TRUST RECEIPT LAW

G.R. No. 199481

ILDEFONSO S. CRISOLOGO
vs.
PEOPLE OF THE PHILIPPINES and CHINA BANKING CORPORATION

This Petition for Review on Certiorari1 under Rule 45 of the Rules of Court assails the November 23, 2011
Decision2 of the Court of Appeals (CA) in CA-G.R. CV No. 80350, which affirmed the December 4, 2002
Decision3 of the Regional Trial Courtt (RTC); Manila, Branch 21. The RTC Decision acquitted petitioner
Ildefonso S. Crisologo (petitioner) of the charges for violation of Presidential Decree (P.D.) No. 115 (Trust
Receipts Law) in relation to Article 315 1(b) of the Revised Penal Code (RPC), but adjudged him civilly
liable under the subject letters of credit.

The Factual Antecedents

Sometime in January and February 1989, petitioner, as President of Novachemical Industries, Inc.
(Novachem), applied for commercial letters of credit from private respondent China Banking Corporation
(Chinabank) to finance the purchase of 1,6004 kgs. of amoxicillin trihydrate micronized from Hyundai
Chemical Company based in Seoul, South Korea and glass containers from San Miguel Corporation (SMC).
Subsequently, Chinabank issued Letters of Credit Nos. 89/03015 and DOM-330416 in the respective
amounts of US$114,400.007 (originally US$135,850.00)8 with a peso equivalent of P2,139,119.809 and
P1,712,289.90. After petitioner received the goods, he executed for and in behalf of Novachem the
corresponding trust receipt agreements dated May 24, 1989 and August 31, 1989 in favor of Chinabank.

On January 28, 2004, Chinabank, through its Staff Assistant, Ms. Maria Rosario De Mesa (Ms. De Mesa),
filed before the City Prosecutor's Office of Manila a Complaint-Affidavit10 charging petitioner for violation
of P.D. No. 115 in relation to Article 315 1(b) of the RPC for his purported failure to turn-over the goods or
the proceeds from the sale thereof, despite repeated demands. It averred that the latter, with intent to
defraud, and with unfaithfulness and abuse of confidence, misapplied, misappropriated and converted the
goods subject of the trust agreements, to its damage and prejudice.

In his defense, petitioner claimed that as a regular client of Chinabank, Novachem was granted a credit line
and letters of credit (L/Cs) secured by trust receipt agreements. The subject L/Cs were included in the
special term-payment arrangement mutually agreed upon by the parties, and payable in installments. In the
payment of its obligations, Novachem would normally give instructions to Chinabank as to what particular
L/C or trust receipt obligation its payments would be applied. However, the latter deviated from the special
arrangement and misapplied payments intended for the subject L/Cs and exacted unconscionably high
interests and penalty charges.

The City Prosecutor found probable cause to indict petitioner as charged and filed the corresponding
informations before the RTC of Manila, docketed as Criminal Case Nos. 94-139613 and 94-139614.

The RTC Ruling

After due proceedings, the RTC rendered a Decision11 dated December 4, 2002 acquitting petitioner of
the criminal charges for failure of the prosecution to prove his guilt beyond reasonable doubt. It, however,
adjudged him civilly liable to Chinabank, without need for a separate civil action, for the amounts of
P1,843,567.90 and P879,166.81 under L/C Nos. 89/0301 and DOM-33041, respectively, less the payment
of P500,000.00 made during the preliminary investigation, with legal interest from the filing of the
informations on October 27, 1994 until full payment, and for the costs.

The CA Ruling

On appeal of the civil aspect, the CA affirmed12 the RTC Decision holding petitioner civilly liable. It noted
that petitioner signed the "Guarantee Clause" of the trust receipt agreements in his personal capacity and
even waived the benefit of excussion against Novachem. As such, he is personally and solidarily liable with
Novachem.

The Petition

In the instant petition, petitioner contends that the CA erred in declaring him civilly liable under the subject
L/Cs which are corporate obligations of Novachem, and that the adjudged amounts were without factual
basis because the obligations had already been settled. He also questions the unilaterally-imposed interest
rates applied by Chinabank and, accordingly, prays for the application of the stipulated interest rate of 18%
per annum (p.a.) on the corporation’s obligations. He further assails the authority of Ms. De Mesa to
prosecute the case against him sans authority from Chinabank's Board of Directors.

The Court's Ruling

The petition is partly meritorious.

Section 13 of the Trust Receipts Law explicitly provides that if the violation or offense is committed by a
corporation, as in this case, the penalty provided for under the law shall be imposed upon the directors,
officers, employees or other officials or person responsible for the offense, without prejudice to the civil
liabilities arising from the criminal offense.

In this case, petitioner was acquitted of the charge for violation of the Trust Receipts Law in relation to
Article 315 1(b)13 of the RPC. As such, he is relieved of the corporate criminal liability as well as the
corresponding civil liability arising therefrom. However, as correctly found by the RTC and the CA, he may
still be held liable for the trust receipts and L/C transactions he had entered into in behalf of Novachem.

Settled is the rule that debts incurred by directors, officers, and employees acting as corporate agents are
not their direct liability but of the corporation they represent, except if they contractually agree/stipulate or
assume to be personally liable for the corporation’s debts,14 as in this case.

The RTC and the CA adjudged petitioner personally and solidarily liable with Novachem for the obligations
secured by the subject trust receipts based on the finding that he signed the guarantee clauses therein in
his personal capacity and even waived the benefit of excussion. However, a review of the records shows
that petitioner signed only the guarantee clauses of the Trust Receipt dated May 24, 198915 and the
corresponding Application and Agreement for Commercial Letter of Credit No. L/C No. 89/0301.16 With
respect to the Trust Receipt17 dated August 31, 1989 and Irrevocable Letter of Credit18 No. L/C No. DOM-
33041 issued to SMC for the glass containers, the second pages of these documents that would have
reflected the guarantee clauses were missing and did not form part of the prosecution's formal offer of
evidence. In relation thereto, Chinabank stipulated19 before the CA that the second page of the August 31,
1989 Trust Receipt attached to the complaint before the court a quo would serve as the missing page. A
perusal of the said page, however, reveals that the same does not bear the signature of the petitioner in
the guarantee clause. Hence, it was error for the CA to hold petitioner likewise liable for the obligation
secured by the said trust receipt (L/C No. DOM-33041). Neither was sufficient evidence presented to prove
that petitioner acted in bad faith or with gross negligence as regards the transaction that would have held
him civilly liable for his actions in his capacity as President of Novachem.1âwphi1

On the matter of interest, while petitioner assailed the unilateral imposition of interest at rates above the
stipulated 18% p.a., he failed to submit a summary of the pertinent dates when excessive interests were
imposed and the purported over-payments that should be refunded. Having failed to prove his affirmative
defense, the Court finds no reason to disturb the amount awarded to Chinabank. Settled is the rule that in
civil cases, the party who asserts the affirmative of an issue has the onus to prove his assertion in order to
obtain a favorable judgment. Thus, the burden rests on the debtor to prove payment rather than on the
creditor to prove non-payment.20

Lastly, the Court affirms Ms. De Mesa's capacity to sue on behalf of Chinabank despite the lack of proof of
authority to represent the latter. The Court noted that as Staff Assistant of Chinabank, Ms. De Mesa was
tasked, among others, to review applications for L/Cs, verify the documents of title and possession of goods
covered by L/Cs, as well as pertinent documents under trust receipts (TRs); prepare/send/cause the
preparation of statements of accounts reflecting the outstanding balance under the said L/Cs and/or TRs,
and accept the corresponding payments; refer unpaid obligations to Chinabank's lawyers and follow-up
results thereon. As such, she was in a position to verify the truthfulness and correctness of the allegations
in the Complaint-Affidavit. Besides, petitioner voluntarily submitted21 to the jurisdiction of the court a quo
and did not question Ms. De Mesa's authority to represent Chinabank in the instant case until an adverse
decision was rendered against him.

WHEREFORE, the assailed November 23, 2011 Decision of the Court of Appeals in CA-G.R. CV No. 80350
is AFFIRMED with the modification absolving petitioner lldefonso S. Crisologo from any civil liability to
private respondent China Banking Corporation with respect to the Trust Receipt dated August 31, 1989 and
L/C No. DOM-33041. The rest of the Decision stands.

NEGOTIABLE INSTRUMENTS LAW

G.R. No. 215910

MANUEL C. UBAS, SR.,

vs.
WILSON CHAN

This case stemmed from a Complaint for Sum of Money with Application for Writ of Attachment3 (Complaint)
filed by petitioner against respondent Wilson Chan (respondent) before the Regional Trial Court of
Catarman, Northern Samar, Branch 19 (RTC), docketed as Civil Case No. C-1071. In his Complaint,
petitioner alleged that respondent, "doing business under the name and style of UNIMASTER," was
indebted to him in the amount of ₱1,500,000.00, representing the price of boulders, sand, gravel, and other
construction materials allegedly purchased by respondent from him for the construction of the Macagtas
Dam in Barangay Macagtas, Catarman, Northern Samar (Macagtas Dam project). He claimed that the said
obligation has long become due and demandable and yet, respondent unjustly refused to pay the same
despite repeated demands.4 Further, he averred that respondent had issued three (3) bank checks,
payable to "CASH" in the amount of ₱500,000.00 each, on January 31, 1998, March 13, 1998, and April 3,
1998, respectively (subject checks),5 but when petitioner presented the subject checks for encashment on
June 29, 1998, the same were dishonored due to a stop payment order. As such, respondent was guilty of
fraud in incurring the obligation.6

Respondent filed an Answer with Motion to Dismiss,7 seeking the dismissal of the case on the following
grounds: (a) the complaint states no cause of action, considering that the checks do not belong to him but
to Unimasters Conglomeration, Inc. (Unimasters); (b) there is no contract that ever existed between him
and petitioner; and (c) if petitioner even had a right of action at all, the complaint should not have been filed
against him but against Unimasters, a duly registered construction company which has a separate juridical
personality from him.8

During trial, petitioner testified that on January 1, 1998, he entered into a verbal agreement with respondent
for the supply of gravel, sand, and boulders for the Macagtas Dam project.9 He presented as the only proof
of their business transaction the subject checks issued to him by respondent and delivered to his office by
respondent's worker on different occasions.10 He alleged that, at the behest of respondent, he only
deposited the checks to his bank account on June 29, 1998.11 When the checks were dishonored,
petitioner demanded from respondent the value of the dishonored checks, but to no avail.12 Apart from his
own testimony, petitioner presented Jose Chie Ubas, the company operations manager of Ubas
Construction, Inc., who testified that in 1998, he accompanied several deliveries of gravel, sand, and
boulders to a certain project engineer named Paking dela Cruz at the Macagtas Dam project site, and that
respondent issued checks for their payment; thus, he came to know that there was a transaction between
them.13 Petitioner also presented Francisco Barrelo, the former employee of Far East Bank, who testified
that the subject checks were dishonored upon presentment because of a stop payment order by the
bank.14

On the other hand, respondent presented Unimasters' comptroller, Belma Murillo (Murillo), who testified
that Unimasters was contracted by the Department of Public Works and Highways for the Macagtas Dam
project; that Engineer Ereberto Merelos (Engr. Merelos) was hired as project engineer tasked to supervise
the work, the hiring of laborers, the delivery and payment of aggregates, and the payroll, and was likewise
in charge of negotiating the supply of aggregates and the revolving fund for its payments; that the subject
checks were issued for the replenishment of the revolving fund,15 but Engr. Merelos lost the same
sometime in January 1998; and that upon being informed about the loss of the checks, respondent, as
President of Unimasters, instructed Murillo to issue a Stop Payment Order on April 10, 1998.16 Murillo
belied petitioner's claim that the subject checks were given to the latter in payment of the aggregates and
materials that he allegedly delivered for the Macagtas Dam project, considering that their office did not
process any delivery receipt or proof of delivery of such aggregates by petitioner.17

For his part, respondent admitted to having issued the subject checks. However, he claimed that they were
not issued to petitioner, but to Engr. Merelos for purposes of replenishing the project's revolving fund.18
Respondent also described the procedure in the delivery of aggregates to their project sites, asserting that
petitioner was not among their suppliers of aggregates for the Macagtas Dam project as, in fact, the latter
never submitted any bill attaching purchase orders and delivery receipts for payments as other suppliers
did.19

The RTC Ruling

In a Decision20 dated January 30, 2008, the RTC ruled that petitioner had a cause of action against
respondent. At the outset, it observed that petitioner's demand letter - which clearly stated the serial
numbers of the checks, including the dates and amounts thereof - was not disputed by respondent. Also, it
did not lend credence to respondent's claim that the subject checks were lost and only came into the
possession of petitioner, considering the fact that petitioner mentioned the details of the subject checks in
the said demand letter and, thus, would have incriminated himself had he actually stolen them.21 It also
took note that respondent did not file a case for theft in relation to the lost checks found in possession of
petitioner.22 Thus, finding that respondent failed to overcome the disputable presumption that every party
to an instrument acquired the same for a valuable consideration under Section 24 of Act No. 2031,23 or
the Negotiable Instruments Law (NIL), the RTC ordered him to pay petitioner the amount of ₱l,500,000.00
representing the principal obligation plus legal interests from June 1998 until fully paid, ₱40,000 as litigation
expenses, ₱50,000 as attorney's fees, and cost of the suit.24

With the subsequent denial25 of his motion for reconsideration,26 respondent filed a notice of appeal.27

The CA Ruling

In a Decision28 dated October 28, 2014, the CA reversed and set aside the RTC's ruling, dismissing
petitioner's complaint on the ground of lack of cause of action.

It held that respondent was not the proper party defendant in the case, considering that the drawer of the
subject checks was Unimasters, which, as a corporate entity, has a separate and distinct personality from
respondent. It observed that the subject checks cannot be validly used as proof of the alleged transactions
between petitioner and respondent, since from the face of these checks alone, it is readily apparent that
they are not personal checks of the former. Thus, if at all, the said checks can only serve as evidence of
transactions between Unimasters and petitioner.29 Accordingly, Unimasters is an indispensable party, and
since it was not impleaded, the court had no jurisdiction over the case.30

In any event, the CA found that petitioner's claim of unpaid deliveries had no merit, given that not a single
delivery receipt, trip ticket or similar document was presented to establish the delivery of construction
materials to respondent.31 Further, the CA gave scant consideration to petitioner's argument that
respondent and Unimasters should be treated as one and the same under the doctrine of piercing the veil
of corporate fiction because not only was the issue raised for the first time on appeal, but that the records
bear no evidence that would establish the factual conditions for the application of the doctrine.32

Hence, the instant petition.

The Issue Before the Court

The sole issue in this case is whether or not the CA erred in dismissing petitioner's complaint for lack of
cause of action.1âwphi1

The Court's Ruling

The petition is meritorious.

Cause of action is defined as the act or omission by which a party violates a right of another. It is well-
settled that the existence of a cause of action is determined by the allegations in the complaint.33

In this case, petitioner's cause of action is anchored on his claim that respondent personally entered into a
contract with him for the delivery of construction materials amounting to ₱l,500,000.00, which was, however,
left unpaid. He also avers that respondent is guilty of fraud in the performance of said obligation because
the subject checks issued to him by respondent were dishonored on the ground of stop payment. As proof,
petitioner offered in evidence, among others, the demand letter he sent to respondent detailing the serial
numbers of the checks that were issued by the latter, including the dates and amounts thereof. He also
offered the dishonored checks which were in his possession.

Respondent neither disputes the fact that he had indeed signed the subject checks nor denies the demand
letter sent to him by petitioner.1âwphi1 Nevertheless, he claims that the checks were not issued to petitioner
but to the project engineer of Unimasters who, however, lost the same. He also disclaims any personal
transaction with petitioner, stating that the subject checks were in fact, issued by Unimasters and not him.
Besides, petitioner failed to present any documentary proof that he or his firm delivered construction
materials for the Macagtas Dam project.

The Court finds for petitioner.

Jurisprudence holds that "in a suit for a recovery of sum of money, as here, the plaintiff-creditor [(petitioner
in this case)] has the burden of proof to show that defendant [(respondent in this case)] had not paid [him]
the amount of the contracted loan. However, it has also been long established that where the plaintiff-
creditor possesses and submits in evidence an instrument showing the indebtedness, a presumption that
the credit has not been satisfied arises in [his] favor. Thus, the defendant is, in appropriate instances,
required to overcome the said presumption and present evidence to prove the fact of payment so that no
judgment will be entered against him."34 This presumption stems from Section 24 of the NIL, which
provides that:

Section 24. Presumption of Consideration. - Every negotiable instrument is deemed prima facie to have
been issued for a valuable consideration; and every person whose signature appears thereon to have
become a party thereto for value.

As mentioned, petitioner had presented in evidence the three (3) dishonored checks which were undeniably
signed by respondent. During trial, respondent admitted to the following:

[Atty. Arturo Villarin] Q: Showing to you this check dated January 31, 1998 x x x, please go over this check
and tell the Honorable Court if that is the same check that you issued as replenishment for the revolving
fund?

x x xx
[Respondent] A: Yes, this is the check I signed.

Q: At the right bottom portion of this check is a signature, whose signature is this?

A: That is my signature.

Q: Likewise, for the month of March 13, 1998 [,] there is a check in the amount of [₱500,000.00]. Is this
also the check that you issued as replenishment for the project?

A: Yes, Sir.35 (Emphases supplied)

Hence, as the RTC correctly ruled, it is presumed that the subject checks were issued for a valid
consideration, which therefore, dispensed with the necessity of any documentary evidence to support
petitioner's monetary claim. Unless otherwise rebutted, the legal presumption of consideration under
Section 24 of the NIL stands. Verily, "the vital function of legal presumption is to dispense with the need for
proof."36

Respondent's defense that the subject checks were lost and, thus, were not actually issued to petitioner is
a factual matter already passed upon by the RTC. As aptly pointed out by the trial court, it would have been
contrary to human nature and experience for petitioner to send respondent a demand letter detailing the
particulars of the said checks if he indeed unlawfully obtained the same. In fact, it is glaring that respondent
did not present Engr. Merelos, the project engineer who had purportedly lost the checks, to personally
testify on the circumstances surrounding the checks' loss. Further, Unimasters' comptroller, Murillo, testified
during trial that "she came to know that the lost checks were deposited in the account of [petitioner as] she
was informed by the [o]ffice[r]-in-charge of the drawee bank, the Far East Bank of Tacloban, City Branch."37
However, there was no showing that Unimasters and/or respondent commenced any action against
petitioner to assert its interest over a significant sum of ₱l,500,000.00 relative to the checks that were
supposedly lost/ stolen. Clearly, this paucity of action under said circumstances is again, inconsistent with
ordinary human nature and experience. Thus, absent any cogent reason to the contrary, the Court defers
to the RTC's findings of fact on this matter. In Madrigal v. CA,38 it was explained that:

The Supreme Court's jurisdiction is limited to reviewing errors of law that may have been committed by the
lower court. The Supreme Court is not a trier of facts. It leaves these matters to the lower court, which [has]
more opportunity and facilities to examine these matters. This same Court has declared that it is the policy
of the Court to defer to the factual findings of the trial judge, who has the advantage of directly observing
the witnesses on the stand and to determine their demeanor whether they are telling or distorting the
truth.39

Besides, Section 16 of the NIL provides that when an instrument is no longer in the possession of the
person who signed it and it is complete in its terms, "a valid and intentional delivery by him is presumed
until the contrary is proved," as in this case.

In Pacheco v. CA,40 the Court has expressly recognized that a check "constitutes an evidence of
indebtedness" and is a veritable "proof of an obligation." Hence, petitioner may rely on the same as proof
of respondent's personal obligation to him.

Although the checks were under the account name of Unimasters, it should be emphasized that the manner
or mode of payment does not alter the nature of the obligation. The source of obligation, as claimed by
petitioner in this case, stems from his contract with respondent. When they agreed upon the purchase of
the construction materials on credit for the amount of ₱l,500,000,00, the contract between them was
perfected.41 Therefore, even if corporate checks were issued for the payment of the obligation, the fact
remains that the juridical tie between the two (2) parties was already established during the contract's
perfection stage and, thus, does not preclude the creditor from proceeding against the debtor during the
contract's consummation stage.
That a privity of contract exists between petitioner and respondent is a conclusion amply supported by the
averments and evidence on record in this case.

First, the Court observes that petitioner was consistent in his account that he directly dealt with respondent
in his personal and not merely his representative capacity. In his Complaint, petitioner alleged that "[Chan,
doing business under the name and style of Unimaster] is indebted to [him] in the amount [₱l,500,000.00]
x x x."42

Moreover, the demand letter, which was admitted by respondent, was personally addressed to respondent
and not to Unimasters as represented by the latter.43

Also, it deserves mentioning that in his testimony before the RTC, petitioner explained that he delivered the
construction materials to respondent absent any written agreement due to his trust on the latter, viz.:

[Atty. Daniel Arnold Añover] Q: So, when you delivered the aggregates, did you agree to deliver the
aggregates to Mr. Chan the defendant in this case, you did not put the terms into writing? Am I correct?

[Petitioner] A: None, because it is verbal only, because I trusted him being a contractor.

x x xx

Q: Now, Mr. Witness you said that you trusted Mr. Chan, am I correct?

A: Yes, Sir.

Q: And that he promised you several times that he would pay you?

A: Yes, he promised me many times.

Q: And yet you still hold all these checks for security? Correct?

A: Yes Sir.

Q: Now, Mr. Witness, you said that you trusted Mr. Chan, then why did you not just handed [sic] over the
checks to him, because you said you trusted him?

A: How many times I gone to Tacloban and I went to Unimaster Office but they referred me to the Leyte
Park Hotel, since they are no longer in good terms with Mr. Wilson Chan so they referred me to Leyte Park
Hotel and then I went to Mr. Chan he promised that he will pay me and after several months again, the
same will be paid next month because there will be final inspection I even let him borrow my equipment for
free and hoping that the checks will be funded but again he lied.44

This squares with respondent's own testimony, wherein he stated that every time he wanted to have
supplies delivered for the Macagtas Dam project, he would not enter into any written contract:

[Atty. Marlonfritz Broto] Q: [Okay], now having read this particular statement Mr. Witness would you agree
with this representation that every time you want to have supplies in Macagtas dam you do not enter into
contract as you testified here a while ago?

[Respondent] A: Yes, Sir.45 (Emphasis supplied)

Petitioner further testified that he personally demanded the value of the subject checks from respondent in
his office, viz.:

[Atty. Daniel Arnold Añover] Q: Now, Mr. Witness you said that you visited Leyte Park Hotel several times,
am I correct?
[Petitioner] A: I think once or twice to demand from Mr. Wilson Chan.

Q: And of course, you were able to see Mr. Chan personally?

A: Yes, we had the conversation.

x x xx

Q: So you are saying you are talking to him in his office?

A: Yes, apparently, it was his Office.

x x xx

Q: You said that when you were there you were just talking each other [sic] and you were taking coffee and
made promises, right?

A: Yes, sir.46

Notably, these statements were considered undisputed. Hence, the same are binding on the parties.

In fine, the Court holds that the CA erred in dismissing petitioner's complaint against respondent on the
ground of lack of cause of action. Respondent was not able to overcome the presumption of consideration
under Section 24 of the NIL and establish any of his affirmative defenses. On the other hand, as the holder
of the subject checks which are presumed to have been issued for a valuable consideration, and having
established his privity of contract with respondent, petitioner has substantiated his cause of action by a
preponderance of evidence. "'Preponderance of evidence' is a phrase that, in the last analysis, means
probability of the truth. It is evidence that is more convincing to the court as worthy of belief than that which
is offered in opposition thereto."47 Consequently, petitioner's Complaint should be granted.

WHEREFORE, the petition is GRANTED. The Decision dated October 28, 2014 of the Court of Appeals in
CA-G.R. CV No. 04024 is hereby SET ASIDE. The Decision dated January 30, 2008 of the Regional Trial
Court of Catarman, Northern Samar, Branch 19 in Civil Case No. C-1071 is REINSTATED.

INSURANCE LAW

G.R. No. 152334

H.H. HOLLERO CONSTRUCTION, INC.,

vs.
GOVERNMENT SERVICE INSURANCE SYSTEM and POOL OF MACHINERY INSURERS

n April 26, 1988, the GSIS and petitioner entered into a Project Agreement (Agreement) whereby the latter
undertook the development of a GSIS housing project known as Modesta Village Section B (Project).5
Petitioner obligated itself to insurethe Project, including all the improvements, upon the execution of the
Agreement under a Contractors’ All Risks (CAR) Insurance with the GSIS General Insurance Department
for an amount equal to its cost or sound value, which shall not be subject to any automatic annual
reduction.6

Pursuant to its undertaking, petitioner secured CAR Policy No. 88/0857 in the amount of ₱1,000,000.00 for
land development, which was later increased to ₱10,000,000.00,8 effective from May 2, 1988 to May 2,
1989.9 Petitioner likewise secured CAR Policy No. 88/08610 in the amount of ₱1,000,000.00 for the
construction of twenty (20) housing units, which amount was later increased to ₱17,750,000.0011 to cover
the construction of another 355 new units, effective from May 2, 1988 toJune 1, 1989.12 In turn, the GSIS
reinsured CAR Policy No. 88/085 with respondent Pool of Machinery Insurers (Pool).13

Under both policies, it was provided that: (a) there must be prior notice of claim for loss, damage or liability
within fourteen (14) days from the occurrence of the loss or damage;14 (b) all benefits thereunder shall be
forfeited if no action is instituted within twelve(12) months after the rejection of the claim for loss, damage
or liability;15 and (c) if the sum insured is found to be less than the amount required to be insured, the
amount recoverable shall be reduced tosuch proportion before taking into account the deductibles stated
in the schedule (average clause provision).16

During the construction, three (3) typhoons hit the country, namely, Typhoon Biring from June 1 to June 4,
1988, Typhoon Huaning on July 29, 1988, and Typhoon Saling on October 11, 1989, which caused
considerable damage to the Project.17 Accordingly, petitioner filed several claims for indemnity with the
GSIS on June 30, 1988,18 August 25, 1988,19 and October 18, 1989,20 respectively.

In a letter21 dated April 26, 1990, the GSIS rejected petitioner’s indemnity claims for the damages wrought
by Typhoons Biring and Huaning, finding that no amount is recoverable pursuant to the average clause
provision under the policies.22 In a letter23 dated June 21, 1990, the GSIS similarly rejected petitioner’s
indemnity claim for damages wrought by Typhoon Saling on a "no loss" basis, itappearing from its records
that the policies were not renewed before the onset of the said typhoon.24

In a letter25 dated April 18, 1991, petitioner impugned the rejection of its claims for damages/loss on
accountof Typhoon Saling, and reiterated its demand for the settlement of its claims.

On September 27, 1991, petitioner filed a Complaint26 for Sum of Money and Damages before the RTC,
docketed as Civil Case No. 91-10144,27 which was opposed by the GSIS through a Motion to Dismiss28
dated October 25, 1991 on the ground that the causes of action stated therein are barred by the twelve-
month limitation provided under the policies, i.e., the complaint was filed more than one(1) year from the
rejection of the indemnity claims. The RTC, in an Order29 dated May 13, 1993, denied the said motion;
hence, the GSIS filed its answer30 with counterclaims for litigation expenses, attorney’s fees, and
exemplary damages. Subsequently, the GSIS filed a Third Party Complaint31 for indemnification against
Pool, the reinsurer.

The RTC Ruling

In a Judgment32 dated February 3, 1999, the RTC granted petitioner’s indemnity claims. It held that: (a)
the average clauseprovision in the policies which did not contain the assentor signature of the petitioner
cannot limit the GSIS’ liability, for being inefficacious and contrary to public policy;33 (b) petitioner has
established that the damages it sustained were due to the peril insured against;34 and (c) CAR Policy No.
88/086 was deemed renewed when the GSIS withheld the amount of 35,855.00 corresponding to the
premium payable,35 from the retentions it released to petitioner.36 The RTC thereby declared the GSIS
liable for petitioner’s indemnity claims for the damages brought about by the said typhoons, less the
stipulated deductions under the policies,plus 6% legal interest from the dates of extrajudicial demand, as
well as for attorney’s fees and costs of suit. It further dismissed for lack of merit GSIS’s counterclaim and
third party complaint.37

Dissatisfied, the GSIS elevated the matter to the CA. The CA Ruling In a Decision38 dated March 13, 2001,
the CAset aside and reversed the RTC Judgment, thereby dismissing the complaint. It ruled that the
complaint filed on September 27, 1991 was barred by prescription, having been commenced beyond the
twelve-month limitation provided under the policies, reckoned from the final rejection of the indemnity claims
on April 26, 1990 and June 21, 1990. The Issue Before the Court

The essential issue for the Court’s resolution is whether or not the CA committed reversible error in
dismissing the complaint onthe ground of prescription.

The Court’s Ruling

The petition lacks merit.

Contracts of insurance, like other contracts, are to be construed according to the sense and meaning of the
terms which the parties themselves have used. If such terms are clear and unambiguous, they must be
taken and understood in their plain, ordinary, and popular sense.39

Section 1040 of the General Conditions of the subject CAR Policies commonly read:

10. If a claim is in any respect fraudulent, or if any false declaration is made or used in support thereof, or
if any fraudulent means or devices are used by the Insured or anyone acting on his behalf to obtain any
benefit under this Policy, or if a claim is made and rejected and no action or suit is commenced within twelve
months after such rejectionor, in case of arbitration taking place as provided herein, within twelve months
after the Arbitrator or Arbitrators or Umpire have made their award, all benefit under this Policy shall be
forfeited. (Emphases supplied)

In this relation, case law illumines that the prescriptive period for the insured’s action for indemnity should
bereckoned from the "final rejection" of the claim.41

Here, petitioner insists that the GSIS’s letters dated April 26, 1990 and June 21, 1990 did not amount to a
"final rejection" ofits claims, arguing that they were mere tentative resolutions pending further action on
petitioner’s part or submission of proof in refutation of the reasons for rejection.42 Hence, its causes of
action for indemnity did not accrue on those dates.

The Court does not agree.

A perusal of the letter43 dated April 26, 1990 shows that the GSIS denied petitioner’s indemnity claims
wrought by Typhoons Biring and Huaning, it appearing that no amount was recoverable under the policies.
While the GSIS gave petitioner the opportunity to dispute its findings, neither of the parties pursued any
further action on the matter; this logically shows that they deemed the said letter as a rejection of the claims.
Lest it cause any confusion, the statement in that letter pertaining to any queries petitioner may have on
the denial should be construed, at best, as a form of notice to the former that it had the opportunity to seek
reconsideration of the GSIS’s rejection. Surely, petitioner cannot construe the said letter to be a mere
"tentative resolution." In fact, despite its disavowals, petitioner admitted in its pleadings44 that the GSIS
indeed denied its claim through the aforementioned letter, buttarried in commencing the necessary action
in court.

The same conclusion obtains for the letter45 dated June 21, 1990 denying petitioner’s indemnity claim
caused by Typhoon Saling on a "no loss" basis due to the non-renewal of the policies therefor before the
onset of the said typhoon. The fact that petitioner filed a letter46 of reconsideration therefrom dated April
18, 1991, considering too the inaction of the GSIS on the same similarly shows that the June 21, 1990 letter
was also a final rejection of petitioner’s indemnity claim.

As correctly observed by the CA, "final rejection" simply means denial by the insurer of the claims of the
insured and not the rejection or denial by the insurer of the insured’s motion or request for
reconsideration.47 The rejection referred to should be construed as the rejection in the first instance,48 as
in the two instances above-discussed.

Comparable to the foregoing is the Court’s action in the case of Sun Insurance Office, Ltd. v. CA49 wherein
it debunked "[t]he contention of the respondents [therein] that the one-year prescriptive period does not
start to run until the petition for reconsideration had been resolved by the insurer," holding that such view
"runs counter to the declared purpose for requiring that an action or suit be filed in the Insurance
Commission or in a court of competent jurisdiction from the denial of the claim."50 In this regard, the Court
rationalized that "uphold[ing]respondents' contention would contradict and defeat the very principle which
this Court had laid down. Moreover, it can easily be used by insured persons as a scheme or device to
waste time until any evidence which may be considered against them is destroyed."51 Expounding on the
matter, the Court had this to say:

The crucial issue in this case is: When does the cause of action accrue?

In support of private respondent’s view, two rulings of this Court have been cited, namely, the case of Eagle
Star Insurance Co.vs.Chia Yu ([supra note 41]), where the Court held:

The right of the insured to the payment of his loss accrues from the happening of the loss. However, the
cause of action in an insurance contract does not accrue until the insured’s claim is finally rejected by the
insurer. This is because before such final rejection there is no real necessity for bringing suit.

and the case of ACCFA vs. Alpha Insurance & Surety Co., Inc. (24 SCRA 151 [1968], holding that:

Since "cause of action" requires as essential elements not only a legal right of the plaintiff and a correlated
obligation of the defendant in violation of the said legal right, the cause of action does not accrue until the
party obligated (surety) refuses, expressly or impliedly, to comply with its duty (in this case to pay the
amount of the bond)."

Indisputably, the above-cited pronouncements of this Court may be taken to mean that the insured' s cause
of action or his right to file a claim either in the Insurance Commission or in a court of competent jurisdiction
[as in this case] commences from the time of the denial of his claim by the Insurer, either expressly or
impliedly.1âwphi1

But as pointed out by the petitioner insurance company, the rejection referred to should be construed as
the rejection, in the first instance, for if what is being referred to is a reiterated rejection conveyed in a
resolution of a yetition for reconsideration, such should have been expressly stipulated.52

In light of the foregoing, it is thus clear that petitioner's causes of action for indemnity respectively accrued
from its receipt of the letters dated April 26, 1990 and June 21, 1990, or the date the GSIS rejected its
claims in the first instance. Consequently, given that it allowed more than twelve (12) months to lapse before
filing the necessary complaint before the R TC on September 27, 1991, its causes of action had already
prescribed.

WHEREFORE, the petition is DENIED. The Decision dated March 13, 2001 and the Resolution dated
February 21, 2002 of the Court of Appeals (CA) in CA-G.R. CV No. 63175 are hereby AFFIRMED.

TRANSPORTATION LAW

G.R. No. 208802

G.V. FLORIDA TRANSPORT, INC.,

vs.
HEIRS OF ROMEO L. BATTUNG, SR., represented by ROMEO BATTUNG,

Respondents alleged that in the evening of March 22, 2003, Romeo L. Battung, Jr. (Battung) boarded
petitioner’s bus with body number 037 and plate number BVJ-525 in Delfin Albano, Isabela, bound for
Manila.5 Battung was seated at the first row behind the driver and slept during the ride. When the bus
reached the Philippine Carabao Center in Muñoz, Nueva Ecija, the bus driver, Duplio, stopped the bus and
alighted to check the tires. At this point, a man who was seated at the fourth row of the bus stood up, shot
Battung at his head, and then left with a companion. The bus conductor, Daraoay, notified Duplio of the
incident and thereafter, brought Romeo to the hospital, but the latter was pronounced dead on arrival.6
Hence, respondents filed a complaint7 on July 15, 2008 for damages in the aggregate amount of
₱1,826,000.008 based on a breach of contract of carriage against petitioner, Duplio, and Baraoay
(petitioner, et al.) before the RTC, docketed as Civil Case No. 22-1103. Respondents contended that as a
common carrier, petitioner and its employees are bound to observe extraordinary diligence in ensuring the
safety of passengers; and in case of injuries and/or death on the part of a passenger, they are presumed
to be at fault and, thus, responsible therefor. As such, petitioner, et al. should be held civilly liable for
Battung’s death.9

In their defense, petitioner, et al. maintained that they had exercised the extraordinary diligence required
by law from common carriers.1âwphi1 In this relation, they claimed that a common carrier is not an absolute
insurer of its passengers and that Battung’s death should be properly deemed a fortuitous event. Thus,
they prayed for the dismissal of the complaint, as well as the payment of their counterclaims for damages
and attorney’s fees.10

The RTC Ruling

In a Decision11 dated August 29, 2011, the RTC ruled in respondents’ favor and, accordingly, ordered
petitioner, et al. to pay respondent the amounts of: (a) ₱1,586,000.00 as compensatory damages for
unearned income; (b) ₱50,000.00 as actual damages; and (c) ₱50,000.00 as moral damages.12

The RTC found that petitioner, et al. were unable to rebut the presumed liability of common carriers in case
of injuries/death to its passengers due to their failure to show that they implemented the proper security
measures to prevent passengers from carrying deadly weapons inside the bus which, in this case, resulted
in the killing of Battung. As such, petitioner, et al. were held civilly liable for the latter’s death based on culpa
contractual.13

Dissatisfied, petitioner, et al. appealed to the CA.14

The CA Ruling

In a Decision15 dated May 31, 2013, the CA affirmed the ruling of the RTC in toto.16 It held that the killing
of Battung cannot be deemed as a fortuitous event, considering that such killing happened right inside
petitioner’s bus and that petitioner, et al. did not take any safety measures in ensuring that no deadly
weapon would be smuggled inside the bus.17

Aggrieved, only petitioner moved for reconsideration18 which was, however, denied in a Resolution19
dated August 23, 2013; hence, the instant petition.

The Issue Before the Court

The core issue for the Court’s resolution is whether or not the CA correctly affirmed the ruling of the RTC
finding petitioner liable for damages to respondent arising from culpa contractual.

The Court’s Ruling

The petition is meritorious.

I.

The law exacts from common carriers (i.e., those persons, corporations, firms, or associations engaged in
the business of carrying or transporting passengers or goods or both, by land, water, or air, for
compensation, offering their services to the public20) the highest degree of diligence (i.e., extraordinary
diligence) in ensuring the safety of its passengers. Articles 1733 and 1755 of the Civil Code state:

Art. 1733. Common carriers, from the nature of their business and for reasons of public policy, are bound
to observe extraordinary diligence in the vigilance over the goods and for the safety of the passengers
transported by them, according to all the circumstances of each case.
Art. 1755. A common carrier is bound to carry the passengers safely as far as human care and foresight
can provide, using the utmost diligence of very cautious persons, with a due regard for all the
circumstances.

In this relation, Article 1756 of the Civil Code provides that "[i]n case of death of or injuries to passengers,
common carriers are presumed to have been at fault or to have acted negligently, unless they prove that
they observed extraordinary diligence as prescribed in Articles 1733 and 1755." This disputable
presumption may also be overcome by a showing that the accident was caused by a fortuitous event.21
The foregoing provisions notwithstanding, it should be pointed out that the law does not make the common
carrier an insurer of the absolute safety of its passengers. In Mariano, Jr. v. Callejas,22 the Court explained
that:

While the law requires the highest degree of diligence from common carriers in the safe transport of their
passengers and creates a presumption of negligence against them, it does not, however, make the

carrier an insurer of the absolute safety of its passengers.

Article 1755 of the Civil Code qualifies the duty of extraordinary care, vigilance[,] and precaution in the
carriage of passengers by common carriers to only such as human care and foresight can provide. What
constitutes compliance with said duty is adjudged with due regard to all the circumstances.

Article 1756 of the Civil Code, in creating a presumption of fault or negligence on the part of the common
carrier when its passenger is injured, merely relieves the latter, for the time being, from introducing evidence
to fasten the negligence on the former, because the presumption stands in the place of evidence. Being a
mere presumption, however, the same is rebuttable by proof that the common carrier had exercised
extraordinary diligence as required by law in the performance of its contractual obligation, or that the injury
suffered by the passenger was solely due to a fortuitous event.

In fine, we can only infer from the law the intention of the Code Commission and Congress to curb the
recklessness of drivers and operators of common carriers in the conduct of their business.

Thus, it is clear that neither the law nor the nature of the business of a transportation company makes it an
insurer of the passenger’s safety, but that its liability for personal injuries sustained by its passenger rests
upon its negligence, its failure to exercise the degree of diligence that the law requires.23 (Emphases and
underscoring supplied)

Therefore, it is imperative for a party claiming against a common carrier under the above-said provisions to
show that the injury or death to the passenger/s arose from the negligence of the common carrier and/or
its employees in providing safe transport to its passengers.

In Pilapil v. CA,24 the Court clarified that where the injury sustained by the passenger was in no way due
(1) to any defect in the means of transport or in the method of transporting, or (2) to the negligent or willful
acts of the common carrier’s employees with respect to the foregoing – such as when the injury arises
wholly from causes created by strangers which the carrier had no control of or prior knowledge to prevent
– there would be no issue regarding the common carrier’s negligence in its duty to provide safe and suitable
care, as well as competent employees in relation to its transport business; as such, the presumption of
fault/negligence foisted under Article 1756 of the Civil Code should not apply:

First, as stated earlier, the presumption of fault or negligence against the carrier is only a disputable
presumption. [The presumption] gives in where contrary facts are established proving either that the carrier
had exercised the degree of diligence required by law or the injury suffered by the passenger was due to a
fortuitous event. Where, as in the instant case, the injury sustained by the petitioner was in no way due to
any defect in the means of transport or in the method of transporting or to the negligent or wilful acts of [the
common carrier’s] employees, and therefore involving no issue of negligence in its duty to provide safe and
suitable [care] as well as competent employees, with the injury arising wholly from causes created by
strangers over which the carrier had no control or even knowledge or could not have prevented, the
presumption is rebutted and the carrier is not and ought not to be held liable. To rule otherwise would make
the common carrier the insurer of the absolute safety of its passengers which is not the intention of the
lawmakers. (Emphasis and underscoring supplied)

In this case, Battung’s death was neither caused by any defect in the means of transport or in the method
of transporting, or to the negligent or willful acts of petitioner’s employees, namely, that of Duplio and
Daraoay, in their capacities as driver and conductor, respectively. Instead, the case involves the death of
Battung wholly caused by the surreptitious act of a copassenger who, after consummating such crime,
hurriedly alighted from the vehicle.25 Thus, there is no proper issue on petitioner’s duty to observe
extraordinary diligence in ensuring the safety of the passengers transported by it, and the presumption of
fault/negligence against petitioner under Article 1756 in relation to Articles 1733 and 1755 of the Civil Code
should not apply.

II.

On the other hand, since Battung’s death was caused by a copassenger, the applicable provision is Article
1763 of the Civil Code, which states that "a common carrier is responsible for injuries suffered by a
passenger on account of the willful acts or negligence of other passengers or of strangers, if the common
carrier’s employees through the exercise of the diligence of a good father of a family could have prevented
or stopped the act or omission." Notably, for this obligation, the law provides a lesser degree of diligence,
i.e., diligence of a good father of a family, in assessing the existence of any culpability on the common
carrier’s part.

Case law states that the concept of diligence of a good father of a family "connotes reasonable care
consistent with that which an ordinarily prudent person would have observed when confronted with a similar
situation. The test to determine whether negligence attended the performance of an obligation is: did the
defendant in doing the alleged negligent act use that reasonable care and caution which an ordinarily
prudent person would have used in the same situation? If not, then he is guilty of negligence."26

In ruling on this case, the CA cited Fortune Express, Inc. v. Court of Appeals 27 (Fortune) in ascribing
negligence on the part of petitioner, ratiocinating that it failed to implement measures to detect if its
passengers were carrying firearms or deadly weapons which would pose a danger to the other
passengers.28 However, the CA’s reliance was plainly misplaced in view of Fortune’s factual variance with
the case at bar.

In Fortune, the common carrier had already received intelligence reports from law enforcement agents that
certain lawless elements were planning to hijack and burn some of its buses; and yet, it failed to implement
the necessary precautions to ensure the safety of its buses and its passengers. A few days later, one of
the company’s buses was indeed hijacked and burned by the lawless elements pretending as mere
passengers, resulting in the death of one of the bus passengers. Accordingly, the Court held that the
common carrier’s failure to take precautionary measures to protect the safety of its passengers despite
warnings from law enforcement agents showed that it failed to exercise the diligence of a good father of a
family in preventing the attack against one of its buses; thus, the common carrier was rightfully held liable
for the death of the aforementioned passenger.

In contrast, no similar danger was shown to exist in this case so as to impel petitioner or its employees to
implement heightened security measures to ensure the safety of its passengers. There was also no showing
that during the course of the trip, Battung’s killer made suspicious actions which would have forewarned
petitioner’s employees of the need to conduct thorough checks on him or any of the passengers. Relevantly,
the Court, in Nocum v. Laguna Tayabas Bus Company,29 has held that common carriers should be given
sufficient leeway in assuming that the passengers they take in will not bring anything that would prove
dangerous to himself, as well as his copassengers, unless there is something that will indicate that a more
stringent inspection should be made, viz.:

In this particular case before Us, it must be considered that while it is true the passengers of appellant’s
bus should not be made to suffer for something over which they had no control, as enunciated in the
decision of this Court cited by His Honor, fairness demands that in measuring a common carrier’s duty
towards its passengers, allowance must be given to the reliance that should be reposed on the sense of
responsibility of all the passengers in regard to their common safety. It is to be presumed that a passenger
will not take with him anything dangerous to the lives and limbs of his co-passengers, not to speak of his
own. Not to be lightly considered must be the right to privacy to which each passenger is entitled. He cannot
be subjected to any unusual search, when he protests the innocuousness of his baggage and nothing
appears to indicate the contrary, as in the case at bar. In other words, inquiry may be verbally made as to
the nature of a passenger’s baggage when such is not outwardly perceptible, but beyond this, constitutional
boundaries are already in danger of being transgressed. Calling a policeman to his aid, as suggested by
the service manual invoked by the trial judge, in compelling the passenger to submit to more rigid inspection,
after the passenger had already declared that the box contained mere clothes and other miscellaneous,
could not have justified invasion of a constitutionally protected domain. Police officers acting without judicial
authority secured in the manner provided by law are not beyond the pale of constitutional inhibitions
designed to protect individual human rights and liberties. Withal, what must be importantly considered here
is not so much the infringement of the fundamental sacred rights of the particular passenger herein involved,
but the constant threat any contrary ruling would pose on the right of privacy of all passengers of all common
carriers, considering how easily the duty to inspect can be made an excuse for mischief and abuse. Of
course, when there are sufficient indications that the representations of the passenger regarding the nature
of his baggage may not be true, in the interest of the common safety of all, the assistance of the police
authorities may be solicited, not necessarily to force the passenger to open his baggage, but to conduct the
needed investigation consistent with the rules of propriety and, above all, the constitutional rights of the
passenger. It is in the sense that the mentioned srvices manual issued by appellant to its conductors must
be understood.30 (Emphases and underscoring supplied)

In this case, records reveal that when the bus stopped at San Jose City to let four (4) men ride petitioner's
bus (two [2] of which turned out to be Battung's murderers), the bus driver, Duplio, saw them get on the bus
and even took note of what they were wearing. Moreover, Duplio made the bus conductor, Daraoay,
approach these men and have them pay the corresponding fare, which Daraoay did. 31 During the
foregoing, both Duplio and Daraoay observed nothing which would rouse their suspicion that the men were
armed or were to carry out an unlawful activity. With no such indication, there was no need for them to
conduct a more stringent search (i.e., bodily search) on the aforesaid men. By all accounts, therefore, it
cannot be concluded that petitioner or any of its employees failed to employ the diligence of a good father
of a family in relation to its responsibility under Article 1763 of the Civil Code. As such, petitioner cannot
altogether be held civilly liable.

WHEREFORE, the petition is GRANTED. Accordingly, the Decision dated May 31, 2013 and the Resolution
dated August 23, 2013 of the Court of Appeals in CA-G.R. CV No. 97757 are hereby REVERSED and SET
ASIDE. Accordingly, the complaint for damages filed by respondents heirs of Romeo L. Battung, Jr. is
DISMISSED for lack of merit.

G.R. No. 171591

ACE NAVIGATION CO., INC.,

vs.
FGU INSURANCE CORPORATION and PIONEER INSURANCE AND SURETY CORPORATION

On July 19, 1990, Cardia Limited (CARDIA) shipped on board the vessel M/V Pakarti Tiga at Shanghai Port
China, 8,260 metric tons or 165,200 bags of Grey Portland Cement to be discharged at the Port of Manila
and delivered to its consignee, Heindrich Trading Corp. (HEINDRICH). The subject shipment was insured
with respondents, FGU Insurance Corp. (FGU) and Pioneer Insurance and Surety Corp. (PIONEER),
against all risks under Marine Open Policy No. 062890275 for the amount of P18,048,421.00. 3
The subject vessel is owned by P.T. Pakarti Tata (PAKARTI) which it chartered to Shinwa Kaiun Kaisha
Ltd. (SHINWA). 4 Representing itself as owner of the vessel, SHINWA entered into a charter party contract
with Sky International, Inc. (SKY), an agent of Kee Yeh Maritime Co. (KEE YEH), 5 which further chartered
it to Regency Express Lines S.A. (REGENCY). Thus, it was REGENCY that directly dealt with consignee
HEINDRICH, and accordingly, issued Clean Bill of Lading No. SM-1. 6

On July 23, 1990, the vessel arrived at the Port of Manila and the shipment was discharged. However, upon
inspection of HEINDRICH and petitioner Ace Navigation Co., Inc. (ACENAV), agent of CARDIA, it was
found that out of the 165,200 bags of cement, 43,905 bags were in bad order and condition. Unable to
collect the sustained damages in the amount of P1,423,454.60 from the shipper, CARDIA, and the
charterer, REGENCY, the respondents, as co-insurers of the cargo, each paid the consignee, HEINDRICH,
the amounts of P427,036.40 and P284,690.94, respectively, 7 and consequently became subrogated to all
the rights and causes of action accruing to HEINDRICH.

Thus, on August 8, 1991, respondents filed a complaint for damages against the following defendants:
"REGENCY EXPRESS LINES, S.A./ UNKNOWN CHARTERER OF THE VESSEL 'PAKARTI TIGA'/
UNKNOWN OWNER and/or DEMIFE (sic) CHARTERER OF THE VESSEL 'PAKARTI TIGA', SKY
INTERNATIONAL, INC. and/or ACE NAVIGATION COMPANY, INC." 8 which was docketed as Civil Case
No. 90-2016.

In their answer with counterclaim and cross-claim, PAKARTI and SHINWA alleged that the suits against
them cannot prosper because they were not named as parties in the bill of lading. 9

Similarly, ACENAV claimed that, not being privy to the bill of lading, it was not a real party-in-interest from
whom the respondents can demand compensation. It further denied being the local ship agent of the vessel
or REGENCY and claimed to be the agent of the shipper, CARDIA. 10

For its part, SKY denied having acted as agent of the charterer, KEE YEH, which chartered the vessel from
SHINWA, which originally chartered the vessel from PAKARTI. SKY also averred that it cannot be sued as
an agent without impleading its alleged principal, KEE YEH. 11

On September 30, 1991, HEINDRICH filed a similar complaint against the same parties and Commercial
Union Assurance Co. (COMMERCIAL), docketed as Civil Case No. 91-2415, which was later consolidated
with Civil Case No. 91-2016. However, the suit against COMMERCIAL was subsequently dismissed on
joint motion by the respondents and COMMERCIAL. 12

Proceedings Before the RTC and the CA

In its November 26, 2001 Decision, 13 the RTC dismissed the complaint, the fallo of which reads:

WHEREFORE, premises considered, plaintiffs’ complaint is DISMISSED. Defendants’ counter-claim

against the plaintiffs are likewise dismissed, it appearing that plaintiff[s] did not act in evident bad faith in
filing the present complaint against them.

Defendant Pakarti and Shinwa’s cross-claims against their co-defendants are likewise dismissed for lack
of sufficient evidence.

No costs.

SO ORDERED.

Dissatisfied, the respondents appealed to the CA which, in its assailed June 22, 2004 Decision, 14 found
PAKARTI, SHINWA, KEE YEH and its agent, SKY, solidarily liable for 70% of the respondents' claim, with
the remaining 30% to be shouldered solidarily by CARDIA and its agent, ACENAV, thus:
WHEREFORE, premises considered, the Decision dated November 26, 2001 is hereby MODIFIED in the
sense that:

a) defendant-appellees P.T. Pakarti Tata, Shinwa Kaiun Kaisha, Ltd., Kee Yeh Maritime Co., Ltd. and the
latter’s agent Sky International, Inc. are hereby declared jointly and severally liable, and are DIRECTED to
pay FGU Insurance Corporation the amount of Two Hundred Ninety Eight Thousand Nine Hundred Twenty
Five and 45/100 (P298,925.45) Pesos and Pioneer Insurance and Surety Corp. the sum of One Hundred
Ninety Nine Thousand Two Hundred Eighty Three and 66/100 (P199,283.66) Pesos representing Seventy
(70%) percentum of their respective claims as actual damages plus interest at the rate of six (6%)
percentum from the date of the filing of the complaint; and

b) defendant Cardia Ltd. and defendant-appellee Ace Navigation Co., Inc. are DECLARED jointly and
severally liable and are hereby DIRECTED to pay FGU Insurance Corporation One Hundred Twenty Eight
Thousand One Hundred Ten and 92/100 (P128,110.92) Pesos and Pioneer Insurance and Surety Corp.
Eighty Five Thousand Four Hundred Seven and 28/100 (P85,407.28) Pesos representing thirty (30%)
percentum of their respective claims as actual damages, plus interest at the rate of six (6%) percentum
from the date of the filing of the complaint.

SO ORDERED.

Finding that the parties entered into a time charter party, not a demise or bareboat charter where the owner
completely and exclusively relinquishes possession, command and navigation to the charterer, the CA held
PAKARTI, SHINWA, KEE YEH and its agent, SKY, solidarily liable for 70% of the damages sustained by
the cargo. This solidarity liability was borne by their failure to prove that they exercised extraordinary
diligence in the vigilance over the bags of cement entrusted to them for transport. On the other hand, the
CA passed on the remaining 30% of the amount claimed to the shipper, CARDIA, and its agent, ACENAV,
upon a finding that the damage was partly due to the cargo's inferior packing.

With respect to REGENCY, the CA affirmed the findings of the RTC that it did not acquire jurisdiction over
its person for defective service of summons.

PAKARTI's, SHINWA's, SKY's and ACENAV's respective motions for reconsideration were subsequently
denied in the CA's assailed February 17, 2006 Resolution.

Issues Before the Court

PAKARTI, SHINWA, SKY and ACENAV filed separate petitions for review on certiorari before the Court,
docketed as G.R. Nos. 171591, 171614, and 171663, which were ordered consolidated in the Court’s
Resolution dated July 31, 2006. 15

On April 21, 2006, SKY manifested 16 that it will no longer pursue its petition in G.R. No. 171614 and has
preferred to await the resolution in G.R. No. 171663 filed by PAKARTI and SHINWA. Accordingly, an entry
of judgment 17 against it was made on August 18, 2006. Likewise, on November 29, 2007, PAKARTI and
SHINWA moved 18 for the withdrawal of their petitions for lack of interest, which the Court granted in its
January 21, 2008 Resolution. 19 The corresponding entry of judgment 20 against them was made on March
17, 2008.

Thus, only the petition of ACENAV remained for the Court's resolution, with the lone issue of whether or
not it may be held liable to the respondents for 30% of their claim.

Maintaining that it was not a party to the bill of lading, ACENAV asserts that it cannot be held liable for the
damages sought to be collected by the respondents. It also alleged that since its principal, CARDIA, was
not impleaded as a party-defendant/respondent in the instant suit, no liability can therefore attach to it as a
mere agent. Moreover, there is dearth of evidence showing that it was responsible for the supposed
defective packing of the goods upon which the award was based.
The Court's Ruling

A bill of lading is defined as "an instrument in writing, signed by a carrier or his agent, describing the freight
so as to identify it, stating the name of the consignor, the terms of the contract for carriage, and agreeing
or directing that the freight to be delivered to the order or assigns of a specified person at a specified place."
21

It operates both as a receipt and as a contract. As a receipt, it recites the date and place of shipment,
describes the goods as to quantity, weight, dimensions, identification marks and condition, quality, and
value. As a contract, it names the contracting parties, which include the consignee, fixes the route,
destination, and freight rates or charges, and stipulates the rights and obligations assumed by the parties.
22 As such, it shall only be binding upon the parties who make them, their assigns and heirs. 23

In this case, the original parties to the bill of lading are: (a) the shipper CARDIA; (b) the carrier PAKARTI;
and (c) the consignee HEINDRICH. However, by virtue of their relationship with PAKARTI under separate
charter arrangements, SHINWA, KEE YEH and its agent SKY likewise became parties to the bill of lading.
In the same vein, ACENAV, as admitted agent of CARDIA, also became a party to the said contract of
carriage.

The respondents, however, maintain 24 that ACENAV is a ship agent and not a mere agent of CARDIA, as
found by both the CA 25 and the RTC. 26

The Court disagrees.

Article 586 of the Code of Commerce provides:

ART. 586. The shipowner and the ship agent shall be civilly liable for the acts of the captain and for the
obligations contracted by the latter to repair, equip, and provision the vessel, provided the creditor proves
that the amount claimed was invested therein.

By ship agent is understood the person entrusted with the provisioning of a vessel, or who represents her
in the port in which she may be found. (Emphasis supplied)

Records show that the obligation of ACENAV was limited to informing the consignee HEINDRICH of the
arrival of the vessel in order for the latter to immediately take possession of the goods. No evidence was
offered to establish that ACENAV had a hand in the provisioning of the vessel or that it represented the
carrier, its charterers, or the vessel at any time during the unloading of the goods. Clearly, ACENAV's
participation was simply to assume responsibility over the cargo when they were unloaded from the vessel.
Hence, no reversible error was committed by the courts a quo in holding that ACENAV was not a ship agent
within the meaning and context of Article 586 of the Code of Commerce, but a mere agent of CARDIA, the
shipper.

On this score, Article 1868 of the Civil Code states:

ART. 1868. By the contract of agency, a person binds himself to render some service or to do something
in representation or on behalf of another, with the consent or authority of the latter.

Corollarily, Article 1897 of the same Code provides that an agent is not personally liable to the party with
whom he contracts, unless he expressly binds himself or exceeds the limits of his authority without giving
such party sufficient notice of his powers.

Both exceptions do not obtain in this case. Records are bereft of any showing that ACENAV exceeded its
authority in the discharge of its duties as a mere agent of CARDIA. Neither was it alleged, much less proved,
that ACENAV's limited obligation as agent of the shipper, CARDIA, was not known to HEINDRICH.
Furthermore, since CARDIA was not impleaded as a party in the instant suit, the liability attributed upon it
by the CA 27 on the basis of its finding that the damage sustained by the cargo was due to improper packing
cannot be borne by ACENAV. As mere agent, ACENAV cannot be made responsible or held accountable
for the damage supposedly caused by its principal. 28

Accordingly, the Court finds that theCA erred in ordering ACENAV jointly and severally liable with CARDIA
to pay 30o/o of the respondents' claim.

WHEREFORE, the assailed Decision and Resolution of the Court of Appeals are hereby REVERSED. The
complaint against petitioner Ace Navigation Co., Inc. is hereby DISMISSED.

SO ORDERED.

CORPORATION LAW

G.R. No. 193078

B. STA. RITA & CO., INC. and ARLENE STA. RITA KANAPI,
vs.
ANGELINE M. GUECO

On April 11, 2000, Gueco purchased four parcels of land from B. Sta. Rita through its then President, Ben
Sta. Rita, situated at Barangay San Juan de Mata, Tarlac City (subject properties) and covered by Transfer
Certificate of Title (TCT) Nos. T-137998,7 T-191599,8 T-191600,9 and T-19160110 (subject titles) issued
by the Registry of Deeds of Tarlac (Tarlac RD), for the total consideration of ₱1,000,000.00 (sale
transaction). The sale transaction was evidenced by the subject deed.11

In October 2001, Gueco filed a petition12 for the surrender of the subject titles against B. Sta. Rita, its
corporate secretary Edgardo Kanapi (Edgardo), and the Tarlac RD. The case was docketed as Civil Case
No. 924513 (surrender of titles case) and was raffled to the Regional Trial Court of Tarlac City, Branch 64
(RTC Branch 64).

In their Answer,14 B. Sta. Rita and Edgardo claimed that: (a) the sale transaction was a conditional sale of
the subject properties for the total consideration of ₱25,000,000.00;15 (b) Gueco was the one who
demanded that the subject deed evidencing the sale transaction be captioned as a deed of absolute sale
for the purpose of obtaining funds to pay the required downpayment;16 (c) Gueco was only able to pay
₱1,565,000.00;17 and (d) B. Sta. Rita continued in possession of the subject properties until Ben Sta. Rita’s
death in 2001, when Gueco took possession thereof and appropriated the harvest.18 Hence, B. Sta. Rita
and Edgardo prayed that: (a) the sale transaction be construed as a conditional sale, and that it be
rescinded; (b) B. Sta. Rita be restored in the possession of the subject properties; and (c) Gueco be
adjudged liable to pay ₱500,000.00 as moral damages, ₱300,000.00 as exemplary damages, and
₱50,000.00 per agricultural year by way of damages for the misappropriated crops, among others.19

On July 30, 2003, while the surrender of titles case was pending, Alfred Ramos Sta. Rita, Ariel Ramos Sta.
Rita, and Arnold Ramos Sta. Rita, (Sta. Ritas), as alleged heirs of the late Ben Sta. Rita and as
shareholders20 of B. Sta. Rita, for themselves, their co-heirs21 and on behalf of B. Sta. Rita, and by way
of a derivative suit,22 filed a complaint23 for reformation and rescission of contract and quieting of title
against Gueco. The case was docketed as Civil Case No. 9532 (reformation case) and was raffled to RTC
Branch 63.

The Sta. Ritas alleged that the sale transaction was a conditional and not an absolute sale, for a
consideration of ₱25,000,000.00, of which Gueco paid only ₱1,000,000.00.24 Further, they maintained that
the subject deed was executed only for the purpose of helping Gueco secure a loan with the bank to pay
the balance of the purchase price.25 Unfortunately, Gueco failed to obtain a loan and consequently failed
to settle the outstanding balance despite demands;26 hence, the possession of the subject properties as
well as the subject titles properly remained with B. Sta. Rita.

Meanwhile, the Sta. Ritas moved27 to intervene in the surrender of titles case, claiming similarity of the
subject matter and parties, which RTC Branch 64 granted.28

On the other hand, Gueco, as defendant in the reformation case, Moved29 to dismiss the complaint on the
following grounds, among others: (a) that the Sta. Ritas failed to comply with a condition precedent before
resorting to a derivative suit, i.e., to show and allege in the complaint that the officers of B. Sta. Rita refused
to sue, are the ones being sued, or were the ones who held control of the corporation;30 and (b) that the
Sta. Ritas are not parties to the subject deed and therefore, had no legal personality to seek its reformation
or rescission.31

Gueco’s motion to dismiss was, however, denied by RTC Branch 63 in an Order32 dated August 26, 2003.
Later, her motion for reconsideration33 therefrom was also denied,34 prompting her to elevate the matter
to the CA via a petition for certiorari, docketed as CA-G.R. SP No. 79932 (certiorari case).35

Subsequently, or on November 5, 2003, the surrender of titles and the reformation cases were ordered36
consolidated before RTC Branch 63.

On March 5, 2004, herein petitioner Arlene Sta. Rita Kanapi (Arlene), wife of Edgardo, together with the
latter’s heirs37 (Heirs of Edgardo), moved38 for leave to file their complaint-in-intervention39 in the
reformation case, alleging that she is also a stockholder and director of B. Sta. Rita. The complaint-in-
intervention reiterated the Sta. Ritas’ allegations in the main complaint. In an Order40 dated March 15,
2004, RTC Branch 63 admitted the complaint-in-intervention and proceeded to hear the cases jointly.

On July 30, 2004, the CA rendered its Decision41 in the certiorari case, dismissing the reformation case
due to the Sta. Ritas’ lack of legal personality to bring a derivative suit. Citing Section 5,42 Rule III of the
Rules of Procedure of the Securities and Exchange Commission, the CA found that while the Sta. Ritas
may be shareholders of B. Sta. Rita at the time of the institution of their complaint against Gueco, their
rights did not antedate nor coincide with the date of the questioned sale. Moreover, records are bereft of
any showing that they had made any prior demand upon the Board of Directors of B. Sta. Rita to institute a
case to preserve any corporate property which is a requirement for a derivative suit.

Aggrieved, the Sta. Ritas filed a motion for reconsideration which was, however, denied by the CA on
October 28, 2004.43 As such, they filed a petition for review on certiorari before the Court, docketed as
G.R. No. 165858.44

In the meantime, RTC Branch 63 proceeded to hear the surrender of titles case independently of the
reformation case.

The RTC Ruling

On December 8, 2005, RTC Branch 63 rendered a Joint Decision45 (Joint Decision), rescinding the sale
transaction and directing the return of the amount of ₱1,000,000.00 to the former, with 6% interest from
receipt of the said decision until finality and 12% interest from finality until fully paid.

It concluded that the parties had not intended to enter into a contract of sale but a mere contract to sell for
the following reasons: (a) there was no immediate transfer of ownership from the seller to the buyer as
Gueco only demanded for the delivery of the subject titles on May 21, 2001; (b) Gueco did not immediately
take possession of the subject properties; and (c) B. Sta. Rita continued paying the real estate taxes due.
However, it held that since Gueco paid the amount of ₱1,000,000.00, the said sum should be returned to
her.46
Dissatisfied, Gueco appealed the Joint Decision to the CA, ascribing Error47 on the part of RTC Branch 63
in: (a) rendering a joint decision despite a pending incident in the reformation case; (b) allowing the
intervention of the Sta. Ritas in the surrender of titles case; and (c) rescinding the absolute sale.

In the interim, the Court issued a Resolution48 dated January 25, 2006 in G.R. No. 165858, denying the
Sta. Ritas’ petition for failure to prosecute, which denial became final and executory on June 16, 2006.49
In fine, the reformation case had been dismissed with finality.

The CA Ruling

In a Decision50 dated January 21, 2010 (CA Decision), the CA reversed and set aside the Joint Decision.
It held that the final dismissal of the reformation case left only the surrender of titles case for RTC Branch
63 to resolve. As rescission was one of the main issues raised in the dismissed reformation case, it was
reversible error on the part of the RTC Branch 63 to have rescinded the sale transaction in favor of the Sta.
Ritas. Consequently, the CA struck down the Joint Decision under the principles of the law of the case and
res judicata.51

Due to the CA’s adverse ruling, Arlene, for herself and purportedly on behalf of B. Sta. Rita, moved for
reconsideration,52 maintaining that res judicata cannot apply, there being no identity of parties as she was
not one of the original plaintiffs in the dismissed reformation case. Gueco opposed53 Arlene’s motion,
pointing out that the latter filed a complaint-in-intervention in the reformation case and, as a result of its
dismissal, the aforementioned complaint was necessarily discharged. Eventually, Arlene’s motion for
reconsideration was denied by the CA in a Resolution54 dated July 26, 2010.

The Issues Before the Court

Undaunted, Arlene, for herself and in representation of the Heirs of Edgardo and B. Sta. Rita, is now before
the Court, insisting that the dismissal of the reformation case on the ground of lack of legal personality on
the part of the Sta. Ritas should not have affected her complaint-in-intervention. She maintains that the CA
erred in applying the doctrine of res judicata in reversing the Joint Decision. Finally, she asserts that the
sale transaction between Gueco and B. Sta. Rita should have been considered as an equitable mortgage,
considering the paltry amount of ₱1,000,000.00 by way of consideration for the subject properties.55

The Court’s Ruling

The petition must be denied.

This course of action is impelled by the fact that Arlene and the Heirs of Edgardo do not have any legal
personality to appeal the CA Decision before the Court since: first, they were only intervenors in the
reformation case which had already been dismissed by the Court with finality; and second, they were not
parties in the surrender of titles case.

With respect to the first incident, it bears to stress that Arlene’s and the Heirs of Edgardo’s complaint-in-
intervention in the dismissed reformation case had been effectively discharged since the principal complaint
therein had already been terminated with finality. Clearly, their complaint-in-intervention cannot be treated
as an independent action as it is merely an ancillary to and a supplement of the principal action.56 In other
words, the complaint-in-intervention essentially latches on the complaint for its legal efficacy so much so
that the dismissal of the complaint leads to its concomitant dismissal. Applying these principles to this case
therefore lead to the conclusion that the dismissal of the main complaint in the reformation case necessarily
resulted in the dismissal of Arlene’s and the Heirs of Edgardo’s complaint-in-intervention lodged in the same
case.

Anent the second incident, records disclose that Arlene or the Heirs of Edgardo were not parties – either
as defendants or intervenors – in the surrender of titles case nor did they, in any manner, participate in the
proceedings of the same. It is a standing rule that no person shall be adversely affected by the outcome of
a civil action or proceeding in which he is not a party.57 In this light, it cannot be gainsaid that Arlene and
the Heirs of Edgardo cannot be adversely affected by the outcome of the surrender of titles case and, as
such, cannot therefore interpose an appeal therefrom.

Thus, due to the above-stated incidents, the Court denies the instant petition for Arlene’s and the Heirs of
Edgardo’s lack of legal personality to appeal the CA Decision.

To note, neither can Arlene file the instant appeal on behalf of B. Sta. Rita since there lies no evidence on
record to show that she had been properly authorized by the said corporation to file the same. It is
fundamental that the power of a corporation to sue and be sued in any court is lodged with the board of
directors and/or its duly authorized officers and agents,58 which Arlene clearly is not. Consequently, for her
lack of authority, the appeal of Arlene on behalf of B. Sta. Rita must necessarily fail.

As a final point, while it has been alleged59 that B. Sta. Rita had already ceased business operations, there
is equally no evidence on record to substantiate this fact. Hence, for all legal intents and purposes, it is
presumed that the corporation still exists and, in this accord, the proper authority to institute a case for and
in its behalf remains a requirement.1âwphi1

In view of the foregoing pronouncements, the Court finds it unnecessary to delve into the other ancillary
issues raised in this case.

WHEREFORE, the petition is DENIED. Accordingly. the Decision dated January 21, 2010 and the
Resolution dated July 26, 2010 of the Court of Appeals in CA-G.R. CV No. 87000 are hereby AFFIRMED

G.R. No. 201167

GOTESCO PROPERTIES, INC., JOSE C. GO, EVELYN GO, LOURDES G. ORTIGA, GEORGE GO, and
VICENTE GO,
vs.
SPOUSES EUGENIO and ANGELINA FAJARDO

On January 24, 1995, respondent-spouses Eugenio and Angelina Fajardo (Sps. Fajardo) entered into a
Contract to Sell4 (contract) with petitioner-corporation Gotesco Properties, Inc. (GPI) for the purchase of a
100-square meter lot identified as Lot No. 13, Block No.6, Phase No. IV of Evergreen Executive Village, a
subdivision project owned and developed by GPI located at Deparo Road, Novaliches, Caloocan City. The
subject lot is a portion of a bigger lot covered by Transfer Certificate of Title (TCT) No. 2442205 (mother
title).

Under the contract, Sps. Fajardo undertook to pay the purchase price of ₱126,000.00 within a 10-year
period, including interest at the rate of nine percent (9%) per annum. GPI, on the other hand, agreed to
execute a final deed of sale (deed) in favor of Sps. Fajardo upon full payment of the stipulated consideration.
However, despite its full payment of the purchase price on January 17, 20006 and subsequent demands,7
GPI failed to execute the deed and to deliver the title and physical possession of the subject lot. Thus, on
May 3, 2006, Sps. Fajardo filed before the Housing and Land Use Regulatory Board-Expanded National
Capital Region Field Office (HLURBENCRFO) a complaint8 for specific performance or rescission of
contract with damages against GPI and the members of its Board of Directors namely, Jose C. Go, Evelyn
Go, Lourdes G. Ortiga, George Go, and Vicente Go (individual petitioners), docketed as HLURB Case No.
REM-050306-13319.

Sps. Fajardo averred that GPI violated Section 209 of Presidential Decree No. 95710 (PD 957) due to its
failure to construct and provide water facilities, improvements, infrastructures and other forms of
development including water supply and lighting facilities for the subdivision project. They also alleged that
GPI failed to provide boundary marks for each lot and that the mother title including the subject lot had no
technical description and was even levied upon by the Bangko Sentral ng Pilipinas (BSP) without their
knowledge. They thus prayed that GPI be ordered to execute the deed, to deliver the corresponding
certificate of title and the physical possession of the subject lot within a reasonable period, and to develop
Evergreen Executive Village; or in the alternative, to cancel and/or rescind the contract and refund the total
payments made plus legal interest starting January 2000.

For their part, petitioners maintained that at the time of the execution of the contract, Sps. Fajardo were
actually aware that GPI's certificate of title had no technical description inscribed on it. Nonetheless, the
title to the subject lot was free from any liens or encumbrances.11 Petitioners claimed that the failure to
deliver the title to Sps. Fajardo was beyond their control12 because while GPI's petition for inscription of
technical description (LRC Case No. 4211) was favorably granted13 by the Regional Trial Court of
Caloocan City, Branch 131 (RTC-Caloocan), the same was reversed14 by the CA; this caused the delay in
the subdivision of the property into individual lots with individual titles. Given the foregoing incidents,
petitioners thus argued that Article 1191 of the Civil Code (Code) – the provision on which Sps. Fajardo
anchor their right of rescission – remained inapplicable since they were actually willing to comply with their
obligation but were only prevented from doing so due to circumstances beyond their control. Separately,
petitioners pointed out that BSP's adverse claim/levy which was annotated long after the execution of the
contract had already been settled.

The Ruling of the HLURB-ENCRFO

On February 9, 2007, the HLURB-ENCRFO issued a Decision15 in favor of Sps. Fajardo, holding that GPI’s
obligation to execute the corresponding deed and to deliver the transfer certificate of title and possession
of the subject lot arose and thus became due and demandable at the time Sps. Fajardo had fully paid the
purchase price for the subject lot. Consequently, GPI’s failure to meet the said obligation constituted a
substantial breach of the contract which perforce warranted its rescission. In this regard, Sps. Fajardo were
given the option to recover the money they paid to GPI in the amount of ₱168,728.83, plus legal interest
reckoned from date of extra-judicial demand in September 2002 until fully paid. Petitioners were likewise
held jointly and solidarily liable for the payment of moral and exemplary damages, attorney's fees and the
costs of suit.

The Ruling of the HLURB Board of Commissioners

On appeal, the HLURB Board of Commissioners affirmed the above ruling in its August 3, 2007 Decision,16
finding that the failure to execute the deed and to deliver the title to Sps. Fajardo amounted to a violation
of Section 25 of PD 957 which therefore, warranted the refund of payments in favor of Sps. Fajardo.

The Ruling of the OP

On further appeal, the OP affirmed the HLURB rulings in its August 27, 2009 Decision.17 In so doing, it
emphasized the mandatory tenor of Section 25 of PD 957 which requires the delivery of title to the buyer
upon full payment and found that GPI unjustifiably failed to comply with the same.

The Ruling of the CA

On petition for review, the CA affirmed the above rulings with modification, fixing the amount to be refunded
to Sps. Fajardo at the prevailing market value of the property18 pursuant to the ruling in Solid Homes v.
Tan (Solid Homes).19

The Petition

Petitioners insist that Sps. Fajardo have no right to rescind the contract considering that GPI's inability to
comply therewith was due to reasons beyond its control and thus, should not be held liable to refund the
payments they had received. Further, since the individual petitioners never participated in the acts
complained of nor found to have acted in bad faith, they should not be held liable to pay damages and
attorney's fees.

The Court's Ruling

The petition is partly meritorious.

A. Sps. Fajardo’s right to rescind

It is settled that in a contract to sell, the seller's obligation to deliver the corresponding certificates of title is
simultaneous and reciprocal to the buyer's full payment of the purchase price.20 In this relation, Section 25
of PD 957, which regulates the subject transaction, imposes on the subdivision owner or developer the
obligation to cause the transfer of the corresponding certificate of title to the buyer upon full payment, to
wit:

Sec. 25. Issuance of Title. The owner or developer shall deliver the title of the lot or unit to the buyer upon
full payment of the lot or unit. No fee, except those required for the registration of the deed of sale in the
Registry of Deeds, shall be collected for the issuance of such title. In the event a mortgage over the lot or
unit is outstanding at the time of the issuance of the title to the buyer, the owner or developer shall redeem
the mortgage or the corresponding portion thereof within six months from such issuance in order that the
title over any fully paid lot or unit may be secured and delivered to the buyer in accordance herewith.
(Emphasis supplied.)

In the present case, Sps. Fajardo claim that GPI breached the contract due to its failure to execute the deed
of sale and to deliver the title and possession over the subject lot, notwithstanding the full payment of the
purchase price made by Sps. Fajardo on January 17, 200021 as well as the latter’s demand for GPI to
comply with the aforementioned obligations per the letter22 dated September 16, 2002. For its part,
petitioners proffer that GPI could not have committed any breach of contract considering that its purported
non-compliance was largely impelled by circumstances beyond its control i.e., the legal proceedings
concerning the subdivision of the property into individual lots. Hence, absent any substantial breach, Sps.
Fajardo had no right to rescind the contract.

The Court does not find merit in petitioners’ contention.

A perusal of the records shows that GPI acquired the subject property on March 10, 1992 through a Deed
of Partition and Exchange23 executed between it and Andres Pacheco (Andres), the former registered
owner of the property. GPI was issued TCT No. 244220 on March 16, 1992 but the same did not bear any
technical description.24 However, no plausible explanation was advanced by the petitioners as to why the
petition for inscription (docketed as LRC Case No. 4211) dated January 6, 2000,25 was filed only after
almost eight (8) years from the acquisition of the subject property.

Neither did petitioners sufficiently explain why GPI took no positive action to cause the immediate filing of
a new petition for inscription within a reasonable time from notice of the July 15, 2003 CA Decision which
dismissed GPI’s earlier petition based on technical defects, this notwithstanding Sps. Fajardo's full payment
of the purchase price and prior demand for delivery of title. GPI filed the petition before the RTC-Caloocan,
Branch 122 (docketed as LRC Case No. C-5026) only on November 23, 2006,26 following receipt of the
letter27 dated February 10, 2006 and the filing of the complaint on May 3, 2006, alternatively seeking refund
of payments. While the court a quo decided the latter petition for inscription in its favor,28 there is no
showing that the same had attained finality or that the approved technical description had in fact been
annotated on TCT No. 244220, or even that the subdivision plan had already been approved.

Moreover, despite petitioners’ allegation29 that the claim of BSP had been settled, there appears to be no
cancellation of the annotations30 in GPI’s favor. Clearly, the long delay in the performance of GPI's
obligation from date of demand on September 16, 2002 was unreasonable and unjustified. It cannot
therefore be denied that GPI substantially breached its contract to sell with Sps. Fajardo which thereby
accords the latter the right to rescind the same pursuant to Article 1191 of the Code, viz:

ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should
not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with the payment
of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter
should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.

This is understood to be without prejudice to the rights of third persons who have acquired the thing, in
accordance with articles 1385 and 1388 and the Mortgage Law.

B. Effects of rescission

At this juncture, it is noteworthy to point out that rescission does not merely terminate the contract and
release the parties from further obligations to each other, but abrogates the contract from its inception and
restores the parties to their original positions as if no contract has been made.31 Consequently, mutual
restitution, which entails the return of the benefits that each party may have received as a result of the
contract, is thus required.32 To be sure, it has been settled that the effects of rescission as provided for in
Article 1385 of the Code are equally applicable to cases under Article 1191, to wit:

xxxx

Mutual restitution is required in cases involving rescission under Article 1191.1âwphi1 This means bringing
the parties back to their original status prior to the inception of the contract. Article 1385 of the Civil Code
provides, thus:

ART. 1385. Rescission creates the obligation to return the things which were the object of the contract,
together with their fruits, and the price with its interest; consequently, it can be carried out only when he
who demands rescission can return whatever he may be obligated to restore.

Neither shall rescission take place when the things which are the object of the contract are legally in the
possession of third persons who did not act in bad faith.

In this case, indemnity for damages may be demanded from the person causing the loss.

This Court has consistently ruled that this provision applies to rescission under Article 1191:

Since Article 1385 of the Civil Code expressly and clearly states that "rescission creates the obligation to
return the things which were the object of the contract, together with their fruits, and the price with its
interest," the Court finds no justification to sustain petitioners’ position that said Article 1385 does not apply
to rescission under Article 1191. x x x33 (Emphasis supplied; citations omitted.)

In this light, it cannot be denied that only GPI benefited from the contract, having received full payment of
the contract price plus interests as early as January 17, 2000, while Sps. Fajardo remained prejudiced by
the persisting non-delivery of the subject lot despite full payment. As a necessary consequence, considering
the propriety of the rescission as earlier discussed, Sps. Fajardo must be able to recover the price of the
property pegged at its prevailing market value consistent with the Court’s pronouncement in Solid
Homes,34 viz:

Indeed, there would be unjust enrichment if respondents Solid Homes, Inc. & Purita Soliven are made to
pay only the purchase price plus interest. It is definite that the value of the subject property already
escalated after almost two decades from the time the petitioner paid for it. Equity and justice dictate that
the injured party should be paid the market value of the lot, otherwise, respondents Solid Homes, Inc. &
Purita Soliven would enrich themselves at the expense of herein lot owners when they sell the same lot at
the present market value. Surely, such a situation should not be countenanced for to do so would be
contrary to reason and therefore, unconscionable. Over time, courts have recognized with almost pedantic
adherence that what is inconvenient or contrary to reason is not allowed in law. (Emphasis supplied.)
On this score, it is apt to mention that it is the intent of PD 957 to protect the buyer against unscrupulous
developers, operators and/or sellers who reneged on their obligations.35 Thus, in order to achieve this
purpose, equity and justice dictate that the injured party should be afforded full recompense and as such,
be allowed to recover the prevailing market value of the undelivered lot which had been fully paid
for.1âwphi1

C. Moral and exemplary damages, attorney’s fees and costs of suit

Furthermore, the Court finds that there is proper legal basis to accord moral and exemplary damages and
attorney's fees, including costs of suit. Verily, GPI’s unjustified failure to comply with its obligations as
above-discussed caused Sps. Fajardo serious anxiety, mental anguish and sleepless nights, thereby
justifying the award of moral damages. In the same vein, the payment of exemplary damages remains in
order so as to prevent similarly minded subdivision developers to commit the same transgression. And
finally, considering that Sps. Fajardo were constrained to engage the services of counsel to file this suit,
the award of attorney’s fees must be likewise sustained.

D. Liability of individual Petitioners

However, the Court finds no basis to hold individual petitioners solidarily liable with petitioner GPI for the
payment of damages in favor of Sps. Fajardo since it was not shown that they acted maliciously or dealt
with the latter in bad faith. Settled 1s the rule that in the absence of malice and bad faith, as in this case,
officers of the corporation cannot be made personally liable for liabilities of the corporation which, by legal
fiction, has a personality separate and distinct from its officers, stockholders, and members.36

WHEREFORE, the assailed July 22, 2011 Decision and February 29, 2012 Resolution of the Court of
Appeals in CA-G.R. SP No. 112981 are hereby AFFIRMED WITH MODIFICATION, absolving individual
petitioners Jose C. Go, Evelyn Go, Lourdes G. Ortiga, George Go, and Vicente Go from personal liability
towards respondent-spouses Eugenio and Angelina Fajardo.

G.R. No. 192571

ABBOTT LABORATORIES, PHILIPPINES, CECILLE A. TERRIBLE, EDWIN D. FEIST, MARIA OLIVIA T.
YABUTMISA, TERESITA C. BERNARDO, AND ALLAN G. ALMAZAR,
vs.
PEARLIE ANN F. ALCARA
On June 27, 2004, petitioner Abbott Laboratories, Philippines (Abbott) caused the publication in a major
broadsheet newspaper of its need for a Medical and Regulatory Affairs Manager (Regulatory Affairs
Manager) who would: (a) be responsible for drug safety surveillance operations, staffing, and budget; (b)
lead the development and implementation of standard operating procedures/policies for drug safety
surveillance and vigilance; and (c) act as the primary interface with internal and external customers
regarding safety operations and queries.4 Alcaraz - who was then a Regulatory Affairs and Information
Manager at Aventis Pasteur Philippines, Incorporated (another pharmaceutical company like Abbott) –
showed interest and submitted her application on October 4, 2004.5

On December 7, 2004, Abbott formally offered Alcaraz the abovementioned position which was an item
under the company’s Hospira Affiliate Local Surveillance Unit (ALSU) department.6 In Abbott’s offer sheet.7
it was stated that Alcaraz was to be employed on a probationary basis.8 Later that day, she accepted the
said offer and received an electronic mail (e-mail) from Abbott’s Recruitment Officer, petitioner Teresita C.
Bernardo (Bernardo), confirming the same. Attached to Bernardo’s e-mail were Abbott’s organizational
chart and a job description of Alcaraz’s work.9

On February 12, 2005, Alcaraz signed an employment contract which stated, inter alia, that she was to be
placed on probation for a period of six (6) months beginning February 15, 2005 to August 14, 2005. The
said contract was also signed by Abbott’s General Manager, petitioner Edwin Feist (Feist):10

PROBATIONARY EMPLOYMENT
Dear Pearl,

After having successfully passed the pre-employment requirements, you are hereby appointed as follows:

Position Title : Regulatory Affairs Manager

Department : Hospira

The terms of your employment are:

Nature of Employment : Probationary

Effectivity : February 15, 2005 to August 14, 2005

Basic Salary : ₱110,000.00/ month

It is understood that you agree to abide by all existing policies, rules and regulations of the company, as
well as those, which may be hereinafter promulgated.

Unless renewed, probationary appointment expires on the date indicated subject to earlier termination by
the Company for any justifiable reason.

If you agree to the terms and conditions of your employment, please signify your conformity below and
return a copy to HRD.

Welcome to Abbott!

Very truly yours,

Sgd.
EDWIN D. FEIST
General Manager

CONFORME:

Sgd.
PEARLIE ANN FERRER-ALCARAZ

During Alcaraz’s pre-employment orientation, petitioner Allan G. Almazar (Almazar), Hospira’s Country
Transition Manager, briefed her on her duties and responsibilities as Regulatory Affairs Manager, stating
that: (a) she will handle the staff of Hospira ALSU and will directly report to Almazar on matters regarding
Hopira’s local operations, operational budget, and performance evaluation of the Hospira ALSU Staff who
are on probationary status; (b) she must implement Abbott’s Code of Good Corporate Conduct (Code of
Conduct), office policies on human resources and finance, and ensure that Abbott will hire people who are
fit in the organizational discipline; (c) petitioner Kelly Walsh (Walsh), Manager of the Literature Drug
Surveillance Drug Safety of Hospira, will be her immediate supervisor; (d) she should always coordinate
with Abbott’s human resource officers in the management and discipline of the staff; (e) Hospira ALSU will
spin off from Abbott in early 2006 and will be officially incorporated and known as Hospira, Philippines. In
the interim, Hospira ALSU operations will still be under Abbott’s management, excluding the technical
aspects of the operations which is under the control and supervision of Walsh; and (f) the processing of
information and/or raw material data subject of Hospira ALSU operations will be strictly confined and
controlled under the computer system and network being maintained and operated from the United States.
For this purpose, all those involved in Hospira ALSU are required to use two identification cards: one, to
identify them as Abbott’s employees and another, to identify them as Hospira employees.11
On March 3, 2005, petitioner Maria Olivia T. Yabut-Misa (Misa), Abbott’s Human Resources (HR) Director,
sent Alcaraz an e-mail which contained an explanation of the procedure for evaluating the performance of
probationary employees and further indicated that Abbott had only one evaluation system for all of its
employees. Alcaraz was also given copies of Abbott’s Code of Conduct and Probationary Performance
Standards and Evaluation (PPSE) and Performance Excellence Orientation Modules (Performance
Modules) which she had to apply in line with her task of evaluating the Hospira ALSU staff.12

Abbott’s PPSE procedure mandates that the job performance of a probationary employee should be
formally reviewed and discussed with the employee at least twice: first on the third month and second on
the fifth month from the date of employment. The necessary Performance Improvement Plan should also
be made during the third-month review in case of a gap between the employee’s performance and the
standards set. These performance standards should be discussed in detail with the employee within the
first two (2) weeks on the job. It was equally required that a signed copy of the PPSE form must be submitted
to Abbott’s Human Resources Department (HRD) and shall serve as documentation of the employee’s
performance during his/her probationary period. This shall form the basis for recommending the
confirmation or termination of the probationary employment.13

During the course of her employment, Alcaraz noticed that some of the staff had disciplinary problems.
Thus, she would reprimand them for their unprofessional behavior such as non-observance of the dress
code, moonlighting, and disrespect of Abbott officers. However, Alcaraz’s method of management was
considered by Walsh to be "too strict."14 Alcaraz approached Misa to discuss these concerns and was told
to "lie low" and let Walsh handle the matter. Misa even assured her that Abbott’s HRD would support her
in all her management decisions.15

On April 12, 2005, Alcaraz received an e-mail from Misa requesting immediate action on the staff’s
performance evaluation as their probationary periods were about to end. This Alcaraz eventually
submitted.16

On April 20, 2005, Alcaraz had a meeting with petitioner Cecille Terrible (Terrible), Abbott’s former HR
Director, to discuss certain issues regarding staff performance standards. In the course thereof, Alcaraz
accidentally saw a printed copy of an e-mail sent by Walsh to some staff members which essentially
contained queries regarding the former’s job performance. Alcaraz asked if Walsh’s action was the normal
process of evaluation. Terrible said that it was not.17

On May 16, 2005, Alcaraz was called to a meeting with Walsh and Terrible where she was informed that
she failed to meet the regularization standards for the position of Regulatory Affairs Manager.18 Thereafter,
Walsh and Terrible requested Alcaraz to tender her resignation, else they be forced to terminate her
services. She was also told that, regardless of her choice, she should no longer report for work and was
asked to surrender her office identification cards. She requested to be given one week to decide on the
same, but to no avail.19

On May 17, 2005, Alcaraz told her administrative assistant, Claude Gonzales (Gonzales), that she would
be on leave for that day. However, Gonzales told her that Walsh and Terrible already announced to the
whole Hospira ALSU staff that Alcaraz already resigned due to health reasons.20

On May 23, 2005, Walsh, Almazar, and Bernardo personally handed to Alcaraz a letter stating that her
services had been terminated effective May 19, 2005.21 The letter detailed the reasons for Alcaraz’s
termination – particularly, that Alcaraz: (a) did not manage her time effectively; (b) failed to gain the trust of
her staff and to build an effective rapport with them; (c) failed to train her staff effectively; and (d) was not
able to obtain the knowledge and ability to make sound judgments on case processing and article review
which were necessary for the proper performance of her duties.22 On May 27, 2005, Alcaraz received
another copy of the said termination letter via registered mail.23

Alcaraz felt that she was unjustly terminated from her employment and thus, filed a complaint for illegal
dismissal and damages against Abbott and its officers, namely, Misa, Bernardo, Almazar, Walsh, Terrible,
and Feist.24 She claimed that she should have already been considered as a regular and not a probationary
employee given Abbott’s failure to inform her of the reasonable standards for her regularization upon her
engagement as required under Article 29525 of the Labor Code. In this relation, she contended that while
her employment contract stated that she was to be engaged on a probationary status, the same did not
indicate the standards on which her regularization would be based.26 She further averred that the individual
petitioners maliciously connived to illegally dismiss her when: (a) they threatened her with termination; (b)
she was ordered not to enter company premises even if she was still an employee thereof; and (c) they
publicly announced that she already resigned in order to humiliate her.27

On the contrary, petitioners maintained that Alcaraz was validly terminated from her probationary
employment given her failure to satisfy the prescribed standards for her regularization which were made
known to her at the time of her engagement.28

The LA Ruling

In a Decision dated March 30, 2006,29 the LA dismissed Alcaraz’s complaint for lack of merit.

The LA rejected Alcaraz’s argument that she was not informed of the reasonable standards to qualify as a
regular employee considering her admissions that she was briefed by Almazar on her work during her pre-
employment orientation meeting30 and that she received copies of Abbott’s Code of Conduct and
Performance Modules which were used for evaluating all types of Abbott employees.31 As Alcaraz was
unable to meet the standards set by Abbott as per her performance evaluation, the LA ruled that the
termination of her probationary employment was justified.32 Lastly, the LA found that there was no evidence
to conclude that Abbott’s officers and employees acted in bad faith in terminating Alcaraz’s employment.33

Displeased with the LA’s ruling, Alcaraz filed an appeal with the National Labor Relations Commission
(NLRC).

The NLRC Ruling

On September 15, 2006, the NLRC rendered a Decision,34 annulling and setting aside the LA’s ruling, the
dispositive portion of which reads:

WHEREFORE, the Decision of the Labor Arbiter dated 31 March 2006 [sic] is hereby reversed, annulled
and set aside and judgment is hereby rendered:

1. Finding respondents Abbot [sic] and individual respondents to have committed illegal dismissal;

2. Respondents are ordered to immediately reinstate complainant to her former position without loss of
seniority rights immediately upon receipt hereof;

3. To jointly and severally pay complainant backwages computed from 16 May 2005 until finality of this
decision. As of the date hereof the backwages is computed at

a. Backwages for 15 months - PhP 1,650,000.00

b. 13th month pay - 110,000.00
TOTAL PhP 1,760,000.00
4. Respondents are ordered to pay complainant moral damages of ₱50,000.00 and exemplary damages of
₱50,000.00.

5. Respondents are also ordered to pay attorney’s fees of 10% of the total award.

6. All other claims are dismissed for lack of merit.

SO ORDERED.35
The NLRC reversed the findings of the LA and ruled that there was no evidence showing that Alcaraz had
been apprised of her probationary status and the requirements which she should have complied with in
order to be a regular employee.36 It held that Alcaraz’s receipt of her job description and Abbott’s Code of
Conduct and Performance Modules was not equivalent to her being actually informed of the performance
standards upon which she should have been evaluated on.37 It further observed that Abbott did not comply
with its own standard operating procedure in evaluating probationary employees.38 The NLRC was also
not convinced that Alcaraz was terminated for a valid cause given that petitioners’ allegation of Alcaraz’s
"poor performance" remained unsubstantiated.39

Petitioners filed a motion for reconsideration which was denied by the NLRC in a Resolution dated July 31,
2007.40

Aggrieved, petitioners filed with the CA a Petition for Certiorari with Prayer for Issuance of a Temporary
Restraining Order and/or Writ of Preliminary Injunction, docketed as CA G.R. SP No. 101045 (First CA
Petition), alleging grave abuse of discretion on the part of NLRC when it ruled that Alcaraz was illegally
dismissed.41

Pending resolution of the First CA Petition, Alcaraz moved for the execution of the NLRC’s Decision before
the LA, which petitioners strongly opposed. The LA denied the said motion in an Order dated July 8, 2008
which was, however, eventually reversed on appeal by the NLRC.42 Due to the foregoing, petitioners filed
another Petition for Certiorari with the CA, docketed as CA G.R. SP No. 111318 (Second CA Petition),
assailing the propriety of the execution of the NLRC decision.43

The CA Ruling

With regard to the First CA Petition, the CA, in a Decision44 dated December 10, 2009, affirmed the ruling
of the NLRC and held that the latter did not commit any grave abuse of discretion in finding that Alcaraz
was illegally dismissed.

It observed that Alcaraz was not apprised at the start of her employment of the reasonable standards under
which she could qualify as a regular employee.45 This was based on its examination of the employment
contract which showed that the same did not contain any standard of performance or any stipulation that
Alcaraz shall undergo a performance evaluation before she could qualify as a regular employee.46 It also
found that Abbott was unable to prove that there was any reasonable ground to terminate Alcaraz’s
employment.47 Abbott moved for the reconsideration of the aforementioned ruling which was, however,
denied by the CA in a Resolution48 dated June 9, 2010.

The CA likewise denied the Second CA Petition in a Resolution dated May 18, 2010 (May 18, 2010
Resolution) and ruled that the NLRC was correct in upholding the execution of the NLRC Decision.49 Thus,
petitioners filed a motion for reconsideration.

While the petitioners’ motion for reconsideration of the CA’s May 18, 2010 Resolution was pending, Alcaraz
again moved for the issuance of a writ of execution before the LA. On June 7, 2010, petitioners received
the LA’s order granting Alcaraz’s motion for execution which they in turn appealed to the NLRC – through
a Memorandum of Appeal dated June 16, 2010 (June 16, 2010 Memorandum of Appeal ) – on the ground
that the implementation of the LA’s order would render its motion for reconsideration moot and academic.50

Meanwhile, petitioners’ motion for reconsideration of the CA’s May 18, 2010 Resolution in the Second CA
Petition was denied via a Resolution dated October 4, 2010.51 This attained finality on January 10, 2011
for petitioners’ failure to timely appeal the same.52 Hence, as it stands, only the issues in the First CA
petition are left to be resolved.

Incidentally, in her Comment dated November 15, 2010, Alcaraz also alleges that petitioners were guilty of
forum shopping when they filed the Second CA Petition pending the resolution of their motion for
reconsideration of the CA’s December 10, 2009 Decision i.e., the decision in the First CA Petition.53 She
also contends that petitioners have not complied with the certification requirement under Section 5, Rule 7
of the Rules of Court when they failed to disclose in the instant petition the filing of the June 16, 2010
Memorandum of Appeal filed before the NLRC.54

The Issues Before the Court

The following issues have been raised for the Court’s resolution: (a) whether or not petitioners are guilty of
forum shopping and have violated the certification requirement under Section 5, Rule 7 of the Rules of
Court; (b) whether or not Alcaraz was sufficiently informed of the reasonable standards to qualify her as a
regular employee; (c) whether or not Alcaraz was validly terminated from her employment; and (d) whether
or not the individual petitioners herein are liable.

The Court’s Ruling

A. Forum Shopping and

Violation of Section 5, Rule 7
of the Rules of Court.

At the outset, it is noteworthy to mention that the prohibition against forum shopping is different from a
violation of the certification requirement under Section 5, Rule 7 of the Rules of Court. In Sps. Ong v. CA,55
the Court explained that:

x x x The distinction between the prohibition against forum shopping and the certification requirement
should by now be too elementary to be misunderstood. To reiterate, compliance with the certification
against forum shopping is separate from and independent of the avoidance of the act of forum shopping
itself. There is a difference in the treatment between failure to comply with the certification requirement and
violation of the prohibition against forum shopping not only in terms of imposable sanctions but also in the
manner of enforcing them. The former constitutes sufficient cause for the dismissal without prejudice to the
filing of the complaint or initiatory pleading upon motion and after hearing, while the latter is a ground for
summary dismissal thereof and for direct contempt. x x x. 56

As to the first, forum shopping takes place when a litigant files multiple suits involving the same parties,
either simultaneously or successively, to secure a favorable judgment. It exists where the elements of litis
pendentia are present, namely: (a) identity of parties, or at least such parties who represent the same
interests in both actions; (b) identity of rights asserted and relief prayed for, the relief being founded on the
same facts; and (c) the identity with respect to the two preceding particulars in the two (2) cases is such
that any judgment that may be rendered in the pending case, regardless of which party is successful, would
amount to res judicata in the other case.57

In this case, records show that, except for the element of identity of parties, the elements of forum shopping
do not exist. Evidently, the First CA Petition was instituted to question the ruling of the NLRC that Alcaraz
was illegally dismissed. On the other hand, the Second CA Petition pertains to the propriety of the
enforcement of the judgment award pending the resolution of the First CA Petition and the finality of the
decision in the labor dispute between Alcaraz and the petitioners. Based on the foregoing, a judgment in
the Second CA Petition will not constitute res judicata insofar as the First CA Petition is concerned. Thus,
considering that the two petitions clearly cover different subject matters and causes of action, there exists
no forum shopping.

As to the second, Alcaraz further imputes that the petitioners violated the certification requirement under
Section 5, Rule 7 of the Rules of Court58 by not disclosing the fact that it filed the June 16, 2010
Memorandum of Appeal before the NLRC in the instant petition.

In this regard, Section 5(b), Rule 7 of the Rules of Court requires that a plaintiff who files a case should
provide a complete statement of the present status of any pending case if the latter involves the same
issues as the one that was filed. If there is no such similar pending case, Section 5(a) of the same rule
provides that the plaintiff is obliged to declare under oath that to the best of his knowledge, no such other
action or claim is pending.
Records show that the issues raised in the instant petition and those in the June 16, 2010 Memorandum of
Appeal filed with the NLRC likewise cover different subject matters and causes of action. In this case, the
validity of Alcaraz’s dismissal is at issue whereas in the said Memorandum of Appeal, the propriety of the
issuance of a writ of execution was in question.

Thus, given the dissimilar issues, petitioners did not have to disclose in the present petition the filing of their
June 16, 2010 Memorandum of Appeal with the NLRC. In any event, considering that the issue on the
propriety of the issuance of a writ of execution had been resolved in the Second CA Petition – which in fact
had already attained finality – the matter of disclosing the June 16, 2010 Memorandum of Appeal is now
moot and academic.

Having settled the foregoing procedural matter, the Court now proceeds to resolve the substantive issues.

B. Probationary employment;
grounds for termination.

A probationary employee, like a regular employee, enjoys security of tenure. However, in cases of
probationary employment, aside from just or authorized causes of termination, an additional ground is
provided under Article 295 of the Labor Code, i.e., the probationary employee may also be terminated for
failure to qualify as a regular employee in accordance with the reasonable standards made known by the
employer to the employee at the time of the engagement.59 Thus, the services of an employee who has
been engaged on probationary basis may be terminated for any of the following: (a) a just or (b) an
authorized cause; and (c) when he fails to qualify as a regular employee in accordance with reasonable
standards prescribed by the employer.60

Corollary thereto, Section 6(d), Rule I, Book VI of the Implementing Rules of the Labor Code provides that
if the employer fails to inform the probationary employee of the reasonable standards upon which the
regularization would be based on at the time of the engagement, then the said employee shall be deemed
a regular employee, viz.:

(d) In all cases of probationary employment, the employer shall make known to the employee the standards
under which he will qualify as a regular employee at the time of his engagement. Where no standards are
made known to the employee at that time, he shall be deemed a regular employee.

In other words, the employer is made to comply with two (2) requirements when dealing with a probationary
employee: first, the employer must communicate the regularization standards to the probationary
employee; and second, the employer must make such communication at the time of the probationary
employee’s engagement. If the employer fails to comply with either, the employee is deemed as a regular
and not a probationary employee.

Keeping with these rules, an employer is deemed to have made known the standards that would qualify a
probationary employee to be a regular employee when it has exerted reasonable efforts to apprise the
employee of what he is expected to do or accomplish during the trial period of probation. This goes without
saying that the employee is sufficiently made aware of his probationary status as well as the length of time
of the probation.

The exception to the foregoing is when the job is self-descriptive in nature, for instance, in the case of
maids, cooks, drivers, or messengers.61 Also, in Aberdeen Court, Inc. v. Agustin,62 it has been held that
the rule on notifying a probationary employee of the standards of regularization should not be used to
exculpate an employee who acts in a manner contrary to basic knowledge and common sense in regard to
which there is no need to spell out a policy or standard to be met. In the same light, an employee’s failure
to perform the duties and responsibilities which have been clearly made known to him constitutes a
justifiable basis for a probationary employee’s non-regularization.
In this case, petitioners contend that Alcaraz was terminated because she failed to qualify as a regular
employee according to Abbott’s standards which were made known to her at the time of her engagement.
Contrarily, Alcaraz claims that Abbott never apprised her of these standards and thus, maintains that she
is a regular and not a mere probationary employee.

The Court finds petitioners’ assertions to be well-taken.

A punctilious examination of the records reveals that Abbott had indeed complied with the above-stated
requirements. This conclusion is largely impelled by the fact that Abbott clearly conveyed to Alcaraz her
duties and responsibilities as Regulatory Affairs Manager prior to, during the time of her engagement, and
the incipient stages of her employment. On this score, the Court finds it apt to detail not only the incidents
which point out to the efforts made by Abbott but also those circumstances which would show that Alcaraz
was well-apprised of her employer’s expectations that would, in turn, determine her regularization:

(a) On June 27, 2004, Abbott caused the publication in a major broadsheet newspaper of its need for a
Regulatory Affairs Manager, indicating therein the job description for as well as the duties and
responsibilities attendant to the aforesaid position; this prompted Alcaraz to submit her application to Abbott
on October 4, 2004;

(b) In Abbott’s December 7, 2004 offer sheet, it was stated that Alcaraz was to be employed on a
probationary status;

(c) On February 12, 2005, Alcaraz signed an employment contract which specifically stated, inter alia, that
she was to be placed on probation for a period of six (6) months beginning February 15, 2005 to August
14, 2005;

(d) On the day Alcaraz accepted Abbott’s employment offer, Bernardo sent her copies of Abbott’s
organizational structure and her job description through e-mail;

(e) Alcaraz was made to undergo a pre-employment orientation where Almazar informed her that she had
to implement Abbott’s Code of Conduct and office policies on human resources and finance and that she
would be reporting directly to Walsh;

(f) Alcaraz was also required to undergo a training program as part of her orientation;

(g) Alcaraz received copies of Abbott’s Code of Conduct and Performance Modules from Misa who
explained to her the procedure for evaluating the performance of probationary employees; she was further
notified that Abbott had only one evaluation system for all of its employees; and

(h) Moreover, Alcaraz had previously worked for another pharmaceutical company and had admitted to
have an "extensive training and background" to acquire the necessary skills for her job.63

Considering the totality of the above-stated circumstances, it cannot, therefore, be doubted that Alcaraz
was well-aware that her regularization would depend on her ability and capacity to fulfill the requirements
of her position as Regulatory Affairs Manager and that her failure to perform such would give Abbott a valid
cause to terminate her probationary employment.

Verily, basic knowledge and common sense dictate that the adequate performance of one’s duties is, by
and of itself, an inherent and implied standard for a probationary employee to be regularized; such is a
regularization standard which need not be literally spelled out or mapped into technical indicators in every
case. In this regard, it must be observed that the assessment of adequate duty performance is in the nature
of a management prerogative which when reasonably exercised – as Abbott did in this case – should be
respected. This is especially true of a managerial employee like Alcaraz who was tasked with the vital
responsibility of handling the personnel and important matters of her department.
In fine, the Court rules that Alcaraz’s status as a probationary employee and her consequent dismissal must
stand. Consequently, in holding that Alcaraz was illegally dismissed due to her status as a regular and not
a probationary employee, the Court finds that the NLRC committed a grave abuse of discretion.

To elucidate, records show that the NLRC based its decision on the premise that Alcaraz’s receipt of her
job description and Abbott’s Code of Conduct and Performance Modules was not equivalent to being
actually informed of the performance standards upon which she should have been evaluated on.64 It,
however, overlooked the legal implication of the other attendant circumstances as detailed herein which
should have warranted a contrary finding that Alcaraz was indeed a probationary and not a regular
employee – more particularly the fact that she was well-aware of her duties and responsibilities and that
her failure to adequately perform the same would lead to her non-regularization and eventually, her
termination.

Accordingly, by affirming the NLRC’s pronouncement which is tainted with grave abuse of discretion, the
CA committed a reversible error which, perforce, necessitates the reversal of its decision.

C. Probationary employment;
termination procedure.

A different procedure is applied when terminating a probationary employee; the usual two-notice rule does
not govern.65 Section 2, Rule I, Book VI of the Implementing Rules of the Labor Code states that "if the
termination is brought about by the x x x failure of an employee to meet the standards of the employer in
case of probationary employment, it shall be sufficient that a written notice is served the employee, within
a reasonable time from the effective date of termination."

As the records show, Alcaraz's dismissal was effected through a letter dated May 19, 2005 which she
received on May 23, 2005 and again on May 27, 2005. Stated therein were the reasons for her termination,
i.e., that after proper evaluation, Abbott determined that she failed to meet the reasonable standards for
her regularization considering her lack of time and people management and decision-making skills, which
are necessary in the performance of her functions as Regulatory Affairs Manager.66 Undeniably, this
written notice sufficiently meets the criteria set forth above, thereby legitimizing the cause and manner of
Alcaraz’s dismissal as a probationary employee under the parameters set by the Labor Code.67

D. Employer’s violation of
company policy and
procedure.

Nonetheless, despite the existence of a sufficient ground to terminate Alcaraz’s employment and Abbott’s
compliance with the Labor Code termination procedure, it is readily apparent that Abbott breached its
contractual obligation to Alcaraz when it failed to abide by its own procedure in evaluating the performance
of a probationary employee.

Veritably, a company policy partakes of the nature of an implied contract between the employer and
employee. In Parts Depot, Inc. v. Beiswenger,68 it has been held that:

Employer statements of policy . . . can give rise to contractual rights in employees without evidence that
the parties mutually agreed that the policy statements would create contractual rights in the employee, and,
hence, although the statement of policy is signed by neither party, can be unilaterally amended by the
employer without notice to the employee, and contains no reference to a specific employee, his job
description or compensation, and although no reference was made to the policy statement in pre-
employment interviews and the employee does not learn of its existence until after his hiring. Toussaint,
292 N.W .2d at 892. The principle is akin to estoppel. Once an employer establishes an express personnel
policy and the employee continues to work while the policy remains in effect, the policy is deemed an
implied contract for so long as it remains in effect. If the employer unilaterally changes the policy, the terms
of the implied contract are also thereby changed.1âwphi1 (Emphasis and underscoring supplied.)
Hence, given such nature, company personnel policies create an obligation on the part of both the
employee and the employer to abide by the same.

Records show that Abbott’s PPSE procedure mandates, inter alia, that the job performance of a
probationary employee should be formally reviewed and discussed with the employee at least twice: first
on the third month and second on the fifth month from the date of employment. Abbott is also required to
come up with a Performance Improvement Plan during the third month review to bridge the gap between
the employee’s performance and the standards set, if any.69 In addition, a signed copy of the PPSE form
should be submitted to Abbott’s HRD as the same would serve as basis for recommending the confirmation
or termination of the probationary employment.70

In this case, it is apparent that Abbott failed to follow the above-stated procedure in evaluating Alcaraz. For
one, there lies a hiatus of evidence that a signed copy of Alcaraz’s PPSE form was submitted to the HRD.
It was not even shown that a PPSE form was completed to formally assess her performance. Neither was
the performance evaluation discussed with her during the third and fifth months of her employment. Nor did
Abbott come up with the necessary Performance Improvement Plan to properly gauge Alcaraz’s
performance with the set company standards.

While it is Abbott’s management prerogative to promulgate its own company rules and even subsequently
amend them, this right equally demands that when it does create its own policies and thereafter notify its
employee of the same, it accords upon itself the obligation to faithfully implement them. Indeed, a contrary
interpretation would entail a disharmonious relationship in the work place for the laborer should never be
mired by the uncertainty of flimsy rules in which the latter’s labor rights and duties would, to some extent,
depend.

In this light, while there lies due cause to terminate Alcaraz’s probationary employment for her failure to
meet the standards required for her regularization, and while it must be further pointed out that Abbott had
satisfied its statutory duty to serve a written notice of termination, the fact that it violated its own company
procedure renders the termination of Alcaraz’s employment procedurally infirm, warranting the payment of
nominal damages. A further exposition is apropos.

Case law has settled that an employer who terminates an employee for a valid cause but does so through
invalid procedure is liable to pay the latter nominal damages.

In Agabon v. NLRC (Agabon),71 the Court pronounced that where the dismissal is for a just cause, the lack
of statutory due process should not nullify the dismissal, or render it illegal, or ineffectual. However, the
employer should indemnify the employee for the violation of his statutory rights.72 Thus, in Agabon, the
employer was ordered to pay the employee nominal damages in the amount of ₱30,000.00.73

Proceeding from the same ratio, the Court modified Agabon in the case of Jaka Food Processing
Corporation v. Pacot (Jaka)74 where it created a distinction between procedurally defective dismissals due
to a just cause, on one hand, and those due to an authorized cause, on the other.

It was explained that if the dismissal is based on a just cause under Article 282 of the Labor Code (now
Article 296) but the employer failed to comply with the notice requirement, the sanction to be imposed upon
him should be tempered because the dismissal process was, in effect, initiated by an act imputable to the
employee; if the dismissal is based on an authorized cause under Article 283 (now Article 297) but the
employer failed to comply with the notice requirement, the sanction should be stiffer because the dismissal
process was initiated by the employer’s exercise of his management prerogative.75 Hence, in Jaka, where
the employee was dismissed for an authorized cause of retrenchment76 – as contradistinguished from the
employee in Agabon who was dismissed for a just cause of neglect of duty77 – the Court ordered the
employer to pay the employee nominal damages at the higher amount of ₱50,000.00.

Evidently, the sanctions imposed in both Agabon and Jaka proceed from the necessity to deter employers
from future violations of the statutory due process rights of employees.78 In similar regard, the Court deems
it proper to apply the same principle to the case at bar for the reason that an employer’s contractual breach
of its own company procedure – albeit not statutory in source – has the parallel effect of violating the
laborer’s rights. Suffice it to state, the contract is the law between the parties and thus, breaches of the
same impel recompense to vindicate a right that has been violated. Consequently, while the Court is wont
to uphold the dismissal of Alcaraz because a valid cause exists, the payment of nominal damages on
account of Abbott’s contractual breach is warranted in accordance with Article 2221 of the Civil Code.79

Anent the proper amount of damages to be awarded, the Court observes that Alcaraz’s dismissal
proceeded from her failure to comply with the standards required for her regularization. As such, it is
undeniable that the dismissal process was, in effect, initiated by an act imputable to the employee, akin to
dismissals due to just causes under Article 296 of the Labor Code. Therefore, the Court deems it
appropriate to fix the amount of nominal damages at the amount of ₱30,000.00, consistent with its rulings
in both Agabon and Jaka.

E. Liability of individual
petitioners as corporate
officers.

It is hornbook principle that personal liability of corporate directors, trustees or officers attaches only when:
(a) they assent to a patently unlawful act of the corporation, or when they are guilty of bad faith or gross
negligence in directing its affairs, or when there is a conflict of interest resulting in damages to the
corporation, its stockholders or other persons; (b) they consent to the issuance of watered down stocks or
when, having knowledge of such issuance, do not forthwith file with the corporate secretary their written
objection; (c) they agree to hold themselves personally and solidarily liable with the corporation; or (d) they
are made by specific provision of law personally answerable for their corporate action.80

In this case, Alcaraz alleges that the individual petitioners acted in bad faith with regard to the supposed
crude manner by which her probationary employment was terminated and thus, should be held liable
together with Abbott. In the same vein, she further attributes the loss of some of her remaining belongings
to them.81

Alcaraz’s contention fails to persuade.

A judicious perusal of the records show that other than her unfounded assertions on the matter, there is no
evidence to support the fact that the individual petitioners herein, in their capacity as Abbott’s officers and
employees, acted in bad faith or were motivated by ill will in terminating

Alcaraz’s services. The fact that Alcaraz was made to resign and not allowed to enter the workplace does
not necessarily indicate bad faith on Abbott’s part since a sufficient ground existed for the latter to actually
proceed with her termination. On the alleged loss of her personal belongings, records are bereft of any
showing that the same could be attributed to Abbott or any of its officers. It is a well-settled rule that bad
faith cannot be presumed and he who alleges bad faith has the onus of proving it. All told, since Alcaraz
failed to prove any malicious act on the part of Abbott or any of its officers, the Court finds the award of
moral or exemplary damages unwarranted.

WHEREFORE, the petition is GRANTED. The Decision dated December 10, 2009 and Resolution dated
June 9, 2010 of the Court of Appeals in CA-G.R. SP No. 101045 are hereby REVERSED and SET ASIDE.
Accordingly, the Decision dated March 30, 2006 of the Labor Arbiter is REINSTATED with the
MODIFICATION that petitioner Abbott Laboratories, Philippines be ORDERED to pay respondent Pearlie
Ann F. Alcaraz nominal damages in the amount of ₱30,000.00 on account of its breach of its own company
procedure.
G.R. No. 208890
JOEL N. MONTALLANA,
vs.
LA CONSOLACION COLLEGE MANILA, SR. IMELDA A. MORA, and ALBERT D. MANALILI

Montallana was a faculty member ofLa Consolacion’s College of Arts and Sciences.6

On January 16, 2009, Mrs. NerissaD. Del Fierro-Juan (Juan), the Assistant Dean of the College of Arts and
Sciences and the immediate superior of Montallana, filed a formal administrative complaint7 with La
Consolacion8 against Montallana, charging him of: (a) oral defamation (or slander); (b) disorderly conduct
in the school premises; and (c) discourteous/indecent behavior or using profane or obscene language in
addressing co-employees, superiors, or anybody within the school premises.9

The said complaint arose from an incident that occurred in the faculty room on January 12, 2009 while
Dean’s Secretary Ann Ruiz (Ruiz) and student assistant Kathlyn Saez (Saez) were numbering the lockers,
pursuant to a policy implemented by Juan.10 At that time, Montallana was conversing with a co-faculty
member, Dr. Beatriz V. Pabito (Pabito), when the latter asked Ruiz and Saez what they were doing.11 Upon
learning of the reassignment of lockers of faculty members through drawing of lots, Pabito commented,
saying "para naman tayong bata nyan,"12 to which Montallana followed suit and, in a loud voice, remarked
"oo nga naman para tayong mga grade one nyan, anong kabubuhan ng grade one yan."13 Juan heard
Montallana’s remark and confronted him, resulting in a heated altercation that ended with the latter walking
out of the room while Juan was still talking to him.14

After due investigation, La Consolacion’s fact-finding committee found Montallana guilty of serious
misconduct in making derogatory and insulting remarks about his superior, aggravated by the fact that he
made such remarks in a loud voice so that Juan would hear them.15 While noting that the foregoing may
be considered as a just cause for Montallana’s termination, the committee observed thatit was his first
offense and stressed on the reformative and redemptive facets of the case.16 In fine, Montallana was only
meted the penalty of suspension without pay for a period of two (2) months and directed him to submit a
written public apology to Juan in a tenor satisfactory to her and La Consolacion’s Human Resource
Department (HRD).17

In a letter18 dated April 22, 2009, Montallana sought reconsideration of his suspension and explained that
a written public apology was inappropriate at that time in view of the pendency of a criminal complaint19
for grave oral defamation filed by Juan against him before the City Prosecutor’s Office. He mentioned that
his issuance of a written public apology while the criminal case was being heard might incriminate himself,
adding too that it was his lawyer who advised him to invoke his right against self-incrimination.20

The request having been denied by La Consolacion’s President, respondent Sr. Imelda A. Mora (Mora), in
her letter21 dated May 12, 2009, Montallana filed a complaint for illegal suspension and unfair labor
practice, with prayer for payment of salaries during the period of suspension, and moral and exemplary
damages against respondents La Consolacion and Mora before the NLRC, docketed as NLRC NCR Case
No. 05-07667-09 (illegal suspension case).22

In a Decision23 dated April 15, 2010, the Labor Arbiter (LA) ruled in favor of Montallana, holding that his
actions did not constitute serious misconduct.24 Hence, Montallana’s suspension from employment was
declared illegal and respondents La Consolacion and Mora were ordered to pay Montallana the amount of
₱48,000.00 as his salary during the period of suspension.25

On appeal,26 however, the NLRC disagreed27 with the findings of the LA and found Montallana’s acts to
be constitutive of serious misconduct and against the rule of honor and decency expected of any teacher.28
While it found sufficient basis to impose the penalty of termination, the NLRC nonetheless sustained the
two (2)-month suspension in deference to the school’s prerogative to discipline its employees.29 Montallana
moved for reconsideration30 but was denied by the NLRC in a Decision31 dated February 7, 2011.
Montallana no longer elevated the matter to the CA and the NLRC’s decision became final and executory
on February 28, 2011.32
Thereafter, on June 1, 2011, La Consolacion, through its HRD Director, respondent Albert D. Manalili
(Manalili), directed Montallana to explain in writing why he should not be dismissed for failure to submit his
written public apology which formed part of the disciplinary sanction that was sustained with finality by the
NLRC.33

In a letter34 dated June 9, 2011, Montallana begged for La Consolacion’s indulgence, explaining that he
had no intention of defying the directive to submit a written public apology and that his inability to comply
therewith was, to reiterate, only in view of the pendency of the criminal case against him. He, nonetheless,
expressed his willingness to comply with the directive once the said case was resolved with finality. Finding
Montallana’s written explanation unsatisfactory, Manalili terminated him from work on June 13, 2011.35

Asserting that his dismissal for failure to submit a written public apology was unjustified and was, in fact,
connected to his position as an officer of La Consolacion’s newly formed and recognized Union, Montallana
filed a complaint36 for illegal dismissal with money claims against respondents La Consolacion, Mora, and
Manalili (respondents), docketed as NLRC NCR Case No. 06-09263-11.

In respondents’ defense,37 they contended that since the directive to apologize was part of the penalty
imposed on Montallana, his refusal and/or failure to comply merited further sanctions.38 They denied
having dismissed Montallana for his union activities, pointing out that even the Union President agreed to
his suspension for his misbehavior.39

The LA Ruling

In a Decision40 dated November 14, 2011, the LA dismissed Montallana’s complaint, holding that his
refusal to apologize – in light of his chosen profession as a teacher and La Consolacion’s right to maintain
a certain standard of behavior among its faculty, who serve as models for its students – was tantamount to
serious misconduct and, hence, warranted his termination.41 In this relation, the LA found Montallana’s
reason for refusing to apologize as invalid, observing thatno evidence was adduced to establish the
existence of the criminal case mentioned in his letters of explanation, and that even if there was one, the
case was strictly between Montallana and Juan and not the concern of the respondents.42

Aggrieved, Montallana filed an appeal43 before the NLRC.

The NLRC Ruling

In a Decision44 dated July 31, 2012, the NLRC reversed and set aside the LA’s verdict, and thus, ordered
respondents to reinstate Montallana and to pay him backwages from the time he was illegally dismissed up
to his reinstatement.

It ruled that Montallana’s failure to submit a written public apology was not an open defiance of respondents’
order since he even begged for the latter’s indulgence, believing that the issuance of a letter of apology
would incriminate him in the on-going criminal case filed by Juan.45 To this, the NLRC added that
Montallana did not question his superiors’ orders as he, in fact, expressed his willingness to abide by the
same, but only at a later appropriate time.46 Further, the NLRC observed that since Montallana had already
been suspended from work without pay, respondents should have accorded him more consideration and
compassion to his plight.47 Thus, it ruled Montallana’s dismissal to be too severe a penalty and ordered
respondents to reinstate him to his former position without loss of seniority and to pay him backwages from
the time he was illegally dismissed up to his reinstatement.48

Respondents moved for reconsideration,49 asserting that the failure to comply with their directive to
apologize constituted insubordination which is subject to disciplinary sanction under the school’s
Administrative Affairs Manual.50 They further manifested that the criminal case filed against Montallana
had already been dismissed in a Resolution51 dated March 5, 2010 and dropped from the prosecutor’s list
of cases on July 2, 2010,52 or way before La Consolacion sent the June1, 2011 directive to explain why
he failed to comply with the required written public apology. Consequently, it was pointed out that
Montallana was lying not only to respondents but also to the NLRC.53

Montallana, in response, claimed to have acquired a copy of the prosecutor’s March 5, 2010 Resolution
only on September 11, 2012 and, in this regard, submitted his letter of apology to the NLRC.54

In a Resolution55 dated October 16, 2012,the NLRC found that Montallana belatedly received the
prosecutor’s March 5, 2010 Resolution only on September 11, 2012 and, hence, denied respondents’
motion.56 This prompted the filing of a petition for certiorari57 before the CA. The CA Ruling

In a Decision58 dated May 31, 2013, the CA gave due course to respondents’ petition and eventually
reversed and set aside the NLRC’s Decision.

It found that Montallana deliberately refused to obey the directive of the respondents to apologize and that
the pendency of the criminal case against him was not sufficient justification to excuse him from compliance.
It observed that the said directive was an integral part of his punishment for serious misconduct, which had
already been sustained with finality by the NLRC in the illegal suspension case.59 Further, the CA agreed
with the LA that La Consolacion, as an educational institution, has the right to maintain and expect a certain
standard of behavior from its faculty, as they serve as role models for its students.60 All told, the CA was
satisfied that Montallana’s employment was terminated for a just and legal cause.61

Dissatisfied, Montallana moved for reconsideration62 which was denied in a Resolution63 dated August
30, 2013, hence, this petition.

The Issue Before the Court

The primordial issue for the Court’s resolution is whether or not Montallana’s termination from work was
lawful and justified.

The Court’s Ruling

The petition is meritorious.

"Willful disobedience by the employee of the lawful orders of his employer or representative in connection
with his work" is one of the just causes to terminate an employee under Article 296 (a) (formerly Article 282
[a]) of the Labor Code.64 In order for this ground to be properly invoked as a just cause for dismissal, the
conduct must be willful or intentional, willfulness being characterized bya wrongful and perverse mental
attitude.65 In Dongon v. Rapid Movers and Forwarders Co., Inc.,66 "willfulness" was described as
"attended by a wrongful and perverse mental attitude rendering the employee’s act inconsistent with proper
subordination."67

It is well to stress that it is the employer who bears the burden of proving, through substantial evidence,
that the aforesaid just cause – or any other authorized cause for that matter – forms the basis of the
employee’s dismissal from work.68 Failing in which, the dismissal should be adjudged as illegal.

In the case at bar, respondents failed to prove, by substantial evidence, that Montallana’s non-compliance
with respondents’ directive to apologize was "willful or intentional." The Court finds itself in complete
agreement with the NLRC that the disobedience attributed to Montallana could not be justly characterized
as "willful" within the contemplation of Article 296 of the Labor Code, in the sense above-described.

As culled from the records, aside from the administrative complaint filed by Juan against Montallana for his
serious misconduct, the former also filed a criminal complaint for grave oral defamation for the utterances
he made arising from the same incident before the Manila City Prosecutor’s Office. In the honest belief that
issuing a letter of apology would incriminate him in the said criminal case – and upon the advice of his own
lawyer at that – Montallana wrote to respondents and voluntarily communicated that he was willing to issue
the required apology, but only had to defer the same in view of his legal predicament. As the Court sees it,
the tenor of his letters, and the circumstances under which they were taken, at the very least, exhibited
Montallana’s good faith indealing with respondents. This, therefore, negates the theory that his failure to
abide by respondents’ directive to apologize was attended by a "wrong and perverse mental attitude
rendering the employee’s act inconsistent with proper subordination," which would warrant his termination
from employment.

It beckons clarification that respondents’ submission of the prosecutor’s March 5, 2010 Resolution to show
that Juan’s criminal complaint against Montallana was dismissed way earlier than their June 1, 2011
directive to explain is not enough to show that the latter took a willfully defiant attitude against a lawful order,
considering that no other evidence was presented to prove that the said Resolution had already attained
finality. In fact, as pointed out by the NLRC, it was only on September 11, 2012 that Montallana was able
to obtain a copy of the prosecutor’s March 5, 2010 Resolution, or long after he had already submitted his
letter of explanation on June 9, 2011.69 Therefore, respondents’ assertion that Montallana had lied tothem
cannot be given any credence.

Besides, even on the assumption that there was willful disobedience, still, the Court finds the penalty of
dismissal too harsh.1âwphi1 It bears to stress that not every case of insubordination or willful disobedience
by an employee reasonably deserves the penalty of dismissal.70 The penalty to be imposed on an erring
employee must be commensurate with the gravity of his offense.71 To the Court’s mind, the case of an
employee who is compelled to apologize for a previous infraction but fails to do so is not one which would
properly warrant his termination, absentany proof that the refusal was made in brazen disrespect of his
employer. While there is no question that teachers are held to a peculiar standard of behavior in view of
their significant role in the rearing of our youth, educational institutions are, in the meantime, held against
a legal standard imposed against all employers, among which, is the reservation of the ultimate penalty of
dismissal for serious infractions enumerated as just causes under Article 296 of the Labor Code.
Unfortunately, respondents herein failed to prove the seriousness of Montallana’s omission by the
evidentiary benchmark of substantial evidence. And to add, on a related note, while La Consolacion’s
Administrative Affairs Manual72 discloses that acts of insubordination (particularly, that of refusing or
neglecting to obey the school’s lawful directive) are dismissible violations, they are only so if imposed as a
third sanction. In the same vein, records are bereft of any showing that Montallana's failure to apologize
was being punished as such.

In fine, since respondents failed to prove, by substantial evidence, that Montallana's dismissal was based
on a just or authorized cause under the Labor Code or was clearly warranted under La Consolacion's
Administrative Affairs Manual, the Court rules that the dismissal was illegal. Consequently, the NLRC's
identical ruling, which was erroneously reversed by the CA on certiorari, must be reinstated with the
modification, however, in that the order for respondents Mora and Manalili to pay Montallana backwages73
should be deleted. It is a rule that personal liability of corporate directors, trustees or officers attaches only
when: (a) they assent to a patently unlawful act of the corporation, or when they are guilty of bad faith or
gross negligence in directing its affairs, or when there is a conflict of interest resulting in damages to the
corporation, its stockholders or other persons; ( b) they consent to the issuance of watered down stocks or
when, having knowledge of such issuance, do not forthwith file with the corporate secretary their written
objection; (c) they agree to hold themselves personally and solidarily liable with the corporation; or (d) they
are made by specific provision of law personally answerable for their corporate action.74 None of these
circumstances, in so far as Mora and Manalili are concerned, were shown to be present in this case; hence,
there is no reason for them to be held liable for Montallana's backwages.

WHEREFORE, the petition is GRANTED. The Decision dated May 31, 2013 and the Resolution dated
August 30, 2013 of the Court of Appeals in CA-G.R. SP No. 127988 are hereby REVERSED and SET
ASIDE. Accordingly, the Decision dated July 31, 2012 and the Resolution dated October 16, 2012 of the
National Labor Relations Commission in NLRC LAC No. 02-000556-12, declaring petitioner Joel N.
Montallana (Montallana) to have been illegally dismissed, are REINSTATED with the MODIFICATION
deleting the order for respondents Sr. Imelda A. Mora and Albert D. Manalili to pay Montallana his
backwages.
G.R. No. 208844,

F & S VELASCO COMPANY, INC., IRWIN J. SEVA, ROSINA B. VELASCO-SCRIBNER, MERCEDEZ

SUNICO, AND JOSE SATURNINO O. VELASCO*,
v. DR. ROMMEL L. MADRID, PETER PAUL L. DANAO, MANUEL L. ARIMADO, AND MAUREEN R.
LABALAN

n June 8, 1987, FSVCI was duly organized and registered as a corporation with Francisco O. Velasco
(Francisco), Simona J. Velasco (Simona), Angela V. Madrid (Angela), herein respondent Dr. Rommel L.
Madrid (Madrid), and petitioner Saturnino O. Velasco (Saturnino) as its incorporators. When Simona and
Francisco died on June 12, 1998 and June 22, 1999, respectively, their daughter, Angela, inherited their
shares, thereby giving her control of 70.82% of FSVCI's total shares of stock. As of May 11, 2009, the
distribution of FSVCI's 24,000 total shares of stock is as follows: (a) Angela with 16,998 shares; (b) Madrid
with 1,000 shares; (c) petitioner Rosina B. Velasco-Scribner (Scribner) with 6,000 shares; and (d)
petitioners Irwin J. Seva (Seva) and Mercedez Sunico (Sunico) with one (1) share each.5

On September 20, 2009 and during her tenure as Chairman of the Board of Directors of FSVCI (the other
members of the Board of Directors being Madrid, Scribner, Seva, and Sunico), Angela died intestate and
without issue. On October 8, 2009, Madrid, as Angela's spouse, executed an Affidavit of Self-Adjudication
covering the latter's estate which includes her 70.82% ownership of FSVCI's shares of stock. Believing that
he is already the controlling stockholder of FSVCI by virtue of such self-adjudication, Madrid called for a
Special Stockholders' and Re-Organizational Meeting to be held on November 18, 2009. On November 10,
2009 and in preparation for said meeting, Madrid executed separate deeds of assignment transferring one
share each to Vitaliano B. Ricafort and to respondents Peter Paul L. Danao (Danao), Maureen R. Labalan
(Labalan), and Manuel L. Arimado (Arimado; collectively, Madrid Group).6

Meanwhile, as Madrid was performing the aforesaid acts, Seva, in his then-capacity as FSVCI corporate
secretary, sent a Notice of an Emergency Meeting to FSVCI's remaining stockholders for the purpose of
electing a new president and vice-president, as well as the opening of a bank account. Such meeting was
held on November 6, 2009 which was attended by Saturnino, Seva, and Sunico (November 6, 2009
Meeting), during which, Saturnino was recognized as a member of the FSVCI Board of Directors and
thereafter, as FSVCI President, while Scribner was elected FSVCI Vice-President (Saturnino Group).7

Despite the election conducted by the Saturnino Group, the Madrid Group proceeded with the Special
Stockholders' and Re-Organizational Meeting on November 18, 2009, wherein: (a) the current members of
FSVCI Board of Directors (save for Madrid) were ousted and replaced by the members of the Madrid Group;
and (b) Madrid, Danao, Arimado, and Labalan were elected President, Vice-President, Corporate
Secretary, and Treaurer, respectively, of FSVCI (November 18, 2009 Meeting).8

In view of the November 18, 2009 Meeting, the Saturnino Group filed a petition for Declaration of Nullity of
Corporate Election with Preliminary Injunction and Temporary Restraining Order9 (TRO) against the Madrid
Group before the RTC, which was acting as a Special Commercial Court.10

After the RTC denied the Saturnino Groups' prayer for TRO, the Madrid Group filed its Answer (with
Compulsory Counterclaims)11 which prayed for, among others, the declaration of nullity of the November
6, 2009 Meeting conducted by the Saturnino Group. The Madrid Group likewise applied for the Appointment
of a Management Committee for FSVCI, which was denied by the RTC in an Order12 dated January 12,
2010.13

The RTC Ruling

In a Decision14 dated March 3, 2010, the RTC declared both the November 6, 2009 and November 18,
2009 Meetings null and void.15 It found the November 6, 2009 Meeting invalid because: (a) it was
conducted without a quorum as only two (2) FSVCI Board Members (i.e., Seva and Sunico) attended the
same, and that Scribner cannot attend by proxy as the Corporation Code expressly prohibits proxy
attendance in Board meetings; and (b) merely recognizing Saturnino as an additional member of the FSVCI
Board of Directors - and not electing him to take the position vacated by Angela upon her death - had the
effect of increasing FSVCI's number of Directors to six (6), thus, exceeding the number of Directors explicitly
stated in the FSVCI Articles of Incorporation.16

On the other hand, in ruling on the invalidity of the November 18, 2009 Meeting, the RTC held that until a
probate court conducting the settlement proceedings of Angela's estate determines the rightful owner of
Angela's properties, Madrid only has an equitable right over Angela's 70.82% ownership of FSVCI's shares
of stock. As such, Madrid cannot exercise the rights accorded to such ownership, hence, making his call
for a meeting, as well as the actual conduct of the November 18, 2009 Meeting, invalid.17

Aggrieved, the Madrid Group appealed18 before the CA contesting the RTC's declaration of invalidity of
the November 18, 2009 Meeting, as well as the denial of the appointment of a Management Committee for
FSVCI.19 Meanwhile, records do not show that the Saturnino Group appealed the declaration of invalidity
of the November 6, 2009 Meeting to the CA.

The CA Ruling

In a Decision20 dated March 1, 2013, the CA modified the RTC ruling: (a) declaring the November 18, 2009
Meeting conducted by the Madrid Group valid; and (b) remanding the case to the court a quo and directing
it to appoint or constitute a Management Committee to take over the corporate and business affairs of
FSVCI.21

Contrary to the RTC findings, the CA held that Madrid's execution of the Affidavit of Self-Adjudication
already conferred upon him the ownership of Angela's 70.82% ownership of FSVCI's shares of stock,
resulting in total ownership of 74.98% shares of stock inclusive of his original 4.16% ownership.22 In this
relation, the CA found that Madrid had already complied with the registration requirement of such transfer
in the books of the corporation through the November 18, 2009 General Information Sheet (GIS) of the
corporation duly filed with the Securities and Exchange Commission (SEC). As such, he validly made the
call for the November 18, 2009 Meeting, and accordingly, the matters resolved therein - such as the
reorganization of the FSVCI Board of Directors and the election of corporate officers — should bind the
corporation.23

Further, the CA ruled that the creation of a Management Committee is appropriate in view of the persisting
conflict between the Saturnino and Madrid Groups, the allegations of embezzlement of corporate funds
among the parties, and the uncertainty in the leadership and direction of the corporation which had created
an imminent danger of dissipation, loss, and wastage of FSVCI's assets and the paralyzation of its business
operations which may be prejudicial to the minority stockholders, parties-litigants, or the general public.24

Dissatisfied, the Saturnino Group moved for reconsideration25 which was, however, denied in a
Resolution26 dated August 7, 2013; hence, the instant petition.

The Issues Before the Court

The core issues for the Court's resolution are whether or not the CA correctly ruled that: (a) the November
18, 2009 Meeting organized by Madrid is legal and valid; and (b) a Management Committee should be
appointed or constituted to take over the corporate and business affairs of FSVCI.

The Court's Ruling

The petition is partly meritorious.

At the outset, the Court notes that after Madrid executed his Affidavit of Self-Adjudication, he then filed a
petition for letters of administration regarding Angela's estate, docketed as S.P. No. M-7025, before the
Regional Trial Court of Makati City, Branch 5927 (RTC-Makati Br. 59). Through Orders dated December
29, 201028 and March 29, 2011,29 the RTC-Makati Br. 59 already recognized Madrid as Angela's sole heir
to the exclusion of others - i.e., Angela's purported biological sister, Lourdita J. Estevez (Estevez) - and,
thus, appointed him as Special Administrator of Angela's estate.30 Estevez then belatedly challenged such
Orders of the RTC-Makati Br. 59 via a petition for annulment of judgment before the CA, docketed as CA-
G.R. SP No. 128979, which was dismissed through Resolutions dated April 3, 201331 and November 4,
2013.32 Undaunted, Estevez made a further appeal33 to the Court, which was denied in the Minute
Resolutions dated February 26, 201434 and June 16, 2014.35 Such ruling of the Court had already attained
finality as evidenced by an Entry of Judgment36 dated June 16, 2014. In view of the foregoing, the Court
is constrained to view that Madrid is indeed Angela's sole heir and her death caused the immediate transfer
of her properties, including her 70.82% ownership of FSVCI's shares of stock, to Madrid.37 As such, Madrid
may compel the issuance of certificates of stock in his favor, as well as the registration of Angela's stocks
in his name in FSVCI's Stock and Transfer Book.

Be that as it may, it must be clarified that Madrid's inheritance of Angela's shares of stock does not ipso
facto afford him the rights accorded to such majority ownership of FSVCI's shares of stock. Section 63 of
the Corporation Code governs the rule on transfers of shares of stock. It reads:
SEC. 63. Certificate of stock and transfer of shares. - The capital stock of stock corporations shall be divided
into shares for which certificates signed by the president or vice president, countersigned by the secretary
or assistant secretary, and sealed with the seal of the corporation shall be issued in accordance with the
by-laws. Shares of stock so issued are personal property and may be transferred by delivery of the
certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized to
make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is
recorded in the books of the corporation showing the names of the parties to the transaction, the date of
the transfer, the number of the certificate or certificates and the number of shares transferred.

No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books
of the corporation. (Emphasis and underscoring supplied)
Verily, all transfers of shares of stock must be registered in the corporate books in order to be binding on
the corporation. Specifically, this refers to the Stock and Transfer Book, which is described in Section 74 of
the same Code as follows:
SEC. 74. Books to be kept; stock transfer agent. - x x x.

xxxx

Stock corporations must also keep a book to be known as the "stock and transfer book", in which must be
kept a record of all stocks in the names of the stockholders alphabetically arranged; the installments paid
and unpaid on all stock for which subscription has been made, and the date of payment of any installment;
a statement of every alienation, sale or transfer of stock made, the date thereof, and by and to whom made;
and such other entries as the by-laws may prescribe. The stock and transfer book shall be kept in the
principal office of the corporation or in the office of its stock transfer agent and shall be open for inspection
by any director or stockholder of the corporation at reasonable hours on business days.

xxxx
In this regard, the case of Batangas Laguna Tayabas Bus Co., Inc. v. Bitanga38 instructs that an owner of
shares of stock cannot be accorded the rights pertaining to a stockholder - such as the right to call for a
meeting and the right to vote, or be voted for - if his ownership of such shares is not recorded in the Stock
and Transfer Book, viz.:
Indeed, until registration is accomplished, the transfer, though valid between the parties, cannot be effective
as against the corporation. Thus, the unrecorded transferee, the Bitanga group in this case, cannot vote
nor be voted for. The purpose of registration, therefore, is two-fold: to enable the transferee to exercise all
the rights of a stockholder, including the right to vote and to be voted for, and to inform the corporation of
any change in share ownership so that it can ascertain the persons entitled to the rights and subject to the
liabilities of a stockholder. Until challenged in a proper proceeding, a stockholder of record has a right to
participate in any meeting; his vote can be properly counted to determine whether a stockholders' resolution
was approved, despite the claim of the alleged transferee. On the other hand, a person who has purchased
stock, and who desires to be recognized as a stockholder for the purpose of voting, must secure such a
standing by having the transfer recorded on the corporate books. Until the transfer is registered, the
transferee is not a stockholder but an outsider.39 (Emphases and underscoring supplied)
In the case at bar, records reveal that at the time Madrid called for the November 18, 2009 Meeting, as well
as the actual conduct thereof, he was already the owner of 74.98% shares of stock of FSVCI as a result of
his inheritance of Angela's 70.82% ownership thereof. However, records are bereft of any showing that the
transfer of Angela's shares of stock to Madrid had been registered in FSVCFs Stock and Transfer Book
when he made such call and when the November 18, 2009 Meeting was held. Thus, the CA erred in holding
that Madrid complied with the required registration of transfers of shares of stock through mere reliance on
FSVCI's GIS dated November 18, 2009.

In this relation, it is noteworthy to point out that the submission of a GIS of a corporation before the SEC is
pursuant to the objective sought by Section 2640 of the Corporation Code which is to give the public
information, under sanction of oath of responsible officers, of the nature of business, financial condition,
and operational status of the company, as well as its key officers or managers, so that those dealing and
who intend to do business with it may know or have the means of knowing facts concerning the corporation's
financial resources and business responsibility.41 The contents of the GIS, however, should not be deemed
conclusive as to the identities of the registered stockholders of the corporation, as well as their respective
ownership of shares of stock, as the controlling document should be the corporate books, specifically the
Stock and Transfer Book. Jurisprudence in Lao v. Lao42 is instructive on this matter, to wit:
The mere inclusion as shareholder of petitioners in the General Information Sheet of PFSC is insufficient
proof that they are shareholders of the company.

Petitioners bank heavily on the General Information Sheet submitted by PFSC to the SEC in which they
were named as shareholders of PFSC. They claim that respondent is now estopped from contesting the
General Information Sheet.

While it may be true that petitioners were named as shareholders in the General Information Sheet
submitted to the SEC, that document alone does not conclusively prove that they are shareholders of PFSC.
The information in the document will still have to be correlated with the corporate books of PFSC. As
between the General Information Sheet and the corporate books, it is the latter that is controlling. As
correctly ruled by the CA:
We agree with the trial court that mere inclusion in the General Information Sheets as stockholders and
officers does not make one a stockholder of a corporation, for this may have come to pass by mistake,
expediency or negligence. As professed by respondent-appellee, this was done merely to comply with the
reportorial requirements with the SEC. This maybe against the law but "practice, no matter how long
continued, cannot give rise to any vested right."

If a transferee of shares of stock who failed to register such transfer in the Stock and Transfer Book of the
Corporation could not exercise the rights granted unto him by law as stockholder, with more reason that
such rights be denied to a person who is not a stockholder of a corporation. Petitioners-appellants never
secured such a standing as stockholders of PFSC and consequently, their petition should be denied.43
(Emphases and underscoring supplied)
In light of the foregoing, Madrid could not have made a valid call of the November 18, 2009 Meeting as his
stock ownership of FSVCI as registered in the Stock and Transfer Book is only 4.16% in view of the
non-registration of Angela's shares of stock in the FSVCI Stock and Transfer Book in his favor. As there
was no showing that he was able to remedy the situation by the time the meeting was held, the conduct of
such meeting, as well as the matters resolved therein, including the reorganization of the FSVCI Board of
Directors and the election of new corporate officers, should all be declared null and void.

Thus, in view of the nullity of the November 6, 2009 Meeting conducted by the Saturnino Group which ruling
of the RTC had already attained finality, as well as the November 18, 2009 Meeting conducted by the
Madrid Group - both of which attempted to wrest control of FSVCI by reorganizing the Board of Directors
and electing a new set of corporate officers - the FSVCI Board of Directors at the time of Angela's death
(i.e. Madrid, Seva, Scribner, and Sunico) should be reconstituted, and thereafter, fill the vacant seat left by
Angela in accordance with Section 2944 of the Corporation Code. Such Board of Directors shall only act in
a hold-over capacity until their successors are elected and qualified, pursuant to Section 2345 of the
Corporation Code.

Finally, on the issue of the propriety of appointing/constituting a Management Committee to manage

FSVCI's affairs, the Court recognizes that a corporation may be placed under the care of a Management
Committee specifically created by a court and, thus, under the latter's control and supervision, for the
purpose of preserving properties involved in a suit and protecting the rights of the parties.46 However, case
law is quick to point out that "the creation and appointment of a management committee x x x is an
extraordinary and drastic remedy to be exercised with care and caution; and only when the requirements
under the Interim Rules [of Procedure Governing Intra-Corporate Controversies] are shown. It is a drastic
course for the benefit of the minority stockholders, the parties-litigants or the general public [and is] allowed
only under pressing circumstances and when there is inadequacy, ineffectual or exhaustion of legal or other
remedies. x x x The power of the court to continue a business of a corporation x x x must be exercised with
the greatest care and caution. There should be a full consideration of all the attendant facts, including the
interest of all the parties concerned.47 In view of the extraordinary nature of such a remedy, Section 1,
Rule 9 of the Interim Rules of Procedure Governing Intra-Corporate Controversies48 provides the elements
needed for the creation of a Management Committee:
SEC. 1. Creation of a management committee. - As an incident to any of the cases filed under these Rules
or the Interim Rules on Corporate Rehabilitation, a party may apply for the appointment of a management
committee for the corporation, partnership or association, when there is imminent danger of :

(1) Dissipation, loss, wastage or destruction of assets or other properties; and

(2) Paralyzation of its business operations which may be prejudicial to the interest of the minority
stockholders, parties-litigants or the general public.
Thus, applicants for the appointment of a management committee need to establish the confluence of these
two (2) requisites. This is because appointed management committees will immediately take over the
management of the corporation and exercise the management powers specified in the law. This may have
a negative effect on the operations and affairs of the corporation with third parties, as persons who are
more familiar with its operations are necessarily dislodged from their positions in favor of appointees who
are strangers to the corporation's operations and affairs.49

In the case at bar, the CA merely based its directive of creating a Management Committee for FSVCI on
its finding of "the persisting conflict between [the Saturn ino and Madrid Groups], the allegations of
embezzlement of corporate funds among the parties, and the uncertainty in the leadership and direction of
the corporation had created an imminent danger of dissipation, loss[,] and wastage of FSVCI's assets and
the paralyzation of its business operations which may be prejudicial to the minority stockholders, parties-
litigants or the general public."50 However, absent any actual evidence from the records showing such
imminent danger, the CA's findings have no legal or factual basis to support the appointment/constitution
of a Management Committee for FSVCI. Accordingly, the CA erred in ordering the creation of a
Management Committee in this case. Hence, in the event a Management Committee had already been
constituted pursuant to the CA ruling, as what herein respondents point out,51 then it should be immediately
dissolved for the reasons aforestated.

WHEREFORE, the petition is PARTLY GRANTED. The Decision dated March 1, 2013 and the Resolution
dated August 7, 2013 of the Court of Appeals (CA) in CA-G.R. SP No. 113279 are hereby REVERSED and
SET ASIDE. The Special Stockholders' and Re-Organizational Meeting of petitioner F & S Velasco
Company, Inc. called by respondent Rommel L. Madrid and held on November 18, 2009 is declared NULL
and VOID and the Management Committee constituted pursuant to the aforementioned CA Decision and
Resolution is hereby DISSOLVED.

Accordingly, the Board of Directors of petitioner F & S Velasco Company, Inc. prior to the death of Angela
V. Madrid - consisting of the remaining members petitioners Rosina B. Velasco-Scribner, Irwin J. Seva, and
Mercedez Sunico and respondent Dr. Rommel L. Madrid - is hereby ORDERED reconstituted. The Board
of Directors is ORDERED to fill the vacant seat left by Angela V. Madrid and, thereafter, act in a hold-over
capacity until their successors are elected and qualified, in accordance with prevailing laws, rules, and
jurisprudence.

G.R. No. 188269

SUMIFRU (PHILIPPINES) CORPORATION (surviving entity in a merger with Davao Fruits

Corporation and other Companies),
vs.
BERNABE BAYA

The instant case stemmed from a complaint 7 for, inter alia, illegal/constructive dismissal filed by Baya
against AMSFC and DFC before the NLRC. 8 Baya alleged that he had been employed by AMSFC since
February 5, 1985, and from then on, worked his way to a supervisory rank on September 1, 1997. As a
supervisor, Baya joined the union of supervisors, and eventually, formed AMS Kapalong Agrarian Reform
Beneficiaries Multipurpose Cooperative (AMSKARBEMCO), the basic agrarian reform organization of the
regular employees of AMSFC. In June 1999, Ba ya was reassigned to a series of supervisory positions in
AMSFC' s sister company, DFC, where he also became a member of the latter's supervisory union while
at the same time, remaining active at AMSKARBEMCO. Later on and upon AMSKARBEMCO's petition
before the Department of Agrarian Reform (DAR), some 220 hectares of AMSFC's 513-hectare banana
plantation were covered by the Comprehensive Agrarian Reform Law. Eventually, said portion was
transferred to AMSFC's regular employees as Agrarian Reform Beneficiaries (ARBs), including Baya.

Thereafter, the ARBs explored a possible agribusiness venture agreement with AMSFC, but the talks broke
down, prompting the Provincial Agrarian Reform Officer to terminate negotiations and, consequently, give
AMSKARBEMCO freedom to enter into similar agreement with other parties. In October 2001, the ARBs
held a referendum in order to choose as to which group between AMSKARBEMCO or SAFFP AI, an
association of pro-company beneficiaries, they wanted to belong. 280 went to AMSKARBEMCO while 85
joined SAFFPAI.9

When AMSFC learned that AMSKARBEMCO entered into an export agreement with another company, it
summoned AMSKARBEMCO officers, including Baya, to lash out at them and even threatened them that
the ARBs' takeover of the lands would not push through. Thereafter, Baya was again summoned, this time
by a DFC manager, who told the former that he would be putting himself in a "difficult situation" if he will
not shift his loyalty to SAFFP AI; this notwithstanding, Baya politely refused to betray his cooperative. A few
days later, Baya received a letter stating that his secondment with DFC has ended, thus, ordering his return
to AMSFC. However, upon Baya's return to AMSFC on August 30, 2002, he was informed that there were
no supervisory positions available; thus, he was assigned to different rank-and-file positions instead. On
September 20, 2002, Baya' s written request to be restored to a supervisory position was denied, prompting
him to file the instant complaint. On even date, the DAR went to the farms of AMSFC to effect the ARBs'
takeover of their awarded lands. 10 The following day, all the members of AMSKARBEMCO were no longer
allowed to work for AMSFC "as they have been replaced by newly hired contract workers"; on the other
hand, the SAFFP AI members were still allowed to do so. 11 .

In their defense, AMSFC and DFC maintained that they did not illegally/constructively dismiss Baya,
considering that his termination from employment was the direct result of the ARBs' takeover of AMSFC's
banana plantation through the government's agrarian reform program. They even shifted the blame to Baya
himself, arguing that he was the one who formed AMSKARBEMCO and, eventually, caused the ARBs'
aforesaid takeover. 12

The LA Ruling

In a Decision13 dated June 30, 2003, the LA ruled in Baya's favor and, accordingly, ordered AMSFC and
DFC to: (a) reinstate Baya to his former position as supervisor without loss of seniority rights, or should
reinstatement be impossible, to pay him separation pay at the rate of 39.25 days of salary for every year of
service as practiced by the company; and (b) pay Baya backwages and other benefits, as well as moral
damages, exemplary damages, and attorney's fees. 14

The LA found that since it was undisputed that Baya held supervisory positions in AMSFC and DFC, his
demotion to various rank-and-file positions without any justifiable reason upon his return to AMSFC
constituted constructive dismissal. In this regard, the LA opined that the alleged lack of supervisory
positions in AMSFC was not a valid justification for Baya's demotion to rank-and-file, as AMSFC and DFC
should not have caused Baya's return to AMSFC if there was indeed no available supervisory position.
Further, the LA did not lend credence to AMSFC and DFC's contention that Baya's termination was on
account of the ARBs' takeover of the banana plantations, considering that: (a) the acts constituting
constructive dismissal occurred when Baya returned to AMSFC on August 30, 2002, while the takeover
was done only on September 20, 2002; and (b) only members of AMSKARBEMCO were no longer allowed
to work after the takeover, while members of SAFFP AI, the pro-company cooperative, were retained. 15

Aggrieved, respondents appealed 16 to the NLRC.

The NLRC Ruling

In a Resolution 17 dated March 10, 2004, the NLRC reversed and set aside the LA ruling except for the
payment of 13th month pay which was affirmed with modification, and entered a new one dismissing the
case for lack of merit. 18 Contrary to the LA's findings, the NLRC found that the termination of Baya's
employment was not caused by illegal/constructive dismissal, but by the cessation of AMSFC's business
operation or undertaking in large portions of its banana plantation due to the implementation of the agrarian
reform program. Thus, the NLRC opined that Baya is not entitled to separation pay as such cessation was
not voluntary, but rather involuntary, on the part of AMSFC as it was an act of the State, i.e., the agrarian
reform program, that caused the same. 19

Baya moved for reconsideration,20 which was, however, denied in a Resolution 21 dated May 31, 2004.
Dissatisfied, he filed a petition for certiorari22 before the Court of Appeals (CA).

The CA Ruling

In a Decision23 dated May 14, 2008, the CA set aside the NLRC ruling and reinstated that of the LA with
modification deleting the award of backwages, annual vacation leave pay, sick leave pay, monthly housing
subsidy, electric light subsidy, and exemplary damages, and ordering AMSFC and DFC to solidarily pay
Baya the aggregate amount of ₱278,600.05, consisting of ₱194,992.82 as separation pay, ₱5,279.95 as
13th month pay, P50,000.00 as moral damages, and ₱25,327.28 as attorney's fees. 24

It held that the NLRC gravely abused its discretion in dismissing Baya' s complaint as the undisputed facts
clearly establish constructive dismissal, based on the following considerations: (a) in spite of knowing that

there was no available supervisory position in AMSFC, the top management still proceeded to order Baya's
return there to force him to accept rank-and file positions; (b) such "return to AMSFC" was done after Baya
was harassed by company managers into switching loyalties to the pro-company cooperative, which was
refused by Baya; (c) such acts of the top management of AMSFC and DFC were in furtherance of their
cooperative busting tactics as stated in the Joint Affidavits executed by AMSKARBEMCO members, which
were not refuted by AMSFC and DFC; and (d) such acts constituting constructive dismissal were done even
before the ARBs were allowed to take over the lands awarded to them. Despite the fact of constructive
dismissal, the CA opted not to award backwages to Baya, as he was already awarded a portion of AMSFC's
banana plantation through the agrarian reform program. Thus, in the interest of justice and fair play, the CA
only awarded him separation pay and 13th month pay, plus moral damages and attorney's fees. 25

Petitioner filed a motion for reconsideration, 26 which was, however, denied in a Resolution27 dated May
20, 2009.
Meanwhile and during the pendency of the CA proceedings, petitioner Sumifru (Philippines) Corporation
(Sumifru) acquired DFC via merger28 sometime in 2008. According to Sumifru, it only learned of the
pendency of the CA proceedings on June 15, 2009, or after the issuance of the CA's Resolution dated May
20, 2009.29 Thus, Sumifru was the one who filed the instant petition on behalf of DFC. 30

The Issue Before the Court

The issues for the Court's resolution are whether or not: (a) the CA correctly ruled that the NLRC gravely
abused its discretion, and consequently, held that AMSFC and DFC constructively dismissed Baya; (b)
whether or not AMSFC and DFC are liable to Baya for separation pay, moral damages, and attorney's fees;
and (c) whether or not Sumifru should be held solidarily liable with AMSFC's for Baya's monetary awards.

The Court's Ruling

The petition is without merit.

"To justify the grant of the extraordinary remedy of certiorari, the petitioner must satisfactorily show that the
court or quasi-judicial authority gravely abused the discretion conferred upon it. Grave abuse of discretion
connotes a capricious and whimsical exercise of judgment, done in a despotic manner by reason of passion
or personal hostility, the character of which being so patent and gross as to amount to an evasion of positive
duty or to a virtual refusal to perform the duty enjoined by or to act at all in contemplation of law."31

"In labor disputes, grave abuse of discretion may be ascribed to the NLRC when, inter alia, its findings and
conclusions are not supported by substantial evidence, or that amount of relevant evidence which a
reasonable mind might accept as adequate to justify a conclusion."32

Guided by the foregoing considerations, the Court finds that the CA correctly ascribed grave abuse of
discretion on the part of the NLRC in reversing the LA ruling, as the LA's finding that Baya was constructively
dismissed from employment is supported by substantial evidence.

"Constructive dismissal exists where there is cessation of work, because 'continued employment is
rendered impossible, unreasonable or unlikely, as an offer involving a demotion in rank or a diminution in
pay' and other benefits. Aptly called a dismissal in disguise or an act amounting to dismissal but made to
appear as if it were not, constructive dismissal may, likewise, exist if an act of clear discrimination,
insensibility, or disdain by an employer becomes so unbearable on the part of the employee that it could
foreclose any choice by him except to forego his continued employment."33 In Peckson v. Robinsons
Supermarket Corp.,34 the Court held that the burden is on the employer to prove that the transfer or
demotion of an employee was a valid exercise of management prerogative and was not a mere subterfuge
to get rid of an employee; failing in which, the employer will be found liable for constructive dismissal, viz.:

In case of a constructive dismissal, the employer has the burden of proving that the transfer and demotion
of an employee are for valid and legitimate grounds such as genuine business necessity. Particularly, for a
transfer not to be considered a constructive dismissal, the employer must be able to show that such transfer
is not unreasonable, inconvenient, or prejudicial to the employee; nor does it involve a demotion in rank or
a diminution of his salaries, privileges and other benefits. Failure of the employer to overcome this burden
of proof, the employee's demotion shall no doubt be tantamount to unlawful constructive dismissal.35

In this case, a judicious review of the records reveals that the top management of both AMSFC and DFC,
which were sister companies at the time, were well-aware of the lack of supervisory positions in AMSFC.
This notwithstanding, they still proceeded to order Baya's return therein, thus, forcing him to accept rank-
and-file positions. Notably, AMSFC and DFC failed to refute the allegation that Baya's "end of secondment
with DFC" only occurred after: (a) he and the rest of AMSKARBEMCO officials and members were
subjected to harassment and cooperative busting tactics employed by AMSFC and DFC; and (b) he refused
to switch loyalties from AMSKARBEMCO to SAFFP AI, the pro-company cooperative. In this relation, the
Court cannot lend credence to the contention that Baya's termination was due to the ARBs' takeover of the
banana plantation, because the said takeover only occurred on September 20, 2002, while the acts
constitutive of constructive dismissal were performed as early as August 30, 2002, when Baya returned to
AMSFC. Thus, AMSFC and DFC are guilty of constructively dismissing Baya.1âwphi1

However, in light of the underlying circumstances which led to Baya's constructive dismissal, it is clear that
an atmosphere of animosity and antagonism now exists between Baya on the one hand, and AMSFC and
DFC on the other, which therefore calls for the application of the doctrine of strained relations. "Under the
doctrine of strained relations, the payment of separation pay is considered an acceptable alternative to
reinstatement when the latter option is no longer desirable or viable. On one hand, such payment liberates
the employee from what could be a highly oppressive work environment. On the other hand, it releases the
employer from the grossly unpalatable obligation of maintaining in its employ a worker it could no longer
trust."36 Thus, it is more prudent that Baya be awarded separation pay, instead of being reinstated, as
computed by the CA.

Further, and as aptly pointed out by both the LA and the CA, the acts constitutive of Baya's constructive
dismissal are clearly tainted with bad faith as they were done to punish him for the actions of his cooperative,
AMSKARBEMCO, and for not switching his loyalty to the pro-company cooperative, SAFFP AI. This
prompted Baya to litigate in order to protect his interest and to recover what is properly due him. Hence,
the award of moral damages and attorney's fees are warranted.

Finally, Sumifru's contention that it should only be held liable for the period when Baya stayed with DFC as
it only merged with the latter and not with AMSFC 37 is untenable. Section 80 of the Corporation Code of
the Philippines clearly states that one of the effects of a merger is that the surviving company shall inherit
not only the assets, but also the liabilities of the corporation it merged with, to wit:

Section 80. Effects of merger or consolidation. - The merger or consolidation shall have the following
effects:

1. The constituent corporations shall become a single corporation which, in case of merger, shall be the
surviving corporation designated in the plan of merger; and, in case of consolidation, shall be the
consolidated corporation designated in the plan of consolidation;

2. The separate existence of the constituent corporations shall cease, except that of the surviving or the
consolidated corporation;

3. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and
powers and shall be subject to all the duties and liabilities of a corporation organized under this Code;

4. The surviving or the consolidated corporation shall thereupon and thereafter possess all the rights,
privileges, immunities and franchises of each of the constituent corporations; and all property, real or
personal, and all receivables due on whatever account, including subscriptions to shares and other choses
in action, and all and every other interest of, or belonging to, or due to each constituent corporation, shall
be deemed transferred to and vested in such surviving or consolidated corporation without further act or
deed; and

5. The surviving or consolidated corporation shall be responsible and liable for all the liabilities and
obligations of each of the constituent corporations in the same manner as if such surviving or consolidated
corporation had itself incurred such liabilities or obligations; and any pending claim, action or proceeding
brought by or against any of such constituent corporations may be prosecuted by or against the surviving
or consolidated corporation. The rights of creditors or liens upon the property of any of such constituent
corporations shall not be impaired by such merger or consolidation.

In this case, it is worthy to stress that both AMSFC and DFC are guilty of acts constitutive of constructive
dismissal performed against Baya. As such, they should be deemed as solidarily liable for the monetary
awards in favor of Baya. Meanwhile, Sumifru, as the surviving entity in its merger with DFC, must be held
answerable for the latter's liabilities, including its solidary liability with AMSFC arising herein. Verily,
jurisprudence states that "in the merger of two existing corporations, one of the corporations survives and
continues the business, while the other is dissolved and all its rights, properties and liabilities are acquired
by the surviving corporation,"38 as in this case.

WHEREFORE, the petition is DENIED. The Decision dated May 14, 2008 and the Resolution dated May
20, 2009 of the Court of Appeals in CA-G.R. SP No. 85950 are hereby AFFIRMED. Accordingly, Sumifru
(Philippines) Corporation, as the surviving entity in its merger with Davao Fruits Corporation, shall be held
answerable for the latter's obligations as indicated in this Decision.

BANKING LAW

G.R. No. 200238

PHILIPPINE SAVINGS BANK (PSBANK) and PASCUAL M. GARCIA III, as representative of Philippine
Savings Bank and in his personal capacity,
vs.
SENATE IMPEACHMENT COURT, consisting of the senators of the republic of the philippines acting
as senator judges, namely: JUAN PONCE ENRILE, JINGGOY EJERCITO ESTRADA, VICENTE C.
SOTTO III, ALAN PETER S. CAYETANO, EDGARDO J. ANGARA, JOKER P. ARROYO, PIA S.
CAYETANO, FRANKLIN M. DRILON, FRANCIS G. ESCUDERO, TEOFISTO GUINGONA III,
GREGORIO B. HONASAN II, PANFILO M. LACSON, MANUEL M. LAPID, LOREN B. LEGARDA,
FERDINAND R. MARCOS, JR., SERGIO R. OSMENA III, FRANCIS "KIKO" PANGILINAN, AQUILINO
PIMENTEL III, RALPH G. RECTO, RAMON REVILLA, JR., ANTONIO F. TRILLANES IV, MANNY
VILLAR; and THE HONORABLE MEMBERS OF THE PROSECUTION PANEL OF THE HOUSE OF
REPRESENTATIVES

Petitioners Philippine Savings Bank (PSBank) and Pascual M. Garcia III, as President of PSBank, filed a
Petition for Certiorari and Prohibition seeking to nullity and set aside the Resolution1 of respondent Senate
of the Republic of the Philippines, sitting as an Impeachment Court, which granted the prosecution's
requests for subpoena duces tecum ad testificandum2 to PSBank and/or its representatives requiring them
to testify and produce before the Impeachment Court documents relative to the foreign currency accounts
that were alleged to belong to then Suprerpe Court Chief Justice Renato C. Corona.

On November 5, 2012, and during the pendency of this petition, petitioners filed a Motion with Leave of
Court to Withdraw the Petition3 averring that subsequent events have overtaken the petition and that, with
the termination of the impeachment proceedings against former Chief Justice Corona, they are no longer
faced with the dilemma of either violating Republic Act No. 6426 (RA 6426) or being held in contempt of
court for refusing to disclose the details of the subject foreign currency deposits.

It is well-settled that courts will not determine questions that have become moot and academic because
there is no longer any justiciable controversy to speak of. The judgment will not serve any useful purpose
or have any practical legal effect because, in the nature of things, it cannot be enforced.4 In Gancho-on v.
Secretary of Labor and Employment,5 the Court ruled:

It is a rule of universal application that courts of justice constituted to pass upon substantial rights will not
consider questions in which no actual interests are involved; they decline jurisdiction of moot cases. And
where the issue has become moot and academic, there is no justiciable controversy, so that a declaration
thereon would be of no practical use or value. There is no actual substantial relief to which petitioners would
be entitled and which would be negated by the dismissal of the petition. (Citations omitted)

Indeed, the main issue of whether the Impeachment Court acted arbitrarily when it issued the assailed
subpoena to obtain information concerning the subject foreign currency deposits notwithstanding the
confidentiality of such deposits under RA 6426 has been overtaken by events. The supervening conviction
of Chief Justice Corona on May 29, 2012, as well as his execution of a waiver against the confidentiality of
all his bank accounts, whether in peso or foreign currency, has rendered the present petition moot and
academic.
On the basis of the foregoing, the Court finds it appropriate to abstain from passing upon the merits of this
case where legal relief is no longer needed nor called for.1âwphi1

WHEREFORE, the petition is DISMISSED for having become moot and academic and the temporary
restraining order issued by the Court on February 9, 2012 is LIFTED.

G.R. No. 183774

PHILIPPINE BANKING CORPORATION,

vs.
ARTURO DY, BERNARDO DY, JOSE DELGADO AND CIPRIANA DELGADO

This Petition for Review on Certiorari assails the January 30, 2008 Decision1 of the Court of Appeals (CA)
in CA-G.R. CV No. 51672, which set aside the October 5, 1994 Decision2 of the Regional Trial Court of
Cebu City, Branch 22 (RTC) and directed the Register of Deeds of Cebu City to cancel Transfer Certificate
of Title (TCT) Nos. 517683 and 519014 in the names of respondents Arturo Dy and Bernardo Dy (Dys) and
to issue the corresponding TCTs in the name of respondent Cipriana Delgado (Cipriana).

The Factual Antecedents

Cipriana was the registered owner of a 58,129-square meter (sq.m.) lot, denominated as Lot No. 6966,
situated in Barrio Tongkil, Minglanilla, Cebu, covered by TCT No. 18568. She and her husband, respondent
Jose Delgado (Jose), entered into an agreement with a certain Cecilia Tan (buyer) for the sale of the said
property for a consideration of P10.00/sq.m. It was agreed that the buyer shall make partial payments from
time to time and pay the balance when Cipriana and Jose (Sps. Delgado) are ready to execute the deed of
sale and transfer the title to her.

At the time of sale, the buyer was already occupying a portion of the property where she operates a noodle
(bihon) factory while the rest was occupied by tenants which Sps. Delgado undertook to clear prior to full
payment. After paying the total sum of P147,000.00 and being then ready to pay the balance, the buyer
demanded the execution of the deed, which was refused. Eventually, the buyer learned of the sale of the
property to the Dys and its subsequent mortgage to petitioner Philippine Banking Corporation (Philbank),
prompting the filing of the Complaint5 for annulment of certificate of title, specific performance and/or
reconveyance with damages against Sps. Delgado, the Dys and Philbank.

In their Answer, Sps. Delgado, while admitting receipt of the partial payments made by the buyer, claimed
that there was no perfected sale because the latter was not willing to pay their asking price of P17.00/sq.m.
They also interposed a cross-claim against the Dys averring that the deeds of absolute sale in their favor
dated June 28, 19826 and June 30, 19827 covering Lot No. 6966 and the adjoining Lot No. 4100-A (on
which Sps. Delgado's house stands), were fictitious and merely intended to enable them (the Dys) to use
the said properties as collateral for their loan application with Philbank and thereafter, pay the true
consideration of P17.00/sq.m. for Lot No. 6966. However, after receiving the loan proceeds, the Dys
reneged on their agreement, prompting Sps. Delgado to cause the annotation of an adverse claim on the
Dys' titles and to inform Philbank of the simulation of the sale. Sps. Delgado, thus, prayed for the dismissal
of the complaint, with a counterclaim for damages and a cross-claim against the Dys for the payment of the
balance of the purchase price plus damages.

For their part, the Dys denied knowledge of the alleged transaction between cross-claimants Sps. Delgado
and buyer. They claimed to have validly acquired the subject property from Sps. Delgado and paid the full
consideration therefor as the latter even withdrew their adverse claim and never demanded for the payment
of any unpaid balance.
On the other hand, Philbank filed its Answer8 asserting that it is an innocent mortgagee for value without
notice of the defect in the title of the Dys. It filed a cross-claim against Sps. Delgado and the Dys for all the
damages that may be adjudged against it in the event they are declared seller and purchaser in bad faith,
respectively.

In answer to the cross-claim, Sps. Delgado insisted that Philbank was not a mortgagee in good faith for
having granted the loan and accepted the mortgage despite knowledge of the simulation of the sale to the
Dys and for failure to verify the nature of the buyer’s physical possession of a portion of Lot No. 6966. They
thereby prayed for the cancellation of the mortgage in Philbank's favor.

Subsequently, Sps. Delgado amended their cross-claim against the Dys to include a prayer for the
nullification of the deeds of absolute sale in the latter's favor and the corresponding certificates of title, and
for the consequent reinstatement of Cipriana’s title.9

The complaints against the Dys and Philbank were subsequently withdrawn. On the other hand, both the
buyer and Sps. Delgado never presented any evidence in support of their respective claims. Hence, the
RTC limited itself to the resolution of the claims of Sps. Delgado, Philbank and the Dys against one another.

The RTC Ruling

In the Decision10 dated October 5, 1994, the RTC dismissed the cross-claims of Sps. Delgado against the
Dys and Philbank. It noted that other than Sps. Delgado's bare allegation of the Dys' supposed non-
payment of the full consideration for Lot Nos. 6966 and 4100-A, they failed to adduce competent evidence
to support their claim. On the other hand, the Dys presented a cash voucher11 dated April 6, 1983 duly
signed by Sps. Delgado acknowledging receipt of the total consideration for the two lots.

The RTC also observed that Sps. Delgado notified Philbank of the purported simulation of the sale to the
Dys only after the execution of the loan and mortgage documents and the release of the loan proceeds to
the latter, negating their claim of bad faith. Moreover, they subsequently notified the bank of the Dys' full
payment for the two lots mortgaged to it.

The CA Ruling

However, on appeal, the CA set aside12 the RTC's decision and ordered the cancellation of the Dys'
certificates of title and the reinstatement of Cipriana's title. It ruled that there were no perfected contracts of
sale between Sps. Delgado and the Dys in view of the latter's admission that the deeds of sale were
purposely executed to facilitate the latter's loan application with Philbank and that the prices indicated
therein were not the true consideration. Being merely simulated, the contracts of sale were, thus, null and
void, rendering the subsequent mortgage of the lots likewise void.

The CA also declared Philbank not to be a mortgagee in good faith for its failure to ascertain how the Dys
acquired the properties and to exercise greater care when it conducted an ocular inspection thereof. It
thereby canceled the mortgage over the two lots.

The Petition

In the present petition, Philbank insists that it is a mortgagee in good faith. It further contends that Sps.
Delgado are estopped from denying the validity of the mortgage constituted over the two lots since they
participated in inducing Philbank to grant a loan to the Dys.

On the other hand, Sps. Delgado maintain that Philbank was not an innocent mortgagee for value for failure
to exercise due diligence in transacting with the Dys and may not invoke the equitable doctrine of estoppel
to conceal its own lack of diligence.

For his part, Arturo Dy filed a Petition-in-Intervention13 arguing that while the deeds of absolute sale over
the two properties were admittedly simulated, the simulation was only a relative one involving a false
statement of the price. Hence, the parties are still bound by their true agreement. The same was
opposed/objected to by both Philbank14 and Sps. Delgado15 as improper, considering that the CA
judgment had long become final and executory as to the Dys who neither moved for reconsideration nor
appealed the CA Decision.

The Ruling of the Court

The petition is meritorious.

At the outset, the Court takes note of the fact that the CA Decision nullifying the questioned contracts of
sale between Sps. Delgado and the Dys had become final and executory. Accordingly, the Petition-in-
Intervention filed by Arturo Dy, which seeks to maintain the subject contracts' validity, can no longer be
entertained. The cancellation of the Dys' certificates of title over the disputed properties and the issuance
of new TCTs in favor of Cipriana must therefore be upheld.

However, Philbank's mortgage rights over the subject properties shall be maintained. While it is settled that
a simulated deed of sale is null and void and therefore, does not convey any right that could ripen into a
valid title,16 it has been equally ruled that, for reasons of public policy,17 the subsequent nullification of title
to a property is not a ground to annul the contractual right which may have been derived by a purchaser,
mortgagee or other transferee who acted in good faith.18

The ascertainment of good faith or lack of it, and the determination of whether due diligence and prudence
were exercised or not, are questions of fact19 which are generally improper in a petition for review on
certiorari under Rule 45 of the Rules of Court (Rules) where only questions of law may be raised. A
recognized exception to the rule is when there are conflicting findings of fact by the CA and the RTC,20 as
in this case.

Primarily, it bears noting that the doctrine of "mortgagee in good faith" is based on the rule that all persons
dealing with property covered by a Torrens Certificate of Title are not required to go beyond what appears
on the face of the title. This is in deference to the public interest in upholding the indefeasibility of a certificate
of title as evidence of lawful ownership of the land or of any encumbrance thereon.21 In the case of banks
and other financial institutions, however, greater care and due diligence are required since they are imbued
with public interest, failing which renders the mortgagees in bad faith. Thus, before approving a loan
application, it is a standard operating practice for these institutions to conduct an ocular inspection of the
property offered for mortgage and to verify the genuineness of the title to determine the real owner(s)
thereof.22 The apparent purpose of an ocular inspection is to protect the "true owner" of the property as
well as innocent third parties with a right, interest or claim thereon from a usurper who may have acquired
a fraudulent certificate of title thereto.23

In this case, while Philbank failed to exercise greater care in conducting the ocular inspection of the
properties offered for mortgage,24 its omission did not prejudice any innocent third parties. In particular,
the buyer did not pursue her cause and abandoned her claim on the property. On the other hand, Sps.
Delgado were parties to the simulated sale in favor of the Dys which was intended to mislead Philbank into
granting the loan application. Thus, no amount of diligence in the conduct of the ocular inspection could
have led to the discovery of the complicity between the ostensible mortgagors (the Dys) and the true owners
(Sps. Delgado).1âwphi1 In fine, Philbank can hardly be deemed negligent under the premises since the
ultimate cause of the mortgagors' (the Dys') defective title was the simulated sale to which Sps. Delgado
were privies.

Indeed, a finding of negligence must always be contextualized in line with the attendant circumstances of
a particular case. As aptly held in Philippine National Bank v. Heirs of Estanislao Militar,25 "the diligence
with which the law requires the individual or a corporation at all times to govern a particular conduct varies
with the nature of the situation in which one is placed, and the importance of the act which is to be
performed."26 Thus, without diminishing the time-honored principle that nothing short of extraordinary
diligence is required of banks whose business is impressed with public interest, Philbank's inconsequential
oversight should not and cannot serve as a bastion for fraud and deceit.
To be sure, fraud comprises "anything calculated to deceive, including all acts, omissions, and concealment
involving a breach of legal duty or equitable duty, trust, or confidence justly reposed, resulting in damage
to another, or by which an undue and unconscientious advantage is taken of another."27 In this light, the
Dys' and Sps. Delgado's deliberate simulation of the sale intended to obtain loan proceeds from and to
prejudice Philbank clearly constitutes fraudulent conduct. As such, Sps. Delgado cannot now be allowed to
deny the validity of the mortgage executed by the Dys in favor of Philbank as to hold otherwise would
effectively sanction their blatant bad faith to Philbank's detriment.

Accordingly, in the interest of public policy, fair dealing, good faith and justice, the Court accords Philbank
the rights of a mortgagee in good faith whose lien to the securities posted must be respected and protected.
In this regard, Philbank is entitled to have its mortgage carried over or annotated on the titles of Cipriana
Delgado over the said properties.

WHERFORE, the assailed January 30, 2008 Decision of the Court of Appeals in CA-G.R. CV No. 51672 is
hereby AFFIRMED with MODIFICATION upholding the mortgage rights of petitioner Philippine Banking
Corporation over the subject properties.

G.R. No. 214866

APEX BANCRIGHTS HOLDINGS, INC., LEAD BANCFUND HOLDINGS, INC., ASIA WIDE
REFRESHMENTS CORPORATION, MEDCO ASIA INVESTMENT CORPORATION, ZEST-O
CORPORATION, HARMONY BANCSHARES HOLDINGS, INC., EXCALIBUR HOLDINGS, INC., and
ALFREDO M. YAO,
vs.
BANGKO SENTRAL NG PILIPINAS DEPOSIT CORPORATION, and PHILIPPINE INSURANCE

Sometime in July 2001, EIB entered into a three-way merger with Urban Bank, Inc. (UBI) and Urbancorp
Investments, Inc. (UII) in an attempt to rehabilitate UBI which was then under receivership.4 In September
2001, following the said merger, EIB itself encountered financial difficulties which prompted respondent the
Philippine Deposit Insurance Corporation (PDIC) to extend financial assistance to it. However, EIB still
failed to overcome its financial problems, thereby causing PDIC to release in May 2005 additional financial
assistance to it, conditioned upon the infusion by EIB stockholders of additional capital whenever EIB' s
adjusted Risk Based Capital Adequacy Ratio falls below 12.5%. Despite this, EIB failed to comply with the
BSP's capital requirements, causing EIB's stockholders to commence the process of selling the bank.5

Initially, Banco de Oro (BDO) expressed interest in acquiring EIB. However, certain issues derailed the
acquisition, including BDO's unwillingness to assume certain liabilities of EIB, particularly the claim of the
Pacific Rehouse Group against it. In the end, BDO's acquisition of EIB did not proceed and the latter's
financial condition worsened. Thus, in a letter6 dated April 26, 2012, EIB 's president and chairman
voluntarily turned-over the full control of EIB to BSP, and informed the latter that the former will declare a
bank holiday on April 27, 2012.7

On April 26, 2012, the BSP, through the Monetary Board, issued Resolution No. 6868 prohibiting EIB from
doing business in the Philippines and placing it under the receivership of PDIC, in accordance with Section
30 of Republic Act No. (RA) 7653, otherwise known as "The New Central Bank Act."9 Accordingly, PDIC
took over EIB.10

In due course, PDIC submitted its initial receivership report to the Monetary Board which contained its
finding that EIB can be rehabilitated or permitted to resume business; provided, that a bidding for its
rehabilitation would be conducted, and that the following conditions would be met: (a) there are qualified
interested banks that will comply with the parameters for rehabilitation of a closed bank, capital
strengthening, liquidity, sustainability and viability of operations, and strengthening of bank governance;
and (b) all parties (including creditors and stockholders) agree to the rehabilitation and the revised payment
terms and conditions of outstanding liabilities.11 Accordingly, the Monetary Board issued Resolution No.
1317 on August 9, 2012 noting PDIC's initial report, and its request to extend the period within which to
submit the final determination of whether or not EIB can be rehabilitated. Pursuant to the rehabilitation
efforts, a public bidding was scheduled by PDIC on October 18, 2012, but the same failed as no bid was
submitted. A re-bidding was then set on March 20, 2013 which also did not materialize as no bids were
submitted.12

On April 1, 2013, PDIC informed BSP that EIB can hardly be rehabilitated.13 Based on PDIC's report that
EIB was insolvent, the Monetary Board passed Resolution No. 571 on April 4, 2013 directing PDIC to
proceed with the liquidation of EIB.14

On April 29, 2013, petitioners, who are stockholders representing the majority stock of EIB,15 filed a petition
for certiorari 16 before the CA challenging Resolution No. 571. In essence, petitioners blame PDIC for the
failure to rehabilitate EIB, contending that PDIC: (a) imposed unreasonable and oppressive conditions
which delayed or frustrated the transaction between BDO and EIB; (b) frustrated EIB's efforts to increase
its liquidity when PDIC disapproved EIB's proposal to sell its MRT bonds to a private third party and, instead,
required EIB to sell the same to government entities; (c) imposed impossible and unnecessary bidding
requirements; and (d) delayed the public bidding which dampened investors' interest.17

In defense, PDIC countered18 that petitioners were already estopped from assailing the placement of EIB
under receivership and its eventual liquidation since they had already surrendered full control of the bank
to the BSP as early as April 26, 2012.19 For its part, BSP maintained20 that it had ample factual and legal
bases to order EIB's liquidation.21

The CA Ruling

In a Decision22 dated January 21, 2014, the CA dismissed the petition for lack of merit. It ruled that the
Monetary Board did not gravely abuse its discretion in ordering the liquidation of EIB pursuant to the PDIC's
findings that the rehabilitation of the bank is no longer feasible. In this regard, the CA held that there is
nothing in Section 30 of RA 7653 that requires the Monetary Board to make its own independent factual
determination on the bank's viability before ordering its liquidation. According to the CA, the law only
provides that the Monetary Board "shall notify in writing the board of directors of its findings and direct the
receiver to proceed with the liquidation of the institution,"23 which it did in this case.

Undaunted, petitioners moved for reconsideration24 which was, however, denied by the CA in its
Resolution25 dated October 10, 2014; hence, this petition.

The Issue Before the Court

The sole issue before the Court is whether or not the CA correctly ruled that the Monetary Board did not
gravely abuse its discretion in issuing Resolution No. 571 which directed the PDIC to proceed with the
liquidation of EIB.

The Court's Ruling

The petition is without merit. Section 30 of RA 7653 provides for the proceedings in the receivership and
liquidation of banks and quasi-banks, the pertinent portions of which read:

Section 30. Proceedings in Receivership and Liquidation. - Whenever, upon report of the head of the
supervising or examining department, the Monetary Board finds that a bank or quasi-bank:

(a) is unable to pay its liabilities as they become due in the ordinary course of business: Provided, That this
shall not include inability to pay caused by extraordinary demands induced by financial panic in the banking
community;

(b) has insufficient realizable assets, as determined by the Bangko Sentral, to meet its liabilities; or
(c) cannot continue in business without involving probable losses to its depositors or creditors; or

(d) has willfully violated a cease and desist order under Section 37 that has become final, involving acts or
transactions which amount to fraud or a dissipation of the assets of the institution; in which cases, the
Monetary Board may summarily and without need for prior hearing forbid the institution from doing business
in the Philippines and designate the Philippine Deposit Insurance Corporation as receiver of the banking
institution.

xxxx

The receiver shall immediately gather and take charge of all the assets and liabilities of the institution,
administer the same for the benefit of its creditors, and exercise the general powers of a receiver under the
Revised Rules of Court x x x[.]

If the receiver determines that the institution cannot be rehabilitated or permitted to resume business in
accordance with the next preceding paragraph, the Monetary Board shall notify in writing the board of
directors of its findings and direct the receiver to proceed with the liquidation of the institution. The receiver
shall:

xxxx

The actions of the Monetary Board taken under this section or under Section 29 of this Act shall be final
and executory, and may not be restrained or set aside by the court except on petition for certiorari on the
ground that the action taken was in excess of jurisdiction or with such grave abuse of discretion as to
amount to lack or excess of jurisdiction. The petition for certiorari may only be filed by the stockholders of
record representing the majority of the capital stock within ten (10) days from receipt by the board of
directors of the institution of the order directing receivership, liquidation or conservatorship.

The designation of a conservator under Section 29 of this Act or the appointment of a receiver under this
section shall be vested exclusively with the Monetary Board.1âwphi1 Furthermore, the designation of a
conservator is not a precondition to the designation of a receiver. (Emphases and underscoring supplied)

It is settled that "[t]he power and authority of the Monetary Board to close banks and liquidate them
thereafter when public interest so requires is an exercise of the police power of the State. Police power,
however, is subject to judicial inquiry. It may not be exercised arbitrarily or unreasonably and could be set
aside if it is either capricious, discriminatory, whimsical, arbitrary, unjust, or is tantamount to a denial of due
process and equal protection clauses of the Constitution."26 Otherwise stated and as culled from the above
provision, the actions of the Monetary Board shall be final and executory and may not be restrained or set
aside by the court except on petition for certiorari on the ground that the action taken was in excess of
jurisdiction or with such grave abuse of discretion as to amount to lack or excess of jurisdiction. "There is
grave abuse of discretion when there is an evasion of a positive duty or a virtual refusal to perform a duty
enjoined by law or to act in contemplation of law as when the judgment rendered is not based on law and
evidence but on caprice, whim and despotism."27

In line with the foregoing considerations, the Court agrees with the CA that the Monetary Board did not
gravely abuse its discretion in ordering the liquidation of EIB through its Resolution No. 571.

To recount, after the Monetary Board issued Resolution No. 686 which placed EIB under the receivership
of PDIC, the latter submitted its initial findings to the Monetary Board, stating that EIB can be rehabilitated
or permitted to resume business; provided, that a bidding for its rehabilitation would be conducted, and that
the following conditions would be met: (a) there are qualified interested banks that will comply with the
parameters for rehabilitation of a closed bank, capital strengthening, liquidity, sustainability and viability of
operations, and strengthening of bank governance; and (b) all parties (including creditors and stockholders)
agree to the rehabilitation and the revised payment terms and conditions of outstanding liabilities.28
However, the foregoing conditions for EIB 's rehabilitation "were not met because the bidding and re-bidding
for the bank's rehabilitation were aborted since none of the pre-qualified Strategic Third Party Investors
(STPI) submitted a letter of interest to participate in the bidding,"29 thereby resulting in the PDIC's finding
that EIB is already insolvent and must already be liquidated - a finding which eventually resulted in the
Monetary Board's issuance of Resolution No. 571.

In an attempt to forestall EIB's liquidation, petitioners insist that the Monetary Board must first make its own
independent finding that the bank could no longer be rehabilitated - instead of merely relying on the findings
of the PDIC - before ordering the liquidation of a bank.30

Such position is untenable.

As correctly held by the CA, nothing in Section 30 of RA 7653 requires the BSP, through the Monetary
Board, to make an· independent determination of whether a bank may still be rehabilitated or not. As
expressly stated in the afore-cited provision, once the receiver determines that rehabilitation is no longer
feasible, the Monetary Board is simply obligated to: (a) notify in writing the bank's board of directors of the
same; and (b) direct the PDIC to proceed with liquidation, viz.:

If the receiver determines that the institution cannot be rehabilitated or permitted to resume business in
accordance with the next preceding paragraph, the Monetary Board shall notify in writing the board of
directors of its findings and direct the receiver to proceed with the liquidation of the institution. x x x.

x x x x31

Suffice it to say that if the law had indeed intended that the Monetary Board make a separate and distinct
factual determination before it can order the liquidation of a bank or quasi-bank, then there should have
been a provision to that effect. There being none, it can safely be concluded that the Monetary Board is not
so required when the PDIC has already made such determination. It must be stressed that the BSP (the
umbrella agency of the Monetary Board), in its capacity as government regulator of banks, and the PDIC,
as statutory receiver of banks under RA 7653, are the principal agencies mandated by law to determine the
financial viability of banks and quasi-banks, and facilitate the receivership and liquidation of closed financial
institutions, upon a factual determination of the latter's insolvency.32 Thus, following the maxim verba legis
non est recedendum - which means "from the words of a statute there should be no departure" - a statute
that is clear, plain, and free from ambiguity must be given its literal meaning and applied without any
attempted interpretation,33 as in this case.

In sum, the Monetary Board's issuance of Resolution No. 571 ordering the liquidation of EIB cannot be
considered to be tainted with grave abuse of discretion as it was amply supported by the factual
circumstances at hand and made in accordance with prevailing law and jurisprudence. To note, the "actions
of the Monetary Board in proceedings on insolvency are explicitly declared by law to be 'final and executory.'
They may not be set aside, or restrained, or enjoined by the courts, except upon 'convincing proof that the
action is plainly arbitrary and made in bad faith,"[['34]] which is absent in this case.

WHEREFORE, the petition is hereby DENIED. The Decision dated January 21, 2014 and the Resolution
dated October 10, 2014 of the Court of Appeals in CA-G.R. SP No. 129674 are hereby AFFIRMED.

INTELLECTUAL PROPERTY CODE

G.R. No. 190706

SHANG PROPERTIES REALTY CORPORATION (formerly THE SHANG GRAND TOWER

CORPORATION) and SHANG PROPERTIES, INC. (formerly EDSA PROPERTIES HOLDINGS, INC.),
vs.
ST. FRANCIS DEVELOPMENT CORPORATION

Respondent – a domestic corporation engaged in the real estate business and the developer of the St.
Francis Square Commercial Center, built sometime in 1992, located at Ortigas Center, Mandaluyong City,
Metro Manila (Ortigas Center)4 – filed separate complaints against petitioners before the IPO - Bureau of
Legal Affairs (BLA), namely: (a) an intellectual property violation case for unfair competition, false or
fraudulent declaration, and damages arising from petitioners’ use and filing of applications for the
registration of the marks "THE ST. FRANCIS TOWERS" and "THE ST. FRANCIS SHANGRI-LA PLACE,"
docketed as IPV Case No. 10-2005-00030 (IPV Case); and (b) an inter partes case opposing the petitioners’
application for registration of the mark "THE ST. FRANCIS TOWERS" for use relative to the latter’s
business, particularly the construction of permanent buildings or structures for residential and office
purposes, docketed as Inter PartesCase No. 14-2006-00098 (St. Francis Towers IP Case); and (c) an inter
partes case opposing the petitioners’ application for registration of the mark "THE ST. FRANCIS SHANGRI-
LA PLACE," docketed as IPC No. 14-2007-00218 (St. Francis Shangri-La IP Case).5

In its complaints, respondent alleged that it has used the mark "ST. FRANCIS" to identify its numerous
property development projects located at Ortigas Center, such as the aforementioned St. Francis Square
Commercial Center, a shopping mall called the "St. Francis Square," and a mixed-use realty project plan
thatincludes the St. Francis Towers. Respondent added that as a result of its continuous use of the mark
"ST. FRANCIS" in its real estate business,it has gained substantial goodwill with the public that consumers
and traders closely identify the said mark with its property development projects. Accordingly, respondent
claimed that petitioners could not have the mark "THE ST. FRANCIS TOWERS" registered in their names,
and that petitioners’ use of the marks "THE ST. FRANCIS TOWERS" and "THE ST. FRANCIS SHANGRI-
LA PLACE" in their own real estate development projects constitutes unfair competition as well as false or
fraudulent declaration.6

Petitioners denied committing unfair competition and false or fraudulent declaration, maintaining that they
could register the mark "THE ST. FRANCIS TOWERS" and "THE ST. FRANCIS SHANGRI-LA PLACE"
under their names. They contended that respondent is barred from claiming ownership and exclusive use
ofthe mark "ST. FRANCIS" because the same is geographically descriptive ofthe goods or services for
which it is intended to be used.7 This is because respondent’s as well as petitioners’ real estate
development projects are locatedalong the streets bearing the name "St. Francis," particularly, St.
FrancisAvenue and St. Francis Street (now known as Bank Drive),8 both within the vicinity of the Ortigas
Center.

The BLA Rulings

On December 19, 2006, the BLA rendered a Decision9 in the IPV Case, and found that petitioners
committed acts of unfair competition against respondent by its use of the mark "THE ST. FRANCIS
TOWERS" but not with its use of the mark "THE ST. FRANCIS SHANGRI-LA PLACE." It, however, refused
to award damages in the latter’s favor, considering that there was no evidence presented to substantiate
the amount of damages it suffered due to the former’s acts. The BLA found that "ST. FRANCIS," being a
name of a Catholic saint, may be considered as an arbitrary mark capable of registration when used in real
estate development projects as the name has no direct connection or significance when used in association
with real estate. The BLA neither deemed "ST. FRANCIS" as a geographically descriptive mark, opiningthat
there is no specific lifestyle, aura, quality or characteristic that the real estate projects possess except for
the fact that they are located along St. Francis Avenueand St. Francis Street (now known as Bank Drive),
Ortigas Center. In this light, the BLA found that while respondent’s use of the mark "ST. FRANCIS" has not
attained exclusivity considering that there are other real estate development projects bearing the name "St.
Francis" in other areas,10 it must nevertheless be pointed out that respondent has been known to be the
only real estate firm to transact business using such name within the Ortigas Center vicinity. Accordingly,
the BLA considered respondent to have gained goodwill and reputation for its mark, which therefore entitles
it to protection against the use by other persons, at least, to those doing business within the Ortigas
Center.11

Meanwhile, on March 28, 2007, the BLA rendered a Decision12 in the St. Francis Towers IP Case, denying
petitioners’ application for registration of the mark "THE ST. FRANCIS TOWERS." Excluding the word
"TOWERS" in view of petitioners’ disclaimer thereof, the BLA ruled that petitioners cannot register the mark
"THE ST. FRANCIS" since it is confusingly similar to respondent’s"ST. FRANCIS" marks which are
registered with the Department of Trade and Industry(DTI). It held that respondent had a better right over
the use of the mark "ST. FRANCIS" because of the latter’s appropriation and continuous usage thereof for
a long period of time.13 A little over a year after, or on March 31, 2008, the BLA then rendered a Decision14
in the St. Francis Shangri-La IP Case, allowing petitioners’ application for registration of the mark "THE ST.
FRANCIS SHANGRI-LA PLACE." It found that respondent cannot preclude petitioners from using the mark
"ST. FRANCIS" as the records show that the former’s use thereof had not been attended with exclusivity.
More importantly, it found that petitioners had adequately appended the word "Shangri-La" to its composite
mark to distinguish it from that of respondent, in which case, the former had removed any likelihood of
confusion that may arise from the contemporaneous use by both parties of the mark "ST. FRANCIS."

Both parties appealed the decision in the IPV Case, while petitioners appealed the decision in the St.
Francis Towers IP Case. Due to the identity of the parties and issues involved, the IPO Director-General
ordered the consolidation of the separate appeals.15 Records are, however, bereft of any showing that the
decision in the St. Francis Shangri-La IP Casewas appealed by either party and, thus, is deemed to have
lapsed into finality.

The IPO Director-General Ruling

In a Decision16 dated September 3, 2008, then IPO Director-General Adrian S. Cristobal, Jr. affirmedthe
rulings of the BLA that: (a) petitioners cannot register the mark "THEST. FRANCIS TOWERS"; and (b)
petitioners are not guilty of unfair competition in its use of the mark "THE ST. FRANCIS SHANGRI-LA
PLACE." However, the IPO DirectorGeneral reversed the BLA’s findingthat petitioners committed unfair
competition through their use of the mark "THE ST. FRANCIS TOWERS," thus dismissing such charge. He
foundthat respondent could not be entitled to the exclusive use of the mark "ST. FRANCIS," even at least
to the locality where it conducts its business, because it is a geographically descriptive mark, considering
that it was petitioners’ as well as respondent’s intention to use the mark "ST. FRANCIS"in order to identify,
or at least associate, their real estate development projects/businesses with the place or location where
they are situated/conducted, particularly, St. Francis Avenue and St. Francis Street (now known as Bank
Drive), Ortigas Center. He further opined that respondent’s registration of the name "ST. FRANCIS" with
the DTI is irrelevant since what should be controlling are the trademark registrations with the IPO itself.17
Also, the IPO Director-General held that since the parties are both engaged in the real estate business, it
would be "hard to imagine that a prospective buyer will be enticed to buy, rent or purchase [petitioners’]
goods or servicesbelieving that this is owned by [respondent] simply because of the name ‘ST. FRANCIS.’
The prospective buyer would necessarily discuss things with the representatives of [petitioners] and would
readily know that this does not belong to [respondent]."18

Disagreeing solely with the IPO Director-General’s ruling on the issue of unfair competition (the bone of
contention in the IPV Case), respondent elevated the sameto the CA.

In contrast, records do not show that either party appealed the IPO Director-General’s ruling on the issue
ofthe registrability of the mark "THE ST. FRANCIS TOWERS" (the bone of contention in the St. Francis
Towers IP Case). As such, said pronouncement isalso deemed to have lapsed into finality.

The CA Ruling

In a Decision19 dated December 18, 2009, the CA found petitioners guilty of unfair competition not only
withrespect to their use of the mark "THE ST. FRANCIS TOWERS" but alsoof the mark "THE ST. FRANCIS
SHANGRI-LA PLACE." Accordingly, itordered petitioners to cease and desist from using "ST. FRANCIS"
singly or as part of a composite mark, as well as to jointly and severally pay respondent a fine in the amount
of ₱200,000.00.

The CA did not adhere to the IPO Director-General’s finding that the mark "ST. FRANCIS" is geographically
descriptive, and ruled that respondent – which has exclusively and continuously used the mark "ST.
FRANCIS" for more than a decade, and,hence, gained substantial goodwill and reputation thereby – is very
muchentitled to be protected against the indiscriminate usage by other companies of the trademark/name
it has so painstakingly tried to establish and maintain. Further, the CA stated that even on the assumption
that "ST. FRANCIS" was indeed a geographically descriptive mark, adequateprotection must still begiven
to respondent pursuant to the Doctrine of Secondary Meaning.20

Dissatisfied, petitioners filed the present petition.

The Issue Before the Court

With the decisions in both Inter PartesCases having lapsed into finality, the sole issue thus left for the
Court’s resolution is whether or not petitioners are guilty of unfair competition in using the marks "THE ST.
FRANCIS TOWERS" and "THE ST. FRANCIS SHANGRI-LA PLACE."

The Court’s Ruling

The petition is meritorious.

Section 168 of Republic Act No. 8293,21 otherwise known as the "Intellectual Property Code of the
Philippines" (IP Code), provides for the rules and regulations on unfair competition.

To begin, Section 168.1 qualifies who is entitled to protection against unfair competition. It states that
"[a]person who has identified in the mind of the public the goods he manufacturesor deals in, his business
or services from those of others, whether or not a registered mark is employed, has a property right in the
goodwill of the said goods, business or services so identified, which will be protected inthe same manner
as other property rights."

Section 168.2proceeds to the core of the provision, describing forthwith who may be found guilty of and
subject to an action of unfair competition – that is, "[a]ny person who shall employ deception or any other
means contrary to good faith by which he shall pass off the goods manufactured by him or in which he
deals, or his business, or services for those of the one having established such goodwill, or who shall
commit any acts calculated to produce said result x x x."

Without limiting its generality, Section 168.3goes on to specify examples of acts which are considered as
constitutive of unfair competition, viz.:

168.3. In particular, and without in any way limiting the scope of protection against unfair competition, the
following shall be deemed guilty of unfair competition:

(a) Any person who is selling his goods and gives them the general appearance of goods of another
manufacturer or dealer, either as to the goods themselves or in the wrapping of the packages in which they
are contained, or the devices or words thereon, or in any other feature of their appearance, which would be
likely to influence purchasers to believe that the goods offered are those of a manufacturer or dealer, other
than the actual manufacturer or dealer, or who otherwise clothes the goods with such appearance as shall
deceive the public and defraud another of his legitimate trade, or any subsequent vendor ofsuch goods or
any agent of any vendor engaged in selling such goods with a like purpose;

(b) Any person who by any artifice, or device, or who employs any other means calculated to induce the
false belief that such person is offering the service of another who has identified such services in the mind
of the public; or

(c) Any person who shall make any false statement in the course of trade or who shall commit any other
act contrary to good faith of a nature calculated to discredit the goods, business or services of another.

Finally, Section 168.4 dwells on a matter of procedure by stating that the "[t]he remedies provided by
Sections 156,22 157,23 and 16124 shall apply mutatis mutandis."

The statutory attribution of the unfair competition concept is wellsupplemented by jurisprudential

pronouncements. In the recent case of Republic Gas Corporation v. Petron Corporation,25 the Court has
echoed the classic definition of the term which is "‘the passing off (or palming off) or attempting to pass off
upon the public of the goods or business of one person as the goods or business of another with the end
and probable effect of deceiving the public.’ Passing off (or palming off) takes place where the defendant,
by imitative devices on the general appearance of the goods, misleads prospective purchasers into buying
his merchandise under the impression that they are buying that of his competitors. [In other words], the
defendant gives his goods the general appearance of the goods of his competitor with the intention of
deceiving the publicthat the goods are those of his competitor."26 The "true test" of unfair competition has
thus been "whether the acts of the defendant have the intent of deceiving or are calculated to deceive the
ordinary buyer making his purchases under the ordinary conditions of theparticular trade to which the
controversy relates." Based on the foregoing, it is therefore essential to prove the existence of fraud, or the
intent to deceive, actual or probable,27 determined through a judicious scrutiny of the factual circumstances
attendant to a particular case.28

Here, the Court finds the element of fraud to be wanting; hence, there can be no unfair competition. The
CA’scontrary conclusion was faultily premised on its impression that respondenthad the right to the
exclusive use of the mark "ST. FRANCIS," for which the latter had purportedly established considerable
goodwill. What the CA appears to have disregarded or been mistaken in its disquisition, however, is the
geographicallydescriptive nature of the mark "ST. FRANCIS" which thus bars its exclusive appropriability,
unless a secondary meaning is acquired. As deftly explained in the U.S. case of Great Southern Bank v.
First Southern Bank:29 "[d]escriptive geographical terms are inthe ‘public domain’ in the sense that every
seller should have the right to inform customers of the geographical origin of his goods. A ‘geographically
descriptive term’ is any noun or adjective that designates geographical location and would tend to be
regarded by buyers as descriptive of the geographic location of origin of the goods or services. A
geographically descriptive term can indicate any geographic location on earth, such as continents, nations,
regions, states, cities, streets and addresses, areas of cities, rivers, and any other location referred to by a
recognized name. In order to determine whether or not the geographic term in question is descriptively
used, the following question is relevant: (1) Is the mark the name of the place or region from which the
goods actually come? If the answer is yes, then the geographic term is probably used in a descriptive sense,
and secondary meaning is required for protection."30

In Burke-Parsons-Bowlby Corporation v. Appalachian Log Homes, Inc.,31 it was held that secondary
meaningis established when a descriptive mark no longer causes the public to associate the goods with a
particular place, but to associate the goods with a particular source.In other words, it is not enough that a
geographically-descriptive mark partakes of the name of a place known generally to the public to be denied
registration as it is also necessary to show that the public would make a goods/place association – that is,
to believe that the goods for which the mark is sought to be registered originatein that place.1âwphi1 To
hold sucha belief, it is necessary, of course, that the purchasers perceive the mark as a place name, from
which the question of obscurity or remoteness then comes to the fore.32 The more a geographical area is
obscure and remote, it becomes less likely that the public shall have a goods/place association with such
area and thus, the mark may not be deemed as geographically descriptive. However, where there is no
genuine issue that the geographical significance of a term is its primary significanceand where the
geographical place is neither obscure nor remote, a public association of the goods with the place may
ordinarily be presumed from the fact that the applicant’s own goods come from the geographical place
named in the mark.33

Under Section 123.234 of the IP Code, specific requirements have to be met in order to conclude that a
geographically-descriptive mark has acquired secondary meaning, to wit: (a) the secondary meaning must
have arisen as a result of substantial commercial use of a mark in the Philippines; (b) such use must result
in the distinctiveness of the mark insofar as the goods or theproducts are concerned; and (c) proof of
substantially exclusive and continuous commercial use in the Philippines for five (5) years beforethe date
on which the claim of distinctiveness is made. Unless secondary meaning has been established, a
geographically-descriptive mark, dueto its general public domain classification, is perceptibly disqualified
from trademark registration. Section 123.1(j) of the IP Code states this rule as follows:

SEC. 123. Registrability. –

123.1 A mark cannot be registered if it:

xxxx

(j) Consists exclusively of signs orof indications that may serve in trade to designate the kind, quality,
quantity, intended purpose, value, geographical origin, time or production of the goods or rendering of the
services, or other characteristics of the goods or services; (Emphasis supplied) x x x x

Cognizant of the foregoing, the Court disagrees with the CA that petitioners committed unfair competition
due to the mistaken notion that petitioner had established goodwill for the mark "ST. FRANCIS" precisely
because said circumstance, by and of itself, does not equateto fraud under the parameters of Section 168
of the IP Code as above-cited. In fact, the records are bereft of any showing thatpetitioners gave their
goods/services the general appearance that it was respondent which was offering the same to the public.
Neither did petitioners employ any means to induce the public towards a false belief that it was offering
respondent’s goods/services. Nor did petitioners make any false statement or commit acts tending to
discredit the goods/services offered by respondent. Accordingly, the element of fraud which is the core of
unfair competition had not been established.

Besides, respondent was not able toprove its compliance with the requirements stated in Section 123.2 of
the IP Code to be able to conclude that it acquired a secondary meaning – and, thereby, an exclusive right
– to the "ST. FRANCIS" mark, which is, as the IPO Director-General correctly pointed out, geographically-
descriptive of the location in which its realty developments have been built, i.e., St. Francis Avenue and St.
Francis Street (now known as "Bank Drive"). Verily, records would reveal that while it is true that respondent
had been using the mark "ST. FRANCIS" since 1992, its use thereof has been merely confined to its realty
projects within the Ortigas Center, as specifically mentioned.As its use of the mark is clearly limited to a
certain locality, it cannot be said thatthere was substantial commercial use of the same recognizedall
throughout the country. Neither is there any showing of a mental recognition in buyers’ and potential buyers’
minds that products connected with the mark "ST. FRANCIS" are associated with the same source35 – that
is, the enterprise of respondent. Thus, absent any showing that there exists a clear goods/service-
association between the realty projects located in the aforesaid area and herein respondent as the
developer thereof, the latter cannot besaid to have acquired a secondary meaning as to its use of the "ST.
FRANCIS" mark.

In fact, even on the assumption that secondary meaning had been acquired, said finding only accords
respondents protectional qualification under Section 168.1 of the IP Code as above quoted. Again, this
does not automatically trigger the concurrence of the fraud element required under Section 168.2 of the IP
Code, as exemplified by the acts mentioned in Section 168.3 of the same. Ultimately, as earlier stated,
there can be no unfair competition without this element. In this respect, considering too the notoriety of the
Shangri-La brand in the real estate industry which dilutes petitioners' propensity to merely ride on
respondent's goodwill, the more reasonable conclusion is that the former's use of the marks "THE ST.
FRANCIS TOWERS" and "THE ST. FRANCIS SHANGRI-LA PLACE" was meant only to identify, or at least
associate, their real estate project/s with its geographical location. As aptly observed by the IPO
DirectorGeneral:36

In the case at hand, the parties are business competitors engaged in real estate or property development,
providing goods and services directly connected thereto. The "goods" or "products" or "services" are real
estate and the goods and the services attached to it or directly related to it, like sale or lease of condominium
units, offices, and commercial spaces, such as restaurants, and other businesses. For these kinds of goods
or services there can be no description of its geographical origin as precise and accurate as that of the
name of the place where they are situated. (Emphasis and underscoring supplied)

Hence, for all the reasons above-discussed, the Court hereby grants the instant petition, and, thus,
exonerates petitioners from the charge of unfair competition in the IPV Case. As the decisions in the Inter
Partes Cases were not appealed, the registrability issues resolved therein are hereby deemed to have
attained finality and, therefore, are now executory.
WHEREFORE, the petition is GRANTED. The Decision dated December 18, 2009 of the Court of Appeals
in CA-G.R. SP No. 105425 is hereby REVERSED and SET ASIDE. Accordingly, the Decision dated
September 3, 2008 of the Intellectual Property Office-Director General is REINSTATED.

G.R. No. 185830

ECOLE DE CUISINE MANILLE (CORDON BLEU OF THE PHILIPPINES), INC

vs.
RENAUD COINTREAU & CIE and LE CORDON BLEU INT'L., B.V.

On June 21, 1990, Cointreau, a partnership registered under the laws of France, filed before the (now
defunct) Bureau of Patents, Trademarks, and Technology Transfer (BPTTT) of the Department of Trade
and Industry a trademark application for the mark "LE CORDON BLEU & DEVICE" for goods falling under
classes 8, 9, 16, 21, 24, 25, 29, and 30 of the International Classification of Goods and Services for the
Purposes of Registrations of Marks ("Nice Classification") (subject mark). The application was filed pursuant
to Section 37 of Republic Act No. 166, as amended (R.A. No. 166), on the basis of Home Registration No.
1,390,912, issued on November 25, 1986 in France. Bearing Serial No. 72264, such application was
published for opposition in the March-April 1993 issue of the BPTTT Gazette and released for circulation
on May 31, 1993.4

On July 23, 1993, petitioner Ecole De Cuisine Manille, Inc. (Ecole) filed an opposition to the subject
application, averring that: (a) it is the owner of the mark "LE CORDON BLEU, ECOLE DE CUISINE
MANILLE," which it has been using since 1948 in cooking and other culinary activities, including in its
restaurant business; and (b) it has earned immense and invaluable goodwill such that Cointreau’s use of
the subject mark will actually create confusion, mistake, and deception to the buying public as to the origin
and sponsorship of the goods, and cause great and irreparable injury and damage to Ecole’s business
reputation and goodwill as a senior user of the same.5

On October 7, 1993, Cointreau filed its answer claiming to be the true and lawful owner of the subject mark.
It averred that: (a) it has filed applications for the subject mark’s registration in various jurisdictions, including
the Philippines; (b) Le Cordon Bleu is a culinary school of worldwide acclaim which was established in
Paris, France in 1895; (c) Le Cordon Bleu was the first cooking school to have set the standard for the
teaching of classical French cuisine and pastry making; and (d) it has trained students from more than
eighty (80) nationalities, including Ecole’s directress, Ms. Lourdes L. Dayrit. Thus, Cointreau concluded that
Ecole’s claim of being the exclusive owner of the subject mark is a fraudulent misrepresentation.6

During the pendency of the proceedings, Cointreau was issued Certificates of Registration Nos. 60631 and
54352 for the marks "CORDON BLEU & DEVICE" and "LE CORDON BLEU PARIS 1895 & DEVICE" for
goods and services under classes 21 and 41 of the Nice Classification, respectively.7

The Ruling of the Bureau of Legal Affairs

In its Decision8 dated July 31, 2006, the Bureau of Legal Affairs (BLA) of the IPO sustained Ecole’s
opposition to the subject mark, necessarily resulting in the rejection of Cointreau’s application.9 While
noting the certificates of registration obtained from other countries and other pertinent materials showing
the use of the subject mark outside the Philippines, the BLA did not find such evidence sufficient to
establishCointreau’s claim of prior use of the same in the Philippines. It emphasized that the adoption and
use of trademark must be in commerce in the Philippines and not abroad. It then concluded that Cointreau
has not established any proprietary right entitled to protection in the Philippine jurisdiction because the law
on trademarks rests upon the doctrine of nationality or territoriality.10

On the other hand, the BLA found that the subject mark, which was the predecessor of the mark "LE
CORDON BLEU MANILLE" has been known and used in the Philippines since 1948 and registered under
the name "ECOLE DE CUISINE MANILLE (THE CORDON BLEU OF THE PHILIPPINES), INC." on May
9, 1980.11

Aggrieved, Cointreau filed an appeal with the IPO Director General.

The Ruling of the IPO Director General

In his Decision dated April 21, 2008, the IPO Director General reversed and set aside the BLA’s decision,
thus, granting Cointreau’s appeal and allowing the registration of the subject mark.12 He held that while
Section 2 of R.A. No. 166 requires actual use of the subject mark in commerce in the Philippines for at least
two (2) months before the filing date of the application, only the owner thereof has the right to register the
same, explaining that the user of a mark in the Philippines is not ipso facto its owner. Moreover, Section 2-
A of the same law does not require actual use in the Philippines to be able to acquire ownership of a
mark.13

In resolving the issue of ownership and right to register the subject mark in favor of Cointreau, he considered
Cointreau’s undisputed use of such mark since 1895 for its culinary school in Paris, France (in which
petitioner’s own directress, Ms. Lourdes L. Dayrit, had trained in 1977). Contrarily, he found that while Ecole
may have prior use of the subject mark in the Philippines since 1948, it failed to explain how it came up
with such name and mark. The IPO Director General therefore concluded that Ecole has unjustly
appropriated the subject mark, rendering it beyond the mantle of protection of Section 4(d)14 of R.A. No.
166.15

Finding the IPO Director General’s reversal of the BLA’s Decision unacceptable, Ecole filed a Petition for
Review16 dated June 7, 2008 with the CA.

Ruling of the CA

In its Decision dated December 23, 2008, the CA affirmed the IPO Director General’s Decision in toto.17 It
declared Cointreau as the true and actual owner of the subject mark with a right to register the same in the
Philippines under Section 37 of R.A. No. 166, having registered such mark in its country of origin on
November 25, 1986.18

The CA likewise held that Cointreau’s right to register the subject mark cannot be barred by Ecole’s prior
use thereof as early as 1948 for its culinary school "LE CORDON BLEU MANILLE" in the Philippines
because its appropriation of the mark was done in bad faith. Further, Ecole had no certificate of registration
that would put Cointreau on notice that the former had appropriated or has been using the subject mark. In
fact, its application for trademark registration for the same which was just filed on February 24, 1992 is still
pending with the IPO.19

Hence, this petition.

Issues Before the Court

The sole issue raised for the Court’s resolution is whether the CA was correct in upholding the IPO Director
General’s ruling that Cointreau is the true and lawful owner of the subject mark and thus, entitled to have
the same registered under its name.

At this point, it should be noted that the instant case shall be resolved under the provisions of the old
Trademark Law, R.A. No. 166, which was the law in force at the time of Cointreau’s application for
registration of the subject mark.

The Court’s Ruling

The petition is without merit.

In the petition, Ecole argues that it is the rightful owner of the subject mark, considering that it was the first
entity that used the same in the Philippines. Hence, it is the one entitled to its registration and not Cointreau.

Petitioner’s argument is untenable.

Under Section 220 of R.A. No. 166, in order to register a trademark, one must be the owner thereof and
must have actually used the mark in commerce in the Philippines for two (2) months prior to the application
for registration. Section 2-A21 of the same law sets out to define how one goes about acquiring ownership
thereof. Under Section 2-A, it is clear that actual use in commerce is also the test of ownership but the
provision went further by saying that the mark must not have been so appropriated by another. Additionally,
it is significant to note that Section 2-A does not require that the actual use of a trademark must be within
the Philippines. Thus, as correctly mentioned by the CA, under R.A. No. 166, one may be an owner of a
mark due to its actual use but may not yet have the right to register such ownership here due to the owner’s
failure to use the same in the Philippines for two (2) months prior to registration.22

Nevertheless, foreign marks which are not registered are still accorded protection against infringement
and/or unfair competition. At this point, it is worthy to emphasize that the Philippines and France,
Cointreau’s country of origin, are both signatories to the Paris Convention for the Protection of Industrial
Property (Paris Convention).23 Articles 6bis and 8 of the Paris Convention state:

ARTICLE 6bis

(1) The countries of the Union undertake, ex officio if their legislation so permits, or at the request of an
interested party, to refuse or to cancel the registration, and to prohibit the use, of a trademark which
constitutes a reproduction, an imitation, or a translation, liable to create confusion, of a mark considered by
the competent authority of the country of registration or use to be well known in that country as being already
the mark of a person entitled to the benefits of this Convention and used for identical or similar
goods.1âwphi1 These provisions shall also apply when the essential part of the mark constitutes a
reproduction of any such well-known mark or an imitation liable to create confusion therewith.

ARTICLE 8

A trade name shall be protected in all the countries of the Union without the obligation of filing or registration,
whether or not it forms part of a trademark. (Emphasis and underscoring supplied)

In this regard, Section 37 of R.A. No. 166 incorporated Article 8 of the Paris Convention, to wit:

Section 37. Rights of foreign registrants. - Persons who are nationals of, domiciled in, or have a bona fide
or effective business or commercial establishment in any foreign country, which is a party to any
international convention or treaty relating to marks or trade-names, or the repression of unfair competition
to which the Philippines may be a party, shall be entitled to the benefits and subject to the provisions of this
Act to the extent and under the conditions essential to give effect to any such convention and treaties so
long as the Philippines shall continue to be a party thereto, except as provided in the following paragraphs
of this section.

xxxx

Trade-names of persons described in the first paragraph of this section shall be protected without the
obligation of filing or registration whether or not they form parts of marks.

xxxx

In view of the foregoing obligations under the Paris Convention, the Philippines is obligated to assure
nationals of the signatory-countries that they are afforded an effective protection against violation of their
intellectual property rights in the Philippines in the same way that their own countries are obligated to accord
similar protection to Philippine nationals.24 "Thus, under Philippine law, a trade name of a national of a
State that is a party to the Paris Convention, whether or not the trade name forms part of a trademark, is
protected "without the obligation of filing or registration.’"25

In the instant case, it is undisputed that Cointreau has been using the subject mark in France since 1895,
prior to Ecole’s averred first use of the same in the Philippines in 1948, of which the latter was fully aware
thereof. In fact, Ecole’s present directress, Ms. Lourdes L. Dayrit (and even its foundress, Pat Limjuco
Dayrit), had trained in Cointreau’s Le Cordon Bleu culinary school in Paris, France. Cointreau was likewise
the first registrant of the said mark under various classes, both abroad and in the Philippines, having
secured Home Registration No. 1,390,912 dated November 25, 1986 from its country of origin, as well as
several trademark registrations in the Philippines.26

On the other hand, Ecole has no certificate of registration over the subject mark but only a pending
application covering services limited to Class 41 of the Nice Classification, referring to the operation of a
culinary school. Its application was filed only on February 24, 1992, or after Cointreau filed its trademark
application for goods and services falling under different classes in 1990. Under the foregoing
circumstances, even if Ecole was the first to use the mark in the Philippines, it cannot be said to have validly
appropriated the same.

It is thus clear that at the time Ecole started using the subject mark, the same was already being used by
Cointreau, albeit abroad, of which Ecole’s directress was fully aware, being an alumna of the latter’s culinary
school in Paris, France. Hence, Ecole cannot claim any tinge of ownership whatsoever over the subject
mark as Cointreau is the true and lawful owner thereof. As such, the IPO Director General and the CA were
correct in declaring Cointreau as the true and lawful owner of the subject mark and as such, is entitled to
have the same registered under its name.

In any case, the present law on trademarks, Republic Act No. 8293, otherwise known as the Intellectual
Property Code of the Philippines, as amended, has already dispensed with the requirement of prior actual
use at the time of registration.27 Thus, there is more reason to allow the registration of the subject mark
under the name of Cointreau as its true and lawful owner.

As a final note, "the function of a trademark is to point out distinctly the origin or ownership of the goods (or
services) to which it is affixed; to secure to him, who has been instrumental in bringing into the market a
superior article of merchandise, the fruit of his industry and skill; to assure the public that they are procuring
the genuine article; to prevent fraud and imposition; and to protect the manufacturer against substitution
and sale of an inferior and different article as his product."28 As such, courts will protect trade names or
marks, although not registered or properly selected as trademarks, on the broad ground of enforcing justice
and protecting one in the fruits of his toil.29

WHEREFORE, the petition is DENIED. Accordingly, the December 23, 2008 Decision of the Court of
Appeals in CA-G.R. SP No. 104672 is hereby AFFIRMED in toto.

G.R. No. 192294

GREAT WHITE SHARK ENTERPRISES, INC.,

vs.
DANILO M. CARALDE, JR

Assailed in this Petition for Review on Certiorari under Rule 45 of the Rules of Court is the December 14,
2009 Decision1 of the Court of Appeals (CA) in CA-G.R. SP No. 105787, which reversed and set aside the
October 6, 2008 Decision2 of the Director General of the Intellectual Property Office (IPO), and directed
him to grant the application for the mark "SHARK & LOGO" filed by respondent Danilo M. Caralde, Jr.
(Caralde).

The Factual Antecedents

On July 31, 2002, Caralde filed before the Bureau of Legal Affairs (BLA), IPO a trademark application
seeking to register the mark "SHARK & LOGO" for his manufactured goods under Class 25, such as
slippers, shoes and sandals. Petitioner Great White Shark Enterprises, Inc. (Great White Shark), a foreign
corporation domiciled in Florida, USA, opposed3 the application claiming to be the owner of the mark
consisting of a representation of a shark in color, known as "GREG NORMAN LOGO" (associated with
apparel worn and promoted by Australian golfer Greg Norman). It alleged that, being a world famous mark
which is pending registration before the BLA since February 19, 2002,4 the confusing similarity between
the two (2) marks is likely to deceive or confuse the purchasing public into believing that Caralde's goods
are produced by or originated from it, or are under its sponsorship, to its damage and prejudice.

In his Answer,5 Caralde explained that the subject marks are distinctively different from one another and
easily distinguishable. When compared, the only similarity in the marks is in the word "shark" alone, differing
in other factors such as appearance, style, shape, size, format, color, ideas counted by marks, and even in
the goods carried by the parties.

Pending the inter partes proceedings, Great White Shark’s trademark application was granted and it was
issued Certificate of Registration No. 4-2002-001478 on October 23, 2006 for clothing, headgear and
footwear, including socks, shoes and its components.6

The Ruling of the BLA Director

On June 14, 2007, the BLA Director rendered a Decision7 rejecting Caralde's application, ratiocinating, as
follows:

Prominent in both competing marks is the illustration of a shark.1âwphi1 The dominant feature in opposer's
mark is the illustration of a shark drawn plainly. On the other hand, the dominant feature in respondent's
mark is a depiction of shark shaded darkly, with its body designed in a way to contain the letters "A" and
"R" with the tail suggestive of the letter "K." Admittedly, there are some differences between the competing
marks. Respondent's mark contains additional features which are absent in opposer's mark. Their dominant
features, i.e., that of an illustration of a shark, however, are of such degree that the overall impression it
create [sic] is that the two competing marks are at least strikingly similar to each another [sic], hence, the
likelihood of confusion of goods is likely to occur. x x x x

Moreover, the goods of the competing marks falls [sic] under the same Class 25. Opposer's mark GREG
NORMAN LOGO, which was applied for registration on February 19, 2002, pertains to clothing apparel
particularly hats, shirts and pants. Respondent, on the other hand, later applied for the registration of the
mark SHARK & LOGO on July 3, 2002 (should be July 31, 2002) for footwear products particularly slippers,
shoes, sandals. Clearly, the goods to which the parties use their marks belong to the same class and are
related to each other."8 (Italics ours)

The BLA Director, however, found no merit in Great White Shark's claim that its mark was famous and well-
known for insufficiency of evidence.

The Ruling of the IPO Director General

On appeal, the IPO Director General affirmed9 the final rejection of Caralde's application, ruling that the
competing marks are indeed confusingly similar. Great White Shark's mark is used in clothing and footwear,
among others, while Caralde's mark is used on similar goods like shoes and slippers. Moreover, Great
White Shark was first in applying for registration of the mark on February 19, 2002, followed by Caralde on
July 31, 2002. Furthermore, Great White Shark’s mark consisted of an illustration of a shark while Caralde's
mark had a composite figure forming a silhouette of a shark. Thus, as to content, word, sound and meaning,
both marks are similar, barring the registration of Caralde's mark under Section 123.1(d) of Republic Act
No. 8293, otherwise known as the Intellectual Property Code (IP Code). Nonetheless, while Great White
Shark submitted evidence of the registration of its mark in several other countries, the IPO Director General
considered its mark as not well-known for failing to meet the other criteria laid down under Rule 10210 of
the Rules and Regulations on Trademarks, Service Marks, Trade Names and Marked or Stamped
Containers.

The Ruling of the Court of Appeals

However, on petition for review, the CA reversed and set aside the foregoing Decision and directed the IPO
to grant Caralde's application for registration of the mark "SHARK & LOGO." The CA found no confusing
similarity between the subject marks notwithstanding that both contained the shape of a shark as their
dominant feature. It observed that Caralde's mark is more fanciful and colorful, and contains several
elements which are easily distinguishable from that of the Great White Shark. It further opined that
considering their price disparity, there is no likelihood of confusion as they travel in different channels of
trade.11

Issues Before The Court

THE COURT OF APPEALS ERRED IN RULING THAT THE RESPONDENT'S MARK SUBJECT OF THE
APPLICATION BEING OPPOSED BY THE PETITIONER IS NOT CONFUSINGLY SIMILAR TO
PETITIONER'S REGISTERED MARK THE COURT OF APPEALS ERRED IN RULING THAT THE COST
OF GOODS COULD NEGATE LIKELIHOOD OF CONFUSION THE COURT OF APPEALS ERRED IN
REVERSING THE PREVIOUS RESOLUTIONS OF THE DIRECTOR GENERAL AND THE BLA12

The Court's Ruling

In the instant petition for review on certiorari, Great White Shark maintains that the two (2) competing marks
are confusingly similar in appearance, shape and color scheme because of the dominant feature of a shark
which is likely to deceive or cause confusion to the purchasing public, suggesting an intention on Caralde's
part to pass-off his goods as that of Great White Shark and to ride on its goodwill. This, notwithstanding the
price difference, targets market and channels of trade between the competing products. Hence, the CA
erred in reversing the rulings of the IPO Director General and the BLA Director who are the experts in the
implementation of the IP Code.

The petition lacks merit.

A trademark device is susceptible to registration if it is crafted fancifully or arbitrarily and is capable of

identifying and distinguishing the goods of one manufacturer or seller from those of another. Apart from its
commercial utility, the benchmark of trademark registrability is distinctiveness.13 Thus, a generic figure, as
that of a shark in this case, if employed and designed in a distinctive manner, can be a registrable trademark
device, subject to the provisions of the IP Code.

Corollarily, Section 123.1(d) of the IP Code provides that a mark cannot be registered if it is identical with
a registered mark belonging to a different proprietor with an earlier filing or priority date, with respect to the
same or closely related goods or services, or has a near resemblance to such mark as to likely deceive or
cause confusion.

In determining similarity and likelihood of confusion, case law has developed the Dominancy Test and the
Holistic or Totality Test. The Dominancy Test focuses on the similarity of the dominant features of the
competing trademarks that might cause confusion, mistake, and deception in the mind of the ordinary
purchaser, and gives more consideration to the aural and visual impressions created by the marks on the
buyers of goods, giving little weight to factors like prices, quality, sales outlets, and market segments. In
contrast, the Holistic or Totality Test considers the entirety of the marks as applied to the products, including
the labels and packaging, and focuses not only on the predominant words but also on the other features
appearing on both labels to determine whether one is confusingly similar to the other14 as to mislead the
ordinary purchaser. The "ordinary purchaser" refers to one "accustomed to buy, and therefore to some
extent familiar with, the goods in question."15
Irrespective of both tests, the Court finds no confusing similarity between the subject marks. While both
marks use the shape of a shark, the Court noted distinct visual and aural differences between them. In
Great White Shark's "GREG NORMAN LOGO," there is an outline of a shark formed with the use of green,
yellow, blue and red16 lines/strokes, to wit:

In contrast, the shark in Caralde's "SHARK & LOGO" mark17 is illustrated in l et t er s outlined in the form
of a shark with the letter "S" forming the head, the letter "H" forming the fins, the letters "A" and "R" forming
the body, and the letter "K" forming the tail. In addition, the latter mark includes several more elements such
as the word "SHARK" in a different font underneath the shark outline, layers of waves, and a tree on the
right side, and liberally used the color blue with some parts in red, yellow, green and white.18 The whole
design is enclosed in an elliptical shape with two linings, thus:

As may be gleaned from the foregoing, the visual dissimilarities between the two (2) marks are evident and
significant, negating the possibility of confusion in the minds of the ordinary purchaser, especially
considering the distinct aural difference between the marks.

Finally, there being no confusing similarity between the subject marks, the matter of whether Great White
Shark’s mark has gained recognition and acquired becomes unnecessary.19 Besides, both the BLA
Director and the IPO Director General have ruled that Great White Shark failed to meet the criteria under
Rule 102 of the Rules and Regulations on Trademarks, Service Marks, Trade Names and Marked or
Stamped Containers to establish that its mark is well-known, and the latter failed to show otherwise.

WHEREFORE, the Court resolves to DENY the instant petition and AFFIRM the assailed December 14,
2009 Decision of the Court of Appeals (CA) for failure to show that the CA committed reversible error in
setting aside the Decision of the IPO Director General and allowing the registration of the mark "SHARK &
LOGO" by respondent Danilo M. Caralde, Jr.

SO ORDERED.

G.R. No. 194307

BIRKENSTOCK ORTHOPAEDIE GMBH AND CO. KG (formerly BIRKENSTOCK ORTHOPAEDIE

GMBH), Petitioner,
vs.
PHILIPPINE SHOE EXPO MARKETING CORPORATION

Petitioner, a corporation duly organized and existing under the laws of Germany, applied for various
trademark registrations before the IPO, namely: (a) "BIRKENSTOCK" under Trademark Application Serial
No. (TASN) 4-1994-091508 for goods falling under Class 25 of the International Classification of Goods
and Services (Nice Classification) with filing date of March 11, 1994; (b) "BIRKENSTOCK BAD HONNEF -
RHEIN & DEVICE COMPRISING OF ROUND COMPANY SEAL AND REPRESENTATION OF A FOOT,
CROSS AND SUNBEA M" under TASN 4-1994-091509 for goods falling under Class 25 of the Nice
Classification with filing date of March 11, 1994; and (c) "BIRKENSTOCK BAD HONNEF-RHEIN & DEVICE
COMPRISING OF ROUND COMPANY SEAL AND REPRESENTATION OF A FOOT, CROSS AND
SUNBEAM" under TASN 4-1994-095043 for goods falling under Class 10 of the Nice Classification with
filing date of September 5, 1994 (subject applications).5

However, registration proceedings of the subject applications were suspended in view of an existing
registration of the mark "BIRKENSTOCK AND DEVICE" under Registration No. 56334 dated October 21,
1993 (Registration No. 56334) in the name of Shoe Town International and Industrial Corporation, the
predecessor-in-interest of respondent Philippine Shoe Expo Marketing Corporation.6 In this regard, on May
27, 1997 petitioner filed a petition for cancellation of Registration No. 56334 on the ground that it is the
lawful and rightful owner of the Birkenstock marks (Cancellation Case).7 During its pendency, however,
respondent and/or its predecessor-in-interest failed to file the required 10th Year Declaration of Actual Use
(10th Year DAU) for Registration No. 56334 on or before October 21, 2004,8 thereby resulting in the
cancellation of such mark.9 Accordingly, the cancellation case was dismissed for being moot and
academic.10

The aforesaid cancellation of Registration No. 56334 paved the way for the publication of the subject
applications in the IPO e-Gazette on February 2, 2007.11 In response, respondent filed three (3) separate
verified notices of oppositions to the subject applications docketed as Inter Partes Case Nos. 14-2007-
00108, 14-2007-00115, and 14-2007-00116,12 claiming, inter alia, that: (a) it, together with its predecessor-
in-interest, has been using Birkenstock marks in the Philippines for more than 16 years through the mark
"BIRKENSTOCK AND DEVICE"; (b) the marks covered by the subject applications are identical to the one
covered by Registration No. 56334 and thus, petitioner has no right to the registration of such marks; (c)
on November 15, 1991, respondent’s predecessor-in-interest likewise obtained a Certificate of Copyright
Registration No. 0-11193 for the word "BIRKENSTOCK" ; (d) while respondent and its predecessor-in-
interest failed to file the 10th Yea r DAU, it continued the use of "BIRKENSTOCK AND DEVICE" in lawful
commerce; and (e) to record its continued ownership and exclusive right to use the "BIRKENSTOCK"
marks, it has filed TASN 4-2006-010273 as a " re-application " of its old registration, Registration No.
56334.13 On November 13, 2007, the Bureau of Legal Affairs (BLA) of the IPO issued Order No. 2007-
2051 consolidating the aforesaid inter partes cases (Consolidated Opposition Cases).14

The Ruling of the BLA

In its Decision15 dated May 28, 2008, the BLA of the IPO sustained respondent’s opposition, thus, ordering
the rejection of the subject applications. It ruled that the competing marks of the parties are confusingly
similar since they contained the word "BIRKENSTOCK" and are used on the same and related goods. It
found respondent and its predecessor-in-interest as the prior user and adopter of "BIRKENSTOCK" in the
Philippines, while on the other hand, petitioner failed to present evidence of actual use in the trade and
business in this country. It opined that while Registration No. 56334 was cancelled, it does not follow that
prior right over the mark was lost, as proof of continuous and uninterrupted use in trade and business in
the Philippines was presented. The BLA likewise opined that petitioner’s marks are not well -known in the
Philippines and internationally and that the various certificates of registration submitted by petitioners were
all photocopies and, therefore, not admissible as evidence.16

Aggrieved, petitioner appealed to the IPO Director General.

The Ruling of the IPO Director General

In his Decision17 dated December 22, 2009, the IPO Director General reversed and set aside the ruling of
the BLA, thus allowing the registration of the subject applications. He held that with the cancellation of
Registration No. 56334 for respondent’s failure to file the 10th Year DAU, there is no more reason to reject
the subject applications on the ground of prior registration by another proprietor.18 More importantly, he
found that the evidence presented proved that petitioner is the true and lawful owner and prior user of
"BIRKENSTOCK" marks and thus, entitled to the registration of the marks covered by the subject
applications.19 The IPO Director General further held that respondent’s copyright for the word
"BIRKENSTOCK" is of no moment since copyright and trademark are different forms of intellectual property
that cannot be interchanged.20

Finding the IPO Director General’s reversal of the BLA unacceptable, respondent filed a petition for review
with the CA.

Ruling of the CA

In its Decision21 dated June 25, 2010, the CA reversed and set aside the ruling of the IPO Director General
and reinstated that of the BLA. It disallowed the registration of the subject applications on the ground that
the marks covered by such applications "are confusingly similar, if not outright identical" with respondent’s
mark.22 It equally held that respondent’s failure to file the 10th Year DAU for Registration No. 56334 "did
not deprive petitioner of its ownership of the ‘BIRKENSTOCK’ mark since it has submitted substantial
evidence showing its continued use, promotion and advertisement thereof up to the present."23 It opined
that when respondent’s predecessor-in-interest adopted and started its actual use of "BIRKENSTOCK,"
there is neither an existing registration nor a pending application for the same and thus, it cannot be said
that it acted in bad faith in adopting and starting the use of such mark.24 Finally, the CA agreed with
respondent that petitioner’s documentary evidence, being mere photocopies, were submitted in violation of
Section 8.1 of Office Order No. 79, Series of 2005 (Rules on Inter Partes Proceedings).

Dissatisfied, petitioner filed a Motion for Reconsideration25 dated July 20, 2010, which was, however,
denied in a Resolution26 dated October 27, 2010. Hence, this petition.27

Issues Before the Court

The primordial issue raised for the Court’s resolution is whether or not the subject marks should be allowed
registration in the name of petitioner.

The Court’s Ruling

The petition is meritorious.

A. Admissibility of Petitioner’s Documentary Evidence.

In its Comment28 dated April 29, 2011, respondent asserts that the documentary evidence submitted by
petitioner in the Consolidated Opposition Cases, which are mere photocopies, are violative of Section 8.1
of the Rules on Inter Partes Proceedings, which requires certified true copies of documents and evidence
presented by parties in lieu of originals.29 As such, they should be deemed inadmissible.

The Court is not convinced.

It is well-settled that "the rules of procedure are mere tools aimed at facilitating the attainment of justice,
rather than its frustration. A strict and rigid application of the rules must always be eschewed when it would
subvert the primary objective of the rules, that is, to enhance fair trials and expedite justice. Technicalities
should never be used to defeat the substantive rights of the other party. Every party-litigant must be afforded
the amplest opportunity for the proper and just determination of his cause, free from the constraints of
technicalities."30 "Indeed, the primordial policy is a faithful observance of [procedural rules], and their
relaxation or suspension should only be for persuasive reasons and only in meritorious cases, to relieve a
litigant of an injustice not commensurate with the degree of his thoughtlessness in not complying with the
procedure prescribed."31 This is especially true with quasi-judicial and administrative bodies, such as the
IPO, which are not bound by technical rules of procedure.32 On this score, Section 5 of the Rules on Inter
Partes Proceedings provides:

Sec. 5. Rules of Procedure to be followed in the conduct of hearing of Inter Partes cases. – The rules of
procedure herein contained primarily apply in the conduct of hearing of Inter Partes cases. The Rules of
Court may be applied suppletorily. The Bureau shall not be bound by strict technical rules of procedure and
evidence but may adopt, in the absence of any applicable rule herein, such mode of proceedings which is
consistent with the requirements of fair play and conducive to the just, speedy and inexpensive disposition
of cases, and which will give the Bureau the greatest possibility to focus on the contentious issues before
it. (Emphasis and underscoring supplied)

In the case at bar, while petitioner submitted mere photocopies as documentary evidence in the
Consolidated Opposition Cases, it should be noted that the IPO had already obtained the originals of such
documentary evidence in the related Cancellation Case earlier filed before it. Under this circumstance and
the merits of the instant case as will be subsequently discussed, the Court holds that the IPO Director
General’s relaxation of procedure was a valid exercise of his discretion in the interest of substantial
justice.33

Having settled the foregoing procedural matter, the Court now proceeds to resolve the substantive issues.

B. Registration and ownership of "BIRKENSTOCK."

Republic Act No. (RA) 166,34 the governing law for Registration No. 56334, requires the filing of a DAU on
specified periods,35 to wit:

Section 12. Duration. – Each certificate of registration shall remain in force for twenty years: Provided, That
registrations under the provisions of this Act shall be cancelled by the Director, unless within one year
following the fifth, tenth and fifteenth anniversaries of the date of issue of the certificate of registration, the
registrant shall file in the Patent Office an affidavit showing that the mark or trade-name is still in use or
showing that its non-use is due to special circumstance which excuse such non-use and is not due to any
intention to abandon the same, and pay the required fee.

The Director shall notify the registrant who files the above- prescribed affidavits of his acceptance or refusal
thereof and, if a refusal, the reasons therefor. (Emphasis and underscoring supplied)

The aforementioned provision clearly reveals that failure to file the DAU within the requisite period results
in the automatic cancellation of registration of a trademark. In turn, such failure is tantamount to the
abandonment or withdrawal of any right or interest the registrant has over his trademark.36

In this case, respondent admitted that it failed to file the 10th Year DAU for Registration No. 56334 within
the requisite period, or on or before October 21, 2004. As a consequence, it was deemed to have
abandoned or withdrawn any right or interest over the mark "BIRKENSTOCK." Neither can it invoke Section
23637 of the IP Code which pertains to intellectual property rights obtained under previous intellectual
property laws, e.g., RA 166, precisely because it already lost any right or interest over the said mark.

Besides, petitioner has duly established its true and lawful ownership of the mark "BIRKENSTOCK."

Under Section 238 of RA 166, which is also the law governing the subject applications, in order to register
a trademark, one must be the owner thereof and must have actually used the mark in commerce in the
Philippines for two (2) months prior to the application for registration. Section 2-A39 of the same law sets
out to define how one goes about acquiring ownership thereof. Under the same section, it is clear that
actual use in commerce is also the test of ownership but the provision went further by saying that the mark
must not have been so appropriated by another. Significantly, to be an owner, Section 2-A does not require
that the actual use of a trademark must be within the Philippines. Thus, under RA 166, one may be an
owner of a mark due to its actual use but may not yet have the right to register such ownership here due to
the owner’s failure to use the same in the Philippines for two (2) months prior to registration.40

It must be emphasized that registration of a trademark, by itself, is not a mode of acquiring

ownership.1âwphi1 If the applicant is not the owner of the trademark, he has no right to apply for its
registration. Registration merely creates a prima facie presumption of the validity of the registration, of the
registrant’s ownership of the trademark, and of the exclusive right to the use thereof. Such presumption,
just like the presumptive regularity in the performance of official functions, is rebuttable and must give way
to evidence to the contrary.41

Clearly, it is not the application or registration of a trademark that vests ownership thereof, but it is the
ownership of a trademark that confers the right to register the same. A trademark is an industrial property
over which its owner is entitled to property rights which cannot be appropriated by unscrupulous entities
that, in one way or another, happen to register such trademark ahead of its true and lawful owner. The
presumption of ownership accorded to a registrant must then necessarily yield to superior evidence of
actual and real ownership of a trademark.
The Court’s pronouncement in Berris Agricultural Co., Inc. v. Abyadang42 is instructive on this point:

The ownership of a trademark is acquired by its registration and its actual use by the manufacturer or
distributor of the goods made available to the purchasing public. x x x A certificate of registration of a mark,
once issued, constitutes prima facie evidence of the validity of the registration, of the registrant’s ownership
of the mark, and of the registrant’s exclusive right to use the same in connection with the goods or services
and those that are related thereto specified in the certificate. x x x In other words, the prima facie
presumption brought about by the registration of a mark may be challenged and overcome in an appropriate
action, x x x by evidence of prior use by another person, i.e. , it will controvert a claim of legal appropriation
or of ownership based on registration by a subsequent user. This is because a trademark is a creation of
use and belongs to one who first used it in trade or commerce.43 (Emphasis and underscoring supplied)

In the instant case, petitioner was able to establish that it is the owner of the mark "BIRKENSTOCK." It
submitted evidence relating to the origin and history of "BIRKENSTOCK" and its use in commerce long
before respondent was able to register the same here in the Philippines. It has sufficiently proven that
"BIRKENSTOCK" was first adopted in Europe in 1774 by its inventor, Johann Birkenstock, a shoemaker,
on his line of quality footwear and thereafter, numerous generations of his kin continuously engaged in the
manufacture and sale of shoes and sandals bearing the mark "BIRKENSTOCK" until it became the entity
now known as the petitioner. Petitioner also submitted various certificates of registration of the mark
"BIRKENSTOCK" in various countries and that it has used such mark in different countries worldwide,
including the Philippines.44

On the other hand, aside from Registration No. 56334 which had been cancelled, respondent only
presented copies of sales invoices and advertisements, which are not conclusive evidence of its claim of
ownership of the mark "BIRKENSTOCK" as these merely show the transactions made by respondent
involving the same.45

In view of the foregoing circumstances, the Court finds the petitioner to be the true and lawful owner of the
mark "BIRKENSTOCK" and entitled to its registration, and that respondent was in bad faith in having it
registered in its name. In this regard, the Court quotes with approval the words of the IPO Director General,
viz.:

The facts and evidence fail to show that [respondent] was in good faith in using and in registering the mark
BIRKENSTOCK. BIRKENSTOCK, obviously of German origin, is a highly distinct and arbitrary mark. It is
very remote that two persons did coin the same or identical marks. To come up with a highly distinct and
uncommon mark previously appropriated by another, for use in the same line of business, and without any
plausible explanation, is incredible. The field from which a person may select a trademark is practically
unlimited. As in all other cases of colorable imitations, the unanswered riddle is why, of the millions of terms
and combinations of letters and designs available, [respondent] had to come up with a mark identical or so
closely similar to the [petitioner’s] if there was no intent to take advantage of the goodwill generated by the
[petitioner’s] mark. Being on the same line of business, it is highly probable that the [respondent] knew of
the existence of BIRKENSTOCK and its use by the [petitioner], before [respondent] appropriated the same
mark and had it registered in its name.46

WHEREFORE, the petition is GRANTED. The Decision dated June 25, 2010 and Resolution dated October
27, 2010 of the Court of Appeals in CA-G.R. SP No. 112278 are REVERSED and SET ASIDE. Accordingly,
the Decision dated December 22, 2009 of the IPO Director General is hereby REINSTATED.

SO ORDERED.
G.R. No. 212705

ROBERTO CO,
vs.
KENG HUAN JERRY YEUNG and EMMA YEUNG

At the core of the controversy isthe product Greenstone Medicated Oil Item No. 16 (Greenstone) which is
manufactured by Greenstone Pharmaceutical, a traditional Chinese medicine manufacturing firm based in
Hong Kong and owned by Keng HuanJerry Yeung (Yeung), and is exclusively imported and distributed in
the Philippines by Taka Trading owned by Yeung’s wife, Emma Yeung (Emma).5

On July 27, 2000, Sps. Yeung filed a civil complaint for trademark infringement and unfair competition
before the RTC against Ling Na Lau, her sister Pinky Lau (the Laus), and Cofor allegedly conspiring in the
sale of counterfeit Greenstone products tothe public. In the complaint, Sps. Yeung averred that on April 24,
2000, Emma’s brother, Jose Ruivivar III (Ruivivar), bought a bottle of Greenstone from Royal Chinese Drug
Store (Royal) in Binondo, Manila, owned by Ling Na Lau.However, when he used the product, Ruivivar
doubted its authenticity considering that it had a different smell, and the heat it producedwas not as strong
as the original Greenstone he frequently used. Having been informed by Ruivivar of the same, Yeung,
together with his son, John Philip, went to Royal on May 4, 2000 to investigate the matter, and, there, found
seven (7) bottles of counterfeit Greenstone on display for sale. He was then told by Pinky Lau (Pinky) – the
store’s proprietor – thatthe items came from Co of Kiao An Chinese Drug Store. According to Pinky, Co
offered the products on April 28, 2000 as "Tienchi Fong Sap Oil Greenstone" (Tienchi) which she eventually
availed from him. Upon Yeung’s prodding, Pinky wrote a note stating these events.6

In defense, Co denied having supplied counterfeit items to Royal and maintained that the stocks of
Greenstone came only from Taka Trading. Meanwhile, the Laus denied selling Greenstone and claimed
that the seven (7) items of Tienchi were left by an unidentified male person at the counter of their drug store
and that when Yeung came and threatened to report the matter to the authorities, the items were
surrendered to him. As to Pinky’s note, it was claimed that she was merely forced by Yeung to sign the
same.7

The RTC Ruling

In a Decision8 dated October 27, 2008, the RTC ruled in favor of Sps. Yeung, and accordingly ordered Co
and the Laus to pay Sps. Yeung: (a) ₱300,000.00 as temperate damages; (b) ₱200,000.00 as moral
damages; (c) ₱100,000.00 as exemplary damages; (d) ₱100,000.00 as attorney’s fees; and (e) costs of
suit.9

It found that the Sps. Yeung had proven by preponderance of evidence that the Laus and Co committed
unfair competition through their conspiracy to sell counterfeit Greenstone products that resulted in confusion
and deception not only to the ordinary purchaser, like Ruivivar, but also to the public.10 It, however, did not
find the Laus and Co liable for trademark infringement as there was no showing that the trademark
"Greenstone" was registered at the time the acts complained of occurred, i.e., in May 2000.11 Dissatisfied,
the Laus and Co appealed to the CA. The CA Ruling

In a Decision12 dated September 16, 2013, the CA affirmed the RTC Decision, pointing out that in the
matter of credibility of witnesses, the findings of the trial court are given great weight and the highest degree
of respect.13 Accordingly, it sustained the RTC’s finding of unfair competition, considering that Sps.
Yeung’s evidence preponderated over that of the Laus and Co which was observed to be shiftyand
contradictory. Resultantly, all awards of damages in favor of Sps. Yeung were upheld.14

The Laus and Co respectively moved for reconsideration but were, however, denied in a Resolution15
dated May 29, 2014, hence, Co filed the instant petition. On the other hand, records are bereft of any
showing that the Laus instituted any appeal before this Court.
The Issue Before the Court

The sole issue for the Court’s resolution is whether or not the CA correctly upheld Co’s liability for unfair
competition.

The Court’s Ruling

The petition is without merit.

The Court’s review of the present case is via a petition for review under Rule 45 of the Rules of Court,which
generally bars any question pertaining to the factual issues raised. The well-settled rule is that questions of
fact are not reviewable in petitionsfor review under Rule 45, subject only to certain exceptions, among them,
the lack of sufficient support in evidence of the trial court’s judgment or the appellate court’s
misapprehension of the adduced facts.16

Co, who mainly interposes a denialof the acts imputed against him, fails to convince the Court that any of
the exceptions exists so as to warrant a review of the findings of facts in this case. Factual findings of the
RTC, when affirmed by the CA, are entitled to great weight and respect by the Court and are deemed final
and conclusive when supported by the evidence on record.17 The Court finds that both the RTC and the
CA fully considered the evidence presented by the parties, and have adequately explained the legal and
evidentiary reasons in concluding that Co committed acts of unfair competition.

Unfair competition is defined as the passing off (or palming off) or attempting to pass off upon the public of
the goods or business of one person as the goods or business of another with the end and probable effect
of deceiving the public. This takes place where the defendant gives his goods the general appearance ofthe
goods of his competitor with the intention of deceiving the public that the goods are those of his
competitor.18

Here, it has been established that Coconspired with the Laus in the sale/distribution of counterfeit
Greenstone products to the public, which were even packaged in bottles identical to that of the original,
thereby giving rise to the presumption of fraudulent intent.19 In light of the foregoing definition, it is thus
clear that Co, together with the Laus, committed unfair competition, and should, consequently, beheld liable
therefor. To this end, the Court finds the award of ₱300,000.00 as temperate damages to be appropriate in
recognition of the pecuniary loss suffered by Sps. Yeung, albeit its actual amount cannot, from the nature
of the case, as it involves damage to goodwill, be proved with certainty.20 The awards of moral and
exemplary damages, attorney's fees, and costs of suit are equally sustained for the reasons already fully-
explained by the courts a quo in their decisions.

Although liable for unfair competition, the Court deems it apt to clarify that Co was properly exculpated from
the charge of trademark infringement considering that the registration of the trademark "Greenstone" –
essential as it is in a trademark infringement case – was not proven to have existed during the time the acts
complained of were committed, i.e., in May 2000. In this relation, the distinctions between suits for
trademark infringement and unfair competition prove useful: (a) the former is the unauthorized use of a
trademark, whereas the latter is the passing off of one's goods as those of another; (b) fraudulent intent is
unnecessary in the former, while it is essential in the latter; and (c) in the former, prior registration of the
trademark is a pre-requisite to the action, while it is not necessary in the latter.21

WHEREFORE, the petition is DENIED. The Decision dated September 16, 2013 and the Resolution dated
May 29, 2014 of the Court of Appeals in CA-G.R. CV No. 93679 are hereby AFFIRMED.
G.R. No. 190706

SHANG PROPERTIES REALTY CORPORATION (formerly THE SHANG GRAND TOWER

CORPORATION) and SHANG PROPERTIES, INC. (formerly EDSA PROPERTIES HOLDINGS, INC.), ,
vs.
ST. FRANCIS DEVELOPMENT CORPORATION

espondent – a domestic corporation engaged in the real estate business and the developer of the St.
Francis Square Commercial Center, built sometime in 1992, located at Ortigas Center, Mandaluyong City,
Metro Manila (Ortigas Center)4 – filed separate complaints against petitioners before the IPO - Bureau of
Legal Affairs (BLA), namely: (a) an intellectual property violation case for unfair competition, false or
fraudulent declaration, and damages arising from petitioners’ use and filing of applications for the
registration of the marks "THE ST. FRANCIS TOWERS" and "THE ST. FRANCIS SHANGRI-LA PLACE,"
docketed as IPV Case No. 10-2005-00030 (IPV Case); and (b) an inter partes case opposing the petitioners’
application for registration of the mark "THE ST. FRANCIS TOWERS" for use relative to the latter’s
business, particularly the construction of permanent buildings or structures for residential and office
purposes, docketed as Inter PartesCase No. 14-2006-00098 (St. Francis Towers IP Case); and (c) an inter
partes case opposing the petitioners’ application for registration of the mark "THE ST. FRANCIS SHANGRI-
LA PLACE," docketed as IPC No. 14-2007-00218 (St. Francis Shangri-La IP Case).5

In its complaints, respondent alleged that it has used the mark "ST. FRANCIS" to identify its numerous
property development projects located at Ortigas Center, such as the aforementioned St. Francis Square
Commercial Center, a shopping mall called the "St. Francis Square," and a mixed-use realty project plan
thatincludes the St. Francis Towers. Respondent added that as a result of its continuous use of the mark
"ST. FRANCIS" in its real estate business,it has gained substantial goodwill with the public that consumers
and traders closely identify the said mark with its property development projects. Accordingly, respondent
claimed that petitioners could not have the mark "THE ST. FRANCIS TOWERS" registered in their names,
and that petitioners’ use of the marks "THE ST. FRANCIS TOWERS" and "THE ST. FRANCIS SHANGRI-
LA PLACE" in their own real estate development projects constitutes unfair competition as well as false or
fraudulent declaration.6

Petitioners denied committing unfair competition and false or fraudulent declaration, maintaining that they
could register the mark "THE ST. FRANCIS TOWERS" and "THE ST. FRANCIS SHANGRI-LA PLACE"
under their names. They contended that respondent is barred from claiming ownership and exclusive use
ofthe mark "ST. FRANCIS" because the same is geographically descriptive ofthe goods or services for
which it is intended to be used.7 This is because respondent’s as well as petitioners’ real estate
development projects are locatedalong the streets bearing the name "St. Francis," particularly, St.
FrancisAvenue and St. Francis Street (now known as Bank Drive),8 both within the vicinity of the Ortigas
Center.

The BLA Rulings

On December 19, 2006, the BLA rendered a Decision9 in the IPV Case, and found that petitioners
committed acts of unfair competition against respondent by its use of the mark "THE ST. FRANCIS
TOWERS" but not with its use of the mark "THE ST. FRANCIS SHANGRI-LA PLACE." It, however, refused
to award damages in the latter’s favor, considering that there was no evidence presented to substantiate
the amount of damages it suffered due to the former’s acts. The BLA found that "ST. FRANCIS," being a
name of a Catholic saint, may be considered as an arbitrary mark capable of registration when used in real
estate development projects as the name has no direct connection or significance when used in association
with real estate. The BLA neither deemed "ST. FRANCIS" as a geographically descriptive mark, opiningthat
there is no specific lifestyle, aura, quality or characteristic that the real estate projects possess except for
the fact that they are located along St. Francis Avenueand St. Francis Street (now known as Bank Drive),
Ortigas Center. In this light, the BLA found that while respondent’s use of the mark "ST. FRANCIS" has not
attained exclusivity considering that there are other real estate development projects bearing the name "St.
Francis" in other areas,10 it must nevertheless be pointed out that respondent has been known to be the
only real estate firm to transact business using such name within the Ortigas Center vicinity. Accordingly,
the BLA considered respondent to have gained goodwill and reputation for its mark, which therefore entitles
it to protection against the use by other persons, at least, to those doing business within the Ortigas
Center.11

Meanwhile, on March 28, 2007, the BLA rendered a Decision12 in the St. Francis Towers IP Case, denying
petitioners’ application for registration of the mark "THE ST. FRANCIS TOWERS." Excluding the word
"TOWERS" in view of petitioners’ disclaimer thereof, the BLA ruled that petitioners cannot register the mark
"THE ST. FRANCIS" since it is confusingly similar to respondent’s"ST. FRANCIS" marks which are
registered with the Department of Trade and Industry(DTI). It held that respondent had a better right over
the use of the mark "ST. FRANCIS" because of the latter’s appropriation and continuous usage thereof for
a long period of time.13 A little over a year after, or on March 31, 2008, the BLA then rendered a Decision14
in the St. Francis Shangri-La IP Case, allowing petitioners’ application for registration of the mark "THE ST.
FRANCIS SHANGRI-LA PLACE." It found that respondent cannot preclude petitioners from using the mark
"ST. FRANCIS" as the records show that the former’s use thereof had not been attended with exclusivity.
More importantly, it found that petitioners had adequately appended the word "Shangri-La" to its composite
mark to distinguish it from that of respondent, in which case, the former had removed any likelihood of
confusion that may arise from the contemporaneous use by both parties of the mark "ST. FRANCIS."

Both parties appealed the decision in the IPV Case, while petitioners appealed the decision in the St.
Francis Towers IP Case. Due to the identity of the parties and issues involved, the IPO Director-General
ordered the consolidation of the separate appeals.15 Records are, however, bereft of any showing that the
decision in the St. Francis Shangri-La IP Casewas appealed by either party and, thus, is deemed to have
lapsed into finality.

The IPO Director-General Ruling

In a Decision16 dated September 3, 2008, then IPO Director-General Adrian S. Cristobal, Jr. affirmedthe
rulings of the BLA that: (a) petitioners cannot register the mark "THEST. FRANCIS TOWERS"; and (b)
petitioners are not guilty of unfair competition in its use of the mark "THE ST. FRANCIS SHANGRI-LA
PLACE." However, the IPO DirectorGeneral reversed the BLA’s findingthat petitioners committed unfair
competition through their use of the mark "THE ST. FRANCIS TOWERS," thus dismissing such charge. He
foundthat respondent could not be entitled to the exclusive use of the mark "ST. FRANCIS," even at least
to the locality where it conducts its business, because it is a geographically descriptive mark, considering
that it was petitioners’ as well as respondent’s intention to use the mark "ST. FRANCIS"in order to identify,
or at least associate, their real estate development projects/businesses with the place or location where
they are situated/conducted, particularly, St. Francis Avenue and St. Francis Street (now known as Bank
Drive), Ortigas Center. He further opined that respondent’s registration of the name "ST. FRANCIS" with
the DTI is irrelevant since what should be controlling are the trademark registrations with the IPO itself.17
Also, the IPO Director-General held that since the parties are both engaged in the real estate business, it
would be "hard to imagine that a prospective buyer will be enticed to buy, rent or purchase [petitioners’]
goods or servicesbelieving that this is owned by [respondent] simply because of the name ‘ST. FRANCIS.’
The prospective buyer would necessarily discuss things with the representatives of [petitioners] and would
readily know that this does not belong to [respondent]."18

Disagreeing solely with the IPO Director-General’s ruling on the issue of unfair competition (the bone of
contention in the IPV Case), respondent elevated the sameto the CA.

In contrast, records do not show that either party appealed the IPO Director-General’s ruling on the issue
ofthe registrability of the mark "THE ST. FRANCIS TOWERS" (the bone of contention in the St. Francis
Towers IP Case). As such, said pronouncement isalso deemed to have lapsed into finality.

The CA Ruling

In a Decision19 dated December 18, 2009, the CA found petitioners guilty of unfair competition not only
withrespect to their use of the mark "THE ST. FRANCIS TOWERS" but alsoof the mark "THE ST. FRANCIS
SHANGRI-LA PLACE." Accordingly, itordered petitioners to cease and desist from using "ST. FRANCIS"
singly or as part of a composite mark, as well as to jointly and severally pay respondent a fine in the amount
of ₱200,000.00.

The CA did not adhere to the IPO Director-General’s finding that the mark "ST. FRANCIS" is geographically
descriptive, and ruled that respondent – which has exclusively and continuously used the mark "ST.
FRANCIS" for more than a decade, and,hence, gained substantial goodwill and reputation thereby – is very
muchentitled to be protected against the indiscriminate usage by other companies of the trademark/name
it has so painstakingly tried to establish and maintain. Further, the CA stated that even on the assumption
that "ST. FRANCIS" was indeed a geographically descriptive mark, adequateprotection must still begiven
to respondent pursuant to the Doctrine of Secondary Meaning.20

Dissatisfied, petitioners filed the present petition.

The Issue Before the Court

With the decisions in both Inter PartesCases having lapsed into finality, the sole issue thus left for the
Court’s resolution is whether or not petitioners are guilty of unfair competition in using the marks "THE ST.
FRANCIS TOWERS" and "THE ST. FRANCIS SHANGRI-LA PLACE."

The Court’s Ruling

The petition is meritorious.

Section 168 of Republic Act No. 8293,21 otherwise known as the "Intellectual Property Code of the
Philippines" (IP Code), provides for the rules and regulations on unfair competition.

To begin, Section 168.1 qualifies who is entitled to protection against unfair competition. It states that
"[a]person who has identified in the mind of the public the goods he manufacturesor deals in, his business
or services from those of others, whether or not a registered mark is employed, has a property right in the
goodwill of the said goods, business or services so identified, which will be protected inthe same manner
as other property rights."

Section 168.2proceeds to the core of the provision, describing forthwith who may be found guilty of and
subject to an action of unfair competition – that is, "[a]ny person who shall employ deception or any other
means contrary to good faith by which he shall pass off the goods manufactured by him or in which he
deals, or his business, or services for those of the one having established such goodwill, or who shall
commit any acts calculated to produce said result x x x."

Without limiting its generality, Section 168.3goes on to specify examples of acts which are considered as
constitutive of unfair competition, viz.:

168.3. In particular, and without in any way limiting the scope of protection against unfair competition, the
following shall be deemed guilty of unfair competition:

(a) Any person who is selling his goods and gives them the general appearance of goods of another
manufacturer or dealer, either as to the goods themselves or in the wrapping of the packages in which they
are contained, or the devices or words thereon, or in any other feature of their appearance, which would be
likely to influence purchasers to believe that the goods offered are those of a manufacturer or dealer, other
than the actual manufacturer or dealer, or who otherwise clothes the goods with such appearance as shall
deceive the public and defraud another of his legitimate trade, or any subsequent vendor ofsuch goods or
any agent of any vendor engaged in selling such goods with a like purpose;

(b) Any person who by any artifice, or device, or who employs any other means calculated to induce the
false belief that such person is offering the service of another who has identified such services in the mind
of the public; or
(c) Any person who shall make any false statement in the course of trade or who shall commit any other
act contrary to good faith of a nature calculated to discredit the goods, business or services of another.

Finally, Section 168.4 dwells on a matter of procedure by stating that the "[t]he remedies provided by
Sections 156,22 157,23 and 16124 shall apply mutatis mutandis."

The statutory attribution of the unfair competition concept is wellsupplemented by jurisprudential

pronouncements. In the recent case of Republic Gas Corporation v. Petron Corporation,25 the Court has
echoed the classic definition of the term which is "‘the passing off (or palming off) or attempting to pass off
upon the public of the goods or business of one person as the goods or business of another with the end
and probable effect of deceiving the public.’ Passing off (or palming off) takes place where the defendant,
by imitative devices on the general appearance of the goods, misleads prospective purchasers into buying
his merchandise under the impression that they are buying that of his competitors. [In other words], the
defendant gives his goods the general appearance of the goods of his competitor with the intention of
deceiving the publicthat the goods are those of his competitor."26 The "true test" of unfair competition has
thus been "whether the acts of the defendant have the intent of deceiving or are calculated to deceive the
ordinary buyer making his purchases under the ordinary conditions of theparticular trade to which the
controversy relates." Based on the foregoing, it is therefore essential to prove the existence of fraud, or the
intent to deceive, actual or probable,27 determined through a judicious scrutiny of the factual circumstances
attendant to a particular case.28

Here, the Court finds the element of fraud to be wanting; hence, there can be no unfair competition. The
CA’scontrary conclusion was faultily premised on its impression that respondenthad the right to the
exclusive use of the mark "ST. FRANCIS," for which the latter had purportedly established considerable
goodwill. What the CA appears to have disregarded or been mistaken in its disquisition, however, is the
geographicallydescriptive nature of the mark "ST. FRANCIS" which thus bars its exclusive appropriability,
unless a secondary meaning is acquired. As deftly explained in the U.S. case of Great Southern Bank v.
First Southern Bank:29 "[d]escriptive geographical terms are inthe ‘public domain’ in the sense that every
seller should have the right to inform customers of the geographical origin of his goods. A ‘geographically
descriptive term’ is any noun or adjective that designates geographical location and would tend to be
regarded by buyers as descriptive of the geographic location of origin of the goods or services. A
geographically descriptive term can indicate any geographic location on earth, such as continents, nations,
regions, states, cities, streets and addresses, areas of cities, rivers, and any other location referred to by a
recognized name. In order to determine whether or not the geographic term in question is descriptively
used, the following question is relevant: (1) Is the mark the name of the place or region from which the
goods actually come? If the answer is yes, then the geographic term is probably used in a descriptive sense,
and secondary meaning is required for protection."30

In Burke-Parsons-Bowlby Corporation v. Appalachian Log Homes, Inc.,31 it was held that secondary
meaningis established when a descriptive mark no longer causes the public to associate the goods with a
particular place, but to associate the goods with a particular source.In other words, it is not enough that a
geographically-descriptive mark partakes of the name of a place known generally to the public to be denied
registration as it is also necessary to show that the public would make a goods/place association – that is,
to believe that the goods for which the mark is sought to be registered originatein that place.1âwphi1 To
hold sucha belief, it is necessary, of course, that the purchasers perceive the mark as a place name, from
which the question of obscurity or remoteness then comes to the fore.32 The more a geographical area is
obscure and remote, it becomes less likely that the public shall have a goods/place association with such
area and thus, the mark may not be deemed as geographically descriptive. However, where there is no
genuine issue that the geographical significance of a term is its primary significanceand where the
geographical place is neither obscure nor remote, a public association of the goods with the place may
ordinarily be presumed from the fact that the applicant’s own goods come from the geographical place
named in the mark.33

Under Section 123.234 of the IP Code, specific requirements have to be met in order to conclude that a
geographically-descriptive mark has acquired secondary meaning, to wit: (a) the secondary meaning must
have arisen as a result of substantial commercial use of a mark in the Philippines; (b) such use must result
in the distinctiveness of the mark insofar as the goods or theproducts are concerned; and (c) proof of
substantially exclusive and continuous commercial use in the Philippines for five (5) years beforethe date
on which the claim of distinctiveness is made. Unless secondary meaning has been established, a
geographically-descriptive mark, dueto its general public domain classification, is perceptibly disqualified
from trademark registration. Section 123.1(j) of the IP Code states this rule as follows:

SEC. 123. Registrability. –

123.1 A mark cannot be registered if it:

xxxx

(j) Consists exclusively of signs orof indications that may serve in trade to designate the kind, quality,
quantity, intended purpose, value, geographical origin, time or production of the goods or rendering of the
services, or other characteristics of the goods or services; (Emphasis supplied) x x x x

Cognizant of the foregoing, the Court disagrees with the CA that petitioners committed unfair competition
due to the mistaken notion that petitioner had established goodwill for the mark "ST. FRANCIS" precisely
because said circumstance, by and of itself, does not equateto fraud under the parameters of Section 168
of the IP Code as above-cited. In fact, the records are bereft of any showing thatpetitioners gave their
goods/services the general appearance that it was respondent which was offering the same to the public.
Neither did petitioners employ any means to induce the public towards a false belief that it was offering
respondent’s goods/services. Nor did petitioners make any false statement or commit acts tending to
discredit the goods/services offered by respondent. Accordingly, the element of fraud which is the core of
unfair competition had not been established.

Besides, respondent was not able toprove its compliance with the requirements stated in Section 123.2 of
the IP Code to be able to conclude that it acquired a secondary meaning – and, thereby, an exclusive right
– to the "ST. FRANCIS" mark, which is, as the IPO Director-General correctly pointed out, geographically-
descriptive of the location in which its realty developments have been built, i.e., St. Francis Avenue and St.
Francis Street (now known as "Bank Drive"). Verily, records would reveal that while it is true that respondent
had been using the mark "ST. FRANCIS" since 1992, its use thereof has been merely confined to its realty
projects within the Ortigas Center, as specifically mentioned.As its use of the mark is clearly limited to a
certain locality, it cannot be said thatthere was substantial commercial use of the same recognizedall
throughout the country. Neither is there any showing of a mental recognition in buyers’ and potential buyers’
minds that products connected with the mark "ST. FRANCIS" are associated with the same source35 – that
is, the enterprise of respondent. Thus, absent any showing that there exists a clear goods/service-
association between the realty projects located in the aforesaid area and herein respondent as the
developer thereof, the latter cannot besaid to have acquired a secondary meaning as to its use of the "ST.
FRANCIS" mark.

In fact, even on the assumption that secondary meaning had been acquired, said finding only accords
respondents protectional qualification under Section 168.1 of the IP Code as above quoted. Again, this
does not automatically trigger the concurrence of the fraud element required under Section 168.2 of the IP
Code, as exemplified by the acts mentioned in Section 168.3 of the same. Ultimately, as earlier stated,
there can be no unfair competition without this element. In this respect, considering too the notoriety of the
Shangri-La brand in the real estate industry which dilutes petitioners' propensity to merely ride on
respondent's goodwill, the more reasonable conclusion is that the former's use of the marks "THE ST.
FRANCIS TOWERS" and "THE ST. FRANCIS SHANGRI-LA PLACE" was meant only to identify, or at least
associate, their real estate project/s with its geographical location. As aptly observed by the IPO
DirectorGeneral:36

In the case at hand, the parties are business competitors engaged in real estate or property development,
providing goods and services directly connected thereto. The "goods" or "products" or "services" are real
estate and the goods and the services attached to it or directly related to it, like sale or lease of condominium
units, offices, and commercial spaces, such as restaurants, and other businesses. For these kinds of goods
or services there can be no description of its geographical origin as precise and accurate as that of the
name of the place where they are situated. (Emphasis and underscoring supplied)

Hence, for all the reasons above-discussed, the Court hereby grants the instant petition, and, thus,
exonerates petitioners from the charge of unfair competition in the IPV Case. As the decisions in the Inter
Partes Cases were not appealed, the registrability issues resolved therein are hereby deemed to have
attained finality and, therefore, are now executory.

WHEREFORE, the petition is GRANTED. The Decision dated December 18, 2009 of the Court of Appeals
in CA-G.R. SP No. 105425 is hereby REVERSED and SET ASIDE. Accordingly, the Decision dated
September 3, 2008 of the Intellectual Property Office-Director General is REINSTATED.

FINANCIAL REHABILITATION AND INSOLVENCY ACT

G.R. No. 205469

BPI FAMILY SAVINGS BANK, INC.,

vs.
ST. MICHAEL MEDICAL CENTER, INC

Spouses Virgilio and Yolanda Rodil (Sps. Rodil) are the owners and sole proprietors of St. Michael
Diagnostic and Skin Care Laboratory Services and Hospital (St. Michael Hospital), a 5-storey secondary
level hospital built on their property located in Molino 2, Bacoor, Cavite. With a vision to upgrade St. Michael
Hospital into a modern, well-equipped and full service tertiary 11-storey hospital, Sps. Rodil purchased two
(2) parcels of land adjoining their existing property and, on May 22, 2003, incorporated SMMCI, with which
entity they planned to eventually consolidate St. Michael Hospital’s operations. SMMCI had an initial capital
of 2,000,000.00 which was later increased to 53,500,000.00, 94.49% of which outstanding capital stock, or
50,553,000.00, was subscribed and paid by Sps. Rodil.5

In May 2004, construction of a new hospital building on the adjoining properties commenced, with Sps.
Rodil contributing personal funds as initial capital for the project which was estimated to cost at least
100,000,000.00.6 To finance the costs of construction, SMMCI applied for a loan with petitioner BPI Family
Savings Bank, Inc. (BPI Family) which gave a credit line of up to 35,000,000.00,7 secured by a Real Estate
Mortgage8 (mortgage) over three (3) parcels of land9 belonging to Sps. Rodil, on a portion of which stands
the hospital building being constructed. SMMCI was able to draw the aggregate amount of
23,700,000.00,10 with interest at the rate of 10.25% per annum (p.a.) and a late payment charge of 3% per
month accruing on the overdue amount, for which Sps. Rodil, who agreed to be co-borrowers on the loan,
executed and signed a Promissory Note.11

In the meantime, after suffering financial losses due to problems with the first building contractor,12 Sps.
Rodil temporarily deferred the original construction plans for the 11-storey hospital building and, instead,
engaged the services of another contractor for the completion of the remaining structural works of the
unfinished building up to the 5th floor. In this regard, they spent an additional 25,000,000.00, or a total of
55,000,000.00 for the construction. The lack of funds for the finishing works of the 3rd, 4th and 5th floors,
however, kept the new building from becoming completely functional and, in turn, hampered the plans for
the physical transfer of St. Michael Hospital’s operations to SMMCI. Nevertheless, using hospital-
generated revenues, Sps. Rodil were still able to purchase new equipment and machinery for St. Michael
Hospital valued in excess of 20,000,000.00.13

Although the finishing works were later resumed and some of the hospital operations were eventually
transferred to the completed first two floors of the new building, as of May 2006, SMMCI was still neither
operational nor earning revenues. Hence, it was only able to pay the interest on its BPI Family loan, or the
amount of 3,000,000.00 over a two-year period, from the income of St. Michael Hospital.14
On September 25, 2009, BPI Family demanded immediate payment of the entire loan obligation15 and,
soon after, filed a petition for extrajudicial foreclosure16 of the real properties covered by the mortgage.
The auction sale was scheduled on December 11, 2009, which was postponed to February 15, 2010 with
the conformity of BPI Family.17

On August 11, 2010, SMMCI filed a Petition for Corporate Rehabilitation18 (Rehabilitation Petition),
docketed as SEC Case No. 086-10, before the RTC, with prayer for the issuance of a Stay Order as it
foresaw the impossibility of meeting its obligation to BPI Family, its purported sole creditor.19

In the said petition, SMMCI claimed that it had to defer the construction of the projected 11-storey hospital
building due to the problems it had with its first contractor as well as the rise of the cost of construction
materials. As of date, only two (2) floors of the new building are functional, in which some of the operations
of St. Michael had already been transferred.20

Also, it was alleged that more than 66,000,000.00 had been spent for the construction of the existing
structure (in excess of its proportionate share of the original estimated cost for the entire project), said
amount having come from the personal funds of Sps. Rodil and/or income generated by St. Michael
Hospital, aside from the drawings from the credit line with BPI Family. At the same time, Sps. Rodil
continued to shoulder the costs of equipment and machinery amounting to 20,000,000.00, in order to build
up the hospital’s medical capabilities. However, since SMMCI was neither operational nor earning
revenues, it could only pay interest on the BPI Family loan, using St. Michael Hospital’s income, over a two-
year period.21

Further, it was averred that while St. Michael Hospital – whose operations were to be eventually absorbed
by SMMCI – was operating profitably, it was saddled with the burden of paying the loan obligation of SMMCI
and Sps. Rodil to BPI Family, which it cannot service together with its current obligations to other persons
and/or entities. The situation became even more difficult when the bank called the entire loan obligation
which, as of November 16, 2009, amounted to 52,784,589.34 (net of unapplied payment), consisting of: (a)
the principal of 23,700,000.00; (b) accrued interest of 7,048,152.74; and (c) late payment charges
amounting to 23,510,400.00. While several persons approached Sps. Rodil signifying their interest to invest
in the corporation, they needed enough time to complete their audit and due diligence of the company,22
hence, the Rehabilitation Petition.

In its proposed Rehabilitation Plan,23 SMMCI merely sought for BPI Family (a) to defer foreclosing on the
mortgage and (b) to agree to a moratorium of at least two (2) years during which SMMCI – either through
St. Michael Hospital or its successor – will retire all other obligations. After which, SMMCI can then start
servicing its loan obligation to the bank under a mutually acceptable restructuring agreement.24 SMMCI
declared that it intends to conclude pending negotiations for investments offered by a group of medical
doctors whose capital infusion shall be used (a) to complete the finishing requirements for the 3rd and 5th
floors of the new building; (b) to renovate the old 5- storey building where St. Michael Hospital operates;
and (c) to pay, in whole or in part, the bank loan with the view of finally integrating St. Michael Hospital with
SMMCI.25

The Proceedings Before the RTC

Finding the Rehabilitation Petition to be sufficient in form and substance, the RTC issued a Stay Order26
on August 16, 2010. After the initial hearing on October 5, 2010, and the filing of comments to the said
petition,27 the same was referred to the court-appointed Rehabilitation Receiver, Dr. Uriel S. Halum (Dr.
Halum), who submitted in due time his Report and Recommendations28 (Receiver’s Report) to the RTC
on February 17, 2011.29

In the said report, Dr. Halum gave credence to the feasibility study conducted by Mrs. Nenita Alibangbang
(Mrs. Alibangbang), a certified public accountant and Dean of the College of Accountancy at the University
of Perpetual Help Dalta, who was commissioned in 2008 to do a study on the viability of the project, finding
that the same was feasible given that St. Michael Hospital, whose operations SMMCI will eventually absorb,
registered outstanding revenue performance for the last seven years of its operation with an average growth
rate of 42.21% annually.30 Accordingly, Dr. Halum found that SMMCI may be rehabilitated because it is a
viable option but, nevertheless, opined that it will take more than what it had proposed to successfully bring
the company back to good financial health considering the finding that its obligation actually extends beyond
the bank, and also includes accounts payable due to suppliers and informal lenders.31 Thus, he made the
following recommendations:

1.The two-year moratorium period to pay the bank is not enough. The Court should seriously consider
extending it by another three years or a total of five (5) years, at least. The bank, whose loan is secured by
mortgages on three prime parcels of land with improvements should discuss restructuring the loan with the
creditors with the end in view of stretching the term and allowing for more flexible rate.

2.Obligations to other creditors such as the suppliers and lenders can be serviced at once. Given the
performance of the hospital, the undersigned reasonably believes that these obligations can be settled in
next three (3) years. These accounts can be paid proportionately provided that [SMMCI] should be allowed
to re- structure these accounts to allow for longer and more convenient payment terms.

3.[SMMCI] should be allowed to spend for the improvement of the building but not necessarily continuing
with the planned 11-storey building. It should make do with what it has but should be permitted to spend
reasonable part of the hospital’s revenues to improve the facilities. For instance, we recommend that the
fifth floor of the building should be finished to provide for an intensive care unit or ICU with equipments (sic)
and required facilities. [SMMCI] should also consider spending (sic) an elevator to make access to and from
the higher floors convenient to patients, doctors, nurses and guests. Incidentally, these improvements
should be programmed for the next two to three years. Given the budgetary constraints of the hospital,
doing all these improvements all at once would be impossible.

4.Finally, [SMMCI] should provide for details on its statements regarding the prospective investors. It (sic)
true, or in case it happens, then this fresh capital should be used partly to pay the bank and the rest to
improve the hospital to make it more competitive with the nearby medical service providers.32

On May 26, 2011, the RTC issued an order requiring the counsels of the creditors/oppositors to file their
comments to the Receiver’s Report within ten (10) days from notice, but only counsel for South East Star
Enterprises complied.33

The RTC Ruling

In an Order34 dated August 4, 2011, the RTC approved the Rehabilitation Plan with the modifications
recommended by the Rehabilitation Receiver and thus, ordered: (a) a five-year moratorium on SMMCI’s
bank loan; (b) a restructuring and payment of obligations to other creditors such as suppliers and lenders;
(c) a programmed spending of a reasonable part of the hospital’s revenues for the finishing of the 5th floor
and the improvement of hospital facilities in the next two or three years; and (d) use of fresh capital from
prospective investors to partly pay SMMCI’s bank loan and improve St. Michael Hospital’s
competitiveness.35

It cited the following considerations which had justified its approval: (1) the Rehabilitation Plan is endorsed
by the Rehabilitation Receiver subject to certain recommendations; (2) the plan ensures preservation of
assets and orderly payment of debts; (3) the plan provides for recovery rates on operating mode as opposed
to liquidation values; (4) it contains details for a business plan which will restore profitability and solvency
of petitioner; (5) the projected cash flow can support the continuous operation of the debtor as a going
concern; (6) the plan did not ask for a waiver of the principal; (7) the plan preserves the security of the
secured creditor; (8) the plan has provisions to ensure that future income will inure to the benefit of the
creditors; and (9) the rehabilitation of the debtor benefits its employees, creditors, stockholders and, in a
large sense, the general public as it will generate employment and is a potential source of revenue for the
government.36
Aggrieved, BPI Family elevated the matter before the CA, mainly arguing that the approval of the
Rehabilitation Plan violated its rights as an unpaid creditor/mortgagee and that the same was submitted
without prior consultation with creditors.37

The CA Ruling

In a Decision38 dated August 30, 2012, the CA affirmed the RTC’s approval of the Rehabilitation Plan.39

It found that: (a) the rehabilitation of SMMCI is feasible considering the outstanding revenue performance
of St. Michael Hospital, which it shall absorb, showing its gross profit exceeding its operating expenses and
the large probability of increased profitability due to the favorable economic conditions of the locality; (b)
the approval of the Rehabilitation Plan did not amount to an impairment of contract since there was no
directive for the release of the mortgaged properties to which BPI Family is entitled to as a secured creditor
but only a suspension of the provisions of the loan agreements; (c) it is not mandatory for the validity of the
Rehabilitation Plan that the Rehabilitation Receiver should consult with the creditors; and (d) the approval
of the Rehabilitation Plan was not made arbitrarily since it was done only after a review of the pleadings
filed and the report submitted by the Rehabilitation Receiver, and its approval was anchored on valid
considerations.40

Dissatisfied, BPI Family moved for reconsideration which was denied in a Resolution41 dated January 18,
2013, hence, this petition.

The Issue Before the Court

The essential issue in this case is whether or not the CA correctly affirmed SMMCI’s Rehabilitation Plan as
approved by the RTC.

The Court’s Ruling

The petition is meritorious.

I.

Restoration is the central idea behind the remedy of corporate rehabilitation. In common parlance, to
"restore" means "to bring back to or put back into a former or original state."42 Case law explains that
corporate rehabilitation contemplates a continuance of corporate life and activities in an effort to restore
and reinstate the corporation to its former position of successful operation and solvency, the purpose being
to enable the company to gain a new lease on life and allow its creditors to be paid their claims out of its
earnings.43 Consistent therewith is the term’s statutory definition under Republic Act No. 10142,44
otherwise known as the "Financial Rehabilitation and Insolvency Act of 2010" (FRIA), which provides:

Section 4. Definition of Terms. – As used in this Act, the term:

xxxx

(gg) Rehabilitation shall refer to the restoration of the debtor to a condition of successful operation and
solvency, if it is shown that its continuance of operation is economically feasible and its creditors can recover
by way of the present value of payments projected in the plan, more if the debtor continues as a going
concern than if it is immediately liquidated.

x x x x (Emphasis supplied)

In other words, rehabilitation assumes that the corporation has been operational but for some reasons like
economic crisis or mismanagement had become distressed or insolvent, i.e., that it is generally unable to
pay its debts as they fall due in the ordinary course of business or has liability that are greater than its
assets.45 Thus, the basic issues in rehabilitation proceedings concern the viability and desirability of
continuing the business operations of the distressed corporation,46 all with a view of effectively restoring it
to a state of solvency or to its former healthy financial condition through the adoption of a rehabilitation plan.

In this case, it cannot be said that the petitioning corporation, SMMCI, had been in a position of successful
operation and solvency at the time the Rehabilitation Petition was filed on August 11, 2010. While it had
indeed "commenced business" through the preparatory act of opening a credit line with BPI Family to
finance the construction of a new hospital building for its future operations, SMMCI itself admits that it has
not formally operated nor earned any income since its incorporation. This simply means that there exists
no viable business concern to be restored. Perforce, the remedy of corporate rehabilitation is improper,
thus rendering the dispositions of the courts a quo infirm.

II.

In fact, for the same reasons, the Court observes that SMMCI could not have even complied with the form
and substance of a proper rehabilitation petition, and submit its accompanying documents, among others,
the required financial statements of a going concern. Section 2, Rule 4 of the 2008 Rules of Procedure on
Corporate Rehabilitation47 (Rules), which were in force at the time SMMCI’s rehabilitation petition was filed
on August 11, 2010, pertinently provides:

SEC. 2. Contents of Petition. -

xxxx

(b)The petition shall be accompanied by the following documents:

(1)An audited financial statement of the debtor at the end of its last fiscal year;

(2)Interim financial statements as of the end of the month prior to the filing of the petition;

xxxx

Note that this defect is not negated by the submission of the financial documents pertaining to St. Michael
Hospital, which is a separate and distinct entity from SMMCI. While the CA gave considerable weight to St.
Michael Hospital’s supposed "profitability," as explicated in its own financial statements, as well as the
feasibility study conducted by Mrs. Alibangbang,48 in affirming the RTC, it has unwittingly lost sight of the
essential fact that SMMCI stands as the sole petitioning debtor in this case; as such, its rehabilitation should
have been primarily examined from the lens of its own financial history. While SMMCI claims that it would
absorb St. Michael Hospital’s operations, there was dearth of evidence to show that a merger was already
agreed upon between them. Accordingly, St. Michael Hospital’s financials cannot be utilized as basis to
determine the feasibility of SMMCI’s rehabilitation.

Note further that while it appears that Sps. Rodil effectively owned and exercised control over the two
entities, such fact does not, by and of itself, warrant their singular treatment for to do so would only confuse
the objective of the proceedings which is to ascertain whether the petitioning corporation, and not any other
entity related thereto (except if joining as a co-petitioning debtor), may be rehabilitated. Neither is the
proceeding the proper forum to pierce the corporate fictions of both entities for it involves no creditor
claiming to be a victim of fraud, an essential requisite for the application of such doctrine.49

In fine, the petition should not have been given due course, nor should a Stay Order have been
issued.1âwphi1

III.

To compound its error, the CA even disregarded the fact that SMMCI’s Rehabilitation Plan, an
indispensable requisite in corporate rehabilitation proceedings, failed to comply with the fundamental
requisites outlined in Section 18, Rule 3 of the Rules, particularly, that of a material financial commitment
to support the rehabilitation and an accompanying liquidation analysis, all of the petitioning debtor:

SEC. 18. Rehabilitation Plan. - The rehabilitation plan shall include (a) the desired business targets or goals
and the duration and coverage of the rehabilitation; (b) the terms and conditions of such rehabilitation which
shall include the manner of its implementation, giving due regard to the interests of secured creditors such
as, but not limited, to the non- impairment of their security liens or interests; (c) the material financial
commitments to support the rehabilitation plan; (d) the means for the execution of the rehabilitation plan,
which may include debt to equity conversion, restructuring of the debts, dacion en pago or sale exchange
or any disposition of assets or of the interest of shareholders, partners or members; (e) a liquidation analysis
setting out for each creditor that the present value of payments it would receive under the plan is more than
that which it would receive if the assets of the debtor were sold by a liquidator within a six-month period
from the estimated date of filing of the petition; and (f) such other relevant information to enable a
reasonable investor to make an informed decision on the feasibility of the rehabilitation plan. (Emphases
supplied)

A. Lack of Material Financial Commitment

to Support the Rehabilitation Plan.

A material financial commitment becomes significant in gauging the resolve, determination, earnestness
and good faith of the distressed corporation in financing the proposed rehabilitation plan. This commitment
may include the voluntary undertakings of the stockholders or the would- be investors of the debtor-
corporation indicating their readiness, willingness and ability to contribute funds or property to guarantee
the continued successful operation of the debtor corporation during the period of rehabilitation.50

In this case, aside from the harped on merger of St. Michael Hospital with SMMCI, the only proposed source
of revenue the Rehabilitation Plan suggests is the capital which would come from SMMCI’s potential
investors, which negotiations are merely pending. Evidently, both propositions commonly border on the
speculative and, hence, hardly fit the description of a material financial commitment which would inspire
confidence that the rehabilitation would turn out to be successful. In fact, the Rehabilitation Receiver himself
recognizes the ambiguity of the proposition when he recommended that:

[T]he petitioner should provide for details on its statements regarding the prospective investors. If true or in
case it happens, then this fresh capital should be used partly to pay the bank and the rest, to improve the
hospital to make it more competitive with the nearby medical service providers.51

In the same manner, the fact that St. Michael Hospital had previously made payments for the benefit of
SMMCI is not enough assurance that the arrangement would prospectively apply in the event that
rehabilitation is granted. As case law intimates, nothing short of legally binding investment commitment/s
from third parties is required to qualify as a material financial commitment.52 However, no such binding
investment was presented in this case.

B. Lack of Liquidation Analysis.

SMMCI likewise failed to include any liquidation analysis in its Rehabilitation Plan. The Court observes that
as of November 16, 2009, or about 9 months prior to the filing of the petition for rehabilitation, the loan with
BPI Family had already amounted to 52,784,589.34, with interest at 10.25% p.a. or a daily interest of about
6,655.48 and late payment charge of 36% p.a.53 However, with no SMMCI financial statement on record,
it is unclear to the Court what assets it possesses in order to determine the values to be derived if liquidation
has to be had thereby. Accordingly, this prevents the Court from ascertaining if the petitioning debtor’s
creditors can recover by way of the present value of payments projected in the plan, more if the debtor
continues as a going concern than if it is immediately liquidated, a crucial factor in a corporate rehabilitation
case. Again, the financial records of St. Michael Hospital, being a separate and distinct entity whose merger
with SMMCI only exists in the realm of probability, cannot be taken as a substitute to fulfill the requirement.
What remains pertinent are the financial statements of SMMCI for it solely stands as the debtor to be
rehabilitated, or liquidated in this case.
At any rate, records disclose that St. Michael Hospital’s current cash operating position54 is just enough to
meet its own maturing obligations.55 While it has substantial total assets, a large portion thereof is
comprised of fixed assets, while its current assets56 consist mostly of inventory.57 Still, the total liquidation
assets and the estimated liquidation return to the creditors, as well as the fair market value vis-à-vis the
forced liquidation value of the fixed assets that would guide the Court in assessing the feasibility of the
Rehabilitation Plan were not shown.

C. Effect of Non-Compliance.

The failure of the Rehabilitation Plan to state any material financial commitment to support rehabilitation,
as well as to include a liquidation analysis, translates to the conclusion that the RTC’s stated considerations
for approval, i.e., that (a) the plan provides for recovery rates on operating mode as opposed to liquidation
values; (b) it contains details for a business plan which will restore profitability and solvency on petitioner;
(c) the projected cash flow can support the continuous operation of the debtor as a going concern; and (d)
the plan has provisions to ensure that future income will inure to the benefit of the creditors,58 are actually
unsubstantiated, and hence, insufficient to decree SMMCI’s rehabilitation. It is well to emphasize that the
remedy of rehabilitation should be denied to corporations that do not qualify under the Rules. Neither should
it be allowed to corporations whose sole purpose is to delay the enforcement of any of the rights of the
creditors, which is rendered obvious by: (a) the absence of a sound and workable business plan; (b)
baseless and unexplained assumptions, targets, and goals; and (c) speculative capital infusion or complete
lack thereof for the execution of the business plan.59 Unfortunately, these negative indicators have all
surfaced to the fore, much to SMMCI’s chagrin.

IV.

While the Court recognizes the financial predicaments of upstart corporations under the prevailing
economic climate, it must nonetheless remain forthright in limiting the remedy of rehabilitation only to
meritorious cases. As above-mentioned, the purpose of rehabilitation proceedings is not only to enable the
company to gain a new lease on life but also to allow creditors to be paid their claims from its earnings,
when so rehabilitated. Hence, the remedy must be accorded only after a judicious regard of all stakeholders’
interests; it is not a one-sided tool that may be graciously invoked to escape every position of distress.

In this case, not only has the petitioning debtor failed to show that it has formally began its operations which
would warrant restoration, but also it has failed to show compliance with the key requirements under the
Rules, the purpose of which are vital in determining the propriety of rehabilitation. Thus, for all the reasons
hereinabove explained, the Court is constrained to rule in favor of BPI Family and hereby dismiss SMMCI’s
Rehabilitation Petition. With this pronouncement, it is now unnecessary to delve on the other ancillary
issues raised herein.

WHEREFORE, the petition is GRANTED. The Decision dated August 30, 2012 and the Resolution dated
January 18, 2013 of the Court of Appeals in CA-G.R. SP No. 121004 upholding the Order dated August 4,
2011 of the Regional Trial Court of Imus, Cavite, Branch 21 approving the Rehabilitation Plan of respondent
St. Michael Medical Center, Inc. (SMMCI) are hereby REVERSED and SET ASIDE. Accordingly, SMMCI’s
Petition for Corporate Rehabilitation is DISMISSED.

G.R. No. 224764

BUREAU OF INTERNAL REVENUE, ASSISTANT COMMISSIONER ALFREDO V. MISAJON, GROUP

SUPERVISOR ROLANDO M. BALBIDO, and EXAMINER REYNANTE DP. MARTIREZ,
vs.
LEPANTO CERAMICS, INC.

On December 23, 2011, respondent Lepanto Ceramics, Inc. (LCI) - a corporation duly organized and
existing under Philippine Laws with principal office address in Calamba City, Laguna - filed a petition 4 for
corporate rehabilitation pursuant to Republic Act No. (RA) 10142, 5 otherwise known as the "Financial
Rehabilitation and Insolvency Act (FRIA) of 2010," docketed before the RTC ofCalamba City, Branch 34,
the designated Special Commercial Court in Laguna (Rehabilitation Court). Essentially, LCI alleged that
due to the financial difficulties it has been experiencing dating back to the Asian financial crisis, it had
entered into a state of insolvency considering its inability to pay its obligations as they become due and that
its total liabilities amounting to ₱4,213 ,682, 715. 00 far exceed its total assets worth ₱1,112,723,941.00.
Notably, LCI admitted in the annexes attached to the aforesaid Petition its tax liabilities to the national
government in the amount of at least ₱6,355,368.00.6

On January 13, 2012, the Rehabilitation Court issued a Commencement Order,7 which, inter alia: (a)
declared LCI to be under corporate rehabilitation; (b) suspended all actions or proceedings, in court or
otherwise, for the enforcement of claims against LCI; (c) prohibited LCI from making any payment of its
liabilities outstanding as of even date, except as may be provided under RA 10142; and (d) directed the
BIR to file and serve on LCI its comment or opposition to the petition, or its claims against LCI. 8
Accordingly, the Commencement Order was published in a newspaper of general circulation and the same,
together with the petition for corporate rehabilitation, were personally served upon LCI's creditors, including
the BIR.9

Despite the foregoing, Misajon, et al., acting as Assistant Commissioner, Group Supervisor, and Examiner,
respectively, of the BIR's Large Taxpayers Service, sent LCI a notice of informal conference10 dated May
27, 2013, informing the latter of its deficiency internal tax liabilities for the Fiscal Year ending June 30, 2010.
In response, LCI's court-appointed receiver, Roberto L. Mendoza, sent BIR a letter-reply, reminding the
latter of the pendency of LCI's corporate rehabilitation proceedings, as well as the issuance of a
Commencement Order in connection therewith. Undaunted, the BIR sent LCI a Formal Letter of Demand11
dated May 9, 2014, requiring LCI to pay deficiency taxes in the amount of P567,519,348.39. 12 This
prompted LCI to file a petition 13 for indirect contempt dated August 13, 2014 against petitioners before
RTC Br. 35. In said petition, LCI asserted that petitioners' act of pursuing the BIR's claims for deficiency
taxes against LCI outside of the pending rehabilitation proceedings in spite of the Commencement Order
issued by the Rehabilitation Court is a clear defiance of the aforesaid Order. As such, petitioners must be
cited for indirect contempt in accordance with Rule 71 of the Rules of Court in relation to Section 16 of RA
10142.14

For their part, petitioners maintained that: (a) RTC Br. 35 had no jurisdiction to cite them in contempt as it
is only the Rehabilitation Court, being the one that issued the Commencement Order, which has the
authority to determine whether or not such Order was defied; (b) the instant petition had already been
mooted by the Rehabilitation Court's Order15 dated August 28, 2014 which declared LCI to have been
successfully rehabilitated resulting in the termination of the corporate rehabilitation proceedings; (c) their
acts do not amount to a defiance of the Commencement Order as it was done merely to toll the prescriptive
period in collecting deficiency taxes, and thus, sanctioned by the Rules of Procedure of the FRIA; (d) their
acts of sending a Notice of Informal Conference and Formal Letter of Demand do not amount to a "legal
action or other recourse" against LCI outside of the rehabilitation proceedings; and (e) the indirect contempt
proceedings interferes with the exercise of their functions to collect taxes due to the govemment.16

The RTC Br. 35 Ruling

In a Decision17 dated June 1, 2015, the RTC Br. 35 found Misajon, et al. guilty of indirect contempt and,
accordingly, ordered them to pay a fine of ₱5,000.00 each. 18 Preliminarily, the RTC Br. 35 ruled that it has
jurisdiction over LCI's petition for indirect contempt as it is docketed, heard, and decided separately from
the principal action. 19 Going to petitioners' other contentions, the RTC found that: (a) the supervening
termination of the rehabilitation proceedings and the consequent lifting of the Commencement Order did
not render moot the petition for indirect contempt as the acts complained of were already consummated;
(b) petitioners' acts of sending LCI a notice of informal conference and Formal Letter of Demand are
covered by the Commencement Order as they were for the purpose of pursuing and enforcing a claim for
deficiency taxes, and thus, are in clear defiance of the Commencement Order; and (c) petitioners could
have tolled the prescriptive period to collect deficiency taxes without violating the Commencement Order
by simply ventilating their claim before the rehabilitation proceedings, which they were adequately notified
of. In this relation, the RTC Br. 35 held that while the BIR is a juridical entity which can only act through its
authorized intermediaries, it cannot be concluded that it authorized the latter to commit the contumacious
acts complained of, i.e., defiance of the Commencement Order. Thus, absent any contrary evidence, only
those individuals who performed such acts, namely, Misajon, et al., should be cited for indirect contempt of
court.20

Aggrieved, Misaj on, et al. moved for reconsideration, 21 which was, however, denied in an Order22 dated
October 26, 2015; hence, this petition.

The Issue Before the Court

The issue for the Court's resolution is whether or not the RTC Br. 35 correctly found Misajon, et al. to have
defied the Commencement Order and, accordingly, cited them for indirect contempt.

The Court's Ruling

The petition is without merit.

Section 4 (gg) of RA 10142 states:

Section 4. Definition of Terms. - As used in this Act, the term:

xxxx

(gg) Rehabilitation shall refer to the restoration of the debtor to a condition of successful operation and
solvency, if it is shown that its continuance of operation is economically feasible and its creditors can recover
by way of the present value of payments projected in the plan, more if the debtor continues as a going
concern than if it is immediately liquidated.

xxxx

"[C]ase law has defined corporate rehabilitation as an attempt to conserve and administer the assets of an
insolvent corporation in the hope of its eventual return from financial stress to solvency. It contemplates the
continuance of corporate life and activities in an effort to restore and reinstate the corporation to its former
position of successful operation and liquidity."23

Verily, the inherent purpose of rehabilitation is to find ways and means to minimize the expenses of the
distressed corporation during the rehabilitation period by providing the best possible framework for the
corporation to gradually regain or achieve a sustainable operating form. 24 "[It] enable[s] the company to
gain a new lease in life and thereby allow creditors to be paid [t]heir claims from its earnings. Thus,
rehabilitation shall be undertaken when it is shown that the continued operation of the corporation is
economically more feasible and its creditors can recover, by way of the present value of payments projected
in the plan, more, if the corporation continues as a going concern than if it is immediately liquidate d.25

In order to achieve such objectives, Section 16 of RA 10142 provides, inter alia, that upon the issuance of
a Commencement Order - which includes a Stay or Suspension Order - all actions or proceedings, in court
or otherwise, for the enforcement of "claims" against the distressed company shall be suspended.26 Under
the same law, claim "shall refer to all claims or demands of whatever nature or character against the debtor
or its property, whether for money or otherwise, liquidated or unliquidated, fixed or contingent, matured or
unmatured, disputed or undisputed, including, but not limited to; (1) all claims of the government, whether
national or local, including taxes, tariffs and customs duties; and (2) claims against directors and officers of
the debtor arising from acts done in the discharge of their functions falling within the scope of their authority:
Provided, That, this inclusion does not prohibit the creditors or third parties from filing cases against the
directors and officers acting in their personal capacities."27
To clarify, however, creditors of the distressed corporation are not without remedy as they may still submit
their claims to the rehabilitation court for proper consideration so that they may participate in the
proceedings, keeping in mind the general policy of the law "to ensure or maintain certainty and predictability
in commercial affairs, preserve and maximize the value of the assets of these debtors, recognize creditor
rights and respect priority of claims, and ensure equitable treatment of creditors who are similarly
situated."28 In other words, the creditors must ventilate their claims before the rehabilitation court, and any
"[a]ttempts to seek legal or other resource against the distressed corporation shall be sufficient to support
a finding of indirect contempt of court."29

In the case at bar, it is undisputed that LCI filed a petition for corporate rehabilitation. Finding the same to
be sufficient in form and substance, the Rehabilitation Court issued a Commencement Order30 dated
January 13, 2012 which, inter alia: (a) declared LCI to be under corporate rehabilitation; (b) suspended all
actions or proceedings, in court or otherwise, for the enforcement of claims against LCI; (c) prohibited LCI
from making any payment of its outstanding liabilities as of even date, except as may be provided under
RA 10142; and (d) directed the BIR to file and serve on LCI its comment or opposition to the petition, or its
claims against LCI. It is likewise undisputed that the BIR - personally and by publication - was notified of
the rehabilitation proceedings involving LCI and the issuance of the Commencement Order related thereto.
Despite the foregoing, the BIR, through Misajon, et al., still opted to send LCI: (a) a notice of informal
conference31 dated May 27, 2013, informing the latter of its deficiency internal tax liabilities for the Fiscal
Year ending June 30, 2010; and (b) a Formal Letter of Demand32 dated May 9, 2014, requiring LCI to pay
deficiency taxes in the amount of P567,5 l 9,348.39, notwithstanding the written reminder coming from LCI's
court-appointed receiver of the pendency of rehabilitation proceedings concerning LCI and the issuance of
a commencement order. Notably, the acts of sending a notice of informal conference and a Formal Letter
of Demand are part and parcel of the entire process for the assessment and collection of deficiency taxes
from a delinquent taxpayer,33 - an action or proceeding for the enforcement of a claim which should have
been suspended pursuant to the Commencement Order. Unmistakably, Misajon, et al. 's foregoing acts are
in clear defiance of the Commencement Order.

Petitioners' insistence that: (a) Misajon, et al. only performed such acts to toll the prescriptive period for the
collection of deficiency taxes; and (b) to cite them in indirect contempt would unduly interfere with their
function of collecting taxes due to the government, cannot be given any credence. As aptly put by the RTC
Br. 35, they could have easily tolled the running of such prescriptive period, and at the same time, perform
their functions as officers of the BIR, without defying the Commencement Order and without violating the
laudable purpose of RA 10142 by simply ventilating their claim before the Rehabilitation Court.34 After all,
they were adequately notified of the LCI's corporate rehabilitation and the issuance of the corresponding
Commencement Order. In sum, it was improper for Misajon, et al. to collect, or even attempt to collect,
deficiency taxes from LCI outside of the rehabilitation proceedings concerning the latter, and in the process,
willfully disregard the Commencement Order lawfully issued by the Rehabilitation Court. Hence, the RTC
Br. 35 correctly cited them for indirect contempt.35

WHEREFORE, the petition is DENIED. The Decision dated June 1, 2015 and the Order dated October 26,
2015 of the Regional Trial Court of Calamba City, Province of Laguna, Branch 35 in Civil Case No. 4813-
2014- C are hereby AFFIRMED.

G.R. No. 175844

BANK OF THE PHILIPPINE ISLANDS,
vs.
SARABIA MANOR HOTEL CORPORATION

Sarabia is a corporation duly organized and existing under Philippine laws, with principal place of business
at 101 General Luna Street, Iloilo City.5 It was incorporated on February 22, 1982, with an authorized
capital stock of ₱10,000,000.00, fully subscribed and paid-up, for the primary purpose of owning, leasing,
managing and/or operating hotels, restaurants, barber shops, beauty parlors, sauna and steam baths,
massage parlors and such other businesses incident to or necessary in the management or operation of
hotels.6
In 1997, Sarabia obtained a ₱150,000,000.00 special loan package from Far East Bank and Trust Company
(FEBTC) in order to finance the construction of a five-storey hotel building (New Building) for the purpose
of expanding its hotel business. An additional ₱20,000,000.00 stand-by credit line was approved by FEBTC
in the same year.7

The foregoing debts were secured by real estate mortgages over several parcels of land8 owned by Sarabia
and a comprehensive surety agreement dated September 1, 1997 signed by its stockholders.9 By virtue of
a merger, Bank of the Philippine Islands (BPI) assumed all of FEBTC’s rights against Sarabia.10

Sarabia started to pay interests on its loans as soon as the funds were released in October 1997. However,
largely because of the delayed completion of the New Building, Sarabia incurred various cash flow
problems. Thus, despite the fact that it had more assets than liabilities at that time,11 it, nevertheless, filed,
on July 26, 2002, a Petition12 for corporate rehabilitation (rehabilitation petition) with prayer for the issuance
of a stay order before the RTC as it foresaw the impossibility to meet its maturing obligations to its creditors
when they fall due.

In the said petition, Sarabia claimed that its cash position suffered when it was forced to take-over the
construction of the New Building due to the recurring default of its contractor, Santa Ana – AJ Construction
Corporation (contractor),13 and its subsequent abandonment of the said project.14 Accordingly, the New
Building was completed only in the latter part of 2000, or two years past the original target date of August
1998, thereby skewing Sarabia’s projected revenues. In addition, it was compelled to divert some of its
funds in order to cover cost overruns. The situation became even more difficult when the grace period for
the payment of the principal loan amounts ended in 2000 which resulted in higher amortizations. Moreover,
external events adversely affecting the hotel industry, i.e., the September 11, 2001 terrorist attacks and the
Abu Sayyaf issue, also contributed to Sarabia’s financial difficulties.15 Owing to these circumstances,
Sarabia failed to generate enough cash flow to service its maturing obligations to its creditors, namely: (a)
BPI (in the amount of ₱191,476,421.42); (b) Rural Bank of Pavia (in the amount of ₱2,500,000.00); (c) Vic
Imperial Appliance Corp. (Imperial Appliance) (in the amount of ₱5,000,000.00); (d) its various suppliers (in
the amount of ₱7,690,668.04); (e) the government (for minimum corporate income tax in the amount of
₱547,161.18); and (f) its stockholders (in the amount of ₱18,748,306.35).16

In its proposed rehabilitation plan,17 Sarabia sought for the restructuring of all its outstanding loans,
submitting that the interest payments on the same be pegged at a uniform escalating rate of: (a) 7% per
annum (p.a.) for the years 2002 to 2005; (b) 8% p.a. for the years 2006 to 2010; (c) 10% p.a. for the years
2011 to 2013; (d) 12% p.a. for the years 2014 to 2015; and (e) 14% p.a. for the year 2018. Likewise, Sarabia
sought to make annual payments on the principal loans starting in 2004, also in escalating amounts
depending on cash flow. Further, it proposed that it should pay off its outstanding obligations to the
government and its suppliers on their respective due dates, for the sake of its day to day operations.

Finding Sarabia’s rehabilitation petition sufficient in form and substance, the RTC issued a Stay Order18
on August 2, 2002. It also appointed Liberty B. Valderrama as Sarabia’s rehabilitation receiver (Receiver).
Thereafter, BPI filed its Opposition.19

After several hearings, the RTC gave due course to the rehabilitation petition and referred Sarabia’s
proposed rehabilitation plan to the Receiver for evaluation.20

In a Recommendation21 dated July 10, 2003 (Receiver’s Report), the Receiver found that Sarabia may be
rehabilitated and thus, made the following recommendations:

(1) Restructure the loans with Sarabia’s creditors, namely, BPI, Imperial Appliance, Rural Bank of Pavia,
and Barcelo Gestion Hotelera, S.L. (Barcelo), under the following terms and conditions: (a) the total
outstanding balance as of December 31, 2002 shall be recomputed, with the interest for the years 2001
and 2002 capitalized and treated as part of the principal; (b) waive all penalties; (c) extend the payment
period to seventeen (17) years, i.e., from 2003 to 2019, with a two-year grace period in principal payment;
(d) fix the interest rate at 6.75% p.a. plus 10% value added tax on interest for the entire term of the
restructured loans;22 (e) the interest and principal based on the amortization schedule shall be payable
annually at the last banking day of each year; and (f) any deficiency shall be paid personally by Sarabia’s
stockholders in the event it fails to generate enough cash flow; on the other hand, any excess funds
generated at the end of the year shall be paid to the creditors to accelerate the debt servicing;23

(2) Pay Sarabia’s outstanding payables with its suppliers and the government so as not to disrupt hotel
operations;24

(3) Convert the Advances from stockholders amounting to ₱18,748,306.00 to stockholder’s equity and other
advances amounting to ₱42,688,734.00 as of the December 31, 2002 tentative financial statements to
Deferred Credits; the said conversion should increase stockholders’ equity to ₱268,545,731.00 and bring
the debt to equity ratio to 0.85:1;25

(4) Require Sarabia’s stockholders to pay its payables to the hotel recorded as Accounts Receivable –
Trade, amounting to ₱285,612.17 as of December 31, 2001, and its remaining receivables after such
date;26

(5) No compensation or cash dividends shall be paid to the stockholders during the rehabilitation period,
except those who are directly employed by the hotel as a full time officer, employee or consultant covered
by a valid contract and for a reasonable fee;27

(6) All capital expenditures which are over and above what is provided in the case flow of the rehabilitation
plan which will materially affect Sarabia’s cash position but which are deemed necessary in order to
maintain the hotel’s competitiveness in the industry shall be subject to the RTC’s approval prior to its
implementation;28

(7) Terminate the management contract with Barcelo, thereby saving an estimated ₱25,830,997.00 in
management fees, over and above the salaries and benefits of certain managerial employees;29

(8) Appoint a new management team which would be required to submit a comprehensive business plan
to support the generation of the target revenue as reported in the rehabilitation plan;30

(9) Open a debt servicing account and transfer all excess funds thereto, which in no case should be less
than ₱500,000.00 at the end of the month; the funds will be drawn payable to the creditors only based on
the amortization schedule;31 and

(10) Release the surety obligations of Sarabia’s stockholders, considering the adequate collaterals and
securities covered by the rehabilitation plan and the continuing mortgages over Sarabia’s properties.32

The RTC Ruling

In an Order33 dated August 7, 2003, the RTC approved Sarabia’s rehabilitation plan as recommended by
the Receiver, finding the same to be feasible. In this accord, it observed that the rehabilitation plan was
realistic since, based on Sarabia’s financial history, it was shown that it has the inherent capacity to
generate funds to pay its loan obligations given the proper perspective.34 The recommended rehabilitation
plan was also practical in terms of the interest rate pegged at 6.75% p.a. since it is based on Sarabia’s
ability to pay and the creditors’ perceived cost of money.35 It was likewise found to be viable since, based
on the extrapolations made by the Receiver, Sarabia’s revenue projections, albeit projected to slow down,
remained to have a positive business/profit outlook altogether.36

The RTC further noted that while it may be true that Sarabia has been unable to comply with its existing
terms with BPI, it has nonetheless complied with its obligations to its employees and suppliers and pay its
taxes to both local and national government without disrupting the day-to-day operations of its business as
an on-going concern.37
More significantly, the RTC did not give credence to BPI’s opposition to the Receiver’s recommended
rehabilitation plan as neither BPI nor the Receiver was able to substantiate the claim that BPI’s cost of
funds was at the 10% p.a. threshold. In this regard, the RTC gave more credence to the Receiver’s
determination of fixing the interest rate at 6.75% p.a., taking into consideration not only Sarabia’s ability to
pay based on its proposed interest rates, i.e., 7% to 14% p.a., but also BPI’s perceived cost of money based
on its own published interest rates for deposits, i.e., 1% to 4.75% p.a., as well as the rates for treasury bills,
i.e., 5.498% p.a. and CB overnight borrowings, i.e., 7.094%. p.a.38

The CA Ruling

In a Decision39 dated April 24, 2006, the CA affirmed the RTC’s ruling with the modification of reinstating
the surety obligations of Sarabia’s stockholders to BPI as an additional safeguard for the effective
implementation of the approved rehabilitation plan.40 It held that the RTC’s conclusions as to the feasibility
of Sarabia’s rehabilitation was well-supported by the company’s financial statements, both internal and
independent, which were properly analyzed and examined by the Receiver.41 It also upheld the 6.75%.
p.a. interest rate on Sarabia’s loans, finding the said rate to be reasonable given that BPI’s interests as a
creditor were properly accounted for. As published, BPI’s time deposit rate for an amount of ₱5,000,000.00
(with a term of 360-364 days) is at 5.5% p.a.; while the benchmark ninety one-day commercial paper, which
banks used to price their loan averages to 6.4% p.a. in 2005, has a three-year average rate of 6.57% p.a.42
As such, the 6.75% p.a. interest rate would be higher than the current market interest rates for time deposits
and benchmark commercial papers. Moreover, the CA pointed out that should the prevailing market interest
rates change as feared by BPI, the latter may still move for the modification of the approved rehabilitation
plan.43

Aggrieved, BPI moved for reconsideration which was, however, denied in a Resolution44 dated December
6, 2006.

Hence, this petition.

The Issue Before the Court

The primordial issue raised for the Court’s resolution is whether or not the CA correctly affirmed Sarabia’s
rehabilitation plan as approved by the RTC, with the modification on the reinstatement of the surety
obligations of Sarabia’s stockholders.

BPI mainly argues that the approved rehabilitation plan did not give due regard to its interests as a secured
creditor in view of the imposition of a fixed interest rate of 6.75% p.a. and the extended loan repayment
period.45 It likewise avers that Sarabia’s misrepresentations in its rehabilitation petition remain
unresolved.46

On the contrary, Sarabia essentially maintains that: (a) the present petition improperly raises questions of
fact;47 (b) the approved rehabilitation plan takes into consideration all the interests of the parties and the
terms and conditions stated therein are more reasonable than what BPI proposes;48 and (c) BPI’s
allegations of misrepresentation are mere desperation moves to convince the Court to overturn the rulings
of the courts a quo.49

The Court’s Ruling

The petition has no merit.

A. Propriety of BPI’s petition;

procedural considerations.

It is fundamental that a petition for review on certiorari filed under Rule 45 of the Rules of Court covers only
questions of law. In this relation, questions of fact are not reviewable and cannot be passed upon by the
Court unless, the following exceptions are found to exist: (a) when the findings are grounded entirely on
speculations, surmises, or conjectures; (b) when the inference made is manifestly mistaken, absurd, or
impossible; (c) when there is a grave abuse of discretion; (d) when the judgment is based on
misappreciation of facts; (e) when the findings of fact are conflicting; (f) when in making its findings, the
same are contrary to the admissions of both parties; (g) when the findings are contrary to those of the trial
court; (h) when the findings are conclusions without citation of specific evidence on which they are based;
(i) when the facts set forth in the petition as well as in the petitioner’s main and reply briefs are not disputed
by the respondent; and (j) when the findings of fact are premised on the supposed absence of evidence
and contradicted by the evidence on record.50

The distinction between questions of law and questions of fact is well-defined. A question of law exists
when the doubt or difference centers on what the law is on a certain state of facts. A question of fact, on
the other hand, exists if the doubt centers on the truth or falsity of the alleged facts. This being so, the
findings of fact of the CA are final and conclusive and the Court will not review them on appeal.51

In view of the foregoing, the Court finds BPI’s petition to be improper – and hence, dismissible52 – as the
issues raised therein involve questions of fact which are beyond the ambit of a Rule 45 petition for review.

To elucidate, the determination of whether or not due regard was given to the interests of BPI as a secured
creditor in the approved rehabilitation plan partakes of a question of fact since it will require a review of the
sufficiency and weight of evidence presented by the parties – among others, the various financial
documents and data showing Sarabia’s capacity to pay and BPI’s perceived cost of money – and not merely
an application of law. Therefore, given the complexion of the issues which BPI presents, and finding none
of the above-mentioned exceptions to exist, the Court is constrained to dismiss its petition, and prudently
uphold the factual findings of the courts a quo which are entitled to great weight and respect, and even
accorded with finality. This especially obtains in corporate rehabilitation proceedings wherein certain
commercial courts have been designated on account of their expertise and specialized knowledge on the
subject matter, as in this case.

In any event, even discounting the above-discussed procedural considerations, the Courts still finds BPI’s
petition lacking in merit.

B. Approval of Sarabia’s
rehabilitation plan; substantive
considerations.

Records show that Sarabia has been in the hotel business for over thirty years, tracing its operations back
to 1972. Its hotel building has been even considered a landmark in Iloilo, being one of its kind in the province
and having helped bring progress to the community.23 Since then, its expansion was continuous which led
to its decision to commence with the construction of a new hotel building. Unfortunately, its contractor
defaulted which impelled Sarabia to take-over the same. This significantly skewed its projected revenues
and led to various cash flow difficulties, resulting in its incapacity to meet its maturing obligations.

Recognizing the volatile nature of every business, the rules on corporate rehabilitation have been crafted
in order to give companies sufficient leeway to deal with debilitating financial predicaments in the hope of
restoring or reaching a sustainable operating form if only to best

accommodate the various interests of all its stakeholders, may it be the corporation’s stockholders, its
creditors and even the general public. In this light, case law has defined corporate rehabilitation as an
attempt to conserve and administer the assets of an insolvent corporation in the hope of its eventual return
from financial stress to solvency. It contemplates the continuance of corporate life and activities in an effort
to restore and reinstate the corporation to its former position of successful operation and liquidity. Verily,
the purpose of rehabilitation proceedings is to enable the company to gain a new lease on life and thereby
allow creditors to be paid their claims from its earnings.54 Thus, rehabilitation shall be undertaken when it
is shown that the continued operation of the corporation is economically more feasible and its creditors can
recover, by way of the present value of payments projected in the plan, more, if the corporation continues
as a going concern than if it is immediately liquidated.55
Among other rules that foster the foregoing policies, Section 23, Rule 4 of the Interim Rules of Procedure
on Corporate Rehabilitation56 (Interim Rules) states that a rehabilitation plan may be approved even over
the opposition of the creditors holding a majority of the corporation’s total liabilities if there is a showing that
rehabilitation is feasible and the opposition of the creditors is manifestly unreasonable. Also known as the
"cram-down" clause, this provision, which is currently incorporated in the FRIA,57 is necessary to curb the
majority creditors’ natural tendency to dictate their own terms and conditions to the rehabilitation, absent
due regard to the greater long-term benefit of all stakeholders. Otherwise stated, it forces the creditors to
accept the terms and conditions of the rehabilitation plan, preferring long-term viability over immediate but
incomplete recovery.

It is within the parameters of the aforesaid provision that the Court examines the approval of Sarabia’s
rehabilitation.

i. Feasibility of Sarabia’s rehabilitation.

In order to determine the feasibility of a proposed rehabilitation plan, it is imperative that a thorough
examination and analysis of the distressed corporation’s financial data must be conducted. If the results of
such examination and analysis show that there is a real opportunity to rehabilitate the corporation in view
of the assumptions made and financial goals stated in the proposed rehabilitation plan, then it may be said
that a rehabilitation is feasible. In this accord, the rehabilitation court should not hesitate to allow the
corporation to operate as an on-going concern, albeit under the terms and conditions stated in the approved
rehabilitation plan. On the other hand, if the results of the financial examination and analysis clearly indicate
that there lies no reasonable probability that the distressed corporation could be revived and that liquidation
would, in fact, better subserve the interests of its stakeholders, then it may be said that a rehabilitation
would not be feasible. In such case, the rehabilitation court may convert the proceedings into one for
liquidation.58 As further guidance on the matter, the Court’s pronouncement in Wonder Book Corporation
v. Philippine Bank of Communications59 proves instructive:

Rehabilitation is x x x available to a corporation [which], while illiquid, has assets that can generate more
cash if used in its daily operations than sold. Its liquidity issues can be addressed by a practicable business
plan that will generate enough cash to sustain daily operations, has a definite source of financing for its
proper and full implementation, and anchored on realistic assumptions and goals. This remedy should be
denied to corporations whose insolvency appears to be irreversible and whose sole purpose is to delay the
enforcement of any of the rights of the creditors, which is rendered obvious by the following: (a) the absence
of a sound and workable business plan; (b) baseless and unexplained assumptions, targets and goals; (c)
speculative capital infusion or complete lack thereof for the execution of the business plan; (d) cash flow
cannot sustain daily operations; and (e) negative net worth and the assets are near full depreciation or fully
depreciated.60 (Emphasis and underscoring supplied)

Keeping with these principles, the Court thus observes that:

First, Sarabia has the financial capability to undergo rehabilitation.

Based on the Receiver’s Report, Sarabia’s financial history shows that it has the inherent capacity to
generate funds to repay its loan obligations if applied through the proper financial framework. The
Receiver’s examination and analysis of Sarabia’s financial data reveals that the latter’s business is not only
an on-going but also a growing concern. Despite its financial constraints, Sarabia likewise continues to be
profitable with its hotelier business as its operations have not been disrupted.61 Hence, given its current
fiscal position, the prospect of substantial and continuous revenue generation is a realistic goal.

Second, Sarabia has the ability to have sustainable profits over a long period of time.

As concluded by the Receiver, Sarabia’s projected revenues shall have a steady year-on-year growth from
the time that it applied for rehabilitation until the end of its rehabilitation plan in 2018, albeit with decreasing
growth rates (growth rate is at 26% in 2003, 5% in 2004-2007, 3% in 2008-2018).62 Should such projections
come through, Sarabia would have the ability not just to pay off its existing debts but also to carry on with
its intended expansion. The projected sustainability of its business, as mapped out in the approved
rehabilitation plan, makes Sarabia’s rehabilitation a more viable option to satisfy the interests of its
stakeholders in the long run as compared to its immediate liquidation.

Third, the interests of Sarabia’s creditors are well-protected.

As correctly perceived by the CA, adequate safeguards are found under the approved rehabilitation plan,
namely: (a) any deficiency in the required minimum payments to creditors based on the presented
amortization schedule shall be paid personally by Sarabia’s stockholders;

(b) the conversion of the advances from stockholders amounting to ₱18,748,306.00 and deferred credits
amounting to ₱42,688,734 as of the December 31, 2002 tentative audited financial statements to
stockholder’s equity was granted;64 (c) all capital expenditures which are over and above what is provided
in the cash flow of the approved rehabilitation plan which will materially affect the cash position of the hotel
but which are deemed necessary in order to maintain the hotel’s competitiveness in the industry shall be
subject to the approval by the Court prior to implementation;65 (d) the formation of Sarabia’s new
management team and the requirement that the latter shall be required to submit a comprehensive business
plan to support the generation of revenues as reported in the Rehabilitation Plan, both short term and long
term;66 (e) the maintenance of all Sarabia’s existing real estate mortgages over hotel properties as
collaterals and securities in favor of BPI until the former’s full and final liquidation of its outstanding loan
obligations with the latter;67 and (f) the reinstatement of the comprehensive surety agreement of Sarabia’s
stockholders regarding the former’s debt to BPI.68 With these terms and conditions69 in place, the
subsisting obligations of Sarabia to its creditors would, more likely than not, be satisfied.

Therefore, based on the above-stated reasons, the Court finds Sarabia’s rehabilitation to be feasible.

ii. Manifest unreasonableness of BPI’s opposition.

Although undefined in the Interim Rules, it may be said that the opposition of a distressed corporation’s
majority creditor is manifestly unreasonable if it counter-proposes unrealistic payment terms and conditions
which would, more likely than not, impede rather than aid its rehabilitation. The unreasonableness becomes
further manifest if the rehabilitation plan, in fact, provides for adequate safeguards to fulfill the majority
creditor’s claims, and yet the latter persists on speculative or unfounded assumptions that his credit would
remain unfulfilled.

While Section 23, Rule 4 of the Interim Rules states that the rehabilitation court shall consider certain
incidents in determining whether the opposition is manifestly unreasonable,70 BPI neither proposes
Sarabia’s liquidation over its rehabilitation nor questions the controlling interest of Sarabia’s shareholders
or owners. It only takes exception to: (a) the imposition of the fixed interest rate of 6.75% p.a. as
recommended by the Receiver and as approved by the courts a quo, proposing that the original escalating
interest rates of 7%, 8%, 10%, 12%, and 14%, over seventeen years be applied instead;71 and (b) the fact
that Sarabia’s misrepresentations in the rehabilitation petition, i.e., that it physically acquired additional
property whereas in fact the increase was mainly due to the recognition of Revaluation Increment and
because of capital expenditures, were not taken into consideration by the courts a quo.72

Anent the first matter, it must be pointed out that oppositions which push for high interests rates are
generally frowned upon in rehabilitation proceedings given that the inherent purpose of a rehabilitation is
to find ways and means to minimize the expenses of the distressed corporation during the rehabilitation
period. It is the objective of a rehabilitation proceeding to provide the best possible framework for the
corporation to gradually regain or achieve a sustainable operating form. Hence, if a creditor, whose interests
remain well-preserved under the existing rehabilitation plan, still declines to accept interests pegged at
reasonable rates during the period of rehabilitation, and, in turn, proposes rates which are largely counter-
productive to the rehabilitation, then it may be said that the creditor’s opposition is manifestly unreasonable.
In this case, the Court finds BPI’s opposition on the approved interest rate to be manifestly unreasonable
considering that: (a) the 6.75% p.a. interest rate already constitutes a reasonable rate of interest which is
concordant with Sarabia’s projected rehabilitation; and (b) on the contrary, BPI’s proposed escalating
interest rates remain hinged on the theoretical assumption of future fluctuations in the market, this
notwithstanding the fact that its interests as a secured creditor remain well-preserved.

The following observations impel the foregoing conclusion: first, the 6.75% p.a. interest rate is actually
higher than BPI’s perceived cost of money as evidenced by its published time deposit rate (for an amount
of ₱5,000,000.00, with a term of 360-364 days) which is only set at 5.5% p.a.; second, the 6.75% p.a. is
also higher than the benchmark ninety one-day commercial paper, which is used by banks to price their
loan averages to 6.4% p.a. in 2005, and has a three-year average rate of 6.57% p.a.; and third, BPI’s
interests as a secured creditor are adequately protected by the maintenance of all Sarabia’s existing real
estate mortgages over its hotel properties as collateral as well as by the reinstatement of the comprehensive
surety agreement of Sarabia’s stockholders, among other terms in the approved rehabilitation plan.

As to the matter of Sarabia’s alleged misrepresentations, records disclose that Sarabia already clarified its
initial statements in its rehabilitation petition by submitting, on its own accord, a supplemental affidavit dated
October 24, 200273 that explains that the increase in its properties and assets was indeed by recognition
of revaluation increment.74 Proceeding from this fact, the CA observed that BPI actually failed to establish
its claimed defects in light of Sarabia’s assertive and forceful explanation that the alleged inaccuracies do
not warrant the dismissal of its petition.75 Thus, absent any compelling reason to disturb the CA's finding
on this score, the Court deems it proper to dismiss BPI's allegations of misrepresentation against Sarabia.

As a final point, BPI claims that Sarabia's projections were "too optimistic," its management was "extremely
incompetent"76 and that it was even forced to pay a pre-termination penalty due to its previous loan with
the Landbank of the Philippines.77 Suffice it to state that bare allegations of fact should not be entet1ained
as they are bereft of any probative value.78 In any event, even if it is assumed that the said allegations are
substantiated by clear and convincing evidence, the Court, absent any cogent basis to proceed otherwise,
remains steadfast in its preclusion to thresh out matters of fact on a Rule 45 petition, as in this case.

All told, Sarabia's rehabilitation plan, as approved and modified by the CA, is hereby sustained. In view of
the foregoing pronouncements, the Court finds it unnecessary to delve on the other ancillary issues as
herein raised.

WHEREFORE, the petition is DENIED. Accordingly, the Decision dated April 24, 2006 and Resolution dated
December 6, 2006 of the Court of Appeals, Cebu City in CA-G.R. CV. No. 81596 are hereby AFFIRMED.

G.R. No. 206528

PHILIPPINE ASSET GROWTH TWO, INC. (Successor-In-Interest of Planters Development Bank) and
PLANTERS DEVELOPMENT BANK,
vs.
FASTECH SYNERGY PHILIPPINES, INC. (Formerly First Asia System Technology, Inc.), FASTECH
MICROASSEMBLY & TEST, INC., FASTECH ELECTRONIQUE, INC., and FASTECH PROPERTIES,
INC

On April 8, 2011, respondents filed a verified Joint Petitions5 for corporate rehabilitation (rehabilitation
petition) before the RTC-Makati, with prayer for the issuance of a Stay or Suspension Order,6 docketed as
SP Case No. M-7130. They claimed that: (a) their business operations and daily affairs are being managed
by the same individuals;7 (b) they share a majority of their common assets;8 and (c) they have common
creditors and common liabilities.9
Among the common creditors listed in the rehabilitation petition was PDB, 10which had earlier filed a
petition 11 for extra judicial foreclosure of mortgage over the two (2) parcels of land, covered by Transfer
Certificate of Title (TCT) Nos. T-45810212 and T-458103 13 and registered in the name of Fastech
Properties (subject properties), 14 listed as common assets of respondents in the rehabilitation petition. 15
The foreclosure sale was held on April 13, 2011, with PDB emerging as the highest bidder. 16 Respondents
claimed that this situation has impacted on their chance to recover from the losses they have suffered over
the years, since the said properties are being used by Fastech Microassembly and Fastech Electronique17
in their business operations, and a source of significant revenue for their owner-lessor, Fastech Properties.
18 Hence, respondents submitted for the court's approval their proposed Rehabilitation Plan, 19 which
sought: (a) a waiver of all accrued interests and penalties; (b) a grace period of two (2) years to pay the
principal amount of respondents' outstanding loans, with the interests accruing during the said period
capitalized as part of the principal, to be paid over a twelve (12)-year period after the grace period; and (c)
an interest rate of four percent (4%) and two percent (2%) per annum (p.a.) for creditors whose credits are
secured by real estate and chattel mortgages, respectively. 20

On April 19, 2011, the RTC-Makati issued a Commencement Order with Stay Order,21 and appointed Atty.
Rosario S. Bernaldo as Rehabilitation Receiver, which the latter subsequently accepted.22

After the initial hearing on May 18, 2011, and the filing of the comments/oppositions on the rehabilitation
petition,23 the RTC-Makati gave due course to the said petition, and, thereafter, referred the same to the
court-appointed Rehabilitation Receiver, who submitted in due time her preliminary report, 24 opining that
respondents may be rehabilitated, considering that their assets appear to be sufficient to cover their
liabilities, but reserved her comment to the Rehabilitation Plan's underlying assumptions, financial goals,
and procedures to accomplish said goals after the submission of a revised rehabilitation plan as directed
by the RTC-Makati, 25 which respondents subsequently complied. 26

After the creditors had filed their respective comments and/or oppositions to the revised Rehabilitation Plan,
and respondents had submitted their consolidated reply27 thereto, the court-appointed Rehabilitation
Receiver submitted her comments,28 opining that respondents may be successfully rehabilitated,
considering the sufficiency of their assets to cover their liabilities and the underlying assumptions, financial
projections and procedures to accomplish said goals in their Rehabilitation Plan.29

The RTC-Makati Ruling

In a Resolution30 dated December 9, 2011, the RTC-Makati dismissed the rehabilitation petition despite
the favorable recommendation of its appointed Rehabilitation Receiver. It found the facts and figures
submitted by respondents to be unreliable in view of the disclaimer of opinion of the independent auditors
who reviewed respondents' 2009 financial statements, 31 which it considered as amounting to a
"straightforward unqualified adverse opinion."32 In the same vein, it did not give credence to the unaudited
2010 financial statements as the same were mere photocopied documents and unsigned by any of
respondents' responsible officers.33 It also observed that respondents added new accounts and/or
deleted/omitted certain accounts.34 Furthermore, it rejected the revised financial projections as the bases
for which were not submitted for its evaluation on the ground of confidentiality. 35

Aggrieved, respondents appealed36 to the CA, with prayer for the issuance of a temporary restraining order
(TRO) and/or a writ of preliminary injunction (WPI), docketed as CA-G.R. SP No. 122836.

The Proceedings Before the CA

In a Resolution dated January 24, 2012, the CA issued a TRO37 so as not to render moot and academic
the case before it in view of PDB 's pending Ex-Parte Petition for Issuance of a Writ of Possession over the
subject properties before the RTC of Biñan, Laguna, docketed as LRC Case No. B-5141.38 Thereafter, the
CA issued a WPI39 on March 22, 2012.
On April 30, 2012, the court-appointed Rehabilitation Receiver submitted a manifestation40 before the CA,
maintaining that the rehabilitation of respondents is viable since the financial projections and procedures
set forth to accomplish the goals in their Rehabilitation Plan are attainable.41

After the creditors and respondents had filed their respective comments and reply to the manifestation, the
CA rendered a Decision 42 dated September 28, 2012 (September 28, 2012 Decision), reversing and
setting aside the RTC-Makati ruling.43 It ruled that the RTC-Makati grievously erred in disregarding the
report/opinion of the Rehabilitation Receiver that respondents may be successfully rehabilitated, despite
being highly qualified to make an opinion on accounting in relation to rehabilitation matters.44 It likewise
observed that the RTC-Makati failed to distinguish the difference between an adverse or negative opinion
and a disclaimer or when an auditor cannot formulate an opinion with exactitude for lack of sufficient data.45
Finally, the CA declared that the Rehabilitation Plan is feasible and should be approved, finding that
respondents would be able to meet their obligations to their creditors within their operating cash profits and
other assets without disrupting their business operations, which will be beneficial to their creditors,
employees, stockholders, and the economy.46

Accordingly, the CA reinstated the rehabilitation petition, approved respondents' Rehabilitation Plan, and
remanded the case to the RTC-Makati to supervise its implementation.1âwphi1 Considering that
respondents' creditors are placed in equal footing as a necessary consequence, it permanently enjoined
PDB from "effecting the foreclosure" of the subject properties during the implementation of the
Rehabilitation Plan.47

Dissatisfied, PDB filed a motion for reconsideration48 which was, however, denied in a Resolution49 dated
March 5, 2013 (March 5, 2013 Resolution).

In the interim, DivinaLaw entered50 its appearance as the new lead counsel of PDB, in collaboration51 and
with the conformity of its counsel of record, Janda Asia & Associates.52 On April 3, 2013, DivinaLaw, on
behalf of petitioner Philippine Asset Growth Two, Inc. (P AGTI), filed a Motion for Substitution of Parties
(motion for substitution),53 averring that PAGTI had acquired PDB 's claims and interests in the instant
case, hence, should be substituted as a party therein.

The Proceedings Before the Court

On April 18, 2013, PAGTI and PDB (petitioners), represented by DivinaLaw, filed the instant petition,
claiming that PDB received a copy of the March 5, 2013 Resolution on April 3, 2013.54

On July 10, 2013, respondents filed their Urgent Motion to Dismiss Petition for Review on Certiorari for
Being Filed Out of Time55 (urgent motion), positing that contrary to petitioners' claim that PDB received
notice of the March 5, 2013 Resolution on April 3, 2013, its counsel, Janda Asia & Associates, already
received a copy of the said resolution on March 12, 2013. Thus, petitioners only had until March 27, 2013
to file a petition for review on certiorari before the Court, and the petition filed on April 18, 2013 was filed
out oftime.56

Meanwhile, the Court required respondents to file their comment57 to the petition, and subsequently
directed petitioners to submit their comment on respondents' urgent motion, and reply to the latter's
comment.58

In their Comment,59 respondents prayed for the dismissal of the petition and reiterated their stand that the
same was filed out of time, arguing that the receipt of the March 5, 2013 Resolution on March 12, 2013 by
Janda Asia & Associates, which remained as collaborating counsel of PDB, binds petitioners and started
the running of the fifteen (15)-day period within which to file a petition for review on certiorari before the
Court. Thus, the petition filed on April 18, 2013 was filed beyond the reglementary period. 60 Respondents
likewise maintained the viability of the rehabilitation plan, which will benefit not only their employees, but
their stockholders, creditors, and the general public.61
For their part, petitioners contended62 that: (a) the date of receipt of petitioners' lead counsel, i.e.,
DivinaLaw's receipt of the March 5, 2013 Resolution, should be the reckoning point of the fifteen (15)-day
period within which to file the instant petition, since only the lead counsel is entitled to service of court
processes,63 citing the case of Home Guaranty Corporation v. R-II Builders,Inc.; 64and (b) the CA erred in
not upholding the dismissal of the rehabilitation petition despite the insufficiency of the Rehabilitation Plan
which was based on financial statements that contained misleading statements, and financial projections
that are mere unfounded assumptions/ speculations. 65

Thereafter, respondents filed a Manifestation and Update (Re: Compliance to [the CA] Decision dated
September 28, 2012)66 before the Court, stating that it had achieved the EBITDA 67 requirement of the
Rehabilitation Plan and made quarterly payments in favor of the bank and non-bank creditors from
December 28, 2014 to September 28, 2015, totalling ₱27,l 19,481.79.68 However, the amount of
₱8,364,836.53 in favor of PDB was not accepted, and is being held by respondents.69

The IssuesBefore the Court

The essential issues for the Court's resolution are: (a) whether or not the petition for review on certiorari
was timely filed; and (b) the Rehabilitation Plan is feasible.

The Court's Ruling

I.

The Court first resolves the procedural issue anent the timeliness of the petition's filing.

It is a long-standing doctrine that where a party is represented by several counsels, notice to one is
sufficient, and binds the said party. 70 Notice to any one of the several counsels on record is equivalent to
notice to all, and such notice starts the running of the period to appeal notwithstanding that the other counsel
on record has not received a copy of the decision or resolution.71

In the present case, PDB was represented by both Janda Asia & Associates and DivinaLaw. It was not
disputed that Janda Asia & Associates, which remained a counsel of record, albeit, as collaborating
counsel, received notice of the CA's March 5, 2013 Resolution on March 12, 2013. As such, it is from this
date, and not from DivinaLaw's receipt of the notice of said resolution on April 3, 2013 that the fifteen (15)-
day period72 to file the petition for review on certiorari before the Court started to run. Hence, petitioners
only had until March 27, 2013 to file a petition for review on certiorari before the Court, and the petition filed
on April 18, 2013 was filed out of time. Notably, there is no showing that the CA had already resolved
PAGTI's motion for substitution; 73 hence, it remained bound by the proceedings and the judgment
rendered against its transferor, PDB. Generally, the failure to perfect an appeal in the manner and within
the period provided for by law renders the decision appealed from final and executory, 74 and beyond the
competence of the Court to review. However, the Court has repeatedly relaxed this procedural rule in the
higher interest of substantial justice. In Barnes v. Padilla,75it was held that:

[A] final and executory judgment can no longer be attacked by any of the parties or be modified, directly or
indirectly, even by the highest court of the land.

However, this Court has relaxed this rule in order to serve substantial justice[,] considering (a) matters of
life, liberty, honor or property, (b) the existence of special or compelling circumstances, (c) the merits of the
case, (d) a cause not entirely attributable to the fault or negligence of the party favored by the suspension
of the rules, (e) a lack of any showing that the review sought is merely frivolous and dilatory, and (f) the
other party will not be unjustly prejudiced thereby. 76

After a meticulous scrutiny of this case, the Court finds that the unjustified rehabilitation of respondents, by
virtue of the CA ruling if so allowed to prevail, warrants the relaxation of the procedural rule violated by
petitioners in the higher interest of substantial justice. The reasons therefor are hereunder explained.
II.

Rehabilitation is statutorily defined under Republic Act No. 10142,77 otherwise known as the "Financial
Rehabilitation and Insolvency Act of 2010" (FRIA), as follows:

Section 4. Definition of Terms. - As used in this Act, the term:

xxxx

(gg) Rehabilitation shall refer to the restoration of the debtor to a condition of successful operation and
solvency, if it is shown that its continuance of operation is economically feasible and its creditors can recover
by way of the present value of payments projected in the plan, more if the debtor continues as a going
concern than if it is immediately liquidated. (Emphasis supplied)

Case law explains that corporate rehabilitation contemplates a continuance of corporate life and activities
in an effort to restore and reinstate the corporation to its former position of successful operation and
solvency, the purpose being to enable the company to gain a new lease on life and allow its creditors to be
paid their claims out of its earnings. 78 Thus, the basic issues in rehabilitation proceedings concern the
viability and desirability of continuing the business operations of the distressed corporation,79 all with a
view of effectively restoring it to a state of solvency or to its former healthy financial condition through the
adoption of a rehabilitation plan.

III.

In the present case, however, the Rehabilitation Plan failed to comply with the minimum requirements, i.e.:
(a) material financial commitments to support the rehabilitation plan; and (b) a proper liquidation analysis,
under Section 18, Rule 3 of the 2008 Rules of Procedure on Corporate Rehabilitation80 (Rules), which
Rules were in force at the time respondents' rehabilitation petition was filed on April 8, 2011:

Section 18. Rehabilitation Plan. - The rehabilitation plan shall include (a) the desired business targets or
goals and the duration and coverage of the rehabilitation; (b) the terms and conditions of such rehabilitation
which shall include the manner of its implementation, giving due regard to the interests of secured creditors
such as, but not limited, to the non-impairment of their security liens or interests; (c) the material financial
commitments to support the rehabilitation plan; (d) the means for the execution of the rehabilitation plan,
which may include debt to equity conversion, restructuring of the debts, dacion en pago or sale or exchange
or any disposition of assets or of the interest of shareholders, partners or members; (e) a liquidation analysis
setting out for each creditor that the present value of payments it would receive under the plan is more than
that which it would receive if the assets of the debtor were sold by a liquidator within a six-month period
from the estimated date of filing of the petition; and (f) such other relevant information to enable a
reasonable investor to make an informed decision on the feasibility of the rehabilitation plan. (Emphases
supplied)

The Court expounds.

A. Lack of Material Financial Commitment

to Support the Rehabilitation Plan.

A material financial commitment becomes significant in gauging the resolve, determination, earnestness,
and good faith of the distressed corporation in financing the proposed rehabilitation plan. This commitment
may include the voluntary undertakings of the stockholders or the would-be investors of the debtor-
corporation indicating their readiness, willingness, and ability to contribute funds or property to guarantee
the continued successful operation of the debtor-corporation during the period of rehabilitation.81

In this case, respondents' Chief Operating Officer, Primo D. Mateo, Jr., in his executed Affidavit of General
Financial Condition82 dated April 8, 2011, averred that respondents will not require the infusion of additional
capital as he, instead, proposed to have all accrued penalties, charges, and interests waived, and a reduced
interest rate prospectively applied to all respondents' obligations, in addition to the implementation of a two
(2)-year grace period.83 Thus, there appears to be no concrete plan to build on respondents' beleaguered
financial position through substantial investments as the plan for rehabilitation appears to be pegged merely
on financial reprieves. Anathema to the true purpose of rehabilitation, a distressed corporation cannot be
restored to its former position of successful operation and regain solvency by the sole strategy of delaying
payments/waiving accrued interests and penalties at the expense of the creditors.

The Court also notes that while respondents have substantial total assets, a large portion of the assets of
Fastech Synergy84 and Fastech Properties85 is comprised of noncurrent assets, 86 such as advances to
affiliates which include Fastech Microassembly, 87 and investment properties which form part of the
common assets of Fastech Properties, Fastech Electronique, and Fastech Microassembly.88 Moreover,
while there is a claim that unnamed customers have made investments by way of consigning production
equipment, and advancing money to fund procurement of various equipment intended to increase
production capacity,89 this can hardly be construed as a material financial commitment which would inspire
confidence that the rehabilitation would turn out to be successful. Case law holds that nothing short of
legally binding investment commitment/s from third parties is required to qualify as a material financial
commitment.90 Here, no such binding investment was presented.

B. Lack of Liquidation Analysis.

Respondents likewise failed to include any liquidation analysis in their Rehabilitation Plan. The total
liquidation assets and the estimated liquidation return to the creditors, as well as the fair market value vis-
a-vis the forced liquidation value of the fixed assets were not shown. As such, the Court could not ascertain
if the petitioning debtor's creditors can recover by way of the present value of payments projected in the
plan, more if the debtor continues as a going concern than if it is immediately liquidated. This is a crucial
factor in a corporate rehabilitation case, which the CA, unfortunately, failed to address.

C. Effect of Non-Compliance.

The failure of the Rehabilitation Plan to state any material financial commitment to support rehabilitation,
as well as to include a liquidation analysis, renders the CA's considerations for approving the same, i.e.,
that: (a) respondents would be able to meet their obligations to their creditors within their operating cash
profits and other assets without disrupting their business operations; (b)the Rehabilitation Receiver's
opinion carries great weight; and (c) rehabilitation will be beneficial for respondents' creditors, employees,
stockholders, and the economy,91 as actually unsubstantiated, and hence, insufficient to decree the
feasibility of respondents' rehabilitation. It is well to emphasize that the remedy of rehabilitation should be
denied to corporations that do not qualify under the Rules. Neither should it be allowed to corporations
whose sole purpose is to delay the enforcement of any of the rights of the creditors.

Even if the Court were to set aside the failure of the Rehabilitation Plan to comply with the fundamental
requisites of material financial commitment to support the rehabilitation and an accompanying liquidation
analysis, a review of the financial documents presented by respondents fails to convince the Court of the
feasibility of the proposed plan.

IV.

The test in evaluating the economic feasibility of the plan was laid down in Bank of the Philippine Islands v.
Sarabia Manor Hotel Corporation92 (Bank of the Philippine Islands), to wit:

In order to determine the feasibility of a proposed rehabilitation plan, it is imperative that a thorough
examination and analysis of the distressed corporation's financial data must be conducted. If the results of
such examination and analysis show that there is a real opportunity to rehabilitate the corporation in view
of the assumptions made and financial goals stated in the proposed rehabilitation plan, then it may be said
that a rehabilitation is feasible. In this accord, the rehabilitation court should not hesitate to allow the
corporation to operate as an on-going concern, albeit under the terms and conditions stated in the approved
rehabilitation plan. On the other hand, if the results of the financial examination and analysis clearly indicate
that there lies no reasonable probability that the distressed corporation could be revived and that liquidation
would, in fact, better subserve the interests of its stakeholders, then it may be said that a rehabilitation
would not be feasible. In such case, the rehabilitation court may convert the proceedings into one for
liquidation.93

In the recent case of Viva Shipping Lines, Inc. v. Keppel Philippines Mining, Jnc.,94the Court took note of
the characteristics of an economically feasible rehabilitation plan as opposed to an infeasible rehabilitation
plan:

Professor Stephanie V. Gomez of the University of the Philippines College of Law suggests specific
characteristics of an economically feasible rehabilitation plan:

a. The debtor has assets that can generate more cash if used in its daily operations than if sold.

b. Liquidity issues can be addressed by a practicable business plan that will generate enough cash to
sustain daily operations.

c. The debtor has a definite source of financing for the proper and full implementation of a Rehabilitation
Plan that is anchored on realistic assumptions and goals.

These requirements put emphasis on liquidity: the cash flow that the distressed corporation will obtain from
rehabilitating its assets and operations. A corporation's assets may be more than its current liabilities, but
some assets may be in the form of land or capital equipment, such as machinery or vessels. Rehabilitation
sees to it that these assets generate more value if used efficiently rather than if liquidated.

On the other hand, this court enumerated the characteristics of a rehabilitation plan that is infeasible:

(a) the absence of a sound and workable business plan;

(b) baseless and unexplained assumptions, targets and goals;

(c) speculative capital infusion or complete lack thereof for the execution of the business plan;

(d) cash flow cannot sustain daily operations; and

(e) negative net worth and the assets are near full depreciation or fully depreciated.

In addition to the tests of economic feasibility, Professor Stephanie V. Gomez also suggests that the
Financial and Rehabilitation and Insolvency Act of 2010 emphasizes on rehabilitation that provides for
better present value recovery for its creditors.

Present value recovery acknowledges that, in order to pave way for rehabilitation, the creditor will not be
paid by the debtor when the credit falls due. The court may order a suspension of payments to set a
rehabilitation plan in motion; in the meantime, the creditor remains unpaid. By the time the creditor is paid,
the financial and economic conditions will have been changed. Money paid in the past has a different value
in the future. It is unfair if the creditor merely receives the face value of the debt. Present value of the credit
takes into account the interest that the amount of money would have earned if the creditor were paid on
time.

Trial courts must ensure that the projected cash flow from a business' rehabilitation plan allows for the
closest present value recovery for its creditors. If the projected cash flow is realistic and allows the
corporation to meet all its obligations, then courts should favor rehabilitation over liquidation. However, if
the projected cash flow is unrealistic, then courts should consider converting the proceedings into that for
liquidation to protect the creditors.95
A perusal of the 2009 audited financial statements shows that respondents' cash operating position96 was
not even enough to meet their maturing obligations. Notably, their current assets were materially lower than
their current liabilities,97 and consisted mostly of advances to related parties in the case of Fastech
Microassembly, Fastech Electronique, and Fastech Properties.98 Moreover, the independent auditors
recognized the absence of available historical or reliable market information to support the assumptions
made by the management to determine the recoverable amount (value in use) of respondents' properties
and equipment.99

On the other hand, respondents' unaudited financial statements for the year 2010, and the months of
February and March 2011 were unaccompanied by any notes or explanation on how the figures were
arrived at. Besides, respondents' cash operating position remained insufficient to meet their maturing
obligations as their current assets are still substantially lower than their current liabilities. 100 The Court
also notes the RTC-Makati's observation that respondents added new accounts and/or deleted/omitted
certain accounts, 101 but failed to explain or justify the same.

Verily, respondents' Rehabilitation Plan should have shown that they have enough serviceable assets to
be able to continue its business operation. In fact, as opposed to this objective, the revised Rehabilitation
Plan still requires "front load Capex spending" to replace common equipment and facility equipment to
ensure sustainability of capacity and capacity robustness, 102 thus, further sacrificing respondents' cash
flow. In addition, the Court is hard-pressed to see the effects of the outcome of the streamlining of
respondents' manufacturing operations on the carrying value of their existing properties and equipment.

In fine, the Rehabilitation Plan and the financial documents submitted in support thereof fail to show the
feasibility of rehabilitating respondents' business.

V.

The CA's reliance on the expertise of the court-appointed Rehabilitation Receiver, who opined that
respondents' rehabilitation is viable, in order to justify its finding that the financial statements submitted
were reliable, overlooks the fact that the determination of the validity and the approval of the rehabilitation
plan is not the responsibility of the rehabilitation receiver, but remains the function of the court. The
rehabilitation receiver's duty prior to the court's approval of the plan is to study the best way to rehabilitate
the debtor, and to ensure that the value of the debtor's properties is reasonably maintained; and after
approval, to implement the rehabilitation plan. 103 Notwithstanding the credentials of the court-appointed
rehabilitation receiver, the duty to determine the feasibility of the rehabilitation of the debtor rests with the
court. While the court may consider the receiver's report favorably recommending the debtor's rehabilitation,
it is not bound thereby if, in its judgment, the debtor's rehabilitation is not feasible.

The purpose of rehabilitation proceedings is not only to enable the company to gain a new lease on life, but
also to allow creditors to be paid their claims from its earnings when so rehabilitated. Hence, the remedy
must be accorded only after a judicious regard of all stakeholders' interests; it is not a one-sided tool that
may be graciously invoked to escape every position of distress. 104 Thus, the remedy of rehabilitation
should be denied to corporations whose insolvency appears to be irreversible and whose sole purpose is
to delay the enforcement of any of the rights of the creditors, which is rendered obvious by: (a)the absence
of a sound and workable business plan; (b)baseless and unexplained assumptions, targets, and goals; and
(c) speculative capital infusion or complete lack thereof for the execution of the business plan, 105 as in
this case.

VI.

In view of all the foregoing, the Court is therefore constrained to grant the instant petition, notwithstanding
the preliminary technical error as above-discussed. A distressed corporation should not be rehabilitated
when the results of the financial examination and analysis clearly indicate that there lies no reasonable
probability that it may be revived, to the detriment of its numerous stakeholders which include not only the
corporation's creditors but also the public at large. In Bank of the Philippine Islands: 106
Recognizing the volatile nature of every business, the rules on corporate rehabilitation have been crafted
in order to give companies sufficient leeway to deal with debilitating financial predicaments in the hope of
restoring or reaching a sustainable operating form if only to best accommodate the various interests of all
its stakeholders, may it be the corporation's stockholders, its creditors, and even the general public. 107

Thus, the higher interest of substantial justice will be better subserved by the reversal of the CA Decision.
Since the rehabilitation petition should not have been granted in the first place, it is of no moment that the
Rehabilitation Plan is currently under implementation. While payments in accordance with the Rehabilitation
Plan were already made, the same were only possible because of the financial reprieves and protracted
payment schedule accorded to respondents, which, as above-intimated, only works at the expense of the
creditors and ultimately, do not meet the true purpose of rehabilitation.

WHEREFORE, the petition is GRANTED. The Decision dated September 28, 2012 and the Resolution
dated March 5, 2013 of the Court of Appeals in CA-G.R. SP No. 122836 are hereby REVERSED and SET
ASIDE. Accordingly, the Joint Petition for corporate rehabilitation filed by respondents Fastech Synergy
Philippines, Inc. (formerly First Asia System Technology, Inc.), Fastech Microassembly & Test, Inc.,
Fastech Electronique, Inc., and Fastech Properties, Inc., before the Regional Trial Court ofMakati City,
Branch 149 in SP Case No. M-7130 is DISMISSED.