upon
the defenses set up in the answer or upon the motion to dismiss, for, were we to be
governed by such rule, the question of jurisdiction could depend almost entirely
upon the defendant.

Of the same tenor was what the Court wrote in Allied Domecq Philippines,
Inc. v. Villon:[72]
 Jurisdiction over the subject matter is the power to hear and determine the
general class to which the proceedings in question belong. Jurisdiction over the
subject matter is conferred by law and not by the consent or acquiescence of any or
all of the parties or by erroneous belief of the court that it exists. Basic is the rule
that jurisdiction over the subject matter is determined by the cause or causes of
action as alleged in the complaint.
The material averments in subdivided CC No. 0033-A and CC No. 0033-F included
the following:

12. Defendant Eduardo Cojuangco, Jr served as a public officer during the Marcos
administration.

13. Defendant Eduardo Cojuangco, Jr., taking advantage of his association,

influence and connection, acting in unlawful concert with the [Marcoses] and the
individual defendants, embarked upon devices, schemes and stratagems, including
the use of defendant corporations as fronts, to unjustly enrich themselves as the
expense of the Plaintiff and the Filipino people, such as when he

a) manipulated, beginning the year 1975 with the active collaboration of

Defendants , Marai Clara Lobregat, Danilo Ursua [etc.], the purchase by the (PCA)
of 72.2% of the outstanding capital stock of the (FUB) which was subsequently
converted into a universal bank named (UCPB) through the use of (CCSF) in a
manner contrary to law and to the specific purposes for which said coconut levy
funds were imposed and collected under P.D. 276 and under anomalous and sinister
designs and circumstances, to wit:

(i) Defendant Eduardo Cojuangco, Jr. coveted the coconut levy funds as a cheap,
lucrative and risk-free source of funds with which to exercise his private option to buy
the controlling interest in FUB.
(ii) to legitimize a posteriori his highly anomalous and irregular use and diversion of
government funds to advance his own private and commercial interests Defendant
Eduardo Cojuangco, Jr. caused the issuance of PD 755 (a) declaring that the coconut
levy funds shall not be considered special and fiduciary and trust funds conveniently
repealing for that purpose a series of previous decrees establishing the character of the
coconut levy funds as special, fiduciary, trust and governments; (b) confirming the
agreement between Cojuangco and PCA on the purchase of FUB by incorporating by
reference said private commercial agreement in PD 755;
(iii) .
(iv) To perpetuate his opportunity to build his economic empire, Cojuangco caused the
issuance of an unconstitutional decree (PD 1468) requiring the deposit of all coconut
levy funds with UCPB interest free to the prejudice of the government and finally
(v) Having fully established himself as the undisputed coconut king with unlimited
powers to deal with the coconut levy funds, the stage was now set for Defendant
Eduardo Cojuangco, Jr. to launch his predatory forays into almost all aspects of
Philippine activity namely . oil mills.
(vi) In gross violation of their fiduciary positions and in contravention of the goal to create
a bank for coconut farmers of the country, the capital stock of UCPB as of February
25, 1986 was actually held by the defendants, their lawyers, factotum and business
 associates, thereby finally gaining control of the UCPB by misusing the names and
identities of the so-called more than one million coconut farmers.

(b) created and/or funded with the use of coconut levy funds various
corporations, such as (COCOFED) with the active collaboration and participation
of Defendants Juan Ponce Enrile, Maria Clara Lobregat most of whom comprised
the interlocking officers and directors of said companies; dissipated, misused
and/or misappropriated a substantial part of said coco levy funds FINALLY GAIN
OWNERSHIP AND CONTROL OF THE UNITED COCONUT PLANTERS
BANK BY MISUSING THE NAMES AND/OR IDENTIFIES OF THE SO-
CALLLED MORE THAN ONE MILLION COCONUT FARNMERS;

(c) misappropriated, misused and dissipated P840 million of the (CIDF)

levy funds deposited with the National Development Corporation (NIDC) as
administrator trustee of said funds and later with UCPB, of which Defendant
Eduardo Cojuangco, Jr. was the Chief Executive Officer.

(d) established and caused to be funded with coconut levy fundfs, with the
active collaboration of Defendants Ferdinand E. Marcos through the issuance of
LOI 926 and of [other] defendants the United Coconut Oil Mills, Inc., a corporation
controlled by Defendant Eduardo Cojuangco, Jr. and bought sixteen (16) certain
competing oil mills at exorbitant prices then mothballed them.

(i) misused coconut levy funds to buy majority of the outstanding shares of
stock of San Miguel Corporation.

14. Defendants Eduardo Cojuangco, Jr. of the Angara Concepcion Cruz

Regala and Abello law offices (ACCRA) plotted, devised, schemed, conspired and
confederated with each otherin setting up, through the use of the coconut levy funds
the financial and corporate structures that led to the establishment of UCPB
UNICOM [etc.] and more than twenty other coconut levy funded corporations
including the acquisition of [SMC] shares and its institutionalization through
presidential directives of the coconut monopoly.

16. The acts of Defendants, singly or collectively, and /or in unlawful

concert with one another, constitute gross abuse of official position and authority,
flagrant breach of public trust and fiduciary obligations, brazen abuse of right and
power, unjust enrichment, violation of the Constitution and laws to the grave and
irreparable damage of the Plaintiff and the Filipino people.

CC No. 0033-F
 12. Defendant Eduardo Cojuangco, Jr., served as a public officer during the
Marcos administration.

13. Having fully established himself as the undisputed coconut king with
unlimited powers to deal with the coconut levy funds, the stage was now set for
Cojuangco, Jr. to launch his predatory forays into almost all aspects of Philippine
economic activity namely oil mills .

14. Defendant Eduardo Cojuangco, Jr., taking undue advantage of his

association, influence, and connection, acting in unlawful concert with Defendants
Ferdinand E. Marcos and Imelda R. Marcos, and the individual defendants,
embarked upon devices, schemes and stratagems, including the use of defendant
corporations as fronts, to unjustly enrich themselves at the expense of Plaintiff and
the Filipino people.

(a) Having control over the coconut levy, Defendant Eduardo M.

Cojuangco invested the funds in diverse activities, such as the various
businesses SMC was engaged in.;

(c) Later that year [1983], Cojuangco also acquired the Soriano stocks
through a series of complicated and secret agreements, a key feature of
which was a voting trust agreement that stipulated that Andres, Jr. or his
heir would proxy over the vote of the shares owned by Soriano and
Cojuangco.

(g) All together, Cojuangco purchased 33 million shares of the SMC through
the 14 holding companies

3.1. The same fourteen companies were in turn owned by the six (6)
so-called CIIF Companies.

(h) Defendant Corporations are but shell corporations owned by

interlocking shareholders who have previously admitted that they are
just nominee stockholders who do not have any proprietary interest over
the shares in their names. [L]awyers of the Angara Abello Concepcion
Regala & Cruz (ACCRA) Law offices, the previous counsel who
incorporated said corporations, prove that they were merely nominee
stockholders thereof.

(l) These companies, which ACCRA Law Offices organized for Defendant
Cojuangco to be able to control more than 60% of SMC shares, were
funded by institutions which depended upon the coconut levy such as
 the UCPB, UNICOM, (COCOLIFE), among others. Cojuangco and
his ACCRA lawyers used the funds from 6 large coconut oil mills and
10 copra trading companies to borrow money from the UCPB and
purchase these holding companies and the SMC stocks. Cojuangco used
$ 150 million from the coconut levy, broken down as follows:

Amount Source Purpose

(in million)

$ 22.26 Oil Mills equity in holding

Companies

$ 65.6 Oil Mills loan to holding

Companies

$ 61.2 UCPB loan to holding

Companies [164]

The entire amount, therefore, came from the coconut levy, some passing
through the Unicom Oil mills, others directly from the UCPB.

(m) With his entry into the said Company, it began to get favors from the
Marcos government, significantly the lowering of the excise taxes on
beer, one of the main products of SMC.

15. Defendants plotted, devised, schemed, conspired and confederated with

each other in setting up, through the use of coconut levy funds, the financial and
corporate framework and structures that led to the establishment of UCPB, [etc.],
and more than twenty other coconut levy-funded corporations, including the
acquisition of [SMC] shares and its institutionalization through presidential
directives of the coconut monopoly.

16. The acts of Defendants, singly or collectively, and/or in unlawful

concert with one another, constitute gross abuse of official position and authority,
flagrant breach of public trust and fiduciary obligations, brazen abuse of right and
power, unjust enrichment, violation of the constitution and laws of the Republic of
the Philippines, to the grave and irreparable damage of Plaintiff and the Filipino
people.[73]

Judging from the allegations of the defendants illegal acts thereat made, it is
fairly obvious that both CC Nos. 0033-A and CC 0033-F partake, in the context of
EO Nos. 1, 2 and 14, series of 1986, the nature of ill-gotten wealth suits. Both deal
with the recovery of sequestered shares, property or business enterprises claimed, as
alleged in the corresponding basic complaints, to be ill-gotten assets of President
Marcos, his cronies and nominees and acquired by taking undue advantage of
relationships or influence and/or through or as a result of improper use, conversion
or diversion of government funds or property. Recovery of these assetsdetermined
as shall hereinafter be discussed as prima facie ill-gottenfalls within the
unquestionable jurisdiction of the Sandiganbayan.[74]

P.D. No. 1606, as amended by R.A. 7975 and E.O. No. 14, Series of 1986,
vests the Sandiganbayan with, among others, original jurisdiction over civil and
criminal cases instituted pursuant to and in connection with E.O. Nos. 1, 2, 14 and
14-A. Correlatively, the PCGG Rules and Regulations defines the term Ill-Gotten
Wealth as any asset, property, business enterprise or material possession of persons
within the purview of [E.O.] Nos. 1 and 2, acquired by them directly, or indirectly
thru dummies, nominees, agents, subordinates and/or business associates by any
of the following means or similar schemes:
(1) Through misappropriation, conversion, misuse or malversation of
public funds or raids on the public treasury;

(2) .;

(3) By the illegal or fraudulent conveyance or disposition of assets

belonging to the government or any of its subdivisions, agencies or
instrumentalities or government-owned or controlled corporations;
(4) By obtaining, receiving or accepting directly or indirectly any shares
of stock, equity or any other form of interest or participation in any business
enterprise or undertaking;

(5) Through the establishment of agricultural, industrial or commercial

monopolies or other combination and/or by the issuance, promulgation
and/or implementation of decrees and orders intended to benefit particular
persons or special interests; and

(6) By taking undue advantage of official position, authority,

relationship or influence for personal gain or benefit.[75] (Emphasis
supplied)

Section 2(a) of E.O. No. 1 charged the PCGG with the task of assisting the President
in [T]he recovery of all ill-gotten wealth accumulated by former [President]
Marcos, his immediate family, relatives, subordinates and close associates including
the takeover or sequestration of all business enterprises and entities owned or
controlled by them, during his administration, directly or through nominees, by
taking undue advantage of their public office and/or using their powers, authority,
influence, connections or relationship.Complementing the aforesaid Section 2(a) is
Section 1 of E.O. No. 2 decreeing the freezing of all assets in which the [Marcoses]
their close relatives, subordinates, business associates, dummies, agents or
nominees have any interest or participation.

The Republics averments in the amended complaints, particularly those detailing the
alleged wrongful acts of the defendants, sufficiently reveal that the subject matter
thereof comprises the recovery by the Government of ill-gotten wealth acquired by
then President Marcos, his cronies or their associates and dummies through the
unlawful, improper utilization or diversion of coconut levy funds aided by P.D. No.
755 and other sister decrees. President Marcos himself issued these decrees in a
brazen bid to legalize what amounts to private taking of the said public funds.

Petitioners COCOFED et al. and Ursua, however, would insist that the Republic has
failed to prove the jurisdiction facts: that the sequestered assets indeed constitute ill-
gotten wealth as averred in the amended subdivided complaints.

This contention is incorrect.

There was no actual need for Republic, as plaintiff a quo, to adduce evidence
to show that the Sandiganbayan has jurisdiction over the subject matter of the
complaints as it leaned on the averments in the initiatory pleadings to make visible
the jurisdiction of the Sandiganbayan over the ill-gotten wealth complaints. As
previously discussed, a perusal of the allegations easily reveals the sufficiency of the
statement of matters disclosing the claim of the government against the coco levy
funds and the assets acquired directly or indirectly through said funds as ill-gotten
wealth. Moreover, the Court finds no rule that directs the plaintiff to first prove the
subject matter jurisdiction of the court before which the complaint is filed. Rather,
such burden falls on the shoulders of defendant in the hearing of a motion to dismiss
anchored on said ground or a preliminary hearing thereon when such ground is
alleged in the answer.

COCOFED et al. and Ursuas reliance on Manila Electric Company [Meralco]

v. Ortanez[76] is misplaced, there being a total factual dissimilarity between that and
the case at bar. Meralco involved a labor dispute before the Court of Industrial
Relations (CIR) requiring the interpretation of a collective bargaining agreement to
determine which between a regular court and CIR has jurisdiction. There, it was held
that in case of doubt, the case may not be dismissed for failure to state a cause of
action as jurisdiction of CIR is not merely based on the allegations of the complaint
but must be proved during the trial of the case. The factual milieu of Meralco shows
that the said procedural holding is peculiar to the CIR. Thus, it is not and could not
be a precedent to the cases at bar.

Even PCGG v. Nepomuceno[77] is not on all fours with the cases at bench, the issue
therein being whether the regional trial court has jurisdiction over the PCGG and
sequestered properties, vis--vis the present cases, which involve an issue concerning
the Sandiganbayans jurisdiction. Like in Meralco, the holding in Nepomuceno is not
determinative of the outcome of the cases at bar.

While the 1964 Meralco and the Nepomuceno cases are inapplicable, the Courts
ruling in Tijam v. Sibonhonoy[78] is the leading case on estoppel relating to
jurisdiction. In Tijam, the Court expressed displeasure on the undesirable practice of
a party submitting his case for decision and then accepting judgment, only if
favorable, and then attacking it for lack of jurisdiction, when adverse.

Considering the antecedents of CC Nos. 0033-A and 0033-F, COCOFED, Lobregat,

Ballares, et al. and Ursua are already precluded from assailing the jurisdiction of the
Sandiganbayan. Remember that the COCOFED and the Lobregat group were not
originally impleaded as defendants in CC No. 0033. They later asked and were
allowed by the Sandiganbayan to intervene. If they really believe then that the
Sandiganbayan is without jurisdiction over the subject matter of the complaint in
question, then why intervene in the first place? They could have sat idly by and let
the proceedings continue and would not have been affected by the outcome of the
case as they can challenge the jurisdiction of the Sandiganbayan when the time for
implementation of the flawed decision comes. More importantly, the decision in the
case will have no effect on them since they were not impleaded as indispensable
parties. After all, the joinder of all indispensable parties to a suit is not only
mandatory, but jurisdictional as well.[79] By their intervention, which the
Sandiganbayan allowed per its resolution dated September 30, 1991, COCOFED
and Ursua have clearly manifested their desire to submit to the jurisdiction of the
Sandiganbayan and seek relief from said court. Thereafter, they filed numerous
pleadings in the subdivided complaints seeking relief and actively participated in
numerous proceedings. Among the pleadings thus filed are the Oppositions to the
Motion for Intervention interposed by the Pambansang Koalisyon ng mga Samahang
Magsasaka at Manggagawa sa Niyogan and Gabay ng Mundo sa Kaunlaran
Foundation, Inc., a Class Action Omnibus Motion to enjoin the PCGG from voting
the SMC shares dated February 23, 2001 (granted by Sandiganbayan) and the Class
Action Motion for a Separate Summary Judgment dated April 11, 2001. By these
acts, COCOFED et al. are now legally estopped from asserting the Sandiganbayns
want of jurisdiction, if that be the case, over the subject matter of the complaint as
they have voluntarily yielded to the jurisdiction of the Sandiganbayan.Estoppel has
now barred the challenge on Sandiganbayans jurisdiction.

The ensuing excerpts from Macahilig v. Heirs of Magalit[80] are instructive:

We cannot allow her to attack its jurisdiction simply because it rendered a Decision
prejudicial to her position. Participation in all stages of a case before a trial court
effectively estops a party from challenging its jurisdiction. One cannot belatedly
reject or repudiate its decision after voluntarily submitting to its jurisdiction, just to
secure affirmative relief against ones opponent or after failing to obtain such
relief. If, by deed or conduct, a party has induced another to act in a particular
manner, estoppel effectively bars the former from adopting an inconsistent position,
attitude or course of conduct that thereby causes loss or injury to the latter.

Lest it be overlooked, this Court has already decided that the sequestered
shares are prima facie ill-gotten wealth rendering the issue of the validity of their
sequestration and of the jurisdiction of the Sandiganbayan over the case beyond
doubt. In the case of COCOFED v. PCGG,[81] We stated that:

It is of course not for this Court to pass upon the factual issues thus raised.
That function pertains to the Sandiganbayan in the first instance. For purposes of
this proceeding, all that the Court needs to determine is whether or not there
is prima facie justification for the sequestration ordered by the PCGG. The Court
is satisfied that there is. The cited incidents, given the public character of the
coconut levy funds, place petitioners COCOFED and its leaders and officials,
at least prima facie, squarely within the purview of Executive Orders Nos. 1,
2 and 14, as construed and applied in BASECO, to wit:

1. that ill-gotten properties (were) amassed by the leaders and supporters of

the previous regime;
 a. more particularly, that (i)ll-gotten wealth was accumulated by Marcos,
his immediate family, relatives, subordinates and close associates, . (and) business
enterprises and entities (came to be) owned or controlled by them, during (the
Marcos) administration, directly or through nominees, by taking undue advantage
of their public office and using their powers, authority, influence, connections or
relationships;

b. otherwise stated, that there are assets and properties purportedly

pertaining to [the Marcoses], their close relatives, subordinates, business
associates, dummies, agents or nominees which had been or were acquired by them
directly or indirectly, through or as a result of the improper or illegal use of funds
or properties owned by the Government or any of its branches, instrumentalities,
enterprises, banks or financial institutions, or by taking undue advantage of their
office, authority, influence, connections or relationship, resulting in their unjust
enrichment .;

2. The petitioners claim that the assets acquired with the coconut levy funds
are privately owned by the coconut farmers is founded on certain provisions of law,
to wit [Sec. 7, RA 6260 and Sec. 5, Art. III, PD 1468] (Words in bracket added;
italics in the original).

In their attempt to dismiss the amended complaints in question, petitioners

asseverate that (1) the coconut farmers cannot be considered as subordinates, close
and/or business associates, dummies, agents and nominees of Cojuangco, Jr. or the
Marcoses, and (2) the sequestered shares were not illegally acquired nor acquired
through or as result of improper or illegal use or conversion of funds belonging to
the Government. While not saying so explicitly, petitioners are doubtless conveying
the idea that wealth, however acquired, would not be considered ill-gotten in the
context of EO 1, 2 and 14, s. of 1986, absent proof that the recipient or end possessor
thereof is outside the Marcos circle of friends, associates, cronies or nominees.

We are not convinced.

As may be noted, E.O. 1 and 2 advert to President Marcos, or his associates

nominees. In its most common signification, the term nominee refers to one who is
designated to act for another usually in a limited way; [82] a person in whose name a
stock or bond certificate is registered but who is not the actual owner thereof is
considered a nominee.[83] Corpus Juris Secundum describes a nominee as one:
 designated to act for another as his representative in a rather limited sense.
It has no connotation, however, other than that of acting for another, in
representation of another or as the grantee of another. In its commonly accepted
meaning the term connoted the delegation of authority to the nominee in a
representative or nominal capacity only, and does not connote the transfer or
assignment to the nominee of any property in, or ownership of, the rights of the
person nominating him.[84]

So, the next question that comes to the fore is: would the term nominee include
the more than one million coconut farmers alleged to be the recipients of the UCPB
shares?

Guided by the foregoing definitions, the query must be answered in the

affirmative if only to give life to those executive issuances aimed at ensuring the
recovery of ill-gotten wealth. It is basic, almost elementary, that:
Laws must receive a sensible interpretation to promote the ends for which
they are enacted. They should be so given reasonable and practical construction as
will give life to them, if it can be done without doing violence to reason.
Conversely, a law should not be so construed as to allow the doing of an act which
is prohibited by law, not so interpreted as to afford an opportunity to defeat
compliance with its terms, create an inconsistency, or contravene the plain words
of the law. Interpretatio fienda est ut res magis valeat quam pereat or that
interpretation as will give the thing efficacy is to be adopted.[85]

E.O. 1, 2, 14 and 14-A, it bears to stress, were issued precisely to effect the
recovery of ill-gotten assets amassed by the Marcoses, their associates, subordinates
and cronies, or through their nominees. Be that as it may, it stands to reason that
persons listed as associated with the Marcoses[86] refer to those in possession of such
ill-gotten wealth but holding the same in behalf of the actual, albeit undisclosed
owner, to prevent discovery and consequently recovery. Certainly, it is well-nigh
inconceivable that ill-gotten assets would be distributed to and left in the hands of
individuals or entities with obvious traceable connections to Mr. Marcos and his
cronies. The Court can take, as it has in fact taken, judicial notice of schemes and
machinations that have been put in place to keep ill-gotten assets under wraps. These
would include the setting up of layers after layers of shell or dummy, but controlled,
corporations[87] or manipulated instruments calculated to confuse if not altogether
mislead would-be investigators from recovering wealth deceitfully amassed at the
expense of the people or simply the fruits thereof. Transferring the illegal assets to
third parties not readily perceived as Marcos cronies would be another. So it was
that in PCGG v. Pena, the Court, describing the rule of Marcos as a well entrenched
plundering regime of twenty years, noted the magnitude of the past regimes
organized pillage and the ingenuity of the plunderers and pillagers with the
assistance of experts and the best legal minds in the market.[88]

Hence, to give full effect to E.O. 1, 2 and 14, s. of 1986, the term nominee, as
used in the above issuances, must be taken to mean to include any person or group
of persons, natural or juridical, in whose name government funds or assets were
transferred to by Pres. Marcos, his cronies or his associates. To this characterization
must include what the Sandiganbayan considered the unidentified coconut farmers,
more than a million of faceless and nameless coconut farmers, the alleged
beneficiaries of the distributed UCPB shares, who, under the terms of Sec. 10
of PCA A.O. No. 1, s. of 1975, were required, upon the delivery of their
respective stock certificates, to execute an irrevocable proxy in favor of the
Banks manager. There is thus ample truth to the observations - [That] the PCA
provided this condition only indicates that the PCA had no intention to constitute
the coconut farmer UCPB stockholder as a bona fide stockholder; that the 1.5
million registered farmer-stockholders were mere nominal stockholders.[89]

From the foregoing, the challenge on the Sandiganbayans subject matter jurisdiction
at bar must fail.

II

Petitioners COCOFED et al. were not

deprived of their right to be heard.

As a procedural issue, COCOFED, et al. and Ursua next contend that in the course
of almost 20 years that the cases have been with the anti-graft court, they have
repeatedly sought leave to adduce evidence (prior to respondents complete
presentation of evidence) to prove the coco farmers actual and beneficial ownership
of the sequestered shares.The Sandiganbayan, however, had repeatedly and
continuously disallowed such requests, thus depriving them of their constitutional
right to be heard.
This contention is untenable, their demand to adduce evidence being disallowable
on the ground of prematurity.

The records reveal that the Republic, after adducing its evidence in CC No. 0033-A,
subsequently filed a Motion Ad Cautelam for Leave to Present Additional
Evidence dated March 28, 2001. This motion remained unresolved at the time the
Republic interposed its Motion for Partial Summary Judgment. The Sandiganbayan
granted the later motion and accordingly rendered the Partial Summary Judgment,
effectively preempting the presentation of evidence by the defendants in said case
(herein petitioners COCOFED and Ursua).

Section 5, Rule 30 the Rules of Court clearly sets out the order of presenting
evidence:

SEC. 5. Order of trial.Subject to the provisions of section 2 of Rule 31, and unless
the court for special reasons otherwise directs, the trial shall be limited to the issues
stated in the pre-trial order and shall proceed as follows:

(a) The plaintiff shall adduce evidence in support of his complaint;

(b) The defendant shall then adduce evidence in support of his defense,
counterclaim, cross-claim and third-party complaint;

(g) Upon admission of the evidence, the case shall be deemed submitted
for decision, unless the court directs the parties to argue or to submit their
respective memoranda or any further pleadings.

If several defendants or third-party defendants, and so forth. having separate

defenses appear by different counsel, the court shall determine the relative order of
presentation of their evidence. (Emphasis supplied.)
Evidently, for the orderly administration of justice, the plaintiff shall first adduce
evidence in support of his complaint and after the formal offer of evidence and the
ruling thereon, then comes the turn of defendant under Section 3 (b) to adduce
evidence in support of his defense, counterclaim, cross-claim and third party
complaint, if any. Deviation from such order of trial is purely discretionary upon the
trial court, in this case, the Sandiganbayan, which cannot be questioned by the parties
unless the vitiating element of grave abuse of discretion supervenes. Thus, the right
of COCOFED to present evidence on the main case had not yet ripened. And the
rendition of the partial summary judgments overtook their right to present evidence
on their defenses.

It cannot be stressed enough that the Republic as well as herein petitioners

were well within their rights to move, as they in fact separately did, for a partial
summary judgment. Summary judgment may be allowed where, save for the amount
of damages, there is, as shown by affidavits and like evidentiary documents, no
genuine issue as to any material fact and the moving party is entitled to a judgment
as a matter of law. A genuine issue, as distinguished from one that is fictitious,
contrived and set up in bad faith, means an issue of fact that calls for the presentation
of evidence.[90] Summary or accelerated judgment, therefore, is a procedural
technique aimed at weeding out sham claims or defenses at an early stage of the
litigation.[91] Sections 1, 2 and 4 of Rule 35 of the Rules of Court on Summary
Judgment, respectively provide:

SECTION 1. Summary judgment for claimant.A party seeking to recover

upon a claim, counterclaim, or cross-claim may, at any time after the pleading in
answer thereto has been served, move with supporting affidavits, depositions or
admissions for a summary judgment in his favor upon all or any part thereof.

SEC. 2. Summary judgment for defending party.A party against whom a

claim, counterclaim or cross-claim is asserted is sought may, at any time, move
with supporting affidavits, depositions or admissions for a summary judgment in
his favor as to all or any part thereof.

SEC. 4. Case not fully adjudicated on motion.If on motion under this Rule,
judgment is not rendered upon the whole case or for all the reliefs sought and a trial
is necessary, the court at the hearing of the motion, by examining the pleadings and
the evidence before it and by interrogating counsel shall ascertain what material
facts exist without substantial controversy and what are actually and in good faith
controverted. It shall thereupon make an order specifying the facts that appear
 without substantial controversy, including the extent to which the amount of
damages or other relief is not in controversy, and directing such further proceedings
in the action as are just. The facts so specified shall be deemed established, and the
trial shall be conducted on the controverted facts accordingly.

Clearly, petitioner COCOFEDs right to be heard had not been violated by the mere
issuance of PSJ-A and PSJ-F before they can adduce their evidence.

As it were, petitioners COCOFED et al. were able to present documentary evidence

in conjunction with its Class Action Omnibus Motion dated February 23,
2001 where they appended around four hundred (400) documents including
affidavits of alleged farmers. These petitioners manifested that said documents
comprise their evidence to prove the farmers ownership of the UCPB shares, which
were distributed in accordance with valid and existing laws.[92]

Lastly, COCOFED et al. even filed their own Motion for Separate Summary
Judgment, an event reflective of their admission that there are no more factual issues
left to be determined at the level of the Sandiganbayan. This act of filing a motion
for summary judgment is a judicial admission against COCOFED under Section 26,
Rule 130 which declares that the act, declaration or omission of a party as to a
relevant fact may be given in evidence against him.

Viewed in this light, the Court has to reject petitioners self-serving allegations about
being deprived the right to adduce evidence.

III

The right to speedy trial was not violated.

This brings to the fore the alleged violation of petitioners right to a speedy trial and
speedy disposition of the case. In support of their contention, petitioners cite Licaros
v. Sandiganbayan,[93] where the Court dismissed the case pending before the
Sandiganbayan for violation of the accuseds right to a speedy trial.

It must be clarified right off that the right to a speedy disposition of case and
the accuseds right to a speedy trial are distinct, albeit kindred, guarantees, the most
obvious difference being that a speedy disposition of cases, as provided in Article
III, Section 16 of the Constitution, obtains regardless of the nature of the case:
Section 16. All persons shall have the right to a speedy disposition of their
cases before all judicial, quasi-judicial, or administrative bodies.

In fine, the right to a speedy trial is available only to an accused and is a peculiarly
criminal law concept, while the broader right to a speedy disposition of cases may
be tapped in any proceedings conducted by state agencies. Thus, in Licaros the
Court dismissed the criminal case against the accused due to the palpable
transgression of his right to a speedy trial.

In the instant case, the appropriate right involved is the right to a speedy disposition
of cases, the recovery of ill-gotten wealth being a civil suit.

Nonetheless, the Court has had the occasion to dismiss several cases owing to
the infringement of a partys right to a speedy disposition of cases.[94] Dismissal of
the case for violation of this right is the general rule. Bernat v. The Honorable
Sandiganbayan (5th Division)[95] expounds on the extent of the right to a speedy
disposition of cases as follows:

Section 16 of Article III of the Constitution guarantees the right of all

persons to a speedy disposition of their cases. Nevertheless, this right is deemed
violated only when the proceedings are attended by vexatious, capricious and
oppressive delays. Moreover, the determination of whether the delays are of said
nature is relative and cannot be based on a mere mathematical reckoning of time.
Particular regard must be taken of the facts and circumstances peculiar to each case.
As a guideline, the Court in Dela Pea v. Sandiganbayan mentioned certain factors
that should be considered and balanced, namely: 1) length of delay; 2) reasons for
the delay; 3) assertion or failure to assert such right by the accused; and 4) prejudice
caused by the delay.

While this Court recognizes the right to speedy disposition quite distinctly
from the right to a speedy trial, and although this Court has always zealously
espoused protection from oppressive and vexatious delays not attributable to the
party involved, at the same time, we hold that a partys individual rights should not
work against and preclude the peoples equally important right to public justice. In
the instant case, three people died as a result of the crash of the airplane that the
accused was flying. It appears to us that the delay in the disposition of the case
prejudiced not just the accused but the people as well. Since the accused has
 completely failed to assert his right seasonably and inasmuch as the respondent
judge was not in a position to dispose of the case on the merits we hold it proper
and equitable to give the parties fair opportunity to obtain substantial justice in the
premises.

The more recent case of Tello v. People[96] laid stress to the restrictive dimension to
the right to speedy disposition of cases, i.e., it is lost unless seasonably invoked:
In Bernat , the Court denied petitioners claim of denial of his right to a
speedy disposition of cases considering that [he] chose to remain silent for eight
years before complaining of the delay in the disposition of his case. The Court ruled
that petitioner failed to seasonably assert his right and he merely sat and waited
from the time his case was submitted for resolution. In this case, petitioner similarly
failed to assert his right to a speedy disposition of his case. He only invoked his
right to a speedy disposition of cases after [his conviction]. Petitioners silence may
be considered as a waiver of his right.

An examination of the petitioners arguments and the cited indicia of delay would
reveal the absence of any allegation that petitioners moved before the
Sandiganbayan for the dismissal of the case on account of vexatious, capricious and
oppressive delays that attended the proceedings. Following Tello, petitioners are
deemed to have waived their right to a speedy disposition of the case. Moreover,
delays, if any, prejudiced the Republic as well. What is more, the alleged breach of
the right in question was not raised below. As a matter of settled jurisprudence, but
subject to equally settled exception, an issue not raised before the trial court cannot
be raised for the first time on appeal.[97] The sporting idea forbidding one from
pulling surprises underpins this rule. For these reasons, the instant case cannot be
dismissed for the alleged violation of petitioners right to a speedy disposition of the
case.

IV
Sections 1 and 2 of P.D. No. 755, Article III, Section 5 of P.D. No. 961 and
Article III, Section 5 of P.D. No. 1468, are unconstitutional.

The Court may pass upon the constitutionality of

P.D. Nos. 755, 961 and 1468.

Petitioners COCOFED et al. and Ursua uniformly scored the Sandiganbayan

for abusing its power of judicial review and wrongly encroaching into the exclusive
domain of Congress when it declared certain provisions of the coconut levy laws and
PCA administrative issuances as unconstitutional.

We are not persuaded.

It is basic that courts will not delve into matters of constitutionality unless
unavoidable, when the question of constitutionality is the very lis mota of the case,
meaning, that the case cannot be legally resolved unless the constitutional issue
raised is determined. This rule finds anchorage on the presumptive constitutionality
of every enactment. Withal, to justify the nullification of a statute, there must be a
clear and unequivocal breach of the Constitution. A doubtful or speculative
infringement would simply not suffice.[98]

Just as basic is the precept that lower courts are not precluded from resolving,
whenever warranted, constitutional questions, subject only to review by this Court.

To Us, the present controversy cannot be peremptorily resolved without going into
the constitutionality of P.D. Nos. 755, 961 and 1468 in particular. For petitioners
COCOFED et al. and Ballares et al. predicate their claim over the sequestered shares
and necessarily their cause on laws and martial law issuances assailed by the
Republic on constitutional grounds. Indeed, as aptly observed by the Solicitor
General, this case is for the recovery of shares grounded on the invalidity of certain
enactments, which in turn is rooted in the shares being public in character, purchased
as they were by funds raised by the taxing and/or a mix of taxing and police powers
of the state.[99] As may be recalled, P.D. No. 755, under the policy-declaring
provision, authorized the distribution of UCPB shares of stock free to coconut
farmers. On the other hand, Section 2 of P.D. No. 755, hereunder quoted below,
effectively authorized the PCA to utilize portions of the CCSF to pay the financial
commitment of the farmers to acquire UCPB and to deposit portions of the CCSF
levies with UCPB interest free. And as there also provided, the CCSF, CIDF and
like levies that PCA is authorized to collect shall be considered as non-special or
fiduciary funds to be transferred to the general fund of the Government, meaning
they shall be deemed private funds.

Section 2 of P.D. No. 755 reads:

 Section 2. Financial Assistance. To enable the coconut farmers to comply with
their contractual obligations under the aforesaid Agreement, the [PCA] is hereby
directed to draw and utilize the collections under the [CCSF] authorized to be levied by
[PD] No. 232, as amended, to pay for the financial commitments of the coconut farmers
under the said agreementand, except for [PCAs] budgetary requirements , all collections
under the [CCSF] Levy and (50%) of the collections under the [CIDF] shall be deposited,
interest free, with the said bank of the coconut farmers and such deposits shall not be
withdrawn until the the bank has sufficient equity capital ; and since the operations, and
activities of the [PCA] are all in accord with the present social economic plans and
programs of the Government, all collections and levies which the [PCA] is authorized to
levy and collect such as but not limited to the [CCS Levy] and the [CIDF] shall not be
considered or construed, under any law or regulation, special and/or fiduciary funds
and do not form part of the general funds of the national government within the
contemplation of [P.D.] No. 711. (Emphasis supplied)

A similar provision can also be found in Article III, Section 5 of P.D. No. 961 and
Article III, Section 5 of P.D. No. 1468, which We shall later discuss in turn:

P.D. No. 961

Section 5. Exemptions. The Coconut Consumers Stabilization Fund and the

Coconut Industry Development Fund as well as all disbursements of said funds
for the benefit of the coconut farmers as herein authorized shall not be
construed or interpreted, under any law or regulation, as special and/or
fiduciary funds, or as part of the general funds of the national
government within the contemplation of P.D. No. 711; nor as a subsidy, donation,
levy, government funded investment, or government share within the contemplation
of P.D. 898, the intention being that said Fund and the disbursements thereof
as herein authorized for the benefit of the coconut farmers shall be owned by
them in their own private capacities.[100](Emphasis Ours)

P.D. No. 1468

Section 5. Exemptions. The [CCSF] and the [CIDF] as well as all disbursement
as herein authorized, shall not be construed or interpreted, under nay law or
regulation, as special and/or fiduciary funds, or as part of the general funds of
the national government within the contemplation of PD 711; nor as subsidy,
donation, levy government funded investment, or government share within the
contemplation of PD 898, the intention being that said Fund and the
disbursements thereof as herein authorized for the benefit of the coconut
 farmers shall be owned by them in their private capacities.[101] (Emphasis
Ours.)

In other words, the relevant provisions of P.D. Nos. 755, as well as those of
P.D. Nos. 961 and 1468, could have been the only plausible means by which close
to a purported million and a half coconut farmers could have acquired the said shares
of stock. It has, therefore, become necessary to determine the validity of the
authorizing law, which made the stock transfer and acquisitions possible.

To reiterate, it is of crucial importance to determine the validity of P.D. Nos. 755,

961 and 1468 in light of the constitutional proscription against the use of special
funds save for the purpose it was established. Otherwise, petitioners claim
of legitimate private ownership over UCPB shares and indirectly over SMC shares
held by UCPBs subsidiaries will have no leg to stand on, P.D. No. 755 being the
only law authorizing the distribution of the SMC and UCPB shares of stock to
coconut farmers, and with the aforementioned provisions actually stating and
holding that the coco levy fund shall not be considered as a special not even general
fund, but shall be owned by the farmers in their private capacities.[102]

The Sandiganbayans ensuing ratiocination on the need to pass upon constitutional

issues the Republic raised below commends itself for concurrence:

This Court is convinced of the imperative need to pass upon the issues of
constitutionality raised by Plaintiff. The issue of constitutionality of the
provisions of P.D. No. 755 and the laws related thereto goes to the very core of
Plaintiffs causes of action and defenses thereto. It will serve the best interest of
justice to define this early the legal framework within which this case shall be heard
and tried, taking into account the admission of the parties and the established facts,
particularly those relating to the main substance of the defense of Lobregat,
COCOFED, et al. and Ballares, et al., which is anchored on the laws being
assailed by Plaintiff on constitutional grounds.

The Court is also mindful that lower courts are admonished to

observe a becoming modesty in examining constitutional questions,
but that they are nonetheless not prevented from resolving the same
whenever warranted, subject only to review by the highest tribunal
(Ynot v. Intermediate Appellate Court).
 It is true that, as a general rule, the question of constitutionality must be
raised at the earliest opportunity. The Honorable Supreme Court has clearly stated
that the general rule admits of exceptions, thus:

For courts will pass upon a constitutional question only when

presented before it in bona fide cases for determination, and the fact
that the question has not been raised before is not a valid reason for
refusing to allow it to be raised later. It has been held that the
determination of a constitutional question is necessary whenever it
is essential to the decision of the case as where the right of a party
is founded solely on a statute, the validity of which is attacked.

In the case now before us, the allegations of the Subdivided Complaint are
consistent with those in the subject Motion, and they sufficiently raise the issue of
constitutionality of the provisions of laws in question. The Third Amended
Complaint (Subdivided) states:

(ii) to legitimize a posteriori his highly anomalous and

irregular use and diversion of government funds to advance his own
private and commercial interests, Cojuangco, Jr. caused the issuance
of PD 755 (a) declaring that the coconut levy funds shall not be
considered special and fiduciary and trusts funds and do not form
part of the general funds of the National Government, conveniently
repealing for that purpose a series of coconut levy funds as special,
fiduciary, trust and government funds.

(iv) To perpetuate his opportunity to deal with and make use the
coconut levy funds to build his economic empire, Cojuangco, Jr.
caused the issuance by Defendant Ferdinand E. Marcos of an
unconstitutional decree (PD 1468) requiring the deposit of all
coconut levy funds with UCPB, interest free, to the prejudice of the
government.

The above-quoted allegations in the Third Amended Complaint (Subdivided)

already question the legitimacy of the exercise by former President Marcos of his
legislative authority when he issued P.D. Nos. 755 and 1468. The provision of Sec.
5, Art. III of P.D. 961 is substantially similar to the provisions of the aforesaid two
[PDs]. P.D. No. 755 allegedly legitimized the highly anomalous and irregular use
and diversion of government funds to advance his [defendant Cojuangcos] own
private and commercial interest. The issuance of the said [PD] which has the force
and effect of a law can only be assailed on constitutional grounds. The merits of the
grounds adverted to in the allegations of the Third Amended Complaint
 (Subdivided) can only be resolved by this Court by testing the questioned [PDs],
which are considered part of the laws of the land.

As early as June 20, 1989, this Court in its Resolution expressed this Courts
understanding of the import of the allegations of the complaint, as follows:

It is likewise alleged in the Complaint that in order to legitimize the

diversion of funds, defendant Ferdinand E. Marcos issued the
Presidential Decrees referred to by the movants. This is then the
core of Plaintiffs complaint: that, insofar as the coconut levy is
concerned, these decrees had been enacted as tools for the
acquisition of ill-gotten wealth for specific favored individuals.

Even if Plaintiff may not have said so effectively, the complaint in

fact disputes the legitimacy, and, if one pleases, the constitutionality
of such enactments.

The issue is validly raised on the face of the complaint and

defendants must respond to it.

Since the question of constitutionality may be raised even on appeal if the

determination of such a question is essential to the decision of the case, we find
more reason to resolve this constitutional question at this stage of the proceedings,
where the defense is grounded solely on the very laws the constitutionality of
which are being questioned and where the evidence of the defendants would seek
mainly to prove their faithful and good faith compliance with the said laws and their
implementing rules and regulations.[103] (Emphasis added.)

The Courts rulings in COCOFED v. PCGG and

Republic v. Sandiganbayan, as law of the case,
are speciously invoked.

To thwart the ruling on the constitutionality of P.D. Nos. 755, 961 and 1468,
petitioners would sneak in the argument that the Court has, in three separate
instances, upheld the validity, and thumbed down the Republics challenge to the
constitutionality, of said laws imposing the different coconut levies and prescribing
the uses of the fund collected. The separate actions of the Court, petitioners add,
would conclude the Sandiganbayan on the issue of constitutionality of said
issuances, following the law-of-the-case principle. Petitioners allege:
 Otherwise stated, the decision of this Honorable Court in the COCOFED Case
overruling the strict public fund theory espoused by the Respondent Republic,
upholding the propriety of the laws imposing the collections of the different
Coconut Levies and expressly allowing COCOFED, et al., to prove that the
Sequestered Assets have legitimately become their private properties had become
final and immutable.[104]

Petitioners are mistaken.

Yu v. Yu,[105] as effectively reiterated in Vios v. Pantangco,[106] defines and explains

the ramifications of the law of the case principle as follows:

Law of the case has been defined as the opinion delivered on a former
appeal. It is a term applied to an established rule that when an appellate court passes
on a question and remands the case to the lower court for further proceedings, the
question there settled becomes the law of the case upon subsequent appeal. It means
that whatever is once irrevocably established as the controlling legal rule or
decision between the same parties in the same case continues to be the law of the
case, so long as the facts on which such decision was predicated continue to be the
facts of the case before the court.

Otherwise put, the principle means that questions of law that have been previously
raised and disposed of in the proceedings shall be controlling in succeeding instances
where the same legal question is raised, provided that the facts on which the legal
issue was predicated continue to be the facts of the case before the court. Guided by
this definition, the law of the case principle cannot provide petitioners any comfort.
We shall explain why.

In the first instance, petitioners cite COCOFED v. PCGG.[107] There, respondent

PCGG questioned the validity of the coconut levy laws based on the limits of the
states taxing and police power, as may be deduced from the ensuing observations of
the Court:

. Indeed, the Solicitor General suggests quite strongly that the laws
operating or purporting to convert the coconut levy funds into private funds, are a
transgression of the basic limitations for the licit exercise of the state's taxing and
police powers, and that certain provisions of said laws are merely clever stratagems
to keep away government audit in order to facilitate misappropriation of the funds
in question.
 The utilization and proper management of the coconut levy funds, [to
acquire shares of stocks for coconut farmers and workers] raised as they were by
the States police and taxing power are certainly the concern of the Government.
The coconut levy funds are clearly affected with public interest. Until it is
demonstrated satisfactorily that they have legitimately become private funds, they
must prima facie be accounted subject to measures prescribed in EO Nos. 1, 2, and
14 to prevent their concealment, dissipation, etc.[108] [Words in bracket added.]

The issue, therefore, in COCOFED v. PCGG turns on the legality of the transfer of
the shares of stock bought with the coconut levy funds to coconut farmers. This must
be distinguished with the issues in the instant case of whether P.D. No. 755 violated
Section 29, paragraph 3 of Article VI of the 1987 Constitution as well as to whether
P.D. No. 755 constitutes undue delegation of legislative power. Clearly, the issues
in both sets of cases are so different as to preclude the application of the law of the
case rule.
The second and third instances that petitioners draw attention to refer to the rulings
in Republic v. Sandiganbayan, where the Court by Resolution of December 13,
1994, as reiterated in another resolution dated March 26, 1996, resolved to deny the
separate motions of the Republic to resolve legal questions on the character of the
coconut levy funds, more particularly to declare as unconstitutional (a) coconut
levies collected pursuant to various issuances as public funds and (b) Article III,
Section 5 of P.D. No. 1468.

Prescinding from the foregoing considerations, petitioners would state: Having filed
at least three (3) motions seeking, among others, to declare certain provisions of the
Coconut Levy Laws unconstitutional and having been rebuffed all three times by
this Court, the Republic - and necessarily Sandiganbayan should have followed as
[they were] legally bound by this Courts prior determination on that above issue of
constitutionality under the doctrine of Law of the Case.

Petitioners are wrong. The Court merely declined to pass upon the
constitutionality of the coconut levy laws or some of their provisions. It did not
declare that the UCPB shares acquired with the use of coconut levy funds have
legitimately become private.

The coconut levy funds are in the nature of taxes

and can only be used for public
purpose. Consequently, they cannot be used to
purchase shares of stocks to be given for free to
private individuals.
Indeed, We have hitherto discussed, the coconut levy was imposed in the exercise
of the States inherent power of taxation. As We wrote in Republic v. COCOFED:[109]

Indeed, coconut levy funds partake of the nature of taxes, which, in general, are
enforced proportional contributions from persons and properties, exacted by the
State by virtue of its sovereignty for the support of government and for all public
needs.

Based on its definition, a tax has three elements, namely: a) it is an enforced

proportional contribution from persons and properties; b) it is imposed by the State
by virtue of its sovereignty; and c) it is levied for the support of the government. The
coconut levy funds fall squarely into these elements for the following reasons:

(a) They were generated by virtue of statutory enactments imposed on the coconut
farmers requiring the payment of prescribed amounts. Thus, PD No. 276, which
created the Coconut Consumer[s] Stabilization Fund (CCSF), mandated the
following:

a. A levy, initially, of P15.00 per 100 kilograms of copra resecada or its

equivalent in other coconut products, shall be imposed on every first sale, in
accordance with the mechanics established under RA 6260, effective at the start
of business hours on August 10, 1973.

The proceeds from the levy shall be deposited with the Philippine
National Bank or any other government bank to the account of the Coconut
Consumers Stabilization Fund, as a separate trust fund which shall not form part
of the general fund of the government.

The coco levies were further clarified in amendatory laws, specifically PD

No. 961 and PD No. 1468 in this wise:

The Authority (PCA) is hereby empowered to impose and collect a levy,

to be known as the Coconut Consumers Stabilization Fund Levy, on every one
hundred kilos of copra resecada, or its equivalent delivered to, and/or purchased
by, copra exporters, oil millers, desiccators and other end-users of copra or its
equivalent in other coconut products. The levy shall be paid by such copra
exporters, oil millers, desiccators and other end-users of copra or its
equivalent in other coconut products under such rules and regulations as the
Authority may prescribe. Until otherwise prescribed by the Authority, the current
levy being collected shall be continued.

Like other tax measures, they were not voluntary payments or donations by
the people. They were enforced contributions exacted on pain of penal sanctions, as
provided under PD No. 276:
 3. Any person or firm who violates any provision of this Decree or the
rules and regulations promulgated thereunder, shall, in addition to penalties
already prescribed under existing administrative and special law, pay a fine of not
less than P2,500 or more than P10,000, or suffer cancellation of licenses to operate,
or both, at the discretion of the Court.

Such penalties were later amended thus: .

(b) The coconut levies were imposed pursuant to the laws enacted by the
proper legislative authorities of the State. Indeed, the CCSF was collected under PD
No. 276.

(c) They were clearly imposed for a public purpose. There is absolutely
no question that they were collected to advance the governments avowed policy
of protecting the coconut industry. This Court takes judicial notice of the fact that
the coconut industry is one of the great economic pillars of our nation, and
coconuts and their byproducts occupy a leading position among the countrys export
products.

Taxation is done not merely to raise revenues to support the government,

but also to provide means for the rehabilitation and the stabilization of a
threatened industry, which is so affected with public interest as to be within the
police power of the State.

Even if the money is allocated for a special purpose and raised by special
means, it is still public in character. In Cocofed v. PCGG, the Court observed that
certain agencies or enterprises were organized and financed with revenues derived
from coconut levies imposed under a succession of law of the late dictatorship with
deposed Ferdinand Marcos and his cronies as the suspected authors and chief
beneficiaries of the resulting coconut industry monopoly. The Court continued: . It
cannot be denied that the coconut industry is one of the major industries
supporting the national economy. It is, therefore, the States concern to make it a
strong and secure source not only of the livelihood of a significant segment of the
population, but also of export earnings the sustained growth of which is one of
the imperatives of economic stability.[110] (Emphasis Ours)

We have ruled time and again that taxes are imposed only for a public
purpose.[111] They cannot be used for purely private purposes or for the exclusive
benefit of private persons.[112] When a law imposes taxes or levies from the public,
with the intent to give undue benefit or advantage to private persons, or the
promotion of private enterprises, that law cannot be said to satisfy the requirement
of public purpose.[113] In Gaston v. Republic Planters Bank, the petitioning sugar
producers, sugarcane planters and millers sought the distribution of the shares of
stock of the Republic Planters Bank, alleging that they are the true beneficial owners
thereof.[114] In that case, the investment, i.e., the purchase of the said bank, was
funded by the deduction of PhP 1.00 per picul from the sugar proceeds of the sugar
producers pursuant to P.D. No. 388.[115] In ruling against the petitioners, the Court
held that to rule in their favor would contravene the general principle that revenues
received from the imposition of taxes or levies cannot be used for purely private
purposes or for the exclusive benefit of private persons.[116] The Court amply
reasoned that the Stabilization Fund must be utilized for the benefit of the entire
sugar industry, and all its components, stabilization of the domestic market
including foreign market, the industry being of vital importance to the countrys
economy and to national interest.[117]

Similarly in this case, the coconut levy funds were sourced from forced
exactions decreed under P.D. Nos. 232, 276 and 582, among others,[118] with the end-
goal of developing the entire coconut industry.[119] Clearly, to hold therefore, even
by law, that the revenues received from the imposition of the coconut levies be used
purely for private purposes to be owned by private individuals in their private
capacity and for their benefit, would contravene the rationale behind the imposition
of taxes or levies.

Needless to stress, courts do not, as they cannot, allow by judicial fiat the
conversion of special funds into a private fund for the benefit of private
individuals. In the same vein, We cannot subscribe to the idea of what appears to be
an indirect if not exactly direct conversion of special funds into private funds, i.e., by
using special funds to purchase shares of stocks, which in turn would be distributed
for free to private individuals. Even if these private individuals belong to, or are a
part of the coconut industry, the free distribution of shares of stocks purchased with
special public funds to them, nevertheless cannot be justified. The ratio in
Gaston,[120] as expressed below, applies mutatis mutandis to this case:

The stabilization fees in question are levied by the State for a special purpose
that of financing the growth and development of the sugar industry and all its
components, stabilization of the domestic market including the foreign market. The
fact that the State has taken possession of moneys pursuant to law is sufficient
to constitute them as state funds even though they are held for a special
purpose.
 That the fees were collected from sugar producers,[etc.], and that the
funds were channeled to the purchase of shares of stock in respondent Bank do
not convert the funds into a trust fund for their benefit nor make them the
beneficial owners of the shares so purchased. It is but rational that the fees be
collected from them since it is also they who are benefited from the expenditure
of the funds derived from it. .[121] (Emphasis Ours.)

In this case, the coconut levy funds were being exacted from copra exporters,
oil millers, desiccators and other end-users of copra or its equivalent in other coconut
products.[122] Likewise so, the funds here were channeled to the purchase of the
shares of stock in UCPB. Drawing a clear parallelism between Gaston and this case,
the fact that the coconut levy funds were collected from the persons or entities in the
coconut industry, among others, does not and cannot entitle them to be beneficial
owners of the subject funds or more bluntly, owners thereof in their private
capacity. Parenthetically, the said private individuals cannot own the UCPB shares
of stocks so purchased using the said special funds of the government. [123]

Coconut levy funds are special public funds of the

government.

Plainly enough, the coconut levy funds are public funds. We have ruled
in Republic v. COCOFED that the coconut levy funds are not only affected with
public interest; they are prima facie public funds.[124] In fact, this pronouncement
that the levies are government funds was admitted and recognized by respondents,
COCOFED, et al., in G.R. No. 147062-64.[125] And more importantly, in the same
decision, We clearly explained exactly what kind of government fund the coconut
levies are. We were categorical in saying that coconut levies are treated as special
funds by the very laws which created them:

Finally and tellingly, the very laws governing the coconut levies recognize
their public character. Thus, the third Whereas clause of PD No. 276 treats them
as special funds for a specific public purpose. Furthermore, PD No. 711
transferred to the general funds of the State all existing special and fiduciary
funds including the CCSF. On the other hand, PD No. 1234 specifically declared
the CCSF as a special fund for a special purpose, which should be treated as
a special account in the National Treasury.[126] (Emphasis Ours.)
 If only to stress the point, P.D. No. 1234 expressly stated that coconut levies
are special funds to be remitted to the Treasury in the General Fund of the State, but
treated as Special Accounts:

Section 1. All income and collections for Special or Fiduciary

Funds authorized by law shall be remitted to the Treasury and treated as Special
Accounts in the General Fund, including the following:

(a) [PCA] Development Fund, including all income derived therefrom under
Sections 13 and 14 of [RA] No. 1145; Coconut Investments Fund under Section 8
of [RA] No. 6260, including earnings, profits, proceeds and interests derived
therefrom; Coconut Consumers Stabilization Funds under Section 3-A of PD No.
232, as inserted by Section 3 of P.D. No. 232, as inserted by Section 2 of P.D. No.
583; and all other fees accruing to the [PCA] under the provisions of Section 19 of
[RA] No. 1365, in accordance with Section 2 of P.D. No. 755 and all other income
accruing to the [PCA] under existing laws.[127] (Emphasis Ours)

Moreover, the Court, in Gaston, stated the observation that the character of a
stabilization fund as a special fund is emphasized by the fact that the funds are
deposited in the Philippine National Bank [PNB] and not in the Philippine Treasury,
moneys from which may be paid out only in pursuance of an appropriation made by
law.[128] Similarly in this case, Sec.1 (a) of P.D. No. 276 states that the proceeds from
the coconut levy shall be deposited with the PNB, then a government bank, or any
other government bank under the account of the CCSF, as a separate trust
fund, which shall not form part of the governments general fund.[129] And even
assuming arguendo that the coconut levy funds were transferred to the general fund
pursuant to P.D. No. 1234, it was with the specific directive that the same be treated
as special accounts in the general fund.[130]

The coconut levy funds can only be used for the

special purpose and the balance thereof should
revert back to the general fund. Consequently,
their subsequent reclassification as a private fund
to be owned by private individuals in their
private capacities under P.D. Nos. 755, 961 and
1468 are unconstitutional.

To recapitulate, Article VI, Section 29 (3) of the 1987 Constitution, restating

a general principle on taxation, enjoins the disbursement of a special fund in
accordance with the special purpose for which it was collected, the balance, if there
be any, after the purpose has been fulfilled or is no longer forthcoming, to be
transferred to the general funds of the government, thus:

Section 29(3).

(3) All money collected on any tax levied for a special purpose shall be treated
as a special fund and paid out for such purpose only. If the purpose for which a
special fund was created has been fulfilled or abandoned, the balance, if any, shall
be transferred to the general funds of the Government. (Emphasis Ours)

Correlatively, Section 2 of P.D. No. 755 clearly states that:

Section 2. Financial Assistance. To enable the coconut farmers to comply

with their contractual obligations under the aforesaid Agreement, the [PCA] is
hereby directed to draw and utilize the collections under the Coconut Consumers
Stabilization Fund [CCSF] authorized to be levied by [P.D.] 232, as amended, to
pay for the financial commitments of the coconut farmers under the said agreement.
and the Coconut Industry Development Fund as prescribed by Presidential Decree
No. 582 shall not be considered or construed, under any law or regulation,
special and/or fiduciary funds and do not form part of the general funds of the
national government within the contemplation of Presidential Decree No. 711.
(Emphasis Ours)

Likewise, as discussed supra, Article III, Section 5 of both P.D. Nos. 961 and 1468
provides that the CCSF shall not be construed by any law as a special and/or trust
fund, the stated intention being that actual ownership of the said fund shall pertain
to coconut farmers in their private capacities.[131] Thus, in order to determine whether
the relevant provisions of P.D. Nos. 755, 961 and 1468 complied with Article VI,
Section 29 (3) of the 1987 Constitution, a look at the public policy or the purpose
for which the CCSF levy was imposed is necessary.
The CCSF was established by virtue of P.D. No. 276 wherein it is stated that:

WHEREAS, an escalating crisis brought about by an abnormal situation in

the world market for fats and oils has resulted in supply and price dislocations in
the domestic market for coconut-based goods, and has created hardships for
consumers thereof;

WHEREAS, the representatives of the coconut industry have proposed

the implementation of an industry-financed stabilization scheme which will permit
socialized pricing of coconut-based commodities;

WHEREAS, it is the policy of the State to promote the welfare and

economic well-being of the consuming public;

1. In addition to its powers granted under [P.D.] No. 232, the [PCA] is
hereby authorized to formulate and immediately implement a stabilization scheme
for coconut-based consumer goods, along the following general guidelines:

(a) .The proceeds of the levy shall be deposited with the Philippine
National Bank or any other government bank to the account of the CCSF as
a separate trust fund.

(b) The Fund shall be utilized to subsidize the sale of coconut-

based products at prices set by the Price Control Council.:

As couched, P.D. No. 276 created and exacted the CCSF to advance the
governments avowed policy of protecting the coconut industry. [132] Evidently, the
CCSF was originally set up as a special fund to support consumer purchases of
coconut products. To put it a bit differently, the protection of the entire coconut
industry, and even more importantly, for the consuming public provides the rationale
for the creation of the coconut levy fund. There can be no quibbling then that
the foregoing provisions of P.D. No. 276 intended the fund created and set up
therein not especially for the coconut farmers but for the entire coconut industry,
albeit the improvement of the industry would doubtlessredound to the benefit of the
farmers. Upon the foregoing perspective, the following provisions of P.D. Nos. 755,
961 and 1468 insofar as they declared, as the case may be, that:[the coconut levy]
fund and the disbursements thereof [shall be] authorized for the benefit of the
coconut farmers and shall be owned by them in their private capacities; [133] or the
coconut levy fund shall not be construed by any law to be a special and/or fiduciary
fund, and do not therefore form part of the general fund of the national government
later on;[134] or the UCPB shares acquired using the coconut levy fund shall be
distributed to the coconut farmers for free,[135] violated the special public purpose for
which the CCSF was established.

In sum, not only were the challenged presidential issuances unconstitutional

for decreeing the distribution of the shares of stock for free to the coconut farmers
and, therefore, negating the public purpose declared by P.D. No. 276, i.e., to
stabilize the price of edible oil[136] and to protect the coconut industry.[137] They
likewise reclassified, nay treated, the coconut levy fund as private fund to be
disbursed and/or invested for the benefit of private individuals in their private
capacities, contrary to the original purpose for which the fund was created. To
compound the situation, the offending provisions effectively removed the coconut
levy fund away from the cavil of public funds which normally can be paid out only
pursuant to an appropriation made by law.[138] The conversion of public funds into
private assets was illegally allowed, in fact mandated, by these provisions. Clearly
therefore, the pertinent provisions of P.D. Nos. 755, 961 and 1468 are
unconstitutional for violating Article VI, Section 29 (3) of the Constitution. In this
context, the distribution by PCA of the UCPB shares purchased by means of the
coconut levy fund a special fund of the government to the coconut farmers, is
therefore void.

We quote with approval the Sandiganbayans reasons for declaring the provisions of
P.D. Nos. 755, 961 and 1468 as unconstitutional:

It is now settled, in view of the ruling in Republic v. COCOFED, et al., supra, that
Coconut levy funds are raised with the use of the police and taxing powers of the
State; that they are levies imposed by the State for the benefit of the coconut
industry and its farmers and that they were clearly imposed for a public
purpose. This public purpose is explained in the said case, as follows:

. c) They were clearly imposed for a public purpose. There is

absolutely no question that they were colleted to advance the
governments avowed policy of protecting the coconut industry.

Taxation is done not merely to raise revenues to support the

government, but also to provide means for the rehabilitation and the
 stabilization of a threatened industry, which is so affected with
public interest as to be within the police power of the State, as held
in Caltex Philippines v. COA and Osmea v. Orbos.

The avowed public purpose for the disbursement of the CCSF is contained in the
perambulatory clauses and Section 1 of P.D. No. 755. The imperativeness of
enunciating the public purpose of the expenditure of funds raised through taxation
is underscored in the case of Pascual v. The Secretary of Public Works and
Communications, et al, supra, which held:

As regards the legal feasibility of appropriating public funds for a

private purpose the principle according to Ruling Case Law, is this:

It is a general rule that the legislature is without power to appropriate

public revenue for anything but a public purpose it is the essential
character of the direct object of the expenditure which must
determine its validity as justifying a tax, and not the magnitude of
the interests to be affected nor the degree to which the general
advantage of the community, and thus the public welfare may be
ultimately benefited by their promotion. Incidental advantage to the
public or to the state, which results from the promotion of private
interests and the prosperity of private enterprises or business, does
not justify their aid by the use of public money. 25 R.L.C. pp. 398-
400)

The rule is set forth in Corpus Juris Secundum in the following

language:

The test of the constitutionality of a statute requiring the

use of public funds is whether the statute is designed to
promote the public interests, as opposed to the furtherance
of the advantage of individuals, although each advantage
to individuals might incidentally serve the public. (81
C.J.S. p. 1147)

Needless to say, this Court is fully in accord with the foregoing

views. Besides, reflecting as they do, the established jurisprudence
in the United States, after whose constitutional system ours has been
patterned, said views and jurisprudence are, likewise, part and parcel
of our own constitutional law.

The gift of funds raised by the exercise of the taxing powers of the State which
were converted into shares of stock in a private corporation, slated for free
 distribution to the coconut farmers, can only be accorded constitutional sanction if
it will directly serve the public purpose declared by law.[139]

Section 1 of P.D. No. 755, as well as PCA

Administrative Order No. 1, Series of 1975 (PCA
AO 1), and Resolution No. 074-75, are invalid
delegations of legislative power.

Petitioners argue that the anti-graft court erred in declaring Section 1 of PD

755, PCA Administrative Order No. 1 and PCA Resolution No. 074-78
constitutionally infirm by reason of alleged but unproven and unsubstantiated flaws
in their implementation. Additionally, they explain that said court erred in
concluding that Section 1 of PD No. 755 constitutes an undue delegation of
legislative power insofar as it authorizes the PCA to promulgate rules and
regulations governing the distribution of the UCPB shares to the farmers.

These propositions are meritless.

The assailed PSJ-A noted the operational distribution nightmare faced by PCA and
the mode of distribution of UCPB shares set in motion by that agency left much
room for diversion. Wrote the Sandiganbayan:

The actual distribution of the bank shares was admittedly an enormous operational
problem which resulted in the failure of the intended beneficiaries to receive their
shares of stocks in the bank, as shown by the rules and regulations, issued by the
PCA, without adequate guidelines being provided to it by P.D. No. 755. PCA
Administrative Order No. 1, Series of 1975 (August 20, 1975), Rules and
Regulations Governing the Distribution of Shares of Stock of the Bank Authorized
to be Acquired Pursuant to PCA Board Resolution No. 246-75, quoted hereunder
discloses how the undistributed shares of stocks due to anonymous coconut farmers
or payors of the coconut levy fees were authorized to be distributed to existing
shareholders of the Bank:

Section 9. Fractional and Undistributed Shares Fractional

shares and shares which remain undistributed shall be
distributed to all the coconut farmers who have qualified and
received equity in the Bank and shall be apportioned among
them, as far as practicable, in proportion to their equity in
relation to the number of undistributed equity and such
 further rules and regulations as may hereafter be
promulgated.

The foregoing PCA issuance was further amended by Resolution No.

074-78, still citing the same problem of distribution of the bank shares.:

Thus, when 51,200,806 shares in the bank remained undistributed, the PCA
deemed it proper to give a bonanza to coconut farmers who already got their bank
shares, by giving them an additional share for each share owned by them and by
converting their fractional shares into full shares. The rest of the shares were then
transferred to a private organization, the COCOFED, for distribution to those
determined to be bona fide coconut farmers who had not received shares of stock
of the Bank. .

The PCA thus assumed, due to lack of adequate guidelines set by P.D. No.
755, that it had complete authority to define who are the coconut farmers and
to decide as to who among the coconut farmers shall be given the gift of bank
shares; how many shares shall be given to them, and what basis it shall use to
determine the amount of shares to be distributed for free to the coconut farmers. In
other words, P.D. No. 755 fails the completeness test which renders it
constitutionally infirm.

Regarding the second requisite of standard, it is settled that legislative standard

need not be expressed.

We observed, however, that the PCA [AO] No. 1, Series of 1975 and PCA Rules
and Regulations 074-78, did not take into consideration the accomplishment of the
public purpose or the national standard/policy of P.D. No. 755 which is directly to
accelerate the development and growth of the coconut industry and as a
consequence thereof, to make the coconut farmers participants in and beneficiaries
of such growth and development. The said PCA issuances did nothing more than
provide guidelines as to whom the UCPB shares were to be distributed and how
many bank shares shall be allotted to the beneficiaries. There was no mention of
how the distributed shares shall be used to achieve exclusively or at least directly
or primarily the aim or public purpose enunciated by P.D. No. 755. The numerical
or quantitative distribution of shares contemplated by the PCA regulations which
is a condition for the validly of said administrative issuances. There was a reversal
of priorities. The narrow private interests prevailed over the laudable
objectives of the law. However, under the May 25, 1975 agreement implemented
by the PCA issuances, the PCA acquired only 64.98% of the shares of the bank and
even the shares covering the said 64.98% were later on transferred to non-coconut
farmers.

The distribution for free of the shares of stock of the CIIF Companies is
tainted with the above-mentioned constitutional infirmities of the PCA
 administrative issuances. In view of the foregoing, we cannot consider the
provision of P.D. No. 961 and P.D. No. 1468 and the implementing regulations
issued by the PCA as valid legal basis to hold that assets acquired with public funds
have legitimately become private properties. [140] (Emphasis added.)

P.D. No. 755 involves an invalid delegation of legislative power, a concept

discussed in Soriano v. Laguardia,[141] citing the following excerpts from Edu v.
Ericta:
It is a fundamental that Congress may not delegate its legislative
power. What cannot be delegated is the authority to make laws and to alter and
repeal them; the test is the completeness of the statute in all its term and provisions
when it leaves the hands of the legislature. To determine whether or not there is an
undue delegation of legislative power, the inquiry must be directed to the scope and
definiteness of the measure enacted. The legislature does not abdicate its
functions when it describes what job must be done, who is to do it, and what is
the scope of his authority.

To avoid the taint of unlawful delegation, there must be a standard, which

implies at the very least that the legislature itself determines matters of principle
and lays down fundamental policy. Otherwise, the charge of complete abdication
may be hard to repel. A standard thus defines legislative policy, marks its limits,
maps out its boundaries and specifies the public agency to apply it. It indicates
the circumstances under which the legislative command is to be effected. It is
the criterion by which legislative purpose may be carried out. Thereafter, the
executive or administrative office designated may in pursuance of the above
guidelines promulgate supplemental rules and regulations.[142] (Emphasis supplied)

Jurisprudence is consistent as regards the two tests, which must be complied with to
determine the existence of a valid delegation of legislative power. In Abakada Guro
Party List, et al. v. Purisima,[143] We reiterated the discussion, to wit:

Two tests determine the validity of delegation of legislative power: (1) the
completeness test and (2) the sufficient standard test. A law is complete when it sets
forth therein the policy to be executed, carried out or implemented by the
delegate. It lays down a sufficient standard when it provides adequate guidelines
or limitations in the law to map out the boundaries of the delegates authority
and prevent the delegation from running riot. To be sufficient, the standard
must specify the limits of the delegates authority, announce the legislative
policy and identify the conditions under which it is to be implemented.

In the instant case, the requisite standards or criteria are absent in P.D. No.
755. As may be noted, the decree authorizes the PCA to distribute to coconut
farmers, for free, the shares of stocks of UCPB and to pay from the CCSF levy the
financial commitments of the coconut farmers under the Agreement for the
acquisition of such bank. Yet, the decree does not even state who are to be considered
as coconut farmers. Would, say, one who plants a single coconut tree be already
considered a coconut farmer and, therefore, entitled to own UCPB shares? If so, how
many shares shall be given to him? The definition of a coconut farmer and the basis
as to the number of shares a farmer is entitled to receive for free are important
variables to be determined by law and cannot be left to the discretion of the
implementing agency.

Moreover, P.D. No. 755 did not identify or delineate any clear condition as to
how the disposition of the UCPB shares or their conversion into private ownership
will redound to the advancement of the national policy declared under it. To recall,
P.D. No. 755 seeks to accelerate the growth and development of the coconut industry
and achieve a vertical integration thereof so that coconut farmers will become
participants in, and beneficiaries of, such growth and development. [144] The
Sandiganbayan is correct in its observation and ruling that the said law gratuitously
gave away public funds to private individuals, and converted them exclusively into
private property without any restriction as to its use that would reflect the avowed
national policy or public purpose. Conversely, the private individuals to whom the
UCPB shares were transferred are free to dispose of them by sale or any other mode
from the moment of their acquisition. In fact and true enough, the Sandiganbayan
categorically stated in its Order dated March 11, 2003,[145] that out of the 72.2%
shares and increased capital stock of the FUB (later UCPB) allegedly covered by the
May 25, 1975 Agreement,[146] entirely paid for by PCA, 7.22% were given to
Cojuangco and the remaining 64.98%, which were originally held by PCA for the
benefit of the coconut farmers, were later sold or transferred to non-coconut
farmers.[147] Even the proposed rewording of the factual allegations of
Lobregat, COCOFED, et al. and Ballares, et al., reveals that indeed, P.D. No. 755
did not provide for any guideline, standard, condition or restriction by which the said
shares shall be distributed to the coconut farmers that would ensure that the same
will be undertaken to accelerate the growth and development of the coconut industry
pursuant to its national policy. The proposed rewording of admissions reads:

There were shares forming part of the aforementioned 64.98% which

were, after their distribution, for free, to the coconut farmers as required by P.D.
 No. 755, sold or transferred respectively by individual coconut farmers who were
then the registered stockholders of those UCPB shares to non-coconut farmers.[148]

Clearly, P.D. No. 755, insofar as it grants PCA a veritable carte blanche to distribute
to coconut farmers UCPB shares at the level it may determine, as well as the full
disposition of such shares to private individuals in their private capacity without any
conditions or restrictions that would advance the laws national policy or public
purpose, present a case of undue delegation of legislative power. As such, there is
even no need to discuss the validity of the administrative orders and resolutions of
PCA implementing P.D. No. 755. Water cannot rise higher than its source.

Even so, PCA AO 1 and PCA Resolution No. 078-74, are in themselves,
infirm under the undue delegation of legislative powers. Particularly, Section 9 of
PCA AO I provides:

SECTION 9. Fractional and Undistributed Shares Fractional shares and

shares which remain undistributed as a consequence of the failure of the coconut
farmers to register their COCOFUND receipts or the destruction of the
COCOFUND receipts or the registration of COCOFUND receipts in the name of
an unqualified individual, after the final distribution is made on the basis of the
consolidated IBM registration Report as of March 31, 1976 shall be distributed to
all the coconut farmers who have qualified and received equity in the Bank and
shall be appointed among them, as far as practicable, in proportion to their equity
in relation to the number of undistributed equity and such further rules and
regulations as may hereafter be promulgated.

The foregoing provision directs and authorizes the distribution of fractional

and undistributed shares as a consequence of the failure of the coconut farmers with
Coco Fund receipts to register them, even without a clear mandate or instruction on
the same in any pertinent existing law. PCA Resolution No. 078-74 had a similar
provision, albeit providing more detailed information. The said Resolution identified
51,200,806 shares of the bank that remained undistributed and PCA devised its own
rules as to how these undistributed and fractional shares shall be disposed of,
notwithstanding the dearth as to the standards or parameters in the laws which it
sought to implement.

Eventually, what happened was that, as correctly pointed out by the

Sandiganbayan, the PCA gave a bonanza to supposed coconut farmers who already
got their bank shares, by giving them extra shares according to the rules established
on its own by the PCA under PCA AO 1 and Resolution No. 078-74. Because of the
lack of adequate guidelines under P.D. No. 755 as to how the shares were supposed
to be distributed to the coconut farmers, the PCA thus assumed that it could decide
for itself how these shares will be distributed. This obviously paved the way to
playing favorites, if not allowing outright shenanigans. In this regard, this poser
raised in the Courts February 16, 1993 Resolution in G.R. No. 96073 is as relevant
then as it is now: How is it that shares of stocks in such entities which was organized
and financed by revenues derived from coconut levy funds which were imbued with
public interest ended up in private hands who are not farmers or beneficiaries; and
whether or not the holders of said stock, who in one way or another had had some
part in the collection, administration, disbursement or other disposition of the
coconut levy funds were qualified to acquire stock in the corporations formed and
operated from these funds. [149]

Likewise, the said PCA issuances did not take note of the national policy or
public purpose for which the coconut levy funds were imposed under P.D. No.
755, i.e. the acceleration of the growth and development of the entire coconut
industry, and the achievement of a vertical integration thereof that could make the
coconut farmers participants in, and beneficiaries of, such growth and
development.[150] Instead, the PCA prioritized the coconut farmers themselves by
fully disposing of the bank shares, totally disregarding the national policy for which
the funds were created. This is clearly an undue delegation of legislative powers.

With this pronouncement, there is hardly any need to establish that the sequestered
assets are ill-gotten wealth. The documentary evidence, the P.D.s and Agreements,
prove that the transfer of the shares to the more than one million of supposed coconut
farmers was tainted with illegality.

Article III, Section 5 of P.D. No. 961 and Article

III, Section 5 of P.D. No. 1468 violate Article IX
(D) (2) of the 1987 Constitution.
Article III, Section 5 of P.D. No. 961 explicitly takes away the coconut levy funds
from the coffer of the public funds, or, to be precise, privatized revenues derived
from the coco levy. Particularly, the aforesaid Section 5 provides:

Section 5. Exemptions. The Coconut Consumers Stabilization Fund and the

Coconut Industry Development fund as well as all disbursements of said funds for the
benefit of the coconut farmers as herein authorized shall not be construed or interpreted,
under any law or regulation, as special and/or fiduciary funds, or as part of the general
funds of the national government within the contemplation of P.D. No. 711; nor as a
subsidy, donation, levy, government funded investment, or government share within the
contemplation of P.D. 898 the intention being that said Fund and the disbursements
thereof as herein authorized for the benefit of the coconut farmers shall be owned in
their own private capacity.[151] (Emphasis Ours)

The same provision is carried over in Article III, Section 5 of P.D. No. 1468,
the Revised Coconut Industry Code:

These identical provisions of P.D. Nos. 961 and 1468 likewise violate Article
IX (D), Section 2(1) of the Constitution, defining the powers and functions of the
Commission on Audit (COA) as a constitutional commission:

Sec. 2. (1) The Commission on Audit shall have the power, authority, and
duty to examine, audit, and settle all accounts pertaining to the revenue and
receipts of, and expenditures or uses of funds and property, owned or held in trust
by, or pertaining to, the Government, or any of its subdivisions, agencies, or
instrumentalities, including government-owned and controlled corporations with
original charters, and on a post-audit basis: (a) constitutional bodies, commissions
and offices that have been granted fiscal autonomy under this Constitution; (b)
autonomous state colleges and universities; (c) other government-owned or
controlled corporations and their subsidiaries;.[152] (Emphasis Ours)

A similar provision was likewise previously found in Article XII (D), Section 2 (1)
of the 1973 Constitution, thus:

Section 2. The Commission on Audit shall have the following powers and functions:

(1) Examine, audit, and settle, in accordance with law and regulations,
all accounts pertaining to the revenues and receipts of, and expenditures
 or uses of funds and property, owned or held in trust by, or pertaining to,
the Government, or any of its subdivisions, agencies, or
instrumentalities, including government-owned and controlled
corporations; keep the general accounts of the government and, for such
period as may be provided by law, preserve the vouchers pertaining thereto;
and promulgate accounting and auditing rules and regulations including
those for the prevention of irregular, unnecessary, excessive, or extravagant
expenditures or use of funds and property.[153] (Emphasis Ours)

The Constitution, by express provision, vests the COA with the responsibility for
State audit.[154] As an independent supreme State auditor, its audit jurisdiction cannot
be undermined by any law. Indeed, under Article IX (D), Section 3 of the 1987
Constitution, [n]o law shall be passed exempting any entity of the Government or its
subsidiary in any guise whatever, or any investment of public funds, from the
jurisdiction of the Commission on Audit.[155] Following the mandate of the COA and
the parameters set forth by the foregoing provisions, it is clear that it has jurisdiction
over the coconut levy funds, being special public funds. Conversely, the COA has
the power, authority and duty to examine, audit and settle all accounts pertaining to
the coconut levy funds and, consequently, to the UCPB shares purchased using the
said funds. However, declaring the said funds as partaking the nature of private
funds, ergo subject to private appropriation, removes them from the coffer of the
public funds of the government, and consequently renders them impervious to the
COA audit jurisdiction. Clearly, the pertinent provisions of P.D. Nos. 961 and 1468
divest the COA of its constitutionally-mandated function and undermine its
constitutional independence.

The assailed purchase of UCPB shares of stocks using the coconut levy funds
presents a classic example of an investment of public funds. The conversion of these
special public funds into private funds by allowing private individuals to own them
in their private capacities is something else. It effectively deprives the COA of its
constitutionally-invested power to audit and settle such accounts. The conversion of
the said shares purchased using special public funds into pure and exclusive private
ownership has taken, or will completely take away the said funds from the
boundaries with which the COA has jurisdiction. Obviously, the COA is without
audit jurisdiction over the receipt or disbursement of private property. Accordingly,
Article III, Section 5 of both P.D. Nos. 961 and 1468 must be struck down for being
unconstitutional, be they assayed against Section 2(1), Article XII (D) of the 1973
Constitution or its counterpart provision in the 1987 Constitution.

The Court, however, takes note of the dispositive portion of PSJ-A, which
states that:[156]

2. Section 2 of P.D. No. 755 which mandated that the coconut levy funds shall not
be considered special and/or fiduciary funds nor part of the general funds of the
national government and similar provisions of Sec. 3, Art. III, P.D. 961 and Sec.
5, Art. III, P.D. 1468 contravene the provisions of the Constitution, particularly,
Art. IX (D), Sec. 2; and Article VI, Sec. 29 (3). (Emphasis Ours)

However, a careful reading of the discussion in PSJ-A reveals that it is Section

5 of Article III of P.D. No. 961 and not Section 3 of said decree, which is at issue,
and which was therefore held to be contrary to the Constitution. The dispositive
portion of the said PSJ should therefore be corrected to reflect the proper provision
that was declared as unconstitutional, which is Section 5 of Article III of P.D. No.
961 and not Section 3 thereof.

The CIIF Companies and the CIIF Block

of SMC shares are public funds/assets

From the foregoing discussions, it is fairly established that the coconut levy
funds are special public funds. Consequently, any property purchased by means of
the coconut levy funds should likewise be treated as public funds or public property,
subject to burdens and restrictions attached by law to such property.

In this case, the 6 CIIF Oil Mills were acquired by the UCPB using coconut
levy funds.[157] On the other hand, the 14 CIIF holding companies are wholly owned
subsidiaries of the CIIF Oil Mills.[158] Conversely, these companies were acquired
using or whose capitalization comes from the coconut levy funds. However, as in
the case of UCPB, UCPB itself distributed a part of its investments in the CIIF oil
mills to coconut farmers, and retained a part thereof as administrator.[159] The portion
distributed to the supposed coconut farmers followed the procedure outlined in PCA
Resolution No. 033-78.[160] And as the administrator of the CIIF holding companies,
the UCPB authorized the acquisition of the SMC shares.[161] In fact, these companies
were formed or organized solely for the purpose of holding the SMC shares.[162] As
found by the Sandiganbayan, the 14 CIIF holding companies used borrowed funds
from the UCPB to acquire the SMC shares in the aggregate amount of P1.656
Billion.[163]

Since the CIIF companies and the CIIF block of SMC shares were acquired
using coconut levy funds funds, which have been established to be public in
character it goes without saying that these acquired corporations and assets ought to
be regarded and treated as government assets. Being government properties, they are
accordingly owned by the Government, for the coconut industry pursuant to
currently existing laws.[164]

It may be conceded hypothetically, as COCOFED et al. urge, that the 14 CIIF

holding companies acquired the SMC shares in question using advances from the
CIIF companies and from UCPB loans. But there can be no gainsaying that the same
advances and UCPB loans are public in character, constituting as they do assets of
the 14 holding companies, which in turn are wholly-owned subsidiaries of the 6 CIIF
Oil Mills. And these oil mills were organized, capitalized and/or financed using
coconut levy funds. In net effect, the CIIF block of SMC shares are simply the fruits
of the coconut levy funds acquired at the expense of the coconut industry.
In Republic v. COCOFED,[165] the en bancCourt, speaking through Justice (later
Chief Justice) Artemio Panganiban, stated: Because the subject UCPB shares were
acquired with government funds, the government becomes their prima facie
beneficial and true owner. By parity of reasoning, the adverted block of SMC shares,
acquired as they were with government funds, belong to the government as, at the
very least, their beneficial and true owner.

We thus affirm the decision of the Sandiganbayan on this point. But as We

have earlier discussed, reiterating our holding in Republic v. COCOFED, the States
avowed policy or purpose in creating the coconut levy fund is for the development
of the entire coconut industry, which is one of the major industries that promotes
sustained economic stability, and not merely the livelihood of a significant segment
of the population.[166] Accordingly, We sustain the ruling of the Sandiganbayan in
CC No. 0033-F that the CIIF companies and the CIIF block of SMC shares are public
funds necessary owned by the Government. We, however, modify the same in the
following wise: These shares shall belong to the Government, which shall be used
only for the benefit of the coconut farmers and for the development of the coconut
industry.

Sandiganbayan did not err in ruling that

PCA (AO) No. 1, Series of 1975 and
PCA rules and regulations 074-78 did
not comply with the national standard
or policy of P.D. No. 755.

According to the petitioners, the Sandiganbayan has identified the national

policy sought to be enhanced by and expressed under Section 1 in relation to Section
2 of P.D. No. 755. Yet, so petitioners argue, that court, with grave abuse of
discretion, disregarded such policy and thereafter, ruled that Section 1 in relation to
Section 2 of P.D. No. 755 is unconstitutional as the decree failed to promote the
purpose for which it was enacted in the first place.

We are not persuaded. The relevant assailed portion of PSJ-A states:

We observe, however, that the PCA [AO] No. 1, Series of 1975 and PCA Rules and
Regulations 074-78, did not take into consideration the accomplishment of the
public purpose or the national standard/policy of P.D. No. 755 which is directly to
accelerate the development and growth of the coconut industry and as a
consequence thereof, to make the coconut farmers participants in and beneficiaries
of such growth and development.

It is a basic legal precept that courts do not look into the wisdom of the laws
passed. The principle of separation of powers demands this hands-off attitude from
the judiciary. Saguiguit v. People[167] teaches why:

[W]hat the petitioner asks is for the Court to delve into the policy behind or
wisdom of a statute, which, under the doctrine of separation of powers, it cannot
do,. Even with the best of motives, the Court can only interpret and apply the law
 and cannot, despite doubts about its wisdom, amend or repeal it. Courts of justice
have no right to encroach on the prerogatives of lawmakers, as long as it has not
been shown that they have acted with grave abuse of discretion. And while the
judiciary may interpret laws and evaluate them for constitutional soundness and to
strike them down if they are proven to be infirm, this solemn power and duty do
not include the discretion to correct by reading into the law what is not written
therein.

We reproduce the policy-declaring provision of P.D. No. 755, thus:

Section 1. Declaration of National Policy. It is hereby declared that the policy of

the State is to provide readily available credit facilities to the coconut farmers at
preferential rates; that this policy can be efficiently realized by the implementation of
the Agreement for the Acquisition of a Commercial Bank for the benefit of the Coconut
Farmers executed by the [PCA], the terms of which Agreement are hereby incorporated
by reference; and that the [PCA] is hereby authorized to distribute, for free, the shares of
stock of the bank it acquired to the coconut farmers under such rules and regulations it
may promulgate.

P.D. No. 755 having stated in no uncertain terms that the national policy of providing
cheap credit facilities to coconut farmers shall be achieved with the acquisition of a
commercial bank, the Court is without discretion to rule on the wisdom of such an
undertaking. It is abundantly clear, however, that the Sandiganbayan did not look
into the policy behind, or the wisdom of, P.D. No. 755. In context, it did no more
than to inquire whether the purpose defined in P.D. No. 755 and for which the coco
levy fund was established would be carried out, obviously having in mind the (a)
dictum that the power to tax should only be exercised for a public purpose and (b)
command of Section 29, paragraph 3 of Article VI of the 1987 Constitution that:
(3) All money collected on any tax levied for a special purpose shall be
treated as a special fund and paid out for such purpose only. If the purpose for
which a special fund was created has been fulfilled or abandoned, the balance, if
any, shall be transferred to the general funds of the Government. (Emphasis
supplied)

For the above reason, the above-assailed action of the Sandiganbayan was
well within the scope of its sound discretion and mandate.
Moreover, petitioners impute on the anti-graft court the commission of grave abuse
of discretion for going into the validity of and in declaring the coco levy laws as
unconstitutional, when there were still factual issues to be resolved in a full blown
trial as directed by this Court.[168]

Petitioners COCOFED and the farmer representatives miss the point. They
acknowledged that their alleged ownership of the sequestered shares in UCPB and
SMC is predicated on the coco levy decrees. Thus, the legality and propriety of their
ownership of these valuable assets are directly related to and must be assayed against
the constitutionality of those presidential decrees. This is a primordial issue, which
must be determined to address the validity of the rest of petitioners claims of
ownership. Verily, the Sandiganbayan did not commit grave abuse of discretion, a
phrase which, in the abstract, denotes the idea of capricious or whimsical exercise
of judgment or the exercise of power in an arbitrary or despotic manner by reason of
passion or personal hostility as to be equivalent to having acted without
jurisdiction.[169]

The Operative Fact Doctrine does not apply

Petitioners assert that the Sandiganbayans refusal to recognize the vested rights
purportedly created under the coconut levy laws constitutes taking of private
property without due process of law. They reason out that to accord retroactive
application to a declaration of unconstitutionality would be unfair inasmuch as such
approach would penalize the farmers who merely obeyed then valid laws.

This contention is specious.

In Yap v. Thenamaris Ships Management,[170] the Operative Fact Doctrine was

discussed in that:

As a general rule, an unconstitutional act is not a law; it confers no rights; it

imposes no duties; it affords no protection; it creates no office; it is inoperative as if it has
not been passed at all. The general rule is supported by Article 7 of the Civil Code, which
provides:
 Art. 7. Laws are repealed only by subsequent ones, and their violation or non-
observance shall not be excused by disuse or custom or practice to the contrary.

The doctrine of operative fact serves as an exception to the aforementioned

general rule. In Planters Products, Inc. v. Fertiphil Corporation, we held:

The doctrine of operative fact, as an exception to the general rule, only applies
as a matter of equity and fair play. It nullifies the effects of an unconstitutional
law by recognizing that the existence of a statute prior to a determination of
unconstitutionality is an operative fact and may have consequences which cannot
always be ignored. The past cannot always be erased by a new judicial declaration.

The doctrine is applicable when a declaration of unconstitutionality will impose

an undue burden on those who have relied on the invalid law. Thus, it was applied
to a criminal case when a declaration of unconstitutionality would put the accused
in double jeopardy or would put in limbo the acts done by a municipality in
reliance upon a law creating it.[171]

In that case, this Court further held that the Operative Fact Doctrine will not be
applied as an exception when to rule otherwise would be iniquitous and would send
a wrong signal that an act may be justified when based on an unconstitutional
provision of law.[172]

The Court had the following disquisition on the concept of the Operative Fact
Doctrine in the case of Chavez v. National Housing Authority:[173]

The operative fact doctrine is embodied in De Agbayani v. Court of Appeals, wherein it is

stated that a legislative or executive act, prior to its being declared as unconstitutional by
the courts, is valid and must be complied with, thus:

As the new Civil Code puts it: When the courts declare a law to be inconsistent
with the Constitution, the former shall be void and the latter shall govern.
Administrative or executive acts, orders and regulations shall be valid only when
 they are not contrary to the laws of the Constitution. It is understandable why it
should be so, the Constitution being supreme and paramount. Any legislative or
executive act contrary to its terms cannot survive.

Such a view has support in logic and possesses the merit of simplicity. It may not
however be sufficiently realistic. It does not admit of doubt that prior to the
declaration of nullity such challenged legislative or executive act must have been
in force and had to be complied with. This is so as until after the judiciary, in an
appropriate case, declares its invalidity, it is entitled to obedience and
respect. Parties may have acted under it and may have changed their
positions. What could be more fitting than that in a subsequent litigation regard
be had to what has been done while such legislative or executive act was in
operation and presumed to be valid in all respects. It is now accepted as a
doctrine that prior to its being nullified, its existence as a fact must be reckoned
with. This is merely to reflect awareness that precisely because the judiciary is
the governmental organ which has the final say on whether or not a legislative
or executive measure is valid, a period of time may have elapsed before it can
exercise the power of judicial review that may lead to a declaration of nullity. It
would be to deprive the law of its quality of fairness and justice then, if there be
no recognition of what had transpired prior to such adjudication.

In the language of an American Supreme Court decision: The actual existence of

a statute, prior to such a determination [of unconstitutionality], is an operative
fact and may have consequences which cannot justly be ignored. The past
cannot always be erased by a new judicial declaration. The effect of the
subsequent ruling as to invalidity may have to be considered in various aspects,
with respect to particular relations, individual and corporate, and particular
conduct, private and official. This language has been quoted with approval in a
resolution in Araneta v. Hill and the decision in Manila Motor Co., Inc.
v. Flores. An even more recent instance is the opinion of Justice Zaldivar
speaking for the Court in Fernandez v. Cuerva and Co. (Emphasis supplied.)

The principle was further explicated in the case of Rieta v. People of the Philippines, thus:

In similar situations in the past this Court had taken the pragmatic and
realistic course set forth in Chicot County Drainage District vs. Baxter Bank to wit:

The courts below have proceeded on the theory that the Act
of Congress, having been found to be unconstitutional, was
not a law; that it was inoperative, conferring no rights and
imposing no duties, and hence affording no basis for the
 challenged decree. It is quite clear, however, that such broad
statements as to the effect of a determination of
unconstitutionality must be taken with qualifications. The
actual existence of a statute, prior to [the determination of its
invalidity], is an operative fact and may have consequences
which cannot justly be ignored. The past cannot always be
erased by a new judicial declaration. The effect of the
subsequent ruling as to invalidity may have to be considered
in various aspects with respect to particular conduct, private
and official. Questions of rights claimed to have become
vested, of status, of prior determinations deemed to have
finality and acted upon accordingly, of public policy in the light
of the nature both of the statute and of its previous
application, demand examination. These questions are among
the most difficult of those which have engaged the attention
of courts, state and federal, and it is manifest from numerous
decisions that an all-inclusive statement of a principle of
absolute retroactive invalidity cannot be justified.

Moreover, the Court ruled in Chavez that:

Furthermore, when petitioner filed the instant case against respondents on August 5,
2004, the JVAs were already terminated by virtue of the MOA between the NHA and
RBI. The respondents had no reason to think that their agreements were unconstitutional
or even questionable, as in fact, the concurrent acts of the executive department lent
validity to the implementation of the Project. The SMDRP agreements have produced
vested rights in favor of the slum dwellers, the buyers of reclaimed land who were issued
titles over said land, and the agencies and investors who made investments in the project
or who bought SMPPCs. These properties and rights cannot be disturbed or questioned
after the passage of around ten (10) years from the start of the SMDRP implementation.
Evidently, the operative fact principle has set in. The titles to the lands in the hands of
the buyers can no longer be invalidated.[174]

In the case at bar, the Court rules that the dictates of justice, fairness and equity do
not support the claim of the alleged farmer-owners that their ownership of the UCPB
shares should be respected. Our reasons:

1. Said farmers or alleged claimants do not have any legal right to own the UCPB
shares distributed to them. It was not successfully refuted that said claimants were
issued receipts under R.A. 6260 for the payment of the levy that went into the
Coconut Investment Fund (CIF) upon which shares in the Coconut Investment
Company will be issued.The Court upholds the finding of the Sandiganbayan that
said investment company is a different corporate entity from the United Coconut
Planters Bank. This was in fact admitted by petitioners during the April 17, 2001
oral arguments in G.R. Nos. 147062-64.[175]

The payments under R.A. 6260 cannot be equated with the payments under P.D. No.
276, the first having been made as contributions to the Coconut Investment Fund
while the payments under P.D. No. 276 constituted the Coconut Consumers
Stabilization Fund (CCSF). R.A. 6260 reads:

Section 2. Declaration of Policy. It is hereby declared to be the national policy to

accelerate the development of the coconut industry through the provision of
adequate medium and long-term financing for capital investment in the industry, by
instituting a Coconut Investment fund capitalized and administered by coconut
farmers through a Coconut Investment Company.[176]

P.D. No. 276 provides:

1. In addition to its powers granted under Presidential Decree No. 232, the
Philippine Coconut Authority is hereby authorized to formulate and immediately
implement a stabilization scheme for coconut-based consumer goods, along the
following general guidelines:

(a) .

The proceeds from the levy shall be deposited with the Philippine National
Bank or any other government bank to the account of the Coconut
Consumers Stabilization Fund, as a separate trust fund which shall not form
part of the general fund of the government.

(b) The Fund shall be utilized to subsidize the sale of coconut-based

products at prices set by the Price Control Council, under rules and
regulations to be promulgated by the Philippine Consumers Stabilization
Committee.[177]
The PCA, via Resolution No. 045-75 dated May 21, 1975, clarified the distinction
between the CIF levy payments under R.A. 6260 and the CCSF levy paid pursuant
to P.D. 276, thusly:

It must be remembered that the receipts issued under R.A. No. 6260 were to be
registered in exchange for shares of stock in the Coconut Investment Company
(CIC), which obviously is a different corporate entity from UCPB. This fact was
admitted by petitioners during the April 17, 2001 oral arguments in G.R. Nos.
147062-64.

In fact, while the CIF levy payments claimed to have been paid by petitioners were
meant for the CIC, the distribution of UCPB stock certificates to the coconut
farmers, if at all, were meant for the payors of the CCSF in proportion to the coconut
farmers CCSF contributions pursuant to PCA Resolution No. 045-75 dated May
21, 1975:

RESOLVED, FURTHER, That the amount of ONE HUNDRED

FIFTY MILLION (P150,000,000.00) PESOS be appropriated and
set aside from available funds of the PCA to be utilized in payment
for the shares of stock of such existing commercial bank and that the
Treasurer be instructed to disburse the said amount accordingly.

RESOLVED, FINALLY, That be directed to organize a team which

shall prepare a list of coconut farmers who have paid the levy and
contributed to the [CCSF] and to prepare a stock distribution plan to
the end that the aforesaid coconut farmers shall receive certificates
of stock of such commercial bank in proportion to their
contributions to the Fund.

Unfortunately, the said resolution was never complied with in the distribution of
the so-called farmers UCPB shares.

The payments therefore under R.A. 6260 are not the same as those under P.D. No.
276. The amounts of CIF contributions under R.A. 6260 which were collected
starting 1971 are undeniably different from the CCSF levy under P.D. No. 276,
which were collected starting 1973. The two (2) groups of claimants differ not only
in identity but also in the levy paid, the amount of produce and the time the
government started the collection.
Thus, petitioners and the alleged farmers claiming them pursuant to R.A. 6260 do
not have any legal basis to own the UCPB shares distributed to them, assuming for
a momentthe legal feasibility of transferring these shares paid from the R.A. 6260
levy to private individuals.

2. To grant all the UCPB shares to petitioners and its alleged members would be
iniquitous and prejudicial to the remaining 4.6 million farmers who have not
received any UCPB shares when in fact they also made payments to either the CIF
or the CCSF but did not receive any receipt or who was not able to register their
receipts or misplaced them.

Section 1 of P.D. No. 755 which was declared unconstitutional cannot be considered
to be the legal basis for the transfer of the supposed private ownership of the UCPB
shares to petitioners who allegedly paid the same under R.A. 6260. The Solicitor
General is correct in concluding that such unauthorized grant to petitioners
constitutes illegal deprivation of property without due process of law. Due process
of law would mean that the distribution of the UCPB shares should be made only to
farmers who have paid the contribution to the CCSF pursuant to P.D. No. 276, and
not to those who paid pursuant to R.A. 6260. What would have been the appropriate
distribution scheme was violated by Section 1 of P.D. No. 755 when it required that
the UCPB shares should be distributed to coconut farmers without distinction in fact,
giving the PCA limitless power and free hand, to determine who these farmers are,
or would be.

We cannot sanction the award of the UCPB shares to petitioners who appear to
represent only 1.4 million members without any legal basis to the extreme prejudice
of the other 4.6 million coconut farmers (Executive Order No. 747 fixed the number
of coconut farmers at 6 million in 1981). Indeed, petitioners constitute only a small
percentage of the coconut farmers in the Philippines. Thus, the Sandiganbayan
correctly declared that the UCPB shares are government assets in trust for the
coconut farmers, which would be more beneficial to all the coconut farmers instead
of a very few dubious claimants;

3. The Sandiganbayan made the finding that due to enormous operational problems
and administrative complications, the intended beneficiaries of the UCPB shares
were not able to receive the shares due to them. To reiterate what the anti-graft court
said:
The actual distribution of the bank shares was admittedly an
enormous operational problem which resulted in the failure of the
intended beneficiaries to receive their shares of stocks in the bank,
as shown by the rules and regulations, issued by the PCA, without
adequate guidelines being provided to it by P.D. No. 755. PCA
Administrative Order No. 1, Series of 1975 (August 20, 1975),
Rules and Regulations Governing the Distribution of Shares of
Stock of the Bank Authorized to be Acquired Pursuant to PCA
Board Resolution No. 246-75, quoted hereunder discloses how the
undistributed shares of stocks due to anonymous coconut farmers or
payors of the coconut levy fees were authorized to be distributed to
existing shareholders of the Bank:

Section 9. Fractional and Undistributed Shares

Fractional shares and shares which remain undistributed as
a consequence of the failure of the coconut farmers to
register their COCOFUND receipts or the destruction of
the COCOFUND receipts or the registration of the
COCOFUND receipts in the name of an unqualified
individual, after the final distribution is made on the basis
of the consolidated IBM registration Report as of March
31, 1976 shall be distributed to all the coconut farmers who
have qualified and received equity in the Bank and shall be
apportioned among them, as far as practicable, in
proportion to their equity in relation to the number of
undistributed equity and such further rules and regulations
as may hereafter be promulgated.

The foregoing PCA issuance was further amended by Resolution

No. 074-78, still citing the same problem of distribution of the bank
shares. This latter Resolution is quoted as follows:

RESOLUTION NO. 074-78

AMENDMENT OF ADMINISTRATIVE ORDER

NO. 1, SERIES OF 1975, GOVERNING THE
DISTRIBUTION OF SHARES

WHEREAS, pursuant to PCA Board Resolution No. 246-75, the

total par value of the shares of stock of the Bank purchased by the
PCA for the benefit of the coconut farmers is P85,773,600.00 with
a par value of P1.00 per share or equivalent to 85,773.600 shares;
WHEREAS, out of the 85,773,600 shares, a total of 34,572,794
shares have already been distributed in accordance with
Administrative Order No. 1, Series of 1975, to wit:

First Distribution - 12,573,059

Second Distribution - 10,841,409
Third Distribution - 11,158,326
34,572,794

WHEREAS, there is, therefore, a total of 51,200,806 shares still

available for distribution among the coconut farmers;

WHEREAS, it was determined by the PCA Board, in consonance

with the policy of the state on the integration of the coconut industry,
that the Bank shares must be widely distributed as possible among
the coconut farmers, for which purpose a national census of coconut
farmers was made through the Philippine Coconut Producers
Federation (COCOFED);

WHEREAS, to implement such determination of the PCA Board,

there is a need to accordingly amend Administrative Order No. 1,
Series of 1975;

NOW, THEREFORE, BE IT RESOLVED, AS IT IS HEREBY

RESOLVED, that the remaining 51,200,806 shares of stock of the
Bank authorized to be acquired pursuant to the PCA Board
Resolution No. 246-75 dated July 25, 1975 be distributed as follows:

(1) All the coconut farmers who have received their shares in the
equity of the Bank on the basis of Section 8 of Administrative
Order No. 1, Series of 1975, shall receive additional share for
each share presently owned by them;

(2) Fractional shares shall be completed into full shares, and

such full shares shall be distributed among the coconut farmers
who qualified for the corresponding fractional shares;

(3) The balance of the shares, after deducting those to be

distributed in accordance with (1) and (2) above, shall be
transferred to COCOFED for distribution, immediately after
completion of the national census of coconut farmers prescribed
under Resolution No. 033-78 of the PCA Board, to all those who
are determined by the PCA Board to be bona fide coconut
farmers and have not received shares of stock of the Bank. The
shares shall be equally determined among them on the basis of
per capita.
 RESOLVED, FURTHER, That the rules and regulations under
Administrative Order No. 1, Series of 1975, which are inconsistent
with this Administrative Order be, as they are hereby, repealed
and/or amended accordingly.

Thus, when 51,200,806 shares in the bank remained undistributed, the PCA
deemed it proper to give a bonanza to coconut farmers who already got their bank
shares, by giving them an additional share for each share owned by them and by
converting their fractional shares into full shares. The rest of the shares were then
transferred to a private organization, the COCOFED, for distribution to those
determined to be bona fide coconut farmers who had not received shares of stock
of the Bank. The distribution to the latter was made on the basis of per capita,
meaning without regard to the COCOFUND receipts. The PCA considered itself
free to disregard the said receipts in the distribution of the shares although they
were considered by the May 25, 1975 Agreement between the PCA and defendant
Cojuangco (par. [8] of said Agreement) and by Sections 1, 3, 4, 6 and 9, PCA
Administrative Order No. 1, Series of 1975 as the basis for the distribution of
shares.

The PCA thus assumed, due to lack of adequate guidelines set by P.D. No.
755, that it had complete authority to define who are the coconut farmers and to
decide as to who among the coconut farmers shall be given the gift of bank shares;
how many shares shall be given to them, and what basis it shall use to determine
the amount of shares to be distributed for free to the coconut farmers. In other
words, P.D. No. 755 fails the completeness test which renders it constitutionally
infirm.

Due to numerous flaws in the distribution of the UCPB shares by PCA, it would be
best for the interest of all coconut farmers to revert the ownership of the UCBP
shares to the government for the entire coconut industry, which includes the farmers;

4. The Court also takes judicial cognizance of the fact that a number, if not all, of
the coconut farmers who sold copra did not get the receipts for the payment of the
coconut levy for the reason that the copra they produced were bought by traders or
middlemen who in turn sold the same to the coconut mills. The reality on the ground
is that it was these traders who got the receipts and the corresponding UCPB
shares. In addition, some uninformed coconut farmers who actually got the
COCOFUND receipts, not appreciating the importance and value of said receipts,
have already sold said receipts to non-coconut farmers, thereby depriving them of
the benefits under the coconut levy laws. Ergo, the coconut farmers are the ones who
will not be benefited by the distribution of the UCPB shares contrary to the policy
behind the coconut levy laws. The nullification of the distribution of the UCPB
shares and their transfer to the government for the coconut industry will, therefore,
ensure that the benefits to be deprived from the UCPB shares will actually accrue to
the intended beneficiaries the genuine coconut farmers.

From the foregoing, it is highly inappropriate to apply the operative fact doctrine to
the UCPB shares. Public funds, which were supposedly given utmost safeguard,
were haphazardly distributed to private individuals based on statutory provisions that
are found to be constitutionally infirm on not only one but on a variety of
grounds. Worse still, the recipients of the UCPB shares may not actually be the
intended beneficiaries of said benefit. Clearly, applying the Operative Fact Doctrine
would not only be iniquitous but would also serve injustice to the Government, to
the coconut industry, and to the people, who, whether willingly or unwillingly,
contributed to the public funds, and therefore expect that their Government would
take utmost care of them and that they would be used no less, than for public purpose.

We clarify that PSJ-A is subject of another petition for review interposed by Eduardo
Cojuangco, Jr., in G.R. No. 180705 entitled, Eduardo M. Cojuangco, Jr. v. Republic
of the Philippines, which shall be decided separately by this Court. Said petition
should accordingly not be affected by this Decision save for determinatively legal
issues directly addressed herein.

WHEREFORE, the petitions in G.R. Nos. 177857-58 and 178793 are

hereby DENIED. The Partial Summary Judgment dated July 11, 2003 in Civil Case
No. 0033-A as reiterated with modification in Resolution dated June 5, 2007, as well
as the Partial Summary Judgment dated May 7, 2004 in Civil Case No. 0033-F,
which was effectively amended in Resolution dated May 11, 2007, are AFFIRMED
with MODIFICATION, only with respect to those issues subject of the petitions in
G.R. Nos. 177857-58 and 178193. However, the issues raised in G.R. No. 180705
in relation to Partial Summary Judgment dated July 11, 2003 and Resolution dated
June 5, 2007 in Civil Case No. 0033-A, shall be decided by this Court in a separate
decision.
 The Partial Summary Judgment in Civil Case No. 0033-A dated July 11, 2003,
is hereby MODIFIED, and shall read as follows:

WHEREFORE, in view of the foregoing, We rule as follows:

SUMMARY OF THE COURTS RULING.

A. Re: CLASS ACTION MOTION FOR A SEPARATE SUMMARY

JUDGMENT dated April 11, 2001 filed by Defendant Maria Clara L. Lobregat,
COCOFED, et al., and Ballares, et al.

The Class Action Motion for Separate Summary Judgment dated April 11,
2001 filed by defendant Maria Clara L. Lobregat, COCOFED, et al. and Ballares,
et al., is hereby DENIED for lack of merit.

B. Re: MOTION FOR PARTIAL SUMMARY JUDGMENT (RE:

COCOFED, ET AL. AND BALLARES, ET AL.) dated April 22, 2002 filed by
Plaintiff.

1. a. The portion of Section 1 of P.D. No. 755, which reads:

and that the Philippine Coconut Authority is hereby authorized to

distribute, for free, the shares of stock of the bank it acquired to the
coconut farmers under such rules and regulations it may promulgate.

taken in relation to Section 2 of the same P.D., is unconstitutional: (i) for

having allowed the use of the CCSF to benefit directly private interest by
the outright and unconditional grant of absolute ownership of the
FUB/UCPB shares paid for by PCA entirely with the CCSF to the undefined
coconut farmers, which negated or circumvented the national policy or
public purpose declared by P.D. No. 755 to accelerate the growth and
development of the coconut industry and achieve its vertical integration;
and (ii) for having unduly delegated legislative power to the PCA.

b. The implementing regulations issued by PCA, namely, Administrative

Order No. 1, Series of 1975 and Resolution No. 074-78 are likewise
 invalid for their failure to see to it that the distribution of shares serve
exclusively or at least primarily or directly the aforementioned public
purpose or national policy declared by P.D. No. 755.

2. Section 2 of P.D. No. 755 which mandated that the coconut levy funds shall
not be considered special and/or fiduciary funds nor part of the general
funds of the national government and similar provisions of Sec. 5, Art. III,
P.D. No. 961 and Sec. 5, Art. III, P.D. No. 1468 contravene the provisions
of the Constitution, particularly, Art. IX (D), Sec. 2; and Article VI, Sec. 29
(3).

3. Lobregat, COCOFED, et al. and Ballares, et al. have not legally and validly
obtained title of ownership over the subject UCPB shares by virtue of P.D.
No. 755, the Agreement dated May 25, 1975 between the PCA and
defendant Cojuangco, and PCA implementing rules, namely, Adm. Order
No. 1, s. 1975 and Resolution No. 074-78.

4. The so-called Farmers UCPB shares covered by 64.98% of the UCPB

shares of stock, which formed part of the 72.2% of the shares of stock of
the former FUB and now of the UCPB, the entire consideration of which
was charged by PCA to the CCSF, are hereby declared conclusively owned
by, the Plaintiff Republic of the Philippines.

SO ORDERED.

The Partial Summary Judgment in Civil Case No. 0033-F dated May 7, 2004,
is hereby MODIFIED, and shall read as follows:

WHEREFORE, the MOTION FOR EXECUTION OF PARTIAL

SUMMARY JUDGMENT (RE: CIIF BLOCK OF SMC SHARES OF
STOCK) dated August 8, 2005 of the plaintiff is hereby denied for lack of
merit. However, this Court orders the severance of this particular claim of
Plaintiff. The Partial Summary Judgment dated May 7, 2004 is now considered a
separate final and appealable judgment with respect to the said CIIF Block of SMC
shares of stock.
 The Partial Summary Judgment rendered on May 7, 2004 is modified by
deleting the last paragraph of the dispositive portion, which will now read, as
follows:

WHEREFORE, in view of the foregoing, we hold that:

The Motion for Partial Summary Judgment (Re: Defendants CIIF

Companies, 14 Holding Companies and Cocofed, et al) filed by Plaintiff is
hereby GRANTED. ACCORDINGLY, THE CIIF COMPANIES,
NAMELY:

1. Southern Luzon Coconut Oil Mills (SOLCOM);

2. Cagayan de Oro Oil Co., Inc. (CAGOIL);
3. Iligan Coconut Industries, Inc. (ILICOCO);
4. San Pablo Manufacturing Corp. (SPMC);
5. Granexport Manufacturing Corp. (GRANEX); and
6. Legaspi Oil Co., Inc. (LEGOIL),

AS WELL AS THE 14 HOLDING COMPANIES, NAMELY:

1. Soriano Shares, Inc.;

2. ACS Investors, Inc.;
3. Roxas Shares, Inc.;
4. Arc Investors; Inc.;
5. Toda Holdings, Inc.;
6. AP Holdings, Inc.;
7. Fernandez Holdings, Inc.;
8. SMC Officers Corps, Inc.;
9. Te Deum Resources, Inc.;
10. Anglo Ventures, Inc.;
11. Randy Allied Ventures, Inc.;
12. Rock Steel Resources, Inc.;
13. Valhalla Properties Ltd., Inc.; and
14. First Meridian Development, Inc.

AND THE CIIF BLOCK OF SAN MIGUEL CORPORATION (SMC)

SHARES OF STOCK TOTALING 33,133,266 SHARES AS OF 1983
TOGETHER WITH ALL DIVIDENDS DECLARED, PAID AND ISSUED
THEREON AS WELL AS ANY INCREMENTS THERETO ARISING
FROM, BUT NOT LIMITED TO, EXERCISE OF PRE-EMPTIVE
RIGHTS ARE DECLARED OWNED BY THE GOVERNMENT TO BE
USED ONLY FOR THE BENEFIT OF ALL COCONUT FARMERS AND
 FOR THE DEVELOPMENT OF THE COCONUT INDUSTRY, AND
ORDERED RECONVEYED TO THE GOVERNMENT.

THE COURT AFFIRMS THE RESOLUTIONS ISSUED BY THE

SANDIGANBAYAN ON JUNE 5, 2007 IN CIVIL CASE NO. 0033-A AND
ON MAY 11, 2007 IN CIVIL CASE NO. 0033-F, THAT THERE IS NO
MORE NECESSITY OF FURTHER TRIAL WITH RESPECT TO THE
ISSUE OF OWNERSHIP OF (1) THE SEQUESTERED UCPB SHARES,
(2) THE CIIF BLOCK OF SMC SHARES, AND (3) THE CIIF
COMPANIES. AS THEY HAVE FINALLY BEEN ADJUDICATED IN
THE AFOREMENTIONED PARTIAL SUMMARY JUDGMENTS
DATED JULY 11, 2003 AND MAY 7, 2004.

SO ORDERED.

Costs against petitioners COCOFED, et al. in G.R. Nos. 177857-58 and Danila S.
Ursua in G.R. No. 178193.

PRESBITERO J. VELASCO, JR.

Associate Justice
WE CONCUR:

RENATO C. CORONA
Chief Justice

No Part I am a petitioner in related

case with same issue GR 147036 &
147811 No part
ANTONIO T. CARPIO TERESITA J. LEONARDO-DE CASTRO
Associate Justice Associate Justice

(On official leave)

ARTURO D. BRION DIOSDADO M. PERALTA
Associate Justice Associate Justice

LUCAS P. BERSAMIN MARIANO C. DEL CASTILLO

Associate Justice Associate Justice

ROBERTO A. ABAD MARTIN S. VILLARAMA, JR.

Associate Justice Associate Justice

JOSE P. PEREZ JOSE C. MENDOZA

Associate Justice Associate Justice
MARIA LOURDES P. ARANAL-SERENO BIENVENIDO L. REYES
Associate Justice Associate Justice

ESTELA M. PERLAS-BERNABE
Associate Justice

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the
conclusions in the above Decision had been reached in consultation before the case
was assigned to the writer of the opinion of the Court.
 RENATO C. CORONA
Chief Justice

* No part.
** On official leave.
[1]
Per the Affidavit of Atty. Arturo Liquete, then PCA Board Secretary, Lobregat was a member of the PCA
Board for the most part from 1970 to 1985; rollo (G.R. No. 180705), p. 804.
[2]
G.R. No. 96073, January 23, 1995, 240 SCRA 376.
[3]
Southern Luzon Coconut Oil Mills, Cagayan de Oro Oil Co. Inc., Iligan Coconut Industries, San Pablo
Manufacturing Corp, Granexport Manufacturing Corp., & Legaspi Oil Co., Inc.
[4]
Composed of Soriano Shares, ASC Investors, ARC Investors, Roxas Shares, Toda Holdings, AP Holdings,
Fernandez Holdings, SMC Officers Corps., Te Deum Resources, and Anglo Ventures, Randy Allied Ventures, Rock
Steel Resources, Valhalla Properties Ltd., and First Meridian Development, all names ending with the suffix Corp. or
Inc.
[5]
Aside from being coconut farmers, petitioners del Rosario and Espina represent themselves as Directors
of COCOFED and the ultimate beneficial owners of CIIF companies.
[6]
Penned by Associate Justice Teresita Leonardo-De Castro (now a member of this Court), concurred in by
Associate Justices Diosdado M. Peralta (now also a member of this Court) and Francisco H. Villaruz, Jr.; rollo (G.R.
Nos. 177857-58), pp. 205-287.
[7]
Id. at 289-327.
[8]
Id. at 329-39.
[9]
Id. at 341-405.
[10]
Id. at 407-25.
[11]
Id. at 427-42.
[12]
Dated September 2, 2009, id. at 2127-49.
[13]
See PSJ-A.
[14]
On July 19, 2011, petitioner Eduardo M. Cojuangco, Jr. also filed a Motion to Deconsolidate G.R. No.
180705 from G.R. Nos. 177857-58 and 178193.
[15]
Section 8. The Coconut Investment Fund. There shall be levied on the coconut farmer a sum which shall
be converted into shares of stock of the [CIC] upon its incorporation. For every fifty-five centavos (P0.55) so collected,
fifty centavos (P0.50) shall be set aside to constitute a special fund, to be known as the Coconut Investment Fund,
which shall be used exclusively to pay the subscription by the Philippine Government for and in behalf of the coconut
farmers to the capital stock of said Company: Provided, . Provided, further, That the (PHILCOA) shall, in consultation
with [COCOFED] prescribe and promulgate the necessary rules, regulations and procedures for the collection of such
levy and issuance of the corresponding receipts. (Emphasis added.)
[16]
COCOFED v. PCGG, G.R. No. 75713, October 2, 1989, 178 SCRA 236.
[17]
R.A. 6260, Sec. 9.
[18]
Republic v. Sandiganbayan, G.R. No. 118661, January 22, 2007; not to be confused with an earlier cited
case of the same title.
 [19]
Per P.D. No. 623, 3 board seats of the PCA 7-man board were reserved to those recommended by
COCOFED.
[20]
For example: Article III, Sec. 2(c) of the Coconut Industry Code (P.D. No. 961) allows the use of the
CCSF levy to finance the development and operating expenses of COCOFED inclusive of its projects; Art. II, Sec.
3(k) of the same Code empowers the PCA to collect a fee from desiccating factory to defray its operating expenses.
[21]
Republic v. COCOFED, G.R. Nos. 14062-64, December 14, 2001, 372 SCRA 462.
[22]
P.D. No. 276, Sec. 1(b).
[23]
P.D. No. 711 is entitled: Abolishing all Existing Special and Fiduciary Funds and Transferring to the
General Fund the Operations and Funding of all Special and Fiduciary Funds.
[24]
Vital Legal Documents, Vol. 69, pp. 90-95.
[25]
Republic v. Sandiganbayan, G.R. No. 118661, January 22, 2007, 512 SCRA 25.
[26]
A total of 33.1 million shares; Republic v. Sandiganbayan, supra.
[27]
Annex G to Petition in G.R. No. 180705; rollo, pp. 459-463.
[28]
No particular day was indicated, although the special power of attorney granted to Atty. Edgardo Angara
by Cojuangco for the former to sign the Agreement was dated May 25, 1975.
[29]
Annex I to Petition in G.R. No. 180705, rollo, pp. 466-76.
[30]
Represented by Lobregat.
[31]
Albeit not mentioned in the first contract document, the notion of an option was adverted to in the SPA
in favor of Mr. Angara and in the second contract document between PCA and Cojuangco.
[32]
On May 30, 1975, FUB issued Stock Certificate Nos. 745 and 746 covering 124,080 and 5,880 shares),
respectively, in the name of [PCA] for the benefit of the coconut farmers of the Philippines; Republic v.
Sandiganbayan, supra note 25.
[33]
PSJ-A, p. 4.
[34]
Republic v. COCOFED, G.R. Nos. 147062-64, December 14, 2001, 372 SCRA 462, 477
[35]
Republic v. Sandiganbayan, G.R. No. 118661, January 22, 2007, 512 SCRA 25.
[36]
The validity and propriety of these processes were sustained by the Court in BASECO v. PCGG, No. L-
75885, May 27, 1987, 150 SCRA 181.
[37]
Per the Sandiganbayans Resolution of October 1, 1991.
[38]
The Complaints in CC 0033-A and CC 0033-F contain common allegations, as shall be detailed later.
[39]
Rollo (G.R. Nos. 177857-58), p. 216.
[40]
Reported in 372 SCRA 2001.
[41]
Named as defendants were Cojuangco, Ferdinand and Imelda Marcos, Lobregat, Enrile, Urusa, Jose
Eleazar, Jr. and Herminigildo Zayco; rollo (G.R. No. 180705), pp. 481-00.
[42]
Class Action Petition for Review, pp. 38-41; Rollo (G.R. Nos.177857-58), pp. 51-54.
[43]
Ursuas Petition for Review, pp. 11-14; Rollo (G.R. No. 178193), pp. 26-29.
[44]
In its pertinent parts, PCA A.O. No. 1 reads:

Section 1. Eligible Coconut Farmers. All coconut farmers who have paid to the [CIF] and registered their
COCOFUND receipts and registered the same with the [PCA] shall be entitled to a proportionate share of the equity
in the Bank, subject to the terms and conditions herein provided.

SECTION. 3 Eligible COCOFUND Receipts.- All COCOFUND receipts issued by the PCA from the
effectivity of R.A.6260 up to June 30, 1975 shall be considered eligible for registration by the coconut farmers for
purposes of qualifying them to participate in the equity in the Bank.

SECTION 4, Registered COCOFUND Receipts All COCOFUND receipts eligible under Section 3 hereof
and which are registered on or before December 31, 1975 shall be qualified for equity participation in the Bank.

SECTION 7- Additional Period of Registration- To enable all qualified farmers to participate in the sharing
of the equity in the Bank, the period of registration shall be extended up to March 31, 1976, thereafter any unregistered
COCOFUND receipts can no longer qualify for registration for purposes of these rules and regulations.
[45]
COCOFED et al.s Petition, rollo (G.R. Nos. 177857-58), pp. 52-53.
[46]
The list was not adduced; in March 2001, the Republic filed a Motion Ad Cautelam for Leave to Present
Additional Evidence which COCOFED opposed.
[47]
Supra note 34.
 [48]
Rollo (G.R. Nos. 177857-58), pp. 830-871.
[49]
See PSJ-A, p. 2.
[50]
Rollo (G.R. No.180705), pp. 956-961.
[51]
Supra note 7.
[52]
Supra note 34.
[53]
The Answer-In-Intervention of COCOFED et al., reads in part as follows:

1.2. The more than one million COCOFED members are the registered owners and/or the beneficial owners
of all, or at least not less than (51%) of the capital stock of the CIIF Companies. The CIIF Companies have wholly
owned subsidiaries described as the 14 CIIF Holding Companies. These 14 are the registered owners of SMC shares.
As such, COCOFED et al., and the COCOFED members are the ultimate beneficial owners of SMC shares.

1.3. The individual COCOFED members are filing and prosecuting this INTERVENTION in their capacities
as: . ; b) Coconut farmers/producers who registered receipts that were issued in their favor by the [PCA] as required
by Rep. Act No. 6260 (hereinafter referred to as COCOFUND Receipt Law) for themselves and for and on behalf of
the more than one million coconut farmers who are similarly situated.
[54]
Section 9. Investment For the Benefit of the Coconut Farmers. Notwithstanding any law to the contrary
notwithstanding, the bank acquired under PD 755 is hereby given full power and authority to make investments in the
form of shares of stock in corporations engaged activities relating to the coconut and other palm oils industry.
[55]
Section 10. Distribution to Coconut Farmers. The investment made by the bank as authorized under
Section 9 hereof shall all be equitably distributed, for free, by the bank to the coconut farmers.
[56]
OSGs Comment, pp. 33-34; rollo (G.R. Nos. 177857-58), pp. 688-689.
[57]
The MOTION FOR JUDGMENT ON THE PLEADINGS AND/OR FOR
PARTIAL SUMMARY JUDGMENT (Re: Defendants CIIF Companies, 14 Holding Companies and COCOFED, et al.) dated
July 12, 2002 filed by plaintiff Republic of the Philippines involves the Twenty-Seven Percent Coconut Industry
Investment Fund (CIIF) Block of San Miguel Corporation (SMC) shares of stock. As culled from the records of this
case, the following are the admitted facts or the facts that appear without substantial controversy:

1. The above-mentioned 27% Block of SMC Shares are registered in the names of fourteen (14) holding companies
listed hereunder:

3. The CIIF is an accumulation of a portion of the Coconut Consumers Stabilization Fund (CCSF) and the Coconut
Industry Development Fund (CIDF), which is mandated by Section 2(d) and Section 9 and 10, Article III, Presidential
Decrees (P.D.) No. 961 and No. 1468 to be utilized by the United Coconut Planters Bank (UCPB) for investment in
the form of shares of stock in corporations organized for the purpose of engaging in the establishment and the
operation of industries and commercial activities and other allied business undertakings relating to coconut and
other palm oils industry in all its aspects. The corporations, including their subsidiaries or affiliates wherein the CIIF
has been invested are referred to as CIIF companies.

4. The investments made by UCPB in CIIF companies are required by the said Decrees to be equitably distributed for
free by the said bank to the coconut farmers except such portion of the investment which it may consider necessary
to retain to insure continuity and adequacy of financing of the particular endeavor.

5. Through PCA Resolution No. 130-77 dated July 19, 1977 (Exh. 337-Farmer), the Philippine Coconut
Authority (PCA), after having ascertained that the CCSF collections are more than sufficient to finance the primary
purposes for which the CCSF is to be utilized, ordered as follows: all unexpected appropriations from out of the CCSF
Collections as of this date shall constitute the initial funds of the Coconut Industry Investment Fund (CIIF), and that
the Acting Administrator of the Philippine Coconut Authority is hereby directed to deliver to the United Coconut
Planters Bank all such unexpended sums.

6. The UCPB acquired controlling interests in the CIIF Oil Mills mentioned in paragraph 2 above using the CIIF.

7. The UCPB as trustee for the CIIF and in compliance with P.D. 1468, prescribed the equitable distribution for free
to the coconut farmers of the shares of the CIIF Companies and the measures that would afford the widest
distribution of the investment among coconut farmers. (Excerpts of Minutes of the UCPB Board of Directors Meeting
held on November 17, 1981) (Exh. 346-Farmer).

8. The UCPB distributed a part of the investments made in such companies to the identified coconut farmers and
retained part as administrator of the CIIF. The said identified coconut farmers and the UCPB for the benefit of the
coconut farmers are the registered controlling stockholders of the outstanding capital stock of the defendants CIIF
Oil Mills listed in paragraph 2 above.

9. In 1983, the UCPB, as administrator of the CIIF, authorized SOLCOM, CAGOIL, ILICOCO, GRANEX and LEGOIL to
acquire 33,133,266 shares of stock of San Miguel Corporation (SMC).

10. To hold the SMC Shares, defendants 14 Holding Companies were incorporated under the Corporation Code as
follows: .

11. All the outstanding capital stock of defendants 14 Holding Companies are owned by defendants CIIF Oil Mills
in the following proportion: .

12. The terms and conditions for the purchase of the CIIF Block of SMC Shares were contained in a written
agreement entered into between defendant Eduardo M. Cojuangco, Jr. and late Don Andres Soriano, Jr. To finance
the acquisition of the CIIF Block of SMC shares, the parent CIIF Companies extended cash advances to the 14 Holding
Companies. The 14 CIIF Holding Companies also used its incorporating equity and borrowed funds from UCPB.

13. The purported farmer-affidavits submitted by defendants COCOFED, et al. in Civil Cases No. 0033-A, B and F
uniformly allege, mutatis mutandis, as basis of their claim for the CIIF Block of SMC Shares, that:

a. they are allegedly coconut farmers who supposedly sold coconut products;

b. in the supposed sale thereof, they allegedly received COCOFUND receipts pursuant to RA
No. 6260;

c. they allegedly registered the said COCOFUND receipts; and

d. by virtue thereof, and under RA No. 6260, PD Nos. 961 and 1468, they are allegedly
entitled to ownership of the CIIF Companies, and ultimately the CIIF Block of SMC Shares.

However, defendants COCOFED, et al. claim in their opposition to the subject motion that the payors of the
CIF under R.A. No. 6260 were the same payors of the CCSF and CIDF, that shares of stock of the UCPB were also
distributed to those who did not register any COCOFUND Receipt; and that their claim over the CIIF Block of SMC
Shares is based on the express mandate of laws and their implementing rules and regulations.

14. In particular, the COCOFED, et al. claim that the COCOFED members are the registered owners and/or
beneficial owner of all, or at least not less than (51%) of the capital stock of the CIIF companies, which have wholly
owned subsidiaries described as the 14 holding companies. These 14 holding companies are the registered owners
of the CIIF Block of SMC Shares. Accordingly, COCOFED, et al. claim that they and the COCOFED members are the
ultimate beneficial owners of the said share. (Record, Vol. III, pp. 526-527 and pp. 138-539).

15. The COCOFED, is a private non-stock, non-profit corporation which was recognized as the national
association of coconut producers with the largest number of membership.
 16. The identification of the coconut farmers and distribution of the shares of stock of the CIIF companies
for free to the so identified coconut farmers followed the same procedure laid down by PCA Administration Order
No. 1, series of 1975 and PCA Resolution No. 074-78 dated June 7, 1978.

17. Defendant Eduardo M. Cojuangco, Jr. disclaims any interest in the 27% CIIF Block of SMC Shares.

The plaintiff and the defendants are hereby directed to submit their comment on the foregoing list of
admitted facts or facts that appear without substantial controversy within ten (10) days from receipt hereof.
[58]
Rollo (G.R. No. 180705), pp. 404-05.
[59]
Supra note 10.
[60]
Supra note 8.
[61]
Rollo (G.R. Nos. 177857-58), pp. 501-516.
[62]
Supra note 11.
[63]
The paragraph in PSJ-F which the May 11, 2007 Resolution deleted reads: Let a trial of this Civil Case
proceed with respect to the issue which has not bee disposed in this [PSA-F] including the determination of whether
the CIIF Block of SMC shares adjudged to be owned by the Government represents 27% of the issued and outstanding
capital stock of the Government according to plaintiff or to 31% of said capital stock according to COCOFED, et al.
and Banares, et al.
[64]
Rollo (G.R. Nos. 177857-58), pp. 35-40.
[65]
Rollo (G.R. No. 178193), pp. 18-20.
[66]
No. L-19557, March 31, 1964, 10 SCRA 637.
[67]
Rollo (G.R. Nos. 177857-58), p. 86.
[68]
G.R. No. 78750, April 20, 1990, 184 SCRA 449, 460.
[69]
1 Regalado, REMEDIAL LAW COMPENDIUM 11 (6th revised ed., 1997).
[70]
Id. at 271.
[71]
No. L-28975, February 27, 1976, 69 SCRA 456.
[72]
G.R. No. 156264, September 30, 2004, 439 SCRA 667, 672-73.
[73]
See PSJ-F, pp. 5-9.
[74]
San Miguel Corporation v. Sandiganbayan, G.R. Nos. 104637-38, September 14, 2000, 340 SCRA 289.
[75]
Section 1.
[76]
Meralco v. Ortaez, 119 Phil. 911 (1964).
[77]
G.R. No. 78750, April 20, 1990, 184 SCRA 449.
[78]
No. L-21450, April 15, 1968, 23 SCRA 30.
[79]
See Pascual v. Robles, G.R. No. 182645, December 15, 2010, 638 SCRA 712, 719.
[80]
G.R. No. 141423, November 15, 2000, 344 SCRA 838.
[81]
G.R. No. 75713, October 2, 1989, 178 SCRA 237, 250-252.
[82]
BLACKS LAW DICTIONARY 1050 (6th ed., 1990).
[83]
WEBSTERS THIRD NEW INTERNATIONAL DICTIONARY (1981 ed.).
[84]
66 C.J.S. 600.
[85]
Agpalo, STATUTORY CONSTRUCTION 259 (4th ed., 1998).
[86]
Their close relatives, subordinates, business associates, dummies, agents or nominees.
[87]
Yuchengco v. Sandiganbayan, G.R. No. 149802, January 20, 2006, 479 SCRA 1.
[88]
No. L-77663, April 12, 1988, 159 SCRA 556, 574.
[89]
Separate concurring opinion in PSJ-A of Associate Justice Villaruz; rollo (G.R. No. 180705), p. 271.
[90]
PNB v. Noahs Ark Sugar Refinery, G.R. No. 107243, September 1, 1993, 226 SCRA 36.
[91]
Carcon Development Corp. v. Court of Appeals, G.R. No. 88218, December 19, 1989, 180 SCRA 348.
[92]
Republic v. COCOFED, et al., TSN, April 17, 2001, p. 198.
[93]
G.R. No. 145851, November 22, 2001, 370 SCRA 394.
[94]
Enriquez v. Office of the Ombudsman, G.R. Nos. 174902-06, February 15, 2008, 545 SCRA 618; Lopez,
Jr. v. Office of the Ombudsman, G.R. No. 140529, September 6, 2001, 364 SCRA 569; Roque v. Office of the
Ombudsman, G.R. No. 129978, May 12, 1999, 307 SCRA 104; Duterte v. Sandiganbayan, G.R. No. 130191, April
27, 1998, 289 SCRA 721; Tatad v. Sandiganbayan, Nos. L-72335-39, March 21, 1988, 159 SCRA 70.
[95]
G.R. No. 158018, May 20, 2004, 428 SCRA 787, 789-790.
[96]
G.R. No. 165781, June 5, 2009, 588 SCRA 519, 527-528.
[97]
Heirs of Bernardo Ulep v. Ducat, G.R. No. 159284, January 27, 2009, 577 SCRA 6, 19.
 [98]
Garcia v. Executive Secretary, G.R. No. 157584, April 2, 2009, 583 SCRA 119, 138-39.
[99]
Sur-Rejoinder, p. 17, rollo (G.R. Nos. 177857-58), p. 846.
[100]
An Act to Codify the Laws Dealing with the Development of the Coconut and other Palm Oil Industry
and for other Purposes [Presidential Decree No 961], art. III, 5.
[101]
Presidential Decree No. 1468, Art. III, Sec. 5.
[102]
P.D. No. 755, Sec. 2; P.D. No. 961, Art. III, Sec. 5; P.D. No. 1468, Art. III, Sec. 5.
[103]
Rollo (G.R. Nos. 177857-58), pp. 33-37, 237-241.
[104]
Id. at 136.
[105]
G.R. No. 164915, March 10, 2006, 484 SCRA 485, 497.
[106]
G.R. No. 163103, February 6, 2009, 578 SCRA 129, 143.
[107]
Supra note 16.
[108]
Id. at 252.
[109]
Republic v. COCOFED, G.R. No. 147062-64, December 14, 2001, 372 SCRA 462, 482-84.
[110]
Republic v. COCOFED, G.R. No. 147062-64, December 14, 2001, 372 SCRA 462, 482-84.
[111]
Planters Products, Inc. v. Fertiphil Corporation, G.R. No. 166006, March 14, 2008, 548 SCRA 485,
510.
[112]
Id.; Pascual v. Secretary of Public Works and Communications, 110 Phil. 331 (1960).
[113]
Id. at 511.
[114]
Gaston v. Republic Planters Bank, No. L-77194, March 15, 1988, 158 SCRA 626, 628-629.
[115]
Id. at 629.
[116]
Id. at 634.
[117]
Id.
[118]
Creating a Philippine Coconut Authority [P.D. No. 232], June 30, 1973; Establishing a Coconut
Consumers Stabilization Fund [P.D. No. 276], August 20, 1973; Further Amending Presidential Decree No. 232, As
Amended [P.D. No. 582], November 14, 1974.
[119]
Republic v. COCOFED, G.R. No. 147062-64, December 14, 2001, 372 SCRA 462, 482-84.
[120]
No. L-77194, March 15, 1988, 158 SCRA 626, 633-634; cited in Republic v. COCOFED, G.R. Nos.
147062-64, December 14, 2001, 372 SCRA 462, 485-86.
[121]
Gaston v. Republic Planters Bank, No. L-77194, March 15, 1988, 158 SCRA 626, 633-34; cited
in Republic v. COCOFED, G.R. Nos. 147062-64, December 14, 2001, 372 SCRA 462, 485-86.
[122]
Republic v. COCOFED, G.R. Nos. 147062-64, December 14, 2001, 372 SCRA 462, 483; citing P.D. No.
961, 1976, Art. III, 1; P.D. No. 1468, 1978, Art. III, 1.
[123]
See infra discussion, coconut levy fund as special fund of the government.
[124]
Republic v. COCOFED, G.R. No. 147062-64, December 14, 2001, 372 SCRA 462, 491.
[125]
Id. at 488.
[126]
Id. at 490.
[127]
Instituting a Procedure for the Management of Special and Fiduciary Funds Earmarked or Administered by
Departments, Bureaus, Offices and Agencies of the National Government, including Government-Owned or
Controlled Corporations [P.D. No. 1234], 1977, 1 (a).
[128]
Gaston v. Republic Planters Bank, G.R. No. L-77194, March 15, 1988, 158 SCRA 626, 633.
[129]
P.D. No. 276, 1 (a).
[130]
P.D. No. 1234, 1 (a).
[131]
P.D. No. 961, Art. III, 5; P.D. No. 1468, Art. III, 5.
[132]
Republic v. COCOFED, G.R. Nos. 147062-64, December 14, 2001, 372 SCRA 462, 484.
[133]
P.D. No. 961, Art. III, 5; P.D. No. 1468, Art. III, 5.
[134]
P.D. No. 775, 2; P.D. No. 961, Art. III, 5; P.D. No. 1468, Art. III, 5.
[135]
P.D. No. 775, 1.
[136]
Supra note 118.
[137]
Supra note 119.
[138]
CONSTITUTION, Art. VI, 29 (1).
[139]
Rollo (G.R. No. 177857-58), pp. 144-148, 799-803.
[140]
Id. at 62-64.
[141]
G.R. No. 164785, April 29, 2009, 587 SCRA 79, 117-18.
[142]
No. L-32096, October 24, 1970, 35 SCRA 481, 496-497.
[143]
G.R. No. 166715, August 14, 2008, 562 SCRA 251, 277.
[144]
P.D. No. 755, whereas clause.
 [145]
Supra note 50.
[146]
See infra discussion Part III, Civil Case No. 0033-A.
[147]
PSJ-A, pp. 51-52.
[148]
PSJ-A, pp. 52, citing Comment of Defendant Maria Clara L. Lobregat, Movants COCOFED, et al., and
Movants Ballares, et al. (Re: Order of March 11, 2003), p. 16.
[149]
See Separate Opinion of Justice Vitug in Republic v. COCOFED, supra note 34.
[150]
P.D. 755, whereas clause.
[151]
P.D. No. 961, Art. III, 5.
[152]
CONSTITUTION, Art. IX (D), 2 (1).
[153]
1973 CONSTITUTION, Art. XII (D), 2 (1).
[154]
Mamaril v. Domingo, G.R. No. 100284, October 13, 1993, 227 SCRA 206.
[155]
CONSTITUTION, Art. IX (D), 3. (Emphasis Ours.)
[156]
PSJ-A, pp. 55 & 81.
[157]
Rollo, G.R. Nos. 177857-58, pp. 504 & 524; PSJ-F, po, 37 & 57.
[158]
Id. at 504 & 513; PSJ-F, pp. 37 & 46.
[159]
Id. at 504 & 515; PSJ-F, pp. 37 & 48.
[160]
Id. at 510; PSJ-F, p. 43.
[161]
Id. at 505 & 515; PSJ-F, pp. 38 & 48.
[162]
Id. at 476 & 515; PSJ-F, pp. 8 & 48.
[163]
Id. at 515-16; PSJ-F, pp. 48-49.
[164]
Supra note 114.
[165]
Supra note 34, at 491.
[166]
Id. at 482-484.
[167]
G.R. No. 144054, June 30, 2006, 484 SCRA 128, 134.
[168]
Rollo (G.R. Nos. 177857-58), p. 156.
[169]
Julies Franchise Corp. v. Ruiz, G.R. No. 180988, August 28, 2009, 597 SCRA 463, 471.
[170]
G.R. No. 179532, May 30, 2011.
[171]
Yap v. Thenamaris Ships Management, G.R. No. 179532, May 30, 2011. (Emphasis Ours)
[172]
See e.g. Yap v. Thenamaris Ships Management, G.R. No. 179532, May 30, 2011.
[173]
G.R. No. 164527, August 15, 2007, 530 SCRA 235.
[174]
Id. at 336.
[175]
Rollo (G.R. Nos. 147062-64), TSN, April 17, 2001, p. 169.
[176]
R.A. No. 6260, 2.
[177]
P.D. No. 276, 1 (a) & (b).

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 171132 August 15, 2012

MANUEL D. YNGSON, JR. (in his capacity as the Liquidator of ARCAM & COMPANY,
INC.), Petitioner,
vs.
PHILIPPINE NATIONAL BANK, Respondent.

DECISION

VILLARAMA, JR., J.:

On appeal are the Resolutions dated April 14, 20051 and January 24, 20062 of the Court of Appeals
(CA) in CA-G.R. SP No. 88735. The CA dismissed petitioner's petition for review of the January 4,
2005 Resolution3 and February 9, 2000 Order4 of the Securities and Exchange Commission (SEC) for
failure of petitioner to attach to the petition copies of material portions of the records and other
relevant or pertinent documents.

The facts follow:

ARCAM & Company, Inc. (ARCAM) is engaged in the operation of a sugar mill in
Pampanga.5 Between 1991 and 1993, ARCAM applied for and was granted a loan by respondent
Philippine National Bank (PNB).6 To secure the loan, ARCAM executed a Real Estate Mortgage over
a 350,004-square meter parcel of land covered by TCT No. 340592-R and a Chattel Mortgage over
various personal properties consisting of machinery, generators, field transportation and heavy
equipment.

ARCAM, however, defaulted on its obligations to PNB. Thus, on November 25, 1993, pursuant to the
provisions of the Real Estate Mortgage and Chattel Mortgage, PNB initiated extrajudicial foreclosure
proceedings in the Office of the Clerk of Court/Ex Officio Sheriff of the Regional Trial

Court (RTC) of Guagua, Pampanga.7 The public auction was scheduled on December 29, 1993 for
the mortgaged real properties and December 8, 1993 for the mortgaged personal properties.

On December 7, 1993, ARCAM filed before the SEC a Petition for Suspension of Payments,
Appointment of a Management or Rehabilitation Committee, and Approval of Rehabilitation Plan,
with application for issuance of a temporary restraining order (TRO) and writ of preliminary
injunction. The SEC issued a TRO and subsequently a writ of preliminary injunction, enjoining PNB
and the Sheriff of the RTC of Guagua, Pampanga from proceeding with the foreclosure sale of the
mortgaged properties.8 An interim management committee was also created.

On February 9, 2000, the SEC ruled that ARCAM can no longer be rehabilitated. The SEC noted
that the petition for suspension of payment was filed in December 1993 and six years had passed
but the potential white knight" investor had not infused the much needed capital to bail out ARCAM
from its financial difficulties.9 Thus, the SEC decreed that ARCAM be dissolved and placed under
liquidation.10 The SEC Hearing Panel also granted PNB’s motion to dissolve the preliminary injunction
and appointed Atty. Manuel D. Yngson, Jr. & Associates as Liquidator for

ARCAM.11 With this development, PNB revived the foreclosure case and requested the RTC Clerk of
Court to re-schedule the sale at public auction of the mortgaged properties.

Contending that foreclosure during liquidation was improper, petitioner filed with the SEC a Motion
for the Issuance of a Temporary Restraining Order and/or Writ of Preliminary Injunction to enjoin the
foreclosure sale of ARCAM’s assets. The SEC en banc issued a TRO effective for seventy-two (72)
hours, but said TRO lapsed without any writ of preliminary injunction being issued by the SEC.
Consequently, on July 28, 2000, PNB resumed the proceedings for the extrajudicial foreclosure sale
of the mortgaged properties.12 PNB emerged as the highest winning bidder in the auction sale, and
certificates of sale were issued in its favor.

On November 16, 2000, petitioner filed with the SEC a motion to nullify the auction sale.13 Petitioner
posited that all actions against companies which are under liquidation, like ARCAM, are suspended
because liquidation is a continuation of the petition for suspension proceedings. Petitioner argued
that the prohibition against foreclosure subsisted during liquidation because payment of all of
ARCAM’s obligations was proscribed except those authorized by the Commission. Moreover,
petitioner asserted that the mortgaged assets should be included in the liquidation and the proceeds
shared with the unsecured creditors.
In its Opposition, PNB asserted that neither Presidential Decree (P.D.) No. 902-A nor the SEC rules
prohibits secured creditors from foreclosing on their mortgages to satisfy the mortgagor’s debt after
the termination of the rehabilitation proceedings and during liquidation proceedings.14

On January 4, 2005, the SEC issued a Resolution15 denying petitioner’s motion to nullify the auction
sale. It held that PNB was not legally barred from foreclosing on the mortgages. Aggrieved,
petitioner filed on February 28, 2005, a petition for review in the CA questioning the January 4, 2005
Resolution of the SEC.16

By Resolution dated April 14, 2005, the CA dismissed the petition on the ground that petitioner failed
to attach material portions of the record and other documents relevant to the petition as required in
Rule 46, Section 3 of the 1997 Rules of Civil Procedure, as amended. The CA likewise denied
ARCAM’s motion for reconsideration in its Resolution dated January 24, 2006.

Hence this petition under Rule 45 arguing that:

4.1. THE SEC ERRED IN FAILING TO APPLY THE RULES OF CONCURRENCE AND
PREFERENCE OF CREDITS UNDER THE CIVIL CODE AND JURISPRUDENCE WHEN PD 902-A
PROVIDES THAT THE SAME BE APPLIED IN INSTANCES WHEREBY AN ENTITY IS ORDERED
DISSOLVED AND PLACED UNDER LIQUIDATION ON ACCOUNT OF FAILURE TO
REHABILITATE DUE TO INSOLVENCY.17

4.2. IT WAS GROSSLY ERRONEOUS FOR THE SEC TO HAVE ALLOWED PNB TO FORECLOSE
THE MORTGAGE WITHOUT FIRST ALLOWING THE ARCAM LIQUIDATOR TO

MAKE A DETERMINATION OF THE LIENS OVER THE ARCAM REAL PROPERTIES, SINCE THE
LIQUIDATOR HAD INITIALLY DETERMINED THAT ASIDE FROM PNB, SOME ARCAM
WORKERS MAY ALSO HAVE A LEGAL LIEN OVER THE SAID PROPERTY AS REGARDS THEIR
CLAIMS FOR UNPAID WAGES. THESE LIENS OVER THE SAME MOVABLE OR REAL
PROPERTY ARE TO BE SATISFIED PRO-RATA WITH THE CONTRACTUAL LIENS PURSUANT
TO 2247 AND 2249 OF THE CIVIL CODE, IN RELATION TO 2241 TO 2242 RESPECTIVELY.
ALSO, THERE MAY BE SOME TAX ASSESSMENTS THAT THE LIQUIDATOR DOES NOT KNOW
ABOUT, AND IF THERE WERE, THESE COULD COMPRISE TAX LIENS, WHICH UNDER
ARTICLE 2243 OF THE CIVIL CODE ARE CLEARLY GIVEN PRIORITY OVER OTHER
PREFERRED CLAIMS SINCE SUCH ARE TO BE SATISFIED FIRST, OVER OTHER LIENS
PROVIDED UNDER ARTICLES 2241 AND 2242 OF THE CIVIL CODE, SUCH AS MORTGAGE
LIENS.18

4.3. THE SEC LABORED UNDER THE MISTAKEN IMPRESSION THAT AFTER AN ENTITY IS
DISSOLVED AND PLACED UNDER LIQUIDATION DUE TO INSOLVENCY, SECURED
CREDITORS ARE AUTOMATICALLY ALLOWED TO FORECLOSE OR EXECUTE OR
OTHERWISE MAKE GOOD ON THEIR CREDITS AGAINST THE DEBTOR.19

4.4. JURISPRUDENCE ON THE MATTER ALSO NEGATES THE SEC’S HOLDING THAT THE
FORECLOSURE BY PNB WAS LEGAL. EVEN ASSUMING FOR THE SAKE OF ARGUMENT
THAT PNB IS THE SOLE AND ONLY LIEN HOLDER, IT STILL CANNOT FORECLOSE UNLESS
THE LIQUIDATOR AGREES TO SUCH OR THAT THE SEC GAVE PNB PRIOR PERMISSION TO
INSTITUTE THE SEPARATE FORECLOSURE PROCEEDINGS.20

4.5. RESPONDENT PNB SHOULD BE MADE TO PAY DAMAGES FOR THE REASON THAT THE
FORECLOSURE PROCEEDINGS WERE ATTENDED WITH BAD FAITH.21
The issues to be resolved are: (1) whether the CA correctly dismissed the petition for failure to
attach material documents referred to in the petition; and (2) whether PNB, as a secured creditor,
can foreclose on the mortgaged properties of a corporation under liquidation without the knowledge
and prior approval of the liquidator or the SEC.

On the procedural issue, the Court finds that the CA erred in dismissing the petition for review before
it on the ground of failure to attach material portions of the record and other documents relevant to
the petition. A perusal of the petition for review filed with the CA, and as admitted by PNB,22 reveals
that certified true copies of the assailed January 4, 2005 SEC Resolution and the February 9, 2000
SEC Order appointing petitioner Atty. Manuel D. Yngson, Jr. as liquidator were annexed therein.

We find the foregoing attached documents sufficient for the appellate court to decide the case at bar
considering that the SEC resolution contains statements of the factual antecedents material to the
case. The Resolution also contains the SEC’s findings on the legality of PNB’s foreclosure of the
mortgages. The SEC held that when the rehabilitation proceeding was terminated and the
suspensive effect of the order staying the enforcement of claims was lifted, PNB could already
assert its preference over unsecured creditors, and the secured asset and the proceeds need not be
included in the liquidation and shared with the unsecured creditors.23 Before the CA, petitioner raised
only the same legal questions as there was no controversy involving factual matters. Petitioner
claimed that the SEC erred in not applying the rules on concurrence and preference of credits, and
in denying its motion to nullify the auction sale of the secured properties.24 Therefore, the assailed
SEC Resolution is the only material portion of the record that should be annexed with the petition for
the CA to decide on the correctness of the SEC’s interpretation of the law and jurisprudence on the
matter before it.

Having so ruled, this Court would normally order the remand of the case to the CA for resolution of
the substantive issues. However, we find it more appropriate to decide the merits of the case in the
interest of speedy justice considering that the parties have adequately argued all points and issues
raised. It is the policy of the Court to strive to settle an entire controversy in a single proceeding, and
to leave no root or branch to bear the seeds of future litigation.25 The ends of speedy justice would
not be served by a remand of this case to the CA especially since any ruling of the CA on the matter
could end up being appealed to this Court.

Did the SEC then err in ruling that PNB was not barred from foreclosing on the mortgages? We
answer in the negative.

In the case of Consuelo Metal Corporation v. Planters Development Bank,26 which involved factual
antecedents similar to the present case, the court has already settled the above question and upheld
the right of the secured creditor to foreclose the mortgages in its favor during the liquidation of a
debtor corporation. In that case, Consuelo Metal Corporation (CMC) filed with the SEC a petition to
be declared in a state of suspension of payment, for rehabilitation, and for the appointment of a
rehabilitation receiver or management committee under Section 5(d) of P.D. No. 902-A. On April 2,
1996, the SEC, finding the petition sufficient in form and substance, declared that "all actions for
claims against CMC pending before any court, tribunal, office, board, body and/or commission are
deemed suspended immediately until further orders" from the SEC. Then on November 29, 2000,
upon the management committee’s recommendation, the SEC issued an Omnibus Order directing
the dissolution and liquidation of CMC. Thereafter, respondent Planters Development Bank (Planters
Bank), one of CMC’s creditors, commenced the extrajudicial foreclosure of CMC’s real estate
mortgage. Planters Bank extrajudicially foreclosed on the real estate mortgage as CMC failed to
secure a TRO. CMC questioned the validity of the foreclosure because it was done without the
knowledge and approval of the liquidator. The Court ruled in favor of the respondent bank, as
follows:
In Rizal Commercial Banking Corporation v. Intermediate Appellate Court, we held that if
rehabilitation is no longer feasible and the assets of the corporation are finally liquidated, secured
creditors shall enjoy preference over unsecured creditors, subject only to the provisions of the Civil
Code on concurrence and preference of credits. Creditors of secured obligations may pursue their
security interest or lien, or they may choose to abandon the preference and prove their credits as
ordinary claims.

Moreover, Section 2248 of the Civil Code provides:

"Those credits which enjoy preference in relation to specific real property or real rights, exclude all
others to the extent of the value of the immovable or real right to which the preference refers."

In this case, Planters Bank, as a secured creditor, enjoys preference over a specific mortgaged
property and has a right to foreclose the mortgage under Section 2248 of the Civil Code. The
creditor-mortgagee has the right to foreclose the mortgage over a specific real property whether or
not the debtor-mortgagor is under insolvency or liquidation proceedings. The right to foreclose such
mortgage is merely suspended upon the appointment of a management committee or rehabilitation
receiver or upon the issuance of a stay order by the trial court. However, the creditor-mortgagee may
exercise his right to foreclose the mortgage upon the termination of the rehabilitation proceedings or
upon the lifting of the stay order.27 (Emphasis supplied)

It is worth mentioning that under Republic Act No. 10142, otherwise known as the Financial
Rehabilitation and Insolvency Act (FRIA) of 2010, the right of a secured creditor to enforce his lien
during liquidation proceedings is retained. Section 114 of said law thus provides:

SEC. 114. Rights of Secured Creditors. – The Liquidation Order shall not affect the right of a
secured creditor to enforce his lien in accordance with the applicable contract or law. A secured
creditor may:

(a) waive his rights under the security or lien, prove his claim in the liquidation proceedings and
share in the distribution of the assets of the debtor; or

(b) maintain his rights under his security or lien;

If the secured creditor maintains his rights under the security or lien:

(1) the value of the property may be fixed in a manner agreed upon by the creditor and the
liquidator. When the value of the property is less than the claim it secures, the liquidator may convey
1âwphi1

the property to the secured creditor and the latter will be admitted in the liquidation proceedings as a
creditor for the balance; if its value exceeds the claim secured, the liquidator may convey the
property to the creditor and waive the debtor’s right of redemption upon receiving the excess from
the creditor;

(2) the liquidator may sell the property and satisfy the secured creditor’s entire claim from the
proceeds of the sale; or

(3) the secured creditor may enforce the lien or foreclose on the property pursuant to applicable
laws. (Emphasis supplied)
In this case, PNB elected to maintain its rights under the security or lien; hence, its right to foreclose
the mortgaged properties should be respected, in line with our pronouncement in Consuelo Metal
Corporation.

As to petitioner's argument on the right of first preference as regards unpaid wages, the Court has
elucidated in the case of Development Bank of the Philippines v. NLRC28 that a distinction should be
made between a preference of credit and a lien. A preference applies only to claims which do not
attach to specific properties. A lien creates a charge on a particular property. The right of first
preference as regards unpaid wages recognized by Article 110 of the Labor Code, does not
constitute a lien on the property of the insolvent debtor in favor of workers. It is but a preference of
credit in their favor, a preference in application. It is a method adopted to determine and specify the
order in which credits should be paid in the final distribution of the proceeds of the insolvent's assets.
It is a right to a first preference in the discharge of the funds of the judgment debtor. Consequently,
the right of first preference for unpaid wages may not be invoked in this case to nullify the
foreclosure sales conducted pursuant to PNB 's right as a secured creditor to enforce its lien on
specific properties of its debtor, ARCAM.

WHEREFORE, the petition for review on certiorari is DENIED.

With costs against the petitioner.

SO ORDERED.

MARTIN S. VILLARAMA, JR.

Associate justice

WE CONCUR:

ANTONIO T. CARPIO*
Senior Associate Justice

TERESITA J. LEONARDO-DE
CASTRO** LUCAS P. BERSAMIN
Associate justice Associate Justice
Acting Chairperson

MARIANO C. DEL CASTILLO

Associate justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation before the case
was assigned to the writer of the opinion of the Court's Division.

TERESITA J. LEONARDO-DE CASTRO

Associate justice
Acting Chairperson

CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution and the Division Acting Chairperson's
Attestation, I certify that the conclusions in the above Decision had been reached in consultation
before the case was assigned to the writer of the opinion of the Court's Division.

ANTONIO T. CARPIO
Senior Associate Justice
(Per Section 12, R.A. 296, The Judiciary Act of 1948, as amended)

Footnotes

* Designated Acting Member of the First Division per Special Order No. 1284 dated August
6, 2012.

** Designated Acting Chairperson of the First Division per Special Order No. 1226 dated May
30, 2012.

Rollo, pp. 32-33. Penned by Associate Justice Perlita J. Tria Tirona with Associate Justices
1

Delilah Vidallon-Magtolis and Jose C. Reyes, Jr. concurring.

2
Id. at 35. Penned by Associate Justice Jose C. Reyes, Jr. with Associate Justices Rosmari
D. Carandang and Monina Arevalo Zenarosa concurring.

3
Id. at 39-45.

4
Id. at 36-38.

5
Id. at 10.

6
Id. at 265.

7
Id. at 272.

8
Id. at 39.

9
Id. at 37.

10
Id. at 38.

11
Id. at 11.

12
Id. at 12.

13
Id.

14
Id. at 41.

15
Id. at 39-45.
 16
Id. at 13.

17
Id. at 15.

18
Id. at 16.

19
Id. at 19.

20
Id. at 21.

21
Id. at 24.

22
Id. at 98.

23
Id. at 44-45.

24
CA rollo, p. 5.

25

26
G.R. No. 152580, June 26, 2008, 555 SCRA 465.

27
Id. at 474-475.

28
G.R. No. 86227, January 19, 1994,229 SCRA 350,353.

SPECIAL SECOND DIVISION

[G.R. No. 144476. April 8, 2003]

ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L. ONG,

WILLIAM T. ONG, WILLIE T. ONG, and JULIE ONG
ALONZO, petitioners, vs. DAVID S. TIU, CELY Y. TIU, MOLY YU
GAW, BELEN SEE YU, D. TERENCE Y. TIU, JOHN YU, LOURDES
C. TIU, INTRALAND RESOURCES DEVELOPMENT CORP.,
MASAGANA TELAMART, INC., REGISTER OF DEEDS OF PASAY
CITY, and the SECURITIES AND EXCHANGE
COMMISSION, respondents.

[G.R. No. 144629. April 8, 2003]

DAVID S. TIU, CELY Y. TIU, MOLY YU GAW, BELEN SEE YU, D.
TERENCE Y. TIU, JOHN YU, LOURDES C. TIU, and INTRALAND
RESOURCES DEVELOPMENT CORP., petitioners, vs. ONG
YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L. ONG,
WILLIAM T. ONG, WILLIE T. ONG, and JULIA ONG
ALONZO, respondents.

RESOLUTION
CORONA, J.:

Before us are the (1) motion for reconsideration, dated March 15, 2002, of petitioner
movants Ong Yong, Juanita Tan Ong, Wilson Ong, Anna Ong, William Ong, Willie Ong
and Julia Ong Alonzo (the Ongs); (2) motion for partial reconsideration, dated March 15,
2002, of petitioner movant Willie Ong seeking a reversal of this Courts Decision, [1] dated
February 1, 2002, in G.R. Nos. 144476 and 144629 affirming with modification the
decision[2] of the Court of Appeals, dated October 5, 1999, which in turn upheld, likewise
with modification, the decision of the SEC en banc, dated September 11, 1998; and (3)
motion for issuance of writ of execution of petitioners David S. Tiu, Cely Y. Tiu, Moly Yu
Gow, Belen See Yu, D. Terence Y. Tiu, John Yu and Lourdes C. Tiu (the Tius) of our
February 1, 2002 Decision.
A brief recapitulation of the facts shows that:
In 1994, the construction of the Masagana Citimall in Pasay City was threatened with
stoppage and incompletion when its owner, the First Landlink Asia Development
Corporation (FLADC), which was owned by the Tius, encountered dire financial
difficulties. It was heavily indebted to the Philippine National Bank (PNB) for P190
million. To stave off foreclosure of the mortgage on the two lots where the mall was being
built, the Tius invited Ong Yong, Juanita Tan Ong, Wilson T. Ong, Anna L. Ong, William
T. Ong and Julia Ong Alonzo (the Ongs), to invest in FLADC. Under the Pre-Subscription
Agreement they entered into, the Ongs and the Tius agreed to maintain equal
shareholdings in FLADC: the Ongs were to subscribe to 1,000,000 shares at a par value
of P100.00 each while the Tius were to subscribe to an additional 549,800 shares
at P100.00 each in addition to their already existing subscription of 450,200
shares. Furthermore, they agreed that the Tius were entitled to nominate the Vice-
President and the Treasurer plus five directors while the Ongs were entitled to nominate
the President, the Secretary and six directors (including the chairman) to the board of
directors of FLADC. Moreover, the Ongs were given the right to manage and operate the
mall.
Accordingly, the Ongs paid P100 million in cash for their subscription to 1,000,000
shares of stock while the Tius committed to contribute to FLADC a four-storey building
and two parcels of land respectively valued at P20 million (for 200,000 shares), P30
million (for 300,000 shares) and P49.8 million (for 49,800 shares) to cover their additional
549,800 stock subscription therein. The Ongs paid in another P70 million[3] to FLADC
and P20 million to the Tius over and above their P100 million investment, the total sum
of which (P190 million) was used to settle the P190 million mortgage indebtedness of
FLADC to PNB.
The business harmony between the Ongs and the Tius in FLADC, however, was
shortlived because the Tius, on February 23, 1996, rescinded the Pre-Subscription
Agreement. The Tius accused the Ongs of (1) refusing to credit to them the FLADC
shares covering their real property contributions; (2) preventing David S. Tiu and Cely Y.
Tiu from assuming the positions of and performing their duties as Vice-President and
Treasurer, respectively, and (3) refusing to give them the office spaces agreed upon.
According to the Tius, the agreement was for David S. Tiu and Cely S. Tiu to assume
the positions and perform the duties of Vice-President and Treasurer, respectively, but
the Ongs prevented them from doing so. Furthermore, the Ongs refused to provide them
the space for their executive offices as Vice-President and Treasurer. Finally, and most
serious of all, the Ongs refused to give them the shares corresponding to their property
contributions of a four-story building, a 1,902.30 square-meter lot and a 151 square-meter
lot. Hence, they felt they were justified in setting aside their Pre-Subscription Agreement
with the Ongs who allegedly refused to comply with their undertakings.
In their defense, the Ongs said that David S. Tiu and Cely Y. Tiu had in fact assumed
the positions of Vice-President and Treasurer of FLADC but that it was they who refused
to comply with the corporate duties assigned to them. It was the contention of the Ongs
that they wanted the Tius to sign the checks of the corporation and undertake their
management duties but that the Tius shied away from helping them manage the
corporation. On the issue of office space, the Ongs pointed out that the Tius did in fact
already have existing executive offices in the mall since they owned it 100% before the
Ongs came in. What the Tius really wanted were new offices which were anyway
subsequently provided to them. On the most important issue of their alleged failure to
credit the Tius with the FLADC shares commensurate to the Tius property contributions,
the Ongs asserted that, although the Tius executed a deed of assignment for the 1,902.30
square-meter lot in favor of FLADC, they (the Tius) refused to pay P 570,690 for capital
gains tax and documentary stamp tax. Without the payment thereof, the SEC would not
approve the valuation of the Tius property contribution (as opposed to cash contribution).
This, in turn, would make it impossible to secure a new Transfer Certificate of Title (TCT)
over the property in FLADCs name. In any event, it was easy for the Tius to simply pay
the said transfer taxes and, after the new TCT was issued in FLADCs name, they could
then be given the corresponding shares of stocks. On the 151 square-meter property, the
Tius never executed a deed of assignment in favor of FLADC. The Tius initially claimed
that they could not as yet surrender the TCT because it was still being reconstituted by
the Lichaucos from whom the Tius bought it. The Ongs later on discovered that FLADC
had in reality owned the property all along, even before their Pre-Subscription Agreement
was executed in 1994. This meant that the 151 square-meter property was at that time
already the corporate property of FLADC for which the Tius were not entitled to the
issuance of new shares of stock.
The controversy finally came to a head when this case was commenced [4] by the Tius
on February 27, 1996 at the Securities and Exchange Commission (SEC), seeking
confirmation of their rescission of the Pre-Subscription Agreement. After hearing, the
SEC, through then Hearing Officer Rolando G. Andaya, Jr., issued a decision on May 19,
1997 confirming the rescission sought by the Tius, as follows:

WHEREFORE, judgment is hereby rendered confirming the rescission of the Pre-

Subscription Agreement, and consequently ordering:

(a) The cancellation of the 1,000,000 shares subscription of the individual defendants in
FLADC;
(b) FLADC to pay the amount of P170,000,000.00 to the individual defendants
representing the return of their contribution for 1,000,000 shares of FLADC;
( c) The plaintiffs to submit with (sic) the Securities and Exchange Commission amended
articles of incorporation of FLADC to conform with this decision;
(d) The defendants to surrender to the plaintiffs TCT Nos. 132493, 132494, 134066
(formerly 15587), 135325 and 134204 and any other title or deed in the name of
FLADC, failing in which said titles are declared void;
(e) The Register of Deeds to issue new certificates of titles in favor of the plaintiffs and
to cancel the annotation of the Pre-Subscription Agreement dated 15 August 1994 on
TCT No. 134066 (formerly 15587);
(f) The individual defendants, individually and collectively, their agents and
representatives, to desist from exercising or performing any and all acts pertaining to
stockholder, director or officer of FLADC or in any manner intervene in the
management and affairs of FLADC;
(g) The individual defendants, jointly and severally, to return to FLADC interest payment
in the amount of P8,866,669.00 and all interest payments as well as any payments
on principal received from the P70,000,000.00 inexistent loan, plus the legal rate of
interest thereon from the date of their receipt of such payment until fully paid;
(h) The plaintiff David Tiu to pay individual defendants the sum of P20,000,000.00
representing his loan from said defendants plus legal interest from the date of receipt
of such amount.

SO ORDERED. [5]

On motion of both parties, the above decision was partially reconsidered but only
insofar as the Ongs P70 million was declared not as a premium on capital stock but an
advance (loan) by the Ongs to FLADC and that the imposition of interest on it was
correct.[6]
Both parties appealed[7] to the SEC en banc which rendered a decision on September
11, 1998, affirming the May 19, 1997 decision of the Hearing Officer. The SEC en
banc confirmed the rescission of the Pre-Subscription Agreement but reverted to
classifying the P70 million paid by the Ongs as premium on capital and not as a loan or
advance to FLADC, hence, not entitled to earn interest.[8]
On appeal, the Court of Appeals (CA) rendered a decision on October 5, 1999, thus:
WHEREFORE, the Order dated September 11, 1998 issued by the Securities and
Exchange Commission En Banc in SEC AC CASE NOS. 598 and 601 confirming the
rescission of the Pre-Subscription Agreement dated August 15, 1994 is hereby
AFFIRMED, subject to the following MODIFICATIONS:

1. The Ong and Tiu Groups are ordered to liquidate First Landlink Asia
Development Corporation in accordance with the following cash and
property contributions of the parties therein.

(a) Ong Group P100,000,000.00 cash contribution for one (1) million
shares in First Landlink Asia Development Corporation at a par
value of P100.00 per share;

(b) Tiu Group:

1) P45,020,000.00 original cash contribution for 450,200 shares in

First Landlink Asia Development Corporation at a par value of
P100.00 per share;

2) A four-storey building described in Transfer Certificate of Title

No. 15587 in the name of Intraland Resources and Development
Corporation valued at P20,000,000.00 for 200,000 shares in
First Landlink Asia Development Corporation at a par value of
P100.00 per share;

3) A 1,902.30 square-meter parcel of land covered by Transfer

Certificate of Title No. 15587 in the name of Masagana Telamart,
Inc. valued at P30,000,000.00 for 300,000 shares in First Landlink
Asia Development Corporation at a par value of P100.00 per
share.

2) Whatever remains of the assets of the First Landlink Asia Development

Corporation and the management thereof is (sic) hereby ordered
transferred to the Tiu Group.

3) First Landlink Asia Development Corporation is hereby ordered to pay

the amount of P70,000,000.00 that was advanced to it by the Ong
Group upon the finality of this decision. Should the former incur in
delay in the payment thereof, it shall pay the legal interest thereon
pursuant to Article 2209 of the New Civil Code.
 4) The Tius are hereby ordered to pay the amount of P20,000,000.00
loaned them by the Ongs upon the finality of this decision. Should the
former incur in delay in the payment thereof, it shall pay the legal
interest thereon pursuant to Article 2209 of the New Civil Code.

SO ORDERED. [9]

An interesting sidelight of the CA decision was its description of the rescission made
by the Tius as the height of ingratitude and as pulling a fast one on the Ongs. The CA
moreover found the Tius guilty of withholding FLADC funds from the Ongs and diverting
corporate income to their own MATTERCO account.[10] These were findings later on
affirmed in our own February 1, 2002 Decision which is the subject of the instant motion
for reconsideration.[11]
But there was also a strange aspect of the CA decision. The CA concluded that both
the Ongs and the Tius were in pari delicto (which would not have legally entitled them to
rescission) but, for practical considerations, that is, their inability to work together, it was
best to separate the two groups by rescinding the Pre-Subscription Agreement, returning
the original investment of the Ongs and awarding practically everything else to the Tius.
Their motions for reconsideration having been denied, both parties filed separate
petitions for review before this Court.
In their petition docketed as G.R. No. 144476, Ong et al. vs. Tiu et al., the Ongs
argued that the Tius may not properly avail of rescission under Article 1191 of the Civil
Code considering that the Pre-Subscription Agreement did not provide for reciprocity of
obligations; that the rights over the subject matter of the rescission (capital assets and
properties) had been acquired by a third party (FLADC); that they did not commit a
substantial and fundamental breach of their agreement since they did not prevent the Tius
from assuming the positions of Vice-President and Treasurer of FLADC, and that the
failure to credit the 300,000 shares corresponding to the 1,902.30 square-meter property
covered by TCT No. 134066 (formerly 15587) was due to the refusal of the Tius to pay
the required transfer taxes to secure the approval of the SEC for the property contribution
and, thereafter, the issuance of title in FLADCs name. They also argued that the
liquidation of FLADC may not legally be ordered by the appellate court even for so called
practical considerations or even to prevent further squabbles and numerous litigations,
since the same are not valid grounds under the Corporation Code. Moreover, the Ongs
bewailed the failure of the CA to grant interest on their P70 million and P20 million
advances to FLADC and David S. Tiu, respectively, and to award costs and damages.
In their petition docketed as G.R. No. 144629, Tiu et al. vs. Ong et al., the Tius, on
the other hand, contended that the rescission should have been limited to the restitution
of the parties respective investments and not the liquidation of FLADC based on the
erroneous perception by the court that: the Masagana Citimall was threatened with
incompletion since FLADC was in financial distress; that the Tius invited the Ongs to
invest in FLADC to settle its P190 million loan from PNB; that they violated the Pre-
Subscription Agreement when it was the Lichaucos and not the Tius who executed the
deed of assignment over the 151 square-meter property commensurate to 49,800 shares
in FLADC thereby failing to pay the price for the said shares;that they did not turn over to
the Ongs the entire amount of FLADC funds; that they were diverting rentals from lease
contracts due to FLADC to their own MATTERCO account; that the P70 million paid by
the Ongs was an advance and not a premium on capital; and that, by rescinding the Pre-
Subscription Agreement, they wanted to wrestle away the management of the mall and
prevent the Ongs from enjoying the profits of their P190 million investment in FLADC.
On February 1, 2002, this Court promulgated its Decision (the subject of the instant
motions), affirming the assailed decision of the Court of Appeals but with the following
modifications:
1. the P20 million loan extended by the Ongs to the Tius shall earn interest at twelve
percent (12%) per annum to be computed from the time of judicial demand which is
from April 23, 1996;
2. the P70 million advanced by the Ongs to the FLADC shall earn interest at ten percent
(10%) per annum to be computed from the date of the FLADC Board Resolution which
is June 19, 1996; and
3. the Tius shall be credited with 49,800 shares in FLADC for their property contribution,
specifically, the 151 sq. m. parcel of land.
This Court affirmed the fact that both the Ongs and the Tius violated their respective
obligations under the Pre-Subscription Agreement. The Ongs prevented the Tius from
assuming the positions of Vice-President and Treasurer of the corporation. On the other
hand, the Decision established that the Tius failed to turn over FLADC funds to the Ongs
and that the Tius diverted rentals due to FLADC to their MATTERCO
account. Consequently, it held that rescission was not possible since both parties were
in pari delicto. However, this Court agreed with the Court of Appeals that the remedy of
specific performance, as espoused by the Ongs, was not practical and sound either and
would only lead to further squabbles and numerous litigations between the parties.
On March 15, 2002, the Tius filed before this Court a Motion for Issuance of a Writ of
Execution on the grounds that: (a) the SEC order had become executory as early as
September 11, 1998 pursuant to Sections 1 and 12, Rule 43 of the Rules of Court; (b) any
further delay would be injurious to the rights of the Tius since the case had been pending
for more than six years; and (c) the SEC no longer had quasi-judicial jurisdiction under
RA 8799 (Securities Regulation Code). The Ongs filed their opposition, contending that
the Decision dated February 1, 2002 was not yet final and executory; that no good reason
existed to issue a warrant of execution; and that, pursuant to Section 5.2 of RA 8799, the
SEC retained jurisdiction over pending cases involving intra-corporate disputes already
submitted for final resolution upon the effectivity of the said law.
Aside from their opposition to the Tius Motion for Issuance of Writ of Execution, the
Ongs filed their own Motion for Reconsideration; Alternatively, Motion for Modification (of
the February 1, 2002 Decision) on March 15, 2002, raising two main points: (a) that
specific performance and not rescission was the proper remedy under the premises; and
(b) that, assuming rescission to be proper, the subject decision of this Court should be
modified to entitle movants to their proportionate share in the mall.
 On their first point (specific performance and not rescission was the proper remedy),
movants Ong argue that their alleged breach of the Pre-Subscription Agreement was, at
most, casual which did not justify the rescission of the contract. They stress that providing
appropriate offices for David S. Tiu and Cely Y. Tiu as Vice-President and Treasurer,
respectively, had no bearing on their obligations under the Pre-Subscription Agreement
since the said obligation (to provide executive offices) pertained to FLADC itself. Such
obligation arose from the relations between the said officers and the corporation and not
any of the individual parties such as the Ongs. Likewise, the alleged failure of the Ongs
to credit shares of stock in favor of the Tius for their property contributions also pertained
to the corporation and not to the Ongs. Just the same, it could not be done in view of the
Tius refusal to pay the necessary transfer taxes which in turn resulted in the inability to
secure SEC approval for the property contributions and the issuance of a new TCT in the
name of FLADC.
Besides, according to the Ongs, the principal objective of both parties in entering into
the Pre-Subscription Agreement in 1994 was to raise the P190 million desperately
needed for the payment of FLADCs loan to PNB. Hence, in this light, the alleged failure
to provide office space for the two corporate officers was no more than an inconsequential
infringement. For rescission to be justified, the law requires that the breach of contract
should be so substantial or fundamental as to defeat the primary objective of the parties
in making the agreement. At any rate, the Ongs claim that it was the Tius who were guilty
of fundamental violations in failing to remit funds due to FLADC and diverting the same
to their MATTERCO account.
The Ongs also allege that, in view of the findings of the Court that both parties were
guilty of violating the Pre-Subscription Agreement, neither of them could resort to
rescission under the principle of pari delicto. In addition, since the cash and other
contributions now sought to be returned already belong to FLADC, an innocent third party,
said remedy may no longer be availed of under the law.
On their second point (assuming rescission to be proper, the Ongs should be given
their proportionate share of the mall), movants Ong vehemently take exception to the
second item in the dispositive portion of the questioned Decision insofar as it decreed
that whatever remains of the assets of FLADC and the management thereof (after
liquidation) shall be transferred to the Tius. They point out that the mall itself, which would
have been foreclosed by PNB if not for their timely investment of P190 million in 1994
and which is now worth about P1 billion mainly because of their efforts, should be included
in any partition and distribution. They (the Ongs) should not merely be given interest on
their capital investments. The said portion of our Decision, according to them, amounted
to the unjust enrichment of the Tius and ran contrary to our own pronouncement that the
act of the Tius in unilaterally rescinding the agreement was the height of ingratitude and
an attempt to pull a fast one as it would prevent the Ongs from enjoying the fruits of
their P190 million investment in FLADC. It also contravenes this Courts assurance in the
questioned Decision that the Ongs and Tius will have a bountiful return of their respective
investments derived from the profits of the corporation.
Willie Ong filed a separate Motion for Partial Reconsideration dated March 8, 2002,
pointing out that there was no violation of the Pre-Subscription Agreement on the part of
the Ongs;that, after more than seven years since the mall began its operations, rescission
had become not only impractical but would also adversely affect the rights of innocent
parties; and that it would be highly inequitable and unfair to simply return the P100 million
investment of the Ongs and give the remaining assets now amounting to about P1 billion
to the Tius.
The Tius, in their opposition to the Ongs motion for reconsideration, counter that the
arguments therein are a mere re-hash of the contentions in the Ongs petition for review
and previous motion for reconsideration of the Court of Appeals decision. The Tius
compare the arguments in said pleadings to prove that the Ongs do not raise new issues,
and, based on well-settled jurisprudence,[12] the Ongs present motion is therefore pro-
forma and did not prevent the Decision of this Court from attaining finality.
On January 29, 2003, the Special Second Division of this Court held oral arguments
on the respective positions of the parties. On February 27, 2003, Dr. Willie Ong and the
rest of the movants Ong filed their respective memoranda. On February 28, 2003, the
Tius submitted their memorandum.
We grant the Ongs motions for reconsideration.
This is not the first time that this Court has reversed itself on a motion for
reconsideration. In Philippine Consumers Foundation, Inc. vs. National
Telecommunications Commission, this Court, through then Chief Justice Felix V.
[13]

Makasiar, said that its members may and do change their minds, after a re-study of the
facts and the law, illuminated by a mutual exchange of views. [14] After a thorough re-
examination of the case, we find that our Decision of February 1, 2002 overlooked certain
aspects which, if not corrected, will cause extreme and irreparable damage and prejudice
to the Ongs, FLADC and its creditors.
The procedural rule on pro-forma motions pointed out by the Tius should not be
blindly applied to meritorious motions for reconsideration. As long as the same adequately
raises a valid ground[15] (i.e., the decision or final order is contrary to law), this Court has
to evaluate the merits of the arguments to prevent an unjust decision from attaining
finality. In Security Bank and Trust Company vs. Cuenca,[16] we ruled that a motion for
reconsideration is not pro-forma for the reason alone that it reiterates the arguments
earlier passed upon and rejected by the appellate court. We explained there that a
movant may raise the same arguments, if only to convince this Court that its ruling was
erroneous. Moreover, the rule (that a motion is pro-forma if it only repeats the arguments
in the previous pleadings) will not apply if said arguments were not squarely passed upon
and answered in the decision sought to be reconsidered. In the case at bar, no ruling was
made on some of the petitioner Ongs arguments. For instance, no clear ruling was made
on why an order distributing corporate assets and property to the stockholders would not
violate the statutory preconditions for corporate dissolution or decrease of authorized
capital stock. Thus, it would serve the ends of justice to entertain the subject motion for
reconsideration since some important issues therein, although mere repetitions, were not
considered or clearly resolved by this Court.
Going now to the merits, we resolve whether the Tius could legally rescind the Pre-
Subscription Agreement. We rule that they could not.
 FLADC was originally incorporated with an authorized capital stock of 500,000 shares
with the Tius owning 450,200 shares representing the paid-up capital. When the Tius
invited the Ongs to invest in FLADC as stockholders, an increase of the authorized capital
stock became necessary to give each group equal (50-50) shareholdings as agreed upon
in the Pre-Subscription Agreement. The authorized capital stock was thus increased from
500,000 shares to 2,000,000 shares with a par value of P100 each, with the Ongs
subscribing to 1,000,000 shares and the Tius to 549,800 more shares in addition to their
450,200 shares to complete 1,000,000 shares. Thus, the subject matter of the contract
was the 1,000,000 unissued shares of FLADC stock allocated to the Ongs. Since these
were unissued shares, the parties Pre-Subscription Agreement was in fact a subscription
contract as defined under Section 60, Title VII of the Corporation Code:

Any contract for the acquisition of unissued stock in an existing corporation or a

corporation still to be formed shall be deemed a subscription within the meaning of
this Title, notwithstanding the fact that the parties refer to it as a purchase or some
other contract (Italics supplied).

A subscription contract necessarily involves the corporation as one of the contracting

parties since the subject matter of the transaction is property owned by the corporation
its shares of stock. Thus, the subscription contract (denominated by the parties as a Pre-
Subscription Agreement) whereby the Ongs invested P100 million for 1,000,000 shares
of stock was, from the viewpoint of the law, one between the Ongs and FLADC, not
between the Ongs and the Tius. Otherwise stated, the Tius did not contract in their
personal capacities with the Ongs since they were not selling any of their own shares to
them. It was FLADC that did.
Considering therefore that the real contracting parties to the subscription agreement
were FLADC and the Ongs alone, a civil case for rescission on the ground of breach of
contract filed by the Tius in their personal capacities will not prosper. Assuming it had
valid reasons to do so, only FLADC (and certainly not the Tius) had the legal personality
to file suit rescinding the subscription agreement with the Ongs inasmuch as it was the
real party in interest therein. Article 1311 of the Civil Code provides that contracts take
effect only between the parties, their assigns and heirs Therefore, a party who has not
taken part in the transaction cannot sue or be sued for performance or for cancellation
thereof, unless he shows that he has a real interest affected thereby. [17]
In their February 28, 2003 Memorandum, the Tius claim that there are two contracts
embodied in the Pre-Subscription Agreement: a shareholders agreement between the
Tius and the Ongs defining and governing their relationship and a subscription contract
between the Tius, the Ongs and FLADC regarding the subscription of the parties to the
corporation. They point out that these two component parts form one whole agreement
and that their terms and conditions are intrinsically related and dependent on each other.
Thus, the breach of the shareholders agreement, which was allegedly the consideration
for the subscription contract, was also a breach of the latter.
Aside from the fact that this is an entirely new angle never raised in any of their
previous pleadings until after the oral arguments on January 29, 2003, we find this
argument too strained for comfort. It is obviously intended to remedy and cover up the
Tius lack of legal personality to rescind an agreement in which they were personally not
parties-in-interest. Assuming arguendo that there were two sub-agreements embodied in
the Pre-Subscription Agreement, this Court fails to see how the shareholders agreement
between the Ongs and Tius can, within the bounds of reason, be interpreted as the
consideration of the subscription contract between FLADC and the Ongs. There was
nothing in the Pre-Subscription Agreement even remotely suggesting such alleged
interdependence. Be that as it may, however, the Tius are nevertheless not the proper
parties to raise this point because they were not parties to the subscription contract
between FLADC and the Ongs. Thus, they are not in a position to claim that the
shareholders agreement between them and the Ongs was what induced FLADC and the
Ongs to enter into the subscription contract. It is the Ongs alone who can say that. Though
FLADC was represented by the Tius in the subscription contract, FLADC had a separate
juridical personality from the Tius. The case before us does not warrant piercing the veil
of corporate fiction since there is no proof that the corporation is being used as a cloak or
cover for fraud or illegality, or to work injustice.[18]
The Tius also argue that, since the Ongs represent FLADC as its management,
breach by the Ongs is breach by FLADC. This must also fail because such an argument
disregards the separate juridical personality of FLADC.
The Tius allege that they were prevented from participating in the management of the
corporation. There is evidence that the Ongs did prevent the rightfully elected Treasurer,
Cely Tiu, from exercising her function as such. The records show that the President,
Wilson Ong, supervised the collection and receipt of rentals in the Masagana
Citimall;[19] that he ordered the same to be deposited in the bank; [20] and that he held on to
the cash and properties of the corporation.[21] Section 25 of the Corporation Code prohibits
the President from acting concurrently as Treasurer of the corporation. The rationale
behind the provision is to ensure the effective monitoring of each officers separate
functions.
However, although the Tius were adversely affected by the Ongs unwillingness to let
them assume their positions, rescission due to breach of contract is definitely the wrong
remedy for their personal grievances. The Corporation Code, SEC rules and even the
Rules of Court provide for appropriate and adequate intra-corporate remedies,
other than rescission, in situations like this. Rescission is certainly not one of them,
specially if the party asking for it has no legal personality to do so and the requirements
of the law therefor have not been met.A contrary doctrine will tread on extremely
dangerous ground because it will allow just any stockholder, for just about any real or
imagined offense, to demand rescission of his subscription and call for the distribution of
some part of the corporate assets to him without complying with the requirements of the
Corporation Code.
Hence, the Tius, in their personal capacities, cannot seek the ultimate and
extraordinary remedy of rescission of the subject agreement based on a less than
substantial breach of subscription contract. Not only are they not parties to the
subscription contract between the Ongs and FLADC; they also have other available and
effective remedies under the law.
 All this notwithstanding, granting but not conceding that the Tius possess the legal
standing to sue for rescission based on breach of contract, said action will nevertheless
still not prosper since rescission will violate the Trust Fund Doctrine and the procedures
for the valid distribution of assets and property under the Corporation Code.
The Trust Fund Doctrine, first enunciated by this Court in the 1923 case of Philippine
Trust Co. vs. Rivera,[22] provides that subscriptions to the capital stock of a corporation
constitute a fund to which the creditors have a right to look for the satisfaction of their
claims.[23] This doctrine is the underlying principle in the procedure for the distribution of
capital assets, embodied in the Corporation Code, which allows the distribution of
corporate capital only in three instances: (1) amendment of the Articles of Incorporation
to reduce the authorized capital stock,[24] (2) purchase of redeemable shares by the
corporation, regardless of the existence of unrestricted retained earnings, [25] and (3)
dissolution and eventual liquidation of the corporation. Furthermore, the doctrine is
articulated in Section 41 on the power of a corporation to acquire its own shares [26] and in
Section 122 on the prohibition against the distribution of corporate assets and property
unless the stringent requirements therefor are complied with.[27]
The distribution of corporate assets and property cannot be made to depend on the
whims and caprices of the stockholders, officers or directors of the corporation, or even,
for that matter, on the earnest desire of the court a quo to prevent further squabbles and
future litigations unless the indispensable conditions and procedures for the protection of
corporate creditors are followed. Otherwise, the corporate peace laudably hoped for by
the court will remain nothing but a dream because this time, it will be the creditors turn to
engage in squabbles and litigations should the court order an unlawful distribution in
blatant disregard of the Trust Fund Doctrine.
In the instant case, the rescission of the Pre-Subscription Agreement will effectively
result in the unauthorized distribution of the capital assets and property of the corporation,
thereby violating the Trust Fund Doctrine and the Corporation Code, since rescission of
a subscription agreement is not one of the instances when distribution of capital assets
and property of the corporation is allowed.
Contrary to the Tius allegation, rescission will, in the final analysis, result in the
premature liquidation of the corporation without the benefit of prior dissolution in
accordance with Sections 117, 118, 119 and 120 of the Corporation Code.[28] The Tius
maintain that rescinding the subscription contract is not synonymous to corporate
liquidation because all rescission will entail would be the simple restoration of the status
quo ante and a return to the two groups of their cash and property contributions. We wish
it were that simple. Very noticeable is the fact that the Tius do not explain why rescission
in the instant case will not effectively result in liquidation. The Tius merely refer in cavalier
fashion to the end-result of rescission (which incidentally is 100% favorable to them) but
turn a blind eye to its unfair, inequitable and disastrous effect on the corporation, its
creditors and the Ongs.
In their Memorandum dated February 28, 2003, the Tius claim that rescission of the
agreement will not result in an unauthorized liquidation of the corporation because their
case is actually a petition to decrease capital stock pursuant to Section 38 of the
Corporation Code. Section 122 of the law provides that (e)xcept by decrease of capital
stock, no corporation shall distribute any of its assets or property except upon lawful
dissolution and after payment of all its debts and liabilities. The Tius claim that their case
for rescission, being a petition to decrease capital stock, does not violate the liquidation
procedures under our laws. All that needs to be done, according to them, is for this Court
to order (1) FLADC to file with the SEC a petition to issue a certificate of decrease of
capital stock and (2) the SEC to approve said decrease. This new argument has no merit.
The Tius case for rescission cannot validly be deemed a petition to decrease capital
stock because such action never complied with the formal requirements for decrease of
capital stock under Section 33 of the Corporation Code. No majority vote of the board of
directors was ever taken. Neither was there any stockholders meeting at which the
approval of stockholders owning at least two-thirds of the outstanding capital stock was
secured. There was no revised treasurers affidavit and no proof that said decrease will
not prejudice the creditors rights. On the contrary, all their pleadings contained were
alleged acts of violations by the Ongs to justify an order of rescission.
Furthermore, it is an improper judicial intrusion into the internal affairs of the
corporation to compel FLADC to file at the SEC a petition for the issuance of a certificate
of decrease of stock. Decreasing a corporations authorized capital stock is an
amendment of the Articles of Incorporation. It is a decision that only the stockholders and
the directors can make, considering that they are the contracting parties thereto. In this
case, the Tius are actually not just asking for a review of the legality and fairness of a
corporate decision. They want this Court to make a corporate decision for FLADC. We
decline to intervene and order corporate structural changes not voluntarily agreed upon
by its stockholders and directors.
Truth to tell, a judicial order to decrease capital stock without the assent of FLADCs
directors and stockholders is a violation of the business judgment rule which states that:

xxx xxx xxx (C)ontracts intra vires entered into by the board of directors are binding
upon the corporation and courts will not interfere unless such contracts are so
unconscionable and oppressive as to amount to wanton destruction to the rights of the
minority, as when plaintiffs aver that the defendants (members of the board), have
concluded a transaction among themselves as will result in serious injury to the
plaintiffs stockholders.[29]

The reason behind the rule is aptly explained by Dean Cesar L. Villanueva, an
esteemed author in corporate law, thus:

Courts and other tribunals are wont to override the business judgment of the board
mainly because, courts are not in the business of business, and the laissez faire rule or
the free enterprise system prevailing in our social and economic set-up dictates that it
is better for the State and its organs to leave business to the businessmen; especially
so, when courts are ill-equipped to make business decisions. More importantly, the
social contract in the corporate family to decide the course of the corporate business
has been vested in the board and not with courts. [30]
 Apparently, the Tius do not realize the illegal consequences of seeking rescission
and control of the corporation to the exclusion of the Ongs. Such an act infringes on the
law on reduction of capital stock. Ordering the return and distribution of the Ongs capital
contribution without dissolving the corporation or decreasing its authorized capital stock
is not only against the law but is also prejudicial to corporate creditors who enjoy absolute
priority of payment over and above any individual stockholder thereof.
Stripped to its barest essentials, the issue of rescission in this case is not difficult to
understand. If rescission is denied, will injustice be inflicted on any of the parties? The
answer is no because the financial interests of both the Tius and the Ongs will remain
intact and safe within FLADC. On the other hand, if rescission is granted, will any of the
parties suffer an injustice?Definitely yes because the Ongs will find themselves out in the
streets with nothing but the money they had in 1994 while the Tius will not only enjoy a
windfall estimated to be anywhere from P450 million to P900 million [31] but will also take
over an extremely profitable business without much effort at all.
Another very important point follows. The Court of Appeals and, later on, our Decision
dated February 1, 2002, stated that both groups were in pari delicto, meaning, that both
the Tius and the Ongs committed breaches of the Pre-Subscription Agreement. This may
be true to a certain extent but, judging from the comparative gravity of the acts separately
committed by each group, we find that the Ongs acts were relatively tame vis--vis those
committed by the Tius in not surrendering FLADC funds to the corporation and diverting
corporate income to their own MATTERCO account. The Ongs were right in not issuing
to the Tius the shares corresponding to the four-story building and the 1,902.30 square-
meter lot because no title for it could be issued in FLADCs name, owing to the Tius refusal
to pay the transfer taxes. And as far as the 151 square-meter lot was concerned, why
should FLADC issue additional shares to the Tius for property already owned by the
corporation and which, in the final analysis, was already factored into the shareholdings
of the Tius before the Ongs came in?
We are appalled by the attempt by the Tius, in the words of the Court of Appeals, to
pull a fast one on the Ongs because that was where the problem precisely started. It is
clear that, when the finances of FLADC improved considerably after the equity infusion
of the Ongs, the Tius started planning to take over the corporation again and exclude the
Ongs from it. It appears that the Tius refusal to pay transfer taxes might not have really
been at all unintentional because, by failing to pay that relatively small amount which they
could easily afford, the Tius should have expected that they were not going to be given
the corresponding shares. It was, from every angle, the perfect excuse for blackballing
the Ongs. In other words, the Tius created a problem then used that same problem as
their pretext for showing their partners the door. In the process, they stood to be rewarded
with a bonanza of anywhere between P450 million to P900 million in assets (from an
investment of only P45 million which was nearly foreclosed by PNB), to the extreme and
irreparable damage of the Ongs, FLADC and its creditors.
After all is said and done, no one can close his eyes to the fact that the Masagana
Citimall would not be what it has become today were it not for the timely infusion of P190
million by the Ongs in 1994. There are no ifs or buts about it.
 Without the Ongs, the Tius would have lost everything they originally invested in said
mall. If only for this and the fact that this Resolution can truly pave the way for both groups
to enjoy the fruits of their investments assuming good faith and honest intentions we
cannot allow the rescission of the subject subscription agreement. The Ongs
shortcomings were far from serious and certainly less than substantial; they were in fact
remediable and correctable under the law. It would be totally against all rules of justice,
fairness and equity to deprive the Ongs of their interests on petty and tenuous grounds.
WHEREFORE, the motion for reconsideration, dated March 15, 2002, of petitioners
Ong Yong, Juanita Tan Ong, Wilson Ong, Anna Ong, William Ong, Willie Ong and Julie
Ong Alonzo and the motion for partial reconsideration, dated March 15, 2002, of petitioner
Willie Ong are hereby GRANTED. The Petition for Confirmation of the Rescission of the
Pre-Subscription Agreement docketed as SEC Case No. 02-96-5269 is hereby
DISMISSED for lack of merit. The unilateral rescission by the Tius of the subject Pre-
Subscription Agreement, dated August 15, 1994, is hereby declared as null and void.
The motion for the issuance of a writ of execution, dated March 15, 2002, of
petitioners David S. Tiu, Cely Y. Tiu, Moly Yu Gow, Belen See Yu, D. Terence Y. Tiu,
John Yu and Lourdes C. Tiu is hereby DENIED for being moot.
Accordingly, the Decision of this Court, dated February 1, 2002, affirming with
modification the decision of the Court of Appeals, dated October 5, 1999, and the SEC en
banc, dated September 11, 1998, is hereby REVERSED.
Costs against the petitioner Tius.
SO ORDERED.
Bellosillo, (Chairman), Quisumbing, and Callejo, Sr., JJ., concur.

[1]
Ong Yong, et.al vs. Tiu, et. al, G.R. No. 144476; Tiu, et.al. vs. Ong Yong, et.al., G.R. No. 144629.
[2]
Rollo of G.R. No. 144476, pp. 111-135.
[3]
The testimony of Wilson Ong, never refuted by the Tius, was that the parties original agreement was to
increase FLADCs authorized capital stock from P50 million to P340 million (which explains the
Ongs 50% share of P170 million). Later on, the parties decided to downgrade the proposed new
authorized capital stock to only P200 million but the Ongs decided to leave the overpayment of P70
million in FLADC to help pay off the loan to PNB. (TSN at the SEC, January 29, 1997 cited in CA
Rollo, pp. 429-452; TSN at the SEC, February 6, 1997 cited in CA Rollo, pp. 485-489).
[4]
Docketed as SEC Case No. 02-96-5269.
[5]
Rollo of G.R. No. 144476, pp. 114-116.
[6]
Ibid., pp. 116-117.
[7]
Docketed as SEC Cases Nos. 598 and 601.
[8]
Rollo of G.R. No. 144476, pp. 117-118.
[9]
Ibid., pp. 133-135.
[10]
CA Decision dated October 5, 1999, p. 18; CA Records, p. 1045; Penned by Associate Justice Ramon
A. Barcelona and concurred in by Associate Justices Mariano M. Umali and Edgardo P. Cruz. Then
Associate Justice Demetrio G. Demetria dissented while also then Associate Justice Conchita
Carpio Morales concurred and dissented.
[11]
Supreme Court Decision dated February 1, 2002, pp. 34-35; Rollo, pp. 299-300.
[12]
Estrada vs. Sto. Domingo, 28 SCRA 890 [1969]; Cruz vs. Tuazon & Co., Inc., 76 SCRA 543
[1977]; Llanter vs. Court of Appeals, 105 SCRA 609 [1981]; Luzon Brokerage Co., Inc. vs. Maritime
Building Co., Inc., 86 SCRA 305 [1978].
[13]
131 SCRA 200 [1984].
[14]
Id at 221.
[15]
See Section 1, Rule 37 of the 1997 Rules of Civil Procedure.
[16]
G.R. No. 138544, October 3, 2000 citing Guerra Enterprises vs. CFI, 32 SCRA 314 [1970].
[17]
Sustiguer vs. Tamayo, 176 SCRA 579 [1989] citing Marimperio Compania Naviera vs. Court of Appeals,
156 SCRA 368 [1987].
[18]
Boyer-Roxas vs. Court of Appeals, 211 SCRA 470 [1992].
[19]
TSN, December 11, 1996, pp. 699-702, Rollo, pp. 705-706.
[20]
TSN, December 17, 1996, pp. 28-34; Rollo, pp. 699-702.
[21]
TSN, January 17, 1997, pp. 92-93; Rollo, pp. 705-706.
[22]
44 Phil 469 [1923].
[23]
Id; Garcia vs. Lim Chu Sing, 59 Phil. 562 [1934]; Boman Environmental Devt. Corp. vs. Court of Appeals,
167 SCRA 540 [1988].
[24]
Section 38 of the Corporation Code provides for the process to be followed for reduction of the authorized
capital stock. First, a proposal to decrease capital stock must be approved by a majority vote of the
board of directors and affirmed by stockholders who own 2/3 of the outstanding capital stock in a
meeting duly called for that purpose. Written notice of the time and place of the meeting on the
proposed decrease in the capital stock must be served to each of the stockholders at his place of
residence as shown in the corporate books. Thereafter, the SEC shall approve the certificate of
decrease of capital stock only if the same is accompanied by a new treasurers affidavit stating that
25% of the authorized capital stock has been subscribed while 25% of the subscribed capital stock
has been paid-up, and also if said decrease will not prejudice the rights of corporate creditors.
[25]
Section 8 of the Corporation Code provides that :
SEC. 8. Redeemable shares Redeemable shares may be issued by the corporation when expressly so
provided in the articles of incorporation. They may be purchased or taken up by the corporation
upon the expiration of a fixed period, regardless of the existence of unrestricted retained earnings
in the books of the corporation, and upon such other terms and conditions as may be stated in the
articles of incorporation, which terms and conditions must also be stated in the certificate of stock
representing said shares.
Section 5, par. 5, SEC Rules Governing Redeemable and Treasury Shares provides that redeemable
shares may be redeemed regardless of the existence of unrestricted retained earning, provided
that the corporation has, after such redemption, assets in its books to cover debts and liabilities of
capital stock. Therefore, redemption, according to SEC Opinion, January 23, 1985, may not be
made where the corporation is insolvent or if such redemption would cause insolvency or inability
of the corporation to meet its debts as they mature. (cited in Hector De Leon, The Corporation Code
of the Philippines, 1999 Ed., pp. 96-97).
[26]
Section 41 of the Corporation Code provides that:
Sec. 41. Power to acquire own shares. A stock corporation shall have the power to purchase or acquire its
own shares for a legitimate corporate purpose or purposes, including but not limited to the following
cases: Provided, That the corporation has unrestricted retained earnings in its books to cover the
shares to be purchased or acquired:
(1) To eliminate fractional shares arising out of stock dividends;
(2) To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a
delinquency sale, and to purchase delinquent shares sold during said sale; and
(3) To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions
of this Code.(Italics supplied)
[27]
xxx xxx xxx
Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute
any of its assets or property except upon lawful dissolution and after payment of all its debts and
liabilities.
[28]
Sections 117, 118, 119, and 120 of the Corporation Code provide that:
SEC. 117. Methods of dissolution. - A corporation formed or organized under the provisions of this Code
may be dissolved voluntarily or involuntarily. (n)
SEC. 118. Voluntary dissolution where no creditors are affected. - If dissolution of a corporation does not
prejudice the rights of any creditor having a claim against it, the dissolution may be effected by
majority vote of the board of directors or trustees, and by a resolution duly adopted by the
affirmative vote of the stockholders owning at least two thirds (2/3) of the outstanding capital or of
at least two-thirds (2/3) of the members at a meeting to be held upon call of the directors or trustees
after publication of the notice of time, place and object of the meeting for three (3) consecutive
weeks in a newspaper published in the place where the principal office of said corporation is
located; and if no newspaper is published in such place, then in a newspaper of general circulation
in the Philippines, after sending such notice to each stockholder or member either by registered
mail or by personal delivery at least thirty (30) days prior to said meeting. A copy of the resolution
authorizing the dissolution shall be certified by a majority of the board of directors or trustees and
countersigned by the secretary of the corporation. The Securities and Exchange Commission shall
thereupon issue the certificate of dissolution. (62a)
SEC. 119. Voluntary dissolution where creditors are affected. - Where the dissolution of a corporation may
prejudice the rights of any creditor, the petition for dissolution shall be filed with the Securities and
Exchange Commission. The petition shall be signed by a majority of its board of directors or
trustees or other officers having the management of its affairs, verified by its president or secretary
or one of its directors or trustees, and shall set forth all claims and demands against it, and that its
dissolution was resolved upon by the affirmative vote of the stockholders representing at least two-
thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the members, at a
meeting of its stockholders or members called for that purpose.
If the petition is sufficient in form and substance, the Commission shall, by an order reciting the purpose of
the petition, fix a date on or before which objections thereto may be filed by any person, which date
shall not be less than thirty (30) days nor more than sixty (60) days after the entry of the
order. Before such date, a copy of the order shall be published at least once a week for three (3)
consecutive weeks in a newspaper of general circulation published in municipality or city where the
principal office of the corporation is situated, or if there be no such newspaper, then in a newspaper
of general circulation in the Philippines, and a similar copy shall be posted for three (3) consecutive
weeks in three (3) public places in such municipality or city.
Upon five (5) days notice, given after the date on which the right to file objections as fixed in the order has
expired, the Commission shall proceed to hear the petition and try any issue made by the objections
filed; and if no such objection is sufficient, and the material allegations of the petition are true, it
shall render judgment dissolving the corporation and directing such disposition of its assets as
 justice requires, and may appoint a receiver to collect such assets and pay the debts of the
corporation. (Rule 104, RCa)
SEC. 120. Dissolution by shortening corporate term. - A voluntary dissolution may be effected by amending
the articles of incorporation to shorten the corporate term pursuant to the provisions of this Code. A
copy of the amended articles of incorporation shall be submitted to the Securities and Exchange
Commission in accordance with this Code. Upon approval of the amended articles of incorporation
or the expiration of the shortened term, as the case may be, the corporation shall be deemed
dissolved without any further proceedings, subject to the provisions of this Code on liquidation. (n)
[29]
Gamboa vs. Victoriano, 90 SCRA 40 [1979].
[30]
Cesar L. Villanueva, Philippine Corporate Law, 1998 Ed., p. 228.
[31]
Estimates of FLADCs current net worth cited during the oral arguments on January 29, 2003 ranged from
P450 million to P1 billion.

THIRD DIVISION

[G.R. No. 136456. October 24, 2000]

HEIRS OF RAMON DURANO, SR., RAMON DURANO III, AND

ELIZABETHHOTCHKISS DURANO, petitioners, vs. SPOUSES
ANGELES SEPULVEDA UY AND EMIGDIO BING SING UY,
SPOUSES FAUSTINO ALATAN AND VALERIANA GARRO,
AURELIA MATA, SILVESTRE RAMOS, HERMOGENES TITO,
TEOTIMO GONZALES, PRIMITIVA GARRO, JULIAN GARRO,
ISMAEL GARRO, BIENVENIDO CASTRO, GLICERIO BARRIGA,
BEATRIZ CALZADA, ANDREA MATA DE BATULAN, TEOFISTA
ALCALA, FILEMON LAVADOR, CANDELARIO
LUMANTAO, GAVINO QUIMBO, JUSTINO TITO, MARCELINO
GONZALES, SALVADOR DAYDAY, VENANCIA REPASO,
LEODEGARIO GONZALES, and RESTITUTA
GONZALES, respondents.

DECISION
GONZAGA-REYES, J.:

Petitioners seek the reversal of the decision of the First Division of the Court of
Appeals dated November 14, 1997 in CA-G.R. CV No. 27220, entitled Heirs of Ramon
Durano, Sr., et. al. versus Spouses Angeles Supelveda Uy, et. al., and the resolution of
the Court of Appeals dated October 29, 1998 which denied petitioners motion for
reconsideration.
 The antecedents of this case may be traced as far back as August 1970; it involves
a 128-hectare parcel of land located in the barrios of Dunga and Cahumayhumayan,
Danao City. On December 27, 1973, the late Congressman Ramon Durano, Sr., together
with his son Ramon Durano III, and the latters wife, Elizabeth Hotchkiss Durano
(petitioners in the herein case), instituted an action for damages against spouses Angeles
Supelveda Uy and Emigdio Bing Sing Uy, spouses Faustino Alatan and Valeriana Garro,
spouses Rufino Lavador and Aurelia Mata, Silvestre Ramos, Hermogenes Tito, Teotimo
Gonzales, Primitiva Garro, Julian Garro, Ismael Garro, Bienvenido Castro, Glicerio
Barriga, Beatriz Calzada, Andrea Mata de Batulan, Teofista Alcala, Filemon Lavador,
Candelario Lumantao, Gavino Quimbo, Justino Tito, Marcelino Gonzales, Salvador
Dayday, Venancia Repaso, Leodegario Gonzales, Jose de la Calzada, Restituta
Gonzales, and Cosme Ramos (herein respondents[1]) before Branch XVII of the then
Court of First Instance of Cebu, Danao City.
In that case, docketed as Civil Case No. DC-56, petitioners accused respondents of
officiating a hate campaign against them by lodging complaints in the Police Department
of Danao City in August 1970, over petitioners so-called invasion of respondents alleged
properties in Cahumayhumayan, Danao City. This was followed by another complaint
sent by respondents to the President of the Philippines in February 1971, which depicted
petitioners as oppressors, landgrabbers and usurpers of respondents alleged
rights. Upon the direction of the President, the Department of Justice through City Fiscal
Jesus Navarro and the Philippine Constabulary of Cebu simultaneously conducted
investigations on the matter. Respondents complaints were dismissed as baseless, and
they appealed the same to the Secretary of Justice, who called for another investigation
to be jointly conducted by the Special Prosecutor and the Office of the City Fiscal of
Danao City. During the course of said joint investigation, respondents Hermogenes Tito
and Salvador Dayday again lodged a complaint with the Office of the President, airing the
same charges of landgrabbing. The investigations on this new complaint, jointly
conducted by the 3rd Philippine Constabulary Zone and the Citizens Legal Assistance
Office resulted in the finding that (petitioners) should not be held answerable therefor. [2]
Petitioners further alleged in their complaint before the CFI that during the course of
the above investigations, respondents kept spreading false rumors and damaging tales
which put petitioners into public contempt and ridicule.[3]
In their Answer, respondents lodged their affirmative defenses, demanded the return
of their respective properties, and made counterclaims for actual, moral and exemplary
damages.Respondents stated that sometime in the early part of August 1970 and months
thereafter they received mimeographed notices dated August 2, 1970 and signed by the
late Ramon Durano, Sr., informing them that the lands which they are tilling and residing
in, formerly owned by the Cebu Portland Cement Company (hereafter, Cepoc), had been
purchased by Durano & Co., Inc. The notices also declared that the lands were needed
by Durano & Co. for planting to sugar and for roads or residences, and directed
respondents to immediately turn over the said lands to the representatives of the
company. Simultaneously, tall bamboo poles with pennants at the tops thereof were
planted in some areas of the lands and metal sheets bearing the initials RMD were nailed
to posts.
 As early as the first week of August 1970, and even before many of the respondents
received notices to vacate, men who identified themselves as employees of Durano &
Co. proceeded to bulldoze the lands occupied by various respondents, destroying in their
wake the plantings and improvements made by the respondents therein. On some
occasions, respondents alleged, these men fired shots in the air, purportedly acting upon
the instructions of petitioner Ramon Durano III and/or Ramon Durano, Jr. On at least one
instance, petitioners Ramon Durano III and Elizabeth Hotchkiss Durano were seen on the
site of the bulldozing operations.
On September 15, 1970, Durano & Co. sold the disputed property to petitioner Ramon
Durano III, who procured the registration of these lands in his name under TCT No. T-
103 and TCT No. T-104.
Respondents contended that the display of force and the known power and prestige
of petitioners and their family restrained them from directly resisting this wanton
depredation upon their property. During that time, the mayor of Danao City was Mrs.
Beatriz Durano, wife of Ramon Durano, Sr. and mother of petitioner Ramon Durano
III. Finding no relief from the local police, who respondents said merely laughed at them
for daring to complain against the Duranos, they organized themselves and sent a letter
to then President Ferdinand Marcos reporting dispossession of their properties and
seeking a determination of the ownership of the land. This notwithstanding, the bulldozing
operations continued until the City Fiscal was requested by the Department of Justice to
conduct an investigation on the matter. When, on July 27, 1971, the City Fiscal
announced that he would be unable to conduct a preliminary investigation, respondents
urged the Department of Justice to conduct the preliminary investigation. This was
granted, and the investigations which spanned the period March 1972 to April 1973 led
to the conclusion that respondents complaint was untenable.[4]
In their counterclaim, respondents alleged that petitioners acts deprived most of them
of their independent source of income and have made destitutes of some of them. Also,
petitioners have done serious violence to respondents spirit, as citizens and human
beings, to the extent that one of them had been widowed by the emotional shock that the
damage and dispossession has caused.[5] Thus, in addition to the dismissal of the
complaint, respondents demanded actual damages for the cost of the improvements they
made on the land, together with the damage arising from the dispossession itself; moral
damages for the anguish they underwent as a result of the high-handed display of power
by petitioners in depriving them of their possession and property; as well as exemplary
damages, attorneys fees and expenses of litigation.
Respondents respective counterclaims --- referring to the improvements destroyed,
their values, and the approximate areas of the properties they owned and occupied ---
are as follows:
a) TEOFISTA ALCALA - Tax Declaration No. 00223; .2400 ha.; bulldozed on August,
10, 1970. Improvements destroyed consist of 47 trees, 10 bundles beatilis firewood
and 2 sacks of cassava, all valued at P5,437.00. (Exh. B, including submarkings)
b) FAUSTINO ALATAN and VALERIANA GARRO - Tax Declaration No. 30758; .2480
ha.; Tax Declaration No. 32974; .8944 ha.; Tax Declaration No. 38908; .8000 ha.;
Bulldozed on September 9, 1970; Improvements destroyed consist of 682 trees, a
 cornfield with one cavan per harvest 3 times a year, valued at P71,770.00; Bulldozed
on March 13, 1971; 753 trees, 1,000 bundles beatilis firewood every year, valued at
P29,100.00; Cut down in the later part of March, 1971 - 22 trees, 1,000 bundles
beatilis firewood every year, 6 cavans corn harvest per year, valued at P1,940.00 or
a total value of P102,810.00. (Exh. C, including submarkings)
c) ANDREA MATA DE BATULAN - Tax Declaration No. 33033; .4259 has.; bulldozed
on September 11, 1970. Improvements destroyed consist of 512 trees and 15 sacks
cassava all valued at P79,425.00. (Exh. D, including submarkings)
d) GLICERIO BARRIGA - Tax Declaration No. 32290; .4000 ha.; bulldozed on
September 10, 1990. Improvements destroyed consist of 354 trees, cassava field if
planted with corn good for one liter, 30 cavans harvest a year of corn, and one
resthouse, all valued at P35,500.00. (Exh. E, including submarkings)
e) BEATRIZ CALZADA - Tax Declaration No. 03449; .900 ha.; Bulldozed on June 16,
1971. Improvements destroyed consist of 2,864 trees, 1,600 bundles of beatilis
firewood, 12 kerosene cans cassava every year and 48 cavans harvest a year of corn
all valued at P34,800.00. (Exh. F, including submarkings)
f) BIENVENIDO CASTRO - Tax Declaration No. 04883; .6000 ha.; bulldozed on
September 10, 1970. Improvements destroyed consist of 170 trees, 10 sacks
cassava every year, 500 bundles beatilis firewood every year, 60 cavans corn harvest
per year, all valued at (5,550.00. (Exh. G, including submarkings)
g) ISMAEL GARRO - Tax Declaration No. 7185; 2 has. Bulldozed in August,
1970. Improvements destroyed consist of 6 coconut trees valued at
P1,800.00. Bulldozed on February 3, 1971 - improvements destroyed consist of 607
trees, a corn field of 5 cavans produce per harvest thrice a year, all valued at
P67,890.00. (Exh. H, including submarkings)
h) JULIAN GARRO - Tax Declaration No. 28653; 1 ha.; Bulldozed in the latter week of
August, 1970. Improvements destroyed consist of 365 trees, 1 bamboo grove, 1 tisa,
1,000 bundles of beatilis firewood, 24 cavans harvest a year of corn, all valued at
P46,060.00. (Exh. I, including submarkings)
i) PRIMITIVA GARRO - Tax Declaration No. 28651; .3000 ha.; Bulldozed on
September 7, 1970. Improvements destroyed consist of 183 trees, 10 pineapples, a
cassava field, area if planted with corn good for liter, sweet potato, area if planted with
corn good for liter all valued at P10,410.00. (Exh. J, including submarkings)
j) TEOTIMO GONZALES - Tax Declaration No. 38159; .8644 ha.; Tax Declaration No.
38158; .8000 ha.; Bulldozed on September 10, 1970 - improvements destroyed
consist of 460 trees valued at P20,000.00. Bulldozed on December 10, 1970 -
Improvements destroyed consist of 254 trees valued at P65,600.00 - or a total value
of P85,600.00. (Exh. K, including submarkings)
k) LEODEGARIO GONZALES - Tax Declaration No. 36884; Bulldozed on February 24,
1971. Improvements destroyed consist of 946 trees, 40 ubi, 15 cavans harvest a year
of corn, all valued at P72,270.00. (Exh. L, including submarkings)
l) FILEMON LAVADOR - Tax Declaration No. 14036; 1 ha.; Bulldozed on February 5,
1971. Improvements destroyed consist of 675 trees and 9 cavans harvest a year of
corn all valued at P63,935.00. (Exh. M, including submarkings)
m) CANDELARIO LUMANTAO - Tax Declaration No. 18791; 1.660 ha. Bulldozed on the
second week of August, 1970 - Improvements destroyed consist of 1,377 trees, a
cornfield with 3 cavans per harvest thrice a year and a copra dryer all valued at
P193,960.00. Bulldozed on February 26, 1971 - Improvements destroyed consist of
44 trees, one pig pen and the fence thereof and the chicken roost all valued
at P12,650.00. Tax Declaration No. 33159; 3.500 has. Bulldozed in the last week of
March, 1971 - Improvements destroyed consist of 13 trees valued at
P1,550.00.Bulldozed in the latter part consist of 6 Bamboo groves and Ipil-Ipil trees
valued at P700.00 with total value of P208,860.00. (Exh. N, including submarkings)
n) AURELIA MATA - Tax Declaration No. 38071; .3333 ha.; Bulldozed sometime in the
first week of March, 1971 - Improvements destroyed consist of 344 trees and 45
cavans corn harvest per year valued at P30,965.00. (Exh. Q, including submarkings)
o) GAVINO QUIMBO - Tax Declaration No. 33231; 2.0978 has.; Tax Declaration No.
24377; .4960 ha. (.2480 ha. Belonging to your defendant) Bulldozed on September
12, 1970 - Improvements destroyed consist of 200 coconut trees and 500 banana fruit
trees valued at P68,500.00. Bulldozed on consist of 59 trees, 20 sacks cassava and
60 cavans harvest a year of corn valued at P9,660.00 or a total value of
P78,160.00. (Exh. R, including submarkings)
p) SILVESTRE RAMOS - Tax Declaration No. 24288; 1.5568 has.; Bulldozed on
February 23, 1971. - Improvements destroyed consist of 737 trees, a cornfield with 3
cavans per harvest 3 times a year and 50 bundles of beatilis firewood, all valued at
P118,170.00. (Exh. S, including submarkings)
q) MARCELINO GONZALES - Tax Declaration No. 34057; .4049 ha. Bulldozed on
March 20, 1972 - Improvements destroyed consist of 5 coconut trees and 9 cavans
harvest a year of corn valued at P1,860.00. Bulldozed on July 4, 1972 - destroying 19
coconut trees valued at P5,700.00 or a total value of P7,560.00. (Exh. U, including
submarkings)
r) JUSTINO TITO -Tax Declaration No. 38072; .2000 has.; Bulldozed on February 25,
1971 - Improvements destroyed consist of 338 trees and 5 kamongay all valued at
P29,650.00. (Exh. T, including submarkings)
s) EMIGDIO BING SING UY and ANGELES SEPULVEDA UY - Transfer Certificate of
Title No. T-35 (Register of Deeds of Danao City); 140.4395 has.; Area bulldozed-
20.000 has. Bulldozed on August 5, 6 and 7, 1970 - destroying 565 coconut trees, 2-
1/2 yrs. old, 65,422 banana groves with 3,600 mango trees, 3 years old, grafted and
about to bear fruit valued at P212,260.00.Bulldozed on November 24, 1970 and on
February 16, 1971 - destroying 8,520 madri-cacao trees and 24 cylindrical cement
posts boundaries valued at P18,540.00. Bulldozed on November 24, 1970 -
destroying 90 coconut trees, 3 years old cornfield at 40 cavans per harvest and at 3
harvests a year (120 cavans) valued at P31,800.00. Bulldozed on February 16, 1971
- destroying 25,727 trees and sugarcane field value P856,725.00 or a total value of
P1,123,825.00. (Exh. V, including submarkings)
t) SALVADOR DAYDAY - Tax Declaration No. (unnumbered) dated September 14,
1967; 4.000 has. Bulldozed on May 6, 1971 - destroying 576 trees, 9 cavans yearly
of corn, 30 kerosene cans of cassava yearly valued at P4,795.00. Bulldozed from
March 26, 1973 to the first week of April, 1973 - destroying 108 trees and cornland, 6
cavans harvest per year valued at P53,900.00 or a total value of P58,695.00. (Exh.
A, including submarkings)
 u) VENANCIA REPASO - Tax Declaration No. 18867; 1.1667 has. Bulldozed on April
15, 1971 - Improvements destroyed were 775 trees, 500 abaca, about to be reaped,
and being reaped 3 times a year 2 bamboo groves all valued at P47,700.00. (Exh. O,
including submarkings)
v) HERMOGENES TITO - Tax Declaration No. 38009; over one (1) ha. Bulldozed in the
latter part of September, 1970 - destroying 1 coconut tree, 18 sacks of corn per year
valued at P1,020.00.Bulldozed on March 15, 1973 - destroying 2 coconut trees, 5 buri
trees, 1 bamboo grove valued at P1,400.00. Bulldozed on March 26, 1974 -
destroying 3 coconut trees valued at P1,500.00 with a total value of P3,920.00. (Exh.
P, including submarkings).[6]
On April 22, 1975, petitioners moved to dismiss their complaint with the
trial court. The trial court granted the motion to dismiss, without prejudice to respondents
right to proceed with their counterclaim.
Hence, the trial proceeded only on the counterclaim.
On September 23, 1980, this Court issued a resolution in Administrative Matter No.
6290 changing the venue of trial in Civil Case No. DC-56 to the Regional Trial Court of
Cebu City.The change was mainly in line with the transfer of Judge Bernardo Ll. Salas,
who presided over the case in Danao City, to Cebu City.
The parties agreed to dispense with pre-trial, and for the evidence-in-chief to be
submitted by way of affidavits together with a schedule of documentary exhibits, subject
to additional direct examination, cross examination and presentation of rebuttal evidence
by the parties.
The trial court and later, the Court of Appeals, took note of the following portions of
affidavits submitted by petitioners:

xxx City Fiscal Jesus Navarro said that in August, 1967, he issued subpoenas to
several tenants in Cahumayhumayan upon representation by Cepoc, the latter
protesting failure by the tenants to continue giving Cepoc its share of the corn
produce. He learned from the tenants that the reason why they were reluctant and as a
matter of fact some defaulted in giving Cepoc its share, was that Uy Bing Sepulveda
made similar demands to them for his share in the produce, and that they did not know
to whom the shares should be given.

xxx xxx xxx

Jesus Capitan said that he is familiar with the place Cahumayhumayan and that the
properties in said locality were acquired by Durano and Company and Ramon Durano
III, but formerly owned by Cepoc.

When the properties of Ramonito Durano were cultivated, the owners of the plants
requested him that they be given something for their effort even if the properties do
not belong to them but to Cepoc, and that he was directed by Ramonito Durano to do
a listing of the improvements as well as the owners. After he made a listing, this was
given to Ramonito who directed Benedicto Ramos to do payment.

When he was preparing the list, they did not object to the removal of the plants
because the counterclaimants understood that the lands did not belong to them, but
later and because of politics a complaint was filed, and finally that when he was doing
the listing, the improvements were even pointed to him by the counterclaimants
themselves. (Exh. 48, Records, p. 385-386).

xxx xxx xxx

Ruperto Rom said that he had an occasion to work at Cepoc from 1947 to 1950
together with Benedicto and Tomas Ramos, the latter a capataz of the Durano Sugar
Mills. Owner of the properties, subject of the complaint, was Cepoc.

The persons who eventually tilled the Cepoc properties were merely allowed to do
cultivation if planted to corn, and for Cepoc to be given a share, which condition was
complied with by all including the counterclaimants. He even possessed one parcel
which he planted to coconuts, jackfruit trees and other plants. (Exh. 51, Records, pp.
383-384)

xxx xxx xxx

Co-defendant Ramon Durano III said that he agreed with the dismissal of the
complaint because his fathers wish was reconciliation with the defendants following
the death of Pedro Sepulveda, father of Angeles Sepulveda Uy, but inspite of the
dismissal of the complaint, the defendants still prosecuted their counterclaim.

The disputed properties were owned formerly by Cepoc, and then of the latter selling
the properties to Durano and Company and then by the latter to him as of September
15, 1970. As a matter of fact, TCT T-103 and T-104 were issued to him and that from
that time on, he paid the taxes.

At the time he purchased the properties, they were not occupied by the
defendants. The first time he learned about the alleged bulldozing of the
improvements was when the defendants filed the complaint of land grabbing against
their family with the Office of the President and the attendant publicity. Precisely his
family filed the complaint against them. (Exh. 57, Records, pp. 723-730)

xxx xxx xxx

Congressman Ramon Durano said he is familiar with the properties, being owned
originally by Cepoc. Thereafter they were purchased by Durano and Company and
then sold to Ramon Durano III, the latter now the owner. He filed a motion to dismiss
the case against Angeles Sepulveda et al. as a gesture of respect to the deceased Pedro
Sepulveda, father of Angeles Sepulveda, and as a Christian, said Pedro Sepulveda
being the former Mayor of Danao, if only to stop all misunderstanding between their
families.

xxx xxx xxx

He was the one who did the discovery of the properties that belonged to Cepoc, which
happened when he was doing mining work near Cahumayhumayan and without his
knowledge extended his operation within the area belonging to Cepoc. After Cepoc
learned of the substantial coal deposits, the property was claimed by Cepoc and then a
survey was made to relocate the muniments. Eventually he desisted doing mining
work and limited himself within the confines of his property that was adjacent to
Cepocs property. All the claimants except Sepulveda Uy were occupants of the Cepoc
properties. Durano and Company purchased the property adjacent to Cepoc,
developed the area, mined the coal and had the surveyed area planted with sugar cane,
and finally the notices to the occupants because of their intention to plant sugar cane
and other crops (T.S. N. December 4, 1985, pp. 31-32, 44-54, RTC Decision, pp. 16-
19, Records, pp. 842-845).[7]

Petitioners also presented Court Commissioner, Engineer Leonidas Gicain, who was
directed by the trial court to conduct a field survey of the disputed property. Gicain
conducted surveys on the areas subjected to bulldozing, including those outside the
Cepoc properties. The survey --- which was based on TCT No. T-103 and TCT No. T-
104, titled in the name of Ramon Durano III, and TCT No. 35, in the name of respondent
Emigdio Bing Sing Uy --- was paid for by petitioners.[8]
Respondents, for their part, also presented their affidavits and supporting
documentary evidence, including tax declarations covering such portions of the property
as they formerly inhabited and cultivated.
On March 8, 1990, the RTC issued a decision upholding respondents
counterclaim. The dispositive portion of said decision reads:

THE FOREGOING CONSIDERED, judgment is hereby rendered in favor of the

counter claimants and against the plaintiffs directing the latter to pay the former:

a) With respect to Salvador Dayday P 14,400.00

b) With respect to Teofista Alcala 4,400.00

c) With respect to Faustino Alatan 118,400.00

 d) With respect to Andrea Mata de Batulan 115,050.00

e) With respect to Glicerio Barriga 35,500.00

f) With respect to Beatriz Galzada 70,300.00

g) With respect to Bienvenido Castro 5,000.00

h) With respect to Ismael Garro 66,060.00

i) With respect to Julian Garro 48,600.00

j) With respect to Primitiva Garro 13,000.00

k) With respect to Teotimo Gonzales 63,200.00

l) With respect to Leodegario Gonzales 85,300.00

m) With respect to Filemon Lavador 70,860.00

n) With respect to Venancia Repaso 101,700.00

o) With respect to Candelario Lumantao 192,550.00

p) With respect to Hermogenes Tito 1,200.00

q) With respect to Aurelia Mata 28,560.00

r) With respect to Gavino Quimbo 81,500.00

s) With respect to Silvestre Ramos 101,700.00

t) With respect to Justino Tito 27,800.00

u) With respect to Marcelino Gonzales 2,360.00

v) With respect to Angeles Supelveda 902,840.00

P120,000.00 should be the figure in terms of litigation expenses and a separate

amount of P100,000.00 as attorneys fees.

Return of the properties to Venancia Repaso, Hermogenes Tito and Marcelino

Gonzales is hereby directed.
With respect to counter claimant Angeles Sepulveda Uy, return of the property to her
should be with respect to the areas outside of the Cepoc property, as mentioned in the
sketch, Exhibit 56-A.

Finally with costs against the plaintiffs.

SO ORDERED. [9]

The RTC found that the case preponderated in favor of respondents, who all
possessed their respective portions of the property covered by TCT Nos. T-103 and T-
104 thinking that they were the absolute owners thereof. A number of these respondents
alleged that they inherited these properties from their parents, who in turn inherited them
from their own parents.Some others came into the properties by purchase from the former
occupants thereof. They and their predecessors were responsible for the plantings and
improvements on the property.They were the ones who sought for the properties to be
tax-declared in their respective names, and they continually paid the taxes
thereto. Respondents maintained that they were unaware of anyone claiming adverse
possession or ownership of these lands until the bulldozing operations in 1970.
As for Venancia Repaso, Hermogenes Tito and Marcelino Gonzales, the Court found
that the properties they laid claim to were not part of the land that was purchased by
Durano & Co. from Cepoc. Thus, it found the bulldozing of these lands by petitioners
totally unjustified and ordered not only the total reimbursement of useful and necessary
expenses on the properties but also the return of these properties to Repaso, Tito and
Gonzales, respectively. As for all the other respondents, the RTC found their possession
of the properties to be in the concept of owner and adjudged them to be builders in good
faith. Considering that petitioners in the instant case appropriated the improvements on
the areas overran by the bulldozers, the RTC ruled that (t)he right of retention to the
improvements necessarily should be secured (in favor of respondents) until reimbursed
not only of the necessary but also useful expenses.[10]
On the matter of litigation expenses and attorneys fees, the RTC observed that the
trial period alone consisted of forty (40) trial dates spread over a period of sixteen (16)
years. At the time, respondents were represented by counsel based in Manila, and the
trial court took into consideration the travel, accommodation and miscellaneous expenses
of their lawyer that respondents must have shouldered during the trial of the case.
Dissatisfied, petitioners appealed the RTC decision to the Court of Appeals, which,
in turn, affirmed the said decision and ordered the return of the property to all the
respondents-claimants, in effect modifying the RTC decision which allowed return only in
favor of respondents Repaso, Tito and Gonzales.
In its decision, the Court of Appeals upheld the factual findings and conclusions of
the RTC, including the awards for actual damages, attorneys fees and litigation expenses,
and found additionally that the issuance of TCT Nos. T-103 and T-104 in the name of
Ramon Durano III was attended by fraud. Evaluating the evidence before it, the Court of
Appeals observed that the alleged reconstituted titles of Cepoc over the property, namely,
TCT No. (RT-38) (T-14457) -4 and TCT No. (RT-39) (T-14456) -3 (Exhibits 19 and 20 of
this case), which were claimed to be the derivative titles of TCT Nos. T-103 and T-104,
were not submitted in evidence before the RTC. Thus, in an Order dated June 15, 1988,
the RTC ordered Exhibits 19 and 20 deleted from petitioners Offer of Exhibits. The Court
of Appeals further noted that even among the exhibits subsequently produced by
petitioners before the RTC, said Exhibits 19 and 20 were still not submitted. [11] Moreover,
Cepoc had no registered title over the disputed property as indicated in TCT Nos. T-103
and T-104. Thus:

TRANSFER CERTIFICATE OF TITLE

NO. - 103 -

xxx xxx

IT IS FURTHER CERTIFIED that said land was originally registered on the N.A. day
of N.A., in the year nineteen hundred and N.A. in Registration Book
No. N.A. page N.A. of the Office of the Register of Deeds of N.A., as Original
Certificate of Title No. N.A., pursuant to a N.A. patent granted by the President of the
Philippines, on the N.A. day of N.A., in the year nineteen hundred and N.A., under
Act No. N.A.

This certificate is a transfer from Transfer Certificate of Title No. (RT-39) (T-14456) -
3 which is cancelled by virtue hereof in so far as the above described land is
concerned.

xxx xxx

TRANSFER CERTIFICATE OF TITLE

NO. T - 104 -

xxx xxx

IT IS FURTHER CERTIFIED that said land was originally registered on the N.A. day
of N.A., in the year nineteen hundred and N.A. in Registration Book
No. N.A. page N.A. of the Office of the Register of Deeds of N.A., as Original
Certificate of Title No. N.A., pursuant to a N.A. patent granted by the President of the
Philippines, on the N.A. day of N.A., in the year nineteen hundred and N.A., under
Act No. N.A.

This certificate is a transfer from Transfer Certificate of Title No. (RT-38) (T-14457) -
4 which is cancelled by virtue hereof in so far as the above described land is
concerned.[12]
 From the foregoing, the Court of Appeals concluded that the issuance of the TCT
Nos. T-103 and T-104 in favor of petitioner Ramon Durano III was attended by fraud;
hence, petitioners could not invoke the principle of indefeasibility of title. Additionally, the
Court of Appeals found that the alleged Deed of Absolute Sale, undated, between Cepoc
Industries, Inc. and Durano & Co. was not notarized and thus, unregistrable.
The Court of Appeals went on to state that while, on the one hand, no valid issuance
of title may be imputed in favor of petitioners from the private Deed of Sale and the alleged
reconstituted titles of Cepoc that were not presented in evidence, respondents, in contrast
--- who although admittedly had no registered titles in their names --- were able to
demonstrate possession that was public, continuous and adverse --- or possession in the
concept of owner, and which was much prior (one or two generations back for many of
respondents) to the claim of ownership of petitioners.
Thus, the Court of Appeals ordered the return of the properties covered by TCT Nos.
T-103 and T-104 to all respondents who made respective claims thereto. Corollarily, it
declared that petitioners were possessors in bad faith, and were not entitled to
reimbursement for useful expenses incurred in the conversion of the property into
sugarcane lands. It also gave no merit to petitioners allegation that the actual damages
awarded by the trial court were excessive, or to petitioners argument that they should not
have been held personally liable for any damages imputable to Durano & Co.
Following is the dispositive portion of the decision of the Court of Appeals:

WHEREFORE, the appealed decision of the lower court in Civil Case No. DC-56 is
hereby AFFIRMED with MODIFICATION ordering the return of the respective
subject properties to all the defendants-appellees, without indemnity to the plaintiffs-
appellants as regards whatever improvements made therein by the latter. In all other
respects, said decision in affirmed.

Costs against plaintiffs-appellants.

SO ORDERED.[13]

On October 29, 1998, the Court of Appeals denied petitioners motion for
reconsideration for lack of merit. Hence, this petition.
Petitioners assign the following errors from the CA decision:
1. The Court of Appeals erred in granting relief to the respondents who did not appeal
the decision of the lower court.
2. The Court of Appeals erred in collaterally attacking the validity of the title of petitioner
Ramon Durano III.
3. The respondents should not have been adjudged builders in good faith.
4. The petitioners should not be held personally liable for damages because of the
doctrine of separate corporate personality.
 5. It was an error to hold that the respondents had proved the existence of improvements
on the land by preponderance of evidence, and in awarding excessive damages
therefor.
6. It was error to direct the return of the properties to respondents Venancia Repaso,
Hermogenes Tito and Marcelino Gonzales.
7. The award of litigation expenses and attorneys fees was erroneous.
8. The petitioners are not possessors in bad faith.
On their first assignment of error, petitioners contend that before the Court of Appeals,
they only questioned that portion of the RTC decision which directed the return of the
properties to respondents Repaso, Tito and Gonzales. They argued that the return of the
properties to all the other respondents by the Court of Appeals was erroneous because it
was not among the errors assigned or argued by petitioners on appeal. Besides, since
respondents themselves did not appeal from the RTC decision on the issue of return of
the physical possession of the property, it is understood that judgment as to them has
already become final by operation of law. To support its argument, petitioners cited the
cases of Madrideo vs. Court of Appeals[14]and Medida vs. Court of Appeals[15], which held
that whenever an appeal is taken in a civil case an appellee who has not himself appealed
cannot obtain from the appellate court any affirmative relief other than the ones granted
in the decision of the court below.
Rule 51 of the New Rules of Civil Procedure provides:

Sec. 8. Questions that may be decided. --- No error which does not affect the
jurisdiction over the subject matter or the validity of the judgment appealed from
or the proceedings therein will be considered unless stated in the assignment of
errors, or closely related to or dependent on an assigned error and properly argued
in the brief, save as the court may pass upon plain errors and clerical errors.

We find untenable petitioners argument that since no party (whether petitioners or

respondents) appealed for the return of the properties to respondents other than Repaso,
Tito and Gonzales, that portion of the RTC decision that awards damages to such other
respondents is final and may no longer be altered by the Court of Appeals. A reading of
the provisions of Section 8, Rule 51, aforecited, indicates that the Court of Appeals is not
limited to reviewing only those errors assigned by appellant, but also those that are closely
related to or dependent on an assigned error.[16] In other words, the Court of Appeals is
imbued with sufficient discretion to review matters, not otherwise assigned as errors on
appeal, if it finds that their consideration is necessary in arriving at a complete and just
resolution of the case. In this case, the Court of Appeals ordered the return of the
properties to respondents merely as a legal consequence of the finding that respondents
had a better right of possession than petitioners over the disputed properties, the former
being possessors in the concept of owner. Thus, it held ---

Plaintiffs-appellants have to return possession of the subject property, not only to

defendants-appellees Venancia Repaso, Hermogenes Tito and Marcelino Gonzales but
to all other defendants-appellees herein, by virtue of the latters priority in time of
declaring the corresponding portions of the subject properties in their name and/or
their predecessors-in-interest coupled with actual possession of the same property
through their predecessors-in-interest in the concept of an owner. Plaintiffs-appellants
who had never produced in court a valid basis by which they are claiming possession
or ownership over the said property cannot have a better right over the subject
properties than defendants-appellees.[17]

Moreover, petitioners reliance on the Madrideo and Medida cases is misplaced. In

the Madrideo case, the predecessors-in-interest of the Llorente Group sold the disputed
property to the Alcala Group, who in turn sold the same to the spouses Maturgo. The RTC
adjudged the spouses Maturgo purchasers in good faith, such that they could retain their
title to the property, but held that the Lllorente Group was unlawfully divested of its
ownership of the property by the Alcala Group. The Alcala Group appealed this decision
to the Court of Appeals, who denied the appeal and ordered the reinstatement in the
records of the Registry of Deeds of the Original Certificates of Title of the predecessors-
in-interest of the Llorente Group. In setting aside the decision of the Court of Appeals, this
Court held that no relief may be afforded in favor of the Llorente Group to the prejudice
of the spouses Maturgo, who --- the Court carefully emphasized --- were third parties to
the appeal, being neither appellants nor appellees before the Court of Appeals, and
whose title to the disputed property was confirmed by the RTC. The application of the
ruling in Madrideo to the instant case bears no justification because it is clear that
petitioners, in appealing the RTC decision, impleaded all the herein respondents.
Meanwhile, in the Medida case, petitioners (who were the appellees before the Court
of Appeals) sought the reversal of a finding of the RTC before the Supreme Court. The
Court explained that since petitioners failed to appeal from the RTC decision, they --- as
appellees before the Court of Appeals --- could only argue for the purpose of sustaining
the judgment in their favor, and could not ask for any affirmative relief other than that
granted by the court below. The factual milieu in Medida is different from that of the
instant case, where the return of the properties to respondents was not an affirmative
relief sought by respondents but an independent determination of the Court of Appeals
proceeding from its findings that respondents were long-standing possessors in the
concept of owner while petitioners were builders in bad faith. Certainly, under such
circumstances, the Court of Appeals is not precluded from modifying the decision of the
RTC in order to accord complete relief to respondents.
Moving now to the other errors assigned in the petition, the return of the properties to
respondents Repaso, Tito and Gonzales was premised upon the factual finding that these
lands were outside the properties claimed by petitioners under TCT Nos. T-103 and T-
104. Such factual finding of the RTC, sustained by the Court of Appeals, is now final and
binding upon this Court.
In respect of the properties supposedly covered by TCT Nos. T-103 and T-104, the
Court of Appeals basically affirmed the findings of the RTC that respondents have shown
prior and actual possession thereof in the concept of owner, whereas petitioners failed to
substantiate a valid and legitimate acquisition of the property --- considering that the
alleged titles of Cepoc from which TCT Nos. T-103 and T-104 were supposed to have
derived title were not produced, and the deed of sale between Cepoc and Durano & Co.
was unregistrable.
The records clearly bear out respondents prior and actual possession; more exactly,
the records indicate that respondents possession has ripened into ownership by
acquisitive prescription.
Ordinary acquisitive prescription, in the case of immovable property, requires
possession of the thing in good faith and with just title,[18] for a period of ten years.[19] A
possessor is deemed to be in good faith when he is not aware of any flaw in his title or
mode of acquisition of the property.[20] On the other hand, there is just title when the
adverse claimant came into possession of the property through one of the modes for
acquiring ownership recognized by law, but the grantor was not the owner or could not
transmit any right.[21] The claimant by prescription may compute the ten-year period by
tacking his possession to that of his grantor or predecessor-in-interest.[22]
The evidence shows that respondents successfully complied with all the
requirements for acquisitive prescription to set in. The properties were conveyed to
respondents by purchase or inheritance, and in each case the respondents were in actual,
continuous, open and adverse possession of the properties. They exercised rights of
ownership over the lands, including the regular payment of taxes and introduction of
plantings and improvements. They were unaware of anyone claiming to be the owner of
these lands other than themselves until the notices of demolition in 1970 --- and at the
time each of them had already completed the ten-year prescriptive period either by their
own possession or by obtaining from the possession of their predecessors-in-
interest. Contrary to the allegation of petitioners that the claims of all twenty-two (22)
respondents were lumped together and indiscriminately sustained, the lower courts
(especially the RTC) took careful consideration of the claims individually, taking note of
the respective modes and dates of acquisition. Whether respondents predecessors-in-
interest in fact had title to convey is irrelevant under the concept of just title and for
purposes of prescription.
Thus, respondents counterclaim for reconveyance and damages before the RTC was
premised upon a claim of ownership as indicated by the following allegations:

(Y)our defendants are owners and occupants of different parcels of land located in
Barrio Cahumayhumayan, your defendants having occupied these parcels of land
for various periods by themselves or through their predecessors-in-interest, some
for over fifty years, and some with titles issued under the Land Registration
Act; xxxxx [23]

Respondents claim of ownership by acquisitive prescription (in respect of the

properties covered by TCT Nos. T-103 and T-104) having been duly alleged and proven,
the Court deems it only proper that such claim be categorically upheld. Thus, the decision
of the Court of Appeals insofar as it merely declares those respondents possessors in the
concept of owner is modified to reflect the evidence on record which indicates that such
possession had been converted to ownership by ordinary prescription.
 Turning now to petitioners claim to ownership and title, it is uncontested that their
claim hinges largely on TCT Nos. T-103 and T-104, issued in the name of petitioner
Ramon Durano III.However, the validity of these certificates of title was put to serious
doubt by the following: (1) the certificates reveal the lack of registered title of Cepoc to
the properties;[24] (2) the alleged reconstituted titles of Cepoc were not produced in
evidence; and (3) the deed of sale between Cepoc and Durano & Co. was unnotarized
and thus, unregistrable.
It is true that fraud in the issuance of a certificate of title may be raised only in an
action expressly instituted for that purpose,[25] and not collaterally as in the instant case
which is an action for reconveyance and damages. While we cannot sustain the Court of
Appeals finding of fraud because of this jurisdictional impediment, we observe that the
above-enumerated circumstances indicate none too clearly the weakness of petitioners
evidence on their claim of ownership. For instance, the non-production of the alleged
reconstituted titles of Cepoc despite demand therefor gives rise to a presumption
(unrebutted by petitioners) that such evidence, if produced, would be adverse to
petitioners.[26] Also, the unregistrability of the deed of sale is a serious defect that should
affect the validity of the certificates of title. Notarization of the deed of sale is essential to
its registrability,[27] and the action of the Register of Deeds in allowing the registration of
the unacknowledged deed of sale was unauthorized and did not render validity to the
registration of the document.[28]
Furthermore, a purchaser of a parcel of land cannot close his eyes to facts which
should put a reasonable man upon his guard, such as when the property subject of the
purchase is in the possession of persons other than the seller.[29] A buyer who could not
have failed to know or discover that the land sold to him was in the adverse possession
of another is a buyer in bad faith.[30] In the herein case, respondents were in open
possession and occupancy of the properties when Durano & Co. supposedly purchased
the same from Cepoc. Petitioners made no attempt to investigate the nature of
respondents possession before they ordered demolition in August 1970.
In the same manner, the purchase of the property by petitioner Ramon Durano III
from Durano & Co. could not be said to have been in good faith. It is not disputed that
Durano III acquired the property with full knowledge of respondents occupancy
thereon. There even appears to be undue haste in the conveyance of the property to
Durano III, as the bulldozing operations by Durano & Co. were still underway when the
deed of sale to Durano III was executed on September 15, 1970. There is not even an
indication that Durano & Co. attempted to transfer registration of the property in its name
before it conveyed the same to Durano III.
In the light of these circumstances, petitioners could not justifiably invoke the defense
of indefeasibility of title to defeat respondents claim of ownership by prescription. The rule
on indefeasibility of title, i.e., that Torrens titles can be attacked for fraud only within one
year from the date of issuance of the decree of registration, does not altogether deprive
an aggrieved party of a remedy at law. As clarified by the Court in Javier vs. Court of
Appeals[31] ---
 The decree (of registration) becomes incontrovertible and can no longer be
reviewed after one (1) year from the date of the decree so that the only remedy of
the landowner whose property has been wrongfully or erroneously registered in
anothers name is to bring an ordinary action in court for reconveyance, which is
an action in personam and is always available as long as the property has not
passed to an innocent third party for value. If the property has passed into the
hands of an innocent purchaser for value, the remedy is an action for damages.

In the instant case, respondents action for reconveyance will prosper, it being clear
that the property, wrongfully registered in the name of petitioner Durano III, has not
passed to an innocent purchaser for value.
Since petitioners knew fully well the defect in their titles, they were correctly held by
the Court of Appeals to be builders in bad faith.
The Civil Code provides:

Art. 449. He who builds, plants or sows in bad faith on the land of another, loses
what is built, planted or sown without right of indemnity.

Art. 450. The owner of the land on which anything has been built, planted or sown
in bad faith may demand the demolition of the work, or that the planting or
sowing be removed, in order to replace things in their former condition at the
expense of the person who built, planted or sowed; or he may compel the builder
or planter to pay the price of the land, and the sower the proper rent.

Art. 451. In the cases of the two preceding articles, the landowner is entitled to
damages from the builder, planter or sower.

Based on these provisions, the owner of the land has three alternative rights: (1) to
appropriate what has been built without any obligation to pay indemnity therefor, or (2) to
demand that the builder remove what he had built, or (3) to compel the builder to pay the
value of the land.[32] In any case, the landowner is entitled to damages under Article 451,
abovecited.
We sustain the return of the properties to respondents and the payment of indemnity
as being in accord with the reliefs under the Civil Code.
On petitioners fifth assignment of error that respondents had not proved the existence
of improvements on the property by preponderance of evidence, and that the damages
awarded by the lower courts were excessive and not actually proved, the Court notes that
the issue is essentially factual. Petitioners, however, invoke Article 2199 of the Civil Code
which requires actual damages to be duly proved. Passing upon this matter, the Court of
Appeals cited with approval the decision of the RTC which stated:
The counter claimants made a detail of the improvements that were damaged. Then
the query, how accurate were the listings, supposedly representing damaged
improvements. The Court notes, some of the counter claimants improvements in the
tax declarations did not tally with the listings as mentioned in their individual
affidavits. Also, others did not submit tax declarations supporting identity of the
properties they possessed. The disparity with respect to the former and absence of tax
declarations with respect to the latter, should not be a justification for defeating right
of reimbursement. As a matter of fact, no controverting evidence was presented by the
plaintiffs that the improvements being mentioned individually in the affidavits did not
reflect the actual improvements that were overran by the bulldozing operation. Aside
from that, the City Assessor, or any member of his staff, were not presented as
witnesses. Had they been presented by the plaintiffs, the least that can be expected is
that they would have enlightened the Court the extent of their individual holdings
being developed in terms of existing improvements. This, the plaintiffs defaulted. It
might be true that there were tax declarations, then presented as supporting documents
by the counter claimants, but then mentioning improvements but in variance with the
listings in the individual affidavits. This disparity similarly cannot be accepted as a
basis for the setting aside of the listing of improvements being adverted to by the
counter claimants in their affidavits. This Court is not foreclosing the possibility that
the tax declarations on record were either table computations by the Assessor or his
deputy, or tax declarations whose entries were merely copied from the old tax
declarations during the period of revision. (RTC Decision, p. 36, Records, p. 862)[33]

The right of the owner of the land to recover damages from a builder in bad faith is
clearly provided for in Article 451 of the Civil Code. Although said Article 451 does not
elaborate on the basis for damages, the Court perceives that it should reasonably
correspond with the value of the properties lost or destroyed as a result of the occupation
in bad faith, as well as the fruits (natural, industrial or civil) from those properties that the
owner of the land reasonably expected to obtain. We sustain the view of the lower courts
that the disparity between respondents affidavits and their tax declarations on the amount
of damages claimed should not preclude or defeat respondents right to damages, which
is guaranteed by Article 451.Moreover, under Article 2224 of the Civil Code:
Temperate or moderate damages, which are more than nominal but less than
compensatory damages, may be recovered when the court finds that some pecuniary
loss has been suffered but its amount cannot, from the nature of the case, be proved with
certainty.
We also uphold the award of litigation expenses and attorneys fees, it being clear that
petitioners acts compelled respondents to litigate and incur expenses to regain rightful
possession and ownership over the disputed property.[34]
The last issue presented for our resolution is whether petitioners could justifiably
invoke the doctrine of separate corporate personality to evade liability for damages. The
Court of Appeals applied the well-recognized principle of piercing the corporate veil, i.e.,
the law will regard the act of the corporation as the act of its individual stockholders when
it is shown that the corporation was used merely as an alter ego by those persons in the
commission of fraud or other illegal acts.
The test in determining the applicability of the doctrine of piercing the veil of corporate
fiction is as follows:
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 acts in contravention of plaintiffs 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 defendants
relationship to that operation.[35]

The question of whether a corporation is a mere alter ego is purely one of fact.[36] The
Court sees no reason to reverse the finding of the Court of Appeals. The facts show that
shortly after the purported sale by Cepco to Durano & Co., the latter sold the property to
petitioner Ramon Durano III, who immediately procured the registration of the property in
his name.Obviously, Durano & Co. was used by petitioners merely as an instrumentality
to appropriate the disputed property for themselves.
WHEREFORE, the instant petition is DENIED. The decision of the Court of Appeals
is MODIFIED to declare respondents with claims to the properties covered by Transfer
Certificate of Title Nos. T-103 and T-104 owners by acquisitive prescription to the extent
of their respective claims. In all other respects, the decision of the Court of Appeals is
AFFIRMED. Costs against petitioners.
SO ORDERED.
Melo, (Chairman), Vitug, and Panganiban, JJ., concur.
Purisima, J., no part.

[1]
With the exception of Rufino Lavador, Jose de la Calzada and Cosme Ramos, who respondents in their
Answer before the trial court declared were only witnesses for respondents, and not claimants to the
disputed property.RTC Decision, 3; Records of the Case.
[2] CA Decision; Rollo, 48-49.
[3] RTC Decision, 2; Records of the Case.
[4] CA Decision; Rollo, 49-55.
[5] Ibid., 55.
[6] Ibid., 50-54.
[7] CA Decision; Rollo, 56-58.
[8] Ibid.; Rollo, 58.
[9] RTC Decision: Rollo, 114.
[10] Ibid., 111.
[11]
Submission of Copies of Some Missing Exhibits of Plaintiffs dated June 29, 1988 (Records of the Case,
774-775) cited in CA Decision; Rollo, 60.
[12] CA Decision; Rollo, 60.
[13]
Ibid.; Rollo, 67. Written by Associate Justice B. A. Adefuin-de la Cruz, with Acting Presiding Justice Fidel
P. Purisima and Associate Justice Ricardo P. Galvez concurring.
[14] 137 SCRA 797.
[15] 208 SCRA 887.
[16] Philippine Commercial and Industrial Bank vs. Court of Appeals, 159 SCRA 24.
[17] CA Decision; Rollo, 64-65.
[18] Civil Code, Art. 1117.
[19] Id., Art. 1134.
[20] Id., Art. 526.
[21] Id., Art. 1129.
[22] Id., Art. 1138.
[23] RTC Decision; Rollo, 80.
[24] See note 12.
[25]
Mallilin vs. Castillo, G.R. No. 136803, June 16, 2000; Eduarte vs. Court of Appeals, 311 SCRA 18; P.D.
1529, Sec. 48.
[26] Rules of Court, Rule 131, Sec. 3(e).
[27] P.D. 1529, Sec. 112.
[28] Gallardo vs. Intermediate Appellate Court, 155 SCRA 248.
[29]
Republic vs. de Guzman, G.R. No. 105630, February 23, 2000; Embrado vs. Court of Appeals, 233
SCRA 355.
[30] St. Peter Memorial Park, Inc. vs. Cleofas, 92 SCRA 389.
[31]
231 SCRA 498; reiterated in Heirs of Pedro Lopez vs. de Castro, G.R. No. 112905, February 3, 2000;
Millena vs. Court of Appeals, G.R. No. 127797, January 31, 2000.
[32] De Vera vs. Court of Appeals, 305 SCRA 624.
[33] CA Decision; Rollo, 65-66.
[34] Civil Code, Art. 2208.
[35]
Lim vs. Court of Appeals, G.R. No. 124715, January 24, 2000; Concept Builders, Inc. vs. NLRC, 257
SCRA 149.
[36] Concept Builders, Inc. vs. NLRC, supra.

SECOND DIVISION

GLORIA V. GOMEZ, G.R. No. 174044

Petitioner,
Present:
Carpio, J., Chairperson,
- versus - Leonardo-De Castro,
Brion,
Del Castillo, and
Abad, JJ.
PNOC DEVELOPMENT AND
MANAGEMENT CORPORATION
(PDMC) (formerly known as
FILOIL DEVELOPMENT AND
MANAGEMENT CORPORATION Promulgated:
[FDMC]),
Respondent. November 27, 2009

x ---------------------------------------------------------------------------------------- x

DECISION

ABAD, J.:
This case is about what distinguishes a regular company manager performing
important executive tasks from a corporate officer whose election and functions
are governed by the companys by-laws.

The Facts and the Case

Petitioner Gloria V. Gomez used to work as Manager of the Legal Department of

Petron Corporation, then a government-owned corporation. With Petrons
privatization, she availed of the companys early retirement program and left that
organization on April 30, 1994. On the following day, May 1, 1994, however, Filoil
Refinery Corporation (Filoil), also a government-owned corporation, appointed her
its corporate secretary and legal counsel,[1] with the same managerial rank,
compensation, and benefits that she used to enjoy at Petron.

But Filoil was later on also identified for privatization. To facilitate its
conversion, the Filoil board of directors created a five-member task force headed
by petitioner Gomez who had been designated administrator.[2] While
documenting Filoils assets, she found several properties which were not in the
books of the corporation. Consequently, she advised the board to suspend the
privatization until all assets have been accounted for.

With the privatization temporarily shelved, Filoil underwent reorganization

and was renamed Filoil Development Management Corporation (FDMC), which
later became the respondent PNOC Development Management Corporation
(PDMC). When this happened, Gomezs task force was abolished and its members,
including Gomez, were given termination notices on March 5, 1996.[3] The matter
was then reported to the Department of Labor and Employment on March 7,
1996.[4]
 Meantime, petitioner Gomez continued to serve as corporate secretary of
respondent PDMC. On September 23, 1996 its president re-hired her as
administrator and legal counsel of the company.[5] In accordance with company
guidelines, it credited her the years she served with the Filoil task force. On May
24, 1998, the next president of PDMC extended her term as administrator beyond
her retirement age,[6] pursuant to his authority under the PDMC Approvals
Manual.[7] She was supposed to serve beyond retirement from August 11, 1998 to
August 11, 2004. Meantime, a new board of directors for PDMC took over the
company.

On March 29, 1999 the new board of directors of respondent PDMC removed
petitioner Gomez as corporate secretary. Further, at the boards meeting on
October 21, 1999 the board questioned her continued employment as
administrator. In answer, she presented the former presidents May 24, 1998 letter
that extended her term. Dissatisfied with this, the board sought the advice of its
legal department, which expressed the view that Gomezs term extension was
an ultra vires act of the former president. It reasoned that, since her position was
functionally that of a vice-president or general manager, her term could be
extended under the companys by-laws only with the approval of the board. The
legal department held that her de facto tenure could be legally put to an end.[8]

Sought for comment, the Office of the Government Corporate Counsel

(OGCC) held the view that while respondent PDMCs board did not approve the
creation of the position of administrator that Gomez held, such action should be
deemed ratified since the board had been aware of it since 1994. But the OGCC
ventured that the extension of her term beyond retirement age should have been
made with the boards approval.[9]

Petitioner Gomez for her part conceded that as corporate secretary, she
served only as a corporate officer. But, when they named her administrator, she
became a regular managerial employee. Consequently, the respondent PDMCs
board did not have to approve either her appointment as such or the extension of
her term in 1998.
 Pending resolution of the issue, the respondent PDMCs board withheld
petitioner Gomezs wages from November 16 to 30, 1999, prompting her to file a
complaint for non-payment of wages, damages, and attorneys fees with the Labor
Arbiter on December 8, 1999.[10] She later amended her complaint to include other
money claims.[11]

In a special meeting held on December 29, 1999 the respondent PDMCs

board resolved to terminate petitioner Gomezs services retroactive on August 11,
1998, her retirement date.[12] On January 5, 2000 the board informed petitioner of
its decision.[13] Thus, she further amended her complaint to include illegal
dismissal.[14]

Respondent PDMC moved to have petitioner Gomezs complaint dismissed

on ground of lack of jurisdiction. The Labor Arbiter granted the motion[15] upon a
finding that Gomez was a corporate officer and that her case involved an intra-
corporate dispute that fell under the jurisdiction of the Securities and Exchange
Commission (SEC) pursuant to Presidential Decree (P.D.) 902-A.[16] On motion for
reconsideration, the National Labor Relations Commission (NLRC) Third Division set
aside the Labor Arbiters order and remanded the case to the arbitration branch for
further proceedings.[17] The Third Division held that Gomez was a regular
employee, not a corporate officer; hence, her complaint came under the
jurisdiction of the Labor Arbiter.

Upon elevation of the matter to the Court of Appeals (CA) in CA-G.R. SP

88819, however, the latter rendered a decision on May 19, 2006,[18] reversing the
NLRC decision. The CA held that since Gomezs appointment as administrator
required the approval of the board of directors, she was clearly a corporate
officer. Thus, her complaint is within the jurisdiction of the Regional Trial Court
(RTC) under P.D. 902-A, as amended by Republic Act (R.A.) 8799.[19] With the denial
of her motion for reconsideration,[20]Gomez filed this petition for review
on certiorari under Rule 45.
 The Issue Presented

The key issue in this case is whether or not petitioner Gomez was, in her capacity
as administrator of respondent PDMC, an ordinary employee whose complaint for
illegal dismissal and non-payment of wages and benefits is within the jurisdiction
of the NLRC.

The Courts Ruling

Ordinary company employees are generally employed not by action of the directors
and stockholders but by that of the managing officer of the corporation who also
determines the compensation to be paid such employees.[21] Corporate officers, on
the other hand, are elected or appointed[22] by the directors or stockholders, and
are those who are given that character either by the Corporation Code or by the
corporations by-laws.[23]

Here, it was the PDMC president who appointed petitioner Gomez

administrator, not its board of directors or the stockholders. The president alone
also determined her compensation package. Moreover, the administrator was not
among the corporate officers mentioned in the PDMC by-laws. The corporate
officers proper were the chairman, president, executive vice-president, vice-
president, general manager, treasurer, and secretary.[24]

Respondent PDMC claims, however, that since its board had under its by-
laws the power to create additional corporate offices, it may be deemed to have
simply ratified its presidents creation of the corporate position of
administrator.[25] But creating an additional corporate office was definitely not
respondent PDMCs intent based on its several actions concerning the position of
administrator.
 Respondent PDMC never told Gomez that she was a corporate officer until
the tail-end of her service after the board found legal justification for getting rid of
her by consulting its legal department and the OGCC which supplied an answer that
the board obviously wanted. Indeed, the PDMC president first hired her as
administrator in May 1994 and then as administrator/legal counsel in September
1996 without a board approval. The president even extended her term in May 1998
also without such approval. The companys mindset from the beginning, therefore,
was that she was not a corporate officer.

Respondent PDMC of course claims that as administrator petitioner Gomez

performed functions that were similar to those of its vice-president or its general
manager, corporate positions that were mentioned in the companys by-laws. It
points out that Gomez was third in the line of command, next only to the
chairman and president,[26] and had been empowered to make major decisions
and manage the affairs of the company.

But the relationship of a person to a corporation, whether as officer or agent

or employee, is not determined by the nature of the services he performs but by
the incidents of his relationship with the corporation as they actually exist.[27] Here,
respondent PDMC hired petitioner Gomez as an ordinary employee without board
approval as was proper for a corporate officer. When the company got her the first
time, it agreed to have her retain the managerial rank that she held with
Petron. Her appointment paper said that she would be entitled to all the rights,
privileges, and benefits that regular PDMC employees enjoyed.[28] This is in sharp
contrast to what the former PDMC presidents appointment paper stated: he was
elected to the position and his compensation depended on the will of the board of
directors.[29]

What is more, respondent PDMC enrolled petitioner Gomez with the Social
Security System, the Medicare, and the Pag-Ibig Fund. It even issued certifications
dated October 10, 2008,[30] stating that Gomez was a permanent employee and
that the company had remitted combined contributions during her tenure. The
company also made her a member of the PDMCs savings and provident plan[31] and
its retirement plan.[32] It grouped her with the managers covered by the companys
group hospitalization insurance.[33] Likewise, she underwent regular employee
performance appraisals,[34] purchased stocks through the employee stock option
plan,[35] and was entitled to vacation and emergency leaves.[36] PDMC even
withheld taxes on her salary and declared her as an employee in the official Bureau
of Internal Revenue forms.[37] These are all indicia of an employer-employee
relationship which respondent PDMC failed to refute.

Estoppel, an equitable principle rooted on natural justice, prevents a person

from rejecting his previous acts and representations to the prejudice of others who
have relied on them.[38] This principle of law applies to corporations as well. The
PDMC in this case is estopped from claiming that despite all the appearances of
regular employment that it weaved around petitioner Gomezs position it must
have technically hired her only as a corporate officer. The board and its officers
made her stay on and work with the company for years under the belief that she
held a regular managerial position.

That petitioner Gomez served concurrently as corporate secretary for a time

is immaterial. A corporation is not prohibited from hiring a corporate officer to
perform services under circumstances which will make him an
employee.[39] Indeed, it is possible for one to have a dual role of officer and
employee. In Elleccion Vda. De Lecciones v. National Labor Relations
Commission,[40] the Court upheld NLRC jurisdiction over a complaint filed by one
who served both as corporate secretary and administrator, finding that the money
claims were made as an employee and not as a corporate officer.

WHEREFORE, the Court GRANTS the petition, REVERSES and SETS ASIDE the
decision dated May 19, 2006 and the resolution dated August 15, 2006 of the Court
of Appeals in CA-G.R. SP 88819, and REINSTATES the resolution dated November
22, 2002 of the National Labor Relations Commissions Third Division in NLRC NCR
30-12-00856-99. Let the records of this case be REMANDED to the arbitration
branch of origin for the conduct of further proceedings.

SO ORDERED.

ROBERTO A. ABAD
Associate Justice

WE CONCUR:

ANTONIO T. CARPIO
Associate Justice

TERESITA J. LEONARDO-DE CASTRO ARTURO D. BRION

Associate Justice Associate Justice
 MARIANO C. DEL CASTILLO
Associate Justice

ATTESTATION

I attest that the conclusions in the above decision were reached in consultation
before the case was assigned to the writer of the opinion of the Courts Division.

ANTONIO T. CARPIO
Associate Justice
Chairperson, Second Division
 CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution and the Division Chairpersons
Attestation, it is hereby certified that the conclusions in the above Decision were
reached in consultation before the case was assigned to the writer of the opinion
of the Courts Division.

REYNATO S. PUNO
Chief Justice

[1]
Rollo, p. 206.
[2]
Id. at 346-347.
[3]
Id. at 221.
[4]
Id. at 222.
[5]
Id. at 223.
[6]
Id. at 224.
[7]
Id. at 225. Authority Item 17 (f), Subject 1, Section 4 of the Approvals Manual states that the president is authorized
to waive company policy on extension of services of employees beyond normal retirement age.
[8]
Id. at 515-517.
[9]
Id. at 685-690.
[10]
Id. at 226. Docketed as NLRC NCR (SOUTH) 30-12-00856-99.
[11]
Id. at 227.
[12]
Id. at 526-527.
[13]
Id. at 523-525.
[14]
Id. at 331.
[15]
Id. at 332-342. Penned by Labor Arbiter Jose G. De Vera.
[16]
P.D. 902-A states that the following cases fall under the exclusive jurisdiction of the SEC:
xxxx
c) Controversies in the election or appointment of directors, trustees, officers, or managers of such corporations,
partnerships or associations;
xxxx
[17]
Rollo, pp. 112-119. Penned by Commissioner Ireneo B. Bernardo and concurred in by Presiding Commissioner
Lourdes C. Javier and Commissioner Tito F. Genilo.
[18]
Id. at 70-75. Penned by Associate Justice Arcangelita M. Romilla-Lontok and concurred in by Associate Justices
Marina L. Buzon and Aurora Santiago-Lagman.
[19]
Section 5.2 of R.A. 8799 (the Securities Regulation Code, July 19, 2000) provides:
The Commissions jurisdiction over all cases enumerated under Section 5 of Presidential Decree No. 902-A
is hereby transferred to the Courts of general jurisdiction or the appropriate Regional Trial Court: Provided, That the
Supreme Court in the exercise of its authority may designate the Regional Trial Court branches that shall exercise
jurisdiction over the cases x x x.
[20]
Rollo, p. 111.
[21]
Easycall Communications Phils., Inc. v. King, G.R. No. 145901, December 15, 2005, 478 SCRA 102, 110.
[22]
See Nacpil v. International Broadcasting Corporation, 429 Phil. 410, 418 (2002).
[23]
Supra note 21, at 109.
[24]
Rollo, p. 418.
[25]
Id. at 419. Under Article VI, Section 1(b) of the by-laws, the board may appoint such other officers as it deems
necessary.
[26]
CA rollo, p. 224.
[27]
Supra note 22, at 418-419.
[28]
Rollo, p. 223.
[29]
Id. at 395.
[30]
Id. at 800-804.
[31]
Id. at 663-666.
[32]
Id. at 652.
[33]
Id. at 661-662.
[34]
Id. at 650-651.
[35]
Id. at 671-672.
[36]
Id. at 669-670.
[37]
Id. at 658-660.
[38]
Philippine National Bank v. Palma, G.R. No. 157279, August 9, 2005, 466 SCRA 307, 324.
[39]
Rural Bank of Coron (Palawan), Inc. v. Cortes, G.R. No. 164888, December 6, 2006, 510 SCRA 443, 450;
citing Mainland Construction Co., Inc. v. Movilla, G.R. No. 118088, November 23, 1995, 250 SCRA 290, 296.
[40]
G.R. No. 184735, September 17, 2009.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-23893 October 29, 1968

VILLA REY TRANSIT, INC., plaintiff-appellant,

vs.
EUSEBIO E. FERRER, PANGASINAN TRANSPORTATION CO., INC. and PUBLIC SERVICE
COMMISSION,defendants.
EUSEBIO E. FERRER and PANGASINAN TRANSPORTATION CO., INC., defendants-appellants.

PANGASINAN TRANSPORTATION CO., INC., third-party plaintiff-appellant,

vs.
JOSE M. VILLARAMA, third-party defendant-appellee.

Chuidian Law Office for plaintiff-appellant.

Bengzon, Zarraga & Villegas for defendant-appellant / third-party plaintiff-appellant.
Laurea & Pison for third-party defendant-appellee.
ANGELES, J.:

This is a tri-party appeal from the decision of the Court of First Instance of Manila, Civil Case No.
41845, declaring null and void the sheriff's sale of two certificates of public convenience in favor of
defendant Eusebio E. Ferrer and the subsequent sale thereof by the latter to defendant Pangasinan
Transportation Co., Inc.; declaring the plaintiff Villa Rey Transit, Inc., to be the lawful owner of the
said certificates of public convenience; and ordering the private defendants, jointly and severally, to
pay to the plaintiff, the sum of P5,000.00 as and for attorney's fees. The case against the PSC was
dismissed.

The rather ramified circumstances of the instant case can best be understood by a chronological
narration of the essential facts, to wit:

Prior to 1959, Jose M. Villarama was an operator of a bus transportation, under the business name
of Villa Rey Transit, pursuant to certificates of public convenience granted him by the Public Service
Commission (PSC, for short) in Cases Nos. 44213 and 104651, which authorized him to operate a
total of thirty-two (32) units on various routes or lines from Pangasinan to Manila, and vice-versa. On
January 8, 1959, he sold the aforementioned two certificates of public convenience to the
Pangasinan Transportation Company, Inc. (otherwise known as Pantranco), for P350,000.00 with
the condition, among others, that the seller (Villarama) "shall not for a period of 10 years from the
date of this sale, apply for any TPU service identical or competing with the buyer."

Barely three months thereafter, or on March 6, 1959: a corporation called Villa Rey Transit, Inc.
(which shall be referred to hereafter as the Corporation) was organized with a capital stock of
P500,000.00 divided into 5,000 shares of the par value of P100.00 each; P200,000.00 was the
subscribed stock; Natividad R. Villarama (wife of Jose M. Villarama) was one of the incorporators,
and she subscribed for P1,000.00; the balance of P199,000.00 was subscribed by the brother and
sister-in-law of Jose M. Villarama; of the subscribed capital stock, P105,000.00 was paid to the
treasurer of the corporation, who was Natividad R. Villarama.

In less than a month after its registration with the Securities and Exchange Commission (March 10,
1959), the Corporation, on April 7, 1959, bought five certificates of public convenience, forty-nine
buses, tools and equipment from one Valentin Fernando, for the sum of P249,000.00, of which
P100,000.00 was paid upon the signing of the contract; P50,000.00 was payable upon the final
approval of the sale by the PSC; P49,500.00 one year after the final approval of the sale; and the
balance of P50,000.00 "shall be paid by the BUYER to the different suppliers of the SELLER."

The very same day that the aforementioned contract of sale was executed, the parties thereto
immediately applied with the PSC for its approval, with a prayer for the issuance of a provisional
authority in favor of the vendee Corporation to operate the service therein involved.1 On May 19,
1959, the PSC granted the provisional permit prayed for, upon the condition that "it may be modified
or revoked by the Commission at any time, shall be subject to whatever action that may be taken on
the basic application and shall be valid only during the pendency of said application." Before the
PSC could take final action on said application for approval of sale, however, the Sheriff of Manila,
on July 7, 1959, levied on two of the five certificates of public convenience involved therein, namely,
those issued under PSC cases Nos. 59494 and 63780, pursuant to a writ of execution issued by the
Court of First Instance of Pangasinan in Civil Case No. 13798, in favor of Eusebio Ferrer, plaintiff,
judgment creditor, against Valentin Fernando, defendant, judgment debtor. The Sheriff made and
entered the levy in the records of the PSC. On July 16, 1959, a public sale was conducted by the
Sheriff of the said two certificates of public convenience. Ferrer was the highest bidder, and a
certificate of sale was issued in his name.
Thereafter, Ferrer sold the two certificates of public convenience to Pantranco, and jointly submitted
for approval their corresponding contract of sale to the PSC.2 Pantranco therein prayed that it be
authorized provisionally to operate the service involved in the said two certificates.

The applications for approval of sale, filed before the PSC, by Fernando and the Corporation, Case
No. 124057, and that of Ferrer and Pantranco, Case No. 126278, were scheduled for a joint hearing.
In the meantime, to wit, on July 22, 1959, the PSC issued an order disposing that during the
pendency of the cases and before a final resolution on the aforesaid applications, the Pantranco
shall be the one to operate provisionally the service under the twocertificates embraced in the
contract between Ferrer and Pantranco. The Corporation took issue with this particular ruling of the
PSC and elevated the matter to the Supreme Court,3 which decreed, after deliberation, that until the
issue on the ownership of the disputed certificates shall have been finally settled by the proper court,
the Corporation should be the one to operate the lines provisionally.

On November 4, 1959, the Corporation filed in the Court of First Instance of Manila, a complaint for
the annulment of the sheriff's sale of the aforesaid two certificates of public convenience (PSC
Cases Nos. 59494 and 63780) in favor of the defendant Ferrer, and the subsequent sale thereof by
the latter to Pantranco, against Ferrer, Pantranco and the PSC. The plaintiff Corporation prayed
therein that all the orders of the PSC relative to the parties' dispute over the said certificates be
annulled.

In separate answers, the defendants Ferrer and Pantranco averred that the plaintiff Corporation had
no valid title to the certificates in question because the contract pursuant to which it acquired them
from Fernando was subject to a suspensive condition — the approval of the PSC — which has not
yet been fulfilled, and, therefore, the Sheriff's levy and the consequent sale at public auction of the
certificates referred to, as well as the sale of the same by Ferrer to Pantranco, were valid and
regular, and vested unto Pantranco, a superior right thereto.

Pantranco, on its part, filed a third-party complaint against Jose M. Villarama, alleging that Villarama
and the Corporation, are one and the same; that Villarama and/or the Corporation was disqualified
from operating the two certificates in question by virtue of the aforementioned agreement between
said Villarama and Pantranco, which stipulated that Villarama "shall not for a period of 10 years from
the date of this sale, apply for any TPU service identical or competing with the buyer."

Upon the joinder of the issues in both the complaint and third-party complaint, the case was tried,
and thereafter decision was rendered in the terms, as above stated.

As stated at the beginning, all the parties involved have appealed from the decision. They submitted
a joint record on appeal.

Pantranco disputes the correctness of the decision insofar as it holds that Villa Rey Transit, Inc.
(Corporation) is a distinct and separate entity from Jose M. Villarama; that the restriction clause in
the contract of January 8, 1959 between Pantranco and Villarama is null and void; that the Sheriff's
sale of July 16, 1959, is likewise null and void; and the failure to award damages in its favor and
against Villarama.

Ferrer, for his part, challenges the decision insofar as it holds that the sheriff's sale is null and void;
and the sale of the two certificates in question by Valentin Fernando to the Corporation, is valid. He
also assails the award of P5,000.00 as attorney's fees in favor of the Corporation, and the failure to
award moral damages to him as prayed for in his counterclaim.
The Corporation, on the other hand, prays for a review of that portion of the decision awarding only
P5,000.00 as attorney's fees, and insisting that it is entitled to an award of P100,000.00 by way of
exemplary damages.

After a careful study of the facts obtaining in the case, the vital issues to be resolved are: (1) Does
the stipulation between Villarama and Pantranco, as contained in the deed of sale, that the former
"SHALL NOT FOR A PERIOD OF 10 YEARS FROM THE DATE OF THIS SALE, APPLY FOR ANY
TPU SERVICE IDENTICAL OR COMPETING WITH THE BUYER," apply to new lines only or does it
include existing lines?; (2) Assuming that said stipulation covers all kinds of lines, is such stipulation
valid and enforceable?; (3) In the affirmative, that said stipulation is valid, did it bind the Corporation?

For convenience, We propose to discuss the foregoing issues by starting with the last proposition.

The evidence has disclosed that Villarama, albeit was not an incorporator or stockholder of the
Corporation, alleging that he did not become such, because he did not have sufficient funds to
invest, his wife, however, was an incorporator with the least subscribed number of shares, and was
elected treasurer of the Corporation. The finances of the Corporation which, under all concepts in
the law, are supposed to be under the control and administration of the treasurer keeping them as
trust fund for the Corporation, were, nonetheless, manipulated and disbursed as if they were the
private funds of Villarama, in such a way and extent that Villarama appeared to be the actual owner-
treasurer of the business without regard to the rights of the stockholders. The following testimony of
Villarama,4together with the other evidence on record, attests to that effect:

Q. Doctor, I want to go back again to the incorporation of the Villa Rey Transit, Inc. You
heard the testimony presented here by the bank regarding the initial opening deposit of ONE
HUNDRED FIVE THOUSAND PESOS, of which amount Eighty-Five Thousand Pesos was a
check drawn by yourself personally. In the direct examination you told the Court that the
reason you drew a check for Eighty-Five Thousand Pesos was because you and your wife,
or your wife, had spent the money of the stockholders given to her for incorporation. Will you
please tell the Honorable Court if you knew at the time your wife was spending the money to
pay debts, you personally knew she was spending the money of the incorporators?

A. You know my money and my wife's money are one. We never talk about those things.

Q. Doctor, your answer then is that since your money and your wife's money are one
money and you did not know when your wife was paying debts with the incorporator's
money?

A. Because sometimes she uses my money, and sometimes the money given to her she
gives to me and I deposit the money.

Q. Actually, aside from your wife, you were also the custodian of some of the
incorporators here, in the beginning?

A. Not necessarily, they give to my wife and when my wife hands to me I did not know it
belonged to the incorporators.

Q. It supposes then your wife gives you some of the money received by her in her
capacity as treasurer of the corporation?

A. Maybe.
 Q. What did you do with the money, deposit in a regular account?

A. Deposit in my account.

Q. Of all the money given to your wife, she did not receive any check?

A. I do not remember.

Q. Is it usual for you, Doctor, to be given Fifty Thousand Pesos without even asking what
is this?

xxx xxx xxx

JUDGE: Reform the question.

Q. The subscription of your brother-in-law, Mr. Reyes, is Fifty-Two Thousand Pesos, did
your wife give you Fifty-two Thousand Pesos?

A. I have testified before that sometimes my wife gives me money and I do not know
exactly for what.

The evidence further shows that the initial cash capitalization of the corporation of P105,000.00 was
mostly financed by Villarama. Of the P105,000.00 deposited in the First National City Bank of New
York, representing the initial paid-up capital of the Corporation, P85,000.00 was covered by
Villarama's personal check. The deposit slip for the said amount of P105,000.00 was admitted in
evidence as Exh. 23, which shows on its face that P20,000.00 was paid in cash and P85,000.00
thereof was covered by Check No. F-50271 of the First National City Bank of New York. The
testimonies of Alfonso Sancho5 and Joaquin Amansec,6 both employees of said bank, have proved
that the drawer of the check was Jose Villarama himself.

Another witness, Celso Rivera, accountant of the Corporation, testified that while in the books of the
corporation there appears an entry that the treasurer received P95,000.00 as second installment of
the paid-in subscriptions, and, subsequently, also P100,000.00 as the first installment of the offer for
second subscriptions worth P200,000.00 from the original subscribers, yet Villarama directed him
(Rivera) to make vouchers liquidating the sums.7 Thus, it was made to appear that the P95,000.00
was delivered to Villarama in payment for equipment purchased from him, and the P100,000.00 was
loaned as advances to the stockholders. The said accountant, however, testified that he was not
aware of any amount of money that had actually passed hands among the parties involved,8 and
actually the only money of the corporation was the P105,000.00 covered by the deposit slip Exh. 23,
of which as mentioned above, P85,000.00 was paid by Villarama's personal check.

Further, the evidence shows that when the Corporation was in its initial months of operation,
Villarama purchased and paid with his personal checks Ford trucks for the Corporation. Exhibits 20
and 21 disclose that the said purchases were paid by Philippine Bank of Commerce Checks Nos.
992618-B and 993621-B, respectively. These checks have been sufficiently established by Fausto
Abad, Assistant Accountant of Manila Trading & Supply Co., from which the trucks were
purchased9 and Aristedes Solano, an employee of the Philippine Bank of Commerce,10as having
been drawn by Villarama.

Exhibits 6 to 19 and Exh. 22, which are photostatic copies of ledger entries and vouchers showing
that Villarama had co-mingled his personal funds and transactions with those made in the name of
the Corporation, are very illuminating evidence. Villarama has assailed the admissibility of these
exhibits, contending that no evidentiary value whatsoever should be given to them since "they were
merely photostatic copies of the originals, the best evidence being the originals themselves."
According to him, at the time Pantranco offered the said exhibits, it was the most likely possessor of
the originals thereof because they were stolen from the files of the Corporation and only Pantranco
was able to produce the alleged photostat copies thereof.

Section 5 of Rule 130 of the Rules of Court provides for the requisites for the admissibility of
secondary evidence when the original is in the custody of the adverse party, thus: (1) opponent's
possession of the original; (2) reasonable notice to opponent to produce the original; (3) satisfactory
proof of its existence; and (4) failure or refusal of opponent to produce the original in
court.11 Villarama has practically admitted the second and fourth requisites.12As to the third, he
admitted their previous existence in the files of the Corporation and also that he had seen some of
them.13 Regarding the first element, Villarama's theory is that since even at the time of the issuance
of the subpoena duces tecum, the originals were already missing, therefore, the Corporation was no
longer in possession of the same. However, it is not necessary for a party seeking to introduce
secondary evidence to show that the original is in the actual possession of his adversary. It is
enough that the circumstances are such as to indicate that the writing is in his possession or under
his control. Neither is it required that the party entitled to the custody of the instrument should, on
being notified to produce it, admit having it in his possession.14 Hence, secondary evidence is
admissible where he denies having it in his possession. The party calling for such evidence may
introduce a copy thereof as in the case of loss. For, among the exceptions to the best evidence rule
is "when the original has been lost, destroyed, or cannot be produced in court."15 The originals of the
vouchers in question must be deemed to have been lost, as even the Corporation admits such loss.
Viewed upon this light, there can be no doubt as to the admissibility in evidence of Exhibits 6 to 19
and 22.

Taking account of the foregoing evidence, together with Celso Rivera's testimony,16 it would appear
that: Villarama supplied the organization expenses and the assets of the Corporation, such as trucks
and equipment;17 there was no actual payment by the original subscribers of the amounts of
P95,000.00 and P100,000.00 as appearing in the books;18 Villarama made use of the money of the
Corporation and deposited them to his private accounts;19 and the Corporation paid his personal
accounts.20

Villarama himself admitted that he mingled the corporate funds with his own money.21 He also
admitted that gasoline purchases of the Corporation were made in his name22 because "he had
existing account with Stanvac which was properly secured and he wanted the Corporation to benefit
from the rebates that he received."23

The foregoing circumstances are strong persuasive evidence showing that Villarama has been too
much involved in the affairs of the Corporation to altogether negative the claim that he was only a
part-time general manager. They show beyond doubt that the Corporation is his alter ego.

It is significant that not a single one of the acts enumerated above as proof of Villarama's oneness
with the Corporation has been denied by him. On the contrary, he has admitted them with offered
excuses.

Villarama has admitted, for instance, having paid P85,000.00 of the initial capital of the Corporation
with the lame excuse that "his wife had requested him to reimburse the amount entrusted to her by
the incorporators and which she had used to pay the obligations of Dr. Villarama (her husband)
incurred while he was still the owner of Villa Rey Transit, a single proprietorship." But with his
admission that he had received P350,000.00 from Pantranco for the sale of the two certificates and
one unit,24 it becomes difficult to accept Villarama's explanation that he and his wife, after
consultation,25 spent the money of their relatives (the stockholders) when they were supposed to
have their own money. Even if Pantranco paid the P350,000.00 in check to him, as claimed, it could
have been easy for Villarama to have deposited said check in his account and issued his own check
to pay his obligations. And there is no evidence adduced that the said amount of P350,000.00 was
all spent or was insufficient to settle his prior obligations in his business, and in the light of the
stipulation in the deed of sale between Villarama and Pantranco that P50,000.00 of the selling price
was earmarked for the payments of accounts due to his creditors, the excuse appears unbelievable.

On his having paid for purchases by the Corporation of trucks from the Manila Trading & Supply Co.
with his personal checks, his reason was that he was only sharing with the Corporation his credit
with some companies. And his main reason for mingling his funds with that of the Corporation and
for the latter's paying his private bills is that it would be more convenient that he kept the money to
be used in paying the registration fees on time, and since he had loaned money to the Corporation,
this would be set off by the latter's paying his bills. Villarama admitted, however, that the corporate
funds in his possession were not only for registration fees but for other important obligations which
were not specified.26

Indeed, while Villarama was not the Treasurer of the Corporation but was, allegedly, only a part-time
manager,27 he admitted not only having held the corporate money but that he advanced and lent
funds for the Corporation, and yet there was no Board Resolution allowing it.28

Villarama's explanation on the matter of his involvement with the corporate affairs of the Corporation
only renders more credible Pantranco's claim that his control over the corporation, especially in the
management and disposition of its funds, was so extensive and intimate that it is impossible to
segregate and identify which money belonged to whom. The interference of Villarama in the complex
affairs of the corporation, and particularly its finances, are much too inconsistent with the ends and
purposes of the Corporation law, which, precisely, seeks to separate personal responsibilities from
corporate undertakings. It is the very essence of incorporation that the acts and conduct of the
corporation be carried out in its own corporate name because it has its own personality.

The doctrine that a corporation is a legal entity distinct and separate from the members and
stockholders who compose it is recognized and respected in all cases which are within reason and
the law.29 When the fiction is urged as a means of perpetrating a fraud or an illegal act or as a
vehicle for the evasion of an existing obligation, the circumvention of statutes, the achievement or
perfection of a monopoly or generally the perpetration of knavery or crime,30 the veil with which the
law covers and isolates the corporation from the members or stockholders who compose it will be
lifted to allow for its consideration merely as an aggregation of individuals.

Upon the foregoing considerations, We are of the opinion, and so hold, that the preponderance of
evidence have shown that the Villa Rey Transit, Inc. is an alter ego of Jose M. Villarama, and that
the restrictive clause in the contract entered into by the latter and Pantranco is also enforceable and
binding against the said Corporation. For the rule is that a seller or promisor may not make use of a
corporate entity as a means of evading the obligation of his covenant.31 Where the Corporation is
substantially the alter ego of the covenantor to the restrictive agreement, it can be enjoined from
competing with the covenantee.32

The Corporation contends that even on the supposition that Villa Rey Transit, Inc. and Villarama are
one and the same, the restrictive clause in the contract between Villarama and Pantranco does not
include the purchase of existing lines but it only applies to application for the new lines. The clause
in dispute reads thus:
 (4) The SELLER shall not, for a period of ten (10) years from the date of this sale apply for
any TPU service identical or competing with the BUYER. (Emphasis supplied)

As We read the disputed clause, it is evident from the context thereof that the intention of the parties
was to eliminate the seller as a competitor of the buyer for ten years along the lines of operation
covered by the certificates of public convenience subject of their transaction. The word "apply" as
broadly used has for frame of reference, a service by the seller on lines or routes that would
compete with the buyer along the routes acquired by the latter. In this jurisdiction, prior authorization
is needed before anyone can operate a TPU service,33whether the service consists in a new line or
an old one acquired from a previous operator. The clear intention of the parties was to prevent the
seller from conducting any competitive line for 10 years since, anyway, he has bound himself not to
apply for authorization to operate along such lines for the duration of such period.34

If the prohibition is to be applied only to the acquisition of new certificates of public convenience thru
an application with the Public Service Commission, this would, in effect, allow the seller just the
same to compete with the buyer as long as his authority to operate is only acquired thru transfer or
sale from a previous operator, thus defeating the intention of the parties. For what would prevent the
seller, under the circumstances, from having a representative or dummy apply in the latter's name
and then later on transferring the same by sale to the seller? Since stipulations in a contract is the
law between the contracting parties,

Every person must, in the exercise of his rights and in the performance of his duties, act with
justice, give everyone his due, and observe honesty and good faith. (Art. 19, New Civil
Code.)

We are not impressed of Villarama's contention that the re-wording of the two previous drafts of the
contract of sale between Villarama and Pantranco is significant in that as it now appears, the parties
intended to effect the least restriction. We are persuaded, after an examination of the supposed
drafts, that the scope of the final stipulation, while not as long and prolix as those in the drafts, is just
as broad and comprehensive. At most, it can be said that the re-wording was done merely for brevity
and simplicity.

The evident intention behind the restriction was to eliminate the sellers as a competitor, and this
must be, considering such factors as the good will35 that the seller had already gained from the riding
public and his adeptness and proficiency in the trade. On this matter, Corbin, an authority on
Contracts has this to say.36

When one buys the business of another as a going concern, he usually wishes to keep it
going; he wishes to get the location, the building, the stock in trade, and the customers. He
wishes to step into the seller's shoes and to enjoy the same business relations with other
men. He is willing to pay much more if he can get the "good will" of the business, meaning by
this the good will of the customers, that they may continue to tread the old footpath to his
door and maintain with him the business relations enjoyed by the seller.

... In order to be well assured of this, he obtains and pays for the seller's promise not to
reopen business in competition with the business sold.

As to whether or not such a stipulation in restraint of trade is valid, our jurisprudence on the
matter37says:

The law concerning contracts which tend to restrain business or trade has gone through a
long series of changes from time to time with the changing condition of trade and commerce.
 With trifling exceptions, said changes have been a continuous development of a general rule.
The early cases show plainly a disposition to avoid and annul all contract which prohibited or
restrained any one from using a lawful trade "at any time or at any place," as being against
the benefit of the state. Later, however, the rule became well established that if the restraint
was limited to "a certain time" and within "a certain place," such contracts were valid and not
"against the benefit of the state." Later cases, and we think the rule is now well established,
have held that a contract in restraint of trade is valid providing there is a limitation upon either
time or place. A contract, however, which restrains a man from entering into business or
trade without either a limitation as to time or place, will be held invalid.

The public welfare of course must always be considered and if it be not involved and the
restraint upon one party is not greater than protection to the other requires, contracts like the
one we are discussing will be sustained. The general tendency, we believe, of modern
authority, is to make the test whether the restraint is reasonably necessary for the protection
of the contracting parties. If the contract is reasonably necessary to protect the interest of the
parties, it will be upheld. (Emphasis supplied.)

Analyzing the characteristics of the questioned stipulation, We find that although it is in the nature of
an agreement suppressing competition, it is, however, merely ancillary or incidental to the main
agreement which is that of sale. The suppression or restraint is only partial or limited: first, in scope,
it refers only to application for TPU by the seller in competition with the lines sold to the buyer;
second, in duration, it is only for ten (10) years; and third, with respect to situs or territory, the
restraint is only along the lines covered by the certificates sold. In view of these limitations, coupled
with the consideration of P350,000.00 for just two certificates of public convenience, and
considering, furthermore, that the disputed stipulation is only incidental to a main agreement, the
same is reasonable and it is not harmful nor obnoxious to public service.38 It does not appear that the
ultimate result of the clause or stipulation would be to leave solely to Pantranco the right to operate
along the lines in question, thereby establishing monopoly or predominance approximating thereto.
We believe the main purpose of the restraint was to protect for a limited time the business of the
buyer.

Indeed, the evils of monopoly are farfetched here. There can be no danger of price controls or
deterioration of the service because of the close supervision of the Public Service
Commission.39 This Court had stated long ago,40that "when one devotes his property to a use in
which the public has an interest, he virtually grants to the public an interest in that use and submits it
to such public use under reasonable rules and regulations to be fixed by the Public Utility
Commission."

Regarding that aspect of the clause that it is merely ancillary or incidental to a lawful agreement, the
underlying reason sustaining its validity is well explained in 36 Am. Jur. 537-539, to wit:

... Numerous authorities hold that a covenant which is incidental to the sale and transfer of a
trade or business, and which purports to bind the seller not to engage in the same business
in competition with the purchaser, is lawful and enforceable. While such covenants are
designed to prevent competition on the part of the seller, it is ordinarily neither their purpose
nor effect to stifle competition generally in the locality, nor to prevent it at all in a way or to an
extent injurious to the public. The business in the hands of the purchaser is carried on just as
it was in the hands of the seller; the former merely takes the place of the latter; the
commodities of the trade are as open to the public as they were before; the same
competition exists as existed before; there is the same employment furnished to others after
as before; the profits of the business go as they did before to swell the sum of public wealth;
 the public has the same opportunities of purchasing, if it is a mercantile business; and
production is not lessened if it is a manufacturing plant.

The reliance by the lower court on tile case of Red Line Transportation Co. v. Bachrach41 and finding
that the stipulation is illegal and void seems misplaced. In the said Red Line case, the agreement
therein sought to be enforced was virtually a division of territory between two operators, each
company imposing upon itself an obligation not to operate in any territory covered by the routes of
the other. Restraints of this type, among common carriers have always been covered by the general
rule invalidating agreements in restraint of trade. 42

Neither are the other cases relied upon by the plaintiff-appellee applicable to the instant case.
In Pampanga Bus Co., Inc. v. Enriquez,43the undertaking of the applicant therein not to apply for the
lifting of restrictions imposed on his certificates of public convenience was not an ancillary or
incidental agreement. The restraint was the principal objective. On the other hand, in Red Line
Transportation Co., Inc. v. Gonzaga,44 the restraint there in question not to ask for extension of the
line, or trips, or increase of equipment — was not an agreement between the parties but a condition
imposed in the certificate of public convenience itself.

Upon the foregoing considerations, Our conclusion is that the stipulation prohibiting Villarama for a
period of 10 years to "apply" for TPU service along the lines covered by the certificates of public
convenience sold by him to Pantranco is valid and reasonable. Having arrived at this conclusion,
and considering that the preponderance of the evidence have shown that Villa Rey Transit, Inc. is
itself the alter ego of Villarama, We hold, as prayed for in Pantranco's third party complaint, that the
said Corporation should, until the expiration of the 1-year period abovementioned, be enjoined from
operating the line subject of the prohibition.

To avoid any misunderstanding, it is here to be emphasized that the 10-year prohibition upon
Villarama is not against his application for, or purchase of, certificates of public convenience, but
merely the operation of TPU along the lines covered by the certificates sold by him to Pantranco.
Consequently, the sale between Fernando and the Corporation is valid, such that the rightful
ownership of the disputed certificates still belongs to the plaintiff being the prior purchaser in good
faith and for value thereof. In view of the ancient rule of caveat emptor prevailing in this jurisdiction,
what was acquired by Ferrer in the sheriff's sale was only the right which Fernando, judgment
debtor, had in the certificates of public convenience on the day of the sale.45

Accordingly, by the "Notice of Levy Upon Personalty" the Commissioner of Public Service was
notified that "by virtue of an Order of Execution issued by the Court of First Instance of Pangasinan,
the rights, interests, or participation which the defendant, VALENTIN A. FERNANDO — in the above
entitled case may have in the following realty/personalty is attached or levied upon, to wit: The
rights, interests and participation on the Certificates of Public Convenience issued to Valentin A.
Fernando, in Cases Nos. 59494, etc. ... Lines — Manila to Lingayen, Dagupan, etc. vice versa."
Such notice of levy only shows that Ferrer, the vendee at auction of said certificates, merely stepped
into the shoes of the judgment debtor. Of the same principle is the provision of Article 1544 of the
Civil Code, that "If the same thing should have been sold to different vendees, the ownership shall
be transferred to the person who may have first taken possession thereof in good faith, if it should be
movable property."

There is no merit in Pantranco and Ferrer's theory that the sale of the certificates of public
convenience in question, between the Corporation and Fernando, was not consummated, it being
only a conditional sale subject to the suspensive condition of its approval by the Public Service
Commission. While section 20(g) of the Public Service Act provides that "subject to established
limitation and exceptions and saving provisions to the contrary, it shall be unlawful for any public
service or for the owner, lessee or operator thereof, without the approval and authorization of the
Commission previously had ... to sell, alienate, mortgage, encumber or lease its property, franchise,
certificates, privileges, or rights or any part thereof, ...," the same section also provides:

... Provided, however, That nothing herein contained shall be construed to prevent the
transaction from being negotiated or completed before its approval or to prevent the sale,
alienation, or lease by any public service of any of its property in the ordinary course of its
business.

It is clear, therefore, that the requisite approval of the PSC is not a condition precedent for the
validity and consummation of the sale.

Anent the question of damages allegedly suffered by the parties, each of the appellants has its or his
own version to allege.

Villa Rey Transit, Inc. claims that by virtue of the "tortious acts" of defendants (Pantranco and Ferrer)
in acquiring the certificates of public convenience in question, despite constructive and actual
knowledge on their part of a prior sale executed by Fernando in favor of the said corporation, which
necessitated the latter to file the action to annul the sheriff's sale to Ferrer and the subsequent
transfer to Pantranco, it is entitled to collect actual and compensatory damages, and attorney's fees
in the amount of P25,000.00. The evidence on record, however, does not clearly show that said
defendants acted in bad faith in their acquisition of the certificates in question. They believed that
because the bill of sale has yet to be approved by the Public Service Commission, the transaction
was not a consummated sale, and, therefore, the title to or ownership of the certificates was still with
the seller. The award by the lower court of attorney's fees of P5,000.00 in favor of Villa Rey Transit,
Inc. is, therefore, without basis and should be set aside.

Eusebio Ferrer's charge that by reason of the filing of the action to annul the sheriff's sale, he had
suffered and should be awarded moral, exemplary damages and attorney's fees, cannot be
entertained, in view of the conclusion herein reached that the sale by Fernando to the Corporation
was valid.

Pantranco, on the other hand, justifies its claim for damages with the allegation that when it
purchased ViIlarama's business for P350,000.00, it intended to build up the traffic along the lines
covered by the certificates but it was rot afforded an opportunity to do so since barely three months
had elapsed when the contract was violated by Villarama operating along the same lines in the
name of Villa Rey Transit, Inc. It is further claimed by Pantranco that the underhanded manner in
which Villarama violated the contract is pertinent in establishing punitive or moral damages. Its
contention as to the proper measure of damages is that it should be the purchase price of
P350,000.00 that it paid to Villarama. While We are fully in accord with Pantranco's claim of
entitlement to damages it suffered as a result of Villarama's breach of his contract with it, the record
does not sufficiently supply the necessary evidentiary materials upon which to base the award and
there is need for further proceedings in the lower court to ascertain the proper amount.

PREMISES CONSIDERED, the judgment appealed from is hereby modified as follows:

1. The sale of the two certificates of public convenience in question by Valentin Fernando to Villa
Rey Transit, Inc. is declared preferred over that made by the Sheriff at public auction of the aforesaid
certificate of public convenience in favor of Eusebio Ferrer;

2. Reversed, insofar as it dismisses the third-party complaint filed by Pangasinan Transportation Co.
against Jose M. Villarama, holding that Villa Rey Transit, Inc. is an entity distinct and separate from
the personality of Jose M. Villarama, and insofar as it awards the sum of P5,000.00 as attorney's
fees in favor of Villa Rey Transit, Inc.;

3. The case is remanded to the trial court for the reception of evidence in consonance with the above
findings as regards the amount of damages suffered by Pantranco; and

4. On equitable considerations, without costs. So ordered.

Concepcion, C. J., Reyes, J.B.L., Dizon, Makalintal, Castro and Fernando, JJ., concur.
Sanchez and Capistrano, JJ., took no part.
Zaldivar, J., is on leave.

Footnotes

1 Application for approval of sale docketed as PSC Case No. 124057.

2 PSC Case No. 126278.

3 G.R. Nos. L-17684-85, promulgated May 30, 1962.

4 TSN, pp. 1649-1651, Session of April 8, 1963.

5 TSN, pp. 1210, 1217-1218, Session of Oct. 8, 1962.

6 TSN, p. 1262, Session of Nov. 8, 1962.

7TSN, pp. 947-948, Session of Sept. 3, 1962; TSN, pp. 1022, 1025, 1027-1029, Session of
Sept. 7, 1962.

8 TSN, pp. 948-949.

9 TSN, pp. 899, 901, Session of Aug. 27, 1962.

10 TSN, pp. 1227-1228, Session of Oct. 8, 1962.

11 Francisco, Evidence, 1964, ed. p. 113.

12 Plaintiff-appellee's Brief, pp. 45-46.

13 TSN, pp. 1568-1569, Session of April 8, 1963.

14 See the Revised Rules of Court — Evidence by Francisco, 1964 ed., pp. 113-114.

15 Sec. 2(a), Rule 130, Rules of Court.

16It was Celso Rivera who prepared these documents as admitted by Villarama, TSN, pp.
1580-1581, Session of April 8, 1963.
17 Exh. 6.

18 Exhs. 8 to 8-C.

19 Exhs. 7 to 7-C.

20 Exhs. 10 to 19, 22; TSN, pp. 1709-1710, Session of April 16, 1963.

21 TSN, p. 1625, Session of April 8, 1963.

22 TSN, p. 1646, Session of April 8, 1963.

23 Brief for Plaintiff-appellee, p. 49.

24 TSN, pp. 1593, 1658, Session of April 8, 1963.

25 TSN, pp. 1660-1661, ditto

26 TSN, pp. 1699-1718, Session of April 16, 1963.

27 TSN, p. 1714, Session of April 16, 1963.

28 TSN, pp. 1627-1628, Session of April 8, 1963.

29 Borja v. Vasquez, 74 Phil. 56.

30Koppel Phil. v. Yatco, 77 Phil. 496; Lidell & Co. v. Collector, G.R. No. L-9687, June 30,
1961; Commissioner v. Norton & Harrison Company, G.R. No. L-17618, Aug. 31, 1964;
Guevarra, Phil. Corp. Law, 1961 ed., p. 7.

31 36 Am. Jur. 548; 18 Am. Jur. 2nd 563-564.

32 94 A. L. R. 346, 348.

33 Secs. 15 and 18, Com. Act 146.

34 The 10-year period will expire on January, 1969. Hence, it is practically over.

35Recent cases have enlarged the concept of good will over the behavioristic resort of old
customers to the old place of business. It is now recognized that "It may include in addition to
those factors all that goes with a business in excess of its mere capital and physical value,
such as reputation for promptness, fidelity, integrity, politeness, business sagacity and
commercial skill in the conduct of its affairs, solicitude for the welfare of customers and other
tangible elements which contribute to successful commercial venture." (Footnotes to p. 4592,
Williston on Contracts, Vol. 5, citing cases.)

36 Corbin on Contracts, Vol. 6, Sec. 1385, p. 483.

37Del Castillo v. Richmon, 45 Phil. 683, citing Anchor Electric Co. v. Hawkes, 171 Mass. 101;
Alger v. Tacher, 19 Pickering (Mass.) 51; Taylor v. Blanchard, 13 Allen (Mass.) 370; Lurkin
 Rule Co. v. Fringeli, 57 Ohio State 596; Fowle v. Park, 131 U. S. 88, 97; Diamond Match Co.
v. Reeber, 106 N. Y. 473; National Benefit Co. v. Union Hospital Co., 45 Minn. 272; Swigert
& Howard v. Tilden, 121 Iowa, 650. See also Ollendorf v. Abrahamson, 38 Phil. 585.

38Clearly, the greater part of said consideration was to compensate Villarama for not
competing with Pantranco for at least 10 years, within which period the latter would put up 31
other units (certificates contained authorization for 32 units), train drivers thereof and incur
such other expenses, so as to put the service along the lines acquired in good, operating and
competing condition.

39 See Secs. 16-C, 19 and 20-A, Com. Act 146.

40 National Coal Co. v. Public Utility Commission, 47 Phil. 356, 360.

41 67 Phil. 577.

42 See Negros Ice & Cold Storage Co., Inc v. PSC, 90 Phil. 138. See also 58 C. J. S. 1051.

43 66 Phil. 645.

44 G.R. No. L-10834, April 28, 1960.

45 See secs. 25 & 26, Rule 39, Rules of Court.

THIRD DIVISION

UNLAD RESOURCES DEVELOPMENT G.R. No. 149338

CORPORATION, UNLAD RURAL BANK OF
NOVELETA, INC., UNLAD COMMODITIES,
INC., HELENA Z. BENITEZ, and CONRADO L.
BENITEZ II,
Petitioners,
Present:

- versus -
YNARES-SANTIAGO, J.,
Chairperson,
RENATO P. DRAGON, TARCISIUS R.
RODRIGUEZ, VICENTE D. CASAS, ROMULO AUSTRIA-MARTINEZ,
M. VIRATA, FLAVIANO PERDITO, TEOTIMO
CHICO-NAZARIO,
 BENITEZ, ELENA BENITEZ, and ROLANDO NACHURA, and
SUAREZ,
REYES, JJ.
Respondents.

Promulgated:

July 28, 2008

x------------------------------------------------------------------------------------x

DECISION

NACHURA, J.:

Before this Court is a Petition for Review on Certiorari under Rule 45 of the
Rules of Civil Procedure seeking the reversal of the November 29, 2000
Decision[1] and August 2, 2001 Resolution[2] of the Court of Appeals (CA) in CA-G.R.
CV No. 54226.

The facts, as found by the CA, are as follows:

 On December 29, 1981, the Plaintiffs (herein respondents) and defendant (herein
petitioner) Unlad Resources, through its Chairman[,] Helena Z. Benitez[,] entered into a
Memorandum of Agreement wherein it is provided that [respondents], as controlling
stockholders of the Rural Bank [of Noveleta] shall allow Unlad Resources to invest four
million eight hundred thousand pesos (P4,800,000.00) in the Rural Bank in the form of
additional equity. On the other hand, [petitioner] Unlad Resources bound itself to invest
the said amount of 4.8 million pesos in the Rural Bank; upon signing, it was, likewise,
agreed that [petitioner] Unlad Resources shall subscribe to a minimum of four hundred
eighty thousand pesos (P480,000.00) (sic) common or preferred non-voting shares of
stock with a total par value of four million eight hundred thousand pesos (P4,800,000.00)
and pay up immediately one million two hundred thousand pesos (P1,200,000.00) for said
subscription; that the [respondents], upon the signing of the said agreement shall transfer
control and management over the Rural Bank to Unlad Resources. According to the
[respondents], immediately after the signing of the agreement, they complied with their
obligation and transferred control of the Rural Bank to Unlad Resources and its nominees
and the Bank was renamed the Unlad Rural Bank of Noveleta, Inc. However,
[respondents] claim that despite repeated demands, Unlad Resources has failed and
refused to comply with their obligation under the said Memorandum of Agreement when
it did not invest four million eight hundred thousand pesos (P4,800,000.00) in the Rural
Bank in the form of additional equity and, likewise, it failed to immediately infuse one
million two hundred thousand pesos (P1,200,000.00) as paid in capital upon signing of
the Memorandum of Agreement.

On August 10, 1984, the Board of Directors of [petitioner] Unlad Resources

passed Resolution No. 84-041 authorizing the President and the General Manager to lease
a mango plantation situated in Naic, Cavite. Pursuant to this Resolution, the Bank as
[lessee] entered into a Contract of Lease with the [petitioner] Helena Z. Benitez as [lessor].
The management of the mango plantation was undertaken by Unlad Commodities, Inc.,
a subsidiary of Unlad Resources[,] under a Management Contract Agreement. The
Management Contract provides that Unlad Commodities, Inc. would receive eighty
percent (80%) of the net profits generated by the operation of the mango plantation while
the Banks share is twenty percent (20%). It was further agreed that at the end of the lease
period, the Rural Bank shall turn over to the lessor all permanent improvements
introduced by it on the plantation.

xxxx

On May 20, 1987, [petitioner] Unlad Rural Bank wrote [respondents] regarding
[the] Central Banks approval to retire its [Development Bank of the Philippines] preferred
shares in the amount of P219,000.00 and giving notice for subscription to proportionate
shares. The [respondents] objected on the grounds that there is already a sinking fund for
 the retirement of the said DBP-held preferred shares provided for annually and that it
could deprive the Rural Bank of a cheap source of fund. (sic)

[Respondents] alleged compliance with all of their obligations under the

Memorandum of Agreement in that they have transferred control and management over
the Rural bank to the [petitioners] and are ready, willing and able to allow [petitioners]
to subscribe to a minimum of four hundred eighty thousand (P480,000.00) (sic) common
or preferred non-voting shares of stocks with a total par value of four million eight
hundred thousand pesos (P4,800,000.00) in the Rural Bank. However, [petitioners] have
failed and refused to subscribe to the said shares of stock and to pay the initial amount
of one million two hundred thousand pesos (P1,200,000.00) for said subscription.[3]

On July 3, 1987, herein respondents filed before the Regional Trial Court
(RTC) of Makati City, Branch 61 a Complaint[4] for rescission of the agreement and
the return of control and management of the Rural Bank from petitioners to
respondents, plus damages. After trial, the RTC rendered a Decision,[5] the
dispositive portion of which provides:

WHEREFORE, Premises Considered, judgment is hereby rendered, as follows:

1. The Memorandum of Agreement dated 29 December 1991 (sic) is hereby

declared rescinded and:

(a) Defendant Unlad Resources Development Corporation is hereby

ordered to immediately return control and management over the Rural
Bank of Noveleta, Inc. to Plaintiffs; and

(b) Unlad Rural Bank of Noveleta, Inc. is hereby ordered to return to

Defendants the sum of One Million Three Thousand Seventy Pesos
(P1,003,070.00)

2. The Director for Rural Banks of the Bangko Sentral ng Pilipinas is hereby
appointed as Receiver of the Rural Bank;
 3. Unlad Rural Bank of Noveleta, Inc. is hereby enjoined from placing the
retired DBP-held preferred shares available for subscription and the same is hereby
ordered to be placed under a sinking fund;

4. Defendant Unlad Resources Development Corporation is hereby ordered

to pay plaintiffs the following:

(a) actual compensatory damages amounting to Four Million Six

Hundred One Thousand Seven Hundred Sixty- Five and 38/100 Pesos
(P4,601,765.38);

(b) moral damages in the amount of Five Hundred Thousand Pesos

(P500,000.00);

(c) exemplary and corrective damages in the amount of One

Hundred Thousand Pesos (P100,000.00); and

(d) attorneys fees in the sum of (P100,000.00), plus cost of suit.

SO ORDERED.[6]

Herein petitioners appealed the ruling to the CA. Respondents filed a Motion
to Dismiss and, subsequently, a Supplemental Motion to Dismiss, which were both
denied. Later, however, the CA, in a Decision dated November 29, 2000, dismissed
the appeal for lack of merit and affirmed the RTC Decision in all
respects. Petitioners motion for reconsideration was denied in CA Resolution
dated August 2, 2001.

Petitioners are now before this Court alleging that the CA committed a grave
and serious reversible error in issuing the assailed Decision. Petitioners question
the jurisdiction of the trial court, something they have done from the beginning of
the controversy, contending that the issues that respondents raised before the trial
court are intra-corporate in nature and are, therefore, beyond the jurisdiction of
the trial court. They point out that respondents complaint charged them with
mismanagement and alleged dissipation of the assets of the Rural Bank. Since the
complaint challenges corporate actions and decisions of the Board of Directors and
prays for the recovery of the control and management of the Rural Bank, these
matters fall outside the jurisdiction of the trial court. Thus, they posit that the
judgment of the trial court, as affirmed by the CA, is null and void and may be
impugned at any time.

Petitioners further argue that the action instituted by respondents had

already prescribed, because Article 1389 of the Civil Code provides that an action
for rescission must be commenced within four years. They claim that the trial court
and the CA mistakenly applied Article 1144 of the Civil Code which treats of
prescription of actions in general. They submit that Article 1389, which deals
specifically with actions for rescission, is the applicable law.

Moreover, petitioners assert that they have fully complied with their
undertaking under the subject Memorandum of Agreement, but that the
undertaking has become a legal and factual impossibility because the authorized
capital stock of the Rural Bank was increased from P1.7 million to only P5 million,
and could not accommodate the subscription by petitioners of P4.8 million worth
of shares. Such deficiency, petitioners contend, is with the knowledge and approval
of respondent Renato P. Dragon and his nominees to the Board of Directors.

Petitioners, without conceding the propriety of the judgment of rescission,

also argue that the subject Memorandum of Agreement could not just be ordered
rescinded without the corresponding order for the restitution of the parties total
contributions and/or investments in the Rural Bank. Finally, they assail the award
for moral and exemplary damages, as well as the award for attorneys fees, as bereft
of factual and legal bases given that, in the body of the Decision, it was merely
stated that respondents suffered moral damages without any discussion or
explanation of, nor any justification for such award. Likewise, the matter of
attorneys fees was not at all discussed in the body of the Decision. Petitioners claim
that pursuant to the prevailing rule, attorneys fees cannot be recovered in the
absence of stipulation.

On the other hand, respondents declare that immediately after the signing
of the Memorandum of Agreement, they complied with their obligation and
transferred control of the Rural Bank to petitioner Unlad Resources and its
nominees, but that, despite repeated demands, petitioners have failed and refused
to comply with their concomitant obligations under the Agreement.

Respondents narrate that shortly after taking over the Rural Bank,
petitioners Conrado L. Benitez II and Jorge C. Cerbo, as President and General
Manager, respectively, entered into a Contract of Lease over the Naic, Cavite
mango plantation, and that, as a consequence of this venture, the bank incurred
expenses amounting to P475,371.57, equivalent to 25.76% of its capital and
surplus. The respondents further assert that the Central Bank found this
undertaking not inherently connected with bona fide rural banking operations, nor
does it fall within the allied undertakings permitted under Section 26 of Central
Bank Circular No. 741 and Section 3379 of the Manual of Regulations of the Central
Bank. Thus, respondents contend that this circumstance, coupled with the fact that
petitioners Helena Z. Benitez and Conrado L. Benitez II were also stockholders and
members of the Board of Directors of Unlad Resources, Unlad Rural Bank, and
Unlad Commodities at that time, is adequate proof that the Rural Banks
management had every intention of diverting, dissipating, and/or wasting the
banks assets for petitioners own gain.

They likewise allege that because of the failure of petitioners to comply with
their obligations under the Memorandum of Agreement, respondents, with the
exception of Tarcisius Rodriguez, lodged a complaint with the Securities and
Exchange Commission (SEC), seeking rescission of the Agreement, damages, and
the appointment of a management committee, but the SEC dismissed the
complaint for lack of jurisdiction.
 Furthermore, when the Rural Bank informed respondents of the Central
Banks approval of its plan to retire its DBP-held preferred shares, giving notices for
subscription to proportionate shares, respondents objected on the ground that
there was already a sinking fund for the retirement of said shares provided for
annually, and that the retirement would deprive the petitioner Rural Bank of a
cheap source of fund. It was at that point, respondents claim, that they instituted
the aforementioned Complaint against petitioners before the RTC of Makati.

The respondents also seek the outright dismissal of this Petition for lack of
verification as to petitioners Helena Z. Benitez and Conrado L. Benitez II; lack of
proper verification as to petitioners Unlad Resources Development Corporation,
Unlad Rural Bank of Noveleta, Inc., and Unlad Commodities, Inc.; lack of proper
verified statement of material dates; and lack of proper sworn certification of non-
forum shopping.

They support the proposition that Tijam v. Sibonghanoy[7] applies, and that
petitioners are indeed estopped from questioning the jurisdiction of the trial
court. They also share the lower courts view that it is Article 1144 of the Civil Code,
and not Article 1389, that is applicable to this case. Finally, respondents allege that
the failure of petitioner Unlad Resources to comply with its undertaking under the
Agreement, as uniformly found by the trial court and the CA, may no longer be
assailed in the instant Petition, and that the award of moral and exemplary
damages and attorneys fees is justified.

The Petition is bereft of merit. We uphold the Decision of the CA affirming

that of the RTC.

First, the subject of jurisdiction. The main issue in this case is the rescission
of the Memorandum of Agreement. This is to be distinguished from respondents
allegation of the alleged mismanagement and dissipation of corporate assets by
the petitioners which is based on the prayer for receivership over the bank. The
two issues, albeit related, are obviously separate, as they pertain to different acts
of the parties involved. The issue of receivership does not arise from the parties
obligations under the Memorandum of Agreement, but rather from specific acts
attributed to petitioners as members of the Board of Directors of the Bank. Clearly,
the rescission of the Memorandum of Agreement is a cause of action within the
jurisdiction of the trial courts, notwithstanding the fact that the parties involved
are all directors of the same corporation.

Still, the petitioners insist that the trial court had no jurisdiction over the
complaint because the issues involved are intra-corporate in nature.

This argument miserably fails to persuade. The law in force at the time of the
filing of the case was Presidential Decree (P.D.) 902-A, Section 5(b) of which vested
the Securities and Exchange Commission with original and exclusive jurisdiction to
hear and decide cases involving controversies arising out of intra-corporate
relations.[8]Interpreting this statutorily conferred jurisdiction on the SEC, this Court
had occasion to state:

Nowhere in said decree do we find even so much as an [intimation] that absolute

jurisdiction and control is vested in the Securities and Exchange Commission in all matters
affecting corporations. To uphold the respondents arguments would remove without
legal imprimatur from the regular courts all conflicts over matters involving or affecting
corporations, regardless of the nature of the transactions which give rise to such disputes.
The courts would then be divested of jurisdiction not by reason of the nature of the
dispute submitted to them for adjudication, but solely for the reason that the dispute
involves a corporation. This cannot be done.[9]

It is well to remember that the respondents had actually filed with the SEC a
case against the petitioners which, however, was dismissed for lack of jurisdiction
due to the pendency of the case before the RTC.[10] The SECs Order dismissing the
respondents complaint is instructive:
 From the foregoing allegations, it is apparent that the present action involves two
separate causes of action which are interrelated, and the resolution of which hinges on
the very document sought to be rescinded. The assertion that the defendants failed to
comply with their contractual undertaking and the claim for rescission of the contract by
the plaintiffs has, in effect, put in issue the very status of the herein defendants as
stockholders of the Rural Bank. The issue as to whether or not the defendants are
stockholders of the Rural Bank is a pivotal issue to be determined on the basis of the
Memorandum of Agreement. It is a prejudicial question and a logical antecedent to confer
jurisdiction to this Commission.

It is to be noted, however, that determination of the contractual undertaking of

the parties under a contract lies with the Regional Trial Courts and not with this
Commission. x x x[11]

Be that as it may, this point has been rendered moot by Republic Act (R.A.)
No. 8799, also known as the Securities Regulation Code. This law, which took effect
in 2000, has transferred jurisdiction over such disputes to the RTC. Specifically, R.A.
8799 provides:

Sec. 5. Powers and Functions of the Commission

xxxx

5.2. The Commissions jurisdiction over all cases enumerated under Section 5 of
Presidential Decree No. 902-A is hereby transferred to the Courts of general jurisdiction
or the appropriate Regional Trial Court: Provided, That the Supreme Court in the exercise
of its authority may designate the Regional Trial Court branches that shall exercise
jurisdiction over these cases. The Commission shall retain jurisdiction over pending cases
involving intra-corporate disputes submitted for final resolution which should be resolved
within one (1) year from the enactment of this Code. The Commission shall retain
jurisdiction over pending suspension of payments/rehabilitation cases filed as of 30 June
2000 until finally disposed.
 Section 5 of P.D. No. 902-A reads, thus:

Sec. 5. In addition to the regulatory and adjudicative functions of the Securities

and Exchange Commission over corporations, partnerships and other forms of
associations registered with it as expressly granted under existing laws and decrees, it
shall have original and exclusive jurisdiction to hear and decide cases involving:

a) Devices and schemes employed by or any acts of the board of directors,

business associates, its officers or partnership, amounting to fraud and misrepresentation
which may be detrimental to the interest of the public and/or of the stockholder,
partners, members of associations or organizations registered with the Commission;

b) Controversies arising out of intra-corporate or partnership relations,

between and among stockholders, members, or associates; between any or all of them
and the corporation, partnership or association of which they are stockholders, members
or associates, respectively; and between such corporation, partnership or association and
the state insofar as it concerns their individual franchise or right to exist as such entity;

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

officers or managers of such corporations, partnerships or associations.

Consequently, whether the cause of action stems from a contractual dispute

or one that involves intra-corporate matters, the RTC already has jurisdiction over
this case. In this light, the question of whether the doctrine of estoppel by laches
applies, as enunciated by this Court in Tijam v. Sibonghanoy, no longer finds
relevance.

Second, the issue of prescription. Petitioners further contend that the action
for rescission has prescribed under Article 1398 of the Civil Code, which provides:

Article 1389. The action to claim rescission must be commenced within four years
x x x.
 This is an erroneous proposition. Article 1389 specifically refers to rescissible
contracts as, clearly, this provision is under the chapter entitled Rescissible
Contracts.

In a previous case,[12] this Court has held that Article 1389:

applies to rescissible contracts, as enumerated and defined in Articles 1380 and 1381. We
must stress however, that the rescission in Article 1381 is not akin to the term rescission
in Article 1191 and Article 1592. In Articles 1191 and 1592, the rescission is a principal
action which seeks the resolution or cancellation of the contract while in Article 1381, the
action is a subsidiary one limited to cases of rescission for lesion as enumerated in said
article.

The prescriptive period applicable to rescission under Articles 1191 and 1592, is
found in Article 1144, which provides that the action upon a written contract should be
brought within ten years from the time the right of action accrues.

Article 1381 sets out what are rescissible contracts, to wit:

Article 1381. The following contracts are rescissible:

(1) Those which are entered into by guardians whenever the wards whom
they represent suffer lesion by more than one-fourth of the value of the
things which are the object thereof;
(2) Those agreed upon in representation of absentees, if the latter suffer the
lesion stated in the preceding number;
(3) Those undertaken in fraud of creditors when the latter cannot in any
other manner collect the claims due them;
 (4) Those which refer to things under litigation if they have been entered
into by the defendant without the knowledge and approval of the litigants
or of competent judicial authority;
(5) All other contracts specially declared by law to be subject to rescission.

The Memorandum of Agreement subject of this controversy does not fall

under the above enumeration. Accordingly, the prescriptive period that should
apply to this case is that provided for in Article 1144, to wit:

Article 1144. The following actions must be brought within ten years from the time the
right of action accrues:

(1) Upon a written contract;

xxxx

Based on the records of this case, the action was commenced on July 3, 1987,
while the Memorandum of Agreement was entered into on December 29,
1981. Article 1144 specifically provides that the 10-year period is counted from the
time the right of action accrues. The right of action accrues from the moment the
breach of right or duty occurs.[13] Thus, the original Complaint was filed well within
the prescriptive period.

We now proceed to determine if the trial court, as affirmed by the CA,

correctly ruled for the rescission of the subject Agreement.

Petitioners contend that they have fully complied with their obligation under
the Memorandum of Agreement. They allege that due to respondents failure to
increase the capital stock of the corporation to an amount that will accommodate
their undertaking, it had become impossible for them to perform their end of the
Agreement.
 Again, petitioners contention is untenable. There is no question that
petitioners herein failed to fulfill their obligation under the Memorandum of
Agreement. Even they admit the same, albeit laying the blame on respondents.

It is true that respondents increased the Rural Banks authorized capital stock
to only P5 million, which was not enough to accommodate the P4.8 million worth
of stocks that petitioners were to subscribe to and pay for. However, respondents
failure to fulfill their undertaking in the agreement would have given rise to the
scenario contemplated by Article 1191 of the Civil Code, which reads:

Article 1191. The power to rescind reciprocal obligations is implied in reciprocal

ones, in case one of the obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation,
with the payment of damages in either case. He may also seek rescission, even after he
has chosen fulfillment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the
fixing of a period.

This is understood to be without prejudice to the rights of third persons who have
acquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage Law.

Thus, petitioners should have exacted fulfillment from the respondents or

asked for the rescission of the contract instead of simply not performing their part
of the Agreement. But in the course of things, it was the respondents who availed
of the remedy under Article 1191, opting for the rescission of the Agreement in
order to regain control of the Rural Bank.
 Having determined that the rescission of the subject Memorandum of
Agreement was in order, the trial court ordered petitioner Unlad Resources to
return to respondents the management and control of the Rural Bank and for the
latter to return the sum of P1,003,070.00 to petitioners.

Mutual restitution is required in cases involving rescission under Article

1191. This means bringing the parties back to their original status prior to the
inception of the contract.[14] Article 1385 of the Civil Code provides, thus:

ART. 1385. Rescission creates the obligation to return the things which were the
object of the contract, together with their fruits, and the price with its interest;
consequently, it can be carried out only when he who demands rescission can return
whatever he may be obligated to restore.

Neither shall rescission take place when the things which are the object of the
contract are legally in the possession of third persons who did not act in bad faith.

In this case, indemnity for damages may be demanded from the person causing
the loss.

This Court has consistently ruled that this provision applies to rescission
under Article 1191:

[S]ince Article 1385 of the Civil Code expressly and clearly states that rescission creates
the obligation to return the things which were the object of the contract, together with
their fruits, and the price with its interest, the Court finds no justification to sustain
petitioners position that said Article 1385 does not apply to rescission under Article
1191.[15]
 Rescission has the effect of unmaking a contract, or its undoing from the
beginning, and not merely its termination.[16] Hence, rescission creates the
obligation to return the object of the contract. It can be carried out only when the
one who demands rescission can return whatever he may be obliged to restore. To
rescind is to declare a contract void at its inception and to put an end to it as though
it never was. It is not merely to terminate it and release the parties from further
obligations to each other, but to abrogate it from the beginning and restore the
parties to their relative positions as if no contract has been made.[17]

Accordingly, when a decree for rescission is handed down, it is the duty of

the court to require both parties to surrender that which they have respectively
received and to place each other as far as practicable in his original situation. The
rescission has the effect of abrogating the contract in all parts.[18]

Clearly, the petitioners failed to fulfill their end of the agreement, and thus,
there was just cause for rescission. With the contract thus rescinded, the parties
must be restored to the status quo ante, that is, before they entered into the
Memorandum of Agreement.

Finally, we must resolve the question of the propriety of the award for
damages and attorneys fees.

The trial courts Decision mentioned that the evidence is clear and convincing
that Plaintiffs (herein respondents) suffered actual compensatory damages
amounting to Four Million Six Hundred One Thousand Seven Hundred Sixty-Five
and 38/100 Pesos (P4,601,765.38) moral damages and attorneys fees.

Though not discussed in the body of the Decision, the records show that the
amount of P4,601,765.38 pertains to actual losses incurred by respondents as a
result of petitioners non-compliance with their undertaking under the
Memorandum of Agreement. On this point, respondent Dragon presented
testimonial and documentary evidence to prove the actual amount of damages,
thus:

Atty. Cruz

Q: Was there any consequence to you Mr. Dragon due to any breach of the agreement
marked as Exhibit A?

A: Yes sir I could have earned thru the shares of stock that I have, or we have or we had
by this time amounting to several millions pesos (sic). They have only put in the
whole amount that we have agreed upon (sic).

Q: In this connection did you cause computation of these losses that you incured (sic)?

A: Yes sir.

xxxx

Q: Will you please kindly go through this computation and explain the same to the
Honorable Court?

A: Number 1 is an Organ (sic) income from the sale of 60% (sic) at only Three Hundred
Ninety Nine Thousand Two hundred for Nineteen Thousand Nine Hundred Sixty
shares which should have been sold if it were sold to others for P50.00 each for a
total of Nine Hundred Ninety Eight Thousand but sold to them for Three Hundred
Ninety nine (sic) Thousand two (sic) Hundred only and of which only Three
Hundred Twenty Four Thousand Six Hundred was paid to me. Therefore, there
was a difference of Six Hundred Seven Three (sic) Thousand Four Hundred
(P673,400.00). On the basis of the commulative (sic) lost income every year from
March 1982 from the amount of Seven Six Hundred (sic) Seventy Three Thousand
four (sic) Hundred (P673,400.) (sic) there would be a discommulative (sic) lost
(sic) of One Million Ninety Three Thousand Nine Hundred Fifty Two Pesos and
forty two (sic) centavos (P1,093,952.42). Please note that the interest imputed is
only at 12% per annum but it should had (sic) been much higher. In 1984 to 1986
(sic) alone rates went as higher (sic) as 40% per annum from the so called (sic)
 Jobo Bills and yet we only computed the imputed income or lost income at 12%
per annum and then there is a 40% participation on the unrealized earnings due
to their failure to put in an stabilized (sic) earnings. You will note that if they put
in 4.8 million Pesos and it would be earning money, 40% of that will go to us
because 40% of the bank would be ours and 60% would be there (sic). But
because they did put in the 4.8 million our 40% did not earn up to that extent and
computed again on the basis of 12% the amount (sic) on the commulative (sic)
basis up to September 1990 is 2 million three hundred fifty two thousand sixty
five pesos and four centavos (sic). (P2,352,065.04). You will note again that the
average return of investment of any Cavite based (sic) Rural Bank has been no
less than 20% or about 30% per annum. And we computed only the earnings at
12%.

xxxx

There were loans granted fraudulently to members of the board and some
borrowers which were not all charged interest for several years and on this basis
we computed a 40% shares (sic) on the foregone income interest income (sic) on
all these fraudulently granted loans, without interest being collected and none a
project (sic) among a plantation project (sic), which was funded by the bank but
nothing was given back to the bank for several hundred thousand of pesos (sic).
And we arrived an (sic) estimate of the foregone interest income a total of One
Million Two Hundred Five Thousand Eight Hundred Sixty None Pesos and eighty
one (sic) centavos and 40 percent share of this (sic) would be Four Hundred Eighty
Two Thousand Three Hundred Forty Seven Pesos and Ninety Two Centavos. All in
all our estimate of the damages we have suffered is Four Million Six Hundred one
(sic) Thousand Seven Hundred Sixty Five Pesos and thirty eight (sic) centavos
(P4,601,765.38).[19]

More importantly, petitioners never raised in issue before the CA this award of
actual compensatory damages. They did not raise the matter of damages in their
Appellants Brief, while in their Motion for Reconsideration, they questioned only
the award of moral and exemplary damages, not the award of actual damages.
Even in the present Petition for Review, what petitioners raised was the propriety
of the award of moral and exemplary damages and attorneys fees.
 On the grant of moral and exemplary damages and attorneys fees, we note
that the trial courts Decision did not discuss the basis for the award. No mention of
these damages awarded or their factual basis is made in the body of the Decision,
only in the dispositive portion. Be that as it may, we have examined the records of
the case and found that the award must be sustained.

It should be remembered that there are two separate causes of action in this
case: one for rescission of the Memorandum of Agreement and the other for
receivership based on alleged mismanagement of the company by the plaintiffs.
While the award of actual compensatory damages was based on the breach of duty
under the Memorandum of Agreement, the award of moral damages appears to
be based on petitioners mismanagement of the company when they became
members of the Board of Directors of the Rural Bank.

Thus, the trial court said:

Under the Rural Banks management, a systematic diversion of the banks assets
was conceived whereby: (a) The Rural Banks funds would be funneled in the development
and improvements of the Benitez Mango Plantation in the guise of an investment in said
plantation; (b) Of the net profits earned from the plantations operations, the Rural Banks
share therein, although it shoulders all of the financial risks, would be a measly twenty
percent (20%) thereof while UCI, without investing a single centavo, would earn eighty
percent (80%) of the said profits. Thus, the bulk of the profits of the mango plantation
was also sought to be diverted to an entity wherein Helena Z. Benitez and Conrado L.
Benitez II are not only principal stockholders but also the Chairman of the Board of
Directors and President, respectively. Moreover, Defendant Helena Z. Benitez would be
entitled to receive, under the lease contract, rentals in the total amount of Three Hundred
Thousand Pesos (P300,000.00) or ten percent (10%) of gross profits, whichever is higher.
(c) Finally, at the end of the lease period, the Rural Bank was obliged to turn over to the
lessor (Helena Z. Benitez) all permanent improvements introduced by it on the plantation
at no cost to Ms. Benitez.
 Further, in its report dated March 13, 1985, the [Central Bank] after conducting
its general examination upon the Rural Bank ordered the latter to explain satisfactorily
why the bank engage (sic) in an undertaking not inherently connected with [bona fide]
rural banking operations nor within the allowed allied undertakings, contrary to the
provisions of Section 3379 of the CB Manual of Regulations and Section 26 of CB Circular
No. 741, otherwise known as the Circular on Rural Banks[.]

The aforestated CB report states that total exposure to this project now amounts
to P475,371.57 or 25.76% of its capital and surplus[.] Notwithstanding a finding by the CB
of the undertakings illegality, the defendants nevertheless persisted in pursuing the
Mango Plantation Project and never acceded to the call of [the] CB for it to desist from
further implementing the said project. It was only after another letter from the CB was
received when defendant finally shelved the mango plantation project.

The result of the aforestated report, as well as the actuations of the Defendants
in not yielding to the order of the CB, adequately establishes not only a violation of CB
Rules (specifically Section 26, Circular 741 and Section 3379 of the CB Manual of
Regulations, but also, that it has caused undue damage both to the Rural bank as well as
its stockholders.

The initial CB report should have sufficiently apprised Defendants of the illegality
of the undertaking. Defendants, therefore have the duty to terminate the Mango
Plantation Project. They, however, [chose] to continue it, apparently to further their
[own] interest in the scheme for their own personal benefit and gain, an act which is
clearly contrary to the fiduciary nature of their relationship with the corporation in which
they are officers. Such persistence proves evident bad faith, or a breach of a known duty
through some motive or ill-will, which resulted in the further dissipation and wastage of
the Rural Banks assets, unjustly depriving Plaintiffs of their fair share in the assets of the
bank.

All the foregoing satisfactorily affirms the allegations of Plaintiffs to the effect
that these contracts were but part of a device employed by Defendants to siphon [off]
the Rural bank for their personal gain.[20]

Moral damages include physical suffering, mental anguish, fright, serious

anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation,
and similar injury. Though incapable of precise pecuniary computation, moral
damages may be recovered if they are the proximate result of the defendants
wrongful act or omission.[21]Article 2220 of the Civil Code further provides that
moral damages may be recovered in case of a breach of contract where the
defendant acted in bad faith.[22]

To award moral damages, a court must be satisfied with proof of the

following requisites: (1) an injury whether physical, mental, or psychological clearly
sustained by the claimant; (2) a culpable act or omission factually established; (3) a
wrongful act or omission of the defendant as the proximate cause of the injury
sustained by the claimant; and (4) the award of damages predicated on any of the
cases stated in Article 2219.[23]

Accordingly, based upon the findings of the trial court, it is clear that
respondents are entitled to moral damages. The acts attributed to the petitioners
as directors of the Rural Bank manifestly prejudiced the respondents causing
detriment to their standing as directors and stockholders of the Rural Bank.

Exemplary damages cannot be recovered as a matter of right.[24] While these

need not be proved, respondents must show that they are entitled to moral,
temperate or compensatory damages before the court may consider the question
of awarding exemplary damages.[25] We find that respondents are indeed entitled
to moral damages; thus, the award for exemplary damages is in order.

Anent the award for attorneys fees, Article 2208 of the Civil Code states:

In the absence of stipulation, attorneys fees and expenses of litigation, other than
judicial costs, cannot be recovered, except:

(1) When exemplary damages are awarded.

 Hence, the award of exemplary damages is in itself sufficient justification for
the award of attorneys fees.[26]

WHEREFORE, the foregoing premises considered, the petition is

hereby DENIED. The assailed Decision and Resolution of the Court of Appeals in CA-
G.R. CV No. 54226 are AFFIRMED.

SO ORDERED.

ANTONIO EDUARDO B. NACHURA

Associate Justice

WE CONCUR:

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson
 MA. ALICIA AUSTRIA-MARTINEZ MINITA V. CHICO-NAZARIO
Associate Justice Associate Justice

RUBEN T. REYES
Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision were reached in consultation
before the case was assigned to the writer of the opinion of the Courts Division.

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson, Third Division

CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution and the Division
Chairperson's Attestation, I certify that the conclusions in the above Decision had
been reached in consultation before the case was assigned to the writer of the
opinion of the Courts Division.

REYNATO S. PUNO
Chief Justice

[1]
Penned by Associate Justice Eugenio S. Labitoria, with Associate Justices Eloy R. Bello, Jr. and Eliezer R. De
los Santos, concurring; rollo, pp. 52-63.
[2]
Id. at 65.
[3]
Id. at 52-54.
[4]
Records, pp. 1-19.
5
Penned by Judge Roberto C. Diokno, id. at 959-960.
6
Rollo, pp. 79-80.
[7]
131 Phil. 556 (1968).
[8]
P.D. 902-A, Sec. 5 (b).
[9]
DMRC Enterprises v. Este del Sol Mountain Reserve, Inc., 217 Phil. 280, 287.
[10]
Records, pp. 426-429.
[11]
Order of the SEC dated March 2, 1987, records, pp. 428-429.
[12]
Iringan v. Court of Appeals, 418 Phil. 286, 296-297 (2001) (Citations omitted).
[13]
De Castro v. Court of Appeals, 434 Phil. 53, 68 (2000), citing TOLENTINO, COMMENTARIES AND
JURISPRUDENCE ON THE CIVIL CODE OF THE PHILIPPINES, 1992 ed., p. 44.
[14]
See Laperal v. Solid Homes, Inc., G.R. No. 130913, June 21, 2005, 460 SCRA 375, 385, citing Velarde v. Court
of Appeals, 361 SCRA 56, 69-70 (2001). See also Reyes v. Lim, 456 Phil. 1, 12 (2003); Asuncion v. Evangelista, 375
Phil. 328, 356 (1999).
[15]
Laperal v. Solid Homes, Inc., supra, at 386-387.
[16]
Pryce Corporation v. Philippine Amusement and Gaming Corporation, G.R. No. 157480, May 6, 2005, 458 SCRA
164, 178, citing Blacks Law Dictionary, 6th ed., p. 1306.
[17]
Spouses Velarde v. Court of Appeals, 413 Phil. 360, 375 (2001).
[18]
Carrascoso v. Court of Appeals, G.R. No. 123672 and Philippine Long Distance Telephone Company v. Leviste, G.R.
No. 164489, December 14, 2005, 477 SCRA 666, 703, citing IV A. Tolentino, COMMENTARIES AND
JURISPRUDENCE ON THE CIVIL CODE OF THE PHILIPPINES (1997 ed.), pp. 180-181
[19]
TSN, September 20, 1990, pp. 998-1006.
[20]
Rollo, pp. 76-77. (Citations omitted).
[21]
Civil Code, Art. 2217.
[22]
Art. 2220. Willful injury to property may be a legal ground for awarding moral damages if the court should find
that, under the circumstances, such damages are justly due. The same rule applies to breaches of contract where the
defendant acted fraudulently or in bad faith.
[23]
Quezon City Government v. Dacara, G.R. No. 150304, June 15, 2005, 460 SCRA 243, 254, citing Expertravel &
Tours, Inc. v. Court of Appeals, 368 Phil. 444 (1999).
[24]
Civil Code, Art. 2233.
[25]
Construction Development Corporation of the Philippines v. Estrella, G.R. No. 147791, September 8, 2006, 501
SCRA 228, 243, citing Del Rosario v. Court of Appeals, 267 SCRA 158, 173 (1997).
[26]
National Power Corporation, et al. v. Court of Appeals and Growth Link, Inc. v. Court of Appeals, 339 Phil. 605,
631 (1997).

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 169836 July 31, 2007

PHILIPPINE FISHERIES DEVELOPMENT AUTHORITY, petitioner,

vs.
COURT OF APPEALS, OFFICE OF THE PRESIDENT, DEPARTMENT OF FINANCE and the
CITY OF ILOILO,respondents.

DECISION

YNARES-SANTIAGO, J.:

Assailed in this petition for review is the June 21, 2005 Decision1 of the Court of Appeals in CA-G.R.
SP No. 81228, which held that petitioner Philippine Fisheries Development Authority (hereafter
referred to as Authority) is liable to pay real property taxes on the land and buildings of the Iloilo
Fishing Port Complex (IFPC) which are owned by the Republic of the Philippines but operated and
governed by the Authority.

The facts are not disputed.

On August 11, 1976, then President Ferdinand E. Marcos issued Presidential Decree No. 977 (PD
977) creating the Authority and placing it under the direct control and supervision of the Secretary of
Natural Resources. On February 8, 1982, Executive Order No. 772 (EO 772) was issued amending
PD 977, and renaming the Authority as the now "Philippine Fisheries Development Authority," and
attaching said agency to the Ministry of Natural Resources. Upon the effectivity of the Administrative
Code (EO 292), the Authority became an attached agency of the Department of Agriculture.2

Meanwhile, beginning October 31, 1981, the then Ministry of Public Works and Highways reclaimed
from the sea a 21-hectare parcel of land in Barangay Tanza, Iloilo City, and constructed thereon the
IFPC, consisting of breakwater, a landing quay, a refrigeration building, a market hall, a municipal
shed, an administration building, a water and fuel oil supply system and other port related facilities
and machineries. Upon its completion, the Ministry of Public Works and Highways turned over IFPC
to the Authority, pursuant to Section 11 of PD 977, which places fishing port complexes and related
facilities under the governance and operation of the Authority. Notwithstanding said turn over, title to
the land and buildings of the IFPC remained with the Republic.
The Authority thereafter leased portions of IFPC to private firms and individuals engaged in fishing
related businesses.

Sometime in May 1988, the City of Iloilo assessed the entire IFPC for real property taxes. The
assessment remained unpaid until the alleged total tax delinquency of the Authority for the fiscal
years 1988 and 1989 amounted to P5,057,349.67, inclusive of penalties and interests. To satisfy the
tax delinquency, the City of Iloilo scheduled on August 30, 1990, the sale at public auction of the
IFPC.

The Authority filed an injunction case with the Regional Trial Court. At the pre-trial, the parties
agreed to avail of administrative proceedings, i.e., for the Authority to file a claim for tax exemption
with the Iloilo City Assessor’s Office. The latter, however, denied the claim for exemption, hence, the
Authority elevated the case to the Department of Finance (DOF).

In its letter-decision3 dated March 6, 1992, the DOF ruled that the Authority is liable to pay real
property taxes to the City of Iloilo because it enjoys the beneficial use of the IFPC. The DOF added,
however, that in satisfying the amount of the unpaid real property taxes, the property that is owned
by the Authority shall be auctioned, and not the IFPC, which is a property of the Republic.4

The Authority filed a petition before the Office of the President but it was dismissed.5 It also denied
the motion for reconsideration filed by the Authority.6

On petition with the Court of Appeals, the latter affirmed the decision of the Office of the President. It
opined, however, that the IFPC may be sold at public auction to satisfy the tax delinquency of the
Authority.7 The dispositive portion thereof, reads:

WHEREFORE, premises considered, the instant Petition for Review is DENIED, and
accordingly the June 30, 2003 Decision and December 3, 2003 Order of the Office of the
President are hereby AFFIRMED.

SO ORDERED.8

Hence, this petition.

The issues are as follows: Is the Authority liable to pay real property tax to the City of Iloilo? If the
answer is in the affirmative, may the IFPC be sold at public auction to satisfy the tax delinquency?

To resolve said issues, the Court has to determine (1) whether the Authority is a government owned
or controlled corporation (GOCC) or an instrumentality of the national government; and (2) whether
the IFPC is a property of public dominion.

The Court rules that the Authority is not a GOCC but an instrumentality of the national government
which is generally exempt from payment of real property tax. However, said exemption does not
apply to the portions of the IFPC which the Authority leased to private entities. With respect to these
properties, the Authority is liable to pay real property tax. Nonetheless, the IFPC, being a property of
public dominion cannot be sold at public auction to satisfy the tax delinquency.

In Manila International Airport Authority (MIAA) v. Court of Appeals,9 the Court made a distinction
between a GOCC and an instrumentality. Thus:
 Section 2(13) of the Introductory Provisions of the Administrative Code of 1987 defines a
government-owned or controlled corporation as follows:

SEC. 2. General Terms Defined. – x x x

(13) Government-owned or controlled corporation refers to any agency organized as

a stock or non-stock corporation, vested with functions relating to public needs
whether governmental or proprietary in nature, and owned by the Government
directly or through its instrumentalities either wholly, or, where applicable as in the
case of stock corporations, to the extent of at least fifty-one (51) percent of its capital
stock: x x x (Emphasis supplied)

A government-owned or controlled corporation must be "organized as a stock or non-

stock corporation." MIAA is not organized as a stock or non-stock corporation. MIAA is not
a stock corporation because it has no capital stock divided into shares. MIAA has no
stockholders or voting shares.

xxxx

Section 3 of the Corporation Code defines a stock corporation as one whose "capital stock is
divided into shares and x x x authorized to distribute to the holders of such shares dividends
x x x." MIAA has capital but it is not divided into shares of stock. MIAA has no
stockholders or voting shares. Hence, MIAA is not a stock corporation.

MIAA is also not a non-stock corporation because it has no members. Section 87 of

the Corporation Code defines a non-stock corporation as "one where no part of its
income is distributable as dividends to its members, trustees or officers." A non-stock
corporation must have members. Even if we assume that the Government is considered as
the sole member of MIAA, this will not make MIAA a non-stock corporation. Non-stock
corporations cannot distribute any part of their income to their members. Section 11 of the
MIAA Charter mandates MIAA to remit 20% of its annual gross operating income to the
National Treasury. This prevents MIAA from qualifying as a non-stock corporation.

Section 88 of the Corporation Code provides that non-stock corporations are "organized for
charitable, religious, educational, professional, cultural, recreational, fraternal, literary,
scientific, social, civil service, or similar purposes, like trade, industry, agriculture and like
chambers." MIAA is not organized for any of these purposes. MIAA, a public utility, is
organized to operate an international and domestic airport for public use.

Since MIAA is neither a stock nor a non-stock corporation, MIAA does not qualify as a
government-owned or controlled corporation.10 (Emphasis supplied)

Thus, for an entity to be considered as a GOCC, it must either be organized as a stock or non-stock
corporation. Two requisites must concur before one may be classified as a stock corporation,
namely: (1) that it has capital stock divided into shares, and (2) that it is authorized to distribute
dividends and allotments of surplus and profits to its stockholders. If only one requisite is present, it
cannot be properly classified as a stock corporation. As for non-stock corporations, they must have
members and must not distribute any part of their income to said members.11

On the basis of the parameters set in the MIAA case, the Authority should be classified as an
instrumentality of the national government. As such, it is generally exempt from payment of real
property tax, except those portions which have been leased to private entities.
In the MIAA case, petitioner Philippine Fisheries Development Authority was cited as among the
instrumentalities of the national government. Thus –

Some of the national government instrumentalities vested by law with juridical

personalities are:Bangko Sentral ng Pilipinas, Philippine Rice Research Institute, Laguna
Lake Development Authority, Fisheries Development Authority, Bases Conversion
Development Authority, Philippine Ports Authority, Cagayan de Oro Port Authority, San
Fernando Port Authority, Cebu Port Authority, and Philippine National Railways.

Indeed, the Authority is not a GOCC but an instrumentality of the government. The Authority has a
capital stock but it is not divided into shares of stocks.12 Also, it has no stockholders or voting shares.
Hence, it is not a stock corporation. Neither it is a non-stock corporation because it has no members.

The Authority is actually a national government instrumentality which is defined as an agency of the
national government, not integrated within the department framework, vested with special functions
or jurisdiction by law, endowed with some if not all corporate powers, administering special funds,
and enjoying operational autonomy, usually through a charter.13 When the law vests in a government
instrumentality corporate powers, the instrumentality does not become a corporation. Unless the
government instrumentality is organized as a stock or non-stock corporation, it remains a
government instrumentality exercising not only governmental but also corporate powers.

Thus, the Authority which is tasked with the special public function to carry out the government’s
policy "to promote the development of the country’s fishing industry and improve the efficiency in
handling, preserving, marketing, and distribution of fish and other aquatic products," exercises the
governmental powers of eminent domain,14 and the power to levy fees and charges.15 At the same
time, the Authority exercises "the general corporate powers conferred by laws upon private and
government-owned or controlled corporations."16

The MIAA case held17 that unlike GOCCs, instrumentalities of the national government, like
MIAA, are exempt from local taxes pursuant to Section 133(o) of the Local Government Code. This
exemption, however, admits of an exception with respect to real property taxes. Applying Section
234(a) of the Local Government Code, the Court ruled that when an instrumentality of the national
government grants to a taxable person the beneficial use of a real property owned by the Republic,
said instrumentality becomes liable to pay real property tax. Thus, while MIAA was held to be an
instrumentality of the national government which is generally exempt from local taxes, it was at the
same time declared liable to pay real property taxes on the airport lands and buildings which it
leased to private persons. It was held that the real property tax assessments and notices of
delinquencies issued by the City of Pasay to MIAA are void except those pertaining to portions of
the airport which are leased to private parties. Pertinent portions of the decision, reads:

Section 193 of the Local Government Code expressly withdrew the tax exemption of all
juridical persons "[u]nless otherwise provided in this Code." Now, Section 133(o) of the
Local Government Code expressly provides otherwise, specifically prohibiting local
governments from imposing any kind of tax on national government instrumentalities.
Section 133(o) states:

SEC. 133. Common Limitations on the Taxing Powers of Local Government

Units. – Unless otherwise provided herein, the exercise of the taxing powers of
provinces, cities, municipalities, and barangays shall not extend to the levy of
the following:

xxxx
 (o) Taxes, fees or charges of any kinds on the National Government, its
agencies and instrumentalities, and local government units.

By express mandate of the Local Government Code, local governments cannot impose any
kind of tax on national government instrumentalities like the MIAA. Local governments are
devoid of power to tax the national government, its agencies and instrumentalities.
The taxing powers of local governments do not extend to the national government, its
agencies and instrumentalities, "[u]nless otherwise provided in this Code" as stated in the
saving clause of Section 133. x x x

xxxx

The saving clause in Section 133 refers to the exception to the exemption in Section 234(a)
of the Code, which makes the national government subject to real estate tax when it
gives the beneficial use of its real properties to a taxable entity. Section 234(a) of the
Local Government Code provides:

SEC. 234. Exemptions from Real Property Tax – The following are exempted from
payment of the real property tax:

(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted, for
consideration or otherwise, to a taxable person.

x x x18 (Emphasis supplied)

WHEREFORE, we GRANT the petition. We SET ASIDE the assailed Resolutions of the
Court of Appeals of 5 October 2001 and 27 September 2002 in CA-G.R. SP No. 66878.
We DECLARE the Airport Lands and Buildings of the Manila International Airport
Authority EXEMPT from the real estate tax imposed by the City of Parañaque. We
declare VOID all the real estate tax assessments, including the final notices of real estate tax
delinquencies, issued by the City of Parañaque on the Airport Lands and Buildings of the
Manila International Airport Authority, except for the portions that the Manila International
Airport Authority has leased to private parties. We also declare VOID the assailed auction
sale, and all its effects, of the Airport Lands and Buildings of the Manila International Airport
Authority.

x x x x.19 (Emphasis added)

In light of the foregoing, the Authority should be classified as an instrumentality of the national
government which is liable to pay taxes only with respect to the portions of the property, the
beneficial use of which were vested in private entities. When local governments invoke the power to
tax on national government instrumentalities, such power is construed strictly against local
governments. The rule is that a tax is never presumed and there must be clear language in the law
imposing the tax. Any doubt whether a person, article or activity is taxable is resolved against
taxation. This rule applies with greater force when local governments seek to tax national
government instrumentalities.20

Thus, the real property tax assessments issued by the City of Iloilo should be upheld only with
respect to the portions leased to private persons. In case the Authority fails to pay the real property
taxes due thereon, said portions cannot be sold at public auction to satisfy the tax delinquency.
In Chavez v. Public Estates Authority it was held that reclaimed lands are lands of the public
domain and cannot, without Congressional fiat, be subject of a sale, public or private, thus:21

The salient provisions of CA No. 141, on government reclaimed, foreshore and marshy lands
of the public domain, are as follows:

Sec. 59. The lands disposable under this title shall be classified as follows:

(a) Lands reclaimed by the Government by dredging, filling, or other means;

(b) Foreshore;

(c) Marshy lands or lands covered with water bordering upon the shores or banks of
navigable lakes or rivers;

(d) Lands not included in any of the foregoing classes.

xxxx

Sec. 61. The lands comprised in classes (a), (b), and (c) of section fifty-nine shall be
disposed of to private parties by lease only and not otherwise, as soon as the
President, upon recommendation by the Secretary of Agriculture, shall declare that the
same are not necessary for the public service and are open to disposition under this
chapter. The lands included in class (d) may be disposed of by sale or lease under the
provisions of this Act." (Emphasis supplied)

xxxx

Since then and until now, the only way the government can sell to private parties government
reclaimed and marshy disposable lands of the public domain is for the legislature to pass a
law authorizing such sale. CA No. 141 does not authorize the President to reclassify
government reclaimed and marshy lands into other non-agricultural lands under Section 59
(d). Lands classified under Section 59 (d) are the only alienable or disposable lands for non-
agricultural purposes that the government could sell to private parties. (Emphasis supplied)

In the same vein, the port built by the State in the Iloilo fishing complex is a property of the public
dominion and cannot therefore be sold at public auction. Article 420 of the Civil Code, provides:

ARTICLE 420. The following things are property of public dominion:

(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and
bridges constructed by the State, banks, shores, roadsteads, and others of similar character;

(2) Those which belong to the State, without being for public use, and are intended for
some public service or for the development of the national wealth.

The Iloilo fishing port which was constructed by the State for public use and/or public service falls
within the term "port" in the aforecited provision. Being a property of public dominion the same
cannot be subject to execution or foreclosure sale.22 In like manner, the reclaimed land on which the
IFPC is built cannot be the object of a private or public sale without Congressional authorization.
Whether there are improvements in the fishing port complex that should not be construed to be
embraced within the term "port," involves evidentiary matters that cannot be addressed in the
present case. As for now, considering that the Authority is a national government instrumentality,
any doubt on whether the entire IFPC may be levied upon to satisfy the tax delinquency should be
resolved against the City of Iloilo.

In sum, the Court finds that the Authority is an instrumentality of the national government, hence, it is
liable to pay real property taxes assessed by the City of Iloilo on the IFPC only with respect to those
portions which are leased to private entities. Notwithstanding said tax delinquency on the leased
portions of the IFPC, the latter or any part thereof, being a property of public domain, cannot be sold
at public auction. This means that the City of Iloilo has to satisfy the tax delinquency through means
other than the sale at public auction of the IFPC.

WHEREFORE, the petition is GRANTED and the June 21, 2005 Decision of the Court of Appeals in
CA-G.R. SP No. 81228 is SET ASIDE. The real property tax assessments issued by the City Iloilo
on the land and buildings of the Iloilo Fishing Port Complex, is declared VOID except those
pertaining to the portions leased to private parties. The City of Iloilo is DIRECTED to refrain from
levying on the Iloilo Fishing Port Complex to satisfy the payment of the real property tax delinquency.

No costs.

SO ORDERED.

Austria-Martinez, Chico-Nazario, Nachura, Reyes, JJ., concur.

Footnotes

1Rollo, pp. 47-55. Penned by Associate Justice Rosmari D. Carandang and concurred in by
Associate Justices Remedios A. Salazar-Fernando and Monina Arevalo-Zenarosa.

2 Book IV, Title IV, Chapter 6, Section 47, Executive Order No. 292 (1987).

3
Rollo, pp. 128-131.

4 Id. at 131.

5 Id. at 87-89.

6 Id. at 90.

7 Id. at 54.

8 Id. at 55. Petitioner filed a motion for reconsideration but was denied (Rollo, pp. 57-58).

9G.R. No. 155650, July 20, 2006, 495 SCRA 591, 615. The decision became final and
executory on November 3, 2006.

10 Id. at 615-617.
11Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines,
vol. 3, 1998 edition, pp. 54-55.

12Sec. 5. Capitalization; Sinking Fund. The Authority shall have an authorized capital stock
of Five Hundred Million Pesos (P500,000,000.00) which shall be fully subscribed by the
Republic of the Philippines, and the following amounts shall be paid in:

(a) The net assets of the Authority, including the Navotas fishing port complex, the
valuation of which shall be determined jointly with the Office of Budget and
Management and the Commission on Audit;

(b) The amount corresponding to the balance of the programmed appropriations for
the Authority for calendar year 1981; and

(c) The amount corresponding to the programmed appropriations for the Authority for
the calendar year 1982.

The Authority is authorized to establish a sinking fund necessary to meet such obligations as
may be incurred by the Authority. The annual contributions to the sinking fund shall come
from the revenues derived from its fishing port complexes and, where such revenues are
deficient, from such other corporate funds not otherwise intended for any specific purpose as
may be designated by the Board. Unless otherwise directed by the Board, the sinking fund
shall be placed under the custody of any government bank which shall invest the same in
such manner as may be advantageous to the Authority.

13 Section 2(10) of the Introductory Provisions of the Administrative Code.

14 Section 4 (k) of PD 977, as amended by EO 772.

15 Section 4 (e) of PD 977, as amended by EO 772.

16 Section 4 (j) of PD 977, as amended by EO 772.

17 Supra note 9 at 645.

18 Id. at 631-634.

19 Id. at 646.

20 Id. at 619.

21Chavez v. Public Estates Authority, G.R. No. 133250, July 9, 2002, 384 SCRA 152, 202-
203.

22Manila International Airport Authority (MIAA) v. Court of Appeals, supra note 9 at

646; Laurel v. Garcia, G.R. Nos. 92013 & 92047, July 25, 1990, 187 SCRA 797, 808-809.

SECOND DIVISION
 [G.R. No. 132684. September 11, 2002]

HERNANI N. FABIA, petitioner, vs. COURT OF APPEALS,

DEPARTMENT OF JUSTICE, OFFICE OF THE CITY
PROSECUTOR OF MANILA, RTC-Br. 22, MANILA and THE
MARITIME TRAINING CENTER OF THE PHILIPPINES
(MTCP), respondents.

RESOLUTION
BELLOSILLO, J.:

This resolves the 9 October 2001 Motion for Clarification of Judgment filed by private
respondent which seeks the elucidation of the 20 August 2001 Decision of this Court by
praying that the Regional Trial Court of Manila that will hear Crim. Case No. 98-162570
be directed to arraign petitioner, try the case and render judgment thereon as the facts
may warrant.
It will be recalled that in the subject Decision of 20 August 2001 this Court reversed
and set aside the Decision of the Court of Appeals of 12 November 1997 as well as its
Resolution of 9 February 1998, this Court holding that Crim. Case No. 98-162570 involves
an intra-corporate dispute over which the Securities and Exchange Commission (SEC)
has jurisdiction and not the regular courts. Cognizant however that The Securities
Regulation Code (RA 8799) amending PD 902-A has effectively vested upon the Regional
Trial Courts jurisdiction over all cases formerly cognizable by the SEC, this Court ordered
that Crim. Case No. 98-162570 be transferred to the appropriate branch of the Regional
Trial Court of Manila tasked to handle intra-corporate matters pursuant to A.M. No. 00-
11-3-SC.
As the motion for clarification in effect urges the reversal of the questioned Decision
of the Court of Appeals, this Court in its Resolution of 12 November 2001 resolved to treat
the motion of private respondent MTCP as a motion for reconsideration and required
petitioner to file his comment thereon.
In his Comment petitioner Fabia prays for the denial of MTCPs motion, arguing that
it does not assign any error on the findings and conclusions of law made by this Court as
it in fact even accepted the ratio decidendi behind the resolution of the case. Petitioner
likewise insists that there is no ambiguity in the Decision as it clearly mandates the
dismissal of the criminal case for estafa filed against him after a finding that the matter
involved an intra-corporate dispute within the jurisdiction of the SEC.
In its Reply private respondent MTCP stresses that Crim. Case No. 98-162570
remains to be a criminal proceeding and may not be converted into an administrative
action. It reasons that the substance of the assailed Decision of the Court of Appeals that
there is probable cause to indict petitioner for the crime of estafa was after all not reversed
by the Decision of this Court of 20 August 2001 as only the procedural aspect was
modified.
In its Resolution of 17 April 2002 this Court set the case for oral argument on 16 June
2002 during which the principal issue was defined and discussed: Whether the
prosecution for violation of PD 902-A as amended by RA 8799 is without prejudice to any
liability for violation of The Revised Penal Code.
Petitioner Fabia argues that there is no ambiguity in the Decision as it clearly
mandates the dismissal of the criminal case filed before the RTC of Manila upon the
Court's finding that the matter involves an intra-corporate dispute within the jurisdiction of
the SEC, and not of the regular courts. Petitioner concedes that the dismissal of the
criminal action is without prejudice to the filing of an intra-corporate/civil case for violation
of PD 902-A as amended by RA 8799 before the RTC which currently exercises
jurisdiction over corporate matters. However, invoking the doctrine of primary jurisdiction,
petitioner reasons that his corporate/civil prosecution must first be resolved before the
criminal action could be filed. Citing Saavedra v. Securities and Exchange
Commission,[1] petitioner argues that under the doctrine of primary jurisdiction the public
prosecutor in the instant case has no authority to rule in a preliminary investigation on a
criminal charge arising from an intra-corporate dispute absent prior resolution of the SEC
on the matter. Petitioner notes that Saavedra does not deprive the public prosecutors of
their jurisdiction to determine the propriety of filing criminal cases, but merely calls for a
deferment of the exercise of such criminal jurisdiction pending prior determination by the
pertinent administrative agency of the issues involved in the case. Petitioner contends
that a violation of the doctrine of primary jurisdiction is jurisdictional in nature and is not
rendered moot by RA 8799.
Petitioner also avers that RA 8799 is not a curative statute and hence cannot apply
retroactively. He explains that curative statutes are intended to retroactively apply to
cases pending before their enactment to supply defects, abridge superfluities in the
existing law and curb certain evils, or to correct a situation involving conflicting
jurisdictions - curative effects which are not evident under RA 8799 as the legislative
intent on the transfer of jurisdiction over SEC cases to the regular courts is merely to
enable the SEC to concentrate more on its regulatory functions.
Petitioner stresses that prior to RA 8799 it was the SEC which had primary jurisdiction
over the instant controversy as the governing law then was PD 902-A. He argues that a
subsequent law cannot apply retroactively so as to confer jurisdiction upon the city
prosecutor and/or regular courts to render a decision which under the law applicable at
the time of the rendition of the decision was clearly outside the competence of the
prosecutor or the courts. He clarifies that RA 8799 has retroactive application only insofar
as it applies to cases pending before the SEC and have not yet been submitted for
resolution upon its effectivity.
Respondent MTCP does not agree. It maintains that Crim. Case No. 98-162570
subsists, and simultaneously with it, a civil case may be filed for violation of RA 8799. It
argues that petitioner is being prosecuted for fraud defined and penalized under The
Revised Penal Code which is not a law administered by the SEC; hence, the SEC has no
jurisdiction over the criminal case as it lies with the regular courts. It contends however
that a civil/intra-corporate case may be filed and prosecuted simultaneously with the
criminal case. It argues that the doctrine of primary jurisdiction does not apply as there is
no controversy between petitioner and private respondent pending before the SEC or any
administrative agency since it filed a criminal complaint.
Respondent further claims that RA 8799 rendered the doctrine of primary jurisdiction
moot and academic since the rationale behind the prior referral of intra-corporate
controversies to the then SEC before the public prosecutor could act on them for purposes
of criminal prosecution, i.e., to implore the special knowledge, experience and services
of the administrative agency to ascertain technical and intricate matters, no longer stands
since the newly enacted law recognizes that the regular courts now have the legal
competence to decide intra-corporate disputes. Respondent also argues that Saavedra
is not applicable since it involved a pure and simple intra-corporate controversy, i.e., the
ownership of stocks in a corporation, which is far different from the criminal nature of the
instant case.
MTCP likewise claims that RA 8799 has rendered moot and academic the issue of
jurisdiction. It argues that when a case is filed with the court which originally has no
jurisdiction over the case but in the meantime a law is passed vesting that court with
jurisdiction to try the case, the jurisdiction of that court will be sustained on the theory that
the enabling law is curative in nature and therefore has retroactive effect. It notes that
before the jurisdictional issue on the authority of the Office of the Public Prosecutor of
Manila to conduct a preliminary investigation of what was claimed to be an intra-corporate
controversy was resolved with finality, the criminal case had already been filed with the
RTC and, in the meantime, RA 8799 was enacted transferring the intra-corporate
jurisdiction of the SEC to the RTC. There is thus no cogent reason to divest the RTC of
jurisdiction that it has already acquired over the case.
Section 5 of PD 902-A pertinently provides that the SEC shall have jurisdiction to hear
and decide cases involving (a) devices or schemes employed by, or any acts of, the board
of directors, business associates, its officers or partners, amounting to fraud and
misrepresentation which may be detrimental to the interest of the public and/or of the
stockholders, partners, members of associations or organizations registered with the
Commission, and (b) controversies arising out of intra-corporate or partnership relations,
between and among stockholders, members or associates; between any or all of them
and the corporation, partnership or association of which they are stockholders, members
or associates, respectively.
In synthesis, Sec. 5 of PD 902-A mandates that cases involving fraudulent actions
and devices which are detrimental to the interest of stockholders, members or associates
and directors of the corporation are within the original and exclusive jurisdiction of the
SEC. Taken in conjunction with Sec. 6 of the same law, it will be gathered that the
fraudulent acts/schemes which the SEC shall exclusively investigate and prosecute are
those "in violation of any law or rules and regulations administered and enforced by the
Commission" alone. This investigative and prosecutorial powers of the SEC are
further "without prejudice to any liability for violation of any provision of The Revised Penal
Code."
 From the foregoing, it can thus be concluded that the filing of the civil/intra-corporate
case before the SEC does not preclude the simultaneous and concomitant filing of a
criminal action before the regular courts; such that, a fraudulent act may give rise to
liability for violation of the rules and regulations of the SEC cognizable by the SEC itself,
as well as criminal liability for violation of the Revised Penal Code cognizable by the
regular courts, both charges to be filed and proceeded independently, and may be
simultaneously, with the other.
It can be discerned from the affidavit-complaint of MTCP President Exequiel B.
Tamayo that he sufficiently alleged acts sufficient to constitute the crime of estafa as well
as to give rise to a prosecution for violation of PD 902-A. The affidavit-complaint alleged
that petitioner Fabia failed to liquidate his cash advances amounting
to P1,291,376.61. These cash advances were drawn by petitioner in his capacity as then
president of the corporation and include those which were taken purportedly for the
purpose of buying office equipment and appliances which petitioner however failed to
deliver despite demands as he apparently had converted or misappropriated it to his own
use and benefit to the prejudice and damage of respondent MTCP.
These incidents are cognizable not only by the then intra-corporate jurisdiction of the
SEC but could also very well fall within the criminal jurisdiction of the regular courts. The
acts charged may be in the nature of an intra-corporate dispute as they involve fraud
committed by virtue of the office assumed by petitioner as President, Director and
stockholder in MTCP, and committed against the MTCP corporation, and therefore
violative of SEC rules and regulations. An intra-corporate controversy involves fraudulent
actions and devices which are detrimental to the interest of stockholders, directors and
the corporation. It is one which arises between stockholders and the corporation. In Abejo
v. de la Cruz,[2] the Court held that there is no distinction, qualification nor any exemption
whatsoever, as the provision is broad and covers all kinds of controversies between
stockholders and corporations. The alleged failure of petitioner to liquidate and settle his
cash advances with respondent MTCP despite demand qualifies as one such
controversy.
In the same vein, the alleged fraudulent acts constitute the elements of abuse of
confidence, deceit or fraudulent means, and damage under Art. 315 of The Revised
Penal Code on estafa. In this case, the relationship of the party-litigants with each other
or the position held by petitioner as a corporate officer in respondent MTCP during the
time he committed the crime becomes merely incidental and holds no bearing on
jurisdiction. What is essential is that the fraudulent acts are likewise of a criminal nature
and hence cognizable by the regular courts.
Be that as it may, petitioner argues that a charge of estafa against him cannot
prosper. He insists that no finding of probable cause may be made against him during a
preliminary investigation as a question of accounting still exists between him and private
respondent. Respondent MTCP believes otherwise.
We hold for respondent. Probable cause has been defined as the existence of such
facts and circumstances as would excite the belief, in a reasonable mind, acting on the
facts within the knowledge of the prosecutor, that the person charged was guilty of the
crime for which he was prosecuted.[3] It has been explained as a reasonable presumption
that a matter is, or may be, well founded, such a state of facts in the mind of the
prosecutor as would lead a person of ordinary caution and prudence to believe, or
entertain an honest or strong suspicion, that a thing is so. The term does not mean "actual
and positive cause" nor does it import absolute certainty. It is merely based on opinion
and reasonable belief. Thus a finding of probable cause does not require an inquiry into
whether there is sufficient evidence to procure a conviction. It is enough that it
is believed that the act or omission complained of constitutes the offense charged, as
there is a trial for the reception of evidence of the prosecution in support of the charge. [4]
Respondent MTCP through its President Exequiel B. Tamayo alleges that petitioner
Fabia, as then president of the corporation, drew cash advances from the corporation in
huge amounts which he failed to liquidate despite demand. Respondent also claims that
certain cash vouchers show that cash was received by petitioner for the purpose of
procuring office equipment and materials which upon inventory however failed to
materialize. These accusations infer that the acquisitions were facilitated through the
office or position occupied by petitioner and as a consequence of which respondent was
in dire straits to pay its loan of P850,000.00 owing to the Bank of the Philippine Islands
(BPI) - circumstances which make up the elements of abuse of confidence and damages
and give rise to the presumption or reasonable belief that the offense of estafa has been
committed and thus the filing of an Information against petitioner is warranted.
Petitioner disagrees and contends that a proper accounting of the amount owing from
him should first be conducted before probable cause for estafa can be established since
a discrepancy of the amounts allegedly owed by him exists, i.e., the Information
for estafa declares a balance of P1,291,376.61 while the audit report of MTCP's external
auditor and its Treasurer's report declare the amounts of P1,333,699.89 and P766,135.05
respectively.
Prior accounting is not an element of the offense and hence its absence would not
preclude the finding of probable cause for estafa against petitioner. In fact, accounting
does not seem to be inexistent in this case, as the records show that it has been
conducted on two (2) occasions by two (2) separate entities - the auditing firm of Mendoza
Ignacio Corvera and Company, and MTCP's own Treasurer, only that petitioner deems it
defective due to the divergent amounts computed by the two (2) entities as allegedly owed
by him.
In his Reply-Affidavit petitioner admits that the auditing firm of Mendoza Ignacio
Corvera and Company determined his accountability to MTCP to be P1,291,376.61 but
alleges that he was not furnished copy of the audit report thus he doubts that it was ever
conducted. MTCP on the other hand claims that petitioner was notified thereof through
an audit report, a copy of which petitioner himself had attached in his Comment dated 15
May 1998 and his Petition before the Court of Appeals dated 2 May 1997. Given that the
defense mounted by the petitioner calls for an inquiry into the authenticity of the
documents he relies upon, a judicial determination, not a preliminary investigation, would
be the proper occasion to ferret out the truth.
Petitioner's reliance on Perez v. People,[5] U.S. v. Camara,[6] and U.S. v.
Berbari[7] which held that there can be no estafa where a previous settlement of an account
is necessary to determine the balance owing the offended party is misplaced. As correctly
discerned by the Department of Justice, the present case involves a determination of
probable cause, while the Perez, Camara and Berbari cases delved into an inquiry on
guilt beyond reasonable doubt. Therein, the accused had all undergone trial and were
found guilty of the offense charged but were acquitted on appeal for lack of proof beyond
reasonable doubt. In the present case, the only issue is whether or not there is probable
cause to warrant the filing of the Information for estafa, which issue is resolved in the
affirmative.
Concededly, the proper case in point is Cruz v. People[8] where the president of the
corporation was likewise charged with estafa through falsification of public documents for
fraud he committed against the corporation. During preliminary investigation, the
president invoked the defense that the cash advances were loans to him that he had
already paid - the same line of defense herein petitioner Fabia is pursuing. In that case,
the Court ruled that such a defense does not defeat probable cause and such is best
ventilated in the trial court. Thus, petitioner's defense of accounting does not ipso facto
clear him of prima facie guilt. Being a matter of defense, its validity needs to be tested in
the crucible of a full-blown trial.
In that connection, petitioner in his Reply-Affidavit vehemently disclaimed any liability
for the amount demanded from him as he had already fully liquidated his cash advances
and averred that the complaint was instigated by those who would like to discredit him
and tarnish his name, and had attached copies of vouchers and checks to prove his
innocence. The presence or absence of the elements of the crime are evidentiary in
nature and are matters of defense, the truth of which can best be passed upon after a
full-blown trial on the merits.Litigation will prove petitioner's innocence if his defense be
true.
The criminal case for estafa currently pending before the RTC can then independently
and simultaneously proceed with a civil/intra-corporate case to be filed with the Regional
Trial Court vested with special jurisdiction pursuant to The Securities Regulation Code
(RA 8799). With RA 8799 signed into law on 19 July 2000, which effectively amended
Sec. 5 of PD 902-A, jurisdiction over intra-corporate disputes is now vested in the
Regional Trial Courts designated by this Court pursuant to A.M. No. 00-11-03-SC
promulgated on 21 November 2000.However, while Sec. 5 of PD No. 902-A was
amended by Sec. 5.2 of RA 8799, there is no repeal of Sec. 6 thereof declaring that
prosecution under the Decree, or any Act, law, rules and regulations enforced and
administered by the SEC shall be without prejudice to any liability for violation of any
provision of The Revised Penal Code.
Moreover, as pointed out by the Department of Justice, Sec. 54 on Administrative
Sanctions found in RA 8799 itself provides that the imposition of the sanctions shall be
without prejudice to the filing of criminal charges against the individuals responsible for
the violation.
From the foregoing, it could be concluded that the fraudulent devices, schemes or
representations which, originally, the Prosecution and Enforcement Department of the
SEC would exclusively investigate and prosecute, are those in violation of any
law or rules and regulations administered and enforced by the SEC and shall be without
prejudice to any liability for violation of any provision of The Revised Penal Code. Hence,
if the fraudulent act is punished under The Revised Penal Code, like estafa under Art.
315, the responsible person may be criminally prosecuted before the regular courts in
addition to proceedings before the branches of the RTC designated by this Court to try
and decide intra-corporate controversies.
Therefore, since the alleged fraudulent acts committed by petitioner pertaining to the
non-liquidation of his cash advances amounting to P1,291,376.61 constitute the offense
of estafa under Art. 315 of The Revised Penal Code, the criminal case may be prosecuted
independently and simultaneously with the corporate/civil case that may be filed for
violation of Sec. 5 of PD 902-A, as amended by RA 8799.
In light of the amendment brought about by RA 8799, the doctrine of primary
jurisdiction no longer precludes the simultaneous filing of the criminal case with the
corporate/civil case.
In cases involving specialized disputes, the practice has been to refer the same to an
administrative agency of special competence in observance of the doctrine of primary
jurisdiction.The Court has ratiocinated that it cannot or will not determine a controversy
involving a question which is within the jurisdiction of the administrative tribunal prior to
the resolution of that question by the administrative tribunal, where the question demands
the exercise of sound administrative discretion requiring the special knowledge,
experience and services of the administrative tribunal to determine technical and intricate
matters of fact, and a uniformity of ruling is essential to comply with the premises of the
regulatory statute administered.[9] The objective of the doctrine of primary jurisdiction is to
guide a court in determining whether it should refrain from exercising its jurisdiction until
after an administrative agency has determined some question or some aspect of some
question arising in the proceeding before the court.[10] It applies where claim is originally
cognizable in the courts and comes into play whenever enforcement of the claim requires
the resolution of issues which, under a regulatory scheme, has been placed within the
special competence of an administrative body; in such case, the judicial process is
suspended pending referral of such issues to the administrative body for its view.[11]
However, as correctly observed by respondent MTCP, the rationale behind the prior
referral of intra-corporate controversies to the SEC before the public prosecutor could act
on them for purposes of criminal prosecution loses significance since the newly enacted
law recognizes that the specially designated RTC branches now have the legal
competence to decide intra-corporate disputes.
To support its contention, petitioner cites the landmark case of Saavedra. However,
the doctrine of primary jurisdiction prevailed therein because the dispute comprehends a
pure andsimple intra-corporate controversy involving the ownership of stocks of the
corporation arising between and among the principal stockholders, while the instant case
involves non-liquidation of corporate funds by a corporate officer as he had allegedly
misappropriated the same for his own use and benefit. It was the SEC's authority to issue
a temporary restraining order enjoining the petitioners therein from disposing of the
company assets that was being challenged, not that of the regular courts, and it was
upheld as it was clear that the SEC had properly acquired jurisdiction over the subject
matter. Resort to the doctrine of primary jurisdiction was essential as the matter of sales
of stocks of the corporation, and thus its ownership, necessitates the expertise and
competence of the SEC. It is not so in the instant case, as the liability of petitioner for the
alleged fraudulent acts is the issue under contention.
WHEREFORE, the Decision of this Court of 20 August 2001 is modified as
follows: The Decision of the Court of Appeals of 12 November 1997 annulling and setting
aside the Resolution of the Department of Justice of 2 December 1996 and accordingly
directing the filing of an Information for estafa against petitioner Hernani N. Fabia in Crim.
Case No. 98-162570, "People of the Philippines v. Hernani N. Fabia," is AFFIRMED. The
Regional Trial Court, Branch 22, Manila, to which this criminal case was previously raffled
and assigned, or any branch of the court to which the case may properly be assigned, is
directed to immediately arraign petitioner Hernani N. Fabia and try his case until decided
and terminated. No costs.
SO ORDERED.
Mendoza, Quisumbing, Austria-Martinez, and Callejo, Sr., JJ., concur.

[1]
G.R. No. 80879, 21 March 1988, 159 SCRA 57.
[2]
G.R. Nos. 63558 & 68450-51, 19 May 1987, 149 SCRA 654.
Pilapil v. Sandiganbayan, G.R. No. 101978, 7 April 1993, 221 SCRA 349, citing Buchanan v. Vda de
[3]

Esteban, 32 Phil. 365 (1915).

[4]
Ibid.
[5]
No. L-43548, 29 June 1981, 105 SCRA 183.
[6]
28 Phil. 238 (1914)
[7]
42 Phil 152 (1921)
[8]
G.R. No. 110436, 27 June 1994, 233 SCRA 439.
[9]
Saavedra v. SEC, citing Pambujan Sur United Mine Workers v. Samar Mining Co. Inc., 94 Phil 932 (1954)
[10]
Quintos ,Jr. v. National Stud Farm, No. L-37052, 29 November 1973, 54 SCRA 210.
Industrial Enterprise v. Court of Appeals, G.R. No. 88550, 18 April 1990, 184 SCRA 426, citing United
[11]

States v. Western Pacific Railroad Co., 352 US 59.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 178768 November 25, 2009

PACIFIC WIDE REALTY AND DEVELOPMENT CORPORATION, Petitioner,

vs.
PUERTO AZUL LAND, INC., Respondent.
x - - - - - - - - - - - - - - - - - - - - - - -x

G.R. No. 180893

PACIFIC WIDE REALTY AND DEVELOPMENT CORPORATION, Petitioner,

vs.
PUERTO AZUL LAND, INC., Respondent.

DECISION

NACHURA, J.:

Before the Court are the consolidated petitions for review on certiorari under Rule 45 of the Rules of
Court: (1) G.R. No. 180893, assailing the Decision1 dated May 17, 2007 and the Resolution2 dated
October 30, 2007 of the Court of Appeals (CA) in CA-G.R. SP No. 92695, entitled "Export and
Industry Bank v. Puerto Azul Land, Inc."; and (2) G.R. No. 178768, assailing the Decision3 dated
March 16, 2007 and the Resolution4 dated June 29, 2007 of the CA in CA-G.R. SP No. 91996,
entitled "Puerto Azul Land, Inc. v. The Regional Trial Court of Manila, Br. 24; Sheriff IV of Pasay City
Virgilio F. Villar; and Pacific Wide Realty & Development Corporation (as substitute for Export and
Industry Bank, Inc.)."

The Facts

In G.R. No. 180893

Puerto Azul Land, Inc. (PALI) is the owner and developer of the Puerto Azul Complex situated in
Ternate, Cavite. Its business involves the development of Puerto Azul into a satellite city with
residential areas, resort, tourism and retail commercial centers with recreational areas.5 In order to
finance its operations, it obtained loans from various banks, the principal amount of which amounted
to Six Hundred Forty Million Two Hundred Twenty-Five Thousand Three Hundred Twenty-Four
Pesos (₱640,225,324.00). PALI and its accommodation mortgagors, i.e., Ternate Development
Corporation (TDC), Ternate Utilities, Inc. (TUI), and Mrs. Trinidad Diaz-Enriquez, secured the loans.6

In the beginning, PALI’s business did very well. However, it started encountering problems when the
Philippine Stock Exchange rejected the listing of its shares in its initial public offering which sent a
bad signal to the real estate market. This resulted in potential investors and real estate buyers
shying away from the business venture. The situation was aggravated by the 1997 Asian financial
crisis and the decline of the real estate market. Consequently, PALI was unable to keep up with the
payment of its obligations, both current and those that were about to fall due. One of its creditors, the
Export and Industry Bank7 (EIB), later substituted by Pacific Wide Realty and Development
Corporation (PWRDC), filed foreclosure proceedings on PALI’s mortgaged properties. Thrust to a
corner, PALI filed a petition for suspension of payments and rehabilitation,8 accompanied by a
proposed rehabilitation plan and three (3) nominees for the appointment of a rehabilitation receiver.9

On September 17, 2004, after finding that the petition was sufficient in form and substance, the
Regional Trial Court (RTC) issued a Stay Order10 and appointed Patrick V. Caoile as rehabilitation
receiver.11 Dissatisfied, EIB filed a motion to replace the appointed rehabilitation receiver. On
January 25, 2005, the RTC denied the motion.12
On April, 20, 2005, the rehabilitation receiver filed his rehabilitation report and recommendation,
wherein he proposed that PALI should be rehabilitated rather than be dissolved and liquidated. On
June 9, 2005, PALI filed a revised rehabilitation plan.13

EIB and the other creditors of PALI filed their respective comments/opposition to the
report/recommendations of the rehabilitation receiver. On November 2, 2005, EIB, together with
another creditor of PALI, Tranche I (SPV-MC), Inc., filed an urgent motion to disqualify the appointed
rehabilitation receiver. The RTC denied the motion in an Order14dated December 9, 2005.15

On December 13, 2005, the RTC rendered a Decision16 approving PALI’s petition for suspension of
payments and rehabilitation. The pertinent portions of the decision read:

The rehabilitation of the petitioner, therefore, shall proceed as follows:

1. The creditors shall have, as first option, the right to be paid with real estate properties
being offered by the petitioner in dacion en pago, which shall be implemented under the
following terms and conditions:

a. The properties offered by the petitioner shall be appraised by three appraisers,

one to be chosen by the petitioner, a second to be chosen by the bank creditors and
the third to be chosen by the Receiver. The average of the appraisals of the three (3)
chosen appraisers shall be the value to be applied in arriving at the dacion value of
the properties. In case the dacion amount is less than the total of the secured
creditor’s principal obligation, the balance shall be restructured in accordance with
the schedule of payments under option 2, paragraph (a). In case of excess, the same
shall [be] applied in full or partial payment of the accrued interest on the obligations.
The balance of the accrued interest, if any, together with the penalties shall [be]
condoned.

2. Creditors who will not opt for dacion shall be paid in accordance with the restructuring of
the obligations as recommended by the Receiver as follows:

a) The obligations to secured creditors will be subject to a 50% haircut of the

principal, and repayment shall be semi-annually over a period of 10 years, with 3-
year grace period. Accrued interests and penalties shall be condoned. Interest shall
be paid at the rate of 2% p.a. for the first 5 years and 5% p.a. thereafter until the
obligations are fully paid. The petitioner shall allot 50% of its cash flow available for
debt service for secured creditors. Upon completion of payments to government and
employee accounts, the petitioner’s cash flow available for debt service shall be used
until the obligations are fully paid.

b) One half (1/2) of the principal of the petitioner’s unsecured loan obligations to
other creditors shall be settled through non-cash offsetting arrangements, with the
balance payable semi-annually over a period of 10 years, with 3-year grace period,
with interest at the rate of 2% p.a. for the first 5 years and 5% p.a. from the 6th year
onwards until the obligations are settled in full. Accrued interest and penalties shall
be condoned.

c) Similarly, one half (1/2) of the petitioner’s obligations to trade creditors shall be
settled through non-cash offsetting arrangements. The cash payments shall be made
semi-annually over a period of 10 years on a pari passu basis with the bank
creditors, without interest, penalties and other charges of similar kind.
WHEREFORE, the rehabilitation of petitioner Puerto Azul Land, Inc. is hereby approved in
accordance with the foregoing pronouncements by the Court. Subject to the following terms and
conditions:

1. Immediately upon the implementation of the rehabilitation of the petitioner, the

Rehabilitation Receiver shall inform the Court thereof;

2. The Rehabilitation Receiver, creditors, and the petitioner shall submit to the Court at the
end of the first year of the petitioner’s rehabilitation, and annually thereafter until the
termination of the rehabilitation, their respective reports on the progress of the petitioner’s
rehabilitation, specially the petitioner’s compliance with the provisions of the plan as modified
by the Rehabilitation Receiver;

3. The Rehabilitation Receiver shall report to the Court any change in the assumptions used
in the Rehabilitation Plan, its projections, and forecasts, that may be brought about by the
settlement through dacion en pago of any of the obligations and to recommend
corresponding changes, if any, in such assumptions, projections, and forecasts;

4. The rehabilitation of the petitioner is binding upon the creditors and all persons who may
be affected by it, including the creditors, whether or not they have participated in the
proceedings or opposed the plan or whether or not their claims have been scheduled.

The petitioner is hereby strictly enjoined to abide by the terms and conditions set forth in this Order
and the provisions of the Interim Rules on Corporate Rehabilitation.

The Rehabilitation Receiver is hereby directed to perform his functions and responsibilities pursuant
to Section 14 of the Interim Rules, with particular emphasis on the following:

"u) To be notified of, and to attend all meetings of the board of directors and stockholders of
the debtors";

"v) To recommend any modification of an approved rehabilitation plan as he may deem

appropriate";

"w) To bring to the attention of the court any material change affecting the debtor’s ability to
meet the obligations under the rehabilitation plan";

[x x x x]

"y) To recommend the termination of the proceedings and the dissolution of the debtor if he
determines that the continuance in business of such entity is no longer feasible or profitable
or no longer works to the best interest of the stockholders, parties- litigants, creditors, or the
general public."

SO ORDERED.17

Finding the terms of the rehabilitation plan and the qualifications of the appointed rehabilitation
receiver unacceptable, EIB filed with the CA a petition for review under Rule 42 of the Rules of
Court. The case was entitled, "Export and Industry Bank v. Puerto Azul Land, Inc."

On May 17, 2007, the CA rendered a Decision,18 the fallo of which reads:
WHEREFORE, in view of the forgoing, the petition for review is hereby DISMISSED. The assailed
December 13, 2005 decision of the court a quo is hereby AFFIRMED in toto.19

EIB filed a motion for reconsideration. However, the same was denied in a Resolution20 dated
October 30, 2007.

In G.R. No. 178768

On September 21, 2004, EIB entered its appearance before the rehabilitation court and moved for
the clarification of the stay order dated September 17, 2004 and/or leave to continue the extrajudicial
foreclosure of the real estates owned by PALI’s accommodation mortgagors. In opposition, PALI
argued that the foreclosure sought would preempt the rehabilitation proceedings and would give EIB
undue preference over PALI’s other creditors. On November 10, 2004, the RTC issued an
Order,21 denying EIB’s motion.22

On March 3, 2005, EIB filed an urgent motion to order PALI and/or the mortgagor TUI/rehabilitation
receiver to pay all the taxes due on Transfer Certificate of Title (TCT) No. 133164. EIB claimed that
the property covered by TCT No. 133164, registered in the name of TUI, was one of the properties
used to secure PALI’s loan from EIB. The said property was subject to a public auction by the
Treasurer’s Office of Pasay City for non-payment of realty taxes. Hence, EIB prayed that PALI or
TUI be ordered to pay the realty taxes due on TCT No. 133164.23

PALI opposed the motion, arguing that the rehabilitation court’s stay order stopped the enforcement
of all claims, whether for money or otherwise, against a debtor, its guarantors, and its sureties not
solidarily liable to the debtor; thus, TCT No. 133164 was covered by the stay order.24

On March 31, 2005, the RTC issued an Order,25 the dispositive portion of which reads:

Accordingly, and as being invoked by the creditor movant, this Court hereby modifies the Stay Order
of September 17, 2004, in such a manner that TCT No. 133614 which is mortgaged with creditor
movant Export and Industry Bank, Inc. is now excluded from the Stay Order. As such, Export and
Industry Bank, Inc. may settle the above-stated realty taxes of third party mortgagor with the local
government of Pasay City. In return, and to adequately protect the creditor movant Export and
Industry Bank, Inc., the latter may foreclose on TCT No. 133614.

SO ORDERED.26

On April 12, 2005, PALI filed an urgent motion for a status quo order, praying that the stay order be
maintained and that the enforcement of the claim of Pasay City be held in abeyance pending the
hearing of its motion.27 On April 13, 2005, the RTC, so as not to render moot PALI’s motion, issued
an Order,28 directing EIB to refrain from taking any steps to implement the March 31, 2005 Order.
The City Treasurer of Pasay City was, likewise, directed to respect the stay order dated September
17, 2004 insofar as TCT No. 133164 was concerned, until further orders from the court.29

On August 16, 2005, the RTC issued an Order30 addressing the April 12, 2005 urgent motion of
PALI. In the said order, the rehabilitation court maintained its March 31, 2005 Order. The court
reiterated that TCT No. 133164, under the name of TUI, was excluded from the stay order. In order
to protect the interest of EIB as creditor of PALI, it may foreclose TCT No. 133164 and settle the
delinquency taxes of third-party mortgagor TUI with the local government of Pasay City.
PALI filed an urgent motion to modify the Order dated August 16, 2005. The same was denied by
the RTC in an Order31 dated October 19, 2005. Aggrieved, PALI filed with the CA a petition for
certiorari under Rule 65 of the Rules of Court, ascribing grave abuse of discretion on the part of the
rehabilitation court in allowing the foreclosure of a mortgage constituted over the property of an
accommodation mortgagor, to secure the loan obligations of a corporation seeking relief in a
rehabilitation proceeding. The case was entitled, "Puerto Azul Land, Inc. v. The Regional Trial Court
of Manila, Br. 24; Sheriff IV of Pasay City Virgilio F. Villar; and Export and Industry Bank, Inc."

On March 16, 2007, the CA rendered a Decision,32 the fallo of which reads:

WHEREFORE, above premises considered, the instant Petition is GRANTED. The October 19, 2005
Order of the Regional Trial Court of Manila, Br. 24, in Civil Case No. 04-110914 is hereby declared
NULL and VOID and the properties covered by TCT No. 133164 are hereby DECLARED subject to
and covered by the September 17, 2004 stay order. Accordingly, Public Respondent Sheriff Virgilio
F. Villar, or his substitute or equivalent, is ORDERED to immediately cease and desist from
enforcing the Amended Notice of Sheriff’s Sale, dated February 8, 2007, and from conducting the
sale at public auction of the parcels of land covered by TCT No. 133164 on March 20, 2007 or at
anytime thereafter. No costs.

SO ORDERED.33

EIB filed a motion for reconsideration. The CA denied the same in a Resolution34 dated June 29,
2007.

Hence, this petition for review on certiorari under Rule 45 of the Rules of Court.

On July 27, 2009, the Court ordered the consolidation of the two petitions.

The Issues

The issues for resolution are the following: (1) whether the terms of the rehabilitation plan are
unreasonable and in violation of the non-impairment clause; and (2) whether the rehabilitation court
erred when it allowed the foreclosure of the accommodation mortgagee’s property and excluded the
same from the coverage of the stay order.

The Ruling of the Court

Rehabilitation35 contemplates a continuance of corporate life and activities in an effort to restore and
reinstate the corporation to its former position of successful operation and solvency. The purpose of
rehabilitation proceedings is to enable the company to gain a new lease on life and thereby allow
creditors to be paid their claims from its earnings. The rehabilitation of a financially distressed
corporation benefits its employees, creditors, stockholders and, in a larger sense, the general
public.36

Under the Rules of Procedure on Corporate Rehabilitation,37 "rehabilitation" is defined as the

restoration of the debtor to a position of successful operation and solvency, if it is shown that its
continuance of operation is economically feasible and its creditors can recover by way of the present
value of payments projected in the plan, more if the corporation continues as a going concern than if
it is immediately liquidated.
An indispensable requirement in the rehabilitation of a distressed corporation is the rehabilitation
plan, and Section 5 of the Interim Rules of Procedure on Corporate Rehabilitation provides the
requisites thereof:

SEC. 5. Rehabilitation Plan. — The rehabilitation plan shall include (a) the desired business targets
or goals and the duration and coverage of the rehabilitation; (b) the terms and conditions of such
rehabilitation which shall include the manner of its implementation, giving due regard to the interests
of secured creditors; (c) the material financial commitments to support the rehabilitation plan; (d) the
means for the execution of the rehabilitation plan, which may include conversion of the debts or any
portion thereof to equity, restructuring of the debts, dacion en pago, or sale of assets or of the
controlling interest; (e) a liquidation analysis that estimates the proportion of the claims that the
creditors and shareholders would receive if the debtor’s properties were liquidated; and (f) such
other relevant information to enable a reasonable investor to make an informed decision on the
feasibility of the rehabilitation plan.

In G.R. No. 180893, the rehabilitation plan is contested on the ground that the same is unreasonable
and results in the impairment of the obligations of contract. PWRDC contests the following
stipulations in PALI’s rehabilitation plan: fifty percent (50%) reduction of the principal obligation;
condonation of the accrued and substantial interests and penalty charges; repayment over a period
of ten years, with minimal interest of two percent (2%) for the first five years and five percent (5%)
for the next five years until fully paid, and only upon availability of cash flow for debt service.

We find nothing onerous in the terms of PALI’s rehabilitation plan. The Interim Rules on Corporate
Rehabilitation provides for means of execution of the rehabilitation plan, which may include, among
others, the conversion of the debts or any portion thereof to equity, restructuring of the debts, dacion
en pago, or sale of assets or of the controlling interest. 1 a vv p h i 1

The restructuring of the debts of PALI is part and parcel of its rehabilitation. Moreover, per findings of
fact of the RTC and as affirmed by the CA, the restructuring of the debts of PALI would not be
prejudicial to the interest of PWRDC as a secured creditor. Enlightening is the observation of the CA
in this regard, viz.:

There is nothing unreasonable or onerous about the 50% reduction of the principal amount when, as
found by the court a quo, a Special Purpose Vehicle (SPV) acquired the credits of PALI from its
creditors at deep discounts of as much as 85%. Meaning, PALI’s creditors accepted only 15% of
their credit’s value. Stated otherwise, if PALI’s creditors are in a position to accept 15% of their
credit’s value, with more reason that they should be able to accept 50% thereof as full settlement by
their debtor. x x x. 38

We also find no merit in PWRDC’s contention that there is a violation of the impairment clause.
Section 10, Article III of the Constitution mandates that no law impairing the obligations of contract
shall be passed. This case does not involve a law or an executive issuance declaring the
modification of the contract among debtor PALI, its creditors and its accommodation mortgagors.
Thus, the non-impairment clause may not be invoked. Furthermore, as held in Oposa v. Factoran,
Jr.39 even assuming that the same may be invoked, the non-impairment clause must yield to the
police power of the State. Property rights and contractual rights are not absolute. The constitutional
guaranty of non-impairment of obligations is limited by the exercise of the police power of the State
for the common good of the general public.

Successful rehabilitation of a distressed corporation will benefit its debtors, creditors, employees,
and the economy in general. The court may approve a rehabilitation plan even over the opposition of
creditors holding a majority of the total liabilities of the debtor if, in its judgment, the rehabilitation of
the debtor is feasible and the opposition of the creditors is manifestly unreasonable.40 The
rehabilitation plan, once approved, is binding upon the debtor and all persons who may be affected
by it, including the creditors, whether or not such persons have participated in the proceedings or
have opposed the plan or whether or not their claims have been scheduled.41

II

On the issue of whether the rehabilitation court erred when it allowed the foreclosure by PWRDC of
the property of the accommodation mortgagor and excluded the same from the coverage of the stay
order, we rule in the negative.

The governing law concerning rehabilitation and suspension of actions for claims against
corporations is Presidential Decree (P.D.) No. 902-A, as amended (P.D. No. 902-A). Section 6(c) of
P.D. No. 902-A mandates that, upon appointment of a management committee, rehabilitation
receiver, board, or body, all actions for claims against corporations, partnerships or associations
under management or receivership pending before any court, tribunal, board, or body shall be
suspended. Stated differently, all actions for claims against a corporation pending before any court,
tribunal or board shall ipso jure be suspended in whatever stage such actions may be found.42

The justification for the suspension of actions or claims pending rehabilitation proceedings is to
enable the management committee or rehabilitation receiver to effectively exercise its/his powers
free from any judicial or extrajudicial interference that might unduly hinder or prevent the "rescue" of
the debtor company. To allow such other action to continue would only add to the burden of the
management committee or rehabilitation receiver, whose time, effort and resources would be wasted
in defending claims against the corporation instead of being directed toward its restructuring and
rehabilitation.43

In G.R. No. 178768, the rehabilitation court, in its Orders dated March 31, 2005 and August 16,
2005, removed TCT No. 133164 from the coverage of the stay order. The property covered by TCT
No. 133164 is owned by TUI. TCT No. 133164 was mortgaged to PWRDC by TUI as an
accommodation mortgagor of PALI by virtue of the Mortgage Trust Indenture (MTI) dated February
1995.

The MTI was executed among TDC, TUI and Mrs. Trinidad Diaz- Enriquez, as mortgagors; PALI, as
borrower; and Urban Bank, as trustee. Under Section 4.04 thereof, the mortgagors and the borrower
guaranteed to pay and discharge on time all taxes, assessments and governmental charges levied
or assessed on the collateral and immediately surrender to the trustee copies of the official receipts
for such payments. It was also agreed therein that should the borrower fail to pay such uncontested
taxes, assessments and charges within sixty (60) calendar days from due date thereof, the trustee,
at its option, shall declare the mortgagors and the borrower in default under Section 6.01(d) of the
MTI, or notify all the lenders of such failure.44

In excluding the property from the coverage of the stay order and allow PWRDC to foreclose on the
mortgage and settle the realty tax delinquency of the property with Pasay City, the rehabilitation
court used as justification Section 12, Rule 4 of the Interim Rules on Corporate Rehabilitation. The
said section provides:

SEC. 12. Relief from, Modification, or Termination of Stay Order. — The court may, on motion or
motu proprio, terminate, modify, or set conditions for the continuance of the stay order, or relieve a
claim from the coverage thereof upon showing that (a) any of the allegations in the petition, or any of
the contents of any attachment, or the verification thereof has ceased to be true; (b) a creditor does
not have adequate protection over property securing its claim; or (c) the debtor’s secured obligation
is more than the fair market value of the property subject of the stay and such property is not
necessary for the rehabilitation of the debtor.

For purposes of this section, the creditor shall lack adequate protection if it can be shown that:

a. the debtor fails or refuses to honor a pre-existing agreement with the creditor to keep the
property insured;

b. the debtor fails or refuses to take commercially reasonable steps to maintain the property;
or

c. the property has depreciated to an extent that the creditor is undersecured.

Upon showing of a lack of adequate protection, the court shall order the rehabilitation receiver to (a)
make arrangements to provide for the insurance or maintenance of the property, or (b) to make
payments or otherwise provide additional or replacement security such that the obligation is fully
secured. If such arrangements are not feasible, the court shall modify the stay order to allow the
secured creditor lacking adequate protection to enforce its claim against the debtor; Provided,
however, that the court may deny the creditor the remedies in this paragraph if such remedies would
prevent the continuation of the debtor as a going concern or otherwise prevent the approval and
implementation of a rehabilitation plan.

In its March 31, 2005 Order, the rehabilitation court ratiocinated that PALI violated the terms of the
MTI by failing to take reasonable steps to protect the security given to PWRDC, viz.:

It is crystal clear that Ternate Utilities, Inc. being the owner of TCT No. 133614 is the one liable to
pay the realty taxes to the local government of Pasay City. The petitioner [PALI], not being the owner
of the subject land does not owe the local government of Pasay City in the same way [as] the local
government of Pasay City is not a creditor of petitioner [PALI]. The local government of Pasay City is
pursuing directly the tax obligation of Ternate Utilities, Inc. which company is not the petitioner [PALI]
in this case. Hence, for all intents and purposes, the Stay Order does not cover the tax obligations of
Ternate Utilities, Inc. to the local government of Pasay City.1avv phi1

In [petitioner PALI’s] Comment, it can be gleaned that neither Ternate Utilities, Inc. nor the petitioner
[PALI] has the intention of paying the real property taxes on TCT No. 133614, which inaction will
naturally result in the auctioning of [the] subject land to the prejudice and damage of creditor movant
being the mortgagee thereof. Likewise, it is uncontested that the failure of the petitioner or Ternate
Utilities, Inc. to pay the realty property taxes violate[d] the pre-existing agreement of the petitioner
[PALI] and Ternate Utilities, Inc. to the creditor movant.45

In the August 16, 2005 Order, the rehabilitation court reaffirmed its decision to remove TCT No.
133164 from the coverage of the stay order in order to protect the secured claim of PWRDC, viz.:

Considering that the auction sale of TCT No. 133614 by the local government of Pasay City without
the Ternate Utilities, Inc., or the petitioner [PALI] redeeming or paying the corresponding due taxes
and penalties totaling to ₱7,523,257.50 as indicated in the aforesaid Certificate of Sale of Delinquent
Real Property, the interest of creditor EIB is greatly prejudiced.

Lastly, even assuming that the value of the PALI property covered by the MTI [Mortgage Trust
Indenture] is indeed ₱1.877 Billion, however, the total claim of EIB against the petitioner [PALI] is
more than ₱1.4 Billion Pesos (By statement of Asset attached by EIB in its Comment/Opposition to
the petition for rehabilitation dated November 10, 2004) as of October 31, 2004 which total obligation
is still counting as to date. Hence, not redeeming the auctioned TCT No. 133614 from the Pasay City
Government definitely renders creditor EIB not possessing adequate protection over [the] property
securing its claim against petitioner [PALI].46

Accordingly, the rehabilitation court committed no reversible error when it removed TCT No. 133164
from the coverage of the stay order. The Interim Rules of Procedure on Corporate Rehabilitation is
silent on the enforcement of claims specifically against the properties of accommodation mortgagors.
It only covers the suspension, during the pendency of the rehabilitation, of the enforcement of all
claims against the debtor, its guarantors and sureties not solidarily liable with the mortgagor.

Furthermore, the newly adopted Rules of Procedure on Corporate Rehabilitation has a specific
provision for this special arrangement among a debtor, its creditor and its accommodation
mortgagor. Section 7(b), Rule 3 of the said Rules explicitly allows the foreclosure by a creditor of a
property not belonging to a debtor under corporate rehabilitation, as it provides:

SEC. 7. Stay Order.— x x x (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
persons not solidarily liable with the debtor; provided, that the stay order shall not cover claims
against letters of credit and similar security arrangements issued by a third party to secure the
payment of the debtor’s obligations; provided, further, that the stay order shall not cover foreclosure
by a creditor of property not belonging to a debtor under corporate rehabilitation; provided, however,
that where the owner of such property sought to be foreclosed is also a guarantor or one who is not
solidarily liable, said owner shall be entitled to the benefit of excussion as such guarantor[.]47

Thus, there is no question that the action of the rehabilitation court in G.R. No. 178768 was justified.

WHEREFORE, in view of the foregoing, (1) the Decision dated May 17, 2007 and the Resolution
dated October 30, 2007 of the Court of Appeals in CA-G.R. SP No. 92695 are hereby AFFIRMED;
and (2) the Decision dated March 16, 2007 and the Resolution dated June 29, 2007 of the Court of
Appeals in CA-G.R. SP No. 91996 are hereby SET ASIDE. The October 19, 2005 Order of the
Regional Trial Court of Manila in Civil Case No. 04-110914 is hereby AFFIRMED. The property
covered by TCT No. 133164 is hereby declared excluded from the coverage of the September 17,
2004 Stay Order.

No costs.

SO ORDERED.

ANTONIO EDUARDO B. NACHURA

Associate Justice

WE CONCUR:

RENATO C. CORONA
Associate Justice
Chairperson

MINITA V. CHICO-NAZARIO TERESITA J. LEONARDO-DE CASTRO*

Associate Justice Associate Justice
 DIOSDADO M. PERALTA
Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision were reached in consultation before the case was
assigned to the writer of the opinion of the Court’s Division.

RENATO C. CORONA
Associate Justice
Chairperson, Third Division

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's Attestation, I
certify that the conclusions in the above Decision had been reached in consultation before the case
was assigned to the writer of the opinion of the Court’s Division.

REYNATO S. PUNO
Chief Justice

Footnotes

* Additional member in lieu of Associate Justice Presbitero J. Velasco, Jr. per Raffle dated
July 22, 2009.

1Penned by Associate Justice Lucenito N. Tagle, with Associate Justices Amelita G.

Tolentino and Mariflor Punzalan-Castillo, concurring; rollo (G.R. No. 180893), pp. 53-65.

2 Id. at 67-72.

3Penned by Associate Justice Normandie B. Pizarro, with Associate Justices Edgardo P.

Cruz and Fernanda Lampas Peralta, concurring; rollo (G.R. No. 178768), pp. 51-64.

4 Id. at 66-68.

5
Rollo (G.R. No. 180893), p. 54.

6 Rollo (G.R. No. 178768), p. 52.

7 Formerly known as Urban Bank.

8The case filed by PALI was entitled "In the Matter of the Corporate
Rehabilitation/Suspension of Payments of Puerto Azul Land, Inc.; pursuant to the Interim
Rules of Procedure on Corporate Rehabilitation (A.M. No. 009-10-SC)," and docketed as
Civil Case No. 04-110914.
9 Rollo (G.R. No. 180893), p. 54.

10 CA rollo (CA-G.R. SP No. 92695), pp. 110-113.

11 Rollo (G.R. No. 180893), pp. 53-55.

12 CA rollo (CA-G.R. SP No. 92695), pp. 140-141.

13 Rollo (G.R. No. 180893), p. 55.

14 CA rollo (CA-G.R. SP No. 92695), pp. 352-354.

15 Rollo (G.R. No. 180893), p. 55.

16Penned by Judge Antonio M. Eugenio, Jr., Regional Trial Court of Manila, Branch 24; CA
rollo (CA-G.R. SP No. 92695), pp. 9-22.

17 Id. at 19-22.

18 Supra note 1.

19 Id. at 65.

20 Supra note 2.

21 CA rollo (CA-G.R. SP No. 91996), pp. 64-67.

22 Rollo (G.R. No. 178768), p. 53.

23 Id.

24 Id.

25 CA rollo (CA-G.R. SP No. 91996), pp. 82-84.

26 Id. at 84.

27 Rollo (G.R. No. 178768), p. 54.

28 Id. at 93.

29 Id.

30 Id. at 94-96.

31 CA rollo (CA-G.R. SP No. 91996), pp. 25-27.

32 Supra note 3.
 33 Id. at 63.

34 Supra note 4.

35The applicable rule of procedure in the instant consolidated petitions is the Interim Rules of
Procedure on Corporate Rehabilitation which was adopted by the Court on December 15,
2000. However, effective January 16, 2009, unless the court orders otherwise to prevent
manifest injustice, new petitions and any pending petition for rehabilitation that have not
undergone the initial hearing prescribed under the Interim Rules of Procedure for Corporate
Rehabilitation shall be governed by the Rules of Procedure on Corporate Rehabilitation
(2008).

36Negros Navigation Co., Inc. v. Court of Appeals, Special Twelfth Division, G.R. Nos.
163156 & 166845, December 10, 2008, 573 SCRA 434, 450, citing New Frontier Sugar
Corporation v. Regional Trial Court, Branch 39, Iloilo City, 513 SCRA 601 (2007);
Rubberworld (Phils.), Inc. v. NLRC, 305 SCRA 721 (1999); Ruby Industrial Corporation v.
Cout of Appeals, 284 SCRA 445 (1998).

37 A.M. NO. 00-8-10-SC.

38 Rollo (G.R. No. 180893), p. 61.

39 G.R. No. 101083, July 30, 1993, 224 SCRA 792.

40 Interim Rules of Procedure on Corporate Rehabilitation, Rule 4, Sec. 23.

41 Interim Rules of Procedure on Corporate Rehabilitation, Rule 4, Sec. 24.

Philippine Airlines, Incorporated v. Zamora, G.R. No. 166996, February 6, 2007, 514
42

SCRA 585.

43Negros Navigation Co., Inc. v. Court of Appeals, Special Twelfth Division, supra note 36, at
451-452.

44
CA rollo (CA-G.R. SP No. 91996), p. 76.

45 Rollo (G.R. No. 178768), pp. 91-92.

46 Id. at 95-96.

47 Italics supplied.

SECOND DIVISION
VALLE VERDE COUNTRY CLUB, G.R. No. 151969
INC., ERNESTO VILLALUNA,
RAY GAMBOA, AMADO Present:
M. SANTIAGO, JR., FORTUNATO
DEE, AUGUSTO SUNICO, QUISUMBING, J., Chairperson,
VICTOR SALTA, FRANCISCO
ORTIGAS III, ERIC ROXAS, in CARPIO-MORALES,
their capacities as members of the BRION,
Board of Directors of Valle Verde
Country Club, Inc., and JOSE DEL CASTILLO, and
RAMIREZ,
Petitioners, ABAD, JJ.

- versus -

VICTOR AFRICA,
Respondent. Promulgated:

September 4, 2009
x ---------------------------------------------------------------------------------------------- x

DECISION

BRION, J.:

In this petition for review on certiorari,[1] the parties raise a legal question on
corporate governance: Can the members of a corporations board of directors elect
another director to fill in a vacancy caused by the resignation of a hold-over
director?

THE FACTUAL ANTECEDENTS

 On February 27, 1996, during the Annual Stockholders Meeting of petitioner
Valle Verde Country Club, Inc. (VVCC), the following were elected as members of
the VVCC Board of Directors: Ernesto Villaluna, Jaime C. Dinglasan (Dinglasan),
Eduardo Makalintal (Makalintal), Francisco Ortigas III, Victor Salta, Amado M.
Santiago, Jr., Fortunato Dee, Augusto Sunico, and Ray Gamboa.[2] In the years 1997,
1998, 1999, 2000, and 2001, however, the requisite quorum for the holding of the
stockholders meeting could not be obtained. Consequently, the above-named
directors continued to serve in the VVCC Board in a hold-over capacity.

On September 1, 1998, Dinglasan resigned from his position as member of

the VVCC Board. In a meeting held on October 6, 1998, the remaining directors, still
constituting a quorum of VVCCs nine-member board, elected Eric Roxas (Roxas) to
fill in the vacancy created by the resignation of Dinglasan.

A year later, or on November 10, 1998, Makalintal also resigned as member

of the VVCC Board. He was replaced by Jose Ramirez (Ramirez), who was elected
by the remaining members of the VVCC Board on March 6, 2001.

Respondent Africa (Africa), a member of VVCC, questioned the election of

Roxas and Ramirez as members of the VVCC Board with the Securities and Exchange
Commission (SEC) and the Regional Trial Court (RTC), respectively. The SEC case
questioning the validity of Roxas appointment was docketed as SEC Case No. 01-
99-6177.The RTC case questioning the validity of Ramirez appointment was
docketed as Civil Case No. 68726.

In his nullification complaint[3] before the RTC, Africa alleged that the
election of Roxas was contrary to Section 29, in relation to Section 23, of the
Corporation Code of the Philippines (Corporation Code). These provisions read:
 Sec. 23. The board of directors or trustees. - Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code shall be exercised, all
business conducted and all property of such corporations controlled and held by
the board of directors or trustees to be elected from among the holders of stocks, or
where there is no stock, from among the members of the corporation, who shall hold
office for one (1) year until their successors are elected and qualified.

xxxx

Sec. 29. Vacancies in the office of director or trustee. - Any vacancy occurring in the
board of directors or trustees other than by removal by the stockholders or members or
by expiration of term, may be filled by the vote of at least a majority of the remaining
directors or trustees, if still constituting a quorum; otherwise, said vacancies must be
filled by the stockholders in a regular or special meeting called for that purpose. A
director or trustee so elected to fill a vacancy shall be elected only for the unexpired term
of his predecessor in office. xxx. [Emphasis supplied.]

Africa claimed that a year after Makalintals election as member of the VVCC Board
in 1996, his [Makalintals] term as well as those of the other members of the VVCC
Board should be considered to have already expired. Thus, according to Africa, the
resulting vacancy should have been filled by the stockholders in a regular or special
meeting called for that purpose, and not by the remaining members of the VVCC
Board, as was done in this case.

Africa additionally contends that for the members to exercise the authority
to fill in vacancies in the board of directors, Section 29 requires, among others, that
there should be an unexpired term during which the successor-member shall
serve. Since Makalintals term had already expired with the lapse of the one-year
term provided in Section 23, there is no more unexpired term during which Ramirez
could serve.

Through a partial decision[4] promulgated on January 23, 2002, the RTC ruled in
favor of Africa and declared the election of Ramirez, as Makalintals replacement,
to the VVCC Board as null and void.
Incidentally, the SEC issued a similar ruling on June 3, 2003, nullifying the election
of Roxas as member of the VVCC Board, vice hold-over director Dinglasan. While
VVCC manifested its intent to appeal from the SECs ruling, no petition was actually
filed with the Court of Appeals; thus, the appellate court considered the case closed
and terminated and the SECs ruling final and executory.[5]

THE PETITION

VVCC now appeals to the Court to assail the RTCs January 23, 2002 partial decision
for being contrary to law and jurisprudence. VVCC made a direct resort to the
Court via a petition for review on certiorari, claiming that the sole issue in the
present case involves a purely legal question.

As framed by VVCC, the issue for resolution is whether the remaining

directors of the corporations Board, still constituting a quorum, can elect another
director to fill in a vacancy caused by the resignation of a hold-over director.

Citing law and jurisprudence, VVCC posits that the power to fill in a vacancy
created by the resignation of a hold-over director is expressly granted to the
remaining members of the corporations board of directors.

Under the above-quoted Section 29 of the Corporation Code, a vacancy

occurring in the board of directors caused by the expiration of a members term
shall be filled by the corporations stockholders. Correlating Section 29 with Section
23 of the same law, VVCC alleges that a members term shall be for one
year and until his successor is elected and qualified; otherwise stated, a members
term expires only when his successor to the Board is elected and qualified. Thus,
until such time as [a successor is] elected or qualified in an annual election where
a quorum is present, VVCC contends that the term of [a member] of the board of
directors has yet not expired.
 As the vacancy in this case was caused by Makalintals resignation, not by the
expiration of his term, VVCC insists that the board rightfully appointed Ramirez to
fill in the vacancy.

In support of its arguments, VVCC cites the Courts ruling in the 1927 El
[6]
Hogar case which states:

Owing to the failure of a quorum at most of the general meetings since the
respondent has been in existence, it has been the practice of the directors to fill
in vacancies in the directorate by choosing suitable persons from among the
stockholders. This custom finds its sanction in Article 71 of the By-Laws, which
reads as follows:

Art. 71. The directors shall elect from among the shareholders
members to fill the vacancies that may occur in the board of
directors until the election at the general meeting.

xxxx

Upon failure of a quorum at any annual meeting the directorate naturally holds over
and continues to function until another directorate is chosen and qualified. Unless
the law or the charter of a corporation expressly provides that an office shall
become vacant at the expiration of the term of office for which the officer was
elected, the general rule is to allow the officer to hold over until his successor is
duly qualified. Mere failure of a corporation to elect officers does not terminate the
terms of existing officers nor dissolve the corporation. The doctrine above stated
finds expression in article 66 of the by-laws of the respondent which declares in so
many words that directors shall hold office "for the term of one year or until their
successors shall have been elected and taken possession of their offices." xxx.

It results that the practice of the directorate of filling vacancies by the action of
the directors themselves is valid. Nor can any exception be taken to the
personality of the individuals chosen by the directors to fill vacancies in the body.
[Emphasis supplied.]

Africa, in opposing VVCCs contentions, raises the same arguments that he did
before the trial court.
 THE COURTS RULING

We are not persuaded by VVCCs arguments and, thus, find its petition
unmeritorious.

To repeat, the issue for the Court to resolve is whether the remaining
directors of a corporations Board, still constituting a quorum, can elect another
director to fill in a vacancy caused by the resignation of a hold-over director. The
resolution of this legal issue is significantly hinged on the determination of what
constitutes a directors term of office.

The holdover period is not part of the term

of office of a member of the board of
directors

The word term has acquired a definite meaning in jurisprudence. In several

cases, we have defined term as the time during which the officer may claim to
hold the office as of right, and fixes the interval after which the several incumbents
shall succeed one another.[7] The term of office is not affected by the
holdover.[8] The term is fixed by statute and it does not change simply because the
office may have become vacant, nor because the incumbent holds over in office
beyond the end of the term due to the fact that a successor has not been elected and
has failed to qualify.

Term is distinguished from tenure in that an officers tenure represents the

term during which the incumbent actually holds office. The tenure may be
shorter (or, in case of holdover, longer) than the term for reasons within or beyond
the power of the incumbent.

Based on the above discussion, when Section 23[9] of the Corporation Code
declares that the board of directorsshall hold office for one (1) year until their
successors are elected and qualified, we construe the provision to mean that the term
of the members of the board of directors shall be only for one year; their term
expires one year after election to the office. The holdover period that time from the
lapse of one year from a members election to the Board and until his successors
election and qualification is not part of the directors original term of office, nor is it
a new term; the holdover period, however, constitutes part of his tenure. Corollary,
when an incumbent member of the board of directors continues to serve in a holdover
capacity, it implies that the office has a fixed term, which has expired, and the
incumbent is holding the succeeding term.[10]

After the lapse of one year from his election as member of the VVCC Board in 1996,
Makalintals term of office is deemed to have already expired. That he continued to
serve in the VVCC Board in a holdover capacity cannot be considered as extending
his term. To be precise, Makalintals term of office began in 1996 and expired in
1997, but, by virtue of the holdover doctrine in Section 23 of the Corporation Code,
he continued to hold office until his resignation on November 10, 1998. This
holdover period, however, is not to be considered as part of his term, which, as
declared, had already expired.

With the expiration of Makalintals term of office, a vacancy resulted which,

by the terms of Section 29[11] of the Corporation Code, must be filled by the
stockholders of VVCC in a regular or special meeting called for the purpose. To
assume as VVCC does that the vacancy is caused by Makalintals resignation in 1998,
not by the expiration of his term in 1997, is both illogical and unreasonable. His
resignation as a holdover director did not change the nature of the vacancy; the
vacancy due to the expiration of Makalintals term had been created long before his
resignation.

The powers of the corporations board of

directors emanate from its stockholders

VVCCs construction of Section 29 of the Corporation Code on the authority to fill

up vacancies in the board of directors, in relation to Section 23 thereof, effectively
weakens the stockholders power to participate in the corporate governance by
electing their representatives to the board of directors. The board of directors is the
directing and controlling body of the corporation. It is a creation of the stockholders
and derives its power to control and direct the affairs of the corporation from them.
The board of directors, in drawing to themselves the powers of the corporation,
occupies a position of trusteeship in relation to the stockholders, in the sense that the
board should exercise not only care and diligence, but utmost good faith in the
management of corporate affairs.[12]

The underlying policy of the Corporation Code is that the business and affairs of a
corporation must be governed by a board of directors whose members have stood
for election, and who have actually been elected by the stockholders, on an annual
basis. Only in that way can the directors' continued accountability to shareholders,
and the legitimacy of their decisions that bind the corporation's stockholders, be
assured. The shareholder vote is critical to the theory that legitimizes the exercise of
power by the directors or officers over properties that they do not own.[13]

This theory of delegated power of the board of directors similarly explains why,
under Section 29 of the Corporation Code, in cases where the vacancy in the
corporations board of directors is caused not by the expiration of a members term,
the successor so elected to fill in a vacancy shall be elected only for the unexpired
term of the his predecessor in office. The law has authorized the remaining members
of the board to fill in a vacancy only in specified instances, so as not to retard or
impair the corporations operations; yet, in recognition of the stockholders right to
elect the members of the board, it limited the period during which the successor shall
serve only to the unexpired term of his predecessor in office.
While the Court in El Hogar approved of the practice of the directors to fill
vacancies in the directorate, we point out that this ruling was made before the present
Corporation Code was enacted[14] and before its Section 29 limited the instances
when the remaining directors can fill in vacancies in the board, i.e., when the
remaining directors still constitute a quorum and when the vacancy is caused for
reasons other than by removal by the stockholders or by expiration of the term.

It also bears noting that the vacancy referred to in Section 29 contemplates

a vacancy occurring within the directors term of office. When a vacancy is created
by the expiration of a term, logically, there is no more unexpired term to speak
of. Hence, Section 29 declares that it shall be the corporations stockholders who
shall possess the authority to fill in a vacancy caused by the expiration of a members
term.
 As correctly pointed out by the RTC, when remaining members of the VVCC
Board elected Ramirez to replace Makalintal, there was no more unexpired term to
speak of, as Makalintals one-year term had already expired. Pursuant to law, the
authority to fill in the vacancy caused by Makalintals leaving lies with the VVCCs
stockholders, not the remaining members of its board of directors.

WHEREFORE, we DENY the petitioners petition for review on certiorari,

and AFFIRM the partial decision of the Regional Trial Court, Branch 152, Manila,
promulgated on January 23, 2002, in Civil Case No. 68726. Costs against the
petitioners.

SO ORDERED.

ARTURO D. BRION
Associate Justice

WE CONCUR:

LEONARDO A. QUISUMBING
Associate Justice
Chairperson

CONCHITA CARPIO MORALES MARIANO C. DEL CASTILLO

Associate Justice Associate Justice
 ROBERTO A. ABAD
Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in
consultation before the case was assigned to the writer of the opinion of the
Courts Division.

LEONARDO A. QUISUMBING
Associate Justice
Chairperson

CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, and the Division
Chairpersons Attestation, it is hereby certified that the conclusions in the above
Decision were reached in consultation before the case was assigned to the writer of
the opinion of the Courts Division.

REYNATO S. PUNO
Chief Justice
[1]
Filed under Rule 45 of the Rules of Court; rollo, pp. 11-23.
[2]
Also co-petitioners of VVCC in the present petition.
[3]
Africas complaint before the RTC was denominated as Nullification of the Election of a New Regular/Hold-Over
(?) Director and Damages; rollo, pp. 31-46.
[4]
Id., pp. 28-30.
[5]
CA Resolution dated August 27, 2003; id., p. 124.
[6]
Government of the Philippine Islands v. El Hogar Filipino, 50 Phil. 399 (1927).
[7]
See Topacio Nueno v. Angeles, 76 Phil. 12, 21-22 (1946); Alba v. Evangelista, 100 Phil. 683, 694
(1957); Paredes v. Abad, 155 Phil. 494 (1974); Aparri v. Court of Appeals, No. L-30057, January 31, 1984, 127
SCRA 231.
[8]
Gaminde v. Commission on Audit, G.R. No. 140335, December 13, 2000, 347 SCRA 655.
[9]
The full text of which reads:

Sec. 23. The board of directors or trustees. - Unless otherwise provided in this Code, the corporate
powers of all corporations formed under this Code shall be exercised, all business conducted and
all property of such corporations controlled and held by the board of directors or trustees to be
elected from among the holders of stocks, or where there is no stock, from among the members
of the corporation, who shall hold office for one (1) year until their successors are elected and
qualified.

Every director must own at least one (1) share of the capital stock of the corporation of which he
is a director, which share shall stand in his name on the books of the corporation. Any director who
ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he
is a director shall thereby cease to be a director. Trustees of non-stock corporations must be
members thereof. A majority of the directors or trustees of all corporations organized under this
Code must be residents of the Philippines.
[10]
Words & Phrases, Vol. 19, p. 576.
[11]
The full text of which reads:

Sec. 29. Vacancies in the office of director or trustee. - Any vacancy occurring in the board of
directors or trustees other than by removal by the stockholders or members or by expiration of
term, may be filled by the vote of at least a majority of the remaining directors or trustees, if still
constituting a quorum; otherwise, said vacancies must be filled by the stockholders in a regular or
special meeting called for that purpose. A director or trustee so elected to fill a vacancy shall be
elected only or the unexpired term of his predecessor in office.

A directorship or trusteeship to be filled by reason of an increase in the number of directors or

trustees shall be filled only by an election at a regular or at a special meeting of stockholders or
members duly called for the purpose, or in the same meeting authorizing the increase of directors
or trustees if so stated in the notice of the meeting.
[12]
Legarda v. La Previsora Filipina, 66 Phil. 173 (1938), citing Angeles v. Santos, 64 Phil. 697 (1937).
[13]
Comac Partners, L.P., et al., v. Ghaznavi, et al., Del. Ch., 793 A.2d 372 (2001), citing Bentas v. Haseotes, Del.
Ch., 769 A.2d 70, 76 (2000) and Blasius Indus., Inc. v. Atlas Corp., Del. Ch., 564 A.2d 651, 659 (1988).
[14]
The Corporation Code or Batas Pambansa Blg. 68 was enacted on May 1, 1980.

SECOND DIVISION

HI-YIELD REALTY, G.R. No. 168863

INCORPORATED,
Present:
Petitioner,

QUISUMBING, J., Chairperson,

- versus -
YNARES-SANTIAGO,
CHICO-NAZARIO,
LEONARDO-DE CASTRO, and
HON. COURT OF APPEALS, HON. CESAR BRION, JJ.
O. UNTALAN, in his capacity as
PRESIDING JUDGE OF RTC-MAKATI,
BRANCH 142, HONORIO TORRES &
SONS, INC., and ROBERTO H. TORRES, Promulgated:
Respondents. June 23, 2009

x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

QUISUMBING, J.:

This is a special civil action for certiorari seeking to nullify and set aside the
Decision[1] dated March 10, 2005 and Resolution[2] dated May 26, 2005 of the
Court of Appeals in CA-G.R. SP. No. 83919. The appellate court had dismissed the
petition for certiorari and prohibition filed by petitioner and denied its
reconsideration.

The antecedent facts of the case are undisputed.

On July 31, 2003, Roberto H. Torres (Roberto), for and on behalf of Honorio Torres
& Sons, Inc. (HTSI), filed a Petition for Annulment of Real Estate Mortgage and
Foreclosure Sale[3] over two parcels of land located in Marikina and Quezon
City. The suit was filed against Leonora, Ma. Theresa, Glenn and Stephanie, all
surnamed Torres, the Register of Deeds of Marikina and Quezon City, and
petitioner Hi-Yield Realty, Inc. (Hi-Yield). It was docketed as Civil Case No. 03-892
with Branch 148 of the Regional Trial Court (RTC) of Makati City.

On September 15, 2003, petitioner moved to dismiss the petition on grounds of

improper venue and payment of insufficient docket fees. The RTC denied said
motion in an Order[4] dated January 22, 2004. The trial court held that the case was,
in nature, a real action in the form of a derivative suit cognizable by a special
commercial court pursuant to Administrative Matter No. 00-11-03-SC.[5] Petitioner
sought reconsideration, but its motion was denied in an Order[6] dated April 27,
2004.

Thereafter, petitioner filed a petition for certiorari and prohibition before the Court
of Appeals. In a Decision dated March 10, 2005, the appellate court agreed with
the RTC that the case was a derivative suit. It further ruled that the prayer for
annulment of mortgage and foreclosure proceedings was merely incidental to the
main action. The dispositive portion of said decision reads:
WHEREFORE, premises considered, this Petition is hereby DISMISSED. However,
public respondent is hereby DIRECTED to instruct his Clerk of Court to compute
the properdocket fees and thereafter, to order the private respondent to pay the
same IMMEDIATELY.

SO ORDERED.[7]

Petitioners motion for reconsideration[8] was denied in a Resolution dated May 26,
2005.

Hence, this petition which raises the following issues:

I.
 WHETHER THE HONORABLE COURT OF APPEALS GRAVELY ABUSED ITS DISCRETION IN
NOT DISMISSING THE CASE AGAINST HI-YIELD FOR IMPROPER VENUE DESPITE FINDINGS
BY THE TRIAL COURT THAT THE ACTION IS A REAL ACTION.

II.

WHETHER THE HONORABLE COURT OF APPEALS ERRED IN NOT DISMISSING THE

COMPLAINT AS AGAINST HI-YIELD EVEN IF THE JOINDER OF PARTIES IN THE COMPLAINT
VIOLATED THE RULES ON VENUE.

III.

WHETHER THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE

ANNULMENT OF REAL ESTATE MORTGAGE AND FORECLOSURE SALE IN THE COMPLAINT
IS MERELY INCIDENTAL [TO] THE DERIVATIVE SUIT.[9]

The pivotal issues for resolution are as follows: (1) whether venue was properly
laid; (2) whether there was proper joinder of parties; and (3) whether the action to
annul the real estate mortgage and foreclosure sale is a mere incident of the
derivative suit.

Petitioner imputes grave abuse of discretion on the Court of Appeals for not
dismissing the case against it even as the trial court found the same to be a real
action. It explains that the rule on venue under the Rules of Court prevails over the
rule prescribing the venue for intra-corporate controversies; hence, HTSI erred
when it filed its suit only in Makatiwhen the lands subjects of the case are
in Marikina and Quezon City. Further, petitioner argues that the appellate court
erred in ruling that the action is mainly a derivative suit and the annulment of real
estate mortgage and foreclosure sale is merely incidental thereto. It points out that
the caption of the case, substance of the allegations, and relief prayed for revealed
that the main thrust of the action is to recover the lands. Lastly, petitioner asserts
that it should be dropped as a party to the case for it has been wrongly impleaded
as a non-stockholder defendant in the intra-corporate dispute.

On the other hand, respondents maintain that the action is primarily a derivative
suit to redress the alleged unauthorized acts of its corporate officers and major
stockholders in connection with the lands. They postulate that the nullification of
the mortgage and foreclosure sale would just be a logical consequence of a decision
adverse to said officers and stockholders.
After careful consideration, we are in agreement that the petition must be
dismissed.

A petition for certiorari is proper if a tribunal, board or officer exercising judicial or

quasi-judicial functions acted without or in excess of jurisdiction or with grave
abuse of discretion amounting to lack or excess of jurisdiction and there is no
appeal, or any plain, speedy and adequate remedy in the ordinary course of law.[10]

Petitioner sought a review of the trial courts Orders dated January 22,
2004 and April 27, 2004 via a petition for certiorari before the Court of Appeals. In
rendering the assailed decision and resolution, the Court of Appeals was acting under
its concurrent jurisdiction to entertain petitions for certiorari under paragraph
2,[11] Section 4 of Rule 65 of the Rules of Court. Thus, if erroneous, the decision and
resolution of the appellate court should properly be assailed by means of a petition
for review on certiorari under Rule 45 of the Rules of Court. The distinction is clear:
a petition for certiorari seeks to correct errors of jurisdiction while a petition for
review on certiorari seeks to correct errors of judgment committed by the court a
quo.[12] Indeed, this Court has often reminded members of the bench and bar that a
special civil action for certiorari under Rule 65 lies only when there is no appeal nor
plain, speedy and adequate remedy in the ordinary course of law.[13] In the case at
hand, petitioner impetuously filed a petition for certiorari before us when a petition
for review was available as a speedy and adequate remedy. Notably, petitioner filed
the present petition 58[14] days after it received a copy of the assailed resolution
dated May 26, 2005. To our mind, this belated action evidences petitioners effort to
substitute for a lost appeal this petition for certiorari.

For the extraordinary remedy of certiorari to lie by reason of grave abuse of

discretion, the abuse of discretion must be so patent and gross as to amount to an
evasion of positive duty, or a virtual refusal to perform the duty enjoined or to act
in contemplation of law, or where the power is exercised in an arbitrary and
despotic manner by reason of passion and personal hostility.[15] We find no grave
abuse of discretion on the part of the appellate court in this case.

Simply, the resolution of the issues posed by petitioner rests on a determination of

the nature of the petition filed by respondents in the RTC. Both the RTC and Court
of Appeals ruled that the action is in the form of a derivative suit although
captioned as a petition for annulment of real estate mortgage and foreclosure sale.
A derivative action is a suit by a shareholder to enforce a corporate cause of
action.[16] Under the Corporation Code, where a corporation is an injured party, its
power to sue is lodged with its board of directors or trustees. But an individual
stockholder may be permitted to institute a derivative suit on behalf of the corporation
in order to protect or vindicate corporate rights whenever the officials of the
corporation refuse to sue, or are the ones to be sued, or hold control of the
corporation. In such actions, the corporation is the real party-in-interest while the suing
stockholder, on behalf of the corporation, is only a nominal party.[17]

In the case of Filipinas Port Services, Inc. v. Go,[18] we enumerated the foregoing
requisites before a stockholder can file a derivative suit:
a) the party bringing suit should be a shareholder as of the time of the act or
transaction complained of, the number of his shares not being material;

b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on

the board of directors for the appropriate relief but the latter has failed or refused to
heed his plea; and

c) the cause of action actually devolves on the corporation, the wrongdoing or

harm having been, or being caused to the corporation and not to the particular
stockholder bringing the suit.[19]

Even then, not every suit filed on behalf of the corporation is a derivative suit. For
a derivative suit to prosper, the minority stockholder suing for and on behalf of the
corporation must allege in his complaint that he is suing on a derivative cause of
action on behalf of the corporation and all other stockholders similarly situated
who may wish to join him in the suit.[20] The Court finds that Roberto had satisfied
this requirement in paragraph five (5) of his petition which reads:
5. Individual petitioner, being a minority stockholder, is instituting the instant
proceeding by way of a derivative suit to redress wrongs done to petitioner corporation
and vindicate corporate rights due to the mismanagement and abuses committed against
it by its officers and controlling stockholders, especially by respondent Leonora H. Torres
(Leonora, for brevity) who, without authority from the Board of Directors, arrogated upon
herself the power to bind petitioner corporation from incurring loan obligations and later
allow company properties to be foreclosed as hereinafter set forth;[21]

Further, while it is true that the complaining stockholder must satisfactorily show
that he has exhausted all means to redress his grievances within the corporation;
such remedy is no longer necessary where the corporation itself is under the
complete control of the person against whom the suit is being filed. The reason is
obvious: a demand upon the board to institute an action and prosecute the same
effectively would have been useless and an exercise in futility.[22]

Here, Roberto alleged in his petition that earnest efforts were made to reach a
compromise among family members/stockholders before he filed the case. He also
maintained that Leonora Torres held 55% of the outstanding shares while Ma.
Theresa, Glenn and Stephanie excluded him from the affairs of the
corporation. Even more glaring was the fact that from June 10, 1992, when the first
mortgage deed was executed until July 23, 2002, when the properties mortgaged
were foreclosed, the Board of Directors of HTSI did nothing to rectify the alleged
unauthorized transactions of Leonora. Clearly, Roberto could not expect relief from
the board.

Derivative suits are governed by a special set of rules under A.M. No. 01-2-04-
SC[23] otherwise known as the Interim Rules of Procedure Governing Intra-
Corporate Controversies under Republic Act No. 8799.[24] Section 1,[25] Rule 1
thereof expressly lists derivative suits among the cases covered by it.

As regards the venue of derivative suits, Section 5, Rule 1 of A.M. No. 01-2-04-SC
states:
SEC. 5. Venue. - All actions covered by these Rules shall be commenced and tried
in the Regional Trial Court which has jurisdiction over the principal office of the
corporation, partnership, or association concerned. Where the principal office of the
corporation, partnership or association is registered in the Securities and Exchange
Commission as Metro Manila, the action must be filed in the city or municipality where
the head office is located.

Thus, the Court of Appeals did not commit grave abuse of discretion when it found
that respondents correctly filed the derivative suit before the Makati RTC where
HTSI had its principal office.

There being no showing of any grave abuse of discretion on the part of the Court
of Appeals the other alleged errors will no longer be passed upon as mere errors of
judgment are not proper subjects of a petition for certiorari.
WHEREFORE, the instant petition is hereby DISMISSED. The Decision dated March
10, 2005 and the Resolution dated May 26, 2005 of the Court of Appeals in CA-G.R.
SP. No. 83919 are AFFIRMED.

No pronouncement as to costs.

SO ORDERED.

LEONARDO A. QUISUMBING
Associate Justice

WE CONCUR:

CONSUELO YNARES-SANTIAGO
Associate Justice

MINITA V. CHICO-NAZARIO TERESITA J. LEONARDO-DE CASTRO

Associate Justice Associate Justice
 ARTURO D. BRION
Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation
before the case was assigned to the writer of the opinion of the Courts Division.

LEONARDO A. QUISUMBING
Associate Justice
Chairperson
CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution and the Division Chairpersons
Attestation, I certify that the conclusions in the above Decision had been reached
in consultation before the case was assigned to the writer of the opinion of the
Courts Division.
REYNATO S. PUNO
Chief Justice


Designated member of the Second Division per Special Order No. 645 in place of Associate Justice Conchita Carpio
Morales who is on official leave.

Designated member of the Second Division per Special Order No. 658.

Designated member of the Second Division per Special Order No. 635 in view of the retirement of Associate Dante
O. Tinga.
[1]
Rollo, pp. 20-31. Penned by Associate Justice Andres B. Reyes, Jr., with Associate Justices Lucas P. Bersamin
(now a member of this Court) and Celia C. Librea-Leagogo concurring.
[2]
Id. at 33.
[3]
Records, pp. 1-6.
[4]
Id. at 47-51.
[5]
RESOLUTION DESIGNATING CERTAIN BRANCHES OF REGIONAL TRIAL COURTS TO TRY AND
DECIDE CASES FORMERLY COGNIZABLE BY THE SECURITIES AND EXCHANGE COMMISSION,
took effect on December 15, 2000.
[6]
Records, p. 77.
[7]
Rollo, p. 31.
[8]
Id. at 92-102.
[9]
Id. at 141-142.
[10]
Banco Filipino Savings and Mortgage Bank v. Court of Appeals, G.R No. 132703, June 23, 2000, 334 SCRA
305, 315.
[11]
SEC. 4. When and where petition filed. - The petition may be filed not later than sixty (60) days from notice of the
judgment, order or resolution sought to be assailed in the Supreme Court or, if it relates to the acts or omissions
of a lower court or of a corporation, board, officer or person, in the Regional Trial Court exercising jurisdiction
over the territorial area as defined by the Supreme Court whether or not the same is in aid of its appellate
jurisdiction, or in the Sandiganbayan if it is in aid of its appellate jurisdiction. If it involves the acts or omissions
of a quasi-judicial agency, unless otherwise provided by law or these rules, the petition shall be filed in and
cognizable only by the Court of Appeals.
[12]
Banco Filipino Savings and Mortgage Bank v. Court of Appeals, supra at 316.
[13]
Id.
[14]
Petitioner received a copy of the assailed Resolution dated May 26, 2005 on May 31, 2005.
[15]
Banco Filipino Savings and Mortgage Bank v. Court of Appeals, supra at 315.
[16]
R.N. Symaco Trading Corporation v. Santos, G.R. No. 142474, August 18, 2005, 467 SCRA 312, 329.
[17]
Filipinas Port Services, Inc. v. Go, G.R. No. 161886, March 16, 2007, 518 SCRA 453, 471.
[18]
Id.
[19]
Id. at 472.
[20]
Chua v. Court of Appeals, G.R. No. 150793, November 19, 2004, 443 SCRA 259, 268.
[21]
Rollo, p. 35.
[22]
Filipinas Port Services, Inc., v. Go, supra at 472.
[23]
Took effect on April 1, 2001.
[24]
THE SECURITIES REGULATION CODE, approved on July 19, 2000.
[25]
SECTION 1.
(a) Cases covered. These Rules shall govern the procedure to be observed in civil cases involving the following:
xxxx
(4) Derivative suits; and
xxxx
THIRD DIVISION

JOSELITO MUSNI PUNO G.R. No. 177066

(as heir of the late Carlos Puno),
Petitioner, Present:

YNARES-SANTIAGO, J.,
Chairperson,
CHICO-NAZARIO,
- versus - VELASCO, JR.,
NACHURA, and
PERALTA, JJ.

PUNO ENTERPRISES, INC., Promulgated:

represented by JESUSA PUNO,
Respondent. September 11, 2009

x------------------------------------------------------------------------------------x

DECISION

NACHURA, J.:

Upon the death of a stockholder, the heirs do not automatically become

stockholders of the corporation; neither are they mandatorily entitled to the rights
and privileges of a stockholder. This, we declare in this petition for review
on certiorari of the Court of Appeals (CA) Decision[1] dated October 11, 2006 and
Resolution dated March 6, 2007 in CA-G.R. CV No. 86137.

The facts of the case follow:

Carlos L. Puno, who died on June 25, 1963, was an incorporator of respondent
Puno Enterprises, Inc. On March 14, 2003, petitioner Joselito Musni Puno, claiming
to be an heir of Carlos L. Puno, initiated a complaint for specific performance against
respondent. Petitioner averred that he is the son of the deceased with the latters
common-law wife, Amelia Puno. As surviving heir, he claimed entitlement to the
rights and privileges of his late father as stockholder of respondent. The complaint
thus prayed that respondent allow petitioner to inspect its corporate book, render an
accounting of all the transactions it entered into from 1962, and give petitioner all
the profits, earnings, dividends, or income pertaining to the shares of Carlos L.
Puno.[2]

Respondent filed a motion to dismiss on the ground that petitioner did not
have the legal personality to sue because his birth certificate names him as Joselito
Musni Muno. Apropos, there was yet a need for a judicial declaration that Joselito
Musni Puno and Joselito Musni Muno were one and the same.

The court ordered that the proceedings be held in abeyance, ratiocinating that
petitioners certificate of live birth was no proof of his paternity and relation to Carlos
L. Puno.

Petitioner submitted the corrected birth certificate with the name Joselito M.
Puno, certified by the Civil Registrar of the City of Manila, and the Certificate of
Finality thereof. To hasten the disposition of the case, the court conditionally
admitted the corrected birth certificate as genuine and authentic and ordered
respondent to file its answer within fifteen days from the order and set the case for
pretrial.[3]

On October 11, 2005, the court rendered a Decision, the dispositive portion
of which reads:

WHEREFORE, judgment is hereby rendered ordering Jesusa Puno and/or

Felicidad Fermin to allow the plaintiff to inspect the corporate books and records
of the company from 1962 up to the present including the financial statements of
the corporation.

The costs of copying shall be shouldered by the plaintiff. Any expenses to

be incurred by the defendant to be able to comply with this order shall be the subject
of a bill of costs.

SO ORDERED.[4]

On appeal, the CA ordered the dismissal of the complaint in its Decision dated
October 11, 2006. According to the CA, petitioner was not able to establish the
paternity of and his filiation to Carlos L. Puno since his birth certificate was prepared
without the intervention of and the participatory acknowledgment of paternity by
Carlos L. Puno. Accordingly, the CA said that petitioner had no right to demand that
he be allowed to examine respondents books. Moreover, petitioner was not a
stockholder of the corporation but was merely claiming rights as an heir of Carlos
L. Puno, an incorporator of the corporation. His action for specific performance
therefore appeared to be premature; the proper action to be taken was to prove the
paternity of and his filiation to Carlos L. Puno in a petition for the settlement of the
estate of the latter.[5]

Petitioners motion for reconsideration was denied by the CA in its

Resolution[6] dated March 6, 2007.

In this petition, petitioner raises the following issues:

I. THE HONORABLE COURT OF APPEALS ERRED IN NOT RULING
THAT THE JOSELITO PUNO IS ENTITLED TO THE RELIEFS
DEMANDED HE BEING THE HEIR OF THE LATE CARLOS PUNO,
ONE OF THE INCORPORATORS [OF] RESPONDENT
CORPORATION.

II. HONORABLE COURT OF APPEALS ERRED IN RULING THAT

FILIATION OF JOSELITO PUNO, THE PETITIONER[,] IS NOT DULY
PROVEN OR ESTABLISHED.

III. THE HONORABLE COURT ERRED IN NOT RULING THAT

JOSELITO MUNO AND JOSELITO PUNO REFERS TO THE ONE AND
THE SAME PERSON.

IV. THE HONORABLE COURT OF APPEALS ERRED IN NOT RULING

THAT WHAT RESPONDENT MERELY DISPUTES IS THE SURNAME
OF THE PETITIONER WHICH WAS MISSPELLED AND THE
FACTUAL ALLEGATION E.G. RIGHTS OF PETITIONER AS HEIR OF
CARLOS PUNO ARE DEEMED ADMITTED HYPOTHETICALLY IN
THE RESPONDENT[S] MOTION TO DISMISS.

V. THE HONORABLE COURT OF APPEALS THEREFORE ERRED I[N]

DECREEING THAT PETITIONER IS NOT ENTITLED TO INSPECT
THE CORPORATE BOOKS OF DEFENDANT CORPORATION.[7]
 The petition is without merit. Petitioner failed to establish the right to inspect
respondent corporations books and receive dividends on the stocks owned by Carlos
L. Puno.

Petitioner anchors his claim on his being an heir of the deceased

stockholder. However, we agree with the appellate court that petitioner was not able
to prove satisfactorily his filiation to the deceased stockholder; thus, the former
cannot claim to be an heir of the latter.

Incessantly, we have declared that factual findings of the CA supported by

substantial evidence, are conclusive and binding.[8] In an appeal via certiorari, the
Court may not review the factual findings of the CA. It is not the Courts function
under Rule 45 of the Rules of Court to review, examine, and evaluate or weigh the
probative value of the evidence presented.[9]

A certificate of live birth purportedly identifying the putative father is not

competent evidence of paternity when there is no showing that the putative father
had a hand in the preparation of the certificate. The local civil registrar has no
authority to record the paternity of an illegitimate child on the information of a third
person.[10] As correctly observed by the CA, only petitioners mother supplied the
data in the birth certificate and signed the same. There was no evidence that Carlos
L. Puno acknowledged petitioner as his son.

As for the baptismal certificate, we have already decreed that it can only serve
as evidence of the administration of the sacrament on the date specified but not of
the veracity of the entries with respect to the childs paternity.[11]

In any case, Sections 74 and 75 of the Corporation Code enumerate the

persons who are entitled to the inspection of corporate books, thus

Sec. 74. Books to be kept; stock transfer agent. x x x.

The records of all business transactions of the corporation and the minutes
of any meeting shall be open to the inspection of any director, trustee,
stockholder or member of the corporation at reasonable hours on business days
and he may demand, in writing, for a copy of excerpts from said records or minutes,
at his expense.
 xxxx

Sec. 75. Right to financial statements. Within ten (10) days from receipt of
a written request of any stockholder or member, the corporation shall furnish to him
its most recent financial statement, which shall include a balance sheet as of the end
of the last taxable year and a profit or loss of statement for said taxable year,
showing in reasonable detail its assets and liabilities and the result of its
operations.[12]

The stockholders right of inspection of the corporations books and records is

based upon his ownership of shares in the corporation and the necessity for self-
protection. After all, a shareholder has the right to be intelligently informed about
corporate affairs.[13] Such right rests upon the stockholders underlying ownership of
the corporations assets and property.[14]

Similarly, only stockholders of record are entitled to receive dividends

declared by the corporation, a right inherent in the ownership of the shares.[15]

Upon the death of a shareholder, the heirs do not automatically become

stockholders of the corporation and acquire the rights and privileges of the deceased
as shareholder of the corporation. The stocks must be distributed first to the heirs in
estate proceedings, and the transfer of the stocks must be recorded in the books of
the corporation. Section 63 of the Corporation Code provides that no transfer shall
be valid, except as between the parties, until the transfer is recorded in the books of
the corporation.[16] During such interim period, the heirs stand as the equitable
owners of the stocks, the executor or administrator duly appointed by the court being
vested with the legal title to the stock.[17]Until a settlement and division of the estate
is effected, the stocks of the decedent are held by the administrator or
executor.[18] Consequently, during such time, it is the administrator or executor who
is entitled to exercise the rights of the deceased as stockholder.

Thus, even if petitioner presents sufficient evidence in this case to establish

that he is the son of Carlos L. Puno, he would still not be allowed to inspect
respondents books and be entitled to receive dividends from respondent, absent any
showing in its transfer book that some of the shares owned by Carlos L. Puno were
transferred to him. This would only be possible if petitioner has been recognized as
an heir and has participated in the settlement of the estate of the deceased.

Corollary to this is the doctrine that a determination of whether a person,

claiming proprietary rights over the estate of a deceased person, is an heir of the
deceased must be ventilated in a special proceeding instituted precisely for the
purpose of settling the estate of the latter. The status of an illegitimate child who
claims to be an heir to a decedents estate cannot be adjudicated in an ordinary civil
action, as in a case for the recovery of property.[19] The doctrine applies to the instant
case, which is one for specific performance to direct respondent corporation to allow
petitioner to exercise rights that pertain only to the deceased and his representatives.

WHEREFORE, premises considered, the petition is DENIED. The Court of

Appeals Decision dated October 11, 2006 and Resolution dated March 6, 2007
are AFFIRMED.

SO ORDERED.

ANTONIO EDUARDO B. NACHURA

Associate Justice

WE CONCUR:

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson
 MINITA V. CHICO-NAZARIO PRESBITERO J. VELASCO, JR.
Associate Justice Associate Justice

DIOSDADO M. PERALTA
Associate Justice

ATTESTATION
I attest that the conclusions in the above Decision were reached in consultation
before the case was assigned to the writer of the opinion of the Courts Division.

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson, Third Division

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution and the Division
Chairperson's Attestation, I certify that the conclusions in the above Decision had
been reached in consultation before the case was assigned to the writer of the opinion
of the Courts Division.
 REYNATO S. PUNO
Chief Justice

[1]
Penned by Associate Justice Conrado M. Vasquez, Jr. (now Presiding Justice of the Court of Appeals) with
Associate Justices Mariano C. del Castillo (now Associate Justice of the Supreme Court) and Santiago Javier Ranada,
concurring; rollo,pp. 28-36.
[2]
Records, pp. 1-4.
[3]
Id. at 96.
[4]
Rollo, p. 30.
[5]
Id. at 31-35.
[6]
CA rollo, pp. 90-91.
[7]
Rollo, pp. 21-22.
[8]
Fernandez v. Tarun, 440 Phil. 334, 349 (2002).
[9]
Social Security System v. Aguas, G.R. No. 165546, February 27, 2006, 483 SCRA 383, 395-396.
[10]
Cabatania v. Court of Appeals, 484 Phil. 42, 51 (2004).
[11]
Id.
[12]
Emphasis supplied.
[13]
5A Fletcher Cyclopedia of the Law of Private Corporations, 2213.
[14]
Gokongwei, Jr. v. Securities and Exchange Commission, 178 Phil. 266, 314 (1979).
[15]
Cesar Villanueva, Philippine Corporate Law, p. 259, citing Nielson & Co., Inc. v. Lepanto Consolidated Mining
Co., 26 SCRA 540 (1968); Lopez, Rosario, the Corporation Code of the Philippines, p. 617, citing Knight v.
Schultz, 141 Ohio St. 267, 47 NE (2d) 286.
[16]
Rosario Lopez, The Corporation Code of the Philippines, Vol. 2, p. 718, citing Miguel A.B. Sison et al v. Hon.
Agellon et al, SEC-EB No. 293, November 23, 1992.
[17]
5A Fletcher Cyclopedia of the Law of Private Corporations., 2213.
[18]
Tan v. Sycip, G.R. No. 153468, August 17, 2006, 499 SCRA 216, 231.
[19]
Joaquino v. Reyes, G.R. No. 154645, July 13, 2004, 434 SCRA 260, 274.

EN BANC

IMELDA O. COJUANGCO, G.R. No. 183278

PRIME HOLDINGS, INC., AND
THE ESTATE OF RAMON U. Present:
COJUANGCO
Petitioners, PUNO, C.J.,
QUISUMBING,*
YNARES-SANTIAGO,
CARPIO,
- versus - AUSTRIA-MARTINEZ,
CORONA,
CARPIO MORALES,
 TINGA,
CHICO-NAZARIO,
VELASCO, JR.,
SANDIGANBAYAN, REPUBLIC NACHURA,
OF THE PHILIPPINES, AND LEONARDO-DE CASTRO,
THE SHERIFF OF BRION,
SANDIGANBAYAN, PERALTA, and
Respondents. BERSAMIN, JJ.

Promulgated:

April 24, 2009

x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x

DECISION

CARPIO MORALES, J.:

The present petition is one for Certiorari.

Petitioners Imelda O. Cojuangco, Prime Holdings, Inc., and the Estate of

Ramon Cojuangco assail via certiorari the Resolutions dated November 7,
2007[1] and June 13, 2008[2] of the Sandiganbayan in Civil Case No. 0002, Republic
of the Philippines v. Ferdinand Marcos, et. al.

A brief recital of the antecedent facts is in order.

On July 16, 1987, respondent Republic of the Philippines (Republic) filed

before the Sandiganbayan a Complaint for Reconveyance, Reversion, Accounting,
Restitution and Damages, docketed as Civil Case 0002, praying for the recovery of
alleged ill-gotten wealth from the late President Marcos and former First Lady
Imelda Marcos and their cronies, including some 2.4 million shares of stock in the
Philippine Long Distance Telephone Company (PLDT).
 The complaint, which was later amended to implead herein petitioners Ramon
and Imelda Cojuangco (the Cojuangcos), alleged that the Marcoses ill-gotten wealth
included shares in the PLDT covered by shares of stock in the Philippine
Telecommunications Investment Corporation (PTIC), registered in the name of
Prime Holdings, Inc. (Prime Holdings).

The Sandiganbayan dismissed the complaint with respect to the recovery of the
PLDT shares, hence, the Republic appealed to this Court, docketed as G.R. No.
153459, which appeal was later consolidated with pending cases of similar import
G.R. Nos. 149802, 150320, and 150367.

By Decision[3] dated January 20, 2006, this Court, in G.R. No. 153459, ruled in
favor of the Republic, declaring it to be the owner of 111,415 PTIC shares registered
in the name of Prime Holdings. The dispositive portion of the Decision reads:
WHEREFORE, the petition of the Republic of the Philippines in G.R. No.
153459 is GRANTED to the extent that it prays for the reconveyance to the
Republic of 111,415 PTIC shares registered in the name of PHI. The petitions in
G.R. Nos. 149802, 150320, 150367, and 153207 are DENIED for lack of merit.

SO ORDERED.

The Decision became final and executory on October 26, 2006, hence, the
Republic filed on November 20, 2006 with the Sandiganbayan a Motion for the
Issuance of a Writ of Execution, praying for the cancellation of the 111,415
shares/certificates of stock registered in the name of Prime Holdings and the
annotation of the change of ownership on PTICs Stock and Transfer Book. The
Republic further prayed for the issuance of an order for PTIC to account for all cash
and stock dividends declared and/or issued by PLDT in favor of PTIC from 1986 up
to the present including compounded interests appurtenant thereto.
By Resolution dated December 14, 2006, the Sandiganbayan granted the Motion for
the Issuance of a Writ of Execution with respect to the reconveyance of the shares,
but denied the prayer for accounting of dividends.

On Motion for Reconsideration of the Republic, the Sandiganbayan, by the

first assailed Resolution dated November 7, 2007, directed PTIC to deliver the
cash and stock dividends pertaining to the 111,415 shares, including compounded
interests, ratiocinating that the same were covered by this Courts Decision in G.R.
No. 153459, since the Republic was therein adjudged the owner of the shares and,
therefore, entitled to the fruits thereof.

The Cojuangcos (hereafter petitioners) moved to reconsider the November 7, 2007

Sandiganbayan Resolution, alleging that this Courts Decision in G.R. No.
153459 did not include a disposition of the dividends and interests accruing to the
shares adjudicated in favor of the Republic.
By the other challenged Resolution dated June 13, 2008, the Sandiganbayan partly
granted petitioners Motion for Reconsideration by including legal interests, but not
compounding the same, from the accounting and remittance to the Republic. The
Sandiganbayan thereupon issued a Writ of Execution,[4] hence, spawned the present
petition for certiorari.

From the myriad assignments of error proffered by petitioners, the pivotal issues for
the Courts resolution are: (1) whether the Sandiganbayan gravely abused its
discretion in ordering the accounting, delivery, and remittance to the Republic of the
stock, cash, and property dividends pertaining to the 111,415 PTIC shares of Prime
Holdings, this Courts Decision in G.R. No. 153459 not having even discussed the
same; and (2) whether the Republic, having transferred the shares to a third party, is
entitled to the dividends, interests, and earnings thereof.
 Petitioners insist on a literal reading of the dispositive portion of this Courts
Decision in G.R. No. 153459 as excluding the dividends, interests, and earnings
accruing to the shares of stock from being accounted for and remitted.

The term dividend in its technical sense and ordinary acceptation is that part or
portion of the profits of the enterprise which the corporation, by its governing agents,
sets apart for ratable division among the holders of the capital stock.[5] It is a payment
to the stockholders of a corporation as a return upon their investment,[6] and the right
thereto is an incident of ownership of stock.[7]

This Court, in directing the reconveyance to the Republic of the 111,415

shares of PLDT stock owned by PTIC in the name of Prime Holdings, declared the
Republic as theowner of said shares and, necessarily, the dividends and interests
accruing thereto.

Ownership is a relation in law by virtue of which a thing pertaining to one

person is completely subjected to his will in everything not prohibited by law or the
concurrence with the rights of another. Its traditional elements or attributes
include jus utendi or the right to receive from the thing what it produces.[8]

Contrary to petitioners contention, while the general rule is that the portion of
a decision that becomes the subject of execution is that ordained or decreed in
the dispositive part thereof, there are recognized exceptions to this
rule, viz: (a).where there is ambiguity or uncertainty, the body of the opinion may be
referred to for purposes of construing the judgment, because the dispositive part of
a decision must find support from the decisions ratio decidendi; and (b).where
extensive and explicit discussion and settlement of the issue is found in the body of
the decision.[9]
 In G.R. No. 153459, although the inclusion of the dividends, interests, and
earnings of the 111,415 PTIC shares as belonging to the Republic was not mentioned
in the dispositive portion of the Courts Decision, it is clear from its body that what
was being adjudicated in favor of the Republic was the whole block of shares and
the fruits thereof, said shares having been found to be part of the Marcoses ill-gotten
wealth, and therefore, public money.

It would be absurd to award the shares to the Republic as their owner and not
include the dividends and interests accruing thereto. An owner who cannot exercise
the jusesor attributes of ownership -- the right to possess, to use and enjoy, to abuse
or consume, to accessories, to dispose or alienate, to recover or vindicate, and to the
fruits - is a crippled owner.[10]

Respecting petitioners argument that the Republic has yielded its right to the
fruits of the shares when it sold them to Metro Pacific Assets Holdings, Inc., (Metro
Pacific), the same does not lie.

Dividends are payable to the stockholders of record as of the date of the

declaration of dividends or holders of record on a certain future date, as the case may
be, unless the parties have agreed otherwise.[11] And a transfer of shares which is not
recorded in the books of the corporation is valid only as between the parties, hence,
the transferor has the right to dividends as against the corporation without notice of
transfer but it serves as trustee of the real owner of the dividends, subject to the
contract between the transferor and transferee as to who is entitled to receive the
dividends.[12]

It is thus clear that the Republic is entitled to the dividends accruing from the
subject 111,415 shares since 1986 when they were sequestered up to the time they
were transferred to Metro Pacific via the Sale and Purchase Agreement of February
28, 2007;[13] and that the Republic has since the latter date been serving as trustee of
 those dividends for the Metro Pacific up to the present, subject to the terms and
conditions of the said agreement they entered into.

WHEREFORE, the petition is DENIED. The challenged Resolutions

dated November 7, 2007 and June 13, 2008 of the Sandiganbayan in Civil Case No.
0002 are, in light of the foregoing, AFFIRMED.

SO ORDERED.

CONCHITA CARPIO MORALES

Associate Justice

WE CONCUR:

REYNATO S. PUNO
Chief Justice

(ON OFFICIAL LEAVE)

LEONARDO A. QUISUMBING CONSUELO YNARES- SANTIAGO
Associate Justice Associate Justice

ANTONIO T. CARPIO MA. ALICIA AUSTRIA-MARTINEZ

Associate Justice Associate Justice
 RENATO C. CORONA DANTE O. TINGA
Associate Justice Associate Justice

PRESBITERO J. VELASCO, JR.

MINITA V. CHICO-NAZARIO Associate Justice
Associate Justice
TERESITA J. LEONARDO-DE CASTRO
Associate Justice
ANTONIO EDUARDO B. NACHURA
Associate Justice

ARTURO D. BRION DIOSDADO M. PERALTA

Associate Justice Associate Justice

LUCAS P. BERSAMIN
Associate Justice

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, I hereby certify that the
conclusions in the above Decision had been reached in consultation before the case
was assigned to the writer of the opinion of the Court.

REYNATO S. PUNO
Chief Justice

*
On official leave.
[1]
Annex A of the Petition, rollo, pp. 51-58. Penned by Associate Justice Jose R. Hernandez and concurred in by
Associate Justices Gregory S. Ong and Rodolfo A. Ponferrada.
[2]
Annex B of the Petition, id. at 59-68. Penned by Associate Justice Jose R. Hernandez and concurred in by Associate
Justices Gregory S. Ong and Rodolfo A. Ponferrada.
[3]
Yuchengco v. Sandiganbayan, G.R. Nos. 149802, 150320, 150367, 153207, and 153459, January 20, 2006, 479
SCRA 1.
[4]
Annex K of Petition, rollo, pp. 449-450.
[5]
Vide Nielson & Co. v. Lepanto Consolidated Mining Co., No. L-21601, December 28, 1968, 26 SCRA 540, 569
[6]
Vide DE LEON, THE CORPORATION CODE OF THE PHILIPPINES Annotated, p. 384, 2002 Ed.., citing 19
Am Jur 2d 370.
[7]
Id. at 410; citing 18 Am. Jur 2d 281-283.
[8]
Vide Distilleria Washington, Inc. v. La Tondea Distillers, Inc., G.R. No. 120961, October 2, 1997, 280 SCRA 116,
125.
[9]
Insular Life v. Toyota Bel-Air, G.R. No. 137884, March 28, 2008.
[10]
Samartino v. Raon, G.R. No. 131482, July 3, 2002, 383 SCRA 664, 674.
[11]
De Leon, p. 410, citing SEC Opinion, November 12, 1986.
[12]
Sec. 63. Certificate of stock and transfer of shares. The capital stock of stock corporations shall be divided into
shares for which certificates signed by the president or vice-president, countersigned by the secretary or assistant
secretary, and sealed with the seal of the corporation shall be issued in accordance with the by-laws. Shares of
stock so issued are personal property and may be transferred by delivery of the certificate or certificates
indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. No
transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books
of the corporation showing the names of the parties to the transaction, the date of the transfer, the number
of the certificate or certificates and the number of shares transferred.
No shares of stock against which the corporation holds any unpaid claim shall be transferable in the
books of the corporation. (Emphasis supplied)
[13]
See Comment/Opposition to the Petition, Annex H of the Petition, rollo, pp. 370-399.
Republic of the Philippines
Supreme Court
Manila

THIRD DIVISION

PHILIP TURNER and ELNORA G.R. No. 157479

TURNER,
Petitioners, Present:

CARPIO MORALES, Chairperson,

BRION,
-versus - BERSAMIN,
VILLARAMA, JR., and
ARANAL-SERENO, JJ.
Promulgated:
LORENZO SHIPPING
CORPORATION, November 24, 2010
Respondent.
x-----------------------------------------------------------------------------------------x
 DECISION

BERSAMIN, J.:

This case concerns the right of dissenting stockholders to demand payment of the
value of their shareholdings.

In the stockholders suit to recover the value of their shareholdings from the
corporation, the Regional Trial Court (RTC) upheld the dissenting stockholders,
herein petitioners, and ordered the corporation, herein respondent, to pay. Execution
was partially carried out against the respondent. On the respondents petition
for certiorari, however, the Court of Appeals (CA) corrected the RTC and dismissed
the petitioners suit on the ground that their cause of action for collection had not yet
accrued due to the lack of unrestricted retained earnings in the books of the
respondent.

Thus, the petitioners are now before the Court to challenge the CAs decision
promulgated on March 4, 2003 in C.A.-G.R. SP No. 74156 entitled Lorenzo
Shipping Corporation v. Hon. Artemio S. Tipon, in his capacity as Presiding Judge
of Branch 46 of the Regional Trial Court of Manila, et al.[1]

Antecedents

The petitioners held 1,010,000 shares of stock of the respondent, a domestic

corporation engaged primarily in cargo shipping activities. In June 1999, the
respondent decided to amend its articles of incorporation to remove the stockholders
pre-emptive rights to newly issued shares of stock. Feeling that the corporate move
would be prejudicial to their interest as stockholders, the petitioners voted against
the amendment and demanded payment of their shares at the rate of P2.276/share
based on the book value of the shares, or a total of P2,298,760.00.
The respondent found the fair value of the shares demanded by the petitioners
unacceptable. It insisted that the market value on the date before the action to remove
the pre-emptive right was taken should be the value, or P0.41/share (or a total
of P414,100.00), considering that its shares were listed in the Philippine Stock
Exchange, and that the payment could be made only if the respondent had
unrestricted retained earnings in its books to cover the value of the shares, which
was not the case.
The disagreement on the valuation of the shares led the parties to constitute an
appraisal committee pursuant to Section 82 of the Corporation Code, each of them
nominating a representative, who together then nominated the third member who
would be chairman of the appraisal committee. Thus, the appraisal committee came
to be made up of Reynaldo Yatco, the petitioners nominee; Atty. Antonio Acyatan,
the respondents nominee; and Leo Anoche of the Asian Appraisal Company, Inc.,
the third member/chairman.
On October 27, 2000, the appraisal committee reported its valuation
of P2.54/share, for an aggregate value of P2,565,400.00 for the petitioners.[2]

Subsequently, the petitioners demanded payment based on the valuation of

the appraisal committee, plus 2%/month penalty from the date of their original
demand for payment, as well as the reimbursement of the amounts advanced as
professional fees to the appraisers.[3]

In its letter to the petitioners dated January 2, 2001, [4] the respondent refused the
petitioners demand, explaining that pursuant to the Corporation Code, the
dissenting stockholders exercising their appraisal rights could be paid only when
the corporation had unrestricted retained earnings to cover the fair value of the
shares, but that it had no retained earnings at the time of the petitioners demand, as
borne out by its Financial Statements for Fiscal Year 1999 showing a deficit
of P72,973,114.00 as of December 31, 1999.
Upon the respondents refusal to pay, the petitioners sued the respondent for
collection and damages in the RTC in Makati City on January 22, 2001. The case,
docketed as Civil Case No. 01-086, was initially assigned to Branch 132.[5]
On June 26, 2002, the petitioners filed their motion for partial summary judgment,
claiming that:

7) xxx the defendant has an accumulated unrestricted retained earnings

of ELEVEN MILLION NINE HUNDRED SEVENTY FIVE
THOUSAND FOUR HUNDRED NINETY (P11,975,490.00) PESOS,
Philippine Currency, evidenced by its Financial Statement as of the
Quarter Ending March 31, 2002; xxx
 8) xxx the fair value of the shares of the petitioners as fixed by the
Appraisal Committee is final, that the same cannot be disputed xxx

9) xxx there is no genuine issue to material fact and therefore, the

plaintiffs are entitled, as a matter of right, to a summary judgment. xxx [6]

The respondent opposed the motion for partial summary judgment, stating that the
determination of the unrestricted retained earnings should be made at the end
of the fiscal year of the respondent, and that the petitioners did not have a
cause of action against the respondent.
During the pendency of the motion for partial summary judgment, however, the
Presiding Judge of Branch 133 transmitted the records to the Clerk of Court
for re-raffling to any of the RTCs special commercial courts
in Makati City due to the case being an intra-corporate dispute. Hence, Civil
Case No. 01-086 was re-raffled to Branch 142.

Nevertheless, because the principal office of the respondent was in

Manila, Civil Case No. 01-086 was ultimately transferred to Branch 46 of the RTC
in Manila, presided by Judge Artemio Tipon,[7] pursuant to the Interim Rules of
Procedure on Intra-Corporate Controversies (Interim Rules) requiring intra-
corporate cases to be brought in the RTC exercising jurisdiction over the place where
the principal office of the corporation was found.

After the conference in Civil Case No. 01-086 set on October 23, 2002, which the
petitioners counsel did not attend, Judge Tipon issued an order,[8] granting the
petitioners motion for partial summary judgment, stating:

As to the motion for partial summary judgment, there is no question that the
3-man committee mandated to appraise the shareholdings of plaintiff submitted its
recommendation on October 27, 2000 fixing the fair value of the shares of stocks
of the plaintiff at P2.54 per share. Under Section 82 of the Corporation Code:

The findings of the majority of the appraisers shall be final, and the
award shall be paid by the corporation within thirty (30) days after the
award is made.

The only restriction imposed by the Corporation Code is

 That no payment shall be made to any dissenting stockholder unless
the corporation has unrestricted retained earning in its books to cover such
payment.

The evidence submitted by plaintiffs shows that in its quarterly financial

statement it submitted to the Securities and Exchange Commission, the defendant
has retained earnings of P11,975,490 as of March 21, 2002. This is not disputed by
the defendant. Its only argument against paying is that there must be unrestricted
retained earning at the time the demand for payment is made.

This certainly is a very narrow concept of the appraisal right of a stockholder.

The law does not say that the unrestricted retained earnings must exist at the time
of the demand. Even if there are no retained earnings at the time the demand is
made if there are retained earnings later, the fair value of such stocks must be paid.
The only restriction is that there must be sufficient funds to cover the creditors after
the dissenting stockholder is paid. No such allegations have been made by the
defendant.[9]

On November 12, 2002, the respondent filed a motion for reconsideration.

On the scheduled hearing of the motion for reconsideration on November 22,

2002, the petitioners filed a motion for immediate execution and a motion to strike
out motion for reconsideration. In the latter motion, they pointed out that the motion
for reconsideration was prohibited by Section 8 of the Interim Rules. Thus, also
on November 22, 2002, Judge Tipon denied the motion for reconsideration and
granted the petitioners motion for immediate execution.[10]

Subsequently, on November 28, 2002, the RTC issued a writ of execution.[11]

Aggrieved, the respondent commenced a special civil action for certiorari in the CA
to challenge the two aforecited orders of Judge Tipon, claiming that:

A.
JUDGE TIPON GRAVELY ABUSED HIS DISCRETION IN GRANTING
SUMMARY JUDGMENT TO THE SPOUSES TURNER, BECAUSE AT THE
TIME THE COMPLAINT WAS FILED, LSC HAD NO RETAINED EARNINGS,
AND THUS WAS COMPLYING WITH THE LAW, AND NOT VIOLATING
ANY RIGHTS OF THE SPOUSES TURNER, WHEN IT REFUSED TO PAY
THEM THE VALUE OF THEIR LSC SHARES. ANY RETAINED EARNINGS
MADE A YEAR AFTER THE COMPLAINT WAS FILED ARE IRRELEVANT
TO THE SPOUSES TURNERS RIGHT TO RECOVER UNDER THE
COMPLAINT, BECAUSE THE WELL-SETTLED RULE, REPEATEDLY
 BROUGHT TO JUDGE TIPONS ATTENTION, IS IF NO RIGHT EXISTED AT
THE TIME (T)HE ACTION WAS COMMENCED THE SUIT CANNOT BE
MAINTAINED, ALTHOUGH SUCH RIGHT OF ACTION MAY HAVE
ACCRUED THEREAFTER.

B.
JUDGE TIPON IGNORED CONTROLLING CASE LAW, AND THUS
GRAVELY ABUSED HIS DISCRETION, WHEN HE GRANTED AND ISSUED
THE QUESTIONED WRIT OF EXECUTION DIRECTING THE EXECUTION
OF HIS PARTIAL SUMMARY JUDGMENT IN FAVOR OF THE SPOUSES
TURNER, BECAUSE THAT JUDGMENT IS NOT A FINAL JUDGMENT
UNDER SECTION 1 OF RULE 39 OF THE RULES OF COURT AND
THEREFORE CANNOT BE SUBJECT OF EXECUTION UNDER THE
SUPREME COURTS CATEGORICAL HOLDING IN PROVINCE OF
PANGASINAN VS. COURT OF APPEALS.

Upon the respondents application, the CA issued a temporary restraining order

(TRO), enjoining the petitioners, and their agents and representatives from enforcing
the writ of execution. By then, however, the writ of execution had been partially
enforced.

The TRO lapsed without the CA issuing a writ of preliminary injunction to

prevent the execution. Thereupon, the sheriff resumed the enforcement of the writ
of execution.

The CA promulgated its assailed decision on March 4, 2003,[12] pertinently

holding:
However, it is clear from the foregoing that the Turners appraisal right is
subject to the legal condition that no payment shall be made to any dissenting
stockholder unless the corporation has unrestricted retained earnings in its books to
cover such payment. Thus, the Supreme Court held that:

The requirement of unrestricted retained earnings to cover the

shares is based on the trust fund doctrine which means that the capital
stock, property and other assets of a corporation are regarded as equity
in trust for the payment of corporate creditors. The reason is that
creditors of a corporation are preferred over the stockholders in the
distribution of corporate assets. There can be no distribution of assets
among the stockholders without first paying corporate creditors. Hence,
any disposition of corporate funds to the prejudice of creditors is null
and void. Creditors of a corporation have the right to assume that so
 long as there are outstanding debts and liabilities, the board of directors
will not use the assets of the corporation to purchase its own stock.

In the instant case, it was established that there were no unrestricted retained
earnings when the Turners filed their Complaint. In a letter dated 20 August 2000,
petitioner informed the Turners that payment of their shares could only be made if
it had unrestricted earnings in its books to cover the same. Petitioner reiterated this
in a letter dated 2 January 2001 which further informed the Turners that its
Financial Statement for fiscal year 1999 shows that its retained earnings ending
December 31, 1999 was at a deficit in the amount of P72,973,114.00, a matter
which has not been disputed by private respondents. Hence, in accordance with the
second paragraph of sec. 82, BP 68 supra, the Turners right to payment had not yet
accrued when they filed their Complaint on January 22, 2001, albeit their appraisal
right already existed.
In Philippine American General Insurance Co. Inc. vs. Sweet Lines, Inc., the
Supreme Court declared that:

Now, before an action can properly be commenced all the essential

elements of the cause of action must be in existence, that is, the cause of
action must be complete. All valid conditions precedent to the institution
of the particular action, whether prescribed by statute, fixed by agreement
of the parties or implied by law must be performed or complied with
before commencing the action, unless the conduct of the adverse party has
been such as to prevent or waive performance or excuse non-performance
of the condition.

It bears restating that a right of action is the right to presently enforce

a cause of action, while a cause of action consists of the operative facts
which give rise to such right of action.The right of action does not arise
until the performance of all conditions precedent to the action and may be
taken away by the running of the statute of limitations, through estoppel,
or by other circumstances which do not affect the cause of
action. Performance or fulfillment of all conditions precedent upon which
a right of action depends must be sufficiently alleged, considering that the
burden of proof to show that a party has a right of action is upon the person
initiating the suit.

The Turners right of action arose only when petitioner had already retained
earnings in the amount of P11,975,490.00 on March 21, 2002; such right of action
was inexistent on January 22, 2001 when they filed the Complaint.

In the doctrinal case of Surigao Mine Exploration Co. Inc., vs. Harris, the
Supreme Court ruled:

Subject to certain qualifications, and except as otherwise provided by

law, an action commenced before the cause of action has accrued is
 prematurely brought and should be dismissed. The fact that the cause of
action accrues after the action is commenced and while it is pending is of
no moment. It is a rule of law to which there is, perhaps, no exception,
either at law or in equity, that to recover at all there must be some cause
of action at the commencement of the suit. There are reasons of public
policy why there should be no needless haste in bringing up litigation, and
why people who are in no default and against whom there is as yet no
cause of action should not be summoned before the public tribunals to
answer complaints which are groundless. An action prematurely brought
is a groundless suit. Unless the plaintiff has a valid and subsisting cause
of action at the time his action iscommenced, the defect cannot be cured
or remedied by the acquisition or accrual of one while the action is
pending, and a supplemental complaint or an amendment setting up such
after-accrued cause of action is not permissible.

The afore-quoted ruling was reiterated in Young vs Court of Appeals and Lao
vs. Court of Appeals.

The Turners apprehension that their claim for payment may prescribe if they
wait for the petitioner to have unrestricted retained earnings is misplaced. It is the
legal possibility of bringing the action that determines the starting point for the
computation of the period of prescription. Stated otherwise, the prescriptive period
is to be reckoned from the accrual of their right of action.

Accordingly, We hold that public respondent exceeded its jurisdiction when

it entertained the herein Complaint and issued the assailed Orders. Excess of
jurisdiction is the state of being beyond or outside the limits of jurisdiction, and as
distinguished from the entire absence of jurisdiction, means that the act although
within the general power of the judge, is not authorized and therefore void, with
respect to the particular case, because the conditions which authorize the exercise
of his general power in that particular case are wanting, and hence, the judicial
power is not in fact lawfully invoked.

We find no necessity to discuss the second ground raised in this petition.

WHEREFORE, upon the premises, the petition is GRANTED. The assailed

Orders and the corresponding Writs of Garnishment are NULLIFIED. Civil Case
No. 02-104692 is hereby ordered DISMISSED without prejudice to refiling by the
private respondents of the action for enforcement of their right to payment as
withdrawing stockholders.

SO ORDERED.
 The petitioners now come to the Court for a review on certiorari of the CAs
decision, submitting that:

I.
THE COURT OF APPEALS COMMITTED SERIOUS ERRORS OF LAW
WHEN IT GRANTED THE PETITION FOR CERTIORARI WHEN THE
REGIONAL TRIAL COURT OF MANILA DID NOT ACT BEYOND ITS
JURISDICTION AMOUNTING TO LACK OF JURISDICTION IN GRANTING
THE MOTION FOR PARTIAL SUMMARY JUDGMENT AND IN GRANTING
THE MOTION FOR IMMEDIATE EXECUTION OF JUDGMENT;

II.
THE COURT OF APPEALS COMMITTED SERIOUS ERRORS OF LAW
WHEN IT ORDERED THE DISMISSAL OF THE CASE, WHEN THE
PETITION FOR CERTIORARI MERELY SOUGHT THE ANNULMENT OF
THE ORDER GRANTING THE MOTION FOR PARTIAL SUMMARY
JUDGMENT AND OF THE ORDER GRANTING THE MOTION FOR
IMMEDIATE EXECUTION OF THE JUDGMENT;

III.
THE HONORABLE COURT OF APPEALS HAS DECIDED QUESTIONS OF
SUBSTANCE NOT THEREFORE DETERMINED BY THIS HONORABLE
COURT AND/OR DECIDED IT IN A WAY NOT IN ACCORD WITH LAW OR
WITH JURISPRUDENCE.

Ruling

The petition fails.

The CA correctly concluded that the RTC had exceeded its jurisdiction in
entertaining the petitioners complaint in Civil Case No. 01-086, and in rendering the
summary judgment and issuing writ of execution.

A.
Stockholders Right of Appraisal, In General

A stockholder who dissents from certain corporate actions has the right to
demand payment of the fair value of his or her shares. This right, known as the right
of appraisal, is expressly recognized in Section 81 of the Corporation Code, to wit:
 Section 81. Instances of appraisal right. - Any stockholder of a corporation
shall have the right to dissent and demand payment of the fair value of his shares
in the following instances:

1. In case any amendment to the articles of incorporation has the effect of

changing or restricting the rights of any stockholder or class of shares, or of
authorizing preferences in any respect superior to those of outstanding shares of
any class, or of extending or shortening the term of corporate existence;

2. In case of sale, lease, exchange, transfer, mortgage, pledge or other

disposition of all or substantially all of the corporate property and assets as provided
in the Code; and

3. In case of merger or consolidation. (n)

Clearly, the right of appraisal may be exercised when there is a fundamental

change in the charter or articles of incorporation substantially prejudicing the rights
of the stockholders. It does not vest unless objectionable corporate action is
taken.[13] It serves the purpose of enabling the dissenting stockholder to have his
interests purchased and to retire from the corporation.[14]

Under the common law, there were originally conflicting views on whether a
corporation had the power to acquire or purchase its own stocks. In England, it was
held invalid for a corporation to purchase its issued stocks because such purchase
was an indirect method of reducing capital (which was statutorily restricted), aside
from being inconsistent with the privilege of limited liability to creditors. [15] Only a
few American jurisdictions adopted by decision or statute the strict English rule
forbidding a corporation from purchasing its own shares. In some American states
where the English rule used to be adopted, statutes granting authority to purchase
out of surplus funds were enacted, while in others, shares might be purchased even
out of capital provided the rights of creditors were not prejudiced. [16] The reason
underlying the limitation of share purchases sprang from the necessity of imposing
safeguards against the depletion by a corporation of its assets and against the
impairment of its capital needed for the protection of creditors.[17]

Now, however, a corporation can purchase its own shares, provided payment is
made out of surplus profits and the acquisition is for a legitimate corporate
purpose.[18] In the Philippines, this new rule is embodied in Section 41 of
the Corporation Code, to wit:
Section 41. Power to acquire own shares. - A stock corporation shall have the
power to purchase or acquire its own shares for a legitimate corporate purpose or
purposes, including but not limited to the following cases: Provided, That the
corporation has unrestricted retained earnings in its books to cover the shares to be
purchased or acquired:

1. To eliminate fractional shares arising out of stock dividends;

2. To collect or compromise an indebtedness to the corporation, arising out of

unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold
during said sale; and

3. To pay dissenting or withdrawing stockholders entitled to payment for their

shares under the provisions of this Code. (n)

The Corporation Code defines how the right of appraisal is exercised, as well
as the implications of the right of appraisal, as follows:

1. The appraisal right is exercised by any stockholder who has voted

against the proposed corporate action by making a written demand
on the corporation within 30 days after the date on which the vote
was taken for the payment of the fair value of his shares. The failure
to make the demand within the period is deemed a waiver of the
appraisal right.[19]

2. If the withdrawing stockholder and the corporation cannot agree on

the fair value of the shares within a period of 60 days from the date
the stockholders approved the corporate action, the fair value shall
be determined and appraised by three disinterested persons, one of
whom shall be named by the stockholder, another by the
corporation, and the third by the two thus chosen. The findings and
award of the majority of the appraisers shall be final, and the
corporation shall pay their award within 30 days after the award is
made. Upon payment by the corporation of the agreed or awarded
price, the stockholder shall forthwith transfer his or her shares to the
corporation.[20]
 3. All rights accruing to the withdrawing stockholders shares,
including voting and dividend rights, shall be suspended from the
time of demand for the payment of the fair value of the shares until
either the abandonment of the corporate action involved or the
purchase of the shares by the corporation, except the right of such
stockholder to receive payment of the fair value of the shares.[21]

4. Within 10 days after demanding payment for his or her shares, a

dissenting stockholder shall submit to the corporation the
certificates of stock representing his shares for notation thereon that
such shares are dissenting shares. A failure to do so shall, at the
option of the corporation, terminate his rights under this Title X of
the Corporation Code. If shares represented by the certificates
bearing such notation are transferred, and the certificates are
consequently canceled, the rights of the transferor as a dissenting
stockholder under this Title shall cease and the transferee shall have
all the rights of a regular stockholder; and all dividend distributions
that would have accrued on such shares shall be paid to the
transferee.[22]

5. If the proposed corporate action is implemented or effected, the

corporation shall pay to such stockholder, upon the surrender of the
certificates of stock representing his shares, the fair value thereof as
of the day prior to the date on which the vote was taken, excluding
any appreciation or depreciation in anticipation of such corporate
action.[23]

Notwithstanding the foregoing, no payment shall be made to any dissenting

stockholder unless the corporation has unrestricted retained earnings in its books to
cover the payment. In case the corporation has no available unrestricted retained
earnings in its books, Section 83 of the Corporation Code provides that if the
dissenting stockholder is not paid the value of his shares within 30 days after the
award, his voting and dividend rights shall immediately be restored.
The trust fund doctrine backstops the requirement of unrestricted retained earnings
to fund the payment of the shares of stocks of the withdrawing stockholders. Under
the doctrine, the capital stock, property, and other assets of a corporation are
regarded as equity in trust for the payment of corporate creditors, who are preferred
in the distribution of corporate assets.[24] The creditors of a corporation have the right
to assume that the board of directors will not use the assets of the corporation to
purchase its own stock for as long as the corporation has outstanding debts and
liabilities.[25] There can be no distribution of assets among the stockholders without
first paying corporate debts. Thus, any disposition of corporate funds and assets to
the prejudice of creditors is null and void.[26]

B.
Petitioners cause of action was premature

That the respondent had indisputably no unrestricted retained earnings in its books
at the time the petitioners commenced Civil Case No. 01-086 on January 22, 2001
proved that the respondents legal obligation to pay the value of the petitioners shares
did not yet arise. Thus, the CA did not err in holding that the petitioners had no cause
of action, and in ruling that the RTC did not validly render the partial summary
judgment.
A cause of action is the act or omission by which a party violates a right of
another.[27] The essential elements of a cause of action are: (a) the existence of a legal
right in favor of the plaintiff; (b) a correlative legal duty of the defendant to respect
such right; and (c) an act or omission by such defendant in violation of the right of
the plaintiff with a resulting injury or damage to the plaintiff for which the latter may
maintain an action for the recovery of relief from the defendant.[28] Although the first
two elements may exist, a cause of action arises only upon the occurrence of the last
element, giving the plaintiff the right to maintain an action in court for recovery of
damages or other appropriate relief.[29]
Section 1, Rule 2, of the Rules of Court requires that every ordinary civil action must
be based on a cause of action. Accordingly, Civil Case No. 01-086 was dismissible
from the beginning for being without any cause of action.

The RTC concluded that the respondents obligation to pay had accrued by its having
the unrestricted retained earnings after the making of the demand by the petitioners.
It based its conclusion on the fact that the Corporation Code did not provide that the
unrestricted retained earnings must already exist at the time of the demand.
 The RTCs construal of the Corporation Code was unsustainable, because
it did not take into account the petitioners lack of a cause of action against the
respondent. In order to give rise to any obligation to pay on the part of the
respondent, the petitioners should first make a valid demand that the respondent
refused to pay despite having unrestricted retained earnings. Otherwise, the
respondent could not be said to be guilty of any actionable omission that could
sustain their action to collect.

Neither did the subsequent existence of unrestricted retained earnings after the filing
of the complaint cure the lack of cause of action in Civil Case No. 01-086. The
petitioners right of action could only spring from an existing cause of action. Thus,
a complaint whose cause of action has not yet accrued cannot be cured by an
amended or supplemental pleading alleging the existence or accrual of a cause of
action during the pendency of the action.[30] For, only when there is an invasion of
primary rights, not before, does the adjective or remedial law become
operative.[31] Verily, a premature invocation of the courts intervention renders the
complaint without a cause of action and dismissible on such ground.[32] In
short, Civil Case No. 01-086, being a groundless suit, should be dismissed.
Even the fact that the respondent already had unrestricted retained earnings more
than sufficient to cover the petitioners claims on June 26, 2002 (when they
filed their motion for partial summary judgment) did not rectify the absence
of the cause of action at the time of the commencement of Civil Case No. 01-
086. The motion for partial summary judgment, being a mere application for
relief other than by a pleading,[33] was not the same as the complaint in Civil
Case No. 01-086. Thereby, the petitioners did not meet the requirement of
the Rules of Court that a cause of action must exist at the commencement of
an action, which is commenced by the filing of the original complaint in
court.[34]
The petitioners claim that the respondents petition for certiorari sought only the
annulment of the assailed orders of the RTC (i.e., granting the motion for partial
summary judgment and the motion for immediate execution); hence, the CA had no
right to direct the dismissal of Civil Case No. 01-086.
The claim of the petitioners cannot stand.

Although the respondents petition for certiorari targeted only the RTCs orders
granting the motion for partial summary judgment and the motion for immediate
execution, the CAs directive for the dismissal of Civil Case No. 01-086 was not an
abuse of discretion, least of all grave, because such dismissal was the only proper
thing to be done under the circumstances. According to Surigao Mine Exploration
Co., Inc. v. Harris:[35]

Subject to certain qualification, and except as otherwise provided by law, an action

commenced before the cause of action has accrued is prematurely brought and
should be dismissed. The fact that the cause of action accrues after the action is
commenced and while the case is pending is of no moment. It is a rule of law to
which there is, perhaps no exception, either in law or in equity, that to recover at
all there must be some cause of action at the commencement of the suit. There are
reasons of public policy why there should be no needless haste in bringing up
litigation, and why people who are in no default and against whom there is as yet
no cause of action should not be summoned before the public tribunals to answer
complaints which are groundless. An action prematurely brought is a groundless
suit. Unless the plaintiff has a valid and subsisting cause of action at the time
his action is commenced, the defect cannot be cured or remedied by the
acquisition or accrual of one while the action is pending, and a supplemental
complaint or an amendment setting up such after-accrued cause of action is not
permissible.

Lastly, the petitioners argue that the respondents recourse of a special action
for certiorari was the wrong remedy, in view of the fact that the granting of
the motion for partial summary judgment constituted only an error of law correctible
by appeal, not of jurisdiction.

The argument of the petitioners is baseless. The RTC was guilty of an error of
jurisdiction, for it exceeded its jurisdiction by taking cognizance of the complaint
that was not based on an existing cause of action.
WHEREFORE, the petition for review on certiorari is denied for lack of merit.

We affirm the decision promulgated on March 4, 2003 in C.A.-G.R. SP No.

74156 entitled Lorenzo Shipping Corporation v. Hon. Artemio S. Tipon, in his
capacity as Presiding Judge of Branch 46 of the Regional Trial Court of Manila, et
al.

Costs of suit to be paid by the petitioners.

SO ORDERED.
LUCAS P. BERSAMIN
Associate Justice

WE CONCUR:

CONCHITA CARPIO MORALES

Associate Justice
Chairperson

ARTURO D. BRION MARTIN S. VILLARAMA, JR.

Associate Justice Associate Justice

MARIA LOURDES P. ARANAL-SERENO

Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation
before the case was assigned to the writer of the opinion of the Courts Division.
 CONCHITA CARPIO MORALES
Associate Justice
Chairperson

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, and the Division
Chairpersons Attestation, I certify that the conclusions in the above Decision had
been reached in consultation before the case was assigned to the writer of the opinion
of the Courts Division.

RENATO C. CORONA
Chief Justice

[1]
Rollo, pp. 20-35; penned by Associate Justice Portia Alio-Hormachuelos, with Associate Justice Jose L. Sabio, Jr.
(retired) and Associate Justice Amelita G. Tolentino concurring.
[2]
Id., p.127.
[3]
Id., p.100.
[4]
Id., pp 118-119.
[5]
Id., p. 120-124.
[6]
Id., pp 151-152.
[7]
Already retired.
[8]
Rollo, pp. 91-93.
[9]
Id., p. 92.
[10]
Id., pp. 94-96.
[11]
Id., p. 97.
[12]
Id., pp. 20-35.
[13]
18 CJS, Corporations, 314, pp. 641-642.
[14]
Ibid.
[15]
Ballantine, Law of Corporations, Revised Edition, Callaghan and Co., Chicago, 1946, p. 603.
[16]
Id., p. 604.
[17]
Id., p. 605.
[18]
II Campos Jr., The Corporation Code, Comments, Notes and Selected Cases (1990).
[19]
Section 82, Corporation Code.
[20]
Ibid.
[21]
Id., Section 83.
[22]
Id., Section 86.
[23]
Id., Section 82.
[24]
Boman Environment Development Corporation v. Court of Appeals, G.R. No. L-77860, November 22, 1988, 167
SCRA 540, 541; citing Steinberg v. Velasco, 52 Phil. 953 (1929).
According to 42A, Words and Phrases, Trust Fund Doctrine, p. 445, the trust fund doctrine is a rule that the property
of a corporation is a trust fund for the payment of creditors, but such property can be called a trust fund only by way
of analogy or metaphor. As between the corporation itself and its creditors it is a simple debtor, and as between its
creditors and stockholders its assets are in equity a fund for the payment of its debts (citing McIver v. Young Hardware
Co., 57 S.E. 169, 171, 144 N.C. 478, 119 Am. St. Rep. 970; Gallagher v. Asphalt Co. of America, 55 A. 259, 262, 65
N.J. Eq. 258).
[25]
Boman Environment Development Corporation v. Court of Appeals, supra.
[26]
Id.
[27]
Section 2, Rule 2, Rules of Court.
[28]
Rebollido v. Court of Appeals, G.R. No. 81123, February 28, 1989, 170 SCRA 800; Heirs of Ildefonso Coscolluela
v. Rico General Insurance Corporation, G.R. No. 84628, November 16, 1989, 179 SCRA 511; Nabus v. Court of
Appeals, G.R. No. 91670, February 7, 1990, 193 SCRA 732;Mathay v. Consolidated Bank, G.R. No. L-23136, August
26, 1974, 58 SCRA 559; Leberman Realty Corporation v. Typingco, G.R. No. 126647, July 29, 1998, 293 SCRA 316.
[29]
Swagman Hotels and Travel, Inc. v. Court of Appeals, G.R. No. 161135, April 8, 2005, 455 SCRA 175.
[30]
Lao v. Court of Appeals, G.R. No. 47013, February 17, 2000, 325 SCRA 694.
[31]
Id.
[32]
Estrada v. Court of Appeals, G.R. No. 137862, November 11, 2004, 442 SCRA 117.
[33]
Section 1, Rule 15, Rules of Court.
[34]
Section 5, Rule 1, Rules of Court; A.G. Development Corporation v. Court of Appeals, G.R. No. 111662, October
23, 1997, 281 SCRA 155.
[35]
68 Phil 113 (1939).