SECTION 20

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G.R. No. L-43350 December 23, 1937

CAGAYAN FISHING DEVELOPMENT CO., INC., plaintiff-appellant,

vs.
TEODORO SANDIKO, defendant-appellee.

LAUREL, J.:

This is an appeal from a judgment of the Court of First Instance of Manila absolving the
defendant from the plaintiff's complaint.

Manuel Tabora is the registered owner of four parcels of land situated in the barrio of
Linao, town of Aparri, Province of Cagayan, as evidenced by transfer certificate of title
No. 217 of the land records of Cagayan, a copy of which is in evidence as Exhibit 1. To
guarantee the payment of a loan in the sum of P8,000, Manuel Tabora, on August 14,
1929, executed in favor of the Philippine National Bank a first mortgage on the four
parcels of land above-mentioned. A second mortgage in favor of the same bank was in
April of 1930 executed by Tabora over the same lands to guarantee the payment of
another loan amounting to P7,000. A third mortgage on the same lands was executed
on April 16, 1930 in favor of Severina Buzon to whom Tabora was indebted in the sum
of P2,9000. These mortgages were registered and annotations thereof appear at the
back of transfer certificate of title No. 217.

On May 31, 1930, Tabora executed a public document entitled "Escritura de Transpaso
de Propiedad Inmueble" (Exhibit A) by virtue of which the four parcels of land owned by
him was sold to the plaintiff company, said to under process of incorporation, in
consideration of one peso (P1) subject to the mortgages in favor of the Philippine
National Bank and Severina Buzon and, to the condition that the certificate of title to
said lands shall not be transferred to the name of the plaintiff company until the latter
has fully and completely paid Tabora's indebtedness to the Philippine National Bank.

The plaintiff company filed its article incorporation with the Bureau of Commerce and
Industry on October 22, 1930 (Exhibit 2). A year later, on October 28, 1931, the board of
directors of said company adopted a resolution (Exhibit G) authorizing its president,
Jose Ventura, to sell the four parcels of lands in question to Teodoro Sandiko for
P42,000. Exhibits B, C and D were thereafter made and executed. Exhibit B is a deed of
sale executed before a notary public by the terms of which the plaintiff sold ceded and
transferred to the defendant all its right, titles, and interest in and to the four parcels of
land described in transfer certificate in turn obligated himself to shoulder the three
mortgages hereinbefore referred to. Exhibit C is a promisory note for P25,300. drawn by
the defendant in favor of the plaintiff, payable after one year from the date thereof.
Exhibit D is a deed of mortgage executed before a notary public in accordance with
which the four parcels of land were given a security for the payment of the promissory
note, Exhibit C. All these three instrument were dated February 15, 1932.

The defendant having failed to pay the sum stated in the promissory note, plaintiff, on
January 25, 1934, brought this action in the Court of First Instance of Manila praying
that judgment be rendered against the defendant for the sum of P25,300, with interest
at legal rate from the date of the filing of the complaint, and the costs of the suits. After
trial, the court below, on December 18, 1934, rendered judgment absolving the
defendant, with costs against the plaintiff. Plaintiff presented a motion for new trial on
January 14, 1935, which motion was denied by the trial court on January 19 of the same
year. After due exception and notice, plaintiff has appealed to this court and makes an
assignment of various errors.

In dismissing the complaint against the defendant, the court below, reached the
conclusion that Exhibit B is invalid because of vice in consent and repugnancy to law.
While we do not agree with this conclusion, we have however voted to affirm the
judgment appealed from the reasons which we shall presently state.

The transfer made by Tabora to the Cagayan fishing Development Co., Inc., plaintiff
herein, was affected on May 31, 1930 (Exhibit A) and the actual incorporation of said
company was affected later on October 22, 1930 (Exhibit 2). In other words, the transfer
was made almost five months before the incorporation of the company. Unquestionably,
a duly organized corporation has the power to purchase and hold such real property as
the purposes for which such corporation was formed may permit and for this purpose
may enter into such contracts as may be necessary (sec. 13, pars. 5 and 9, and sec.
14, Act No. 1459). But before a corporation may be said to be lawfully organized, many
things have to be done. Among other things, the law requires the filing of articles of
incorporation (secs. 6 et seq., Act. No. 1459). Although there is a presumption that all
the requirements of law have been complied with (sec. 334, par. 31 Code of Civil
Procedure), in the case before us it can not be denied that the plaintiff was not yet
incorporated when it entered into a contract of sale, Exhibit A. The contract itself
referred to the plaintiff as "una sociedad en vias de incorporacion." It was not even a de
facto corporation at the time. Not being in legal existence then, it did not possess
juridical capacity to enter into the contract.

Corporations are creatures of the law, and can only come into existence in the
manner prescribed by law. As has already been stated, general law authorizing
the formation of corporations are general offers to any persons who may bring
themselves within their provisions; and if conditions precedent are prescribed in
the statute, or certain acts are required to be done, they are terms of the offer,
and must be complied with substantially before legal corporate existence can be
acquired. (14 C. J., sec. 111, p. 118.)

That a corporation should have a full and complete organization and existence as
an entity before it can enter into any kind of a contract or transact any business,
would seem to be self evident. . . . A corporation, until organized, has no being,
 franchises or faculties. Nor do those engaged in bringing it into being have any
power to bind it by contract, unless so authorized by the charter there is not a
corporation nor does it possess franchise or faculties for it or others to exercise,
until it acquires a complete existence. (Gent vs. Manufacturers and Merchant's
Mutual Insurance Company, 107 Ill., 652, 658.)

Boiled down to its naked reality, the contract here (Exhibit A) was entered into not
between Manuel Tabora and a non-existent corporation but between the Manuel Tabora
as owner of the four parcels of lands on the one hand and the same Manuel Tabora, his
wife and others, as mere promoters of a corporations on the other hand. For reasons
that are self-evident, these promoters could not have acted as agent for a projected
corporation since that which no legal existence could have no agent. A corporation, until
organized, has no life and therefore no faculties. It is, as it were, a child in ventre sa
mere. This is not saying that under no circumstances may the acts of promoters of a
corporation be ratified by the corporation if and when subsequently organized. There
are, of course, exceptions (Fletcher Cyc. of Corps., permanent edition, 1931, vol. I,
secs. 207 et seq.), but under the peculiar facts and circumstances of the present case
we decline to extend the doctrine of ratification which would result in the commission of
injustice or fraud to the candid and unwary.(Massachusetts rule, Abbott vs. Hapgood,
150 Mass., 248; 22 N. E. 907, 908; 5 L. R. A., 586; 15 Am. St. Rep., 193; citing English
cases; Koppel vs. Massachusetts Brick Co., 192 Mass., 223; 78 N. E., 128; Holyoke
Envelope Co., vs. U. S. Envelope Co., 182 Mass., 171; 65 N. E., 54.) It should be
observed that Manuel Tabora was the registered owner of the four parcels of land,
which he succeeded in mortgaging to the Philippine National Bank so that he might
have the necessary funds with which to convert and develop them into fishery. He
appeared to have met with financial reverses. He formed a corporation composed of
himself, his wife, and a few others. From the articles of incorporation, Exhibit 2, it
appears that out of the P48,700, amount of capital stock subscribed, P45,000 was
subscribed by Manuel Tabora himself and P500 by his wife, Rufina Q. de Tabora; and
out of the P43,300, amount paid on subscription, P42,100 is made to appear as paid by
Tabora and P200 by his wife. Both Tabora and His wife were directors and the latter
was treasurer as well. In fact, to this day, the lands remain inscribed in Tabora's name.
The defendant always regarded Tabora as the owner of the lands. He dealt with Tabora
directly. Jose Ventura, president of the plaintiff corporation, intervened only to sign the
contract, Exhibit B, in behalf of the plaintiff. Even the Philippine National Bank,
mortgagee of the four parcels of land, always treated Tabora as the owner of the same.
(See Exhibits E and F.) Two civil suits (Nos. 1931 and 38641) were brought against
Tabora in the Court of First Instance of Manila and in both cases a writ of attachment
against the four parcels of land was issued. The Philippine National Bank threatened to
foreclose its mortgages. Tabora approached the defendant Sandiko and succeeded in
the making him sign Exhibits B, C, and D and in making him, among other things,
assume the payment of Tabora's indebtedness to the Philippine National Bank. The
promisory note, Exhibit C, was made payable to the plaintiff company so that it may not
attached by Tabora's creditors, two of whom had obtained writs of attachment against
the four parcels of land.
If the plaintiff corporation could not and did not acquire the four parcels of land here
involved, it follows that it did not possess any resultant right to dispose of them by sale
to the defendant, Teodoro Sandiko.

Some of the members of this court are also of the opinion that the transfer from Manuel
Tabora to the Cagayan Fishing Development Company, Inc., which transfer is
evidenced by Exhibit A, was subject to a condition precedent (condicion suspensiva),
namely, the payment of the mortgage debt of said Tabora to the Philippine National
Bank, and that this condition not having been complied with by the Cagayan Fishing
Development Company, Inc., the transfer was ineffective. (Art. 1114, Civil Code; Wise &
Co. vs. Kelly and Lim, 37 Phil., 696; Manresa, vol. 8, p. 141.) However, having arrived
at the conclusion that the transfer by Manuel Tabora to the Cagayan Fishing
Development Company, Inc. was null because at the time it was affected the
corporation was non-existent, we deem it unnecessary to discuss this point.lawphil.net
#2

G.R. No. L-20993 September 28, 1968

RIZAL LIGHT & ICE CO., INC., petitioner,

vs.
THE MUNICIPALITY OF MORONG, RIZAL and THE PUBLIC SERVICE
COMMISSION, respondents.

----------------------------

G.R. No. L-21221 September 28, 1968

RIZAL LIGHT & ICE CO., INC., petitioner,

vs.
THE PUBLIC SERVICE COMMISSION and MORONG ELECTRIC CO., INC., respondents.

ZALDIVAR, J.:

These two cases, being interrelated, are decided together.

Case G.R. No. L-20993 is a petition of the Rizal Light & Ice Co., Inc. to review and set aside the
orders of respondent Public Service Commission, 1 dated August 20, 1962, and February 15, 1963,
in PSC Case No. 39716, cancelling and revoking the certificate of public convenience and necessity
and forfeiting the franchise of said petitioner. In the same petition, the petitioner prayed for the
issuance of a writ of preliminary injunction ex partesuspending the effectivity of said orders and/or
enjoining respondents Commission and/or Municipality of Morong, Rizal, from enforcing in any way
the cancellation and revocation of petitioner's franchise and certificate of public convenience during
the pendency of this appeal. By resolution of March 12, 1963, this Court denied the petition for
injunction, for lack of merit.

Case G. R. L-21221 is likewise a petition of the Rizal Light & Ice Co., Inc. to review and set aside the
decision of the Commission dated March 13, 1963 in PSC Case No. 62-5143 granting a certificate of
public convenience and necessity to respondent Morong Electric Co., Inc. 2 to operate an electric
light, heat and power service in the municipality of Morong, Rizal. In the petition Rizal Light & Ice
Co., Inc. also prayed for the issuance of a writ of preliminary injunction ex parte suspending the
effectivity of said decision. Per resolution of this Court, dated May 6, 1963, said petition for injunction
was denied.

The facts, as they appear in the records of both cases, are as follows:

Petitioner Rizal Light & Ice Co., Inc. is a domestic corporation with business address at Morong,
Rizal. On August 15, 1949, it was granted by the Commission a certificate of public convenience and
necessity for the installation, operation and maintenance of an electric light, heat and power service
in the municipality of Morong, Rizal.

In an order dated December 19, 1956, the Commission required the petitioner to appear before it on
February 18, 1957 to show cause why it should not be penalized for violation of the conditions of its
certificate of public convenience and the regulations of the Commission, and for failure to comply
with the directives to raise its service voltage and maintain them within the limits prescribed in the
Revised Order No. 1 of the Commission, and to acquire and install a kilowattmeter to indcate the
load in kilowatts at any particular time of the generating unit. 3

For failure of the petitioner to appear at the hearing on February 18, 1957, the Commission ordered
the cancellation and revocation of petitioner's certificate of public convenience and necessity and the
forfeiture of its franchise. Petitioner moved for reconsideration of said order on the ground that its
manager, Juan D. Francisco, was not aware of said hearing. Respondent municipality opposed the
motion alleging that petitioner has not rendered efficient and satisfactory service and has not
complied with the requirements of the Commission for the improvement of its service. The motion
was set for hearing and Mr. Pedro S. Talavera, Chief, Industrial Division of the Commission, was
authorized to conduct the hearing for the reception of the evidence of the parties. 4

Finding that the failure of the petitioner to appear at the hearing set for February 18, 1957 — the sole
basis of the revocation of petitioner's certificate — was really due to the illness of its manager, Juan
D. Francisco, the Commission set aside its order of revocation. Respondent municipality moved for
reconsideration of this order of reinstatement of the certificate, but the motion was denied.

In a petition dated June 25, 1958, filed in the same case, respondent municipality formally asked the
Commission to revoke petitioner's certificate of public convenience and to forfeit its franchise on the
ground, among other things, that it failed to comply with the conditions of said certificate and
franchise. Said petition was set for hearing jointly with the order to show cause. The hearings had
been postponed several times.

Meanwhile, inspections had been made of petitioner's electric plant and installations by the
engineers of the Commission, as follows: April 15, 1958 by Engineer Antonio M. Alli; September 18,
1959, July 12-13, 1960, and June 21-24, 1961, by Engineer Meliton S. Martinez. The inspection on
June 21-24, 1961 was made upon the request of the petitioner who manifested during the hearing
on December 15, 1960 that improvements have been made on its service since the inspection on
July 12-13, 1960, and that, on the basis of the inspection report to be submitted, it would agree to
the submission of the case for decision without further hearing.

When the case was called for hearing on July 5, 1961, petitioner failed to appear. Respondent
municipality was then allowed to present its documentary evidence, and thereafter the case was
submitted for decision.

On July 7, 1961, petitioner filed a motion to reopen the case upon the ground that it had not been
furnished with a copy of the report of the June 21-24, 1961 inspection for it to reply as previously
agreed. In an order dated August 25, 1961, petitioner was granted a period of ten (10) days within
which to submit its written reply to said inspection report, on condition that should it fail to do so
within the said period the case would be considered submitted for decision. Petitioner failed to file
the reply. In consonance with the order of August 25, 1961, therefore, the Commission proceeded to
decide the case. On July 29, 1962 petitioner's electric plant was burned.

In its decision, dated August 20, 1962, the Commission, on the basis of the inspection reports of its
aforenamed engineers, found that the petitioner had failed to comply with the directives contained in
its letters dated May 21, 1954 and September 4, 1954, and had violated the conditions of its
certificate of public convenience as well as the rules and regulations of the Commission. The
Commission concluded that the petitioner "cannot render the efficient, adequate and satisfactory
electric service required by its certificate and that it is against public interest to allow it to continue its
operation." Accordingly, it ordered the cancellation and revocation of petitioner's certificate of public
convenience and the forfeiture of its franchise.
On September 18, 1962, petitioner moved for reconsideration of the decision, alleging that before its
electric plant was burned on July 29, 1962, its service was greatly improved and that it had still
existing investment which the Commission should protect. But eight days before said motion for
reconsideration was filed, or on September 10, 1962, Morong Electric, having been granted a
municipal franchise on May 6, 1962 by respondent municipality to install, operate and maintain an
electric heat, light and power service in said municipality — approved by the Provincial Board of
Rizal on August 31, 1962 — filed with the Commission an application for a certificate of public
convenience and necessity for said service. Said application was entitled "Morong Electric Co., Inc.,
Applicant", and docketed as Case No. 62-5143.

Petitioner opposed in writing the application of Morong Electric, alleging among other things, that it is
a holder of a certificate of public convenience to operate an electric light, heat and power service in
the same municipality of Morong, Rizal, and that the approval of said application would not promote
public convenience, but would only cause ruinous and wasteful competition. Although the opposition
is dated October 6, 1962, it was actually received by the Commission on November 8, 1962, or
twenty four days after the order of general default was issued in open court when the application
was first called for hearing on October 15, 1962. On November 12, 1962, however, the petitioner
filed a motion to lift said order of default. But before said motion could be resolved, petitioner filed
another motion, dated January 4, 1963, this time asking for the dismissal of the application upon the
ground that applicant Morong Electric had no legal personality when it filed its application on
September 10, 1962, because its certificate of incorporation was issued by the Securities and
Exchange Commission only on October 17, 1962. This motion to dismiss was denied by the
Commission in a formal order issued on January 17, 1963 on the premise that applicant Morong
Electric was a de facto corporation. Consequently, the case was heard on the merits and both
parties presented their respective evidence. On the basis of the evidence adduced, the Commission,
in its decision dated March 13, 1963, found that there was an absence of electric service in the
municipality of Morong and that applicant Morong Electric, a Filipino-owned corporation duly
organized and existing under the laws of the Philippines, has the financial capacity to maintain said
service. These circumstances, considered together with the denial of the motion for reconsideration
filed by petitioner in Case No. 39715 on February, 15, 1963, such that as far as the Commission was
concerned the certificate of the petitioner was already declared revoked and cancelled, the
Commission approved the application of Morong Electric and ordered the issuance in its favor of the
corresponding certificate of public convenience and necessity. 1awphîl.nèt

On March 8, 1963, petitioner filed with this Court a petition to review the decision in Case No. 39715
(now G. R. No. L-20993). Then on April 26, 1963, petitioner also filed a petition to review the
decision in Case No. 62-5143 (now G. R. No. L-21221).

In questioning the decision of the Commission in Case No. 39715, petitioner contends: (1) that the
Commission acted without or in excess of its jurisdiction when it delegated the hearing of the case
and the reception of evidence to Mr. Pedro S. Talavera who is not allowed by law to hear the same;
(2) that the cancellation of petitioner's certificate of public convenience was unwarranted because no
sufficient evidence was adduced against the petitioner and that petitioner was not able to present
evidence in its defense; (3) that the Commission failed to give protection to petitioner's investment;
and (4) that the Commission erred in imposing the extreme penalty of revocation of the certificate.

In questioning the decision in Case No. 62-5143, petitioner contends: (1) that the Commission erred
in denying petitioner's motion to dismiss and proceeding with the hearing of the application of the
Morong Electric; (2) that the Commission erred in granting Morong Electric a certificate of public
convenience and necessity since it is not financially capable to render the service; (3) that the
Commission erred when it made findings of facts that are not supported by the evidence adduced by
the parties at the trial; and (4) that the Commission erred when it did not give to petitioner protection
to its investment — a reiteration of the third assignment of error in the other case.
1aw phîl.nèt
We shall now discuss the appeals in these two cases separately.

G.R. No. L-20993

1. Under the first assignment of error, petitioner contends that while Mr. Pedro S. Talavera, who
conducted the hearings of the case below, is a division chief, he is not a lawyer. As such, under
Section 32 of Commonwealth Act No. 146, as amended, the Commission should not have delegated
to him the authority to conduct the hearings for the reception of evidence of the parties.

We find that, really, Mr. Talavera is not a lawyer. 5 Under the second paragraph of Section 32 of
Commonwealth Act No. 146, as amended, 6 the Commission can only authorize a division chief to
hear and investigate a case filed before it if he is a lawyer. However, the petitioner is raising this
question for the first time in this appeal. The record discloses that petitioner never made any
objection to the authority of Mr. Talavera to hear the case and to receive the evidence of the parties.
On the contrary, we find that petitioner had appeared and submitted evidence at the hearings
conducted by Mr. Talavera, particularly the hearings relative to the motion for reconsideration of the
order of February 18, 1957 cancelling and revoking its certificate. We also find that, through counsel,
petitioner had entered into agreements with Mr. Talavera, as hearing officer, and the counsel for
respondent municipality, regarding procedure in order to abbreviate the proceedings. 7 It is only after
the decision in the case turned out to be adverse to it that petitioner questioned the proceedings held
before Mr. Talavera.

This Court in several cases has ruled that objection to the delegation of authority to hear a case filed
before the Commission and to receive the evidence in connection therewith is a procedural, not a
jurisdictional point, and is waived by failure to interpose timely the objection and the case had been
decided by the Commission. 8 Since petitioner has never raised any objection to the authority of Mr.
Talavera before the Commission, it should be deemed to have waived such procedural defect, and
consonant with the precedents on the matter, petitioner's claim that the Commission acted without or
in excess of jurisdiction in so authorizing Mr. Talavera should be dismissed. 9

2. Anent the second assigned error, the gist of petitioner's contention is that the evidence —
consisting of inspection reports — upon which the Commission based its decision is insufficient and
untrustworthy in that (1) the authors of said reports had not been put to test by way of cross-
examination; (2) the reports constitute only one side of the picture as petitioner was not able to
present evidence in its defense; (3) judicial notice was not taken of the testimony of Mr. Harry B.
Bernardino, former mayor of respondent municipality, in PSC Case No. 625143 (the other case, G.
R. No. L-21221) to the effect that the petitioner had improved its service before its electric power
plant was burned on July 29, 1962 — which testimony contradicts the inspection reports; and (4) the
Commission acted both as prosecutor and judge — passing judgment over the very same evidence
presented by it as prosecutor — a situation "not conducive to the arrival at just and equitable
decisions."

Settled is the rule that in reviewing the decision of the Public Service Commission this Court is not
required to examine the proof de novo and determine for itself whether or not the preponderance of
evidence really justifies the decision. The only function of this Court is to determine whether or not
there is evidence before the Commission upon which its decision might reasonably be based. This
Court will not substitute its discretion for that of the Commission on questions of fact and will not
interfere in the latter's decision unless it clearly appears that there is no evidence to support
it. 10 Inasmuch as the only function of this Court in reviewing the decision of the Commission is to
determine whether there is sufficient evidence before the Commission upon which its decision can
reasonably be based, as it is not required to examine the proof de novo, the evidence that should be
made the basis of this Court's determination should be only those presented in this case before the
Commission. What then was the evidence presented before the Commission and made the basis of
its decision subject of the present appeal? As stated earlier, the Commission based its decision on
the inspection reports submitted by its engineers who conducted the inspection of petitioner's electric
service upon orders of the Commission. 11 Said inspection reports specify in detail the deficiencies
incurred, and violations committed, by the petitioner resulting in the inadequacy of its service. We
consider that said reports are sufficient to serve reasonably as bases of the decision in question. It
should be emphasized, in this connection that said reports, are not mere documentary proofs
presented for the consideration of the Commission, but are the results of the Commission's own
observations and investigations which it can rightfully take into consideration, 12 particularly in this
case where the petitioner had not presented any evidence in its defense, and speaking of petitioner's
failure to present evidence, as well as its failure to cross-examine the authors of the inspection
reports, petitioner should not complain because it had waived not only its right to cross-examine but
also its right to present evidence. Quoted hereunder are the pertinent portions of the transcripts of
the proceedings where the petitioner, through counsel, manifested in clear language said waiver and
its decision to abide by the last inspection report of Engineer Martinez:

Proceedings of December 15, 1960

COMMISSION:

It appears at the last hearing of this case on September 23, 1960, that an engineer of this
Commission has been ordered to make an inspection of all electric services in the province of Rizal
and on that date the engineer of this Commission is still undertaking that inspection and it appears
that the said engineer had actually made that inspection on July 12 and 13, 1960. The engineer has
submitted his report on November 18, 1960 which is attached to the records of this case.

ATTY. LUQUE (Councel for Petitioner):

... (W)e respectfully state that while the report is, as I see it attached to the records, clear and very
thorough, it was made sometime July of this year and I understand from the respondent that there is
some improvement since this report was made ... we respectfully request that an up-to-date
inspection be made ... . An inspector of this Commission can be sent to the plant and considering
that the engineer of this Commission, Engineer Meliton Martinez, is very acquainted to the points
involved we pray that his report will be used by us for the reason that he is a technical man and he
knows well as he has done a good job and I think our proposition would expedite the matter. We
sincerely believe that the inspection report will be the best evidence to decide this matter.

xxx xxx xxx

ATTY. LUQUE:

... This is a very important matter and to show the good faith of respondent in this case we will not
even cross-examine the engineer when he makes a new report. We will agree to the findings and,
your honor please, considering as we have manifested before that Engineer Martinez is an
experienced engineer of this Commission and the points reported by Engineer Martinez on the
situation of the plant now will prevent the necessity of having a hearing, of us bringing new evidence
and complainant bringing new evidence. ... .

xxx xxx xxx

COMMISSION (to Atty. Luque):

 Q Does the Commission understand from the counsel for applicant that if the motion is
granted he will submit this order to show cause for decision without any further hearing and
the decision will be based on the report of the engineer of this Commission?

A We respectfully reply in this manner that we be allowed or be given an opportunity

just to read the report and 99%, we will agree that the report will be the basis of that
decision. We just want to find out the contents of the report, however, we request that we be
furnished with a copy of the report before the hearing so that we will just make a
manifestation that we will agree.

COMMISSION (to Atty. Luque):

Q In order to prevent the delay of the disposition of this case the Commission will allow
counsel for the applicant to submit his written reply to the report that the engineer of this
Commission. Will he submit this case without further hearing upon the receipt of that written
reply?

A Yes, your honor.

Proceedings of August 25, 1961

ATTY. LUQUE (Counsel for petitioner):

In order to avoid any delay in the consideration of this case we are respectfully move (sic) that
instead of our witnesses testifying under oath that we will submit a written reply under oath together
with the memorandum within fifteen (15) days and we will furnish a copy and upon our submission of
said written reply under oath and memorandum we consider this case submitted. This suggestion is
to abbreviate the necessity of presenting witnesses here which may prolong the resolution of this
case.

ATTY. OLIVAS (Counsel for respondent municipality):

I object on the ground that there is no resolution by this Commission on the action to reopen the
case and second this case has been closed.

ATTY. LUQUE:

With regard to the testimony on the ground for opposition we respectfully submit to this Commission
our motion to submit a written reply together with a memorandum. Also as stated to expedite the
case and to avoid further hearing we will just submit our written reply. According to our records we
are furnished with a copy of the report of July 17, 1961. We submit your honor.

xxx xxx xxx

COMMISSION:

To give applicant a chance to have a day in court the Commission grants the request of applicant
that it be given 10 days within which to submit a written reply on the report of the engineer of the
Commission who inspected the electric service, in the municipality of Morong, Rizal, and after the
submission of the said written reply within 10 days from today this case will be considered submitted
for decision.
The above-quoted manifestation of counsel for the petitioner, specifically the statement referring to
the inspection report of Engineer Martinez as the "best evidence to decide this matter," can serve as
an argument against petitioner's claim that the Commision should have taken into consideration the
testimony of Mr. Bernardino. But the primary reasons why the Commission could not have taken
judicial cognizance of said testimony are: first, it is not a proper subject of judicial notice, as it is not a
"known" fact — that is, well established and authoritatively settled, without qualification and
contention; 13 second, it was given in a subsequent and distinct case after the petitioner's motion for
reconsideration was heard by the Commission en banc and submitted for decision, 14 and third, it
was not brought to the attention of the Commission in this case through an appropriate pleading. 15

Regarding the contention of petitioner that the Commission had acted both as prosecutor and judge,
it should be considered that there are two matters that had to be decided in this case, namely, the
order to show cause dated December 19, 1956, and the petition or complaint by respondent
municipality dated June 25, 1958. Both matters were heard jointly, and the record shows that
respondent municipality had been allowed to present its evidence to substantiate its complaint. It can
not be said, therefore, that in this case the Commission had acted as prosecutor and judge. But
even assuming, for the sake of argument, that there was a commingling of the prosecuting and
investigating functions, this exercise of dual function is authorized by Section 17(a) of
Commonwealth Act No. 146, as amended, under which the Commission has power "to investigate,
upon its own initiative or upon complaint in writing, any matter concerning any public service as
regards matters under its jurisdiction; to, require any public service to furnish safe, adequate, and
proper service as the public interest may require and warrant; to enforce compliance with any
standard, rule, regulation, order or other requirement of this Act or of the Commission ... ." Thus, in
the case of Collector of Internal Revenue vs. Estate of F. P. Buan, L-11438, July 31, 1958, this Court
held that the power of the Commission to cancel and revoke a certificate of public convenience and
necessity may be exercised by it even without a formal charge filed by any interested party, with the
only limitation that the holder of the certificate should be given his day in court.

It may not be amiss to add that when prosecuting and investigating duties are delegated by statute
to an administrative body, as in the case of the Public Service Commission, said body may take
steps it believes appropriate for the proper exercise of said duties, particularly in the manner of
informing itself whether there is probable violation of the law and/or its rules and regulations. It may
initiate an investigation, file a complaint, and then try the charge as preferred. So long as the
respondent is given a day in court, there can be no denial of due process, and objections to said
procedure cannot be sustained.

3. In its third assignment of error, petitioner invokes the "protection-of-investment rule" enunciated by
this Court in Batangas Transportation Co. vs. Orlanes 16 in this wise:

The Government having taken over the control and supervision of all public utilities, so long
as an operator under a prior license complies with the terms and conditions of his license
and reasonable rules and regulations for its operation and meets the reasonable demands of
the public, it is the duty of the Commission to protect rather than to destroy his investment by
the granting of the second license to another person for the same thing over the same route
of travel. The granting of such a license does not serve its convenience or promote the
interests of the public.

The above-quoted rule, however, is not absolute, for nobody has exclusive right to secure a
franchise or a certificate of public convenience. 17 Where, as in the present case, it has been shown
by ample evidence that the petitioner, despite ample time and opportunity given to it by the
Commission, had failed to render adequate, sufficient and satisfactory service and had violated the
important conditions of its certificate as well as the directives and the rules and regulations of the
Commission, the rule cannot apply. To apply that rule unqualifiedly is to encourage violation or
disregard of the terms and conditions of the certificate and the Commission's directives and
regulations, and would close the door to other applicants who could establish, operate and provide
adequate, efficient and satisfactory service for the benefit and convenience of the inhabitants. It
should be emphasized that the paramount consideration should always be the public interest and
public convenience. The duty of the Commission to protect investment of a public utility operator
refers only to operators of good standing — those who comply with the laws, rules and regulations
— and not to operators who are unconcerned with the public interest and whose investments have
failed or deteriorated because of their own fault. 18

4. The last assignment of error assails the propriety of the penalty imposed by the Commission on
the petitioner — that is, the revocation of the certificate and the forfeiture of the franchise. Petitioner
contends that the imposition of a fine would have been sufficient, as had been done by the
Commission in cases of a similar nature.

It should be observed that Section 16(n) of Commonwealth Act No. 146, as amended, confers upon
the Commission ample power and discretion to order the cancellation and revocation of any
certificate of public convenience issued to an operator who has violated, or has willfully and
contumaciously refused to comply with, any order, rule or regulation of the Commission or any
provision of law. What matters is that there is evidence to support the action of the Commission. In
the instant case, as shown by the evidence, the contumacious refusal of the petitioner since 1954 to
comply with the directives, rules and regulations of the Commission, its violation of the conditions of
its certificate and its incapability to comply with its commitment as shown by its inadequate service,
were the circumstances that warranted the action of the Commission in not merely imposing a fine
but in revoking altogether petitioner's certificate. To allow petitioner to continue its operation would
be to sacrifice public interest and convenience in favor of private interest.

A grant of a certificate of public convenience confers no property rights but is a mere license
or privilege, and such privilege is forfeited when the grantee fails to comply with his
commitments behind which lies the paramount interest of the public, for public necessity
cannot be made to wait, nor sacrificed for private convenience. (Collector of Internal
Revenue v. Estate of F. P. Buan, et al., L-11438 and Santiago Sambrano, et al. v. PSC, et
al., L-11439 & L-11542-46, July 31, 1958)

(T)he Public Service Commission, ... has the power to specify and define the terms and
conditions upon which the public utility shall be operated, and to make reasonable rules and
regulations for its operation and the compensation which the utility shall receive for its
services to the public, and for any failure to comply with such rules and regulations or the
violation of any of the terms and conditions for which the license was granted, the
Commission has ample power to enforce the provisions of the license or even to revoke it,
for any failure or neglect to comply with any of its terms and provisions. (Batangas Trans.
Co. v. Orlanes, 52 Phil. 455, 460; emphasis supplied)

Presumably, the petitioner has in mind Section 21 of Commonwealth Act No. 146, as amended,
which provides that a public utility operator violating or failing to comply with the terms and
conditions of any certificate, or any orders, decisions or regulations of the Commission, shall be
subject to a fine and that the Commission is authorized and empowered to impose such fine, after
due notice and hearing. It should be noted, however, that the last sentence of said section states
that the remedy provided therein "shall not be a bar to, or affect any other remedy provided in this
Act but shall be cumulative and additional to such remedy or remedies." In other words, the
imposition of a fine may only be one of the remedies which the Commission may resort to, in its
discretion. But that remedy is not exclusive of, or has preference over, the other remedies. And this
Court will not substitute its discretion for that of the Commission, as long as there is evidence to
support the exercise of that discretion by the Commission.

G. R. No. L-21221

Coming now to the other case, let it be stated at the outset that before any certificate may be
granted, authorizing the operation of a public service, three requisites must be complied with,
namely: (1) the applicant must be a citizen of the Philippines or of the United States, or a corporation
or co-partnership, association or joint-stock company constituted and organized under the laws of
the Philippines, sixty per centum at least of the stock or paid-up capital of which belongs entirely to
citizens of the Philippines or of the United States; 19 (2) the applicant must be financially capable of
undertaking the proposed service and meeting the responsibilities incident to its operation; 20 and (3)
the applicant must prove that the operation of the public service proposed and the authorization to
do business will promote the public interest in a proper and suitable manner. 21

As stated earlier, in the decision appealed from, the Commission found that Morong Electric is a
corporation duly organized and existing under the laws of the Philippines, the stockholders of which
are Filipino citizens, that it is financially capable of operating an electric light, heat and power
service, and that at the time the decision was rendered there was absence of electric service in
Morong, Rizal. While the petitioner does not dispute the need of an electric service in Morong,
Rizal, 22 it claims, in effect, that Morong Electric should not have been granted the certificate of public
convenience and necessity because (1) it did not have a corporate personality at the time it was
granted a franchise and when it applied for said certificate; (2) it is not financially capable of
undertaking an electric service, and (3) petitioner was rendering efficient service before its electric
plant was burned, and therefore, being a prior operator its investment should be protected and no
new party should be granted a franchise and certificate of public convenience and necessity to
operate an electric service in the same locality.

1. The bulk of petitioner's arguments assailing the personality of Morong Electric dwells on the
proposition that since a franchise is a contract, 23 at least two competent parties are necessary to the
execution thereof, and parties are not competent except when they are in being. Hence, it is
contended that until a corporation has come into being, in this jurisdiction, by the issuance of a
certificate of incorporation by the Securities and Exchange Commission (SEC) it cannot enter into
any contract as a corporation. The certificate of incorporation of the Morong Electric was issued by
the SEC on October 17, 1962, so only from that date, not before, did it acquire juridical personality
and legal existence. Petitioner concludes that the franchise granted to Morong Electric on May 6,
1962 when it was not yet in esse is null and void and cannot be the subject of the Commission's
consideration. On the other hand, Morong Electric argues, and to which argument the Commission
agrees, that it was a de facto corporation at the time the franchise was granted and, as such, it was
not incapacitated to enter into any contract or to apply for and accept a franchise. Not having been
incapacitated, Morong Electric maintains that the franchise granted to it is valid and the approval or
disapproval thereof can be properly determined by the Commission.

Petitioner's contention that Morong Electric did not yet have a legal personality on May 6, 1962 when
a municipal franchise was granted to it is correct. The juridical personality and legal existence of
Morong Electric began only on October 17, 1962 when its certificate of incorporation was issued by
the SEC. 24 Before that date, or pending the issuance of said certificate of incorporation, the
incorporators cannot be considered as de facto corporation. 25 But the fact that Morong Electric had
no corporate existence on the day the franchise was granted in its name does not render the
franchise invalid, because later Morong Electric obtained its certificate of incorporation and then
accepted the franchise in accordance with the terms and conditions thereof. This view is sustained
by eminent American authorities. Thus, McQuiuin says:
 The fact that a company is not completely incorporated at the time the grant is made to it by
a municipality to use the streets does not, in most jurisdictions, affect the validity of the grant.
But such grant cannot take effect until the corporation is organized. And in Illinois it has been
decided that the ordinance granting the franchise may be presented before the corporation
grantee is fully organized, where the organization is completed before the passage and
acceptance. (McQuillin, Municipal Corporations, 3rd Ed., Vol. 12, Chap. 34, Sec. 34.21)

Fletcher says:

While a franchise cannot take effect until the grantee corporation is organized, the franchise
may, nevertheless, be applied for before the company is fully organized.

A grant of a street franchise is valid although the corporation is not created until afterwards.
(Fletcher, Cyclopedia Corp. Permanent Edition, Rev. Vol. 6-A, Sec. 2881)

And Thompson gives the reason for the rule:

(I)n the matter of the secondary franchise the authorities are numerous in support of the
proposition that an ordinance granting a privilege to a corporation is not void because the
beneficiary of the ordinance is not fully organized at the time of the introduction of the
ordinance. It is enough that organization is complete prior to the passage and acceptance of
the ordinance. The reason is that a privilege of this character is a mere license to the
corporation until it accepts the grant and complies with its terms and conditions. (Thompson
on Corporations, Vol. 4, 3rd Ed., Sec. 2929) 26

The incorporation of Morong Electric on October 17, 1962 and its acceptance of the franchise as
shown by its action in prosecuting the application filed with the Commission for the approval of said
franchise, not only perfected a contract between the respondent municipality and Morong Electric
but also cured the deficiency pointed out by the petitioner in the application of Morong EIectric. Thus,
the Commission did not err in denying petitioner's motion to dismiss said application and in
proceeding to hear the same. The efficacy of the franchise, however, arose only upon its approval by
the Commission on March 13, 1963. The reason is that —

Under Act No. 667, as amended by Act No. 1022, a municipal council has the power to grant
electric franchises, subject to the approval of the provincial board and the President.
However, under Section 16(b) of Commonwealth Act No. 146, as amended, the Public
Service Commission is empowered "to approve, subject to constitutional limitations any
franchise or privilege granted under the provisions of Act No. 667, as amended by Act No.
1022, by any political subdivision of the Philippines when, in the judgment of the
Commission, such franchise or privilege will properly conserve the public interests and the
Commission shall in so approving impose such conditions as to construction, equipment,
maintenance, service, or operation as the public interests and convenience may reasonably
require, and to issue certificates of public convenience and necessity when such is required
or provided by any law or franchise." Thus, the efficacy of a municipal electric franchise
arises, therefore, only after the approval of the Public Service Commission. (Almendras vs.
Ramos, 90 Phil. 231) .

The conclusion herein reached regarding the validity of the franchise granted to Morong Electric is
not incompatible with the holding of this Court in Cagayan Fishing Development Co., Inc. vs.
Teodoro Sandiko 27 upon which the petitioner leans heavily in support of its position. In said case this
Court held that a corporation should have a full and complete organization and existence as an
entity before it can enter into any kind of a contract or transact any business. It should be pointed
out, however, that this Court did not say in that case that the rule is absolute or that under no
circumstances may the acts of promoters of a corporation be ratified or accepted by the corporation
if and when subsequently organized. Of course, there are exceptions. It will be noted that American
courts generally hold that a contract made by the promoters of a corporation on its behalf may be
adopted, accepted or ratified by the corporation when organized. 28

2. The validity of the franchise and the corporate personality of Morong Electric to accept the same
having been shown, the next question to be resolved is whether said company has the financial
qualification to operate an electric light, heat and power service. Petitioner challenges the financial
capability of Morong Electric, by pointing out the inconsistencies in the testimony of Mr. Jose P.
Ingal, president of said company, regarding its assets and the amount of its initial investment for the
electric plant. In this connection it should be stated that on the basis of the evidence presented on
the matter, the Commission has found the Morong Electric to be "financially qualified to install,
maintain and operate the proposed electric light, heat and power service." This is essentially a
factual determination which, in a number of cases, this Court has said it will not disturb unless
patently unsupported by evidence. An examination of the record of this case readily shows that the
testimony of Mr. Ingal and the documents he presented to establish the financial capability of
Morong Electric provide reasonable grounds for the above finding of the Commission.

It is now a very well-settled rule in this jurisdiction that the findings and conclusions of fact
made by the Public Service Commission, after weighing the evidence adduced by the parties
in a public service case, will not be disturbed by the Supreme Court unless those findings
and conclusions appear not to be reasonably supported by evidence. (La Mallorca and
Pampanga Bus Co. vs. Mercado, L-19120, November 29, 1965)

For purposes of appeal, what is decisive is that said testimonial evidence provides
reasonable support for the Public Service Commission's findings of financial capacity on the
part of applicants, rendering such findings beyond our power to disturb. (Del Pilar Transit vs.
Silva, L-21547, July 15, 1966)

It may be worthwhile to mention in this connection that per inspection report dated January 20,
1964 29 of Mr. Meliton Martinez of the Commission, who inspected the electric service of Morong on
January 15-16, 1964, Morong Electric "is serving electric service to the entire area covered by its
approved plan and has constructed its line in accordance with the plans and specifications approved
by the Commission." By reason thereof, it was recommended that the requests of Morong Electric
(1) for the withdrawal of its deposit in the amount of P1,000.00 with the Treasurer of the Philippines,
and (2) for the approval of Resolution No. 160 of the Municipal Council of Morong, Rizal, exempting
the operator from making the additional P9,000.00 deposit mentioned in its petition, dated
September 16, 1963, be granted. This report removes any doubt as to the financial capability of
Morong Electric to operate and maintain an electric light, heat and power service.

3. With the financial qualification of Morong Electric beyond doubt, the remaining question to be
resolved is whether, or not, the findings of fact of the Commission regarding petitioner's service are
supported by evidence. It is the contention of the petitioner that the Commission made some findings
of fact prejudicial to its position but which do not find support from the evidence presented in this
case. Specifically, petitioner refers to the statements or findings that its service had "turned from bad
to worse," that it miserably failed to comply with the oft-repeated promises to bring about the needed
improvement, that its equipment is unserviceable, and that it has no longer any plant site and,
therefore, has discredited itself. Petitioner further states that such statements are not only devoid of
evidentiary support but contrary to the testimony of its witness, Mr. Harry Bernardino, who testified
that petitioner was rendering efficient and satisfactory service before its electric plant was burned on
July 29, 1962.
On the face of the decision appealed from, it is obvious that the Commission in describing the kind of
service petitioner was rendering before its certificate was ordered revoked and cancelled, took
judicial notice of the records of the previous case (PSC Case No. 39715) where the quality of
petitioner's service had been squarely put in issue. It will be noted that the findings of the
Commission were made notwithstanding the fact that the aforementioned testimony of Mr.
Bernardino had been emphasized and pointed out in petitioner's Memorandum to the
Commission. 30 The implication is simple: that as between the testimony of Mr. Bernardino and the
inspection reports of the engineers of the Commission, which served as the basis of the revocation
order, the Commission gave credence to the latter. Naturally, whatever conclusion or finding of fact
that the Commission arrived at regarding the quality of petitioner's service are not borne out by the
evidence presented in this case but by evidence in the previous case. 31In this connection, we
repeat, the conclusion, arrived at by the Commission after weighing the conflicting evidence in the
two related cases, is a conclusion of fact which this Court will not disturb.

And it has been held time and again that where the Commission has reached a conclusion of
fact after weighing the conflicting evidence, that conclusion must be respected, and the
Supreme Court will not interfere unless it clearly appears that there is no evidence to support
the decision of the Commission. (La Mallorca and Pampanga Bus Co., Inc. vs. Mercado, L-
19120, November 29, 1965 citing Pangasinan Trans. Co., Inc. vs. Dela Cruz, 96 Phil. 278)

For that matter, petitioner's pretension that it has a prior right to the operation of an electric service in
Morong, Rizal, is not tenable; and its plea for protection of its investment, as in the previous case,
cannot be entertained.

WHEREFORE, the two decisions of the Public Service Commission, appealed from, should be, as
they are hereby affirmed, with costs in the two cases against petitioner Rizal Light & Ice Co., Inc. It is
so ordered.
#3

G.R. No. L-48627

FERMIN Z. CARAM, JR. and ROSA O. DE CARAM, petitioners

vs.
THE HONORABLE COURT OF APPEALS and ALBERTO V.
ARELLANO, respondents.

CRUZ, J.:

We gave limited due course to this petition on the question of the solidary liability of the
petitioners with their co-defendants in the lower court 1 because of the challenge to the
following paragraph in the dispositive portion of the decision of the respondent court: *

1. Defendants are hereby ordered to jointly and severally pay the plaintiff the
amount of P50,000.00 for the preparation of the project study and his technical
services that led to the organization of the defendant corporation, plus
P10,000.00 attorney's fees; 2

The petitioners claim that this order has no support in fact and law because they had no
contract whatsoever with the private respondent regarding the above-mentioned
services. Their position is that as mere subsequent investors in the corporation that was
later created, they should not be held solidarily liable with the Filipinas Orient Airways, a
separate juridical entity, and with Barretto and Garcia, their co-defendants in the lower
court, ** who were the ones who requested the said services from the private
respondent. 3

We are not concerned here with the petitioners' co-defendants, who have not appealed
the decision of the respondent court and may, for this reason, be presumed to have
accepted the same. For purposes of resolving this case before us, it is not necessary to
determine whether it is the promoters of the proposed corporation, or the corporation
itself after its organization, that shall be responsible for the expenses incurred in
connection with such organization.

The only question we have to decide now is whether or not the petitioners themselves
are also and personally liable for such expenses and, if so, to what extent.

The reasons for the said order are given by the respondent court in its decision in this
wise:

As to the 4th assigned error we hold that as to the remuneration due the plaintiff
for the preparation of the project study and the pre-organizational services in the
 amount of P50,000.00, not only the defendant corporation but the other
defendants including defendants Caram should be jointly and severally liable for
this amount. As we above related it was upon the request of defendants Barretto
and Garcia that plaintiff handled the preparation of the project study which project
study was presented to defendant Caram so the latter was convinced to invest in
the proposed airlines. The project study was revised for purposes of presentation
to financiers and the banks. It was on the basis of this study that defendant
corporation was actually organized and rendered operational. Defendants Garcia
and Caram, and Barretto became members of the Board and/or officers of
defendant corporation. Thus, not only the defendant corporation but all the other
defendants who were involved in the preparatory stages of the incorporation,
who caused the preparation and/or benefited from the project study and the
technical services of plaintiff must be liable. 4

It would appear from the above justification that the petitioners were not really involved
in the initial steps that finally led to the incorporation of the Filipinas Orient Airways.
Elsewhere in the decision, Barretto was described as "the moving spirit." The finding of
the respondent court is that the project study was undertaken by the private respondent
at the request of Barretto and Garcia who, upon its completion, presented it to the
petitioners to induce them to invest in the proposed airline. The study could have been
presented to other prospective investors. At any rate, the airline was eventually
organized on the basis of the project study with the petitioners as major stockholders
and, together with Barretto and Garcia, as principal officers.

The following portion of the decision in question is also worth considering:

... Since defendant Barretto was the moving spirit in the pre-organization work of
defendant corporation based on his experience and expertise, hence he was
logically compensated in the amount of P200,000.00 shares of stock not as
industrial partner but more for his technical services that brought to fruition the
defendant corporation. By the same token, We find no reason why the plaintiff
should not be similarly compensated not only for having actively participated in
the preparation of the project study for several months and its subsequent
revision but also in his having been involved in the pre-organization of the
defendant corporation, in the preparation of the franchise, in inviting the interest
of the financiers and in the training and screening of personnel. We agree that for
these special services of the plaintiff the amount of P50,000.00 as compensation
is reasonable. 5

The above finding bolsters the conclusion that the petitioners were not involved in the
initial stages of the organization of the airline, which were being directed by Barretto as
the main promoter. It was he who was putting all the pieces together, so to speak. The
petitioners were merely among the financiers whose interest was to be invited and who
were in fact persuaded, on the strength of the project study, to invest in the proposed
airline.
Significantly, there was no showing that the Filipinas Orient Airways was a fictitious
corporation and did not have a separate juridical personality, to justify making the
petitioners, as principal stockholders thereof, responsible for its obligations. As a bona
fide corporation, the Filipinas Orient Airways should alone be liable for its corporate acts
as duly authorized by its officers and directors.

In the light of these circumstances, we hold that the petitioners cannot be held
personally liable for the compensation claimed by the private respondent for the
services performed by him in the organization of the corporation. To repeat, the
petitioners did not contract such services. It was only the results of such services that
Barretto and Garcia presented to them and which persuaded them to invest in the
proposed airline. The most that can be said is that they benefited from such services,
but that surely is no justification to hold them personally liable therefor. Otherwise, all
the other stockholders of the corporation, including those who came in later, and
regardless of the amount of their share holdings, would be equally and personally liable
also with the petitioners for the claims of the private respondent.

The petition is rather hazy and seems to be flawed by an ambiguous ambivalence. Our
impression is that it is opposed to the imposition of solidary responsibility upon the
Carams but seems to be willing, in a vague, unexpressed offer of compromise, to
accept joint liability. While it is true that it does here and there disclaim total liability, the
thrust of the petition seems to be against the imposition of solidary liability only rather
than against any liability at all, which is what it should have categorically argued.

Categorically, the Court holds that the petitioners are not liable at all, jointly or jointly
and severally, under the first paragraph of the dispositive portion of the challenged
decision. So holding, we find it unnecessary to examine at this time the rules on solidary
obligations, which the parties-needlessly, as it turns out have belabored unto death.

WHEREFORE, the petition is granted. The petitioners are declared not liable under the
challenged decision, which is hereby modified accordingly. It is so ordered.
#4

G.R. No. L-11442 May 23, 1958

MANUELA T. VDA. DE SALVATIERRA, petitioner,

vs.
HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First Instance of
Leyte, Branch II, and SEGUNDINO REFUERZO, respondents.

Jimenez, Tantuico, Jr. and Tolete for petitioner.

Francisco Astilla for respondent Segundino Refuerzo.

FELIX, J.:

This is a petition for certiorari filed by Manuela T. Vda. de Salvatierra seeking to nullify the order of
the Court of First Instance of Leyte in Civil Case No. 1912, dated March 21, 1956, relieving
Segundino Refuerzo of liability for the contract entered into between the former and the Philippine
Fibers Producers Co., Inc., of which Refuerzo is the president. The facts of the case are as follows:

Manuela T. Vda. de Salvatierra appeared to be the owner of a parcel of land located at Maghobas,
Poblacion, Burauen, Teyte. On March 7, 1954, said landholder entered into a contract of lease with
the Philippine Fibers Producers Co., Inc., allegedly a corporation "duly organized and existing under
the laws of the Philippines, domiciled at Burauen, Leyte, Philippines, and with business address
therein, represented in this instance by Mr. Segundino Q. Refuerzo, the President". It was provided
in said contract, among other things, that the lifetime of the lease would be for a period of 10 years;
that the land would be planted to kenaf, ramie or other crops suitable to the soil; that the lessor
would be entitled to 30 per cent of the net income accruing from the harvest of any, crop without
being responsible for the cost of production thereof; and that after every harvest, the lessee was
bound to declare at the earliest possible time the income derived therefrom and to deliver the
corresponding share due the lessor.

Apparently, the aforementioned obligations imposed on the alleged corporation were not complied
with because on April 5, 1955, Alanuela T. Vda, de Salvatierra filed with the Court of First Instance
of Leyte a complaint against the Philippine Fibers Producers Co., Inc., and Segundino Q. Refuerzo,
for accounting, rescission and damages (Civil Case No. 1912). She averred that sometime in April,
1954, defendants planted kenaf on 3 hectares of the leased property which crop was, at the time of
the commencement of the action, already harvested, processed and sold by defendants; that
notwithstanding that fact, defendants refused to render an accounting of the income derived
therefrom and to deliver the lessor's share; that the estimated gross income was P4,500, and the
deductible expenses amounted to P1,000; that as defendants' refusal to undertake such task was in
violation of the terms of the covenant entered into between the plaintiff and defendant corporation, a
rescission was but proper.

As defendants apparently failed to file their answer to the complaint, of which they were allegedly
notified, the Court declared them in default and proceeded to receive plaintiff's evidence. On June 8,
1955, the lower Court rendered judgment granting plaintiff's prayer, and required defendants to
render a complete accounting of the harvest of the land subject of the proceeding within 15 days
from receipt of the decision and to deliver 30 per cent of the net income realized from the last
harvest to plaintiff, with legal interest from the date defendants received payment for said crop. It
was further provide that upon defendants' failure to abide by the said requirement, the gross income
would be fixed at P4,200 or a net income of P3,200 after deducting the expenses for production, 30
per cent of which or P960 was held to be due the plaintiff pursuant to the aforementioned contract of
lease, which was declared rescinded.

No appeal therefrom having been perfected within the reglementary period, the Court, upon motion
of plaintiff, issued a writ of execution, in virtue of which the Provincial Sheriff of Leyte caused the
attachment of 3 parcels of land registered in the name of Segundino Refuerzo. No property of the
Philippine Fibers Producers Co., Inc., was found available for attachment. On January 31, 1956,
defendant Segundino Refuerzo filed a motion claiming that the decision rendered in said Civil Case
No. 1912 was null and void with respect to him, there being no allegation in the complaint pointing to
his personal liability and thus prayed that an order be issued limiting such liability to defendant
corporation. Over plaintiff's opposition, the Court a quo granted the same and ordered the Provincial
Sheriff of Leyte to release all properties belonging to the movant that might have already been
attached, after finding that the evidence on record made no mention or referred to any fact which
might hold movant personally liable therein. As plaintiff's petition for relief from said order was
denied, Manuela T. Vda. de Salvatierra instituted the instant action asserting that the trial Judge in
issuing the order complained of, acted with grave abuse of discretion and prayed that same be
declared a nullity.

From the foregoing narration of facts, it is clear that the order sought to be nullified was issued by tile
respondent Judge upon motion of defendant Refuerzo, obviously pursuant to Rule 38 of the Rules of
Court. Section 3 of said Rule, however, in providing for the period within which such a motion may
be filed, prescribes that:

SEC. 3. WHEN PETITION FILED; CONTENTS AND VERIFICATION. — A petition provided

for in either of the preceding sections of this rule must be verified, filed within sixty days after
the petitioner learns of the judgment, order, or other proceeding to be set aside, and not
more than six months after such judgment or order was entered, or such proceeding was
taken; and must be must be accompanied with affidavit showing the fraud, accident, mistake,
or excusable negligence relied upon, and the facts constituting the petitioner is good and
substantial cause of action or defense, as the case may be, which he may prove if his
petition be granted". (Rule 38)

The aforequoted provision treats of 2 periods, i.e., 60 days after petitioner learns of the judgment,
and not more than 6 months after the judgment or order was rendered, both of which must be
satisfied. As the decision in the case at bar was under date of June 8, 1955, whereas the motion
filed by respondent Refuerzo was dated January 31, 1956, or after the lapse of 7 months and 23
days, the filing of the aforementioned motion was clearly made beyond the prescriptive period
provided for by the rules. The remedy allowed by Rule 38 to a party adversely affected by a decision
or order is certainly an alert of grace or benevolence intended to afford said litigant a penultimate
opportunity to protect his interest. Considering the nature of such relief and the purpose behind it,
the periods fixed by said rule are non-extendible and never interrupted; nor could it be subjected to
any condition or contingency because it is of itself devised to meet a condition or contingency
(Palomares vs. Jimenez,* G.R. No. L-4513, January 31, 1952). On this score alone, therefore, the
petition for a writ of certiorari filed herein may be granted. However, taking note of the question
presented by the motion for relief involved herein, We deem it wise to delve in and pass upon the
merit of the same.

Refuerzo, in praying for his exoneration from any liability resulting from the non-fulfillment of the
obligation imposed on defendant Philippine Fibers Producers Co., Inc., interposed the defense that
the complaint filed with the lower court contained no allegation which would hold him liable
personally, for while it was stated therein that he was a signatory to the lease contract, he did so in
his capacity as president of the corporation. And this allegation was found by the Court a quo to be
supported by the records. Plaintiff on the other hand tried to refute this averment by contending that
her failure to specify defendant's personal liability was due to the fact that all the time she was under
the impression that the Philippine Fibers Producers Co., Inc., represented by Refuerzo was a duly
registered corporation as appearing in the contract, but a subsequent inquiry from the Securities and
Exchange Commission yielded otherwise. While as a general rule a person who has contracted or
dealt with an association in such a way as to recognize its existence as a corporate body is
estopped from denying the same in an action arising out of such transaction or dealing, (Asia
Banking Corporation vs. Standard Products Co., 46 Phil., 114; Compania Agricola de Ultramar vs.
Reyes, 4 Phil., 1; Ohta Development Co.; vs. Steamship Pompey, 49 Phil., 117), yet this doctrine
may not be held to be applicable where fraud takes a part in the said transaction. In the instant case,
on plaintiff's charge that she was unaware of the fact that the Philippine Fibers Producers Co., Inc.,
had no juridical personality, defendant Refuerzo gave no confirmation or denial and the
circumstances surrounding the execution of the contract lead to the inescapable conclusion that
plaintiff Manuela T. Vda. de Salvatierra was really made to believe that such corporation was duly
organized in accordance with law.

There can be no question that a corporation with registered has a juridical personality separate and
distinct from its component members or stockholders and officers such that a corporation cannot be
held liable for the personal indebtedness of a stockholder even if he should be its president (Walter
A. Smith Co. vs. Ford, SC-G.R. No. 42420) and conversely, a stockholder or member cannot be held
personally liable for any financial obligation be, the corporation in excess of his unpaid subscription.
But this rule is understood to refer merely to registered corporations and cannot be made applicable
to the liability of members of an unincorporated association. The reason behind this doctrine is
obvious-since an organization which before the law is non-existent has no personality and would be
incompetent to act and appropriate for itself the powers and attribute of a corporation as provided by
law; it cannot create agents or confer authority on another to act in its behalf; thus, those who act or
purport to act as its representatives or agents do so without authority and at their own risk. And as it
is an elementary principle of law that a person who acts as an agent without authority or without a
principal is himself regarded as the principal, possessed of all the rights and subject to all the
liabilities of a principal, a person acting or purporting to act on behalf of a corporation which has no
valid existence assumes such privileges and obligations and comes personally liable for contracts
entered into or for other acts performed as such, agent (Fay vs. Noble, 7 Cushing [Mass.] 188. Cited
in II Tolentino's Commercial Laws of the Philippines, Fifth Ed., P. 689-690). Considering that
defendant Refuerzo, as president of the unregistered corporation Philippine Fibers Producers Co.,
Inc., was the moving spirit behind the consummation of the lease agreement by acting as its
representative, his liability cannot be limited or restricted that imposed upon corporate shareholders.
In acting on behalf of a corporation which he knew to be unregistered, he assumed the risk of
reaping the consequential damages or resultant rights, if any, arising out of such transaction.

Wherefore, the order of the lower Court of March 21, 1956, amending its previous decision on this
matter and ordering the Provincial Sheriff of Leyte to release any and all properties of movant therein
which might have been attached in the execution of such judgment, is hereby set aside and nullified
as if it had never been issued. With costs against respondent Segundino Refuerzo. It is so ordered.
#5

G.R. No. L-19118 January 30, 1965

MARIANO A. ALBERT, plaintiff-appellant,

vs.
UNIVERSITY PUBLISHING CO., INC., defendant-appellee.

Uy & Artiaga and Antonio M. Molina for plaintiff-appellant.

Aruego, Mamaril & Associates for defendant-appellees.

BENGZON, J.P., J.:

No less than three times have the parties here appealed to this Court.

In Albert vs. University Publishing Co., Inc., L-9300, April 18, 1958, we found plaintiff entitled to
damages (for breach of contract) but reduced the amount from P23,000.00 to P15,000.00.

Then in Albert vs. University Publishing Co., Inc., L-15275, October 24, 1960, we held that the
judgment for P15,000.00 which had become final and executory, should be executed to its full
amount, since in fixing it, payment already made had been considered.

Now we are asked whether the judgment may be executed against Jose M. Aruego, supposed
President of University Publishing Co., Inc., as the real defendant.

Fifteen years ago, on September 24, 1949, Mariano A. Albert sued University Publishing Co., Inc.
Plaintiff alleged inter alia that defendant was a corporation duly organized and existing under the
laws of the Philippines; that on July 19, 1948, defendant, through Jose M. Aruego, its President,
entered into a contract with plaintifif; that defendant had thereby agreed to pay plaintiff P30,000.00
for the exclusive right to publish his revised Commentaries on the Revised Penal Code and for his
share in previous sales of the book's first edition; that defendant had undertaken to pay in eight
quarterly installments of P3,750.00 starting July 15, 1948; that per contract failure to pay one
installment would render the rest due; and that defendant had failed to pay the second installment.

Defendant admitted plaintiff's allegation of defendant's corporate existence; admitted the execution
and terms of the contract dated July 19, 1948; but alleged that it was plaintiff who breached their
contract by failing to deliver his manuscript. Furthermore, defendant counterclaimed for damages. 1äwphï1.ñët

Plaintiff died before trial and Justo R. Albert, his estate's administrator, was substituted for him.

The Court of First Instance of Manila, after trial, rendered decision on April 26, 1954, stating in the
dispositive portion —

IN VIEW OF ALL THE FOREGOING, the Court renders judgment in favor of the plaintiff and
against the defendant the University Publishing Co., Inc., ordering the defendant to pay the
administrator Justo R. Albert, the sum of P23,000.00 with legal [rate] of interest from the date
of the filing of this complaint until the whole amount shall have been fully paid. The defendant
shall also pay the costs. The counterclaim of the defendant is hereby dismissed for lack of
evidence.
As aforesaid, we reduced the amount of damages to P15,000.00, to be executed in full. Thereafter,
on July 22, 1961, the court a quo ordered issuance of an execution writ against University Publishing
Co., Inc. Plaintiff, however, on August 10, 1961, petitioned for a writ of execution against Jose M.
Aruego, as the real defendant, stating, "plaintiff's counsel and the Sheriff of Manila discovered
that there is no such entity as University Publishing Co., Inc." Plaintiff annexed to his petition a
certification from the securities and Exchange Commission dated July 31, 1961, attesting: "The
records of this Commission do not show the registration of UNIVERSITY PUBLISHING CO., INC.,
either as a corporation or partnership." "University Publishing Co., Inc." countered by filing, through
counsel (Jose M. Aruego's own law firm), a "manifestation" stating that "Jose M. Aruego is not a
party to this case," and that, therefore, plaintiff's petition should be denied.

Parenthetically, it is not hard to decipher why "University Publishing Co., Inc.," through counsel,
would not want Jose M. Aruego to be considered a party to the present case: should a separate
action be now instituted against Jose M. Aruego, the plaintiff will have to reckon with the statute of
limitations.

The court a quo denied the petition by order of September 9, 1961, and from this, plaintiff has
appealed.

The fact of non-registration of University Publishing Co., Inc. in the Securities and Exchange
Commission has not been disputed. Defendant would only raise the point that "University Publishing
Co., Inc.," and not Jose M. Aruego, is the party defendant; thereby assuming that "University
Publishing Co., Inc." is an existing corporation with an independent juridical personality. Precisely,
however, on account of the non-registration it cannot be considered a corporation, not even a
corporation de facto (Hall vs. Piccio, 86 Phil. 603). It has therefore no personality separate from Jose
M. Aruego; it cannot be sued independently.

The corporation-by-estoppel doctrine has not been invoked. At any rate, the same is inapplicable
here. Aruego represented a non-existent entity and induced not only the plaintiff but even the court
to believe in such representation. He signed the contract as "President" of "University Publishing
Co., Inc.," stating that this was "a corporation duly organized and existing under the laws of the
Philippines," and obviously misled plaintiff (Mariano A. Albert) into believing the same. One who has
induced another to act upon his wilful misrepresentation that a corporation was duly organized and
existing under the law, cannot thereafter set up against his victim the principle of corporation by
estoppel (Salvatiera vs. Garlitos, 56 O.G. 3069).

"University Publishing Co., Inc." purported to come to court, answering the complaint and litigating
upon the merits. But as stated, "University Publishing Co., Inc." has no independent personality; it is
just a name. Jose M. Aruego was, in reality, the one who answered and litigated, through his own
law firm as counsel. He was in fact, if not, in name, the defendant.

Even with regard to corporations duly organized and existing under the law, we have in many a case
pierced the veil of corporate fiction to administer the ends of justice. * And in Salvatiera vs.
Garlitos, supra, p. 3073, we ruled: "A person acting or purporting to act on behalf of a corporation
which has no valid existence assumes such privileges and obligations and becomes personally
liable for contracts entered into or for other acts performed as such agent." Had Jose M. Aruego
been named as party defendant instead of, or together with, "University Publishing Co., Inc.," there
would be no room for debate as to his personal liability. Since he was not so named, the matters of
"day in court" and "due process" have arisen.

In this connection, it must be realized that parties to a suit are "persons who have a right to control
the proceedings, to make defense, to adduce and cross-examine witnesses, and to appeal from a
decision" (67 C.J.S. 887) — and Aruego was, in reality, the person who had and exercised these
rights. Clearly, then, Aruego had his day in court as the real defendant; and due process of law has
been substantially observed.

By "due process of law" we mean " "a law which hears before it condemns; which proceeds upon
inquiry, and renders judgment only after trial. ... ." (4 Wheaton, U.S. 518, 581.)"; or, as this Court has
said, " "Due process of law" contemplates notice and opportunity to be heard before judgment is
rendered, affecting one's person or property" (Lopez vs. Director of Lands, 47 Phil. 23, 32)." (Sicat
vs. Reyes, L-11023, Dec. 14, 1956.) And it may not be amiss to mention here also that the "due
process" clause of the Constitution is designed to secure justice as a living reality; not to sacrifice it
by paying undue homage to formality. For substance must prevail over form. It may now be trite, but
none the less apt, to quote what long ago we said in Alonso vs. Villamor, 16 Phil. 315, 321-322:

A litigation is not a game of technicalities in which one, more deeply schooled and skilled in
the subtle art of movement and position, entraps and destroys the other. It is, rather, a
contest in which each contending party fully and fairly lays before the court the facts in issue
and then, brushing side as wholly trivial and indecisive all imperfections of form and
technicalities of procedure, asks that Justice be done upon the merits. Lawsuits, unlike
duels, are not to be won by a rapier's thrust. Technicality, when it deserts its proper office as
an aid to justice and becomes its great hindrance and chief enemy, deserves scant
consideration from courts. There should be no vested rights in technicalities.

The evidence is patently clear that Jose M. Aruego, acting as representative of a non-existent
principal, was the real party to the contract sued upon; that he was the one who reaped the benefits
resulting from it, so much so that partial payments of the consideration were made by him; that he
violated its terms, thereby precipitating the suit in question; and that in the litigation he was the real
defendant. Perforce, in line with the ends of justice, responsibility under the judgment falls on him.

We need hardly state that should there be persons who under the law are liable to Aruego for
reimbursement or contribution with respect to the payment he makes under the judgment in
question, he may, of course, proceed against them through proper remedial measures.

PREMISES CONSIDERED, the order appealed from is hereby set aside and the case remanded
ordering the lower court to hold supplementary proceedings for the purpose of carrying the judgment
into effect against University Publishing Co., Inc. and/or Jose M. Aruego. So ordered.
#6

G.R. No. 22106 September 11, 1924

ASIA BANKING CORPORATION, plaintiff-appellee,

vs.
STANDARD PRODUCTS, CO., INC., defendant-appellant.

Charles C. De Selms for appellant.

Gibbs & McDonough and Roman Ozaeta for appellee.

OSTRAND, J.:

This action is brought to recover the sum of P24,736.47, the balance due on the
following promissory note:

P37,757.22

MANILA, P. I., Nov. 28, 1921.

MANILA, P. I., Nov. 28, 1921.

On demand, after date we promise to pay to the Asia Banking Corporation, or

order, the sum of thirty-seven thousand seven hundred fifty-seven and 22/100
pesos at their office in Manila, for value received, together with interest at the
rate of ten per cent per annum.

No. ________ Due __________

THE STANDARD PRODUCTS CO.,

INC.
By (Sgd.) GEORGE H. SEAVER

By President

The court below rendered judgment in favor of the plaintiff for the sum demanded in the
complaint, with interest on the sum of P24,147.34 from November 1, 1923, at the rate of
10 per cent per annum, and the costs. From this judgment the defendant appeals to this
court.

At the trial of the case the plaintiff failed to prove affirmatively the corporate existence of
the parties and the appellant insists that under these circumstances the court erred in
finding that the parties were corporations with juridical personality and assigns same as
reversible error.
There is no merit whatever in the appellant's contention. The general rule is that in the
absence of fraud a person who has contracted or otherwise dealt with an association in
such a way as to recognize and in effect admit its legal existence as a corporate body is
thereby estopped to deny its corporate existence in any action leading out of or
involving such contract or dealing, unless its existence is attacked for cause which have
arisen since making the contract or other dealing relied on as an estoppel and this
applies to foreign as well as to domestic corporations. (14 C. J., 227; Chinese Chamber
of Commerce vs. Pua Te Ching, 14 Phil., 222.)

The defendant having recognized the corporate existence of the plaintiff by making a
promissory note in its favor and making partial payments on the same is therefore
estopped to deny said plaintiff's corporate existence. It is, of course, also estopped from
denying its own corporate existence. Under these circumstances it was unnecessary for
the plaintiff to present other evidence of the corporate existence of either of the parties.
It may be noted that there is no evidence showing circumstances taking the case out of
the rules stated.

The judgment appealed from is affirmed, with the costs against the appellant. So
ordered.
#7

G.R. No. 156759 June 5, 2013

ALLEN A. MACASAET, NICOLAS V. QUIJANO, JR., ISAIAS ALBANO, LILY REYES, JANET
BAY, JESUS R. GALANG, AND RANDY HAGOS, Petitioners,
vs.
FRANCISCO R. CO, JR., Respondent.

DECISION

BERSAMIN, J.:

To warrant the substituted service of the summons and copy of the complaint, the serving officer
must first attempt to effect the same upon the defendant in person. Only after the attempt at
personal service has become futile or impossible within a reasonable time may the officer resort to
substituted service.

The Case

Petitioners – defendants in a suit for libel brought by respondent – appeal the decision promulgated
on March 8, 20021 and the resolution promulgated on January 13, 2003,2 whereby the Court of
Appeals (CA) respectively dismissed their petition for certiorari, prohibition and mandamus and
denied their motion for reconsideration. Thereby, the CA upheld the order the Regional Trial Court
(RTC), Branch 51, in Manila had issued on March 12, 2001 denying their motion to dismiss because
the substituted service of the summons and copies of the complaint on each of them had been valid
and effective.3

Antecedents

On July 3, 2000, respondent, a retired police officer assigned at the Western Police District in
Manila, sued Abante Tonite, a daily tabloid of general circulation; its Publisher Allen A. Macasaet; its
Managing Director Nicolas V. Quijano; its Circulation Manager Isaias Albano; its Editors Janet Bay,
Jesus R. Galang and Randy Hagos; and its Columnist/Reporter Lily Reyes (petitioners), claiming
damages because of an allegedly libelous article petitioners published in the June 6, 2000 issue of
Abante Tonite. The suit, docketed as Civil Case No. 00-97907, was raffled to Branch 51 of the RTC,
which in due course issued summons to be served on each defendant, including Abante Tonite, at
their business address at Monica Publishing Corporation, 301-305 3rd Floor, BF Condominium
Building, Solana Street corner A. Soriano Street, Intramuros, Manila.4

In the morning of September 18, 2000, RTC Sheriff Raul Medina proceeded to the stated address to
effect the personal service of the summons on the defendants. But his efforts to personally serve
each defendant in the address were futile because the defendants were then out of the office and
unavailable. He returned in the afternoon of that day to make a second attempt at serving the
summons, but he was informed that petitioners were still out of the office. He decided to resort to
substituted service of the summons, and explained why in his sheriff’s return dated September 22,
2005,5 to wit:

SHERIFF’S RETURN
This is to certify that on September 18, 2000, I caused the service of summons together with copies
of complaint and its annexes attached thereto, upon the following:

1. Defendant Allen A. Macasaet, President/Publisher of defendant AbanteTonite, at Monica

Publishing Corporation, Rooms 301-305 3rd Floor, BF Condominium Building, Solana corner
A. Soriano Streets, Intramuros, Manila, thru his secretary Lu-Ann Quijano, a person of
sufficient age and discretion working therein, who signed to acknowledge receipt thereof.
That effort (sic) to serve the said summons personally upon said defendant were made, but
the same were ineffectual and unavailing on the ground that per information of Ms. Quijano
said defendant is always out and not available, thus, substituted service was applied;

2. Defendant Nicolas V. Quijano, at the same address, thru his wife Lu-Ann Quijano, who
signed to acknowledge receipt thereof. That effort (sic) to serve the said summons
personally upon said defendant were made, but the same were ineffectual and unavailing on
the ground that per information of (sic) his wife said defendant is always out and not
available, thus, substituted service was applied;

3. Defendants Isaias Albano, Janet Bay, Jesus R. Galang, Randy Hagos and Lily Reyes, at
the same address, thru Rene Esleta, Editorial Assistant of defendant AbanteTonite, a person
of sufficient age and discretion working therein who signed to acknowledge receipt thereof.
That effort (sic) to serve the said summons personally upon said defendants were made, but
the same were ineffectual and unavailing on the ground that per information of (sic) Mr.
Esleta said defendants is (sic) always roving outside and gathering news, thus, substituted
service was applied.

Original copy of summons is therefore, respectfully returned duly served.

Manila, September 22, 2000.

On October 3, 2000, petitioners moved for the dismissal of the complaint through counsel’s special
appearance in their behalf, alleging lack of jurisdiction over their persons because of the invalid and
ineffectual substituted service of summons. They contended that the sheriff had made no prior
attempt to serve the summons personally on each of them in accordance with Section 6 and Section
7, Rule 14 of the Rules of Court. They further moved to drop Abante Tonite as a defendant by virtue
of its being neither a natural nor a juridical person that could be impleaded as a party in a civil action.

At the hearing of petitioners’ motion to dismiss, Medina testified that he had gone to the office
address of petitioners in the morning of September 18, 2000 to personally serve the summons on
each defendant; that petitioners were out of the office at the time; that he had returned in the
afternoon of the same day to again attempt to serve on each defendant personally but his attempt
had still proved futile because all of petitioners were still out of the office; that some competent
persons working in petitioners’ office had informed him that Macasaet and Quijano were always out
and unavailable, and that Albano, Bay, Galang, Hagos and Reyes were always out roving to gather
news; and that he had then resorted to substituted service upon realizing the impossibility of his
finding petitioners in person within a reasonable time.

On March 12, 2001, the RTC denied the motion to dismiss, and directed petitioners to file their
answers to the complaint within the remaining period allowed by the Rules of Court,6 relevantly
stating:

Records show that the summonses were served upon Allen A. Macasaet, President/Publisher of
defendant AbanteTonite, through LuAnn Quijano; upon defendants Isaias Albano, Janet Bay, Jesus
R. Galang, Randy Hagos and Lily Reyes, through Rene Esleta, Editorial Assistant of defendant
Abante Tonite (p. 12, records). It is apparent in the Sheriff’s Return that on several occasions, efforts
to served (sic) the summons personally upon all the defendants were ineffectual as they were
always out and unavailable, so the Sheriff served the summons by substituted service.

Considering that summonses cannot be served within a reasonable time to the persons of all the
defendants, hence substituted service of summonses was validly applied. Secretary of the President
who is duly authorized to receive such document, the wife of the defendant and the Editorial
Assistant of the defendant, were considered competent persons with sufficient discretion to realize
the importance of the legal papers served upon them and to relay the same to the defendants
named therein (Sec. 7, Rule 14, 1997 Rules of Civil Procedure).

WHEREFORE, in view of the foregoing, the Motion to Dismiss is hereby DENIED for lack of merit..

Accordingly, defendants are directed to file their Answers to the complaint within the period still open
to them, pursuant to the rules.

SO ORDERED.

Petitioners filed a motion for reconsideration, asserting that the sheriff had immediately resorted to
substituted service of the summons upon being informed that they were not around to personally
receive the summons, and that Abante Tonite, being neither a natural nor a juridical person, could
not be made a party in the action.

On June 29, 2001, the RTC denied petitioners’ motion for reconsideration.7 It stated in respect of the
service of summons, as follows:

The allegations of the defendants that the Sheriff immediately resorted to substituted service of
summons upon them when he was informed that they were not around to personally receive the
same is untenable. During the hearing of the herein motion, Sheriff Raul Medina of this Branch of the
Court testified that on September 18, 2000 in the morning, he went to the office address of the
defendants to personally serve summons upon them but they were out. So he went back to serve
said summons upon the defendants in the afternoon of the same day, but then again he was
informed that the defendants were out and unavailable, and that they were always out because they
were roving around to gather news. Because of that information and because of the nature of the
work of the defendants that they are always on field, so the sheriff resorted to substituted service of
summons. There was substantial compliance with the rules, considering the difficulty to serve the
summons personally to them because of the nature of their job which compels them to be always out
and unavailable. Additional matters regarding the service of summons upon defendants were
sufficiently discussed in the Order of this Court dated March 12, 2001.

Regarding the impleading of Abante Tonite as defendant, the RTC held, viz:

"Abante Tonite" is a daily tabloid of general circulation. People all over the country could buy a copy
of "Abante Tonite" and read it, hence, it is for public consumption. The persons who organized said
publication obviously derived profit from it. The information written on the said newspaper will affect
the person, natural as well as juridical, who was stated or implicated in the news. All of these facts
imply that "Abante Tonite" falls within the provision of Art. 44 (2 or 3), New Civil Code. Assuming
arguendo that "Abante Tonite" is not registered with the Securities and Exchange Commission, it is
deemed a corporation by estoppels considering that it possesses attributes of a juridical person,
otherwise it cannot be held liable for damages and injuries it may inflict to other persons.
Undaunted, petitioners brought a petition for certiorari, prohibition, mandamusin the CA to nullify the
orders of the RTC dated March 12, 2001 and June 29, 2001.

Ruling of the CA

On March 8, 2002, the CA promulgated its questioned decision,8 dismissing the petition for certiorari,
prohibition, mandamus, to wit:

We find petitioners’ argument without merit. The rule is that certiorari will prosper only if there is a
showing of grave abuse of discretion or an act without or in excess of jurisdiction committed by the
respondent Judge. A judicious reading of the questioned orders of respondent Judge would show
that the same were not issued in a capricious or whimsical exercise of judgment. There are factual
bases and legal justification for the assailed orders. From the Return, the sheriff certified that "effort
to serve the summons personally xxx were made, but the same were ineffectual and unavailing xxx.

and upholding the trial court’s finding that there was a substantial compliance with the rules that
allowed the substituted service.

Furthermore, the CA ruled:

Anent the issue raised by petitioners that "Abante Tonite is neither a natural or juridical person who
may be a party in a civil case," and therefore the case against it must be dismissed and/or dropped,
is untenable.

The respondent Judge, in denying petitioners’ motion for reconsideration, held that:

xxxx

Abante Tonite’s newspapers are circulated nationwide, showing ostensibly its being a corporate
entity, thus the doctrine of corporation by estoppel may appropriately apply.

An unincorporated association, which represents itself to be a corporation, will be estopped from

denying its corporate capacity in a suit against it by a third person who relies in good faith on such
representation.

There being no grave abuse of discretion committed by the respondent Judge in the exercise of his
jurisdiction, the relief of prohibition is also unavailable.

WHEREFORE, the instant petition is DENIED. The assailed Orders of respondent Judge are
AFFIRMED.

SO ORDERED.9

On January 13, 2003, the CA denied petitioners’ motion for reconsideration.10

Issues

Petitioners hereby submit that:

 1. THE COURT OF APPEALS COMMITTED AN ERROR OF LAW IN HOLDING THAT THE
TRIAL COURT ACQUIRED JURISDICTION OVER HEREIN PETITIONERS.

2. THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR BY SUSTAINING THE

INCLUSION OF ABANTE TONITE AS PARTY IN THE INSTANT CASE.11

Ruling

The petition for review lacks merit.

Jurisdiction over the person, or jurisdiction in personam –the power of the court to render a personal
judgment or to subject the parties in a particular action to the judgment and other rulings rendered in
the action – is an element of due process that is essential in all actions, civil as well as criminal,
except in actions in rem or quasi in rem. Jurisdiction over the defendantin an action in rem or quasi
in rem is not required, and the court acquires jurisdiction over an actionas long as it acquires
jurisdiction over the resthat is thesubject matter of the action. The purpose of summons in such
action is not the acquisition of jurisdiction over the defendant but mainly to satisfy the constitutional
requirement of due process.12

The distinctions that need to be perceived between an action in personam, on the one hand, and an
action inrem or quasi in rem, on the other hand, are aptly delineated in Domagas v. Jensen,13 thusly:

The settled rule is that the aim and object of an action determine its character. Whether a
proceeding is in rem, or in personam, or quasi in rem for that matter, is determined by its nature and
purpose, and by these only. A proceeding in personam is a proceeding to enforce personal rights
and obligations brought against the person and is based on the jurisdiction of the person, although it
may involve his right to, or the exercise of ownership of, specific property, or seek to compel him to
control or dispose of it in accordance with the mandate of the court. The purpose of a proceeding in
personam is to impose, through the judgment of a court, some responsibility or liability directly upon
the person of the defendant. Of this character are suits to compel a defendant to specifically perform
some act or actions to fasten a pecuniary liability on him. An action in personam is said to be one
which has for its object a judgment against the person, as distinguished from a judgment against the
property to determine its state. It has been held that an action in personam is a proceeding to
enforce personal rights or obligations; such action is brought against the person. As far as suits for
injunctive relief are concerned, it is well-settled that it is an injunctive act in personam. In Combs v.
Combs, the appellate court held that proceedings to enforce personal rights and obligations and in
which personal judgments are rendered adjusting the rights and obligations between the affected
parties is in personam. Actions for recovery of real property are in personam.

On the other hand, a proceeding quasi in rem is one brought against persons seeking to subject the
property of such persons to the discharge of the claims assailed. In an action quasi in rem, an
individual is named as defendant and the purpose of the proceeding is to subject his interests
therein to the obligation or loan burdening the property. Actions quasi in rem deal with the status,
ownership or liability of a particular property but which are intended to operate on these questions
only as between the particular parties to the proceedings and not to ascertain or cut off the rights or
interests of all possible claimants. The judgments therein are binding only upon the parties who
joined in the action.

As a rule, Philippine courts cannot try any case against a defendant who does not reside and is not
found in the Philippines because of the impossibility of acquiring jurisdiction over his person unless
he voluntarily appears in court; but when the case is an action in rem or quasi in rem enumerated in
Section 15, Rule 14 of the Rules of Court, Philippine courts have jurisdiction to hear and decide the
case because they have jurisdiction over the res, and jurisdiction over the person of the non-resident
defendant is not essential. In the latter instance, extraterritorial service of summons can be made
upon the defendant, and such extraterritorial service of summons is not for the purpose of vesting
the court with jurisdiction, but for the purpose of complying with the requirements of fair play or due
process, so that the defendant will be informed of the pendency of the action against him and the
possibility that property in the Philippines belonging to him or in which he has an interest may be
subjected to a judgment in favor of the plaintiff, and he can thereby take steps to protect his interest
if he is so minded. On the other hand, when the defendant in an action in personam does not reside
and is not found in the Philippines, our courts cannot try the case against him because of the
impossibility of acquiring jurisdiction over his person unless he voluntarily appears in court.14

As the initiating party, the plaintiff in a civil action voluntarily submits himself to the jurisdiction of the
court by the act of filing the initiatory pleading. As to the defendant, the court acquires jurisdiction
over his person either by the proper service of the summons, or by a voluntary appearance in the
action.15

Upon the filing of the complaint and the payment of the requisite legal fees, the clerk of court
forthwith issues the corresponding summons to the defendant.16 The summons is directed to the
defendant and signed by the clerk of court under seal. It contains the name of the court and the
names of the parties to the action; a direction that the defendant answers within the time fixed by the
Rules of Court; and a notice that unless the defendant so answers, the plaintiff will take judgment by
default and may be granted the relief applied for.17 To be attached to the original copy of the
summons and all copies thereof is a copy of the complaint (and its attachments, if any) and the
order, if any, for the appointment of a guardian ad litem.18

The significance of the proper service of the summons on the defendant in an action in personam
cannot be overemphasized. The service of the summons fulfills two fundamental objectives, namely:
(a) to vest in the court jurisdiction over the person of the defendant; and (b) to afford to the
defendant the opportunity to be heard on the claim brought against him.19 As to the former, when
jurisdiction in personam is not acquired in a civil action through the proper service of the summons
or upon a valid waiver of such proper service, the ensuing trial and judgment are void.20 If the
defendant knowingly does an act inconsistent with the right to object to the lack of personal
jurisdiction as to him, like voluntarily appearing in the action, he is deemed to have submitted himself
to the jurisdiction of the court.21 As to the latter, the essence of due process lies in the reasonable
opportunity to be heard and to submit any evidence the defendant may have in support of his
defense. With the proper service of the summons being intended to afford to him the opportunity to
be heard on the claim against him, he may also waive the process.21 In other words, compliance with
the rules regarding the service of the summons is as much an issue of due process as it is of
jurisdiction.23

Under the Rules of Court, the service of the summons should firstly be effected on the defendant
himself whenever practicable. Such personal service consists either in handing a copy of the
summons to the defendant in person, or, if the defendant refuses to receive and sign for it, in
tendering it to him.24 The rule on personal service is to be rigidly enforced in order to ensure the
realization of the two fundamental objectives earlier mentioned. If, for justifiable reasons, the
defendant cannot be served in person within a reasonable time, the service of the summons may
then be effected either (a) by leaving a copy of the summons at his residence with some person of
suitable age and discretion then residing therein, or (b) by leaving the copy at his office or regular
place of business with some competent person in charge thereof.25 The latter mode of service is
known as substituted service because the service of the summons on the defendant is made
through his substitute.
It is no longer debatable that the statutory requirements of substituted service must be followed
strictly, faithfully and fully, and any substituted service other than that authorized by statute is
considered ineffective.26 This is because substituted service, being in derogation of the usual method
of service, is extraordinary in character and may be used only as prescribed and in the
circumstances authorized by statute.27 Only when the defendant cannot be served personally within
a reasonable time may substituted service be resorted to. Hence, the impossibility of prompt
personal service should be shown by stating the efforts made to find the defendant himself and the
fact that such efforts failed, which statement should be found in the proof of service or sheriff’s
return.28 Nonetheless, the requisite showing of the impossibility of prompt personal service as basis
for resorting to substituted service may be waived by the defendant either expressly or impliedly.29

There is no question that Sheriff Medina twice attempted to serve the summons upon each of
petitioners in person at their office address, the first in the morning of September 18, 2000 and the
second in the afternoon of the same date. Each attempt failed because Macasaet and Quijano were
"always out and not available" and the other petitioners were "always roving outside and gathering
news." After Medina learned from those present in the office address on his second attempt that
there was no likelihood of any of petitioners going to the office during the business hours of that or
any other day, he concluded that further attempts to serve them in person within a reasonable time
would be futile. The circumstances fully warranted his conclusion. He was not expected or required
as the serving officer to effect personal service by all means and at all times, considering that he
was expressly authorized to resort to substituted service should he be unable to effect the personal
service within a reasonable time. In that regard, what was a reasonable time was dependent on the
circumstances obtaining. While we are strict in insisting on personal service on the defendant, we do
not cling to such strictness should the circumstances already justify substituted service instead. It is
the spirit of the procedural rules, not their letter, that governs.30

In reality, petitioners’ insistence on personal service by the serving officer was demonstrably
superfluous. They had actually received the summonses served through their substitutes, as borne
out by their filing of several pleadings in the RTC, including an answer with compulsory counterclaim
ad cautelam and a pre-trial brief ad cautelam. They had also availed themselves of the modes of
discovery available under the Rules of Court. Such acts evinced their voluntary appearance in the
action.

Nor can we sustain petitioners’ contention that Abante Tonite could not be sued as a defendant due
to its not being either a natural or a juridical person. In rejecting their contention, the CA categorized
Abante Tonite as a corporation by estoppel as the result of its having represented itself to the
reading public as a corporation despite its not being incorporated. Thereby, the CA concluded that
the RTC did not gravely abuse its discretion in holding that the non-incorporation of Abante Tonite
with the Securities and Exchange Commission was of no consequence, for, otherwise, whoever of
the public who would suffer any damage from the publication of articles in the pages of its tabloids
would be left without recourse. We cannot disagree with the CA, considering that the editorial box of
the daily tabloid disclosed that basis, nothing in the box indicated that Monica Publishing Corporation
had owned Abante Tonite.

WHEREFORE, the Court AFFIRMS the decision promulgated on March 8, 2002; and ORDERS
petitioners to pay the costs of suit.

SO ORDERED.
#8

G.R. No. 203993, April 20, 2015

PRISCILO B. PAZ,*Petitioner, v. NEW INTERNATIONAL ENVIRONMENTAL

UNIVERSALITY, INC., Respondent.

DECISION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari1 are the Decision2 dated January 31,
2012 and the Resolution3 dated October 2, 2012 of the Court of Appeals (CA) in CA-
G.R. CV No. 00903-MIN, which affirmed the Decision4 dated May 19, 2006 of the
Regional Trial Court of Davao City, Branch 33 (RTC) in Civil Case No. 29,292-2002,
declaring petitioner Captain Priscilo B. Paz (petitioner) liable for breach of contract.

The Facts

On March 1, 2000, petitioner, as the officer-in-charge of the Aircraft Hangar at the

Davao International Airport, Davao City, entered into a Memorandum of
Agreement5 (MOA) with Captain Allan J. Clarke (Capt. Clarke), President of
International Environmental University, whereby for a period of four (4) years, unless
pre-terminated by both parties with six (6) months advance notice, the former shall allow
the latter to use the aircraft hangar space at the said Airport "exclusively for company
aircraft/helicopter."6 Said hangar space was previously leased to Liberty Aviation
Corporation, which assigned the same to petitioner.7

On August 19, 2000, petitioner complained in a letter8 addressed to "MR. ALLAN J.

CLARKE, International Environmental Universality, Inc. x x x" that the hangar space
was being used "for trucks and equipment, vehicles maintenance and fabrication,"
instead of for "company helicopter/aircraft" only, and thereby threatened to cancel the
MOA if the "welding, grinding, and fabrication jobs" were not stopped immediately.9

On January 16, 2001, petitioner sent another letter10 to "MR. ALLAN J. CLARKE,
International Environmental Universality, Inc. x x x," reiterating that the hangar space
"must be for aircraft use only," and that he will terminate the MOA due to the safety of
the aircrafts parked nearby. He further offered a vacant space along the airport road
that was available and suitable for Capt. Clarke's operations.11

On July 19, 2002, petitioner sent a third letter,12 this time, addressed to "MR. ALLAN
JOSEPH CLARKE, CEO, New International Environmental University, Inc. x x x,"
demanding that the latter vacate the premises due to the damage caused by an Isuzu
van driven by its employee to the left wing of an aircraft parked inside the hangar space,
which Capt. Clarke had supposedly promised to buy, but did not.13
On July 23, 2002, petitioner sent a final letter14 addressed to "MR. ALLAN J. CLARKE,
Chairman, CEO, New International Environmental University, Inc. x x x," strongly
demanding the latter to immediately vacate the hangar space. He further informed
Capt. Clarke that the company will "apply for immediate electrical disconnection with the
Davao Light and Power Company (DLPC)[,] so as to compel [the latter] to desist from
continuing with [the] works" thereon.15

On September 4, 2002, respondent New International Environmental Universality,

Inc.16 (respondent) filed a complaint17 against petitioner for breach of contract before the
RTC, docketed as Civil Case No. 29, 292-2002,18 claiming that: (a) petitioner had
disconnected its electric and telephone lines; (b) upon petitioner's instruction, security
guards prevented its employees from entering the leased premises by blocking the
hangar space with barbed wire; and (c) petitioner violated the terms of the MOA when
he took over the hangar space without giving respondent the requisite six (6)-month
advance notice of termination.19

In his defense, petitioner alleged, among others, that: (a) respondent had no cause of
action against him as the MOA was executed between him and Capt. Clarke in the
latter's personal capacity; (b) there was no need to wait for the expiration of the MOA
because Capt. Clarke performed highly risky works in the leased premises that
endangered other aircrafts within the vicinity; and (c) the six (6)-month advance notice
of termination was already given in the letters he sent to Capt. Clarke. 20

On March 25, 2003, the RTC issued a Writ of Preliminary Injunction21 ordering petitioner
to: (a) immediately remove all his aircrafts parked within the leased premises; (b) allow
entry of respondent by removing the steel gate installed thereat; and (c) desist and
refrain from committing further acts of dispossession and/or interference in respondent's
occupation of the hangar space.

For failure of petitioner to comply with the foregoing writ, respondent filed on October
24, 2003 a petition for indirect contempt22 before the RTC, docketed as Civil Case No.
30,030-2003, which was tried jointly with Civil Case No. 29, 292-2002.23

The RTC Ruling

After due trial, the RTC rendered a Decision24 dated May 19, 2006 finding petioner:
(a) guilty of indirect contempt for contumaciously disregarding its Order25 dated
March 6, 2003, by not allowing respondent to possess occupy the leased premises
pending final decision in the main case; and (b) liable for breach of contract for
illegally terminating the MOA even before the expiration of the term thereof. 26 He was,
thus, ordered to pay a fine of P5,000.00, and to pay respondent nominal damages of
P100,000.00 and attorney's fees of P50,000.00 with legal interest, and costs of suit. 27

On the challenge to respondent's juridical personality, the RTC quoted the

Order28 dated April 11, 2005 of the SEC explaining that respondent was issued a
Certificate of Incorporation on September 3, 2001 as New International Environmental
Universality, Inc. but that, subsequently, when it amended its Articles of Incorporation
on November 14, 2001 and July 11, 2002, the SEC Extension Office in Davao City
erroneously used the name New International Environmental University, Inc.29 The latter
name was used by respondent when it filed its amended complaint on September 11,
2002 and the petition for indirect contempt against petitioner on October 24, 2003
believing that it was allowed to do so, as it was only on April 11, 2005 when the SEC
directed it to revert to its correct name.30

The RTC further declared that the MOA, which was "made and executed by and
between CAPT. [PRISCILO] B. PAZ, Officer-In-Charge of Aircraft Hangar at Davao
International Airport, Davao City, Philippines, hereinafter called as FIRST PARTY [a]nd
CAPT. ALLAN J. CLARKE[,] President of INTERNATIONAL ENVIRONMENTAL
UNIVERSITY with office address at LIBERTY AVIATION HANGAR, Davao International
Airport, Davao City, Philippines, hereinafter called as SECOND PARTY," 31 was
executed by the parties not only in their personal capacities but also in representation of
their respective corporations or entities.32

On the issue of the violation of the terms of the MOA, the RTC found respondent to
have been effectively evicted from the leased premises between July and August of
2002, or long before the expiration of the term thereof in 2004, when petitioner: (a)
placed a gate/fence that prevented ingress to and egress from the leased premises; (b)
parked a plane inside and outside the leased premises; (c) disconnected the electrical
and telephone connections of respondent; and (d) locked respondent's employees
out.33 Despite the service of the injunctive writ upon petitioner, respondent was not
allowed to possess and occupy the leased premises, as in fact, the trial court even had
to order on March 8, 2004 the inventory of the items locked inside the bodega of said
premises that was kept off-limits to respondent. Hence, petitioner was declared guilty of
indirect contempt.34

Aggrieved, petitioner elevated his case on appeal before the CA, arguing that the trial
court should have dismissed outright the cases against him for failure of respondent to
satisfy the essential requisites of being a party to an action, i.e., legal personality, legal
capacity to sue or be sued, and real interest in the subject matter of the action. 35

The CA Ruling

Finding that the errors ascribed by petitioner to the trial court only touched the civil
action for breach of contract, the appellate court resolved the appeal against him in a
Decision36 dated January 31, 2012, and affirmed the RTC's finding of petitioner's
liability for breach of contract.37

The CA ruled that, while there was no corporate entity at the time of the execution of the
MOA on March 1, 2000 when Capt. Clarke signed as "President of International
Environmental University," petitioner is nonetheless estopped from denying that he had
contracted with respondent as a corporation, having recognized the latter as the
"Second Party" in the MOA that "will use the hangar space exclusively
for company aircraft/helicopter."38 Petitioner was likewise found to have issued checks
to respondent from May 3, 2000 to October 13, 2000, which belied his claim of
contracting with Capt. Clarke in the latter's personal capacity.39

Petitioner moved for the reconsideration40 of the foregoing Decision, raising as an

additional issue the death41 of Capt. Clarke which allegedly warranted the dismissal of
the case.42 However, the motion was denied in a Resolution43 dated October 2, 2012
where the CA held that Capt. Clarke was merely an agent of respondent, who is the real
party in the case. Thus, Capt. Clarke's death extinguished only the agency between him
and respondent, not the appeal against petitioner.44

Undaunted, petitioner is now before the Court via the instant petition,45 claiming that: (a)
the CA erred in not settling his appeal for both the breach of contract and indirect
contempt cases in a single proceeding and, consequently, the review of said cases
before the Court should be consolidated,46 and (b) the CA should have dismissed the
cases against him for (1) lack of jurisdiction of the trial court in view of the failure to
implead Capt. Clarke as an indispensable party;47 (2) lack of legal capacity and
personality on the part of respondent;48 and (3) lack of factual and legal bases for the
assailed RTC Decision.49

The Court's Ruling

The petition lacks merit.

First, on the matter of the consolidation50 of the instant case with G.R. No. 202826
entitled "Priscilo B. Paz v. New International Environmental University,'' the petition for
review of the portion of the RTC Decision finding petitioner guilty of indirect
contempt,51 the Court had earlier denied said motion in a Resolution52 dated July 24,
2013 on the ground that G.R. No. 202826 had already been denied53 with
finality.54 Thus, any further elucidation on the issue would be a mere superfluity.

Second, whether or not Capt. Clarke should have been impleaded as an indispensable
party was correctly resolved by the CA which held that the former was merely an agent
of respondent.55 While Capt. Clarke's name and signature appeared on the MOA, his
participation was, nonetheless, limited to being a representative of respondent. As a
mere representative, Capt. Clarke acquired no rights whatsoever, nor did he incur any
liabilities, arising from the contract between petitioner and respondent. Therefore, he
was not an indispensable party to the case at bar.56

It should be emphasized, as it has been time and again, that this Court is not a trier of
facts, and is thus not duty-bound to analyze again and weigh the evidence introduced in
and considered by the tribunals.57When supported by substantial evidence, the findings
of fact by the CA are conclusive and binding on the parties and are not reviewable by
this Court, unless the case falls under any of the exceptions,58 none of which was
established herein.

The CA had correctly pointed out that, from the very language itself of the MOA entered
into by petitioner whereby he obligated himself to allow the use of the hangar space
"for company aircraft/helicopter," petitioner cannot deny that he contracted with
respondent.59 Petitioner further acknowledged this fact in his final letter dated July 23,
2002, where he reiterated and strongly demanded the former to immediately vacate the
hangar space his "company is occupying/utilizing."60

Section 2161 of the Corporation Code62 explicitly provides that one who assumes an
obligation to an ostensible corporation, as such, cannot resist performance thereof on
the ground that there was in fact no corporation. Clearly, petitioner is bound by his
obligation under the MOA not only on estoppel but by express provision of law. As aptly
raised by respondent in its Comment63 to the instant petition, it is futile to insist that
petitioner issued the receipts for rental payments in respondent's name and not with
Capt. Clarke's, whom petitioner allegedly contracted in the latter's personal capacity,
only because it was upon the instruction of an employee.64 Indeed, it is disputably
presumed that a person takes ordinary care of his concerns,65 and that all private
transactions have been fair and regular.66 Hence, it is assumed that petitioner, who is a
pilot, knew what he was doing with respect to his business with respondent.

Petitioner's pleadings, however, abound with clear indications of a business relationship

gone sour. In his third letter dated July 19, 2002, petitioner lamented the fact that Capt.
Clarke's alleged promise to buy an aircraft had not materialized. 67 He likewise
insinuated that Capt. Clarke's real motive in staying in the leased premises was the
acquisition of petitioner's right to possess and use the hangar space.68 Be that as it
may, it is settled that courts have no power to relieve parties from obligations they
voluntarily assumed, simply because their contracts turn out to be disastrous deals or
unwise investments.69

The lower courts, therefore, did not err in finding petitioner liable for breach of contract
for effectively evicting respondent from the leased premises even before the expiration
of the term of the lease. The Court reiterates with approval the ratiocination of the RTC
that, if it were true that respondent was violating the terms and conditions of the lease,
"[petitioner] should have gone to court to make the [former] refrain from its 'illegal'
activities or seek rescission of the [MOA], rather than taking the law into his own
hands."70

WHEREFORE, the petition is DENIED. The Decision dated January 31, 2012 and the
Resolution dated October 2, 2012 of the Court of Appeals in CA-G.R. CV No. 00903-
MIN are hereby AFFIRMED.

SO ORDERED.
#9

[G.R. No. 127937. July 28, 1999]

NATIONAL TELECOMMUNICATIONS COMMISSION, petitioner, vs. HONORABLE
COURT OF APPEALS and PHILIPPINE LONG DISTANCE TELEPHONE
COMPANY, respondents.
DECISION
PURISIMA, J.:
At bar is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of
Court seeking to modify the October 30, 1996 Decision[1] and the January 27,
1997 Resolution[2] of the Court of Appeals[3] in CA-G.R. SP No. 34063.
The antecedent facts that matter can be culled as follows:
Sometime in 1988, the National Telecommunications Commission (NTC) served on
the Philippine Long Distance Telephone Company (PLDT) the following assessment
notices and demands for payment:
1. the amount of P7,495,161.00 as supervision and regulation fee under Section 40 (e)
of the PSA for the said year, 1988, computed at P0.50 per P100.00 of the Protestants
(PLDT) outstanding capital stock as at December 31, 1987 which then consisted of
Serial Preferred Stock amounting to P1,277,934,390.00 (Billion) and Common Stock of
P221,097,785 (Million) or a total of P1,499,032,175.00 (Billion).
2. the amount of P9.0 Million as permit fee under Section 40 (f) of the PSA for the
approval of the protestants increase of its authorized capital stock from P2.7 Billion to
P4.5 Billion; and
3. the amounts of P12,261,600.00 and P33,472,030.00 as permit fees under Section 40
(g) of the PSA in connection with the Commissions decisions in NTC Cases Nos. 86-13
and 87-008 respectively, approving the Protestants equity participation in the Fiber
Optic Interpacific Cable systems and X-5 Service Improvement and Expansion
Program.[4]
In its two letter-protests[5] dated February 23, 1988 and July 14, 1988, and position
papers[6] dated November 8, 1990 and March 12, 1991, respectively, the PLDT
challenged the aforesaid assessments, theorizing inter alia that:
(a) The assessments were being made to raise revenues and not as mere
reimbursements for ctual regulatory expenses in violation of the doctrine in PLDT vs.
PSC, 66 SCRA 341 [1975];
(b) The assessment under Section 40 (e) should only have been on the basis of the par
values of private respondents outstanding capital stock;
(c) Petitioner has no authority to compel private respondents payment of the assessed
fees under Section 40 (f) for the increase of its authorized capital stock since petitioner
did not render any supervisory or regulatory activity and incurred no expenses in
relation thereto.
x x x[7]
On September 29, 1993, the NTC rendered a Decision [8] in NTC Case No. 90-223,
denying the protest of PLDT and disposing thus:
FOR ALL THE FOREGOING, finding PLDTs protest to be without merit, the
Commission has no alternative but to uphold the law and DENIES the protest of
PLDT. Unless otherwise restrained by a competent court of law, the Common Carrier
Authorization Department (CCAD) is hereby directed to update its assessments and
collections on PLDT and all public telecommunications carriers for the payment of the
fees in accordance with the provisions of Section 40 (e) (f) and (g) of the Revised NTC
Schedule of Fees and Charges.
This decision takes effect immediately.
SO ORDERED.
On October 22, 1993, PLDT interposed a Motion for Reconsideration,[9] which
was denied by NTC in an Order[10] issued on May 3, 1994.
On May 12, 1994, PLDT appealed the aforesaid Decision to the Court of Appeals,
which came out with its questioned Decision of October 30, 1996, modifying the
disposition of NTC as follows:
"WHEREFORE, the assailed decision and order of the respondent Commission dated
September 29, 1993 and May 03, 1994, respectively, in NTC Case No. 90-223 are
hereby MODIFIED. The Commission is ordered to recompute its assessments and
demands for payment from petitioner PLDT as follows:
A. For annual supervision and regulation fees (SRF) under Section 40 (e) of the Public
Service Act, as amended, they should be computed at fifty centavos for each one
hundred pesos or fraction thereof of the par value of the capital stock subscribed or
paid excluding stock dividends, premiums or capital in excess of par.
B. For permit fees for the approval of petitioners increase of authorized capital stock
under Section 40 (f) of the same Act, they should be computed at fifty for each one
hundred pesos or fraction thereof, regardless of any regulatory service or expense
incurred by respondent.
On November 20, 1996, NTC moved for partial reconsideration of the
abovementioned Decision, with respect to the basis of the assessment under Section
40(e), i.e., par value of the subscribed capital stock. It also sought a partial
reconsideration of the fee of fifty (P0.50) centavos for the issuance or increasing of the
capital stock under Section 40 (f).[11]
With the denial of its motions for reconsideration by the Resolution of the Court of
Appeals dated January 27, 1997, petitioner found its way to this Court via the present
Petition; posing as sole issue:
WHETHER THE COURT OF APPEALS ERRED IN HOLDING THAT THE
COMPUTATION OF SUPERVISION AND REGULATION FEES UNDER SECTION
40 (F) OF THE PUBLIC SERVICE ACT SHOULD BE BASED ON THE PAR VALUE
OF THE SUBSCRIBED CAPITAL STOCK.
Simply put, the submission of NTC is that the fee under Section 40 (e) should be
based on the market value of PLDTs outstanding capital stock inclusive of stock
dividends and premium, and not on the par value of PLDTs capital
stock excluding stock dividends and premium, as contended by PLDT.
Succinct and clear is the ruling of this Court in the case of Philippine Long Distance
Telephone Company vs. Public Service Commission, 66 SCRA 341, that the basis for
computation of the fee to be charged by NTC on PLDT, is the capital stock
subscribed or paid and not, alternatively, the property and equipment.
The law in point is clear and categorical. There is no room for construction. It simply
calls for application. To repeat, the fee in question is based on the capital stock
subscribed or paid, nothing less nothing more.
 It bears stressing that it is not the NTC that imposed such a fee. It is the legislature
itself. Since Congress has the power to exercise the State inherent powers of Police
Power, Eminent Domain and Taxation, the distinction between police power and the
power to tax, which could be significant if the exercising authority were mere political
subdivisions (since delegation by it to such political subdivisions of one power does not
necessarily include the other), would not be of any moment when, as in the case under
consideration, Congress itself exercises the power. All that is to be done would be to
apply and enforce the law when sufficiently definitive and not constitutional infirm.
The term capital and other terms used to describe the capital structure of a
corporation are of universal acceptance, and their usages have long been established in
jurisprudence. Briefly, capital refers to the value of the property or assets of a
corporation. The capital subscribed is the total amount of the capital that persons
(subscribers or shareholders) have agreed to take and pay for, which need not
necessarily be, and can be more than, the par value of the shares. In fine, it is the
amount that the corporation receives, inclusive of the premiums if any, in consideration
of the original issuance of the shares.In the case of stock dividends, it is the amount that
the corporation transfers from its surplus profit account to its capital account. It is the
same amount that can loosely be termed as the trust fund of the corporation. The Trust
Fund doctrine considers this subscribed capital as a trust fund for the payment of the
debts of the corporation, to which the creditors may look for satisfaction. Until the
liquidation of the corporation, no part of the subscribed capital may be returned or
released to the stockholder (except in the redemption of redeemable shares) without
violating this principle. Thus, dividends must never impair the subscribed capital;
subscription commitments cannot be condoned or remitted; nor can the corporation buy
its own shares using the subscribed capital as the consideration therefor. [12]
In the same way that the Court in PLDT vs. PSC has rejected the value of the
property and equipment as being the proper basis for the fee imposed by Section 40(e)
of the Public Service Act, as amended by Republic Act No. 3792, so also must the
Court disallow the idea of computing the fee on the par value of [PLDTs] capital stock
subscribed or paid excluding stock dividends, premiums, or capital in excess of par.
Neither, however, is the assessment made by the National Telecommunications
Commission on the basis of the market value of the subscribed or paid-in capital stock
acceptable since it is itself a deviation from the explicit language of the law.
From the pleadings on hand, it can be gleaned that the assessment for supervision
and regulation fee under Section 40(e) made by NTC for 1988, computed at P0.50 per
100 of PLDTs outstanding capital stock as of December 31, 1987, amounted to
P7,495,161.00. The same was based on the amount of P1,277,934,390.00 of serial
preferred stocks and P221,097,785.00 of common stocks or a total of
P1,499,032,175.00. The assessment was reported to include stock dividends, premium
on issued common shares and premium on preferred shares converted into common
stock.[13] The actual capital paid or the amount of capital stock paid and for which PLDT
received actual payments were not disclosed or extant in the records before the
Court. The only other item available is the amount assessed by petitioner from PLDT,
which had been based on market value of the outstanding capital stock on given
dates.[14]
 All things studiedly considered, and mindful of the aforesaid ruling of this Court in
the case of Philippine Long Distance Telephone Company vs. Public Service
Commission, it should be reiterated that the proper basis for the computation of subject
fee under Section 40(e) of the Public Service Act, as amended by Republic Act No.
3792, is the capital stock subscribed or paid and not, alternatively, the property
and equipment.
WHEREFORE, the decision of the Court of Appeals, dated October 30, 1996, and
its Resolution, dated January 27, 1997, in CA G.R. SP No. 34063, as well as the
decision of the National Telecommunication Commission, dated September 29, 1993,
and Order, dated May 3, 1994, in NTC case No. 90-223, are hereby SET ASIDE and
the National Telecommunication Commission is hereby ordered to make a re-
computation of the fee to be imposed on Philippine Long Distance Telephone Company
on the basis of the latters capital stock subscribed or paid and strictly in accordance
with the foregoing disquisition and conclusion.
No pronouncement as to costs.
SO ORDERED.
#10

[G.R. No. 144476. April 8, 2003]

ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L. ONG, WILLIAM T.
ONG, WILLIE T. ONG, and JULIE ONG ALONZO, petitioners, vs. DAVID S.
TIU, CELY Y. TIU, MOLY YU GAW, BELEN SEE YU, D. TERENCE Y. TIU,
JOHN YU, LOURDES C. TIU, INTRALAND RESOURCES DEVELOPMENT
CORP., MASAGANA TELAMART, INC., REGISTER OF DEEDS OF PASAY
CITY, and the SECURITIES AND EXCHANGE COMMISSION, respondents.
[G.R. No. 144629. April 8, 2003]
DAVID S. TIU, CELY Y. TIU, MOLY YU GAW, BELEN SEE YU, D. TERENCE Y. TIU,
JOHN YU, LOURDES C. TIU, and INTRALAND RESOURCES
DEVELOPMENT CORP., petitioners, vs. ONG YONG, JUANITA TAN ONG,
WILSON T. ONG, ANNA L. ONG, WILLIAM T. ONG, WILLIE T. ONG, and
JULIA ONG ALONZO, respondents.
RESOLUTION
CORONA, J.:
Before us are the (1) motion for reconsideration, dated March 15, 2002, of petitioner
movants Ong Yong, Juanita Tan Ong, Wilson Ong, Anna Ong, William Ong, Willie Ong
and Julia Ong Alonzo (the Ongs); (2) motion for partial reconsideration, dated March 15,
2002, of petitioner movant Willie Ong seeking a reversal of this Courts Decision, [1] dated
February 1, 2002, in G.R. Nos. 144476 and 144629 affirming with modification the
decision[2] of the Court of Appeals, dated October 5, 1999, which in turn upheld, likewise
with modification, the decision of the SEC en banc, dated September 11, 1998; and (3)
motion for issuance of writ of execution of petitioners David S. Tiu, Cely Y. Tiu, Moly Yu
Gow, Belen See Yu, D. Terence Y. Tiu, John Yu and Lourdes C. Tiu (the Tius) of our
February 1, 2002 Decision.
A brief recapitulation of the facts shows that:
In 1994, the construction of the Masagana Citimall in Pasay City was threatened
with stoppage and incompletion when its owner, the First Landlink Asia Development
Corporation (FLADC), which was owned by the Tius, encountered dire financial
difficulties. It was heavily indebted to the Philippine National Bank (PNB) for P190
million. To stave off foreclosure of the mortgage on the two lots where the mall was
being built, the Tius invited Ong Yong, Juanita Tan Ong, Wilson T. Ong, Anna L. Ong,
William T. Ong and Julia Ong Alonzo (the Ongs), to invest in FLADC. Under the Pre-
Subscription Agreement they entered into, the Ongs and the Tius agreed to maintain
equal shareholdings in FLADC: the Ongs were to subscribe to 1,000,000 shares at a
par value of P100.00 each while the Tius were to subscribe to an additional 549,800
shares at P100.00 each in addition to their already existing subscription of 450,200
shares. Furthermore, they agreed that the Tius were entitled to nominate the Vice-
President and the Treasurer plus five directors while the Ongs were entitled to nominate
the President, the Secretary and six directors (including the chairman) to the board of
directors of FLADC. Moreover, the Ongs were given the right to manage and operate
the mall.
Accordingly, the Ongs paid P100 million in cash for their subscription to 1,000,000
shares of stock while the Tius committed to contribute to FLADC a four-storey building
and two parcels of land respectively valued at P20 million (for 200,000 shares), P30
million (for 300,000 shares) and P49.8 million (for 49,800 shares) to cover their
additional 549,800 stock subscription therein. The Ongs paid in another P70 million[3] to
FLADC and P20 million to the Tius over and above their P100 million investment, the
total sum of which (P190 million) was used to settle the P190 million mortgage
indebtedness of FLADC to PNB.
The business harmony between the Ongs and the Tius in FLADC, however, was
shortlived because the Tius, on February 23, 1996, rescinded the Pre-Subscription
Agreement. The Tius accused the Ongs of (1) refusing to credit to them the FLADC
shares covering their real property contributions; (2) preventing David S. Tiu and Cely
Y. Tiu from assuming the positions of and performing their duties as Vice-President and
Treasurer, respectively, and (3) refusing to give them the office spaces agreed upon.
According to the Tius, the agreement was for David S. Tiu and Cely S. Tiu to
assume the positions and perform the duties of Vice-President and Treasurer,
respectively, but the Ongs prevented them from doing so. Furthermore, the Ongs
refused to provide them the space for their executive offices as Vice-President and
Treasurer. Finally, and most serious of all, the Ongs refused to give them the shares
corresponding to their property contributions of a four-story building, a 1,902.30 square-
meter lot and a 151 square-meter lot. Hence, they felt they were justified in setting aside
their Pre-Subscription Agreement with the Ongs who allegedly refused to comply with
their undertakings.
In their defense, the Ongs said that David S. Tiu and Cely Y. Tiu had in fact
assumed the positions of Vice-President and Treasurer of FLADC but that it was they
who refused to comply with the corporate duties assigned to them. It was the contention
of the Ongs that they wanted the Tius to sign the checks of the corporation and
undertake their management duties but that the Tius shied away from helping them
manage the corporation. On the issue of office space, the Ongs pointed out that the
Tius did in fact already have existing executive offices in the mall since they owned it
100% before the Ongs came in. What the Tius really wanted were new offices which
were anyway subsequently provided to them. On the most important issue of their
alleged failure to credit the Tius with the FLADC shares commensurate to the Tius
property contributions, the Ongs asserted that, although the Tius executed a deed of
assignment for the 1,902.30 square-meter lot in favor of FLADC, they (the Tius) refused
to pay P 570,690 for capital gains tax and documentary stamp tax. Without the payment
thereof, the SEC would not approve the valuation of the Tius property contribution (as
opposed to cash contribution). This, in turn, would make it impossible to secure a new
Transfer Certificate of Title (TCT) over the property in FLADCs name. In any event, it
was easy for the Tius to simply pay the said transfer taxes and, after the new TCT was
issued in FLADCs name, they could then be given the corresponding shares of
stocks. On the 151 square-meter property, the Tius never executed a deed of
assignment in favor of FLADC. The Tius initially claimed that they could not as yet
surrender the TCT because it was still being reconstituted by the Lichaucos from whom
the Tius bought it. The Ongs later on discovered that FLADC had in reality owned the
property all along, even before their Pre-Subscription Agreement was executed in
1994. This meant that the 151 square-meter property was at that time already the
corporate property of FLADC for which the Tius were not entitled to the issuance of new
shares of stock.
 The controversy finally came to a head when this case was commenced [4] by the
Tius on February 27, 1996 at the Securities and Exchange Commission (SEC), seeking
confirmation of their rescission of the Pre-Subscription Agreement. After hearing, the
SEC, through then Hearing Officer Rolando G. Andaya, Jr., issued a decision on May
19, 1997 confirming the rescission sought by the Tius, as follows:
WHEREFORE, judgment is hereby rendered confirming the rescission of the Pre-
Subscription Agreement, and consequently ordering:
(a) The cancellation of the 1,000,000 shares subscription of the individual
defendants in FLADC;
(b) FLADC to pay the amount of P170,000,000.00 to the individual defendants
representing the return of their contribution for 1,000,000 shares of FLADC;
( c) The plaintiffs to submit with (sic) the Securities and Exchange Commission
amended articles of incorporation of FLADC to conform with this decision;
(d) The defendants to surrender to the plaintiffs TCT Nos. 132493, 132494,
134066 (formerly 15587), 135325 and 134204 and any other title or deed in
the name of FLADC, failing in which said titles are declared void;
(e) The Register of Deeds to issue new certificates of titles in favor of the
plaintiffs and to cancel the annotation of the Pre-Subscription Agreement
dated 15 August 1994 on TCT No. 134066 (formerly 15587);
(f) The individual defendants, individually and collectively, their agents and
representatives, to desist from exercising or performing any and all acts
pertaining to stockholder, director or officer of FLADC or in any manner
intervene in the management and affairs of FLADC;
(g) The individual defendants, jointly and severally, to return to FLADC interest
payment in the amount of P8,866,669.00 and all interest payments as well as
any payments on principal received from the P70,000,000.00 inexistent loan,
plus the legal rate of interest thereon from the date of their receipt of such
payment until fully paid;
(h) The plaintiff David Tiu to pay individual defendants the sum of
P20,000,000.00 representing his loan from said defendants plus legal
interest from the date of receipt of such amount.
SO ORDERED.[5]
On motion of both parties, the above decision was partially reconsidered but only
insofar as the Ongs P70 million was declared not as a premium on capital stock but an
advance (loan) by the Ongs to FLADC and that the imposition of interest on it was
correct.[6]
Both parties appealed[7] to the SEC en banc which rendered a decision on
September 11, 1998, affirming the May 19, 1997 decision of the Hearing Officer. The
SEC en banc confirmed the rescission of the Pre-Subscription Agreement but reverted
to classifying the P70 million paid by the Ongs as premium on capital and not as a loan
or advance to FLADC, hence, not entitled to earn interest. [8]
On appeal, the Court of Appeals (CA) rendered a decision on October 5, 1999,
thus:
WHEREFORE, the Order dated September 11, 1998 issued by the Securities and
Exchange Commission En Banc in SEC AC CASE NOS. 598 and 601 confirming the
rescission of the Pre-Subscription Agreement dated August 15, 1994 is hereby
AFFIRMED, subject to the following MODIFICATIONS:
1. The Ong and Tiu Groups are ordered to liquidate First Landlink Asia
Development Corporation in accordance with the following cash and
property contributions of the parties therein.
(a) Ong Group P100,000,000.00 cash contribution for one (1) million
shares in First Landlink Asia Development Corporation at a par
value of P100.00 per share;
(b) Tiu Group:
1) P45,020,000.00 original cash contribution for 450,200 shares in
First Landlink Asia Development Corporation at a par value of
P100.00 per share;
2) A four-storey building described in Transfer Certificate of Title No.
15587 in the name of Intraland Resources and Development
Corporation valued at P20,000,000.00 for 200,000 shares in First
Landlink Asia Development Corporation at a par value of P100.00
per share;
3) A 1,902.30 square-meter parcel of land covered by Transfer
Certificate of Title No. 15587 in the name of Masagana Telamart,
Inc. valued at P30,000,000.00 for 300,000 shares in First Landlink
Asia Development Corporation at a par value of P100.00 per share.
2) Whatever remains of the assets of the First Landlink Asia Development
Corporation and the management thereof is (sic) hereby ordered
transferred to the Tiu Group.
3) First Landlink Asia Development Corporation is hereby ordered to pay the
amount of P70,000,000.00 that was advanced to it by the Ong Group
upon the finality of this decision. Should the former incur in delay in the
payment thereof, it shall pay the legal interest thereon pursuant to Article
2209 of the New Civil Code.
4) The Tius are hereby ordered to pay the amount of P20,000,000.00
loaned them by the Ongs upon the finality of this decision. Should the
former incur in delay in the payment thereof, it shall pay the legal interest
thereon pursuant to Article 2209 of the New Civil Code.
SO ORDERED.[9]
An interesting sidelight of the CA decision was its description of the rescission made
by the Tius as the height of ingratitude and as pulling a fast one on the Ongs. The CA
moreover found the Tius guilty of withholding FLADC funds from the Ongs and diverting
corporate income to their own MATTERCO account.[10] These were findings later on
affirmed in our own February 1, 2002 Decision which is the subject of the instant motion
for reconsideration.[11]
But there was also a strange aspect of the CA decision. The CA concluded that
both the Ongs and the Tius were in pari delicto (which would not have legally entitled
them to rescission) but, for practical considerations, that is, their inability to work
together, it was best to separate the two groups by rescinding the Pre-Subscription
Agreement, returning the original investment of the Ongs and awarding practically
everything else to the Tius.
 Their motions for reconsideration having been denied, both parties filed separate
petitions for review before this Court.
In their petition docketed as G.R. No. 144476, Ong et al. vs. Tiu et al., the Ongs
argued that the Tius may not properly avail of rescission under Article 1191 of the Civil
Code considering that the Pre-Subscription Agreement did not provide for reciprocity of
obligations; that the rights over the subject matter of the rescission (capital assets and
properties) had been acquired by a third party (FLADC); that they did not commit a
substantial and fundamental breach of their agreement since they did not prevent the
Tius from assuming the positions of Vice-President and Treasurer of FLADC, and that
the failure to credit the 300,000 shares corresponding to the 1,902.30 square-meter
property covered by TCT No. 134066 (formerly 15587) was due to the refusal of the
Tius to pay the required transfer taxes to secure the approval of the SEC for the
property contribution and, thereafter, the issuance of title in FLADCs name. They also
argued that the liquidation of FLADC may not legally be ordered by the appellate court
even for so called practical considerations or even to prevent further squabbles and
numerous litigations, since the same are not valid grounds under the Corporation
Code. Moreover, the Ongs bewailed the failure of the CA to grant interest on their P70
million and P20 million advances to FLADC and David S. Tiu, respectively, and to
award costs and damages.
In their petition docketed as G.R. No. 144629, Tiu et al. vs. Ong et al., the Tius, on
the other hand, contended that the rescission should have been limited to the restitution
of the parties respective investments and not the liquidation of FLADC based on the
erroneous perception by the court that: the Masagana Citimall was threatened with
incompletion since FLADC was in financial distress; that the Tius invited the Ongs to
invest in FLADC to settle its P190 million loan from PNB; that they violated the Pre-
Subscription Agreement when it was the Lichaucos and not the Tius who executed the
deed of assignment over the 151 square-meter property commensurate to 49,800
shares in FLADC thereby failing to pay the price for the said shares;that they did not
turn over to the Ongs the entire amount of FLADC funds; that they were diverting
rentals from lease contracts due to FLADC to their own MATTERCO account; that
the P70 million paid by the Ongs was an advance and not a premium on capital; and
that, by rescinding the Pre-Subscription Agreement, they wanted to wrestle away the
management of the mall and prevent the Ongs from enjoying the profits of their P190
million investment in FLADC.
On February 1, 2002, this Court promulgated its Decision (the subject of the instant
motions), affirming the assailed decision of the Court of Appeals but with the following
modifications:
1. the P20 million loan extended by the Ongs to the Tius shall earn interest at
twelve percent (12%) per annum to be computed from the time of judicial
demand which is from April 23, 1996;
2. the P70 million advanced by the Ongs to the FLADC shall earn interest at ten
percent (10%) per annum to be computed from the date of the FLADC Board
Resolution which is June 19, 1996; and
3. the Tius shall be credited with 49,800 shares in FLADC for their property
contribution, specifically, the 151 sq. m. parcel of land.
 This Court affirmed the fact that both the Ongs and the Tius violated their respective
obligations under the Pre-Subscription Agreement. The Ongs prevented the Tius from
assuming the positions of Vice-President and Treasurer of the corporation. On the other
hand, the Decision established that the Tius failed to turn over FLADC funds to the
Ongs and that the Tius diverted rentals due to FLADC to their MATTERCO
account. Consequently, it held that rescission was not possible since both parties were
in pari delicto. However, this Court agreed with the Court of Appeals that the remedy of
specific performance, as espoused by the Ongs, was not practical and sound either and
would only lead to further squabbles and numerous litigations between the parties.
On March 15, 2002, the Tius filed before this Court a Motion for Issuance of a Writ
of Execution on the grounds that: (a) the SEC order had become executory as early as
September 11, 1998 pursuant to Sections 1 and 12, Rule 43 of the Rules of Court;
(b) any further delay would be injurious to the rights of the Tius since the case had been
pending for more than six years; and (c) the SEC no longer had quasi-judicial
jurisdiction under RA 8799 (Securities Regulation Code). The Ongs filed their
opposition, contending that the Decision dated February 1, 2002 was not yet final and
executory; that no good reason existed to issue a warrant of execution; and that,
pursuant to Section 5.2 of RA 8799, the SEC retained jurisdiction over pending cases
involving intra-corporate disputes already submitted for final resolution upon the
effectivity of the said law.
Aside from their opposition to the Tius Motion for Issuance of Writ of Execution, the
Ongs filed their own Motion for Reconsideration; Alternatively, Motion for Modification
(of the February 1, 2002 Decision) on March 15, 2002, raising two main points: (a) that
specific performance and not rescission was the proper remedy under the premises;
and (b) that, assuming rescission to be proper, the subject decision of this Court should
be modified to entitle movants to their proportionate share in the mall.
On their first point (specific performance and not rescission was the proper remedy),
movants Ong argue that their alleged breach of the Pre-Subscription Agreement was, at
most, casual which did not justify the rescission of the contract. They stress that
providing appropriate offices for David S. Tiu and Cely Y. Tiu as Vice-President and
Treasurer, respectively, had no bearing on their obligations under the Pre-Subscription
Agreement since the said obligation (to provide executive offices) pertained to FLADC
itself. Such obligation arose from the relations between the said officers and the
corporation and not any of the individual parties such as the Ongs. Likewise, the alleged
failure of the Ongs to credit shares of stock in favor of the Tius for their property
contributions also pertained to the corporation and not to the Ongs. Just the same, it
could not be done in view of the Tius refusal to pay the necessary transfer taxes which
in turn resulted in the inability to secure SEC approval for the property contributions and
the issuance of a new TCT in the name of FLADC.
Besides, according to the Ongs, the principal objective of both parties in entering
into the Pre-Subscription Agreement in 1994 was to raise the P190 million desperately
needed for the payment of FLADCs loan to PNB. Hence, in this light, the alleged failure
to provide office space for the two corporate officers was no more than an
inconsequential infringement. For rescission to be justified, the law requires that the
breach of contract should be so substantial or fundamental as to defeat the primary
objective of the parties in making the agreement. At any rate, the Ongs claim that it was
the Tius who were guilty of fundamental violations in failing to remit funds due to FLADC
and diverting the same to their MATTERCO account.
The Ongs also allege that, in view of the findings of the Court that both parties were
guilty of violating the Pre-Subscription Agreement, neither of them could resort to
rescission under the principle of pari delicto. In addition, since the cash and other
contributions now sought to be returned already belong to FLADC, an innocent third
party, said remedy may no longer be availed of under the law.
On their second point (assuming rescission to be proper, the Ongs should be given
their proportionate share of the mall), movants Ong vehemently take exception to the
second item in the dispositive portion of the questioned Decision insofar as it decreed
that whatever remains of the assets of FLADC and the management thereof (after
liquidation) shall be transferred to the Tius. They point out that the mall itself, which
would have been foreclosed by PNB if not for their timely investment of P190 million in
1994 and which is now worth about P1 billion mainly because of their efforts, should be
included in any partition and distribution. They (the Ongs) should not merely be given
interest on their capital investments. The said portion of our Decision, according to
them, amounted to the unjust enrichment of the Tius and ran contrary to our own
pronouncement that the act of the Tius in unilaterally rescinding the agreement was the
height of ingratitude and an attempt to pull a fast one as it would prevent the Ongs from
enjoying the fruits of their P190 million investment in FLADC. It also contravenes this
Courts assurance in the questioned Decision that the Ongs and Tius will have a
bountiful return of their respective investments derived from the profits of the
corporation.
Willie Ong filed a separate Motion for Partial Reconsideration dated March 8, 2002,
pointing out that there was no violation of the Pre-Subscription Agreement on the part of
the Ongs;that, after more than seven years since the mall began its operations,
rescission had become not only impractical but would also adversely affect the rights of
innocent parties; and that it would be highly inequitable and unfair to simply return
the P100 million investment of the Ongs and give the remaining assets now amounting
to about P1 billion to the Tius.
The Tius, in their opposition to the Ongs motion for reconsideration, counter that the
arguments therein are a mere re-hash of the contentions in the Ongs petition for review
and previous motion for reconsideration of the Court of Appeals decision. The Tius
compare the arguments in said pleadings to prove that the Ongs do not raise new
issues, and, based on well-settled jurisprudence,[12] the Ongs present motion is
therefore pro-forma and did not prevent the Decision of this Court from attaining finality.
On January 29, 2003, the Special Second Division of this Court held oral arguments
on the respective positions of the parties. On February 27, 2003, Dr. Willie Ong and the
rest of the movants Ong filed their respective memoranda. On February 28, 2003, the
Tius submitted their memorandum.
We grant the Ongs motions for reconsideration.
This is not the first time that this Court has reversed itself on a motion for
reconsideration. In Philippine Consumers Foundation, Inc. vs. National
[13]
Telecommunications Commission, this Court, through then Chief Justice Felix V.
Makasiar, said that its members may and do change their minds, after a re-study of the
facts and the law, illuminated by a mutual exchange of views. [14] After a thorough re-
examination of the case, we find that our Decision of February 1, 2002 overlooked
certain aspects which, if not corrected, will cause extreme and irreparable damage and
prejudice to the Ongs, FLADC and its creditors.
The procedural rule on pro-forma motions pointed out by the Tius should not be
blindly applied to meritorious motions for reconsideration. As long as the same
adequately raises a valid ground[15] (i.e., the decision or final order is contrary to law),
this Court has to evaluate the merits of the arguments to prevent an unjust decision
from attaining finality. In Security Bank and Trust Company vs. Cuenca,[16] we ruled that
a motion for reconsideration is not pro-forma for the reason alone that it reiterates the
arguments earlier passed upon and rejected by the appellate court. We explained there
that a movant may raise the same arguments, if only to convince this Court that its
ruling was erroneous. Moreover, the rule (that a motion is pro-forma if it only repeats the
arguments in the previous pleadings) will not apply if said arguments were not squarely
passed upon and answered in the decision sought to be reconsidered. In the case at
bar, no ruling was made on some of the petitioner Ongs arguments. For instance, no
clear ruling was made on why an order distributing corporate assets and property to the
stockholders would not violate the statutory preconditions for corporate dissolution or
decrease of authorized capital stock. Thus, it would serve the ends of justice to
entertain the subject motion for reconsideration since some important issues therein,
although mere repetitions, were not considered or clearly resolved by this Court.
Going now to the merits, we resolve whether the Tius could legally rescind the Pre-
Subscription Agreement. We rule that they could not.
FLADC was originally incorporated with an authorized capital stock of 500,000
shares with the Tius owning 450,200 shares representing the paid-up capital. When the
Tius invited the Ongs to invest in FLADC as stockholders, an increase of the authorized
capital stock became necessary to give each group equal (50-50) shareholdings as
agreed upon in the Pre-Subscription Agreement. The authorized capital stock was thus
increased from 500,000 shares to 2,000,000 shares with a par value of P100 each, with
the Ongs subscribing to 1,000,000 shares and the Tius to 549,800 more shares in
addition to their 450,200 shares to complete 1,000,000 shares. Thus, the subject matter
of the contract was the 1,000,000 unissued shares of FLADC stock allocated to the
Ongs. Since these were unissued shares, the parties Pre-Subscription Agreement was
in fact a subscription contract as defined under Section 60, Title VII of the Corporation
Code:
Any contract for the acquisition of unissued stock in an existing corporation or a
corporation still to be formed shall be deemed a subscription within the meaning of this
Title, notwithstanding the fact that the parties refer to it as a purchase or some other
contract (Italics supplied).
A subscription contract necessarily involves the corporation as one of the
contracting parties since the subject matter of the transaction is property owned by the
corporation its shares of stock. Thus, the subscription contract (denominated by the
parties as a Pre-Subscription Agreement) whereby the Ongs invested P100 million for
1,000,000 shares of stock was, from the viewpoint of the law, one between the Ongs
and FLADC, not between the Ongs and the Tius. Otherwise stated, the Tius did not
contract in their personal capacities with the Ongs since they were not selling any of
their own shares to them. It was FLADC that did.
 Considering therefore that the real contracting parties to the subscription agreement
were FLADC and the Ongs alone, a civil case for rescission on the ground of breach of
contract filed by the Tius in their personal capacities will not prosper. Assuming it had
valid reasons to do so, only FLADC (and certainly not the Tius) had the legal personality
to file suit rescinding the subscription agreement with the Ongs inasmuch as it was the
real party in interest therein. Article 1311 of the Civil Code provides that contracts take
effect only between the parties, their assigns and heirs Therefore, a party who has not
taken part in the transaction cannot sue or be sued for performance or for cancellation
thereof, unless he shows that he has a real interest affected thereby. [17]
In their February 28, 2003 Memorandum, the Tius claim that there are two contracts
embodied in the Pre-Subscription Agreement: a shareholders agreement between the
Tius and the Ongs defining and governing their relationship and a subscription contract
between the Tius, the Ongs and FLADC regarding the subscription of the parties to the
corporation. They point out that these two component parts form one whole agreement
and that their terms and conditions are intrinsically related and dependent on each
other. Thus, the breach of the shareholders agreement, which was allegedly the
consideration for the subscription contract, was also a breach of the latter.
Aside from the fact that this is an entirely new angle never raised in any of their
previous pleadings until after the oral arguments on January 29, 2003, we find this
argument too strained for comfort. It is obviously intended to remedy and cover up the
Tius lack of legal personality to rescind an agreement in which they were personally not
parties-in-interest. Assuming arguendo that there were two sub-agreements embodied
in the Pre-Subscription Agreement, this Court fails to see how the shareholders
agreement between the Ongs and Tius can, within the bounds of reason, be interpreted
as the consideration of the subscription contract between FLADC and the Ongs. There
was nothing in the Pre-Subscription Agreement even remotely suggesting such alleged
interdependence. Be that as it may, however, the Tius are nevertheless not the proper
parties to raise this point because they were not parties to the subscription contract
between FLADC and the Ongs. Thus, they are not in a position to claim that the
shareholders agreement between them and the Ongs was what induced FLADC and
the Ongs to enter into the subscription contract. It is the Ongs alone who can say
that. Though FLADC was represented by the Tius in the subscription contract, FLADC
had a separate juridical personality from the Tius. The case before us does not warrant
piercing the veil of corporate fiction since there is no proof that the corporation is being
used as a cloak or cover for fraud or illegality, or to work injustice.[18]
The Tius also argue that, since the Ongs represent FLADC as its management,
breach by the Ongs is breach by FLADC. This must also fail because such an argument
disregards the separate juridical personality of FLADC.
The Tius allege that they were prevented from participating in the management of
the corporation. There is evidence that the Ongs did prevent the rightfully elected
Treasurer, Cely Tiu, from exercising her function as such. The records show that the
President, Wilson Ong, supervised the collection and receipt of rentals in the Masagana
Citimall;[19] that he ordered the same to be deposited in the bank;[20] and that he held on
to the cash and properties of the corporation.[21] Section 25 of the Corporation Code
prohibits the President from acting concurrently as Treasurer of the corporation. The
rationale behind the provision is to ensure the effective monitoring of each officers
separate functions.
However, although the Tius were adversely affected by the Ongs unwillingness to
let them assume their positions, rescission due to breach of contract is definitely the
wrong remedy for their personal grievances. The Corporation Code, SEC rules and
even the Rules of Court provide for appropriate and adequate intra-corporate
remedies, other than rescission, in situations like this. Rescission is certainly not
one of them, specially if the party asking for it has no legal personality to do so and the
requirements of the law therefor have not been met.A contrary doctrine will tread on
extremely dangerous ground because it will allow just any stockholder, for just about
any real or imagined offense, to demand rescission of his subscription and call for the
distribution of some part of the corporate assets to him without complying with the
requirements of the Corporation Code.
Hence, the Tius, in their personal capacities, cannot seek the ultimate and
extraordinary remedy of rescission of the subject agreement based on a less than
substantial breach of subscription contract. Not only are they not parties to the
subscription contract between the Ongs and FLADC; they also have other available and
effective remedies under the law.
All this notwithstanding, granting but not conceding that the Tius possess the legal
standing to sue for rescission based on breach of contract, said action will nevertheless
still not prosper since rescission will violate the Trust Fund Doctrine and the procedures
for the valid distribution of assets and property under the Corporation Code.
The Trust Fund Doctrine, first enunciated by this Court in the 1923 case
of Philippine Trust Co. vs. Rivera,[22] provides that subscriptions to the capital stock of a
corporation constitute a fund to which the creditors have a right to look for the
satisfaction of their claims.[23] This doctrine is the underlying principle in the procedure
for the distribution of capital assets, embodied in the Corporation Code, which allows
the distribution of corporate capital only in three instances: (1) amendment of the
Articles of Incorporation to reduce the authorized capital stock, [24] (2) purchase of
redeemable shares by the corporation, regardless of the existence of unrestricted
retained earnings,[25] and (3) dissolution and eventual liquidation of the corporation.
Furthermore, the doctrine is articulated in Section 41 on the power of a corporation to
acquire its own shares[26] and in Section 122 on the prohibition against the distribution of
corporate assets and property unless the stringent requirements therefor are complied
with.[27]
The distribution of corporate assets and property cannot be made to depend on the
whims and caprices of the stockholders, officers or directors of the corporation, or even,
for that matter, on the earnest desire of the court a quo to prevent further squabbles and
future litigations unless the indispensable conditions and procedures for the protection
of corporate creditors are followed. Otherwise, the corporate peace laudably hoped for
by the court will remain nothing but a dream because this time, it will be the creditors
turn to engage in squabbles and litigations should the court order an unlawful
distribution in blatant disregard of the Trust Fund Doctrine.
In the instant case, the rescission of the Pre-Subscription Agreement will effectively
result in the unauthorized distribution of the capital assets and property of the
corporation, thereby violating the Trust Fund Doctrine and the Corporation Code, since
rescission of a subscription agreement is not one of the instances when distribution of
capital assets and property of the corporation is allowed.
Contrary to the Tius allegation, rescission will, in the final analysis, result in the
premature liquidation of the corporation without the benefit of prior dissolution in
accordance with Sections 117, 118, 119 and 120 of the Corporation Code. [28] The Tius
maintain that rescinding the subscription contract is not synonymous to corporate
liquidation because all rescission will entail would be the simple restoration of the status
quo ante and a return to the two groups of their cash and property contributions. We
wish it were that simple. Very noticeable is the fact that the Tius do not explain why
rescission in the instant case will not effectively result in liquidation. The Tius merely
refer in cavalier fashion to the end-result of rescission (which incidentally is 100%
favorable to them) but turn a blind eye to its unfair, inequitable and disastrous effect on
the corporation, its creditors and the Ongs.
In their Memorandum dated February 28, 2003, the Tius claim that rescission of the
agreement will not result in an unauthorized liquidation of the corporation because their
case is actually a petition to decrease capital stock pursuant to Section 38 of the
Corporation Code. Section 122 of the law provides that (e)xcept by decrease of capital
stock, no corporation shall distribute any of its assets or property except upon lawful
dissolution and after payment of all its debts and liabilities. The Tius claim that their
case for rescission, being a petition to decrease capital stock, does not violate the
liquidation procedures under our laws. All that needs to be done, according to them, is
for this Court to order (1) FLADC to file with the SEC a petition to issue a certificate of
decrease of capital stock and (2) the SEC to approve said decrease. This new
argument has no merit.
The Tius case for rescission cannot validly be deemed a petition to decrease capital
stock because such action never complied with the formal requirements for decrease of
capital stock under Section 33 of the Corporation Code. No majority vote of the board of
directors was ever taken. Neither was there any stockholders meeting at which the
approval of stockholders owning at least two-thirds of the outstanding capital stock was
secured. There was no revised treasurers affidavit and no proof that said decrease will
not prejudice the creditors rights. On the contrary, all their pleadings contained were
alleged acts of violations by the Ongs to justify an order of rescission.
Furthermore, it is an improper judicial intrusion into the internal affairs of the
corporation to compel FLADC to file at the SEC a petition for the issuance of a
certificate of decrease of stock. Decreasing a corporations authorized capital stock is an
amendment of the Articles of Incorporation. It is a decision that only the stockholders
and the directors can make, considering that they are the contracting parties thereto. In
this case, the Tius are actually not just asking for a review of the legality and fairness of
a corporate decision. They want this Court to make a corporate decision for FLADC. We
decline to intervene and order corporate structural changes not voluntarily agreed upon
by its stockholders and directors.
Truth to tell, a judicial order to decrease capital stock without the assent of FLADCs
directors and stockholders is a violation of the business judgment rule which states that:
xxx xxx xxx (C)ontracts intra vires entered into by the board of directors are binding
upon the corporation and courts will not interfere unless such contracts are so
unconscionable and oppressive as to amount to wanton destruction to the rights of the
minority, as when plaintiffs aver that the defendants (members of the board), have
concluded a transaction among themselves as will result in serious injury to the plaintiffs
stockholders.[29]
The reason behind the rule is aptly explained by Dean Cesar L. Villanueva, an
esteemed author in corporate law, thus:
Courts and other tribunals are wont to override the business judgment of the board
mainly because, courts are not in the business of business, and the laissez faire rule or
the free enterprise system prevailing in our social and economic set-up dictates that it is
better for the State and its organs to leave business to the businessmen; especially so,
when courts are ill-equipped to make business decisions. More importantly, the social
contract in the corporate family to decide the course of the corporate business has been
vested in the board and not with courts.[30]
Apparently, the Tius do not realize the illegal consequences of seeking rescission
and control of the corporation to the exclusion of the Ongs. Such an act infringes on the
law on reduction of capital stock. Ordering the return and distribution of the Ongs capital
contribution without dissolving the corporation or decreasing its authorized capital stock
is not only against the law but is also prejudicial to corporate creditors who enjoy
absolute priority of payment over and above any individual stockholder thereof.
Stripped to its barest essentials, the issue of rescission in this case is not difficult to
understand. If rescission is denied, will injustice be inflicted on any of the parties? The
answer is no because the financial interests of both the Tius and the Ongs will remain
intact and safe within FLADC. On the other hand, if rescission is granted, will any of the
parties suffer an injustice?Definitely yes because the Ongs will find themselves out in
the streets with nothing but the money they had in 1994 while the Tius will not only
enjoy a windfall estimated to be anywhere from P450 million to P900 million[31] but will
also take over an extremely profitable business without much effort at all.
Another very important point follows. The Court of Appeals and, later on, our
Decision dated February 1, 2002, stated that both groups were in pari delicto, meaning,
that both the Tius and the Ongs committed breaches of the Pre-Subscription
Agreement. This may be true to a certain extent but, judging from the comparative
gravity of the acts separately committed by each group, we find that the Ongs acts were
relatively tame vis--vis those committed by the Tius in not surrendering FLADC funds to
the corporation and diverting corporate income to their own MATTERCO account. The
Ongs were right in not issuing to the Tius the shares corresponding to the four-story
building and the 1,902.30 square-meter lot because no title for it could be issued in
FLADCs name, owing to the Tius refusal to pay the transfer taxes. And as far as the
151 square-meter lot was concerned, why should FLADC issue additional shares to the
Tius for property already owned by the corporation and which, in the final analysis, was
already factored into the shareholdings of the Tius before the Ongs came in?
We are appalled by the attempt by the Tius, in the words of the Court of Appeals, to
pull a fast one on the Ongs because that was where the problem precisely started. It is
clear that, when the finances of FLADC improved considerably after the equity infusion
of the Ongs, the Tius started planning to take over the corporation again and exclude
the Ongs from it. It appears that the Tius refusal to pay transfer taxes might not have
really been at all unintentional because, by failing to pay that relatively small amount
which they could easily afford, the Tius should have expected that they were not going
to be given the corresponding shares. It was, from every angle, the perfect excuse for
blackballing the Ongs. In other words, the Tius created a problem then used that same
problem as their pretext for showing their partners the door. In the process, they stood
to be rewarded with a bonanza of anywhere between P450 million to P900 million in
assets (from an investment of only P45 million which was nearly foreclosed by PNB), to
the extreme and irreparable damage of the Ongs, FLADC and its creditors.
After all is said and done, no one can close his eyes to the fact that the Masagana
Citimall would not be what it has become today were it not for the timely infusion
of P190 million by the Ongs in 1994. There are no ifs or buts about it.
Without the Ongs, the Tius would have lost everything they originally invested in
said mall. If only for this and the fact that this Resolution can truly pave the way for both
groups to enjoy the fruits of their investments assuming good faith and honest intentions
we cannot allow the rescission of the subject subscription agreement. The Ongs
shortcomings were far from serious and certainly less than substantial; they were in fact
remediable and correctable under the law. It would be totally against all rules of justice,
fairness and equity to deprive the Ongs of their interests on petty and tenuous grounds.
WHEREFORE, the motion for reconsideration, dated March 15, 2002, of petitioners
Ong Yong, Juanita Tan Ong, Wilson Ong, Anna Ong, William Ong, Willie Ong and Julie
Ong Alonzo and the motion for partial reconsideration, dated March 15, 2002, of
petitioner Willie Ong are hereby GRANTED. The Petition for Confirmation of the
Rescission of the Pre-Subscription Agreement docketed as SEC Case No. 02-96-5269
is hereby DISMISSED for lack of merit. The unilateral rescission by the Tius of the
subject Pre-Subscription Agreement, dated August 15, 1994, is hereby declared as null
and void.
The motion for the issuance of a writ of execution, dated March 15, 2002, of
petitioners David S. Tiu, Cely Y. Tiu, Moly Yu Gow, Belen See Yu, D. Terence Y. Tiu,
John Yu and Lourdes C. Tiu is hereby DENIED for being moot.
Accordingly, the Decision of this Court, dated February 1, 2002, affirming with
modification the decision of the Court of Appeals, dated October 5, 1999, and the
SEC en banc, dated September 11, 1998, is hereby REVERSED.
Costs against the petitioner Tius.
SO ORDERED.
#11

G.R. NO. 175278

GSIS FAMILY BANK - THRIFT BANK [Formerly Inc.], Petitioner,

vs.
BPI FAMILY BANK, Respondent.

DECISION

JARDELEZA, J.:

This is a Petition for Review on Certiorari filed by GSIS Family Bank - Thrift
Bank1 assailing the Court of Appeals Decision2 dated March 29, 2006 (Decision) and
Resolution3 dated October 23, 2006 which denied petitioner's petition for review of the
Securities and Ex.change Commission Decision dated February 22, 2005 (SEC En
Banc Decision). The SEC En Banc Decision4 prohibited petitioner from using the word
"Family" as part of its corporate name and ordered petitioner to delete the word from its
name.5

Facts

Petitioner was originally organized as Royal Savings Bank and started operations in
1971. Beginning 1983 and 1984, petitioner encountered liquidity problems. On July 9,
1984, it was placed under receivership and later temporarily closed by the Central Bank
of the Philippines. Two (2) months after its closure, petitioner reopened and was
renamed Comsavings Bank, Inc. under the management of the Commercial Bank of
Manila.6

In 1987, the Government Service Insurance System (GSIS) acquired petitioner from the
Commercial Bank of Manila. Petitioner's management and control was thus transferred
to GSIS.7 To improve its marketability to the public, especially to the members of the
GSIS, petitioner sought Securities and Exchange Commission (SEC) approval to
change its corporate name to "GSIS Family Bank, a Thrift Bank." 8 Petitioner likewise
applied with the Department of Trade and Industry (DTI) and Bangko Sentral ng
Pilpinas (BSP) for authority to use "GSIS Family Bank, a Thrift Bank" as its business
name. The DTI and the BSP approved the applications. 9 Thus, petitioner operates
under the corporate name "GSIS Family Bank – a Thrift Bank," pursuant to the DTI
Certificate of Registration No. 741375 and the Monetary Board Circular approval. 10

Respondent BPI Family Bank was a product of the merger between the Family Bank
and Trust Company (FBTC) and the Bank of the Philippine Islands (BPI). 11 On June 27,
1969, the Gotianum family registered with the SEC the corporate name "Family First
Savings Bank," which was amended to "Family Savings Bank," and then later to "Family
Bank and Trust Company."12 Since its incorporation, the bank has been commonly
known as "Family Bank." In 1985, Family Bank merged with BPI, and the latter acquired
all the rights, privileges, properties, and interests of Family Bank, including the right to
use names, such as "Family First Savings Bank,"

"Family Bank," and "Family Bank and Trust Company." BPI Family Savings Bank was
registered with the SEC as a wholly-owned subsidiary of BPI. BPI Family Savings Bank
then registered with the Bureau of Domestic Trade the trade or business name "BPI
Family Bank," and acquired a reputation and goodwill under the name. 13

Proceedings before the SEC

Eventually, it reached respondent’s attention that petitioner is using or attempting to use

the name "Family Bank." Thus, on March 8, 2002, respondent petitioned the SEC
Company Registration and Monitoring Department (SEC CRMD) to disallow or prevent
the registration of the name "GSIS Family Bank" or any other corporate name with the
words "Family Bank" in it. Respondent claimed exclusive ownership to the name
"Family Bank," having acquired the name since its purchase and merger with Family
Bank and Trust Company way back 1985.14 Respondent also alleged that through the
years, it has been known as "BPI Family Bank" or simply "Family Bank" both locally and
internationally. As such, it has acquired a reputation and goodwill under the name, not
only with clients here and abroad, but also with correspondent and competitor banks,
and the public in general.15

Respondent prayed the SEC CRMD to disallow or prevent the registration of the name
"GSIS Family Bank" or any other corporate name with the words "Family Bank" should
the same be presented for registration.

Respondent likewise prayed the SEC CRMD to issue an order directing petitioner or
any other corporation to change its corporate name if the names have already been
registered with the SEC.16

The SEC CRMD was thus confronted with the issue of whether the names BPI Family
Bank and GSIS Family Bank are confusingly similar as to require the amendment of the
name of the latter corporation.

The SEC CRMD declared that upon the merger of FBTC with the BPI in 1985, the latter
acquired the right to the use of the name of the absorbed corporation. Thus, BPI Family
Bank has a prior right to the use of the name

Family Bank in the banking industry, arising from its long and extensive nationwide use,
coupled with its registration with the Intellectual Property Office (IPO) of the name
"Family Bank" as its trade name. Applying the rule of "priority in registration" based on
the legal maxim first in time, first in right, the SEC CRMD concluded that BPI has the
preferential right to the use of the name "Family Bank." More, GSIS and Comsavings
Bank were then fully aware of the existence and use of the name "Family Bank" by
FBTC prior to the latter's merger with BPI.17
The SEC CRMD also held that there exists a confusing similarity between the corporate
names BPI Family Bank and GSIS Family Bank. It explained that although not identical,
the corporate names are indisputably similar, as to cause confusion in the public mind,
even with the exercise of reasonable care and observation, especially so since both
corporations are engaged in the banking business.18

In a decision19 dated May 19, 2003, the SEC CRMD said, PREMISES CONSIDERED
respondent GSIS FAMILY BANK is hereby directed to refrain from using the word
"Family" as part of its name and make good its commitment to change its name by
deleting or dropping the subject word from its corporate name within [thirty (30) days]
from the date of actual receipt hereof.20

Petitioner appealed21 the decision to the SEC En Banc, which denied the appeal, and
upheld the SEC CRMD in the SEC En Banc Decision.22 Petitioner elevated the SEC En
Banc Decision to the Court of Appeals, raising the following issues:

1. Whether the use by GSIS Family Bank of the words "Family Bank" is
deceptively and confusingly similar to the name BPI Family Bank;

2. Whether the use by Comsavings Bank of "GSIS Family Bank" as its business
constitutes unfair competition;

3. Whether BPI Family Bank is guilty of forum shopping;

4. Whether the approval of the DTI and the BSP of petitioner's application to use
the name GSIS Family Bank constitutes its authority to the lawful and valid use of
such trade name or trade mark;

5. Whether the application of respondent BPI Family Bank for the exclusive use
of the name "Family Bank," a generic name, though not yet approved by IPO of
the Bureau of Patents, has barred the GSIS Family Bank from using such trade
mark or name.23

Court of Appeals Ruling

The Court of Appeals ruled that the approvals by the BSP and by the DTI of petitioner’s
application to use the name "GSIS Family Bank" do not constitute authority for its lawful
and valid use. It said that the SEC has absolute jurisdiction, supervision and control
over all corporations.24 The Court of Appeals held that respondent was entitled to the
exclusive use of the corporate name because of its prior adoption of the name "Family
Bank" since 1969.25There is confusing similarity in the corporate names because
"[c]onfusion as to the possible association with GSIS might arise if we were to allow
Comsavings Bank to add its parent company’s acronym, ‘GSIS’ to ‘Family Bank.’ This is
true especially considering both companies belong to the banking industry. Proof of
actual confusion need not be shown. It suffices that confusion is probably or likely to
occur."26The Court of Appeals also ruled out forum shopping because not all the
requirements of litis pendentia are present.27

The dispositive portion of the decision read,

WHEREFORE, the instant petition for review is hereby DISMISSED for lack of merit. 28

After its Motion for Reconsideration was denied,29 petitioner brought the decision to this
Court via a Petition for Review on Certiorari.30

Issues in the Petition

Petitioner raised the following issues in its petition:

I. The Court of Appeals gravely erred in affirming the SEC Resolution finding the
word "Family" not generic despite its unregistered status with the IPO of the
Bureau of Patents and the use by GSIS-Family Bank in its corporate name of the
words "[F]amily [B]ank" as deceptive and [confusingly similar] to the name BPI
Family Bank;31

II. The Court of Appeals gravely erred when it ruled that the respondent is not
guilty of forum shopping despite the filing of three (3) similar complaints before
the DTI and BSP and with the SEC without the requisite certification of non-forum
shopping attached thereto;32

III. The Court of Appeals gravely erred when it completely disregarded the
opinion of the Banko Sentral ng Pilipinas that the use by the herein petitioner of
the trade name GSIS Family Bank – Thrift Bank is not similar or does not deceive
or likely cause any deception to the public.33

Court's Ruling

We uphold the decision of the Court of Appeals.

Section 18 of the Corporation Code provides,

Section 18. Corporate name. – No corporate name may be allowed by the Securities
and Exchange Commission if the proposed name is identical or deceptively or
confusingly similar to that of any existing corporation or to any other name already
protected by law or is patently deceptive, confusing or contrary to existing laws. When a
change in the corporate name is approved, the Commission shall issue an amended
certificate of incorporation under the amended name.

In Philips Export B.V. v. Court of Appeals,34 this Court ruled that to fall within the
prohibition of the law on the right to the exclusive use of a corporate name, two
requisites must be proven, namely:
 (1) that the complainant corporation acquired a prior right over the use of such
corporate name; and

(2) the proposed name is either

(a) identical or

(b) deceptive or confusingly similar to that of any existing corporation or to

any other name already protected by law; or

(c) patently deceptive, confusing or contrary to existing law.35

These two requisites are present in this case. On the first requisite of a prior right,
Industrial Refractories Corporation of the Philippines v. Court of Appeals (IRCP
case)36 is instructive. In that case, Refractories Corporation of the Philippines (RCP)
filed before the SEC a petition to compel Industrial Refractories Corporation of the
Philippines (IRCP) to change its corporate name on the ground that its corporate name
is confusingly similar with that of RCP’s such that the public may be confused into
believing that they are one and the same corporation. The SEC and the Court of
Appeals found for petitioner, and ordered IRCP to delete or drop from its corporate
name the word "Refractories." Upon appeal of IRCP, this Court upheld the decision of
the CA.

Applying the priority of adoption rule to determine prior right, this Court said that RCP
has acquired the right to use the word "Refractories" as part of its corporate name,
being its prior registrant. In arriving at this conclusion, the Court considered that RCP
was incorporated on October 13, 1976 and since then continuously used the corporate
name "Refractories Corp. of the Philippines." Meanwhile, IRCP only started using its
corporate name "Industrial Refractories Corp. of the Philippines" when it amended its
Articles of Incorporation on August 23, 1985.37

In this case, respondent was incorporated in 1969 as Family Savings Bank and in 1985
as BPI Family Bank. Petitioner, on the other hand, was incorporated as GSIS Family –
Thrift Bank only in 2002,38 or at least seventeen (17) years after respondent started
using its name. Following the precedent in the IRCP case, we rule that respondent has
the prior right over the use of the corporate name.

The second requisite in the Philips Export case likewise obtains on two points: the
proposed name is (a) identical or (b) deceptive or confusingly similar to that of any
existing corporation or to any other name already protected by law.

On the first point (a), the words "Family Bank" present in both petitioner and
respondent's corporate name satisfy the requirement that there be identical names in
the existing corporate name and the proposed one.
Respondent cannot justify its claim under Section 3 of the Revised Guidelines in the
Approval of Corporate and Partnership Names,39 to wit:

3. The name shall not be identical, misleading or confusingly similar to one already
registered by another corporation or partnership with the Commission or a sole
proprietorship registered with the Department of Trade and Industry.

If the proposed name is similar to the name of a registered firm, the proposed name
must contain at least one distinctive word different from the name of the company
already registered.

Section 3 states that if there be identical, misleading or confusingly similar name to one
already registered by another corporation or partnership with the SEC, the proposed
name must contain at least one distinctive word different from the name of the company
already registered. To show contrast with respondent's corporate name, petitioner used
the words "GSIS" and "thrift." But these are not sufficiently distinct words that
differentiate petitioner's corporate name from respondent's. While "GSIS" is merely an
acronym of the proper name by which petitioner is identified, the word "thrift" is simply a
classification of the type of bank that petitioner is. Even if the classification of the bank
as "thrift" is appended to petitioner's proposed corporate name, it will not make the said
corporate name distinct from respondent's because the latter is likewise engaged in the
banking business.

This Court used the same analysis in Ang mga Kaanib sa Iglesia ng Dios Kay Kristo
Hesus, H.S.K. sa Bansang Pilipinas, Inc. v. Iglesia ng Dios Kay Cristo Jesus, Haligi at
Suhay ng Katotohanan.40 In that case, Iglesia ng Dios Kay Cristo Jesus filed a case
before the SEC to compel Ang mga Kaanib sa Iglesia ng Dios Kay Kristo Hesus to
change its corporate name, and to prevent it from using the same or similar name on
the ground that the same causes confusion among their members as well as the public.
Ang mga Kaanib sa Iglesia ng Dios Kay Kristo Hesus claimed that it complied with SEC
Memorandum Circular No. 14-2000 by adding not only two, but eight words to their
registered name, to wit: "Ang Mga Kaanib" and "Sa Bansang Pilipinas, Inc.," which
effectively distinguished it from Iglesia ng Dios Kay Cristo Jesus. This Court rejected the
argument, thus:

The additional words "Ang Mga Kaanib" and "Sa Bansang Pilipinas, Inc." in
petitioner's name are, as correctly observed by the SEC, merely descriptive of
and also referring to the members, or kaanib, of respondent who are likewise
residing in the Philippines. These words can hardly serve as an effective
differentiating medium necessary to avoid confusion or difficulty in distinguishing
petitioner from respondent. This is especially so, since both petitioner and
respondent corporations are using the same acronym – H.S.K.; not to mention
the fact that both are espousing religious beliefs and operating in the same place.
Xxx41
On the second point (b), there is a deceptive and confusing similarity between
petitioner's proposed name and respondent's corporate name, as found by the
SEC.42 In determining the existence of confusing similarity in corporate names, the test
is whether the similarity is such as to mislead a person using ordinary care and
discrimination.43 And even without such proof of actual confusion between the two
corporate names, it suffices that confusion is probable or likely to occur.44

Petitioner's corporate name is "GSIS Family Bank—A Thrift Bank" and respondent's
corporate name is "BPI Family Bank." The only words that distinguish the two are "BPI,"
"GSIS," and "Thrift." The first two words are merely the acronyms of the proper names
by which the two corporations identify themselves; and the third word simply describes
the classification of the bank. The overriding consideration in determining whether a
person, using ordinary care and discrimination, might be misled is the circumstance that
both petitioner and respondent are engaged in the same business of banking. "The
likelihood of confusion is accentuated in cases where the goods or business of one
corporation are the same or substantially the same to that of another corporation." 45

Respondent alleged that upon seeing a Comsavings Bank branch with the signage
"GSIS Family Bank" displayed at its premises, some of the respondent’s officers and
their clients began asking questions. These include whether GSIS has acquired Family
Bank; whether there is a joint arrangement between GSIS and Family Bank; whether
there is a joint arrangement between BPI and GSIS regarding Family Bank; whether
Comsavings Bank has acquired Family Bank; and whether there is there an
arrangement among Comsavings Bank, GSIS, BPI, and Family Bank regarding BPI
Family Bank and GSIS Family Bank.46 The SEC made a finding that "[i]t is not a remote
possibility that the public may entertain the idea that a relationship or arrangement
indeed exists between BPI and GSIS due to the use of the term ‘Family Bank’ in their
corporate names."47

Findings of fact of quasi-judicial agencies, like the SEC, are generally accorded respect
and even finality by this Court, if supported by substantial evidence, in recognition of
their expertise on the specific matters under their consideration, more so if the same
has been upheld by the appellate court, as in this case.48

Petitioner cannot argue that the word "family" is a generic or descriptive name, which
cannot be appropriated exclusively by respondent. "Family," as used in respondent's
corporate name, is not generic. Generic marks are commonly used as the name or
description of a kind of goods, such as "Lite" for beer or "Chocolate Fudge" for
chocolate soda drink. Descriptive marks, on the other hand, convey the characteristics,
function, qualities or ingredients of a product to one who has never seen it or does not
know it exists, such as "Arthriticare" for arthritis medication.49

Under the facts of this case, the word "family" cannot be separated from the word
"bank."50 In asserting their claims before the SEC up to the Court of Appeals, both
petitioner and respondent refer to the phrase "Family Bank" in their submissions. This
coined phrase, neither being generic nor descriptive, is merely suggestive and may
properly be regarded as arbitrary. Arbitrary marks are "words or phrases used as a
mark that appear to be random in the context of its use. They are generally considered
to be easily remembered because of their arbitrariness. They are original and
unexpected in relation to the products they endorse, thus, becoming themselves
distinctive."51 Suggestive marks, on the other hand, "are marks which merely suggest
some quality or ingredient of goods. xxx The strength of the suggestive marks lies on
how the public perceives the word in relation to the product or service." 52

In Ang v. Teodoro,53 this Court ruled that the words "Ang Tibay" is not a descriptive term
within the meaning of the Trademark Law but rather a fanciful or coined phrase. 54 In so
ruling, this Court considered the etymology and meaning of the Tagalog words, "Ang
Tibay" to determine whether they relate to the quality or description of the merchandise
to which respondent therein applied them as trademark, thus:

We find it necessary to go into the etymology and meaning of the Tagalog words "Ang
Tibay" to determine whether they are a descriptive term, i.e., whether they relate to the
quality or description of the merchandise to which respondent has applied them as a
trade-mark. The word "ang" is a definite article meaning "the" in English. It is also used
as an adverb, a contraction of the word "anong" (what or how). For instance, instead of
saying, "Anong ganda!" ("How beautiful!"), we ordinarily say, "Ang ganda!" Tibay is a
root word from which are derived the verb magpatibay (to strengthen); the nouns
pagkamatibay (strength, durability), katibayan (proof, support, strength), katibaytibayan
(superior strength); and the adjectives matibay (strong, durable, lasting), napakatibay
(very strong), kasintibay or magkasintibay (as strong as, or of equal strength). The
phrase "Ang Tibay" is an exclamation denoting admiration of strength or durability. For
instance, one who tries hard but fails to break an object exclaims, "Ang tibay!" ("How
strong!") It may also be used in a sentence thus, "Ang tibay ng sapatos mo!" ("How
durable your shoes are!") The phrase "ang tibay" is never used adjectively to define or
describe an object. One does not say, "ang tibay sapatos" or "sapatos ang tibay" to
mean "durable shoes," but "matibay na sapatos" or "sapatos na matibay."

From all of this we deduce that "Ang Tibay" is not a descriptive term within the meaning
of the Trade-Mark Law but rather a fanciful or coined phrase which may properly and
legally be appropriated as a trade-mark or trade-name. xxx55 (Underscoring supplied).

The word "family" is defined as "a group consisting of parents and children living
together in a household" or "a group of people related to one another by blood or
marriage."56 Bank, on the other hand, is defined as "a financial establishment that
invests money deposited by customers, pays it out when requested, makes loans at
interest, and exchanges currency."57 By definition, there can be no expected relation
between the word "family" and the banking business of respondent. Rather, the words
suggest that respondent’s bank is where family savings should be deposited. More, as
in the Ang case, the phrase "family bank" cannot be used to define an object.
Petitioner’s argument that the opinion of the BSP and the certificate of registration
granted to it by the DTI constitute authority for it to use "GSIS Family Bank" as
corporate name is also untenable.

The enforcement of the protection accorded by Section 18 of the Corporation Code to

corporate names is lodged exclusively in the SEC. The jurisdiction of the SEC is not
merely confined to the adjudicative functions provided in Section 5 of the SEC
Reorganization Act,58 as amended.59 By express mandate, the SEC has absolute
jurisdiction, supervision and control over all corporations.60 It is the SEC’s duty to
prevent confusion in the use of corporate names not only for the protection of the
corporations involved, but more so for the protection of the public. It has authority to de-
register at all times, and under all circumstances corporate names which in its
estimation are likely to generate confusion.61

The SEC62 correctly applied Section 18 of the Corporation Code, and Section 15 of SEC
Memorandum Circular No. 14-2000, pertinent portions of which provide:

In implementing Section 18 of the Corporation Code of the Philippines (BP 69), the
following revised guidelines in the approval of corporate and partnership names are
hereby adopted for the information and guidance of all concerned:

xxx

15. Registrant corporations or partnership shall submit a letter undertaking to change

their corporate or partnership name in case another person or firm has acquired a prior
right to the use of the said firm name or the same is deceptively or confusingly similar to
one already registered unless this undertaking is already included as one of the
provisions of the articles of incorporation or partnership of the registrant.

The SEC, after finding merit in respondent's claims, can compel petitioner to abide by its
commitment "to change its corporate name in the event that another person, firm or
entity has acquired a prior right to use of said name or one similar to it." 63

Clearly, the only determination relevant to this case is that one made by the SEC in the
exercise of its express mandate under the law. The BSP opinion invoked by petitioner
even acknowledges that "the issue on whether a proposed name is identical or
deceptively similar to that of any of existing corporation is matter within the official
jurisdiction and competence of the SEC."64

Judicial notice65 may also be taken of the action of the IPO in approving respondent’s
registration of the trademark "BPI Family Bank" and its logo on October 17, 2008. The
certificate of registration of a mark shall be prima facie evidence of the validity of the
registration, the registrant’s ownership of the mark, and of the registrant’s exclusive right
to use the same in connection with the goods or services and those that are related
thereto specified in the certificate.66
Finally, we uphold the Court of Appeals' finding that the issue of forum shopping was
belatedly raised by petitioner and, thus, cannot anymore be considered at the appellate
stage of the proceedings. Petitioner raised the issue of forum shopping for the first time
only on appeal.67 Petitioner argued that the complaints filed by respondent did not
contain certifications against non-forum shopping, in violation of Section 5, Rule 7 of the
Rules of Court.68

In S.C. Megaworld Construction and Development Corporation vs. Parada, 69 this Court
said that objections relating to non-compliance with the verification and certification of
non-forum shopping should be raised in the proceedings below, and not for the first time
on appeal. In that case, S.C. Megaworld argued that the complaint for collection of sum
of money should have been dismissed outright by the trial court on account of an invalid
nonforum shopping certification. It alleged that the Special Power of Attorney granted to
Parada did not specifically include an authority for the latter to sign the verification and
certification of non-forum shopping, thus rendering the complaint defective for violation
of Sections 4 and 5 of Rule 7 of the Rules of Court. On motion for reconsideration of the
decision of the Court of Appeals, petitioner raised for the first time, the issue of forum
shopping. The Court ruled against S.C. Megaworld, thus:

It is well-settled that no question will be entertained on appeal unless it has been raised
in the proceedings below. Points of law, theories, issues and arguments not brought to
the attention of the lower court, administrative agency or quasi-judicial body, need not
be considered by a reviewing court, as they cannot be raised for the first time at that
late stage. Basic considerations of fairness and due process impel this rule. Any issue
raised for the first time on appeal is barred by estoppel.70

In this case, the fact that respondent filed a case before the DTI was made known to
petitioner71 long before the SEC rendered its decision. Yet, despite its knowledge,
petitioner failed to question the alleged forum shopping before the SEC. The exceptions
to the general rule that forum shopping should be raised in the earliest opportunity, as
explained in the cited case of Young v. Keng Seng,72 do not obtain in this case.

WHEREFORE, the petition is DENIED. The decision of the Court of Appeals dated
March 29, 2006 is hereby AFFIRMED.

SO ORDERED.