03 DBP Vs CA

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SUPREMECOURTREPORTSANNOTATEDVOLUME363
VOL. 363, AUGUST 16, 2001
307
Development Bank of the Philippines vs. Court of Appeals

*
G.R. No. 126200. August 16, 2001.
DEVELOPMENT BANK OF THE PHILIPPINES,

petitioner, vs. HONORABLE COURT OF APPEALS and
REMINGTON INDUSTRIAL SALES CORPORATION,
respondents.
Corporation Law Piercing the Veil of Corporate Fiction
Doctrine When the notion of legal entity is used to defeat public
convenience, justify wrong, protect fraud, or defend crime, the law
will regard the corporation as an association of persons or in case
of two corporations, merge them into one.In Yutivo Sons
Hardware vs. Court of Tax Appeals, cited by the Court of Appeals
in its decision, this Court declared: It is an elementary and
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. However, when the
notion of legal entity is used to defeat public convenience, justify
wrong, protect fraud, or defend crime, the law will regard the
corporation as an association of persons or in case of two
corporations, merge them into one. (Koppel [Phils.], Inc., vs.
Yatco, 71 Phil. 496, citing 1 Fletcher Encyclopedia of Corporation,
Permanent Ed., pp. 135136 U.S. vs. Milwaukee Refrigeration
Transit Co., 142 Fed., 247, 255 per Sanborn, J.) x x x In
accordance with the foregoing rule, this Court has disregarded the
separate personality of the corporation where the corporate entity
was used to escape liability to third parties. In this case, however,
we do not find any fraud on the part of Marinduque Mining and
its transferees to warrant the piercing of the corporate veil.
________________
*
FIRST DIVISION.
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SUPREME COURT REPORTS ANNOTATED

Same Banks and Banking Development Bank of the

Philippines Philippine National Bank P.D. 385 PNB and DBP
are mandated to foreclose on the mortgage when the past due
account had incurred arrearages of more than 20% of the total
outstanding obligations.It bears stressing that PNB and DBP
are mandated to foreclose on the mortgage when the past due
account had incurred arrearages of more than 20% of the total
outstanding obligation. Section 1 of Presidential Decree No. 385
(The Law on Mandatory Foreclosure) provides: It shall be
mandatory for government financial institutions, after the lapse
of sixty (60) days from the issuance of this decree, to foreclose the
collateral and/or securities for any loan, credit accommodation,
and/or guarantees granted by them whenever the arrearages on
such account, including accrued interest and other charges,
amount to at least twenty percent (20%) of the total outstanding
obligations, including interest and other charges, as appearing in
the books of account and/or related records of the financial
institution concerned. This shall be without prejudice to the
exercise by the government financial institution of such rights
and/or remedies available to them under their respective
contracts with their debtors, including the right to foreclose on
loans, credits, accomodations and/or guarantees on which the
arrearages are less than twenty (20%) percent.
Same The rule pertaining to transactions between
corporations with interlocking directors resulting in the prejudice
to one of the corporations does not apply where the corporation
allegedly prejudiced is a third party, not one of the corporations
with interlocking directors.The Court of Appeals made reference
to two principles in corporation law. The first pertains to
transactions between corporations with interlocking directors
resulting in the prejudice to one of the corporations. This rule
does not apply in this case, however, since the corporation
allegedly prejudiced (Remington) is a third party, not one of the
corporations with interlocking directors (Marinduque Mining and
DBP).
Same No bad faith could be discerned in the creation by DBP
of three corporations where the same was necessary to manage and
operate assets acquired in the foreclosure sale lest they deteriorate
from nonuse and lose their value.Neither do we discern any bad
faith on the part of DBP by its creation of Nonoc Mining,
Maricalum and Island Cement. As Remington itself concedes,
DBP is not authorized by its charter to engage in the mining
business. The creation of the three corporations was necessary to
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manage and operate the assets acquired in the foreclosure sale

lest they deteriorate from nonuse and lose their value. In the
absence of any entity willing to purchase these assets from the
bank, what else would it
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309
do with these properties in the meantime? Sound business

practice required that they be utilized for the purposes for which
they were intended. anteed by a chattel mortgage, upon the
things pledged or mortgaged, up to the value thereof. x x x
Same The 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 crimeto
disregard juridical personality of a corporation, the wrongdoing
must be clearly and convincingly established.To reiterate, the
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 a corporation, the wrongdoing must be
clearly and convincingly established. It cannot be presumed. In
this case, the Court finds that Remington failed to discharge its
burden of proving bad faith on the part of Marinduque Mining
and its transferees in the mortgage and foreclosure of the subject
properties to justify the piercing of the corporate veil.
Concurrence and Preference of Credit In the absence of
liquidation proceedings, the vendors lien on the unpaid purchases
cannot be enforced against the transferee of such purchases.The
Court of Appeals also held that there exists in Remingtons favor
a lien on the unpaid purchases of Marinduque Mining, and as
transferee of these purchases, DBP should be held liable for the
value thereof. In the absence of liquidation proceedings, however,
the claim of Remington cannot be enforced against DBP. Article
2241 of the Civil Code provides: Article 2241. With reference to
specific movable property of the debtor, the following claims or
liens shall be preferred: x x x (3) Claims for the unpaid price of
movables sold, on said movables, so long as they are in the
possession of the debtor, up to the value of the same and if the
movable has been resold by the debtor and the price is still
unpaid, the lien may be enforced on the price this right is not lost
by the immobilization of the thing by destination, provided it has
not lost its form, substance and identity, neither is the right lost
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by the sale of the thing together with other property for a lump
sum, when the price thereof can be determined proportionally (4)
Credits guaranteed with a pledge so long as the things pledged
are in the hands of the creditor, or those guaranteed by a chattel
mortgage, upon the things pledge or mortgaged, up to the value
thereof.x x x
Same Same Same The ruling in Barretto v. Villanueva, 1
SCRA 288 (1961), although involving specific immovable property,
should apply equally in a case where specific movable property is
involved.The ruling in Barretto was reiterated in Phil. Savings
Bank vs. Hon. Lantin, Jr., etc., et al., and in two cases both
entitled Development Bank of the Philippines
310
310

vs. NLRC. Although Barretto involved specific immovable

property, the ruling therein should apply equally in this case
where specific movable property is involved. As the extrajudicial
foreclosure instituted by PNB and DBP is not the liquidation
proceeding contemplated by the Civil Code, Remington cannot
claim its pro rata share from DBP.
PETITION for review on certiorari of a decision of the

Court of Appeals.
The facts are stated in the opinion of the Court.
Office of the Legal Counsel for petitioners.
P.C. Nolasco & Associates for private respondents.
KAPUNAN, J.:
Before the Court is a petition for review on certiorari under
Rule 45 of the Rules of Court, seeking a review of the
Decision of the Court of Appeals dated October 6, 1995 and
the Resolution of the same court dated August 29, 1996.
The facts are as follows:
Marinduque
Mining
Industrial
Corporation
(Marinduque Mining), a corporation engaged in the
manufacture of pure and refined nickel, nickel and cobalt
in mixed sulfides, copper ore/concentrates, cement and
pyrite cone, obtained from the Philippine National Bank
(PNB) various loan accommodations. To secure the loans,
Marinduque Mining executed on October 9, 1978 a Deed of
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Real Estate Mortgage and Chattel Mortgage in favor of

PNB. The mortgage covered all of Marinduque Minings
real properties, located at Surigao del Norte, Sipalay,
Negros Occidental, and at Antipolo, Rizal, including the
improvements thereon. As of November 20, 1980, the loans
extended by PNB amounted
to P4 Billion, exclusive of
1
interest and charges.
On July 13, 1981, Marinduque Mining executed in favor
of PNB and the Development Bank of the Philippines
(DBP) a second Mortgage Trust Agreement. In said
agreement, Marinduque Mining mortgaged to PNB and
DBP all its real properties located at
_______________
1
Rollo, pp. 6162.

311
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311
Surigao del Norte, Sipalay, Negros Occidental, and

Antipolo, Rizal, including the improvements thereon. The
mortgage also covered all of Marinduque Minings chattels,
as well as assets of whatever kind, nature and description
which Marinduque Mining may subsequently acquire in
substitution or replenishment or in addition to the
properties covered by the previous Deed of Real and
Chattel Mortgage dated October 7, 1978. Apparently,
Marinduque Mining had also obtained loans totaling
P2
2
Billion from DBP, exclusive of interest and charges.
On April 27, 1984, Marinduque Mining executed in favor
of PNB and DBP an Amendment to Mortgage Trust
Agreement by virtue of which Marinduque Mining
mortgaged in favor of PNB and DBP all other real and
personal properties and other 3real rights subsequently
acquired by Marinduque Mining.
For failure of Marinduque Mining to settle its loan
obligations, PNB and DBP instituted sometime on July and
August 1984 extrajudicial foreclosure proceedings over the
mortgaged properties.
The events following the foreclosure are narrated by
DBP in its petition, as follows:
In the ensuing public auction sale conducted on August 31, 1984,
PNB and DBP emerged and were declared the highest bidders
over the foreclosed real properties, buildings, mining claims,
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leasehold rights together with the improvements thereon as well

as machineries [sic] and equipments [sic] of MMIC located at
Nonoc Nickel Refinery Plant at Surigao del Norte for a bid price of
P14,238,048,150.00 [and] [o]ver the foreclosed chattels of MMIC
located at Nonoc Refinery Plant at Surigao del Norte, PNB and
DBP as highest bidders, bidded for P170,577,610.00 (Exhs. 5 to
5A, 6, 7 to 7AA PNB/DBP). For the foreclosed real
properties together with all the buildings, major machineries &
equipment and other improvements of MMIC located at Antipolo,
Rizal, likewise held on August 31, 1984, were sold to PNB and
DBP as highest bidders in the sum of P1,107,167,950.00 (Exhs.
10 to 10XPNB/DBP).
At the auction sale conducted on September 7, 1984[,] over the
foreclosed real properties, buildings, & machineries/equipment of
MMIC lo cated at Sipalay, Negros Occidental were sold to PNB
and DBP, as highest
________________
2
Id., at 62.
Id.
312
312

bidders, in the amount of P2,383,534,000.00 and P543,040,000.00

respectively (Exhs. 8 to 8BB, 9 to 90GGGGGG
PNB/DBP).
Finally, at the public auction sale conducted on September 18,
1984 on the foreclosed personal properties of MMIC, the same
were sold to PNB and DBP as the highest bidder in the sum of
P678,772,000.00 (Exhs. 11 and 12QQQQQPNB).
PNB and DBP thereafter thru a Deed of Transfer dated August
31, 1984, purposely, in order to ensure the continued operation of
the Nickel refinery plant and to prevent the deterioration of the
assets foreclosed, assigned and transferred to Nonoc Mining and
Industrial Corporation all their rights, interest and participation
over the foreclosed properties of MMIC located at Nonoc Island,
Surigao
del
Norte
for
an
initial
consideration
of
P14,361,000,000.00 (Exh. 13PNB).
Likewise, thru [sic] a Deed of Transfer dated June 6, 1984,
PNB and DBP assigned and transferred in favor of Maricalum
Mining Corp. all its rights, interest and participation over the
foreclosed properties of MMIC at Sipalay, Negros Occidental for
an initial consideration of P325,800,000.00 (Exh. 14
PNB/DBP).
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On February 27, 1987, PNB and DBP, pursuant to

Proclamation No. 50 as amended, again assigned, transferred and
conveyed to the National Government thru [sic] the Asset
Privatization Trust (APT) all its existing rights and interest over
the assets of MMIC, earlier assigned to Nonoc Mining and
Industrial Corporation, Maricalum Mining Corporation 4 and
Island Cement Corporation (Exh. 15 & 15APNB/DBP).
In the meantime, between July 16, 1982 to October 4, 1983,

Marinduque Mining purchased and caused to be delivered
construction materials and other merchandise from
Remington Industrial Sales Corporation (Remington)
worth P921,755.95. The purchases remained unpaid as of
August 1, 1984 when Remington filed a complaint for a
sum of money and damaged against Marinduque Mining
for the value of the unpaid construction materials and
other merchandise purchased by Marinduque Mining, as
well as interest, attorneys fees and the costs of suit.
On September 7, 1984, Remingtons original complaint
was amended to include PNB and DBP as codefendants in
view of the foreclosure by the latter of the real and chattel
mortgages on the
_______________
4
Rollo, pp. 6263. Underscoring in the original.

313
VOL. 363, AUGUST 16, 2001
313
real and personal properties, chattels, mining claims,

machinery,
equipment and other assets of Marinduque
5
Mining.
On September 13, 1984, Remington filed a second
amended complaint to include as additional defendant, the
Nonoc Mining and Industrial Corporation (Nonoc Mining).
Nonoc Mining is the assignee of all real and personal
properties, chattels, machinery, equipment and all other
assets of Marinduque
Mining at its Nonoc Nickel Factory
6
in Surigao del Norte.
On March 26, 1986, Remington filed a third amended
complaint including the Maricalum Mining Corporation
(Maricalum Mining) and Island Cement Corporation
(Island Cement) as codefendants. Remington asserted that
Marinduque Mining, PNB, DBP, Nonoc Mining, Maricalum
Mining and Island Cement must be treated in law as one
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and the same entity by disregarding the veil of corporate

fiction since:
1. Codefendants NMIC, Maricalum and Island
Cement which are newly created entities are
practically owned wholly by defendants PNB and
DBP, and managed by their officers, aside from the
fact that the aforesaid codefendants NMIC,
Maricalum and Island Cement were organized in
such a hurry and in such suspicious circumstances
by codefendants PNB and DBP after the supposed
extrajudicial foreclosure of MMICs assets as to
make their supposed projects assets, machineries
and equipment which were originally owned by co
defendant MMIC beyond the reach of creditors of
the latter.
2. The personnel, key officers and rankandfile
workers and employees of codefendants NMIC,
Maricalum and Island Cement creations of co
defendants PNB and DBP were the personnel of co
defendant MMIC such that x x x practically there
has only been a change of name for all legal purpose
and intents.
3. The places of business not to mention the mining
claims and project premises of codefendants NMIC,
Maricalum and Island Cement likewise used to be
the places of business, mining claims and project
premises of codefendant MMIC as to make the
aforesaid codefendants NMIC, Maricalum and
Island Cement mere adjuncts and subsidiaries of
________________
5
Id., at 90.
Id.
314
314
codefendants PNB and DBP, and subject to their

control and management.
On top of everything, codefendants PNB, DBP NMIC,
Maricalum and Island Cement being all corporations
created by the government in the pursuit of business
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ventures should not be allowed to ignore, x x x or obliterate

with impunity nay illegally, the financial obligations of x x
x MMIC whose operations codefendants PNB and DBP
had highly financed before the alleged extrajudicial
foreclosure of defendant MMICs assets, machineries and
equipment to the extent that major policies of codefendant
MMIC were being decided upon by codefendants PNB and
DBP as major financiers who were represented in its board
of directors forming part of the majority thereof which
through the alleged extrajudicial foreclosure culminated in
a complete takeover by codefendants PNB and DBP
bringing about the organization of their codefendants
NMIC, Maricalum and Island Cement to which were
transferred all the assets, machineries and pieces of
equipment of codefendant MMIC used in its nickel mining
project in Surigao del Norte, copper mining operation in
Sipalay, Negros Occidental and cement factory in Antipolo,
Rizal to the prejudice of creditors of codefendant MMIC
such as plaintiff Remington Industrial Sales Corporation
whose stockholders, officers and rankandfile workers in
the legitimate pursuit of its business activities, invested
considerable time, sweat and private money to supply,
among others, codefendant MMIC with some of its vital
needs for its operation, which codefendant MMIC during
the time of the transactions material to this case became x
x x codefendants PNB and DBPs instrumentality,
business conduit, alter ego, agency (sic), subsidiary or
auxiliary corporation, by virtue of which it becomes doubly
necessary to disregard the corporation fiction that co
defendants PNB, DBP, MMIC, NMIC, Maricalum and
Islano Cement, six (6) distinct and separate entities, when
in fact and in law, they should be treated as one and the
same at least as far as plaintiffs transactions with co
defendant MMIC are concerned, so as not to defeat public
convenience, justify wrong, subvert justice, protect fraud or
confuse legitimate issues involving creditors such as
plaintiff, a fact which all defendants were as (sic) still are
aware of during all7 the time material to the transactions
subject of this case.
On April 3, 1989, Remington filed a motion for leave to
file a fourth amended complaint impleading the Asset
Privatization
_________________
7
Id., at 9192.
315
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315
Trust (APT) as codefendant. Said fourth amended

complaint was admitted by the lower court in its Order
dated April 29, 1989.
On April 10, 1990, the Regional Trial Court (RTC)
rendered a decision in favor of Remington, the dispositive
portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of the
plaintiff, ordering the defendants Marinduque Mining &
Industrial Corporation, Philippine National Bank, Development
Bank of the Philippines, Nonoc Mining and Industrial
Corporation, Maricalum Mining Corporation, Island Cement
Corporation and Asset Privatization Trust to pay, jointly and
severally, the sum of P920,755.95, representing the principal
obligation, including the stipulated interest as of June 22, 1984,
plus ten percent (10%) surcharge per annum by way of penalty,
until the amount is fully paid the sum equivalent to 10%8 of the
amount due as and for attorneys fees and to pay the costs.
Upon appeal by PNB, DBP, Nonoc Mining, Maricalum

Mining, Island Cement and APT, the Court of Appeals, in
its Decision dated October 6, 1995, affirmed the decision of
the RTC. Petitioner filed a Motion for Reconsideration,
which was denied in the Resolution dated August 29, 1996.
Hence, this petition, DBP maintaining that Remington
has no cause of action against it or PNB, nor against their
transferees, Nonoc Mining, Island Cement, Maricalum
Mining, and the APT.
On the other hand, private respondent Remington
submits that the transfer of the properties was made in
fraud of creditors. The presence of fraud, according to
Remington, warrants the piercing of the corporate veil such
that Marinduque Mining and its transferees could be
considered as one and the same corporation. The
transferees, therefore, are also liable for the value of
Marinduque Minings purchases.
9
In Yutivo Sons Hardware vs. Court of Tax Appeals,
cited
10
by the Court of Appeals in its decision, this Court
declared:
_________________
8
Id., at 89.
1 SCRA 160 (1961).
10
Rollo, p. 102.
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316
316

It is an elementary and 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. However, when the notion of legal entity is used to
defeat public convenience, justify wrong, protect fraud, or defend
crime, the law will regard the corporation as an association of
persons or in case of two corporations, merge them into one.
(Koppel [Phils.], Inc., vs. Yatco, 71 Phil. 496, citing 1 Fletcher
Encyclopedia of Corporation, Permanent Ed., pp. 135136 U.S. vs.
Milwaukee Refrigeration Transit Co., 142 Fed., 247, 255 per
Sanborn, J.) x x x
In accordance with the foregoing rule, this Court has

disregarded the separate personality of the corporation
where the corporate
entity was used to escape liability to
11
third parties. In this case, however, we do not find any
fraud on the part of Marinduque Mining and its transferees
to warrant the piercing of the corporate veil.
It bears stressing that PNB and DBP are mandated to
foreclose on the mortgage when the past due account had
incurred arrearages of more than 20% of the total
outstanding obligation. Section 1 of Presidential Decree No.
385 (The Law on Mandatory Foreclosure) provides:
It shall be mandatory for government financial institutions, after
the lapse of sixty (60) days from the issuance of this decree, to
foreclose the collateral and/or securities for any loan, credit
accommodation, and/or guarantees granted by them whenever the
arrearages on such account, including accrued interest and other
charges, amount to at least twenty percent (20%) of the total
outstanding obligations, including interest and other charges, as
appearing in the books of account and/or related records of the
financial institution concerned. This shall be without prejudice to
the exercise by the government financial institution of such rights
and/or remedies available to them under their respective
contracts with their debtors, including the right to foreclose on
loans, credits, accomodations
________________
11
Tan Bonn Bee & Co. vs. Jarencio, 163 SCRA 205 (1988) Claparols, et al. vs.
Court of Industrial Relations, 65 SCRA 613 (1975) Villa Rey Transit, Inc. vs.
Eusebio E. Ferrer, 25 SCRA 849 (1968) National Marketing Corporation vs.
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Associated Financing Company, et al., 19 SCRA 962 (1967) Palacio, et al. vs. Fely
Transportation Company, 5 SCRA 1011 (1962) McConnel, et al. vs. Court of
Appeals, et al., 1 SCRA 721 (1961).
317
VOL. 363, AUGUST 16, 2001
317
and/or guarantees on which the arrearages are less than twenty

(20%) percent.
Thus, PNB and DBP did not only have a right, but the duty
under said law, to foreclose upon the subject properties.
The banks had no choice but to obey the statutory
command.
The import of this mandate was lost on the Court of
Appeals, which reasoned that under Article 19 of the Civil
Code, Every person must, in the exercise of his rights and
in the performance of his duties, act with justice, give
everyone his due, and observe honesty and good faith. The
appellate court, however, did not point to any fact
evidencing bad faith on the part of the Marinduque Mining
and its transferees. Indeed, it skirted the issue entirely by
holding that the question of actual fraudulent intent on the
part of the interlocking directors of DBP and Marinduque
Mining was irrelevant because:
As aptly stated by the appellee in its brief, x x x where the
corporations have directors and officers in common, there may be
circumstances under which their interest as officers in one
company may disqualify them in equity from representing both
corporations in transactions between the two. Thus, where one
corporation was insolvent and indebted to another, it has been
held that the directors of the creditor corporation were
disqualified, by reason of selfinterest, from acting as directors of
the debtor corporation in the authorization of a mortgage or deed
of trust to the former to secure such indebtedness x x x (page 105
of the Appellees Brief). In the same manner that x x x when the
corporation is insolvent, its directors who are its creditors can not
secure to themselves any advantage or preference over other
creditors. They can not thus take advantage of their fiduciary
relation and deal directly with themselves, to the injury of others
in equal right. If they do, equity will set aside the transaction at
the suit of creditors of the corporation or their representatives,
without reference to the question of any actual fraudulent intent on
the part of the directors, for the right of the creditors does not
depend upon fraud in fact, but upon the violation of the fiduciary
relation to the directors. x x x. (page 106 of the Appellees Brief.)
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We also concede that x x x directors of insolvent corporation,

who are creditors of the company, can not secure to themselves
any preference or advantage over other creditors in the payment
of their claims. It is not good morals or good law. The governing
body of officers thereof are charged with the duty of conducting its
affairs strictly in the interest of its
318
318

existing creditors, and it would be a breach of such trust for them

to undertake to give any one of its members any advantage over
any other creditors in securing the payment of his debts in
preference to all others. When validity of these mortgages, to
secure debts upon which the directors were indorsers, was
questioned by other creditors of the corporation, they should have
been classed as instruments rendered void by the legal principle
which prevents directors of an insolvent corporation from giving
themselves a preference over
outside creditors, x x x (page 106
12
107 of the Appellees Brief.)
The Court of Appeals made reference to two principles in

corporation law. The first pertains to transactions between
corporations with interlocking directors resulting in the
prejudice to one of the corporations. This rule does not
apply in this case, however, since the corporation allegedly
prejudiced (Remington) is a third party, not one of the
corporations with interlocking directors (Marinduque
Mining and DBP).
The second principle invoked by respondent court
involves directors . . . who are creditors which is also
inapplicable herein. Here, the creditor of Marinduque
Mining is DBP, not the directors of Marinduque Mining.
Neither do we discern any bad faith on the part of DBP
by its creation of Nonoc Mining, Maricalum and Island
Cement. As Remington itself concedes, DBP is not
authorized by its charter to engage in the mining
business.P13 P The creation of the three corporations was
necessary to manage and operate the assets acquired in the
foreclosure sale lest they deteriorate from nonuse and lose
their value. In the absence of any entity willing to purchase
these assets from the bank, what else would it do with
these properties in the meantime? Sound business practice
required that they be utilized for the purposes for which
they were intended.
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Remington also asserted in its third amended complaint

that the use of Nonoc Mining, Maricalum and Island
Cement of the premises of Marinduque Mining and the
hiring of the latters officers and personnel also constitute
badges of bad faith.
_________________
12
Rollo, p. 107. Italics in the original.
13
Id., at 232.
319
VOL. 363, AUGUST 16, 2001
319
Assuming that the premises of Marinduque Mining were

not among those acquired by DBP in the foreclosure sale,
convenience and practicality dictated that the corporations
so created occupy the premises where these assets were
found instead of relocating them. No doubt, many of these
assets are heavy equipment and it may have been
impossible to move them. The same reasons of convenience
and practicality, not to mention efficiency, justified the
hiring by Nonoc Mining, Maricalum and Island Cement of
Marinduque Minings personnel to manage and operate the
properties and to maintain the continuity of the mining
operations.
To reiterate, the 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
14
defend crime.
To disregard the separate juridical
personality of a corporation, the wrongdoing must be
clearly and
convincingly established. It cannot be
15
presumed. In this case, the Court finds that Remington
failed to discharge its burden of proving bad faith on the
part of Marinduque Mining and its transferees in the
mortgage and foreclosure of the subject properties to justify
the piercing of the corporate veil.
The Court of Appeals also held that there exists in
Remingtons favor a lien on the unpaid purchases of
Marinduque Mining, and as transferee of these purchases,
DBP should be held liable for the value thereof.
In the absence of liquidation proceedings, however, the
claim of Remington cannot be enforced against DBP.
Article 2241 of the Civil Code provides:
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Article 2241. With reference to specific movable property of the

debtor, the following claims or liens shall be preferred:
xxx
________________
14
Union Bank of the Philippines vs. Court of Appeals, 290 SCRA 198
(1998).
15
Complex Electronics Employees Association vs. NLRC, 310 SCRA 403
(1990) Luxuria Homes, Inc. vs. Court of Appeals, 302 SCRA 315 (1999)
Matuguina Integrated Wood Products vs. Court of Appeals, 263 SCRA 490
(1996).
320
320
(3) Claims for the unpaid price of movables sold, on

said movables, so long as they are in the possession
of the debtor, up to the value of the same and if the
movable has been resold by the debtor and the price
is still unpaid, the lien may be enforced on the
price this right is not lost by the immobilization of
the thing by destination, provided it has not lost its
form, substance and identity, neither is the right
lost by the sale of the thing together with other
property for a lump sum, when the price thereof can
be determined proportionally
(4) Credits guaranteed with a pledge so long as the
things pledged are in the hands of the creditor, or
those guaranteed by a chattel mortgage, upon the
things pledged or mortgaged, up to the value
thereofx x x
16
In Barretto vs. Villanueva, the Court had occasion to

construe Article 2242, governing claims or liens over
specific immovable property. The facts that gave rise to the
case were summarized by this Court in its resolution as
follows:
x x x Rosario Cruzado sold all her right, title, and interest and
that of her children in the house and lot herein involved to Pura
L. Villanueva for P19,000.00. The purchaser paid P1,500 in
advance, and executed a promissory note for the balance of
P17,500.00. However, the buyer could only pay P5,500 on account
of the note, for which reason the vendor obtained judgment for the
unpaid balance. In the meantime, the buyer Villanueva was able
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to secure a clean certificate of title (No. 32626), and mortgaged

the property to appellant Magdalena C. Barretto, married to Jose
C. Baretto, to secure a loan of P30,000.03, said mortgage having
been duly recorded.
Pura Villanueva defaulted on the mortgage loan in favor of
Barretto. The latter foreclosed the mortgage in her favor, obtained
judgment, and upon its becoming final asked for execution on 31
July 1958. On 14 August 1958, Cruzado filed a motion for
recognition for her vendors lien in the amount of P12,000.00,
plus legal interest, invoking Articles 2242, 2243, and 2249 of the
new Civil Code. After hearing, the court below ordered the lien
annotated on the back of Certificate of Title No. 32626, with the
proviso that in case of sale under the foreclosure decree the
vendors lien and the mortgage credit of appellant Barretto should
be paid pro rata from the proceeds. Our original decision affirmed
this order of the Court of First Instance of Manila.
______________
16
1 SCRA 288 (1961).

321
VOL. 363, AUGUST 16, 2001
321
In its decision upholding the order of the lower court, the

Court ratiocinated thus:
Article 2242 of the new Civil Code enumerates the claims,
mortgages and liens that constitute an encumbrance on specific
immovable property, and among them are:
(2) For the unpaid price of real property sold, upon the
immovable sold and
(5) Mortgage credits recorded in the Registry of Property.
Article 2249 of the same Code provides that if there are two or
more credits with respect to the same specific real property or real
rights, they shall be satisfied prorata, after the payment of the
taxes and assessments upon the immovable property or real
rights.
Application of the abovequoted provisions to the case at bar
would mean that the herein appellee Rosario Cruzado as an
unpaid vendor of the property in question has the right to share
prorata with the appellants the proceeds of the foreclosure sale.
xxx
As to the point made that the articles of the Civil Code on
concurrence and preference of credits are applicable only to the
insolvent debtor, suffice it to say that nothing in the law shows
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any such limitation. If we are to interpret this portion of the Code

as intended only for insolvency cases, then other creditordebtor
relationships where there are concurrence of credits would be left
without any rules to govern them, and
it would render
17
purposeless the special laws on insolvency.
Upon motion by appellants, however, the Court

reconsidered its decision. Justice J.B.L. Reyes, speaking for
the Court, explained the reasons for the reversal:
A. The previous decision failed to take fully into account the
radical changes introduced by the Civil Code of the Philippines
into the system of priorities among creditors ordained by the Civil
Code of 1889.
Pursuant to the former Code, conflicts among creditors entitled
to preference as to specific real property under Article 1923 were
to be resolved according to an order of priorities established by
Article 1927, whereby one class of creditors could exclude the
creditors of lower order until the claims of the former were fully
satisfied out of the proceeds of the
________________
17
Id., at 292294.
322
322

sale of the real property subject of the preference, and could even
exhaust proceeds if necessary.
Under the system of the Civil Code of the Philippines, however,
only taxes enjoy a similar absolute preference. All the remaining
thirteen classes of preferred creditors under Article 2242 enjoy no
priority among themselves, but must be paid pro rata, i.e., in
proportion to the amount of the respective credits. Thus, Article
2249 provides:
If there are two or more credits with respect to the same
specific real property or real rights, they shall be satisfied pro
rata, after the payment of the taxes and assessments upon the
immovable property or real rights.
But in order to make this prorating fully effective, the
preferred creditors enumerated in Nos. 2 to 14 of Article 2242 (or
such of them as have credits outstanding) must necessarily be
convened, and the import of their claims ascertained. It is thus
apparent that the full application of Articles 2249 and 2242
demands that there must be first some proceeding where the
claims of all the preferred creditors may be bindingly adjudicated,
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such as insolvency, the settlement of decedents estate under Rule

87 of the Rules of Court, or other liquidation proceedings of
similar import.
This explains the rule of Article 2243 of the new Civil Code
that
The claims or credits enumerated in the two preceding articles
shall be considered as mortgages or pledges of real or personal
property, or liens within the purview of legal provisions governing
insolvency x x x (Italics supplied).
And the rule is further clarified in the Report of the Code
Commission, as follows:
The question as to whether the Civil Code and the Insolvency
Law can be harmonized is settled by this Article (2243). The
preferences named in Articles 2261 and 2262 (now 2241 and 2242)
are to be enforced in accordance with the Insolvency Law (Italics
supplied)
Thus, it becomes evident that one preferred creditors third
party claim to the proceeds of a foreclosure sale (as in the case now
before us) is not the proceeding contemplated by law for the
enforcement of preferences under Article 2242, unless the claimant
were enforcing a credit for taxes that enjoy absolute priority. If
none of the claims is for taxes, a dispute between two creditors will
not enable the Court to ascertain the pro rata dividend
corresponding to each, because the rights of the other creditors
likewise enjoying preference under Article 2242 can not be
ascertained. Wherefore, the order of the Court of First Instance of
Manila now appealed from, decreeing that the proceeds of the
foreclosure sale be apportioned only
323
VOL. 363, AUGUST 16, 2001
323
between appellant and appellee, is incorrect, and must be

reversed. [Italics supplied]
The ruling in Barretto was reiterated

in Phil. Savings Bank
18
vs. Hon. Lantin, Jr., etc., et al., and in two cases both
19
entitled Development Bank of the Philippines vs. NLRC.
Although Barretto involved specific immovable property,
the ruling therein should apply equally in this case where
specific movable property is involved. As the extrajudicial
foreclosure instituted by PNB and DBP is not the
liquidation proceeding contemplated by the Civil Code,
Remington cannot claim its pro rata share from DBP.
WHEREFORE, the petition is GRANTED. The decision
of the Court of Appeals dated October 6, 1995 and its
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Resolution promulgated on August 29, 1996 is REVERSED

and SET ASIDE. The original complaint filed in the
Regional Trial Court in CV Case No. 8425858 is hereby
DISMISSED.
SO ORDERED.
Davide, Jr. (C.J., Chairman), Puno, Pardo and
YnaresSantiago, JJ., concur.
Petition granted, judgment and resolution reversed and
set aside.
Notes.The mere fact that both corporations have the
same president is not in itself sufficient to pierce the veil of
corporate fiction of the two corporations. (Compex
Electronics Employees Association (CEEA) vs. National
Labor Relations Commission, 310 SCRA 403 [1999])
The fact that a corporation owns fifty percent (50%) of
the capital stock of another corporation is not enough to
pierce the veil of corporate fiction between the two
corporations. (Manila Hotel Corp. vs. National Labor
Relations Commission, 343 SCRA 1 [2000])
o0o
_______________
18
209 SCRA 383 (1983).
19
183 SCRA 328 (1990), 186 SCRA 841 (1990).

324
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8/18/2016

VOL. 363, AUGUST 16, 2001

Development Bank of the Philippines vs. Court of Appeals

G.R. No. 126200. August 16, 2001.

DEVELOPMENT BANK OF THE PHILIPPINES,

SUPREME COURT REPORTS ANNOTATED

Same Banks and Banking Development Bank of the

manage and operate the assets acquired in the foreclosure sale

VOL. 363, AUGUST 16, 2001

Development Bank of the Philippines vs. Court of Appeals

do with these properties in the meantime? Sound business

SUPREME COURT REPORTS ANNOTATED

vs. NLRC. Although Barretto involved specific immovable

PETITION for review on certiorari of a decision of the

Real Estate Mortgage and Chattel Mortgage in favor of

Rollo, pp. 6162.

VOL. 363, AUGUST 16, 2001

Development Bank of the Philippines vs. Court of Appeals

Surigao del Norte, Sipalay, Negros Occidental, and

leasehold rights together with the improvements thereon as well

SUPREME COURT REPORTS ANNOTATED

bidders, in the amount of P2,383,534,000.00 and P543,040,000.00

On February 27, 1987, PNB and DBP, pursuant to

In the meantime, between July 16, 1982 to October 4, 1983,

Rollo, pp. 6263. Underscoring in the original.

VOL. 363, AUGUST 16, 2001

Development Bank of the Philippines vs. Court of Appeals

real and personal properties, chattels, mining claims,

and the same entity by disregarding the veil of corporate

SUPREME COURT REPORTS ANNOTATED

Development Bank of the Philippines vs. Court of Appeals

codefendants PNB and DBP, and subject to their

ventures should not be allowed to ignore, x x x or obliterate

VOL. 363, AUGUST 16, 2001

Development Bank of the Philippines vs. Court of Appeals

Trust (APT) as codefendant. Said fourth amended

Upon appeal by PNB, DBP, Nonoc Mining, Maricalum

1 SCRA 160 (1961).

SUPREME COURT REPORTS ANNOTATED

Development Bank of the Philippines vs. Court of Appeals

In accordance with the foregoing rule, this Court has

VOL. 363, AUGUST 16, 2001

Development Bank of the Philippines vs. Court of Appeals

and/or guarantees on which the arrearages are less than twenty

We also concede that x x x directors of insolvent corporation,

SUPREME COURT REPORTS ANNOTATED

existing creditors, and it would be a breach of such trust for them

The Court of Appeals made reference to two principles in

Remington also asserted in its third amended complaint

Rollo, p. 107. Italics in the original.

VOL. 363, AUGUST 16, 2001

Development Bank of the Philippines vs. Court of Appeals

Assuming that the premises of Marinduque Mining were

Article 2241. With reference to specific movable property of the

Complex Electronics Employees Association vs. NLRC, 310 SCRA 403

SUPREME COURT REPORTS ANNOTATED

Development Bank of the Philippines vs. Court of Appeals