THIRD DIVISION

[G.R. No. 166282. February 13, 2013.]

HEIRS OF FE TAN UY (Represented by her heir, Manling Uy Lim) ,

petitioners, vs. INTERNATIONAL EXCHANGE BANK, respondent.

[G.R. No. 166283. February 13, 2013.]

GOLDKEY DEVELOPMENT CORPORATION, petitioner, vs.

INTERNATIONAL EXCHANGE BANK, respondent.

DECISION

MENDOZA, J : p

Before the Court are two consolidated petitions for review on certiorari under Rule
45 of the 1997 Revised Rules of Civil Procedure, assailing the August 16, 2004 Decision 1
and the December 2, 2004 Resolution 2 of the Court of Appeals (CA) in CA-G.R. CV No.
69817 entitled "International Exchange Bank v. Hammer Garments Corp., et al."

The Facts
On several occasions, from June 23, 1997 to September 3, 1997, respondent
International Exchange Bank (iBank), granted loans to Hammer Garments Corporation
(Hammer), covered by promissory notes and deeds of assignment, in the following
amounts: 3
Date of Promissory
Amount
Note
June 23, 1997 P5,599,471.33
July 24, 1997 2,700,000.00
July 25, 1997 2,300,000.00
August 1, 1997 2,938,505.04
August 1, 1997 3,361,494.96
August 14, 1997 980,000.00
August 21, 1997 2,527,200.00
August 21, 1997 3,146,715.00
September 3, 1997 1,385,511.75
—————————————
Total P24,938,898.08
============

These were made pursuant to the Letter-Agreement, 4 dated March 23, 1996,
between iBank and Hammer, represented by its President and General Manager, Manuel
Chua (Chua) a.k.a. Manuel Chua Uy Po Tiong, granting Hammer a P25 Million-Peso
Omnibus Line. 5 The loans were secured by a P9 Million-Peso Real Estate Mortgage 6
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 executed on July 1, 1997 by Goldkey Development Corporation (Goldkey) over several of
its properties and a P25 Million-Peso Surety Agreement 7 signed by Chua and his wife, Fe
Tan Uy (Uy), on April 15, 1996. ASHaDT

As of October 28, 1997, Hammer had an outstanding obligation of P25,420,177.62

to iBank. 8 Hammer defaulted in the payment of its loans, prompting iBank to foreclose on
Goldkey's third-party Real Estate Mortgage. The mortgaged properties were sold for P12
million during the foreclosure sale, leaving an unpaid balance of P13,420,177.62. 9 For
failure of Hammer to pay the deficiency, iBank filed a Complaint 10 for sum of money on
December 16, 1997 against Hammer, Chua, Uy, and Goldkey before the Regional Trial
Court, Makati City (RTC). 11
Despite service of summons, Chua and Hammer did not file their respective answers
and were declared in default. In her separate answer, Uy claimed that she was not liable to
iBank because she never executed a surety agreement in favor of iBank. Goldkey, on the
other hand, also denies liability, averring that it acted only as a third-party mortgagor and
that it was a corporation separate and distinct from Hammer. 12
Meanwhile, iBank applied for the issuance of a writ of preliminary attachment which
was granted by the RTC in its December 17, 1997 Order. 13 The Notice of Levy on
Attachment of Real Properties, dated July 15, 1998, covering the properties under the
name of Goldkey, was sent by the sheriff to the Registry of Deeds of Quezon City. 14
The RTC, in its Decision, 15 dated December 27, 2000, ruled in favor of iBank. While
it made the pronouncement that the signature of Uy on the Surety Agreement was a
forgery, it nevertheless held her liable for the outstanding obligation of Hammer because
she was an officer and stockholder of the said corporation. The RTC agreed with Goldkey
that as a third-party mortgagor, its liability was limited to the properties mortgaged. It came
to the conclusion, however, that Goldkey and Hammer were one and the same entity for
the following reasons: (1) both were family corporations of Chua and Uy, with Chua as the
President and Chief Operating Officer; (2) both corporations shared the same office and
transacted business from the same place, (3) the assets of Hammer and Goldkey were co-
mingled; and (4) when Chua absconded, both Hammer and Goldkey ceased to operate. As
such, the piercing of the veil of corporate fiction was warranted. Uy, as an officer and
stockholder of Hammer and Goldkey, was found liable to iBank together with Chua,
Hammer and Goldkey for the deficiency of P13,420,177.62.

Aggrieved, the heirs of Uy and Goldkey (petitioners) elevated the case to the CA. On
August 16, 2004, it promulgated its decision affirming the findings of the RTC. The CA
found that iBank was not negligent in evaluating the financial stability of Hammer.
According to the appellate court, iBank was induced to grant the loan because petitioners,
with intent to defraud the bank, submitted a falsified Financial Report for 1996 which
incorrectly declared the assets and cashflow of Hammer. 16 Because petitioners acted
maliciously and in bad faith and used the corporate fiction to defraud iBank, they should be
treated as one and the same as Hammer. 17 DACaTI

Hence, these petitions filed separately by the heirs of Uy and Goldkey. On February
9, 2005, this Court ordered the consolidation of the two cases. 18
The Issues
Petitioners raise the following issues:

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 Whether or not a trial court, under the facts of this case, can go out of the
issues raised by the pleadings; 19

Whether or not there is guilt by association in those cases where the veil
of corporate fiction may be pierced; 20 and

Whether or not the "alter ego" theory in disregarding the corporate

personality of a corporation is applicable to Goldkey. 21

Simplifying the issues in this case, the Court must resolve the following: (1) whether
Uy can be held liable to iBank for the loan obligation of Hammer as an officer and
stockholder of the said corporation; and (2) whether Goldkey can be held liable for the
obligation of Hammer for being a mere alter ego of the latter.
The Court's Ruling
The petitions are partly meritorious.

Uy is not liable; The piercing of the

veil of corporate fiction is not justified
The heirs of Uy argue that the latter could not be held liable for being merely an
officer of Hammer and Goldkey because it was not shown that she had committed any
actionable wrong 22 or that she had participated in the transaction between Hammer and
iBank. They further claim that she had cut all ties with Hammer and her husband long
before the execution of the loan. 23
The Court finds in favor of Uy.
Basic is the rule in corporation law that a corporation is a juridical entity which is
vested with a legal personality separate and distinct from those acting for and in its behalf
and, in general, from the people comprising it. Following this principle, obligations incurred
by the corporation, acting through its directors, officers and employees, are its sole
liabilities. A director, officer or employee of a corporation is generally not held personally
liable for obligations incurred by the corporation. 24 Nevertheless, this legal fiction may be
disregarded if it is used as a means to perpetrate fraud or an illegal act, or as a vehicle for
the evasion of an existing obligation, the circumvention of statutes, or to confuse legitimate
issues. 25 This is consistent with the provisions of the Corporation Code of the Philippines,
which states: cAaDCE

Sec. 31. Liability of directors, trustees or officers. — Directors or trustees

who wilfully and knowingly vote for or assent to patently unlawful acts of the
corporation or who are guilty of gross negligence or bad faith in directing the
affairs of the corporation or acquire any personal or pecuniary interest in
conflict with their duty as such directors or trustees shall be liable jointly and
severally for all damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons.

Solidary liability will then attach to the directors, officers or employees of the
corporation in certain circumstances, such as:
1. When directors and trustees or, in appropriate cases, the officers of a
corporation: (a) vote for or assent to patently unlawful acts of the
corporation; (b) act in bad faith or with gross negligence in directing
the corporate affairs; and (c) are guilty of conflict of interest to the
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 prejudice of the corporation, its stockholders or members, and other
persons;
2. When a director or officer has consented to the issuance of watered
stocks or who, having knowledge thereof, did not forthwith file with the
corporate secretary his written objection thereto;
3. When a director, trustee or officer has contractually agreed or
stipulated to hold himself personally and solidarily liable with the
corporation; or
4. When a director, trustee or officer is made, by specific provision of
law, personally liable for his corporate action. 26
Before a director or officer of a corporation can be held personally liable for
corporate obligations, however, the following requisites must concur: (1) the complainant
must allege in the complaint that the director or officer assented to patently unlawful acts of
the corporation, or that the officer was guilty of gross negligence or bad faith; and (2) the
complainant must clearly and convincingly prove such unlawful acts, negligence or bad
faith. 27 CaATDE

While it is true that the determination of the existence of any of the circumstances
that would warrant the piercing of the veil of corporate fiction is a question of fact which
cannot be the subject of a petition for review on certiorari under Rule 45, this Court can
take cognizance of factual issues if the findings of the lower court are not supported by the
evidence on record or are based on a misapprehension of facts. 28
In this case, petitioners are correct to argue that it was not alleged, much less
proven, that Uy committed an act as an officer of Hammer that would permit the piercing of
the corporate veil. A reading of the complaint reveals that with regard to Uy, iBank did not
demand that she be held liable for the obligations of Hammer because she was a
corporate officer who committed bad faith or gross negligence in the performance of her
duties such that the lifting of the corporate mask would be merited. What the complaint
simply stated is that she, together with her errant husband Chua, acted as surety of
Hammer, as evidenced by her signature on the Surety Agreement which was later found
by the RTC to have been forged. 29
Considering that the only basis for holding Uy liable for the payment of the loan was
proven to be a falsified document, there was no sufficient justification for the RTC to have
ruled that Uy should be held jointly and severally liable to iBank for the unpaid loan of
Hammer. Neither did the CA explain its affirmation of the RTC's ruling against Uy. The
Court cannot give credence to the simplistic declaration of the RTC that liability would
attach directly to Uy for the sole reason that she was an officer and stockholder of
Hammer.
At most, Uy could have been charged with negligence in the performance of her
duties as treasurer of Hammer by allowing the company to contract a loan despite its
precarious financial position. Furthermore, if it was true, as petitioners claim, that she no
longer performed the functions of a treasurer, then she should have formally resigned as
treasurer to isolate herself from any liability that could result from her being an officer of the
corporation. Nonetheless, these shortcomings of Uy are not sufficient to justify the piercing
of the corporate veil which requires that the negligence of the officer must be so gross that
it could amount to bad faith and must be established by clear and convincing evidence.
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 Gross negligence is one that is characterized by the lack of the slightest care, acting or
failing to act in a situation where there is a duty to act, wilfully and intentionally with a
conscious indifference to the consequences insofar as other persons may be affected. 30
ASHaDT

It behooves this Court to emphasize that the piercing of the veil of corporate fiction is
frowned upon and can only be done if it has been clearly established that the separate and
distinct personality of the corporation is used to justify a wrong, protect fraud, or perpetrate
a deception. 31 As aptly explained in Philippine National Bank v. Andrada Electric &
Engineering Company: 32
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. Otherwise, an injustice that was never unintended may
result from an erroneous application. 33

Indeed, there is no showing that Uy committed gross negligence. And in the

absence of any of the aforementioned requisites for making a corporate officer, director or
stockholder personally liable for the obligations of a corporation, Uy, as a treasurer and
stockholder of Hammer, cannot be made to answer for the unpaid debts of the corporation.

Goldkey is a mere alter ego of Hammer

Goldkey contends that it cannot be held responsible for the obligations of its
stockholder, Chua. 34 Moreover, it theorizes that iBank is estopped from expanding
Goldkey's liability beyond the real estate mortgage. 35 It adds that it did not authorize the
execution of the said mortgage. 36 Finally, it passes the blame on to iBank for failing to
exercise the requisite due diligence in properly evaluating Hammer's creditworthiness
before it was extended an omnibus line. 37
The Court disagrees with Goldkey.
There is no reason to discount the findings of the CA that iBank duly inspected the
viability of Hammer and satisfied itself that the latter was a good credit risk based on the
Financial Statement submitted. In addition, iBank required that the loan be secured by
Goldkey's Real Estate Mortgage and the Surety Agreement with Chua and Uy. The records
support the factual conclusions made by the RTC and the CA. CITaSA

To the Court's mind, Goldkey's argument, that iBank is barred from pursuing
Goldkey for the satisfaction of the unpaid obligation of Hammer because it had already
limited its liability to the real estate mortgage, is completely absurd. Goldkey needs to be
reminded that it is being sued not as a consequence of the real estate mortgage, but
rather, because it acted as an alter ego of Hammer. Accordingly, they must be treated as
one and the same entity, making Goldkey accountable for the debts of Hammer.
In fact, it is Goldkey who is now precluded from denying the validity of the Real
Estate Mortgage. In its Answer with Affirmative Defenses and Compulsory Counterclaim,
dated January 5, 1998, it already admitted that it acted as a third-party mortgagor to secure
the obligation of Hammer to iBank. 38 Thus, it cannot, at this late stage, question the due
execution of the third-party mortgage.
Similarly, Goldkey is undoubtedly mistaken in claiming that iBank is seeking to
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 enforce an obligation of Chua. The records clearly show that it was Hammer, of which
Chua was the president and a stockholder, which contracted a loan from iBank. What
iBank sought was redress from Goldkey by demanding that the veil of corporate fiction be
lifted so that it could not raise the defense of having a separate juridical personality to
evade liability for the obligations of Hammer.
Under a variation of the doctrine of piercing the veil of corporate fiction, when two
business enterprises are owned, conducted and controlled by the same parties, both law
and equity will, when necessary to protect the rights of third parties, disregard the legal
fiction that two corporations are distinct entities and treat them as identical or one and the
same. 39
While the conditions for the disregard of the juridical entity may vary, the following
are some probative factors of identity that will justify the application of the doctrine of
piercing the corporate veil, as laid down in Concept Builders, Inc. v. NLRC: 40
(1) Stock ownership by one or common ownership of both corporations;
(2) Identity of directors and officers;
(3) The manner of keeping corporate books and records; and
(4) Methods of conducting the business. 41

These factors are unquestionably present in the case of Goldkey and Hammer, as
observed by the RTC, as follows: TaDSCA

1. Both corporations are family corporations of defendants Manuel Chua

and his wife Fe Tan Uy. The other incorporators and shareholders of the two
corporations are the brother and sister of Manuel Chua (Benito Ng Po Hing and
Nenita Chua Tan) and the sister of Fe Tan Uy, Milagros Revilla. The other
incorporator/share holder is Manling Uy, the daughter of Manuel Chua Uy Po
Tiong and Fe Tan Uy.
The stockholders of Hammer Garments as of March 23, 1987, aside from
spouses Manuel and Fe Tan Uy are: Benito Chua, brother Manuel Chua, Nenita
Chua Tan, sister of Manuel Chua and Tessie See Chua Tan. On March 8, 1988,
the shares of Tessie See Chua Uy were assigned to Milagros T. Revilla, thereby
consolidating the shares in the family of Manuel Chua and Fe Tan Uy.
2. Hammer Garments and Goldkey share the same office and practically
transact their business from the same place.
3. Defendant Manuel Chua is the President and Chief Operating Officer of
both corporations. All business transactions of Goldkey and Hammer are done
at the instance of defendant Manuel Chua who is authorized to do so by the
corporations.
The promissory notes subject of this complaint are signed by him as
Hammer's President and General Manager. The third-party real estate mortgage
of defendant Goldkey is signed by him for Goldkey to secure the loan obligation
of Hammer Garments with plaintiff "iBank". The other third-party real estate
mortgages which Goldkey executed in favor of the other creditor banks of
Hammer are also signed by Manuel Chua.
4. The assets of Goldkey and Hammer are co-mingled. The real properties
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 of Goldkey are mortgaged to secure Hammer's obligation with creditor banks.
The proceeds of at least two loans which Hammer obtained from plaintiff
"iBank", purportedly to finance its export to Wal-Mart are instead used to finance
the purchase of a manager's check payable to Goldkey. The defendants' claim
that Goldkey is a creditor of Hammer to justify its receipt of the Manager's check
is not substantiated by evidence. Despite subpoenas issued by this Court,
Goldkey thru its treasurer, defendant Fe Tan Uy and or its corporate secretary
Manling Uy failed to produce the Financial Statement of Goldkey. THEDCA

5. When defendant Manuel Chua "disappeared", the defendant Goldkey

ceased to operate despite the claim that the other "officers" and
stockholders like Benito Chua, Nenita Chua Tan, Fe Tan Uy, Manling
Uy and Milagros T. Revilla are still around and may be able to
continue the business of Goldkey, if it were different or distinct from
Hammer which suffered financial set back. 42
Based on the foregoing findings of the RTC, it was apparent that Goldkey was
merely an adjunct of Hammer and, as such, the legal fiction that it has a separate
personality from that of Hammer should be brushed aside as they are, undeniably, one
and the same.
WHEREFORE, the petitions are PARTLY GRANTED . The August 16, 2004
Decision and the December 2, 2004 Resolution of the Court of Appeals, in CA-G.R. CV No.
69817, are hereby MODIFIED. Fe Tan Uy is released from any liability arising from the
debts incurred by Hammer from iBank. Hammer Garments Corporation, Manuel Chua Uy
Po Tiong and Goldkey Development Corporation are jointly and severally liable to pay
International Exchange Bank the sum of P13,420,177.62 representing the unpaid loan
obligation of Hammer as of December 12, 1997 plus interest. No costs.
SO ORDERED.

Velasco, Jr., Abad, Villarama, Jr. * and Leonen, JJ., concur.

Footnotes
*Designated additional member in lieu of Associate Justice Diosdado M. Peralta, per raffle,
dated July 20, 2011.

1.Rollo (G.R. No. 166283), pp. 41-54; penned by Associate Justice Josefina Guevara-Salonga
and concurred in by Associate Justice Conrado M. Vazquez, Jr. and Associate Justice
Fernanda Lampas Peralta of the Seventh Division.

2.Id. at 56-57.

3.Id. at 62, 325, 414-431.

4.Id. at 106-107.

5.Id. at 60.

6.Id. at 432-433.

7.Id. at 434-435.
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 8.Id. at 42, 60 and 350.

9.Id. at 60-61.

10.Id. at 349-357.

11.Id. at 321.

12.Id. at 61-62.

13.Id. at 43.

14.Id. at 323 and 385.

15.Id. at 60-69.

16.Id. at 46-47.

17.Id. at 50.

18.Rollo (G.R. No. 166282), p. 8a.

19.Id. at 22.

20.Id. at 22.

21.Rollo (G.R. No. 166283), p. 20.

22.Id. at 253.

23.Id. at 245-246.

24.Garcia v. Social Security Commission Legal and Collection, G.R. No. 170735, December
17, 2007, 540 SCRA 456, 473-474.

25.Aratea v. Suico, G.R. No. 170284, March 16, 2007, 518 SCRA 501, 507 citingPrudential
Bank v. Alviar, 502 Phil. 595 (2005).

26.Uichico v. National Labor Relations Commission, 339 Phil. 242, 252 (1997).

27.Francisco v. Mallen, Jr., G.R. No. 173169, September 22, 2010, 631 SCRA 118, 123.

28.Sarona v. National Labor Relations Commission, G.R. No. 185280, January 18, 2012, 663
SCRA 394, 415.

29.Rollo (G.R. No. 166283), pp. 64 and 351.

30.Magaling v. Ong, G.R. No. 173333, August 13, 2008, 562 SCRA 152, 169-170.

31.Kukan International Corporation v. Reyes, G.R. No. 182729, September 29, 2010, 631
SCRA 596, 628.
32.430 Phil. 882 (2002).

33.Philippine National Bank v. Andrada Electric & Engineering Company, 430 Phil. 882, 894
(2002).

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 34.Rollo (G.R. No. 166283), p. 257.

35.Id. at 260.

36.Id. at 262.

37.Id. at 234.

38.Id. at 367-368.

39.General Credit Corporation v. Alsons Development and Investment Corporation, 542 Phil.
219, 231 (2007).

40.326 Phil. 955 (1996).

41.Concept Builders, Inc. v. NLRC, 326 Phil. 955, 965 (1996).

42.Rollo (G.R. No. 166283), pp. 66-67.

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