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DIVISION
[ GR NO. 141994, Jan 17, 2005 ]
FILIPINAS BROADCASTING NETWORK v. AGO MEDICAL
DECISION
CARPIO, J.:
The Case
This petition for review[1] assails the 4 January 1999 Decision[2] and 26 January 2000 Resolution of the Court of
Appeals in CA-G.R. CV No. 40151. The Court of Appeals affirmed with modification the 14 December 1992
Decision[3] of the Regional Trial Court of Legazpi City, Branch 10, in Civil Case No. 8236. The Court of Appeals
held Filipinas Broadcasting Network, Inc. and its broadcasters Hermogenes Alegre and Carmelo Rima liable
for libel and ordered them to solidarily pay Ago Medical and Educational Center-Bicol Christian College of
Medicine moral damages, attorney's fees and costs of suit.

The Antecedents
"Exposé" is a radio documentary[4] program hosted by Carmelo 'Mel' Rima ("Rima") and Hermogenes 'Jun'
Alegre ("Alegre").[5] Exposé is aired every morning over DZRC-AM which is owned by Filipinas Broadcasting
Network, Inc. ("FBNI"). "Exposé" is heard over Legazpi City, the Albay municipalities and other Bicol areas. [6]

In the morning of 14 and 15 December 1989, Rima and Alegre exposed various alleged complaints from
students, teachers and parents against Ago Medical and Educational Center-Bicol Christian College of
Medicine ("AMEC") and its administrators. Claiming that the broadcasts were defamatory, AMEC and Angelita
Ago ("Ago"), as Dean of AMEC's College of Medicine, filed a complaint for damages [7] against FBNI, Rima and
Alegre on 27 February 1990. Quoted are portions of the allegedly libelous broadcasts:

JUN ALEGRE:
Let us begin with the less burdensome: if you have children taking medical course at AMEC-BCCM, advise
them to pass all subjects because if they fail in any subject they will repeat their year level, taking up all
subjects including those they have passed already. Several students had approached me stating that they had
consulted with the DECS which told them that there is no such regulation. If [there] is no such regulation why
is AMEC doing the same?

xxx
Second: Earlier AMEC students in Physical Therapy had complained that the course is not recognized by
DECS. Xxx
Third: Students are required to take and pay for the subject even if the subject does not have an instructor -
such greed for money on the part of AMEC's administration. Take the subject Anatomy: students would pay
for the subject upon enrolment because it is offered by the school. However there would be no instructor for
such subject. Students would be informed that course would be moved to a later date because the school is
still searching for the appropriate instructor.
xxx

It is a public knowledge that the Ago Medical and Educational Center has survived and has been surviving for
the past few years since its inception because of funds support from foreign foundations. If you will take a look
at the AMEC premises you'll find out that the names of the buildings there are foreign soundings. There is a
McDonald Hall. Why not Jose Rizal or Bonifacio Hall? That is a very concrete and undeniable evidence that
the support of foreign foundations for AMEC is substantial, isn't it? With the report which is the basis of the
expose in DZRC today, it would be very easy for detractors and enemies of the Ago family to stop the flow of
support of foreign foundations who assist the medical school on the basis of the latter's purpose. But if the
purpose of the institution (AMEC) is to deceive students at cross purpose with its reason for being it is possible
for these foreign foundations to lift or suspend their donations temporarily.[8]

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xxx
On the other hand, the administrators of AMEC-BCCM, AMEC Science High School and the AMEC-Institute of
Mass Communication in their effort to minimize expenses in terms of salary are absorbing or continues to
accept "rejects". For example how many teachers in AMEC are former teachers of Aquinas University but
were removed because of immorality? Does it mean that the present administration of AMEC have the total
definite moral foundation from catholic administrator of Aquinas University. I will prove to you my friends,
that AMEC is a dumping ground, garbage, not merely of moral and physical misfits. Probably they only qualify
in terms of intellect. The Dean of Student Affairs of AMEC is Justita Lola, as the family name implies. She is
too old to work, being an old woman. Is the AMEC administration exploiting the very [e]nterprising or
compromising and undemanding Lola? Could it be that AMEC is just patiently making use of Dean Justita
Lola were if she is very old. As in atmospheric situation zero visibility the plane cannot land, meaning she is
very old, low pay follows. By the way, Dean Justita Lola is also the chairman of the committee on scholarship
in AMEC. She had retired from Bicol University a long time ago but AMEC has patiently made use of her.
xxx
MEL RIMA:
xxx My friends based on the expose, AMEC is a dumping ground for moral and physically misfit people. What
does this mean? Immoral and physically misfits as teachers.
May I say I'm sorry to Dean Justita Lola. But this is the truth. The truth is this, that your are no longer fit to
teach. You are too old. As an aviation, your case is zero visibility. Don't insist.
xxx Why did AMEC still absorb her as a teacher, a dean, and chairman of the scholarship committee at
that. The reason is practical cost saving in salaries, because an old person is not fastidious, so long as she
has money to buy the ingredient of beetle juice. The elderly can get by that's why she (Lola) was taken in as
Dean.
xxx
xxx On our end our task is to attend to the interests of students. It is likely that the students would be
influenced by evil. When they become members of society outside of campus will be liabilities rather than
assets. What do you expect from a doctor who while studying at AMEC is so much burdened with
unreasonable imposition? What do you expect from a student who aside from peculiar problems because not
all students are rich in their struggle to improve their social status are even more burdened with false
regulations. xxx[9] (Emphasis supplied)

The complaint further alleged that AMEC is a reputable learning institution. With the supposed exposés, FBNI,
Rima and Alegre "transmitted malicious imputations, and as such, destroyed plaintiffs' (AMEC and Ago)
reputation." AMEC and Ago included FBNI as defendant for allegedly failing to exercise due diligence in the
selection and supervision of its employees, particularly Rima and Alegre.

On 18 June 1990, FBNI, Rima and Alegre, through Atty. Rozil Lozares, filed an Answer [10] alleging that the
broadcasts against AMEC were fair and true. FBNI, Rima and Alegre claimed that they were plainly impelled
by a sense of public duty to report the "goings-on in AMEC, [which is] an institution imbued with public
interest."

Thereafter, trial ensued. During the presentation of the evidence for the defense, Atty. Edmundo Cea,
collaborating counsel of Atty. Lozares, filed a Motion to Dismiss[11] on FBNI's behalf. The trial court denied the
motion to dismiss. Consequently, FBNI filed a separate Answer claiming that it exercised due diligence in the
selection and supervision of Rima and Alegre. FBNI claimed that before hiring a broadcaster, the broadcaster
should (1) file an application; (2) be interviewed; and (3) undergo an apprenticeship and training program after
passing the interview. FBNI likewise claimed that it always reminds its broadcasters to "observe truth, fairness
and objectivity in their broadcasts and to refrain from using libelous and indecent language." Moreover, FBNI
requires all broadcasters to pass the Kapisanan ng mga Brodkaster sa Pilipinas ("KBP") accreditation test and
to secure a KBP permit.

On 14 December 1992, the trial court rendered a Decision[12] finding FBNI and Alegre liable for libel except
Rima. The trial court held that the broadcasts are libelous per se. The trial court rejected the broadcasters'
claim that their utterances were the result of straight reporting because it had no factual basis. The
broadcasters did not even verify their reports before airing them to show good faith. In holding FBNI liable

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for libel, the trial court found that FBNI failed to exercise diligence in the selection and supervision of its
employees.

In absolving Rima from the charge, the trial court ruled that Rima's only participation was when he agreed with
Alegre's exposé. The trial court found Rima's statement within the "bounds of freedom of speech, expression,
and of the press." The dispositive portion of the decision reads:

WHEREFORE, premises considered, this court finds for the plaintiff. Considering the degree of damages
caused by the controversial utterances, which are not found by this court to be really very serious and
damaging, and there being no showing that indeed the enrollment of plaintiff school dropped, defendants
Hermogenes "Jun" Alegre, Jr. and Filipinas Broadcasting Network (owner of the radio station DZRC), are
hereby jointly and severally ordered to pay plaintiff Ago Medical and Educational Center-Bicol Christian
College of Medicine (AMEC-BCCM) the amount of P300,000.00 moral damages, plus P30,000.00
reimbursement of attorney's fees, and to pay the costs of suit.

SO ORDERED. [13] (Emphasis supplied)

Both parties, namely, FBNI, Rima and Alegre, on one hand, and AMEC and Ago, on the other, appealed the
decision to the Court of Appeals. The Court of Appeals affirmed the trial court's judgment with modification.
The appellate court made Rima solidarily liable with FBNI and Alegre. The appellate court denied Ago's claim
for damages and attorney's fees because the broadcasts were directed against AMEC, and not against her.
The dispositive portion of the Court of Appeals' decision reads:

WHEREFORE, the decision appealed from is hereby AFFIRMED, subject to the modification that broadcaster
Mel Rima is SOLIDARILY ADJUDGED liable with FBN[I] and Hermo[g]enes Alegre.

SO ORDERED.[14]
FBNI, Rima and Alegre filed a motion for reconsideration which the Court of Appeals denied in its 26 January
2000 Resolution.

Hence, FBNI filed this petition.[15]

The Ruling of the Court of Appeals

The Court of Appeals upheld the trial court's ruling that the questioned broadcasts are libelous per se and that
FBNI, Rima and Alegre failed to overcome the legal presumption of malice. The Court of Appeals found Rima
and Alegre's claim that they were actuated by their moral and social duty to inform the public of the students'
gripes as insufficient to justify the utterance of the defamatory remarks.

Finding no factual basis for the imputations against AMEC's administrators, the Court of Appeals ruled that the
broadcasts were made "with reckless disregard as to whether they were true or false." The appellate court
pointed out that FBNI, Rima and Alegre failed to present in court any of the students who allegedly complained
against AMEC. Rima and Alegre merely gave a single name when asked to identify the students. According to
the Court of Appeals, these circumstances cast doubt on the veracity of the broadcasters' claim that they were
"impelled by their moral and social duty to inform the public about the students' gripes."

The Court of Appeals found Rima also liable for libel since he remarked that "(1) AMEC-BCCM is a dumping
ground for morally and physically misfit teachers; (2) AMEC obtained the services of Dean Justita Lola to
minimize expenses on its employees' salaries; and (3) AMEC burdened the students with unreasonable
imposition and false regulations."[16]

The Court of Appeals held that FBNI failed to exercise due diligence in the selection and supervision of its
employees for allowing Rima and Alegre to make the radio broadcasts without the proper KBP

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accreditation. The Court of Appeals denied Ago's claim for damages and attorney's fees because the libelous
remarks were directed against AMEC, and not against her. The Court of Appeals adjudged FBNI, Rima and
Alegre solidarily liable to pay AMEC moral damages, attorney's fees and costs of suit.

Issues
FBNI raises the following issues for resolution:
I. WHETHER THE BROADCASTS ARE LIBELOUS;
II. WHETHER AMEC IS ENTITLED TO MORAL DAMAGES;
III. WHETHER THE AWARD OF ATTORNEY'S FEES IS PROPER; and
IV. WHETHER FBNI IS SOLIDARILY LIABLE WITH RIMA AND ALEGRE FOR PAYMENT OF MORAL
DAMAGES, ATTORNEY'S FEES AND COSTS OF SUIT.

The Court's Ruling

We deny the petition.

This is a civil action for damages as a result of the allegedly defamatory remarks of Rima and Alegre against
AMEC.[17] While AMEC did not point out clearly the legal basis for its complaint, a reading of the complaint
reveals that AMEC's cause of action is based on Articles 30 and 33 of the Civil Code. Article 30[18] authorizes
a separate civil action to recover civil liability arising from a criminal offense. On the other hand, Article
33[19] particularly provides that the injured party may bring a separate civil action for damages in cases of
defamation, fraud, and physical injuries. AMEC also invokes Article 19[20] of the Civil Code to justify its claim
for damages. AMEC cites Articles 2176[21] and 2180[22] of the Civil Code to hold FBNI solidarily liable with
Rima and Alegre.
I.
Whether the broadcasts are libelous

A libel[23] is a public and malicious imputation of a crime, or of a vice or defect, real or imaginary, or any act or
omission, condition, status, or circumstance tending to cause the dishonor, discredit, or contempt of a natural
or juridical person, or to blacken the memory of one who is dead.[24]

There is no question that the broadcasts were made public and imputed to AMEC defects or circumstances
tending to cause it dishonor, discredit and contempt. Rima and Alegre's remarks such as "greed for money on
the part of AMEC's administrators"; "AMEC is a dumping ground, garbage of xxx moral and physical misfits";
and AMEC students who graduate "will be liabilities rather than assets" of the society are libelous per
se. Taken as a whole, the broadcasts suggest that AMEC is a money-making institution where physically and
morally unfit teachers abound.

However, FBNI contends that the broadcasts are not malicious. FBNI claims that Rima and Alegre were plainly
impelled by their civic duty to air the students' gripes. FBNI alleges that there is no evidence that ill will or spite
motivated Rima and Alegre in making the broadcasts. FBNI further points out that Rima and Alegre exerted
efforts to obtain AMEC's side and gave Ago the opportunity to defend AMEC and its administrators. FBNI
concludes that since there is no malice, there is no libel.

FBNI's contentions are untenable.

Every defamatory imputation is presumed malicious.[25] Rima and Alegre failed to show adequately their good
intention and justifiable motive in airing the supposed gripes of the students. As hosts of a documentary or
public affairs program, Rima and Alegre should have presented the public issues "free from inaccurate and
misleading information."[26] Hearing the students' alleged complaints a month before the exposé,[27] they had
sufficient time to verify their sources and information. However, Rima and Alegre hardly made a thorough
investigation of the students' alleged gripes. Neither did they inquire about nor confirm the purported

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irregularities in AMEC from the Department of Education, Culture and Sports. Alegre testified that he merely
went to AMEC to verify his report from an alleged AMEC official who refused to disclose any
information. Alegre simply relied on the words of the students "because they were many and not because
there is proof that what they are saying is true."[28] This plainly shows Rima and Alegre's reckless disregard of
whether their report was true or not.

Contrary to FBNI's claim, the broadcasts were not "the result of straight reporting." Significantly, some courts in
the United States apply the privilege of "neutral reportage" in libel cases involving matters of public interest or
public figures. Under this privilege, a republisher who accurately and disinterestedly reports certain defamatory
statements made against public figures is shielded from liability, regardless of the republisher's subjective
awareness of the truth or falsity of the accusation.[29] Rima and Alegre cannot invoke the privilege of neutral
reportage because unfounded comments abound in the broadcasts. Moreover, there is no existing controversy
involving AMEC when the broadcasts were made. The privilege of neutral reportage applies where the
defamed person is a public figure who is involved in an existing controversy, and a party to that controversy
makes the defamatory statement.[30]

However, FBNI argues vigorously that malice in law does not apply to this case. Citing Borjal v. Court of
Appeals,[31] FBNI contends that the broadcasts "fall within the coverage of qualifiedly privileged
communications" for being commentaries on matters of public interest. Such being the case, AMEC should
prove malice in fact or actual malice. Since AMEC allegedly failed to prove actual malice, there is no libel.

FBNI's reliance on Borjal is misplaced. In Borjal, the Court elucidated on the "doctrine of fair comment," thus:

[F]air commentaries on matters of public interest are privileged and constitute a valid defense in an action for
libel or slander. The doctrine of fair comment means that while in general every discreditable imputation
publicly made is deemed false, because every man is presumed innocent until his guilt is judicially proved, and
every false imputation is deemed malicious, nevertheless, when the discreditable imputation is directed against
a public person in his public capacity, it is not necessarily actionable. In order that such discreditable
imputation to a public official may be actionable, it must either be a false allegation of fact or a comment based
on a false supposition. If the comment is an expression of opinion, based on established facts, then it is
immaterial that the opinion happens to be mistaken, as long as it might reasonably be inferred from the
facts.[32] (Emphasis supplied)

True, AMEC is a private learning institution whose business of educating students is "genuinely imbued with
public interest." The welfare of the youth in general and AMEC's students in particular is a matter which the
public has the right to know. Thus, similar to the newspaper articles in Borjal, the subject broadcasts dealt with
matters of public interest. However, unlike in Borjal, the questioned broadcasts are not based on established
facts. The record supports the following findings of the trial court:

xxx Although defendants claim that they were motivated by consistent reports of students and parents against
plaintiff, yet, defendants have not presented in court, nor even gave name of a single student who made the
complaint to them, much less present written complaint or petition to that effect. To accept this defense of
defendants is too dangerous because it could easily give license to the media to malign people and
establishments based on flimsy excuses that there were reports to them although they could not satisfactorily
establish it. Such laxity would encourage careless and irresponsible broadcasting which is inimical to public
interests.

Secondly, there is reason to believe that defendant radio broadcasters, contrary to the mandates of their
duties, did not verify and analyze the truth of the reports before they aired it, in order to prove that they are in
good faith.

Alegre contended that plaintiff school had no permit and is not accredited to offer Physical Therapy
courses. Yet, plaintiff produced a certificate coming from DECS that as of Sept. 22, 1987 or more than 2 years
before the controversial broadcast, accreditation to offer Physical Therapy course had already been given the

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plaintiff, which certificate is signed by no less than the Secretary of Education and Culture herself, Lourdes R.
Quisumbing (Exh. C-rebuttal). Defendants could have easily known this were they careful enough to
verify. And yet, defendants were very categorical and sounded too positive when they made the erroneous
report that plaintiff had no permit to offer Physical Therapy courses which they were offering.

The allegation that plaintiff was getting tremendous aids from foreign foundations like Mcdonald Foundation
prove not to be true also. The truth is there is no Mcdonald Foundation existing. Although a big building of
plaintiff school was given the name Mcdonald building, that was only in order to honor the first missionary in
Bicol of plaintiffs' religion, as explained by Dr. Lita Ago. Contrary to the claim of defendants over the air, not a
single centavo appears to be received by plaintiff school from the aforementioned McDonald Foundation which
does not exist.

Defendants did not even also bother to prove their claim, though denied by Dra. Ago, that when medical
students fail in one subject, they are made to repeat all the other subject[s], even those they have already
passed, nor their claim that the school charges laboratory fees even if there are no laboratories in the
school. No evidence was presented to prove the bases for these claims, at least in order to give semblance of
good faith.

As for the allegation that plaintiff is the dumping ground for misfits, and immoral teachers, defendant[s] singled
out Dean Justita Lola who is said to be so old, with zero visibility already. Dean Lola testified in court last Jan.
21, 1991, and was found to be 75 years old. xxx Even older people prove to be effective teachers like
Supreme Court Justices who are still very much in demand as law professors in their late years. Counsel for
defendants is past 75 but is found by this court to be still very sharp and effective. So is plaintiffs' counsel.

Dr. Lola was observed by this court not to be physically decrepit yet, nor mentally infirmed, but is still alert and
docile.

The contention that plaintiffs' graduates become liabilities rather than assets of our society is a mere
conclusion. Being from the place himself, this court is aware that majority of the medical graduates of plaintiffs
pass the board examination easily and become prosperous and responsible professionals.[33]

Had the comments been an expression of opinion based on established facts, it is immaterial that the opinion
happens to be mistaken, as long as it might reasonably be inferred from the facts. [34] However, the comments
of Rima and Alegre were not backed up by facts. Therefore, the broadcasts are not privileged and remain
libelous per se.

The broadcasts also violate the Radio Code[35] of the Kapisanan ng mga Brodkaster sa Pilipinas, Ink. ("Radio
Code"). Item I(B) of the Radio Code provides:

B. PUBLIC AFFAIRS, PUBLIC ISSUES AND COMMENTARIES

1. x x x
4. Public affairs program shall present public issues free from personal bias, prejudice and inaccurate and
misleading information. x x x Furthermore, the station shall strive to present balanced discussion of issues. x x
x.
xxx
7. The station shall be responsible at all times in the supervision of public affairs, public issues and
commentary programs so that they conform to the provisions and standards of this code.
8. It shall be the responsibility of the newscaster, commentator, host and announcer to protect public interest,
general welfare and good order in the presentation of public affairs and public issues.[36] (Emphasis supplied)

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The broadcasts fail to meet the standards prescribed in the Radio Code, which lays down the code of ethical
conduct governing practitioners in the radio broadcast industry. The Radio Code is a voluntary code of
conduct imposed by the radio broadcast industry on its own members. The Radio Code is a public warranty by
the radio broadcast industry that radio broadcast practitioners are subject to a code by which their conduct are
measured for lapses, liability and sanctions.
The public has a right to expect and demand that radio broadcast practitioners live up to the code of conduct of
their profession, just like other professionals. A professional code of conduct provides the standards for
determining whether a person has acted justly, honestly and with good faith in the exercise of his rights and
performance of his duties as required by Article 19[37] of the Civil Code. A professional code of conduct also
provides the standards for determining whether a person who willfully causes loss or injury to another has
acted in a manner contrary to morals or good customs under Article 21[38] of the Civil Code.

II.
Whether AMEC is entitled to moral damages
FBNI contends that AMEC is not entitled to moral damages because it is a corporation. [39]
A juridical person is generally not entitled to moral damages because, unlike a natural person, it cannot
experience physical suffering or such sentiments as wounded feelings, serious anxiety, mental anguish or
moral shock.[40] The Court of Appeals cites Mambulao Lumber Co. v. PNB, et al.[41] to justify the award of moral
damages. However, the Court's statement in Mambulao that "a corporation may have a good reputation
which, if besmirched, may also be a ground for the award of moral damages" is an obiter dictum.[42]
Nevertheless, AMEC's claim for moral damages falls under item 7 of Article 2219 [43] of the Civil Code. This
provision expressly authorizes the recovery of moral damages in cases of libel, slander or any other form of
defamation. Article 2219(7) does not qualify whether the plaintiff is a natural or juridical person. Therefore, a
juridical person such as a corporation can validly complain for libel or any other form of defamation and claim
for moral damages.[44]
Moreover, where the broadcast is libelous per se, the law implies damages.[45] In such a case, evidence of an
honest mistake or the want of character or reputation of the party libeled goes only in mitigation of
damages.[46] Neither in such a case is the plaintiff required to introduce evidence of actual damages as a
condition precedent to the recovery of some damages.[47] In this case, the broadcasts are libelous per
se. Thus, AMEC is entitled to moral damages.
However, we find the award of P300,000 moral damages unreasonable. The record shows that even though
the broadcasts were libelous per se, AMEC has not suffered any substantial or material damage to its
reputation. Therefore, we reduce the award of moral damages from P300,000 to P150,000.

III.
Whether the award of attorney's fees is proper
FBNI contends that since AMEC is not entitled to moral damages, there is no basis for the award of attorney's
fees. FBNI adds that the instant case does not fall under the enumeration in Article 2208[48] of the Civil Code.
The award of attorney's fees is not proper because AMEC failed to justify satisfactorily its claim for attorney's
fees. AMEC did not adduce evidence to warrant the award of attorney's fees. Moreover, both the trial and
appellate courts failed to explicitly state in their respective decisions the rationale for the award of attorney's
fees.[49] In Inter-Asia Investment Industries, Inc. v. Court of Appeals,[50] we held that:
[I]t is an accepted doctrine that the award thereof as an item of damages is the exception rather than the rule,
and counsel's fees are not to be awarded every time a party wins a suit. The power of the court to award
attorney's fees under Article 2208 of the Civil Code demands factual, legal and equitable justification, without
which the award is a conclusion without a premise, its basis being improperly left to speculation and
conjecture. In all events, the court must explicitly state in the text of the decision, and not only in the decretal
portion thereof, the legal reason for the award of attorney's fees.[51] (Emphasis supplied)
While it mentioned about the award of attorney's fees by stating that it "lies within the discretion of the court
and depends upon the circumstances of each case," the Court of Appeals failed to point out any circumstance
to justify the award.

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IV. Whether FBNI is solidarily liable with Rima and Alegre for moral damages, attorney's fees and costs of suit
FBNI contends that it is not solidarily liable with Rima and Alegre for the payment of damages and attorney's
fees because it exercised due diligence in the selection and supervision of its employees, particularly Rima
and Alegre. FBNI maintains that its broadcasters, including Rima and Alegre, undergo a "very regimented
process" before they are allowed to go on air. "Those who apply for broadcaster are subjected to interviews,
examinations and an apprenticeship program."
FBNI further argues that Alegre's age and lack of training are irrelevant to his competence as a
broadcaster. FBNI points out that the "minor deficiencies in the KBP accreditation of Rima and Alegre do not
in any way prove that FBNI did not exercise the diligence of a good father of a family in selecting and
supervising them." Rima's accreditation lapsed due to his non-payment of the KBP annual fees while Alegre's
accreditation card was delayed allegedly for reasons attributable to the KBP Manila Office. FBNI claims that
membership in the KBP is merely voluntary and not required by any law or government regulation.

FBNI's arguments do not persuade us.

The basis of the present action is a tort. Joint tort feasors are jointly and severally liable for the tort which they
commit.[52] Joint tort feasors are all the persons who command, instigate, promote, encourage, advise,
countenance, cooperate in, aid or abet the commission of a tort, or who approve of it after it is done, if done for
their benefit.[53] Thus, AMEC correctly anchored its cause of action against FBNI on Articles 2176 and 2180 of
the Civil Code.
As operator of DZRC-AM and employer of Rima and Alegre, FBNI is solidarily liable to pay for damages arising
from the libelous broadcasts. As stated by the Court of Appeals, "recovery for defamatory statements
published by radio or television may be had from the owner of the station, a licensee, the operator of the
station, or a person who procures, or participates in, the making of the defamatory statements." [54] An employer
and employee are solidarily liable for a defamatory statement by the employee within the course and scope of
his or her employment, at least when the employer authorizes or ratifies the defamation. [55] In this case, Rima
and Alegre were clearly performing their official duties as hosts of FBNI's radio program Exposé when they
aired the broadcasts. FBNI neither alleged nor proved that Rima and Alegre went beyond the scope of their
work at that time. There was likewise no showing that FBNI did not authorize and ratify the defamatory
broadcasts.
Moreover, there is insufficient evidence on record that FBNI exercised due diligence in
the selection and supervision of its employees, particularly Rima and Alegre. FBNI merely showed that it
exercised diligence in the selection of its broadcasters without introducing any evidence to prove that it
observed the same diligence in the supervision of Rima and Alegre. FBNI did not show how it exercised
diligence in supervising its broadcasters. FBNI's alleged constant reminder to its broadcasters to "observe
truth, fairness and objectivity and to refrain from using libelous and indecent language" is not enough to prove
due diligence in the supervision of its broadcasters. Adequate training of the broadcasters on the industry's
code of conduct, sufficient information on libel laws, and continuous evaluation of the broadcasters'
performance are but a few of the many ways of showing diligence in the supervision of broadcasters.
FBNI claims that it "has taken all the precaution in the selection of Rima and Alegre as broadcasters, bearing
in mind their qualifications." However, no clear and convincing evidence shows that Rima and Alegre
underwent FBNI's "regimented process" of application. Furthermore, FBNI admits that Rima and Alegre had
deficiencies in their KBP accreditation,[56] which is one of FBNI's requirements before it hires a broadcaster.
Significantly, membership in the KBP, while voluntary, indicates the broadcaster's strong commitment to
observe the broadcast industry's rules and regulations. Clearly, these circumstances show FBNI's lack of
diligence in selecting and supervising Rima and Alegre. Hence, FBNI is solidarily liable to pay damages
together with Rima and Alegre.
WHEREFORE, we DENY the instant petition. We AFFIRM the Decision of 4 January 1999 and Resolution of
26 January 2000 of the Court of Appeals in CA-G.R. CV No. 40151 with the MODIFICATION that the award of
moral damages is reduced from P300,000 to P150,000 and the award of attorney's fees is deleted. Costs
against petitioner. SO ORDERED.

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[ G.R. No. L-23893, October 29, 1968 ]

VILLA REY TRANSIT, INC., PLAINTIFF-APPELLANT, VS. EUSEBIO E. FERRER, PANGASINAN
TRANSPORTATION CO., INC., AND PUBLIC SERVICE COMMISSION, DEFENDANTS, EUSEBIO E.
FERRER AND PANGASINAN TRANSPORTATION CO., INC., DEFENDANTS-APPELLANTS.
PANGASINAN TRANSPORTATION CO., INC., THIRD-PARTY PLAINTIFF-APPELLANT, VS. JOSE M.
VILLARAMA, THIRD-PARTY DEFENDANT-APPELLEE.

DECISION
ANGELES, J.:
This is a tri-party appeal from the decision of the Court of First Instance of Manila, Civil Case No. 41845,
declaring null and void the sheriff's sale of two certificates of public convenience in favor of
defendant Eusebio E. Ferrer and the subsequent sale thereof by the latter to
defendant Pangasinan Transportation Co., Inc.; declaring the plaintiff Villa Rey Transit, Inc., to be the lawful
owner of the said certificates of public convenience; and ordering the private defendants, jointly and severally,
to pay to the plaintiff, the sum of P5,000.00 as and for attorney's fees. The case against the PSC was
dismissed.
The rather ramified circumstances of the instant case can best be understood by a chronological narration of
the essential facts, to wit:
Prior to 1959, Jose M. Villarama was an operator of a bus transportation, under the business name of
Villa Rey Transit, pursuant to certificates of public convenience granted him by the Public Service Commission
(PSC, for short) in Cases Nos. 44213 and 104651, which authorized him to operate a total of thirty-two (32)
units on various routes or lines from Pangasinan to Manila, and vice-versa. On January 8, 1959, he sold the
aforementioned two certificates of public convenience to the Pangasinan Transportation Company, Inc.
(otherwise known as Pantranco), for P350,000.00 with the condition, among others, that the seller (Villarama)
"shall not for a period of 10 years from the date of this sale, apply for any TPU service identical or competing
with the buyer."
Barely three months thereafter, or on March 6, 1959, a corporation called Villa Rey Transit, Inc. (which shall be
referred to hereafter as the Corporation) was organized with a capital stock of P500,000.00 divided into 5,000
shares of the par value of P100.00 each; P200,000.00 was the subscribed stock; Natividad R. Villarama (wife
of Jose M. Villarama) was one of the incorporators, and she subscribed for P1,000.00; the balance of
P199,000.00 was subscribed by the brother and sister-in-law of Jose M. Villarama; of the subscribed capital
stock, P105,000.00 was paid to the treasurer of the corporation, who was Natividad R. Villarama.
In less than a month after its registration with the Securities and Exchange Commission (March 10, 1959), the
Corporation, on April 7, 1959, bought five certificates of public convenience, forty-nine buses, tools
and equipment from one Valentin Fernando, for the sum of P249,000.00, of which P100,000.00 was paid upon
the signing of the contract; P50,000.00 was payable upon the final approval of the sale by the PSC;
P49,500.00 one year after the final approval of the sale; and the balance of P50,000.00 "shall be paid by the
BUYER to the different suppliers of the SELLER."
The very same day that the aforementioned contract of sale was executed, the parties thereto immediately
applied with the PSC for its approval, with a prayer for the issuance of a provisional authority in favor of the
vendee Corporation to operate the service therein involved.[1] On May 19, 1959, the PSC granted the
provisional permit prayed for, upon the condition that "it may be modified or revoked by the Commission at any
time, shall be subject to whatever action that may be taken on the basic application and shall be valid only
during the pendency of said application." Before the PSC could take final action on said application for
approval of sale, however, the Sheriff of Manila, on July 7, 1959, levied on two of the five certificates of public
convenience involved therein, namely those issued underPSC cases Nos. 59494 and 63780, pursuant to a writ
of execution issued by the Court of First Instance of Pangasinan in Civil Case No. 13798, in favor
of Eusebio Ferrer, plaintiff, judgment creditor, against Valentin Fernando, defendant, judgment debtor. The
Sheriff made and entered the levy in the records of the PSC. On July 16, 1959, a public sale was conducted
by the Sheriff of the said two certificates of public convenience. Ferrer was the highest bidder, and a certificate
of sale was issued in his name.
Thereafter, Ferrer sold the two certificates of public convenience to Pantranco, and jointly submitted for
approval their corresponding contract of sale to the PSC.[2] Pantranco therein prayed that it be autho-
rized provisionally to operate the service involved in the said two certificates.

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The applications for approval of sale, filed before the PSC, by Fernando and the Corporation, Case No.
124057, and that of Ferrer and Pantranco, Case No. 126278, were scheduled for a joint hearing. In the
meantime, to wit, on July 22, 1959, the PSC issued an order disposing that during the pendency of the cases
and before a final resolution on the aforesaid applications, the Pantranco shall be the one to operate
provisionally the service under the two certificates embraced in the contract bet-
ween Ferrer and Pantranco. The Corporation took issue with this particular ruling of the PSC and elevated the
matter to the Supreme Court,[3] which decreed, after deliberation, that until the issue on the ownership of
the disputed certificates shall have been finally settled by the proper court, the Corporation should be the one
to operate the lines provisionally.
On November 4, 1959, the Corporation filed in the Court of First Instance of Manila, a complaint for
the annulment of the sheriff's sale of the aforesaid two certificates of public convenience (PSC Cases Nos.
59494 and 63780) in favor of the defendant Ferrer, and the subsequent sale thereof by the latter to Pantranco,
against Ferrer, Pantranco and the PSC. The plaintiff Corporation prayed therein that all the orders of the PSC
relative to the parties' dispute over the said certificates be annulled.
In separate answers, the defendants Ferrer and Pantranco averred that the plaintiff Corporation had no valid
title to the certificates in question because the contract pursuant to which it acquired them from Fernando was
subject to a suspensive condition - the approval of the PSC - which has not yet been fulfilled, and,
therefore, the Sheriff's levy and the consequent sale at public auction of the certificates referred to, as well as
the sale of the same by Ferrer to Pantranco, were valid and regular, and vested unto Pantranco, a superior
right thereto.
Pantranco, on its part, filed a third-party complaint against Jose M. Villarana, alleging that Villarama and the
Corporation, are one and the same; that Villarama and/or the Corporation was disqualified from operating the
two certificates in question by virtue of the aforementioned agreement between said Villarama and Pantranco,
which stipulated that Villarama "shall not for a period of 10 years from the date of this sale, apply for any TPU
service identical or competing with the buyer."
Upon the joinder of the issues in both the complaint and third-party complaint, the case was tried, and there-
after decision was rendered in the terms as above stated.
As stated at the beginning, all the parties involved have appealed from the decision. They submitted a joint
record on appeal.
Pantranco disputes the correctness of the decision insofar as it holds that Villa Rey Transit, Inc. (Corporation)
is a distinct and separate entity from Jose M. Villarama; that the restriction clause in the contract of January 8,
1959 between Pantranco and Villarama is null and void, that the Sheriff's sale of July 16, 1959, is likewise null
and void; and the failure to award damages in its favor and against Villarama.
Ferrer, for his part, challenges the decision insofar as it holds that the sheriff's sale is null and void; and the
sale of the two certificates in question by Valentin Fernando to the Corporation, is valid. He also assails the
award of P5,000.00 as attorney's fees in favor of the Corporation, and the failure to award moral damages to
him as prayed for in his counterclaim.
The Corporation, on the other hand, prays for a review of that portion of the decision awarding only P5,000.00
as attorney's fees, and insisting that it is entitled to an award of P100,000.00 by way of exemplary damages.
After a careful study of the facts obtaining in the case, the vital issues to be resolved are: (1) Does the
stipulation between Villarama and Pantranco, as contained in the deed of sale, that the former "SHALL NOT
FOR A PERIOD OF 10 YEARS FROM THE DATE OF THIS SALE, APPLY FOR ANY TPU SERVICE
IDENTICAL OR COMPETING WITH THE BUYER", apply to new lines only or does it include existing lines?;
(2) Assuming that said stipulation covers all kinds of lines, is such stipulation valid and enforceable?; (3) In the
affirmative, that said stipulation is valid, did it bind the Corporation?
For convenience, We propose to discuss the foregoing issues by starting with the last proposition.
The evidence has disclosed that Villarama, albeit was not an incorporator or stockholder of the Corporation,
alleging that he did not become such, because he did not have sufficient funds to invest, his wife, however,
was an incorporator with the least subscribed number of shares, and was elected treasurer of the
Corporation. The finances of the Corporation which, under all concepts in the law, aresupposed to be under
the control and administration of the treasurer keeping them as trust fund for the Corporation, were,
nonetheless, manipulated and disbursed as if they were the private funds of Villarama, in such a way and
extent that Villarama appeared to be the actual owner-treasurer of the business without regard to the rights of

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the stockholders. The following testimony of Villarama,[4] together with the other evidence on record, attests to
that effect:
"Q. - Doctor, I want to go back again to the incorporation of the Villa Rey Transit, Inc. You heard the testimony
presented here by the bank regarding the initial opening deposit of ONE HUNDRED FIVE THOUSAND
PESOS, of which amount Eighty-Five Thousand Pesos was a check drawn by yourself personally. In the
direct examination you told the Court that the reason you drew a check for Eighty-Five Thousand Pesos was
because you and your wife, or your wife, had spent the money of the stockholders given to her for
incorporation. Will you please tell the Honorable Court if you knew at the time your wife was spending the
money to pay debts, you personally know she was spending the money of the incorporators?
"A. - You know my money and my wife's money are one. We never talk about those things.
"Q. - Doctor, your answer then is that since your money and your wife's money are one money and you did not
know when your wife was paying debts with the incorporator's money?
"A. - Because sometimes she uses my money and sometimes the money, given to her she gives to me and I
deposit the money.
"Q. - Actually, aside from your wife, you were also the custodian of some of the incorporators here, in the
beginning?
"A. - Not necessarily, they give to my wife and when my wife hands to me I did not know it belonged to the
incorporators.
"Q. - It supposes then your wife gives you some of the money received by her in her capacity as treasurer of
the corporation?
"A. - Maybe.
"Q. - What did you do with the money, deposit in a regular account?
"A. - Deposit in my account.
"Q. - Of all the money given to your wife, she did not receive any check?
"A. - I do not remember.
"Q. - Is it usual for you, Doctor, to be given Fifty Thousand Pesos without even asking what is this?
x x x x x x x x x x
JUDGE: Reform the question.
"Q. - The subscription of your brother-in-law, Mr. Reyes, is Fifty-Two Thousand Pesos, did your wife give you
Fifty-Two Thousand Pesos?
"A. - I have testified before that sometimes my wife gives me money and I do not know exactly for what."
The evidence further show that the initial cash capitalization of the corporation of P105,000.00 was mostly
financed by Villarama. Of the P105,000.00 deposited in the First National City Bank of New York, representing
the initial paid-up capital of the Corporation, P85,000.00 was covered by Villarama's personal check. The
deposit slip for the said amount of P105,000.00 was admitted in evidence asExh. 23, which shows on its face
that P20,000.00 was paid in cash and P85,000.00 thereof was covered by Check No. F-50271 of the First
National City Bank of New York. The testimonies of Alfonso Sancho[5] and Joaquin Amansec,[6] both
employees of said bank, have proved that the drawer of the check was Jose Villarama himself.
Another witness, Celso Rivera, accountant of the Corporation, testified that while in the books of the
corporation there appears an entry that the treasurer received P95,000.00 as second installment of the paid-in
subscriptions, and, subsequently, also P100,000.00 as the first installment of the offer for second subscriptions
worth P200,000.00 from the original subscribers, yet Villarama directed him (Rivera) to make vouchers
liquidating the sums.[7] Thus, it was made to appear that the P95,000.00 was delivered to Villarama in payment
for equipment purchased from him, and the P100,000.00 was loaned as advances to the stockholders. The
said accountant, however, testified that he was not aware of any amount of money that had actually passed
hands among the parties involved,[8] and actually the only money of the corporation was the P105,000.00
covered by the deposit slip Exh. 23, of which, as mentioned above, P85,000.00 was paid
by Villarama's personal check.
Further, the evidence show that when the Corporation was in its initial months of operation, Villa-
rama purchased and paid with his personal checks Ford trucks for the Corporation. Exhibits 20 and 21

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disclose that the said purchases were paid by Philippine Bank of Commerce Checks Nos. 992618-B and
993621-B, respectively. These checks have been sufficiently established by Fausto Abad, Assistant
Accountant of Manila Trading & Supply Co., from which the trucks were purchased[9] and Aristedes Solano, an
employee of the Philippine Bank of Commerce,[10] as having been drawn by Villarama.
Exhibits 6 to 19 and Exh. 22, which are photostatic copies of ledger entries and vouchers showing
that Villarama had co-mingled his personal funds and transactions with those made in the name of the Cor-
poration, are very illuminating evidence. Villarama has assailed the admissibility of these exhibits, contending
that no evidentiary value whatsoever should be given to them since "they were merely photostatic copies of the
originals, the best evidence being the originals themselves." According to him, at the time Pantranco offered
the said exhibits, it was the most likely possessor of the originals thereof because they were stolen from the
files of the Corporation and onlyPantranco was able to produce the alleged photostat copies thereof.
Section 5 of Rule 130 of the Rules of Court provides for the requisites for the admissibility of secondary
evidence when the original is in the custody of the adverse party, thus: (1) opponent's possession of the
original; (2) reasonable notice to opponent to produce the original; (3) satisfactory proof of its existence; and
(4) failure or refusal of opponent to produce the original in court. [11] Villarama has practically admitted the
second and fourth requisites.[12] As to the third, he admitted their previous existence in the files of the
Corporation and also that he had seen some of them.[13] Regarding the first element, Villarama's theory is that
since even at the time of the issuance of the subpoena duces tecum, the originals were already missing,
therefore, the Corporation was no longer in possession of the same. However,it is not necessary for a party
seeking to introduce secondary evidence to show that the original is in the actual possession of his
adversary. It is enough that the circumstances are such as to indicate that the writing is in his possession or
under his control.
Neither is it required that the party entitled to the custody of the instrument should, on being notified to produce
it, admit having it in his possession.[14] Hence, secondary evidence is admissible where he denies having it in
his possession. The party calling for such evidencemay introduce a copy thereof as in the case of loss. For,
among the exceptions to the best evidence rule is "when the original has been lost, destroyed, or cannot be
produced in court."[15] The originals of the vouchers in question must be deemed to have been lost, as even the
Corporation admits such loss. Viewed upon this light, there can be no doubt as to the admissibility in evidence
of Exhibits 6 to 19 and 22.
Taking account of the foregoing evidence, together with Celso Rivera's testimony,[16] it would Appear
that: Villarama supplied the organization expenses and the assets of the Corporation, such as trucks and
equipments;[17] there was no actual payment by the original subscribers of the amounts of P95,000.00 and
P100,000.00 as appearing in the books;[18] Villarama made use of the money of the Corporation and deposited
them to his private accounts;[19] and the Corporation paid his personal accounts.[20]
Villarama himself admitted that he mingled the corporate funds with his own money.[21] He also admitted that
gasoline purchases of the Corporation were made in his name[22] because "he had existing
account with Stanvac which was properly secured and he wanted the Corporation to benefit from the rebates
that he received."[23]
The foregoing circumstances are strong persuasive evidence showing that Villarama has been too much
involved in the affairs of the Corporation to altogether negative the claim that he was only a part time
general manager. They show beyond doubt that the Corporation is his alter ego.
It is significant that not a single one of the acts enumerated above as proof of Villarama's oneness with the
Corporation has been denied by him. On the contrary, he has admitted them with offered excuses.
Villarama has admitted, for instance, having paid P85,000.00 of the initial capital of the Corporation with the
lame excuse that "his wife had requested him to reimburse the amount entrusted to her by the incorporators
and which she had used to pay the obligations of Dr. Villarama (her husband) incurred while he was still the
owner of Villa Rey Transit, a single proprietorship." But with his admission that he had received P350,000.00
from Pantranco for the sale of the two certificates and one unit,[24] it becomes difficult to
accept Villarama'sexplanation that he and his wife, after consultation,[25] spent the money of their relatives (the
stockholders) when they were supposed to have their own money. Even if Pantranco paid the P350,000.00 in
check to him, as claimed, it could have been easy for Villarama to have deposited said check in his account
and issued his own check to pay his obligations. And there is no evidence adduced that the said amount of
P350,000.00 was all spent or was insufficient to settle his prior obligations in his business, and in the light of
the stipulation in the deed of sale between Villarama and Pantranco that P50,000.00 of the selling price was
earmarked for the payments of accounts due to his creditors, the excuse appears unbelievable.

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On his having paid for purchases by the Corporation of trucks from the Manila Trading & Supply Co. with his
personal checks, his reason was that he was only sharing with the Corporation his credit with
some companies. And his main reason for mingling his funds with that of the Corporation and for the latter's
paying his private bills is that it would be more convenient that he kept the money to be used in paying the
registration fees on time, and since he had loaned money to the Corporation, this would be set-off by the
latter's paying his bills. Villarama admitted, however, that the corporate funds in his possession were not only
for registration fees but for other important obligations which were not specified.[26]
Indeed, while Villarama was not the Treasurer of the Corporation but was, allegedly, only a part-time
Manager,[27] he admitted not only having held the corporate money but that he advanced and lent funds for the
Corporation, and yet there was no Board Resolution allowing it.[28]
Villarama's explanation on the matter of his involvement with the corporate affairs of the Corporation only
renders more credible Pantranco's claim that his control over the corporation, especially in the management
and disposition of its funds, was so extensive and intimate that it is impossible to segregate and identify which
money belonged to whom. The interference of Villarama in the complex affairs of the corporation, and
particularly its finances, are much too inconsistent with the ends and purposes of the Corporation law, which,
precisely, seeks to separate personal responsibilities from corporate undertakings. It is the very essence of
incorporation that the acts and conduct of the corporation be carried out in its own corporate name because it
has its own personality.
The doctrine that a corporation is a legal entity distinct and separate from the members and stockholders who
compose it is recognized and respected in all cases which are within reason and the law. [29] When the fiction is
urged as a means of perpetrating a fraud or an illegal act or as a vehicle for the evasion of an existing
obligation, the circumvention of statutes, the achievement or perfection of a monopoly or generally the
perpetration of knavery or crime,[30] the veil with which the law covers and isolates the corporation from the
members or stockholders who compose it will be lifted to allow for its consideration merely as an aggregation
of individuals.
Upon the foregoing considerations, We are of the opinion, and so hold, that the preponderance of evidence
have shown that the Villa ReyTransit, Inc. is an alter ego of Jose M. Villarama, and that the restrictive clause in
the contract entered into by the latter and Pantranco isalso enforceable and binding against the said
Corporation. For the rule is that a seller or promissor may not make use of a corporate entity as a means of
evading the obligation of his covenant.[31] Where the Corporation is substantially the alter ego of
the covenantor to the restrictive agreement, it can be enjoined from competing with the covenantee.[32]
The Corporation contends that even on the supposition that Villa Rey Transit, Inc. and Villarama are one and
the same, the restrictive clause in the contract between Villarama and Pantranco does not include the
purchase of existing lines but it only applies to application for new lines. The clause in dispute reads thus:
"(4) The SELLER shall not, for a period of ten (10) years from the date of this sale apply for any TPU
service identical or competing with the BUYER." (Underscoring supplied)
As We read the disputed clause, it is evident from the context thereof that the intention of the parties was to
eliminate the seller as a competitor of the buyer for ten years along the lines of operation covered by the
certificates of public convenience subject of their transaction. The word "apply" as broadly used has for
frame of reference, a service by the seller on lines or routes that would compete with the buyer along the
routes acquired by the latter. In this jurisdictions, prior authorization is needed before anyone can operate a
TPU service,[33] whether the service consists in a new line or an old one acquired from a previous
operator. The clear intention of the parties was to prevent the seller from conducting any competitive line for
10 years since, anyway, he has bound himself not to apply for authorization to operate along such lines for the
duration of such period.[34]
If the prohibition is to be applied only to the acquisition of new certificates of public convenience thru an
application with the Public Service Commission, this would, in effect, allow the seller just the same to compete
with the buyer as long as his authority to operate is only acquired thru transfer or sale from a previous
operator, thus defeating the intention of the parties. For what would prevent the seller, under the
circumstances, from having a representative or dummy apply in the latter's name and then later on transferring
the same by sale to the seller? Since stipulations in a contract is the law between the contracting parties,
"Every person must, in the exercise of his rights and in the performance of his duties, act with justice, give
everyone his due, and observe honesty and good faith." (Art. 19, New Civil Code.)

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We are not impressed of Villarama's contention that the re-wording of the two previous drafts of the contract of
sale between Villaramaand Pantranco is significant in that as it now appears, the parties intended to effect the
least restriction. We are persuaded, after an examination of the supposed drafts, that the scope of the final
stipulation, while not as long and prolix as those in the drafts, is just as broad and comprehensive. At most, it
can be said that the re-wording was done merely for brevity and simplicity.
The evident intention behind the restriction was to eliminate the seller as a competitor, and this must be,
considering such factors as the good will[35] that the seller had already gained from the riding public and his
adeptness and proficiency in the trade. On this matter, Corbin, an authority on Contracts, has this to say:[36]
"When one buys the business of another as a going concern, he usually wishes to keep it going; he wishes to
get the location, the building, the stock in trade, and the customers. He wishes to step into the seller's shoes
and to enjoy the same business relations with other men. He is willing to pay much more if he can get the
'good will' of the business, meaning by this the good will of the customers, that they may continue to tread the
old footpath to his doer and maintain with him the business relations enjoyed by the seller.
"x x x In order to be well assured of this, he obtains and pays for the seller's promise not to reopen business in
competition with the business sold."
As to whether or not such a stipulation in restraint of trade is valid, our jurisprudence on the matter[37] says:
"The law concerning contracts which tend to restrain business or trade has gone through a long series of
changes from time to time with the changing condition of trade and commerce, With trifling exceptions, said
changes have been a continuous development of a general rule. The early cases show plainly a disposition to
avoid and annul all contract which prohibited or restrained any one from using a lawful trade 'at any time or at
any place', as being against the benefit of the state. Later; however, the rule became wellestablished that
if the restraint was limited to 'a certain time' and within 'a certain place', such contracts were valid and not
'against the benefit of the state.' Later cases, and we think the rule is now well established, have held that a
contract in restraint of trade is valid providing there is a limitation upon either time or place. A contract,
however, which restrains a man from entering into business or trade without either a limitation as to time or
place, will be held invalid.
"The public welfare of course must always be considered and if it be not involved and the restraint upon one
party is not greater than protection to the other requires, contracts like the one we are discussing will be
sustained. The general tendency, we believe, of modern authority, is to make the test whether the
restraint is reasonably necessary for the protection of the contracting parties. If the contract is reasonably
necessary to protect the interest of the parties, it will be upheld." (Underscoring supplied.)
Analyzing the characteristics of the questioned stipulation, We find that although it is in the nature of an
agreement suppressing competition, it is, however, merely ancillary or incidental to the main agreement which
is that of sale. The suppression or restraint is only partial or limited: first, in scope, it refers only to application
for TPU by the seller in competition with the lines sold to the buyer; second, in duration, it is only for ten (10)
years; and third, with respect to situs or territory, the restraint is only along the lines covered by the certificates
sold. In view of these limitations, coupled with the consideration of P350,000.00 for just two certificates
of public convenience, and considering, furthermore, that the disputed stipulation is only incidental to a
main agreement, the same is reasonable and it is not harmful nor obnoxious to public service.[38] It does not
appear that the ultimate result of the clause or stipulation would be to leave solely to Pantranco the right to
operate along the lines in question, thereby establishing a monopoly or predominance approximating
thereto. We believe the main purpose of the restraint was to protect for a limited time the business of the
buyer.
Indeed, the evils of monopoly, are farfetched here. There can be no danger of price controls or deterioration of
the service because of the close supervision of the Public Service Commission.[39] This Court had stated long
ago,[40] that "when one devotes his property to a use in which the public has an interest, he virtually grants to
the public an interest in that use and submits it to such public use under reasonable rules and regulations to be
fixed by the Public Utility Commission."
Regarding that aspect of the clause that it is merely ancillary or incidental to a lawful agreement, the underlying
reason sustaining its validity is well explained in 36 Am. Jur. 537-539, to wit:
"x x x Numerous authorities hold that a covenant which is incidental to the sale and transfer of a trade or
business, and which purports to bind the seller not to engage in the same business in competition with the
purchaser, is lawful and enforceable. While such covenants are designed to prevent competition on the part of
the seller, it is ordinarily neither their purpose nor effect to stifle competition generally in the locality, nor to

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prevent it at all in a way or to an extent injurious to the public. The business in the hands of the purchaser
is carried on just as it was in the hands of the seller; the former merely takes the place of the latter; the
commodities of the trade are as open to the public as they were before; the same competition exists as existed
before; there is the same employment furnished to others after as before; the profits of the business go as they
did before to swell the sum of public wealth; the public has the same opportunities of purchasing, if it is a
mercantile business; and production is not lessened if it is a manufacturing plant."
The reliance by the lower court on the case of Red Line Transportation Co. v. Bachrach,[41] and finding that the
stipulation is illegal and void seems misplaced. In the said Red Line case, the agreement therein sought to be
enforced was virtually a division of territory between two operators, each company imposing upon itself an
obligation not to operate in any territory covered by the routes of the other. Restraints of this type, among
common carriers, have always been covered by the general rule invalidating agreements in restraint of
trade.[42]
Neither are the other cases relied upon by the plaintiff-appellee applicable to the instant
case. In Pampanga Bus Co. Inc. v. Enriquez,[43]the undertaking of the applicant therein not to apply for the
lifting of restrictions imposed on his certificates of public convenience was not an ancillary or incidental agree-
ment. The restraint was the principal objective. On the other hand, in Red Line Transportation Co. Inc.
v. Gonzaga,[44] the restraint there in question not to ask for extension of the line, or trips, or increase of
equipment - was not an agreement between the parties but a condition imposed in the certificate of public
convenience itself.
Upon the foregoing considerations, Our conclusion is that the stipulation prohibiting Villarama for a period of 10
years to "apply" for TPU service along the lines covered by the certificates of public convenience sold by
him to Pantranco is valid and reasonable. Having arrived at this conclusion, and considering that the
preponderance of the evidence have shown that Villa Rey Transit, Inc. is itself the alter ego of Villarama, We
hold, as prayed for in Pantranco's third party complaint, that the said Corporation should, until the expiration of
the 1-year period abovementioned, be enjoined from operating the lines subject of the prohibition.
To avoid any misunderstanding, it is here to be emphasized that the 10year prohibition upon Villarama is not
against his application for, or purchase of, certificates of public convenience, but merely the operation of TPU
along the lines covered by the certificates sold by him to Pantranco. Consequently, the sale between
Fernando and the Corporation is valid, such that the rightful ownership of the disputed certificates still belongs
to the plaintiff being the prior purchaser in good faith and for value thereof. In view of the ancient rule
of caveat emptorprevailing in this jurisdiction, what was acquired by Ferrer in the sheriff's sale was only the
right which Fernando, judgment debtor, had in the certificates of public convenience on the day of the sale. [45]
Accordingly, by the "Notice of Levy Upon Personalty" the Commissioner of Public Service was notified that "by
virtue of an Order of Execution issued by the Court of First Instance of Pangasinan, the rights, interests, or
participation which the defendant, VALENTIN A. FERNANDO - in the above entitled case may have in the
following realty/personalty is attached or levied upon, to wit: The rights, interests and participation on the
Certificates of Public Convenience issued to Valentin A. Fernando, in Cases Nos. 59494, etc. x x x Lines -
Manila to Lingayen, Dagupan, etc. vice versa." Such notice of levy only shows that Ferrer, the vendee at
auction of said certificates, merely stepped into the shoes of the judgment debtor. Of the same principle is the
provision of Article 1544 of the Civil Code, that "If the same thing should have been sold to different vendees,
the ownership shall be transferred to the person who may have first taken possession thereof in good faith, if it
should be movable property."
There is no merit in Pantrenco and Ferrer's theory that the sale of the certificates of public convenience in
question, between the Corporation and Fernando, was not consummated, it being only a conditional sale
subject to the suspensive condition of its approval by the Public Service Commission. While section 20(g) of
the Public Service Act provides that "subject to established limitation and exceptions and saving provisions to
the contrary, it shall be unlawful for any public service or for the owner, lessee or operator thereof, without the
approval and authorization of the Commission previously had x x x to sell, alienate, mortgage, encumber or
lease its property, franchise, certificates, privileges, or rights or any part thereof, x x x," the same section also
provides:
"x x x Provided, however, That nothing herein contained shall be construed to prevent the transaction from
being negotiated or completed before its approval or to prevent the sale, alienation, or lease by any public
service of any of its property in the ordinary course of its business."
It is clear, therefore, that the requisite approval of the PSC is not a condition precedent for the validity and
consummation of the sale.

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Anent the question of damages allegedly suffered by the parties, each of the appellants has its or his own
version to allege.
Villa Rey Transit, Inc. claims that by virtue of the "tortious acts" of defendants (Pantranco and Ferrer) in
acquiring the certificates of public convenience in question, despite constructive and actual knowledge on their
part of a prior sale executed by Fernando in favor of the said corporation, which necessitated the latter to file
the action to annul the sheriff's sale to Ferrer and the subsequent transfer to Pantranco, it is entitled to collect
actual and compensatory damages, and attorney's fees in the amount of P25,000.00. The evidence on record,
however, does not clearly show that said defendants acted in bad faith in their acquisition of the certificates in
question. They believed that because the bill of sale has yet to be approved by the Public Service
Commission, the transaction was not a consummated sale, and, therefore, the title to or ownership of the
certificates was still with the seller. The award by the lower court of attorney's fees of P5,000.00 in favor of
Villa Rey Transit, Inc. is, therefore, without basis and should be set aside.
Eusebio Ferrer's charge that by reason of the filing of the action to annul the sheriff's sale, he had suffered and
should be awarded moral, exemplary damages and attorney's fees, cannot be entertained, in view of the
conclusion herein reached that the sale by Fernando to the Corporation was valid.
Pantranco, on the other hand, justifies its claim for damages with the allegation that when it
purchased Villarama's business for P350,000.00, it intended to build up the traffic along the lines covered by
the certificates but it was not afforded an opportunity to do so since barely three months had elapsed when the
contract was violated by Villarama operating along the same lines in the name of Villa ReyTransit, Inc. It is
further claimed by Pantranco that the underhanded manner in which Villarama violated the contract is pertinent
in establishing punitive or moral damages. Its contention as to the proper measure of damages is that it should
be the purchase price of P350,000.00 that it paid to Villarama. While We are fully in accord
with Pantranco's claim of entitlement to damages it suffered as a result of Villarama's breach of his contract
with it, the record does not sufficiently supply the necessary evidentiary materials upon which to base the
award and there is need for further proceedings in the lower court to ascertain the proper amount.
PREMISES CONSIDERED, the judgment appealed from is hereby modified as follows:
1. The sale of the two certificates of public convenience in question by Valentin Fernando to
Villa Rey Transit, Inc. is declared preferred over that made by the Sheriff at public auction of the aforesaid
certificate of public convenience in favor of Eusebio Ferrer;
2. Reversed, insofar as it dismisses the third-party complaint filed by Pangasinan Transportation Co. against
Jose M. Villarama, holding that Villa Rey Transit, Inc. is an entity distinct and separate from the personality of
Jose M. Villarama, and insofar as it awards the sum ofP5,000.00 as attorney's fees in favor of
Villa Rey Transit, Inc.;
3. The case is remanded to the trial court for the reception of evidence in consonance with the above findings
as regards the amount of damages suffered by Pantranco; and
4. On equitable considerations, without cots. So ordered.

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SECOND DIVISION
[ G.R. No. 100812, June 25, 1999 ]
FRANCISCO MOTORS CORPORATION, PETITIONER, VS. COURT OF APPEALS AND SPOUSES
GREGORIO AND LIBRADA MANUEL, RESPONDENTS.

DECISION
QUISUMBING, J.:
This petition for review on certiorari, under Rule 45 of the Rules of Court, seeks to annul the decision[1] of the
Court of Appeals in C.A. G.R. CV No. 10014 affirming the decision rendered by Branch 135, Regional Trial
Court of Makati, Metro Manila. The procedural antecedents of this petition are as follows:

On January 23, 1985, petitioner filed a complaint[2] against private respondents to recover three thousand four
hundred twelve and six centavos (P3,412.06), representing the balance of the jeep body purchased by the
Manuels from petitioner; an additional sum of twenty thousand four hundred fifty-four and eighty centavos
(P20,454.80) representing the unpaid balance on the cost of repair of the vehicle; and six thousand pesos
(P6,000.00) for cost of suit and attorney's fees.[3] To the original balance on the price of jeep body were added
the costs of repair.[4] In their answer, private respondents interposed a counterclaim for unpaid legal services
by Gregorio Manuel in the amount of fifty thousand pesos (P50,000) which was not paid by the incorporators,
directors and officers of the petitioner. The trial court decided the case on June 26, 1985, in favor of petitioner
in regard to the petitioner's claim for money, but also allowed the counter-claim of private respondents. Both
parties appealed. On April 15, 1991, the Court of Appeals sustained the trial court's decision. [5] Hence, the
present petition.

For our review in particular is the propriety of the permissive counterclaim which private respondents filed
together with their answer to petitioner's complaint for a sum of money. Private respondent Gregorio Manuel
alleged as an affirmative defense that, while he was petitioner's Assistant Legal Officer, he represented
members of the Francisco family in the intestate estate proceedings of the late Benita Trinidad. However, even
after the termination of the proceedings, his services were not paid. Said family members, he said, were also
incorporators, directors and officers of petitioner. Hence to counter petitioner's collection suit, he filed a
permissive counterclaim for the unpaid attorney's fees.[6]

For failure of petitioner to answer the counterclaim, the trial court declared petitioner in default on this score,
and evidence ex-parte was presented on the counterclaim. The trial court ruled in favor of private respondents
and found that Gregorio Manuel indeed rendered legal services to the Francisco family in Special Proceedings
Number 7803- "In the Matter of Intestate Estate of Benita Trinidad". Said court also found that his legal
services were not compensated despite repeated demands, and thus ordered petitioner to pay him the amount
of fifty thousand (P50,000.00) pesos.[7]
Dissatisfied with the trial court's order, petitioner elevated the matter to the Court of Appeals, posing the
following issues:

"I.WHETHER OR NOT THE DECISION RENDERED BY THE LOWER COURT IS NULL AND VOID AS IT
NEVER ACQUIRED JURISDICTION OVER THE PERSON OF THE DEFENDANT.

II.WHETHER OR NOT PLAINTIFF-APPELLANT NOT BEING A REAL PARTY IN THE ALLEGED

PERMISSIVE COUNTERCLAIM SHOULD BE HELD LIABLE TO THE CLAIM OF DEFENDANT-APPELLEES.

III.WHETHER OR NOT THERE IS FAILURE ON THE PART OF PLAINTIFF-APPELLANT TO ANSWER THE

ALLEGED PERMISSIVE COUNTERCLAIM."[8]
Petitioner contended that the trial court did not acquire jurisdiction over it because no summons was validly
served on it together with the copy of the answer containing the permissive counterclaim. Further, petitioner
questions the propriety of its being made party to the case because it was not the real party in interest but the
individual members of the Francisco family concerned with the intestate case.

In its assailed decision now before us for review, respondent Court of Appeals held that a counterclaim must
be answered in ten (10) days, pursuant to Section 4, Rule 11, of the Rules of Court; and nowhere does it state
in the Rules that a party still needed to be summoned anew if a counterclaim was set up against him. Failure to
Page 17 of 34
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serve summons, said respondent court, did not effectively negate trial court's jurisdiction over petitioner in the
matter of the counterclaim. It likewise pointed out that there was no reason for petitioner to be excused from
answering the counterclaim. Court records showed that its former counsel, Nicanor G. Alvarez, received the
copy of the answer with counterclaim two (2) days prior to his withdrawal as counsel for petitioner. Moreover
when petitioner's new counsel, Jose N. Aquino, entered his appearance, three (3) days still remained within
the period to file an answer to the counterclaim. Having failed to answer, petitioner was correctly considered in
default by the trial court.[9] Even assuming that the trial court acquired no jurisdiction over petitioner,
respondent court also said, but having filed a motion for reconsideration seeking relief from the said order of
default, petitioner was estopped from further questioning the trial court's jurisdiction.[10]

On the question of its liability for attorney's fees owing to private respondent Gregorio Manuel, petitioner
argued that being a corporation, it should not be held liable therefor because these fees were owed by the
incorporators, directors and officers of the corporation in their personal capacity as heirs of Benita Trinidad.
Petitioner stressed that the personality of the corporation, vis-à-vis the individual persons who hired the
services of private respondent, is separate and distinct,[11] hence, the liability of said individuals did not become
an obligation chargeable against petitioner.

Nevertheless, on the foregoing issue, the Court of Appeals ruled as follows:

"However, this distinct and separate personality is merely a fiction created by law for convenience and to
promote justice. Accordingly, this separate personality of the corporation may be disregarded, or the veil of
corporate fiction pierced, in cases where it is used as a cloak or cover for found (sic) illegality, or to work an
injustice, or where necessary to achieve equity or when necessary for the protection of creditors. (Sulo ng
Bayan, Inc. vs. Araneta, Inc., 72 SCRA 347) Corporations are composed of natural persons and the legal
fiction of a separate corporate personality is not a shield for the commission of injustice and inequity.
(Chemplex Philippines, Inc. vs. Pamatian, 57 SCRA 408)

"In the instant case, evidence shows that the plaintiff-appellant Francisco Motors Corporation is composed of
the heirs of the late Benita Trinidad as directors and incorporators for whom defendant Gregorio Manuel
rendered legal services in the intestate estate case of their deceased mother. Considering the aforestated
principles and circumstances established in this case, equity and justice demands plaintiff-appellant's veil of
corporate identity should be pierced and the defendant be compensated for legal services rendered to the
heirs, who are directors of the plaintiff-appellant corporation."[12]
Now before us, petitioner assigns the following errors:
"I.THE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE OF PIERCING THE VEIL OF
CORPORATE ENTITY.
II.THE COURT OF APPEALS ERRED IN AFFIRMING THAT THERE WAS JURISDICTION OVER
PETITIONER WITH RESPECT TO THE COUNTERCLAIM."[13]
Petitioner submits that respondent court should not have resorted to piercing the veil of corporate fiction
because the transaction concerned only respondent Gregorio Manuel and the heirs of the late Benita Trinidad.
According to petitioner, there was no cause of action by said respondent against petitioner; personal concerns
of the heirs should be distinguished from those involving corporate affairs. Petitioner further contends that the
present case does not fall among the instances wherein the courts may look beyond the distinct personality of
a corporation. According to petitioner, the services for which respondent Gregorio Manuel seeks to collect fees
from petitioner are personal in nature. Hence, it avers the heirs should have been sued in their personal
capacity, and not involve the corporation.[14]
With regard to the permissive counterclaim, petitioner also insists that there was no proper service of the
answer containing the permissive counterclaim. It claims that the counterclaim is a separate case which can
only be properly served upon the opposing party through summons. Further petitioner states that by nature, a
permissive counterclaim is one which does not arise out of nor is necessarily connected with the subject of the
opposing party's claim. Petitioner avers that since there was no service of summons upon it with regard to the
counterclaim, then the court did not acquire jurisdiction over petitioner. Since a counterclaim is considered an
action independent from the answer, according to petitioner, then in effect there should be two simultaneous
actions between the same parties: each party is at the same time both plaintiff and defendant with respect to
the other,[15] requiring in each case separate summonses.

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In their Comment, private respondents focus on the two questions raised by petitioner. They defend the
propriety of piercing the veil of corporate fiction, but deny the necessity of serving separate summonses on
petitioner in regard to their permissive counterclaim contained in the answer.

Private respondents maintain both trial and appellate courts found that respondent Gregorio Manuel was
employed as assistant legal officer of petitioner corporation, and that his services were solicited by the
incorporators, directors and members to handle and represent them in Special Proceedings No. 7803,
concerning the Intestate Estate of the late Benita Trinidad. They assert that the members of petitioner
corporation took advantage of their positions by not compensating respondent Gregorio Manuel after the
termination of the estate proceedings despite his repeated demands for payment of his services. They cite
findings of the appellate court that support piercing the veil of corporate identity in this particular case. They
assert that the corporate veil may be disregarded when it is used to defeat public convenience, justify wrong,
protect fraud, and defend crime. It may also be pierced, according to them, where the corporate entity is being
used as an alter ego, adjunct, or business conduit for the sole benefit of the stockholders or of another
corporate entity. In these instances, they aver, the corporation should be treated merely as an association of
individual persons.[16]

Private respondents dispute petitioner's claim that its right to due process was violated when respondents'
counterclaim was granted due course, although no summons was served upon it. They claim that no provision
in the Rules of Court requires service of summons upon a defendant in a counterclaim. Private respondents
argue that when the petitioner filed its complaint before the trial court it voluntarily submitted itself to the
jurisdiction of the court. As a consequence, the issuance of summons on it was no longer necessary. Private
respondents say they served a copy of their answer with affirmative defenses and counterclaim on petitioner's
former counsel, Nicanor G. Alvarez. While petitioner would have the Court believe that respondents served
said copy upon Alvarez after he had withdrawn his appearance as counsel for the petitioner, private
respondents assert that this contention is utterly baseless. Records disclose that the answer was received two
(2) days before the former counsel for petitioner withdrew his appearance, according to private respondents.
They maintain that the present petition is but a form of dilatory appeal, to set off petitioner's obligations to the
respondents by running up more interest it could recover from them. Private respondents therefore claim
damages against petitioner.[17]
To resolve the issues in this case, we must first determine the propriety of piercing the veil of corporate fiction.

Basic in corporation law is the principle that a corporation has a separate personality distinct from its
stockholders and from other corporations to which it may be connected.[18] However, under the doctrine of
piercing the veil of corporate entity, the corporation's separate juridical personality may be disregarded, for
example, when the corporate identity is used to defeat public convenience, justify wrong, protect fraud, or
defend crime. Also, where the corporation is a mere alter ego or business conduit of a person, or where the
corporation is so organized and controlled and its affairs are so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another corporation, then its distinct personality may be
ignored.[19] In these circumstances, the courts will treat the corporation as a mere aggrupation of persons and
the liability will directly attach to them. The legal fiction of a separate corporate personality in those cited
instances, for reasons of public policy and in the interest of justice, will be justifiably set aside.

In our view, however, given the facts and circumstances of this case, the doctrine of piercing the corporate veil
has no relevant application here. Respondent court erred in permitting the trial court's resort to this doctrine.
The rationale behind piercing a corporation's identity in a given case is to remove the barrier between the
corporation from the persons comprising it to thwart the fraudulent and illegal schemes of those who use the
corporate personality as a shield for undertaking certain proscribed activities. However, in the case at bar,
instead of holding certain individuals or persons responsible for an alleged corporate act, the situation has
been reversed. It is the petitioner as a corporation which is being ordered to answer for the personal liability of
certain individual directors, officers and incorporators concerned. Hence, it appears to us that the doctrine has
been turned upside down because of its erroneous invocation. Note that according to private respondent
Gregorio Manuel his services were solicited as counsel for members of the Francisco family to represent them
in the intestate proceedings over Benita Trinidad's estate. These estate proceedings did not involve any
business of petitioner.
Note also that he sought to collect legal fees not just from certain Francisco family members but also from
petitioner corporation on the claims that its management had requested his services and he acceded thereto

Page 19 of 34
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as an employee of petitioner from whom it could be deduced he was also receiving a salary. His move to
recover unpaid legal fees through a counterclaim against Francisco Motors Corporation, to offset the unpaid
balance of the purchase and repair of a jeep body could only result from an obvious misapprehension that
petitioner's corporate assets could be used to answer for the liabilities of its individual directors, officers, and
incorporators. Such result if permitted could easily prejudice the corporation, its own creditors, and even other
stockholders; hence, clearly inequitous to petitioner.
Furthermore, considering the nature of the legal services involved, whatever obligation said incorporators,
directors and officers of the corporation had incurred, it was incurred in their personal capacity. When directors
and officers of a corporation are unable to compensate a party for a personal obligation, it is far-fetched to
allege that the corporation is perpetuating fraud or promoting injustice, and be thereby held liable therefor by
piercing its corporate veil. While there are no hard and fast rules on disregarding separate corporate identity,
we must always be mindful of its function and purpose. A court should be careful in assessing the milieu where
the doctrine of piercing the corporate veil may be applied. Otherwise an injustice, although unintended, may
result from its erroneous application.
The personality of the corporation and those of its incorporators, directors and officers in their personal
capacities ought to be kept separate in this case. The claim for legal fees against the concerned individual
incorporators, officers and directors could not be properly directed against the corporation without violating
basic principles governing corporations. Moreover, every action --including a counterclaim -- must be
prosecuted or defended in the name of the real party in interest.[20] It is plainly an error to lay the claim for legal
fees of private respondent Gregorio Manuel at the door of petitioner (FMC) rather than individual members of
the Francisco family.
However, with regard to the procedural issue raised by petitioner's allegation, that it needed to be summoned
anew in order for the court to acquire jurisdiction over it, we agree with respondent court's view to the contrary.
Section 4, Rule 11 of the Rules of Court provides that a counterclaim or cross-claim must be answered within
ten (10) days from service. Nothing in the Rules of Court says that summons should first be served on the
defendant before an answer to counterclaim must be made. The purpose of a summons is to enable the court
to acquire jurisdiction over the person of the defendant. Although a counterclaim is treated as an entirely
distinct and independent action, the defendant in the counterclaim, being the plaintiff in the original complaint,
has already submitted to the jurisdiction of the court. Following Rule 9, Section 3 of the 1997 Rules of Civil
Procedure,[21] if a defendant (herein petitioner) fails to answer the counterclaim, then upon motion of plaintiff,
the defendant may be declared in default. This is what happened to petitioner in this case, and this Court finds
no procedural error in the disposition of the appellate court on this particular issue. Moreover, as noted by the
respondent court, when petitioner filed its motion seeking to set aside the order of default, in effect it submitted
itself to the jurisdiction of the court. As well said by respondent court:
"Further on the lack of jurisdiction as raised by plaintiff-appellant[,] [t]he records show that upon its request,
plaintiff-appellant was granted time to file a motion for reconsideration of the disputed decision. Plaintiff-
appellant did file its motion for reconsideration to set aside the order of default and the judgment rendered on
the counterclaim.

"Thus, even if the court acquired no jurisdiction over plaintiff-appellant on the counterclaim, as it vigorously
insists, plaintiff-appellant is considered to have submitted to the court's jurisdiction when it filed the motion for
reconsideration seeking relief from the court. (Soriano vs. Palacio, 12 SCRA 447). A party is estopped from
assailing the jurisdiction of a court after voluntarily submitting himself to its jurisdiction. (Tejones vs. Gironella,
159 SCRA 100). Estoppel is a bar against any claims of lack of jurisdiction. (Balais vs. Balais, 159 SCRA
37)."[22]
WHEREFORE, the petition is hereby GRANTED and the assailed decision is hereby REVERSED insofar only
as it held Francisco Motors Corporation liable for the legal obligation owing to private respondent Gregorio
Manuel; but this decision is without prejudiceto his filing the proper suit against the concerned members of
the Francisco family in their personal capacity. No pronouncement as to costs.

SO ORDERED.

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FIRST DIVISION
[ G.R. No. 167530, March 13, 2013 ]
PHILIPPINE NATIONAL BANK, PETITIONER, VS. HYDRO RESOURCES CONTRACTORS
CORPORATION, RESPONDENT.

[G.R. NO. 167561]

ASSET PRIVATIZATION TRUST, PETITIONER, VS. HYDRO RESOURCES CONTRACTORS

CORPORATION, RESPONDENT.

[G.R. NO. 167603]

DEVELOPMENT BANK OF THE PHILIPPINES, PETITIONER, VS. HYDRO RESOURCES CONTRACTORS

CORPORATION, RESPONDENT.

DECISION
LEONARDO-DE CASTRO, J.:
These petitions for review on certiorari[1] assail the Decision[2] dated November 30, 2004 and the
Resolution[3] dated March 22, 2005 of the Court of Appeals in CA-G.R. CV No. 57553. The said Decision
affirmed the Decision[4] dated November 6, 1995 of the Regional Trial Court (RTC) of Makati City, Branch 62,
granting a judgment award of P8,370,934.74, plus legal interest, in favor of respondent Hydro Resources
Contractors Corporation (HRCC) with the modification that the Privatization and Management Office (PMO),
successor of petitioner Asset Privatization Trust (APT),[5] has been held solidarily liable with Nonoc Mining and
Industrial Corporation (NMIC)[6]and petitioners Philippine National Bank (PNB) and Development Bank of the
Philippines (DBP), while the Resolution denied reconsideration separately prayed for by PNB, DBP, and APT.

Sometime in 1984, petitioners DBP and PNB foreclosed on certain mortgages made on the properties of
Marinduque Mining and Industrial Corporation (MMIC). As a result of the foreclosure, DBP and PNB acquired
substantially all the assets of MMIC and resumed the business operations of the defunct MMIC by organizing
NMIC.[7] DBP and PNB owned 57% and 43% of the shares of NMIC, respectively, except for five qualifying
shares.[8] As of September 1984, the members of the Board of Directors of NMIC, namely, Jose Tengco, Jr.,
Rolando Zosa, Ruben Ancheta, Geraldo Agulto, and Faustino Agbada, were either from DBP or PNB.[9]

Subsequently, NMIC engaged the services of Hercon, Inc., for NMIC's Mine Stripping and Road Construction
Program in 1985 for a total contract price of P35,770,120. After computing the payments already made by
NMIC under the program and crediting the NMIC's receivables from Hercon, Inc., the latter found that NMIC
still has an unpaid balance of P8,370,934.74.[10] Hercon, Inc. made several demands on NMIC, including a
letter of final demand dated August 12, 1986, and when these were not heeded, a complaint for sum of money
was filed in the RTC of Makati, Branch 136 seeking to hold petitioners NMIC, DBP, and PNB solidarily liable for
the amount owing Hercon, Inc.[11] The case was docketed as Civil Case No. 15375.

Subsequent to the filing of the complaint, Hercon, Inc. was acquired by HRCC in a merger. This prompted the
amendment of the complaint to substitute HRCC for Hercon, Inc. [12]

Thereafter, on December 8, 1986, then President Corazon C. Aquino issued Proclamation No. 50 creating the
APT for the expeditious disposition and privatization of certain government corporations and/or the assets
thereof. Pursuant to the said Proclamation, on February 27, 1987, DBP and PNB executed their respective
deeds of transfer in favor of the National Government assigning, transferring and conveying certain assets and
liabilities, including their respective stakes in NMIC.[13] In turn and on even date, the National Government
transferred the said assets and liabilities to the APT as trustee under a Trust Agreement.[14] Thus, the
complaint was amended for the second time to implead and include the APT as a defendant.

In its answer,[15] NMIC claimed that HRCC had no cause of action. It also asserted that its contract with HRCC
was entered into by its then President without any authority. Moreover, the said contract allegedly failed to
comply with laws, rules and regulations concerning government contracts. NMIC further claimed that the
contract amount was manifestly excessive and grossly disadvantageous to the government. NMIC made

Page 21 of 34
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counterclaims for the amounts already paid to Hercon, Inc. and attorney's fees, as well as payment for
equipment rental for four trucks, replacement of parts and other services, and damage to some of NMIC's
properties.[16]

For its part, DBP's answer[17] raised the defense that HRCC had no cause of action against it because DBP
was not privy to HRCC's contract with NMIC. Moreover, NMIC's juridical personality is separate from that of
DBP. DBP further interposed a counterclaim for attorney's fees.[18]
PNB's answer[19] also invoked lack of cause of action against it. It also raised estoppel on HRCC's part and
laches as defenses, claiming that the inclusion of PNB in the complaint was the first time a demand for
payment was made on it by HRCC. PNB also invoked the separate juridical personality of NMIC and made
counterclaims for moral damages and attorney's fees.[20]

APT set up the following defenses in its answer[21]: lack of cause of action against it, lack of privity between
Hercon, Inc. and APT, and the National Government's preferred lien over the assets of NMIC. [22]

After trial, the RTC of Makati rendered a Decision dated November 6, 1995 in favor of HRCC. It pierced the
corporate veil of NMIC and held DBP and PNB solidarily liable with NMIC:
On the issue of whether or not there is sufficient ground to pierce the veil of corporate fiction, this Court
likewise finds for the plaintiff.
From the documentary evidence adduced by the plaintiff, some of which were even adopted by defendants
and DBP and PNB as their own evidence (Exhibits "I", "I-1", "I-2", "I-3", "I-4", "I-5", "I-5-A", "I-5-B", "I-5-C", "I-5-
D" and submarkings, inclusive), it had been established that except for five (5) qualifying shares, [NMIC] is
owned by defendants DBP and PNB, with the former owning 57% thereof, and the latter 43%. As of September
24, 1984, all the members of [NMIC]'s Board of Directors, namely, Messrs. Jose Tengco, Jr., Rolando M. Zosa,
Ruben Ancheta, Geraldo Agulto, and Faustino Agbada are either from DBP or PNB (Exhibits "I-5", "I-5-C", "I-5-
D").

The business of [NMIC] was then also being conducted and controlled by both DBP and PNB. In fact, it was
Rolando M. Zosa, then Governor of DBP, who was signing and entering into contracts with third persons, on
behalf of [NMIC].

In this jurisdiction, it is well-settled that "where it appears that the business enterprises are owned, conducted
and controlled by the same parties, both law and equity will, when necessary to protect the rights of third
persons, disregard legal fiction that two (2) corporations are distinct entities, and treat them as identical." (Phil.
Veterans Investment Development Corp. vs. CA, 181 SCRA 669).

From all indications, it appears that [NMIC] is a mere adjunct, business conduit or alter ego of both DBP and
PNB. Thus, the DBP and PNB are jointly and severally liable with [NMIC] for the latter's unpaid obligations to
plaintiff.[23]
Having found DBP and PNB solidarily liable with NMIC, the dispositive portion of the Decision of the trial court
reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered in favor of the plaintiff HYDRO
RESOURCES CONTRACTORS CORPORATION and against the defendant[s] NONOC MINING AND
INDUSTRIAL CORPORATION, DEVELOPMENT BANK OF THE PHILIPPINES and PHILIPPINE NATIONAL
BANK, ordering the aforenamed defendants, to pay the plaintiff jointly and severally, the sum of P8,370,934.74
plus legal interest thereon from date of demand, and attorney's fees equivalent to 25% of the judgment award.

The complaint against APT is hereby dismissed. However, APT, as trustee of NONOC MINING AND
INDUSTRIAL CORPORATION is directed to ensure compliance with this Decision.[24]

DBP and PNB filed their respective appeals in the Court of Appeals. Both insisted that it was wrong for the
RTC to pierce the veil of NMIC's corporate personality and hold DBP and PNB solidarily liable with NMIC. [25]

The Court of Appeals rendered the Decision dated November 30, 2004, affirmed the piercing of the veil of the

Page 22 of 34
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corporate personality of NMIC and held DBP, PNB, and APT solidarily liable with NMIC. In particular, the
Court of Appeals made the following findings:
In the case before Us, it is indubitable that [NMIC] was owned by appellants DBP and PNB to the extent of
57% and 43% respectively; that said two (2) appellants are the only stockholders, with the qualifying
stockholders of five (5) consisting of its own officers and included in its charter merely to comply with the
requirement of the law as to number of incorporators; and that the directorates of DBP, PNB and [NMIC] are
interlocked.
x x x x
We find it therefore correct for the lower court to have ruled that:
"From all indications, it appears that [NMIC] is a mere adjunct, business conduit or alter ego of both DBP and
PNB. Thus, the DBP and PNB are jointly and severally liable with [NMIC] for the latter's unpaid obligation to
plaintiff."[26] (Citation omitted.)

The Court of Appeals then concluded that, "in keeping with the concept of justice and fair play," the corporate
veil of NMIC should be pierced, ratiocinating:
For to treat [NMIC] as a separate legal entity from DBP and PNB for the purpose of securing beneficial
contracts, and then using such separate entity to evade the payment of a just debt, would be the height of
injustice and iniquity. Surely that could not have been the intendment of the law with respect to corporations. x
x x.[27]

The dispositive portion of the Decision of the Court of Appeals reads:

WHEREFORE, premises considered, the Decision appealed from is hereby MODIFIED. The judgment in favor
of appellee Hydro Resources Contractors Corporation in the amount of P8,370,934.74 with legal interest from
date of demand is hereby AFFIRMED, but the dismissal of the case as against Assets Privatization Trust is
REVERSED, and its successor the Privatization and Management Office is INCLUDED as one of those jointly
and severally liable for such indebtedness. The award of attorney's fees is DELETED.
All other claims and counter-claims are hereby DISMISSED. Costs against appellants.[28]

The respective motions for reconsideration of DBP, PNB, and APT were denied.[29]
Hence, these consolidated petitions.[30]
All three petitioners assert that NMIC is a corporate entity with a juridical personality separate and distinct from
both PNB and DBP. They insist that the majority ownership by DBP and PNB of NMIC is not a sufficient
ground for disregarding the separate corporate personality of NMIC because NMIC was not a mere adjunct,
business conduit or alter ego of DBP and PNB. According to them, the application of the doctrine of piercing
the corporate veil is unwarranted as nothing in the records would show that the ownership and control of the
shareholdings of NMIC by DBP and PNB were used to commit fraud, illegality or injustice. In the absence of
evidence that the stock control by DBP and PNB over NMIC was used to commit some fraud or a wrong and
that said control was the proximate cause of the injury sustained by HRCC, resort to the doctrine of "piercing
the veil of corporate entity" is misplaced.[31]

DBP and PNB further argue that, assuming they may be held solidarily liable with NMIC to pay NMIC's
exclusive and separate corporate indebtedness to HRCC, such liability of the two banks was transferred to and
assumed by the National Government through the APT, now the PMO, under the respective deeds of transfer
both dated February 27, 1997 executed by DBP and PNB pursuant to Proclamation No. 50 dated December 8,
1986 and Administrative Order No. 14 dated February 3, 1987.[32]

For its part, the APT contends that, in the absence of an unqualified assumption by the National Government
of all liabilities incurred by NMIC, the National Government through the APT could not be held liable for NMIC's
contractual liability. The APT asserts that HRCC had not sufficiently shown that the APT is the successor-in-
interest of all the liabilities of NMIC, or of DBP and PNB as transferors, and that the adjudged liability is
included among the liabilities assigned and transferred by DBP and PNB in favor of the National
Government.[33]

HRCC counters that both the RTC and the CA correctly applied the doctrine of "piercing the veil of corporate
fiction." It claims that NMIC was the alter ego of DBP and PNB which owned, conducted and controlled the

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business of NMIC as shown by the following circumstances: NMIC was owned by DBP and PNB, the officers
of DBP and PNB were also the officers of NMIC, and DBP and PNB financed the operations of NMIC. HRCC
further argues that a parent corporation may be held liable for the contracts or obligations of its subsidiary
corporation where the latter is a mere agency, instrumentality or adjunct of the parent corporation. [34]

Moreover, HRCC asserts that the APT was properly held solidarily liable with DBP, PNB, and NMIC because
the APT assumed the obligations of DBP and PNB as the successor-in-interest of the said banks with respect
to the assets and liabilities of NMIC.[35] As trustee of the Republic of the Philippines, the APT also assumed
the responsibility of the Republic pursuant to the following provision of Section 2.02 of the respective deeds of
transfer executed by DBP and PNB in favor of the Republic:
SECTION 2. TRANSFER OF BANK'S LIABILITIES
x x x x
2.02 With respect to the Bank's liabilities which are contingent and those liabilities where the Bank's creditors
consent to the transfer thereof is not obtained, said liabilities shall remain in the books of the BANK with the
GOVERNMENT funding the payment thereof.[36]
After a careful review of the case, this Court finds the petitions impressed with merit.
A corporation is an artificial entity created by operation of law. It possesses the right of succession and such
powers, attributes, and properties expressly authorized by law or incident to its existence. [37] It has a
personality separate and distinct from that of its stockholders and from that of other corporations to which it
may be connected.[38] As a consequence of its status as a distinct legal entity and as a result of a conscious
policy decision to promote capital formation,[39] a corporation incurs its own liabilities and is legally responsible
for payment of its obligations.[40] In other words, by virtue of the separate juridical personality of a corporation,
the corporate debt or credit is not the debt or credit of the stockholder. [41] This protection from liability for
shareholders is the principle of limited liability.[42]
Equally well-settled is the principle that the corporate mask may be removed or the corporate veil pierced when
the corporation is just an alter ego of a person or of another corporation. For reasons of public policy and in
the interest of justice, the corporate veil will justifiably be impaled only when it becomes a shield for fraud,
illegality or inequity committed against third persons.[43
However, the rule is that a court should be careful in assessing the milieu where the doctrine of the corporate
veil may be applied. Otherwise an injustice, although unintended, may result from its erroneous
application.[44] Thus, cutting through the corporate cover requires an approach characterized by due care and
caution:
Hence, any application of the doctrine of piercing the corporate veil should be done with caution. A
court should be mindful of the milieu where it is to be applied. It must be certain that the corporate fiction
was misused to such an extent that injustice, fraud, or crime was committed against another, in
disregard of its rights. The wrongdoing must be clearly and convincingly established; it cannot be
presumed. x x x.[45] (Emphases supplied; citations omitted.)
Sarona v. National Labor Relations Commission[46] has defined the scope of application of the doctrine of
piercing the corporate veil:
The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: 1) defeat of public
convenience as when the corporate fiction is used as a vehicle for the evasion of an existing obligation; 2)
fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime; or 3) alter
ego cases, where a corporation is merely a farce since it is a mere alter ego or business conduit of a person,
or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely
an instrumentality, agency, conduit or adjunct of another corporation. (Citation omitted.)

Here, HRCC has alleged from the inception of this case that DBP and PNB (and the APT as assignee of DBP
and PNB) should be held solidarily liable for using NMIC as alter ego.[47] The RTC sustained the allegation of
HRCC and pierced the corporate veil of NMIC pursuant to the alter ego theory when it concluded that NMIC "is
a mere adjunct, business conduit or alter ego of both DBP and PNB."[48] The Court of Appeals upheld such
conclusion of the trial court.[49] In other words, both the trial and appellate courts relied on the alter ego theory
when they disregarded the separate corporate personality of NMIC.
In this connection, case law lays down a three-pronged test to determine the application of the alter ego theory,
which is also known as the instrumentality theory, namely:

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(1) Control, not mere majority or complete stock control, but complete domination, not only of finances but of
policy and business practice in respect to the transaction attacked so that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its own;

(2) Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation
of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff's legal right;
and

(3) The aforesaid control and breach of duty must have proximately caused the injury or unjust loss
complained of.[50] (Emphases omitted.)

The first prong is the "instrumentality" or "control" test. This test requires that the subsidiary be completely
under the control and domination of the parent.[51] It examines the parent corporation's relationship with the
subsidiary.[52] It inquires whether a subsidiary corporation is so organized and controlled and its affairs are so
conducted as to make it a mere instrumentality or agent of the parent corporation such that its separate
existence as a distinct corporate entity will be ignored.[53] It seeks to establish whether the subsidiary
corporation has no autonomy and the parent corporation, though acting through the subsidiary in form and
appearance, "is operating the business directly for itself." [54]

The second prong is the "fraud" test. This test requires that the parent corporation's conduct in using the
subsidiary corporation be unjust, fraudulent or wrongful.[55] It examines the relationship of the plaintiff to the
corporation.[56] It recognizes that piercing is appropriate only if the parent corporation uses the subsidiary in a
way that harms the plaintiff creditor.[57] As such, it requires a showing of "an element of injustice or
fundamental unfairness."[58]

The third prong is the "harm" test. This test requires the plaintiff to show that the defendant's control, exerted
in a fraudulent, illegal or otherwise unfair manner toward it, caused the harm suffered. [59] A causal connection
between the fraudulent conduct committed through the instrumentality of the subsidiary and the injury suffered
or the damage incurred by the plaintiff should be established. The plaintiff must prove that, unless the
corporate veil is pierced, it will have been treated unjustly by the defendant's exercise of control and improper
use of the corporate form and, thereby, suffer damages. [60]

To summarize, piercing the corporate veil based on the alter ego theory requires the concurrence of three
elements: control of the corporation by the stockholder or parent corporation, fraud or fundamental unfairness
imposed on the plaintiff, and harm or damage caused to the plaintiff by the fraudulent or unfair act of the
corporation. The absence of any of these elements prevents piercing the corporate veil.[61]

This Court finds that none of the tests has been satisfactorily met in this case.

In applying the alter ego doctrine, the courts are concerned with reality and not form, with how the corporation
operated and the individual defendant's relationship to that operation.[62] With respect to the control element, it
refers not to paper or formal control by majority or even complete stock control but actual control which
amounts to "such domination of finances, policies and practices that the controlled corporation has, so to
speak, no separate mind, will or existence of its own, and is but a conduit for its principal."[63] In addition, the
control must be shown to have been exercised at the time the acts complained of took place. [64]

Both the RTC and the Court of Appeals applied the alter ego theory and penetrated the corporate cover of
NMIC based on two factors: (1) the ownership by DBP and PNB of effectively all the stocks of NMIC, and (2)
the alleged interlocking directorates of DBP, PNB and NMIC. [65] Unfortunately, the conclusion of the trial and
appellate courts that the DBP and PNB fit the alter ego theory with respect to NMIC's transaction with HRCC
on the premise of complete stock ownership and interlocking directorates involved a quantum leap in logic and
law exposing a gap in reason and fact.

While ownership by one corporation of all or a great majority of stocks of another corporation and their
interlocking directorates may serve as indicia of control, by themselves and without more, however, these
circumstances are insufficient to establish an alter egorelationship or connection between DBP and PNB on
the one hand and NMIC on the other hand, that will justify the puncturing of the latter's corporate cover. This
Court has declared that "mere ownership by a single stockholder or by another corporation of all or nearly all of
Page 25 of 34
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the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate
personality."[66] This Court has likewise ruled that the "existence of interlocking directors, corporate officers
and shareholders is not enough justification to pierce the veil of corporate fiction in the absence of fraud or
other public policy considerations."[67]

True, the findings of fact of the Court of Appeals are conclusive and cannot be reviewed on appeal to this
Court, provided they are borne out of the record or are based on substantial evidence.[68] It is equally true that
the question of whether one corporation is merely an alter ego of another is purely one of fact. So is the
question of whether a corporation is a paper company, a sham or subterfuge or whether the requisite quantum
of evidence has been adduced warranting the piercing of the veil of corporate personality. [69] Nevertheless, it
has been held in Sarona v. National Labor Relations Commission[70] that this Court has the power to resolve a
question of fact, such as whether a corporation is a mere alter ego of another entity or whether the corporate
fiction was invoked for fraudulent or malevolent ends, if the findings in the assailed decision are either not
supported by the evidence on record or based on a misapprehension of facts.

In this case, nothing in the records shows that the corporate finances, policies and practices of NMIC were
dominated by DBP and PNB in such a way that NMIC could be considered to have no separate mind, will or
existence of its own but a mere conduit for DBP and PNB. On the contrary, the evidence establishes that
HRCC knew and acted on the knowledge that it was dealing with NMIC, not with NMIC's stockholders. The
letter proposal of Hercon, Inc., HRCC's predecessor-in-interest, regarding the contract for NMIC's mine
stripping and road construction program was addressed to and accepted by NMIC. [71] The various billing
reports, progress reports, statements of accounts and communications of Hercon, Inc./HRCC regarding
NMIC's mine stripping and road construction program in 1985 concerned NMIC and NMIC's officers, without
any indication of or reference to the control exercised by DBP and/or PNB over NMIC's affairs, policies and
practices.[72]

HRCC has presented nothing to show that DBP and PNB had a hand in the act complained of, the alleged
undue disregard by NMIC of the demands of HRCC to satisfy the unpaid claims for services rendered by
HRCC in connection with NMIC's mine stripping and road construction program in 1985. On the contrary, the
overall picture painted by the evidence offered by HRCC is one where HRCC was dealing with NMIC as a
distinct juridical person acting through its own corporate officers. [73]

Moreover, the finding that the respective boards of directors of NMIC, DBP, and PNB were interlocking has no
basis. HRCC's Exhibit "I-5,"[74] the initial General Information Sheet submitted by NMIC to the Securities and
Exchange Commission, relied upon by the trial court and the Court of Appeals may have proven that DBP and
PNB owned the stocks of NMIC to the extent of 57% and 43%, respectively. However, nothing in it supports a
finding that NMIC, DBP, and PNB had interlocking directors as it only indicates that, of the five members of
NMIC's board of directors, four were nominees of either DBP or PNB and only one was a nominee of both DBP
and PNB.[75] Only two members of the board of directors of NMIC, Jose Tengco, Jr. and Rolando Zosa, were
established to be members of the board of governors of DBP and none was proved to be a member of the
board of directors of PNB.[76] No director of NMIC was shown to be also sitting simultaneously in the board of
governors/directors of both DBP and PNB.\
In reaching its conclusion of an alter ego relationship between DBP and PNB on the one hand and NMIC on
the other hand, the Court of Appeals invoked Sibagat Timber Corporation v. Garcia,[77] which it described as "a
case under a similar factual milieu."[78] However, in Sibagat Timber Corporation, this Court took care to
enumerate the circumstances which led to the piercing of the corporate veil of Sibagat Timber Corporation for
being the alter ego of Del Rosario & Sons Logging Enterprises, Inc. Those circumstances were as follows:
holding office in the same building, practical identity of the officers and directors of the two corporations and
assumption of management and control of Sibagat Timber Corporation by the directors/officers of Del Rosario
& Sons Logging Enterprises, Inc.\
[79]
Here, DBP and PNB maintain an address different from that of NMIC. As already discussed, there was
insufficient proof of interlocking directorates. There was not even an allegation of similarity of corporate
officers. Instead of evidence that DBP and PNB assumed and controlled the management of NMIC, HRCC's
evidence shows that NMIC operated as a distinct entity endowed with its own legal personality. Thus, what
obtains in this case is a factual backdrop different from, not similar to, Sibagat Timber Corporation.

In relation to the second element, to disregard the separate juridical personality of a corporation, the
wrongdoing or unjust act in contravention of a plaintiff's legal rights must be clearly and convincingly

Page 26 of 34
CORPO

established; it cannot be presumed. Without a demonstration that any of the evils sought to be prevented by
the doctrine is present, it does not apply.[80]

In this case, the Court of Appeals declared:

We are not saying that PNB and DBP are guilty of fraud in forming [NMIC], nor are we implying that [NMIC]
was used to conceal fraud. x x x.[81]

Such a declaration clearly negates the possibility that DBP and PNB exercised control over NMIC which DBP
and PNB used "to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty,
or dishonest and unjust act in contravention of plaintiff's legal rights." It is a recognition that, even assuming
that DBP and PNB exercised control over NMIC, there is no evidence that the juridical personality of NMIC was
used by DBP and PNB to commit a fraud or to do a wrong against HRCC.

There being a total absence of evidence pointing to a fraudulent, illegal or unfair act committed against HRCC
by DBP and PNB under the guise of NMIC, there is no basis to hold that NMIC was a mere alter ego of DBP
and PNB. As this Court ruled in Ramoso v. Court of Appeals[82]:
As a general rule, a corporation will be looked upon as a legal entity, unless and until sufficient reason to the
contrary appears. When the notion of legal entity is used to defeat public convenience, justify wrong, protect
fraud, or defend crime, the law will regard the corporation as an association of persons. Also, the corporate
entity may be disregarded in the interest of justice in such cases as fraud that may work inequities among
members of the corporation internally, involving no rights of the public or third persons. In both instances, there
must have been fraud, and proof of it. For the separate juridical personality of a corporation to be
disregarded, the wrongdoing must be clearly and convincingly established. It cannot be presumed.

As regards the third element, in the absence of both control by DBP and PNB of NMIC and fraud or
fundamental unfairness perpetuated by DBP and PNB through the corporate cover of NMIC, no harm could be
said to have been proximately caused by DBP and PNB on HRCC for which HRCC could hold DBP and PNB
solidarily liable with NMIC.

Considering that, under the deeds of transfer executed by DBP and PNB, the liability of the APT as transferee
of the rights, titles and interests of DBP and PNB in NMIC will attach only if DBP and PNB are held liable, the
APT incurs no liability for the judgment indebtedness of NMIC. Even HRCC recognizes that "as assignee of
DBP and PNB's loan receivables," the APT simply "stepped into the shoes of DBP and PNB with respect to the
latter's rights and obligations" in NMIC.[83] As such assignee, therefore, the APT incurs no liability with respect
to NMIC other than whatever liabilities may be imputable to its assignors, DBP and PNB.

Even under Section 2.02 of the respective deeds of transfer executed by DBP and PNB which HRCC invokes,
the APT cannot be held liable. The contingent liability for which the National Government, through the APT,
may be held liable under the said provision refers to contingent liabilities of DBP and PNB. Since DBP and
PNB may not be held solidarily liable with NMIC, no contingent liability may be imputed to the APT as
well. Only NMIC as a distinct and separate legal entity is liable to pay its corporate obligation to HRCC in the
amount of P8,370,934.74, with legal interest thereon from date of demand.
As trustee of the assets of NMIC, however, the APT should ensure compliance by NMIC of the judgment
against it. The APT itself acknowledges this.[84]
WHEREFORE, the petitions are hereby GRANTED.
The complaint as against Development Bank of the Philippines, the Philippine National Bank, and the Asset
Privatization Trust, now the Privatization and Management Office, is DISMISSED for lack of merit. The Asset
Privatization Trust, now the Privatization and Management Office, as trustee of Nonoc Mining and Industrial
Corporation, now the Philnico Processing Corporation, is DIRECTED to ensure compliance by the Nonoc
Mining and Industrial Corporation, now the Philnico Processing Corporation, with this Decision.
SO ORDERED.

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[ G. R. No. L-19550, June 19, 1967 ]

HARRY S. STONEHILL, ROBERT P. BROOKS, JOHN J. BROOKS AND KARL BECK, PETITIONERS,
VS.
HON. JOSE W. DIOKNO, IN HIS CAPACITY AS SECRETARY OF JUSTICE; JOSE LUKBAN IN HIS
CAPACITY AS ACTING DIRECTOR, NATIONAL BUREAU OF INVESTIGATION; SPECIAL
PROSECUTORS PEDRO D. CENZON, EFREN I. PLANA AND MANUEL VILLAREAL, JR., AND ASST.
FISCAL MANASES G. REYES; JUDGE AMADO ROAN, MUNICIPAL COURT OF MANILA; JUDGE
ROMAN CANSINO, MUNICIPAL COURT OF MANILA; JUDGE HERMOGENES CALUAG, COURT OF
FIRST INSTANCE OF RIZAL-QUEZON CITY BRANCH, AND JUDGE DAMIAN JIMENEZ, MUNICIPAL
COURT OF QUEZON CITY, RESPONDENTS.

DECISION
CONCEPCION, C.J.:
Upon application of the officers of the government named on the margin[1]- hereinafter
referred to as Respondent-Prosecutors - several judges[2] - hereinafter referred to as Respondent-Judges -
issued, on different dates,[3] a total of 42 search warrants against petitioners herein[4] and/or the corporations of
which they were officers,[5] directed to any peace officer, to search the persons above-named and/or the
premises of their offices, warehouses and/or residences, and to seize and take possession of the following
personal property to wit:
"Books of accounts, financial records, vouchers, correspondence, receipts, ledgers, journals, portfolios, credit
journals, typewriters, and other documents and/or papers showing all business transactions including
disbursements receipts, balance sheets and profit and loss statements and Bobbins (cigarette wrappers)."
as "the subject of the offense; stolen or embezzled and proceeds or fruits of the offense," or "used or intended
to be used as the means of committing the offense," which is described in the applications adverted to above
as "violation of Central Bank Laws, Tariff and Customs Laws, Internal Revenue (Code) and the Revised Penal
Code."
Alleging that the aforementioned search warrants are null and void, as contravening the Constitution and the
Rules of Court - because, inter alia: (1) they do not describe with particularity the documents, books and
things to be seized; (2) cash money, not mentioned in the warrants, were actually seized; (3) the warrants were
issued to fish evidence against the aforementioned petitioners in deportation cases filed against them; (4) the
searches and seizures were made in an illegal manner; and (5) the documents, papers and cash money
seized were not delivered to the courts that issued the warrants, to be disposed of in accordance with law - on
March 20, 1962, said petitioners filed with the Supreme Court this original action for certiorari, prohibition,
mandamus and injunction, and prayed that, pending final disposition of the present case, a writ of preliminary
injunction be issued restraining Respondent-Prosecutors, their agents and/or representatives from using the
effects seized as aforementioned, or any copies thereof, in the deportation cases already adverted to, and that,
in due course, thereafter, decision be rendered quashing the contested search warrants and declaring the
same null and void, and commanding the respondents, their agents or representatives to return to petitioners
herein, in accordance with Section 3, Rule 67, of the Rules of Court, the documents, papers, things and cash
moneys seized or confiscated under the search warrants in question.
In their answer, respondents-prosecutors alleged[6] (1) that the contested search warrants are valid and have
been issued in accordance with law; (2) that the defects of said warrants, if any, were cured by petitioners'
consent; and (3) that, in any event, the effects seized are admissible in evidence against herein petitioners,
regardless of the alleged illegality of the aforementioned searches and seizures.
On March 22, 1962, this Court issued the writ of preliminary injunction prayed for in the petition. However, by
resolution dated June 29, 1962, the writ was partially lifted or dissolved, insofar as the papers, documents and
things seized from the offices of the corporations above mentioned are concerned; but, the injunction was
maintained as regards the papers, documents and things found and seized in the residences of petitioners
herein.[7]
Thus, the documents, papers, and things seized under the alleged authority of the warrants in question may be
split into two (2) major groups, namely: (a) those found and seized in the offices of the aforementioned
corporations, and (b) those found and seized in the residences of petitioners herein.
As regards the first group, we hold that petitioners herein have no cause of action to assail the legality of the
contested warrants and of the seizures made in pursuance thereof, for the simple reason that said corporations
have their respective personalities, separate and distinct from the personality of herein petitioners, regardless
of the amount of shares of stock or of the interest of each of them in said corporations, and whatever the
offices they hold therein may be.[8] Indeed, it is well settled that the legality of a seizure can be contested only
by the party whose rights have been impaired thereby,[9] and that the objection to an unlawful search and
seizure is purely personal and cannot be availed of by third parties.[10] Consequently, petitioners herein may
not validly object to the use in evidence against them of the documents, papers and things seized from the
offices and premises of the corporations adverted to above, since the right to object to the admission of said

Page 28 of 34
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papers in evidence belongs exclusively to the corporations, to whom the seized effects belong, and may not be
invoked by the corporate officers in proceedings against them in their individual capacity. [11] Indeed, it has been
held:
x x x that the Government's action in gaining possession of papers belonging to the corporation did not relate
to nor did it affect the personal defendants. If these papers were unlawfully seized and thereby the
constitutional rights of or any one were invaded, they were the rights of the corporation and not the rights of
the other defendants. Next, it is clear that a question of the lawfulness of a seizure can be raised only by
one whose rights have been invaded. Certainly, such a seizure, if unlawful, could not affect the constitutional
rights of defendants whose property had not been seized or the privacy of whose homes had not
been disturbed; nor could they claim for themselves the benefits of the Fourth Amendment, when its violation,
if any, was with reference to the rights of another. Remus vs. United States (C.C.A.) 291 F501, 511. It follows,
therefore, that the question of the admissibility of the evidence based on an alleged unlawful search and
seizure does not extend to the personal defendants but embraces only the corporation whose property was
taken. x x x." (A. Guckenheimer & Bros. Co. vs. United States, [1925] 3 F. 2d, 786, 789, underscoring
supplied.)
With respect to the documents, papers and things seized in the residences of petitioners herein, the
aforementioned resolution of June 29, 1962, denied the lifting of the writ of preliminary injunction previously
issued by this Court,[12] thereby, in effect, restraining herein Respondent-Prosecutors from using them in
evidence against petitioners herein.
In connection with said documents, papers and things, two (2) important questions need be settled,
namely: (1) whether the search warrants in question, and the searches and seizures made under the authority
thereof, are valid or not; and (2) if the answer to the preceding question is in the negative, whether said
documents, papers and things may be used in evidence against petitioners herein.
Petitioners maintain that the aforementioned search warrants are in the nature of general warrants and that,
accordingly, the seizures effected upon the authority thereof are null and void. In this connection, the
Constitution[13] provides:
"The right of the people to be secure in their persons, houses, papers, and effects against unreasonable
searches and seizures shall not be violated, and no warrants shall issue but upon probable cause, to be
determined by the judge after examination under oath or affirmation of the complainant and the witnesses he
may produce, and particularly describing the place to be searched, and the persons or things to be seized."
Two points must be stressed in connection with this constitutional mandate, namely: (1) that no warrant shall
issue but upon probable cause, to be determined by the judge in the manner set forth in said provision; and (2)
that the warrant shall particularly describe the things to be seized.
None of these requirements has been complied with in the contested warrants. Indeed, the same were
issued upon applications stating that the natural and juridical persons therein named had committed a
"violation of Central Bank Laws, Tariff and Customs Laws, Internal Revenue (Code) and Revised Penal Code."
In other words, no specific offense had been alleged in said applications. The averments thereof with respect
to the offense committed were abstract. As a consequence, it was impossible for the judges who issued the
warrants to have found the existence of probable cause, for the same presupposes the introduction of
competent proof that the party against whom it is sought has performed particular acts, or
committed specific omissions, violating a given provision of our criminal laws. As a matter of fact, the
applications involved in this case do not allege any specific acts performed by herein petitioners. It would be a
legal heresy, of the highest order, to convict anybody of a "violation of Central Bank Laws, Tariff and Customs
Laws, Internal Revenue (Code) and Revised Penal Code," - as alleged in the aforementioned applications -
without reference to any determinate provision of said laws or codes.
To uphold the validity of the warrants in question would be to wipe out completely one of the most fundamental
rights guaranteed in our Constitution, for it would place the sanctity of the domicile and the privacy of
communication and correspondence at the mercy of the whims, caprice or passion of peace officers. This is
precisely the evil sought to be remedied by the constitutional provision above quoted - to outlaw the so-called
general warrants. It is not difficult to imagine what would happen, in times of keen political strife, when the
party in power feels that the minority is likely to wrest it, even though by legal means.
Such is the seriousness of the irregularities committed in connection with the disputed search warrants, that
this Court deemed it fit to amend Section 3 of Rule 122 of the former Rules of Court [14] by providing in its
counterpart under the Revised Rules of Court[15] that "a search warrant shall not issue but upon probable
cause in connection with one specific offense." Not satisfied with this qualification, the Court added thereto a
paragraph, directing that "no search warrant shall issue for more than one specific offense."
The grave violation of the Constitution made in the application for the contested search warrants was
compounded by the description therein made of the effects to be searched for and seized, to wit:
"Books of accounts, financial records, vouchers, journals, correspondence, receipts, ledgers, portfolios, credit
journals, typewriters, and other documents and/or papers showing all business transactions including
disbursement receipts, balance sheets and related profit and loss statements."

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Thus, the warrants authorized the search for and seizure of records pertaining to all business transactions of
petitioners herein, regardless of whether the transactions were legal or illegal. The warrants sanctioned
the seizure of all records of the petitioners and the aforementioned corporations, whatever their nature, thus
openly contravening the explicit command of our Bill of Rights - that the things to be seized
be particularly described - as well as tending to defeat its major objective: the elimination of general warrants.
Relying upon Moncado vs. People's Court (80 Phil. 1), Respondent-Prosecutors maintain that, even if the
searches and seizures under consideration were unconstitutional, the documents, papers and things thus
seized are admissible in evidence against petitioners herein. Upon mature deliberation, however, we are
unanimously of the opinion that the position taken in the Moncado case must be abandoned. Said position was
in line with the American common law rule, that the criminal should not be allowed to go free merely "because
the constable has blundered,"[16] upon the theory that the constitutional prohibition against unreasonable
searches and seizures is protected by means other than the exclusion of evidence unlawfully obtained,[17] such
as the common-law action for damages against the searching officer, against the party who procured the
issuance of the search warrant and against those assisting in the execution of an illegal search, their criminal
punishment, resistance, without liability to an unlawful seizure, and such other legal remedies as may be
provided by other laws.
However, most common law jurisdictions have already given up this approach and eventually adopted the
exclusionary rule, realizing that this is the only practical means of enforcing the constitutional
injunction against unreasonable searches and seizures. In the language of Judge Learned Hand:
"As we understand it, the reason for the exclusion of evidence competent as such, which has been unlawfully
acquired, is that exclusion is the only practical way of enforcing the constitutional privilege. In earlier times the
action of trespass against the offending official may have been protection enough; but that is true no
longer. Only in case the prosecution which itself controls the seizing officials, knows that it cannot profit by
their wrong, will that wrong be repressed."[18]
In fact, over thirty (30) years before, the Federal Supreme Court had already declared:
"If letters and private documents can thus be seized and held and used in evidence against a citizen accused
of an offense, the protection of the 4th Amendment, declaring his rights to be secure against such searches
and seizures, is of no value, and, so far as those thus placed are concerned, might as well be stricken from the
Constitution. The efforts of the courts and their officials to bring the guilty to punishment, praiseworthy as they
are, are not to be aided by the sacrifice of those great principles established by years of endeavor and suf-
fering which have resulted in their embodiment in the fundamental law of the land."[19]
This view was, not only reiterated, but, also broadened in subsequent decisions of the same Federal
Court.[20] After reviewing previous decisions thereon, said Court held, in Mapp vs. Ohio (supra.):
"x x x Today we once again examine the Wolf's constitutional documentation of the right of privacy free from
unreasonable state intrusion, and, after its dozen years on our books, are led by it to close the only courtroom
door remaining open to evidence secured by official lawlessness in flagrant abuse of that basic right, reserved
to all persons as a specific guarantee against that very same unlawful conduct. We held that all evidence
obtained by searches and seizures in violation of the Constitution is, by that same authority, inadmissible in a
State court.
"Since the Fourth Amendment's right of privacy has been declared enforceable against the States through the
Due Process Clause of the Fourteenth, it is enforceable against them by the same sanction of exclusion as it
used against the Federal Government. Were it otherwise, then just as without the Weeks rule the assurance
against unreasonable federal searches and seizures would be 'a form of words', valueless and underserving of
mention in a perpetual charter of inestimable human liberties, so too, without that rule the freedom from state
invasions of privacy would be so ephemeral and so neatly severed from its conceptual nexus with the freedom
from all brutish means of coercing evidence as not to permit this Court's high regard as a freedom 'implicit in
the concept of ordered liberty.' At the time that the Court held in Wolf that the Amendment was applicable to
the States through the Due Process Clause, the cases of this Court as we have seen, had steadfastly held that
as to federal officers the Fourth Amendment included the exclusion of the evidence seized in violation of its
provisions. Even wolf 'stoutly adhered' to that proposition. The right to privacy, when conceded operatively
enforceable against the States, was not susceptible of destruction by avulsion of the sanction upon which its
protection and enjoyment had always been deemed dependent under the Boyd, Weeks and Silverthorne
Cases. Therefore, in extending the substantive protections of due process to all constitutionally unreasonable
searches - state or federal - it was logically and constitutionally necessary that the exclusion doctrine - an
essential part of the right to privacy - be also insisted upon as an essential ingredient of the right newly
recognized by the Wolf Case. In short, the admission of the new constitutional right by Wolf could not
consistently tolerate denial of its most important constitutional privilege, namely, the exclusion of the evidence
which an accused had been forced to give by reason of the unlawful seizure. To hold otherwise is to grant the
right but in reality to withhold its privilege and enjoyment. Only last year the Court itself recognized that the
purpose of the exclusionary rule 'is to deter - to compel respect for the constitutional guaranty in the only
effectively available way - by removing the incentive to disregard it.' x x x.

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"The ignoble shortcut to conviction left open to the State tends to destroy the entire system of constitutional
restraints on which the liberties of the people rest. Having once recognized that the right to privacy embodied
in the Fourth Amendment is enforceable against the States, and that the right to be secure against rude
invasions of privacy by state officers is, therefore constitutional in origin, we can no longer permit that right to
remain an empty promise. Because it is enforceable in the same manner and to like effect as other basic
rights secured by the Due Process Clause, we can no longer permit it to be revocable at the whim of any police
officer who, in the name of law enforcement itself, chooses to suspend its enjoyment. Our decision, founded
on reason and truth, gives to the individual no more than that which the Constitution guarantees him, to the
police officer no less than that to which honest law enforcement is entitled, and, to the courts, that judicial
integrity so necessary in the true administration of justice." (Underscoring ours.)
Indeed, the non-exclusionary rule is contrary, not only to the letter, but, also, to spirit of the constitutional
injunction against unreasonable searches and seizures. To be sure, if the applicant for a search warrant has
competent evidence to establish probable cause of the commission of a given crime by the party against whom
the warrant is intended, then there is no reason why the applicant should not comply with the requirements of
the fundamental law. Upon the other hand, if he has no such competent evidence, then it is not possible for
the Judge to find that there is probable cause, and, hence, no justification for the issuance of the warrant. The
only possible explanation (not justification) for its issuance is the necessity of fishing evidence of the
commission of a crime. But, then, this fishing expedition is indicative of the absence of evidence to establish a
probable cause.
Moreover, the theory that the criminal prosecution of those who secure an illegal search warrant and/or make
unreasonable searches or seizures would suffice to protect the constitutional guarantee under consideration,
overlooks the fact that violations thereof are, in general, committed by agents of the party in power, for,
certainly, those belonging to the minority could not possibly abuse a power they do not have. Regardless of
the handicap under which the minority usually - but, understandably - finds itself in prosecuting agents of the
majority, one must not lose sight of the fact that the psychological and moral effect of the possibility [21] of
securing their conviction, is watered down by the pardoning power of the party for whose benefit the illegality
had been committed.
In their Motion for Reconsideration and Amendment of the Resolution of this Court dated June 29, 1962,
petitioners allege that Rooms Nos. 81 and 91 of Carmen Apartments, House No. 2008, Dewey Boulevard,
House No. 1436, Colorado Street, and Room No. 304 of the Army-Navy Club, should be included among the
premises considered in said Resolution as residences of herein petitioners, Harry S. Stonehill, Robert P.
Brook, John J. Brooks and Karl Beck, respectively, and that, furthermore, the records, papers and other effects
seized in the offices of the corporations above referred to include personal belongings of said petitioners and
other effects under their exclusive possession and control, for the exclusion of which they have a standing
under the latest rulings of the federal courts of the United States.[22]
We note, however, that petitioners' theory, regarding their alleged possession of and control over the
aforementioned records, papers and effects, and the alleged "personal" nature thereof, has been
advanced, not in their petition or amended petition herein, but in the Motion for Reconsideration and
Amendment of the Resolution of June 29, 1962. In other words, said theory would appear to be a
readjustment of that followed in said petitions, to suit the approach intimated in the Resolution sought to be
reconsidered and amended. Then, too, some of the affidavits or copies of alleged affidavits attached to said
motion for reconsideration, or submitted in support thereof, contain either inconsistent allegations, or
allegations inconsistent with the theory now advanced by petitioners herein.
Upon the other hand, we are not satisfied that the allegations of said petitions and motion for reconsideration,
and the contents of the aforementioned affidavits and other papers submitted in support of said motion, have
sufficiently established the facts or conditions contemplated in the cases relied upon by the petitioners, to
warrant application of the views therein expressed, should we agree thereto. At any rate, we do not deem it
necessary to express our opinion thereon, it being best to leave the matter open for determination in
appropriate cases in the future.
We hold, therefore, that the doctrine adopted in the Moncado case must be, as it is hereby, abandoned; that
the warrants for the search of three (3) residences of herein petitioners, as specified in the Resolution of June
29, 1962, are null and void; that the searches and seizures therein made are illegal; that the writ of preliminary
injunction heretofore issued, in connection with the documents, papers and other effects thus seized in said
residences of herein petitioners is hereby made permanent; that the writs prayed for are granted, insofar as the
documents, papers and other effects so seized in the aforementioned residences are concerned; that the
aforementioned motion for Reconsideration and Amendment should be, as it is hereby, denied; and that the
petition herein is dismissed and the writs prayed for denied, as regards the documents, papers and other
effects seized in the twenty-nine (29) places, offices and other premises enumerated in the same Resolution,
without special pronouncement as to costs.
IT IS SO ORDERED.

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EN BANC
[ G.R. No. L-30896, April 28, 1983 ]
JOSE O. SIA, PETITIONER, VS. THE PEOPLE OF THE PHILIPPINES, RESPONDENT.

DECISION
DE CASTRO, J.:
Petition for review of the decision of the Court of Appeals affirming the decision of the Court of First Instance of
Manila convicting the appellant of estafa, under an information which reads:
"That in, about or during the period comprised between July 24, 1963 and December 31, 1963, both dates
inclusive, in the City of Manila, Philippines, the said accused did then and there willfully, unlawfully and
feloniously defraud the Continental Bank, a banking institution duly organized and doing business in the City of
Manila, in the following manner, to wit: the said accused, in his capacity as president and general manager of
the Metal Manufacturing of the Philippines, Inc. (MEMAP) and on behalf of said company, obtained delivery of
150 M/T Cold Rolled Steel Sheets valued at P71,023.60 under a trust receipt agreement under L/C No.
63/109, which cold rolled steel sheets were consigned to the Continental Bank, under the express obligation on
the part of said accused of holding the said steel sheets in trust and selling them and turning over the proceeds
of the sale to the Continental Bank; but the said accused, once in possession of the said goods, far from
complying with his aforesaid obligation and despite demands made upon him to do so, with intent to defraud,
failed and refused to return the said cold rolled sheets or account for the proceeds thereof, if sold, which the
said accused willfully, unlawfully and feloniously misappropriated, misapplied and converted to his own
personal use and benefit, to the damage and prejudice of the said Continental Bank in the total amount of
P46,818.68, that is the balance including the interest after deducting the sum of P28,736.47 deposited by the
said accused with the aforementioned bank as marginal deposit and forfeited by the said bank from the value
of the said goods, in the said sum of P71,023.60." (Original Records, p. 1).
In reviewing the evidence, the Court of Appeals came up with the following findings of facts which the Solicitor
General alleges should be conclusive upon this Court:
"There is no debate on certain antecedents: Accused Jose O. Sia sometime prior to 24 May, 1963, was
General Manager of the Metal Manufacturing Company of the Philippines, Inc. engaged in the manufacture of
steel office equipment; on 31 May, 1963, because his company was in need of raw materials to be imported
from abroad, he applied for a letter of credit to import steel sheets from Mitsui Bussan Kaisha, Ltd. of Tokyo,
Japan, the application being directed to the Continental Bank, herein complainant, Exhibit B and his application
having been approved, the letter of credit was opened on 5 June, 1963 in the amount of $18,300, Exhibit D;
and the goods arrived sometime in July, 1963 according to accused himself, tsn. II:7; now from here on there is
some debate on the evidence; according to Complainant Bank, there was permitted delivery of the steel sheets
only upon execution of a trust receipt, Exhibit A; while according to the accused, the goods were delivered to
him sometime before he executed that trust receipt in fact they had already been converted into steel office
equipment by the time he signed said trust receipt, tsn. II:8 but there is no question - and this is not debated -
that the bill of exchange issued for the purpose of collecting the unpaid account thereon having fallen due (see
Exh. B) neither accused nor his company having made payment thereon notwithstanding demands, Exh. C
and C-1, dated 17 and 27 December, 1963, and the accounts having reached the sum in pesos of P46,818.68
after deducting his deposit valued at P28,736.47; that was the reason why upon complaint by Continental
Bank, the Fiscal filed the information after preliminary investigation as has been said on 22 October, 1964."
(Rollo [CA], pp. 103-104).
The first issue raised, which in effect combines the first three errors assigned, is whether petitioner Jose O.
Sia, having only acted for and in behalf of the Metal Manufacturing Company of the Philippines (Metal
Company, for short) as President thereof in dealing with the complainant, the Continental Bank, (Bank for
short) he may be liable for the crime charged.
In discussing this question, petitioner proceeds, in the meantime, on the assumption that the acts imputed to
him would constitute the crime of estafa, which he also disputes, but seeks to avoid liability on his theory that
the Bank knew all along that petitioner was dealing with him only as an officer of the Metal Company which
was the true and actual applicant for the letter of credit (Exhibit B) and which, accordingly, assumed sole
obligation under the trust receipt (Exhibit A). In disputing the theory of petitioner, the Solicitor General relies on
the general principle that when a corporation commits an act which would constitute a punishable offense
under the law, it is the responsible officers thereof, acting for the corporation, who would be punished for the
crime. The Court of Appeals has subscribed to this view when it quoted approvingly from the decision of the
trial court the following:
"A corporation is an artificial person, an abstract being. If the defense theory is followed unscrupulously legions
would form corporations to commit swindle right and left where nobody could be convicted, for it would be futile
and ridiculous to convict an abstract being that can not be pinched and confined in jail like a natural, living
person, hence the result of the defense theory would be hopeless chose in business and finance. It is
completely untenable." (Rollo [CA], p. 108.)

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The above-quoted observation of the trial court would seem to be merely restating a general principle that for
crimes committed by a corporation, the responsible officers thereof would personally bear the criminal liability.
(People vs. Tan Boon Kong, 54 Phil. 607. See also Tolentino, Commercial Laws of the Philippines, p. 625,
citing cases.)
The case cited by the Court of Appeals in support of its stand Tan Boon Kong case, supra may however not be
squarely applicable to the instant case in that the corporation was directly required by law to do an act in a
given manner, and the same law makes the person who fails to perform the act in the prescribed manner
expressly liable criminally. The performance of the act is an obligation directly imposed by the law on the
corporation. Since it is a responsible officer or officers of the corporation who actually perform the act for the
corporation, they must of necessity be the ones to assume the criminal liability; otherwise this liability as
created by the law would be illusory, and the deterrent effect of the law, negated.
In the present case, a distinction is to be found with the Tan Boon Kong case in that the act alleged to be a
crime is not in the performance of an act directly ordained by law to be performed by the corporation. The act is
imposed by agreement of parties, as a practice observed in the usual pursuit of a business or a commercial
transaction. The offense may arise, if at all, from the peculiar terms and condition agreed upon by the parties to
the transaction, not by direct provision of the law. The intention of the parties, therefore, is a factor determinant
of whether a crime was committed or whether a civil obligation alone was intended by the parties. With this
explanation, the distinction adverted to between the Tan Boon Kong case and the case at bar should come out
clear and meaningful. In the absence of an express provision of law making the petitioner liable for the criminal
offense committed by the corporation of which he is a president as in fact there is no such provisions in the
Revised Penal Code under which petitioner is being prosecuted, the existence of a criminal liability on his part
may not be said to be beyond any doubt. In all criminal prosecutions, the existence of criminal liability for which
the accused is made answerable must be clear and certain. The maxim that all doubts must be resolved in
favor of the accused is always of compelling force in the prosecution of offenses. This Court has thus far not
ruled on the criminal liability of an officer of a corporation signing in behalf of said corporation a trust receipt of
the same nature as that involved herein. In the case of Samo vs. People, L-17603-04, May 31, 1962, the
accused was not clearly shown to be acting other than in his own behalf, not in behalf of a corporation.
The next question is whether the violation of a trust receipt constitutes estafa under Art. 315 (1-[2]) of the
Revised Penal Code, as also raised by the petitioner. We now entertain grave doubts, in the light of the
promulgation of P. D. 115 providing for the regulation of trust receipts transaction, which is a very
comprehensive piece of legislation, and includes an express provision that if the violation or offense is
committed by a corporation, partnership, association or other juridical entities the penalty provided for in this
Decree shall be imposed upon the directors, officers, employees or other officials or persons therein
responsible for the offense, without prejudice to civil liabilities arising from the criminal offense. The question
that suggests itself is, therefore, whether the provisions of the Revised Penal Code, Article 315, par. 1(b) are
not adequate to justify the punishment of the act made punishable by P.D. 115, that the necessity was felt for
the promulgation of the decree. To answer this question, it is imperative to make an in-depth analysis of the
conditions usually embodied in a trust receipt to test their legal sufficiency to constitute the basis for holding the
violation of said conditions as estafa under Article 315 of the Revised Penal Code which P.D. 115 now seeks
to punish expressly.
As executed, the trust receipt in question reads:
"I/WE HEREBY AGREE TO HOLD SAID GOODS IN TRUST FOR THE SAID BANK as its property with liberty
to sell the same for its account but without authority to make any other disposition whatsoever of the said
goods or any part thereof (or the proceeds thereof) either way of conditional sale, pledge or otherwise;
"In case of sale I/we further agree to hand the proceeds as soon as received to the BANK to apply against the
relative acceptance (as described above) and for the payment of any other indebtedness of mine/ours to
CONTINENTAL BANK." (Original Records, p. 108)
One view is to consider the transaction as merely that of a security of a loan, and that the trust element is but
an inherent feature of the security aspect of the arrangement where the goods are placed in the possession of
the "entrustee," to use the term used in P.D. 115, violation of the element of trust not being intended to be in
the same concept as how it is understood in the criminal sense. The other view is that the bank as the owner
and "entrustor" delivers the goods to the "entrustee," with the authority to sell the goods, but with the obligation
to give the proceeds to the "entrustor" or return the goods themselves if not sold, a trust being thus created in
the full sense as contemplated by Art. 315, par. 1(b).
We consider the view that the trust receipt arrangement gives rise only to civil liability as the more feasible,
before the promulgation of P.D. 115. The transaction being contractual, the intent of the parties should govern.
Since the trust receipt has, by its nature, to be executed upon the arrival of the goods imported, and acquires
legal standing as such receipt only upon acceptance by the "entrustee," the trust receipt transaction itself, the
antecedent acts consisting of the application of the L/C, the approval of the L/C and the making of the marginal
deposit and the effective importation of the goods, all through the efforts of the importer who has to find his
supplier, arrange for the payment and shipment of the imported goods all these circumstances would negate
any intent of subjecting the importer to criminal prosecution, which could possibly give rise to a case of
imprisonment for non-payment of a debt. The parties, therefore, are deemed to have consciously entered into

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a purely commercial transaction that could give rise only to civil liability, never to subject the "entrustee" to
criminal prosecution. Unlike, for instance, when several pieces of jewelry are received by a person from the
owner for sale on commission, and the former misappropriates for his personal use and benefit, either the
jewelries or the proceeds of the sale, instead of returning them to the owner as is his obligation, the bank is not
in the same concept as the jewelry owner with full power of disposition of the goods, which the bank does not
have, for the bank has previously extended a loan which the L/C represents to the importer, and by that loan,
the importer should be the real owner of the goods. If under the trust receipt, the bank is made to appear as
the owner, it was but an artificial expedient, more of a legal fiction than fact, for if it were really so, it could
dispose of the goods in any manner it wants, which it cannot do, just to give consistency with the purpose of
the trust receipt of giving a stronger security for the loan obtained by the importer. To consider the bank as the
true owner from the inception of the transaction would be to disregard the loan feature thereof, a feature totally
absent in the case of the transaction between the jewel-owner and his agent.
Consequently, if only from the fact that the trust receipt transaction is susceptible to two reasonable
interpretation, one as giving rise only to civil liability for the violation of the condition thereof, and the other, as
generating also criminal liability, the former should be adopted as more favorable to the supposed offender.
(Duran vs. CA, L-39758, May 7, 1976, 71 SCRA 68; People vs. Parayno, L-24804, July 5, 1968, 24 SCRA 3;
People vs. Abendan, L-1481, January 28, 1949, 82 Phil. 711; People vs. Bautista, L-1502, May 24, 1948, 81
Phil. 78; People vs. Abana, L-39, February 1, 1946, 76 Phil. 1.)
There is, moreover, one circumstance appearing on record, the significance of which should be properly
evaluated. As stated in petitioner's brief (page 2), not denied by the People, "before the Continental Bank
approved the application for a letter of credit (Exhibit 'D'), subsequently covered by the trust receipt, the
Continental Bank examined the financial capabilities of the applicant, Metal Manufacturing Company of the
Philippines because that was the bank's standard procedure (Testimony of Mr. Ernesto Garlit, Asst. Manager
of the Foreign Department, Continental Bank, t.s.n., August 30, 1965). The Continental Bank did not examine
the financial capabilities of herein petitioner, Jose O. Sia, in connection with the same letter of credit. (Ibid)."
From this fact, it would appear as positively established that the intention of the parties in entering into the
"trust receipt" agreement is merely to afford a stronger security for the loan evidenced by the letter of credit,
may be not as an ordinary pledge as observed in P.N.B. vs. Viuda e Hijos de Angel Jose, et al., 63 Phil. 814,
citing In re Dunlap C (206 Fed. 726) but neither as a transaction falling under Article 315-1(b) of the Revised
Penal Code giving rise to criminal liability, as previously explained and demonstrated.
It is worthy of note that the civil liability imposed by the trust receipt is exclusively on the Metal Company.
Speaking of such liability alone, as one arising from the contract, as distinguished from the civil liability arising
out of a crime, the petitioner was never intended to be equally liable as the corporation. Without being made so
liable personally as the corporation is, there would then be no basis for holding him criminally liable, for any
violation of the trust receipt. This is made clearly so upon consideration of the fact that in the violation of the
trust agreement and in the absence of positive evidence to the contrary, only the corporation benefited, not the
petitioner personally, yet, the allegation of the information is to the effect that the misappropriation or
conversion was for the personal use and benefit of the petitioner, with respect to which there is variance
between the allegation and the evidence.
It is also worthy of note that while the trust receipt speaks of authority to sell, the fact is undisputed that the
imported goods were to be manufactured into finished products first before they could be sold, as the Bank had
full knowledge of. This fact is, however, not embodied in the trust agreement, thus impressing on the trust
receipt vagueness and ambiguity which should not be the basis for criminal prosecution, in the event of a
violation of the terms of the trust receipt. Again, P. D. 115 has express provision relative to the "manufacture or
process of the good with the purpose of ultimate sale," as a distinct condition from that of "to sell the goods or
procure their sale" (Section 4, (1). Note that what is embodied in the receipt in question is the sale of imported
goods, the manufacture thereof not having been mentioned. The requirement in criminal prosecution, that
there must be strict harmony, not variance, between the allegation and the evidence, may therefore, not be
said to have been satisfied in the instant case.
FOR ALL THE FOREGOING, We reverse the decision of the Court of Appeals and hereby acquit the
petitioner, with costs de oficio.
SO ORDERED.

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