Bataan Shipyard & Engineering Co., Inc.

vs Presidential Commission on Good Government

150 SCRA 181 Business Organization Corporation Law A Corporation Cannot Invoke the Right Against Self-Incrimination

When President Corazon Aquino took power, the Presidential Commission on Good Government (PCGG) was formed in order to recover ill gotten wealth allegedly acquired by former President Marcos and his cronies. Aquino then issued two executive orders in 1986 and pursuant thereto, a sequestration and a takeover order were issued against Bataan Shipyard & engineering Co., Inc. (BASECO). BASECO was alleged to be in actuality owned and controlled by the Marcoses through the Romualdez family, and in turn, through dummy stockholders. The sequestration order issued in 1986 required, among others, that BASECO produce corporate records from 1973 to 1986 under pain of contempt of the PCGG if it fails to do so. BASECO assails this order as it avers, among others, that it is against BASECOs right against self incrimination and unreasonable searches and seizures.

ISSUE: Whether or not BASECO is correct.

HELD: No. First of all, PCGG has the right to require the production of such documents pursuant to the power granted to it. Second, and more importantly, right against self-incrimination has no application to juridical persons. There is a reserve right in the legislature to investigate the contracts of a corporation and find out whether it has exceeded its powers. It would be a strange anomaly to hold that a state, having chartered a corporation like BASECO to make use of certain franchises, could not, in the exercise of sovereignty, inquire how these franchises had been employed, and whether they had been abused, and demand the production of the corporate books and papers for that purpose. Neither is the right against unreasonable searches and seizures applicable here. There were no searches made and no seizure pursuant to any search was ever made. BASECO was merely ordered to produce the corporate records.

Bache & Co. Inc. et al vs BIR Commissioner Vivencio Ruiz et al

Search and Seizure Personal Examination of the Judge On 24 Feb 1970, Commissioner Vera of Internal Revenue, wrote a letter addressed to J Ruiz requesting the issuance of a search warrant against petitioners for violation of Sec 46(a) of the NIRC, in relation to all other pertinent provisions thereof, particularly Sects 53, 72, 73, 208 and 209, and authorizing Revenue Examiner de Leon make and file the application for search warrant which was attached to the letter. The next day, de Leon and his witnesses went to CFI Rizal to obtain the search warrant. At that time J Ruiz was hearing a certain case; so, by means of a note, he instructed his Deputy Clerk of Court to take the depositions of De Leon and Logronio. After the session had adjourned, J Ruiz was informed that the depositions had already been taken. The stenographer read to him her stenographic notes; and thereafter, J Ruiz asked respondent Logronio to take the oath and warned him that if his deposition was found to be false and without legal basis, he could be charged for perjury. J Ruiz signed de Leons application for search warrant and Logronios deposition. The search was subsequently conducted. ISSUE: Whether or not there had been a valid search warrant. HELD: The SC ruled in favor of Bache on three grounds. 1. J Ruiz failed to personally examine the complainant and his witness. Personal examination by the judge of the complainant and his witnesses is necessary to enable him to determine the existence or non-existence of a probable cause. 2. The search warrant was issued for more than one specific offense. The search warrant in question was issued for at least four distinct offenses under the Tax Code. As ruled in Stonehill Such is the seriousness of the irregularities committed in connection with the disputed search warrants, that this Court deemed it fit to amend Section 3 of Rule 122 of the former Rules of Court that a search warrant shall not issue but upon probable cause in connection with one specific offense. Not satisfied with this qualification, the Court added thereto a paragraph, directing that no search warrant shall issue for more than one specific offense. 3. The search warrant does not particularly describe the things to be seized.

The documents, papers and effects sought to be seized are described in the Search Warrant Unregistered and private books of accounts (ledgers, journals, columnars, receipts and disbursements books, customers ledgers); receipts for payments received; certificates of stocks and securities; contracts, promissory notes and deeds of sale; telex and coded messages; business communications, accounting and business records; checks and check stubs; records of bank deposits and withdrawals; and records of foreign remittances, covering the years 1966 to 1970. The description does not meet the requirement in Art III, Sec. 1, of the Constitution, and of Sec. 3, Rule 126 of the Revised Rules of Court, that the warrant should particularly describe the things to be seized. A search warrant may be said to particularly describe the things to be seized when the description therein is as specific as the circumstances will ordinarily allow or when the description expresses a conclusion of fact not of law by which the warrant officer may be guided in making the search and seizure or when the things described are limited to those which bear direct relation to the offense for which the warrant is being issued.

LIM TONG LIM v. PHILIPPINE FISHING GEAR INDUSTRIES INC(G.R. No. 136448; November 3, 1999) FACTS: On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao entered into a Contract dated February 7, 1990, for the purchase of fishing nets of various sizes from the Philippine Fishing Gear Industries,Inc. (herein respondent). They claimed that they were engaged in a business venture with Petitioner Lim Tong Lim, who however was not a signatory to the agreement. The total price of the nets amounted to P532,045. Four hundred pieces of floats worth P68,000 were also sold to the Corporation. The buyers, however, failed to pay for the fishing nets and the floats; hence, private respondents filed a collection suit against Chua, Yao and Petitioner Lim Tong Lim with a prayer for a writ of preliminary attachment. The suit was brought against the three in their capacities as general partners, on the allegation that "Ocean Quest Fishing Corporation" was a non- existent corporation as shown by a Certification from the Securities and Exchange Commission. On September 20, 1990, the lower court Issued A Writ of Preliminary Attachment, which the sheriff enforced by attaching the fishing nets on board F/B Lourdes which was then docked at the Fisheries Port, Navotas, Metro Manila.

ISSUE: Whether or not there was a partnership? HELD: Yes. it is clear that Chua, Yao and Lim had decided to engage in a fishing business, which they started by buying boats worth P3.35 million, financed by a loan secured from Jesus Lim who was petitioner's brother. These boats, the purchase and the repair of which were financed with borrowed money, fell under the term "common fund" under Article 1767. The contribution to such fund need not be cash or fixed assets; it could be an intangible like credit or industry. That the parties agreed that any loss or profit from the sale and operation of the boats would be divided equally among them also shows that they had indeed formed a partnership. Given the preceding FACTS, it is clear that there was, among petitioner, Chua and Yao, a partnership engaged in the fishing business. They purchased the boats, which constituted the main assets of the partnership, and they agreed that the proceeds from the sales and operations thereof would be divided among them HAVING REAPED THE BENEFITS OF THE CONTRACT ENTERED INTO BY PERSONS WITH WHOM THEY PREVIOUSLY HAD AN EXISTING RELATIONSHIP, PETITIONER IS DEEMED TO BE PART OF SAID CORPORATION AND IS COVERED BY THE DOCTRINE OF CORPORATION BY ESTOPPEL.

International Express Travel & Tour Services, Inc. v. CA, Kahn & Philippine Football Federation [343 SCRA 674 (Oct.19, 2000)] Creation of Separate Corporate Personality Liability of Person Acting for Unincorporated Entity Doctrine of Estoppel Facts: IETTSI wrote a letter to the Federation through its president, Kahn, offering its services as a travel agency. This was accepted by the Federation. IETTSI secured airline tickets for the trips of the athletes & officials of the Federation to the South East Asian Games in Kula Lumpur as well as other trips to China & Brisbane. A demand letter was sent to the Federation re: payment of the tickets. After 3 partial payments, Kahn issued a personal check as partial payment for the Federations balance. No further payments were made, causing IETTSI to file a civil case before the RTC against Kahn in his personal capacity on the ground that he allegedly guaranteed the said obligation & as President of the Federation, impleading the Federation as an alternative defendant.

Kahn filed a counterclaim against IETTSI averring that it had no cause of action against him either in his personal nor official capacity as he did not guarantee the payment but merely acted as an agent of the Federation w/c has a separate & distinct juridical personality. The Federation, in failing to file its answer, was declared in default. The RTC found Kahn personally liable since a voluntary unincorporated association, like the Federation, doesnt have the power to enter nor ratify a contract. The contract thus entered into by its officers or agents on its behalf is not binding on the association nor enforceable against it but against the officers or agents in their personal capacity. On appeal to the CA, decision was reversed saying that IETTSI failed to prove that Kahn guaranteed the obligation, hence this petition.

Issues: (1) WON the Federation has a separate juridical personality. (2) WON Kahn can be held personally liable for the unpaid obligations of the Federation Held: CA decision reversed & set aside. RTC decision reinstated. RA 3135 & PD 604 recognized the juridical existence of national sports associations. The power to purchase, sell, lease & encumber property are acts w/c may only be done by persons, whether natural or artificial, with juridical capacity and these have been granted to national sports associations, clearly indicating their juridical personality.

However, such does not automatically take place by mere passage of the laws. Before a corp may acquire juridical personality, the State must give its consent either in the form of a special law or a general enabling act. Nowhere can it be found in RA 3135 & PD 604 any provision creating the Philippine Football Federation. These laws merely recognized the existence of national sports associations & provided the manner by which they may acquire juridical personality. The statutory provisions require that before an entity may be considered as a national sports association, such must be recognized by the accrediting organization, the Philippine Amateur

Athletic Federation under RA 3135 & the Department of Youth & Sports Development under PD 604. In attempting to prove juridical existence of the Federation, Kahn attached a copy of the constitution & by-laws of the Federation this doesnt prove the said Federation has been recognized & accredited. Any person acting or purporting to act on behalf of a corp w/c has no valid existence assumes such privileges & obligations & becomes personally liable for contracts entered into or for such other acts performed as such agent. Hence, Kahn should be liable for the unpaid obligations of the unincorporated Federation. He is presumed to have known of the corp existence or non-existence of the Federation. Doctrine of Corporation by Estoppel applies to third persons only when he tries to escape liability on a contract from w/c he has benefited on the irrelevant ground of defective corporation. Here, IETTSI is not trying to escape liability from the contract but rather is the 1 claiming from it.

LUCIA MAGALING, PARALUMAN R. MAGALING, MARCELINA MAGALINGTABLADA, AND BENITO R. MAGALING (HEIRS OF THE LATE REYNALDO MAGALING), PETITIONERS, VS. PETER ONG, RESPONDENT. G. R. No. 173333, August 13, 2008

Doctrine: The veil of corporate fiction may be pierced if theres gross negligence on the part of the directors. Nature: Petition for Review on Certiorari filed under Rule 45 seeking the reversal of the Decision of the CA. FACTS: 1) Respondent Ong instituted with the RTC a Complaint for the collection of the sum of P389,000.00, with interest, attorney's fees and costs of suit, with prayer for issuance of a writ of preliminary attachment against the spouses Magaling and Termo Loans. The allegation was that said sps. are the controlling stockholders/owners of Termo Loans and had used the corporation as mere alter ego or adjunct to evade the payment of valid obligation

2) The sps. sought a loan from Peter Ong and promised a corresponding interest of 2.5 %. As a guarantee, Reynaldo issued 7 checks, but only 2 were cleared by the bank. Despite demands, the sps. and and Termo Loans failed to pay. 3) RTC grants the writ of preliminary attachment against sps Magaling as it finds that the petition of Ong was impressed with merit. In their response with counterclaim, the sps. alleged that Ong voluntarily invested the money without any inducement because he got attracted with the interest rate and that the checks that were issued by Termo Loans as a corporation and answering defendants are not even signatories thereto. 4) Pursuant to the writ of preliminary attachment earlier issued the Sheriff of RTC, Br. 13 of Lipa City, caused the attachment of two (2) parcels of land covered by Transfer Certificates of Title No. T-109347 and No. T-75559, both in the names of the Spouses Magaling. 5) The Sps. Magaling expectedly moved for the reconsideration of the Order of the RTC granting the writ of preliminary attachment which the RTC granted. The RTC found that Spouses Magaling's Motion to Discharge Attachment was impressed with merit: FIRSTLY, it appears that the obligation was incurred by Termo Loans. It is therefore a corporate liability and not the personal obligation of the sps. 6) RTC decided against Termo Loans and ordered the execution of the order against it and subsequently cleared the sps. Magaling of liability ratiocinating that Termo Loans has a personality separate and distinct from that of Reynaldo Magaling who happens to be only a stockholder thereof and president at that time. However, the Sheriff was not able to attach any of the properties of Termo Loans as it had already stopped its operations. 7) CA reverses the decision of RTC and held that pouses Magaling jointly and severally liable to Ong for the corporate obligation of Termo Loans. The CA pierced the veil of corporate fiction and held the sps. Magaling solidarily liable with Termo Loans for the corporate obligations of the latter since it found that Reynaldo Magaling was grossly negligent in managing the affairs of the said corporation. MoR of sps was denied by CA and grants the motion of Ong for the re-issuance of preliminary attachment against the properties of sps Magaling.

ISSUE: Was the CA correct in making the sps Magaling liable for the loans contracted by Termo Loans? HELD: Yes!

The general rule is that obligations incurred by the corporation, acting through its directors, officers and employees, are its sole liabilities, and vice versa. There are times, however, when solidary liabilities may be incurred and the veil of corporate fiction may be pierced. Exceptional circumstances warranting such disregard of a separate personality are summarized as follows: 1. When directors and trustees or, in appropriate case, the officers of a corporation: (a) vote for or assent to patently unlawful acts of the corporation; (b) act in bad faith or with gross negligence in directing the corporate affairs; (c) are guilty of conflict of interest to the prejudice of the corporation, its stockholders or members, and other persons; 2. When a director or officer has consented to the issuance of watered down stocks or who, having knowledge thereof, did not forthwith file with the corporate secretary his written objection thereto; 3. When a director, trustee or officer has contractually agreed or stipulated to hold himself personally and solidarily liable with the corporation; or 4. When a director, trustee or officer is made, by specific provision of law, personally liable for his corporate action. Although theres no bad faith and fraud in this instance , the Court still cannot totally absolve Reynaldo Magaling from any liability considering his gross negligence in directing the affairs of Termo Loans; thus, he must be made personally liable for the debt of Termo Loans to Ong. In order to pierce the veil of corporate fiction, for reasons of negligence by the director, trustee or officer in the conduct of the transactions of the corporation, such negligence must be gross. Gross negligence is one that is characterized by the want of even slight care, acting or omitting to act in a situation where there is a duty to act, not inadvertently but willfully and intentionally with a conscious indifference to consequences insofar as other persons may be affected; and must be established by clear and convincing evidence. Parenthetically, gross or willful negligence could amount to bad faith. He never told the investors of the risks that their investment will be subjected to in his testimony when he said, upon cross-examination, that I did not tell that to investors, what is going on for fear that they might be afraid of what is happening, Your Honor. Worse, he didnt pursue the investements when Termo Loans closed down because he was also managing 9 other loan companies simultaneously.

The Court of Appeals observed correctly when it succinctly stated that, "[c]learly, Reynaldo Magaling was grossly negligent in directing the affairs of Thermo (sic) Loans without due regard to the plight of its investors and thus should be held jointly and severally liable for the corporate obligation of Thermo (sic) Loans to appellant Peter Ong

DBP vs. CA FACTS: Marinduque Mining obtained from PNB various loan accommodations. To secure loans, Marinduque executed DEED OF REAL ESTATE Mortagage and Chattel Mortgage. Thereafter second MORTGAGE TRUST AGREEMENT was executed by Marinduque Mining in favor of PNB and DBP. It includes a provision wherein properties which Marinduque Mining will subsequently acquire will be part of the mortgage. For Failure to settle the loan obligations, PNB and DBP instituted Extrajudicial Foreclosure over the mortgaged properties. PNB and DBP as highest bidders, assigned their rights to Nonoc Mining. Pursuant to Proclamation No. 50, the properties were thereafter reassigned to Asset Privatization Trust. In the meantime, during the existence of the mortgage, Marinduque Mining purchased materials from Remington worth more or less Php 900,000 which has been subject of complaint for sum of money and damages. In the complaint Remington alleged that PNB, DBP and all the assignees must be treated as one and the same identity , necessitating the disregard of corporate fiction and that the transfer of properties was made in defraud of creditors. ISSUE: W/N there can be a valid disregard of veil of corporate fiction HELD: Piercing the veil of corporate fiction does not apply. DOCTRINE OF PIERCING THE VEIL OF CORPORATE FICTION APPLIES ONLY WHEN such corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or defend crime. To disregard the separate juridical personality of the corporation, the wrongdoing must be clearly and convincingly established.

 In this case REMINGTON failed to established bad faith on the part of Marinduque Mining and all its assignees. The fact of interlocking directors of Marinduque Mining and DBP was irrelevant. The rule of interlocking directors resulting in prejudice to one corporation does not apply because the corporation allegedly prejudiced in this case is Remington which is a third party to the interlocking directors. Likewise, that the said directors are themselves creditors of their company likewise does not apply to warrant piercing of veil because the Creditor of Marinduque Mining is DBP and not the directors. Thus, the act of Bank in foreclosure is merely an exercise of law.