MERCANTILE LAW DIGESTS 2014-June 2016 LETTERS OF CREDIT
DOCTRINE OF INDEPENDENCE Philippine National Bank vs. San Miguel Corporation G.R. No. 186063; January 15, 2014 J. Peralta Where the trial court rendered a decision finding the applicant of a letter of credit solely liable to pay the beneficiary and omitted by inadvertence to insert in its decision the phrase ‘without prejudice to the decision that will be made against the issuing bank,’ the bank cannot evade responsibility base on this ground.The Independence Principle assures the seller or the beneficiary of prompt payment independent of any breach of the main contract and precludes the issuing bank from determining whether the main contract is actually accomplished or not. Facts: San Miguel Corporation (SMC) entered into an Exclusive Dealership Agreement with Rodolfo Goroza, wherein the latter was given by SMC the right to trade, deal, market or otherwise sell its various beer products. Goroza applied for a credit line with SMC. To comply with the credit line application requirement, he applied for and was granted a letter of credit by PNB. Subsequently, Goroza availed of his credit line with PNB and started selling SMC’s beer products. An additional credit line with PNB was applied for by Goroza and his total credit line reached P4,400,000. Initially, Goroza was able to pay his credit purchases with SMC, but after sometime he started to become delinquent with his accounts. SMC demanded Goroza and PNB to pay the amount of P3,722,440.88, but neither of them paid. As a result, SMC filed a Complaint for collection of sum of money against PNB and Goroza.
After summons, PNB filed its answer, while Goroza did not. Upon motion, Goroza was subsequently declared in default. RTC later on rendered a decision in favor of SMC and against Goroza.
In the meantime, trial continued with respect to PNB. AN Urgent Motion to Terminate Proceedings was filed by PNB on the ground that a decision was already rendered finding Goroza solely liable. The RTC denied this motion and subsequently issued a Supplemental Judgment stating that: “the phrase ‘without prejudice to the decision made against the other defendant PNB which was not declared in default’ shall be inserted in the dispositive portion of the decision.” PNB then filed a motion for reconsideration, but the RTC denied the same. Aggrieved, PNB filed a special civil action for certiorari with the CA, but was denied. A motion for reconsideration was filed, but was again denied. Hence, the petition. Page 1 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 PNB argues that the RTC decision, finding Goroza solely liable to pay the entire amount sought to be recovered by SMC, has settled the obligation of both Goroza and PNB. Issue:
Whether or not the issuing bank is released from its liability to pay the beneficiary. Ruling:
Petition Denied.
In the case ofTransfield Philippines, Inc. v. Luzon Hydro Corporation: By definition, a letter of credit is a written instrument whereby the writer requests or authorizes the addressee to pay money or deliver goods to a third person and assumes responsibility for payment of debt therefor to the addressee. A letter of credit, however, changes its nature as different transactions occur and if carried through to completion ends up as a binding contract between the issuing and honoring banks without any regard or relation to the underlying contract or disputes between the parties thereto. Thus, the engagement of the issuing bank is to pay the seller or beneficiary of the credit once the draft and the required documents are presented to it. The so-called "independence principle" assures the seller or the beneficiary of prompt payment independent of any breach of the main contract and precludes the issuing bank from determining whether the main contract is actually accomplished or not. Under this principle, banks assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any documents, or for the general and/or particular conditions stipulated in the documents or superimposed thereon, nor do they assume any liability or responsibility for the description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods represented by any documents, or for the good faith or acts and/or omissions, solvency, performance or standing of the consignor, the carriers, or the insurers of the goods, or any other person whomsoever.
In a letter of credit transaction, such as in this case, where the credit is stipulated as irrevocable, there is a definite undertaking by the issuing bank to pay the beneficiary provided that the stipulated documents are presented and the conditions of the credit are complied with. Precisely, the independence principle liberates the issuing bank from the duty of ascertaining compliance by the parties in the main contract. As the principle's nomenclature clearly suggests, the obligation under the letter of credit is independent of the related and originating contract. In brief, the letter of credit is separate and distinct from the underlying transaction. In other words, PNB cannot evade responsibility on the sole ground that the RTC judgment found Goroza liable and ordered him to pay the amount sought to be recovered by SMC. PNB's liability, if any, under the letter of credit is yet to be determined.
Page 2 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Hongkong and Shanghai Banking Corporation Limited v. National Steel Corporation and Citytrust Banking Corporation G.R. No. 183486, February 24, 2016, Jardeleza, J:
Facts:
Respondent National Steel Corporation (NSC) entered into an Export Sales Contract (the Contract) with Klockner East Asia Limited (Klockner) on October 12, 1993. NSC sold 1,200 metric tons of prime cold rolled coils to Klockner under FOB ST Iligan terms. In accordance with the requirements in the Contract, Klockner applied for an irrevocable letter of credit with HSBC in favor of NSC as the beneficiary in the amount of US$468,000. On October 22, 1993, HSBC issued an irrevocable and onsight letter of credit no. HKH 239409 (the Letter of Credit) in favor of NSC. The Letter of Credit stated that it is governed by the International Chamber of Commerce Uniform Customs and Practice for Documentary Credits (UCP 400). Under UCP 400, HSBC as the issuing bank, has the obligation to immediately pay NSC upon presentment of the documents listed in the Letter of Credit.3 These documents are: (1) one original commercial invoice; (2) one packing list; (3) one non-negotiable copy of clean on board ocean bill of lading made out to order, blank endorsed marked 'freight collect and notify applicant etc. The Letter of Credit was amended twice to reflect changes in the terms of delivery. On November 2, 1993, the Letter of Credit was first amended to change the delivery terms from FOB ST Iligan to FOB ST Manila and to increase the amount to US$488,400. It was subsequently amended on November 18, 1993 to extend the expiry and shipment date to December 8, 1993. On November 21, 1993, NSC, through Emerald Forwarding Corporation, loaded and shipped the cargo of prime cold rolled coils on board MV Sea Dragon under China Ocean Shipping Company Bill of Lading. The cargo arrived in Hongkong on November 25, 1993.
NSC coursed the collection of its payment from Klockner through CityTrust Banking Corporation (CityTrust). NSC had earlier obtained a loan from CityTrust secured by the proceeds of the Letter of Credit issued by HSBC. CityTrust sent a collection order (Collection Order) to HSBC respecting the collection of payment from Klockner. HSBC sent a cablegram to CityTrust acknowledging receipt of the Collection Order. It also stated that the documents will be presented to "the drawee against payment subject to UCP 322 [Uniform Rules for Collection (URC) 322] as instructed. It also informed SCB-M that it has referred the matter to Klockner for payment and that it will revert upon the receipt of the amount. 17 On December 8, 1993, the Letter of Credit expired.
HSBC sent another cablegram to SCB-M advising it that Klockner had refused payment. It then informed SCB-M that it intends to return the documents to NSC with all the banking charges for its account. CityTrust insisted that a demand for payment must be made from Klockner since the documents "were found in compliance with LC terms and conditions." HSBC replied on the same day stating that in accordance with CityTrust's instruction in its Collection Order, HSBC treated the transaction as a matter under URC 322. Thus, it Page 3 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 demanded payment from Klockner which unfortunately refused payment for unspecified reasons. It then noted that under URC 322, Klockner has no duty to provide a reason for the refusal. Meanwhile, on March 3, 1994, NSC sent a letter to HSBC where it, for the first time, demanded payment under the Letter of Credit.
Unable to collect from HSBC, NSC filed a complaint against it for collection of sum of money (Complaint) docketed as Civil Case No. 94-2122 (Collection Case) of the RTC Makati. In its Complaint, NSC alleged that it coursed the collection of the Letter of Credit through CityTrust. However, notwithstanding CityTrust's complete presentation of the documents in accordance with the requirements in the Letter of Credit, HSBC unreasonably refused to pay its obligation in the amount of US$485,767.93. HSBC denied that it has any liability under the Letter of Credit. It argued that CityTrust modified the obligation when it stated in its Collection Order that the transaction is subject to URC 322 and not under UCP 400.
The RTC Makati rendered a decision (RTC Decision) dated February 23, 2000. It found that HSBC is not liable to pay NSC the amount stated in the Letter of Credit. It ruled that the applicable law is URC 322 as it was the law which CityTrust intended to apply to the transaction. Under URC 322, HSBC has no liability to pay when Klockner refused payment. The CA reversed the ruling of the RTC. The CA found that it is UCP 400 and not URC 322 which governs the transaction. According to the CA, the terms of the Letter of Credit clearly stated that UCP 400 shall apply. Further, the CA explained that even if the Letter of Credit did not state that UCP 400 governs, it nevertheless finds application as this Court has consistently recognized it under Philippine jurisdiction. Thus, applying UCP 400 and principles concerning letters of credit, the CA explained that the obligation of the issuing bank is to pay the seller or beneficiary of the credit once the draft and the required documents are properly presented. Issue: Who among the parties bears the liability to pay the amount stated in the Letter of Credit. Held: The Court upheld the CA’s decision. HSCB is liable to pay NSC. Under the independence principle, the issuing bank's obligation to pay under the letter of credit is separate from the compliance of the parties in the main contract.
Letters of credit are governed primarily by their own provisions, by laws specifically applicable to them, and by usage and custom. Consistent with our rulings in several cases, 100 usage and custom refers to UCP 400. When the particular issues are not covered by the provisions of the letter of credit, by laws specifically applicable to them and by UCP 400, our general civil law finds suppletory application. Page 4 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Applying this set of laws and rules, the Court ruled that HSBC is liable under the provisions of the Letter of Credit, in accordance with usage and custom as embodied in UCP 400, and under the provisions of general civil law.
From the moment that HSBC agreed to the terms of the Letter of Credit - which states that UCP 400 applies - its actions in connection with the transaction automatically became bound by the rules set in UCP 400. Even assuming that URC 322 is an international custom that has been recognized in commerce, this does not change the fact that HSBC, as the issuing bank of a letter of credit, undertook certain obligations dictated by the terms of the Letter of Credit itself and by UCP 400. In Feati, this Court applied UCP 400 even when there is no express stipulation in the letter of credit that it governs the transaction. On the strength of our ruling in Feati, we have the legal duty to apply UCP 400 in this case independent of the parties' agreement to be bound by it.
UCP 400 states that an irrevocable credit payable on sight, such as the Letter of Credit in this case, constitutes a definite undertaking of the issuing bank to pay, provided that the stipulated documents are presented and that the terms and conditions of the credit are complied with. Further, UCP 400 provides that an issuing bank has the obligation to examine the documents with reasonable care. Thus, when CityTrust forwarded the Letter of Credit with the attached documents to HSBC, it had the duty to make a determination of whether its obligation to pay arose by properly examining the documents. TRUST RECEIPTS LAW
LOAN SECURITY FEATURE BANGKO SENTRAL NG PILIPINAS v. AGUSTIN LIBO-ON G.R. No. 173864, November 23, 2015, REYES, J. In the absence of such absolute conveyance of title to qualify as an assignment of credit, the subject promissory note with trust receipt agreement should be interpreted as it is denominated. The contract being that of a mere loan, and because there was no valid assignment of credit, BSP may not foreclose the mortgage Facts: The Spouses Libo-on secured loans from the Rural Bank of Hinigaran, Inc. As security for the loan, the Spouses Libo-on executed a Deed of Real Estate Mortgage over a parcel of land in favor of the Rural Bank of Hinigaran. The Rural Bank of Hinigaran, in turn, secured a loan with Bangko Sentral ng Pilipinas (BSP). As a security for the loan, the Rural Bank of Hinigaran pledged and deposited to BSP promissory notes with supporting TCTs, including the promissory note and TCT of the Spouses Libo-ons mortgaged with the former. Despite BSP's demand, the Spouses Libo-on
Page 5 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 failed to pay. The loan obligation of the Rural Bank of Hinigaran with BSP likewise fell due and demandable as the former failed to pay its loan from BSP. As a result, BSP filed an application for extrajudicial foreclosure against the mortgage security of the Spouses Libo-on with the Rural Bank of Hinigaran. However, before BSP could complete the auction sale, Agustin Libo-on filed an action against BSP for damages with prayer for the issuance of a TRO and a writ of preliminary injunction before the RTC. The Spouses Libo-on argued that there is no privity of contract between them and BSP as the latter was not authorized by the Rural Bank of Hinigaran to act on its behalf, nor was the mortgage assigned to it. BSP claimed that its authority to foreclose the subject mortgage was by virtue of an assignment of credit, i.e., "Promissory Note with Trust Receipt Agreement" executed by the Rural Bank of Hinigaran in their favor where the latter assigned, deposited, and pledged the promissory notes executed by the Spouses Libo-on including the contract of real estate mortgage to it. Issue:
Whether BSP has the authority to foreclose the mortgage Ruling:
No. In a trust receipt transaction, the entrustee has the obligation to deliver to the entruster the price of the sale, or if the merchandise is not sold, to return the merchandise to the entruster. There are, therefore, two obligations in a trust receipt transaction: the first refers to money received under the obligation involving the duty to turn it over to the owner of the merchandise sold, while, the second refers to the merchandise received under the obligation to "return" it to the owner. Clearly, this concept of trust receipt is inconsistent with that of an assignment of credit where there is an absolute conveyance of title that would have in effect given authority to BSP to foreclose the subject mortgage. Without a valid assignment of credit, as in this case, BSP has no authority to foreclose the mortgaged property of the Spouses Libo-on to the Rural Bank of Hinigaran. Moreso, BSP could not possibly sell the subject property without violating the prohibition against pactum commissorium since without a valid assignment of credit, BSP cannot ipso facto appropriate for itself the Spouses Libo-on's mortgaged property to the Rural Bank of Hinigaran. The character of the transactions between the parties is not only determined by the language used in the document but by their intention. However, the intent of the parties to the transaction is to be determined in the first instance, by the very language which they used. A deed of assignment usually contains language which suggests that the parties intended to effect a complete alienation of title to and rights over the receivables which are the subject of the assignment. This language is comprised of works like "remise," "release and quitclaim" and clauses like "the title and right of possession to said accounts receivable is to remain in said assignee" who "shall have the right to collect directly from the debtor." The same intent is also suggested by the
Page 6 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 use of the words "agent and representative of the assignee" in referring to the assignor. NEGOTIABLE INSTRUMENTS LAW
This concept of complete alienation of title and rights in an assignment of credit is lacking. KINDS OF NEGOTIABLE INSTRUMENTS NUNELON MARQUEZ v. ELISAN CREDIT CORPORATION G.R. No. 194642, April 6, 2015, BRION, J. The promissory notes securing the first and second loan contained exactly the same terms and conditions, except for the date and amount of principal. Marquez knew of such terms and conditions even assuming that the entries on the interest and penalty charges were in blank when he signed the promissory note. Facts: Nunelon Marquez obtained a first loan from Elisan Credit Corporation (ECC) for P53,000 payable in 180 days. Marquez signed a promissory note which provides that it is payable in weekly installments and subject to 26% annual interest. In case of nonpayment, he agreed to pay 10% monthly penalty based on the total amount unpaid and another 25% of such for attorney’s fees. To further secure payment of the loan, Marquez executed a chattel mortgage over a motor vehicle which reads that, among others, “the motor vehicle shall stand as a security for the first loan and all other obligations of every kind already incurred or which may hereafter be incurred."
Subsequently, Marquez obtained a second loan from ECC for P55,000, as evidenced by a promissory note and a cash voucher. The promissory note covering the second loan contained exactly the same terms and conditions as the first promissory note. When the second loan had matured, Marquez only paid P29,600, leaving an unpaid balance of P25,040. Due to liquidity problems, Marquez asked ECC if he could pay in daily installments until the second loan is paid, to which the latter acquiesced. Twenty-one months after the second loan’s maturity, Marquez had already paid P56,440, an amount greater than the principal.
Despite the receipt of such an amount, ECC filed a complaint for judicial foreclosure of the chattel mortgage because Marquez allegedly failed to settle the balance of the second loan despite demand. It further alleged that pursuant to the terms of the promissory note, Marquez’s failure to fully pay upon maturity triggered the imposition of the 10% monthly penalty and 25% attorney’s fees. Before Marquez could file an answer, the MTC approved the writ of replevin which ECC sought for. The MTC found for Marquez and held that the second loan was fully extinguished. The RTC initially affirmed the ruling but reversed the same upon reconsideration. The CA affirmed the reversal. Page 7 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Issue: Whether the second promissory note was genuine and duly executed Ruling: Yes. Marquez denies that he stipulated upon and consented to the interest, penalty and attorney's fees because he purportedly signed the promissory note in blank. This allegation deserves scant consideration. It is self-serving and unsupported by evidence. Moreover, Marquez does not deny the genuineness and due execution of the first promissory note. Only when he failed to pay the second loan did he impugn the validity of the interest, penalty and attorney's fees. The CA and the RTC also noted that Marquez is a schooled individual, an engineer by profession, who, because of these credentials, will not just sign a document in blank without appreciating the import of his action. HOLDER IN DUE COURSE
ALVIN PATRIMONIO vs. NAPOLEON GUTIERREZ AND OCTAVIO MARASIGAN III G.R. No. 187769, June 4, 2014, J. Brion Arguing that Gutierrez is not a holder in due course, Patrimonio filed the instant petition praying that the ruling of the CA, ordering him to pay Gutierrez, be reversed. Ruling in favor of the Patrimonio the SC ruled that Section 52(c) of the NIL states that a holder in due course is one who takes the instrument "in good faith and for value." Acquisition in good faith means taking without knowledge or notice of equities of any sort which could be set up against a prior holder of the instrument. It means that he does not have any knowledge of fact which would render it dishonest for him to take a negotiable paper. The absence of the defense, when the instrument was taken, is the essential element of good faith. In this case, after having been found out that the blanks were not filled up in accordance with the authority the Patrimonio gave, Gutierrez has no right to enforce payment against Patrimonio, thus, the latter cannot be obliged to pay the face value of the check. Facts: Patrimonio and Gutierrez entered in a business venture under the name of Slam Dunk Corporation, a corporation which produces mini-concerts and shows related to basketball. In the course of their business, Patrimonio pre-signed several checks to answer for the expenses of their business. Although signed, these checks had no payee’s name, date or amount. The blank checks were entrusted to Gutierrez with the specific instruction not to fill them out without previous notification to and approval by Patrimonio. However, in the middle of 1993, without Patrimonio’s knowledge and consent, Gutierrez went to Marasigan (Patrimonio’s former teammate), to secure a loan in the amount of P200,000.00 alleging that Patrimonio needed the money for the construction of his house. Marasigan agreed to the request and gave him P 200, 000. Consequently, Guitierrez delivered to Marasigan one of the pre-signed blank checks with the blank portions filled out with the words "Cash" "Two Hundred Thousand Pesos Only", and the amount of "P200,000.00". The
Page 8 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 portion of the check corresponding to the date was also filled out with the words "May 23, 1994".
When Marasigan deposited the check, the same was dishonored for the reason of Account Closed. Thereafter, Marasigan sought recovery from Gutierrez but to no avail. He then sent several demand letters to Patrimonio asking for payment but his demands likewise went unheeded. Consequently, he filed a criminal case for violation of B.P. 22 against Patrimonio. Thereafter, Patrimonio filed before the RTC a complaint for the declaration of nullity of the loan and recovery of damages against herein Gutierrez and Marasigan. Patrmonio completely denied authorizing the loan or the check’s negotiation, and asserted that he was not privy to the parties’ loan agreement.
The RTC ruled in favor of Marasigan. It declared Marasigan as a holder in due course and dismissed Patrimonio’s complaint. It further ordered Patrimonio to pay Marasigan the face value of the check with a right to claim reimbursement from Gutierrez. On appeal, the CA affirmed the ruling of the RTC but agreed with Patrimonio that Marasigan is not a holder in due course. However, since the loan is grounded on an obligation arising from law, it held that it cannot be nullified and that Patrimonio is still liable to pay Marasigan the sum of P 200, 000. Hence, this petition. Issues:
1. Whether Marasigan is a holder in due course.
2. Whether respondent Gutierrez has completely filled out the subject check strictly under the authority given by Patrimonio. Ruling:
1. No. Marasigan is Not a Holder in Due Course
The Negotiable Instruments Law (NIL) defines a holder in due course, thus: Sec. 52 — A holder in due course is a holder who has taken the instrument under the following conditions: (a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact; (c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. Page 9 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Acquisition in good faith means taking without knowledge or notice of equities of any sort which could be set up against a prior holder of the instrument. It means that he does not have any knowledge of fact which would render it dishonest for him to take a negotiable paper. The absence of the defense, when the instrument was taken, is the essential element of good faith. Since he (Marasigan) knew that the underlying obligation was not actually for Patrimonio, the rule that a possessor of the instrument is prima facie a holder in due course is inapplicable. As correctly noted by the CA, his inaction and failure to verify, despite knowledge that Patrimonio was not a party to the loan, may be construed as gross negligence amounting to bad faith. 2. No, the Check Was Not Completed Strictly Under The Authority Given by Patrimonio.
The answer is supplied by the applicable statutory provision found in Section 14 of the Negotiable Instruments Law (NIL) which states: Sec. 14. Blanks; when may be filled.- Where the instrument is wanting in any material particular, the person in possession thereof has a prima facie authority to complete it by filling up the blanks therein. And a signature on a blank paper delivered by the person making the signature in order that the paper may be converted into a negotiable instrument operates as a prima facie authority to fill it up as such for any amount. In order, however, that any such instrument when completed may be enforced against any person who became a party thereto prior to its completion, it must be filled up strictly in accordance with the authority given and within a reasonable time. But if any such instrument, after completion, is negotiated to a holder in due course, it is valid and effectual for all purposes in his hands, and he may enforce it as if it had been filled up strictly in accordance with the authority given and within a reasonable time.
This provision applies to an incomplete but delivered instrument. Under this rule, if the maker or drawer delivers a pre-signed blank paper to another person for the purpose of converting it into a negotiable instrument, that person is deemed to have prima facie authority to fill it up. It merely requires that the instrument be in the possession of a person other than the drawer or maker and from such possession, together with the fact that the instrument is wanting in a material particular, the law presumes agency to fill up the blanks.
In order however that one who is not a holder in due course can enforce the instrument against a party prior to the instrument’s completion, two requisites must exist: (1) that the blank must be filled strictly in accordance with the authority given; and (2) it must be filled up within a reasonable time. If it was proven that the instrument had not been filled up strictly in accordance with the authority given and within a reasonable time, the maker can set this up as a personal defense and avoid liability. However, if the holder is Page 10 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 a holder in due course, there is a conclusive presumption that authority to fill it up had been given and that the same was not in excess of authority. While under the law, Gutierrez had a prima facie authority to complete the check, such prima facie authority does not extend to its use (i.e., subsequent transfer or negotiation) once the check is completed. In other words, only the authority to complete the check is presumed. Further, the law used the term "prima facie" to underscore the fact that the authority which the law accords to a holder is a presumption juris tantum only; hence, subject to subject to contrary proof. Thus, evidence that there was no authority or that the authority granted has been exceeded may be presented by the maker in order to avoid liability under the instrument. Notably, Gutierrez was only authorized to use the check for business expenses; thus, he exceeded the authority when he used the check to pay the loan he supposedly contracted for the construction of Patrimonio's house. This is a clear violation of Patrimonio 's instruction to use the checks for the expenses of Slam Dunk. It cannot therefore be validly concluded that the check was completed strictly in accordance with the authority given by Patrimonio.
Considering that Marasigan is not a holder in due course, Patrimonio can validly set up the personal defense that the blanks were not filled up in accordance with the authority he gave. Consequently, Marasigan has no right to enforce payment against Patrimonio and the latter cannot be obliged to pay the face value of the check. MATERIAL ALTERATION
CESAR V. AREZA and LOLITA B. AREZA vs. EXPRESS SAVINGS BANK, INC. and MICHAEL POTENCIANO G.R. No. 176697, September 10, 2014, J. PEREZ When the drawee bank pays a materially altered check, it violates the terms of the check, as well as its duty to charge its client’s account only for bona fide disbursements he had made. If the drawee did not pay according to the original tenor of the instrument, as directed by the drawer, then it has no right to claim reimbursement from the drawer, much less, the right to deduct the erroneous payment it made from the drawer’s account which it was expected to treat with utmost fidelity. The drawee, however, still has recourse to recover its loss. The collecting banks are ultimately liable for the amount of the materially altered check. It cannot further pass the liability back to Cesar and Lolita absent any showing in the negligence on the part of Cesar and Lolita which substantially contributed to the loss from alteration. Facts: Cesar V. Areza and Lolita B. Areza maintained two bank deposits with Express Savings Bank’s Biñan branch (the Bank). Page 11 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 They were engaged in the business of "buy and sell" of brand new and second-hand motor vehicles. On 2 May 2000, they received an order from a certain Gerry Mambuay (Mambuay) for the purchase of a second-hand Mitsubishi Pajero and a brand-new Honda CRV.
The buyer, Mambuay, paid Cesar and Lolita with nine (9) Philippine Veterans Affairs Office (PVAO) checks payable to different payees and drawn against the Philippine Veterans Bank (drawee), each valued at Two Hundred Thousand Pesos (P200,000.00) for a total of One Million Eight Hundred Thousand Pesos (P1,800,000.00). About this occasion, Cesar and Lolita claimed that Michael Potenciano (Potenciano), the branch manager of the Bank was present during the transaction and immediately offered the services of the Bank for the processing and eventual crediting of the said checks to Cesar and Lolita’ account. On the other hand, Potenciano countered that he was prevailed upon to accept the checks by way of accommodation of Cesar and Lolita who were valued clients of the Bank.
On 3 May 2000, Cesar and Lolita deposited the said checks in their savings account with the Bank. The Bank, in turn, deposited the checks with its depositary bank, EquitablePCI Bank, in Biñan, Laguna. Equitable-PCI Bank presented the checks to the drawee, the Philippine Veterans Bank, which honored the checks. On 6 May 2000, Potenciano informed Cesar and Lolita that the checks they deposited with the Bank were honored. He allegedly warned Cesar and Lolita that the clearing of the checks pertained only to the availability of funds and did not mean that the checks were not infirmed. Thus, the entire amount of P1,800,000.00 was credited to Cesar and Lolita’ savings account. Based on this information, Cesar and Lolita released the two cars to the buyer.
Sometime in July 2000, the subject checks were returned by PVAO to the drawee on the ground that the amount on the face of the checks was altered from the original amount of P4,000.00 to P200,000.00. The drawee returned the checks to Equitable-PCI Bank by way of Special Clearing Receipts. In August 2000, the Bank was informed by Equitable-PCI Bank that the drawee dishonored the checks on the ground of material alterations. Equitable-PCI Bank initially filed a protest with the Philippine Clearing House. In February 2001, the latter ruled in favor of the drawee Philippine Veterans Bank. Equitable-PCI Bank, in turn, debited the deposit account of the Bank in the amount of P1,800,000.00. The Bank insisted that they informed Cesar and Lolita of said development in August 2000 by furnishing them copies of the documents given by its depositary bank. On the other hand, Cesar and Lolita maintained that the Bank never informed them of these developments. On 9 March 2001, Cesar and Lolita issued a check in the amount of P500,000.00. Said check was dishonored by the Bank for the reason "Deposit Under Hold." According to Cesar and Lolita, the Bank unilaterally and unlawfully put their account with the Bank on
Page 12 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 hold. On 22 March 2001, Cesar and Lolita’ counsel sent a demand letter asking the Bank to honor their check. The Bank refused to heed their request and instead, closed the Special Savings Account of the Cesar and Lolita with a balance of P1,179,659.69 and transferred said amount to their savings account. The Bank then withdrew the amount of P1,800,000.00 representing the returned checks from Cesar and Lolita’ savings account. Acting on the alleged arbitrary and groundless dishonoring of their checks and the unlawful and unilateral withdrawal from their savings account, Cesar and Lolita filed a Complaint for Sum of Money with Damages against the Bank and Potenciano with the RTC of Calamba. The RTC ruled in favor of Cesar and Lolita.
Express Savings Bank and Potenciano filed a motion for reconsideration while Cesar and Lolita filed a motion for execution from the Decision of the RTC. On appeal, the Court of Appeals affirmed the ruling of the trial court but deleted the award of damages. Hence, Cesar and Lolita filed the present petition for review on certiorari. Issues:
1. Whether or not the Bank had the right to debit P1,800,000.00 from Cesar and Lolita’ accounts. 2. What are the liabilities of the drawee, the intermediary banks, and the Cesar and Lolita for the altered checks?
Ruling:
The Bank cannot debit the savings account of Cesar and Lolita.
When the drawee bank pays a materially altered check, it violates the terms of the check, as well as its duty to charge its client’s account only for bona fide disbursements he had made. If the drawee did not pay according to the original tenor of the instrument, as directed by the drawer, then it has no right to claim reimbursement from the drawer, much less, the right to deduct the erroneous payment it made from the drawer’s account which it was expected to treat with utmost fidelity. The drawee, however, still has recourse to recover its loss. It may pass the liability back to the collecting bank which is what the drawee bank exactly did in this case. It debited the account of Equitable-PCI Bank for the altered amount of the checks. When Cesar and Lolita deposited the check with the Bank, they were designating the latter as the collecting bank. This is in consonance with the rule that a negotiable instrument, such as a check, whether a manager's check or ordinary check, is not legal tender. As such, after receiving the deposit, under its own rules, the Bank shall credit the amount in Cesar and Lolita’ account or infuse value thereon only after the drawee bank shall have paid the amount of the check or the check has been cleared for deposit.
Page 13 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 As collecting banks, the Bank and Equitable-PCI Bank are both liable for the amount of the materially altered checks. Since Equitable-PCI Bank is not a party to this case and the Bank allowed its account with Equitable PCI Bank to be debited, it has the option to seek recourse against the latter in another forum. As the rule now stands, the 24-hour rule is still in force, that is, any check which should be refused by the drawee bank in accordance with long standing and accepted banking practices shall be returned through the PCHC/local clearing office, as the case may be, not later than the next regular clearing (24-hour). The modification, however, is that items which have been the subject of material alteration or bearing forged endorsement may be returned even beyond 24 hours so long that the same is returned within the prescriptive period fixed by law. The consensus among lawyers is that the prescriptive period is ten (10) years because a check or the endorsement thereon is a written contract. Moreover, the item need not be returned through the clearing house but by direct presentation to the presenting bank. In short, the 24-hour clearing rule does not apply to altered checks.
The Bank cannot debit the savings account of Cesar and Lolita. A depositary/collecting bank may resist or defend against a claim for breach of warranty if the drawer, the payee, or either the drawee bank or depositary bank was negligent and such negligence substantially contributed to the loss from alteration. In the instant case, no negligence can be attributed to Cesar and Lolita. The drawee bank, Philippine Veterans Bank in this case, is only liable to the extent of the check prior to alteration. Since Philippine Veterans Bank paid the altered amount of the check, it may pass the liability back as it did, to Equitable-PCI Bank, the collecting bank. The collecting banks, Equitable-PCI Bank and the Bank, are ultimately liable for the amount of the materially altered check. It cannot further pass the liability back to the Cesar and Lolita absent any showing in the negligence on the part of the Cesar and Lolita which substantially contributed to the loss from alteration. CHECKS
METROPOLITAN BANK AND TRUST COMPANY vs. WILFRED N. CHIOK BANK OF THE PHILIPPINE ISLANDS vs. WILFRED N. CHIOK GLOBAL BUSINESS BANK, INC. vs. WILFRED N. CHIOK G.R. No. 172652, G.R. No. 175302, G.R. No. 175394, November 26, 2014, J. LEONARDODE CASTRO Clearing should not be confused with acceptance. Manager’s and cashier’s checks are still the subject of clearing to ensure that the same have not been materially altered or otherwise completely counterfeited. However, manager’s and cashier’s checks are preaccepted by the mere issuance thereof by the bank, which is both its drawer and drawee. Thus, while manager’s and cashier’s checks are still subject to clearing, they cannot be countermanded for being drawn against a closed account, for being drawn against insufficient funds, or for similar reasons such as a condition not appearing on the face of the Page 14 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 check. Long standing and accepted banking practices do not countenance the countermanding of manager’s and cashier’s checks on the basis of a mere allegation of failure of the payee to comply with its obligations towards the purchaser. On the contrary, the accepted banking practice is that such checks are as good as cash. However, in view of the peculiar circumstances of the case at bench, We are constrained to set aside the foregoing concepts and principles in favor of the exercise of the right to rescind a contract upon the failure of consideration thereof. Facts: Wilfred N. Chiok (Chiok) had been engaged in dollar trading for several years. He usually buys dollars from Gonzalo B. Nuguid (Nuguid) at the exchange rate prevailing on the date of the sale. Chiok pays Nuguid either in cash or manager’s check, to be picked up by the latter or deposited in the latter’s bank account. Nuguid delivers the dollars either on the same day or on a later date as may be agreed upon between them, up to a week later. Chiok and Nuguid had been dealing in this manner for about six to eight years, with their transactions running into millions of pesos. For this purpose, Chiok maintained accounts with Metropolitan Bank and Trust Company (Metrobank) and Global Business Bank, Inc. (Global Bank), the latter being then referred to as the Asian Banking Corporation (Asian Bank). Chiok likewise entered into a Bills Purchase Line Agreement (BPLA) with Asian Bank. Under the BPLA, checks drawn in favor of, or negotiated to, Chiok may be purchased by Asian Bank. Upon such purchase, Chiok receives a discounted cash equivalent of the amount of the check earlier than the normal clearing period. On July 5, 1995, pursuant to the BPLA, Asian Bank “bills purchased” Security Bank & Trust Company (SBTC) Manager’s Check (MC) No. 037364 in the amount of P25,500,000.00 issued in the name of Chiok, and credited the same amount to the latter’s Savings Account No. 2-007-03-00201-3.
On the same day, July 5, 1995, Asian Bank issued MC No. 025935 in the amount of P7,550,000.00 and MC No. 025939 in the amount of P10,905,350.00 to Gonzalo Bernardo, who is the same person as Gonzalo B. Nuguid. The two Asian Bank manager’s checks, with a total value of P18,455,350.00 were issued pursuant to Chiok’s instruction and was debited from his account. Likewise upon Chiok’s application, Metrobank issued Cashier’s Check (CC) No. 003380 in the amount of P7,613,000.00 in the name of Gonzalo Bernardo. The same was debited from Chiok’s Savings Account No. 154-42504955. Chiok then deposited the three checks (Asian Bank MC Nos. 025935 and 025939, and Metrobank CC No. 003380), with an aggregate value of P26,068,350.00 in Nuguid’s account with Far East Bank & Trust Company (FEBTC), the predecessor-in-interest of Bank of the Philippine Islands (BPI). Nuguid was supposed to deliver US$1,022,288.50, the dollar equivalent of the three checks as agreed upon, in the afternoon of the same day. Nuguid, however, failed to do so, prompting Chiok to request that payment on the three checks be stopped. Chiok was allegedly advised to secure a court order within the 24-hour clearing period.
Page 15 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 On the following day, July 6, 1995, Chiok filed a Complaint for damages with application for ex parterestraining order and/or preliminary injunction with the Regional Trial Court (RTC) of Quezon City against the spouses Gonzalo and Marinella Nuguid, and the depositary banks, Asian Bank and Metrobank, represented by their respective managers, Julius de la Fuente and Alice Rivera. The complaint was docketed as Civil Case No. Q-95-24299 and was raffled to Branch 96. The complaint was later amended to include the prayer of Chiok to be declared the legal owner of the proceeds of the subject checks and to be allowed to withdraw the entire proceeds thereof. On the same day, July 6, 1995, the RTC issued a temporary restraining order (TRO) directing the spouses Nuguid to refrain from presenting the said checks for payment and the depositary banks from honoring the same until further orders from the court.
Asian Bank refused to honor MC Nos. 025935 and 025939 in deference to the TRO. Metrobank claimed that when it received the TRO on July 6, 1995, it refused to honor CC No. 003380 and stopped payment thereon. However, in a letter also dated July 6, 1995, Ms. Jocelyn T. Paz of FEBTC, Cubao-Araneta Branch informed Metrobank that the TRO was issued a day after the check was presented for payment. Thus, according to Paz, the transaction was already consummated and FEBTC had already validly accepted the same. In another letter, FEBTC informed Metrobank that “the restraining order indicates the name of the payee of the check as GONZALO NUGUID, but the check is in fact payable to GONZALO BERNARDO. We believe there is a defect in the restraining order and as such should not bind your bank.” Alice Rivera of Metrobank replied to said letters, reiterating Metrobank’s position to comply with the TRO lest it be cited for contempt by the trial court. However, as would later be alleged in Metrobank’s Answer before the trial court, Metrobank eventually acknowledged the check when it became clear that nothing more can be done to retrieve the proceeds of the check. Metrobank furthermore claimed that since it is the issuer of CC No. 003380, the check is its primary obligation and should not be affected by any prior transaction between the purchaser (Chiok) and the payee (Nuguid). In the meantime, FEBTC, as the collecting bank, filed a complaint against Asian Bank before the Philippine Clearing House Corporation (PCHC) Arbitration Committee for the collection of the value of Asian Bank MC No. 025935 and 025939, which FEBTC had allegedly allowed Nuguid to withdraw on July 5, 1995, the same day the checks were deposited. The case was docketed as Arbicom Case No. 95-082. The PCHC Arbitration Committee later relayed, in a letter dated August 4, 1995, its refusal to assume jurisdiction over the case on the ground that any step it may take might be misinterpreted as undermining the jurisdiction of the RTC over the case or a violation of the July 6, 1995 TRO. On July 25, 1995, the RTC issued an Order directing the issuance of a writ of preliminary prohibitory injunction. On May 5, 2006, the Court of Appeals rendered the assailed Decision affirming the RTC Decision with modifications. Global Bank and BPI filed separate Motions for Reconsideration of the May 5, 2006 Court of Appeals’ Decision. On November 6, 2006, the Court of Appeals denied the Motions for Reconsideration. Page 16 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Metrobank (G.R. No. 172652), BPI (G.R. No. 175302), and Global Bank (G.R. No. 175394) filed with this Court separate Petitions for Review on Certiorari. In Resolutions dated February 21, 2007 and March 12, 2007, this Court resolved to consolidate the three petitions.
Issues: 1. Whether or not payment of manager’s and cashier’s checks are subject to the condition that the payee thereof should comply with his obligations to the purchaser of the checks. 2. Whether or not the purchaser of manager’s and cashier’s checks has the right to have the checks cancelled by filing an action for rescission of its contract with the payee.
3. Whether or not the peculiar circumstances of this case justify the deviation from the general principles on causes and effects of manager’s and cashier’s checks.
Ruling: 1.
The legal effects of a manager’s check and a cashier’s check are the same. A manager’s check, like a cashier’s check, is an order of the bank to pay, drawn upon itself, committing in effect its total resources, integrity, and honor behind its issuance. By its peculiar character and general use in commerce, a manager’s check or a cashier’s check is regarded substantially to be as good as the money it represents. The RTC effectively ruled that payment of manager’s and cashier’s checks are subject to the condition that the payee thereof complies with his obligations to the purchaser of the checks.
The dedication of such checks pursuant to specific reciprocal undertakings between their purchasers and payees authorizes rescission by the former to prevent substantial and material damage to themselves, which authority includes stopping the payment of the checks. Moreover, it seems to be fallacious to hold that the unconditional payment of manager’s and cashier’s checks is the rule. To begin with, both manager’s and cashier’s checks are still subject to regular clearing under the regulations of the Bangko Sentral ng Pilipinas, a fact borne out by the BSP manual for banks and intermediaries, which provides, among others, in its Section 1603.1, c. Page 17 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 It goes without saying that under the aforecited clearing rule, the enumeration of causes to return checks is not exclusive but may include other causes which are consistent with long standing and accepted banking practices. The reason of plaintiffs can well constitute such a justifiable cause to enjoin payment.
The RTC made an error at this point. While indeed, it cannot be said that manager’s and cashier’s checks are pre-cleared, clearing should not be confused with acceptance. Manager’s and cashier’s checks are still the subject of clearing to ensure that the same have not been materially altered or otherwise completely counterfeited. However, manager’s and cashier’s checks are pre-accepted by the mere issuance thereof by the bank, which is both its drawer and drawee. Thus, while manager’s and cashier’s checks are still subject to clearing, they cannot be countermanded for being drawn against a closed account, for being drawn against insufficient funds, or for similar reasons such as a condition not appearing on the face of the check. Long standing and accepted banking practices do not countenance the countermanding of manager’s and cashier’s checks on the basis of a mere allegation of failure of the payee to comply with its obligations towards the purchaser. On the contrary, the accepted banking practice is that such checks are as good as cash. 2.
The right to rescind invoked by the Court of Appeals is provided by Article 1191 of the Civil Code.
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.
The cause of action supplied by the above article, however, is clearly predicated upon the reciprocity of the obligations of the injured party and the guilty party. Reciprocal obligations are those which arise from the same cause, and in which each party is a debtor and a creditor of the other, such that the obligation of one is dependent upon the obligation of the other. They are to be performed simultaneously such that the performance of one is conditioned upon the simultaneous fulfillment of the other. When Nuguid failed to deliver the agreed amount to Chiok, the latter had a cause of action against Nuguid to ask for the rescission of their contract. On the other hand, Chiok did not have a cause of action against Metrobank and Global Bank that would allow him to rescind the contracts of sale of the manager’s or cashier’s checks, which would have resulted in the crediting of the amounts thereof back to his accounts. Page 18 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Otherwise stated, the right of rescission under Article 1191 of the Civil Code can only be exercised in accordance with the principle of relativity of contracts under Article 1131 of the same code. 3.
In view of the peculiar circumstances of this case, and in the interest of substantial justice, the Court is constrained to rule in the affirmative. The Court does not detract from well-settled concepts and principles in commercial law regarding the nature, causes and effects of a manager’s check and cashier’s check. Such checks are primary obligations of the issuing bank and accepted in advance by the mere issuance thereof. They are a bank’s order to pay drawn upon itself, committing in effect its total resources, integrity, and honor. By their peculiar character and general use in the commercial world, they are regarded substantially as good as the money they represent. However, in view of the peculiar circumstances of the case at bench, the Court is constrained to set aside the foregoing concepts and principles in favor of the exercise of the right to rescind a contract upon the failure of consideration thereof.
In deviating from general banking principles and disposing the case on the basis of equity, the courtsa quo should have at least ensured that their dispositions were indeed equitable. This Court observes that equity was not served in the dispositions below wherein Nuguid, the very person found to have violated his contract by not delivering his dollar obligation, was absolved from his liability, leaving the banks who are not parties to the contract to suffer the losses of millions of pesos. Asian Bank, which is now Global Bank, obeyed the TRO and denied the clearing of the manager’s checks. As such, Global Bank may not be held liable on account of the knowledge of whatever else Chiok told them when he asked for the procedure to secure a Stop Payment Order. On the other hand, there was no mention that Metrobank was ever notified of the alleged failure of consideration. Only Asian Bank was notified of such fact. Furthermore, the mere allegation of breach on the part of the payee of his personal contract with the purchaser should not be considered a sufficient cause to immediately nullify such checks, thereby eroding their integrity and honor as being as good as INSURANCE LAW
cash.NSURANC
NON-LIFE INSURANCE Fortune Medicare, Inc. vs. David Robert Amorin G.R. No195872; March 12, 2014 J. Reyes
For purposes of determining the liability of a health care provider to its members, a health care agreement is in the nature of non-life insurance, which is primarily a contract of indemnity. Once the member incurs hospital, medical or any other expense arising from Page 19 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 sickness, injury or other stipulated contingent, the health care provider must pay for the same to the extent agreed upon under the contract. Limitations as to liability must be distinctly specified and clearly reflected in the extent of coverage which the company voluntary assume, otherwise, any ambiguity arising therein shall be construed in favor of the member. Facts: David Robert Amorin was a cardholder/member of Fortune Medicare, Inc. (Fortune Care). While on vacation in Hawaii, Amorin underwent an emergency surgery, specifically appendectomy, at St. Francis Medical Center, causing him to incur professional and hospitalization expenses of $7,242.35 and $1,777.79, respectively. He attempted to recover from Fortune Care the full amount thereof upon his return to Manila, but the company merely approved a reimbursement of P12, 151, an amount that was based on the average cost of appendectomy if the procedure were performed in an accredited hospital in Metro Manila. Amorin received the said amount under protest, but asked for its adjustment to cover the total amount of professional fees which he had paid, and 80% of the approved standard charges based on “American standard” considering that the emergency procedure occurred in the US. To support his claim, Amorin cited Section 3, Art. V on Benefits and Coverages of the Health Care Contract. Fortune Care denied the request thereby prompting Amorin to file a complaint for breach of contract with damages. For its part, Fortune Care argued that the Health Care Contract did not cover hospitalization costs and professional fees incurred in foreign countries, as the contract’s operation was confined to Philippine territory. The RTC dismissed Amorin’s complaint. Dissatisfied, Amorin appealed the RTC decision to the CA. Subsequently, the CA rendered its decision granting the appeal, thereby reversing and setting aside the trial court decision. Hence, the appeal. Fortune Care argues that the phase “approved standard charges” did not automatically mean “Philippine Standard” Issue:
Whether Fortune Care is liable to the member for the amount demanded by the latter. Ruling:
Petition Denied.
For purposes of determining the liability of a health care provider to its members, jurisprudence holds that a health care agreement is in the nature of non-life insurance, which is primarily a contract of indemnity. Once the member incurs hospital, medical or any other expense arising from sickness, injury or other stipulated contingent, the health care provider must pay for the same to the extent agreed upon under the contract. In the instant case, the extent of Fortune Care’s liability to Amorin under the attendant circumstances was governed by Section 3(B), Article V of the subject Health Care Contract, considering that the appendectomy which the member had to undergo qualified as an
Page 20 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 emergency care, but the treatment was performed at St. Francis Medical Center in Honolulu, Hawaii, U.S.A., a non-accredited hospital. We restate the pertinent portions of Section 3(B): B. EMERGENCY CARE IN NON-ACCREDITED HOSPITAL 1. Whether as an in-patient or out-patient, FortuneCare shall reimburse the total hospitalization cost including the professional fee (based on the total approved charges) to a member who receives emergency care in a nonaccredited hospital. The above coverage applies only to Emergency confinement within Philippine Territory. However, if the emergency confinement occurs in foreign territory, Fortune Care will be obligated to reimburse or pay eighty (80%) percent of the approved standard charges which shall cover the hospitalization costs and professional fees.
The point of dispute now concerns the proper interpretation of the phrase “approved standard charges”, which shall be the base for the allowable 80% benefit. The trial court ruled that the phrase should be interpreted in light of the provisions of Section 3(A), i.e., to the extent that may be allowed for treatments performed by accredited physicians in accredited hospitals. As the appellate court however held, this must be interpreted in its literal sense, guided by the rule that any ambiguity shall be strictly construed against Fortune Care, and liberally in favor of Amorin. As may be gleaned from the Health Care Contract, the parties thereto contemplated the possibility of emergency care in a foreign country. As the contract recognized Fortune Care’s liability for emergency treatments even in foreign territories, it expressly limited its liability only insofar as the percentage of hospitalization and professional fees that must be paid or reimbursed was concerned, pegged at a mere 80% of the approved standard charges. In the absence of any qualifying word that clearly limited Fortune Care’s liability to costs that are applicable in the Philippines, the amount payable by Fortune Care should not be limited to the cost of treatment in the Philippines, as to do so would result in the clear disadvantage of its member. If, as Fortune Care argued, the premium and other charges in the Health Care Contract were merely computed on assumption and risk under Philippine cost and, that the American cost standard or any foreign country’s cost was never considered, such limitations should have been distinctly specified and clearly reflected in the extent of coverage which the company voluntarily assumed. INSURANCE POLICY
Gaisano v. Development Insurance Corporation, G.R. No. 190702 On September 27, 1996, respondent issued a comprehensive commercial vehicle policy to petitioner in the amount of Pl,500,000.00 over petitioner’s vehicle for a period of one year
Page 21 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 commencing on September 27, 1996 up to September 27, 1997. To collect the premiums and other charges on the policies, respondent's agent, Trans-Pacific Underwriters Agency (Trans-Pacific), issued a statement of account to petitioner's company, Noah's Ark Merchandising (Noah's Ark). Noah's Ark immediately processed the payments and issued a Far East Bank check dated September 27, 1996 payable to Trans-Pacific on the same day. However, nobody from Trans-Pacific picked up the check that day (September 27). TransPacific informed Noah's Ark that its messenger would get the check the next day, September 28. In the evening of September 27, 1996, the vehicle was stolen. Oblivious of the incident, Trans-Pacific picked up the check the next day, September 28. It issued an official receipt numbered 124713 dated September 28, 1996, acknowledging the receipt of P55,620.60 for the premium and other charges over the vehicle. The check issued to TransPacific for P140,893.50 was deposited with Metrobank for encashment on October 1, 1996. Was there a valid insurance contract from which petitioner can claim?
There was none. The general rule in insurance laws is that unless the premium is paid, the insurance policy is not valid and binding. Here, there is no dispute that the check was delivered to and was accepted by respondent's agent, Trans-Pacific, only on September 28, 1996. No payment of premium had thus been made at the time of the loss of the vehicle on September 27, 1996. While petitioner claims that Trans-Pacific was informed that the check was ready for pick-up on September 27, 1996, the notice of the availability of the check, by itself, does not produce the effect of payment of the premium. Trans-Pacific could not be considered in delay in accepting the check because when it informed petitioner that it will only be able to pick-up the check the next day, petitioner did not protest to this, but instead allowed Trans-Pacific to do so. Thus, at the time of loss, there was no payment of premium yet to make the insurance policy effective. In UCPB General Insurance Co., Inc., we summarized the exceptions to the general rule above as follows: (1) in case of life or industrial life policy, whenever the grace period provision applies, as expressly provided by Section 77 itself; (2) where the insurer acknowledged in the policy or contract of insurance itself the receipt of premium, even if premium has not been actually paid, as expressly provided by Section 78 itself; (3) where the parties agreed that premium payment shall be in installments and partial payment has been made at the time of loss, as held in Makati Tuscany Condominium Corp. v. Court of Appeals (4) where the insurer granted the insured a credit term for the payment of the premium, and loss occurs before the expiration of the term, as held in Makati Tuscany Condominium Corp.; and (5) where the insurer is in estoppel as when it has consistently granted a 60 to 90-day credit term for the payment of premiums. The insurance policy in question does not fall under any of these exceptions. We cannot sustain petitioner's claim that the parties agreed that the insurance contract is immediately effective upon issuance despite nonpaymentof the premiums. Even if there is a waiver of pre-payment ofpremiums, that in itself does not become an exception to Section 77, unless the insured clearly gave a credit term or extension. This is the clear import of the fourth exception in the UCPB General Insurance Co., Inc. To rule otherwise would render nugatory the requirement in Section 77 that "[n]otwithstanding any agreement to the contrary, no policy or contract of insurance issued by an insurance company is valid and binding unless and until the premium thereof has been paid, x x x." Page 22 of 195
MERCANTILE LAW DIGESTS 2014-June 2016
INCONTESTABILITY PERIOD
Facts:
The Insular Life Assurance Company, Ltd. V. Khu et. al. G.R. No. 195176, April 18, 2016, Del Castillo, J:
On March 6, 1997, Felipe N. Khu, Sr. (Felipe) applied for a life insurance policy with Insular Life under the latter’s Diamond Jubilee Insurance Plan. Felipe accomplished the required medical questionnaire wherein he did not declare any illness or adverse medical condition. Insular Life thereafter issued him an insurance policy with a face value of P1 million. This took effect on June 22, 1997. On June 23, 1999, Felipe’s policy lapsed due to non-payment of the premium covering the period from June 22, 1999 to June 23, 2000.
On September 7, 1999, Felipe applied for the reinstatement of his policy and paid P25,020.00 as premium. Except for the change in his occupation of being self-employed to being the Municipal Mayor of Binuangan, Misamis Oriental, all the other information submitted by Felipe in his application for reinstatement was virtually identical to those mentioned in his original policy.
On October 12, 1999, Insular Life advised Felipe that his application for reinstatement may only be considered if he agreed to certain conditions such as payment of additional premium and the cancellation of the riders pertaining to premium waiver and accidental death benefits. Felipe agreed to these conditions and paid the premium. On June 23, 2000, Felipe paid the annual premium in the amount of P28,000.00 covering the period from June 22, 2000 to June 22, 2001. And on July 2, 2001, he also paid the same amount as annual premium covering the period from June 22, 2001 to June 21, 2002. On September 22, 2001, Felipe died.
The beneficiaries demanded for the proceeds but the same was denied by Insular Life on the ground that Felipe did not disclose the ailments (viz., Type 2 Diabetes Mellitus, Diabetes Nephropathy and Alcoholic Liver Cirrhosis with Ascites) that he already had prior to his application for reinstatement of his insurance policy; and that it would not have reinstated the insurance policy had Felipe disclosed the material information on his adverse health condition. It contended that when Felipe died, the policy was still contestable. The RTC ruled in favor of the beneficiaries. This was upheld by the CA, hence, this petition.
Issue: Whether Felipe’s reinstated life insurance policy is already incontestable at the time of his death.
Page 23 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Held: Petition denied. 1.
After a policy of life insurance made payable on the death of the insured shall have been in force during the lifetime of the insured for a period of two years from the date of its issue or of its last reinstatement, the insurer cannot prove that the policy is void ab initio or is rescindible by reason of the fraudulent concealment or misrepresentation of the insured or his agent.
Section 48 regulates both the actions of the insurers and prospective takers of life insurance. It gives insurers enough time to inquire whether the policy was obtained by fraud, concealment, or misrepresentation; on the other hand, it forewarns scheming individuals that their attempts at insurance fraud would be timely uncovered – thus deterring them from venturing into such nefarious enterprise. At the same time, legitimate policy holders are absolutely protected from unwarranted denial of their claims or delay in the collection of insurance proceeds occasioned by allegations of fraud, concealment, or misrepresentation by insurers, claims which may no longer be set up after the two-year period expires as ordained under the law. The insurer is deemed to have the necessary facilities to discover such fraudulent concealment or misrepresentation within a period of two (2) years. It is not fair for the insurer to collect the premiums as long as the insured is still alive, only to raise the issue of fraudulent concealment or misrepresentation when the insured dies in order to defeat the right of the beneficiary to recover under the policy.
At least two (2) years from the issuance of the policy or its last reinstatement, the beneficiary is given the stability to recover under the policy when the insured dies. The provision also makes clear when the two-year period should commence in case the policy should lapse and is reinstated, that is, from the date of the last reinstatement.
2. The policy was reinstated in June 1999 (instead of December 1999 as claimed by the
insurer). The court ruled in favor of the insured and in favor of the effectivity of the insurance contract in the midst of ambiguity in the insurance contract provisions.
Indemnity and liability insurance policies are construed in accordance with the general rule of resolving any ambiguity therein in favor of the insured, where the contract or policy is prepared by the insurer. A contract of insurance, being a contract of adhesion, par excellence, any ambiguity therein should be resolved against the insurer; in other words, it should be construed liberally in favor of the insured and strictly against the insurer. Limitations of liability should be regarded with extreme jealousy and must be construed in such a way as to preclude the insurer from noncompliance with its obligations. RESCISSION OF INSURANCE CONTRACTS
Page 24 of 195
MERCANTILE LAW DIGESTS 2014-June 2016
Facts:
Sunlife of Canada (Philippines), Inc. v. Sibya, et. al. G.R. No. 211212, 08 June 2016, Reyes, J:
On January 10, 2001, Atty. Jesus Sibya, Jr. (Atty. Jesus Jr.) applied for life insurance with Sun Life. In his Application for Insurance, he indicated that he had sought advice for kidney problems. On February 5, 2001, Sun Life approved Atty. Jesus Jr.'s application and issued an insurance policy in his favor. The policy indicated the respondents as beneficiaries and entitles them to a death benefit of PhPl,000,000.00 should Atty. Jesus Jr. dies on or before February 5, 2021, or a sum of money if Atty. Jesus Jr. is still living on the endowment date.
On May 11, 2001, Atty. Jesus Jr. died as a result of a gunshot wound in San Joaquin, Iloilo. As such, Ma. Daisy filed a Claimant's Statement with Sun Life to seek the death benefits indicated in his insurance policy. In a letter dated August 27, 2001, however, Sun Life denied the claim on the ground that the details on Atty. Jesus Jr.'s medical history were not disclosed in his application.
The respondents reiterated their claim against Sun Life thru a letter dated September 17, 2001. Sun Life, however, refused to heed the respondents' requests and instead filed a Complaint for Rescission before the RTC and prayed for judicial confirmation of Atty. Jesus Jr.'s rescission. In its Complaint, Sun Life alleged that Atty. Jesus Jr. did not disclose in his insurance application his previous medical treatment at the National Kidney Transplant Institute in May and August of 1994. According to Sun Life, the undisclosed fact suggested that the insured was in "renal failure" and at a high risk medical condition. Consequently, had it known such fact, it would not have issued the insurance policy in favor of Atty. Jesus Jr. Simultaneously, Sun Life tendered a check representing the refund ofthe premiums paid by Atty. Jesus Jr. For their defense, the respondents claimed that Atty. Jesus Jr. did not commit misrepresentation in his application for insurance. They averred that Atty. Jesus Jr. was in good faith when he signed the insurance application and even authorized Sun Life to inquire further into his medical history for verification purposes.
The RTC held that Atty. Jesus Jr. did not commit material concealment and misrepresentation when he applied for life insurance with Sun Life. It observed that given the disclosures and the waiver and authorization to investigate executed by Atty. Jesus Jr. to Sun Life, the latter had all the means of ascertaining the facts allegedly concealed by the applicant. Hence, it held that the petitioner violated Sections 241 and 242 of the Insurance Code of the Philippines and ordered petitioner Sun Life of Canada (Philippines), Inc. (Sun Life) to pay Ma. Daisy S. Sibya (Ma. Daisy), Jesus Manuel S. Sibya III, and Jaime Luis S. Sibya (respondents) the amounts of PhPl,000,000.00 as death benefits, PhPl00,000.00 as moral Page 25 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 damages, PhPl00,000.00 as exemplary damages, and PhPl00,000.00 as attorney's fees and costs of suit. This was upheld by the CA but modified the decision of the RTC in so far as petitioner’s alleged violation of Sections 241 and 242 of the Insurance Code of the Philippines. Hence, this petition. Issue: Whether Atty. Sibuya is entitled to the proceeds of the insurance policy given the alleged concealment/misrepresentation when he applied for an insurance policy Held: The petition has no merit. The Court held that if the insured dies within the twoyear contestability period, the insurer is bound to make good its obligation under the policy, regardless of the presence or lack of concealment or misrepresentation.
Section 48 serves a noble purpose, as it regulates the actions of both the insurer and the insured. Under the provision, an insurer is given two years - from the effectivity of a life insurance contract and while the insured is alive - to discover or prove that the policy is void ab initio or is rescindible by reason of the fraudulent concealment or misrepresentation of the insured or his agent. After the two-year period lapses, or when the insured dies within the period, the insurer must make good on the policy, even though the policy was obtained by fraud, concealment, or misrepresentation. This is not to say that insurance fraud must be rewarded, but that insurers who recklessly and indiscriminately solicit and obtain business must be penalized, for such recklessness and lack of discrimination ultimately work to the detriment of bona fide takers of insurance and the public in general. In the present case, Sun Life issued Atty. Jesus Jr.'s policy on February 5, 2001. Thus, it has two years from its issuance, to investigate and verify whether the policy was obtained by fraud, concealment, or misrepresentation. Upon the death of Atty. Jesus Jr., however, on May 11, 2001, or a mere three months from the issuance ofthe policy, Sun Life loses its right to rescind the policy. Assuming, however, for the sake of argument, that the incontestability period has not yet set in, the Court agreed with the CA when it held that Sun Life failed to show that Atty. Jesus Jr. committed concealment and misrepresentation. CLAIMS SETTLEMENT AND SUBROGRATION
H.H. HOLLERO CONSTRUCTION, INC. vs. GOVERNMENT SERVICE INSURANCE SYSTEM and POOL OF MACHINERY INSURERS G.R. No. 152334, September 24, 2014, J. Perlas-Bernabe The prescriptive period for the insured’s action for indemnity should be reckoned from the "final rejection" of the claim. "Final rejection" simply means denial by the insurer of the claims of the insured and not the rejection or denial by the insurer of the insured’s motion or request for reconsideration. A perusal of the letter dated April 26, 1990 shows that the GSIS denied Hollero Construction’s indemnity claims. The same conclusion obtains for the letter dated June 21, 1990 denying Hollero Construction’s indemnity claim. Holler's causes of Page 26 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 action for indemnity respectively accrued from its receipt of the letters dated April 26, 1990 and June 21, 1990, or the date the GSIS rejected its claims in the first instance. Consequently, given that it allowed more than twelve (12) months to lapse before filing the necessary complaint before the RTC on September 27, 1991, its causes of action had already prescribed. Facts:
The GSIS and Hollero Construction entered into a Project Agreement whereby the latter undertook the development of a GSIS housing project known as Modesta Village Section B. Hollero obligated itself to insure the Project, including all the improvements, upon the execution of the Agreement under a Contractors’ All Risks (CAR) Insurance with the GSIS General Insurance Department for an amount equal to its cost or sound value, which shall not be subject to any automatic annual reduction.
Pursuant to its undertaking, Holler secured a CAR Policy for land development and for the construction of twenty (20) housing units. In turn, the GSIS reinsured the CAR Policy with Pool of Machinery Insurers. Under both policies, it was provided that: (a) there must be prior notice of claim for loss, damage or liability within fourteen (14) days from the occurrence of the loss or damage; (b) all benefits thereunder shall be forfeited if no action is instituted within twelve(12) months after the rejection of the claim for loss, damage or liability; and (c) if the sum insured is found to be less than the amount required to be insured, the amount recoverable shall be reduced to such proportion before taking into account the deductibles stated in the schedule (average clause provision). During the construction, three (3) typhoons hit the country, namely, Typhoon, Typhoon Huaning, and Typhoon, which caused considerable damage to the Project. Accordingly, Hollero Construction filed several claims for indemnity with the GSIS. In a letter dated April 26, 1990, the GSIS rejected Hollero Construction’s indemnity claims for the damages wrought by Typhoons Biring and Huaning, finding that no amount is recoverable pursuant to the average clause provision under the policies. In a letter dated June 21, 1990, the GSIS similarly rejected Hollero Construction’s indemnity claim for damages wrought by Typhoon Saling on a "no loss" basis, it appearing from its records that the policies were not renewed before the onset of the said typhoon. Hollero filed a Complaint for Sum of Money and Damages before the RTC which was opposed by the GSIS through a Motion to Dismiss on the ground that the causes of action stated therein are barred by the twelve-month limitation provided under the policies, i.e., the complaint was filed more than one (1) year from the rejection of the indemnity claims. The RTC granted Hollero Construction’s indemnity claims. The CA set aside and reversed the RTC Judgment.
Issue: Whether or not the CA committed reversible error in dismissing the complaint on the ground of prescription. Ruling:
Page 27 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 No. Contracts of insurance, like other contracts, are to be construed according to the sense and meaning of the terms which the parties themselves have used. If such terms are clear and unambiguous, they must be taken and understood in their plain, ordinary, and popular sense. Section 10 of the General Conditions of the subject CAR Policies commonly read:
10. If a claim is in any respect fraudulent, or if any false declaration is made or used in support thereof, or if any fraudulent means or devices are used by the Insured or anyone acting on his behalf to obtain any benefit under this Policy, or if a claim is made and rejected and no action or suit is commenced within twelve months after such rejection or, in case of arbitration taking place as provided herein, within twelve months after the Arbitrator or Arbitrators or Umpire have made their award, all benefit under this Policy shall be forfeited. In this relation, case law illumines that the prescriptive period for the insured’s action for indemnity should be reckoned from the "final rejection" of the claim.
A perusal of the letter dated April 26, 1990 shows that the GSIS denied Hollero Construction’s indemnity claims wrought by Typhoons Biring and Huaning, it appearing that no amount was recoverable under the policies. While the GSIS gave Hollero Construction the opportunity to dispute its findings, neither of the parties pursued any further action on the matter; this logically shows that they deemed the said letter as a rejection of the claims. Lest it cause any confusion, the statement in that letter pertaining to any queries Hollero Construction may have on the denial should be construed, at best, as a form of notice to the former that it had the opportunity to seek reconsideration of the GSIS’s rejection. Surely, Hollero Construction cannot construe the said letter to be a mere "tentative resolution." In fact, despite its disavowals, Hollero Construction admitted in its pleadings that the GSIS indeed denied its claim through the aforementioned letter, but tarried in commencing the necessary action in court. The same conclusion obtains for the letter dated June 21, 1990 denying Hollero Construction s indemnity claim caused by Typhoon Saling on a "no loss" basis due to the non-renewal of the policies therefor before the onset of the said typhoon. The fact that Hollero Construction filed a letter of reconsideration therefrom dated April 18, 1991, considering too the inaction of the GSIS on the same similarly shows that the June 21, 1990 letter was also a final rejection of Hollero Construction’s indemnity claim. As correctly observed by the CA, "final rejection" simply means denial by the insurer of the claims of the insured and not the rejection or denial by the insurer of the insured’s motion or request for reconsideration. The rejection referred to should be construed as the rejection in the first instance, as in the two instances above-discussed. Holler's causes of action for indemnity respectively accrued from its receipt of the letters dated April 26, 1990 and June 21, 1990, or the date the GSIS rejected its claims in the first instance. Consequently, given that it allowed more than twelve (12) months to
Page 28 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 lapse before filing the necessary complaint before the RTC on September 27, 1991, its causes of action had already prescribed. VIGILANCE OVER GOODS
ASIAN TERMINALS, INC. vs. FIRST LEPANTO-TAISHO INSURANCE CORPORATION G.R. No. 185964, June 16, 2014, J. Reyes The shipment received by the ATI from the vessel of COCSCO was found to have sustained loss and damages. An arrastre operator’s duty is to take good care of the goods and to turn them over to the party entitled to their possession. It must prove that the losses were not due to its negligence or to that of its employees. The Court held that ATI failed to discharge its burden of proof. ATI blamed COSCO but when the damages were discovered, the goods were already in ATI’s custody for two weeks. Witnesses also testified that the shipment was left in an open area exposed to the elements, thieves and vandals.
Facts: About 3,000 bags of sodium tripolyphosphate contained in 100 plain jumbo bags were loaded on M/V “Da Feng” owned by China Ocean Shipping Co. (COSCO) in favor of Grand Asian Sales, Inc. (GASI). It was insured by GASI with FIRST LEPANTO for P7,959,550.50 under Marine Open Policy No. 0123.
The shipment arrived in Manila and was discharged into the custody of ATI, which was engaged in arrastre business. It remained at ATI’s storage area until withdrawen by broker, Proven Customs Brokerage Corporation (PROVEN) for delivery to GASI.
Upon receipt, GASI found that the goods incurred shortages of 8,600 kg. and spillages of 3,315 kg. for a total of loss valued at P166,722.41. GASI sought recompense from COSCO through its Philippine agent Smith Bell Shipping Lines, Inc. (SMITH BELL), ATI, and PROVEN, but was denied. Thus, FIRST LEPANTO paid P165,772.40 as insurance indemnity.
Then GASI executed a Release of Claim, discharging FIRST LEPANTO from any and all liabilities pertaining to the damaged shipment and subrogating it to all the rights of recovery and claims the former may have against any person or corporation in relation to the damaged shipment. FIRST LEPANTO demanded reimbursement from COSCO through SMITH BELL, PROVEN, and ATI. When denied, it filed a Complaint for sum of money before the MeTC. ATI denied liability and claimed it exercised due diligence and care in handling the goods. ATI alleged that upon arrival, it was discovered that one jumbo bag sustained loss/damage while in custody of COSCO as evidenced by Turn Over Survey of Bad Order
Page 29 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Cargo No. 47890. During withdrawal of PROVEN, it was re-examined and the goods were found to be in the same condition as when it was turned over to ATI such that one jumbo bag was damaged. ATI also averred that even if it was liable, its contract for cargo handling service limits its liability to not more than P5,000 per package. PROVEN also denied liability and claimed that the damages were sustained before they were withdrawn from ATI’s custody under which the shipment was left in an open area exposed to the elements, thieves and vandals. Despite receipt of summons, COSCO and SMITH BELL failed to file an answer to the complaint.
MeTC dismissed the claim, absolving ATI and PROVEN of liability and finding COSCO to be liable but ruling that it had no jurisdiction over it since it was a foreign corporation and it was not established that SMITH BELL is its Philippine Agent. On appeal, the RTC reversed this decision, by which it held ATI liable. ATI challenged the RTC’s decision before the Court of Appeals in which it argued that there was no valid subrogation because FIRST LEPANTO failed to present a valid and existing Marine Open Policy or insurance contract. The CA dismissed the appeal. Issue:
1. Is ATI liable for the damages of the shipment?
2. Whether or not the presentation of the insurance policy is indispensable in proving right of FIRST LEPANTO to be subrogated Ruling:
1. Yes, ATI failed to prove that it exercised due care and diligence while shipment was under its custody, control and possession as arrastre operator.
Factual questions pertaining to ATI’s liability has already been settled in the uniform factual findings of the RTC and the CA. Such findings are binding and conclusive upon the Supreme Court. Only questions of law are allowed in petitions for review on certiorari under Rule 45 of the Rules of Court.
The relationship between the consignee and the arrastre operator is akin to that existing between the consignee and/or the owner of the shipped goods and the common carrier, or that between a depositor and a warehouseman. Hence, in the performance of its obligations, an arrastre operator should observe the same degree of diligence as that required of a common carrier and a warehouseman. An arrastre operator’s duty is to take good care of the goods and to turn them over to the party entitled to their possession.
Since the safekeeping of the goods is its responsibility, it must prove that the losses were not due to its negligence or to that of its employees. ATI failed to discharge its burden of proof. Instead, it insisted on shifting the blame to COSCO on the basis of the Request for Page 30 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Bad Order Survey, purportedly showing that when ATI received the shipment, one jumbo bag thereof was already in damaged condition. The Court affirmed the finding of the RTC and CA that ATI’s contention was improbable and illogical. The date of the said document was too distant from the date when the shipment was actually received by ATI from COSCO. In fact, what the document established is that when the loss/damage was discovered, the shipment has been in ATI’s custody for at least two weeks. This circumstance, coupled with the undisputed declaration of PROVEN’s witnesses that while the shipment was in ATI’s custody, it was left in an open area exposed to the elements, thieves and vandals, all generate the conclusion that ATI failed to exercise due care and diligence. 2. No, the non-presentation of the insurance contract is not fatal to FIRST LEPANTO’s cause of action.
ATI put in issue the submission of the insurance contract for the first time before the CA. ATI also failed to allege the necessity of the insurance contract in its answer to the complaint before the MeTC. Neither was the same considered during pre-trial as one of the decisive matters in the case. Since it was not agreed during the pre-trial proceedings that FIRST LEPANTO will have to prove its subrogation rights by presenting a copy of the insurance contract, ATI is barred from pleading the absence of such contract in its appeal. It is imperative for the parties to disclose during pre-trial all issues they intend to raise during the trial because they are bound by the delimitation of such issues. The determination of issues during the pre-trial conference bars the consideration of other questions, whether during trial or on appeal.
However, the Court ruled that the non-presentation of the insurance contract is not fatalto FIRST LEPANTO’s right to collect reimbursement. Subrogation is the substitution of one person in the place of another with reference to a lawful claim or right, so that he who is substituted succeeds to the rights of the other in relation to a debt or claim, including its remedies or securities. As a general rule, the marine insurance policy needs to be presented in evidence before the insurer may recover the insured value of the lost/damaged cargo in the exercise of its subrogatory right. Presentation of the contract constitutive of the insurance relationship between the consignee and insurer is critical because it is the legal basis of the latter’s right to subrogation.
But the Court held that there are exceptions to this rule. The right of subrogation accrues simply upon payment by the insurance company of the insurance claim. Hence, presentation in evidence of the marine insurance policy is not indispensable before the insurer may recover from the common carrier the insured value of the lost cargo in the exercise of its subrogatory right. The subrogation receipt, by itself, was held sufficient to establish not only the relationship between the insurer and consignee, but also the amount paid to settle the insurance claim. Page 31 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 It was held that the Certificate of Insurance and the Release of Claim presented as evidence sufficiently established FIRST LEPANTO’s right to collect reimbursement as the subrogee of GASI. LIABILITY FOR ACTS OF OTHERS
MARIANO C. MENDOZA AND ELVIRA LIM vs. SPOUSES LEONORA J. GOMEZ AND GABRIEL V. GOMEZ G.R. No. 160110, June 18, 2014, J. Perez The operator of a bus company cannot renege on the obligation brought about by collision of vehicles by claiming that she is not the true owner of the bus. In case of collision of motor vehicles, the person whose name appears in the certificate of registration shall be considered the employer of the person driving the vehicle and shall be directly and primarily liable with the driver under the principle of vicarious liability.
Facts: An Isuzu Elf truck (Isuzu truck) owned by Leonora J. Gomez (Leonora) and driven by Antenojenes Perez (Perez), was hit by a Mayamy Transportation bus (Mayamy bus) with registered under the name of Elvira Lim (Lim) and driven by Mariano C. Mendoza (Mendoza). Mendoza was charged with reckless imprudence resulting in damage to property and multiple physical injuries, however, he eluded arrest, prompting the spouses Gomez to file a separate complaint for damages against Mendoza and Lim, seeking actual damages, compensation for lost income, moral damages, exemplary damages, attorney’s fees and costs of the suit.
At the trial, it was found out that the Isuzu truck was on its right lane when the Mayamy bus intruded the lane which caused the collision. As a result, the helpers on board the truck sustained injuries necessitating medical treatment amounting to P11,267.35, which amount was shouldered by spouses Gomez. The spouses also contended that the collision deprived them the daily income of P1,000.00 as they were engaged in buying plastic scraps and delivering them to recycling plants, truck was vital in the furtherance of the business. Lastly, the spouses claimed that the Isuzu truck sustained extensive damages on its cowl, chassis, lights and steering wheel, amounting to P142,757.40. Lim raised the issue of ownership of the bus in question that although the registered owner was Lim, the actual owner of the bus was one SPO1 Cirilo Enriquez, who had the bus attached with Mayamy Transportation Company under the so-called "kabit system." The RTC found Mendoza liable for direct personal negligence under Article 2176 of the Civil Code, and it also found Lim vicariously liable under Article 2180 of the same Code.
Page 32 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 The RTC relied on the Certificate of Registration in concluding that she is the registered owner of the bus in question. Although actually owned by Enriquez, following the established principle in transportation law, Lim, as the registered owner, is the one who can be held liable. Mendoza and Lim were ordered to pay spouses Gomez 1) the costs of repair of the damaged vehicle in the amount of P142,757.40; 2) the amount ofP1,000.00 per day from March 7, 1997 up to November 1997 representing the unrealized income of the spouses Gomez when the incident transpired up to the time the damaged Isuzu truck was repaired; 3) P100,000.00 as moral damages, plus a separate amount of P50,000.00 as exemplary damages; 4) P50,000.00 as attorney’s fees; and lastly 5) the costs of suit. Aggrieved, Mendoza appealed to the CA which affirmed the decision of the RTC with the exception of the award of unrealized income. Hence, the present petition. Issues:
1. Whether or not Lim is liable as the employer despite the fact that the original owner of the bus is Enriquez 2. Whether or not the award of moral and exemplary damages as well as attorney’s fees and costs of suit is proper Ruling: 1. Yes, Lim shall be vicariously liable with Mendoza.
In Filcar Transport Services v. Espinas, we held that the registered owner is deemed the employer of the negligent driver, and is thus vicariously liable under Article 2176, in relation to Article 2180, of the Civil Code. Citing Equitable Leasing Corporation v. Suyom, the Court ruled that in so far as third persons are concerned, the registered owner of the motor vehicle is the employer of the negligent driver, and the actual employer is considered merely as an agent of such owner. Thus, whether there is an employeremployee relationship between the registered owner and the driver is irrelevant in determining the liability of the registered owner who the law holds primarily and directly responsible for any accident, injury or death caused by the operation of the vehicle in the streets and highways.
As early as Erezo v. Jepte, the Court, speaking through Justice Alejo Labrador summarized the justification for holding the registered owner directly liable, to wit: x x x The main aim of motor vehicle registration is to identify the owner so that if any accident happens, or that any damage or injury is caused by the vehicles on the public highways, responsibility therefore can be fixed on a definite individual, the registered owner. Instances are numerous where vehicle running on public highways caused accidents or injuries to pedestrians or other vehicles without positive identification of the owner or drivers, or with very scant means of identification. It is to forestall these circumstances, so inconvenient or prejudicial to the public, that the motor
Page 33 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 vehicle registration is primarily ordained, in the interest of the determination of persons responsible for damages or injuries caused on public highways. As such, there can be no other conclusion but to hold Lim vicariously liable with Mendoza.
2. As to exemplary damages and costs of suit, yes but as to moral damages and attorney’s fees, no.
Moral Damages. Moral damages are awarded to enable the injured party to obtain means, diversions or amusements that will serve to alleviate the moral suffering he has undergone, by reason of the defendant's culpable action. In fine, an award of moral damages calls for the presentation of 1) evidence of besmirched reputation or physical, mental or psychological suffering sustained by the claimant; 2)a culpable act or omission factually established; 3) proof that the wrongful act or omission of the defendant is the proximate cause of the damages sustained by the claimant; and 4) the proof that the act is predicated on any of the instances expressed or envisioned by Article 2219 and Article 2220 of the Civil Code. A review of the complaint and the transcript of stenographic notes yields the pronouncement that respondents neither alleged nor offered any evidence of besmirched reputation or physical, mental or psychological suffering incurred by them.
Spouses Gomez cannot rely on Article 2219 (2) of the Civil Code which allows moral damages in quasi-delicts causing physical injuries because in physical injuries, moral damages are recoverable only by the injured party, and in the case at bar, herein respondents were not the ones who were actually injured. In B.F. Metal (Corp.) v. Sps. Lomotan, et al., the Court, in a claim for damages based on quasi-delict causing physical injuries, similarly disallowed an award of moral damages to the owners of the damaged vehicle, when neither of them figured in the accident and sustained injuries. Neither can respondents rely on Article 21 of the Civil Code as the RTC erroneously did. Article 21 deals with acts contra bonus mores, and has the following elements: (1) There is an act which is legal; (2) but which is contrary to morals, good custom, public order, or public policy; (3) and it is done with intent to injure. In the present case, it can hardly be said that Mendoza’s negligent driving and violation of traffic laws are legal acts. Moreover, it was not proven that Mendoza intended to injure Perez, et al. Thus, Article 21 finds no application to the case at bar. All in all, we find that the RTC and the CA erred in granting moral damages to respondents. Exemplary Damages. Article 2229 of the Civil Code provides that exemplary or corrective damages are imposed, by way of example or correction for the public good, in addition to moral, temperate, liquidated or compensatory damages. Article 2231 of the same Code further states that in quasi-delicts, exemplary damages may be granted if the defendant acted with gross negligence. Page 34 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 In motor vehicle accident cases, exemplary damages may be awarded where the defendant’s misconduct is so flagrant as to transcend simple negligence and be tantamount to positive or affirmative misconduct rather than passive or negative misconduct. In characterizing the requisite positive misconduct which will support a claim for punitive damages, the courts have used such descriptive terms as willful, wanton, grossly negligent, reckless, or malicious, either alone or in combination.
Gross negligence is the absence of care or diligence as to amount to a reckless disregard of the safety of persons or property. It evinces a thoughtless disregard of consequences without exerting any effort to avoid them. In the case at bar, having established respondents’ right to compensatory damages, exemplary damages are also in order, given the fact that Mendoza was grossly negligent in driving the Mayamy bus. His act of intruding or encroaching on the lane rightfully occupied by the Isuzu truck shows his reckless disregard for safety. Attorney’s Fees. Article 2208 of the Civil Code enumerates the instances when attorney’s fees may be recovered: Art. 2208. In the absence of stipulation, attorney’s fees and expenses of litigation, other than judicial costs, cannot be recovered, except: (1) When exemplary damages are awarded; (2) When the defendant’s 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 plaintiff’s valid 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 workmen’s compensation and employer’s 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 attorney’s fees and expenses of litigation should be recovered; In all cases, the attorney’s fees and expenses of litigation must be reasonable.
In Spouses Agustin v. CA, we held that, the award of attorney’s fees being an exception rather than the general rule, it is necessary for the court to make findings of facts and law that would bring the case within the exception and justify the grant of such award. Thus, the reason for the award of attorney’s fees must be stated in the text of the court’s decision; otherwise, if it is stated only in the dispositive portion of the decision, the same must be disallowed on appeal. Page 35 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 In the case at bar, the RTC Decision had nil discussion on the propriety of attorney’s fees, and it merely awarded such in the dispositive portion. Following established jurisprudence, however, the CA should have disallowed on appeal said award of attorney’s fees as the RTC failed to substantiate said award. Costs of suit. The Rules of Court provide that, generally, costs shall be allowed to the prevailing party as a matter of course, thus: Section 1. Costs ordinarily follow results of suit.- Unless otherwise provided in these rules, costs shall be allowed to the prevailing party as a matter of course, but the court shall have power, for special reasons, to adjudge that either party shall pay the costs of an action, or that the same be divided, as may be equitable. No costs shall be allowed against the Republic of the Philippines, unless otherwise provided by law.
In the present case, the award of costs of suit to respondents, as the prevailing party, is in order.
STIPULATION FOR LIMITATION OF LIABILITY PHILAM INSURANCE COMPANY, INC. (now CHARTIS PHILIPPINES INSURANCE, INC.*) vs. HEUNG-A SHIPPING CORPORATION and WALLEM PHILIPPINES SHIPPING, INC G.R. No. 1877l HEUNG-A SHIPPING CORPORATION and W ALLEM PHILIPPINES SHIPPING, INC. vs. PHILAM INSURANCE COMPANY, INC. (now CHARTIS PHILIPPINES INSURANCE, INC.), G.R. No. 187812, July 23, 2014, J. Reyes Common carriers, as a general rule, are presumed to have been at fault or negligent if the goods they transported deteriorated or got lost or destroyed. That is, unless they prove that they exercised extraordinary diligence in transporting the goods. In order to avoid responsibility for any loss or damage, therefore, they have the burden of proving that they observed such diligence. As the carrier of the subject shipment, HEUNG-A was bound to exercise extraordinary diligence in conveying the same and its slot charter agreement with DONGNAMA did not divest it of such characterization nor relieve it of any accountability for the shipment. However, the liability of HEUNG-A is limited to $500 per package or pallet because in case of the shipper’s failure to declare the value of the goods in the bill of lading, Section 4, paragraph 5 of the COGSA provides that neither the carrier nor the ship shall in any Page 36 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 event be or become liable for any loss or damage to or in connection with the transportation of goods in an amount exceeding $500 per package Facts: On December 19, 2000, Novartis Consumer Health Philippines, Inc. (NOVARTIS) imported from Jinsuk Trading Co. Ltd., (JINSUK) in South Korea, 19 pallets of 200 rolls of Ovaltine Power 18 G laminated plastic packaging material.
In order to ship the goods to the Philippines, JINSUK engaged the services of Protop Shipping Corporation (PROTOP), a freight forwarder likewise based in South Korea, to forward the goods to their consignee, NOVARTIS. PROTOP shipped the cargo through Dongnama Shipping Co. Ltd. (DONGNAMA) which in turn loaded the same on M/V Heung-A Bangkok V-019 owned and operated by Heung-A Shipping Corporation, (HEUNG-A), a Korean corporation, pursuant to a ‘slot charter agreement’ whereby a space in the latter’s vessel was reserved for the exclusive use of the former. Wallem Philippines Shipping, Inc. (WALLEM) is the ship agent of HEUNG-A in the Philippines. NOVARTIS insured the shipment with Philam Insurance Company, Inc. (PHILAM, now Chartis Philippines Insurance, Inc.) under All Risk Marine Open Insurance Policy No. MOP-0801011828 against all loss, damage, liability, or expense before, during transit and even after the discharge of the shipment from the carrying vessel until its complete delivery to the consignee’s premises.
The vessel arrived at the port of Manila, South Harbor, on December 27, 2000. The shipment reached NOVARTIS’ premises on January 5, 2001 and was thereupon inspected by the company’s Senior Laboratory Technician, Annie Rose Caparoso (Caparoso). Upon initial inspection, Caparoso found the container van locked with its load intact. After opening the same, she inspected its contents and discovered that the boxes of the shipment were wet and damp. The boxes on one side of the van were in disarray while others were opened or damaged due to the dampness. Caparoso further observed that parts of the container van were damaged and rusty. There were also water droplets on the walls and the floor was wet. Since the damaged packaging materials might contaminate the product they were meant to hold, Caparoso rejected the entire shipment.
Aggrieved, NOVARTIS demanded indemnification for the lost/damaged shipment from PROTOP but was denied. Insurance claims were, thus, filed with PHILAM which paid the insured value of the shipment in the adjusted amount of One Million Nine Hundred Four Thousand Six Hundred Thirteen Pesos and Twenty Centavos (1,904,613.20). Claiming that after such payment, it was subrogated to all the rights and claims of NOVARTIS against the parties liable for the lost/damaged shipment, PHILAM filed on June 4, 2001, a complaint for damages against PROTOP. On December 11, 2001, PHILAM filed a Motion to Admit Second Amended Complaint this time designating PROTOP as the owner/operator of M/V Heung-A Bangkok V-019 and adding HEUNG-A as party defendant for being the registered owner of the vessel. The motion was granted and the second amended complaint was admitted by the trial court on December 14, 2001. Page 37 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 In a Decision dated February 26, 2007, the RTC rendered HEUNG-A, PROTOP and WALLEM liable for the loss. PHILAM was declared to have been validly subrogated in NOVARTIS’ stead and thus entitled to recover the insurance claims it paid to the latter.
An appeal to the CA was interposed by PHILAM, WALLEM and HEUNG-A. The CA ruled that proximate cause of the damage was the failure of HEUNG-A to inspect and examine the actual condition of the sea van before loading it on the vessel. However, the CA limited the liability of PROTOP, WALLEM and HEUNG-A to US$8,500.00 pursuant to the liability limitation under the COGSA since the shipper failed to declare the value of the subject cargo in the bill of lading and since they could not be made answerable for the two (2) unaccounted pallets because the shipment was on a “shipper’s load, count and seal” basis. Issues:
1. Whether HEUNG-A should be liable for the loss sustained.
2. Whether HEUNG-A’s liability can be limited to US$500 per package pursuant to the COGSA.
Ruling:
1. As the carrier of the subject shipment, HEUNG-A was bound to exercise extraordinary diligence in conveying the same and its slot charter agreement with DONGNAMA did not divest it of such characterization nor relieve it of any accountability for the shipment.
“[C]ommon carriers, as a general rule, are presumed to have been at fault or negligent if the goods they transported deteriorated or got lost or destroyed. That is, unless they prove that they exercised extraordinary diligence in transporting the goods. In order to avoid responsibility for any loss or damage, therefore, they have the burden of proving that they observed such diligence.” Further, under Article 1742 of the Civil Code, even if the loss, destruction, or deterioration of the goods should be caused by the faulty nature of the containers, the common carrier must exercise due diligence to forestall or lessen the loss.
Here, HEUNG-A failed to rebut this prima facie presumption when it failed to give adequate explanation as to how the shipment inside the container van was handled, stored and preserved to forestall or prevent any damage or loss while the same was in its possession, custody and control. 2. Yes. Under Article 1753 of the Civil Code, the law of the country to which the goods are to be transported shall govern the liability of the common carrier for their loss, destruction or deterioration. Since the subject shipment was being transported from South Korea to the Philippines, the Civil Code provisions shall apply. In all matters not regulated
Page 38 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 by the Civil Code, the rights and obligations of common carriers shall be governed by the Code of Commerce and by special laws such as the COGSA. While the Civil Code contains provisions making the common carrier liable for loss/damage to the goods transported, it failed to outline the manner of determining the amount of such liability. Article 372 of the Code of Commerce fills in this gap, thus: Article 372. The value of the goods which the carrier must pay in cases if loss or misplacement shall be determined in accordance with that declared in the bill of lading, the shipper not being allowed to present proof that among the goods declared therein there were articles of greater value and money.
In case, however, of the shipper’s failure to declare the value of the goods in the bill of lading, Section 4, paragraph 5 of the COGSA provides: Neither the carrier nor the ship shall in any event be or become liable for any loss or damage to or in connection with the transportation of goods in an amount exceeding $500 per package lawful money of the United States, or in case of goods not shipped in packages, per customary freight unit, or the equivalent of that sum in other currency, unless the nature and value of such goods have been declared by the shipper before shipment and inserted in the bill of lading. This declaration, if embodied in the bill of lading shall be prima facie evidence, but shall be conclusive on the carrier.
Hence, when there is a loss/damage to goods covered by contracts of carriage from a foreign port to a Philippine port and in the absence a shipper’s declaration of the value of the goods in the bill of lading, as in the present case, the foregoing provisions of the COGSA shall apply. The CA, therefore, did not err in ruling that HEUNG-A, WALLEM and PROTOP’s liability is limited to $500 per package or pallet. DILIGENCE REQUIRED OF COMMON CARRIERS
NEDLLOYD LIJNEN B.V. ROTTERDAM AND THE EAST ASIATIC CO., LTD. vs. GLOW LAKS ENTERPRISES, LTD. G.R. No. 156330, November 19, 2014, J. Perez There is no dispute that the custody of the goods was never turned over to the consignee or his agents but was lost into the hands of unauthorized persons who secured possession thereof on the strength of falsified documents. When the goods shipped are either lost or arrived in damaged condition, a presumption arises against the carrier of its failure to observe that diligence, and there need not be an express finding of negligence to hold it liable. To overcome the presumption of negligence, the common carrier must establish by adequate proof that it exercised extraordinary diligence over the goods. In the present case, Nedlloyd failed to prove that they did exercise the degree of diligence required by law over the goods they transported, it failed to adduce sufficient evidence they exercised extraordinary care to prevent unauthorized withdrawal of the shipments. Page 39 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Facts: Nedlloyd Lijnen B.V. Rotterdam is a foreign corporation engaged in the business of carrying goods by sea, whose vessels regularly call at the port of Manila. It is doing business in the Philippines thru its local ship agent, co-petitioner East Asiatic Co., Ltd. Glow Laks Enterprises, Ltd., is likewise a foreign corporation organized and existing under the laws of Hong Kong. It is not licensed to do, and it is not doing business in, the Philippines. On or about 14 September 1987, Glow loaded on board M/S Scandutch at the Port of Manila a total 343 cartoons of garments, complete and in good order for pre-carriage to the Port of Hong Kong. The goods covered by Bills of Lading Nos. MHONX-2 and MHONX-34 arrived in good condition in Hong Kong and were transferred to M/S Amethyst for final carriage to Colon, Free Zone, Panama. Both vessels, M/S Scandutch and M/S Amethyst, are owned by Nedlloyd represented in the Phlippines by its agent, East Asiatic. The goods which were valued at US$53,640.00 was agreed to be released to the consignee, Pierre Kasem, International, S.A., upon presentation of the original copies of the covering bills of lading. Upon arrival of the vessel at the Port of Colon on 23 October 1987, Nedlloyd purportedly notified the consignee of the arrival of the shipments, and its custody was turned over to the National Ports Authority in accordance with the laws, customs regulations and practice of trade in Panama. By an unfortunate turn of events, however, unauthorized persons managed to forge the covering bills of lading and on the basis of the falsified documents, the ports authority released the goods. On 16 July 1988, Glow filed a formal claim with Nedlloyd for the recovery of the amount of US$53,640.00 representing the invoice value of the shipment but to no avail. Claiming that Nedlloyd are liable for the misdelivery of the goods, Glow initiated Civil Case before the RTC of Manila, seeking for the recovery of the amount of US$53,640.00, including the legal interest from the date of the first demand. After the Pre-Trial Conference, trial on the merits ensued. The RTC rendered a Decision ordering the dismissal of the complaint but granted Nedlloyd counterclaims. The Court of Appeals reversed the findings of the RTC and held that foreign laws were not proven in the manner provided by Section 24, Rule 132 of the Revised Rules of Court, and therefore, it cannot be given full faith and credit. Issue: laws.
Whether or not Nedllyod are liable for the misdelivery of goods under Philippine
Ruling: Yes, Nedlloyd is laible.
Explicit is the rule under Article 1736 of the Civil Code that the extraordinary responsibility of the common carrier begins from the time the goods are delivered to the carrier. This responsibility remains in full force and effect even when they are temporarily unloaded or stored in transit, unless the shipper or owner exercises the right of stoppage in
Page 40 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 transitu, and terminates only after the lapse of a reasonable time for the acceptance, of the goods by the consignee or such other person entitled to receive them. It was further provided in the same statute that the carrier may be relieved from the responsibility for loss or damage to the goods upon actual or constructive delivery of the same by the carrier to the consignee or to the person who has the right to receive them.
In this case, there is no dispute that the custody of the goods was never turned over to the consignee or his agents but was lost into the hands of unauthorized persons who secured possession thereof on the strength of falsified documents. The loss or the misdelivery of the goods in the instant case gave rise to the presumption that the common carrier is at fault or negligent. A common carrier is presumed to have been negligent if it fails to prove that it exercised extraordinary vigilance over the goods it transported. When the goods shipped are either lost or arrived in damaged condition, a presumption arises against the carrier of its failure to observe that diligence, and there need not be an express finding of negligence to hold it liable. To overcome the presumption of negligence, the common carrier must establish by adequate proof that it exercised extraordinary diligence over the goods. It must do more than merely show that some other party could be responsible for the damage. In the present case, Nedlloyd failed to prove that they did exercise the degree of diligence required by law over the goods they transported. Indeed, aside from their persistent disavowal of liability by conveniently posing an excuse that their extraordinary responsibility is terminated upon release of the goods to the Panamanian Ports Authority, Nedlloyd failed to adduce sufficient evidence they exercised extraordinary care to prevent unauthorized withdrawal of the shipments. Nothing in the New Civil Code, however, suggests, even remotely, that the common carriers’ responsibility over the goods ceased upon delivery thereof to the custom authorities. The contract of carriage remains in full force and effect even after the delivery of the goods to the port authorities; the only delivery that releases it from their obligation to observe extraordinary care is the delivery to the consignee or his agents. Even more telling of Nedlloyd’ continuing liability for the goods transported to the fact that the original bills of lading up to this time, remains in the possession of the notify party or consignee.
While surrender of the original bill of lading is not a condition precedent for the common carrier to be discharged from its contractual obligation, there must be, at the very least, an acknowledgement of the delivery by signing the delivery receipt, if surrender of the original of the bill of lading is not possible. There was neither surrender of the original copies of the bills of lading nor was there acknowledgment of the delivery in the present case. This leads to the conclusion that the contract of carriage still subsists and Nedlloyd could be held liable for the breach thereof. Petitioners could have offered evidence before the trial court to show that they exercised the highest degree of care and caution even after the goods was turned over to the custom authorities, by promptly notifying the consignee of its arrival at the Port of Cristobal in order to afford them ample opportunity to remove the cargoes from the port of discharge. This court have scoured the records and found that neither the consignee nor the notify party was informed by Nedlloyd of the arrival of the goods, a crucial fact indicative of Page 41 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Nedlloyd’s failure to observe extraordinary diligence in handling the goods entrusted to their custody for transport. LIABILITIES OF COMMON CARRIERS
LOADSTAR SHIPPING COMPANY, INCORPORATED and LOADSTAR INTERNATIONAL SHIPPING COMPANY, INCORPORATED vs. MALAYAN INSURANCE COMPANY, INCORPORATED G.R. No. 185565, November 26, 2014, J. Reyes Under the Code of Commerce, if the goods are delivered but arrived at the destination in damaged condition, the remedies to be pursued by the consignee depend on the extent of damage on the goods. If the effect of damage on the goods consisted merely of diminution in value, the carrier is bound to pay only the difference between its price on that day and its depreciated value as provided under Article 364. Malayan, as the insurer of PASAR, neither stated nor proved that the goods are rendered useless or unfit for the purpose intended by PASAR due to contamination with seawater. Hence, there is no basis for the goods’ rejection under Article 365 of the Code of Commerce. Clearly, it is erroneous for Malayan to reimburse PASAR as though the latter suffered from total loss of goods in the absence of proof that PASAR sustained such kind of loss. Facts: Loadstar International Shipping (Loadstar Shipping) and PASAR entered into a contract of affreightment of the latter’s copper concentrates. A shipment of cooper concentrates were loaded in MV Bobcat, the vessel of Loadstar International Shipping Co., Inc. (Loadstar International), with Philex as shipper and PASAR as consignee. The cargo was insured by Malayan Insurance Company, Inc. (Malayan). While out in the sea, the crew of the vessel found a crack on the vessel which caused seawater to enter and wet the copper concentrates.
Immediately after the vessel arrived at port, PASAR and Philex’s tested the copper concentrates and found them to be contaminated. PASAR sent a formal notice of claim to Loadstar Shipping, and surveyors recommended the value of the claim at P 32,351,102.32. Malayan paid PASAR said amount. Meanwhile, Malayan wrote Loadstar Shipping informing the latter of a prospective buyer for the damaged copper concentrates and the opportunity to nominate/refer other salvage buyers to PASAR. Malayan later wrote Loadstar Shipping informing the latter of the acceptance of PASAR’s proposal to take the damaged copper concentrates at a residual value of US$90,000.00. Loadstar Shipping wrote Malayan requesting for the reversal of its decision to accept PASAR’s proposal and the conduct of a public bidding to allow Loadstar Shipping to match or top PASAR’s bid by 10%. PASAR then signed a subrogation receipt in favor of Malaya. To recover the amount Malaya paid to PASAR, it demanded reimbursement from Loadstar Shipping, which refused
Page 42 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 to comply, prompting Malaya to file a case of damages with the RTC, against Loadstar Shipping, and later including Loadstar International. Malayan alleged that due to the unseaworthiness of the vessel, PASAR suffered loss of the cargo. Petitioners maintain, among others, that Malayan’s claim is excessive, grossly overstated, unreasonable and unsubstantiated; that their liability, if any, should not exceed the CIF value of the lost/damaged cargo as set forth in the bill of lading, charter party or customary rules of trade; and that the arbitration clause in the contract of affreightment should be followed.
The RTC dismissed the complaint, finding that although contaminated by seawater, the copper concentrates can still be used. It gave credence to the testimony of Francisco Esguerra, petitioners expert witness, that despite high chlorine content, the copper concentrates remain intact and will not lose their value. The gold and silver remain with the grains/concentrates even if soaked with seawater and does not melt. The RTC observed that the purchase agreement between PASAR and Philex contains a penalty clause and has no rejection clause. Despite this agreement, the parties failed to sit down and assess the penalty. The CA reversed and set aside the RTC, holding that petitioners must pay Malayan the amount of P33,934,948.74 as actual damages, less $90,000.00-the residual value of the copper concentrates it sold to PASAR in 2000. Issue:
Did PASAR not suffer total loss of the copper concentrates as to warrant rejection of the goods and reimbursement from Malayan? Ruling:
The petition is granted.
The contract between PASAR and the petitioners is a contract of carriage of goods and not a contract of sale. Therefore, the petitioners and PASAR are bound by the laws on transportation of goods and their contract of affreightment. Since the Contract of Affreightment between the petitioners and PASAR is silent as regards the computation of damages, whereas the bill of lading presented before the trial court is undecipherable, the New Civil Code and the Code of Commerce shall govern the contract between the parties.
Malayan paid PASAR the amount of P32,351,102.32 covering the latter’s claim of damage to the cargo. This represents damages for the total loss of that portion of the cargo which were contaminated with seawater and not merely the depreciation in its value. Strangely though, after claiming damages for the total loss of that portion, PASAR bought back the contaminated copper concentrates from Malayan at the price of US$90,000.00. The fact of repurchase is enough to conclude that the contamination of the copper concentrates cannot be considered as total loss on the part of PASAR. Page 43 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 [Under the Code of Commerce], if the goods are delivered but arrived at the destination in damaged condition, the remedies to be pursued by the consignee depend on the extent of damage on the goods. If the goods are rendered useless for sale, consumption or for the intended purpose, the consignee may reject the goods and demand the payment of such goods at their market price on that day pursuant to Article 365. In case the damaged portion of the goods can be segregated from those delivered in good condition, the consignee may reject those in damaged condition and accept merely those which are in good condition. But if the consignee is able to prove that it is impossible to use those goods which were delivered in good condition without the others, then the entire shipment may be rejected. To reiterate, under Article 365, the nature of damage must be such that the goods are rendered useless for sale, consumption or intended purpose for the consignee to be able to validly reject them.
If the effect of damage on the goods consisted merely of diminution in value, the carrier is bound to pay only the difference between its price on that day and its depreciated value as provided under Article 364.
Malayan, as the insurer of PASAR, neither stated nor proved that the goods are rendered useless or unfit for the purpose intended by PASAR due to contamination with seawater. Hence, there is no basis for the goods’ rejection under Article 365 of the Code of Commerce. Clearly, it is erroneous for Malayan to reimburse PASAR as though the latter suffered from total loss of goods in the absence of proof that PASAR sustained such kind of loss. Otherwise, there will be no difference in the indemnification of goods which were not delivered at all; or delivered but rendered useless, compared against those which were delivered albeit, there is diminution in value.
Malayan also failed to establish the legal basis of its decision to sell back the rejected copper concentrates to PASAR. It cannot be ascertained how and when Malayan deemed itself as the owner of the rejected copper concentrates to have these validly disposed of. If the goods were rejected, it only means there was no acceptance on the part of PASAR from the carrier. Furthermore, PASAR and Malayan simply agreed on the purchase price of US$90,000.00 without any allegation or proof that the said price was the depreciated value based on the appraisal of experts as provided under Article 364 of the Code of Commerce. BILL OF LADING
EASTERN SHIPPING LINES, INC. vs. BPI/MS INSURANCE CORP., &MITSUI SUMITOMO INSURANCE CO., LTD., G.R. No. 182864, January 12, 2015, J. Perez Mere proof of delivery of the goods in good order to a common carrier and of their arrival in bad order at their destination constitutes a prima facie case of fault or negligence against the carrier. If no adequate explanation is given as to how the deterioration, loss, or Page 44 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 destruction of the goods happened, the transporter shall be held responsible. In this case, the fault is attributable to ESLI. Facts: BPI/MS and Mitsui alleged that on 2 February 2004 at Yokohama, Japan, Sumitomo Corporation shipped on board Eastern Shipping Lines’ vessel M/V “Eastern Venus 22” 22 coils of various Steel Sheet weighing in good order and condition for transportation to and delivery at the port of Manila in favor of consignee Calamba Steel Center, Inc. The declared value of the shipment was US$83,857.59. The shipment was insured with the BPI/MS and Mitsui against all risks under Marine Policy No. 103-GG03448834. The complaint alleged that the shipment arrived and upon withdrawal of the shipment by the Calamba Steel’s representative, it was found out that part of the shipment was damaged and was in bad order condition such that there was a Request for Bad Order Survey. It was found out that the damage amounted to US$4,598.85 prompting Calamba Steel to reject the damaged shipment for being unfit for the intended purpose. On 12 May 2004, Sumitomo Corporation again shipped on board ESLI’s vessel M/V “Eastern Venus 25” 50 coils in various Steel Sheet weighing 383,532 kilograms in good order and condition for transportation to and delivery at the port of Manila, Philippines in favor of the same consignee Calamba Steel. The shipment was insured with the BPI/MS and Mitsui against all risks under Marine Policy No. 104-GG04457785. ESLI’s vessel with the second shipment arrived at the port of Manila partly damaged and in bad order. The coils sustained further damage during the discharge from vessel to shore until its turnover to ATI’s custody for safekeeping. Upon withdrawal from ATI and delivery to Calamba Steel, it was found out that the damage amounted to US$12,961.63. As it did before, Calamba Steel rejected the damaged shipment for being unfit for the intended purpose.
Calamba Steel attributed the damages on both shipments to ESLI as the carrier and ATI as the arrastre operator in charge of the handling and discharge of the coils and filed a claim against them. When ESLI and ATI refused to pay, Calamba Steel filed an insurance claim for the total amount of the cargo against BPI/MS and Mitsui as cargo insurers. As a result, BPI/MS and Mitsui became subrogated in place of and with all the rights and defenses accorded by law in favor of Calamba Steel. BPI/MS and Mitsui filed a Complaint before the RTC of Makati City against ESLI and ATI to recover actual damages amounting to US$17,560.48 with legal interest, attorney’s fees and costs of suit. ATI, in its Answer, denied the allegations and insisted that the coils in two shipments were already damaged upon receipt from ESLI’s vessels. It likewise insisted that it exercised due diligence in the handling of the shipments and invoked that in case of adverse decision. On its part, ESLI denied the allegations of the complainants and averred that the damage to both shipments was incurred while the same were in the possession and custody of ATI and/or of the consignee or its representatives. BPI/MS and Mitsui, to substantiate their claims, submitted the Affidavits of (1) Manuel, the Cargo Surveyor of Philippine Japan Marine Surveyors and Sworn Measurers Corporation who personally examined and conducted the surveys on the two shipments;
Page 45 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 (2) Richatto P. Almeda, the General Manager of Calamba Steel who oversaw and examined the condition, quantity, and quality of the shipped steel coils, and who thereafter filed formal notices and claims against ESLI and ATI; and (3) Virgilio G. Tiangco, Jr., the Marine Claims Supervisor of BPI/MS who processed the insurance claims of Calamba Steel. Along with the Affidavits were the Bills of Lading covering the two shipments, Invoices, Notices of Loss of Calamba Steel, Subrogation Form, Insurance Claims, Survey Reports, Turn Over Survey of Bad Order Cargoes and Request for Bad Order Survey. ESLI, in turn, submitted the Affidavits of Captain Hermelo M. Eduarte, who monitored in coordination with ATI the discharge of the two shipments, and Rodrigo Victoria who personally surveyed the subject cargoes on board the vessel as well as the manner the ATI employees discharged the coils. Lastly, ATI submitted the Affidavits of its Bad Order Inspector Ramon Garcia and Claims Officer Ramiro De Vera.
RTC Makati City rendered a decision finding both the ESLI and ATI liable for the damages sustained by the two shipments. On appeal, ESLI argued that the trial court erred when it found BPI/MS has the capacity to sue and when it assumed jurisdiction over the case. It also questioned the ruling on its liability since the Survey Reports indicated that the cause of loss and damage was due to the “rough handling of ATI’s stevedores during discharge from vessel to shore and during loading operation onto the trucks.” It invoked the limitation of liability of US$500.00 per package as provided in Commonwealth Act No. 65 or the Carriage of Goods by Sea Act (COGSA). The CA denied the appeal of ESLI while granted that of ATI. Issue:
Whether or not CA correctly ruled that ESLI is liable.
Ruling:
On the liability of ESLI ESLI bases of its non-liability on the survey reports prepared by BPI/MS and Mitsui’s witness Manuel which found that the cause of damage was the rough handling on the shipment by the stevedores of ATI during the discharging operations. However, Manuel does not absolve ESLI of liability. The witness in fact includes ESLI in the findings of negligence. As stated in the affidavit of Manuel: “During the aforesaid operations, the employees and forklift operators of ESLI and ATI were very negligent in the handling of the subject cargoes.” ESLI cites the affidavit of its witness Rodrigo who stated that the cause of the damage was the rough mishandling by ATI’s stevedores. As Rodrigo admits, it was also his duty to inspect and monitor the cargo on-board upon arrival of the vessel. ESLI cannot invoke its non-liability solely on the manner the cargo was discharged and unloaded. The actual condition of the cargoes upon arrival prior to discharge is equally important and cannot be disregarded. Proof is needed that the cargo arrived at the port of Manila in good order condition and remained as such prior to its handling by ATI. Page 46 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Based on the bills of lading issued, it is undisputed that ESLI received the two shipments of coils from shipper Sumitomo Corporation in good condition at the ports of Yokohama and Kashima, Japan. However, upon arrival at the port of Manila, some coils from the two shipments were partly dented and crumpled as evidenced turn over survey of bad cargoes signed by ESLI’s representatives, a certain Tabanao and Rodrigo together with ATI’s representative Garcia. According to the report, four coils and one skid were partly dented and crumpled prior to turnover by ESLI to ATI’s possession while a total of eleven coils were partly dented and crumpled prior to turnover. Mere proof of delivery of the goods in good order to a common carrier and of their arrival in bad order at their destination constitutes a prima facie case of fault or negligence against the carrier. If no adequate explanation is given as to how the deterioration, loss, or destruction of the goods happened, the transporter shall be held responsible. From the foregoing, the fault is attributable to ESLI. Limitation of Liability
ESLI assigns as error the appellate court’s finding and reasoning that the package limitation under the COGSA is inapplicable even if the bills of lading covering the shipments only made reference to the corresponding invoices. ESLI argues that the value of the cargoes was not incorporated in the bills of lading and that there was no evidence that the shipper had presented to the carrier in writing prior to the loading of the actual value of the cargo, and, that there was a no payment of corresponding freight
The New Civil Code provides that a stipulation limiting a common carrier’s liability to the value of the goods appearing in the bill of lading is binding, unless the shipper or owner declares a greater value. In addition, a contract fixing the sum that may be recovered by the owner or shipper for the loss, destruction, or deterioration of the goods is valid, if it is reasonable and just under the circumstances, and has been fairly and freely agreed upon. COGSA, on the other hand, provides under Section 4, Subsection 5 that an amount recoverable in case of loss or damage shall not exceed US$500.00 per package or per customary freight unless the nature and value of such goods have been declared by the shipper before shipment and inserted in the bill of lading. The Code takes precedence as the primary law over the rights and obligations of common carriers with the Code of Commerce and COGSA applying suppletorily. ESLI contends that there must be an insertion of this declaration in the bill of lading itself to fall outside the statutory limitation of liability.
The bills of lading represent the formal expression of the parties’ rights, duties and obligations. It is the best evidence of the intention of the parties which is to be deciphered from the language used in the contract, not from the unilateral post facto assertions of one of the parties, or of third parties who are strangers to the contract. As to the non-declaration of the value of the goods on the second bill of lading, there is no error on the part of the appellate court when it ruled that there was a compliance of
Page 47 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 the requirement provided by COGSA. The declaration requirement does not require that all the details must be written down on the very bill of lading itself. It must be emphasized that all the needed details are in the invoice, which “contains the itemized list of goods shipped to a buyer, stating quantities, prices, shipping charges,” and other details which may contain numerous sheets. Compliance can be attained by incorporating the invoice, by way of reference, to the bill of lading provided that the former containing the description of the nature, value and/or payment of freight charges is as in this case duly admitted as evidence. A review of the bill of ladings and invoice on the second shipment indicates that the shipper declared the nature and value of the goods with the corresponding payment of the freight on the bills of lading. Further, under the caption “description of packages and goods,” it states that the description of the goods to be transported as “various steel sheet in coil” with a gross weight of 383,532 kilograms (89.510 M3). On the other hand, the amount of the goods is referred in the invoice, the due execution and genuineness of which has already been admitted by ESLI, is US$186,906.35 as freight on board with payment of ocean freight of US$32,736.06 and insurance premium of US$1,813.17. From the foregoing, the Court ruled that the non- limitation of liability applies in the present case. Facts:
Designer Baskets, Inc. v. Air Sea Transport, Inc., et. al. G.R. No. 184513, March 9, 2016, Jardeleza, J:
DBI is a domestic corporation engaged in the production of housewares and handicraft items for export. Sometime in October 1995, Ambiente, a foreign-based company, ordered from DBI 223 cartons of assorted wooden items (the “Shipment”). The Shipment was worth US$12,590.87 and payable through telegraphic transfer. Ambiente designated ACCLI as the forwarding agent that will ship out its order from the Philippines to the United States (US). ACCLI is a domestic corporation acting as agent of ASTI, a US based corporation engaged in carrier transport business, in the Philippines.
On January 7, 1996, DBI delivered the shipment to ACCLI for sea transport from Manila and delivery to Ambiente at 8306 Wilshire Blvd., Suite 1239, Beverly Hills, California. To acknowledge receipt and to serve as the contract of sea carriage, ACCLI issued to DBI triplicate copies of the Bill of Lading. DBI retained possession of the originals of the bills of lading pending the payment of the goods by Ambiente. ASTI released the Shipment to Ambiente on the strength of an Indemnity Agreement executed in its favor. DBI then made several demands to Ambiente for the payment of the shipment, but to no avail. Thus, on October 7, 1996, DBI filed the Original Complaint against Ambiente, ACCLI and ASTI for the payment of the value of the Shipment, damages and legal fees.
ASTI, ACCLI and its directors and incorporators filed a motion to dismiss. They argued that: (a) they are not the real parties-in-interest in the action because the cargo was delivered and accepted by Ambiente. The case, therefore, was a simple case of non- payment of the buyer; (b) relative to the incorporators-stockholders of ACCLI, piercing the corporate veil is misplaced; (c) contrary to the allegation of DBI, the bill of lading covering the shipment
Page 48 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 does not contain a proviso exposing ASTI to liability in case the shipment is released without the surrender of the bill of lading; and (d) the Original Complaint did not attach a certificate of non-forum shopping. DBI opposed the said motion, asserting that ASTI and ACCLI failed to exercise the required extraordinary diligence when they allowed the cargoes to be withdrawn by the consignee without the surrender of the original bill of lading. ASTI, ACCLI, and ACCLI’s incorporatorsstockholders countered that it is DBI who failed to exercise extraordinary diligence in protecting its own interest. They averred that whether or not the buyer-consignee pays the seller is already outside of their concern.
Before the case was resolved by the lower court, DBI impleaded Ambiente as additional party defendant. The RTC found ASTI, ACCLI and its incorporators solidarily liable with Ambiente. The incorporators were, however, absolved from liability. The CA affirmed that Ambiente is liable but absolved ASTI and ACCLI. According to the CA, there is nothing in the applicable laws that require the surrender of bills of lading before the goods may be released to the buyer/consignee. The CA stressed that DBI failed to present evidence to prove its assertion that the surrender of the bill of lading upon delivery of the goods is a common mercantile practice. As for ASTI, the CA explained that its only obligation as a common carrier was to deliver the shipment in good condition. It did not include looking beyond the details of the transaction between the seller and the consignee, or more particularly, ascertaining the payment of the goods by the buyer Ambiente. Issue: Whether ASTI/ACCLI may be held liable for releasing the Shipment without first demanding for the surrender of the Bill of Lading Held: No. A common carrier may release the goods to the consignee even without the surrender of the bill of lading.
Under Article 350 of the Code of Commerce, “the shipper as well as the carrier of the merchandise or goods may mutually demand that a bill of lading be made.” A bill of lading, when issued by the carrier to the shipper, is the legal evidence of the contract of carriage between the former and the latter. It defines the rights and liabilities of the parties in reference to the contract of carriage. The stipulations in the bill of lading are valid and binding unless they are contrary to law, morals, customs, public order or public policy.
Here, ACCLI, as agent of ASTI, issued Bill of Lading No. AC/MLLA601317 to DBI. This bill of lading governs the rights, obligations and liabilities of DBI and ASTI. DBI claims that Bill of Lading No. AC/MLLA601317 contains a provision stating that ASTI and ACCLI are “to release and deliver the cargo/shipment to the consignee, x x x, only after the original copy or copies of the said Bill of Lading is or are surrendered to them; otherwise they become liable to [DBI] for the value of the shipment. Quite tellingly, however, DBI does not point or refer to any specific clause or provision on the bill of lading supporting this claim. The language of the bill of lading shows no such requirement. There is no obligation, therefore, Page 49 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 on the part of ASTI and ACCLI to release the goods only upon the surrender of the original bill of lading. Further, a carrier is allowed by law to release the goods to the consignee even without the latter’s surrender of the bill of lading. The third paragraph of Article 353 of the Code of Commerce is enlightening: Article 353. The legal evidence of the contract between the shipper and the carrier shall be the bills of lading, by the contents of which the disputes which may arise regarding their execution and performance shall be decided, no exceptions being admissible other than those of falsity and material error in the drafting.
After the contract has been complied with, the bill of lading which the carrier has issued shall be returned to him, and by virtue of the exchange of this title with the thing transported, the respective obligations and actions shall be considered cancelled, unless in the same act the claim which the parties may wish to reserve be reduced to writing, with the exception of that provided for in Article 366.
In case the consignee, upon receiving the goods, cannot return the bill of lading subscribed by the carrier, because of its loss or any other cause, he must give the latter a receipt for the goods delivered, this receipt producing the same effects as the return of the bill of lading. (Emphasis supplied.)
The general rule is that upon receipt of the goods, the consignee surrenders the bill of lading to the carrier and their respective obligations are considered canceled. The law, however, provides two exceptions where the goods may be released without the surrender of the bill of lading because the consignee can no longer return it. These exceptions are when the bill of lading gets lost or for other cause. In either case, the consignee must issue a receipt to the carrier upon the release of the goods. Such receipt shall produce the same effect as the surrender of the bill of lading. The non-surrender of the original bill of lading does not violate the carrier’s duty of extraordinary diligence over the goods. The surrender of the original bill of lading is not a condition precedent for a common carrier to be discharged of its contractual obligation. DELIVERY OF GOODS TO COMMON CARRIER
Eastern Shipping Lines Inc. vs. BPI/MS Insurance Corp. and Mitsui Sum Tomo Insurance Co. Ltd. G.R. No. 193986; January 15, 2014 J. Villarama, Jr.
Page 50 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 When the goods were damaged even before they were turned over to the stevedore and such damage was even compounded by the negligent acts of the common carrier and stevedore when both mishandled the goods during the discharging operation, the common carrier cannot deny its liability. From the nature of their business and for reasons of public policy, common carriers are bound to observe extraordinary diligence in the vigilance over the goods transported by them. The extraordinary responsibility of the common carrier lasts from the time the goods are unconditionally placed in the possession of, and received by the carrier for transportation until the same are delivered, actually or constructively, by the carrier to the consignee, or to the person who has a right to receive them. Facts: On several occasions, Sumimoto Corporation (Sumimoto) shipped though a vessel owned by Eastern Shipping Lines various steel sheets in coil in favor of the consignee Calamba Steel Center Inc. (Calamba Steel). The cargo was insured against all risk by umimoto with Mitsui Sumimoto Insurance (Mitsui). Upon arrival of the shipments on various dates, a number of coils were observed to be in bad condition upon its discharge. The possession of the cargoes were then turned over to ATI for stevedoring, storage and safekeeping pending the withdrawal thereof by Calamba Steel.
Being unfit for its intended purpose, Calamba steel rejected the damaged portion of the goods. Thereafter it filed an insurance claim with Mitsui though the latter’s settling agent, respondent BPI/MI Insurance Corporation (BPI/MS), and the former was paid the total amount of the damages suffered by all the shipments. Subsequently, as insurer and subrogee of Calamba Steel, Mitsui and BPI/MS filed a Complaint for Damages against Eastern Shipping and ATI. The RTC rendered its decision in favor of the respondents. Aggrieved, the petitioner appealed to the CA, which later on affirmed the RTC’s findings and ruling. After the denial of its motion for reconsideration, petitioner filed the petition for review. The petitioner argued that it had no participation in the discharging operations and that it did not have a choice in selecting the stevedore since ATI is the only arrastre operator mandated to conduct the discharging operations. Thus, petitioner prays that it be absolve from any liability relative to the damage incurred by the goods. Issue:
Whether or not the petitioner is solidarily liable with ATI on account of the damage incurred by the goods. Ruling:
Petition Denied.
It is settled in maritime law jurisprudence that cargoes while being loaded generally remain under the custody of the carrier. As hereinbefore found by the RTC and affirmed by
Page 51 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 the CA based on the evidence presented, the goods were damaged even before they were turned over to ATI. Such damage was even compounded by the negligent acts of the petitioner and ATI which both mishandled the goods during the discharging operation. Thus, it bears stressing unto petitioner that common carriers, from the nature of their business and for reasons of public policy, are bound to observe extraordinary diligence in the vigilance over the goods transported by them. Subject to certain exceptions enumerated under Article 1734 of the Civil Code, common carriers are responsible for the loss, destruction, or deterioration of the goods. The extraordinary responsibility of the common carrier lasts from the time the goods are unconditionally placed in the possession of, and received by the carrier for transportation until the same are delivered, actually or constructively, by the carrier to the consignee, or to the person who has a right to receive them. Owing to this high degree of diligence required of them, common carriers, as a general rule, are presumed to have been at fault or are negligent if the goods they transported deteriorated or got lost or destroyed. That is, unless they prove that they exercised extraordinary diligence in transporting the goods. In order to avoid responsibility for any loss or damage, therefore, they have the burden of proving that they observed such high level of diligence. In this case, petitioner failed to hurdle such burden. CARRIAGE OF GOODS BY SEA ACT
MARINA PORT SERVICES, INC v. AMERICAN HOME ASSURANCE CORPORATION, G.R. No. 201822, August 12, 2015 MSC’s shipment of bags of flour arrived at the Marina Port Services (MPSI) and was duly checked and assessed. However, upon receipt of the container vans containing the shipment at its warehouse, MSC discovered substantial shortages in the number of bags of flour delivered. Hence, it filed a formal claim for loss with MPSI. When MPSI denied the claim, MSC’s insurer paid the same and was subrogated to MSC. Issue: Can MPSI be held liable for the loss?
Held: No. The relationship between an arrastre operator and a consignee is similar to that between a warehouseman and a depositor, or to that between a common carrier and the consignee and/or the owner of the shipped goods. Thus, an arrastre operator should adhere to the same degree of diligence as that legally expected of a warehouseman or a common carrier as set forth in Section 3[b] of the Warehouse Receipts [Act] and Article 1733 of the Civil Code. As custodian of the shipment discharged from the vessel, the arrastre operator must take good care of the same and turn it over to the party entitled to its possession. In case of claim for loss filed by a consignee or the insurer as subrogee, it is the arrastre operator that carries the burden of proving compliance with the obligation to deliver the goods to the appropriate party. It must show that the losses were not due to its negligence or that of its employees. It must establish that it observed the required diligence in handling the shipment. Otherwise, it shall be presumed that the loss was due to its fault.
To prove proper delivery, MPSI presented 10 gate passes which bore the duly identified Page 52 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 signature of MSC's representative. In the gate pass, it was acknowledged that “Issuance of [the] Gate Pass constitutes delivery to and receipt by consignee of the goods as described above in good order and condition, unless an accompanying B.O. certificate duly issued and noted on the face of [the] Gate Pass appears. As held in International Container Terminal Services, Inc. v. Prudential Guarantee & Assurance Co., Inc., the signature of the consignee's representative on the gate pass is evidence of receipt of the shipment in good order and condition. Also, that MPSI delivered the subject shipment to MSC's representative in good and complete condition and with lock and seals intact is established by the testimonies.
At any rate, MPSI cannot just the same be held liable for the missing bags of flour since the consigned goods were shipped under "Shipper's Load and Count" arrangement. "This means that the shipper was solely responsible for the loading of the container, while the carrier was oblivious to the contents of the shipment. Protection against pilferage of the shipment was the consignee's lookout. The arrastre operator was, like any ordinary depositary, duty-bound to take good care of the goods received from the vessel and to turn the same over to the party entitled to their possession, subject to such qualifications as may have validly been imposed in the contract between the parties. The arrastre operator was not required to verify the contents of the container received and to compare them with those declared by the shipper because, as earlier stated, the cargo was at the shipper's load and count. The arrastre operator was expected to deliver to the consignee only the container received from the carrier." CORPORATION LAW
CLASSES OF CORPORATIONS Iglesia Filipina Independente vs. Heirs of Bernardino Taeza G.R. No. 179597; February 3, 2014 J. Peralta Sec. 113 of the Corporation Code states that: “Any corporation sole may purchase and hold real estate and personal property for its church, charitable, benevolent or educational purposes, and may receive bequests or gifts for such purposes. Such corporation may mortgage or sell real property held by it upon obtaining an order for that purpose from the Court of First Instance of the province where the property is situated; Provided, That in cases where the rules, regulations and discipline of the religious denomination, sect or church, religious society or order concerned represented by such corporation sole regulate the method of acquiring, holding, selling and mortgaging real estate and personal property, such rules, regulations and discipline shall control, and the intervention of the courts shall not be necessary.” Hence, the sale of real properties owned by a religious corporation by the Supreme Bishop alone is unenforceable where its Canons require not just the consent of the Supreme Bishop but also the concurrence of the laymen’s committee, the parish priest, and the Diocesan Bishop. Facts: Page 53 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Iglesia Filipina Independiente (IFI), a duly registered religious corporation, owned a parcel of land decscribed as Lot 3653. The lot is subdivided as follows: Lot Nos. 3653-A, 3653-B, 3653-C, and 3653-D. Through IFI’s Supreme Bishop Rev. Macario Ga, Lot 3653-D was sold to one Bienveniedo de Guzman. Years after, Lot Nos. 3653-A and 3653-B were likewise sold by Bishop Rev. Ga to Bernardino Taeza. Subsequently, Taeza registered the subject parcels of land and occupied a portion thereof.
IFI demanded Taeza to vacate said land which he failed to do. A complaint for annulment of sale was filed by IFI against Taeza before the RTC of Tuguegarao City. The trial court rendered judgment in favor of IFI and held that the deed of sale executed between Rev. Ga and Taeza is null and void.
On appeal, the CA rendered its decision reversing and setting aside the RTC decision. It ruled that IFI, being a corporation sole, validly transferred ownership over the land in question through its Supreme Bishop, who was at the time the administrator of all properties and the official representative of the church. It further held that the authority of Supreme Bishop Rev. Ga to enter into a contract and represent IFI cannot be assailed, as there are no provisions in its constitution and canons giving the said authority to any other person or entity. IFI elevated the case to the SC. It maintained that there was no consent to the contract of sale as Supreme Bishop Ga had no authority to give such consent. Issue:
Whether or not the Supreme Bishop is authorized to enter into a contract of sale in behalf of the religious corporation. Ruling:
Petition Granted.
Section 113 of the Corporation Code of the Philippines provides that: Sec. 113. Acquisition and alienation of property. - Any corporation sole may purchase and hold real estate and personal property for its church, charitable, benevolent or educational purposes, and may receive bequests or gifts for such purposes. Such corporation may mortgage or sell real property held by it upon obtaining an order for that purpose from the Court of First Instance of the province where the property is situated; Provided, That in cases where the rules, regulations and discipline of the religious denomination, sect or church, religious society or order concerned represented by such corporation sole regulate the method of acquiring, holding, selling and mortgaging real estate and personal property, such rules,
Page 54 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 regulations and discipline shall control, and the intervention of the courts shall not be necessary.
Pursuant to the foregoing, petitioner provided in Article IV (a) of its Constitution and Canons of the Philippine Independent Church, that "[a]ll real properties of the Church located or situated in such parish can be disposed of only with the approval and conformity of the laymen'scommittee, the parish priest, the Diocesan Bishop, with sanction of the Supreme Council, and finally with the approval of the Supreme Bishop, as administrator of all the temporalities of the Church."
Evidently, under petitioner's Canons, any sale of real property requires not just the consent of the Supreme Bishop but also the concurrence of the laymen's committee, the parish priest, and the Diocesan Bishop, as sanctioned by the Supreme Council. However, petitioner's Canons do not specify in what form the conformity of the other church entities should be made known. Thus, as petitioner's witness stated, in practice, such consent or approval may be assumed as a matter of fact, unless some opposition is expressed.
Here, the trial court found that the laymen's committee indeed made its objection to the sale known to the Supreme Bishop. The CA, on the other hand, glossed over the fact of such opposition from the laymen's committee, opining that the consent of the Supreme Bishop to the sale was sufficient, especially since the parish priest and the Diocesan Bishop voiced no objection to the sale. The Court finds it erroneous for the CA to ignore the fact that the laymen's committee objected to the sale of the lot in question. The Canons require that ALL the church entities listed in Article IV (a) thereof should give its approval to the transaction. Thus, when the Supreme Bishop executed the contract of sale of petitioner's lot despite the opposition made by the laymen's committee, he acted beyond his powers. Dennis A.B. Funa vs. Manila Economic and Cultural Office and the Commission on Audit G.R. No. 193462; February 4, 2014 J. Perez
The Manila Economic and Cultural Office (MECO) is not a GOCC or government instrumentality. It is a sui generis private entity especially entrusted by the government with the facilitation of unofficial relations with the people in Taiwan without jeopardizing the country’s faithful commitment to the One China policy of the PROC. However, despite its nongovernmental character, the MECO handles government funds in the form of the verification fees it collects on behalf of the DOLE and the consular fees it collects under Section 2(6) of EO No. 15, s. 2001. Hence, under existing laws, the accounts of the MECO pertaining to its collection of such "verification fees" and "consular fees" should be audited by the COA. Facts: Manila Economic and Cultural Office (MECO) was organized as a non-stock, non-profit corporation under the Corporation Code. From the moment it was incorporated, MECO
Page 55 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 became the corporate entity entrusted by the Philippine government with the responsibility of fostering friendly and unofficial relations with the people of Taiwan, particularly in the areas of trade, economic cooperation, investment, cultural, scientific and educational exchanges. To enable it to carry out such responsibility, MECO was authorized by the government to perform certain consular and other functions that relates to the promotion, protection and facilitation of Philippine interests in Taiwan.
On August 23, 2010, the petitioner sent a letter to the COA requesting for a copy of the latest financial and audit report of MECO invoking, for that purpose, his constitutional right to information of matters of public concern. The petitioner made the request on the belief that MECO, being under the operational supervision of the DTI, is a GOCC and thus subject to the audit jurisdiction of COA. Two days later, the Assistant Commissioner issued a memorandum stating that MECO was not among the agencies audited by any of the three Clusters of the Corporate Government Sector. Perceiving the memorandum as an admission that COA had never audited and examined the accounts of MECO, the petitioner filed the instant petition for mandamus and impleaded both COA and MECO. According to the petitioner, MECO possesses all the essential characteristics of a GOCC and an instrumentality under the Administrative Code as it is controlled by the government thru a board of directors appointed by the President of the Philippines and while not integrated within the executive departmental framework, it is nonetheless under the operational and policy supervision of the DTI. MECO, for its part, maintains that while it performs public functions, it is not a GOCC, and its funds are private funds. COA, on the other hand, claims that MECO is a nongovernmental entity, but argues that, despite being such, it may still be audited with respect to the verification fees for overseas employment documents that it collects from Taiwanese employers on behalf of DOLE. Issue:
Whether or not the Manila Economic and Cultural Office (MECO) is a GOCC subject to the audit jurisdiction of COA. Ruling:
Petition is Partially Granted.
GOCCs are "stock or non-stock" corporations "vested with functions relating to public needs" that are "owned by the Government directly or through its instrumentalities." By definition, three attributes thus make an entity a GOCC: first, its organization as stock or non-stock corporation; second, the public character of its function; and third, government ownership over the same. Possession of all three attributes is necessary to deem an entity a GOCC.
Page 56 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 In this case, there is not much dispute that the MECO possesses the first and second attributes. It is the third attribute, which the MECO lacks.The organization of the MECO as a non-stock corporation cannot at all be denied. Records disclose that the MECO was incorporated as a non-stock corporation under the Corporation Code on 16 December 1977. The purposes for which the MECO was organized are somewhat analogous to those of a trade, business or industry chamber, but only on a much larger scale i.e., instead of furthering the interests of a particular line of business or industry within a local sphere, the MECO seeks to promote the general interests of the Filipino people in a foreign land. Finally, it is not disputed that none of the income derived by the MECO is distributable as dividends to any of its members, directors or officers. Verily, the MECO is organized as a non-stock corporation.
The public character of the functions vested in the MECO cannot be doubted either. Indeed, to a certain degree, the functions of the MECO can even be said to partake of the nature of governmental functions. As earlier intimated, it is the MECO that, on behalf of the people of the Philippines, currently facilitates unofficial relations with the people in Taiwan.Consistent with its corporate purposes, the MECO was "authorized" by the Philippine government to perform certain "consular and other functions" relating to the promotion, protection and facilitation of Philippine interests in Taiwan.
A perusal of the functions of the MECO reveals its uncanny similarity to some of the functions typically performed by the DFA itself, through the latter’s diplomatic and consular missions. The functions of the MECO, in other words, are of the kind that would otherwise be performed by the Philippines’ own diplomatic and consular organs, if not only for the government’s acquiescence that they instead be exercised by the MECO. Evidently, the functions vested in the MECO are impressed with a public aspect. The MECO Is Not Owned or Controlled by the Government Organization as a non-stock corporation and the mere performance of functions with a public aspect, however, are not by themselves sufficient to consider the MECO as a GOCC. In order to qualify as a GOCC, a corporation must also, if not more importantly, be owned by the government. The government owns a stock or non-stock corporation if it has controlling interest in the corporation. In a stock corporation, the controlling interest of the government is assured by its ownership of at least fifty-one percent (51%) of the corporate capital stock. In a nonstock corporation, like the MECO, jurisprudence teaches that the controlling interest of the government is affirmed when "at least majority of the members are government officials holding such membership by appointment or designation"or there is otherwise "substantial participation of the government in the selection" of the corporation’s governing board.
In this case, the petitioner argues that the government has controlling interest in the MECO because it is the President of the Philippines that indirectly appoints the directors of the corporation. The petitioner claims that the President appoints directors of the MECO thru Page 57 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 "desire letters" addressed to the corporation’s board. The fact of the incorporation of the MECO under the Corporation Code is key. The MECO was correct in postulating that, as a corporation organized under the Corporation Code, it is governed by the appropriate provisions of the said code, its articles of incorporation and its by-laws. In this case, it is the by-laws of the MECO that stipulates that its directors are elected by its members; its officers are elected by its directors; and its members, other than the original incorporators, are admitted by way of a unanimous board resolution.
It is significant to note that none of the original incorporators of the MECO were shown to be government officials at the time of the corporation’s organization. Indeed, none of the members, officers or board of directors of the MECO, from its incorporation up to the present day, were established as government appointees or public officers designated by reason of their office. There is, in fact, no law or executive order that authorizes such an appointment or designation. Hence, from a strictly legal perspective, it appears that the presidential "desire letters" pointed out by petitioner are, no matter how strong its persuasive effect may be, merely recommendatory.
The MECO Is Not a Government Instrumentality; It Is a Sui Generis Entity.The categorical exclusion of the MECO from a GOCC makes it easier to exclude the same from any other class of government instrumentality. The other government instrumentalities are all, by explicit or implicit definition, creatures of the law. The MECO cannot be any other instrumentality because it was, as mentioned earlier, merely incorporated under the Corporation Code. It is evident, from the peculiar circumstances surrounding its incorporation, that the MECO was not intended to operate as any other ordinary corporation. And it is not. Despite its private origins, and perhaps deliberately so, the MECO was "entrusted" by the government with the "delicate and precarious" responsibility of pursuing "unofficial"relations with the people of a foreign land whose government the Philippines is bound not to recognize. The intricacy involved in such undertaking is the possibility that, at any given time in fulfilling the purposes for which it was incorporated, the MECO may find itself engaged in dealings or activities that can directly contradict the Philippines’ commitment to the One China policy of the PROC. Such a scenario can only truly be avoided if the executive department exercises some form of oversight, no matter how limited, over the operations of this otherwise private entity. Indeed, from hindsight, it is clear that the MECO is uniquely situated as compared with other private corporations. From its over-reaching corporate objectives, its special duty and authority to exercise certain consular functions, up to the oversight by the executive department over its operations—all the while maintaining its legal status as a nongovernmental entity—the MECO is, for all intents and purposes, sui generis.
The Accounts of the MECO Pertaining to the Verification Fees and Consular Fees May Be Audited by the COA. Section 14(1), Book V of the Administrative Code authorizes the COA to audit accounts of non-governmental entities "required to pay or have government share"
Page 58 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 but only with respect to "funds xxx coming from or through the government." This provision of law perfectly fits the MECO:
First. The MECO receives the "verification fees" by reason of being the collection agent of the DOLE—a government agency. Out of its collections, the MECO is required, by agreement, to remit a portion thereof to the DOLE. Hence, the MECO is accountable to the government for its collections of such "verification fees" and, for that purpose, may be audited by the COA. Second. Like the "verification fees," the "consular fees" are also received by the MECO through the government, having been derived from the exercise of consular functions entrusted to the MECO by the government. Hence, the MECO remains accountable to the government for its collections of "consular fees" and, for that purpose, may be audited by the COA. GRANDFATHER RULE
NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND DEVELOPMENT, INC., and McARTHUR MINING, INC., vs. REDMONT CONCOLIDATED MINES CORP. G.R. No. 195580, January 28, 2015, J. Velasco, Jr. A corporation that complies with the 60-40 Filipino to foreign equity requirement can be considered a Filipino corporation if there is no doubt as to who has the “beneficial ownership” and “control” of the corporation. In this case, a further investigation as to the nationality of the personalities with the beneficial ownership and control of the corporate shareholders in both the investing and investee corporations is necessary. “Doubt” refers to various indicia that the “beneficial ownership” and “control” of the corporation do not in fact reside in Filipino shareholders but in foreign stakeholders. Even if at first glance the petitioners comply with the 60-40 Filipino to foreign equity ratio, doubt exists in the present case that gives rise to a reasonable suspicion that the Filipino shareholders do not actually have the requisite number of control and beneficial ownership in petitioners Narra, Tesoro, and McArthur. Hence, the Court is correct in using the Grandfather Rule in determining the nationality of the petitioners. Facts:
Petitioner Narra Nickel and Mining Development Corp. (Narra) filed this Motion for Reconsideration of the Supreme Court's April 21, 2014 Decision wherein it affirmed the appellate court's ruling that petitioners, being foreign corporations, are not entitled to Mineral Production Sharing Agreements (MPSAs ). In reaching the assailed decision, the Court upheld with approval the appellate court's finding that there was doubt as to petitioners' nationality since a 100% Canadian-owned firm, MBMI Resources, Inc. (MBMI), effectively owns 60% of the common stocks of the petitioners by owning equity interest of petitioners' other majority corporate shareholders.
To petitioners, the Court’s application of the Grandfather Rule to determine their nationality is erroneous and allegedly without basis in the Constitution, the Foreign Page 59 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Investments Act of 1991 (FIA), the Philippine Mining Act of 1995, and the Rules issued by the Securities and Exchange Commission (SEC). These laws and rules supposedly espouse the application of the Control Test in verifying the Philippine nationality of corporate entities for purposes of determining compliance with Sec. 2, Art. XII of the Constitution that only “corporations or associations at least sixty per centum of whose capital is owned by such [Filipino] citizens” may enjoy certain rights and privileges, like the exploration and development of natural resources Issue:
Whether the Court erred in using the Grandfather rule and not the control test in determining the nationality of the petitioners. Ruling:
No. As defined by Dean Cesar Villanueva, the Grandfather Rule is “the method by which the percentage of Filipino equity in a corporation engaged in nationalized and/or partly nationalized areas of activities, provided for under the Constitution and other nationalization laws, is computed, in cases where corporate shareholders are present, by attributing the nationality of the second or even subsequent tier of ownership to determine the nationality of the corporate shareholder.” Thus, to arrive at the actual Filipino ownership and control in a corporation, both the direct and indirect shareholdings in the corporation are determined. In other words, if there are layers of intervening corporations investing in a mining joint venture, we must delve into the citizenship of the individual stockholders of each corporation. Admittedly, an ongoing quandary obtains as to the role of the Grandfather Rule in determining compliance with the minimum Filipino equity requirement vis-à-vis the Control Test. This confusion springs from the erroneous assumption that the use of one method forecloses the use of the other. The Control Test and the Grandfather Rule are not, as it were, incompatible ownership-determinant methods that can only be applied alternative to each other. Rather, these methods can, if appropriate, be used cumulatively in the determination of the ownership and control of corporations engaged in fully or partly nationalized activities, as the mining operation.
The Grandfather Rule, standing alone, should not be used to determine the Filipino ownership and control in a corporation, as it could result in an otherwise foreign corporation rendered qualified to perform nationalized or partly nationalized activities. Hence, it is only when the Control Test is first complied with that the Grandfather Rule may be applied. Put in another manner, if the subject corporation’s Filipino equity falls below the threshold 60%, the corporation is immediately considered foreign-owned, in which case, the need to resort to the Grandfather Rule disappears. On the other hand, a corporation that complies with the 60-40 Filipino to foreign equity requirement can be considered a Filipino corporation if there is no doubt as to who has the “beneficial ownership” and “control” of the corporation. In that instance, there is no need for a dissection or further inquiry on the ownership of the corporate shareholders in
Page 60 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 both the investing and investee corporation or the application of the Grandfather Rule. As a corollary rule, even if the 60-40 Filipino to foreign equity ratio is apparently met by the subject or investee corporation, a resort to the Grandfather Rule is necessary if doubt exists as to the locus of the “beneficial ownership” and “control.”
In this case, a further investigation as to the nationality of the personalities with the beneficial ownership and control of the corporate shareholders in both the investing and investee corporations is necessary.
As explained in the April 21, 2012 Decision, the “doubt” that demands the application of the Grandfather Rule in addition to or in tandem with the Control Test is not confined to, or more bluntly, does not refer to the fact that the apparent Filipino ownership of the corporation’s equity falls below the 60% threshold. Rather, “doubt” refers to various indicia that the “beneficial ownership” and “control” of the corporation do not in fact reside in Filipino shareholders but in foreign stakeholders. Even if at first glance the petitioners comply with the 60-40 Filipino to foreign equity ratio, doubt exists in the present case that gives rise to a reasonable suspicion that the Filipino shareholders do not actually have the requisite number of control and beneficial ownership in petitioners Narra, Tesoro, and McArthur. Hence, a further investigation and dissection of the extent of the ownership of the corporate shareholders through the Grandfather Rule is justified. NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND DEVELOPMENT, INC., and MCARTHUR MINING, INC. vs. REDMONT CONSOLIDATED MINES CORP. G.R. No. 195580, April 21, 2014, J. Velasco Jr.
The Grandfather Rule is a method to determine the nationality of the corporation by making reference to the nationality of the stockholders of the investor corporation. Based on a SEC Rule and DOJ Opinion, the Grandfather Rule or the second part of the SEC Rule applies only when the 60-40 Filipino-foreign equity ownership is in doubt (i.e., in cases where the joint venture corporation with Filipino and foreign stockholders with less than 60% Filipino stockholdings [or 59%] invests in other joint venture corporation which is either 60-40% Filipino-alien or the 59% less Filipino). Stated differently, where the 60-40 Filipino- foreign equity ownership is not in doubt, the Grandfather Rule will not apply. Facts: Redmont Consolidated Mines Corp. (Redmont), a domestic corporation organized and existing under Philippine laws, took interest in mining and exploring certain areas of the province of Palawan. After inquiring with the Department of Environment and Natural Resources (DENR), it learned that the areas where it wanted to undertake exploration and mining activities where already covered by Mineral Production Sharing Agreement (MPSA) applications of petitioners Narra, Tesoro and McArthur. Petitioner McArthur, through its predecessor-in-interest Sara Marie Mining, Inc. (SMMI), filed an application for an MPSA. Subsequently, SMMI was issued MPSA-AMA-IVB-
Page 61 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 153 covering an area of over 1,782 hectares and EPA-IVB-44 which includes an area of 3,720 hectares. The MPSA and EP were then transferred to Madridejos Mining Corporation (MMC) and, on November 6, 2006, assigned to petitioner McArthur. Petitioner Narra acquired its MPSA from Alpha Resources and Development Corporation and Patricia Louise Mining & Development Corporation (PLMDC) which previously filed an application for an MPSA. Through the said application, the DENR issued MPSA-IV-1-12 covering an area of 3.277 hectares in barangays Calategas and San Isidro, Municipality of Narra, Palawan. Subsequently, another MPSA application of SMMI was filed with the DENR Region IV-B, labeled as MPSA-AMA-IVB-154 (formerly EPA-IVB-47) over 3,402 hectares in Barangays Malinao and Princesa Urduja, Municipality of Narra, Province of Palawan. SMMI subsequently conveyed, transferred and assigned its rights and interest over the said MPSA application to Tesoro. On 2007, Redmont filed before the Panel of Arbitrators (POA) of the DENR three (3) separate petitions for the denial of petitioners’ applications for MPSA. In the petitions, Redmont alleged that at least 60% of the capital stock of McArthur, Tesoro and Narra are owned and controlled by MBMI Resources, Inc. (MBMI), a 100% Canadian corporation. Redmont reasoned that since MBMI is a considerable stockholder of petitioners, it was the driving force behind petitioners’ filing of the MPSA’s over the areas covered by applications since it knows that it can only participate in mining activities through corporations which are deemed Filipino citizens. Redmont argued that given that petitioners’ capital stocks were mostly owned by MBMI, they were likewise disqualified from engaging in mining activities through MPSAs, which are reserved only for Filipino citizens. Issue:
Whether or not petitioner corporations Narra, Tesoro and McArthur are foreign corporations based on the "Grandfather Rule". Ruling:
Yes.
Grandfather Rule is a method to determine the nationality of the corporation by making reference to the nationality of the stockholders of the investor corporation. Based on a SEC Rule and DOJ Opinion, the Grandfather Rule or the second part of the SEC Rule applies only when the 60-40 Filipino-foreign equity ownership is in doubt (i.e., in cases where the joint venture corporation with Filipino and foreign stockholders with less than 60% Filipino stockholdings [or 59%] invests in other joint venture corporation which is either 60-40% Filipino-alien or the 59% less Filipino). Stated differently, where the 60-40 Filipino- foreign equity ownership is not in doubt, the Grandfather Rule will not apply.
After a scrutiny of the evidence extant on record, the Court finds that this case calls for the application of the grandfather rule since doubt prevails and persists in the corporate ownership of petitioners. Also doubt is present in the 60-40 Filipino equity ownership of petitioners Narra, McArthur and Tesoro, since their common investor, the Page 62 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 100% Canadian corporation––MBMI, funded them. Obviously, the instant case presents a situation which exhibits a scheme employed by stockholders to circumvent the law, creating a cloud of doubt in the Court’s mind. To determine, therefore, the actual participation, direct or indirect, of MBMI, the grandfather rule must be used. McArthur Mining, Inc.
To establish the actual ownership, interest or participation of MBMI in each of petitioners’ corporate structure, they have to be "grandfathered." As previously discussed, McArthur acquired its MPSA application from MMC, which acquired its application from SMMI. McArthur has a capital stock of ten million pesos (PhP 10,000,000) divided into 10,000 common shares at one thousand pesos (PhP 1,000) per share, subscribed to by the following: Name
Madridejos Mining Corporation
MBMI Resources, Inc. Lauro L. Salazar Fernando B. Esguerra Manuel A. Agcaoili
Michael T. Mason Kenneth Cawkell
Nationality Number of Shares
Amount Subscribed
Amount Paid
PhP 5,997,000.00
PhP 825,000.00
Filipino
5,997
Canadian
3,998
PhP 3,998,000.0
PhP 1,878,174.60
Filipino
1
PhP 1,000.00
PhP 1,000.00
Filipino Filipino
American Canadian Total
1 1 1 1
10,000
PhP 1,000.00 PhP 1,000.00 PhP 1,000.00 PhP 1,000.00
PhP 10,000,000.00
PhP 1,000.00 PhP 1,000.00 PhP 1,000.00 PhP 1,000.00
PhP 2,708,174.60
Interestingly, looking at the corporate structure of MMC, we take note that it has a similar structure and composition as McArthur. In fact, it would seem that MBMI is also a major investor and "controls" MBMI and also, similar nominal shareholders were present, i.e. Fernando B. Esguerra (Esguerra), Lauro L. Salazar (Salazar), Michael T. Mason (Mason) and Kenneth Cawkell (Cawkell): Madridejos Mining Corporation
Page 63 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 In the case of Madridejos Mining Corporation, noticeably, Olympic Mines & Development Corporation (Olympic) as one of its stockholders did not pay any amount with respect to the number of shares they subscribed to in the corporation, which is quite absurd since Olympic is the major stockholder in MMC. MBMI’s 2006 Annual Report sheds light on why Olympic failed to pay any amount with respect to the number of shares it subscribed to. MBMI states that Olympic entered into joint venture agreements with several Philippine companies, wherein MBMI holds directly and indirectly a 60% effective equity interest in the Olympic Properties. Thus, as demonstrated in this first corporation, McArthur, when it is "grandfathered," company layering was utilized by MBMI to gain control over McArthur. It is apparent that MBMI has more than 60% or more equity interest in McArthur, making the latter a foreign corporation. Tesoro Mining and Development, Inc.
Tesoro, which acquired its MPSA application from SMMI, has a capital stock of ten million pesos (PhP 10,000,000) divided into ten thousand (10,000) common shares at PhP 1,000 per share. Except for the name "Sara Marie Mining, Inc.," Tesoro’s corporate structure shows exactly the same figures as the corporate structure of petitioner McArthur, down to the last centavo. All the other shareholders are the same: MBMI, Salazar, Esguerra, Agcaoili, Mason and Cawkell. The figures under "Nationality," "Number of Shares," "Amount Subscribed," and "Amount Paid" are exactly the same. Sara Marie Mining, Inc.
After subsequently studying SMMI’s corporate structure, it is not farfetched for us to spot the glaring similarity between SMMI and MMC’s corporate structure. Again, the presence of identical stockholders, namely: Olympic, MBMI, Amanti Limson (Limson), Esguerra, Salazar, Hernando, Mason and Cawkell. The figures under the headings "Nationality," "Number of Shares," "Amount Subscribed," and "Amount Paid" are exactly the same except for the amount paid by MBMI which now reflects the amount of two million seven hundred ninety four thousand pesos (PhP 2,794,000). Oddly, the total value of the amount paid is two million eight hundred nine thousand nine hundred pesos (PhP 2,809,900). Accordingly, after "grandfathering" petitioner Tesoro and factoring in Olympic’s participation in SMMI’s corporate structure, it is clear that MBMI is in control of Tesoro and owns 60% or more equity interest in Tesoro. This makes petitioner Tesoro a non-Filipino corporation and, thus, disqualifies it to participate in the exploitation, utilization and development of our natural resources. Narra Nickel Mining and Development Corporation Moving on to the last petitioner, Narra, which is the transferee and assignee of PLMDC’s MPSA application, whose corporate structure’s arrangement is similar to that of the first two petitioners discussed. The capital stock of Narra is ten million pesos (PhP
Page 64 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 10,000,000), which is divided into ten thousand common shares (10,000) at one thousand pesos (PhP 1,000) per share. Again, MBMI, along with other nominal stockholders, i.e., Mason, Agcaoili and Esguerra, is present in this corporate structure. Patricia Louise Mining & Development Corporation
Using the grandfather method, we further look and examine PLMDC’s corporate structure: Name
Nationality Number of Amount Shares Subscribed
Palawan Alpha South Filipino Resources Development Corporation
6,596
Higinio C. Mendoza, Jr.
1
MBMI Resources, Inc.
Fernando B. Esguerra Henry E. Fernandez Lauro L. Salazar
Manuel A. Agcaoili Bayani H. Agabin
Michael T. Mason Kenneth Cawkell
Canadian
3,396
Filipino
1
Filipino Filipino Filipino Filipino Filipino
American Canadian Total
1 1 1 1 1 1
10,000
Amount Paid
PhP 6,596,000.00
PhP 0
PhP 1,000.00
PhP 1,000.00
PhP 3,396,000.00
PhP 2,796,000.00
PhP 1,000.00
PhP 1,000.00
PhP 1,000.00 PhP 1,000.00 PhP 1,000.00 PhP 1,000.00 PhP 1,000.00 PhP 1,000.00
PhP 10,000,000.00
PhP 1,000.00 PhP 1,000.00 PhP 1,000.00 PhP 1,000.00 PhP 1,000.00 PhP 1,000.00 PhP 2,708,174.60
Yet again, the same stockholders in petitioners’ corporate structures are present. Similarly, the amount of money paid by the 2nd tier majority stock holder, in this case, Palawan Alpha South Resources and Development Corp. (PASRDC), is zero.
Concluding from the above-stated facts, it is quite safe to say that petitioners McArthur, Tesoro and Narra are not Filipino since MBMI, a 100% Canadian corporation, owns 60% or more of their equity interests. Such conclusion is derived from grandfathering petitioners’ corporate owners, namely: MMI, SMMI and PLMDC. Going further and adding to the picture, MBMI’s Summary of Significant Accounting Policies statement– –regarding the "joint venture" agreements that it entered into with the "Olympic" and "Alpha" groups––involves SMMI, Tesoro, PLMDC and Narra. Noticeably, the Page 65 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 ownership of the "layered" corporations boils down to MBMI, Olympic or corporations under the "Alpha" group wherein MBMI has joint venture agreements with, practically exercising majority control over the corporations mentioned. In effect, whether looking at the capital structure or the underlying relationships between and among the corporations, petitioners are NOT Filipino nationals and must be considered foreign since 60% or more of their capital stocks or equity interests are owned by MBMI. RINE OF SEPARATE JURIDICAL PERSONALITY
PHILIPPINE NATIONAL BANK vs. MERELO B. AZNAR et al. G.R. No. 171805, May 30, 2014, J. Leonardo-De Castro Stockholders cannot claim ownership over corporate properties by virtue of the Minutes of a Stockholder’s meeting which merely evidence a loan agreement between the stockholders and the corporation. As such, there interest over the properties are merely inchoate. Facts: In 1958, RISCO ceased operation due to business reverses. Due to Merelo B. Aznar, Matias B. Aznar III, Jose L. Aznar, Rosario T. Barcenilla, Jose B. Enad and Ricardo Gabuya’s (Aznar et al)desire to rehabilitate RISCO, they contributed a total amount of P212,720.00 which was used in the purchase of the three (3) parcels of land located in various areas in the Cebu Province.
After the purchase of the above lots, titles were issued in the name of RISCO. The amount contributed by plaintiffs constituted as liens and encumbrances on the aforementioned properties as annotated in the titles of said lots. Such annotation was made pursuant to the Minutes of the Special Meeting of the Board of Directors of RISCO stating that; “And that the respective contributions above-mentioned shall constitute as their lien or interest on the property described above, if and when said property are titled in the name of RURAL INSURANCE & SURETY CO., INC., subject to registration as their adverse claim in pursuance of the Provisions of Land Registration Act, (Act No. 496, as amended) until such time their respective contributions are refunded to them completely.”
Thereafter, various subsequent annotations were made on the same titles in favor of PNB. As a result, a Certificate of Sale was issued in favor of PNB, being the lone and highest bidder of the three (3) parcels of land and was also issued Transfer Certificate of Title over the said parcels of land. This prompted Aznar et. al to file a complaint seeking the quieting of their supposed title to the subject properties. They alleged that the subsequent annotations on the titles are subject to the prior annotation of their liens and encumbrances. On the other hand,
Page 66 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 asserts that plaintiffs, as mere stockholders of RISCO do not have any legal or equitable right over the properties of the corporation. PNB posited that even if plaintiff’s monetary lien had not expired, their only recourse was to require the reimbursement or refund of their contribution.
Aznar, et al., filed a Manifestation and Motion for Judgment on the Pleadings. Thus, the trial court rendered the November 18, 1998 Decision, which ruled against PNB. It further declared that the Minutes of the Special Meeting of the Board of Directors of RISCO annotated on the titles to subject properties as an express trust whereby RISCO was a mere trustee and the above-mentioned stockholders as beneficiaries being the true and lawful owners of Lots 3597, 7380 and 1323. On appeal, the CA set aside the ruling of the trial court and ruled that there was no trust created. The lien is merely an evidence of the loan. Thus, it directed PNB to pay Aznar, et al., the amount of their contributions plus legal interest from the time of acquisition of the property until finality of judgment. Issue:
Whether or not Aznar et al as stockholders has the legal or equitable rights over the subject properties Ruling:
No. Aznar et al do not have any legal or equitable rights over the properties.
Indeed, we find that Aznar, et al., have no right to ask for the quieting of title of the properties at issue because they have no legal and/or equitable rights over the properties that are derived from the previous registered owner which is RISCO. As a consequence thereof, a corporation has a personality separate and distinct from those of its stockholders and other corporations to which it may be connected. Thus, we had previously ruled in Magsaysay-Labrador v. Court of Appeals that the interest of the stockholders over the properties of the corporation is merely inchoate and therefore does not entitle them to intervene in litigation involving corporate property.
Here, the interest, if it exists at all, of petitioners-movants is indirect, contingent, remote, conjectural, consequential and collateral. At the very least, their interest is purely inchoate, or in sheer expectancy of a right in the management of the corporation and to share in the profits thereof and in the properties and assets thereof on dissolution, after payment of the corporate debts and obligations.
In the case at bar, there is no allegation, much less any proof, that the corporate existence of RISCO has ceased and the corporate property has been liquidated and distributed to the stockholders. The records only indicate that, as per Securities and Exchange Commission (SEC) Certification dated June 18, 1997, the SEC merely suspended Page 67 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 RISCO’s Certificate of Registration beginning on September 5, 1988 due to its nonsubmission of SEC required reports and its failure to operate for a continuous period of at least five years.
Verily, Aznar, et al., who are stockholders of RISCO, cannot claim ownership over the properties at issue in this case on the strength of the Minutes which, at most, is merely evidence of a loan agreement between them and the company. There is no indication or even a suggestion that the ownership of said properties were transferred to them which would require no less that the said properties be registered under their names. For this reason, the complaint should be dismissed since Aznar, et al., have no cause to seek a quieting of title over the subject properties. At most, what Aznar, et al., had was merely a right to be repaid the amount loaned to RISCO. Unfortunately, the right to seek repayment or reimbursement of their contributions used to purchase the subject properties is already barred by prescription. COMMISSIONER OF CUSTOMS vs. OILINK INTERNATIONAL CORPORATION G.R. No. 161759, July 2, 2014, J. Bersamin
URC and Oilink had the same Board of Directors and Oilink was 100% owned by URC. The Court held that the doctrine of piercing the corporate veil has no application here because the Commissioner of Customs did not establish that Oilink had been set up to avoid the payment of taxes or duties, or for purposes that would defeat public convenience, justify wrong, protect fraud, defend crime, confuse legitimate legal or judicial issues, perpetrate deception or otherwise circumvent the law. Facts: In the course of its business undertakings, particularly in the period from 1991 to 1994, Union Refinery Corporation (URC) imported oil products into the country. URC and Oilink had interlocking directors when Oilink started its business. They had the same Board of Directors and Oilink was 100% owned by URC. The District Collector of the Port of Manila, formally demanded that URC pay the taxes and duties on its oil imports that had arrived between January 6, 1991 and November 7, 1995 at the Port of Lucanin in Mariveles, Bataan.
On July 2, 1999, Commissioner Tan made a final demand for the total liability of P138,060,200.49 upon URC and Oilink. Co requested from Commissioner Tan a complete finding of the facts and law in support ofthe assessment made in the latter’s July 2, 1999 final demand. Oilink formally protested the assessment on the ground that it was not the party liable for the assessed deficiency taxes. On July 12, 1999, after receiving the letter from Co, Commissioner Tan communicated in writing the detailed computation of the tax liability, stressing that the Bureau of Customs (BoC) would not issue any clearance to Oilink unless the amount of
Page 68 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 P138,060,200.49 demanded as Oilink’s tax liability be first paid, and a performance bond be posted by URC/Oilink to secure the payment of any adjustments that would result from the BIR’s review of the liabilities for VAT, excise tax, special duties, penalties, etc. Thus, on July 30, 1999, Oilink appealed to the CTA, seeking the nullification of the assessment for having been issued without authority and with grave abuse of discretion tantamount to lack of jurisdiction because the Government was thereby shifting the imposition from URC to Oilink. The CTA rendered its decision declaring as null and void the assessment of the Commissioner of Customs. The CA ruled in favor of Oilink. Issue:
fiction
Whether or not the Commissioner of Customs could pierce the veil of corporate
Ruling: No. A corporation, upon coming into existence, is invested by law with a personality separate and distinct from those of the persons composing it as well as from any other legal entity to which it may be related. For this reason, a stockholder is generally not made to answer for the acts or liabilities of the corporation, and viceversa. The separate and distinct personality of the corporation is, however, a mere fiction established by law for convenience and to promote the ends of justice. It may not be used or invoked for ends that subvert the policy and purpose behind its establishment, or intended by law to which the corporation owes its being. This is true particularly when the fiction is used to defeat public convenience, to justify wrong, to protect fraud, to defend crime, to confuse legitimate legal or judicial issues, to perpetrate deception or otherwise to circumvent the law. This is likewise true where the corporate entity is being used as an alter ego, adjunct, or business conduit for the sole benefit of the stockholders or of another corporate entity. In such instances, the veil of corporate entity will be pierced or disregarded with reference to the particular transaction involved.
In Philippine National Bank v. Ritratto Group, Inc., the Court has outlined the following circumstances thatare useful in the determination of whether a subsidiary is a mere instrumentality of the parent-corporation, viz:
1. Control, not mere majority or complete control, but complete domination, not only of finances butof 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 perpetrate the violation of a statutory or other positive legal duty, or dishonest and, unjust act incontravention of plaintiff's legal rights; and Page 69 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.
In applying the "instrumentality" or "alter ego" doctrine, the courts are concerned with reality, not form, and with how the corporation operated and the individual defendant's relationship to the operation. Consequently, the absence of any one of the foregoing elements disauthorizes the piercing of the corporate veil. Indeed, the doctrine of piercing the corporate veil has no application here because the Commissioner of Customs did not establish that Oilink had been set up to avoid the payment of taxes or duties, or for purposes that would defeat public convenience, justify wrong, protect fraud, defend crime, confuse legitimate legal or judicial issues, perpetrate deception or otherwise circumvent the law. It is also noteworthy that from the outset the Commissioner of Customs sought to collect the deficiency taxes and duties from URC, and that it was only on July 2, 1999 when the Commissioner of Customs sent the demand letter to both URC and Oilink. That was revealing, because the failure of the Commissioner of Customs to pursue the remedies against Oilink from the outset manifested that its belated pursuit of Oilink was only an afterthought. GIRLY G. ICO vs. SYSTEMS TECHNOLOGY INSTITUTE, INC., MONICO V. JACOB and PETER K. FERNANDEZ G.R. No. 185100, July 9, 2014, J. Del Castillo
A corporation, as a juridical entity, may act only through its directors, officers and employees. Obligations incurred as a result of the directors’ and officers’ acts as corporate agents, are not their personal liability but the direct responsibility of the corporation they represent. As a rule, they are only solidarily liable with the corporation for the illegal termination of services of employees if they acted with malice or bad faith. To hold a director or officer personally liable for corporate obligations, two requisites must concur: (1) it must be alleged in the complaint that the director or officer assented to patently unlawful acts of the corporation or that the officer was guilty of gross negligence or bad faith; and (2) there must be proof that the officer acted in bad faith. Facts: Systems Technology Institute, Inc. (STI) is an educational institution duly incorporated, organized, and existing under Philippine laws. Monico V. Jacob (Jacob) and Peter K. Fernandez (Fernandez) are STI officers, the former being the President and Chief Executive Officer (CEO) and the latter Senior Vice-President. STI offers pre-school, elementary, secondary and tertiary education, as well as post-graduate courses either through franchisees or STI wholly-owned schools. Girly G. Ico (Ico), a masteral degree holder with doctorate units earned, was hired as Faculty Member by STI College Makati (Inc.), which operates STI College-Makati (STIMakati). STI College Makati (Inc.) is a wholly-owned subsidiary of STI. Ico was subsequent
Page 70 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 promoted as Dean of STI College- Parañaque and, thereafter, as Chief Operating Officer (COO) of STI-Makati.
However, after the merger between STI and STI College Makati (Inc.), Ico received a memorandum cancelling her COO assignment at STI-Makati, citing management’s decision to undertake an "organizational restructuring" in line with the merger of STI and STIMakati. Further ordering Ico to report to turn over her work to one Victoria Luz (Luz), who shall function as STI-Makati’s School Administrator. According to STI, the "organizational re-structuring" was undertaken "in order to streamline operations. In the process, the positions of Chief Executive Officer and Chief Operating Officer of STI Makati were abolished." Furthermore, the STI’s Corporate Auditor/Audit Advisory Group conducted an audit of STI-Makati covering the whole period of Ico’s stint as COO/School Administrator therein. In a report (Audit Report) later submitted to Fernandez, the auditors claim to have discovered several irregularities. In another memorandum, it was recommended that an investigation committee be formed to investigate Ico for grave abuse of authority, falsification, gross dishonesty, maligning and causing intrigues, and other charges. Fernandez recommended that Ico be placed under preventive suspension pending investigation. Hence, pursuant to said recommendation, Ico was placed under preventive suspension and banning her entry to any of STI’s premises.
Labor Arbiter (LA) found Ico to have been illegally constructively and in bad faith dismissed by respondents in her legally acquired status as regular employee thus, ordering respondents SYSTEMS TECHNOLOGY INSTITUTE, INC. and/or MONICO V. JACOB, PETER K. FERNANDEZ in solido to reinstate her to her former position and pay Ico’s full back wages plus damages. On appeal, NLRC reversed the ruling of the LA. On petition for certiorari by Ico before the CA, CA affirmed the ruling of the NLRC, hence, this petition. Issue:
Whether Jacob, as officer of STI, may be held solidarily liable with STI.
Ruling:
Nonetheless, the Court fails to discern any bad faith or negligence on the part of respondent Jacob. The principal character that figures prominently in this case is Fernandez; he alone relentlessly caused petitioner’s hardships and suffering. He alone is guilty of persecuting petitioner. Indeed, some of his actions were without sanction of STI itself, and were committed outside of the authority given to him by the school; they bordered on the personal, rather than official. His superior, Jacob, may have been, for the most part, clueless of what Fernandez was doing to petitioner. After all, Fernandez was the Head of the Academic Services Group of the EMD, and petitioner directly reported to him at the time; his position enabled him to pursue a course of action with petitioner that Jacob was largely unaware of. Page 71 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 A corporation, as a juridical entity, may act only through its directors, officers and employees. Obligations incurred as a result of the directors’ and officers’ acts as corporate agents, are not their personal liability but the direct responsibility of the corporation they represent. As a rule, they are only solidarily liable with the corporation for the illegal termination of services of employees if they acted with malice or bad faith. To hold a director or officer personally liable for corporate obligations, two requisites must concur: (1) it must be alleged in the complaint that the director or officer assented to patently unlawful acts of the corporation or that the officer was guilty of gross negligence or bad faith; and (2) there must be proof that the officer acted in bad faith. Hence, Jacob is absolved from any liability.
PALM AVENUE HOLDING CO.,INC., and PALM AVENUE REALTY AND DEVELOPMENT CORPORATION vs. SANDIGANBAYAN 5TH Division, REPUBLIC OF THE PHILIPPINES, represented by the PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT (PCGG) G.R. No. 173082, August 6, 2014, J. Peralta The writ of sequestration issued against the assets of the corporation is not valid because the suit in the civil case was against the shareholder in the corporation and is not a suit against the latter. Thus, the failure to implead these corporations as defendants and merely annexing a list of such corporations to the complaints is a violation of their right to due process for it would be, in effect, disregarding their distinct and separate personality without a hearing. Furthermore, the sequestration order issued against the corporation is deemed automatically lifted due to the failure of the Republic to commence the proper judicial action or to implead them therein within the period under the Constitution. Facts: Through a writ of sequestration dated October 27, 1986, the Presidential Commission on Good Government (PCGG) sequestered all the assets, properties, records, and documents of the Palm Companies.The PCGG had relied on a letter from the Palm Companies’ Attorney-in-Fact, Jose S. Sandejas, specifically identifying Benjamin “Kokoy” Romualdez, a known crony of former President Ferdinand E. Marcos, as the beneficial owner of the Benguet Corporation shares in the Palm Companies’ name. The Republic, represented by the PCGG, filed a complaint with the Sandiganbayan docketed as Civil Case No. 0035 but did not initially implead the Palm Companies as defendants. However, the Sandiganbayan issued a Resolution dated June 16, 1989 where it ordered said companies to be impleaded. Pursuant to said order, the Republic filed an amended complaint dated January 17, 1997 and named therein the Palm Companies as defendants. The graft court admitted the amended complaint on October 15, 2001. Thereafter, the companies filed a Motion for Bill of Particulars to direct the Republic
Page 72 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 to submit a bill of particulars regarding matters in the amended complaint which were not alleged with certainty or particularity.
Hence, the Republic submitted its bill of particulars. Subsequently, the Palm Companies filed a motion to dismiss the Republic’s complaint. They argued that the bill of particulars did not satisfactorily comply with the requested details. Furthermore, the Palm Companies filed another motion to order the PCGG to release all the companies’ shares of stock and funds in its custody on the ground that since they were not impleaded as parties-defendants in Civil Case No. 0035 within the period prescribed by the Constitution. The Sandiganbayan then issued its October 21, 2010 Resolution, granting the companies’ foregoing motion. Issue:
Whether the Sandiganbayan committed grave abuse of discretion amounting to excess off jurisdiction in granting the Palm Companies motion to release all shares of stock and funds in the custody of the PCGG Ruling:
No.
Under Sec. 26, Article XVIII of the 1987 Constitution, it mandates the Republic to file the corresponding judicial action or proceedings within a six-month period (from its ratification on February 2, 1987) in order to maintain sequestration, non-compliance with which would result in the automatic lifting of the sequestration order. Hence, there is a necessity on the part of the Republic to actually implead corporations as defendants in the complaint, out of recognition for their distinct and separate personalities, failure to do so would necessarily be denying such entities their right to due process. Here, the writ of sequestration issued against the assets of the Palm Companies is not valid because the suit in Civil Case No. 0035 against Benjamin Romualdez as shareholder in the Palm Companies is not a suit against the latter. Thus, the failure to implead these corporations as defendants and merely annexing a list of such corporations to the complaints is a violation of their right to due process for it would be, in effect, disregarding their distinct and separate personality without a hearing.
In the case at bar, the Palm Companies were merely mentioned as Item Nos. 47 and 48, Annex A of the Complaint, as among the corporations where defendant Romualdez owns shares of stocks. Furthermore, while the writ of sequestration was issued on October 27, 1986, the Palm Companies were impleaded in the case only in 1997, or already a decade from the ratification of the Constitution in 1987, way beyond the prescribed period.
Page 73 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 The sequestration order issued against the Palm Companies is therefore deemed automatically lifted due to the failure of the Republic to commence the proper judicial action or to implead them therein within the period under the Constitution. However, the lifting of the writ of sequestration will not necessarily be fatal to the main case since the same does not ipso facto mean that the sequestered properties are, in fact, not illgotten. The effect of the lifting of the sequestration will merely be the termination of the government’s role as conservator. OLONGAPO CITY vs. SUBIC WATER AND SEWERAGE CO., INC. G.R. No. 171626, August 6, 2014, J. Brion
OCWD and Subic Water are two separate and different entities. Subic Water clearly demonstrated that it was a separate corporate entity from OCWD. OCWD is just a ten percent (10%) shareholder of Subic Water. As a mere shareholder, OCWD’s juridical personality cannot be equated nor confused with that of Subic Water. It is basic in corporation law that a corporation is a juridical entity vested with a legal personality separate and distinct from those acting for and in its behalf and, in general, from the people comprising it. Under this corporate reality, Subic Water cannot be held liable for OCWD’s corporate obligations in the same manner that OCWD cannot be held liable for the obligations incurred by Subic Water as a separate entity. The corporate veil should not and cannot be pierced unless it is clearly established that the separate and distinct personality of the corporation was used to justify a wrong, protect fraud, or perpetrate a deception. Facts: The Olongapo City filed a complaint for sum of money and damages against Olongapo City Water District (OCWD). It alleged that OCWD failed to pay its electricity bills to Olongapo City and remit its payment under the contract to pay, pursuant to OCWD’s acquisition of Olongapo City’s water system. In the interim, OCWD entered into a Joint Venture Agreement (JVA) with Subic Bay Metropolitan Authority (SBMA), Biwater International Limited (Biwater), and D.M. Consunji, Inc. (DMCI). Pursuant to this agreement, Subic Water– a new corporate entity – was incorporated, with the following equity participation from its shareholders: SBMA 19.99% or 20%; OCWD 9.99% or 10%; Biwater 29.99% or 30%; and DMCI 39.99% or 40%.
Subic Water was granted the franchise to operate and to carry on the business of providing water and sewerage services in the Subic Bay Free Port Zone, as well as in Olongapo City. Hence, Subic Water took over OCWD’s water operations in Olongapo City. To finally settle their money claims against each other, Olongapo City and OCWD entered into a compromise agreement. The compromise agreement also contained a provision regarding the parties’ request that Subic Water, Philippines, which took over the operations of the defendant Olongapo City Water District be made the co-maker for OCWD’s obligations. Mr. Noli Aldip,
Page 74 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 then chairman of Subic Water, acted as its representative and signed the agreement on behalf of Subic Water. To enforce the compromise agreement, Olongapo City filed a motion for the issuance of a writ of execution with the RTC. It granted the motion, but did not issue the corresponding writ of execution. Almost four years later, the Olongapo City, prayed again for the issuance of a writ of execution against OCWD.
OCWD’s former counsel, filed a manifestation alleging that OCWD had already been dissolved and that Subic Water is now the former OCWD. Because of this assertion, Subic Water also filed a manifestation informing the RTC that as borne out by the articles of incorporation and general information sheet of Subic Water defendant OCWD is not Subic Water. The manifestation also indicated that OCWD was only a ten percent (10%) shareholder of Subic Water; and that its 10% share was already in the process of being transferred to Olongapo City pursuant to a Deed of Assignment . The RTC granted the motion for execution and directed its issuance against OCWD and/or Subic Water. The CA granted Subic Water’s petition for certiorari and reversed the trial court’s rulings. Issue:
Whether or not Subic Water can be made liable under the writ of execution issued by RTC in favor of Olongapo City Ruling:
No, the writ of execution issued by the RTC, in favor of Olongapo City, is null and void. OCWD and Subic Water are two separate and different entities. Olongapo City practically suggests that since Subic Water took over OCWD’s water operations in Olongapo City, it also acquired OCWD’s juridical personality, making the two entities one and the same. This is an interpretation that we cannot make or adopt under the facts and the evidence of this case. Subic Water clearly demonstrated that it was a separate corporate entity from OCWD. OCWD is just a ten percent (10%) shareholder of Subic Water. As a mere shareholder, OCWD’s juridical personality cannot be equated nor confused with that of Subic Water. It is basic in corporation law that a corporation is a juridical entity vested with a legal personality separate and distinct from those acting for and in its behalf and, in general, from the people comprising it.
Under this corporate reality, Subic Water cannot be held liable for OCWD’s corporate obligations in the same manner that OCWD cannot be held liable for the obligations incurred by Subic Water as a separate entity. The corporate veil should not and Page 75 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 cannot be pierced unless it is clearly established that the separate and distinct personality of the corporation was used to justify a wrong, protect fraud, or perpetrate a deception.
In Concept Builders, Inc. v. NLRC, the Court enumerated the possible probative factors of identity which could justify the application of the doctrine of piercing the corporate veil. These are: (1) Stock ownership by one or common ownership of both corporations; (2) Identity of directors and officers; (3) The manner of keeping corporate books and records; and (4) Methods of conducting the business.
The burden of proving the presence of any of these probative factors lies with the one alleging it. Unfortunately, Olongapo City simply claimed that Subic Water took over OCWD's water operations in Olongapo City. Apart from this allegation, Olongapo City failed to demonstrate any link to justify the construction that Subic Water and OCWD are one and the same. Under this evidentiary situation, our duty is to respect the separate and distinct personalities of these two juridical entities. Furthermore, an officer’s actions can only bind the corporation if he had been authorized to do so. An examination of the compromise agreement reveals that it was not accompanied by any document showing a grant of authority to Mr. Noli Aldip to sign on behalf of Subic Water. Subic Water is a corporation. A corporation, as a juridical entity, primarily acts through its board of directors, which exercises its corporate powers. In this capacity, 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 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 which have been intentionally conferred, and also such 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 persons dealing with the officer or agent to believe that it has conferred.
Mr. Noli Aldip signed the compromise agreement purely in his own capacity. Moreover, the compromise agreement did not expressly provide that Subic Water consented to become OCWD’s co-maker. As worded, the compromise agreement merely provided that both parties also request Subic Water, Philippines, which took over the operations of Olongapo City Water District be made as co-maker for the obligations abovecited. This request was never forwarded to Subic Water’s board of directors. Even if due notification had been made (which does not appear in the records), Subic Water’s board does not appear to have given any approval to such request. No document such as the minutes of Subic Water’s board of directors’ meeting or a secretary’s certificate, purporting Page 76 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 to be an authorization to Mr. Aldip to conform to the compromise agreement, was ever presented. In effect, Mr. Aldip’s act of signing the compromise agreement was outside of his authority to undertake.
Since Mr. Aldip was never authorized and there was no showing that Subic Water’s articles of incorporation or by-laws granted him such authority, then the compromise agreement he signed cannot bind Subic Water. Subic Water cannot likewise be made a surety or even a guarantor for OCWD’s obligations. OCWD’s debts under the compromise agreement are its own corporate obligations to Olongapo City. The SC confirmed that the writ of execution issued by RTC Olongapo, in favor of Olongapo City, is null and void. Accordingly, Subic Water cannot be made liable under the writ. GERARDO LANUZA, JR. AND ANTONIO 0. OLBES vs. BF CORPORATION, SHANGRI- LA PROPERTIES, INC., ALFREDO C. RAMOS, RUFO B. COLAYCO, MAXIMO G. LICAUCO III, AND BENJAMIN C. RAMOS G.R. No. 174938, October 01, 2014, J. Leonen
BF Corporation filed a collection complaint with the Regional Trial Court against Shangri-La and the members of its board of directors. A corporation’s representatives are generally not bound by the terms of the contract executed by the corporation. They are not personally liable for obligations and liabilities incurred on or in behalf of the corporation. Facts: In 1993, BF Corporation filed a collection complaint with the Regional Trial Court against Shangri-La and the members of its board of directors.
BF Corporation alleged that Shangri-La induced BF Corporation to continue with the construction of the buildings using its own funds and credit despite Shangri-La’s default. According to BF Corporation, Shangri- La misrepresented that it had funds to pay for its obligations with BF Corporation, and the delay in payment was simply a matter of delayed processing of BF Corporation’s progress billing statements. BF Corporation eventually completed the construction of the buildings. Shangri-La allegedly took possession of the buildings while still owing BF Corporation an outstanding balance.
On August 3, 1993, Shangri-La, and its BOD filed a motion to suspend the proceedings in view of BF Corporation’s failure to submit its dispute to arbitration, in accordance with the arbitration clause provided in its contract.
Petitioners’ main argument arises from the separate personality given to juridical persons vis-à -vis their directors, officers, stockholders, and agents. Since they did not sign the arbitration agreement in any capacity, they cannot be forced to submit to the jurisdiction of the Arbitration Tribunal in accordance with the arbitration agreement. Page 77 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Moreover, they had already resigned as directors of Shangri-La at the time of the alleged default.
The Arbitral Tribunal rendered a decision, finding that BF Corporation failed to prove the existence of circumstances that render petitioners and the other directors solidarily liable. It ruled that petitioners and Shangri-La’s other directors were not liable for the contractual obligations of Shangri-La to BF Corporation. Issue:
Whether or not Shangri-La’s directors were liable for the contractual obligations of Shangri-La to BF Corporation Ruling:
No.
Indeed, as petitioners point out, their personalities as directors of Shangri-La are separate and distinct from Shangri-La.
A corporation is an artificial entity created by fiction of law. This means that while it is not a person, naturally, the law gives it a distinct personality and treats it as such. A corporation, in the legal sense, is an individual with a personality that is distinct and separate from other persons including its stockholders, officers, directors, representatives, and other juridical entities. The law vests in corporations rights, powers, and attributes as if they were natural persons with physical existence and capabilities to act on their own. For instance, they have the power to sue and enter into transactions or contracts. A consequence of a corporation’s separate personality is that consent by a corporation through its representatives is not consent of the representative, personally. Its obligations, incurred through official acts of its representatives, are its own. A stockholder, director, or representative does not become a party to a contract just because a corporation executed a contract through that stockholder, director or representative. Hence, a corporation’s representatives are generally not bound by the terms of the contract executed by the corporation. They are not personally liable for obligations and liabilities incurred on or in behalf of the corporation.
This court recognized in Heirs of Augusto Salas, Jr. v. Laperal Realty Corporation that an arbitration clause shall not apply to persons who were neither parties to the contract nor assignees of previous parties, thus: “A submission to arbitration is a contract. As such, the Agreement, containing the stipulation on arbitration, binds the parties thereto, as well as their assigns and heirs. But only they.” As a general rule, therefore, a corporation’s representative who did not personally bind himself or herself to an arbitration agreement cannot be forced to participate in
Page 78 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 arbitration proceedings made pursuant to an agreement entered into by the corporation. He or she is generally not considered a party to that agreement.
However, there are instances when the distinction between personalities of directors, officers, and representatives, and of the corporation, are disregarded. The Court calls this piercing the veil of corporate fiction. When there are allegations of bad faith or malice against corporate directors or representatives, it becomes the duty of courts or tribunals to determine if these persons and the corporation should be treated as one. Without a trial, courts and tribunals have no basis for determining whether the veil of corporate fiction should be pierced. Courts or tribunals do not have such prior knowledge. Thus, the courts or tribunals must first determine whether circumstances exist to warrant the courts or tribunals to disregard the distinction between the corporation and the persons representing it. Hence, when the directors, as in this case, are impleaded in a case against a corporation, alleging malice or bad faith on their part in directing the affairs of the corporation, complainants are effectively alleging that the directors and the corporation are not acting as separate entities.
In that case, complainants have no choice but to institute only one proceeding against the parties. Under the Rules of Court, filing of multiple suits for a single cause of action is prohibited. Institution of more than one suit for the same cause of action constitutes splitting the cause of action, which is a ground for the dismissal of the others. Thus, in Rule 2: Section 3. One suit for a single cause of action. — A party may not institute more than one suit for a single cause of action. (3a)
Section 4. Splitting a single cause of action; effect of. — If two or more suits are instituted on the basis of the same cause of action, the filing of one or a judgment upon the merits in any one is available as a ground for the dismissal of the others. (4a)
It is because the personalities of petitioners and the corporation may later be found to be indistinct that we rule that petitioners may be compelled to submit to arbitration. FVR SKILLS AND SERVICES EXPONENTS, INC. (SKILLEX), FULGENCIO V. RANA and MONINA R. BURGOS vs. JOVERT SEV A, JOSUEL V. V ALENCERINA, JANET ALCAZAR, ANGELITO AMPARO, BENJAMIN ANAEN, JR., JOHN HILBERT BARBA, BONIFACIO BATANG, JR., VALERIANO BINGCO,JR., RONALD CASTRO, MARLON CONSORTE, ROLANDO CORNELIO, EDITO CULDORA, RUEL DUNCIL, MERVIN FLORES, LORD GALISIM, SOTERO GARCIA, JR., REY GONZALES, DANTE ISIP, RYAN ISMEN, JOEL JUNIO, CARLITO LATOJA, ZALDY MARRA, MICHAEL PANTANO, GLENN PILOTON, NORELDO QUIRANTE, ROEL RANCE, RENANTE ROSARIO and LEONARDA TANAEL G.R. No. 200857, October 22, 2014, J. Arturo D. Brion
Page 79 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 A corporation is a juridical entity with legal personality separate and distinct from those acting for and in its behalf and, in general, from the people comprising it. The general rule is that, obligations incurred by the corporation, acting through its directors, officers and employees, are its sole liabilities. A director or officer shall only be personally liable for the obligations of the corporation, if the following conditions concur: (1) the complainant alleged in the complaint that the director or officer assented to patently unlawful acts of the corporation, or that the officer was guilty of gross negligence or bad faith; and (2) the complainant clearly and convincingly proved such unlawful acts, negligence or bad faith. In the present case, the respondents failed to show the existence of the first requisite. They did not specifically allege in their complaint that Rana and Burgos willfully and knowingly assented to the petitioner's patently unlawful act of forcing the respondents to sign the dubious employment contracts in exchange for their salaries. The respondents also failed to prove that Rana and Burgos had been guilty of gross negligence or bad faith in directing the affairs of the corporation. Facts: The twenty-eight (28) respondents in this case were employees of petitioner FVR Skills and Services Exponents, Inc. (petitioner), an independent contractor engaged in the business of providing janitorial and other manpower services to its clients.
Skillex entered into a Contract of Janitorial Service (service contract) with Robinsons Land Corporation (Robinsons). Both agreed that the petitioner shall supply janitorial, manpower and sanitation services to Robinsons Place Ermita Mall for a period of one year. Halfway through the service contract, the Skillex asked the respondents to execute individual contracts which stipulated that their respective employments shall end at the last day of the year. The Skillex and Robinsons no longer extended their contract of janitorial services. Consequently, the Skillex dismissed the respondents as they were project employees whose duration of employment was dependent on the petitioner's service contract with Robinsons. Respondents filed a complaint for illegal dismissal with the NLRC. They argued that they were not project employees; they were regular employees who may only be dismissed for just or authorized causes. The LA ruled in the Skillex's favor but was reversed by NLRC considering that the respondents had been under the petitioner's employ for more than a year already and was affirmed by CA. Issue:
Page 80 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Whether or not Rana and Burgos should be held solidarily liable with the corporation for respondents' monetary claims having personalities separate and distinct from the corporation. Ruling: No, Rana and Burgos, as the petitioner's president and general manager, should not be held solidarily liable with the corporation for its monetary liabilities with the respondents.
A corporation is a juridical entity with legal personality separate and distinct from those acting for and in its behalf and, in general, from the people comprising it. The general rule is that, obligations incurred by the corporation, acting through its directors, officers and employees, are its sole liabilities. A director or officer shall only be personally liable for the obligations of the corporation, if the following conditions concur: (1) the complainant alleged in the complaint that the director or officer assented to patently unlawful acts of the corporation, or that the officer was guilty of gross negligence or bad faith; and (2) the complainant clearly and convincingly proved such unlawful acts, negligence or bad faith.
In the present case, the respondents failed to show the existence of the first requisite. They did not specifically allege in their complaint that Rana and Burgos willfully and knowingly assented to the petitioner's patently unlawful act of forcing the respondents to sign the dubious employment contracts in exchange for their salaries. The respondents also failed to prove that Rana and Burgos had been guilty of gross negligence or bad faith in directing the affairs of the corporation. To hold an officer personally liable for the debts of the corporation, and thus pierce the veil of corporate fiction, it is necessary to clearly and convincingly establish the bad faith or wrongdoing of such officer, since bad faith is never presumed. Because the respondents were not able to clearly show the definite participation of Burgos and Rana in their illegal dismissal, the Court upholds the general rule that corporate officers are not personally liable for the money claims of the discharged employees, unless they acted with evident malice and bad faith in terminating their employment. DOCTRINE OF PIERCING THE CORPORATE VEIL
Eric Godfrey Stanley Livesey vs. Binswanger Philippines, Inc. and Keth Elliot G.R. No. 177493; March 19, 2014 J. Brion
Page 81 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Piercing the veil of corporate fiction is warranted when a corporation ceased to exist only in name, as it re-emerged in the person of another corporation, for the purpose of evading its unfulfilled financial obligation under a compromise agreement
Facts: CBB Philippines Strategic Property Services, Inc. (CBB) hired Livesy as Director and Head of Business Space Development with a monthly salary of $5,000. Later on, Livesy was appointed as Managing Director and his salary was increased to $16,000 a month. Despite the several deals that Livesy was able to draw up for CBB, the latter failed to pay him a significant portion of his salary. For this reason, he was compelled to resign.
Subsequently, Livesy filed a complaint for illegal dismissal with money claims against CBB and Dwyer, CBB’s president, with the Labor Arbiter. Livesy demanded that CBB pay him $25,000 for the unpaid salaries. For its part, CBB posited that the LA had no jurisdiction as the complaint involved an intra-corporate dispute. The LA rendered decision in favor of Livesy and ordered CBB to pay him $23,000 in accrued salaries and $5,000 a month in back salaries until restatement. Thereafter, the parties entered into a compromise agreement which the LA approved. In the agreement, Livesey was to receive an amount in full satisfaction of the LA’s decision, broken down into three installments.
CBB was able to pay Livesey the initial amount, but not the two installments as the company ceased operations. Because of this, Livesey moved for the issuance of writ of execution which the LA granted. However, the same was not enforced. Livesey claimed that there was evidence showing the CBB and Binswanger Philippines Inc. (Binswanger) are one and the same corporation. Invoking the doctrine of piercing the veil of corporate fiction, Livesey prayed that an alias writ of execution be issued against Binswanger and Keith Elliot, CBB’s former President and current President and CEO of Brinswanger. The LA denied the motion. On appeal, the NLRC ruled in favor of Livesy and declared the respondents jointly and severally liable with CBB. When the case was elevated to the CA, the NLRC decision was reversed. The CA emphasized that the mere fact that Binswanger and CBB have the same President is not itself sufficient to peirce the viel of corporate fiction of the two entities. Thereafter, Livesy moved for reconsideration, but the CA denied the same. Hence, the petition. Issue:
Whether or not the veil of corporate fiction may be disregarded.
Page 82 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Ruling: Petition Granted.
Piercing the veil of corporate fiction is an equitable doctrine developed to address situations where the separate corporate personality of a corporation is abused or used for wrongful purposes. Under the 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 de obligation, to justify a wrong, to shield or perpetrate fraud or to carry out similar or inequitable considerations, other unjustifiable aims or intentions, in which case, the fiction will be disregarded and the individuals composing it and the two corporations will be treated as identical.
In the present case, we see an indubitable link between CBB’s closure and Binswanger’s incorporation. CBB ceased to exist only in name; it re-emerge in the person of Binswanger for an urgent purpose—to avoid payment by CBB of the last two installments of its monetary obligation to Livesey as well as its other financial liabilities. Freed of CBB’s liabilities, especially that owing to Livesy, Binswanger can continue, as it did continue, CBB’s real estate brokerage business. While the ostensible reason for Binswanger’s establishment is to continue CBB’s business operations in the Philippines, which by itself is not illegal, the close proximity between CBB’s disestablishment and Binswanger’s coming into existence points to an unstated but urgent consideration which, as earlier noted, was to evade CBB’s unfulfilled financial obligation to Livesy under the compromise agreement. Pacific Rehouse Corporation vs. CA and Export and Industry Bank, Inc. G.R. Nos. 199687 & 201537; March 24, 2014 J. Reyes
The court cannot have jurisdiction over both the parent corporation and its whollyowned subsidiary where service of summons was only made upon the parent corporation. If the court has no jurisdiction over the corporation, it follows that the court has no business piercing its veil of corporate fiction because such action offends the corporation’s right to due process. Furthermore, the alter ego doctrine is inapplicable where fraudulent intent is lacking. Control, by itself, does not mean that the controlled corporation is a mere instrumentality or a business conduit of the mother company. Even control over the financial and operational concerns of a subsidiary company does not by itself call for disregarding its corporate fiction. There must bear perpetuation of fraud behind the control or at least a fraudulent or illegal purpose behind the control in order to justify piercing the veil of corporate fiction. Facts:
Page 83 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 A Complaint was instituted against EIB Securities Inc. (E-Securities) for unauthorized sale of 32,180,000 DMCI shares of private respondents Pacific Rehouse Corporation, et al. When judgment was rendered, the RTC directed E-Securities to return to the private respondents the DMCI shares. After attaining finality of the judgment, a writ of execution was issued, but was returned unsatisfied. Alleging that E-Securities is a wholly-owned controlled and dominated subsidiary of Export and Industry Bank and is thus a mere alter ego and business conduit of Export and Industry Bank, the respondents moved for the issuance of an alias writ of execution to hold Export and Industry Bank liable. Concluding that E-Securities is a mere business conduit or alter ego of Export and Industry Bank, the dominant parent corporation, RTC ruled that the piercing of the veil of corporate fiction is justified. Furthermore, the RTC ratiocinated that being one and the same entity in the eyes of law, the service of summons upon E-Securities has bestowed jurisdiction over both the parent and wholly-owned subsidiary. Export Bank filed before the CA a petition for certiorari with prayer for TRO seeking the nullification of the RTC Order. Later on, the CA rendered decision granting Export Bank’s petition. The CA explained that the alter ego theory cannot be sustained because ownership of a subsidiary by the parent company is not enough justification to pierce the veil of corporate fiction. Issue:
1) Whether or not the court validly acquired jurisdiction. 2) Whether or not the alter ego doctrine is not applicable.
Ruling:
JURISDICTION The Court already ruled in Kukan International Corporation v. Reyes that compliance with the recognized modes of acquisition of jurisdiction cannot be dispensed with even in piercing the veil of corporate fiction.
It is therefore correct to say that the court must first and foremost acquire jurisdiction over the parties; and only then would the parties be allowed to present evidence for and/or against piercing the veil of corporate fiction. If the court has no jurisdiction over the corporation, it follows that the court has no business piercing its veil of corporate fiction because such action offends the corporation’s right to due process. “Jurisdiction over the defendant is acquired either upon a valid service of summons or the defendant’s voluntary appearance in court. When the defendant does not voluntarily submit to the court’s jurisdiction or when there is no valid service of summons, any judgment of the court which has no jurisdiction over the person of the defendant is null and void. The defendant must be properly apprised of a pending action against him and assured
Page 84 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 of the opportunity to present his defenses to the suit. Proper service of summons is used to protect one’s right of due process.”
As Export Bank was neither served with summons, nor has it voluntarily appeared before the court, the judgment sought to be enforced as against E-Securities cannot be made against its parent company, Export Bank. Export bank has consistently disputed the RTC jurisdiction, commencing from its filing of an Omnibus Motion by way of special appearance during the execution state until the filling of its Comment before the Court wherein it was pleaded that “RTC of Makati never acquired jurisdiction over Export Bank. Export Bank was not pleaded as a party in the case. It was never served with summons by nor did it voluntarily appear before RTC of Makati so as to be subjected to the latter’s jurisdiction.” ALTER EGO DOCTRINE IS NOT APPLICABLE
It is a fundamental principle of corporation law that a corporation is an entity separate and distinct from its stockholders and from other corporations to which it may be connected. But, this separate and distinct personality of a corporation is merely a fiction created by law for convenience and to promote justice. So, when the notion of separate juridical personality is used to defeat public convenience, justify wrong, protect fraud or defend crime, or is used as a device used to defeat the labor law, this separate personality of the corporation may be disregarded or the veil of corporate fiction pierced. This is true likewise when the corporation is merely an adjunct, a business conduit or an alter ego of another corporation.
Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the “instrumentality” may be disregarded. The control necessary to invoke the rule is not majority or even complete stock control but such domination of finances, policies and practices that the controlled corporation has, so to speak, no separate mind, will or existence of its own, and is but a conduit for its principal. It must be kept in mind that the control must be shown to have been excercised at the time the acts complained of took place. Moreover, the control and breach of duty must proximately cause the injury or unjust loss for which the complaint is made. The Court has laid down a three-prolonged control test to establish when the alter ego doctrine should be operative:
1. Control, not mere majority or complete stock control, but complete domination, not only of finances by of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; 2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of the plaintiff’s legal right; and
Page 85 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 3. The aforesaid control and breach of duty must have proximately caused the injury or unjust loss complained of.
The absence of any one of these elements prevents piercing the veil in applying the instrumentality or alter ego doctrine, the courts are concerned with reality and not form, with how the corporation operated and the individual defendant’s relationship to that operation. Hence, all three elements should concur for the alter ego doctrine to be applicable.
The RTC bore emphasis on the alleged control exercised by Export Bank upon its subsidiary E-Securities, “control, by itself, does not mean that the controlled corporation is a mere instrumentality or a business conduit of the mother company. Even control over the financial and operational concerns of a subsidiary company does not by itself call for disregarding its corporate fiction. There must bear perpetuation of fraud behind the control or at least a fraudulent or illegal purpose behind the control in order to justify piercing the veil of corporate fiction. Such fraudulent intent is lacking in this case. Moreover, there was nothing on record demonstrative of Export Bank’s wrongful intent in setting up a subsidiary, E-Securities. If used to perform legitimate functions, a subsidiary’s separate existence shall be respected, and the liability of the parent corporation as well as the subsidiary will be confined to those arising in their respective business. To justify treating the sole stockholder or holding company as responsible, it is not enough that the subsidiary is so organized and controlled as to make it merely an instrumentality, conduit or adjunct of its stockholders. It must further appear that to organize their separate entities would aid in the consummation of a wrong.
As established in the main case and reiterated by the CA, the subject 32,180,000 DMCI shares which E-Securities is obliged to return to the petitioners were an average price of P0.24 per share. The proceeds were then used to buy back 61,000,000 KPP shares earlier sold by E-Securities. Quite unexpectedly however, the total amount of these DMCI shares ballooned to P1,465,799,000.00. It must be taken into account that this unexpected turnabout did not inure to the benefit of E-Securities, much less Export Bank. Furthermore, ownership by Export Bank of great majority or all of stocks of E-Securities and the existence of interlocking directorates may serve as badges of control, but ownership of another corporation, per se, without proof of actuality of the other conditions are insufficient to establish an alter ego relationship or connection between the two corporations, which will justify the setting aside of the cover of corporate fiction. The court has declared that mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of the corporation is not of itself sufficient ground for disregarding the separate corporate personality. The Court likewise ruled that the existence of interlocking directors, corporate officers, and shareholders is not enough justification to pierce the veil of corporate fiction in the absence of fraud or other public policy considerations. Page 86 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 ARCO PULP AND PAPER CO., INC. and CANDIDA A. SANTOS vs. DAN T. LIM, doing business under the name and style of QUALITY PAPERS & PLASTIC PRODUCTS ENTERPRISES G.R. No. 206806, June 25, 2014, J. Leonen 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 obligation, or to justify a wrong, to shield or perpetrate fraud or to carry out similar or inequitable considerations, other unjustifiable aims or intentions, in which case, the fiction will be disregarded and the individuals composing it and the two corporations will be treated as identical. In the case at bar, when petitioner Arco Pulp and Paper’s obligation to Lim became due and demandable, she not only issued an unfunded check but also contracted with a third party in an effort to shift petitioner Arco Pulp and Paper’s liability. She unjustifiably refused to honor petitioner corporation’s obligations to respondent. These acts clearly amount to bad faith. In this instance, the corporate veil may be pierced, and petitioner Santos may be held solidarily liable with petitioner Arco Pulp and Paper. Facts: Dan T. Lim works in the business of supplying scrap papers, cartons, and other raw materials, under the name Quality Paper and Plastic Products, Enterprises, to factories engaged in the paper mill business. Lim delivered scrap papers worth 7,220,968.31 to Arco Pulp and Paper Company, Inc. through its Chief Executive Officer and President, Candida A. Santos. The parties allegedly agreed that Arco Pulp and Paper would either pay Dan T. Lim the value of the raw materials or deliver to him their finished products of equivalent value. Dan T. Lim alleged that when he delivered the raw materials, Arco Pulp and Paper issued a post-dated check as partial payment, with the assurance that the check would not bounce. When he deposited the check, it was dishonored for being drawn against a closed account. On the same day, Arco Pulp and Paper and a certain Eric Sy executed a memorandum of agreement where Arco Pulp and Paper bound themselves to deliver their finished products to Megapack Container Corporation, owned by Eric Sy, for his account. According to the memorandum, the raw materials would be supplied by Dan T. Lim, through his company, Quality Paper and Plastic Products.
Despite repeated demands by Lim, Arco Pulp and Paper did not pay. Lim filed a complaint for collection of sum of money with prayer for attachment with the RTC. The trial court rendered a judgment in favor of Arco Pulp and Paper and dismissed the complaint, holding that when Arco Pulp and Paper and Eric Sy entered into the memorandum of agreement, novation took place, which extinguished Arco Pulp and Paper’s obligation to. Lim. The CA reversed said decision. Issue: Inc.
Whether or not Candida A. Santos was solidarily liable with Arco Pulp and Paper Co.,
Page 87 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Ruling: Yes.
In Heirs of Fe Tan Uy v. International Exchange Bank, the Court has ruled:
Basic is the rule in corporation law that a corporation is a juridical entity which is vested with a legal personality separate and distinct from those acting for and in its behalf and, in general, from the people comprising it. Following this principle, obligations incurred by the corporation, acting through its directors, officers and employees, are its sole liabilities. A director, officer or employee of a corporation is generally not held personally liable for obligations incurred by the corporation. Nevertheless, this legal fiction may be disregarded if it is used as a means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, or to confuse legitimate issues.
Before a director or officer of a corporation can be held personally liable for corporate obligations, however, the following requisites must concur: (1) the complainant must allege in the complaint that the director or officer assented to patently unlawful acts of the corporation, or that the officer was guilty of gross negligence or bad faith; and (2) the complainant must clearly and convincingly prove such unlawful acts, negligence or bad faith. As a general rule, directors, officers, or employees of a corporation cannot be held personally liable for obligations incurred by the corporation. However, this veil of corporate fiction may be pierced if complainant is able to prove, as in this case, that (1) the officer is guilty of negligence or bad faith, and (2) such negligence or bad faith was clearly and convincingly proven. Here, Santos entered into a contract with respondent in her capacity as the President and Chief Executive Officer of Arco Pulp and Paper. She also issued the check in partial payment of petitioner corporation’s obligations to respondent on behalf of petitioner Arco Pulp and Paper. This is clear on the face of the check bearing the account name, "Arco Pulp & Paper, Co., Inc." Any obligation arising from these acts would not, ordinarily, be Santos’ personal undertaking for which she would be solidarily liable with petitioner Arco Pulp and Paper. The Court found, however, that the corporate veil must be pierced. In Livesey v. Binswanger Philippines: Piercing the veil of corporate fiction is an equitable doctrine developed to address situations where the separate corporate personality of a corporation is abused or used for wrongful purposes. Under the doctrine, the corporate existence may be disregarded where the entity is formed or used for nonlegitimate purposes, such as to evade a just and due obligation, or to justify a
Page 88 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 wrong, to shield or perpetrate fraud or to carry out similar or inequitable considerations, other unjustifiable aims or intentions, in which case, the fiction will be disregarded and the individuals composing it and the two corporations will be treated as identical.
We agree with the Court of Appeals. Petitioner Santos cannot be allowed to hide behind the corporate veil. When petitioner Arco Pulp and Paper’s obligation to respondent became due and demandable, she not only issued an unfunded check but also contracted with a third party in an effort to shift petitioner Arco Pulp and Paper’s liability. She unjustifiably refused to honor petitioner corporation’s obligations to respondent. These acts clearly amount to bad faith. In this instance, the corporate veil may be pierced, and petitioner Santos may be held solidarily liable with petitioner Arco Pulp and Paper.
____________________________________________________________________________________________________ WPM INTERNATIONAL TRADING , INC. and WARLITO P. MANLAPAZ vs. FE CORAZON LABAYEN G.R. No. 182770, September 17, 2014, J. Brion When an officer owns almost all of the stocks of a corporation, it does not ipso facto warrant the application of the principle of piercing the corporate veil unless it is proven that the officer has complete dominion over the corporation. Facts: WPM International Trading, Inc. (WPM) is engaged in the restaurant business, with Warlito P. Manlapaz as its president. WPM entered into a management agreement with the Labayen, by virtue of which the Labayen was authorized to operate, manage and rehabilitate Quickbite, a restaurant owned and operated by WPM. As part of her tasks, the respondent looked for a contractor who would renovate the two existing Quickbite outlets. She engaged the services of CLN Engineering Services to renovate one of the outlets at the cost of P432,876.02. However, out of the P432,876.02 renovation cost, only the amount of P320,000.00 was paid to CLN, leaving a balance of P112,876.02. CLN filed a complaint for sum of money and damages before the RTC against the respondent and Manlapaz. CLN later amended the complaint to exclude Manlapaz as defendant. Labayen was declared in default for her failure to file a responsive pleading. The RTC found the respondent liable to pay CLN actual damages in the amount of P112,876.02 with 12% interest per annum and 20% of the amount recoverable as attorney’s fees.
As a result, Labayen instituted a complaint for damages against WPM and Manlapaz. She alleged that she should be entitled to reimbursement. Labayen also contended that her participation in the management agreement was limited only to introducing Manlapaz to CLN’s general manager and that it was actually Manlapaz and the general manager who agreed on the terms and conditions of the agreement. Manlapaz, on the other hand, claimed Page 89 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Labayen had entered into the renovation agreement with CLN in her own personal capacity and that since she had exceeded her authority as agent of WPM, the renovation agreement should only bind her. Further, WPM has a separate and distinct personality, Manlapaz cannot be made liable for the Labayen’s claim. RTC held that Labayen was entitled to indemnity from Manlapaz. The RTC found that based on the records, there is a clear indication that WPM is a mere instrumentality or business conduit of Manlapaz and as such, WPM and Manlapaz are considered one and the same. The RTC also found that Manlapaz had complete control over WPM considering that he is its chairman, president and treasurer at the same time. The RTC thus concluded that Manlapaz is liable in his personal capacity to reimburse the respondent the amount she paid to CLN in connection with the renovation agreement. CA affirmed the decision of the RTC applying the principle of piercing the veil of corporate fiction. Issue: fiction
Whether or not CA correctly applied the principle of piercing the veil of corporate
Ruling: No, the CA erred in applying the doctrine.
The doctrine of piercing the corporate veil applies only in three (3) basic instances, namely: a) when the separate and distinct corporate personality defeats public convenience, as when the corporate fiction is used as a vehicle for the evasion of an existing obligation; b) in fraud cases, or when the corporate entity is used to justify a wrong, protect a fraud, or defend a crime; or c) is used in alter ego cases, i.e., where a corporation is essentially a farce, since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation. Piercing the corporate veil based on the alter ego theory requires the concurrence of three elements, namely: (1) Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; (2) Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff’s legal right; and
Page 90 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 (3) The aforesaid control and breach of duty must have proximately caused the injury or unjust loss complained of. The absence of any of these elements prevents piercing the corporate veil.
In the present case, the attendant circumstances do not establish that WPM is a mere alter ego of Manlapaz. Aside from the fact that Manlapaz was the principal stockholder of WPM, records do not show that WPM was organized and controlled, and its affairs conducted in a manner that made it merely an instrumentality, agency, conduit or adjunct of Manlapaz. As held in Martinez v. Court of Appeals, the mere ownership by a single stockholder of even all or nearly all of the capital stocks of a corporation is not by itself a sufficient ground to disregard the separate corporate personality. To disregard the separate juridical personality of a corporation, the wrongdoing must be clearly and convincingly established. In this connection, the Court stresses that the control necessary to invoke the instrumentality or alter ego rule is not majority or even complete stock control but such domination of finances, policies and practices that the controlled corporation has, so to speak, no separate mind, will or existence of its own, and is but a conduit for its principal. The control must be shown to have been exercised at the time the acts complained of took place. Moreover, the control and breach of duty must proximately cause the injury or unjust loss for which the complaint is made.
Here, Labayen failed to prove that Manlapaz, acting as president, had absolute control over WPM. Even granting that he exercised a certain degree of control over the finances, policies and practices of WPM, in view of his position as president, chairman and treasurer of the corporation, such control does not necessarily warrant piercing the veil of corporate fiction since there was not a single proof that WPM was formed to defraud CLN or the respondent, or that Manlapaz was guilty of bad faith or fraud. On the contrary, the evidence establishes that CLN and Labayen knew and acted on the knowledge that they were dealing with WPM for the renovation of the latter’s restaurant, and not with Manlapaz. That WPM later reneged on its monetary obligation to CLN, resulting to the filing of a civil case for sum of money against the respondent, does not automatically indicate fraud, in the absence of any proof to support it. _________________________________________________________________________________________________________ HACIENDA CATAYWA/MANUEL VILLANUEVA, et al. vs. ROSARIO LOREZO G.R. No. 179640, March 18, 2015, J. Peralta
This Court agrees with the petitioners that there is no need to pierce the corporate veil. Respondent failed to substantiate her claim that Mancy and Sons Enterprises, Inc. and Manuel and Jose Marie Villanueva are one and the same. She based her claim on the SSS form wherein Manuel Villanueva appeared as employer. However, this does not prove, in any way, that the corporation is used to defeat public convenience, justify wrong, protect fraud, or defend crime, Page 91 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 or when it is made as a shield to confuse the legitimate issues, warranting that its separate and distinct personality be set aside. Facts: Rosario Lorezo received, upon inquiry, a letter from the Social Security System, informing her that she cannot avail of their retirement benefits since per their record she has only paid 16 months. Such is 104 months short of the minimum requirement of 120 months payment to be entitled to the benefit.
Aggrieved, Lorezo then filed her Amended Petition before the SSC, alleging that she was employed as laborer in Hda. Cataywa managed by Jose Marie Villanueva in 1970 but was reported to the SSS only in 1978. She alleged that SSS contributions were deducted from her wages from 1970 to 1995, but not all were remitted to the SSS which, subsequently, caused the rejection of her claim. She also impleaded Talisay Farms, Inc. by virtue of its Investment Agreement with Mancy and Sons Enterprises. She also prayed that the veil of corporate fiction be pierced since she alleged that Mancy and Sons Enterprises and Manuel and Jose Marie Villanueva are one and the same. Petitioners Manuel and Jose Villanueva refuted in their answer, the allegation that not all contributions of respondent were remitted. Petitioners alleged that all farm workers of Hda. Cataywa were reported and their contributions were duly paid and remitted to SSS. It was the late Domingo Lizares, Jr. who managed and administered the hacienda. While, Talisay Farms, Inc. filed a motion to dismiss on the ground of lack of cause of action in the absence of an allegation that there was an employer-employee relationship between Talisay Farms and respondent.
The SSC found that Lorezo was a regular employee subject to compulsory coverage of Hda. Cataywa/Manuel Villanueva/ Mancy and Sons Enterprises, Inc. within the period of 1970 to February 25, 1990. The SSC denied petitioners' Motion for Reconsideration. The petitioners, then, elevated the case before the CA where the case was dismissed outright because the signatory to the Verification failed to attach his authority to sign for and in behalf of the other Petitioners and the certified true copies of pleadings and documents relevant and pertinent to the petition are incomplete. Issues:
Whether or not the corporate veil should be pierced
Ruling:
No. It was held in Rivera v. United Laboratories, Inc. that –
While a corporation may exist for any lawful purpose, the law will regard it as an association of persons or, in case of two corporations, merge them into one, when its corporate legal entity is used as a cloak for fraud or illegality. This is the doctrine of Page 92 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 piercing the veil of corporate fiction. The doctrine applies only when such corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or defend crime, or when it is made as a shield to confuse the legitimate issues, or where a corporation is the mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation. To disregard the separate juridical personality of a corporation, the wrongdoing must be established clearly and convincingly. It cannot be presumed.
This Court has cautioned against the inordinate application of this doctrine, reiterating the basic rule that "the corporate veil may be pierced only if it becomes a shield for fraud, illegality or inequity committed against a third person. The Court has expressed the language of piercing doctrine when applied to alter ego cases, as follows: Where the stock of a corporation is owned by one person whereby the corporation functions only for the benefit of such individual owner, the corporation and the individual should be deemed the same.
This Court agrees with the petitioners that there is no need to pierce the corporate veil. Respondent failed to substantiate her claim that Mancy and Sons Enterprises, Inc. and Manuel and Jose Marie Villanueva are one and the same. She based her claim on the SSS form wherein Manuel Villanueva appeared as employer. However, this does not prove, in any way, that the corporation is used to defeat public convenience, justify wrong, protect fraud, or defend crime, or when it is made as a shield to confuse the legitimate issues, warranting that its separate and distinct personality be set aside. Also, it was not alleged nor proven that Mancy and Sons Enterprises, Inc. functions only for the benefit of Manuel Villanueva, thus, one cannot be an alter ego of the other. INCORPORATION AND ORGANZATION
BY-LAWS FOREST HILLS GOLF AND COUNTRY CLUB, INC. vs. GARDPRO, INC. G.R. No. 164686, October 22, 2014, J. Bersamin The relevant provisions of the articles of incorporation and the by-laws of Forest Hills governed the relations of the parties as far as the issues between them were concerned. Indeed, the articles of incorporation of Forest Hills defined its charter as a corporation and the contractual relationships between Forest Hills and the State, between its stockholders and the State, and between Forest Hills and its stockholder; hence, there could be no gainsaying that the contents of the articles of incorporation were binding not only on Forest Hills but also on its shareholders. On the other hand, the by-laws were the self-imposed rules resulting from the agreement between Forest Hills and its members to conduct the corporate business in a particular way. In that sense, the by-laws were the private “statutes” by which Forest Hills was regulated, and would function. The charter and the by-laws were thus the fundamental Page 93 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 documents governing the conduct of Forest Hills’ corporate affairs; they established norms of procedure for exercising rights, and reflected the purposes and intentions of the incorporators. Until repealed, the by-laws were a continuing rule for the government of Forest Hills and its officers, the proper function being to regulate the transaction of the incidental business of Forest Hills. The by-laws constituted a binding contract as between Forest Hills and its members, and as between the members themselves. Every stockholder governed by the by-laws was entitled to access them. The by-laws were self-imposed private laws binding on all members, directors and officers of Forest Hills. The prevailing rule is that the provisions of the articles of incorporation and the by-laws must be strictly complied with and applied to the letter. Facts: Petitioner Forest Hills Golf and Country Club, Inc. (interchangeably Forest Hills or Club), a non-profit stock corporation, was established to promote social, recreational and athletic activities among its members. It was an exclusive and private club organized for the sole benefit of its members. Fil-Estate Properties, Inc., a party to a Project Agreement to develop the Forest Hills Residential Estates and the Forest Hills Golf and Country Club, undertook to market the golf club shares of Forest Hills for a fee. In July 1995, Fil-Estate Properties, Inc. (FEPI) assigned its rights and obligations under the Project Agreement to Fil- Estate Golf and Development, Inc. (FEGDI). In 1995, FEPI and FEGDI engaged Fil-Estate Marketing Associates Inc., (FEMAI) to market and offer for sale the shares of stocks of Forest Hills. Leandro de Mesa, the President of FEMAI, oriented the sales staff on the information that would usually be inquired about by prospective buyers. He made it clear that membership in the Club was a privilege, such that purchasers of shares of stock would not automatically become members of the Club, but must apply for and comply with all the requirements in order to qualify them for membership, subject to the approval of the Board of Directors.
Gardpro, Inc. (Gardpro) bought class “C” common shares of stock, which were special corporate shares that entitled the registered owner to designate two nominees or representatives for membership in the Club. Subsequently, Ramon Albert, the General Manager of the Club, notified the shareholders that it was already accepting applications for membership. In that regard, Gardpro designated Fernando R. Martin and Rolando N. Reyes to be its corporate nominees; hence, the two applied for membership in the Club. Forest Hills charged them membership fees of P50, 000.00 each, prompting Martin to immediately call up Albert and complain about being thus charged despite having been assured that no such fees would be collected from them. With Albert assuring that the fees were temporary, both nominees of Gardpro paid the fees. At that time, the P45, 000.00 membership fees of corporate members were increased to P75,000.00 per nominee by virtue of the resolution of the Board of Directors. Any nominee who paid the fees within a specified period was entitled to a discount of P25, 000.00. Both nominees of Gardpro were then admitted as members upon approval of their applications by the Board of Directors. Later, Gardpro decided to change its designated nominees, and Forest Hills charged Page 94 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Gardpro new membership fees of P75, 000.00 per nominee. When Gardpro refused to pay, the replacement did not take place. Later, Gardpro filed a complaint in the SEC. SEC Hearing Officer rendered decision in favor of Gardpro which were later affirmed by both the SEC En Bank and the CA. Issue:
Whether or not the replacement nominees of Gardpro are required to pay membership fees. Ruling:
No. Forest Hills was not authorized under its articles of incorporation and by-laws to collect new membership fees for the replacement nominees of Gardpro.
There is no question that Gardpro held class “C” common stocks that entitled it to two memberships in the Club. Its nominees could be admitted as regular members upon approval of the Board of Directors but only one nominee for each class “C” share as designated in the resolution could vote as such. A regular member was then entitled to use all the facilities and privileges of the Club. In that regard, Gardpro could only designate as its nominees/representatives its officers whose functions and office were defined by its own by-laws. The membership in the Club was a privilege, it being clear that the mere purchase of a share in the Club did not immediately qualify a juridical entity for membership. Admission for membership was still upon the favorable action of the Board of Directors of the Club. Under Section 2.2.7 of its by-laws, the application form was accomplished by the chairman of the board, president or chief executive officer of the applicant juridical entity. The designated nominees also accomplished their respective application forms, duly proposed and seconded, and the nominees were evaluated as to their qualifications. The nominees automatically became ineligible for membership once they ceased to be officers of the corporate member under its by-laws upon certification of such loss of tenure by a responsible officer of the corporate member.
Corporations buy shares in clubs in order to invest for earnings. Their purchases may also be to reward their corporate executives by having them enjoy the facilities and perks concomitant to the club memberships. When Gardpro purchased and registered its ownership of the class “C” common shares, it did not only invest for earnings because it also became entitled to nominate two of its officers in the Club as set forth in its seventh purpose of the articles of incorporation and Section 2.2.2 of the by-laws. Golf clubs usually sell shares to individuals and juridical entities in order to raise capital for the construction of their recreational facilities. In that regard, golf clubs accept juridical entities to become regular members, and allow such entities to designate corporate nominees because only natural persons can enjoy the sports facilities. In the
Page 95 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 context of this arrangement, Gardpro’s two nominees held playing rights. But the articles of incorporation of Forest Hills and Section 2.2.2 of its by-laws recognized the right of the corporate member to replace the nominees, subject to the payment of the transfer fee in such amount as the Board of Directors determined for every change. The replacement could take place for any of the following reasons, namely: (a) if the nominee should cease to be an officer of the corporate member; or (b) if the corporate member should request the replacement. In case of a replacement, the playing rights would also be transferred to the new nominees.
The relevant provisions of the articles of incorporation and the by-laws of Forest Hills governed the relations of the parties as far as the issues between them were concerned. Indeed, the articles of incorporation of Forest Hills defined its charter as a corporation and the contractual relationships between Forest Hills and the State, between its stockholders and the State, and between Forest Hills and its stockholder; hence, there could be no gainsaying that the contents of the articles of incorporation were binding not only on Forest Hills but also on its shareholders. On the other hand, the by-laws were the self-imposed rules resulting from the agreement between Forest Hills and its members to conduct the corporate business in a particular way. In that sense, the by-laws were the private “statutes” by which Forest Hills was regulated, and would function. The charter and the by-laws were thus the fundamental documents governing the conduct of Forest Hills’ corporate affairs; they established norms of procedure for exercising rights, and reflected the purposes and intentions of the incorporators. Until repealed, the by-laws were a continuing rule for the government of Forest Hills and its officers, the proper function being to regulate the transaction of the incidental business of Forest Hills. The by-laws constituted a binding contract as between Forest Hills and its members, and as between the members themselves. Every stockholder governed by the by-laws was entitled to access them. The by-laws were self-imposed private laws binding on all members, directors and officers of Forest Hills. The prevailing rule is that the provisions of the articles of incorporation and the by-laws must be strictly complied with and applied to the letter. Anent the second issue, the Court disagrees with the contention of Forest Hills that the CA encroached upon its prerogative to determine its own rules and procedures and to decide all issues on the construction of its articles of incorporation and by-laws. On the contrary, the CA acted entirely within its legal competence to decide the issues between the parties. The complaint of Gardpro stated a cause of action, and thus contained the operative acts that gave rise to its remedial right against Forest Hills. The cause of action required not only the interpretation of contracts and the application of corporate laws but also the application of the civil law itself, particularly its tenets on unjust enrichment and those regulating property rights arising from ownership. If Forest Hills were allowed to charge nominees membership fees, and then to still charge their replacement nominees every time a corporate member changed its nominees, Gardpro would be unduly deprived of its full enjoyment and control of its property even as the former would be unjustly enriched. GENERAL POWERS, THEORY OF GENERAL CAPACITY CORORATE POWERS: HOW EXERCISED Page 96 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 PHILIPPINE RACE HORSE TRAINER'S ASSOCIATION, INC. v. PIEDRAS NEGRAS CONSTRUCTION AND DEVELOPMENT CORPORATION G.R. No. 192659, December 02, 2015, PERALTA, J. The doctrine of apparent authority provides that a corporation will be estopped from denying the agent's authority if it knowingly permits one of its officers or any other agent to act within the scope of an apparent authority, and it holds him out to the public as possessing the power to do those acts. The doctrine does not apply, however, if the principal did not commit any act or conduct which a third party knew and relied upon in good faith as a result of the exercise of reasonable prudence. Facts: Through its president, Rogelio Catajan, and pursuant to a Resolution it issued, Philippine Race Horse Trainer’s Association (PRHTC) entered into an agreement with Fil-Estate Properties Inc., (FEPI) whereby the latter would render construction services for the former. Through a Deed of Assignment, all the rights and obligations of FEPI were transferred to Piedras Negras Construction and Development Corporation (PNCDC) for the continuation of the construction works. However, when the obligation of PRHTC became due, it refused to pay PNCDC for the construction on the ground that it was suffering from financial difficulties. Meanwhile, there was a change in the composition of the Board of Directors of PRHTC. PNCDC was prompted to bring the case before the Construction Industry Arbitration Commission (CIAC) for satisfaction of PRHTC’s obligation. Issue:
Whether the contract between PRHTC and PNCDC is enforceable
Ruling:
No. The Resolution by the Board of Directors of PRHTC cannot be construed to authorize Catajan to enter into a contract with PNCDC since the Resolution provides that Catajan’s authority is limited only to dealing with FEPI and not with PNCDC. The doctrine of apparent authority finds no application in this case. The board of directors, not the president, exercises corporate power. While in the absence of a charter or bylaw provision to the contrary the president is presumed to have authority, the questioned act should still be within the domain of the general objectives of the company's business and within the scope of his or her usual duties. Here, PRHTAI is an association of professional horse trainers in the Philippine horse racing industry organized as a non-stock corporation and it is committed to the uplifting of the economic condition of the working sector of the racing industry. It is not in its ordinary course of business to enter into housing projects, especially not in such scale and magnitude so massive as to amount to P101,150,000.00.
Page 97 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 MEETINGS LOPEZ REALTY, INC. AND ASUNCION LOPEZ-GONZALES vs. SPOUSES REYNALDO TANJANGCO AND MARIA LUISA ARGUELLES-TANJANGCO G.R. No. 154291, November 12, 2014, J. Reyes The petitioner assails the validity of sale of shares of stocks to the respondents claiming that there was no compliance with the requirement of prior notice to the Board of Directors when the Board Resolution authorizing the sale to the respondent spouses were promulgated. The Supreme Court ruled that the general rule is that a corporation, through its board of directors, should act in the manner and within the formalities, if any, prescribed by its charter or by the general law. However, the actions taken in such a meeting by the directors or trustees may be ratified expressly or impliedly. Facts: The petitioner Lopez Realty, Inc. issued a Board Resolution authorizing Arturo, a member of the Board of Directors of the corporation, to negotiate with the Tanjanco spouses for the sale of the ½ shares of LRI (Lopez Realty Corporation). Because of this, Arturo and the spouses executed a Deed of Sale for the shares for a consideration of Php3.6M. However, Asuncion, another Board of Director of the said corporation, submitted a letter requesting the Board to defer any transaction with Tanjanco as she was not apprised and given notice of the said transaction. Despite this, the execution of the Deed of Absolute Sale between Arturo and spouses Tanjanco proceeded. Asuncion then filed a complaint for the Annulment of the Deed of Sale with a prayer for a writ of preliminary injuction in the Regional Trial Court. Asuncion alleges that she was neither notified nor apprised of the on-going sale of the shares of LRI. The Regional Trial Court granted the prayer of Asuncion and declared the subject deed null and void for failure to comply with the strict procedural requirements. The RTC ruled that for a Board Resolution authorizing the sale of share to be valid, it is necessary that notice must be sent to the Board of Directors at least one day prior to the said board meeting. However, on appeal, the Court of Appeals reversed and set aside the decision of the RTC. Hence, the current petition. Issue:
Whether or not the sale of the shares of stock of LRI to respondent spouses Tanjanco are valid pursuant to the Board Resolution promulgated by LRI despite lack of notice to Asuncion, one of its Board of Directors. Ruling:
The sale of the shares of stock of LRI to the respondent spouses Tanjanco is deemed valid because the Board Resolution from which it is derived is also valid despite the lack of
Page 98 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 the required prior notice to its Board of Directors. The Supreme Court reinstated the decision of the RTC and affirmed the decision of the Court of Appeals. Section 53 of the Corporation Code provides for the following:
SEC. 53. Regular and special meetings of directors or trustees.— Regular meetings of the board of directors or trustees of every corporation shall be held monthly, unless the by-laws provide otherwise.
Special meetings of the board of directors or trustees may be held at any time upon call of the president or as provided in the by-laws.
Meetings of directors or trustees of corporations may be held anywhere in or outside of the Philippines, unless the by-laws provide otherwise. Notice of regular or special meetings stating the date, time and place of the meeting must be sent to every director or trustee at least one (1) day prior to the scheduled meeting, unless otherwise provided by the by-laws. A director or trustee may waive this requirement, either expressly or impliedly.
The general rule is that a corporation, through its board of directors, should act in the manner and within the formalities, if any, prescribed by its charter or by the general law. Thus, directors must act as a body in a meeting called pursuant to the law or the corporation's bylaws, otherwise, any action taken therein may be questioned by any objecting director or shareholder. However, the actions taken in such a meeting by the directors or trustees may be ratified expressly or impliedly. "Ratification means that the principal voluntarily adopts, confirms and gives sanction to some unauthorized act of its agent on its behalf. It is this voluntary choice, knowingly made, which amounts to a ratification of what was theretofore unauthorized and becomes the authorized act of the party so making the ratification. The substance of the doctrine is confirmation after conduct, amounting to a substitute for a prior authority. Ratification can be made either expressly or impliedly. Implied ratification may take various forms — like silence or acquiescence, acts showing approval or adoption of the act, or acceptance and retention of benefits flowing therefrom." In the present case, the ratification was expressed through the July 30, 1982 Board Resolution. Asuncion claims that the July 30, 1982 Board Resolution did not ratify the Board Resolution dated August 17, 1981 for lack of the required number of votes because Juanito is not entitled to vote while Leo voted "no" to the ratification of the sale even if the minutes stated otherwise. Facts:
Simny Guy v. Gilbert Guy G.R. No. 184068, April 19, 2016, Sereno, J:
Page 99 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 GCI is a family-owned corporation of the Guy family duly organized and existing under Philippine laws. Petitioner Simny G. Guy (Simny) is a stockholder of record and member of the board of directors of the corporation. Respondents are also GCI stockholders of record who were allegedly elected as new directors by virtue of the assailed stockholders' meeting held on 7 September 2004.
On 10 September 2004, Paulino Delfin Pe and Benjamin Lim (stockholder of record of GCI) informed petitioner that they had received a notice dated 31 August 2004 calling for the holding of a stockholders’ meeting on 07 September 2004 at Manila Hotel. On 22 September 2004, or fifteen (15) days after the stockholders' meeting, petitioner received the aforementioned notice.
On 30 September 2004, petitioner, for himself and on behalf of GCI and Grace Guy Cheu (Cheu), filed a Complaint against respondents before the RTC of Manila for the "Nullification of Stockholders' Meeting and Election of Directors, Nullification of Acts and Resolutions, Injunction and Damages with Prayer for Temporary Restraining Order and/or Writ of Preliminary lnjunction. Petitioner assailed the election held on 7 September 2004 on the following grounds: (1) there was no previous notice to petitioner and Cheu; (2) the meeting was not called by the proper person; and (3) the notices were not issued by the person who had the legal authority to do so. In his Answer, respondent Gilbert G. Guy (Gilbert) argued that the stockholders' meeting on 7 September 2004 was legally called and held; that the notice of meeting was signed by the authorized officer of GCI and sent in accordance with the bylaws of the corporation; and that Cheu was not a stockholder of record of the corporation, a status that would have entitled her to receive a notice of the meeting.
The RTC issued a temporary restraining order against the respondents. Meantime, in a Manifestation dated 10 August 2005, the respondents disclosed that a stockholders’ meeting has already been held and hence, the complaint by the petitioner has already been mooted. The RTC thereafter issued a decision dismissing the complaint on the ground that appropriate notices were sent to the petitioner. The CA affirmed the RTC’s decision in toto; hence, this petition. Issue: Whether the special stockholders’ meeting was not validly called and held
Held: The special stockholders’ meeting was validly conducted. For a stockholders' special meeting to be valid, certain requirements must be met with respect to notice, quorum and place. Under the Corporation Code, one of the requirements is a previous written notice sent to all stockholders at least one (1) week prior to the scheduled meeting. Under the Bylaws of GCI, the notice of the meeting shall be mailed not less than five (5) days prior to the date set for the special meeting. The Corporation Code itself permits the shortening (or lengthening) of the period within which to send the notice to call a special (or regular) meeting. Thus, no irregularity exists in the mailing of the notice sent by respondent Gilbert G. Guy on 2 September 2004 calling for
Page 100 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 the special stockholders' meeting to be held on 7 September 2004, since it abides by what is stated in GCI's by-laws ELECTIONS OF BOARD OF DIRECTORS AND TRUSTEES
Facts:
Estate of Dr. Juvencio P. Ortanez v. Jose C. Lee, et. al. GR. No. 184251, March 9, 2016; Perez, J:
On 6 July 1956, Dr. Ortañ ez organized and founded the Philippine International Life Insurance Company, Inc. (Philinterlife). At the time of its incorporation, Dr. Ortañ ez owned ninety percent (90%) of the subscribed capital stock of Philinterlife. Upon his death on 21 July 1980, Dr. Ortañ ez left behind an estate consisting of, among others, 2,029 shares of stock in Philinterlife, then representing at least 50.725% of the outstanding capital stock of Philinterlife which was at 4,000 shares valued at P4,000,000.00. On 30 March 2006, petitioners filed a Complaint for Election Contest before the RTC of Quezon City. The complaint challenged the lawfulness and validity of the meeting and election conducted by the group of Jose C. Lee (respondents) et. al. on 15 March 2006. During the assailed meeting, Jose C. Lee (Lee) et. al. were elected as members of the Board of Directors of Philinterlife.
Petitioners claimed that before the contested election, they formally informed the respondents that without the participation of the Estate, no quorum would be constituted in the scheduled annual stockholders’ meeting. Petitioners averred that in spite of their formal announcement and notice that they were not participating in the session, the respondents continued, in bad faith, with the illegal meeting. Further, respondents allegedly elected themselves as directors of Philinterlife and proceeded to elect their own set of officers. Petitioners, who insisted that they represented at least 51% of the outstanding capital stock of 5,000 shares of Philinterlife, conducted on the same day and in the same venue but in a different room, their own annual stockholders’ meeting and proceeded to elect their own set of directors. According to the petitioners, the sale of the shares of the estate to the respondents through the Filipino Loan Assistance Group (FLAG), as well as the increases in the authorized capita stock of the corporation, was declared null and void by the court, which decision was affirmed by no longer than the Supreme Court. They further submitted that the exercise of pre-emptive right of the Estate to acquire 51% of the additional 1,000 paid up shares of stock, raising the total outstanding capital stock to 5,000 shares, was recognized by the RTC of Quezon City. Respondents, for their part, categorically denied the material allegations of the complaint and raised the defense that the stockholders’ meeting they conducted on 15 March 2006
Page 101 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 was valid as it was allegedly attended by stockholders representing 98.76% of the 50,000 shares representing the authorized and issued capital stock of Philinterlife.
The RTC ruled in favor of the respondents on the ground that the petitioners failed to present the required preponderance of evidence to substantiate their claim that they were the owners of at least 51% of the outstanding capital stock of Philinterlife. The ruling of the RTC was affirmed by the CA; hence, this petition. Issue: Whether the respondents were validly elected as directors of Philinterlife
Held: Yes. The Court agreed with the lower courts that the petitioners failed to present credible and convincing evidence that Philinterlife’s outstanding capital stock during the 15 March 2006 annual stockholders’ meeting was 5,000 and that they own more than 2,550 shares or 51% thereof. The unrebutted presumption is that respondents, were duly elected as directors-officers of Philinterlife. In the absence of evidence to the contrary, the presumption is that the respondents were duly elected as directors/officers of Philinterlife during the aforesaid annual stockholders’ meeting. Petitioners cannot, in the instant election contest case, question the increases in the capital stocks of the corporation. FIDUCIARY DUTIES AND LIABILITY RULES
Rodolfo Laborte and Philippine Tourism Authority vs. Pagsanjan Tourism Consumers Cooperative G.R. No. 183860; January 15, 2014 J. Reyes Operation by a cooperative of a restaurant and boat ride services in an administration complex owned by a Government Owned and Controlled Corporation may, in the absence of any contract, concession and franchise, be terminated any time so as to allow the latter to fulfil its mandated duty as tourism administrator. Facts: Petitioner Philippine Tourism Authority (PTA) is a GOCC that administers tourism zones as mandated by P.D. 564. PTA used to operate the Philippine Gorge Tourist Zone (PGTZ) Administration Complex (PTA Complex), a declared tourist zone in Pagsanjan, Laguna. On the other hand, respondent Pagsanjan Tourism Consumers’ Cooperative (PTCC), is a cooperative organized under the Cooperative Code of the Philippines and the other respondents are PTCC employees, consisting of restaurant staff and boatmen at the PTA Complex. During sometime, PTA implemented a reorganization and reshuffling in its top level management. Rodolfo Laborte was designated as Area Manager in the CALABARZON area with direct supervision over the PTA Complex and other entities at the Southern Luzon.
Page 102 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 In view of PTA Complex’s rehabilitation and upgrading project, Laborte served a written notice to the respondents to cease operation of the restaurant business and boat ride services. Consequently, PTCC filed a Complaint for Prohibition, Injunction and Damages with TRO and Preliminary Injunction against Laborte. Subsequently, the trial court issued the TRO prayed for. Opposing the issuance of the TRO, Laborte averred that the PTCC does not own the restaurant facility as it was onlyt olerated to operate the same by the PTA as a matter of lending support and assistance to the cooperative in its formative years. Since PTCC had no contract, concession, or exclusive franchise to operate the restaurant business and the boating services in the PTA Complex, no existing right has been allegedly violated by the petitioners. RTC rendered a decision in favor of the respondents.
Laborte and PTA appealed to the CA. Later on, CA promulgated its decision affirming RTC’s decision. A motion for reconsideration was filed, but was denied for lack of merit. Hence, the petition.
Petitioners assert that the PTA is mandated to administer tourism zones and it has adopted a comprehensive program and project to rehabilitate and upgrade the facilities of the PTA complex and that PTCC has novested right to continue operating the restaurant and boat ride services since it has no contract, concession or exclusive franchise with PTA. Issue:
Whether or not PTA can validly terminate PTCC’s operation. Ruling:
Petition Granted.
The PTA is a government owned and controlled corporation which was mandated to administer tourism zones. Based on this mandate, it was the PTA’s obligation to adopt a comprehensive program and project to rehabilitate and upgrade the facilities of the PTA. The Court finds that there was indeed a renovation of the Pagsanjan Administration Complex which was sanctioned by the PTA main office; and such renovation was done in good faith in performance of its mandated duties as tourism administrator. In the exercise of its management prerogative to determine what is best for the said agency, the PTA had the right to terminate at any moment the PTCC’s operations of the restaurant and the boat ride services since the PTCC has no contract, concession or franchise from the PTA to operate the above-mentioned businesses. As shown by the records, the operation of the restaurant and the boat ride services was merely tolerated, in order to extend financial assistance to its PTA employee-members who are members of the then fledging PTCC. Except for receipts for rents paid by the PTCC to the PTA, the respondents failed to show any contract, concession agreement or franchise to operate the restaurant and boat ride
Page 103 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 services. In fact, the PTCC initially did not implead the PTA in its Complaint since it was well aware that there was no contract executed between the PTCC and the PTA. While the PTCC has been operating the restaurant and boat ride services for almost ten (10) years until its closure, the same was by mere tolerance of the PTA. In the consolidated case of Phil. Ports Authority v. Pier 8 Arrastre & Stevedoring Services, Inc., the Court upheld the authority of government agencies to terminate at any time hold-over permits. Thus, considering that the PTCC’s operation of the restaurant and the boat ride services was by mere tolerance, the PTA can, at any time, terminate such operation. With respect to Laborte's liability in his official and personal capacity, the Court finds that Laborte was simply implementing the lawful order of the PTA Management. As a general rule the officer cannot be held personally liable with the corporation, whether civilly or otherwise, for the consequences of his acts, if acted for and in behalf of the corporation, within the scope of his authority and in good faith. Thus, the Court finds no basis to hold petitioner Laborte liable. RIGHT TO INSPECT
ADERITO Z. YUJUICO AND BONIFACIO C. SUMBILLA vs. CEZAR T. QUIAMBAO AND ERIC C. PILAPIL G.R. No. 180416, June 02, 2014, J. Perez A criminal action based on the violation of a stockholder's right to examine or inspect the corporate records and the stock and transfer hook of a corporation under the second and fourth paragraphs of Section 74 of the Corporation Code can only he maintained against corporate officers or any other persons acting on behalf of such corporation. The complaint and the evidence Quiambao and Sumbilla submitted during preliminary investigation do not establish that Quiambao and Pilapil were acting on behalf of STRADEC. Violations of Section 74 contemplates a situation wherein a corporation, acting thru one of its officers or agents, denies the right of any of its stockholders to inspect the records, minutes and the stock and transfer book of such corporation. Thus, the dismissal is valid. Facts: Strategic Alliance Development Corporation is a domestic corporation operating as a business development and investment company. On 1 March 2004, during the annual stockholder's meeting of STRADEC, Aderito Z. Yujuico was elected as president and chairman of the company. Yujuico replaced Cezar T. Quiambao, who had been the president and chairman of STRADEC since 1994. STRADEC appointed petitioner Bonifacio C. Sumbilla as treasurer and one Joselito John G. Blando as corporate secretary. Blando replaced respondent Eric C. Pilapil, the previous corporate secretary of STRADEC. On 12 August 2005, Yujuico and Sumbilla filed a criminal complaint against Quiambao and Pilapil and one Giovanni T. Casanova before the Office of the City Prosecutor of Pasig City. The complaint accuses Quiambao, Pilapil and Casanova of violating Section 74 in relation to Section 144 of the Corporation Code. Page 104 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 That during the stockholders' meeting, Yujuico--as newly elected president and chairman of STRADEC--demanded Quiambao for the turnover of the corporate records of the company, particularly the accounting files, ledgers, journals and other records of the corporation's business. Quiambao refused. After the stockholders' meeting, Quiambao and Casanova caused the removal of the corporate records of STRADEC from the company's offices in Pasig City. Upon his appointment as corporate secretary, Blando likewise demanded Pilapil for the turnover of the stock and transfer book of STRADEC. Pilapil refused. On 25 June 2004, Pilapil proposed to Blando to have the stock and transfer book deposited in a safety deposit box with Equitable Pel Bank. Blando acceded to the proposal and the stock and transfer book was deposited in a safety deposit box with the bank identified. It was agreed that the safety deposit box may only be opened in the presence of both Quiambao and Blando. Quiambao and Pilapil withdrew the stock and transfer book from the safety deposit box and brought it to the offices of the Stradcom Corporation in Quezon City. Quiambao thereafter asked Blando to proceed to the STRADCOM offices. Upon arriving thereat, Quiambao pressured Blando to make certain entries in the stock and transfer books. After making such entries, Blando again demanded that he be given possession of the stock and transfer book. Quiambao refused. Blando received an order issued by the RTC of Pasig City, which directed him to cancel the entries he made in the stock and transfer book. Blando wrote letters to Quiambao and Pilapil once again demanding for the turnover of the stock and transfer book. Pilapil replied where he appeared to agree to Blando's demand. However, Quiambao still refused to turnover the stock and transfer book to Blando. Blando was once again constrained to agree to a proposal by Pilapil to have the stock and transfer book deposited with the RTC of Pasig City. The said court, however, refused to accept such deposit on the ground that it had no place for safekeeping. Since Quiambao and Pilapil still refused to turnover the stock and transfer book, Blando again acceded to have the book deposited in a safety deposit box, this time, with the Export and Industry Bank. Yujuico and Sumbilla theorize that the refusal by the Quiambao, Pilapil and Casanova to turnover STRADEC's corporate records and stock and transfer book violates their right, as stockholders, directors and officers of the corporation, to inspect such records and book under Section 74 of the Corporation Code and may be held criminally liable pursuant to Section 144 of the Corporation Code. The MeTC partially granted the Urgent Omnibus Motion. The MeTC ordered the issuance of a warrant of arrest against Quiambao and Pilapil. The RTC issued a TRO enjoining the MeTC from conducting further proceedings in Criminal Case No. 89724.
The RTC granted Quiambao and Pilapil’s certiorari petition and directing the dismissal of Criminal Case No. 89724. According to the RTC, the MeTC committed grave abuse of discretion in issuing a warrant of arrest against Quiambao and Pilapil. The RTC opined that refusing to allow inspection of the stock and transfer book, as opposed to refusing examination of other corporate records, is not punishable as an offense under the Corporation Code. The petitioners moved for reconsideration, but the RTC remained steadfast. Hence, this petition by Yujuico and Sumbilla. Page 105 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Issue: Whether or not the RTC’s refusal to allow inspection of the stock and transfer book of a corporation is not a punishable offense under the Corporation Code, such a refusal still amounts to a violation of Section 74 of the Corporation Code, for which Section 144 of the same code prescribes a penalty.cra1aw Ruling:
No, there is no violation of the Corporation, thus, dismissal of the complaint is warranted.
The act of refusing to allow inspection of the stock and transfer book of a corporation, when done in violation of Section 74(4) of the Corporation Code, is punishable as an offense under Section 144 of the same code. In justifying this conclusion, the RTC seemingly relied on the fact that, under Section 74 of the Corporation Code, the application of Section 144 is expressly mentioned only in relation to the act of "refusing to allow any director, trustees, stockholder or member of the corporation to examine and copy excerpts from the corporation's records or minutes" that excludes its stock and transfer book, the same does not mean that the latter section no longer applies to any other possible violations of the former section. It must be emphasized that Section 144 already purports to penalize "violations" of "any provision" of the Corporation Code "not otherwise specifically penalized therein." Hence, we find inconsequential the fact that that Section 74 expressly mentions the application of Section 144 only to a specific act, but not with respect to the other possible violations of the former section. A criminal action based on the violation of a stockholder's right to examine or inspect the corporate records and the stock and transfer hook of a corporation under the second and fourth paragraphs of Section 74 of the Corporation Code can only he maintained against corporate officers or any other persons acting on behalf of such corporation. The submissions of the Yujuico and Sumbilla during the preliminary investigation clearly suggest that Quiambao and Pilapil are neither in relation to STRADEC. Thus, we sustain the dismissal of Criminal Case No. 89724.
Criminal Case No. 89724 accuses Quiambao and Pilapil of denying Yujuico and Sumbilla's right to examine or inspect the corporate records and the stock and transfer book of STRADEC. It is thus a criminal action that is based on the violation of the second and fourth paragraphs of Section 74 of the Corporation Code. A perusal of the second and fourth paragraphs of Section 74, as well as the first paragraph of the same section, reveal that they are provisions that obligates a corporation: they prescribe what books or records a corporation is required to keep; where the corporation shall keep them; and what are the other obligations of the corporation to its stockholders or members in relation to such books and records. Hence, by parity of reasoning, the second and fourth paragraphs of Section 74, including the first paragraph of the same section, can only be violated by a corporation. Page 106 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 It is clear then that a criminal action based on the violation of the second or fourth paragraphs of Section 74 can only be maintained against corporate officers or such other persons that are acting on behalf of the corporation. Violations of Section 74 contemplates a situation wherein a corporation, acting thru one of its officers or agents, denies the right of any of its stockholders to inspect the records, minutes and the stock and transfer book of such corporation. The problem with the Yujuico and Sumbilla's complaint and the evidence that they submitted during preliminary investigation is that they do not establish that Quiambao and Pilapil were acting on behalf of STRADEC. Quiambao and Sumbilla are not actually invoking their right to inspect the records and the stock and transfer book of STRADEC under the second and fourth paragraphs of Section 74. What they seek to enforce is the proprietary right of STRADEC to be in possession of such records and book. Such right, though certainly legally enforceable by other means, cannot be enforced by a criminal prosecution based on a violation of the second and fourth paragraphs of Section 74. DERIVATIVE SUIT
NESTOR CHING and ANDREW WELLINGTON vs. SUBIC BAY GOLF AND COUNTRY CLUB, INC., HU HO HSIU LIEN alias SUSAN HU, HU TSUNG CHIEH alias JACK HU, HU TSUNG HUI, HU TSUNG TZU and REYNALD R. SUAREZ G.R. No. 174353, September 10, 2014, J. LEONARDO-DE CASTRO A derivative suit cannot prosper without first complying with the legal requisites for its institution. Thus, a complaint which contained no allegation whatsoever of any effort to avail of intra-corporate remedies allows the court to dismiss it, even motu proprio. Indeed, even if petitioners thought it was futile to exhaust intra-corporate remedies, they should have stated the same in the Complaint and specified the reasons for such opinion. The requirement of this allegation in the Complaint is not a useless formality which may be disregarded at will. Facts: On February 26, 2003, petitioners Nestor Ching and Andrew Wellington filed a Complaint with the RTC of Olongapo City on behalf of the members of Subic Bay Golf and Country Club, Inc. (SBGCCI) against the said country club and its Board of Directors and officers under the provisions of Presidential Decree No. 902-A in relation to Section 5.2 of the Securities Regulation Code. The complaint alleged that the defendant corporation sold shares to plaintiffs at US$22,000.00 per share, presenting to them the Articles of Incorporation. However, on June 27, 1996, an amendment to the Articles of Incorporation was approved by the Securities and Exchange Commission (SEC). Petitioners claimed in the Complaint that SBGCCI did not disclose to them the above amendment which allegedly makes the shares non-proprietary, as it takes away the right of the shareholders to participate in the pro-rata distribution of the assets of the corporation after its dissolution. According to petitioners, this is in fraud of the stockholders who only discovered the amendment when they filed a case for injunction to restrain the corporation
Page 107 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 from suspending their rights to use all the facilities of the club. Furthermore, petitioners alleged that the Board of Directors and officers of the corporation did not call any stockholders’ meeting from the time of the incorporation, in violation of Section 50 of the Corporation Code and the By-Laws of the corporation. Neither did the defendant directors and officers furnish the stockholders with the financial statements of the corporation nor the financial report of the operation of the corporation in violation of Section 75 of the Corporation Code. Petitioners also claim SBGCCI presented to the SEC an amendment to the By-Laws of the corporation suspending the voting rights of the shareholders except for the five founders’ shares. Said amendment was allegedly passed without any stockholders’ meeting or notices to the stockholders in violation of Section 48 of the Corporation Code. The Complaint furthermore enumerated several instances of fraud in the management of the SBGCCI allegedly committed by the Board of Directors and officers of the corporation. The RTC issued an Order dismissing the Complaint. The RTC held that the action is a derivative suit. Petitioners Ching and Wellington elevated the case to the Court of Appeals which rendered the assailed Decision affirming that of the RTC. Hence, petitioners resort to the present Petition for Review, wherein they argue that the Complaint they filed with the RTC was not a derivative suit. Issue:
Whether or not the Complaint is indeed a derivative suit.
Ruling:
The nature of an action, as well as which court or body has jurisdiction over it, is determined based on the allegations contained in the complaint of the plaintiff, irrespective of whether or not the plaintiff is entitled to recover upon all or some of the claims asserted therein. While there were allegations in the Complaint of fraud in their subscription agreements, such as the misrepresentation of the Articles of Incorporation, petitioners do not pray for the rescission of their subscription or seek to avail of their appraisal rights. Instead, they ask that defendants be enjoined from managing the corporation and to pay damages for their mismanagement. Petitioners’ only possible cause of action as minority stockholders against the actions of the Board of Directors is the common law right to file a derivative suit. The legal standing of minority stockholders to bring derivative suits is not a statutory right, there being no provision in the Corporation Code or related statutes authorizing the same, but is instead a product of jurisprudence based on equity. However, a derivative suit cannot prosper without first complying with the legal requisites for its institution. Page 108 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra Corporate Controversies imposes the following requirements for derivative suits:
(1) He was a stockholder or member at the time the acts or transactions subject of the action occurred and at the time the action was filed; (2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all remedies available under the articles of incorporation, bylaws, laws or rules governing the corporation or partnership to obtain the relief he desires; (3) No appraisal rights are available for the act or acts complained of; and (4) The suit is not a nuisance or harassment suit.
The RTC dismissed the Complaint for failure to comply with the second and fourth requisites above.
Upon a careful examination of the Complaint, this Court finds that the same should not have been dismissed on the ground that it is a nuisance or harassment suit. Although the shareholdings of petitioners are indeed only two out of the 409 alleged outstanding shares or 0.24%, the Court has held that it is enough that a member or a minority of stockholders file a derivative suit for and in behalf of a corporation.
With regard, however, to the second requisite, we find that petitioners failed to state with particularity in the Complaint that they had exerted all reasonable efforts to exhaust all remedies available under the articles of incorporation, by-laws, and laws or rules governing the corporation to obtain the relief they desire. The Complaint contained no allegation whatsoever of any effort to avail of intra-corporate remedies. Indeed, even if petitioners thought it was futile to exhaust intra-corporate remedies, they should have stated the same in the Complaint and specified the reasons for such opinion. Failure to do so allows the RTC to dismiss the Complaint, even motu proprio, in accordance with the Interim Rules. The requirement of this allegation in the Complaint is not a useless formality which may be disregarded at will. ALFREDO L. VILLAMOR, JR. vs. JOHN S. UMALE, IN SUBSTITUTION OF HERNANDO F. BALMORES G.R. No. 172843, September 24, 2014, J. Leonen
Derivative Suit: The Court has recognized that a stockholder's right to institute a derivative suit is not based on any express provision of the Corporation Code, or even the Securities Regulation Code, but is impliedly recognized when the said laws make corporate directors or officers liable for damages suffered by the corporation and its stockholders for violation of their fiduciary duties. In effect, the suit is an action for specific performance of an obligation, owed by the corporation to the stockholders, to assist its rights of action when the corporation has been put in default by the wrongful refusal of the directors or management to adopt suitable measures for its protection.
Page 109 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Management committees: Management committees and receivers are appointed when the corporation is in imminent danger of (1) dissipation, loss, wastage or destruction of assets or other properties; and (2) paralysation of its business operations that may be prejudicial to' the interest of the minority stockholders, parties-litigants, or the general public." Applicants for the appointment of a receiver or management committee need to establish the confluence of these two requisites. This is because appointed receivers and management committees will immediately take over the management of the corporation and will have the management powers specified in law. Jurisdiction to appoint receiver: The Court of Appeals has no power to appoint a receiver or management committee. The Regional Trial Court has original and exclusive jurisdiction to hear and decide intra-corporate controversies, including incidents of such controversies. These incidents include applications for the appointment of receivers or management committees. Facts: MC Home Depot occupied a prime property (Rockland area) in Pasig. The property was part of the area owned by Mid-Pasig Development Corporation. Pasig Printing Corporation (PPC) obtained an option to lease portions of Mid-Pasig's property, including the Rockland area. PPC's board of directors issued a resolution waiving all its rights, interests, and participation in the option to lease contract in favor of the law firm of Atty. Villamor. PPC, represented by Villamor, entered into a memorandum of agreement with MC Home Depot. Under the MOA, MC Home Depot would continue to occupy the area as PPC's sub-lessee for 4 years, renewable for another 4 years, at a monthly rental of P4,500,000.00 plus goodwill of P18,000,000.00.
In compliance with the terms of the MOA, MC Home Depot issued 20 post-dated checks representing rental payments for one year and the goodwill money. The checks were given to Villamor who did not turn these or the equivalent amount over to PPC, upon encashment. Hernando Balmores, stockholder and director of PPC, wrote a letter addressed to PPJC's directors informing them that Villamor should be made to deliver to PPC and account for MC Home Depot's checks or their equivalent value. Due to the alleged inaction of the directors, respondent Balmores filed with the RTC an intra-corporate controversy complaint against petitioners for their alleged devices or schemes amounting to fraud or misrepresentation. Respondent Balmores alleged that because of petitioners' actions, PPC's assets were ". . . not only in imminent danger, but have actually been dissipated, lost, wasted and destroyed." Respondent Balmores prayed that a receiver be appointed from his list of nominees. He also prayed for petitioners' prohibition from "selling, encumbering, transferring or disposing in any manner any of PPC's properties, including the MC Home Depot checks and/or their proceeds." He prayed for the accounting and remittance to PPC of the MC Home Depot checks or their proceeds and for the annulment of the board's resolution "waiving PPC's rights in favor of Villamor's law firm. The RTC denied respondent Balmores' prayer for the appointment of a receiver or the creation of a management committee. According to it, PPC's entitlement to the checks
Page 110 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 was doubtful. The resolution issued by PPC's board of directors; waiving its rights to the option to lease contract in favor of Villamor's law firm, must be accorded prima facie validity. Balmores filed with CA a petition for certiorari which was given due course. It reversed the trial court's decision, and issued a new order placing PPC under receivership and creating an interim management committee. The CA considered the danger of dissipation, wastage, and loss of PPC's assets if the review of the trial court's judgment would be delayed. It stated that the board's waiver of PPC's rights in favor of Villamor's law firm without any consideration and its inaction on Villamor's failure to turn over the proceeds of rental payments to PPC warrant the creation of a management committee. Also, the CA ruled that the case filed by respondent Balmores with the trial court "was a derivative suit because there were allegations of fraud or ultra vires acts ... by PPC's directors.” Issues:
1. Whether the Court of Appeals correctly characterized respondent Balmores' action as a derivative suit 2. Whether the Court of Appeals properly placed PPC under receivership and created a receiver or management committee
Ruling:
1. No.
The requisites of a derivative suit are as follows:
a. He was a stockholder or member at the time the acts or transactions subject of the action occurred and at the time the action was filed; b. He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires; c. No appraisal rights are available for the act or acts complained of; and d. The suit is not a nuisance or harassment suit. In case of nuisance or harassment suit, the court shall forthwith dismiss the case.
Balmores' action in the trial court failed to satisfy all the requisites of a derivative suit. Balmores failed to exhaust all available remedies to obtain the reliefs he prayed for. Though he tried to communicate with PPC's directors about the checks in Villamor's possession before he filed an action with the trial court, Balmores was not able to show that this comprised -all the remedies available under the articles of incorporation, bylaws, laws, or rules governing PPC. Neither did respondent Balmores implead PPC as party in the case nor did he allege that he was filing on behalf of the corporation. The non-derivative character of Balmores' action may also be gleaned from his allegations in the trial court Page 111 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 complaint. In the complaint, he described the nature of his action as an action under Rule 1, Section l(a)(l) of the Interim Rules, and not an action under Rule 1, Section l(a)(4) of the Interim Rules, which refers to derivative suits. Respondent Balmores filed an individual suit. His intent was very clear from his manner of describing the nature of his action as being based on Rule 1, Sec. 1(a)(1) of the Interim Rules, “involving devices or schemes employed by, or acts of, the petitioners as board of directors, business associates and officers of PPC, amounting to fraud or misrepresentation, which are detrimental to the interest of the plaintiff as stockholder of PPC.”
Balmores did not bring the action for the benefit of the corporation. Instead, he was alleging that the acts of PPC’s directors, specifically the waiver of rights in favor of Villamor’s law firm and their failure to take back the MC Home Depot checks from Villamor, were detrimental to his individual interest as a stockholder. In filing an action, therefore, his intention was to vindicate his individual interest and not PPC’s or a group of stockholders’. 2. No.
The CA still erred in placing PPC under receivership and in creating and appointing a management committee. A corporation may be placed under receivership, or management committees may be created to preserve properties involved in a suit and to protect the rights of the parties under the control and supervision of the court. Management committees and receivers are appointed when the corporation is in imminent danger of (1) dissipation, loss, wastage or destruction of assets or other properties; and (2) paralysation of its business operations that may be prejudicial to' the interest of the minority stockholders, parties-litigants, or the general public." PPC waived its rights, without any consideration in favor of Villamor. The checks were already in Villamor's possession. Some of the checks may have already been encashed. It is, therefore, enough to constitute loss or dissipation of assets under the Interim Rules. Balmores, however, failed to show that there was an imminent danger of paralysis of PPC's business operations. Apparently, PPC was- earning substantial amounts from its other sub-lessees. Balmores did not prove otherwise. He, therefore, failed to show at least one of the requisites for appointment of a receiver or management committee. Facts:
Marcelino Florete, Jr. et. al. v. Rogelio Florente, et. al. GR. No. 174909, January 20, 2016, Leonen, J:
Spouses Marcelino Florete, Sr. and Salome Florete (now both deceased) had four (4) children: Marcelino Florete, Jr. (Marcelino, Jr.), Maria Elena Muyco (Ma. Elena), Rogelio Florete, Sr. (Rogelio, Sr.), and Teresita Menchavez (Teresita), now deceased. People’s Broadcasting Service, Inc. (People’s Broadcasting) is a private corporation authorized to operate, own, maintain, install, and construct radio and television stations in
Page 112 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 the Philippines. In its incorporation on March 8, 1966,7 it had an authorized capital stock of ₱250,000.00 divided into 2,500 shares at ₱100.00 par value per share. Twenty-five percent (25%) of the corporation’s authorized capital stock were then subscribed. On November 17, 1967, Berlin and Sudario resigned from their positions as General Manager and Station Supervisor, respectively.Berlin and Sudario each transferred 20 shares to Raul Muyco and Estrella Mirasol.
Salome died on November 22, 1980. Marcelino, Sr. suffered a stroke on July 12, 1982, which left him paralyzed and bedridden until his death on October 3, 1990. After Marcelino, Sr.’s stroke, their son, Rogelio, Sr. started managing the affairs of People’s Broadcasting.
In October 1993, People’s Broadcasting sought the services of the accounting and auditing firm Sycip Gorres Velayo and Co. in order to determine the ownership of equity in the corporation. Sycip Gorres Velayo and Co. submitted a report detailing the movements of the corporation’s shares from November 23, 1967 to December 8, 1989. Even as it tracked the movements of shares, Sycip Gorres Velayo and Co. declined to give a categorical statement on equity ownership as People’s Broadcasting’s corporate records were incomplete.
On June 23, 2003, Marcelino, Jr., Ma. Elena, and Raul Muyco (Marcelino, Jr. Group) filed before the Regional Trial Court a Complaintfor Declar ation of Nullity of Issuances, Transfers and Sale of Shares in People’s Broadcasting Service, Inc. and All Posterior Subscriptions and Increases thereto with Damages against Diamel Corporation, Rogelio, Sr., Imelda Florete, Margaret Florete, and Rogelio Florete, Jr. (Rogelio, Sr. Group). he Regional Trial Court issued a Decision (which it called a "Placitum") dismissing the Marcelino, Jr. Group’s Complaint. It ruled that the Marcelino, Jr. Group did not have a cause of action against the Rogelio, Sr. Group and that the former is estopped from questioning the assailed movement of shares of People’s Broadcasting. It also ruled that indispensible parties were not joined in their Complaint. he Marcelino, Jr. Group filed before the Court of Appeals a Petition for Review with a prayer for the issuance of a temporary restraining order and/or writ of preliminary injunction to deter the immediate execution of the trial court Decision awarding damages to Rogelio, Sr. The Court of Appeals issued a temporary restraining order and, subsequently, a writ of preliminary injunction.
In its Decision dated March 29, 2006, the Court of Appeals denied the Marcelino, Jr. Group’s Petition and affirmed the trial court Decision. It also lifted the temporary restraining order and writ of preliminary injunction. The Court of Appeals ruled that the Marcelino, Jr. Group did not have a cause of action against those whom they have impleaded as defendants. It also noted that the principal obligors in or perpetrators of the assailed transactions were persons other than those in the Rogelio, Sr. Group who have not been impleaded as parties. Thus, the Court of Appeals emphasized that the following parties were indispensable to the case: People’s Broadcasting; Marcelino, Sr.; Consolidated Broadcasting System, Inc.; Page 113 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Salome; Divinagracia; Teresita; and "other stockholders of [People’s Broadcasting] to whom the shares were transferred or the nominees of the stockholders." Hence, this petition. Issue: Whether the CA erred in dismissing the complaint filed by the petitioners
Held: No. A stockholder may suffer from a wrong done to or involving a corporation, but this does not vest in the aggrieved stockholder a sweeping license to sue in his or her own capacity. The determination of the stockholder’s appropriate remedy—whether it is an individual suit, a class suit, or a derivative suit—hinges on the object of the wrong done. When the object of the wrong done is the corporation itself or "the whole body of its stock and property without any severance or distribution among individual holders,"1 it is a derivative suit, not an individual suit or class/representative suit, that a stockholder must resort to. Among the basic requirements for a derivative suit to prosper is that the minority shareholder who is suing for and on behalf of the corporation must allege in his complaint before the proper forum that he is suing on a derivative cause of action on behalf of the corporation and all other shareholders similarly situated who wish to join him. Moreover, it is important that the corporation be made a party to the case. DISPOSITION AND ENCUMBRANCES OF SHARES
Facts:
Interport Resources Corporation v. Securities Specialist, Inc. et. al. G.R. No.154069, 06 June 2016, Bersamin, J:
In January 1977, Oceanic Oil & Mineral Resources, Inc. (Oceanic) entered into a subscription agreement with R.C. Lee, a domestic corporation engaged in the trading of stocks and other securities, covering 5,000,000 of its shares with par value of PO.O1 per share, for a total of P50,000.00. Thereupon, R.C. Lee paid 25% of the subscription, leaving 75% unpaid. Oceanic issued Subscription Agreements to R.C. Lee. On July 28, 1978, Oceanic merged with Interport, with the latter as the surviving corporation. Under the terms of the merger, each share of Oceanic was exchanged for a share of lnterport. Thereafter, R.C. Lee endorsed the Subscription Agreements to SSI, a domestic corporation registered as a dealer in securities.
Later on, R.C. Lee requested Interport for a list of subscription agreements and stock certificates issued in the name of R.C. Lee and other individuals named in the request. Upon finding no record showing any transfer or assignment of the Oceanic subscription agreements and stock certificates of Interport as contained in the list, R.C. Lee paid its unpaid subscriptions and was accordingly issued stock certificates corresponding thereto. On February 8, 1989, Interport issued a call for the full payment of subscription receivables, setting March 15, 1989 as the deadline. SSI tendered payment prior to the
Page 114 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 deadline through two stockbrokers of the Manila Stock Exchange. However, the stockbrokers reported to SSI that lnterport refused to honor the Oceanic subscriptions.
On the date of the deadline, SSI directly tendered payment to lnterport for the balance of the 5,000,000 shares covered by the Oceanic Subscription Agreements. Interport rejected the same. SSI learned that Interport had issued the 5,000,000 shares to R.C. Lee, relying on the latter's registration as the owner of the subscription agreements in the books of the former, Thus, SSI wrote R.C. Lee demanding the delivery of the 5,000,000 Interport shares on the basis of a purported assignment of the subscription agreements covering the shares made in 1979. R.C. Lee failed to return the subject shares inasmuch as it had already sold the same to other parties. SSI thus demanded that R.C. Lee pay not only the equivalent of the 25% it had paid on the subscription but the whole 5,000,000 shares at current market value. SSI also made demands upon Interport and R.C. Lee for the cancellation of the shares issued to R.C. Lee and for the delivery of the shares to SSl. After its demands were not met, SSI commenced this case in the SEC to compel the respondents to deliver the shares and pay damages.
The SEC ruled in favor of SSI and required Interport to issue all the 5,000,000 shares and pay damages. The respondents appealed to the SEC En Bank. The latter modified the decision and stated that it would be inequitable to issue the 5,000,000 shares in favor of SSI since it only paid 25% thereof. The decision of the SEC En Banc was affirmed by the CA, hence, this petition. lnterport argues that R.C. Lee should be held liable for the delivery of 25% of the shares under the subject subscription agreements inasmuch as R.C. Lee had already received all the 5,000,000 shares upon its payment of the 75% balance on the subscription price to Interport; that it was only proper for R.C. Lee to deliver 25% of the shares under the Oceanic subscription agreements because it had already received the corresponding payment therefor from SSI for the assignment of the shares; that R.C. Lee would be unjustly enriched if it retained the 5,000,000 shares and the 25% payment of the subscription price made by SSI in favor of R.C. Lee as a result of the assignment; and that it merely relied on its records, in accordance with Section 74 of the Corporation Code, when it issued the stock certificates to R.C. Lee upon its full payment of the subscription price. Issue: Whether Interport is liable to deliver the Oceanic shares of stock to SSI Held:
1. The SEC correctly categorized the assignment of the subscription agreements as a form of novation by substitution of a new debtor and which required the consent of or notice to the creditor. Under the Civil Code, obligations may be modified by: (l) changing their object or principal conditions; or (2) substituting the person of the debtor; or (3) subrogating a third person of the original one, may be made even
Page 115 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 without the knowledge or against the will of the latter, but not without the consent of the creditor. In this case, the change of debtor took place when R.C. Lee assigned the Oceanic shares under Subscription Agreement to SSI so that the latter became obliged to settle the 75% unpaid balance on the subscription.
Clearly, the effect of the assignment of the subscription agreements to SSI was to extinguish the obligation of R.C. Lee to Oceanic, now Interport, to settle the unpaid balance on the subscription. As a result of the assignment, Interport was no longer obliged to accept any payment from R.C. Lee because the latter had ceased to be privy to Subscription Agreements for having been extinguished insofar as it was concerned. On the other hand, Interport was legally bound to accept SSI's tender of payment for the 75% balance on the subscription price because SSI had become the new debtor under Subscription Agreements Nos. 1805, and 1808 to 1811. As such, the issuance of the stock certificates in the name of R.C. Lee had no legal basis in the absence of a contractual agreement between R.C. Lee and Interport.
2. Under Section 63 of the Corporation Code, no transfer of shares of stock shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation. This statutory rule cannot be strictly applied herein, however, because lnterport had unduly refused to recognize the assignment of the shares between R.C. Lee and SSL
Facts:
Anna Teng v. Securities and Exchange Commission G.R. No. 184332, February 17, 2016, Reyes, J:
This case has its origin in the case entitled TCL Sales Corporation and Anna Teng v. Hon. Court of Appeals and Ting Ping Lay (G.R. No. 129777). Herein respondent Ting Ping purchased 480 shares of TCL Sales Corporation (TCL) from Peter Chiu (Chiu) on February 2, 1979; 1,400 shares on September 22, 1985 from his brother Teng Ching Lay (Teng Ching), who was also the president and operations manager of TCL; and 1,440 shares from Ismaelita Maluto (Maluto) on September 2, 1989.
Upon Teng Ching's death in 1989, his son Henry Teng (Henry) took over the management of TCL. To protect his shareholdings with TCL, Ting Ping on August 31, 1989 requested TCL's Corporate Secretary, herein petitioner Teng, to enter the transfer in the Stock and Transfer Book of TCL for the proper recording of his acquisition. He also demanded the issuance of new certificates of stock in his favor. TCL and Teng, however, refused despite repeated demands. Because of their refusal, Ting Ping filed a petition for mandamus with the SEC against TCL and Teng, Page 116 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 The Securities and Exchange Commission (SEC) granted the issuance of an alias writ of execution, compelling petitioner Anna Teng (Teng) to register and issue new certificates of stock in favor of respondent Ting Ping Lay (Ting Ping). The order of the SEC was affirmed by the CA; hence, this petition.
Issue: Whether the surrender of the certificates of stock is a requisite before registration of the transfer may be made in the corporate books and for the issuance of new certificates in its stead. Held: No. Under Section 63 of the Corporation Code, certain minimum requisites must be complied with for there to be a valid transfer of stocks, to wit: (a) there must be delivery of the stock certificate; (b) the certificate must be endorsed by the owner or his attorney-infact 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.
It is the delivery of the certificate, coupled with the endorsement by the owner or his duly authorized representative that is the operative act of transfer of shares from the original owner to the transferee.41 The Court even emphatically declared. in Fil-Estate Golf and Development, Inc., et al. v. Vertex Sales and Trading, Inc. that in "a sale of shares of stock, physical delivery of a stock certificate is one of the essential requisites for the transfer of ownership of the stocks purchased."43 The delivery contemplated in Section 63, however, pertains to the delivery of the certificate of shares by the transferor to the transferee, that is, from the original stockholder named in the certificate to the person or entity the stockholder was transferring the shares to, whether by sale or some other valid form of absolute conveyance of ownership. "[S]hares of stock may be transferred by delivery to the transferee of the certificate properly indorsed. Title may be vested in the transferee by the delivery of the duly indorsed certificate of stock." It is thus clear that Teng's position - that Ting Ping must first surrender Chiu's and Maluto's respective certificates of stock before the transfer to Ting Ping may be registered in the books of the corporation - does not have legal basis. The delivery or surrender adverted to by Teng, i.e., from Ting Ping to TCL, is not a requisite before the conveyance may be recorded in its books. To compel Ting Ping to deliver to the corporation the certificates as a condition for the registration of the transfer would amount to a restriction on the right of Ting Ping to have the stocks transferred to his name, which is not sanctioned by law. The only limitation imposed by Section 63 is when the corporation holds any unpaid claim against the shares intended to be transferred. DISSOLUTION AND LIQUIDATION
ALABANG DEVELOPMENT CORPORATION vs. ALABANG HILLS VILLAGE ASSOCIATION AND RAFAEL TINIO G.R. No. 187456, June 02, 2014, J. Peralta ADC filed its complaint not only after its corporate existence was terminated but also beyond the three-year period allowed by Section 122 of the Corporation Code. To allow ADC Page 117 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 to initiate the subject complaint and pursue it until final judgment, on the ground that such complaint was filed for the sole purpose of liquidating its assets, would be to circumvent the provisions of Section 122 of the Corporation Code. Thus, it is clear that at the time of the filing of the subject complaint petitioner lacks the capacity to sue as a corporation. Facts: The case traces its roots to the Complaint for Injunction and Damages filed with the RTC of Muntinlupa City on Alabang Development Corporation against Alabang Hills Village Association, Inc. and Rafael Tinio Tinio, President of AHVAI. The Complaint alleged that Alabang is the developer of Alabang Hills Village and still owns certain parcels of land therein that are yet to be sold, as well as those considered open spaces that have not yet been donated to the local government of Muntinlupa City or the Homeowner's Association. In September 2006, ADC learned that AHVAI started the construction of a multi-purpose hall and a swimming pool on one of the parcels of land still owned by ADC without the latter's consent and approval, and that despite demand, AHVAI failed to desist from constructing the said improvements. ADC thus prayed that an injunction be issued enjoining defendants from constructing the multi-purpose hall and the swimming pool at the Alabang Hills Village. In its Answer With Compulsory Counterclaim, AHVAI denied ADC's asseverations and claimed that the latter has no legal capacity to sue since its existence as a registered corporate entity was revoked by the SEC on May 26, 2003; that ADC has no cause of action because by law it is no longer the absolute owner but is merely holding the property in question in trust for the benefit of AHVAI as beneficial owner thereof; and that the subject lot is part of the open space required by law to be provided in the subdivision. As counterclaim, it prayed that an order be issued divesting ADC of the title of the property and declaring AHVAI as owner thereof; and that ADC be made liable for moral and exemplary damages as well as attorney's fees. On January 4, 2007, the RTC of Muntinlupa City, rendered judgment dismissing ADC’s complaint. ADC filed a Notice of Appeal of the RTC decision. The RTC approved ADC's notice of appeal but dismissed respondent AHVAI’s counterclaim on the ground that it is dependent on ADC's complaint. Respondent AHVAI then filed an appeal with the CA. The CA dismissed both appeals of ADC and AHVAI, and affirmed the decision of the RTC. Thus, the instant petition. Issue:
1. Whether or not the Court of Appeals erred in relying on the case of “Columbia Pictures, Inc. V. Court of appeals” in resolving ADC's lack of capacity 2. Whether or not the Court of Appeals erred in finding lack of capacity of the ADC in filing the case contrary to the earlier rulings of this honorable court
Ruling:
1. No, the CA did not err.
Page 118 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 The Court does not agree that the CA erred in relying on the case of Columbia Pictures, Inc. v. Court of Appeals. The CA cited the case for the purpose of restating and distinguishing the jurisprudential definition of the terms “lack of capacity to sue” and “lack of personality to sue;” and of applying these definitions to the present case. Unlike in the instant case, the corporations involved in the Columbia case were foreign corporations is of no moment. The definition of the term “lack of capacity to sue” enunciated in the said case still applies to the case at bar. Indeed, as held by this Court and as correctly cited by the CA in the case of Columbia: “lack of legal capacity to sue means that the plaintiff is not in the exercise of his civil rights, or does not have the necessary qualification to appear in the case, or does not have the character or representation he claims; ‘lack of capacity to sue' refers to a plaintiff's general disability to sue, such as on account of minority, insanity, incompetence, lack of juridical personality or any other general disqualifications of a party. In the instant case, petitioner lacks capacity to sue because it no longer possesses juridical personality by reason of its dissolution and lapse of the three-year grace period provided under Section 122 of the Corporation Code. 2. As provided by Section 122 of the Corporation Code.
It is to be noted that the time during which the corporation, through its own officers, may conduct the liquidation of its assets and sue and be sued as a corporation is limited to three years from the time the period of dissolution commences; but there is no time limit within which the trustees must complete a liquidation placed in their hands. It is provided only that the conveyance to the trustees must be made within the three-year period. It may be found impossible to complete the work of liquidation within the three-year period or to reduce disputed claims to judgment. The authorities are to the effect that suits by or against a corporation abate when it ceased to be an entity capable of suing or being sued but trustees to whom the corporate assets have been conveyed pursuant to the authority of Sec. 78 may sue and be sued as such in all matters connected with the liquidation. Still in the absence of a board of directors or trustees, those having any pecuniary interest in the assets, including not only the shareholders but likewise the creditors of the corporation, acting for and in its behalf, might make proper representations with the SEC which has primary and sufficiently broad jurisdiction in matters of this nature, for working out a final settlement of the corporate concerns. In the instant case, there is no dispute that petitioner's corporate registration was revoked on May 26, 2003. Based on law, it had three years, or until May 26, 2006, to prosecute or defend any suit by or against it. The subject complaint, however, was filed only on October 19, 2006, more than three years after such revocation. It is not disputed that the subject complaint was filed by ADC and not by its directors or trustees. In the present case, petitioner filed its complaint not only after its corporate existence was terminated but also beyond the three-year period allowed by Section 122 of the Corporation Code. Thus, it is clear that at the time of the filing of the subject complaint petitioner lacks the capacity to sue as a corporation. To allow petitioner to initiate the subject complaint and pursue it until final judgment, on the ground that such complaint
Page 119 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 was filed for the sole purpose of liquidating its assets, would be to circumvent the provisions of Section 122 of the Corporation Code. MERGERS AND CONSOLIDATIONS
BANK OF COMMERCE vs. RADIO PHILIPPINES NETWORK, INC., ET. AL. G.R. No. 195615, April 21, 2014, J. Abad Indubitably, it is clear that no merger took place between Bancommerce and TRB as the requirements and procedures for a merger were absent. A merger does not become effective upon the mere agreement of the constituent corporations. All the requirements specified in the law must be complied with in order for merger to take effect. Here, Bancommerce and TRB remained separate corporations with distinct corporate personalities. What happened is that TRB sold and Bancommerce purchased identified recorded assets of TRB in consideration of Bancommerce’s assumption of identified recorded liabilities of TRB including booked contingent accounts. There is no law that prohibits this kind of transaction especially when it is done openly and with appropriate government approval. Facts: Traders Royal Bank (TRB) sold to petitioner Bank of Commerce (Bancommerce) its banking business consisting of specified assets and liabilities through a Purchase and Assumption (P & A) Agreement. Bangko Sentral ng Pilipinas' (BSP's) approval of their P & A Agreement was however necessary. On November 8, 2001 the BSP approved that agreement subject to the condition that Bancommerce and TRB would set up an escrow fund of PSO million with another bank to cover TRB liabilities for contingent claims that may subsequently be adjudged against it, which liabilities were excluded from the purchase. Subsequently, P & A Agreement was approved by BSP. To comply with a BSP mandate, TRB placed P50 million in escrow with Metropolitan Bank and Trust Co. (Metrobank) to answer for those claims and liabilities that were excluded from the P & A Agreement and remained with TRB. Shortly after acting in G.R. 138510, Traders Royal Bank v. Radio Philippines Network (RPN), Inc., this Court ordered TRB to pay respondents RPN, Intercontinental Broadcasting Corporation, and Banahaw Broadcasting Corporation (collectively, RPN, et al.) actual damages plus 12% legal interest and some amounts. Based on this decision, RPN, et al.filed a motion for execution against TRB before the Regional Trial Court (RTC). But rather than pursue a levy in execution of the corresponding amounts on escrow with Metrobank, RPN, et al. filed a Supplemental Motion for Execution where they described TRB as "now Bank of Commerce" based on the assumption that TRB had been merged into Bancommerce.
Subsequently, the RTC issued the assailed Order directing the release to the Sheriff of Bancommerce’s "garnished monies and shares of stock or their monetary equivalent" and for the sheriff to pay 25% of the amount "to the respondents’ counsel representing his Page 120 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 attorney’s fees and appearance fees and litigation expenses" and the balance to be paid to the respondents after deducting court dues. Issue:
Whether or not there was a merger or de facto merger between TRB and Bancommerce thereby considering the latter as judgment debtor. Ruling:
None.
Indubitably, it is clear that no merger took place between Bancommerce and TRB as the requirements and procedures for a merger were absent. A merger does not become effective upon the mere agreement of the constituent corporations. All the requirements specified in the law must be complied with in order for merger to take effect. Section 79 of the Corporation Code further provides that the merger shall be effective only upon the issuance by the Securities and Exchange Commission (SEC) of a certificate of merger. Here, Bancommerce and TRB remained separate corporations with distinct corporate personalities. What happened is that TRB sold and Bancommerce purchased identified recorded assets of TRB in consideration of Bancommerce’s assumption of identified recorded liabilities of TRB including booked contingent accounts. There is no law that prohibits this kind of transaction especially when it is done openly and with appropriate government approval. In his book, Philippine Corporate Law, Dean Cesar Villanueva explained that under the Corporation Code, "a de facto merger can be pursued by one corporation acquiring all or substantially all of the properties of another corporation in exchange of shares of stock of the acquiring corporation. The acquiring corporation would end up with the business enterprise of the target corporation; whereas, the target corporation would end up with basically its only remaining assets being the shares of stock of the acquiring corporation." No de facto merger took place in the present case simply because the TRB owners did not get in exchange for the bank’s assets and liabilities an equivalent value in Bancommerce shares of stock. Moreover, Bancommerce and TRB agreed with BSP approval to exclude from the sale the TRB’s contingent judicial liabilities, including those owing to RPN, et al. The Bureau of Internal Revenue (BIR) treated the transaction between the two banks purely as a sale of specified assets and liabilities when it rendered its opinion on the tax consequences of the transaction given that there is a difference in tax treatment between a sale and a merger or consolidation. Furthermore, what was "consolidated" was the banking activities and transactions of Bancommerce and TRB, not their corporate existence. The BSP did not remotely suggest a merger of the two corporations. To end, since there had been no merger, Bancommerce cannot be considered as TRB’s successor-in-interest and against which the Court’s Decision of October 10, 2002 in G.R. 138510 may be enforced. Bancommerce did not hold the former TRBs assets in trust
Page 121 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 for it as to subject them to garnishment for the satisfaction of the latter’s liabilities to RPN, et al. Bancommerce bought and acquired those assets and thus, became their absolute owner. SECURITIES REGULATION CODE
SECURITIES AND EXCHANGE COMMISSION PRIMANILA PLANS, INC., HEREIN REPRESENTED BY EDUARDO S. MADRID vs. SECURITIES AND EXCHANGE COMMISSION G.R. No. 193791, August 6, 2014, J. Reyes The authority of the SEC and the manner by which it can issue cease and desist orders are provided in Section 64 of the SRC. The law is clear on the point that a cease and desist order may be issued by the SEC motu proprio, it being unnecessary that it results from a verified complaint from an aggrieved party. A prior hearing is also not required whenever the Commission finds it appropriate to issue a cease and desist order that aims to curtail fraud or grave or irreparable injury to investors. It is beyond dispute that Primasa plans were not registered with the SEC. Primanila was then barred from selling and offering for sale the said plan product. A continued sale by the company would operate as fraud to its investors, and would cause grave or irreparable injury or prejudice to the investing public, grounds which could justify the issuance of a cease and desist order under Section 64 of the SRC. Facts: Primanila’s website www.primanila.com was offering a pension plan product called Primasa Plan. The website contains detailed instructions as to how interested persons can apply for the said plan and where initial contributions and succeeding installment payments can be made by applicants and planholders. Primanila failed to renew its Dealer’s License for 2008. In view of the expiration of the said license, the SEC’s Non Traditional Securities and Instruments Department (NTD) enjoined Primanila from selling and/or offering for sale pre-need plans to the public.
Primanila has not been issued a secondary license to act as dealer or general agent for pre-need pension plans for 2008. Also, no registration statement has been filed by Primanila for the approval of a pension plan product called Primasa Plan. This is shown in the certification issued by NTD upon the request of SEC’s Compliance and Enforcement Department (CED).
It was discovered by CED Primanila’s Bank Account is still active when it deposited on March 6, 2008 the sum of Php 50.00. Among the many planholders of PRIMANILA are enlisted personnel of the PNP. The PNP remitted the total amount of Php 2,072,149.38 to PRIMANILA representing the aforementioned premium collections via salary deductions of the 410 enlisted personnel of PNP who are planholders. But Primanila failed to deposit the Page 122 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 required monthly contributions to the trust fund in violation of Pre-need Rule 19.1. This is shown in the Trust Fund Reports for the months of November and December 2007 prepared by ASIATRUST BANK, the trustee of Primanila.
Primanila under-declared the total amount of its collections as shown in its SEC Monthly Collection Reports which it submitted to NTD. Its reports show that it only collected Php 302,081.00 from January to September 2007. However, the remittance report of the PNP shows that Primanila received the amount of Php 1,688,965.22 from the PNP planholders alone for the said period. Therefore, it under-declared its report by Php 1,386,884.22.7 From these findings, the SEC declared that Primanila committed a flagrant violation of Republic Act No. 8799, otherwise known as The Securities Regulation Code (SRC), particularly Section 16 thereof. The SEC then issued the subject cease and desist order "in order to prevent further violations and in order to protect the interest of its plan holders and the public."
Feeling aggrieved, Primanila filed a Motion for Reconsideration/Lift Cease and Desist Order, arguing that it was denied due process as the order was released without any prior issuance by the SEC of a notice or formal charge that could have allowed the company to defend itself. The cease and desist order issued on April 9, 2008 was then made permanent. The CA affirmed in toto the issuances of the SEC. Issue:
Whether or not Primanila was accorded due process notwithstanding the SEC’s immediate issuance of the cease and desist order on April 9, 2008 Ruling: Yes, the authority of the SEC and the manner by which it can issue cease and desist orders are provided in Section 64 of the SRC.
The law is clear on the point that a cease and desist order may be issued by the SEC motu proprio, it being unnecessary that it results from a verified complaint from an aggrieved party. A prior hearing is also not required whenever the Commission finds it appropriate to issue a cease and desist order that aims to curtail fraud or grave or irreparable injury to investors. There is good reason for this provision, as any delay in the restraint of acts that yield such results can only generate further injury to the public that the SEC is obliged to protect.
To equally protect individuals and corporations from baseless and improvident issuances, the authority of the SEC under this rule is nonetheless with defined limits. A cease and desist order may only be issued by the Commission after proper investigation or Page 123 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 verification, and upon showing that the acts sought to be restrained could result in injury or fraud to the investing public. Without doubt, these requisites were duly satisfied by the SEC prior to its issuance of the subject cease and desist order.
Records indicate the prior conduct of a proper investigation on Primanila’s activities by the Commission’s CED. Investigators of the CED personally conducted an ocular inspection of Primanila’s declared office, only to confirm reports that it had closed even without the prior approval of the SEC. Members of CED also visited the company website of Primanila, and discovered the company’s offer for sale thereon of the pension plan product called Primasa Plan, with instructions on how interested applicants and planholders could pay their premium payments for the plan. One of the payment options was through bank deposit to Primanila’s given Metrobank account which, following an actual deposit made by the CED was confirmed to be active. As part of their investigation, the SEC also looked into records relevant to Primanila’s business. Records with the SEC’s Non-Traditional Securities and Instruments Department (NTD) disclosed Primanila’s failure to renew its dealer’s license for 2008, orto apply for a secondary license as dealer or general agent for pre-need pension plans for the same year. SEC records also confirmed Primanila’s failureto file a registration statement for Primasa Plan, to fully remit premium collections from planholders, and to declare truthfully its premium collections from January to September 2007. The SEC was not mandated to allow Primanila to participate in the investigation conducted by the Commission prior to the cease and desist order’s issuance. Given the circumstances, it was sufficient for the satisfaction of the demands of due process that the company was amply apprised of the results of the SEC investigation, and then given the reasonable opportunity to present its defense. Primanila was able to do this via its motion to reconsider and lift the cease and desist order. After the CED filed its comment on the motion, Primanila was further given the chance to explain its side to the SEC through the filing of its reply. "Trite to state, a formal trial or hearing isnot necessary to comply with the requirements of due process. Its essence is simply the opportunity to explain one’s position." The validity of the SEC’s cease and desist order is further sustained for having sufficient factual and legal bases.
The acts specifically restrained by the subject cease and desist order were Primanila’s sale, offer for sale and collection of payments specifically for its Primasa plans. Notwithstanding the findings of both the SEC and the CA on Primanila’s activities, the company still argued in its petition that it neither sold nor collected premiums for the Primasa product. Primanila argued that the offer for sale of Primasa through the Primanila website was the result of mere inadvertence, after the website developer whom it hired got hold of a copy of an old Primasa brochure and then included its contents in the company website even without the knowledge and prior approval of Primanila. Page 124 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 In the instant case, the substantial evidence is derived from the results of the SEC investigation on Primanila’s activities. Specifically on the product Primasa plans, the SEC ascertained that there were detailed instructions on Primanila’s website as to how interested persons could apply for a plan, together with the manner by which premium payments therefor could be effected. A money deposit by CED to Primanila’s Metrobank account indicated in the advertisement confirmed that the bank account was active. There could be no better conclusion from the foregoing circumstances that Primanila was engaged in the sale or, at the very least, an offer for sale to the public of the Primasa plans. The offer for Primasa was direct and its reach was even expansive, especially as it utilized its website as a medium and visits to it were, as could be expected, from prospective clients. It is beyond dispute that Primasa plans were not registered with the SEC. Primanila was then barred from selling and offering for sale the said plan product. A continued sale by the company would operate as fraud to its investors, and would cause grave or irreparable injury or prejudice to the investing public, grounds which could justify the issuance of a cease and desist order under Section 64 of the SRC. Furthermore, even prior to the issuance of the subject cease and desist order, Primanila was already enjoined by the SEC from selling and/or offering for sale pre-need products to the public. The SEC Order dated April 9, 2008 declared that Primanila failed to renew its dealer’s license for 2008, prompting the SEC’s NTD to issue a letter dated January3, 2008 addressed to Primanila’s Chairman and Chief Executive Officer Eduardo S. Madrid, enjoining the company from selling and/or offering for sale pre-need plans to the public. It also had not obtained a secondary license to act as dealer or general agent for pre-need pension plans for 2008.
In view of the foregoing, Primanila clearly violated Section 16 of the SRC and pertinent rules which barred the sale or offer for sale to the public of a pre-need product except in accordance with SEC rules and regulations. COSMOS BOTTLING CORPORATION vs. COMMISSION EN BANC of the SECURITIES AND EXCHANGE COMMISSION (SEC) and JUSTINA F. CALLANGAN, in her capacity as Director of the Corporation Finance Department of the SEC G.R. No. 199028, November 12, 2014, J. Perlas- Bernabe
As an administrative agency with both regulatory and adjudicatory functions, the SEC was given the authority to delegate some of its functions to, inter alia, its various operating departments, such as the SECCFD, the Enforcement and Investor Protection Department, and the Company Registration and Monitoring Department. In this case, the Court disagrees with the findings of both the SEC En Banc and the CA that the Revocation Order emanated from the SEC En Banc. Rather, such Order was merely issued by the SEC-CFD as one of the SEC’s operating departments. In other words, the Revocation Order is properly deemed as a decision issued by the SEC-CFD as one of the Operating Departments of the SEC, and accordingly, may be appealed to the SEC En Banc, as what Cosmos properly did in this case. Perforce, the SEC En Banc and the CA erred in deeming Cosmos’s appeal as a motion for reconsideration and ordering its dismissal on such ground. Page 125 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Facts: The instant case stemmed from Cosmos’s failure to submit its 2005 Annual Report to the SEC within the prescribed period. In connection therewith, it requested an extension of time within which to file the same. In response, the SEC-Corporation Finance Department (SEC-CFD), through respondent Director Callangan, sent Cosmos a letter denying the latter’s request and directing it to submit its 2005 Annual Report. The same letter also ordered Cosmos to show cause why the Cosmos’s Registration of Securities/Permit to Sell Securities to the Public (Subject Registration/Permit) should not be revoked for violating Section 17.1 (a) of Republic Act No. 8799, otherwise known as "The Securities Regulation Code" (SRC). Cosmos sent a reply-letter to the SEC-CFD, explaining that its failure to file its 2005 Annual Report was due to the non-completion by its external auditors of their audit procedures. For this reason, Cosmos implored the SEC-CFD to reconsider its previous denial of Cosmos’s request for additional time to file its 2005 Annual Report. Thereafter, hearings for the suspension of the Subject Registration/Permit commenced, with Cosmos advancing the same reasons for the non- submission of its 2005 Annual Report. The SECCFD ordered the suspension of the Subject Registration/Permit (suspension order) for a period of 60 days from receipt of the same, or until Cosmos files its 2005 Annual Report, whichever is earlier. The SEC-CFD also stated that Cosmos’s failure to submit its 2005 Annual Report within the 60-day period shall constrain the SEC to initiate proceedings for revocation of the Subject Registration/Permit.
On October 31, 2007, Cosmos finally submitted its 2005 and 2006 Annual Reports to the SEC. In connection therewith, Cosmos requested SEC-CFD that the latter lift the suspension order and abandon the revocation proceedings against the former. The SECCFD referred the matter to the SEC En Banc for its consideration. After the said meeting, the SEC En Banc issued Resolution No. 87, series of (s.) 2008 wherein they resolved to: (a) deny Cosmos’s request for the lifting of the suspension order; and (b) revoke the Subject Registration/Permit. On the basis thereof, the SEC-CFD issued a Revocation Order echoing the pronouncements indicated in the aforesaid resolution. On appeal, this resolution was later on affirmed by SEC En Banc and CA stating that the Revocation Order was a mere articulation of the SEC En Banc’s Resolution No. 87, s. 2008, and thus, should be considered an issuance of the SEC En Banc itself. The SEC En Banc deemed Cosmos’s appeal as a motion for reconsideration, a prohibited pleading under Section 3-6, Rule III of the 2006 SEC Rules of Procedure. Furthermore, CA held that Cosmos’s appeal, which was treated as a prohibited motion for reconsideration under the 2006 SEC Rules of Procedure, did not toll the reglementary period for filing an appeal before it. As such, the SEC En Banc’s Ruling, as well as the Revocation Order, had already lapsed into finality and could no longer be disturbed. Issue:
Page 126 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Whether or not the CA correctly treated Cosmos’s appeal before the SEC En Banc as a motion for reconsideration, and consequently, affirmed its dismissal for being a prohibited pleading under the 2006 SEC Rules of Procedure. Ruling:
No.
As an administrative agency with both regulatory and adjudicatory functions, the SEC was given the authority to delegate some of its functions to, inter alia, its various operating departments, such as the SECCFD, the Enforcement and Investor Protection Department, and the Company Registration and Monitoring Department, pursuant to Section 4.6 of the SRC. Naturally, the aforesaid provision also gives the SEC the power to review the acts performed by its operating departments in the exercise of the former’s delegated functions. This power of review is squarely addressed by Section 11-1, Rule XI of the 2006 SEC Rules of Procedure.
In this case, the Court disagrees with the findings of both the SEC En Banc and the CA that the Revocation Order emanated from the SEC En Banc. Rather, such Order was merely issued by the SEC-CFD as one of the SEC’s operating departments, as evidenced by the following: (a) it was printed and issued on the letterhead of the SEC-CFD, and not the SEC En Banc; (b) it was docketed as a case under the SEC-CFD as an operating department of the SEC, since it bore the serial number "SEC-CFD Order No. 027, [s.] 2008;" and (c) it was signed solely by Director Callangan as director of the SEC-CFD, and not by the commissioners of the SEC En Banc. Further, both the SEC En Banc and the CA erred in holding that the Revocation Order merely reflected Resolution No. 87, s. 2008, and thus, should already be considered as the ruling of the SEC En Banc in this case. As admitted by respondents, the SEC-CFD’s referral of the case to the SEC En Banc for its consideration in its March 13, 2008 meeting, which eventually resulted in the issuance of Resolution No. 87, s.2008, was merely an internal procedure inherent in the exercise by the SEC of its administrative and regulatory functions.
In sum, the Revocation Order is properly deemed as a decision issued by the SECCFD as one of the Operating Departments of the SEC, and accordingly, may be appealed to the SEC En Banc, as what Cosmos properly did in this case. Perforce, the SEC En Banc and the CA erred in deeming Cosmos’s appeal as a motion for reconsideration and ordering its dismissal on such ground. In view thereof, the Court deems it prudent to reinstate and remand the case to the SEC En Banc for its resolution on the merits. INTRA-CORPORATE DISPUTES
Raul Cosare vs. Bradcom Asia, Inc. and Dante Arevalo G.R. No. 201298; February 5, 2014 J. Reyes
Page 127 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 When the officer claiming to have been illegally dismissed is an ordinary employee of the corporation, jurisdiction over the same lies with the Labor Arbiter. It is only when the officer claiming to have been illegally dismissed is classified as a corporate officer that the issue is deemed an intra-corporate dispute which falls within the jurisdiction of the trial courts Furthermore, the mere fact that the stockholder of a corporation is the one who filed the case for illegal dismissal does not necessarily make the action an intra-corporate controversy. Not all conflicts between the stockholders and the corporation are classified as intra-corporate. There are other facts to consider in determining whether the dispute involves corporate matters as to consider them as intra-corporate controversies. Facts: Cosare was named as an incorporator of Broadcom, a company set up by Arevalo, with an assigned 100 shares of stock. Cosare was promoted to the position of Assistant Vice President and Head of the Technical Coordination. Sometime in 2003, Abiong was appointed as Broadcom’s Vice President for Sales, and thus, became Cosare’s immediate superior. On March 2009, Cosare sent a confidential memo to Arevalo informing the latter of certain anomalies which were allegedly being committed by Abiog against the company. Instead of acting on Cosare’s accusations, he was instead called for a meeting by Arevalo wherein he was asked to tender his resignation. Cosare refused to comply with the dirtive.
Later on, Cosare filed a labor complaint claiming that he was constructively dismissed from employment by the respondents and further argued that he was illegally suspended. The Labor Arbiter rendered decision dismissing the complaint. On appeal, the NLRC reversed the Decision of the Labor Arbiter. After the denial of their motion for reconsideration, the respondents filed a petition for certiorari with the CA and argued that the case involved an intra-corporate controversy which is within the jurisdiction of the RTC, instead of the LA. The CA granted the petition and ruled that the case involved an intra-corporate controversy. Cosare filed a motion for reconsideration, but was denied. Hence, the petition. Issue:
Whether or not the case instituted by Cosare was an intra-corporate dispute that falls within the jurisdiction of the RTC. Ruling:
Petition Granted.
When the dispute involves a charge of illegal dismissal, the action may fall under the jurisdiction of the LAs upon whose jurisdiction, as a rule, falls termination disputes and claims for damages arising from employer-employee relations as provided in Article 217 of
Page 128 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 the Labor Code. Consistent with this jurisprudence, the mere fact that Cosare was a stockholder and an officer of Broadcom at the time the subject controversy developed failed to necessarily make the case an intra-corporate dispute.
In Matling Industrial and Commercial Corporation v. Coros, the Court distinguished between a "regular employee" and a "corporate officer" for purposes of establishing the true nature of a dispute or complaint for illegal dismissal and determining which body has jurisdiction over it. Succinctly, it was explained that "[t]he determination of whether the dismissed officer was a regular employee or corporate officer unravels the conundrum" of whether a complaint for illegal dismissal is cognizable by the LA or by the RTC. "In case of the regular employee, the LA has jurisdiction; otherwise, the RTC exercises the legal authority to adjudicate.
There are two circumstances which must concur in order for an individual to be considered a corporate officer, as against an ordinary employee or officer, namely: (1) the creation of the position is under the corporation’s charter or by-laws; and (2) the election of the officer is by the directors or stockholders. It is only when the officer claiming to have been illegally dismissed is classified as such corporate officer that the issue is deemed an intra-corporate dispute which falls within the jurisdiction of the trial courts. Finally, the mere fact that Cosare was a stockholder of Broadcom at the time of the case’s filing did not necessarily make the action an intra- corporate controversy. "Not all conflicts between the stockholders and the corporation are classified as intra-corporate. There are other facts to consider in determining whether the dispute involves corporate matters as to consider them as intra-corporate controversies." Time and again, the Court has ruled that in determining the existence of an intra-corporate dispute, the status or relationship of the parties and the nature of the question that is the subject of the controversy must be taken into account. Considering that the pending dispute particularly relates to Cosare’s rights and obligations as a regular officer of Broadcom, instead of as a stockholder of the corporation, the controversy cannot be deemed intra-corporate. This is consistent with the "controversy test" explained by the Court in Reyes v. Hon. RTC, Br. 142, to wit: Under the nature of the controversy test, the incidents of that relationship must also be considered for the purpose of ascertaining whether the controversy itself is intra-corporate. The controversy must not only be rooted in the existence of an intra-corporate relationship, but must as well pertain to the enforcement of the parties’ correlative rights and obligations under the Corporation Code and the internal and intra-corporate regulatory rules of the corporation. If the relationship and its incidents are merely incidental to the controversy or if there will still be conflict even if the relationship does not exist, then no intra-corporate controversy exists.
All told, it is then evident that the CA erred in reversing the NLRC’s ruling that favored Cosare solely on the ground that the dispute was an intra-corporate controversy within the jurisdiction of the regular courts. _________________________________________________________________________________________________________
Page 129 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 ROBERTO L. ABAD, MANUEL D. ANDAL, BENITO V. ARANETA, PHILIP G. BRODETT, ENRIQUE L. LOCSIN and ROBERTO V. SAN JOSE vs. PHILIPPINE COMMUNICATIONS SATELLITE CORPORATION G.R. No. 200620, March 18, 2015, J. Villarama, Jr. . Upon the enactment of Republic Act No. 8799, the jurisdiction of the SEC over intracorporate controversies and the other cases enumerated in Section 5 of P.D. No. 902-A was transferred to the Regional Trial Court. The jurisdiction of the Sandiganbayan has been held not to extend even to a case involving a sequestered company notwithstanding that the majority of the members of the board of directors were PCGG nominees. Facts: Respondent PHILCOMSA, along with Philippine Overseas Telecommunications Corporation (POTC) were among those private companies sequestered by the PCGG after the EDSA People Power Revolution in 1986. PHILCOMSAT owns 81% of the outstanding capital stock of Philcomsat Holdings Corporation (PHC). The majority shareholders of PHILCOMSAT are also the seven families who have owned and controlled POTC. During the administration of President Gloria Macapagal-Arroyo, Enrique L. Locsin and Manuel D. Andal, along with Julio Jalandoni, were appointed nominee-directors representing the Republic of the Philippines. These PCGG nominees have aligned with the Nieto family (Nieto-PCGG) against the group of Africa and Ilusorio (Africa-Bildner), in the ensuing battle for control over the respective boards of POTC, PHILCOMSAT and PHC.
On August 31, 2004, the following were elected during the annual stockholders’ meeting of PHC conducted by the Nieto-PCGG group wherein Locsin was elected Chairman. Said election at PHC was the offshoot of separate elections conducted by the two factions in POTC and PHILCOMSAT, the Africa-Bildner group and the Nieto-PCGG group. In the July 28, 2004 stockholders’ meetings of POTC and PHILCOMSAT, Victor Africa was among those in the Africa-Bildner group who were elected as Directors. He was designated as the POTC proxy to the PHILCOMSAT stockholders’ meeting. While Locsin, Andal and Nieto, Jr. were also elected as Directors, they did not accept their election as POTC and PHILCOMSAT Directors. Instead, the Nieto-PCGG group held the stockholders’ meeting for PHILCOMSAT on August 9, 2004 at the Manila Golf Club. Immediately after the stockholders’ meeting, an organizational meeting was held, and Nieto, Jr. and Locsin were respectively elected as Chairman and President of PHILCOMSAT. At the same meeting, they issued a proxy in favor of Nieto, Jr. and/or Locsin authorizing them to represent PHILCOMSAT and vote the PHILCOMSAT shares in the stockholders’ meeting of PHC scheduled on August 31, 2004.
Thereafter, the two factions took various legal steps including the filing of suits and countersuits to gain legitimacy for their respective election as directors and officers of POTC and PHILCOMSAT. The Africa group had sought the invalidation of the proxy issued in favor of Nieto, Jr. and/or Locsin and consequent nullification of the elections held during the annual stockholders’ meeting of PHC on August 31, 2004. Africa in his capacity as Page 130 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 President and CEO of PHILCOMSAT, and as stockholder in his own right, wrote the board and management of PHC that PHILCOMSAT will exercise its right of inspection over the books, records, papers, etc. pertinent to the business transactions of PHC. In his letter, Nieto, Jr. said that Africa’s request will be referred to the PHC Board of Directors or Executive Committee in view of the several pending cases involving the Africa and NietoPCGG groups on one hand, and the PHC and its board of directors on the other. He further advised Africa to inform them in writing of his reasons and purposes for such inspection. In reply, Africa reiterated his request for inspection asserting that the PHILCOMSAT board of directors was elected on September 22, 2005. On the day of the scheduled inspection, PHILCOMSAT sent its representatives. However, Brodett disallowed the conduct of the inspection which prompted PHILCOMSAT through its counsel to make a written query whether the refusal of Brodett to permit the conduct of PHC’s inspection of corporate books and financial documents was with the knowledge and authority of PHC’s board of directors. But no reply or communication was received by Africa from the PHC. PHILCOMSAT filed in the RTC a Complaint for Inspection of Books against the incumbent PHC directors and/or officers, to enforce its right under Sections 74 and 75 of the Corporation Code of the Philippines. The RTC dismissed the complaint for lack of jurisdiction. PHILCOMSAT appealed to the CA thru a petition for review arguing that it is the RTC and not Sandiganbayan which has jurisdiction over the case involving a stockholder’s right to inspect corporate books and records. The CA granted the petition. Issue:
Whether it is the Sandiganbayan or RTC which has jurisdiction over a stockholders’ suit to enforce its right of inspection under Section 74 of the Corporation Code Ruling:
It is the RTC and not the Sandiganbayan which has jurisdiction over cases which do not involve a sequestration-related incident but an intra-corporate controversy.
Originally, Section 5 of P.D. No. 902-A vested the original and exclusive jurisdiction over cases involving the following in the SEC: 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. Upon the enactment of Republic Act No. 8799, effective on August 8, 2000, the jurisdiction of the SEC over intra-corporate controversies and the other cases enumerated in Section 5 of P.D. No. 902-A was transferred to the Regional Trial Court. The jurisdiction of the Sandiganbayan has been held not to extend even to a case involving a sequestered company notwithstanding that the majority of the members of the board of directors were PCGG nominees. The Court marked this distinction clearly in Holiday Inn (Phils.), Inc. v. Sandiganbayan:
Page 131 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 The original and exclusive jurisdiction given to the Sandiganbayan over PCGG cases pertains to (a) cases filed by the PCGG, pursuant to the exercise of its powers under Executive Order Nos. 1, 2 and 14, as amended by the Office of the President, and Article XVIII, Section 26 of the Constitution, i.e., where the principal cause of action is the recovery of ill-gotten wealth, as well as all incidents arising from, incidental to, or related to such cases and (b) cases filed by those who wish to question or challenge the commission’s acts or orders in such cases. The complaint concerns PHILCOMSAT’s demand to exercise its right of inspection as stockholder of PHC but which petitioners refused on the ground of the ongoing power struggle within POTC and PHILCOMSAT that supposedly prevents PHC from recognizing PHILCOMSAT’s representative (Africa) as possessing such right or authority from the legitimate directors and officers. Clearly, the controversy is intra-corporate in nature as they arose out of intra-corporate relations between and among stockholders, and between stockholders and the corporation. _________________________________________________________________________________________________________ SECURITIES AND EXCHANGE COMMISSION v. SUBIC BAY GOLF AND COUNTRY CLUB, INC. AND UNIVERSAL INTERNATIONAL GROUP DEVELOPMENT CORPORATION G.R. No. 179047, March 11, 2015, LEONEN, J.
Intra-corporate controversies, previously under the SEC's jurisdiction, are now under the jurisdiction of RTCs designated as commercial courts. However, this does not oust the SEC of its jurisdiction to determine if administrative rules and regulations were violated. Facts: Subic Bay Golf Course operated by Subic Bay Metropolitan Authority (SBMA) and Universal International Group of Taiwan (UIG) entered into a Lease and Development Agreement. SBMA agreed to lease the golf course to UIG for 50 years while UIG agreed to develop, manage and maintain the golf course and other related facilities within the complex. Later, Universal International Group Development Corporation (UIGDC) which succeeded to the interests of UIG executed a Deed of Assignment in favor of Subic Bay Golf and Country Club, Inc. (SBGCCI). SBGCCI and UIGDC entered into a Development Agreement. After application, SBGCCI was issued by SEC a Certificate of Permit to Offer Securities for Sale to the Public of its propriety shares.
Regina Filart and Margarita Villareal informed the SEC that they had been asking UIGDC for the refund of their payment for their SBGCCI shares claiming that there was failure to deliver the promised amenities. SEC's Corporation Finance Department gave due course to Villareal and Filart's letter-complaint. Due to UIGDC’s failure to comply with undertakings in the Registration Statement and Prospectus, tantamount to misrepresentation, and in violation of the provisions of the Securities Regulation Code, and its implementing rules and regulation, the Certificate of Registration and Permit to
Page 132 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Sell Securities to the Public issued to respondent Subic Bay Golf and Country Club, Inc., were suspended.
SBGCCI and UIGDC filed a Petition for Review arguing that the letter-complaint filed by Villareal and Filart involved an intra-corporate dispute that was under the jurisdiction of the RTC and not the SEC. They also argued that the Securities Regulation Code does not grant the SEC the power to order the refund of payment for shares of stock. The CA found that the case involved an intra-corporate controversy and that SEC acted in excess of its jurisdiction when it ordered UIGDC and SBGCCI to refund Villareal and Filart the amount they paid for SBGCCI shares of stock. Issue:
Whether the SEC has jurisdiction over the case Ruling:
No. Actions pertaining to intra-corporate disputes should be filed directly before designated Regional Trial Courts. Intra-corporate disputes brought before other courts or tribunals are dismissible for lack of jurisdiction. The relationship test requires that the dispute be between a corporation/partnership/association and the public; a corporation/partnership/association and the state regarding the entity's franchise, permit, or license to operate; a corporation/partnership/association and its stockholders, partners, members, or officers; and among stockholders, partners, or associates of the entity.
The nature of the controversy test requires that the action involves the enforcement of corporate rights and obligations. This case is an intra-corporate dispute, over which the RTC has jurisdiction. It is a dispute between the corporation, SBGCCI, and its shareholders, Villareal and Filart. Villareal and Filart's right to a refund of the value of their shares was based on SBGCCI and UIGDC's alleged failure to abide by their representations in their prospectus. Specifically, Villareal and Filart alleged in their letter-complaint that the world-class golf course that was promised to them when they purchased shares did not materialize. This is an intra-corporate matter under the RTC's jurisdiction. It involves the determination of a shareholder's rights under the Corporation Code or other intracorporate rules when the corporation or association fails to fulfill its obligations. However, even though the Complaint filed before SEC contains allegations that are intra- corporate in nature, it does not necessarily oust it of its regulatory and administrative jurisdiction to determine and act if there were administrative violations committed. Thus, when Villareal and Filart alleged in their letter-complaint that SBGCCI and UIGDC committed misrepresentations in the sale of their shares, nothing prevented the SEC from taking cognizance of it to determine if SBGCCI and UIGDC committed administrative violations and were liable under the Securities Regulation Code.
Page 133 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 However, SEC's regulatory power does not include the authority to order the refund of the purchase price of Villareal's and Filart's shares in the golf club. The issue of refund is intra-corporate or civil in nature. Similar to issues such as the existence or inexistence of appraisal rights, pre- emptive rights, and the right to inspect books and corporate records, the issue of refund is an intra- corporate dispute that requires the court to determine and adjudicate the parties' rights based on law or contract. Injuries, rights, and obligations involved in intra-corporate disputes are specific to the parties involved. They do not affect the SEC or the public directly. ROBERTO L. ABAD, MANUEL D. ANDAL, BENITO V. ARANETA, PHILIP G. BRODETT, ENRIQUE L. LOCSIN AND ROBERTO V. SAN JOSE v. PHILIPPINE COMMUNICATIONS SATELLITE CORPORATION, REPRESENTED BY VICTOR AFRICA G.R. No. 200620, March 18, 2015, VILLARAMA, JR., J.
The jurisdiction of the Sandiganbayan has been held not to extend even to a case involving a sequestered company notwithstanding that the majority of the members of the board of directors were PCGG nominees. Facts: This case is a remnant of the multiple suits generated by the two factions (Nieto-PCGG group and Africa-Bildner group) battling for control of two sequestered corporations. Philcomsat and POTC were sequestered by PCGG. Philcomsat owns 81% of the outstanding capital stock of Philcomsat Holdings (PHC). The majority shareholders of Philcomsat are also the seven families who have owned and controlled POTC. Africa, in his capacity as President of Philcomsat, and as stockholder in his own right, wrote the board and management of PHC that Philcomsat will exercise its right of inspection over the books of PHC. PHC refused prompting Africa to file a case in the RTC. The Nieto-PCGG group claim that RTC has no jurisdiction since the main controversy is rooted upon the issue of who between the Africa and Nieto-PCGG groups is the legitimate board of directors. It was further pointed out that POTC and PHILCOMSAT were both under sequestration by the PCGG, and hence all issues and controversies arising therefrom or related or incidental thereto fall under the exclusive and original jurisdiction of the Sandiganbayan. Issue: Whether the RTC has jurisdiction over a stockholders’ suit
Ruling:
Page 134 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Yes. It is the RTC and not the Sandiganbayan which has jurisdiction over cases which do not involve a sequestration-related incident but an intra-corporate controversy. Upon the enactment of Republic Act No. 8799 (The Securities Regulation Code), the jurisdiction of the SEC over intra- corporate controversies and the other cases enumerated in Section 5 of P.D. No. 902-A was transferred to the RTC. Issues regarding the propriety of the election of a party as a Director and his authority to act in that capacity should be determined only by the RTC pursuant to the pertinent law on jurisdiction because they do not concern the recovery of ill-gotten wealth.
The complaint concerns PHILCOMSAT’s demand to exercise its right of inspection as stockholder of PHC which petitioners refused on the ground of the ongoing power struggle within POTC and PHILCOMSAT that supposedly prevents PHC from recognizing PHILCOMSAT’s representative (Africa) as possessing such right or authority from the legitimate directors and officers. The controversy is intracorporate in nature as they arose out of intra-corporate relations between and among stockholders, and between stockholders and the corporation. PROHIBITIONS ON FRAUD, MANIPULATION AND INSIDER TRADING Securities and Exchange Commission vs. Oudine Santos G.R. No. 195542; March 19, 2014 J. Perez The violation of Section 28 of the SRC has the following elements: (a) engaging in the business of buying or selling securities in the Philippines as a broker or dealer; or (b) acting as a salesman; or(c) acting as an associated person of any broker or dealer, unless registered as such with the SEC. Thus, a person is liable for violating Section 28 of the SRC where, acting as a broker, dealer or salesman, is in the employ of a corporation which sold or offered for sale unregistered securities in the Philippines. Facts: To do business in the Philippines, PIPC-BVI, a foreign corporation registered in the British Virgin Islands, was incorporated as Philippine International Planning Center Corporation (PIPC Corporation).
When the head of PIPC Corporation had gone missing with the monies and investments of significant number of investors, the SEC was flooded with complaints against PICP Corporation, its directors, officers, employees, agents and brokers for the alleged violation of certain provisions of the Securities Regulation Code. Soon thereafter, the SEC filed a complaint-affidavit for the violation of Sections 8, 26 and 28 of the SRC before the DOC. Among the respondents were the directors, officers and employees of PIPC, including Oudine Santos. Page 135 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Private complainants Luisa Lorenzo and Ricky Sy charged Santos in her capacity as investment consultant of PIPC who actively engaged in the solicitation and recruitment of investors. Private complainants maintain that Santos acted as the corporation’s agent and made representations regarding tis investment products and that of the supposed global corporation PIPC-BVI. Facilitating Lorenzo’s and Sy’s investment with the corporation, Santos represented to the tow that investing with PIPC Corporation, an affiliate of PIPCBVI, would be safe and full-proof. Later on, the DOJ issued a resolution indicting, among others, Santos for the violation of Section 28 of the SRC. Specifically referring to Santos as Investment Consultant of the corporation, the DOJ found probable cause to indict her for violation of Section 28 of the SRC for engaging in the business of selling or offering for sale securities on behalf of the PIPC Corporation without her being registered as a broker, dealer, salesman or an associated person.
Upon separate motions for reconsideration, the DOJ panel issued a Resolution modifying its previous ruling and excluding one of the respondents therein. Santos filed a petition for review before the Office of the Secretary of the DOJ assailing the Resolution and claiming that she was a mere clerical employee/information provider who never solicited nor recruited investors, particularly Lorenzo and Sy. Thereafter, the Office of the Secretary of the DOJ issued a Resolution excluding Santos from prosecution for violation of Section 28 of the SRC. After the denial of the motion for reconsideration, the SEC filed a petition for certiorari before the CA seeking to annul the Resolution of the DOJ. The CC dismissed SEC’s petition. Hence, the appeal by certiorari raising the sole error of Santos’ exclusion from the Information for violation of Section 28 of the SRC. Issue:
Whether or not the respondent is an Investment Consultant and the transaction between her and the petitioners constitutes as an investment contract. Ruling:
Petition Granted.
We sustain the DOJ panel’s findings which were not overruled by the Secretary of the DOJ and the appellate court, that PIPC Corporation and/or PIPC-BVI was: (1) an insurer of securities without the necessary registration or license form the SEC, and (2) engage in the business of buying or selling securities. In connection therewith, we look to Section 3 of the Securities Regulation Code for pertinent definition of terms: Sec. 3. Definition of Terms.-xxx xxx
Page 136 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 3.3. “Broker” is a person engaged in the business of buying and selling securities for the account of others. 3.4. “Dealer” means any person who buys and sells securities for his/her own account in the ordinary course of business. 3.5. “Associated person of a broker or dealer” is an employee thereof whom, directly exercises control of supervisory authority, but does not include a salesman, or an agent or a person whose functions are solely clerical or ministerial. xxx 3.13. “Salesman” is a natural person, employed as such or as an agent, by a dealer, issuer or broker to buy and sell securities.
To determine whether the DOJ Secretary’s Resolution was tainted with grave abuse of discretion, we pass upon the elements for violation of Section 28 of the SRC: (a) engaging in the business of buying or selling securities in the Philippines as a broker or dealer; or (b) acting as a salesman; or(c) acting as an associated person of any broker or dealer, unless registered as such with the SEC. Trying it all in, there is no quarrel that Santos was in the employ of PIPC Corporation and/or PIPC-BVI, a corporation which sold or offered for sale unregistered securities in the Philippines. To escape probable culpability, Santos claims that she was a mere clerical employee of PIPC Corporation and/or PIPC-BVI and was never an agent or salesman who actually solicited the sale of or sold unregistered securities issued by PIPC Corporation and/or PIPC-BVI. Solicitation is that act of seeking or asking for business or information; it is not a commitment to an agreement.
Santos, by the very nature of her function as when she now unaffectedly calls an information provider, brought about by the sale of securities made by PIPC Corporation and/or PIPC-BVI to certain individuals, specifically private complainants Sy and Lorenzo by providing information on the investment products of PIPC Corporation and/or PIPC-BVI with the end in view of PIPC Corporation closing a sale.
While Santos was not a signatory to the contracts Sy’s or Lorenzo’s investments, Santos procured the sales of these unregistered securities to the two complainants by providing information on the investment products being offered for sale byPIPC Corporation and/or PIPC-BVI and convincing them to invest therein. No matter Santos’ strenuous objections, it is apparent that she connected the probable investors, Sy and Lorenzo, to PIPC Corporation and/or PIPC-BVI, acting as an ostensible agent of the latter on the viability of PIPC Corporation as an investment company. At each point of Sy’s and Lorenzo’s investment, Santos’ participation thereon, even if not shown strictly on paper, was prima facie established.
Page 137 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 In all of the documents presented by Santos, she never alleged or pointed out that she did not receive extra consideration for her simply providing information to Sy and Lorenzo about PIPC Corporation and/or PIPC-BVI. Santos only claims that the monies invested by Sy and Lorenzo did not pass though her hands. In short, Santos did not present in evidence her salaries as supposed “mere clerical employee or information provider” of PIPC-BVI. Such presentation would have foreclosed all questions on her status within PIPC Corporation and/or PIPC-BVI at the lowest rung of the ladder who only provided information and who did not use her discretion in any capacity. The transaction initiated by Santos with Sy and Lorenzo, respectively, is an investment contract or participation in a profit sharing agreement that falls within the definition of law. When the investor is relatively uniformed and turns over his money to others, essentially depending upon their representations and their honesty and skill in managing it, the transaction generally is considered to be an investment contract. The touchstone is the presence of an investment in a common venture premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others. At the bottom, the exculpation of Santos cannot be preliminarily established simply by asserting that she did not sign the investment contracts, as the facts alleged in this case constitute fraud perpetrated on the public. Specially so because the absence of Santo’s signature in the contract is, likewise, indicative of a scheme to circumvent and evade liability should the pyramid fall apart. MARGARITA M. BENEDICTO-MUÑOZ v. MARIA ANGELES CACHO-OLIVARES, EDGARDO P. OLIVARES, PETER C. OLIVARES, CARMELA Q. OLIVARES, MICHAEL C. OLIVARES, ALEXANDRA B. OLIVARES, AND MELISSA C. OLIVARES G.R. No. 179121, November 09, 2015, JARDELEZA, J.
The SRC punishes the persons primarily liable for fraudulent transactions under Section 58 and their aiders or abettors under Section 51.5, by making their liability for damages joint and solidary. Thus, one cannot condone the liability of the person primarily liable and proceed only against his aiders or abettors because the liability of the latter is tied up with the former. Liability attaches to the aider or abettor precisely because of the existence of the liability of the person primarily liable. Facts: Olivares filed a complaint for stock market fraud against Cuaycong and other defendant stock market brokerage firms such as Abacus Securities Corporation, and Sapphire Securities, Inc., among others. Later on, the Cuaycong brothers and Olivares manifested to the RTC that they had amicably settled their differences and entered into a Compromise Agreement. Olivares also agreed to drop the Cuaycong brothers as defendants in the Case. Thereafter the RTC dismissed the complaint, holding that the Cuaycong brothers were indispensable parties sued with the other defendants, under a common cause of action, and that by reason of the dismissal of the complaint against the Cuaycongs, it had lost competency to act
Page 138 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 on the instant complaint for lack of sufficient legal basis, the benefits of dismissal having been extended to the other defendants. Issue:
Whether the dismissal of the case as against the Cuaycong brothers benefits the other defendants in the stock market fraud case Ruling:
Yes. The dismissal of the case as against the Cuaycong brothers inures to the benefit of other defendants because they were sued under a single and/or common cause of action with the Cuaycong brothers; and the Cuaycong brothers are indispensable parties, without whom no final determination can be had on the case. The allegations plead the substantive unity in the alleged fraud and deceit that the Cuaycong brothers and the brokerage firms committed against Olivares. The indispensable parties are not only the Cuaycong brothers but also the petitioners. As indispensable parties, since they had played various interconnected roles that led to the singular injury and loss of the Olivares, their liabilities cannot be separately determined. The dismissal of the action against the Cuaycong brothers also warrants the dismissal of the suit against the other defendants. PROXY SOLICITATION
SECURITIES AND EXCHANGE COMMISSION, vs. THE HONORABLE COURT OF APPEALS, OMICO CORPORATION, EMILIO S. TENG AND TOMMY KIN HING TIA ASTRA SECURITIES CORPORATION, vs. OMICO CORPORATION, EMILIO S. TENG AND TOMMY KIN HING TIA, G.R. No. 187702, October 22, 2014, CJ. SERENO, The power of the SEC to investigate violations of its rules on proxy solicitation is unquestioned when proxies are obtained to vote on matters unrelated to the cases enumerated under Section 5 of Presidential Decree No. 902-A. However, when proxies are solicited in relation to the election of corporate directors, the resulting controversy, even if it ostensibly raised the violation of the SEC rules on proxy solicitation, should be properly seen as an election controversy within the original and exclusive jurisdiction of the trial courts by virtue of Section 5.2 of the SRC in relation to Section 5 (c) of Presidential Decree No. 902-A Indeed, the validation of proxies in this case relates to the determination of the existence of a quorum. Nonetheless, it is a quorum for the election of the directors, and, as such, which requires the presence – in person or by proxy – of the owners of the majority of the outstanding capital stock of Omico. Also, the fact that there was no actual voting did not make the election any less so, especially since Astra had never denied that an election of directors took place.
Page 139 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Facts: Omico Corporation (Omico) is a company whose shares of stock are listed and traded in the Philippine Stock Exchange, Inc. Astra Securities Corporation (Astra) is one of the stockholders of Omico owning about 18% of the latter’s outstanding capital stock.
Omico scheduled its annual stockholders’ meeting. It set the deadline for submission of proxies on and the validation of proxies. Astra objected to the validation of the proxies issued in favor of Tommy Kin Hing Tia (Tia) as well as the inclusion of the proxies issued in favor of Tia and/or Martin Buncio.
Astra maintained that the proxy issuers, who were brokers, did not obtain the required express written authorization of their clients when they issued the proxies in favor of Tia. In so doing, the issuers were allegedly in violation of SRC or Republic Act No. 8799 Rules. Despite the objections of Astra, Omico’s Board of Inspectors declared that the proxies issued in favor of Tia were valid.
Astra filed a Complaint before the Securities and Exchange Commission (SEC) praying for the invalidation of the proxies issued in favor of Tia. Astra also prayed for the issuance of a cease and desist order (CDO) enjoining the holding of Omico’s annual stockholders’ meeting until the SEC had resolved the issues pertaining to the validation of proxies which SEC granted. The stockholders’ meeting proceeded as scheduled prompting Astra to institute before the SEC a Complaint for indirect contempt against Omico for disobedience of the CDO. On the other hand, Omico filed before the CA a Petition for Certiorari and Prohibition imputing grave abuse of discretion on the part of the SEC for issuing the CDO. CA declared the CDO null and void since the controversy was an intra-corporate dispute. The SRC expressly transferred the jurisdiction over actions involving intracorporate controversies from the SEC to the regional trial courts. Issue:
Whether or not the SEC has jurisdiction over controversies arising from the validation of proxies for the election of the directors of a corporation. Ruling:
No, SEC has no jurisdiction over controversies arising from the validation of proxies for the election of the directors of a corporation
In GSIS v. CA, it was necessary for the Court to determine whether the action to invalidate the proxies was intimately tied to an election controversy. Hence, the Court pronounced: Under Section 5(c) of Presidential Decree No. 902-A, in relation to the SRC, the jurisdiction of the regular trial courts with respect to election related controversies is specifically confined to "controversies in the election or appointment of directors, trustees, Page 140 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 officers or managers of corporations, partnerships, or associations." Evidently, the jurisdiction of the regular courts over so-called election contests or controversies under Section 5 (c) does not extend to every potential subject that may be voted on by shareholders, but only to the election of directors or trustees, in which stockholders are authorized to participate under Section 24 of the Corporation Code.
This qualification allows for a useful distinction that gives due effect to the statutory right of the SEC to regulate proxy solicitation, and the statutory jurisdiction of regular courts over election contests or controversies. The power of the SEC to investigate violations of its rules on proxy solicitation is unquestioned when proxies are obtained to vote on matters unrelated to the cases enumerated under Section 5 of Presidential Decree No. 902-A. However, when proxies are solicited in relation to the election of corporate directors, the resulting controversy, even if it ostensibly raised the violation of the SEC rules on proxy solicitation, should be properly seen as an election controversy within the original and exclusive jurisdiction of the trial courts by virtue of Section 5.2 of the SRC in relation to Section 5 (c) of Presidential Decree No. 902-A. The Court explained that the power of the SEC to regulate proxies remains in place in instances when stockholders vote on matters other than the election of directors. The test is whether the controversy relates to such election. All matters affecting the manner and conduct of the election of directors are properly cognizable by the regular courts. Otherwise, these matters may be brought before the SEC for resolution based on the regulatory powers it exercises over corporations, partnerships and associations.
Indeed, the validation of proxies in this case relates to the determination of the existence of a quorum. Nonetheless, it is a quorum for the election of the directors, and, as such, which requires the presence – in person or by proxy – of the owners of the majority of the outstanding capital stock of Omico. Also, the fact that there was no actual voting did not make the election any less so, especially since Astra had never denied that an election of directors took place.
Court finds no merit either in the proposal of Astra regarding the "two (2) viable, non-exclusive and successive legal remedies to question the validity of proxies." It suggests that the power to pass upon the validity of proxies to determine the existence of a quorum prior to the conduct of the stockholders’ meeting should lie with the SEC; but, after the stockholders’ meeting, questions regarding the use of invalid proxies in the election of directors should be cognizable by the regular courts, since there was already an election to speak of. There is no point in making distinctions between who has jurisdiction before and who has jurisdiction after the election of directors, as all controversies related thereto whether before, during or after - shall be passed upon by regular courts as provided by law. The Court closes with an observation.
BANKING LAWS
Page 141 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Development Bank of the Philippines v. Guariña Agricultural and Realty Dev’t Corp. G.R. No. 160758; January 15, 2014 J. Bersamin The lender who refuses to release the full amount of the loan cannot foreclose the mortgage constituted thereon. Foreclosure prior to the mortgagor’s default is premature and unenforceable and the mortgagee who has been given possession over the mortgaged property by virtue of a writ of possession may be ordered to restore the possession of the same to the mortgagor and to pay reasonable rent for its use during the intervening period Facts: In order to finance the development of a resort complex, Guariña Corporation applied for a loan from DBP in the amount of P3,387,000. Guariña Corporation executed a real estate mortgage over several real properties in favor of DBP as security for the repayment of the loan and a chattel mortgage over the personal properties existing at the resort complex and those yet to be acquired out of the proceeds of the loan. The loan was released in several instalments and the same was used by Guariña Corporation to defray the cost of additional improvements in the resort complex. In all, the amount released totalled P3,003,617.49. Subsequently, Guariña Corporation demanded the release of the balance of the loan. DPB refused and directly paid some suppliers of Guariña Corporation instead. Later on, upon inspection, DBP discovered that Guariña Corporation had not completed the construction works. DBP thus demanded to expedite the completion of the project and warned that it would initiate foreclosure proceedings shouldGuariña Corporation not do so.
With the non-action and objection of Guariña Corporation, DBP initiated extrajudicial foreclosure proceedings. This resulted in Guariña Corporation suing DPB for specific performance of the latter’s obligations under the loan agreement and to stop the foreclosure of the mortgage. Due to the fact that DBP had already sold the mortgaged properties, Guariña Corporation amended the complaint to seek the nullification of the foreclosure proceedings and cancellation of the certificate of sale. Thereafter, a writ of possession was issued in favor of DBP.
RTC rendered judgment declaring the extra-judicial sales of the mortgage properties null and void and ordered DBP to return to Guariña Corporation the actuall possession and enjoyment of all the properties foreclosed and possessed by it. On appeal, the CA affirmed the decision of the trial court. DBP filed a motion for reconsideration, but the CA denied the same. Hence, the appeal. Issue:
Whether or not the foreclosure was valid.
Page 142 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Ruling: By its failure to release the proceeds of the loan in their entirety, DBP had no right yet to exact on Guariña Corporation the latter's compliance with its own obligation under the loan. Indeed, if a party in a reciprocal contract like a loan does not perform its obligation, the other party cannot be obliged to perform what is expected of it while the other's obligation remains unfulfilled. In other words, the latter party does not incur delay. Still, DBP called upon Guariña Corporation to make good on the construction works pursuant to the acceleration clause written in the mortgage contract or else it would foreclose the mortgages.
DBP's actuations were legally unfounded. It is true that loans are often secured by a mortgage constituted on real or personal property to protect the creditor's interest in case of the default of the debtor. By its nature, however, a mortgage remains an accessory contract dependent on the principal obligation, such that enforcement of the mortgage contract will depend on whether or not there has been a violation of the principal obligation. While a creditor and a debtor could regulate the order in which they should comply with their reciprocal obligations, it is presupposed that in a loan the lender should perform its obligation - the release of the full loan amount - before it could demand that the borrower repay the loaned amount. In other words, Guariña Corporation would not incur in delay before DBP fully performed its reciprocal obligation.
Considering that it had yet to release the entire proceeds of the loan, DBP could not yet make an effective demand for payment upon Guariña Corporation to perform its obligation under the loan. According to Development Bank of the Philippines v. Licuanan, it would only be when a demand to pay had been made and was subsequently refused that a borrower could be considered in default, and the lender could obtain the right to collect the debt or to foreclose the mortgage. Hence, Guariña Corporation would not be in default without the demand. Assuming that DBP could already exact from the latter its compliance with the loan agreement, the letter dated February 27, 1978 that DBP sent would still not be regarded as a demand to render Guariña Corporation in default under the principal contract because DBP was only thereby requesting the latter "to put up the deficiency in the value of improvements." Under the circumstances, DBP's foreclosure of the mortgage and the sale of the mortgaged properties at its instance were premature, and, therefore, void and ineffectual. The Court thereby affirms the order for the restoration of possession to Guariña Corporation and the payment of reasonable rentals for the use of the resort. _________________________________________________________________________________________________________ Land Bank of the Philippines vs. Emmanuel Oñate G.R. No. 192371; January 15, 2014 J. Del Castillo
Page 143 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 A bank who mismanages the trust accounts of its client cannot benefit from the inaccuracies of the reports resulting therefrom. It cannot impute the consequence of its negligence to the client. The bank must record every single transaction accurately, down to the last centavo and as promptly as possible. This has to be done if the account is to reflect at any given time the amount of money the depositor can dispose of as he sees fit, confident that the bank will deliver it as and to whomever he directs. Facts: Oñate opened and maintained seven trust accounts with Land Bank. Each trust account was covered by an Investment Management Account (IMA) with Full Discretion and has a corresponding passbook where deposits and withdrawals were recorded.
In a letter dated October 1981, Land Bank demanded from Oñate the return of P4 million it claimed to have been inadvertently deposited to Trust Account No. 01-125 as additional funds. Oñate refused. To settle the matter, a meeting was held, but the parties failed to reach an agreement. Since then, the issue of “miscrediting” remained unsettled. Subsequently, Land Bank unilaterally applied the outstanding balance in all of Oñate’s trust accounts against his resulting indebtedness reason of the miscrediting of funds. Although it exhausted the funds in all of Oñate’s trust accounts, Land Bank was able to debit the amount of P1,528,583.48 only. To recover the remaining balance of Oñate’s indebtedness, Land Bank filed a Complaint for Sum of Money. In his Answer, Oñate asserted that the set-off was without legal and factual bases. He maintained that all the funds in his accounts came from legitimate sources and that he was totally unaware of and had nothing to do with the alleged miscrediting.
RTC issued and Order creating a Board of Commissioners for the purpose of examining the records of Oñate’s seven trust accounts, as well as to determine the total amount of deposits, withdrawals, funds invested, earnings, and expenses incurred. Subsequently, the Board submitted a consolidated report which revealed that there were undocumented and over withdrawals and drawings from Oñate’s trust accounts. In his comment, Oñate asserted that the undocumented withdrawals mentioned in the consolidated report should not be considered as cash outflows. Rather, they should be treated as unauthorized transactions and the amounts subject thereof must be credited back to his accounts. Land Bank for its part did not object to the Board’s findings.
Eventually, RTC rendered a decision dismissing Land Bank’s Complaint. On appeal, the CA affirmed RTC’s ruling. Land Bank filed a Motion for Reconsideration, but was denied. Hence, the petition for review.Land Bank argues that Oñate is not entitled to the undocumented withdrawals and insisted that it made proper accounting and apprised Oñate of the status of his investments in accordance with the terms of the IMAs. According to the bank, it made a full disclosure in its demand letter that the total outstanding balance of all the trust accounts amounted to P1,471,416.52, but that the same was setoff to recoup Page 144 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 the "miscredited" funds. It faults Oñate for not interposing any objection as his silence constitutes as his approval after 30 days from receipt thereof. Land Bank asseverates that Oñate could have also inspected and audited the records of his accounts at any reasonable time. But he never did.For his part, Oñate refuted Land Bank’s claim to negative balances and over withdrawals and posited that the bank cannot benefit from its own negligence in mismanaging the trust accounts. Issue:
Whether or not the bank can be held liable for the inaccuracies of the reports. Ruling:
In Simex International (Manila), Inc. v. Court of Appeals, we elucidated on the nature of banking business and the responsibility of banks: The banking system is an indispensable institution in the modern world and plays a vital role in the economic life of every civilized nation. Whether as mere passive entities for the safekeeping and saving of money or as active instruments of business and commerce, banks have become an ubiquitous presence among the people, who have come to regard them with respect and even gratitude and, most of all, confidence. Thus, even the humble wageearner has not hesitated to entrust his life’s savings to the bank of his choice, knowing that they will be safe in its custody and will even earn some interest for him. The ordinary person, with equal faith, usually maintains a modest checking account for security and convenience in the settling of his monthly bills and the payment of ordinary expenses. As for business entities like the petitioner, the bank is a trusted and active associate that can help in the running of their affairs, not only in the form of loans when needed but more often in the conduct of their day-to-day transactions like the issuance or encashment of checks. In every case, the depositor expects the bank to treat his account with the utmost fidelity, whether such account consists only of a few hundred pesos or of millions. The bank must record every single transaction accurately, down to the last centavo and as promptly as possible. This has to be done if the account is to reflect at any given time the amount of money the depositor can dispose of as he sees fit, confident that the bank will deliver it as and to whomever he directs. The point is that as a business affected with public interest and because of the nature of its functions, the bank is under obligations to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship.
Page 145 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 As to the conceded inaccuracies in the reports, we cannot allow Land Bank to benefit therefrom. Time and again, we have cautioned banks to spare no effort in ensuring the integrity of the records of its clients. And in Philippine National Bank v. Court of Appeals, we held that "as between parties where negligence is imputable to one and not to the other, the former must perforce bear the consequences of its neglect." In this case, the Board could have submitted a more accurate report had Land Bank faithfully complied with its duty of maintaining a complete and accurate record of Oñate’s accounts. But the Board could not find and present the corresponding slips for the withdrawals reflected in the passbooks. In addition, Land Bank was less than cooperative when the Board was examining the records of Oñate’s accounts. It did not give the Board enough leeway to go over the records systematically or in orderly fashion. Hence, we cannot allow Land Bank to benefit from possible inaccuracies in the report. Oliver v. Philippine Savings Bank and Castro G.R. No. 214567, April 4, 2016, Mendoza, J:
Facts: Sometime in 1997, Olive made an initial deposit of PhP12 million into her PSBank account. During that time, Castro convinced her to loan out her deposit as interim or bridge financing for the approved loans of bank borrowers who were waiting for the actual release of their loan proceeds.
Under this arrangement, Castro would first show the approved loan documents to Oliver. Thereafter, Castro would withdraw the amount needed from Oliver’s account. Upon the actual release of the loan by PSBank to the borrower, Castro would then charge the rate of 4% a month from the loan proceeds as interim or bridge financing interest. Together with the interest income, the principal amount previously withdrawn from Oliver’s bank account would be deposited back to her account. Meanwhile, Castro would earn a commission of 10% from the interest.
Their arrangement went on smoothly for months. Due to the frequency of bank transactions, Oliver even entrusted her passbook to Castro. Because Oliver earned substantial profit, she was further convinced by Castro to avail of an additional credit line in the amount of P10 million. The said credit line was secured by a real estate mortgage on her house and lot in Ayala Alabang. Oliver instructed Castro to pay P2 million monthly to PSBank starting on September 3, 1998 so that her credit line for P10 million would be fully paid by January 3, 1999.
Beginning September 1998, Castro stopped rendering an accounting for Oliver. The latter then demanded the return of her passbook. When Castro showed her the passbook sometime in late January or early February 1998, she noticed several erasures and superimpositions therein. She became very suspicious of the many erasures pertaining to the December 1998 entries so she requested a copy of her transaction history register from PSBank. Page 146 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 When her transaction history register6 was shown to her, Oliver was surprised to discover that the amount of PhP4,491,250.00 (estimated at PhP4.5 million) was entered into her account on December 21, 1998. While a total of PhP7 million was withdrawn from her account on the same day, Oliver asserted that she neither applied for an additional loan of PhP4.5 million nor authorized the withdrawal of PhP7 million. She also discovered another loan for PhP1,396,310.45, acquired on January 5, 1999 and allegedly issued in connection with the P10 million credit line. There were, however, no entries in her passbook.
PS Bank demanded payment of the unpaid loans (i.e. PhP4.5 million and PhP1.396 million) but she alleged that she did not contract the same and that her PhP10 million credit line has already paid in full. Thereafter, Oliver received a notice of sale (i.e. the impeding extrajudicial foreclosure of her property in Alabang). Hence, the complaint of Oliver against PS Bank and Castro. The RTC ruled in favor of PS Bank and Castro. According to the Court, there was enough evidence to prove that Oliver contracted the additional loans. The court reversed this decision when Oliver moved for a reconsideration. Upon appeal, the CA reinstated the original decision of the RTC; hence, this petition. Issues:
1. Whether Castro is liable for damages for having defrauded Oliver 2. Whether the bank may be held liable for the withdrawal made on Oliver’s bank account
Held: 1.
Yes. Although the Court declared that there was an agency relationship between Castro and Oliver (and that the additional loans were properly made as Oliver did not dispute her signatures on the promissory notes), Castro exceeded her authority as an agent when a PhP7 million withdrawal was made from Oliver’s account. The Court noted that there was nothing in the records which proved that she also allowed the withdrawal of P7 million from her bank account. Verily, Castro, as agent of Oliver and as branch manager of PS Bank, utterly failed to secure the authorization of Oliver to withdraw such substantial amount. As a standard banking practice intended precisely to prevent unauthorized and fraudulent withdrawals, a bank manager must verify with the client-depositor to authenticate and confirm that he or she has validly authorized such withdrawal. Castro’s lack of authority to withdraw the P7 million on behalf of Oliver became more apparent when she altered the passbook to hide such transaction.
2. PSBank failed to exercise the highest degree of diligence required of banking
institutions. Aside from Castro, PSBank must also be held liable because it failed to exercise utmost diligence in the improper withdrawal of the P7 million from Oliver’s bank account.
Page 147 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 In the case of banks, the degree of diligence required is more than that of a good father of a family. Considering the fiduciary nature of their relationship with their depositors, banks are duty bound to treat the accounts of their clients with the highest degree of care. The point is that as a business affected with public interest and because of the nature of its functions, the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship. LAW ON SECRECY OF BANK DEPOSITS
DOÑA ADELA EXPORT INTERNATIONAL, INC. vs. TRADE AND INVESTMENT DEVELOPMENT CORPORATION and the BANK OF THE PHILIPPINE ISLANDS G.R. No. 201931, February 11, 2015, J. Villarama, Jr. Section 2 of R.A. No. 1405, the Law on Secrecy of Bank Deposits, provides for exceptions when records of deposits may be disclosed. These are under any of the following instances: (a) upon written permission of the depositor, (b) in cases of impeachment, (c) upon order of a competent court in the case of bribery or dereliction of duty of public officials or, (d) when the money deposited or invested is the subject matter of the litigation, and (e) in cases of violation of the Anti-Money Laundering Act, the Anti-Money Laundering Council may inquire into a bank account upon order of any competent court. The Joint Motion to Approve Agreement was executed by BPI and TIDCORP only. There was no written consent given by Doña Adela or its representative that it is waiving the confidentiality of its bank deposits.It is clear therefore that Doña Adela is not bound by the said provision since it was without the express consent of Doña Adela who was not a party and signatory to the said agreement. Facts: Doña Adela Export International, Inc. (Doña Adela) filed a Petition for Voluntary Insolvency. The RTC, after finding the petition sufficient inform and substance, issued an order declaring Doña Adela as insolvent and staying all civil proceedings against it.
Thereafter, Atty. Arlene Gonzales was appointed as receiver. Subsequently, Atty. Gonzales filed a Motion for Parties to Enter Into Compromise Agreement incorporating her proposed terms of compromise. Creditors Trade and Investment Development Corporation (TIDCORP) and Bank of the Philippine Islands (BPI) also filed a Joint Motion to Approve the Compromise Agreement.
One of the stipulations of the agreement was the waiver of confidentiality in which Doña Adela shall waive all rights to confidentiality provided under the provisions of Republic Act No. 1405, as amended, otherwise known as the Law on Secrecy of Bank Deposits, and Republic Act No. 8791, otherwise known as The General Banking Law of
Page 148 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 2000. Furthermore Doña Adela will grant TIDCORP and BPI access to any deposit or other accounts maintained by them with any bank. The RTC approved the Compromise Agreement filed by TIDCORP and BPI.
Doña Adela filed a motion for partial reconsideration and claimed that TIDCORP and BPI’s agreement imposes on it several obligations such as waiver of confidentiality of its bank deposits but it is not a party and signatory to the said agreement. Furthermore, there must be an express and written waiver from the depositor concerned as required by law before any third person or entity is allowed to examine bank deposits or bank records. BPI counters that Doña Adela is estopped from questioning the BPI-TIDCORP compromise agreement because Doña Adela and its counsel participated in all the proceedings involving the subject compromise agreement and did not object when the compromise agreement was considered by the RTC.
The RTC denied the motion and held that Doña Adela’s silence and acquiescence to the joint motion to approve compromise agreement while it was set for hearing by creditors BPI and TIDCORP is tantamount to admission and acquiescence. Issue:
Whether the waiver of confidentiality provision in the Agreement between TIDCORP and BPI is valid despite Doña Adela not being a party and signatory to the same. Ruling:
No.
Section 2 of R.A. No. 1405, the Law on Secrecy of Bank Deposits, provides for exceptions when records of deposits may be disclosed. These are under any of the following instances: (a) upon written permission of the depositor, (b) in cases of impeachment, (c) upon order of a competent court in the case of bribery or dereliction of duty of public officials or, (d) when the money deposited or invested is the subject matter of the litigation, and (e) in cases of violation of the Anti-Money Laundering Act, the AntiMoney Laundering Council may inquire into a bank account upon order of any competent court.
In this case, the Joint Motion to Approve Agreement was executed by BPI and TIDCORP only. There was no written consent given by Doña Adela or its representative, Epifanio Ramos, Jr., that Doña Adela is waiving the confidentiality of its bank deposits. The provision on the waiver of the confidentiality of Doña Adela’s bank deposits was merely inserted in the agreement. It is clear therefore that Doña Adela is not bound by the said provision since it was without the express consent of Doña Adela who was not a party and signatory to the said agreement. Page 149 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Neither can be Doña Adela deemed to have given its permission by failure to interpose its objection during the proceedings. It is an elementary rule that the existence of a waiver must be positively demonstrated since a waiver by implication is not normally countenanced. The norm is that a waiver must not only be voluntary, but must have been made knowingly, intelligently, and with sufficient awareness of the relevant circumstances and likely consequences.
Furthermore, it is basic in law that a compromise agreement, as a contract, is binding only upon the parties to the compromise, and not upon non-parties. This is the doctrine of relativity of contracts. The sound reason for the exclusion of non-parties to an agreement is the absence of a vinculum or juridical tie which is the efficient cause for the establishment of an obligation. Hence, a court judgment made solely on the basis of a compromise agreement binds only the parties to the compromise, and cannot bind a party litigant who did not take part in the compromise agreement. BPI FAMILY SAVINGS BANKC, INC. vs. ST. MICHAEL MEDICAL CENTER, INC. G.R. No. 205469, March 25, 2015, J. Perlas-Bernabe It is well to emphasize that the remedy of rehabilitation should be denied to corporations that do not qualify under the Rules. Neither should it be allowed to corporations whose sole purpose is to delay the enforcement of any of the rights of the creditors, which is rendered obvious by: (a) the absence of a sound and workable business plan; (b) baseless and unexplained assumptions, targets, and goals; and (c) speculative capital infusion or complete lack thereof for the execution of the business plan. In this case, not only has the petitioning debtor failed to show that it has formally began its operations which would warrant restoration, but also it has failed to show compliance with the key requirements under the Rules, the purpose of which are vital in determining the propriety of rehabilitation. Thus, for all the reasons hereinabove explained, the Court is constrained to rule in favor of BPI Family and hereby dismiss SMMCI’s Rehabilitation Petition. Facts: Spouses Virgilio and Yolanda Rodil (Sps. Rodil) are the owners and sole proprietors of St. Michael Hospital. With a vision to upgrade St. Michael Hospital into a modern, wellequipped and full service tertiary 11-storey hospital, Sps. Rodil purchased two (2) parcels of land adjoining their existing property and, on May 22, 2003, incorporated SMMCI, with which entity they planned to eventually consolidate St. Michael Hospital’s operations. In order to finance the expansion of the premises of the hospital, the Spouses Rodil obtained load from BPI Family Savings Bank. The Spouses thereafter incurred problems with the first contractor, so the building was not completed. SMMCI was only able to pay the interest on its BPI Family loan, or the amount of 3,000,000.00 over a two-year period, from the income of St. Michael Hospital. On September 25, 2009, BPI Family demanded immediate payment of the entire loan obligation and, soon after, filed a petition for extrajudicial foreclosure of the real
Page 150 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 properties covered by the mortgage. The auction sale was scheduled on December 11, 2009, which was postponed to February 15, 2010 with the conformity of BPI Family.
On August 11, 2010, SMMCI filed a Petition for Corporate Rehabilitation18 (Rehabilitation Petition) before the RTC, with prayer for the issuance of a Stay Order as it foresaw the impossibility of meeting its obligation to BPI Family, its purported sole creditor. In its proposed Rehabilitation Plan,23 SMMCI merely sought for BPI Family (a) to defer foreclosing on the mortgage and (b) to agree to a moratorium of at least two (2) years during which SMMCI – either through St. Michael Hospital or its successor – will retire all other obligations. After which, SMMCI can then start servicing its loan obligation to the bank under a mutually acceptable restructuring agreement. 24 SMMCI declared that it intends to conclude pending negotiations for investments offered by a group of medical doctors whose capital infusion shall be used (a) to complete the finishing requirements for the 3rd and 5th floors of the new building; (b) to renovate the old 5storey building where St. Michael Hospital operates; and (c) to pay, in whole or in part, the bank loan with the view of finally integrating St. Michael Hospital with SMMCI. Finding the Rehabilitation Petition to be sufficient in form and substance, the RTC issued a Stay Order. In an Order 34 dated August 4, 2011, the RTC approved the Rehabilitation Plan
Aggrieved, BPI Family elevated the matter before the CA, mainly arguing that the approval of the Rehabilitation Plan violated its rights as an unpaid creditor/mortgagee and that the same was submitted without prior consultation with creditors. In a Decision dated August 30, 2012, the CA affirmed the RTC’s approval of the Rehabilitation Plan. Hence, this petition. Issue:
Whether or not the CA correctly affirmed SMMCI’s Rehabilitation Plan as approved by the RTC. Ruling:
No. that SMMCI’s Rehabilitation Plan, an indispensable requisite in corporate rehabilitation proceedings, failed to comply with the fundamental requisites outlined in Section 18, Rule 3 of the Rules, particularly, that of a material financial commitment to support the rehabilitation and an accompanying liquidation analysis, all of the petitioning debtor: SEC. 18. 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 such as, but not limited, to the nonimpairment of their security liens or interests; (c) the material financial commitments to support the rehabilitation plan; (d) the means for the execution of the rehabilitation plan, which may include debt to equity conversion, restructuring of the debts, dacion en pago or sale exchange or any disposition of assets or of the interest of shareholders, partners or members; (e) a liquidation analysis setting out for each creditor that the present value of payments it would receive under the plan is more than that which it would Page 151 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 receive if the assets of the debtor were sold by a liquidator within a six-month period from the estimated date of filing of the petition; and (f) such other relevant information to enable a reasonable investor to make an informed decision on the feasibility of the rehabilitation plan.
It is well to emphasize that the remedy of rehabilitation should be denied to corporations that do not qualify under the Rules. Neither should it be allowed to corporations whose sole purpose is to delay the enforcement of any of the rights of the creditors, which is rendered obvious by: (a) the absence of a sound and workable business plan; (b) baseless and unexplained assumptions, targets, and goals; and (c) speculative capital infusion or complete lack thereof for the execution of the business plan. Unfortunately, these negative indicators have all surfaced to the fore, much to SMMCI’s chagrin. While the Court recognizes the financial predicaments of upstart corporations under the prevailing economic climate, it must nonetheless remain forthright in limiting the remedy of rehabilitation only to meritorious cases. As above-mentioned, the purpose of rehabilitation proceedings is not only to enable the company to gain a new lease on life but also to allow creditors to be paid their claims from its earnings, when so rehabilitated. Hence, the remedy must be accorded only after a judicious regard of all stakeholders’ interests; it is not a one-sided tool that may be graciously invoked to escape every position of distress. In this case, not only has the petitioning debtor failed to show that it has formally began its operations which would warrant restoration, but also it has failed to show compliance with the key requirements under the Rules, the purpose of which are vital in determining the propriety of rehabilitation. Thus, for all the reasons hereinabove explained, the Court is constrained to rule in favor of BPI Family and hereby dismiss SMMCI’s Rehabilitation Petition. SPOUSES EDUARDO AND LYDIA SILOS vs. PHILIPPINE NATIONAL BANK G.R. No. 181045, July 2, 2014, J. Del Castillo Plainly, with the subject credit agreement, the element of consent or agreement by the borrower is now completely lacking, which makes [PNB’s] unlawful act all the more reprehensible. Accordingly, [Spouses Silos] are correct in arguing that estoppels should not apply to them, for estoppels cannot be predicated on an illegal act. As between the parties to a contract, validity cannot be given to it by estoppels if it is prohibited by law or public policy. It appears that by its acts, PNB violated the Truth in Lending Act or Republic Act No. 3765 which was enacted to protect citizens from a lack of awareness of the true cost of credit to the use by using a full disclosure of such cost with a view of preventing the uninformed use of credit to the detriment of the national economy. Facts: Page 152 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Spouses Silos were engaged in retail business since 1980s and for which they secured several loans from PNB. Consequently, the following agreements were executed, to wit: 1. Real Estate Mortgage to secure the credit line of PhP150,000.00; 2. Supplement to the Real Estate Mortgage to secure the credit line which was first raised to PhP1.8 Million then to PhP2.5 Million; 3. Credit Agreement of July 1989 and Eight (8) Promissory Notes; and, 4. Amendment to Credit Agreement of August 1991 and Eighteen (18) Promissory Notes.
The original Credit Agreement provided an interest of 19.5% per annum and authorized PNB to modify the interest rate without need of notice to Spouses Silos and depending on whatever policy the Bank may adopt. All of the agreements and promissory notes contained stipulations respecting this unilateral modification of interest rate. PNB renewed the credit line from 1990 up to 1997 and Spouses Silos religiously paid their accounts. In 1997, due to the Asian Financial Crisis, Spouses Silos failed to make good on their outstanding promissory note for PhP2.5 Million, which provided for a penalty clause equivalent to 24% per annum in case of default. Thus, PNB prepared a Statement of Account showing aggregate accountabilities in the amount of PhP3,620,541.60 against Spouses Silos. Failing to heed PNB’s demand, the mortgages were foreclosed and sold to the Bank at auction for the amount of PhP4,324,172.96.
Spouses Silos commenced a complaint for annulment of foreclosure sale with prayer for accounting of their credit with PNB. After hearing the opposing arguments of the parties on the disputed stipulations, the trial court ruled in favor of PNB and upheld the accounting of debts, foreclosure sale and agreements between the parties among others. On appeal, the CA affirmed the judgment of the trial court but with modifications respecting the applicable interest on the unpaid promissory note, attorney’s fees of 10% and reimbursement of the difference between the bid price and the total amount due. Issues:
1. Whether or not the provision conferring upon PNB the power to solely determine and change the interest rate stated in the subject credit agreement is contrary to law. 2. What is the appropriate interest that may be applied to the remaining monetary obligation of Spouses Silos? 3. Whether or not the penalty charge in the still unpaid promissory note is also covered by the security.
Page 153 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Ruling: 1. YES, the provision runs counter to Article 1308 of the Civil Code and the Truth in Lending Act.
In a long line of cases, the Court has struck down provisions in credit documents issued by PNB to its borrowers, which allow it to increase or decrease interest rate within the limits allowed by law at any time depending on whatever policy it may adopt in the future. In the cases of PNB vs. CA circa 1991 and 1994, the Court took the position that P.D. No. 1684 and C.B. Circular No. 905, respecting the non-application of the usury law in loans and certain forbearances, “no more than allow contracting parties to stipulate freely regarding any subsequent adjustment in the interest rate that shall accrue on a loan or forbearance of money, goods or credits.” In other words, the parties can agree to adjust, upward or downward, the interest stipulated. Nevertheless, the Court pointed out that “the said law and circular did not authorize either party to unilaterally raise the interest rate without the other’s consent.” Thus, it was held that such clause introduced by PNB ran afoul with the principle of mutuality of contracts ordained in Article 1308 of the Civil Code. In Spouses Almeda vs. CA, the Court also invalidated the very same provisions in PNB’s prepared Credit Agreement and mainly ratiocinated that “[e]scalation clauses are not basically wrong or legally objectionable so long as they are not solely potestative but based on reasonable and valid grounds [and in this case] not only are the increases of the interest rates on the basis of escalation clause patently unreasonable and unconscionable, but also there are no valid and reasonable standards upon which the increases are anchored.”
In another PNB vs. CA case, circa 1996, the disquisition went in this wise: “while the Usury Law ceiling on interest rates was lifted by C.B. No. 905, nothing in the said circular could possibly be read as granting PNB carte blanche authority to raise interest rates to levels which would either enslave its borrowers or lead to a hemorrhaging of their assets.” An equally relevant case, New Sampaguita Builders Construction, Inc. vs. PNB, this Court pronounced that “excessive interests, penalties and other charges not revealed in the disclosure statements issued by banks, even it stipulated in the promissory notes, cannot be given effect under the Truth in Lending Act.” Withal, in the light of these cases, the stipulations found in the Credit Agreement, Amendment to the Credit Agreement and the promissory notes prepared by PNB in the instant case must be once more invalidated. The lack of consent by Spouses Silos has been made obvious by the fact that they signed the promissory notes in blank for PNB to fill. The witness for PNB, Branch Manager Aspa, admitted that interest rates were fixed solely by its Treasury Department in Manila, which were then simply communicated to all PNB branches for imple-mentation. If this were the case, then this would explain why Spouses Silos had to sign the promissory notes in blank, since the imposable interest rates have yet to be determined and fixed by PNB Treasury Department. Page 154 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Further, in Aspa’s enumeration of factors that determine the interest rates, it can be seen that considerations which affect PNB’s borrowers are ignored. A borrower’s current financial state, his feedback or opinions, the nature and purpose of his borrowings, the effect of foreign currency values or fluctuations on his business or borrowing, etc. – these are not factors which influence the fixing of interest rates to be imposed on him. Clearly, PNB’s method of fixing interest rates based on one-sided, indeterminate, and subjective criteria such as profitability, cost of money, bank cost etc. is arbitrary for there is no fixed standard or margin above or below these considerations.
To repeat what has been said in the cited cases, any modification in the contract, such as interest rates must be made with the consent of the contracting parties. The minds of all the parties must meet as to the proposed modification, especially when it affects an important aspect of the agreement. In the case of loan agreements, the rate of interest is a principal condition, if not the most important component. Thus, any modification thereof must be mutually agreed upon; otherwise, it has no binding effect.
What is even more glaring in the present case is that, the stipulations in question no longer provide that the parties shall agree upon the interest rate to be fixed; instead, they are worded in such a way that Spouses Silos shall agree to whatever interest rate PNB fixes. Plainly, with the subject credit agreement, the element of consent or agreement by Spouses Silos is now completely lacking, which makes PNB’s unlawful act all the more reprehensible. Accordingly, Spouses Silos are correct in arguing that estoppels should not apply to them, for estoppels cannot be predicated on an illegal act. As between the parties to a contract, validity cannot be given to it by estoppels if it is prohibited by law or public policy. It appears that by its acts, PNB violated the Truth in Lending Act or Republic Act No. 3765 which was enacted to protect citizens from a lack of awareness of the true cost of credit to the use by using a full disclosure of such cost with a view of preventing the uninformed use of credit to the detriment of the national economy.”
However, the one-year period within which an action for violation of the Truth in Lending Act may be filed evidently prescribed long ago, or sometime in 2001, one year after Spouses Silos received the March 2000 demand letter which contained the illegal charges. The fact that Spouses Silos later received several statements of account detailing its outstanding obligations does not cure PNB’s breach. To repeat, the belated discovery of the true cost of credit does not reverse the ill effects of an already consummated business decision. Neither may the statements be considered proposals sent to secure Spouses Silos’ conformity; they were sent after the imposition and application of the interest rate, and not before. 2. The loan shall be subject to the original or stipulated rate of interest and upon maturity, the amount due shall be subject to legal interest at the rates of 12% and then 6% per annum.
Page 155 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Since the escalation clause is annulled, the principal amount of the loan is subject to the original or stipulated rate of interest and upon maturity, the amount due shall be subject to legal interest at the rate of 12% per annum. The interests paid by Spouses Silos should be applied first to the payment of the stipulated or legal and unpaid interest, as the case may be and later, to the capital or principal. PNB should then refund the excess amount of interest that it has illegally imposed upon Spouses Silos; the amount to be refunded refers to that paid by Spouses Silos when they had no obligation to do so. Thus, the parties’ original agreement stipulated the payment of 19.5% interest; however, this rate was intended to apply only to the first promissory note which expired in November 1989 and was paid by Spouses Silos; it was not intended to apply to the whole duration of the loan. Subsequent higher interest rates have been declared illegal; but because only the rates are found to be improper, the obligation to pay interest subsists, the same to be fixed at the legal rate of 12% per annum. However, the 12% interest shall apply only until June 30, 2013. Starting July 01, 2013, the prevailing rate of interest shall be 6% per annum pursuant to BSP Monetary Board Circular No. 799. 3. NO, the penalty charge must be excluded for not being expressly covered by the credit agreement.
The unpaid promissory note provides that failure to pay it or any installment thereon, when due, shall constitute default, and a penalty charge of 24% per annum based on the defaulted principal amount shall be imposed. This penalty charge can no longer be sustained based on the above disquisition. Having found the credit agreements and promissory notes to be tainted, the mortgages must likewise be accorded with the same treatment. After all, a mortgage and a note secured by it are deemed parts of one transaction and are construed together. Being so tainted and having attributes of a contract of adhesion as the principal credit documents, the mortgages must be construed strictly and against the party who drafted it. An examination of the mortgage agreements reveals that nowhere it is stated that penalties are to be included in the secured amount. Construing the silence strictly against PNB, the Court can only conclude that the parties did not intend to include the penalty allowed under the subject note as part of the secured amount. PHILIPPINE AMANAH BANK (NOW AL-AMANAH ISLAMIC INVESTMENT BANK OF THE PHILIPPINES, ALSO KNOWN AS ISLAMIC BANK) vs. EVANGELISTA CONTRERAS G.R. No. 173168, September 29, 2014, J. Brion
In the present case, however, nothing in the documents presented by Calinico would arouse the suspicion of PAB to prompt a more extensive inquiry. When the Ilogon spouses applied for a loan, they presented as collateral a parcel of land evidenced by an OCT issued by the Office of the Register of Deeds… and registered in the name of Calinico. This document did not contain any inscription or annotation indicating that Contreras was the owner or that he has any interest in the subject land. In fact, he admitted that there was no encumbrance annotated on Calinico’s title at the time of the latter’s loan application. Any private arrangement between Calinico and him regarding the proceeds of the loan was not the Page 156 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 concern of PAB, as it was not a privy to this agreement. If Calinico violated the terms of his agreement with Contreras on the turn-over of the proceeds of the loan, then the latter's proper recourse was to file the appropriate criminal action in court. Facts: In July 1981, Respondent Contreras filed a complaint for annulment of real estate mortgage, cancellation of original certificate of title, reconveyance, recovery of possession and damages before the RTC against Spouses Calinico and Elnora Ilogon and Petitioner Philippine Amanah Bank (PAB). Prior to the escalation of the issue to a civil suit, Contreras approached Spouses Ilogon to ask for help in obtaining a loan from PAB. Thereafter, Contreras and Calinico executed documents to the effect that the property owned by the former is open for mortgage as security for a loan and that Calinico was going to facilitate this transaction with PAB.
Eventually, a loan was due for release by PAB but Contreras forthwith requested that the same should not be released to Calinico. To her dismay, however, PAB released a total of PhP 100,000.00 to Calinico. Consequently, when he failed to settle the loan, PAB was forced to extrajudicially foreclose the mortgage and ultimately it consolidated its ownership over the same. Hence, Contreras had to file the complaint before the RTC. The trial court ruled in favor of PAB, pointing out that the bank had no knowledge about the internal agreements between Contreras and Calinico. Contreras moved for reconsideration but it was denied for having been filed out of time and then later a petition for relief from judg-ment which was likewise denied. The CA reversed this decision by the trial court. It found that there is sufficient evidence showing that PAB knew of certain conflicting claims over the land and that it ignored the Contreras’ representations that Calinoco’s title was defective. Issue:
Whether or not PAB exercised extraordinary diligence in dealing with Calinico over the subject property. Ruling:
YES, PAB cannot be faulted in accepting the property as mortgage and releasing the loan to Spouses Ilongon.
[The Court is aware] of the rule that banks are expected to exercise more care and prudence than private individuals in their dealings, even those involving registered lands, since their business is impressed with public interest. The rule that persons dealing with registered lands can rely solely on the certificate of title does not apply to banks. Simply put, the ascertainment of the status or condition of a property offered to it as security for a loan must be a standard and indispensable part of a bank’s operations. Page 157 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 In the present case, however, nothing in the documents presented by Calinico would arouse the suspicion of [PAB] to prompt a more extensive inquiry. When the Ilogon spouses applied for a loan, they presented as collateral a parcel of land evidenced by [an OCT] issued by the Office of the Register of Deeds… and registered in the name of Calinico. This document did not contain any inscription or annotation indicating that [Contreras] was the owner or that he has any interest in the subject land. In fact, [he] admitted that there was no encumbrance annotated on Calinico’s title at the time of the latter’s loan application. Any private arrangement between Calinico and [him] regarding the proceeds of the loan was not the concern of [PAB], as it was not a privy to this agreement. If Calinico violated the terms of his agreement with [Contreras] on the turn-over of the proceeds of the loan, then the latter's proper recourse was to file the appropriate criminal action in court.
[Contreras] also failed to prove its allegation that the petitioner bank knew, thru a letter sent by the former’s lawyer, Atty. Crisanto Mutya, Jr., that the sale of the subject land between him and Calinico was made only for loan purposes, and that failure of Calinico to turn over the proceeds of the loan will invalidate the sale. Even assuming, for the sake of argument, that the petitioner bank received a copy of Atty. Mutya’s letter, it was still well-within its discretion to grant or deny the loan application after evaluating the documents submitted for loan applicant. As earlier stated, [the certificate of title]issued in Calinico’s favor was free from any encumbrances. [PAB] is not anymore privy to whatever arrangements the owner entered into regarding the proceeds of the loan.
Finally, [the Court points] out that [PAB] is a [GOCC]. While [the OCT] issued in favor of Calinico by virtue of the deed of confirmation of sale contained a prohibition against the alienation and encumbrance… from the date of the patent, the CA failed to mention that by the express wordings of the OCT itself, the prohibition does not cover the alienation and encumbrance “in favor of the Government or any of its branches, units or institutions.” PHILIPPINE BANK OF COMMUNICATIONS vs. BASIC POLYPRINTERS AND PACKAGING CORPORATION G.R. No. 187581, October 20, 2014, J. Bersamin
A material financial commitment becomes significant in gauging the resolve, determination, earnestness and good faith of the distressed corporation in financing the proposed rehabilitation plan. This commitment may include the voluntary undertakings of the stockholders or the would-be investors of the debtor-corporation indicating their readiness, willingness and ability to contribute funds or property to guarantee the continued successful operation of the debtor corporation during the period of rehabilitation. In this case, the financial commitments presented by Basic Polyprinters were insufficient for the purpose of rehabilitation. Thus, its petition for corporate rehabilitation must necessarily fail.
Page 158 of 195
MERCANTILE LAW DIGESTS 2014-June 2016
Facts: Basic Polyprinters and Packaging Corporation (Basic Polyprinters) was a domestic corporation engaged in the business of printing greeting cards, gift wrappers, gift bags, calendars, posters, labels and other novelty items.
On February 27, 2004, Basic Polyprinters, along with the eight other corporations belonging to the Limtong Group of Companies (namely: Cuisine Connection, Inc., Fine Arts International, Gibson HP Corporation, Gibson Mega Corporation, Harry U. Limtong Corporation, Main Pacific Features, Inc., T.O.L. Realty & Development Corp., and Wonder Book Corporation), filed a joint petition for suspension of payments with approval of the proposed rehabilitation in the RTC. Included in its overall Rehabilitation Program was the full payment of its outstanding loans in favor of Philippine Bank of Communications (PBCOM), RCBC, Land Bank, EPCIBank and AUB via repayment over 15 years with moratorium of two-years for the interest and five years for the principal at 5% interest per annum and a dacion en pago of its affiliate property in favor of EPCIBank.
Finding the petition sufficient in form and substance, the RTC issued the stay order dated August 31, 2006. It appointed Manuel N. Cacho III as the rehabilitation receiver, and required all creditors and interested parties, including the Securities and Exchange Commission (SEC), to file their comments. After the initial hearing and evaluation of the comments and opposition of the creditors, including PBCOM, the RTC gave due course to the petition and referred it to the rehabilitation receiver for evaluation and recommendation. On October 18, 2007, the rehabilitation receiver submitted his report recommending the approval of the rehabilitation plan. On December 19, 2007, the rehabilitation receiver submitted his clarifications and corrections to his report and recommendations. On January 11, 2008, the RTC issued an order approving the rehabilitation plan.
In the assailed decision promulgated on December 16, 2008, the CA affirmed the questioned order of the RTC, agreeing with the finding of the rehabilitation receiver that there were sufficient evidence, factors and actual opportunities in the rehabilitation plan indicating that Basic Polyprinters could be successfully rehabilitated in due time.
The PBCOM claims that the CA did not pass upon the issues presented in its petition, that the rehabilitation plan did not contain the material financial commitments required by Section 5, Rule 4 of the Interim Rules of Procedure for Corporate Rehabilitation (Interim Rules); that, accordingly, the proposed repayment scheme did not constitute a material Page 159 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 financial commitment, and the proposed dacion en pago was not proper because the property subject thereof had been mortgaged in its favor; Issue:
Whether or not Basic Polyprinters can be rehabilitated.
Ruling:
No. Basic Polyprinters cannot be rehabilitated.
A material financial commitment becomes significant in gauging the resolve, determination, earnestness and good faith of the distressed corporation in financing the proposed rehabilitation plan. This commitment may include the voluntary undertakings of the stockholders or the would-be investors of the debtor-corporation indicating their readiness, willingness and ability to contribute funds or property to guarantee the continued successful operation of the debtor corporation during the period of rehabilitation. Basic Polyprinters presented financial commitments, as follows:
1. Additional P10 million working capital to be sourced from the insurance claim; 2. Conversion of the directors’ and shareholders’ deposit for future subscription to common stock; 3. Conversion of substituted liabilities, if any, to additional paid-in capital to increase the company’s equity; and 4. All liabilities (cash advances made by the stockholders) of the company from the officers and stockholders shall be treated as trade payables. However, these financial commitments were insufficient for the purpose.
The commitment to add P10,000,000.00 working capital appeared to be doubtful considering that the insurance claim from which said working capital would be sourced had already been written-off by Basic Polyprinters’s affiliate, Wonder Book Corporation. A claim that has been written-off is considered a bad debt or a worthless asset, and cannot be deemed a material financial commitment for purposes of rehabilitation. At any rate, the proposed additional P10,000,000.00 working capital was insufficient to cover at least half of the shareholders’ deficit that amounted to P23,316,044.00 as of June 30, 2006.
The Supreme Court also declared in Wonder Book Corporation v. Philippine Bank of Communications (Wonder Book) that the conversion of all deposits for future subscriptions to common stock and the treatment of all payables to officers and stockholders as trade payables was hardly constituting material financial commitments. Such “conversion” of cash advances to trade payables was, in fact, a mere re-classification of the liability entry and had no effect on the shareholders’ deficit. On the other hand, the Supreme Court cannot determine the effect of the “conversion” of the directors’ and shareholders’ deposits for Page 160 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 future subscription to common stock and substituted liabilities on the shareholders’ deficit because their amounts were not reflected in the financial statements contained in the rollo.
Basic Polyprinters’s rehabilitation plan likewise failed to offer any proposal on how it intended to address the low demands for their products and the effect of direct competition from stores like SM, Gaisano, Robinsons, and other malls. Even the P245 million insurance claim that was supposed to cover the destroyed inventories worth P264 million appears to have been written-off with no probability of being realized later on.
The Supreme Court observes, too, that Basic Polyprinters’s proposal to enter into the dacion en pago to create a source of “fresh capital” was not feasible because the object thereof would not be its own property but one belonging to its affiliate, TOL Realty and Development Corporation, a corporation also undergoing rehabilitation. Moreover, the negotiations (for the return of books and magazines from Basic Polyprinters’s trade creditors) did not partake of a voluntary undertaking because no actual financial commitments had been made thereon. Worthy of note here is that Wonder Book Corporation was a sister company of Basic Polyprinters, being one of the corporations that had filed the joint petition for suspension of payments and rehabilitation in SEC. Both of them submitted identical commitments in their respective rehabilitation plans. As a result, as the Court observed in Wonder Book, the commitments by Basic Polyprinters could not be considered as firm assurances that could convince creditors, future investors and the general public of its financial and operational viability.
Due to the rehabilitation plan being an indispensable requirement in corporate rehabilitation proceedings, Basic Polyprinters was expected to exert a conscious effort in formulating the same, for such plan would spell the future not only for itself but also for its creditors and the public in general. The contents and execution of the rehabilitation plan could not be taken lightly.
The Supreme Court is not oblivious to the plight of corporate debtors like Basic Polyprinters that have inevitably fallen prey to economic recession and unfortunate incidents in the course of their operations. However, the Supreme Court must endeavor to balance the interests of all the parties that had a stake in the success of rehabilitating the debtors. In doing so here, the Supreme Court cannot now find the rehabilitation plan for Basic Polyprinters to be genuine and in good faith, for it was, in fact, unilateral and detrimental to its creditors and the public. INTELLECTUAL PROPERTY LAW
DOCTRINE OF UNRELATED GOODS TAIWAN KOLIN CORPORATION, LTD. vs. KOLIN ELECTRONICS CO., INC., Page 161 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 G.R. No. 209843, March 25, 2015, J. Velasco, Jr. In trademark registration, while both competing marks refer to the word “KOLIN” written in upper case letters and in bold font, but one is italicized and colored black while the other is white in pantone red color background and there are differing features between the two, registration of the said mark could be granted. It is hornbook doctrine that emphasis should be on the similarity of the products involved and not on the arbitrary classification or general description of their properties or characteristics. The mere fact that one person has adopted and used a trademark on his goods would not, without more, prevent the adoption and use of the same trademark by others on unrelated articles of a different kind. Facts:
Taiwan Kolin filed with the IPO, then BPTTT, a trademark application, for the use of “KOLIN” on a combination of goods, including colored televisions, refrigerators, windowtype and split-type air conditioners, electric fans and water dispensers with Taiwan Kolin electing Class 9 as the subject of its application. Kolin Electronics opposed Taiwan Kolin’s application arguing that the mark Taiwan Kolin seeks to register is identical, if not confusingly similar, with its registered “KOLIN” mark covering products under Class 9 of the NCL.
BLA-IPO denied Taiwan Kolin’s application, citing Sec. 123(d) of the IP Code that a mark cannot be registered if it is identical with a registered mark belonging to a different proprietor in respect of the same or closely-related goods. Accordingly, Kolin Electronics, as the registered owner of the mark “KOLIN” for goods falling under Class 9 of the NCL, should then be protected against anyone who impinges on its right, including Taiwan Kolin who seeks to register an identical mark to be used on goods also belonging to Class 9 of the NCL.
Taiwan Kolin appealed the above Decision to the Office of the Director General of the IPO which gave due course to the appeal ratiocinating that product classification alone cannot serve as the decisive factor in the resolution of whether or not the goods are related and that emphasis should be on the similarity of the products involved and not on the arbitrary classification or general description of their properties or characteristics.
Kolin Electronics elevated the case to the CA which found for Kolin Electronics on the strength of the following premises: (a) the mark sought to be registered by Taiwan Kolin is confusingly similar to the one already registered in favor of Kolin Electronics; (b) there are no other designs, special shape or easily identifiable earmarks that would differentiate the products of both competing companies; and (c) the intertwined use of television sets with amplifier, booster and voltage regulator bolstered the fact that televisions can be considered as within the normal expansion of Kolin Electronics, and is thereby deemed covered by its trademark as explicitly protected under Sec. 138 of the IP Code. Issue:
Page 162 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Whether or not Taiwan Kolin is entitled to its trademark registration of “KOLIN” over its specific goods of television sets and DVD players. Ruling:
Yes, Taiwan Kolin is entitled.
Whether or not the products covered by the trademark sought to be registered by Taiwan Kolin, on the one hand, and those covered by the prior issued certificate of registration in favor of Kolin Electronics, on the other, fall under the same categories in the NCL is not the sole and decisive factor in determining a possible violation of Kolin Electronics’ intellectual property right should Taiwan Kolin’s application be granted. It is hornbook doctrine that emphasis should be on the similarity of the products involved and not on the arbitrary classification or general description of their properties or characteristics. The mere fact that one person has adopted and used a trademark on his goods would not, without more, prevent the adoption and use of the same trademark by others on unrelated articles of a different kind. It must be noted that the products covered by Taiwan Kolin’s application and Kolin Electronics’ registration are unrelated.
A certificate of trademark registration confers upon the trademark owner the exclusive right to sue those who have adopted a similar mark not only in connection with the goods or services specified in the certificate, but also with those that are related thereto. In resolving one of the pivotal issues in this case––whether or not the products of the parties involved are related––the doctrine in Mighty Corporation is authoritative. There, the Court held that the goods should be tested against several factors before arriving at a sound conclusion on the question of relatedness. Among these are: (a) the business (and its location) to which the goods belong; (b) the class of product to which the goods belong; (c) the product’s quality, quantity, or size, including the nature of the package, wrapper or container; (d) the nature and cost of the articles; (e) the descriptive properties, physical attributes or essential characteristics with reference to their form, composition, texture or quality; (f) the purpose of the goods; (g) whether the article is bought for immediate consumption, that is, day-to-day household items; (h) the fields of manufacture; (i) the conditions under which the article is usually purchased; and (j) the channels of trade through which the goods flow, how they are distributed, marketed, displayed and sold.
Page 163 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 As mentioned, the classification of the products under the NCL is merely part and parcel of the factors to be considered in ascertaining whether the goods are related. It is not sufficient to state that the goods involved herein are electronic products under Class 9 in order to establish relatedness between the goods, for this only accounts for one of many considerations enumerated in Mighty Corporation.
Clearly then, it was erroneous for Kolin Electronics to assume over the CA to conclude that all electronic products are related and that the coverage of one electronic product necessarily precludes the registration of a similar mark over another. In this digital age wherein electronic products have not only diversified by leaps and bounds, and are geared towards interoperability, it is difficult to assert readily, as Kolin Electronics simplistically did, that all devices that require plugging into sockets are necessarily related goods. As a matter of fact, while both competing marks refer to the word “KOLIN” written in upper case letters and in bold font, the Court at once notes the distinct visual and aural differences between them: Kolin Electronics’ mark is italicized and colored black while that of Taiwan Kolin is white in pantone red color background. The differing features between the two, though they may appear minimal, are sufficient to distinguish one brand from the other.
Finally, in line with the foregoing discussions, more credit should be given to the “ordinary purchaser.” Cast in this particular controversy, the ordinary purchaser is not the “completely unwary consumer” but is the “ordinarily intelligent buyer” considering the type of product involved
All told, We are convinced that Taiwan Kolin’s trademark registration not only covers unrelated good, but is also incapable of deceiving the ordinary intelligent buyer. The ordinary purchaser must be thought of as having, and credited with, at least a modicum of intelligence to be able to see the differences between the two trademarks in question. HOLISTIC TEST
Facts:
UFC Philippines, Inc. v. Barrio Fiesta Manufacturing Corporation G.R. No. 198889, January 20, 2016, Leonardo-De Castro, J:
Petitioner Nutri-Asia, Inc. (petitioner) is a corporation duly organized and existing under Philippine laws.5 It is the emergent entity in a merger with UFC Philippines, Inc. that was completed on February 11, 2009.6 Respondent Barrio Fiesta Manufacturing Corporation (respondent) is likewise a corporation organized and existing under Philippine laws. On April 4, 2002, respondent filed Application No. 4-2002-002757 for the mark "PAPA BOY & DEVICE" for goods under Class 30, specifically for "lechon sauce." The Intellectual Property Office (IPO) published said application for opposition in the IP Phil. e-Gazette released on September 8, 2006. Petition filed an opposition to his application. Page 164 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 In its verified opposition before the IPO, petitioner contended that "PAPA BOY & DEVICE" is confusingly similar with its "PAPA" marks inasmuch as the former incorporates the term "PAP A," which is the dominant feature of petitioner's "PAPA" marks. Petitioner averred that respondent's use of "PAPA BOY & DEVICE" mark for its lechon sauce product, if allowed, would likely lead the consuming public to believe that said lechon sauce product originates from or is authorized by petitioner, and that the "PAPA BOY & DEVICE" mark is a variation or derivative of petitioner's "PAPA" marks. Petitioner argued that this was especially true considering that petitioner's ketchup product and respondent's lechon sauce product are related articles that fall under the same Class 30. Petitioner alleged that the registration of respondent's challenged mark was also likely to damage the petitioner, considering that its former sister company, Southeast Asia Food, Inc., and the latter's predecessors-in-interest, had been major manufacturers and distributors of lechon and other table sauces since 1965, such as products employing the registered "Mang Tomas" mark.
In its comment, respondent claims that petitioner's marks have either expired and/or "that no confusing similarity exists between them and respondent's "PAPA BOY & DEVICE' mark." Respondent alleges that under Section 15 of Republic Act No. 166, a renewal application should be filed within six months before the expiration of the period or within three months after such expiration. Respondent avers that the expiration of the 20-year term for the "PAPA" mark under Registration No. 32416 issued on August 11, 1983 was August 11, 2003. The sixth month before August 11, 2003 was February 11, 2003 and the third month after August 11, 2003 was November 11, 2003. Respondent claims that the application that petitioner filed on October 28, 2005 was almost two years late. Thus, it was not a renewal application, but could only be considered a new application under the new Trademark Law, with the filing date reckoned on October 28, 2005. The registrability of the mark under the new application was examined again, and any certificate issued for the registration of "PAPA" could not have been a renewal certificate. As for petitioner's other mark "PAPA BANANA CATSUP LABEL," respondent claims that its 20-year term also expired on August 11, 2003 and that petitioner only filed its application for the new "PAPA LABEL DESIGN" on November 15, 2006. Having been filed three years beyond the renewal application deadline, petitioner was not able to renew its application on time, and cannot claim a "continuous existence of its rights over the 'PAPA BANANA CATSUP LABEL."' Respondent claims that the two marks are different from each other and that the registration of one is independent of the other. Respondent concludes that the certificate of registration issued for "PAPA LABEL DESIGN" is "not and will never be a renewal certificate. The IPO ruled in favor of the petitioner, applying the dominance test. This was reversed by the CA (using the holistic test); hence, this petition. Issue: Whether the CA erred in applying the holistic test
Page 165 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Held: Yes. The dominancy test should have been applied. This Cour has relied on the dominancy test rather than the holistic test. The dominancy test considers the dominant features in the competing marks in determining whether they are confusingly similar. Under the dominancy test, courts give greater weight to the similarity of the appearance of the product arising from the adoption of the dominant features of the registered mark, disregarding minor differences. Courts will consider more the aural and visual impressions created by the marks in the public mind, giving little weight to factors like prices, quality, sales outlets and market segments. Thus, in the 1954 case of Co Tiong Sa v. Director of Patents, the Court ruled:
It has been consistently held that the question of infringement of a trademark is to be determined by the test of dominancy. Similarity in size, form and color, while relevant, is not conclusive. If the competing trademark contains the main or essential or dominant features of another, and confusion and deception is likely to result, infringement takes place. Duplication or imitation is not necessary; nor is it necessary that the infringing label should suggest an effort to imitate.
The Court agreed that respondent's mark cannot be registered. Respondent's mark is related to a product, lechon sauce, an everyday all-purpose condiment and sauce, that is not subjected to great scrutiny and care by the casual purchaser, who knows from regular visits to the grocery store under what aisle to find it, in which bottle it is contained, and approximately how much it costs. Since petitioner's product, catsup, is also a household product found on the same grocery aisle, in similar packaging, the public could think that petitioner had expanded its product mix to include lechon sauce, and that the "PAPA BOY" lechon sauce is now part of the "PAPA" family of sauces, which is not unlikely considering the nature of business that petitioner is in. Thus, if allowed. registration, confusion of business may set in, and petitioner's hard-earned goodwill may be associated to the newer product introduced by respondent, all because of the use of the dominant feature of petitioner's mark on respondent's mark, which is the word "PAPA." The words "Barrio Fiesta" are not included in the mark, and although printed on the label of respondent's lechon sauce packaging, still do not remove the impression that "PAPA BOY" is a product owned by the manufacturer of "PAPA" catsup, by virtue of the use of the dominant feature. It is possible that petitioner could expand its business to include lechon sauce, and that would be well within petitioner's rights, but the existence of a "PAPA BOY" lechon sauce would already eliminate this possibility and deprive petitioner of its rights as an owner of a valid mark included in the Intellectual Property Code. The Court of Appeals likewise erred in finding that "PAPA," being a common term of endearment for one's father, is a word over which petitioner could not claim exclusive use and ownership. The Merriam-Webster dictionary defines "Papa" simply as "a person's father." True, a person's father has no logical connection with catsup products, and that precisely makes "PAPA" as an arbitrary mark capable of being registered, as it is distinctive, coming from a family name that started the brand several decades ago. What was registered was not the word "Papa" as defined in the dictionary, but the word "Papa" as the Page 166 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 last name of the original owner of the brand. In fact, being part of several of petitioner's marks, there is no question that the IPO has found "PAPA" to be a registrable mark.
Respondent had an infinite field of words and combinations of words to choose from to coin a mark for its lechon sauce. While its claim as to the origin of the term "PAPA BOY" is plausible, it is not a strong enough claim to overrule the rights of the owner of an existing and valid mark. Furthermore, this Court cannot equitably allow respondent to profit by the name and reputation carefully built by petitioner without running afoul of the basic demands of fair play UNFAIR COMPETITION SHANG PROPERTIES REALTY CORPORATION (formerly THE SHANG GRAND TOWER CORPORATION) and SHANG PROPERTIES, INC. (formerly EDSA PROPERTIES HOLDINGS, INC.), vs. ST. FRANCIS DEVELOPMENT CORPORATION G.R. No. 190706, July 21, 2014, J. Perlas-Bernabe Section 168 of Republic Act No. 8293, otherwise known as the “Intellectual Property Code of the Philippines” (IP Code), provides for the rules and regulations on unfair competition. Section 168.2 proceeds to the core of the provision, describing forthwith who may be found guilty of and subject to an action of unfair competition — that is, “any person who shall employ deception or any other means contrary to good faith by which he shall pass off the goods manufactured by him or in which he deals, or his business, or services for those of the one having established such goodwill, or who shall commit any acts calculated to produce said result x x x.” In this case, the Court finds the element of fraud to be wanting; hence, there can be no unfair competition. Facts: St. Francis Development Corporation (SFDC) — a domestic corporation engaged in the real estate business and the developer of the St. Francis Square Commercial Center, built sometime in 1992, located at Ortigas Center, Mandaluyong City, Metro Manila (Ortigas Center) — filed an intellectual property violation case for unfair competition, false or fraudulent declaration, and damages arising from Shang Properties’ use and filing of applications for the registration of the marks “THE ST. FRANCIS TOWERS” and “THE ST. FRANCIS SHANGRI-LA PLACE” against Shang Properties before the IPO Bureau of Legal Affairs (BLA).
In its complaints, SFDC alleged that it has used the mark “ST. FRANCIS” to identify its numerous property development projects located at Ortigas Center. SFDC added that as a result of its continuous use of the mark “ST. FRANCIS” in its real estate business, it has gained substantial goodwill with the public that consumers and traders closely identify the said mark with its property development projects. Shang Properties contended that SFDC is barred from claiming ownership and exclusive use of the mark “ST. FRANCIS” because the same is geographically descriptive of the goods or services for which it is intended to be used. This is because SFDC’s as well as Page 167 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Shang Properties’ real estate development projects are located along the streets bearing the name “St. Francis,” particularly, St. Francis Avenue and St. Francis Street (now known as Bank Drive), both within the vicinity of the Ortigas Center.
The BLA rendered a decision and found that Shang Properties committed acts of unfair competition against SFDC by its use of the mark “THE ST. FRANCIS TOWERS” but not with its use of the mark “THE ST. FRANCIS SHANGRI-LA PLACE.” The BLA considered SFDC to have gained goodwill and reputation for its mark, which therefore entitles it to protection against the use by other persons, at least, to those doing business within the Ortigas Center.
Both parties appealed the BLA decision. The IPO Director-General reversed the BLA’s finding that Shang Properties committed unfair competition through their use of the mark “THE ST. FRANCIS TOWERS,” thus dismissing such charge. He found that SFDC could not be entitled to the exclusive use of the mark “ST. FRANCIS,” even at least to the locality where it conducts its business, because it is a geographically descriptive mark, considering that it was Shang Properties as well as SFDC’s intention to use the mark “ST. FRANCIS” in order to identify, or at least associate, their real estate development projects/businesses with the place or location where they are situated/conducted, particularly, St. Francis Avenue and St. Francis Street (now known as Bank Drive), Ortigas Center.
SFDC elevated the case to the CA. The appellate court found Shang Properties guilty of unfair competition not only with respect to their use of the mark “THE ST. FRANCIS TOWERS” but also of the mark “THE ST. FRANCIS SHANGRI-LA PLACE.” It ruled that SFDC — which has exclusively and continuously used the mark “ST. FRANCIS” for more than a decade, and, hence, gained substantial goodwill and reputation thereby — is very much entitled to be protected against the indiscriminate usage by other companies of the trademark/name it has so painstakingly tried to establish and maintain. Issue:
Whether or not Shang Properties companies are guilty of unfair competition in using the marks “THE ST. FRANCIS TOWERS” and “THE ST. FRANCIS SHANGRI-LA PLACE.” Ruling:
No. Shang Properties are not guilty of unfair competition in using the marks “THE ST. FRANCIS TOWERS” and “THE ST. FRANCIS SHANGRI-LA PLACE.”
Section 168 of Republic Act No. 8293, otherwise known as the “Intellectual Property Code of the Philippines” (IP Code), provides for the rules and regulations on unfair competition. Section 168.2 proceeds to the core of the provision, describing forthwith who may be found guilty of and subject to an action of unfair competition — that is, “any person who shall employ deception or any other means contrary to good faith by which he shall pass off the goods manufactured by him or in which he deals, or his business, or services Page 168 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 for those of the one having established such goodwill, or who shall commit any acts calculated to produce said result x x x.” The “true test” of unfair competition has thus been “whether the acts of the defendant have the intent of deceiving or are calculated to deceive the ordinary buyer making his purchases under the ordinary conditions of the particular trade to which the controversy relates.” It is therefore essential to prove the existence of fraud, or the intent to deceive, actual or probable, determined through a judicious scrutiny of the factual circumstances attendant to a particular case.
Here, the Court finds the element of fraud to be wanting; hence, there can be no unfair competition. What the CA appears to have disregarded or been mistaken in its disquisition, however, is the geographically-descriptive nature of the mark “ST. FRANCIS” which thus bars its exclusive appropriability, unless a secondary meaning is acquired.
Under Section 123.2 of the IP Code, specific requirements have to be met in order to conclude that a geographically-descriptive mark has acquired secondary meaning, to wit: (a) the secondary meaning must have arisen as a result of substantial commercial use of a mark in the Philippines; (b) such use must result in the distinctiveness of the mark insofar as the goods or the products are concerned; and (c) proof of substantially exclusive and continuous commercial use in the Philippines for five (5) years before the date on which the claim of distinctiveness is made. Unless secondary meaning has been established, a geographically-descriptive mark, due to its general public domain classification, is perceptibly disqualified from trademark registration. The records are bereft of any showing that Shang Properties gave their goods/services the general appearance that it was SFDC which was offering the same to the public. Neither did Shang Properties employ any means to induce the public towards a false belief that it was offering SFDC’s goods/services. Nor did Shang Properties make any false statement or commit acts tending to discredit the goods/services offered by SFDC. Accordingly, the element of fraud which is the core of unfair competition had not been established.
Besides, SFDC was not able to prove its compliance with the requirements stated in Section 123.2 of the IP Code to be able to conclude that it acquired a secondary meaning — and, thereby, an exclusive right — to the “ST. FRANCIS” mark, which is, as the IPO DirectorGeneral correctly pointed out, geographically-descriptive of the location in which its realty developments have been built. While it is true that SFDC had been using the mark “ST. FRANCIS” since 1992, its use thereof has been merely confined to its realty projects within the Ortigas Center. As its use of the mark is clearly limited to a certain locality, it cannot be said that there was substantial commercial use of the same recognized all throughout the country. Neither is there any showing of a mental recognition in buyers’ and potential buyers’ minds that products connected with the mark “ST. FRANCIS” are associated with the same source — that is, the enterprise of SFDC. Thus, absent any showing that there exists a clear goods/service-association between the realty projects located in the aforesaid Page 169 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 area and herein SFDC as the developer thereof, the latter cannot be said to have acquired a secondary meaning as to its use of the “ST. FRANCIS” mark. ROBERTO CO vs. KENG HUAN JERRY YEUNG and EMMA YEUNG G.R. No. 212705, September 10, 2014, J. Perlas-Bernabe
Unfair competition is defined as the passing off (or palming off) or attempting to pass off upon the public of the goods or business of one person as the goods or business of another with the end and probable effect of deceiving the public. This takes place where the defendant gives his goods the general appearance of the goods of his competitor with the intention of deceiving the public that the goods are those of his competitor. Here, it has been established that Co conspired with the Laus in the sale/distribution of counterfeit Greenstone products to the public, which were even packaged in bottles identical to that of the original, thereby giving rise to the presumption of fraudulent intent. In light of the foregoing definition, it is thus clear that Co, together with the Laus, committed unfair competition, and should, consequently, be held liable therefor. Although liable for unfair competition, the Court deems it apt to clarify that Co was properly exculpated from the charge of trademark infringement considering that the registration of the trademark "Greenstone" – essential as it is in a trademark infringement case – was not proven to have existed during the time the acts complained of were committed. Facts: At the core of the controversy is the product Greenstone Medicated Oil Item No. 16 (Greenstone) which is manufactured by Greenstone Pharmaceutical, a traditional Chinese medicine manufacturing firm based in Hong Kong and owned by Keng Huan Jerry Yeung (Yeung), and is exclusively imported and distributed in the Philippines by Taka Trading owned by Yeung’s wife, Emma Yeung (Emma).
On July 27, 2000, Sps. Yeung filed a civil complaint for trademark infringement and unfair competition before the RTC against Ling Na Lau, her sister Pinky Lau (the Laus), and Cof or allegedly conspiring in the sale of counterfeit Greenstone products to the public. In the complaint, Sps. Yeung averred that on April 24, 2000, Emma’s brother, Jose Ruivivar III (Ruivivar), bought a bottle of Greenstone from Royal Chinese Drug Store (Royal) in Binondo, Manila, owned by Ling Na Lau. However, when he used the product, Ruivivar doubted its authenticity considering that it had a different smell, and the heat it produced was not as strong as the original Greenstone he frequently used. Having been informed by Ruivivar of the same, Yeung, together with his son, John Philip, went to Royal on May 4, 2000 to investigate the matter, and, there, found seven (7) bottles of counterfeit Greenstone on display for sale. He was then told by Pinky Lau (Pinky) – the store’s proprietor – thatthe items came from Co of Kiao An Chinese Drug Store. According to Pinky, Co offered the products on April 28, 2000 as "Tienchi Fong Sap Oil Greenstone" (Tienchi) which she eventually availed from him. Upon Yeung’s prodding, Pinky wrote a note stating these events. Page 170 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 In defense, Co denied having supplied counterfeit items to Royal and maintained that the stocks of Greenstone came only from Taka Trading. Meanwhile, the Laus denied selling Greenstone and claimed that the seven (7) items of Tienchi were left by an unidentified male person at the counter of their drug store and that when Yeung came and threatened to report the matter to the authorities, the items were surrendered to him. As to Pinky’s note, it was claimed that she was merely forced by Yeung to sign the same. The RTC ruled in favor of Sps. Yeung. The CA affirmed the RTC Decision. The Laus and Co respectively moved for reconsideration but were, however, denied. Hence, Co filed the instant petition. Issue:
Whether or not the CA correctly upheld Co’s liability for unfair competition. Ruling: The petition is without merit.
Unfair competition is defined as the passing off (or palming off) or attempting to pass off upon the public of the goods or business of one person as the goods or business of another with the end and probable effect of deceiving the public. This takes place where the defendant gives his goods the general appearance of the goods of his competitor with the intention of deceiving the public that the goods are those of his competitor. Here, it has been established that Co conspired with the Laus in the sale/distribution of counterfeit Greenstone products to the public, which were even packaged in bottles identical to that of the original, thereby giving rise to the presumption of fraudulent intent. In light of the foregoing definition, it is thus clear that Co, together with the Laus, committed unfair competition, and should, consequently, be held liable therefor.
Although liable for unfair competition, the Court deems it apt to clarify that Co was properly exculpated from the charge of trademark infringement considering that the registration of the trademark "Greenstone" – essential as it is in a trademark infringement case – was not proven to have existed during the time the acts complained of were committed, i.e., in May 2000. In this relation, the distinctions between suits for trademark infringement and unfair competition prove useful: (a) the former is the unauthorized use of a trademark, whereas the latter is the passing off of one's goods as those of another; (b) fraudulent intent is unnecessary in the former, while it is essential in the latter; and (c) in the former, prior registration of the trademark is a pre-requisite to the action, while it is not necessary in the latter. COPYRIGHT LIMITATIONS ON COPYRIG COPYRIGHTABLE WORKS
Page 171 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 ABS-CBN CORPORATION v. FELIPE GOZON, GILBERTO R. DUAVIT, JR. MARISSA L. FLORES, JESSICA SOHO, GRACE DELA PENA-REYES, JOHN OLIVER T. MANALASTAS, JOHN DOES AND JANE DOES G.R. No. 195956, March 11, 2015, LEONEN, J. News or the event itself is not copyrightable. However, an event can be captured and presented in a specific medium. News as expressed in a video footage is entitled to copyright protection. Facts: The controversy arose from GMA-7’s news coverage on the homecoming of OFW and Iraqi militant hostage victim Angelo dela Cruz. ABS-CBN conducted live audio-video coverage of and broadcasted the arrival Angelo dela Cruz at the NAIA and the subsequent press conference. ABS-CBN allowed Reuters to air the footages it had taken earlier under a special embargo agreement. GMA-7 subscribes to Reuters and it received a live video feed coverage of Angelo dela Cruz’ arrival from them. Thereafter, it carried the live newsfeed in its program “Flash Report” together with its live broadcast. Allegedly, GMA-7 did not receive any notice or was not aware that Reuters was airing footages of ABS-CBN. GMA-7's news control room staff saw neither the "No Access Philippines" notice nor a notice that the video feed was under embargo in favor of ABS-CBN. ABS-CBN then filed a complaint for copyright infringement. Issues: 1) 2)
Whether the news footage is copyrightable under the law Whether criminal prosecution for infringement of copyrightable material, such as live rebroadcast, can be negated by good faith.
Ruling: 1)
Yes. Under the Intellectual Property Code, "works are protected by the sole fact of their creation, irrespective of their mode or form of expression, as well as of their content, quality and purpose."
An idea or event must be distinguished from the expression of that idea or event. Ideas can be either abstract or concrete. It is the concrete ideas that are generally referred to as expression. News or the event itself is not copyrightable. However, an event can be captured and presented in a specific medium. As recognized by this court in Joaquin, Jr. v. Drilon (G.R. No. 108946, January 28, 1999), television "involves a whole spectrum of visuals and effects, video and audio." News coverage in television involves framing shots, using images, graphics, and sound effects. It involves creative process and originality. Television news footage is an expression of the news. News as expressed in a video footage is entitled to copyright protection.
Page 172 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 2)
No. Infringement under the Intellectual Property Code is malum prohibitum. The general rule is that acts punished under a special law are malum prohibitum. "In an act which is malum prohibitum, malice or criminal intent is completely immaterial." Unless clearly provided in the law, offenses involving infringement of copyright protections should be considered malum prohibitum. It is the act of infringement, not the intent, which causes the damage. To require or assume the need to prove intent defeats the purpose of intellectual property protection H LIMITATIONS ON COPYRIGHTT GMA NETWORK, INC. vs. CENTRAL CATV, INC. G.R. No. 176694, July 18, 2014, J. Brion
The mustcarry rule mandates that the local television (TV) broadcast signals of an authorized TV broadcast station, such as the GMA Network, Inc., should be carried in full by the cable antenna television (CATV) operator, without alteration or deletion. In this case, the Central CATV, Inc. was found not to have violated the must-carry rule when it solicited and showed advertisements in its cable television (CATV) system. Such solicitation and showing of advertisements did not constitute an infringement of the “television and broadcast markets” under Section 2 of E.O. No. 205. Facts: Sometime in February 2000, GMA Network, Inc. (GMA), together with the Kapisanan ng mga Brodkaster ng Pilipinas, Audiovisual Communicators, Incorporated, Filipinas Broadcasting Network and Rajah Broadcasting Network, Inc. (complainants), filed with the NTC a complaint against Central CATV, Inc. (Central CATV) to stop it from soliciting and showing advertisements in its cable television (CATV) system, pursuant to Section 2 of Executive Order (EO) No. 205. Under this provision, a grantee’s authority to operate a CATV system shall not infringe on the television and broadcast markets. GMA alleged that the phrase “television and broadcast markets” includes the commercial or advertising market.
In its answer, Central CATV admitted the airing of commercial advertisement on its CATV network but alleged that Section 3 of EO No. 436 expressly allowed CATV providers to carry advertisements and other similar paid segments provided there is consent from their program providers. After GMA presented and offered its evidence, Central CATV filed a motion to dismiss by demurrer to evidence claiming that the evidence presented by the complainants failed to show how Central CATV’s acts of soliciting and/or showing advertisements infringed upon the television and broadcast market. The NTC granted Central CATV’s demurrer to evidence and dismissed the complaint. It ruled that since EO No. 205 does not define “infringement,” EO No. 436 merely clarified or filled in the details of the term to mean that the CATV operators may show
Page 173 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 advertisements, provided that they secure the consent of their program providers. In the present case, the documents attached to Central CATV’s demurrer to evidence showed that its program providers have given such consent.
The NTC added that since the insertion of advertisements under EO No. 436 would result in the alteration or deletion of the broadcast signals of the consenting television broadcast station, its ruling necessarily results in the amendment of these provisions. The second paragraph 9 of Section 3 of EO No. 436 is deemed to amend the previous provisional authority issued to Central CATV, as well as Sections 6.2.1 and 6.4 of the NTC’s Memorandum Circular (MC) 40888. Sections 6.2.1 and 6.4 require the CATV operators within the Grade A or B contours of a television broadcast station to carry the latter’s television broadcast signals in full, without alteration or deletion. This is known as the “must-carryrule.”
GMA went to the CA, which, in turn, upheld the NTC ruling. Hence, GMA filed a petition for review on certiorari before the Supreme Court.
GMA alleges that the NTC gravely erred in failing to differentiate between EO No. 205, which is a law, and EO No. 436 which is merely an executive issuance. An executive issuance cannot make a qualification on the clear prohibition in the law, EO No. 205.
On the other hand, Central CATV contends that EO No. 205 does not expressly prohibit CATV operators from soliciting and showing advertisements. The noninfringement limitation under Section 2 thereof, although couched in general terms, should not be interpreted in such a way as to deprive CATV operators of legitimate business opportunities. Also, EO No. 436, being an executive issuance and a valid administrative legislation, has the force and effect of a law and cannot be subject to collateral attack. Issue:
Whether Central CATV, as a CATV operator, could show commercial advertisements in its CATV networks. Ruling:
Yes. Central CATV could show commercial advertisements in its CATV networks.
First, EO No. 205 is a law while EO No. 436 is an executive issuance. The NTC and the CA proceeded from the wrong premise that both EO No. 205 and EO No. 436 are statutes.
EO No. 205 was issued by President Corazon Aquino. At the time of the issuance of EO No. 205, President Aquino was still exercising legislative powers. EO No. 436, on the other hand, is an executive order which was issued by President Ramos in the exercise purely of his executive power. In short, it is not a law. In considering EO No. 436 as a law, the NTC and the CA hastily concluded that it has validly qualified Section 2 of EO No. 205 and has amended the provisions of MC 40888. Following this wrong premise, the NTC and Page 174 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 the CA ruled that Central CATV has a right to show advertisements under Section 3 of EO No. 436. While Central CATV indeed has the right to solicit and show advertisements, the NTC and the CA incorrectly interpreted and appreciated the relevant provisions of the law and rules. The Court seeks to correct this error by ruling that MC 40888 alone sufficiently resolves the issue on whether Central CATV could show advertisements in its CATV networks. In other words, EO No. 436 is not material in resolving the substantive issue before us. Second, the CATV operators are not prohibited from showing advertisements under EO No. 205 and its implementing rules and regulations, MC 40888.
MC 40888 has sufficiently filled in the details of Section 2 of EO No. 205, specifically the contentious proviso that “the authority to operate [CATV] shall not infringe on the television and broadcast markets.” It is clear from Section 6.1 of MC 040888 that the phrase “television market” connotes “audience” or “viewers” in geographic areas and not the commercial or advertising market as what GMA claims. The kind of infringement prohibited by Section 2 of EO No. 205 was particularly clarified under Sections 6.2, 6.2.1, 6.4(a)(1) and 6.4(b) of MC 040888, which embody the “mustcarry rule.” This rule mandates that the local TV broadcast signals of an authorized TV broadcast station, such as GMA, should be carried in full by the CATV operator, without alteration or deletion.
MC 40888 mirrored the legislative intent of EO No. 205 and acknowledged the importance of the CATV operations in the promotion of the general welfare. The circular provides in its whereas clause that the CATV has the ability to offer additional programming and to carry much improved broadcast signals in the remote areas, thereby enriching the lives of the rest of the population through the dissemination of social, economic and educational information, and cultural programs. Unavoidably, however, the improved broadcast signals that CATV offers may infringe or encroach upon the audience or viewer market of the freesignal TV. This is so because the latter’s signal may not reach the remote areas or reach them with poor signal quality. To foreclose this possibility and protect the freeTV market (audience market), the mustcarry rule was adopted to level the playing field. With the mustcarry rule in place, the CATV networks are required to carry and show in full the free-local TV’s programs, including advertisements, without alteration or deletion. This, in turn, benefits the public who would have a wide range of choices of programs or broadcast to watch. This also benefits the freeTV signal as their broadcasts are carried under the CATV’s much-improved broadcast signals thus expanding their viewer’s share. The Court finds that the Sections 6.2, 6.2.1, 6.4(a)(1) and 6.4(b) of MC 40888, which embody the “mustcarry rule,” are the governing rules in the present case. Under these rules, the phrase “television and broadcast markets” means viewers or audience market and not commercial advertisement market as claimed by GMA. Therefore, Central CATV’s act of showing advertisements does not constitute an infringement of the “television and broadcast markets” under Section 2 of EO No. 205.
Page 175 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 COPYRIGHT INFRINGEMENT MICROSOFT CORPORATION v. ROLANDO D. MANANSALA AND/OR MEL MANANSALA, DOING BUSINESS AS DATAMAN TRADING COMPANY AND/OR COMIC ALLEY G.R. No. 166391, October 21, 2015, BERSAMIN, J. The mere sale of the illicit copies of the software programs was enough by itself to show the existence of probable cause for copyright infringement. Facts: Respondent, without any authority from petitioner, was engaged in distributing and selling Microsoft computer software programs. A private investigator accompanied by an agent from the NBI was able to purchase 6 CD-ROMs belonging to Microsoft. A search warrant was issued against the premises of respondent, the search yielded several illegal copies of Microsoft programs. Microsoft filed an affidavitcomplaint with the DOJ. The State Prosecutor dismissed the charge for lack of proof that it was really respondent who printed and copied the products in his store. Microsoft filed a petition for certiorari before the CA. The CA affirmed the dismissal by the DOJ. Issue:
Whether printing or copying is essential in the crime of copyright infringement
Ruling:
No. The gravamen of copyright infringement is not merely the unauthorized manufacturing of intellectual works but rather the unauthorized performance of any of the acts covered by Section 5 of PD No. 49. Hence any person who performs any of the acts under Section 5 without obtaining the copyright owner’s prior consent renders himself civilly and criminally liable for copyright infringement.
There was no need for the petitioner to still prove who copied, replicated or reproduced the software programs. The public prosecutor and the DOJ gravely abused their discretion in dismissing the petitioner's charge for copyright infringement against the respondents for lack of evidence. There was grave abuse of discretion because the public prosecutor and the DOJ acted whimsically or arbitrarily in disregarding the settled jurisprudential rules on finding the existence of probable cause to charge the offender in court. Accordingly, the CA erred in upholding the dismissal by the DOJ of the petitioner's petition for review. Sison Olano, et. al. v. Lim Eng Co G.R. No. 195835, March 14, 2016 Reyes, J:
Page 176 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Facts: The petitioners are the officers and/or directors of Metrotech Steel Industries, Inc. Lim Eng Co, on the other hand, is the Chairman of LEC Steel Manufacturing Corporation (LEC), a company which specializes in architectural metal manufacturing.
Sometime in 2002, LEC was invited by the architects of the Manansala Project (Project), a high-end residential building in Rockwell Center, Makati City, to submit design/drawings and specifications for interior and exterior hatch doors. LEC complied by submitting on July 16, 2002, shop plans/drawings, including the diskette therefor, embodying the designs and specifications required for the metal hatch doors. After a series of consultations and revisions, the final shop plans/drawings were submitted by LEC on January 15, 2004 and thereafter copied and transferred to the title block of SkiFirst Balfour Joint Venture (SKI-FB), the Project’s contractor, and then stamped approved for construction on February 3, 2004.
LEC was thereafter subcontracted by SKI-FB to manufacture and install the interior and exterior hatch doors for the 7th and 22nd floors of the Project. Sometime thereafter, LEC learned that Metrotech was also subcontracted to install interior and exterior hatch doors for the 23rd and 41st floors. On June 24, 2004, LEC demanded Metrotech to cease from infringing its intellectual property rights. Metrotech, however, insisted that no copyright infringement was committed because the hatch doors it manufactured were patterned in accordance with the drawings provided by SKI-FB.
On July 6, 2004, LEC was issued a Certificate of Copyright Registration and Deposit showing that it is the registered owner of plans/drawings for interior and exterior hatch doors. This copyright pertains to class work “I” under Section 172 of Republic Act (R.A.) No. 8293, The Intellectual Property Code of the Philippines, which covers “illustrations, maps, plans, sketches, charts and three-dimensional works relative to geography, topography, architecture or science. On December 9, 2004, LEC was issued another Certificate of Copyright Registration and Deposit showing that it is the registered owner of plans/drawings for interior and exterior hatch doors which is classified under Section 172(h) (i.e. ornamental designs or models for articles of manufacture, whether or not registrable as an industrial design, and other works of applied art). When Metrotech still refused to stop fabricating hatch doors based on LEC’s shop plans/drawings, the latter sought the assistance of the National Bureau of Investigation (NBI) which in turn applied for a search warrant before the Regional Trial Court (RTC) of Quezon City, Branch 24. The application was granted on August 13, 2004 thus resulting in
Page 177 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 the confiscation of finished and unfinished metal hatch doors as well as machines used in fabricating and manufacturing hatch doors from the premises of Metrotech. The respondent filed a complaint for copyright infringement before the DOJ. The latter, however, quashed the motion for search warrant since the allegation was not established.
Traversing the complaint, the petitioners admitted manufacturing hatch doors for the Project. They denied, however, that they committed copyright infringement and averred that the hatch doors they manufactured were functional inventions that are proper subjects of patents and that the records of the Intellectual Property Office reveal that there is no patent, industrial design or utility model registration on LEC’s hatch doors. Metrotech further argued that the manufacturing of hatch doors per se is not copyright infringement because copyright protection does not extend to the objects depicted in the illustrations and plans. Moreover, there is no artistic or ornamental expression embodied in the subject hatch doors that would subject them to copyright protection. The DOJ initially denied the complaint of the petitioner for want of probable cause but reversed the same upon motion for reconsideration filed by the respondents. The DOJ reversed itself again when the petitioners moved for reconsideration and declared that the evidence on record did not establish probable cause because the subject hatch doors were plainly metal doors with functional components devoid of any aesthetic or artistic features. The CA, however, reversed the decision of the DOJ, hence, this petition. Issue: Whether there is copyright infringement in this case Held: None. Copyright infringement is thus committed by any person who shall use original literary or artistic works, or derivative works, without the copyright owner’s consent in such a manner as to violate the foregoing copy and economic rights. For a claim of copyright infringement to prevail, the evidence on record must demonstrate: (1) ownership of a validly copyrighted material by the complainant; and (2) infringement of the copyright by the respondent. While both elements subsist in the records, they did not simultaneously concur so as to substantiate infringement of LEC’s two sets of copyright registrations.
The respondent failed to substantiate the alleged reproduction of the drawings/sketches of hatch doors copyrighted. There is no proof that the respondents reprinted the copyrighted sketches/drawings of LEC’s hatch doors. The raid conducted by the NBI on Metrotech’s premises yielded no copies or reproduction of LEC’s copyrighted sketches/drawings of hatch doors. What were discovered instead were finished and unfinished hatch doors.
Certificate of Registration Nos. I-2004-13 and I-2004-14 pertain to class work “I” under Section 172 of R.A. No. 8293 which covers “illustrations, maps, plans, sketches, charts and three-dimensional works relative to geography, topography, architecture or science. As Page 178 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 such, LEC’s copyright protection thereunder covered sketches/drawings and not the actual hatch door they depict.
only
the
hatch
door
Copyright, in the strict sense of the term, is purely a statutory right. Being a mere statutory grant, the rights are limited to what the statute confers. It may be obtained and enjoyed only with respect to the subjects and by the persons, and on terms and conditions specified in the statute. Accordingly, it can cover only the works falling within the statutory enumeration or description. Since the hatch doors cannot be considered as either illustrations, maps, plans, sketches, charts and three-dimensional works relative to geography, topography, architecture or science, to be properly classified as a copyrightable class “I” work, what was copyrighted were their sketches/drawings only, and not the actual hatch doors themselves. To constitute infringement, the usurper must have copied or appropriated the original work of an author or copyright proprietor, absent copying, there can be no infringement of copyright. SPECIAL LAWS
FINANCIAL REHABILITATION AND INSOLVENCY ACT
PUERTO AZUL LAND, INC. vs. PACIFIC WIDE REALTY DEVELOPMENT CORPORATION G.R. No. 184000, September 17, 2014, J. Perlas- Bernabe PALI filed petition for rehabilitation due to impossibility of meeting its debts and obligations. The issue is whether or not such dismissal of petition by the CA is valid. The court ruled that The validity of PALI’s rehabilitation was already raised as an issue by PWRDC and resolved with finality by the Court in its November 25, 2009 Decision in G.R. No. 180893 (consolidated with G.R. No. 178768). The Court sustained therein the CA’s affirmation of PALI’s Revised Rehabilitation Plan, including those terms which its creditors had found objectionable, namely, the 50% "haircut" reduction of the principal obligations and the condonation of accrued interests and penalty charges Facts:
PALI is a domestic corporation engaged in the business of developing the Puerto Azul Complex located in Ternate, Cavite into a "satellite city," described as a "self-sufficient and integrated tourist destination community with residential areas, resort/tourism, and retail commercial centers with recreation areas like golf courses, jungle trails, and white sand lagoons." To finance the full operation of its business, PALI obtained loans in the total principal amount of 640,225,324.00 from several creditors, among which were East Asia Capital, Export and Industry Bank (EIB), Philippine National Bank, and Equitable PCI Bank (EPCIB), secured by real estate owned by PALI and by accommodation mortgagors under a Mortgage Trust Indenture. Page 179 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Foreseeing the impossibility of meeting its debts and obligations to its creditors as they fall due, PALI, on September 14, 2004, filed a Petition for Suspension of Payments and Rehabilitation before the RTC. On September 17, 2004, the RTC, finding PALI’s petition to be sufficient in form and substance, issued a Stay Order pursuant to Section 6, Rule 4 of the Interim Rules on Corporate Rehabilitation (Interim Rules). RTC approved PALI’s Revised Rehabilitation Plan. CA granted PWRDC’s petition for review and reversed the December 13, 2005 RTC Decision, thereby dismissing PALI’s petition for rehabilitation. It held that the causes of PALI’s inability to pay its debts were not alleged in the petition with sufficient particularity as to have allowed the RTC to properly evaluate whether or not to issue a Stay Order and eventually approve its rehabilitation. Issue:
Whether or not the CA erred in reversing the RTC Decision, thereby dismissing PALI’s Revised Rehabilitation Plan Ruling:
Yes. CA erred in dismissing PALI’S Rehabilitation Plan
The validity of PALI’s rehabilitation was already raised as an issue by PWRDC and resolved with finality by the Court in its November 25, 2009 Decision in G.R. No. 180893 (consolidated with G.R. No. 178768). The Court sustained therein the CA’s affirmation of PALI’s Revised Rehabilitation Plan, including those terms which its creditors had found objectionable, namely, the 50% "haircut" reduction of the principal obligations and the condonation of accrued interests and penalty charges.
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.
The Court found 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. 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.
There is nothing unreasonable or onerous about the 50% reduction of the principal amount when, as found by the courta quo, a Special Purpose Vehicle (SPV) acquired the Page 180 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 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. Since the issue on the validity, as well as regularity of the December 13, 2005 RTC Decision approving PALI’s Revised Rehabilitation Plan had already been resolved, the Court, in line with the res judicata principle, is constrained to grant the present petition and, consequently, reverse the assailed CA decision. ROBINSON'S BANK CORPORATION vs. HON. SAMUEL H. GAERLAN, et al. G.R. No. 195289, September 24, 2014, J. Del Castillo
Under Rule 3, Section 5 of the Rules of Procedure on Corporate Rehabilitation, the review of any order or decision of the rehabilitation court or on appeal therefrom shall be in accordance with the Rules of Court, unless otherwise provided. In the case at bar, TIDCORP’s Petition for Review sought to nullify the pari passu sharing scheme directed by the trial court and to grant preferential and special treatment to TIDCORP over other WGC creditors, such as RBC. This being the case, there is no visible objection to RBC’s participation in said case, as it stands to be injured or benefited by the outcome of TIDCORP’s Petition for Review – being both a secured and unsecured creditor of WGC.
Facts: Nation Granary, Inc. (now World Granary Corporation, or WGC) filed a Petition for Rehabilitation with Prayer for Suspension of Payments, Actions and Proceedings before the RTC.
WGC is engaged in the business of mechanized bulk handling, transport and storage, warehousing, drying, and milling of grains. It incurred loans amounting to P2.66 billion from RBC and other banks and entities such as Trade and Investment Development Corporation of the Philippines (TIDCORP). It appears that RBC is both a secured and unsecured creditor, while TIDCORP is a secured creditor.
The RTC issued a Stay Order staying the enforcement of creditors’ claims and prohibiting WGC from disposing its properties and paying its outstanding liabilities. The RTC gave due course to the Petition for Rehabilitation. Accordingly, the receiver submitted his Report with a proposal of a pari passu– or equal – sharing between the secured and unsecured creditors of the proceeds from WGC’s cash flow made available for debt servicing. In its Comment, TIDCORP among others took exception to the proposed pari passu sharing, insisting that as a secured creditor, it should enjoy preference over unsecured creditors, citing law and jurisprudence to the effect that the law on preference of credits shall be observed in resolving claims against corporations under rehabilitation. It likewise Page 181 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 claimed that WGC violated its Indemnity Agreement with TIDCORP – which required that while the agreement subsisted, WGC shall not incur new debts without TIDCORP’s approval – by obtaining additional loans without the knowledge and consent of the latter.
RBC filed an Opposition to TIDCORP’s Comment, arguing that giving preference to TIDCORP would violate the Stay Order and impair the powers of the receiver; and that any change in the contractual relations between TIDCORP and WGC relative to their Indemnity Agreement comes as a necessary consequence of rehabilitation, which TIDCORP may not be heard to complain. The RTC approved WGC’s rehabilitation plan. TIDCORP filed a Petition for review before the CA praying that the order directing that all WGC obligations be settled on a pari passu basis be reversed and set aside. RBC filed an Urgent Motion for Intervention with attached Comment in Intervention, which is anchored on its original claim and objection to TIDCORP’s position. In its Opposition, TIDCORP maintained that intervention is not allowed in rehabilitation proceedings, citing Rule 3, Section 1 of the Interim Rules of Procedure on Corporate Rehabilitation. It argued that a final determination of the appeal does not depend on RBC’s participation since rehabilitation proceedings are in remand binding on all interested and affected parties even if they did not participate in the proceedings. Issues: 1. Whether or not RBC should be allowed to participate in the petition for review; 2. Whether or not a petition for review is the proper remedy for RBC
Ruling:
1. Yes. Under Rule 3, Section 5 of the Rules of Procedure on Corporate Rehabilitation, the review of any order or decision of the rehabilitation court or on appeal therefrom shall be in accordance with the Rules of Court, unless otherwise provided. This being the case, there is no visible objection to RBC’s participation in CA-G.R. SP No. 104141 as it stands to be injured or benefited by the outcome of TIDCORP’s Petition for Review – being both a secured and unsecured creditor of WGC. To recall, TIDCORP’s Petition for Review in CA-G.R. SP No. 104141 sought to 1) nullify the pari passu sharing scheme directed by the trial court; 2) declare RBC and the other creditor banks– which granted additional loans to WGC after the latter executed its Indemnity Agreement with TIDCORP – guilty of violating TIDCORP’s rights; and 3) grant preferential and special treatment to TIDCORP over other WGC creditors. These remedies would undoubtedly affect not merely the rights of RBC, but of all the other WGC creditors as well, as their standing or status as creditors would be somewhat downgraded, and the manner of recovery of their respective credits will be altered if TIDCORP’s prayer is Page 182 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 granted. Thus, the nature of TIDCORP’s Petition in CA-G.R. SP No. 104141 is such that the other creditors like RBC must be allowed to participate in the proceedings. They have an interest in the controversy where a final decree would necessarily affect their rights.
To disallow the participation of RBC constitutes an evasion of the appellate court’s positive duty to observe due process, a gross and patent error that can be considered as grave abuse of discretion. Likewise, when an adverse effect on the substantial rights of a litigant results from the exercise of the court’s discretion, certiorari may issue. If not, this Court possesses the prerogative and initiative to take corrective action when necessary to prevent a substantial wrong or to do substantial justice. 2. No. While TIDCORP is correct in arguing that intervention is not the proper mode for RBC coming to the CA since it is already a party to the rehabilitation proceedings, this merely highlights the former’s error in not allowing the latter to participate in the proceedings in CA-G.R. SP No. 104141 just as it underscores the appellate court’s blunder in not ordering that RBC be allowed to comment or participate in the case so that they may be given the opportunity to be heard on TIDCORP’s allegations and accusations. And while RBC chose the wrong mode for interposing its comments and objections in CA-G.R. SP No. 104141, this does not necessarily warrant the outright denial of its chosen remedy; the Court is not so rigid as to be precluded from adopting measures to insure that justice would be administered fairly to all parties concerned. If TIDCORP must pursue its Petition for Review, then RBC should be allowed to comment and participate in the proceedings. There is no other solution to the impasse.
Finally, the CA committed another patent error in declaring that RBC’s proper remedy was not to move for intervention, but to file a Petition for Review of the trial court’s June 6, 2008 Order. It failed to perceive the obvious fact that there is nothing about the trial court’s order that RBC questioned; quite the contrary, it sought to affirm the said order in toto and simply prayed for the dismissal of TIDCORP’s Petition for Review. There is thus no legal and logical basis for its conclusion that RBC should have resorted to a Petition for Review just the same. PHILIPPINE BANK OF COMMUNICATIONS vs. BASIC POLYPRINTERS AND PACKAGING CORPORATION G.R. No. 187581, October 20, 2014, J. Bersamin
A material financial commitment becomes significant in gauging the resolve, determination, earnestness and good faith of the distressed corporation in financing the proposed rehabilitation plan. This commitment may include the voluntary undertakings of the stockholders or the would-be investors of the debtor-corporation indicating their readiness, willingness and ability to contribute funds or property to guarantee the continued successful operation of the debtor corporation during the period of rehabilitation. In this case, the financial commitments presented by Basic Polyprinters were insufficient for the purpose of rehabilitation. Thus, its petition for corporate rehabilitation must necessarily fail. Facts: Page 183 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Basic Polyprinters and Packaging Corporation (Basic Polyprinters) was a domestic corporation engaged in the business of printing greeting cards, gift wrappers, gift bags, calendars, posters, labels and other novelty items.
On February 27, 2004, Basic Polyprinters, along with the eight other corporations belonging to the Limtong Group of Companies (namely: Cuisine Connection, Inc., Fine Arts International, Gibson HP Corporation, Gibson Mega Corporation, Harry U. Limtong Corporation, Main Pacific Features, Inc., T.O.L. Realty & Development Corp., and Wonder Book Corporation), filed a joint petition for suspension of payments with approval of the proposed rehabilitation in the RTC. Included in its overall Rehabilitation Program was the full payment of its outstanding loans in favor of Philippine Bank of Communications (PBCOM), RCBC, Land Bank, EPCIBank and AUB via repayment over 15 years with moratorium of two-years for the interest and five years for the principal at 5% interest per annum and a dacion en pago of its affiliate property in favor of EPCIBank.
Finding the petition sufficient in form and substance, the RTC issued the stay order dated August 31, 2006. It appointed Manuel N. Cacho III as the rehabilitation receiver, and required all creditors and interested parties, including the Securities and Exchange Commission (SEC), to file their comments. After the initial hearing and evaluation of the comments and opposition of the creditors, including PBCOM, the RTC gave due course to the petition and referred it to the rehabilitation receiver for evaluation and recommendation. On October 18, 2007, the rehabilitation receiver submitted his report recommending the approval of the rehabilitation plan. On December 19, 2007, the rehabilitation receiver submitted his clarifications and corrections to his report and recommendations. On January 11, 2008, the RTC issued an order approving the rehabilitation plan.
In the assailed decision promulgated on December 16, 2008, the CA affirmed the questioned order of the RTC, agreeing with the finding of the rehabilitation receiver that there were sufficient evidence, factors and actual opportunities in the rehabilitation plan indicating that Basic Polyprinters could be successfully rehabilitated in due time.
The PBCOM claims that the CA did not pass upon the issues presented in its petition, that the rehabilitation plan did not contain the material financial commitments required by Section 5, Rule 4 of the Interim Rules of Procedure for Corporate Rehabilitation (Interim Rules); that, accordingly, the proposed repayment scheme did not constitute a material financial commitment, and the proposed dacion en pago was not proper because the property subject thereof had been mortgaged in its favor; Page 184 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Issue: Whether or not Basic Polyprinters can be rehabilitated.
Ruling:
No. Basic Polyprinters cannot be rehabilitated.
A material financial commitment becomes significant in gauging the resolve, determination, earnestness and good faith of the distressed corporation in financing the proposed rehabilitation plan. This commitment may include the voluntary undertakings of the stockholders or the would-be investors of the debtor-corporation indicating their readiness, willingness and ability to contribute funds or property to guarantee the continued successful operation of the debtor corporation during the period of rehabilitation.
Basic Polyprinters presented financial commitments, as follows: 5. Additional P10 million working capital to be sourced from the insurance claim; 6. Conversion of the directors’ and shareholders’ deposit for future subscription to common stock; 7. Conversion of substituted liabilities, if any, to additional paid-in capital to increase the company’s equity; and 8. All liabilities (cash advances made by the stockholders) of the company from the officers and stockholders shall be treated as trade payables. However, these financial commitments were insufficient for the purpose.
The commitment to add P10,000,000.00 working capital appeared to be doubtful considering that the insurance claim from which said working capital would be sourced had already been written-off by Basic Polyprinters’s affiliate, Wonder Book Corporation. A claim that has been written-off is considered a bad debt or a worthless asset, and cannot be deemed a material financial commitment for purposes of rehabilitation. At any rate, the proposed additional P10,000,000.00 working capital was insufficient to cover at least half of the shareholders’ deficit that amounted to P23,316,044.00 as of June 30, 2006.
The Supreme Court also declared in Wonder Book Corporation v. Philippine Bank of Communications (Wonder Book) that the conversion of all deposits for future subscriptions to common stock and the treatment of all payables to officers and stockholders as trade payables was hardly constituting material financial commitments. Such “conversion” of cash advances to trade payables was, in fact, a mere re-classification of the liability entry and had no effect on the shareholders’ deficit. On the other hand, the Supreme Court cannot determine the effect of the “conversion” of the directors’ and shareholders’ deposits for future subscription to common stock and substituted liabilities on the shareholders’ deficit because their amounts were not reflected in the financial statements contained in the rollo. Page 185 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Basic Polyprinters’s rehabilitation plan likewise failed to offer any proposal on how it intended to address the low demands for their products and the effect of direct competition from stores like SM, Gaisano, Robinsons, and other malls. Even the P245 million insurance claim that was supposed to cover the destroyed inventories worth P264 million appears to have been written-off with no probability of being realized later on.
The Supreme Court observes, too, that Basic Polyprinters’s proposal to enter into the dacion en pago to create a source of “fresh capital” was not feasible because the object thereof would not be its own property but one belonging to its affiliate, TOL Realty and Development Corporation, a corporation also undergoing rehabilitation. Moreover, the negotiations (for the return of books and magazines from Basic Polyprinters’s trade creditors) did not partake of a voluntary undertaking because no actual financial commitments had been made thereon. Worthy of note here is that Wonder Book Corporation was a sister company of Basic Polyprinters, being one of the corporations that had filed the joint petition for suspension of payments and rehabilitation in SEC. Both of them submitted identical commitments in their respective rehabilitation plans. As a result, as the Court observed in Wonder Book, the commitments by Basic Polyprinters could not be considered as firm assurances that could convince creditors, future investors and the general public of its financial and operational viability.
Due to the rehabilitation plan being an indispensable requirement in corporate rehabilitation proceedings, Basic Polyprinters was expected to exert a conscious effort in formulating the same, for such plan would spell the future not only for itself but also for its creditors and the public in general. The contents and execution of the rehabilitation plan could not be taken lightly.
The Supreme Court is not oblivious to the plight of corporate debtors like Basic Polyprinters that have inevitably fallen prey to economic recession and unfortunate incidents in the course of their operations. However, the Supreme Court must endeavor to balance the interests of all the parties that had a stake in the success of rehabilitating the debtors. In doing so here, the Supreme Court cannot now find the rehabilitation plan for Basic Polyprinters to be genuine and in good faith, for it was, in fact, unilateral and detrimental to its creditors and the public. MARILYN VICTORIO-AQUINO vs. PACIFIC PLANS INC. and MAMARETO A. MARCELO, JR. G.R. No. 193108, December 10, 2014, J. Peralta
While the voice and participation of the creditors is crucial in the determination of the viability of the rehabilitation plan, as they stand to benefit or suffer in the implementation thereof, the interests of all stakeholders is the ultimate and prime consideration. Facts: Page 186 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Respondent Pacific Plans, Inc. (now Abundance Providers and Entrepreneurs Corporation or “APEC”) is engaged in the business of selling pre-need plans and educational plans, including traditional open-ended educational plans. PEPTrads are educational plans where respondent guarantees to pay the planholder, without regard to the actual cost at the time of enrolment, the full amount of tuition and other school fees of a designated beneficiary. Petitioner Marilyn is a holder of two units of respondent’s PEPTrads. On April 7, 2005, foreseeing the impossibility of meeting its obligations to the availing plan holders as they fall due, respondent filed a Petition for Corporate Rehabilitation with the Regional Trial Court (Rehabilitation Court), praying that it be placed under rehabilitation and suspension of payments. The Rehabilitation Court issued a Stay Order, directing the suspension of payments of the obligations of respondent and ordering all creditors and interested parties to file their comments/oppositions, respectively, to the Petition for Corporate Rehabilitation. The same Order also appointed respondent Mamerto A. Marcelo as the rehabilitation receiver and set the initial hearing of the case on May 25, 2005.
APEC submitted to the Rehabilitation Court its proposed rehabilitation plan. Under the terms thereof, APEC proposed the implementation of a “Swap,” which will essentially give the plan holder a means to exit from the PEPTrads at terms and conditions relative to a termination value that is more advantageous than those provided under the educational plan in case of voluntary termination. On February 16, 2006, the Rehabilitation Receiver submitted an Alternative Rehabilitation Plan for the approval of the Rehabilitation Court. Under the ARP, the benefits under the PEPTrads shall be translated into fixed-value benefits as of December 31, 2004, which will be termed as Base Year-end 2004 Entitlement. The creditors/oppositors did not oppose/comment on the Rehabilitation Receiver’s ARP. Respondent commenced with the implementation of its ARP in coordination with, and with clearance from, the Rehabilitation Receiver. In the meantime, the value of the Philippine Peso strengthened and appreciated. In view of this development, and considering that the trust fund of respondent is mainly composed of NAPOCOR bonds that are denominated in US Dollars, respondent submitted a manifestation with the Rehabilitation Court on February 29, 2008, stating that the continued appreciation of the Philippine Peso has grossly affected the value of the U.S. Dollar-denominated NAPOCOR bonds, which stood as security for the payment of the Net Translated Values of the PEPTrads. Thereafter, the Rehabilitation Receiver filed a Manifestation with Motion to Admit dated March 7, 2008, echoing the earlier tenor and substance of respondent’s manifestation, and praying that the Modified Rehabilitation Plan be approved by the Rehabilitation Court. Under the MRP, the ARP previously approved by the Rehabilitation Court is modified. The Rehabilitation Court issued a Resolution dated July 28, 2008 approving the MRP. Marilyn questioned the approval of the MRP before the CA on September 26, 2008.Unfortunately for her, despite motion for reconsideration, the CA denied the same on July 21, 2010.
Page 187 of 195
MERCANTILE LAW DIGESTS 2014-June 2016
Issue:
Hence, this Petition for Review on Certiorari.
Whether the MRP is ultra vires insofar as it reduces the original claim and even the original amount that Marilyn was to receive under the ARP. Ruling:
No, it is not.
The “cram-down” power of the Rehabilitation Court has long been established and even codified under Section 23, Rule 4 of the Interim Rules. Such prerogative was carried over in the Rehabilitation Rules, which maintains that the court may approve a rehabilitation plan over the objection of the creditors if, in its judgment, the rehabilitation of the debtors is feasible and the opposition of the creditors is manifestly unreasonable. In Bank of the Philippine Islands v. Sarabia Manor Hotel Corporation, where the Court elucidated the rationale behind Section 23, Rule 4 of the Interim Rules, the Court said that “a rehabilitation plan may be approved even over the opposition of the creditors holding a majority of the corporation’s total liabilities if there is a showing that rehabilitation is feasible and the opposition of the creditors is manifestly unreasonable. Also known as the “cram-down” clause, this provision, which is currently incorporated in the FRIA, is necessary to curb the majority creditors’ natural tendency to dictate their own terms and conditions to the rehabilitation, absent due regard to the greater long-term benefit of all stakeholders. Otherwise stated, it forces the creditors to accept the terms and conditions of the rehabilitation plan, preferring long-term viability over immediate but incomplete recovery.”
Based on the aforequoted doctrine, petitioner’s outright censure of the concept of the cram-down power of the rehabilitation court cannot be countenanced. To adhere to the reasoning of petitioner would be a step backward — a futile attempt to address an outdated set of challenges. It is undeniable that there is a need to move to a regime of modern restructuring, cram-down and court supervision in the matter of corporation rehabilitation in order to address the greater interest of the public. This is clearly manifested in Section 64 of Republic Act No. 10142, otherwise known as Financial Rehabilitation and Insolvency Act of 2010. BPI FAMILY SAVINGS BANKC, INC. vs. ST. MICHAEL MEDICAL CENTER, INC. G.R. No. 205469, March 25, 2015, J. Perlas-Bernabe
It is well to emphasize that the remedy of rehabilitation should be denied to corporations that do not qualify under the Rules. Neither should it be allowed to corporations whose sole purpose is to delay the enforcement of any of the rights of the creditors, which is rendered obvious by: (a) the absence of a sound and workable business plan; (b) baseless and Page 188 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 unexplained assumptions, targets, and goals; and (c) speculative capital infusion or complete lack thereof for the execution of the business plan. In this case, not only has the petitioning debtor failed to show that it has formally began its operations which would warrant restoration, but also it has failed to show compliance with the key requirements under the Rules, the purpose of which are vital in determining the propriety of rehabilitation. Thus, for all the reasons hereinabove explained, the Court is constrained to rule in favor of BPI Family and hereby dismiss SMMCI’s Rehabilitation Petition. Facts: Spouses Virgilio and Yolanda Rodil (Sps. Rodil) are the owners and sole proprietors of St. Michael Hospital. With a vision to upgrade St. Michael Hospital into a modern, wellequipped and full service tertiary 11-storey hospital, Sps. Rodil purchased two (2) parcels of land adjoining their existing property and, on May 22, 2003, incorporated SMMCI, with which entity they planned to eventually consolidate St. Michael Hospital’s operations. In order to finance the expansion of the premises of the hospital, the Spouses Rodil obtained load from BPI Family Savings Bank. The Spouses thereafter incurred problems with the first contractor, so the building was not completed. SMMCI was only able to pay the interest on its BPI Family loan, or the amount of 3,000,000.00 over a two-year period, from the income of St. Michael Hospital. On September 25, 2009, BPI Family demanded immediate payment of the entire loan obligation and, soon after, filed a petition for extrajudicial foreclosure of the real properties covered by the mortgage. The auction sale was scheduled on December 11, 2009, which was postponed to February 15, 2010 with the conformity of BPI Family.
On August 11, 2010, SMMCI filed a Petition for Corporate Rehabilitation (Rehabilitation Petition) before the RTC, with prayer for the issuance of a Stay Order as it foresaw the impossibility of meeting its obligation to BPI Family, its purported sole creditor. In its proposed Rehabilitation Plan,23 SMMCI merely sought for BPI Family (a) to defer foreclosing on the mortgage and (b) to agree to a moratorium of at least two (2) years during which SMMCI – either through St. Michael Hospital or its successor – will retire all other obligations. After which, SMMCI can then start servicing its loan obligation to the bank under a mutually acceptable restructuring agreement. 24 SMMCI declared that it intends to conclude pending negotiations for investments offered by a group of medical doctors whose capital infusion shall be used (a) to complete the finishing requirements for the 3rd and 5th floors of the new building; (b) to renovate the old 5storey building where St. Michael Hospital operates; and (c) to pay, in whole or in part, the bank loan with the view of finally integrating St. Michael Hospital with SMMCI. Finding the Rehabilitation Petition to be sufficient in form and substance, the RTC issued a Stay Order. In an Order 34 dated August 4, 2011, the RTC approved the Rehabilitation Plan
Aggrieved, BPI Family elevated the matter before the CA, mainly arguing that the approval of the Rehabilitation Plan violated its rights as an unpaid creditor/mortgagee and that the same was submitted without prior consultation with creditors. In a Decision dated Page 189 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 August 30, 2012, the CA affirmed the RTC’s approval of the Rehabilitation Plan. Hence, this petition. Issue:
Whether or not the CA correctly affirmed SMMCI’s Rehabilitation Plan as approved by the RTC. Ruling:
No. that SMMCI’s Rehabilitation Plan, an indispensable requisite in corporate rehabilitation proceedings, failed to comply with the fundamental requisites outlined in Section 18, Rule 3 of the Rules, particularly, that of a material financial commitment to support the rehabilitation and an accompanying liquidation analysis, all of the petitioning debtor: SEC. 18. 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 such as, but not limited, to the nonimpairment of their security liens or interests; (c) the material financial commitments to support the rehabilitation plan; (d) the means for the execution of the rehabilitation plan, which may include debt to equity conversion, restructuring of the debts, dacion en pago or sale exchange or any disposition of assets or of the interest of shareholders, partners or members; (e) a liquidation analysis setting out for each creditor that the present value of payments it would receive under the plan is more than that which it would receive if the assets of the debtor were sold by a liquidator within a six-month period from the estimated date of filing of the petition; and (f) such other relevant information to enable a reasonable investor to make an informed decision on the feasibility of the rehabilitation plan. It is well to emphasize that the remedy of rehabilitation should be denied to corporations that do not qualify under the Rules. Neither should it be allowed to corporations whose sole purpose is to delay the enforcement of any of the rights of the creditors, which is rendered obvious by: (a) the absence of a sound and workable business plan; (b) baseless and unexplained assumptions, targets, and goals; and (c) speculative capital infusion or complete lack thereof for the execution of the business plan. Unfortunately, these negative indicators have all surfaced to the fore, much to SMMCI’s chagrin. While the Court recognizes the financial predicaments of upstart corporations under the prevailing economic climate, it must nonetheless remain forthright in limiting the remedy of rehabilitation only to meritorious cases. As above-mentioned, the purpose of rehabilitation proceedings is not only to enable the company to gain a new lease on life but also to allow creditors to be paid their claims from its earnings, when so rehabilitated. Hence, the remedy must be accorded only after a judicious regard of all stakeholders’ interests; it is not a one-sided tool that may be graciously invoked to escape every position of distress. Page 190 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 In this case, not only has the petitioning debtor failed to show that it has formally began its operations which would warrant restoration, but also it has failed to show compliance with the key requirements under the Rules, the purpose of which are vital in determining the propriety of rehabilitation. Thus, for all the reasons hereinabove explained, the Court is constrained to rule in favor of BPI Family and hereby dismiss SMMCI’s Rehabilitation Petition. Viva Shipping Lines, Inc. v. Keppel Philippines, Inc. et. al. G.R. No. 177382, February 17, 2016, Leonen, J:
Facts: On October 4, 2005, Viva Shipping Lines, Inc. (Viva Shipping Lines) filed a Petition for Corporate Rehabilitation before the Regional Trial Court of Lucena City. The Regional Trial Court initially denied the Petition for failure to comply with the requirements in Rule 4, Sections 2 and 3 of the Interim Rules of Procedure on Corporate Rehabilitation. On October 17, 2005, Viva Shipping Lines filed an Amended Petition. In the Amended Petition, Viva Shipping Lines claimed to own and operate 19 maritime vessels5 and Ocean Palace Mall, a shopping mall in downtown Lucena City. Viva Shipping Lines also declared its total properties’ assessed value at about ₱45,172,790.00. However, these allegations were contrary to the attached documents in the Amended Petition.
One of the attachments, the Property Inventory List, showed that Viva Shipping Lines owned only two (2) maritime vessels: M/V Viva Peñafrancia V and M/V Marian Queen. The list also stated that the fair market value of all of Viva Shipping Lines’ assets amounted to ₱447,860,000.00, ₱400 million more than what was alleged in its Amended Petition. Some of the properties listed in the Property Inventory List were already marked as "encumbered" by its creditors; hence, only ₱147,630,000.00 of real property and its vessels were marked as "free assets." In its Company Rehabilitation Plan, Viva Shipping Lines enumerated possible sources of funding such as the sale of old vessels and commercial lots of its sister company, Sto. Domingo Shipping Lines. It also proposed the conversion of the Ocean Palace Mall into a hotel, the acquisition of two (2) new vessels for shipping operations, and the "re-operation" of an oil mill in Buenavista, Quezon.
On October 19, 2005, the Regional Trial Court found that Viva Shipping Lines’ Amended Petition to be "sufficient in form and substance," and issued a stay order. It stayed the enforcement of all monetary and judicial claims against Viva Shipping Lines, and prohibited Viva Shipping Lines from selling, encumbering, transferring, or disposing of any of its properties except in the ordinary course of business. Thereafter, several of the creditors of Viva Shipping Lines (including emplloyees) came out. The RTC then lifted the stay order and denied Viva Shiping Lines’ petition. Page 191 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 The Regional Trial Court found that Viva Shipping Lines’ assets all appeared to be nonperforming. Further, it noted that Viva Shipping Lines failed to show any evidence of consent to sell real properties belonging to its sister company. Aggrieved, Viva Shipping Lines filed a Petition for Review under Rule 43 of the Rules of Court before the Court of Appeals. The Court of Appeals dismissed Viva Shipping Lines’ Petition for Review in the Resolution dated January 5, 2007. It found that Viva Shipping Lines failed to comply with procedural requirements under Rule 43. The Court of Appeals ruled that due to the failure of Viva Shipping Lines to implead its creditors as respondents, "there are no respondents who may be required to file a comment on the petition, pursuant to Section 8 of Rule 43."
Petitioner argues that the Court of Appeals should have given due course to its Petition and excused its non-compliance with procedural rules. For petitioner, the Interim Rules of Procedure on Corporate Rehabilitation mandates a liberal construction of procedural rules, which must prevail over the strict application of Rule 43 of the Rules of Court. Issue:
1. Whether the Court of Appeals erred in dismissing petitioner Viva Shipping Lines’ Petition for Review on procedural grounds; and 2. Whether petitioner was denied substantial justice when the Court of Appeals did not give due course to its petition.
Held:
1. No. The Court held that it cannot exercise its equity jurisdiction and allow petitioner to circumvent the requirement to implead its creditors as respondents. Tolerance of such failure will not only be unfair to the creditors, it is contrary to the goals of corporate rehabilitation, and will invalidate the cardinal principle of due process of law. The failure of petitioner to implead its creditors as respondents cannot be cured by serving copies of the Petition on its creditors. Since the creditors were not impleaded as respondents, the copy of the Petition only serves to inform them that a petition has been filed before the appellate court. Their participation was still significantly truncated. Petitioner’s failure to implead them deprived them of a fair hearing. The appellate court only serves court orders and processes on parties formally named and identified by the petitioner. Since the creditors were not named as respondents, they could not receive court orders prompting them to file remedies to protect their property rights. 2. No. Petitioner’s rehabilitation plan is almost impossible to implement. Even an ordinary individual with no business acumen can discern the groundlessness of petitioner’s rehabilitation plan. Petitioner should have presented a more realistic and practicable rehabilitation plan within the time periods allotted after initiatory hearing, or otherwise, should have opted for liquidation. Page 192 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 Corporate rehabilitation is a remedy for corporations, partnerships, and associations "who [foresee] the impossibility of meeting [their] debts when they respectively fall due." A corporation under rehabilitation continues with its corporate life and activities to achieve solvency, or a position where the corporation is able to pay its obligations as they fall due in the ordinary course of business. Solvency is a state where the businesses’ liabilities are less than its assets. Corporate rehabilitation is a type of proceeding available to a business that is insolvent. In general, insolvency proceedings provide for predictability that commercial obligations will be met despite business downturns. Stability in the economy results when there is assurance to the investing public that obligations will be reasonably paid. It is considered state policy to encourage debtors, both juridical and natural persons, and their creditors to collectively and realistically resolve and adjust competing claims and property rights[.] . . . [R]ehabilitation or liquidation shall be made with a view to ensure or maintain certainty and predictability in commercial affairs, preserve and maximize the value of the assets of these debtors, recognize creditor rights and respect priority of claims, and ensure equitable treatment of creditors who are similarly situated. When rehabilitation is not feasible, it is in the interest of the State to facilitate a speedy and orderly liquidation of these debtors’ assets and the settlement of their obligations. The rationale in corporate rehabilitation is to resuscitate businesses in financial distress because "assets . . . are often more valuable when so maintained than they would be when liquidated." Rehabilitation assumes that assets are still serviceable to meet the purposes of the business. The corporation receives assistance from the court and a disinterested rehabilitation receiver to balance the interest to recover and continue ordinary business, all the while attending to the interest of its creditors to be paid equitably. These interests are also referred to as the rehabilitative and the equitable purposes of corporate rehabilitation. Rather than let struggling corporations slip and vanish, the better option is to allow commercial courts to come in and apply the process for corporate rehabilitation. Mervic Realty, Inv. v. Viccy Realty, Inc. G.R. No. 193748, February 3, 2016, Brion, J: Facts: Mervic Realty and Viccy Realty jointly filed a petition for rehabilitation before the RTC of Malabon. The rehabilitation petition was filed under A.M. No. 00-8-10-SC dated November 21, 2000, or the 2000 Interim Rules of Procedure on Corporate Rehabilitation Page 193 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 The petitioners alleged that they are duly organized domestic real estate corporations with principal place of business in Malabon City. They disclosed that their common president is Mario Siochi and that a majority of their stockholders and officers are members of the Siochi family. The petitioners averred that they were financially stable until they were hit by the Asian financial crisis in 1997. As a result of the financial crisis, they foresaw the impossibility of meeting their obligations when they fall due. The petitioners thus prayed that the rehabilitation court issue a stay order to suspend the enforcement of the claims against them. As of September 30, 2006, their combined total obligations inclusive of interests, penalties, and other charges had reached P193,156,559.00.
The RTC granted the stay order prayed for. Chinabank, one of the creditors of the petitioners opposed the petition and likewise questioned the venue of the rehabilitation petition. Under Section 2, Rule 3 of the Interim Rules, petitions for corporate rehabilitation shall be filed with the Regional Trial Court having jurisdiction over the territory where the debtor's principal office is located. According to China Bank, the Articles of Incorporation (AOI) of the petitioners show that their principal place of business is located in Quezon City, not in Malabon City.
The rehabilitation court approved the rehabilitation plan and denied China Bank’s opposition. The Court of Appeals granted China Bank’s petition for review and dismissed the petition for rehabilitation on the ground of improper venue. The petitioners invoke the 2008 Rules which allow a group of companies to file a joint rehabilitation petition.
Issue: Whether the petitioners, which are close family corporations, can jointly file the petition for rehabilitation under the Interim Rules. Held: No. The rules in effect at the time the rehabilitation petition was filed were the Interim Rules. The Interim Rules took effect on December 15, 2000, and did not allow the joint or consolidated filing of rehabilitation petitions. In the present case, the rehabilitation court conducted the initial hearing on 22 January 2007 and approved the rehabilitation plan on 15 April 2008, long before the effectivity of the 2008 Rules. Clearly, the 2008 Rules cannot be retroactively filed in the rehabilitation petition filed by the petitioners.
In Asiatrust Development Bank v. First Aikka Development, Inc., the Court held that the consolidation of petitions involving two separate entities is not proper. Although the Corporations had interlocking directors, owners, officers, as well as intertwined loans, the two corporations were separate, each one with its own distinct personality. In determining the feasibility of rehabilitation, the court evaluates the assets and liabilities of each of these corporations separately and not jointly with other corporations. Thus, the Court dismissed the rehabilitation petition but only with respect to the corporation located in Pasig City. The Court found that the other corporation properly filed
Page 194 of 195
MERCANTILE LAW DIGESTS 2014-June 2016 its rehabilitation petition in Baguio City because its principal office is located in that city. The Court remanded the case to the rehabilitation court of Baguio City for further proceedings but only with respect to the corporation located in that city.
Page 195 of 195
