Edward A. Keller & Co., Ltd. V. COB Group Marketing Inc. GR No.
L-68907, 16
January 1986
Case Doctrine:
As to the liability of the stockholders, it is settled that a stockholder is personally liable for
the financial obligations of a corporation to the extent of his unpaid subscription.
Facts:
Edward A. Keller & Co., Ltd. appointed COB Group Marketing, Inc. as exclusive
distributor of its household products, Brite and Nuvan in Panay and Negros, as shown in
the sales agreement dated March 14, 1970 (32-33 RA). Under that agreement Keller sold on
credit its products to COB Group Marketing. As security for COB Group Marketing's credit
purchases up to the amount of P35,000, one Asuncion Manahan mortgaged her land to
Keller. Manahan assumed solidarily with COB Group Marketing the faithful performance
of all the terms and conditions of the sales agreement.
A second sales agreement was entered whereby COB’s territory was extended to Northern
and Southern Luzon. This was the cause of having the land of the Lorenzos be mortgaged.
The credit purchases of COB Group Marketing, which started on October 15, 1969, limited
up to January 22, 1971. On May 8, the board of directors of COB Group Marketing were
apprised by Jose E. Bax the firm's president and general manager, that the firm owed Keller
about P179,000. Bax was authorized to negotiate with Keller for the settlement of his firm's
liability.
The stockholders of COB Group Marketing, Moises P. Adao and Tomas C. Lorenzo, Jr., in
a letter dated July 24, 1971 to Keller's counsel, proposed to pay Keller P5,000 on
November 30, 1971 and thereafter every thirtieth day of the month for three years until
COB Group Marketing's mortgage obligation had been fully satisfied. They also proposed
to substitute the Manahan mortgage with a mortgage on Adao's lot at 72 7th Avenue,
Cubao, Quezon City. These pieces of documentary evidence are sufficient to prove the
liability of COB Group Marketing and to justify the foreclosure of the two mortgages
executed by Manahan and Lorenzo.
ISSUE:
Whether or not the stockholders of COB Group Marketing can be held personally liable for
the credit.
HELD:
No. The Supreme Court found that the lower courts erred in nullifying the admissions of
liability made in 1971 by Bax as president and general manager of COB Group Marketing
and in giving credence to the alleged overpayment computed by Bax.
The lower courts not only allowed Bax to nullify his admissions as to the liability of COB
Group Marketing but they also erroneously rendered judgment in its favor in the amount of
its supposed overpayment in the sum of P100,596.72, in spite of the fact that COB Group
Marketing was declared in default and did not file any counterclaim for the supposed
overpayment.
The lower courts harped on Keller's alleged failure to thresh out with representatives of
COB Group Marketing their "diverse statements of credits and payments". That means that
there was a conference on the COB Group Marketing's liability. Bax in that discussion did
not present his reconciliation statements to show overpayment. He admitted that Keller sent
his company monthly statements of accounts but he could not produce any formal protest
against the supposed inaccuracy of the said statements. He lamely explained that he would
have to dig up his company's records for the formal protest. He did not make any written
demand for reconciliation of accounts.
Thus, as to the liability of the stockholders, it is settled that a stockholder is personally
liable for the financial obligations of a corporation to the extent of his unpaid subscription.
Heirs of Fely Tan, Uy v. International Exchange Bank GR Nos. 166282 and 166283, 13
February 2013
Case Doctrine:
Solidary liability will attach to the directors, officers or employees of the corporation in
certain circumstances, such as:
1. When directors and trustees or, in appropriate cases, 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; and (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 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.
Facts:
On several occasions, International Exchange Bank granted loans to Hammer Garments
Corporation (Hammer), covered by promissory notes and deeds of assignment for a total
amount of ₱24,938,898.08. These were made pursuant to the Letter-Agreement,4 dated
March 23, 1996, between iBank and Hammer, represented by its President and General
Manager, Manuel Chua (Chua) a.k.a. Manuel Chua Uy Po Tiong, granting Hammer a P 25
Million-Peso Omnibus Line. The loans were secured by a P 9 Million-Peso Real Estate
Mortgage executed on July 1, 1997 by Goldkey Development Corporation (Goldkey) over
several of its properties and a P 25 Million-Peso Surety Agreement7 signed by Chua and
his wife, Fe Tan Uy (Uy), on April 15, 1996.
Hammer defaulted in the payment of its loans, prompting iBank to foreclose on Goldkey’s
third-party Real Estate Mortgage. The mortgaged properties were sold for P 12 million
during the foreclosure sale, leaving an unpaid balance of P 13,420,177.62.9 For failure of
Hammer to pay the deficiency, iBank filed a Complaint10 for sum of money on December
16, 1997 against Hammer, Chua, Uy, and Goldkey before the Regional Trial Court, Makati
City (RTC).
The RTC ruled in favor of iBank. While it made the pronouncement that the signature of
Uy on the Surety Agreement was a forgery, it nevertheless held her liable for the
outstanding obligation of Hammer because she was an officer and stockholder of the said
corporation. The RTC agreed with Goldkey that as a third-party mortgagor, its liability was
limited to the properties mortgaged.
Aggrieved, the heirs of Uy and Goldkey (petitioners) elevated the case to the CA and the
latter affirmed the RTC’s Decision. It ruled that iBank was not negligent in evaluating the
financial stability of Hammer. According to the appellate court, iBank was induced to grant
the loan because petitioners, with intent to defraud the bank, submitted a falsified Financial
Report for 1996 which incorrectly declared the assets and cashflow of Hammer. Because
petitioners acted maliciously and in bad faith and used the corporate fiction to defraud
iBank, they should be treated as one and the same as Hammer.
ISSUE:
Whether or not Uy was personally liable to iBank for the loan obligation of Hammer as an
officer and stockholder of the said corporation.
HELD:
The Supreme Court finds in favor of Uy.
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.
Consistent with the provisions of the Corporation Code of the Philippines, which states:
Sec. 31. Liability of directors, trustees or officers. – Directors or trustees who willfully and
knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty
of gross negligence or bad faith in directing the affairs of the corporation or acquire any
personal or pecuniary interest in conflict with their duty as such directors or trustees shall
be liable jointly and severally for all damages resulting therefrom suffered by the
corporation, its stockholders or members and other persons.
Solidary liability will then attach to the directors, officers or employees of the corporation
in certain circumstances, such as:
1. When directors and trustees or, in appropriate cases, 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; and (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 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.
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.
The Heirs of Uy are correct to argue that it was not alleged, much less proven, that Uy
committed an act as an officer of Hammer that would permit the piercing of the corporate
veil. A reading of the complaint reveals that with regard to Uy, iBank did not demand that
she be held liable for the obligations of Hammer because she was a corporate officer who
committed bad faith or gross negligence in the performance of her duties such that the
lifting of the corporate mask would be merited.
General Credit Corporation v. Alsons Development and Investment Corporation, GR
No. 154975, 29 January 2007
Case Doctrine:
A corporation is an artificial being vested by law with a personality distinct and separate
from those of the persons composing it as well as from that of any other entity to which it
may be related. The first consequence of the doctrine of legal entity of the separate
personality of the corporation is that a corporation may not be made to answer for acts and
liabilities of its stockholders or those of legal entities to which it may be connected or vice
versa.
The notion of separate personality, however, may be disregarded under the doctrine –
"piercing the veil of corporate fiction" – as in fact the court will often look at the
corporation as a mere collection of individuals or an aggregation of persons undertaking
business as a group, disregarding the separate juridical personality of the corporation
unifying the group. Another formulation of this doctrine is that when two (2) business
enterprises are owned, conducted and controlled by the same parties, both law and equity
will, when necessary to protect the rights of third parties, disregard the legal fiction that two
corporations are distinct entities and treat them as identical or one and the same.
Whether the separate personality of the corporation should be pierced hinges on obtaining
facts, appropriately pleaded or proved. However, any piercing of the corporate veil has to
be done with caution, albeit the Court will not hesitate to disregard the corporate veil when
it is misused or when necessary in the interest of justice. After all, the concept of corporate
entity was not meant to promote unfair objectives.
Authorities are agreed on at least three (3) basic areas where piercing the veil, with which
the law covers and isolates the corporation from any other legal entity to which it may be
related, is allowed. These are: 1) defeat of public convenience, as when the corporate
fiction is used as vehicle for the evasion of an existing obligation;
2) fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or
defend a crime; or
3) alter ego cases, where a corporation is merely 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 are so conducted as to make it merely an instrumentality, agency, conduit or adjunct
of another corporation.
Facts:
General Credit Corporation (GCC, for short), then known as Commercial Credit
Corporation (CCC), established CCC franchise companies in different urban centers of the
country.3 In furtherance of its business, GCC had, as early as 1974, applied for and was
able to secure license from the then Central Bank (CB) of the Philippines and the Securities
and Exchange Commission (SEC) to engage also in quasi-banking activities.4 On the other
hand, respondent CCC Equity Corporation (EQUITY, for brevity) was organized in
November 1994 by GCC for the purpose of, among other things, taking over the operations
and management of the various franchise companies. At a time, material hereto, respondent
Alsons Development and Investment Corporation (ALSONS, hereinafter) and Conrado,
Nicasio, Editha and Ladislawa, all surnamed Alcantara, and Alfredo de Borja (hereinafter
the Alcantara family, for convenience), each owned, just like GCC, shares in the aforesaid
GCC franchise companies, e.g., CCC Davao and CCC Cebu.
In December 1980, ALSONS and the Alcantara family, for a consideration of Two Million
(P2,000,000.00) Pesos, sold their shareholdings – a total of 101,953 shares, more or less –
in the CCC franchise companies to EQUITY. On January 2, 1981, EQUITY issued
ALSONS et al., a "bearer" promissory note for P2,000,000.00 with a one-year maturity
date, at 18% interest per annum, with provisions for damages and litigation costs in case of
default.
Some four years later, the Alcantara family assigned its rights and interests over the bearer
note to ALSONS which thenceforth became the holder thereof.7 But even before the
execution of the assignment deal, letters of demand for interest payment were already sent
to EQUITY, through its President, Wilfredo Labayen, who pleaded inability to pay the
stipulated interest, EQUITY no longer then having assets or property to settle its obligation
nor being extended financial support by GCC.
ISSUE:
Whether or not EQUITY and GCC are distinct and separate corporate entities and the
doctrine of alter ego may be applied.
HELD:
No. The Supreme Court ruled that EQUITY was jointly and severally liable to pay what
respondent ALSONS is entitled to under the "bearer" promissory note. The judgment
argues against the notion of the note being simulated or altered or that respondent ALSONS
has no standing to sue on the note, not being the payee of the "bearer" note. For, the
declaration of liability not only presupposes the duly established authenticity and due
execution of the promissory note over which ALSONS, as the holder in due course has.
The CA found the bearer promissory note was a genuine and authentic instrument payable
to the holder thereof.
With these findings, Supreme Court agreed on at least three (3) basic areas where piercing
the veil, with which the law covers and isolates the corporation from any other legal entity
to which it may be related, is allowed. These are: 1) defeat of public convenience, as when
the corporate fiction is used as vehicle for the evasion of an existing obligation; 2) fraud
cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a
crime; or 3) alter ego cases, where a corporation is merely 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 are so conducted as to make it merely an instrumentality, agency, conduit or
adjunct of another corporation.
The CA found valid grounds to pierce the corporate veil of petitioner GCC, there being
justifiable basis for such action. When the appellate court spoke of a justifying factor, the
reference was to what the trial court said in its decision, namely: the existence of "certain
circumstances which, taken together, gave rise to the ineluctable conclusion that EQUITY
is but an instrumentality or adjunct of GCC. Thus, alter ego doctrine may be applied.
Manacop v. Equitable PCI Bank GR No. 162814, 25 August 2005
Case Doctrine:
An execution pending appeal cannot be granted where the winning party is a corporation. A
juridical entity’s existence cannot be likened to a natural person. Its precarious financial
condition is not by itself a compelling circumstance warranting immediate execution and
also does not outweigh the long-standing general policy of enforcing only final and
executory judgment.
Facts:
Lavine Loungewear Manufacturing, Inc. ("Lavine") insured its buildings and supplies
against fire with Philippine Fire and Marine Insurance Corporation ("PhilFire"), Rizal
Surety and Insurance Company ("Rizal Surety"), Tabacalera Insurance Company ("TICO"),
First Lepanto-Taisho Insurance Corporation ("First Lepanto"), Equitable Insurance
Corporation ("Equitable Insurance"), and Reliance Insurance Corporation ("Reliance
Insurance"). Except for Policy No. 13798 issued by First Lepanto, all the policies provide
that:
Loss, if any, under this policy is payable to Equitable Banking Corporation-Greenhills
Branch, as their interest may appear subject to the terms, conditions, clauses and warranties
under this policy.
On August 1, 1998, a fire gutted Lavine’s buildings and their contents thus claims were
made against the policies. As found by the Office of the Insurance Commission, the
insurance proceeds payable to Lavine is P112,245,324.34.
Prior to the release of the proceeds, the insurance companies required Lavine to sign a
Sworn Statement in Proof of Loss and Subrogation Agreement whereby the former would
be absolved from their liabilities upon payment of the proceeds to Equitable Bank. Only
Harish signed the document while the rest of Lavine’s directors refused to sign.
Rizal Surety stated its willingness to pay the insurance proceeds but only to the rightful
claimant, while Equitable Bank alleged it had sufficiently established the amount of its
claim and as beneficiary of the insurance policies, it was entitled to collect the proceeds.
First Lepanto alleged that its share in the combined proceeds was P16,145,760.11, of which
P6,000,000.00 had already been paid to Equitable Bank. It withheld payment of the balance
since it could not determine to whom it should be made.
PhilFire filed its Answer14 admitting liability in the amount of P12,916,608.09, of which
P4,288,329.52 had been paid to Equitable Bank but withheld paying the balance until the
rightful claimant has been determined. TICO did not file an answer to Lavine’s complaint
and was declared in default.
ISSUE:
Whether or not that the order granting the Motion for Execution Pending Appeal & the
Writ of Execution was proper.
HELD:
The Supreme Court found no merit in the petition. The fact that the insurance companies
admit their liabilities is not a compelling or superior circumstance that would warrant
execution pending appeal. On the contrary, admission of their liabilities and willingness to
deliver the proceeds to the proper party militate against execution pending appeal since
there is little or no danger that the judgment will become illusory.
There is likewise no merit in petitioners’ contention that the appeals are merely dilatory
because, while the insurance companies admitted their liabilities, the matter of how much is
owing from each of them and who is entitled to the same remain unsettled. It should be
noted that respondent insurance companies are questioning the amounts awarded by the
trial court for being over and above the amount ascertained by the Office of the Insurance
Commission. There are also three parties claiming the insurance proceeds, namely:
petitioners, Equitable Bank, and Lavine as represented by the group of Chandru.
An execution pending appeal cannot be granted where the winning party is a corporation. A
juridical entity’s existence cannot be likened to a natural person. Its precarious financial
condition is not by itself a compelling circumstance warranting immediate execution and
also does not outweigh the long-standing general policy of enforcing only final and
executory judgment.
Lanuza Jr. v. BF Corporation GR No. 174938, 1 October 2014
Case Doctrine:
Being an inexpensive, speedy and amicable method of settling disputes, arbitration —
along with mediation, conciliation and negotiation — is encouraged by the Supreme Court.
Aside from unclogging judicial dockets, arbitration also hastens the resolution of disputes,
especially of the commercial kind. It is thus regarded as the "wave of the future" in
international civil and commercial disputes. Brushing aside a contractual agreement calling
for arbitration between the parties would be a step backward.
Consistent with the above-mentioned policy of encouraging alternative dispute resolution
methods, courts should liberally construe arbitration clauses. Provided such clause is
susceptible of an interpretation that covers the asserted dispute, an order to arbitrate should
be granted. Any doubt should be resolved in favor of arbitration.
Facts:
In 1993, BF Corporation filed a collection complaint with the Regional Trial Court against
Shangri-Laand the members of its board of directors: Alfredo C. Ramos, Rufo B.Colayco,
Antonio O. Olbes, Gerardo Lanuza, Jr., Maximo G. Licauco III, and Benjamin C. Ramos.
BF Corporation alleged in its complaint that on December 11, 1989 and May 30, 1991, it
entered into agreements with Shangri-La wherein it undertook to construct for Shangri-La a
mall and a multilevel parking structure along EDSA.
Shangri-La had been consistent in paying BF Corporation in accordance with its progress
billing statements. However, by October 1991, Shangri-La started defaulting in payment.
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, ShangriLa 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.
After BF Corporation had initiated arbitration proceedings. BF Corporation and Shangri-La
failed to agree as to the law that should govern the arbitration proceedings. On October 27,
1998, the trial court issued the order directing the parties to conduct the proceedings in
accordance with Republic Act No. 876. RTC found that Shangri-La’s directors were
interested parties who "must also be served with a demand for arbitration to give them the
opportunity to ventilate their side of the controversy, safeguard their interest and fend off
their respective positions and this decision was affirmed by the Court of Appeals.
ISSUE:
Whether or not Lanuza and Obles should be made personally liable for corporate acts or
obligations.
HELD:
The Supreme Court found that petitioners may be compelled to submit to the arbitration
proceedings in accordance with Shangri-Laand BF Corporation’s agreement, in order to
determine if the distinction between Shangri-La’s personality and their personalities should
be disregarded.
When the courts disregard the corporation’s distinct and separate personality from its
directors or officers, the courts do not say that the corporation, in all instances and for all
purposes, is the same as its directors, stockholders, officers, and agents. It does not result in
an absolute confusion of personalities of the corporation and the persons composing or
representing it. Courts merely discount the distinction and treat them as one, in relation to a
specific act, in order to extend the terms of the contract and the liabilities for all damages to
erring corporate officials who participated in the corporation’s illegal acts. This is done so
that the legal fiction cannot be used to perpetrate illegalities and injustices.
Thus, in cases alleging solidary liability with the corporation or praying for the piercing of
the corporate veil, parties who are normally treated as distinct individuals should be made
to participate in the arbitration proceedings in order to determine if such distinction should
indeed be disregarded and, if so, to determine the extent of their liabilities.
In this case, 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. The Arbitral Tribunal’s
decision was made with the participation of petitioners, albeit with their continuing
objection. In view of our discussion above, SC rule that petitioners are bound by such
decision.
Francisco v. GSIS, GR Nos. L-18287 and 18155, 30 March 1963
Case Doctrine:
ART. 1393. Ratification may be effected expressly or tacitly. It is understood that there is a
tacit ratification if, with knowledge of the reason which renders the contract voidable and
such reason having ceased, the person who has a right to invoke it should execute an act
which necessarily implies an intention to waive his right.
Knowledge of facts acquired or possessed by an officer or agent of a corporation in the
course of his employment, and in relation to matters within the scope of his authority, is
notice to the corporation, whether he communicates such knowledge or not. Since a
corporation cannot see, or know, anything except through its officers.
In passing upon the liability of a corporation in cases of this kind it is always well to keep
in mind the situation as it presents itself to the third party with whom the contract is made.
Naturally he can have little or no information as to what occurs in corporate meetings; and
he must necessarily rely upon the external manifestations of corporate consent. The
integrity of commercial transactions can only be maintained by holding the corporation
strictly to the liability fixed upon it by its agents in accordance with law; and we would be
sorry to announce a doctrine which would permit the property of a man in the city of Paris
to be whisked out of his hands and carried into a remote quarter of the earth without
recourse against the corporation whose name and authority had been used in the manner
disclosed in this case. As already observed, it is familiar doctrine that if a corporation
knowingly permits one of its officers, or any other agent, to do acts within the scope of an
apparent authority, and thus holds him out to the public as possessing power to do those
acts, the corporation will, as against anyone who has in good faith dealt with the
corporation through such agent, be estopped from denying his authority; and where it is
said "if the corporation permits" this means the same as "if the thing is permitted by the
directing power of the corporation.
Facts:
The plaintiff, Trinidad J. Francisco, in consideration of a loan mortgaged in favor of the
defendant, Government Service Insurance System a parcel of land known as Vic-Mari
Compound, located at Baesa, Quezon City. The System extrajudicially foreclosed the
mortgage on the ground that up to that date the plaintiff-mortgagor was in arrears on her
monthly instalments. The System itself was the buyer of the property in the foreclosure
sale. The plaintiff’s father, Atty. Vicente J. Francisco, sent a letter to the general manager
of the defendant corporation, Mr. Rodolfo P. Andal. And later, the System approved the
request of Francisco to redeem the land through a telegram. Defendant received the
payment and it did not, however, take over the administration of the compound. The
System then sent a letter to Francisco informing of his indebtedness and the 1-year period
of redemption has been expired. And the System argued that the telegram sent to Francisco
saying that the System has approved the request in redeeming the property is incorrect due
to clerical problems.
ISSUE:
Whether or not the GSIS is liable for the acts of its employees approving the redemption
through a telegram.
HELD:
No. Yes. There was nothing in the telegram that hinted at any anomaly, or gave ground to
suspect its veracity, and the plaintiff, therefore, cannot be blamed for relying upon it. There
is no denying that the telegram was within Andal’s apparent authority. Hence, even if it
were the board secretary who sent the telegram, the corporation could not evade the binding
effect produced by the telegram. Knowledge of facts acquired or possessed by an officer or
agent of a corporation in the course of his employment, and in relation to matters within the
scope of his authority, is notice to the corporation, whether he communicates such
knowledge or not. Yet, notwithstanding this notice, the defendant System pocketed the
amount, and kept silent about the telegram not being in accordance with the true facts, as it
now alleges. This silence, taken together with the unconditional acceptance of three other
subsequent remittances from plaintiff, constitutes in itself a binding ratification of the
original agreement.
