TRUST FUND DOCTRINE CASE DIGESTS

Case No. 1
Ong Yong vs Tiu
GR No. 144476 ; April 8, 2003

Facts:

In 1994, the construction of Masagana Citimall in Pasay City faced potential stoppage
and non-completion due to severe financial problems of its owner, First Landlink Asia
Development Corporation (FLADC), owned by David S. Tiu, Cely Y. Tiu, Moly Yu Gow, Belen
See Yu, D. Terence Y. Tiu, John Yu, and Lourdes C. Tiu (collectively referred to as "the Tius").
FLADC was heavily indebted to the Philippine National Bank (PNB) for P190 million, risking
mortgage foreclosure on the two mall lots.

To prevent foreclosure, the Tius invited Ong Yong, Juanita Tan Ong, Wilson T. Ong,
Anna L. Ong, William T. Ong, and Julia Ong Alonzo (collectively referred to as "the Ongs") to
invest in FLADC. They agreed that both parties would maintain equal shareholdings: the Ongs
would subscribe to 1,000,000 shares at a par value of P100.00 each, while the Tius would
subscribe to an additional 549,800 shares at P100.00 each, in addition to their existing
subscription of 450,200 shares. The Tius were entitled to nominate certain directors and officers,
while the Ongs had management rights.

The Ongs paid P100 million in cash for their subscription, and the Tius committed to
contribute real property valued at P99.8 million to cover their additional stock subscription. The
P190 million total investment was used to settle FLADC's PNB mortgage. However, disputes
arose, and on February 23, 1996, the Tius rescinded the Pre-Subscription Agreement, alleging
various grievances.

The Securities and Exchange Commission (SEC) confirmed the rescission in May 1997,
albeit reclassifying the P70 million paid by the Ongs as a premium on capital, not a loan. Both
parties appealed to the SEC en banc, which upheld the rescission but reverted to classifying the
P70 million as a premium on capital.

The Court of Appeals (CA) modified the SEC's decision in October 1999, and both
parties appealed to the Supreme Court. In February 2002, the Supreme Court affirmed the CA's
decision with modifications regarding interest rates on loans and shares credited to the Tius.
On March 15, 2002, the Tius requested a Writ of Execution. The Ongs opposed this motion and
filed their own "Motion for Reconsideration; Alternatively, Motion for Modification (of the
February 1, 2002 Decision)." Willie Ong filed a separate "Motion for Partial Reconsideration" on
March 8, 2002, contesting any violation of the Pre-Subscription Agreement by the Ongs. Oral
arguments were held on January 29, 2003, and memoranda were submitted by both parties in
February 2003.

Issues:

Whether the rescission of Pre-Subscription Agreement would result in unauthorized

liquidation.

Ruling:

The cancellation of the Pre-Subscription Agreement will potentially lead to an

unauthorized dispersal of the corporation's capital assets and property. This action would
contravene both the Trust Fund Doctrine and the provisions of the Corporation Code. The Trust
Fund Doctrine emphasizes that the capital of a corporation should be preserved and protected
for the benefit of its shareholders and creditors. Furthermore, the Corporation Code delineates
specific circumstances under which the distribution of capital assets and property is
permissible.

In essence, rescinding the agreement could ultimately result in the premature dissolution
of the corporation, bypassing the requisite procedures outlined in Sections 117, 118, 119, and 120
of the Corporation Code for the proper dissolution and winding up of corporate affairs.
Case No. 2
Enano-Bote vs. Alvarez
GR No. 223572 ; November 10, 2020

Facts:

On February 3, 1999, Subic Bay Metropolitan Authority (SBMA) entered into a Lease
Agreement with Centennial Air, Inc. (CAIR) for the lease of a property at Subic Bay
International Airport (SBIA). The agreement was for five years, starting on February 1, 1999.
The lease included monthly rent and obligations related to facility usage.

CAIR consistently failed to meet its financial obligations, leading SBMA to send
numerous demand letters. Despite attempts to settle the outstanding debt, CAIR did not comply
with payment agreements. In January 2004, SBMA terminated the Lease Agreement and
demanded payment of the outstanding amount.

SBMA filed a complaint against CAIR, seeking payment of the outstanding obligation,
exemplary damages, and attorney's fees. Summons were served on defendants, including
Jennifer Enano-Bote, Virgilio A. Bote, and others (referred to as Enano-Bote, et al.), who claimed
they were no longer CAIR's stockholders at the time of the Lease Agreement due to an
assignment of their shares to Jose Ch. Alvarez.

Alvarez also filed an answer with counterclaim, asserting defenses and counterclaims
similar to those of CAIR.CAIR was declared in default but later allowed to adopt the answer
filed by Roberto Lozada, a representative of CAIR.The trial proceeded, and SBMA presented
witnesses. Enano-Bote, et al. filed a third-party complaint against Alvarez, claiming they had
transferred their shares and were no longer liable for CAIR's obligations. Alvarez, in his
defense, repeated arguments raised by Lozada in the main case.

During the trial, only Jennifer testified as a witness for Enano-Bote, et al. CAIR did not
present evidence, and Alvarez failed to do so despite opportunities.

The court deemed Alvarez to have waived his right to present evidence.

Issues:

Whether the CA committed an error of law in applying the trust fund doctrine to make
petitioners personally and solidarily liable with CAIR for the unpaid rentals claimed by SBMA
against CAIR because of their supposedly unpaid subscriptions in CAIR's capital stock.
Ruling:

The Regional Trial Court (RTC) consistently held that the petitioners could be held liable
for CAIR's unpaid rentals to SBMA up to the extent of their unpaid subscription to CAIR's
capital stock. This ruling was based on the trust fund doctrine, which holds that subscriptions to
a corporation's capital stock constitute a fund that creditors can look to for satisfaction of their
claims. This doctrine extends to the assets and property held in trust for creditors when a
corporation is insolvent. The petitioners argued that this doctrine doesn't apply to them, as they
had assigned their subscription rights to Alvarez, who assumed the payment of their unpaid
balances. However, the Court of Appeals (CA) held that there was no evidence of a valid
transfer of shares as required by law, making the petitioners still liable as stockholders of CAIR.
The CA also noted that the trust fund doctrine is often applied when a corporation becomes
insolvent, allowing creditors to seek payment from stockholders for unpaid subscriptions. This
legal principle has been established in previous cases, such as the Philippine Trust Company v.
Rivera, where the Court upheld the right of creditors to collect unpaid stock subscriptions from
a stockholder, even if a resolution had been passed to reduce the capital stock without
complying with statutory requirements.
Case No. 3
Securities and Exchange Commissions (SEC) and Insurance Commissions (IC) vs.
College Assurance Plan Philippines
GR No. 202052 ; March 7, 2018

Facts:

This case involves College Assurance Plan Philippines, Inc. (CAP), a company that sells
pre-need educational plans. CAP established a Trust Fund to secure payments for the
educational plans it offered. The Trust Fund received a portion of the funds collected from
planholders and invested them in assets with higher yields than projected tuition fee increases.
However, due to changes in government regulations and economic crises, CAP faced financial
difficulties. To address a Trust Fund shortfall, CAP purchased MRT III Bonds and assigned them
to the Trust Fund to correct the deficiency.

During negotiations to sell these bonds, a creditor named Smart demanded payment of
CAP's outstanding balance. The Securities and Exchange Commission (SEC) Oversight Board
directed CAP to cease payments to Smart due to concerns about financial adequacy. CAP
subsequently filed for rehabilitation, resulting in a Stay Order that suspended claims against
CAP. A Rehabilitation Receiver was appointed, and CAP's Rehabilitation Plan included selling
the MRT Bonds at a discount in 2009.

While the bond sale was in progress, Smart demanded payment. The Rehabilitation
Receiver sought court approval for paying Smart and FEMI from the proceeds of the MRT
Bonds. Initially, the court approved the payment, but it later withdrew its approval, leading to a
legal dispute.

Smart and FEMI initiated legal proceedings against CAP in Hong Kong, prompting CAP
to seek court authorization to pay these claims. However, the court denied this request. The
Court of Appeals (CA) later determined that the court's denial constituted an abuse of
discretion. The CA argued that payments to Smart and FEMI could be considered as "benefits"
that could be withdrawn from the Trust Fund under specific rules. Furthermore, it held that
Smart and FEMI's roles in the sale of the MRT Bonds ultimately benefited planholders. The
petitioners (Smart and FEMI) challenged this decision, contending that Trust Fund assets should
be kept separate from CAP's assets. They argued that the law prohibited using the Trust Fund to
pay creditors and disagreed with the CA's interpretation of "benefits" and "cost of services."

Issues:
 Whether or not the payment of respondent’s outstanding obligation to Smart and FEMI,
representing the balance of the purchase price of the MRT III Bonds can be validly withdrawn
from the Respondent’s Trust Fund.

Ruling:

Yes, with regards to the Trust Fund, the MRT III bonds, when added to it, and
consequently, the earnings from selling them, were treated as integral components of the Trust
Fund itself.

This legal case revolves around the proper handling of a trust fund created by a pre-need
company, College Assurance Plan Philippines, Inc. (CAP), and whether specific obligations,
particularly those owed to creditors Smart and FEMI, can be settled using this trust fund. The
petitioners argue that the trust fund should remain separate from CAP's corporate assets and
responsibilities. They emphasize that the trust fund's primary purpose is to secure benefits for
planholders as defined in their pre-need agreements. They assert that "benefits" refer to
payments or services committed to planholders and should not encompass payments to
creditors. Additionally, Section 30 of Republic Act No. 9829 explicitly mandates that the trust
fund must exclusively serve the interests of planholders and should not be utilized to satisfy the
company's creditors.

The petitioners further contend that Section 16.4, Rule 16 of the New Rules on the
Registration and Sale of Pre-Need Plans only permits withdrawals from the trust fund for
specific purposes, primarily to fulfill commitments to planholders, rather than for creditor
payments. They also argue against the CA's interpretation that only the paid value of certain
bonds (MRT III Bonds) should be considered part of the trust fund. They claim that this
interpretation is incorrect because there were no restrictions or conditions imposed when these
bonds were assigned to the trust fund. Hence, the entirety of the proceeds from selling these
bonds should be regarded as trust fund assets.

In contrast, the respondent (CAP) asserts that the CA's decision was valid, contending
that settling obligations to Smart and FEMI was essential for selling the MRT III Bonds, which
ultimately benefited planholders. However, the petitioners counter this argument by
maintaining that such obligations should be covered by CAP's assets, not the trust fund, as
explicitly stated in Section 30 of the law.

The court's judgment aligns with the petitioners, emphasizing that the trust fund's
purpose is to guarantee the provision of benefits and services to planholders according to their
pre-need contracts. This encompasses payments or services explicitly outlined in these
contracts. The court concludes that the trust fund should not be utilized to settle claims from the
company's creditors, as specifically prohibited by Section 30 of Republic Act No. 9829.
Consequently, the CA's approval of payments to Smart and FEMI from the trust fund was
incorrect. Furthermore, the court dismisses the notion that only the paid value of the MRT III
Bonds should be considered trust fund assets, as no such conditions were imposed when these
bonds were incorporated into the trust fund. Hence, the entire proceeds from the sale of these
bonds should be recognized as trust fund assets.
Case No. 4
Philippines Trust Company vs Marciano Rivera
GR No. L-19761 ; January 29, 1923

Facts:

In 1918, the Cooperativa Naval Filipina was legally established in accordance with Philippine
laws, with an initial capital of P100,000, divided into one thousand shares, each having a par value of
P100. One of the individuals involved in the formation of this company was the defendant Mariano
Rivera, who committed to subscribing for 450 shares equivalent to P45,000 in value, while the remaining
stock was acquired by other individuals.

Over time, the company faced financial difficulties and eventually went into the hands of the
Philippine Trust Company, acting as the bankruptcy assignee. It was through this entity that legal action
was initiated to recover half of the defendant's stock subscription, which, it is acknowledged, has never
been paid.

The defendant's justification for not fulfilling the entire subscription is that shortly after the
incorporation of the Cooperativa Naval Filipina, a meeting of its shareholders took place. During this
meeting, a resolution was passed, reducing the company's capital by 50 percent and absolving subscribers
from the obligation to pay any outstanding balance of their subscription exceeding 50 percent of the
original amount.

Issues:

Whether or not the resolution adopted to the effect that the capital should be reduced by 50 per
centum and the subscribers are released from the obligation to pay any unpaid balance of their
subscription in excess of 50 per centum?

Ruling:

NO. It is a well-established legal principle that subscriptions to a corporation's capital represent

funds that creditors can rightfully seek to satisfy their claims. Therefore, an insolvency assignee has the
legal standing to bring a lawsuit to collect any unpaid stock subscriptions, thereby generating assets to
settle the corporation's debts.

A corporation does not possess the authority to exempt an original subscriber to its capital stock
from the obligation of paying for the subscribed shares unless there is a valuable consideration for such
exemption. When it comes to creditors' rights, a reduction in the capital stock can only occur as stipulated
by the statute, the corporate charter, or the articles of incorporation.

Furthermore, strict adherence to the statutory regulations is imperative (as per 14 C. J., 498, 620).
In the case at hand, the resolution that absolved shareholders from the responsibility of paying 50 percent
of their respective subscriptions attempted to withdraw a portion of the capital from the fund upon which
the company's creditors were ultimately entitled to rely. This resolution, having been executed without
complying with the statutory requirements, is entirely invalid.
Case No. 5
Halley vs. Printwell, Inc.
GR No. 157549 ; May 30, 2011

Facts:

In this case, the petitioner held the position of an incorporator and an original director in
Business Media Philippines, Inc. (BMPI), a company with an authorized capital stock of
₱3,000,000. BMPI engaged the services of Printwell for printing and agreed to a 30-day credit
arrangement. However, BMPI failed to settle its credit obligations, leading Printwell to initiate
legal action against BMPI to recover the outstanding balance of ₱291,342.76.

Subsequently, Printwell amended its complaint to include all original stockholders and
incorporators as defendants in an attempt to collect their unpaid subscription fees. The
defendants contended that they had fully satisfied their subscription payments, arguing that
BMPI possessed a distinct legal identity and had undergone dissolution.

In support of their claims of full payment, the defendants presented various documents,
including BMPI's official receipts, audit reports, balance sheets, income statements, income tax
returns, journal vouchers, cash deposit slips, and a bank account passbook.

The Regional Trial Court (RTC) ruled in favor of Printwell, dismissing the assertion of
full payment due to irregularities in the official receipts. The RTC concluded that the defendants
had exploited BMPI's corporate identity to evade their financial responsibilities. The trust fund
doctrine was applied by the RTC, holding the defendant stockholders jointly liable to Printwell
on a pro rata basis.

The Court of Appeals (CA) upheld the RTC's decision, underscoring that the defendants
had misused the corporate veil as a means to avoid payment, which would result in an unjust
outcome. The CA also reaffirmed the relevance of the trust fund doctrine, permitting creditors
to seek satisfaction from the unpaid subscription fees of stockholders.

The CA identified inconsistencies in the issuance of official receipts, casting doubt on the
claim of full payment. The court maintained that piercing the corporate veil was justified when
it was employed as a shield to perpetrate fraud or introduce confusion into legitimate matters.
Despite multiple appeals and motions for reconsideration, the CA's verdict remained unaltered.
This case underscores the significance of transparency in financial transactions and the
application of legal principles such as the trust fund doctrine and the piercing of the corporate
veil when necessary to prevent injustice and uphold creditors' rights.
Issues:

Whether or not the Court of Appeals erred in applying the Trust Fund Doctrine when
the grounds therefore have not been satisfied.

Ruling:

In this legal case, both the Regional Trial Court (RTC) and the Court of Appeals (CA)
applied the trust fund doctrine to the defendant stockholders, including the petitioner. The
petitioner's primary argument was that the trust fund doctrine should not be applied to her
since she had already completely settled her subscriptions to the capital stock of Business Media
Philippines, Inc. (BMPI). She asserted that the lower courts made an error in disregarding her
evidence, which included receipts, income tax returns, and financial statements, all of which
supported her claim of full payment.

However, the court found the petitioner's argument lacking merit. The trust fund
doctrine, originating from American jurisprudence and subsequently adopted in the
Philippines, is based on the principle that a corporation's assets essentially function as a fund
intended for the satisfaction of its creditors' claims. This doctrine asserts that stock subscriptions
represent a fund to which creditors have a legitimate entitlement to settle their debts.
Importantly, it is not restricted to unpaid subscriptions but extends to other corporate assets and
property when the corporation faces insolvency.

Under the trust fund doctrine, a corporation cannot release an original subscriber from
the obligation to pay for their shares unless there is valuable consideration or if it is done
fraudulently to the detriment of creditors. Creditors are entitled to take legal action to recover
unpaid subscriptions, effectively stepping into the shoes of the corporation to satisfy their
claims. To establish a case against stockholders of an insolvent corporation, it is adequate to
show that they acted in bad faith by failing to pay the par value of the corporation's stocks.

The petitioner argued that irregularities in the issuance of receipts to other stockholders
should not affect her case because her receipt did not suffer from similar irregularities.
Nevertheless, even though the RTC and CA found no irregularity in her receipt, the court did
not accept her defense of full payment. In civil cases, the burden of proving payment rests with
the party making the claim, and it is the debtor's responsibility to demonstrate with legal
certainty that the obligation has been discharged through payment.

The petitioner presented an official receipt indicating that she had paid the balance of
her subscription with a check. However, the court noted that the delivery of a check does not
constitute payment until it has been successfully encashed. Since a check is not money but a
substitute for money, its delivery does not discharge the obligation under a judgment. The
burden of proof fell on the respondents to not only demonstrate that they had delivered the
checks to the petitioner but also that these checks were encashed. Their failure to provide
sufficient evidence shifted the burden of evidence back to the petitioner.

The court also found that the petitioner's income tax return (ITR) and statement of assets
and liabilities of BMPI were irrelevant to the issue of subscription payment since they did not
inherently prove payment. Likewise, deposit slips and passbook entries were deemed
unsuitable evidence due to their inability to confirm the alleged payments.

Furthermore, the absence of the stock and transfer book, which is typically a reliable
source for verifying stockholders' payment status, raised doubts about the actual payment of
the petitioner's subscription. Moreover, the petitioner failed to produce a certificate of stock
issued by BMPI, which would have constituted strong evidence of full payment.

Lastly, the petitioner argued that relying on the articles of incorporation as proof of
stockholders' liabilities was erroneous, asserting that these documents did not reflect BMPI's
latest subscription status. However, the court emphasized that it was the duty of the
stockholders, including the petitioner, to substantiate the fact of full payment, not the creditor,
Printwell, which acted as the plaintiff in this case. The failure to substantiate their claim of full
payment and to counter the reliance on the articles of incorporation indicated their inability to
prove their defense.

In conclusion, the court determined that the petitioner was liable under the trust fund
doctrine because her subscription remained unpaid. The trust fund doctrine is a crucial
principle in corporate law designed to safeguard the rights of creditors and ensure
accountability among stockholders, especially in cases of insolvency. Consequently, Printwell, as
BMPI's creditor, possessed the legal right to pursue the petitioner's unpaid subscription to
satisfy its claim.
PIERCING THE VEIL OF CORPORATE FICTION CASE DIGESTS

Case No. 1
International Academy of Management and Economics vs Litton and Company, Inc.
GR No. 191525 ; December 13, 2017

Facts:

Litton filed an unlawful detainer complaint against Atty. Emmanuel T. Santos (Santos)
for unpaid rent and realty taxes. The MeTC ruled in Litton's favor, but the judgment was not
executed. Litton filed an action for revival of judgment, which was granted by the RTC. Santos
appealed to the CA, which affirmed the RTC decision. The CA upheld the piercing of the
corporate veil of International Academy of Management and Economics Incorporated (I/AME),
a corporation connected to Santos, as Santos used it to shield his property from execution. The
CA found this use of I/AME to be improper and allowed the piercing of the corporate veil.

Issues:

The issues boil down to the alleged denial of due process when the court pierced the
corporate veil of I/ AME and its property was made to answer for the liability of Santos.

Ruling:

The case involves the piercing of the corporate veil to enforce a judgment against Atty.
Emmanuel T. Santos (Santos), who owed rental arrears and realty taxes to Litton. Litton sought
to enforce the judgment against a piece of real property registered in the name of International
Academy of Management and Economics Incorporated (I/AME), a corporation associated with
Santos. I/AME claimed that it was a separate entity from Santos and should not be held liable
for his debts.

The court ruled that there was no violation of due process against I/AME as the piercing
of the corporate veil was justified. It found that Santos had used I/AME to shield his assets
from the judgment and evade his obligation. The court applied the concept of reverse piercing
of the corporate veil, allowing Litton, as a third-party creditor, to access I/AME's assets to
satisfy Santos's debt. The court rejected the argument that the piercing of the corporate veil only
applies to stock corporations and held that it can be applied to non-stock corporations like
I/AME.

In summary, the court upheld the piercing of the corporate veil to enforce the judgment
against Santos and I/AME, allowing Litton to access I/AME's assets to satisfy Santos's debt.
Case No. 2
Kukan International Corporation vs. Amor Reyes
GR No. 182729 ; September 29, 2010

Facts:

This legal case involves a dispute between Romeo M. Morales, a contractor, and two
corporations, Kukan, Inc. and Kukan International Corporation (KIC), related to a contract for
signage installation. Morales filed a lawsuit (Civil Case No. 99-93173) against Kukan, Inc. for
unpaid fees, which resulted in a judgment in his favor in 2002.

Kukan, Inc. failed to pay the judgment amount, leading Morales to seek its enforcement.
However, KIC, a corporation formed after the lawsuit had begun, claimed ownership of certain
assets that the sheriff sought to levy in satisfaction of the judgment. KIC argued that it was a
separate entity from Kukan, Inc.

Morales, believing that KIC was essentially the same as Kukan, Inc., filed a motion to
pierce the corporate veil, effectively treating them as one entity. The Regional Trial Court (RTC)
granted this motion, holding KIC liable for the judgment. KIC appealed this decision to the
Court of Appeals (CA), arguing that its due process rights were violated and that the RTC
improperly modified its earlier judgment.

The CA affirmed the RTC's decision, and KIC appealed to the Supreme Court. KIC
presented several issues for the Supreme Court's consideration, including the alleged violation
of its due process rights, the modification of the RTC's judgment, and the procedure followed by
the lower courts.

The case revolves around whether KIC can be held liable for the judgment against
Kukan, Inc., with Morales seeking to pierce the corporate veil and treat them as one entity. The
Supreme Court will need to determine if the lower courts' decisions were legally sound or if
KIC's rights were indeed violated during the legal proceedings.

Issues:

Whether the trial and appellate courts correctly applied, under the premises, the
principle of piercing the veil of corporate fiction.

Ruling:

Under this doctrine, a court may disregard the separate legal identity of a corporation
and treat it as an aggregation of individuals or as one and the same entity as another
corporation when it is used to commit fraud, illegality, or other wrongdoing.
In this specific case, Kukan, Inc. and Kukan International Corporation (KIC) were involved. KIC
claimed that it was a separate entity from Kukan, Inc., but the Regional Trial Court (RTC)
declared them to be one entity, holding KIC liable for Kukan, Inc.'s debt to Romeo M. Morales.
Morales sought to enforce a judgment against Kukan, Inc. by levying assets belonging to KIC.

However, the Supreme Court ruled that the application of the doctrine of piercing the
corporate veil must be done with caution and established liability. The Court emphasized that
the court must first have jurisdiction over the corporation before piercing the corporate veil.
Furthermore, the doctrine should generally be applied only to determine established liability,
not to confer jurisdiction on a court.

The Court found that the RTC and the Court of Appeals (CA) had failed to identify the
necessary elements to pierce the corporate veil. While there were commonalities between the
two corporations, such as shared stock ownership by Michael Chan, it was insufficient to
establish their identity or that KIC was formed to defraud Morales.
In conclusion, the Supreme Court granted the petition, reversing the CA's decision, and lifting
the levy on KIC's assets. The RTC was directed to execute the judgment against Kukan, Inc.
Case No. 3
Zaragoza vs. Tan
GR No. 225544 ; December 24, 2017

Facts:

This case involves a labor dispute where petitioner Rogel N. Zaragoza was dismissed
from his position as Area Sales Manager by Consolidated Distillers of the Far East Incorporated
(Condis) in 2007. He filed an illegal dismissal case against Condis and its officers, which
resulted in a favorable decision from the Labor Arbiter. However, Condis and the officers
appealed the decision, and the case went through various legal proceedings.

Ultimately, the National Labor Relations Commission (NLRC) nullified a resolution that
held Emperador Distillers Inc. (EDI) and Katherine Tan, the President of Condis, jointly liable
for petitioner's claims. The NLRC argued that these parties were not properly summoned or
involved in the case, and thus, the Labor Arbiter did not have jurisdiction over them.

Petitioner appealed to the Court of Appeals (CA), which upheld the NLRC decision. The
CA ruled that the Labor Arbiter lacked jurisdiction over EDI and Katherine Tan because they
were not properly included in the case. The CA dismissed petitioner's petition for certiorari and
upheld the NLRC's decision.

This summary provides an overview of the case's procedural history and the key issues
related to the labor dispute and the jurisdiction of the Labor Arbiter and NLRC over certain
parties involved.

Issues:

Whether or not the Doctrine of Piercing the Corporate Veil Fiction is applied
appropriately in this case.

Ruling:

The principle of piercing the veil of corporate fiction is applied to establish liability
rather than jurisdiction. It cannot be used to give a court jurisdiction over a party that was not
initially included in a case. In other words, a corporation not originally involved in a lawsuit
cannot be subject to the court's process of piercing its corporate veil. Doing so would violate the
corporation's right to due process.

To have jurisdiction over a defendant, there must be a valid service of summons or the
defendant's voluntary appearance in court. Without proper service of summons or voluntary
appearance, any judgment by the court is null and void. Proper service of summons is essential
to protect an individual's right to due process.
Additionally, it's a fundamental principle of corporate law that a corporation has a
separate and distinct legal personality from its stockholders and other related corporations.
Corporate officers and directors are generally not personally liable for the corporation's
obligations unless specific conditions are met, such as their assent to unlawful acts or gross
negligence.

In this case, the argument is made that respondent Tan, as the President of Condis,
should be held personally liable for a judgment award, even though she was not initially a party
to the illegal dismissal case. However, this argument is not supported because respondent Tan's
involvement in the case was never established, and the legal basis for piercing the corporate veil
is not met.

Furthermore, the court cannot pierce the corporate veil merely because two corporations
have interlocking directors, corporate officers, or shareholders. Such a decision must be made
cautiously and requires clear and convincing evidence of wrongdoing. In this particular case,
the court found that there was no valid justification for piercing the corporate veil of the two
corporations involved.

Ultimately, the court's decision emphasized that the doctrine of piercing the corporate
veil should be applied sparingly and only when fraud or other public policy considerations are
clearly and convincingly established. Additionally, this doctrine cannot be used to confer
jurisdiction over parties that were not properly included in the case from the beginning.
Case No. 4
Zambrano vs. Philippines Carpet Manufacturing Corporation
GR No. 224099 ; June 21, 2017

Facts:

The petitioners were employees of Philippine Carpet Manufacturing Corporation (Phil

Carpet) who were terminated due to the company's claimed cessation of operations. The
employees argued that the closure was a pretense to transfer its operations to its wholly-owned
corporation, Pacific Carpet Manufacturing Corporation (Pacific Carpet), and that their dismissal
constituted unfair labor practice.

Phil Carpet defended the closure, citing continuous financial losses, and argued that it
followed the legal procedures for business closure. They provided evidence of declining
demand, financial losses, and compliance with labor laws in closing the business.
The Labor Arbiter (LA) ruled in favor of Phil Carpet, stating that the closure was due to
economic necessity and that there was no evidence of unfair labor practices. The National Labor
Relations Commission (NLRC) upheld the LA's decision, finding that the financial statements
supported the closure and that Phil Carpet followed proper procedures.

The Court of Appeals (CA) also sided with Phil Carpet, concluding that the closure was
not in bad faith and that the dismissal of union officers and members did not constitute unfair
labor practice. The CA found no convincing evidence to support the claim that clients
transferred job orders to Pacific Carpet or that Phil Carpet's machines were transferred to Pacific
Carpet.

The CA rejected the argument that the closure was a pretense, stating that mere
ownership by a single stockholder or another corporation is not enough to disregard a
corporation's separate legal identity.

The petitioners' motion for reconsideration was denied, leading them to file this petition.

Issues:

Whether or not Pacific Carpet may be held liable for Philippine Carpet’s obligations.

Ruling:

The petitioners are seeking to hold Pacific Carpet liable for the obligations of Phil Carpet
by arguing that Pacific Carpet is a subsidiary of the latter. However, it's important to
understand that a corporation is a distinct legal entity created by law, separate from the
individuals or entities that form it. The corporate veil, or the separation between the corporation
and its owners, can only be pierced in specific cases where it is used to shield fraud, illegality, or
injustice against others.

The principle of piercing the corporate veil should be applied cautiously and only when
wrongdoing is clearly and convincingly established, not based on presumption. In other words,
it should be proven that the corporate structure was abused to commit fraud, illegal activities,
or injustice against third parties.
Case No. 5
Maricalum Mining Corporation vs. Florentino
GR No. 221813 ; July 23, 2018

Facts:

The dispute revolves around Maricalum Mining, which was transferred to the National
Government for privatization due to financial issues. G Holdings, a domestic corporation,
acquired 90% of Maricalum Mining's shares and financial claims through a Purchase and Sale
Agreement with the Asset Privatization Trust. G Holdings also took control of Maricalum
Mining's operations.

Several manpower cooperatives were formed by former Maricalum Mining employees.

These cooperatives provided services to Maricalum Mining under agreements.
Maricalum Mining decided to stop its mining and milling operations due to financial problems
in 2001. G Holdings subsequently foreclosed on Maricalum Mining's properties, which were
used as collateral for the financial claims.

Former Maricalum Mining employees filed a complaint against G Holdings, alleging

illegal dismissal and various labor violations. They claimed that G Holdings was their
employer. The Labor Arbiter (LA) ruled in favor of the employees, holding G Holdings
responsible for labor violations. The LA ordered G Holdings to pay monetary awards to the
employees. G Holdings appealed to the National Labor Relations Commission (NLRC), which
modified the LA's decision. The NLRC shifted the liability to Maricalum Mining, stating that
Maricalum Mining had entered into service contracts with the manpower cooperatives.
Complainants and Maricalum Mining filed motions for reconsideration with the NLRC, which
partially granted the motion, canceling the monetary awards of two complainants. Both parties
then filed petitions for certiorari with the Court of Appeals (CA). The CA denied the petitions
and upheld the NLRC's decision, emphasizing that factual issues are not suitable for review
through certiorari.

In summary, the dispute involves former Maricalum Mining employees seeking

labor-related claims against G Holdings, with the NLRC ultimately holding Maricalum Mining
liable for the claims. The CA upheld the NLRC's decision, emphasizing that factual findings by
the NLRC are conclusive and not subject to review through certiorari.

Issues:

Whether or not the Court of Appeals erred in affirming the NLRC’s ruling which
allowed the piercing of the corporate veil against Maricalum Mining but not against Sipalay
Hospital.
Ruling:

The doctrine of piercing the corporate veil can be applied in three basic situations: (a)
when a corporation is used to evade an existing obligation, (b) in fraud cases where the
corporate entity is used to protect fraud or defend a crime, and (c) in alter ego cases where a
corporation is essentially a facade or instrument of another corporation or individual. However,
this principle is applied cautiously because corporations have a separate legal personality. A
parent or holding company is one that owns a significant portion of another company's voting
shares to control or influence its management. Holding companies primarily invest in other
companies' securities.

In an alter ego theory, the corporate veil can be pierced if three elements concur: (1)
complete control of the subsidiary by the parent, (2) the control was used to commit fraud or
wrong, and (3) the control and breach of duty caused harm or loss. Control is assessed based on
factors like stock ownership, identity of directors and officers, how corporate books are kept,
and business conduct. Fraud test involves examining whether the corporate veil was used to
shield fraud, crime, or perpetuate injustice, considering various factors. Additionally, the harm
test requires establishing a causal link between the control's improper use and the injury
suffered.

In the case at hand, the court evaluates whether G Holdings can be held liable for
Maricalum Mining's labor-related claims. It considers factors like control, fraud, and transfer of
assets. While G Holdings had control over Maricalum Mining, mere control is insufficient to
pierce the corporate veil. Moreover, there is no evidence of fraudulent intent in transferring
assets, and the transfer was not for the purpose of evading the complainants' claims.
Additionally, it was not proven that all assets were transferred or depleted. G Holdings
purchased Maricalum Mining's shares for investment purposes, not to continue its operations.
In summary, to pierce the corporate veil, all three elements of the alter ego theory must be
present. Control alone is not enough, and there must be evidence of fraud or wrongful intent in
the transfer of assets. G Holdings, as a holding company, can only be held liable if there is proof
of fraud or gross negligence amounting to bad faith.

In conclusion, the complainants failed to provide clear and convincing evidence to prove
fraud on the part of G Holdings. While they presented some evidence related to payment of
wages and dismissal, they lacked substantial evidence to demonstrate that G Holdings
exercised control over the employees of Maricalum Mining and Sipalay Hospital. Moreover, the
Articles of Incorporation of Sipalay Hospital indicated its independence in providing medical
services to the public, and there was no evidence of a substantial transfer of shares from the
original incorporators to G Holdings. Consequently, the Court upheld the CA's decision,
affirming the NLRC's findings, and concluded that G Holdings was not liable for the
complainants' monetary awards.
 Republic of the Philippines
JOSE RIZAL MEMORIAL STATE UNIVERSITY
The Premier University in Zamboanga del Norte
Dipolog Campus, Dipolog City

Corporation Law Case Digests

ARBASIT PEREZ TULAWIE

Juris Doctor - II

ATTY. NIZZA LESTERIO ABSIN

Professor

September 15, 2023