CORPORATION LAW DOCTRINE

NARRA NICKEL MINING AND DEV. CORP. VS. REDMONT

CONSOLIDATED MINES, G.R. NO. 195580, APR. 21, 2014

GRAND FATHER RULE DOCTRINES

Applies in case of corporate layering.

First, as a rule in statutory construction, when there is a conflict between

the Constitution and a statute, the former will prevail.

In this case, Foreign Investment Act will not apply. Corporate layering is
admittedly allowed by the FIA, but if it is used to circumvent the Constitution and
other pertinent laws, then it becomes illegal.

Second, under SEC Rule and DOJ opinion, the Grandfather Rule must be
applied when the 60-40 Filipino-foreign equity ownership is in doubt.

Doubt is present in this case since their common investor, the 100%
Canadian-owned corporation – MBMI funded them.

Under the Grandfather rule, it is enough that the corporation does not
have required 60% Filipino stockholdings at face value. To determine the
percentage of the ultimate Filipino ownership, it must be first be traced to the
level of the investing corporation and added to the shares directly owned by the
investee corporation. Applying this rule, it turns out that the Canadian
corporation, owns more than 60% of the equity interest of Narra, Tesoro and
MacArthur. Hence, the latter are disqualified to participate in the exploration,
development and utilization of the Ph natural resources.

Application of the grandfather rule did not result in the abandonment of

the control test.

The control test can be applied jointly with the GF Rule to determine the
observance of foreign ownership restriction in nationalized economic activities.

The control test and the GF rule are not incompatible ownership-
determinant methods that can only be applied alternative to each other.

Rather these methods can, if appropriate, be used cumulatively in the

determination of the ownership and control of corporations engaged in fully or
partly nationalized activities, as the mining operation involved in this case or the
operation of public utilities.
 The GFR, standing alone, should not be used to determine Filipino
ownership and control in a corporation, as it could result in an otherwise foreign
corporation rendered qualified to perform nationalized or partly nationalized
activities. Hence, it is only when the Control Test is first complied with that the
GFR may be applied.

Put in another manner, if the subject corporation’s Filipino equity falls

below the threshold 60%, the corporation is immediately considered foreign-
owned, in which case, the need to resort to the GFR disappears.

In this case, using control test, Narra, Tesoro and MacArthur appear to
have satisfied the 60-40 equity requirement. But the nationality of these
corporations and the foreign-owned common investor that funds them was in
doubt, hence, the need to apple the GFR.

Controlling Share Holder

Full beneficial ownership of the stocks couple with appropriate voting rights
is essential.

Full beneficial ownership/Share without voting right

Mere legal title is not enough to meet the required Filipino equity, which means
that a share is registered in the name of a Filipino Citizen or national.

If not allowed to vote in the election of directors, then you are not the controlling
shareholder/ owner of the share

SEPARATE PERSONALITY/ PIERCING THE VEIL

REYNALDO S. GERALDO VS. THE BILL SENDER CORP./MS. LOURDES

NER CANDO

It must be noted, however, that respondent Cando cannot be held personally and
solidarity liable with the company for the monetary claims of Geraldo. As a general
rule, a corporate officer cannot be held liable for acts done in his official
capacity because a corporation, by legal fiction, has a personality separate
and distinct from its officers, stockholders, and members. To pierce this
fictional veil, it must be shown that the corporate personality was used to perpetuate
fraud or an illegal act, or to evade an existing obligation, or to confuse a legitimate issue.
In illegal dismissal cases, corporate officers may be held solidarily liable
with the corporation if the termination was done with malice or bad
faith.17 To hold a director or officer personally liable for corporate obligations, two
requisites must concur, to wit:
 (1) the complaint must allege that the director or officer assented to the patently
unlawful acts of the corporation, or that the director or officer was guilty of gross
negligence or bad faith; and

(2) there must be proof that the director or officer acted in bad faith.
 In the instant case, however, there is no showing that Cando, as President of the
company, was guilty of malice or bad faith in terminating the employment of Geraldo.

Thus, she should not be held personally liable for his monetary claims.

EDSA SHANGRI-LA HOTEL AND RESORT, INC. V. BF CORP., G.R.

NO. 145842, JUNE 27, 2008

The Court notes that the appellate court, by its affirmatory ruling, effectively
recognized the applicability of the doctrine on piercing the veil of the separate corporate
identity. Under the circumstances of this case, we cannot allow such application. A
corporation, upon coming to existence, is invested by law with a personality separate
and distinct from those of the persons composing it. Ownership by a single or a small
group of stockholders of nearly all of the capital stock of the corporation is not, without
more, sufficient to disregard the fiction of separate corporate personality. 23 Thus,
obligations incurred by corporate officers, acting as corporate agents, are not theirs but
direct accountabilities of the corporation they represent. Solidary liability on the part
of corporate officers may at times attach, but only under exceptional circumstances,
such as when they act with malice or in bad faith.24 Also, in appropriate cases, the
veil of corporate fiction shall be disregarded when the separate juridical personality of a
corporation is abused or used to commit fraud and perpetrate a social injustice, or used
as a vehicle to evade obligations. 25 In this case, no act of malice or like dishonest purpose
is ascribed on petitioner Roxas-del Castillo as to warrant the lifting of the corporate veil.

The above conclusion would still hold even if petitioner Roxas-del Castillo, at the
time ESHRI defaulted in paying BF's monthly progress bill, was still a director, for,
before she could be held personally liable as corporate director, it must be shown that
she acted in a manner and under the circumstances contemplated in Sec. 31 of the
Corporation Code, which reads:

Section 31. Directors or trustees who willfully or knowingly vote for or

assent to patently unlawful acts of the corporation or acquire any pecuniary
interest in conflict with their duty as such directors or trustees shall be liable jointly
and severally for all damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons. (Emphasis ours.)

We do not find anything in the testimony of one Crispin Balingit to indicate that
Roxas-del Castillo made any misrepresentation respecting the payment of the bills in
question. Balingit, in fact, testified that the submitted but unpaid billings were still
being evaluated. Further, in the said testimony, in no instance was bad faith imputed on
Roxas-del Castillo.

Not lost on the Court are some material dates. As it were, the controversy
between the principal parties started in July 1992 when Roxas-del Castillo no longer sat
in the ESHRI Board, a reality BF does not appear to dispute. In fine, she no longer had
any participation in ESHRI's corporate affairs when what basically is the ESHRI-BF
dispute erupted. Familiar and fundamental is the rule that contracts are binding only
among parties to an agreement. Art. 1311 of the Civil Code is clear on this point:

Article 1311. Contracts take effect only between the parties, their assigns and
heirs, except in cases where the rights and obligations are not transmissible by their
nature, or by stipulation or by provision of law.

In the instant case, Roxas-del Castillo could not plausibly be held liable for
breaches of contract committed by ESHRI nor for the alleged wrongdoings of its
governing board or corporate officers occurring after she severed official ties with the
hotel management.

Given the foregoing perspective, the other issues raised by Roxas-del Castillo as
to her liability for moral and exemplary damages and attorney's fees are now moot and
academic.

And her other arguments insofar they indirectly impact on the liability of ESHRI
need not detain us any longer for we have sufficiently passed upon those concerns in our
review of G.R. No. 145842.

WHEREFORE, the petition is DISMISSED.

MARICALUM MINING CORPORATION VS. ELY G. FLORENTINO, ET. AL.,

G.R. NO. 221813, JULY 23, 2018

The doctrine of piercing the corporate veil applies only in three (3) basic
areas:

a. Defeat of public convenience as when the corporate fiction is used as a

vehicle for the evasion of an existing obligation,
b.  fraud cases or when the corporate entity is used to justify a wrong, protect
fraud, or defend a crime
c. alter ego cases, where a corporation is merely a farce since it is a mere alter
ego or business conduit of a person, or where the corporation is so
organized and controlled and its affairs are so conducted as to make it
merely an instrumentality, agency, conduit or adjunct of another
corporation.
Complainants mainly harp their cause on the alter ego theory.

Under this theory, piercing the veil of corporate fiction may be allowed only if the
following elements concur:

1.  "instrumentality" or "control" test. This test requires that the subsidiary be

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

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

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

To summarize, piercing the corporate veil based on the alter ego theory requires

the concurrence of three elements: control of the corporation by the stockholder
or parent corporation, fraud or fundamental unfairness imposed on the plaintiff, and
harm or damage caused to the plaintiff by the fraudulent or unfair act of the
corporation. The absence of any of these elements prevents piercing the
corporate veil. (emphases and underscoring supplied)

Again, all these three elements must concur before the corporate veil may be
pierced under the alter ego theory. Keeping in mind the parameters, guidelines and
indicators for proper piercing of the corporate veil, the Court now proceeds to determine
whether Maricalum Mining's corporate veil may be pierced in order to allow
complainants to enforce their monetary awards against G Holdings.

In relation to the elements above, SC laid down the jurisprudential tests for
piercing, to wit:
 1. Control Test - There is no doubt that G Holdings - being the majority and
controlling stockholder - had been exercising significant control over Maricalum
Mining. This is because this Court had already upheld the validity and
enforceability of the PSA between the APT and G Holdings
2. Fraud Test - No clear and convincing evidence was presented by the
complainants to conclusively prove the presence of fraud on the part of G
Holdings.
3. Harm Test - In the case at bench, complainants have not yet even suffered any
monetary injury. They have yet to enforce their claims against Maricalum.

Hence, in order for a parent corporation to be held liable for the obligations or
liabilities of its subsidiary, all three (3) tests must be satisfied. "Piercing of the corporate
veil" cannot be done when only one or two of the said tests have been satisfied. Only one
of the three (3) tests was met (particularly, control). The complainants therein (who
claimed to be employees of the subsidiary) failed to prove that the parent purposely
used the separate corporate fiction of its subsidiary to defraud them; neither were
complainants able to show any harm inflicted upon them, which was proximately caused
by the control of the parent over the subsidiary. In other words, while control was
undoubtedly present in this case, there was neither fraud done nor harm inflicted. ■
Hence, the complainants were held unable to proceed against the parent corporation for
supposed liabilities of its subsidiary, in keeping with the principle of separate and
distinct juridical personalities of corporations

RULING: Wherefore, CA Affirmed.

MANUEL C. ESPIRITU, JR., ET AL. VS. PETRON CORP., ET AL., G.R. NO.
170891, NOV. 24, 2009

Bicol Gas is a corporation. As such, it is an entity separate and distinct from the
persons of its officers, directors, and stockholders. It has been held, however, that
corporate officers or employees, through whose act, default or omission the corporation
commits a crime, may themselves be individually held answerable for the crime. 15

Jose claimed in his affidavit that, when he negotiated the swapping of captured
cylinders with Bicol Gas, its manager, petitioner Audie Llona, claimed that he would be
consulting with the owners of Bicol Gas about it. Subsequently, Bicol Gas declined the
offer to swap cylinders for the reason that the owners wanted to send their captured
cylinders to Batangas. The Court of Appeals seized on this as evidence that the
employees of Bicol Gas acted under the direct orders of its owners and that "the owners
of Bicol Gas have full control of the operations of the business." 16
 The "owners" of a corporate organization are its stockholders and they are to be
distinguished from its directors and officers. The petitioners here, with the exception of
Audie Llona, are being charged in their capacities as stockholders of Bicol Gas. But the
Court of Appeals forgets that in a corporation, the management of its business is
generally vested in its board of directors, not its stockholders. 17 Stockholders are
basically investors in a corporation. They do not have a hand in running the day-to-day
business operations of the corporation unless they are at the same time directors or
officers of the corporation. Before a stockholder may be held criminally liable for acts
committed by the corporation, therefore, it must be shown that he had knowledge of the
criminal act committed in the name of the corporation and that he took part in the same
or gave his consent to its commission, whether by action or inaction.

The finding of the Court of Appeals that the employees "could not have
committed the crimes without the consent, [abetment], permission, or participation of
the owners of Bicol Gas"18 is a sweeping speculation especially since, as demonstrated
above, what was involved was just one Petron Gasul tank found in a truck filled with
Bicol Gas tanks. Although the KPE manager heard petitioner Llona say that he was
going to consult the owners of Bicol Gas regarding the offer to swap additional captured
cylinders, no indication was given as to which Bicol Gas stockholders Llona consulted. It
would be unfair to charge all the stockholders involved, some of whom were proved to
be minors.19 No evidence was presented establishing the names of the stockholders who
were charged with running the operations of Bicol Gas. The complaint even failed to
allege who among the stockholders sat in the board of directors of the company or
served as its officers.

The Court of Appeals of course specifically mentioned petitioner stockholder

Manuel C. Espiritu, Jr. as the registered owner of the truck that the KPE manager
brought to the police for investigation because that truck carried a tank of Petron Gasul.
But the act that R.A. 623 punishes is the unlawful filling up of registered tanks of
another. It does not punish the act of transporting such tanks. And the complaint did
not allege that the truck owner connived with those responsible for filling up that Gasul
tank with Bicol Gas LPG.

ERIC GODFREY STANLEY LIVESEY VS. BINSWANGER PHILS., INC., ET.

AL., G.R. NO. 177493, MAR. 19, 2014

It has long been settled that the law vests a corporation with a personality distinct
and separate from its stockholders or members. In the same vein, a corporation, by legal
fiction and convenience, is an entity shielded by a protective mantle and imbued by law
with a character alien to the persons comprising it. 43 Nonetheless, the shield is not at all
times impenetrable and cannot be extended to a point beyond its reason and policy.
Circumstances might deny a claim for corporate personality, under the "doctrine of
piercing the veil of corporate fiction."

Piercing the veil of corporate fiction is an equitable doctrine developed to address

situations where the separate corporate personality of a corporation is abused or used
for wrongful purposes.44 Under the doctrine, the corporate existence may be disregarded
where the entity is formed or used for non-legitimate purposes, such as to evade a just
and due obligation, or to justify a wrong, to shield or perpetrate fraud or to carry out
similar or inequitable considerations, other unjustifiable aims or intentions, 45 in which
case, the fiction will be disregarded and the individuals composing it and the two
corporations will be treated as identical.46

In the present case, we see an indubitable link between CBB’s closure and
Binswanger’s incorporation. CBB ceased to exist only in name; it re-emerged in the
person of Binswanger for an urgent purpose — to avoid payment by CBB of the last two
installments of its monetary obligation to Livesey, as well as its other financial liabilities.
Freed of CBB’s liabilities, especially that owing to Livesey, Binswanger can continue, as
it did continue, CBB’s real estate brokerage business.

Livesey’s evidence, whose existence the respondents never denied, converged to

show this continuity of business operations from CBB to Binswanger. It was not just
coincidence that Binswanger is engaged in the same line of business CBB embarked on:
(1) it even holds office in the very same building and on the very same floor where CBB
once stood; (2) CBB’s key officers, Elliot, no less, and Catral moved over to Binswanger,
performing the tasks they were doing at CBB; (3) notwithstanding CBB’s closure,
Binswanger’s Web Editor (Young), in an e-mail correspondence, supplied the
information that Binswanger is “now known” as either CBB (Chesterton Blumenauer
Binswanger or as Chesterton Petty, Ltd., in the Philippines; (4) the use of Binswanger of
CBB’s paraphernalia (receiving stamp) in connection with a labor case where
Binswanger was summoned by the authorities, although Elliot claimed that he bought
the item with his own money; and (5) Binswanger’s takeover of CBB’s project with the
PNB.

While the ostensible reason for Binswanger’s establishment is to continue CBB’s

business operations in the Philippines, which by itself is not illegal, the close proximity
between CBB’s disestablishment and Binswanger’s coming into existence points to an
unstated but urgent consideration which, as we earlier noted, was to evade CBB’s
unfulfilled financial obligation to Livesey under the compromise agreement.

ULTRA VIRES ACTS

JOSE BERNAS, ET. AL. VS. JOVENCIO CINCO, ET. AL., G.R. NOS. 163356-
57, JULY 01, 2015

A distinction should be made between corporate acts or contracts which are

illegal and those which are merely ultra vires. The former contemplates the doing of an
act which are contrary to law, morals or public policy or public duty, and are, like similar
transactions between individuals, void: They cannot serve as basis of a court action nor
acquire validity by performance, ratification or estoppel. Mere ultra vires acts, on the
other hand, or those which are not illegal or void ab initio, but are not merely within the
scope of the articles of incorporation, are merely voidable and may become binding and
enforceable when ratified by the stockholders. 32 The 1 7 December 1997 Meeting belongs
to the category of the latter, that is, it is void ab initio and cannot be validated.

Magallanes Watercraft Asso., Inc., et. al. vs. Margarito Auguis, et. al., G.R. No.
211485, May 30, 2016

A corporation may exercise its powers only within those definitions. Corporate
acts that are outside those express definitions under the law or articles of incorporation
or those "committed outside the object for which a corporation is created" are ultra
vires.
The only exception to this rule is when acts are necessary and
incidental to carry out a corporation's purposes, and to the exercise of
powers conferred by the Corporation Code and under a corporation's
articles of incorporation.
Based on the foregoing, MWAI can properly impose sanctions on Auguis and
Basnig for being delinquent members considering that the payment of membership dues
enables MWAI to discharge its duties and functions enumerated under its charter.
Moreover, respondents were obligated by the by-laws of the association to pay said dues.
The suspension of their rights and privileges is not an ultra vires act as it is reasonably
necessary or proper in order to further the interest and welfare of MWAI. Also, the
imposition of the temporary ban on the use of MWAI's berthing facilities until Auguis
and Basnig have paid their outstanding obligations was a reasonable measure that the
former could undertake to ensure the prompt payment of its membership dues. 15 
Otherwise, MWAI will be rendered inutile as it will have no means of ensuring that its
members will promptly settle their obligations. It will be exposed to deleterious
consequences as it will be unable to continue with its operations if the members
continue to be delinquent in the payment of their obligations, without fear of possible
sanctions.

RESIDENCE OF A CORPORATION
HYATT ELEVATORS INC. VS. GOLDSTAR ELEVATORS. PHILS., G.R. NO.
161026, OCT. 24, 2005

Admittedly, the latter’s principal place of business is Makati, as indicated in its

Articles of Incorporation. Since the principal place of business of a corporation
determines its residence or domicile, then the place indicated in petitioner’s
[Hyatt’s] articles of incorporation becomes controlling in determining the
venue for this case.
 Petitioner [Hyatt] argues that the Rules of Court do not provide that when the
plaintiff is a corporation, the complaint should be filed in the location of its principal
office as indicated in its articles of incorporation. Jurisprudence has, however,
settled that the place where the principal office of a corporation is located,
as stated in the articles, indeed establishes its residence. This ruling is
important in determining the venue of an action by or against a
corporation, as in the present case.

Without merit is the argument of petitioner [Hyatt] that the locality stated in its
Articles of Incorporation does not conclusively indicate that its principal office is still in
the same place. We agree with the appellate court in its observation that the
requirement to state in the articles the place where the principal office of the
corporation is to be located "is not a meaningless requirement. That proviso would be
rendered nugatory if corporations were to be allowed to simply disregard what is
expressly stated in their Articles of Incorporation."

Inconclusive are the bare allegations of petitioner [Hyatt] that it had closed its
Makati office and relocated to Mandaluyong City, and that respondent [Goldstar
Elevators] was well aware of those circumstances. Assuming arguendo that they
transacted business with each other in the Mandaluyong office of petitioner [Hyatt], the
fact remains that, in law, the latter’s residence was still the place indicated in its Articles
of Incorporation. Further unacceptable is its faulty reasoning that the ground for the
CA’s dismissal of its Complaint was its failure to amend its Articles of Incorporation so
as to reflect its actual and present principal office. The appellate court was clear enough
in its ruling that the Complaint was dismissed because the venue had been improperly
laid, not because of the failure of petitioner to amend the latter’s Articles of
Incorporation.

CLAIM FOR MORAL DAMAGES

ABS-CBN Broadcasting Corp. vs. CA, 301SCRA 589, G.R. No. 128690. Jan.
21, 1999

As to moral damages the law is Section 1, Chapter 3, Title XVIII, Book IV of the
Civil Code. Article 2217 thereof defines what are included in moral damages, while
Article 2219 enumerates the cases where they may be recovered, Article 2220 provides
that moral damages may be recovered in breaches of contract where the defendant acted
fraudulently or in bad faith. RBS's claim for moral damages could possibly fall only
under item (10) of Article 2219, thereof which reads:

(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34,
and 35.

Moral damages are in the category of an award designed to compensate the

claimant for actual injury suffered. and not to impose a penalty on the wrongdoer. 62 The
award is not meant to enrich the complainant at the expense of the defendant, but to
enable the injured party to obtain means, diversion, or amusements that will serve to
obviate then moral suffering he has undergone. It is aimed at the restoration, within the
limits of the possible, of the spiritual status quo ante, and should be proportionate to the
suffering inflicted.63 Trial courts must then guard against the award of exorbitant
damages; they should exercise balanced restrained and measured objectivity to avoid
suspicion that it was due to passion, prejudice, or corruption on the part of the trial
court. 64

The award of moral damages cannot be granted in favor of a corporation because,

being an artificial person and having existence only in legal contemplation, it has no
feelings, no emotions, no senses, It cannot, therefore, experience physical suffering and
mental anguish, which call be experienced only by one having a nervous system. 65 The
statement in People v. Manero 66 and Mambulao Lumber Co. v. PNB 67 that a
corporation may recover moral damages if it "has a good reputation that is debased,
resulting in social humiliation" is an obiter dictum. On this score alone the award for
damages must be set aside, since RBS is a corporation.

FILIPINAS BROADCASTING NETWORK, INC. VS. AGO MEDICAL AND

EDUCATIONAL CENTER-BICOL CHRISTIAN COLLEGE OF MEDICINE,
(AMEC-BCCM) AND ANGELITA F. AGO, G.R. NO. 141994, JANUARY 17,
2005

Whether AMEC is entitled to moral damages

FBNI contends that AMEC is not entitled to moral damages because it is a

corporation.39

A juridical person is generally not entitled to moral damages because, unlike a

natural person, it cannot experience physical suffering or such sentiments as wounded
feelings, serious anxiety, mental anguish or moral shock. 40 The Court of Appeals
cites Mambulao Lumber Co. v. PNB, et al.41 to justify the award of moral damages.
However, the Court's statement in Mambulao that "a corporation may have a good
reputation which, if besmirched, may also be a ground for the award of moral damages"
is an obiter dictum.42

Nevertheless, AMEC's claim for moral damages falls under item 7 of Article
221943 of the Civil Code. This provision expressly authorizes the recovery of moral
damages in cases of libel, slander or any other form of defamation. Article 2219(7) does
not qualify whether the plaintiff is a natural or juridical person. Therefore, a juridical
person such as a corporation can validly complain for libel or any other form of
defamation and claim for moral damages.44

Moreover, where the broast is libelous per se, the law implies damages.45 In such
a case, evidence of an honest mistake or the want of character or reputation of the party
libeled goes only in mitigation of damages. 46 Neither in such a case is the plaintiff
required to introduce evidence of actual damages as a condition precedent to the
recovery of some damages.47 In this case, the broasts are libelous per se. Thus, AMEC is
entitled to moral damages.

However, we find the award of P300,000 moral damages unreasonable. The

record shows that even though the broasts were libelous per se, AMEC has not suffered
any substantial or material damage to its reputation. Therefore, we reduce the award of
moral damages from P300,000 to P150,000.

DOCTRINE OF APPARENT AUTHORITY

ADVANCE PAPER CORP, ET.AL., VS. ARMA TRADERS CORP, ET. AL. G.R.
NO.176897, DEC. 11, 2013

Arma Traders is liable to pay the

loans on the basis of the doctrine of
apparent authority.

The doctrine of apparent authority provides that a corporation will be estopped

from denying the agent’s authority if it knowingly permits one of its officers or any other
agent to act within the scope of an apparent authority, and it holds him out to the public
as possessing the power to do those acts. 76 The doctrine of apparent authority does not
apply if the principal did not commit any acts or conduct which a third party knew and
relied upon in good faith as a result of the exercise of reasonable prudence. Moreover,
the agent’s acts or conduct must have produced a change of position to the third party’s
detriment.77

In Inter-Asia Investment Industries v. Court of Appeals, 78 we explained:

Under this provision [referring to Sec. 23 of the Corporation Code], the power
and responsibility to decide whether the corporation should enter into a contract that
will bind the corporation is lodged in the board, subject to the articles of incorporation,
bylaws, or relevant provisions of law. However, just as a natural person who may
authorize another to do certain acts for and on his behalf, the board of
directors may validly delegate some of its functions and powers to officers,
committees or agents. The authority of such individuals to bind the
corporation is generally derived from law, corporate bylaws or
authorization from the board, either expressly or impliedly by habit,
custom or acquiescence in the general course of business, viz.:

A corporate officer or agent may represent and bind the corporation in

transactions with third persons to the extent that [the] authority to do so has been
conferred upon him, and this includes powers as, in the usual course of the particular
business, are incidental to, or may be implied from, the powers intentionally conferred,
powers added by custom and usage, as usually pertaining to the particular officer or
agent, and such apparent powers as the corporation has caused person dealing with the
officer or agent to believe that it has conferred.

Apparent authority is derived not merely from practice. Its existence

may be ascertained through 

(1) the general manner in which the corporation holds out an officer or agent as having
the power to act or, in other words the apparent authority to act in general, with which it
clothes him; or

(2) the acquiescence in his acts of a particular nature, with actual or

constructive knowledge thereof, within or beyond the scope of his ordinary
powers. It requires presentation of evidence of similar act(s) executed
either in its favor or in favor of other parties.

It is not the quantity of similar acts which establishes apparent

authority, but the vesting of a corporate officer with the power to bind the
corporation. [emphases and underscores ours]

In People’s Aircargo and Warehousing Co., Inc. v. Court of Appeals, 79 we ruled
that the doctrine of apparent authority is applied when the petitioner, through its
president Antonio Punsalan Jr., entered into the First Contract without first securing
board approval. Despite such lack of board approval, petitioner did not object to or
repudiate said contract, thus "clothing" its president with the power to bind the
corporation.

"Inasmuch as a corporate president is often given general supervision and control

over corporate operations, the strict rule that said officer has no inherent power to act
for the corporation is slowly giving way to the realization that such officer has certain
limited powers in the transaction of the usual and ordinary business of the
corporation."80 "In the absence of a charter or bylaw provision to the contrary,
the president is presumed to have the authority to act within the domain of
the general objectives of its business and within the scope of his or her
usual duties."81

In the present petition, we do not agree with the CA’s findings that Arma Traders
is not liable to pay the loans due to the lack of board resolution authorizing Tan and Uy
to obtain the loans. To begin with, Arma Traders’ Articles of Incorporation 82 provides
that the corporation may borrow or raise money to meet the financial
requirements of its business by the issuance of bonds, promissory notes and other
evidence of indebtedness. Likewise, it states that Tan and Uy are not just ordinary
corporate officers and authorized bank signatories because they are also Arma
Traders’ incorporators along with respondents Ng and Ting, and Pedro Chao.
Furthermore, the respondents, through Ng who is Arma Traders’ corporate secretary,
incorporator, stockholder and director, testified that the sole management of Arma
Traders was left to Tan and Uy and that he and the other officers never dealt
with the business and management of Arma Traders for 14 years. He also
confirmed that since 1984 up to the filing of the complaint against Arma
Traders, its stockholders and board of directors never had its meeting. 83

Thus, Arma Traders bestowed upon Tan and Uy broad powers by allowing them
to transact with third persons without the necessary written authority from its non-
performing board of directors. Arma Traders failed to take precautions to prevent its
own corporate officers from abusing their powers. Because of its own laxity in its
business dealings, Arma Traders is now estopped from denying Tan and Uy’s authority
to obtain loan from Advance Paper.

We also reject the respondents’ claim that Advance Paper, through Haw,
connived with Tan and Uy. The records do not contain any evidence to prove that the
loan transactions were personal to Tan and Uy. A different conclusion might have been
inferred had the cashier’s checks been issued in favor of Tan and Uy, and had the
postdated checks in favor of Advance Paper been either Tan and/or Uy’s, or had the
respondents presented convincing evidence to show how Tan and Uy conspired with the
petitioners to defraud Arma Traders.84 We note that the respondents initially intended
to present Sharow Ong, the secretary of Tan and Uy, to testify on how Advance Paper
connived with Tan and Uy. As mentioned, the respondents failed to present her on the
witness stand.

TERP CONSTRUCTION CORP. VS. BANCO FILIPINO SAVINGS BANK, G.R.

NO. 221771, SEPT.18, 2019

A corporation exercises its corporate powers through its board of directors. 43 This
power may be validly delegated to its officers, committees, or agencies. "The authority of
such individuals to bind the corporation is generally derived from law, corporate bylaws
or authorization from the board, either expressly or impliedly by habit, custom or
acquiescence in the general course of business[.]"44

The authority of the board of directors to delegate its corporate powers may
either be: (1) actual; or (2) apparent.45

Actual authority may be express or implied. Express actual authority refers to the
corporate powers expressly delegated by the board of directors. Implied actual
authority, on the other hand, "can be measured by his or her prior acts which have been
ratified by the corporation or whose benefits have been accepted by the corporation." 46

Petitioner's subsequent act of twice paying the additional interest Escalona

committed to during the term of the Margarita Bonds is considered a ratification of
Escalona's acts. Petitioner's only defense that they were "erroneous payment[s]" 47 since
it never obligated itself from the start cannot stand. Corporations are bound by errors of
their own making.
 Escalona likewise had apparent authority to transact on behalf of petitioner.
In Yao Ka Sin Trading v. Court of Appeals:48

The rule is of course settled that "[a]lthough an officer or agent acts without, or in
excess of, his actual authority if he acts within the scope of an apparent authority with
which the corporation has clothed him by holding him out or permitting him to appear
as having such authority, the corporation is bound thereby in favor of a person who
deals with him in good faith in reliance on such apparent authority, as where an officer
is allowed to exercise a particular authority with respect to the business, or a particular
branch of its continuously and publicly, for a considerable time." 49

Apparent authority is ascertained through:

(1) the general manner by which the corporation holds out an officer or agent as
having power to act or, in other words, the apparent authority with which it clothes him
to act in general, or

(2) the acquiescence in his acts of a particular nature, with actual or constructive
knowledge thereof, whether within or without the scope of his ordinary
powers.50 (Citation omitted)

Here, respondent relied on Escalona's apparent authority to promise interest

payments over and above the guaranteed 8.5%, considering that Escalona was
petitioner's then senior vice president. His apparent authority was further demonstrated
by petitioner paying respondent what Escalona promised during the Margarita Bonds'
term.

It should likewise be noted that at the time this Petition was filed, Escalona
signed the Verification and Certification 51 as the president of the corporation, signifying
that petitioner did not consider his alleged unauthorized acts as fatal to his continued
involvement in corporate affairs.

TRUST FUND DOCTRINE

DONNINA C. HALLEY VS. PRINTWELL, INC., G.R. NO. 157549, MAY 30,
2011

Unpaid creditor may satisfy its claim from

unpaid subscriptions; stockholders must
prove full payment of their subscriptions

Both the RTC and the CA applied the trust fund doctrine against the defendant
stockholders, including the petitioner.
 The petitioner argues, however, that the trust fund doctrine was inapplicable
because she had already fully paid her subscriptions to the capital stock of BMPI. She
thus insists that both lower courts erred in disregarding the evidence on the complete
payment of the subscription, like receipts, income tax returns, and relevant financial
statements.

The petitioner’s argument is devoid of substance.

The trust fund doctrine enunciates a –

xxx rule that the property of a corporation is a trust fund for the payment of creditors,
but such property can be called a trust fund ‘only by way of analogy or metaphor.’ As
between the corporation itself and its creditors it is a simple debtor, and as between its
creditors and stockholders its assets are in equity a fund for the payment of its debts. 32

The trust fund doctrine, first enunciated in the American case of Wood v.
Dummer, was adopted in our jurisdiction in Philippine Trust Co. v. Rivera, 34where this
Court declared that:

It is established doctrine that subscriptions to the capital of a corporation

constitute a fund to which creditors have a right to look for satisfaction of their claims
and that the assignee in insolvency can maintain an action upon any unpaid stock
subscription in order to realize assets for the payment of its debts. (Velasco vs. Poizat, 37
Phil., 802) xxx35

We clarify that the trust fund doctrine is not limited to reaching the stockholder’s
unpaid subscriptions. The scope of the doctrine when the corporation is insolvent
encompasses not only the capital stock, but also other property and assets generally
regarded in equity as a trust fund for the payment of corporate debts. 36All assets and
property belonging to the corporation held in trust for the benefit of creditors that were
distributed or in the possession of the stockholders, regardless of full payment of their
subscriptions, may be reached by the creditor in satisfaction of its claim.

Also, under the trust fund doctrine, a corporation has no legal capacity to release
an original subscriber to its capital stock from the obligation of paying for his shares, in
whole or in part,37 without a valuable consideration, 38 or fraudulently, to the prejudice of
creditors.39The creditor is allowed to maintain an action upon any unpaid subscriptions
and thereby steps into the shoes of the corporation for the satisfaction of its debt. 40To
make out a prima facie case in a suit against stockholders of an insolvent corporation to
compel them to contribute to the payment of its debts by making good unpaid balances
upon their subscriptions, it is only necessary to establish that the stockholders have not
in good faith paid the par value of the stocks of the corporation. 41

The petitioner posits that the finding of irregularity attending the issuance of the
receipts (ORs) issued to the other stockholders/subscribers should not affect her
because her receipt did not suffer similar irregularity.
Notwithstanding that the RTC and the CA did not find any irregularity in the OR issued
in her favor, we still cannot sustain the petitioner’s defense of full payment of her
subscription.

In civil cases, the party who pleads payment has the burden of proving it, that
even where the plaintiff must allege nonpayment, the general rule is that the burden
rests on the defendant to prove payment, rather than on the plaintiff to prove
nonpayment. In other words, the debtor bears the burden of showing with legal
certainty that the obligation has been discharged by payment. 42

Apparently, the petitioner failed to discharge her burden.

A receipt is the written acknowledgment of the fact of payment in money or other

settlement between the seller and the buyer of goods, the debtor or the creditor, or the
person rendering services, and the client or thecustomer. 43Althougha receipt is the best
evidence of the fact of payment, it is not conclusive, but merely presumptive; nor is it
exclusive evidence, considering that parole evidence may also establish the fact of
payment.44

The petitioner’s ORNo. 227, presented to prove the payment of the balance of her
subscription, indicated that her supposed payment had been made by means of a check.
Thus, to discharge the burden to prove payment of her subscription, she had to adduce
evidence satisfactorily proving that her payment by check was regarded as payment
under the law.

Payment is defined as the delivery of money. 45Yet, because a check is not money
and only substitutes for money, the delivery of a check does not operate as payment and
does not discharge the obligation under a judgment. 46 The delivery of a bill of exchange
only produces the fact of payment when the bill has been encashed. 47The following
passage from Bank of Philippine Islands v. Royeca48is enlightening:

Settled is the rule that payment must be made in legal tender. A check is not legal
tender and, therefore, cannot constitute a valid tender of payment. Since a negotiable
instrument is only a substitute for money and not money, the delivery of such an
instrument does not, by itself, operate as payment. Mere delivery of checks does not
discharge the obligation under a judgment. The obligation is not extinguished and
remains suspended until the payment by commercial document is actually realized.

To establish their defense, the respondents therefore had to present proof, not
only that they delivered the checks to the petitioner, but also that the checks were
encashed. The respondents failed to do so. Had the checks been actually encashed, the
respondents could have easily produced the cancelled checks as evidence to prove the
same. Instead, they merely averred that they believed in good faith that the checks were
encashed because they were not notified of the dishonor of the checks and three years
had already lapsed since they issued the checks.
 Because of this failure of the respondents to present sufficient proof of payment,
it was no longer necessary for the petitioner to prove non-payment, particularly proof
that the checks were dishonored. The burden of evidence is shifted only if the party
upon whom it is lodged was able to adduce preponderant evidence to prove its claim.

Ostensibly, therefore, the petitioner’s mere submission of the receipt issued in

exchange of the check did not satisfactorily establish her allegation of full payment of
her subscription. Indeed, she could not even inform the trial court about the identity of
her drawee bank,49and about whether the check was cleared and its amount paid to
BMPI.50In fact, she did not present the check itself.

The income tax return (ITR) and statement of assets and liabilities of BMPI,
albeit presented, had no bearing on the issue of payment of the subscription because
they did not by themselves prove payment. ITRs establish a taxpayer’s liability for taxes
or a taxpayer’s claim for refund. In the same manner, the deposit slips and entries in the
passbook issued in the name of BMPI were hardly relevant due to their not reflecting the
alleged payments.

It is notable, too, that the petitioner and her co-stockholders did not support
their allegation of complete payment of their respective subscriptions with the stock and
transfer book of BMPI. Indeed, books and records of a corporation (including the stock
and transfer book) are admissible in evidence in favor of or against the corporation and
its members to prove the corporate acts, its financial status and other matters (like the
status of the stockholders), and are ordinarily the best evidence of corporate acts and
proceedings.51Specifically, a stock and transfer book is necessary as a measure of
precaution, expediency, and convenience because it provides the only certain and
accurate method of establishing the various corporate acts and transactions and of
showing the ownership of stock and like matters. 52That she tendered no explanation
why the stock and transfer book was not presented warrants the inference that the book
did not reflect the actual payment of her subscription.

Nor did the petitioner present any certificate of stock issued by BMPI to her. Such
a certificate covering her subscription might have been a reliable evidence of full
payment of the subscriptions, considering that under Section 65 of the Corporation
Code a certificate of stock issues only to a subscriber who has fully paid his subscription.
The lack of any explanation for the absence of a stock certificate in her favor likewise
warrants an unfavorable inference on the issue of payment.

Lastly, the petitioner maintains that both lower courts erred in relying on the
articles of incorporation as proof of the liabilities of the stockholders subscribing to
BMPI’s stocks, averring that the articles of incorporation did not reflect the latest
subscription status of BMPI.

Although the articles of incorporation may possibly reflect only the pre-
incorporation status of a corporation, the lower courts’ reliance on that document to
determine whether the original subscribersalready fully paid their subscriptions or not
was neither unwarranted nor erroneous. As earlier explained, the burden of establishing
the fact of full payment belonged not to Printwell even if it was the plaintiff, but to the
stockholders like the petitioner who, as the defendants, averredfull payment of their
subscriptions as a defense. Their failure to substantiate their averment of full payment,
as well as their failure to counter the reliance on the recitals found in the articles of
incorporation simply meant their failure or inability to satisfactorily prove their defense
of full payment of the subscriptions.

To reiterate, the petitioner was liable pursuant to the trust fund doctrine for the
corporate obligation of BMPI by virtue of her subscription being still unpaid. Print well,
as BMPI’s creditor, had a right to reach her unpaid subscription in satisfaction of its
claim.

BOARD OF DIRECTORS/POWER OF THE BOD

VALLE VERDE COUNTRY CLUB, INC. V. AFRICA, G.R. NO.151969,

SEPTEMBER 4, 2009.

NO. The SC said that the term being referred to under Sec. 23 of the Corporation
Code should mean that the term of the members of the board of directors shall
be only for one year; that their term expires one year after election to the office.  The
holdover period – that time from the lapse of one year from a member’s election to the
Board and until his successor’s election and qualification – is not part of the
director’s original term of office, nor is it a new term; however, the hold over
period constitutes part of his tenure.  

Consequently, when an incumbent member of the board of directors continues to

serve in a holdover capacity, it implies that the office has a fixed term, which has
expired, and the incumbent is holding the succeeding term.

In this case, when remaining members of the VVCC Board elected Ramirez to
replace Makalintal, there was no more unexpired term to speak of, as Makalintal’s one-
year term had already expired.  Pursuant to law, the authority to fill in the vacancy
caused by Makalintal’s rests with the VVCC’s stockholders, not to the remaining
members of its board of directors.

To assume – as VVCC does – that the vacancy is caused by Makalintal’s

resignation in 1998, not by the expiration of his term in 1997, is both illogical and
unreasonable.  His resignation as a holdover director did not change the nature of the
vacancy; the vacancy due to the expiration of Makalintal’s term had been created long
before his resignation.

WHEREFORE, we DENY the petitioners’ petition for review on certiorari, and

AFFIRM the partial decision of the Regional Trial Court.
 FILIPINAS PORT V. GO (2007)

RATIONALE FOR "CENTRALIZED MANAGEMENT" DOCTRINE

The governing body of a corporation is its board of directors. Section 23 of the

Corporation Code explicitly provides that unless otherwise provided therein, the
corporate powers of all corporations formed under the Code shall be exercised, all
business conducted, and all property of the corporation shall be controlled and held by a
board of directors. Thus, with the exception only of some powers expressly granted by
law to stockholders (or members, in case of non-stock corporations), the board of
directors (or trustees, in case of non-stock corporations) has the sole authority to
determine policies, enter into contracts, and conduct the ordinary business of the
corporation within the scope of its charter, i.e., its articles of incorporation, by-laws and
relevant provisions of law. Verily, the authority of the board of directors is restricted to
the management of the regular business affairs of the corporation, unless more
extensive power is expressly conferred.

The reason behind the conferment of corporate powers on the board of directors
is not lost on the Court. Indeed, the concentration in the board of the powers of control
of corporate business and of appointment of corporate officers and managers is
necessary for efficiency in any large organization. Stockholders are too numerous,
scattered and unfamiliar with the business of a corporation to conduct its business
directly. And so the plan of corporate organization is for the stockholders to choose the
directors who shall control and supervise the conduct of corporate business.

In the present case, the board’s creation of the positions of Assistant Vice
Presidents for Corporate Planning, Operations, Finance and Administration, and those
of the Special Assistants to the President and the Board Chairman, was in accordance
with the regular business operations of Filport as it is authorized to do so by the
corporation’s by-laws, pursuant to the Corporation Code.

Amended Bylaws of Filport provides the following:

Officers of the corporation, as provided for by the by-laws, shall be

elected by the board of directors at their first meeting after the election of
Directors. xxx

The officers of the corporation shall be a Chairman of the Board,

President, a Vice-President, a Secretary, a Treasurer, a General Manager
and such other officers as the Board of Directors may from time to time
provide, and these officers shall be elected to hold office until their
successors are elected and qualified. (Emphasis supplied.)

Unfortunately, the bylaws of the corporation are silent as to the creation by its
board of directors of an executive committee. Under Section 35 of the Corporation Code,
the creation of an executive committee must be provided for in the bylaws of the
corporation. Notwithstanding the silence of Filport’s bylaws on the matter, the creation
of the executive committee by the board of directors cannot be ruled as illegal or
unlawful. One reason is the absence of a showing as to the true nature and functions of
said executive committee considering that the "executive committee," referred to in
Section 35 of the Corporation Code which is as powerful as the board of directors and in
effect acting for the board itself, should be distinguished from other committees which
are within the competency of the board to create at anytime and whose actions require
ratification and confirmation by the board. Another reason is that, ratiocinated by both
the 2 courts below, the Board of Directors has the power to create positions not provided
for in Filport’s bylaws since the board is the corporation’s governing body, clearly
upholding the power of its board to exercise its prerogatives in managing the business
affairs of the corporation.

As well, it may not be amiss to point out that, as testified to and admitted by
petitioner Cruz himself, it was during his incumbency as Filport president that the
executive committee in question was created, and that he was even the one who moved
for the creation of the positions of the AVPs for Operations, Finance and
Administration. By his acquiescence and/or ratification of the creation of the aforesaid
offices, Cruz is virtually precluded from suing to declare such acts of the board as invalid
or illegal. And it makes no difference that he sues in behalf of himself and of the other
stockholders. Indeed, as his voice was not heard in protest when he was still Filport’s
president, raising a hue and cry only now leads to the inevitable conclusion that he did
so out of spite and resentment for his non-reelection as president of the corporation.

AGO REALTY & DEV.CORP. (ARDC) VS. DR. ANGELITA F. AGO, ET. AL.,

No, Emmanuel et. al cannot sue on behalf of ARDC’s without a board resolution
authorizing the institution of the case.

While corporations are subjected to the State's broad regulatory powers, it is their
directors and officers who are tasked with addressing questions of internal policy and
management.62The business of a corporation is conducted by its board of
directors, and so long as the board acts in good faith, the State, through the
courts, may not interfere with its management decisions.63 This finds support
in Section 23 of the Corporation Code, which provides that a corporation exercises its
powers, conducts its business, and controls and holds its property through its board of
directors.64

As creatures of the law, corporations only possess those powers that are granted
through statute, either expressly or by way of implication, or those that are incidental to
their existence.65

One of the powers expressly granted by law to corporations is the power to

sue.66 As with other corporate powers, the power to sue is lodged in the board of
directors, acting as a collegial body.67 Thus, in the absence of any clear authority from
the board, charter, or by-laws, 68 no suit may be maintained on behalf of the corporation.
A case instituted by a corporation without authority from its board of directors is subject
to dismissal on the ground of failure to state a cause of action. 69

In certain instances, however, the stockholders may sue on behalf of the

corporation such in the case of a derivative suit where a board resolution
may be dispensed with upon failure to satisfy the requirements set forth by
law.

In this case, Emmauel et, al failed to exhaust the remedies under the corporation code
prior to his filing of a derivative suit before the RTC Legazpi. The fact of being a close
family corporation does not exempt Emmanuel from complying with the clear
requirements and formalities of the rules with the filing a derivative suit.

The apparent remedy available to Emmanuel, et al. was to cause ARDC

itself, through its Board of Directors, to directly institute the case. Because
of their controlling interest in the corporation, Emmanuel, et al. could have prevailed
upon the board to pass a resolution authorizing any of them to file the case and sign the
certification against forum shopping. Emmanuel, et al. should not be allowed to
use a derivative suit to shortcut the law.
WHEREFORE, the September 26, 2013 Decision and January 10, 2014 Resolution
rendered by the Court of Appeals in CA-G.R. CV No. 99771 are AFFIRMED.

CORPORATE OFFICER / LIABILITY OF CORPORATE OFFICER

MATLING INDUSTRIAL VS COROS (G.R. NO. 157802 OCTOBER 13, 2010)

No, the office of Vice President for Finance and Administration

created by Matlings President pursuant to By Law No. V was an ordinary,
not a corporate, office.  

Pursuant to Sec. 25 og the Corporation Code, a position must be expressly

mentioned in the By-Laws in order to be considered as a corporate office. Thus, the
creation of an office pursuant to or under a By-Law enabling provision is not enough to
make a position a corporate office. The SC further held that, the only officers of a
corporation were those given that character either by the Corporation Code or by the By-
Laws; the rest of the corporate officers could be considered only as employees or
subordinate officials.

Thus, pursuant to the above provision (Section 25 of the Corporation Code),

whoever are the corporate officers enumerated in the by-laws are the exclusive Officers
of the corporation and the Board has no power to create other Offices without amending
first the corporate By-laws. However, the Board may create appointive
positions other than the positions of corporate Officers, but the persons
occupying such positions are not considered as corporate officers within
the meaning of Section 25 of the Corporation Code and are not empowered to
exercise the functions of the corporate Officers, except those functions lawfully
delegated to them. Their functions and duties are to be determined by the Board of
Directors/Trustees.

In this case, since the respondent’s position is a mere creation pursuant to the
enabling provision of the By-Law, could not be considered as a corporate officer but as
employee or subordinate officials. Therefore, LA has jurisdiction.

LESLIE OKOL VS. SLIMMERS WORLD INTERNATIONAL, ET AL., G.R. NO.

160146, DECEMBER 11, 2009
Yes, the petitioner is a corporate officer.

Section 25 of the Corporation Code enumerates corporate officers as the president,

secretary, treasurer and such other officers as may be provided for in the by-laws.

In the present case, the respondents, in their motion to dismiss filed before the
labor arbiter, attached the General Information Sheet13 (GIS) of the meeting of the
Board of Directors and Secretary's Certificate, 15 and the Amended By-Laws of Slimmers
World as submitted to the SEC showing that petitioner was a corporate officer
whose rights do not fall within the NLRC's jurisdiction. The GIS and minutes of
the meeting of the board of directors indicated that petitioner was a member of the
board of directors, holding one subscribed share of the capital stock, and an elected
corporate officer.

It was clear in the documents submitted by respondents that petitioner was a

director and officer of Slimmers World. The charges of illegal suspension, illegal
dismissal, unpaid commissions, reinstatement and back wages imputed by petitioner
against respondents fall squarely within the ambit of intra-corporate disputes.

In a number of cases,17 we have held that a corporate officer's dismissal is always

a corporate act, or an intra-corporate controversy which arises between a stockholder
and a corporation. The question of remuneration involving a stockholder and officer,
not a mere employee, is not a simple labor problem but a matter that comes within the
area of corporate affairs and management and is a corporate controversy in
contemplation of the Corporation Code.18

GLORIA V. GOMEZ VS. PNOC DEV. AND MNGT. CORP. (PDMC), G.R. NO.
174044, NOV. 27, 2009
Gomez is NOT a corporate officer.
 Ordinary company employees are generally employed not by action of
the directors and stockholders but by that of the managing officer of the
corporation who also determines the compensation to be paid such employees.
Corporate officers, on the other hand, are elected or appointed by the directors
or stockholders, and are those who are given that character either by the
Corporation Code or by the corporation’s by-laws.

Here, it was the PDMC president who appointed petitioner Gomez

administrator, not its board of directors or the stockholders. The president alone
also determined her compensation package. Moreover, the administrator was not
among the corporate officers mentioned in the by-laws.

As to the claim if PDMC that Gomez was performing functions that were similar
to those of its vice-president or its general manager (corporate positions mentioned
in the by-laws), the relationship of a person to a corporation, whether as officer or
agent or employee, is not determined by the nature of the services he performs
but by the incidents of his relationship with the corporation as they actually exist.
Here, respondent PDMC hired petitioner Gomez as an ordinary employee without
board approval as was proper for a corporate officer. When the company got her
the first time, it agreed to have her retain the managerial rank that she held with
Petron. Her appointment paper said that she would be entitled to all the rights,
privileges, and benefits that regular PDMC employees enjoyed.

In addition, that Gomez served concurrently as corporate secretary for a time

is immaterial. A corporation is not prohibited from hiring a corporate officer to
perform services under circumstances which will make him an employee. Indeed, it
is possible for one to have a dual role of officer and employee.

RODOLFO LABORTE, ET AL. V. PAGSANJAN TOURISM CONSUMERS’

COOP., ET AL., G.R. NO. 183860, JAN. 15, 2014
As a general rule the officer cannot be held personally liable with the corporation,
whether civilly or otherwise, for the consequences of his acts, if acted for and in behalf of
the corporation, within the scope of his authority and in good faith. Furthermore, the
Court also notes that the charges against petitioners Laborte and the PTA for grave
coercion and for the violation of R.A. 6713 have all been dismissed. Thus, the Court finds
no basis to hold petitioner Laborte liable.

(1) The PTA is a government owned and controlled corporation which was
mandated to administer tourism zones. Based on this mandate, it was the PTA’s
obligation to adopt a comprehensive program and project to rehabilitate and upgrade
the facilities of the PTA Complex as shown in Annexes "H-2" to "H-4" of the petition.
The Court finds that there was indeed a renovation of the Pagsanjan Administration
Complex which was sanctioned by the PTA main office; and such renovation was done
in good faith in performance of its mandated duties as tourism administrator. In the
exercise of its management prerogative to determine what is best for the said agency,
the PTA had the right to terminate at any moment the PTCC’s operations of the
restaurant and the boat ride services since the PTCC has no contract, concession or
franchise from the PTA to operate the above-mentioned businesses. As shown by the
records, the operation of the restaurant and the boat ride services was merely tolerated,
in order to extend financial assistance to its PTA employee-members who are members
of the then fledging PTCC.

While the PTCC has been operating the restaurant and boat ride services for
almost ten (10) years until its closure, the same was by mere tolerance of the PTA. In the
consolidated case of Phil. Ports Authority v. Pier 8 Arrastre & Stevedoring Services, Inc.,
the Court upheld the authority of government agencies to terminate at any time hold-
over permits. Thus, considering that the PTCC’s operation of the restaurant and the boat
ride services was by mere tolerance, the PTA can, at any time, terminate such operation

(2) With respect to Laborte's liability in his official and personal capacity, the
Court finds that Laborte was simply implementing the lawful order of the PTA
Management. As a general rule the officer cannot be held personally liable with the
corporation, whether civilly or otherwise, for the consequences of his acts, if acted for
and in behalf of the corporation, within the scope of his authority and in good faith.
Furthermore, the Court also notes that the charges against petitioners Laborte and the
PTA for grave coercion and for the violation of R.A. 6713 have all been dismissed. Thus,
the Court finds no basis to hold petitioner Laborte liable.
HARPOON MARINE SERVICES, INC., ET AL.., Petitioner, v. FERNAN H.
FRANCISCO, Respondents

Rosit could not be held solidarily liable with Harpoon

for lack of substantial evidence of bad faith and malice
on his part in terminating respondent.

Although we find no error on the part of the NLRC and the CA in declaring the
dismissal of respondent illegal, we, however, are not in accord with the ruling that
petitioner Rosit should be held solidarily liable with petitioner Harpoon for the payment
of respondent's backwages and separation pay.

As held in the case of MAM Realty Development Corporation v. National Labor

Relations Commission, "obligations incurred by [corporate officers], acting as such
corporate agents, are not theirs but the direct accountabilities of the corporation they
represent." As such, they should not be generally held jointly and solidarily liable with
the corporation.

The Court, however, cited circumstances when solidary liabilities may be

imposed, as when the officer acted in bad faith or gross negligence in handling corporate
affairs.
Here, the CA imposed personal liability on Rosit based on bad faith, even though there
was no proof that Rosit acted with bad faith or outside of his authority as company
president.

At most, his acts merely showed the absence of a just or valid cause in
terminating the employment of Francisco.
The general rule is grounded on the theory that a corporation has a legal personality
separate and distinct from the persons comprising it. [36] To warrant the piercing of the
veil of corporate fiction, the officer's bad faith or wrongdoing "must be established
clearly and convincingly" as "[b]ad faith is never presumed." [37]

In the case at bench, the CA's basis for petitioner Rosit's liability was that he
acted in bad faith when he approached respondent and told him that the company could
no longer afford his salary and that he will be paid instead his separation pay and
accrued commissions. This finding, however, could not substantially justify the holding
of any personal liability against petitioner Rosit. The records are bereft of any other
satisfactory evidence that petitioner Rosit acted in bad faith with gross or inexcusable
negligence, or that he acted outside the scope of his authority as company president.

Indeed, petitioner Rosit informed respondent that the company wishes to

terminate his services since it could no longer afford his salary. Moreover, the promise
of separation pay, according to petitioners, was out of goodwill and magnanimity.

At the most, petitioner Rosit's actuations only show the illegality of the manner of
effecting respondent's termination from service due to absence of just or valid cause and
non-observance of procedural due process but do not point to any malice or bad faith on
his part. Besides, good faith is still presumed. In addition, liability only attaches if the
officer has assented to patently unlawful acts of the corporation.

Thus, it was error for the CA to hold petitioner Rosit solidarily liable with
petitioner Harpoon for illegally dismissing respondent.

Petition is PARTLY GRANTED.

MIRANT (PHILIPPINES) CORPORATION, ET. AL., Petitioners, v.

JOSELITO A. CARO, Respondent
We agree with the disposition of the appellate court that there was illegal
dismissal in the case at bar.
 While the adoption and enforcement by petitioner corporation of its Anti-Drugs
Policy is recognized as a valid exercise of its management prerogative as an employer,
such exercise is not absolute and unbridled. Managerial prerogatives are subject to
limitations provided by law, collective bargaining agreements, and the general
principles of fair play and justice. In the exercise of its management prerogative, an
employer must therefore ensure that the policies, rules and regulations on work-related
activities of the employees must always be fair and reasonable and the corresponding
penalties, when prescribed, commensurate to the offense involved and to the degree of
the infraction. The Anti-Drugs Policy of Mirant fell short of these requirements.

Petitioner corporations subject Anti-Drugs Policy fell short of being fair and
reasonable.

First. The policy was not clear on what constitutes unjustified refusal when the
subject drug policy prescribed that an employees unjustified refusal to submit to a
random drug test shall be punishable by the penalty of termination for the first offense.
To be sure, the term unjustified refusal could not possibly cover all forms of refusal as
the employees resistance, to be punishable by termination, must be unjustified. To the
mind of the Court, it is on this area where petitioner corporation had fallen short of
making it clear to its employees as well as to management as to what types of acts would
fall under the purview of unjustified refusal. Even petitioner corporations own
Investigating Panel recognized this ambiguity.
A corporation has a personality separate and distinct from its officers
and board of directors who may only be held personally liable for damages
if it is proven that they acted with malice or bad faith in the dismissal of an
employee. 57 Absent any evidence on record that petitioner Bautista acted
maliciously or in bad faith in effecting the termination of respondent, plus
the apparent lack of allegation in the pleadings of respondent that
petitioner Bautista acted in such manner, the doctrine of corporate fiction
dictates that only petitioner corporation should be held liable for the illegal
dismissal of respondent.
 

QUEENSLAND-TOKYO COMMODITIES, INC., ROMEO Y. LAU, and

CHARLIE COLLADO, vs. THOMAS GEORGE.
G.R. NO. 172727, September 8, 2010

Yes, individual respondents are jointly and severally liable with QTCI for the
payment of respondent's claim.
Doctrine dictates that a corporation is invested by law with a personality separate
and distinct from those of the persons composing it, such that, save for certain
exceptions, corporate officers who entered into contracts in behalf of the corporation
cannot be held personally liable for the liabilities of the latter. Personal liability of a
corporate director, trustee, or officer, along (although not necessarily) with the
corporation, may validly attach, as a rule,
 The SC cited the circumstances when corporate officers may be held personally
liable for the liabilities of the corporation:
(1) he assents to a patently unlawful act of the corporation, or when he is
guilty of
bad faith or gross negligence in directing its affairs, or when there is a
conflict of interest resulting in damages to the corporation, its
stockholders, or other persons;

(2) he consents to the issuance of watered down stocks or who, having

knowledge thereof, does not forthwith file with the corporate secretary
his written objection thereto;
(3) he agrees to hold himself personally and solidarily liable with the
corporation; or

(4) he is made by a specific provision of law personally answerable for his

corporate action.22cralaw

In this case, the evidence on record established that petitioners indeed permitted
an unlicensed trader and salesman, like Mendoza, to handle George's account. On the
other hand, the record is bereft of proof that George had knowledge that the person
handling his account was not a licensed trader. George can, therefore, recover the
amount he had given under the contract.

The SEC Hearing Officer, held Lau and Collado jointly and severally liable with
QTCI for respondent's claim,pursuant to Section 31 of the Corporation Code, because:

1. Collado, who is not a licensed commodity salesman, violated the provisions of the
Revised Rules and Regulations on Commodity Futures Trading when he admitted
having participated in the execution of the customers orders without giving any
exception thereto, which presumably includes his participation in the execution
of customers orders of the .

Such being the case, [Mendoza's] participation in the trading of [respondent's]

account is within the knowledge of Collado.

2. Lau, as president of QTCI was negligent when it allowed the presence of 7

unlicensed investment consultants within QTCI (apart from Mendoza), and
allowed Collado's participation in the unlawful execution of orders under the
[respondent's] account. The management of QTCI failed to implement the rules
and regulations against the hiring of, and associating with, unlicensed
consultants or traders. How these unlicensed personnel been able to pursue their
unlawful activities is a reflection of how negligent the management was.

Lau cannot pretend innocence on the existence of these unlawful activities within
the company, especially so that Collado, himself a ranking officer of QTCI, is involved in
the unlawful execution of customer’s orders. Lau, being the chief operating officer,
cannot escape the fact that had he exercised a modicum of care and discretion in
supervising the operations of QTCI, he could have detected and prevented the unlawful
acts of Collado and Mendoza.

Wherefore there is no compelling reason to depart from the conclusion of the

SEC Hearing Officer, which was affirmed by the CA. We are in full accord with his
reasons for holding Lau and Collado jointly and severally liable with QTCI for the
payment of respondent's claim.

MARC II MARKETING, INC. and LUCILA V. JOSON, Petitioners, v.

ALFREDO M. JOSON, Respondent.

No, respondent though occupying the General Manager position, was not a corporate
officer of petitioner corporation rather he was merely its employee occupying a high-
ranking position.

Conformably with Section 25, a position must be expressly mentioned in the by-
laws in order to be considered as a corporate office. Thus, the creation of an office
pursuant to or under a by-law enabling provision is not enough to make a position a
corporate office.

The SC added that the only officers of a corporation were those given character
either by the Corporation Code or by the by laws; the rest of the corporate officers could
be considered only as employees or subordinate officials.

A careful perusal of petitioner corporations by-laws, revealed that its corporate

officers are composed only of:

(1) Chairman;
(2) President;
(3) one or more Vice-President;
(4) Treasurer; and
(5) Secretary.

The position of General Manager was not among those enumerated.

With the given circumstances and in conformity with Matling Industrial and
Commercial Corporation v. Coros, this Court rules that respondent was not a corporate
officer of petitioner corporation because his position as General Manager was not
specifically mentioned in the roster of corporate officers in its corporate by-laws.

STOCKHOLDERS
26. JOSELITO MUSNI PUNO VS. PUNO ENTERPRISES, INC., ET. AL., G.R.
NO. 177066, SEPT. 11, 2009
 The stockholder's right of inspection of the corporation's books and records is
based upon his ownership of shares in the corporation and the necessity for self-
protection. After all, a shareholder has the right to be intelligently informed about
corporate affairs.[13] Such right rests upon the stockholder's underlying ownership of the
corporation's assets and property.[14]

Similarly, only stockholders of record are entitled to receive dividends declared

by the corporation, a right inherent in the ownership of the shares. [15]

Upon the death of a shareholder, the heirs do not automatically become

stockholders of the corporation and acquire the rights and privileges of the deceased as
shareholder of the corporation. The stocks must be distributed first to the heirs in estate
proceedings, and the transfer of the stocks must be recorded in the books of the
corporation. Section 63 of the Corporation Code provides that no transfer shall be valid,
except as between the parties, until the transfer is recorded in the books of the
corporation.[16] During such interim period, the heirs stand as the equitable owners of
the stocks, the executor or administrator duly appointed by the court being vested with
the legal title to the stock.[17] Until a settlement and division of the estate is effected, the
stocks of the decedent are held by the administrator or executor. [18] Consequently,
during such time, it is the administrator or executor who is entitled to exercise the rights
of the deceased as stockholder.

Thus, even if petitioner presents sufficient evidence in this case to establish that
he is the son of Carlos L. Puno, he would still not be allowed to inspect respondent's
books and be entitled to receive dividends from respondent, absent any showing in its
transfer book that some of the shares owned by Carlos L. Puno were transferred to him.
This would only be possible if petitioner has been recognized as an heir and has
participated in the settlement of the estate of the deceased.

Corollary to this is the doctrine that a determination of whether a person,

claiming proprietary rights over the estate of a deceased person, is an heir of the
deceased must be ventilated in a special proceeding instituted precisely for the purpose
of settling the estate of the latter. The status of an illegitimate child who claims to be an
heir to a decedent's estate cannot be adjudicated in an ordinary civil action, as in a case
for the recovery of property.[19] The doctrine applies to the instant case, which is one for
specific performance to direct respondent corporation to allow petitioner to exercise
rights that pertain only to the deceased and his representatives.

WHEREFORE, premises considered, the petition is DENIED. The Court of

Appeals Decision dated October 11, 2006 and Resolution dated March 6, 2007
are AFFIRMED.

David C. Lao and Jose C. Lao vs. Dionisio C. Lao, G.R. No. 170585, October 6, 2008
By-Laws

1) Loyola Grand Villas Homeowners Asso. Inc. vs. CA, et. al., G.R. No. 117188,
Aug. 7, 1997
2) Valley Golf & Country Club, Inc., Rosa O. Vda. De Caram, G.R. No. 158805, April
16, 2009

Derivative Suit

3) Legaspi Towers 300, Inc., et. al. vs. Amelia P. Muer, et. al., G.R. No. 170783, June
18, 2012
4) Maj. Stockholders of Ruby Ind’l. Corp. vs. Miguel Lim, et. al. , G.R. No. 165887,
June 6, 2011

Transfer of Stock Ownership

5) Simny G. Guy, et. al. vs. The Hon. Ofelia C. Calo, G.R. No. 189486, Sept. 5, 2012
6) Fil-Estate Gold and Dev. Inc., et al. v. Vertex Sales and Trading, Inc., G.R. No.
202079, June 10, 2013

SALE OF DELINQUENT STOCK

CALATAGAN GOLF CLUB, INC. VS. SIXTO CLEMENTE, JR., G.R. NO.
16544, APRIL 16, 2009
Facts:
Respondent Clemente purchase one share of stock at Petitioner Calatagan.
After paying the value of the share, Calatagan issued him a Stock Certificate.
In the articles of incorporation and by-laws of Calatagan, there is a
provision pertaining to the payment of monthly dues. As such, Calatagan charges
monthly dues on its member to meet expenses for general operations and costs
for maintenance and improvement of its facilities. It is also indicated at the back
of each certificate of stock.
At the start, Clemente is paying his monthly dues until December of 1991.
At that point, he incurred a balance for not paying his monthly dues.
 10 months later, Calatagan made the initial step to collect clemente’s back
accounts by sending demand letters to his address indicated in his membership
application, however the letters were sent back to sender with the postal note that
the address dad ben closed.
Consequently, Calatagan declared clemente delinquent for failure to pay
his monthly dues. Clemente’s name was also included in the list of delinquent
members posted on the club’s bulletin board.
Subsequently, Calatagan's board of directors adopted a resolution
authorizing the foreclosure of shares of delinquent members, including Clemente
and the public auction of these shares.
A final demand letter was sent to clemente using the same address
containing warning that if he failed to settle his dues, his share will be sold at
public auction.
Still, no settlement occurred, hence, calatagan sold clemente’s share in
auction sale.

Four years later, Clemente learned of the sale of his share and filed a claim
with the Securities and Exchange Commission (SEC) seeking the restoration of
his shareholding in Calatagan with damages.
SEC dismissed the complaint of clemente had already prescribed stating
that the sale of shares at an auction sale can only be questioned within 6 mos
from date of sale as provided under the Code.
CA reverse the SEC decision and restored clementes share. According to
the CA, the prescription being referred to by the SEC applies only to unpaid
subscriptions to capital stock, and not to any other debt of stockholders and that
the proper rule of prescription is provided under Article 1140 of the Civil Code
which sets the prescription period of actions to recover movables at eight (8)
years.

CA also pointed out that, Calatagan failed to observe to notice requirement

provided under its own by-laws where it requires that within 10 days after the
Board has ordered the sale at auction of a member’s share of stock indebtedness,
the corporate secretary shall notify the owner thereof and advice the membership
committee od such fact. According to the CA, "a person who is in danger of the
imminent loss of his property has the right to be notified and be given the chance
to prevent the loss."
Hence, this appeal.
Issue:
Whether Calatagan was correct in declaring Clemente’s shares delinquent
and selling it in an auction sale.

Ruling:
No, Calatagan was not correct.
The SC was not convinced on the reliance of Calatagan and CA on Section
69 of the Corporation Code. According to the SC, there are fundamental
differences that defy equivalence between the sale of delinquent stock
(failed to fully paid the amount of stock) under Section 68 and the
sale that occurred in this case (delinquent due to nonpayment of
dues). 

Sale pf delinquent stock referred by section 68 is the sale caused by non-

payment of the subscription price for the share of stock itself. The stockholder or
subscriber has yet to fully pay for the value of the share or shares subscribed.

While in this case, Clemente had already fully paid for the share in
Calatagan and no longer had any outstanding obligation to deprive him of full
title to his share, hence, section 69 cannot be applied in this case.
The SC likewise ruled that Calatagan had endeavored to establish clear and
comprehensive procedure to govern issues pertaining to payment of f monthly
dues, the declaration of a member as delinquent, and the constitution of a lien on
the shares and its eventual public sale to answer for the member's debts as
outlined in its by-laws and articles of incorporation. However, the SC found that
Calatagan had failed to duly observe both the spirit and letter of its own by-laws. 
According to the SC, the by-law provisions of Calatagam was clearly
created to afford due notice to the delinquent member. Calatagan very well knew
that Clemente's postal box to which it sent its previous letters had already been
closed, yet it persisted in sending that final letter to the same postal box. Nothing
in Calatagan's By-Laws requires that the final notice prior to the sale be made
solely through the member's mailing address. A simple telephone call and an
ounce of good faith could have prevented this present controversy.
The SC denied the petition.
 QUORUM

PAUL LEE TAN, ET. AL. VS. PAUL SYCIP, ET. AL., AUGUST 17, 2006

FACTS:

Petitioner Grace Christian High School or GCHS is a nonstock, non-profit

educational corporation with fifteen (15) regular members, who also constitute the
board of trustees.

During the annual members' meeting in 1998, there were only eleven (11) living
member-trustees as four of (4) had already died.

Out of the 11, only 7 attended the meeting through their respective proxies.

The meeting was convened and chaired by Atty. Sabino Padilla Jr. over the
objection of Atty. Antonio C. Pacis, contending that there was no quorum. 

In the said meeting, Petitioners Ernesto Tanchi, Edwin Ngo, Virginia Khoo, and
Judith Tan were voted to replace the four deceased member-trustees.

When the controversy reached the Securities and Exchange Commission (SEC),
petitioners maintained that the deceased member-trustees should not be counted in the
computation of the quorum because, upon their death, members automatically lost all
their rights (including the right to vote) and interests in the corporation. (Petitioners –
hindi na dapat bilangin ung patay na)

SEC declared the 1998 annual member’s meeting null and void for lack of
quorum stating that the basis for determining the quorum in a meeting of
members should be their number as specified in the articles of
incorporation, not simply the number of living members. 

SEC explained that the qualifying phrase "entitled to vote" in Section 24 of the
Corporation Code, which provided the basis for determining a quorum for the election
of directors or trustees, should be read together with Section 89. (bilangin pa dapat ang
patay sa basehan ng quorum)

The SEC en banc denied the appeal of petitioners and affirmed the Decision of
the hearing officer in toto. It found to be untenable their contention that the word
"members," of the Corporation Code, referred only to the living members of a nonstock
corporation.

CA also dismissed the appeal. Hence, this petition.

ISSUES
 Whether or not in NON-STOCK corporations, dead members should still be
counted in determination of quorum for purposed of conducting the Annual Members'
Meeting.
HELD

Stock holders/members – periodically elect the board of directors or

trustees who are charged with the management
of the corporation

While SH and members are entitled to receive

Profits (acts of ownership)

The board of Directors - periodically elects officers to carry out

Management functions on a day-to-day basis.

The management and direction of the

Corporation are lodged with their
representatives and agents (acts of
management)

For stock corporations, the "quorum" referred to in Section 52 of the Corporation

Code is based on the number of outstanding voting stocks. For nonstock corporations,
only those who are actual, living members with voting rights shall be counted in
determining the existence of a quorum during members’ meetings. Dead members shall
not be counted.
One of the most important rights of a qualified shareholder or member is the
right to vote -- either personally or by proxy -- for the directors or trustees who are to
manage the corporate affairs. The right to vote is inherent in and incidental to the
ownership of
corporate stocks. In nonstock corporations, the voting rights attach to membership.
The principle for determining the quorum for stock corporations is applied by
analogy to nonstock corporations, only those who are actual members with voting
rights should be counted. Under Section 52, the majority of the members representing
the actual number of voting rights, not the number or numerical constant that may
originally be specified in the articles of incorporation, constitutes the quorum. Having
thus determined that the quorum in a members’ meeting is to be reckoned as the actual
number of members of the corporation, the next question to resolve is what happens in
the event of the death of one of them. In stock corporations, the executor or
administrator duly appointed by the Court is vested with the legal title to the stock and
entitled to vote it.
 Until a settlement and division of the estate is effected, the stocks of the decedent
are held by the administrator or executor. On the other hand, membership in and all
rights arising from a nonstock corporation are personal and non-transferable,
unless the articles of incorporation or the bylaws of the corporation provide otherwise.
In other words, the determination of whether or not "dead members" are entitled
to exercise their voting rights (through their executor or administrator), depends on
those articles of incorporation or bylaws.
Under the By-Laws of GCHS, membership in the corporation shall,
among others, be terminated by the death of the member. Applying Section 91, dead
members who are dropped from the membership roster in the manner and for the cause
provided for in the By-Laws of GCHS are not to be counted in determining the requisite
vote in corporate matters or the requisite quorum for the annual members’ meeting.
With 11 remaining members, the quorum in the present case should be 6.
Therefore, there being a quorum, the annual members’ meeting was valid.

PHILIP TURNER, ET. AL. VS. LORENZO SHIPPING CORP., G.R. NO.
157479, NOV.24, 2010

Facts:
This case concerns the right of dissenting stockholders to demand payment of the
value of their shareholdings.

The petitioners held 1,010,000 shares of stock of the respondent, a domestic

corporation engaged primarily in cargo shipping activities.

In June 1999, the respondent decided to amend its articles of incorporation to

remove the stockholders’ pre-emptive rights to newly issued shares of stock.
Feeling that the corporate move would be prejudicial to their interest as
stockholders, the petitioners voted against the amendment and demanded payment of
their shares at the rate of ₱2.276/share based on the book value of the shares, or a total
of ₱2,298,760.00.
The respondent found the fair value of the shares demanded by the petitioners
unacceptable. It insisted that the market value on the date before the action to remove
the pre-emptive right was taken should be the value, or ₱0.41/share (or a total of
₱414,100.00), considering that its shares were listed in the Philippine Stock Exchange,
and that the payment could be made only if the respondent had unrestricted retained
earnings in its books to cover the value of the shares, which was not the case.
The disagreement on the valuation of the shares led the parties to constitute an
appraisal committee pursuant to Section 82 of the Corporation Code.
On October 27, 2000, the appraisal committee reported its valuation of
₱2.54/share, for an aggregate value of ₱2,565,400.00 for the petitioners. Subsequently,
the petitioners demanded payment based on the valuation of the appraisal committee,
plus 2%/month penalty from the date of their original demand for payment, as well as
the reimbursement of the amounts advanced as professional fees to the appraisers.
In its letter to the petitioners dated January 2, 2001, the respondent refused the
petitioners’ demand, explaining that pursuant to the Corporation Code, the dissenting
stockholders exercising their appraisal rights could be paid only when the corporation
had unrestricted retained earnings to cover the fair value of the shares, but that it had
no retained earnings at the time of the petitioners’ demand, as borne out by its Financial
Statements for Fiscal Year 1999 showing a deficit of ₱72,973,114.00 as of December 31,
1999.
In the stockholders’ suit to recover the value of their shareholdings from the
corporation, the Regional Trial Court (RTC) upheld the dissenting stockholders, herein
petitioners, and ordered the corporation, herein respondent, to pay. Execution was
partially carried out against the respondent. On the respondent’s petition for certiorari,
however, the Court of Appeals (CA) corrected the RTC and dismissed the petitioners’
suit on the ground that their cause of action for collection had not yet accrued due to the
lack of unrestricted retained earnings in the books of the respondent. The petitioners
now come to the Court for a review on certiorari of the CA’s decision.

ISSUES
Whether the dissenting stockholders (petitioners) can recover the value of their
shareholdings despite inexistence of URE at the time of demand. (NO)
Dapat mayroon URE at the time of demand bago magakapag claim and
dissenting stockholder.
RULING
Stockholder’s Right of Appraisal, In General A stockholder who dissents from
certain corporate actions has the right to demand payment of the fair value of his or her
shares.
This right, known as the right of appraisal, is expressly recognized in Section 81
of the Corporation Code.
 The right of appraisal may be exercised when there is a fundamental change in
the charter or articles of incorporation substantially prejudicing the rights of the
stockholders.
It does not vest unless objectionable corporate action is taken. It serves the
purpose of enabling the dissenting stockholder to have his interests
purchased and to retire from the corporation. Notwithstanding, no payment
shall be made to any dissenting stockholder unless the corporation has unrestricted
retained earnings in its books to cover the payment. In case the corporation has
no available unrestricted retained earnings in its books, Section 83 of the
Corporation Code provides that if the dissenting stockholder is not paid the
value of his shares within 30 days after the award, his voting and dividend
rights shall immediately be restored.
The trust fund doctrine backstops the requirement of unrestricted retained
earnings to fund the payment of the shares of stocks of the withdrawing stockholders.
Under the doctrine, the capital stock, property, and other assets of a
corporation are regarded as equity in trust for the payment of corporate
creditors, who are preferred in the distribution of corporate assets.
The creditors of a corporation have the right to assume that the board of directors
will not use the assets of the corporation to purchase its own stock for as long as the
corporation has outstanding debts and liabilities. There can be no distribution of assets
among the stockholders without first paying corporate debts.
Thus, any disposition of corporate funds and assets to the prejudice of
creditors is null and void.
B. Petitioners’ cause of action was premature That the respondent had indisputably no
unrestricted retained earnings in its books at the time the petitioners commenced the
action for collection and damages (Civil Case No. 01-086) proved that the respondent’s
legal obligation to pay the value of the petitioners’ shares did not yet arise.

The RTC concluded that the respondent’s obligation to pay had accrued by it
having the unrestricted retained earnings after the making of the demand by the
petitioners. It based its conclusion on the fact that the Corporation Code did not provide
that the unrestricted retained earnings must already exist at the time of the demand.
The RTC’s construal of the Corporation Code was unsustainable, because it did
not take into account the petitioners’ lack of a cause of action against the respondent. In
order to give rise to any obligation to pay on the part of the respondent, the
petitioners should first make a valid demand that the respondent refused to
pay despite having unrestricted retained earnings. Otherwise, the respondent
could not be said to be guilty of any actionable omission that could sustain their action
to collect. Neither did the subsequent existence of unrestricted retained earnings of the
respondent which is more than sufficient to cure the petitioner’s claim cure the lack of
cause of action. The petitioners’ right of action could only spring from an existing cause
of action.
Verily, a premature invocation of the court’s intervention renders the complaint
without a cause of action and dismissible on such ground. In short, Civil Case No. 01-
086, being a groundless suit, should be dismissed.

MA. BELEN FLORDELIZA ANG-ABAYA, ET. AL. VS. EDUARDO G. ANG,

G.R. NO. 178511, DEC. 4, 2008

Facts:

Petitioner Belen Flordeliza Abaya and Respondent Eduardo Ang are

shareholders, officers and board of directors of the family-owned
corporation VMV and Genato Corporation.

Prior to the instant controversy, the corporation filed a civil case

against respondent Eduardo for allegedly conniving to fraudulently wrest
control/management of the corporations.

During the pendency of the case, Eduardo sought permission to inspect the
corporate books of VMC and Genato on account of petitioners’ alleged failure and/or
refusal to update him on the financial and business activities of these family
corporations.

Petitioners denied the request claiming that Eduardo would use the information
obtained from said inspection for purposes inimical to the corporations’ interests.

Because of petitioners’ refusal to grant his request to inspect the corporate books
of VMC and Genato, Eduardo filed an Affidavit-Complaint 8 against petitioners
Flordeliza and Jason, charging them with violation (two counts) of Section 74, in
relation to Section 144, of the Corporation Code of the Philippines.
Petitioner denied violating Section 74 of the Corporation Code and reiterated the
allegations contained in their complaint in Civil Case against Eduardo.

Meanwhile, in Civil Case against Eduardo, the trial court rendered a Decision
granting the permanent injunction applied for by the corporations.
The appellate court however annulled the permanent injunction issued by the
trial court and remanded the case for further proceedings.
 Hence, this instant appeal.
Issue:
WON the petitioner violated SECTION 74 OF THE CORPORATION CODE OF
THE PHILIPPINES or the right to inspect and/or examine the records of a corporation.
HELD:
No. The SC explained that the stockholder's right of inspection of the
corporation's books and records is based upon their ownership of the assets and
property of the corporation.
It is, therefore, an incident of ownership of the corporate property, whether this
ownership or interest be termed an equitable ownership, a beneficial ownership, or a
quasi-ownership.
This right is predicated upon the necessity of self-protection. It is generally held
by majority of the courts that where the right is granted by statute to the stockholder, it
is given to him as such and must be exercised by him with respect to his interest as a
stockholder and for some purpose germane thereto or in the interest of the corporation. 
In other words, the inspection has to be germane to the petitioner's
interest as a stockholder, and has to be proper and lawful in character and
not inimical to the interest of the corporation.
Contrary to Eduardo’s insistence, the stockholder’s right to inspect corporate
books is not without limitations. The SC said that the Corporation Code expressly
required as a condition for such examination that the one requesting it must not have
been guilty of using improperly any information secured through a prior examination,
or that the person asking for such examination must be acting in good faith and for a
legitimate purpose in making his demand.

In this case, the serious allegations against respondent supported by official and
other documents serve to justify petitioners’ allegation that Eduardo was not acting in
good faith and for a legitimate purpose in making his demand for inspection of the
corporate books.
Therefore, the SC granted the petition.

ADERITO Z. YUJUICO , ET. AL. VS. CEZAR T. QUIAMBAO ET. AL., G.R. NO.
180416, JUNE 2, 2014

Facts:
 In 2004, during the annual stockholder's meeting of STRADEC, petitioner
Aderito Z. Yujuico (Yujuico) was elected as president and chairman of the company. 

Yujuico replaced respondent Cezar T. Quiambao (Quiambao), who had been the
president and chairman of STRADEC since 1994.

As newly elected president and chairman of STRADEC--demanded Quiambao for

the turnover of the corporate records of the company, particularly the accounting files,
ledgers, journals and other records of the corporation's business. Quiambao and other
respondents refused.
Several attempts was initiated by the petitioners but respondents still refused to
turn over the book to them, hence the petitioners filed a criminal complaint against
respondents for violation of Sec 74 of the corporation code.
However, RTC dismissed the case stating that refusing to allow inspection of the
stock and transfer book, as opposed to refusing examination of other corporate records,
is not punishable as an offense under the Corporation Code.
Petitioners filed a petition before the SC.
Issue:
WON the respondents violated Section 74(4) of the Corporation Code for its
refusal to allpw petitioners inspect the corporate books.

Held:
No. The SC said that A criminal action based on the violation of a stockholder's
right to examine or inspect the corporate records and the stock and transfer book of a
corporation can only be maintained against corporate officers or any other
persons acting on behalf of such corporation.

The submissions of the petitioners during the preliminary investigation, however,

clearly suggest that respondents are neither in relation to STRADEC. Petitioners failed
to establish that respondents were acting on behalf of STRADEC. Quite the contrary, the
scenario painted by the complaint is that the respondents are merely outgoing officers of
STRADEC who, for some reason, withheld and refused to tum-over the company
records of STRADEC; that it is the petitioners who are actually acting on behalf of
STRADEC; and that STRADEC is actually merely trying to recover custody of the
withheld records.
In other words, petitioners are not actually invoking their right to inspect the
records and the stock and transfer book of STRADEC under the second and fourth
paragraphs of Section 74. What they seek to enforce is the proprietary right of
STRADEC to be in possession of such records and book. Such right, though
certainly legally enforceable by other means, cannot be enforced by a criminal
prosecution based on a violation of the second and fourth paragraphs of Section 74. That
is simply not the situation contemplated by the second and fourth paragraphs of Section
74 of the Corporation Code.
For this reason, we affirm the dismissal of Criminal Case No. 89724 for lack of
probable cause.
WHEREFORE, premises considered, the petition is hereby DENIED. The
Orders dated 4 June 2007 and 5 November 2007 of the Regional Trial Court, Branch
154, of Pasig City in S.C.A. No. 3047, insofar as said orders effectively dismissed
Criminal Case No. 89724 pending before Metropolitan Trial Court, Branch 69, of Pasig
City, are hereby AFFIRMED.

MINDANAO SAVINGS AND LOAN ASSO., VS. EDWARD WILLKOM, ET. AL,
G.R. NO. 178618 OCT. 11, 2010
Facts:
Mindanao Savings and Loan Association, Inc. (MSLAI) merged with another
banking company, the First Iligan Savings and Loan Association, Inc. (FISLAI)
sometime in 1985, which however was never recorded with SEC for lack of
documentation.

MSLAI subsequently suffered insolvency and was later on liquidated by the

Philippine Deposit Insurance Company (PDIC).
However, unknown to MSLAI and PDIC, a money judgment was rendered
against FLSAI, which resulted to several parcels of land owned by the latter to be sold
at public auction, which was bought by Willkom, and subsequently transferred to his
name upon the expiration of the redemption period.

PDIC and MSLAI sought for the annulment of the sale on execution of the subject
properties, alleging that the sale was conducted without notice to the latter, and that the
properties sold are in custodia legis, since MSLAI was under receivership and
liquidation.
Willkom argued that MSLAI has no cause of action since it is a separate and
distinct entity from FISLAI, because of the unsuccessful merger for failure to follow
the procedure laid down by the Corporation Code, to which both RTC and CA agreed
to. Hence, this petition.
Issue:
Whether or not the merger between FISLAI and MSLAI was valid and effective.
Ruling:
Ordinarily, in the merger of two or more existing corporations, one of the
corporations survives and continues the combined business, while the rest are dissolved
and all their rights, properties, and liabilities are acquired by the surviving corporation.
The merger, however, does not become effective upon the mere agreement of the
constituent corporations, but only upon the issuance of a certificate of merger by the
SEC, subject to its prior determination that the merger is not inconsistent with the
Corporation Code or existing laws.
Where a party to the merger is a special corporation governed by its own
charter, the Code particularly mandates that a favorable recommendation of the
appropriate government agency should first be obtained.
In this case, it is undisputed that the articles of merger between FISLAI
and DSLAI were not registered with the SEC due to incomplete documentation.
Consequently, the SEC did not issue the required certificate of merger.
Even if it is true that the Monetary Board of the Central Bank is of the Philippines
recognized such merger, the fact remains that no certificate was issued by the SEC. Such
merger is still incomplete without the certification.
The issuance of the certificate of merger is crucial because not only does it bear
out SEC’s approval but it also marks the moment when the consequences of a merger
take place. By operation of law, upon the effectivity of the when the consequences of a
merger take place. By operation of law, upon the effectivity of the merger, the absorbed
corporation ceases to exist but its rights and properties, as well as liabilities, shall
be taken and deemed transferred to and vested in the surviving corporation.

SUMIFRU (PHILIPPINES) CORPORATION, ET. AL. VS. BERNABE BAYA,

G.R. NO. 188269. * APRIL 17, 2017

Facts
As a supervisor, Baya joined the union of supervisors, and eventually, formed
AMS Kapalong Agrarian Reform Beneficiaries Multipurpose Cooperative
(AMSKARBEMCO)
 Baya was reassigned to a series of supervisory positions in AMSFC's sister
company, DFC, where he also became a member of the latter's supervisory union while
at the same time, remaining active at AMSKARBEMCO.
A few days later, Baya received a letter stating that his secondment with DFC has
ended, thus, ordering his return to AMSFC. However, upon Baya's return to AMSFC on
August 30, 2002, he was informed that there were no supervisory positions available;
thus, he was assigned to different rank-and-file positions instead.
On September 20, 2002, Baya's written request to be restored to a supervisory
position was denied, prompting him to file the instant complaint.
Meanwhile and during the pendency of the CA proceedings, petitioner Sumifru
(Philippines) Corporation (Sumifru) acquired DFC via merger[28] sometime in 2008.
According to Sumifru, it only learned of the pendency of the CA proceedings on June 15,
2009, or after the issuance of the CA's Resolution dated May 20, 2009.[29] Thus,
Sumifru was the one who filed the instant petition on behalf of DFC.
Issues:
whether or not Sumifru should be held solidarily liable with AMSFC's for Baya's
monetary awards.
Ruling:
Sumifru's contention that it should only be held liable for the period when Baya
stayed with DFC as it only merged with the latter and not with AMSFC[37] is untenable.
Section 80 of the Corporation Code of the Philippines clearly states that one of the
effects of a merger is that the surviving company shall inherit not only the assets, but
also the liabilities of the corporation it merged with
In this case, it is worthy to stress that both AMSFC and DFC are guilty of acts
constitutive of constructive dismissal performed against Baya. As such, they should be
deemed as solidarily liable for the monetary awards in favor of Baya. Meanwhile,
Sumifru, as the surviving entity in its merger with DFC, must be held answerable for the
latter's liabilities, including its solidary liability with AMSFC arising herein. Verily,
jurisprudence states that "in the merger of two existing corporations, one of the
corporations survives and continues the business, while the other is dissolved and all its
rights, properties and liabilities are acquired by the surviving corporation,"[38] as in
this case.
VITALIANO N. AGUIRRE II, ET. AL. VS. FQB+, INC., ET. AL., G.R. NO.
170770, JAN. 9, 2013
Facts:
In 2004 Petitioner Aguirre, in his individual capacity and in behalf of FQB+7
filed a complaint for intra-corporate dispute against respondents.
 In his complaint, he alleges that, he notice substantial changes in the GIS of the
corporation which prompted him to question the annual stockholders meeting held in
2002. He asked the "real" Board to rectify what he perceived as erroneous entries in the
GIS, and to allow him to inspect the corporate books and records. The "real" Board
allegedly ignored Vitaliano's request.
The Complaint also asked for an injunction against repondents and for the
nullification of all their previous actions as purported directors, including the GIS they
had filed with the SEC. The Complaint also sought damages for the plaintiffs and a
declaration of Vitaliano's right to inspect the corporate records.
The respondents sought, in their certiorari petition, the annulment of all the
proceedings and issuances
The respondents further informed the CA that the SEC had already revoked
FQB+7's Certificate of Registration on September 29, 2003 for its failure to comply with
the SEC reportorial requirements.
Issue: Is the Complaint a continuation of business?
Held:
Pursuant to Section 145 of the Corporation Code, an existing intra-
corporate dispute, which does not constitute a continuation of corporate
business, is not affected by the subsequent dissolution of the corporation.
Section 122 of the Corporation Code prohibits a dissolved corporation from
continuing its business, but allows it to continue with a limited personality in order to
settle and close its affairs, including its complete liquidation, thus:
Sec. 122. Corporate liquidation. - Every corporation whose charter expires by
its own limitation or is annulled by forfeiture or otherwise, or whose corporate existence
for other purposes is terminated in any other manner, shall nevertheless be continued as
a body corporate for three (3) years after the time when it would have been so dissolved,
for the purpose of prosecuting and defending suits by or against it and enabling it to
settle and close its affairs, to dispose of and convey its property and to distribute its
assets, but not for the purpose of continuing the business for which it was
established.
Upon learning of the corporation's dissolution by revocation of its corporate
franchise, the CA held that the intra-corporate Complaint, which aims to continue the
corporation's business, must now be dismissed under Section 122.c
Petitioners concede that a dissolved corporation can no longer continue its
business. They argue, however, that Section 122 allows a dissolved corporation to wind
up its affairs within 3 years from its dissolution. Petitioners then maintain that the
Complaint, which seeks only a declaration that respondents are strangers to the
corporation and have no right to sit in the board or act as officers thereof, and a return
of Vitaliano's stockholdings, intends only to resolve remaining corporate issues. The
resolution of these issues is allegedly part of corporate winding up.ca
The Court fails to find in the prayers above any intention to continue the
corporate business of FQB+7. The Complaint does not seek to enter into contracts, issue
new stocks, acquire properties, execute business transactions, etc. Its aim is not to
continue the corporate business, but to determine and vindicate an alleged stockholder's
right to the return of his stockholdings and to participate in the election of directors, and
a corporation's right to remove usurpers and strangers from its affairs. The Court fails to
see how the resolution of these issues can be said to continue the business of
FQB+7.cralawlibrary
Neither are these issues mooted by the dissolution of the corporation. A
corporation's board of directors is not rendered functus officio by its dissolution. Since
Section 122 allows a corporation to continue its existence for a limited purpose,
necessarily there must be a board that will continue acting for and on behalf of the
dissolved corporation for that purpose. In fact, Section 122 authorizes the dissolved
corporation's board of directors to conduct its liquidation within three years from its
dissolution. Jurisprudence has even recognized the board's authority to act as trustee for
persons in interest beyond the said three-year period. 43Ï‚rνl1 Thus, the determination
of which group is the bona fide or rightful board of the dissolved corporation will still
provide practical relief to the parties involved.c
The same is true with regard to Vitaliano's shareholdings in the dissolved
corporation. A party's stockholdings in a corporation, whether existing or dissolved, is a
property right44Ï‚rνl1 which he may vindicate against another party who has deprived
him thereof. The corporation's dissolution does not extinguish such property right.
Section 145 of the Corporation Code ensures the protection of this right, thus:
Sec. 145. Amendment or repeal.  No right or remedy in favor of or against any
corporation, its stockholders, members, directors, trustees, or officers, nor any liability
incurred by any such corporation, stockholders, members, directors, trustees, or
officers, shall be removed or impaired either by the subsequent dissolution of said
corporation or by any subsequent amendment or repeal of this Code or of any part
thereof. (Emphases supplied.)

ALABANG DEV. CORP. V. ALABANG HILLS VILLAGE ASSO. ET. AL., G.R.
NO. 187456, JUNE 2, 2014
Facts:
 Petitioner ADC is the developer of respondent AHVAI. Petitioner still owns
certain parcels of land that are yet to be sold including open spaces that have not yet
donated to the LGU or the homeowner’s association. In 2006, Petitioner learned that
AHVAI started constructing a multi-purpose hall and a swimming pool on one of the
parcels of land owned by ADC without the latter’s consent and approval. Despite
demand, respondent AHVAI failed to desist from constructing improvement therein.
ADC, filed a complaint for injunction and damages against respondent and its president
Rafael Tinio.
Respondent answered that the petitioner has no legal capacity to sue since its
existence as a registered corporate entity was revoked by the SEC in 2003, thus no legal
action because by law it is no longer the absolute owner but is merely holding the
property in question in trust for the benefit of AHVAI as beneficial owner thereof; and
that the subject lot is part of the open space required by law to be provided in the
subdivision.
RTC dismissed petitioner’s complaint on the grounds of no legal capacity.
CA affirmed RTC stating that the complaint filed by petitioner was already
defunct and, as such, it no longer had capacity to file the said complaint. 
Issue:
WON Petitioner has no legal capacity to sue respondent by reason of the dissolution of
its corporate registration by the SEC.
Held:
Yes, the petitioner lacks capacity to sue because it no longer possesses juridical
personality by reason of its dissolution and lapse of the three-year grace period provided
under Section 122 of the Corporation Code.
Sec. 122 of the Corportation Code provides that At any time during said three (3)
years, said corporation is authorized and empowered to convey all of its property to
trustees for the benefit of stockholders, members, creditors, and other persons in
interest. From and after any such conveyance by the corporation of its property in trust
for the benefit of its stockholders, members, creditors and others in interest, all interest
which the corporation had in the property terminates, the legal interest vests in the
trustees, and the beneficial interest in the stockholders, members, creditors or other
persons in interest.
In the instant case, there is no dispute that petitioner's corporate registration was
revoked on May 26, 2003.1âwphi1 Based on the above-quoted provision of law, it had
three years, or until May 26, 2006, to prosecute or defend any suit by or against it. The
subject complaint, however, was filed only on October 19, 2006, more than three years
after such revocation. It is likewise not disputed that the subject complaint was filed by
petitioner corporation and not by its directors or trustees. In fact, it is even averred,
albeit wrongly, in the first paragraph of the Complaint 9 that "[p]laintiff is a duly
organized and existing corporation under the laws of the Philippines, with capacity to
sue and be sued. 

In the present case, petitioner filed its complaint not only after its corporate
existence was terminated but also beyond the three-year period allowed by Section 122
of the Corporation Code. Thus, it is clear that at the time of the filing of the subject
complaint petitioner lacks the capacity to sue as a corporation. To allow petitioner to
initiate the subject complaint and pursue it until final judgment, on the ground that
such complaint was filed for the sole purpose of liquidating its assets, would be to
circumvent the provisions of Section 122 of the Corporation Code.

As to the last issue raised, the basic and pivotal issue in the instant case is
petitioner's capacity to sue as a corporation and it has already been settled that
petitioner indeed lacks such capacity. Thus, this Court finds no cogent reason to depart
from the ruling of the CA finding it unnecessary to delve on the other issues raised by
petitioner.

STEELCASE, INC. VS. DESIGN INTERNATIONAL SELECTIONS, INC.,G.R.

NO. 171995 APRIL 18, 2012

Facts:
Petitioner steelcase is a foreign corporation engaged in the manufacturing of
office furniture with dealers worldwide.
Respondent DISI is a dimestic corporation engaged in the business including the
distribution of furniture.
Petitioner and respondent entered into a dealership agreement whereby
petitioner granted DISI the right to to market, sell, distribute, install, and service its
products to end-user customers within the Philippines. The business relationship
continued smoothly until it was terminated after the agreement was breached with
neither party admitting any fault.
Steelcase filed a complaint for sum of money against DISI alleging that the latter
had an upaid accounts.
In respondent’s answer, it claims that complaint failed to state a cause of action
and to contain the required allegations on Steelcase’s capacity to sue in the Philippines
despite the fact that it (Steelcase) was doing business in the Philippines without the
required license to do so.
RTC ruled that steelcase was "doing business" in the Philippines, as contemplated
by Republic Act (R.A.) No. 7042 (The Foreign Investments Act of 1991). And since it did
not have the license to do business in the country, it was barred from seeking redress
from our courts until it obtained the requisite license to do so.
 CA rendered its Decision affirming the RTC orders, ruling that Steelcase was a
foreign corporation doing or transacting business in the Philippines without a license.
Issues:

(1) Whether or not Steelcase is doing business in the Philippines without a license; and

(2) Whether or not DISI is estopped from challenging the Steelcase’s legal capacity to
sue.

Ruling:
Steelcase is an unlicensed foreign corporation NOT doing business in the
Philippines
DISI is estopped from challenging Steelcase’s legal capacity to sue.

The rule that an unlicensed foreign corporations doing business in the Philippine
do not have the capacity to sue before the local courts is well-established. Section 133 of
the Corporation Code of the Philippines explicitly states:

Sec. 133. Doing business without a license. - No foreign corporation transacting

business in the Philippines without a license, or its successors or assigns, shall be
permitted to maintain or intervene in any action, suit or proceeding in any court or
administrative agency of the Philippines; but such corporation may be sued or
proceeded against before Philippine courts or administrative tribunals on any valid
cause of action recognized under Philippine laws.

The phrase "doing business" shall include soliciting orders, service contracts,
opening offices, whether called "liaison" offices or branches; appointing representatives
or distributors domiciled in the Philippines or who in any calendar year stay in the
country for a period or periods totalling one hundred eighty (180) days or more;
participating in the management, supervision or control of any domestic business, firm,
entity or corporation in the Philippines; and any other act or acts that imply a continuity
of commercial dealings or arrangements, and contemplate to that extent the
performance of acts or works, or the exercise of some of the functions normally incident
to, and in progressive prosecution of, commercial gain or of the purpose and object of
the business organization: Provided, however, That the phrase "doing business" shall
not be deemed to include mere investment as a shareholder by a foreign entity in
domestic corporations duly registered to do business, and/or the exercise of rights as
such investor; nor having a nominee director or officer to represent its interests in such
corporation; nor appointing a representative or distributor domiciled in the Philippines
which transacts business in its own name and for its own account; (Emphases supplied)
 From the preceding citations, the appointment of a distributor in the Philippines
is not sufficient to constitute "doing business" unless it is under the full control of the
foreign corporation. On the other hand, if the distributor is an independent entity which
buys and distributes products, other than those of the foreign corporation, for its own
name and its own account, the latter cannot be considered to be doing business in the
Philippines.14 It should be kept in mind that the determination of whether a foreign
corporation is doing business in the Philippines must be judged in light of the attendant
circumstances.

GLOBAL BUSINESS HOLDINGS, INC. V. SURECOMP SOFTWARE, B.V.,

G.R. NO. 173463, OCT. 13, 2010

Respondent Surecomp Software, B.V. (Surecomp), a foreign corporatio entered

into a software license agreement with Asian Bank Corporation (ABC), a domestic
corporation, for the use of its IMEX Software System (System) in the bank’s computer
system for a period of twenty (20) years.

Subsequently,ABC merged with petitioner Global Business Holdings, Inc.

(Global),4 with Global as the surviving corporation. 
When Global took over the operations of ABC, it found the System unworkable
for its operations, and informed Surecomp of its decision to discontinue with the
agreement and to stop further payments thereon.
Consequently, for failure of Global to pay its obligations under the agreement
despite demands, Surecomp filed a complaint for breach of contract with damages
before the Regional Trial Court (RTC) of Makati.
Instead of filing an answer, Global filed a motion to dismiss based on two
grounds: (1) that Surecomp had no capacity to sue because it was doing business in the
Philippines without a license; and (2) that the claim on which the action was founded
was unenforceable under the Intellectual Property Code of the Philippines.
Issue:
Whether Global is estopped from questioning Surecomp’s capacity to sue.
Ruling
Yes, Global is estopped.
As a rule, unlicensed foreign non-resident corporations doing business in the
Philippines cannot file suits in the Philippines.
 A corporation has a legal status only within the state or territory in which it was
organized. For this reason, a corporation organized in another country has no
personality to file suits in the Philippines. In order to subject a foreign corporation
doing business in the country to the jurisdiction of our courts, it must acquire a license
from the Securities and Exchange Commission and appoint an agent for service of
process. Without such license, it cannot institute a suit in the Philippines
The exception to this rule is the doctrine of estoppel. Global is estopped from
challenging Surecomp’s capacity to sue.
A foreign corporation doing business in the Philippines without license may sue
in Philippine courts a Filipino citizen or a Philippine entity that had contracted with and
benefited from it.25 A party is estopped from challenging the personality of a corporation
after having acknowledged the same by entering into a contract with it. 26 The principle is
applied to prevent a person contracting with a foreign corporation from later taking
advantage of its noncompliance with the statutes, chiefly in cases where such person has
received the benefits of the contract.
Due to Global’s merger with ABC and because it is the surviving corporation, it is
as if it was the one which entered into contract with Surecomp. In the merger of two
existing corporations, one of the corporations survives and continues the business, while
the other is dissolved, and all its rights, properties, and liabilities are acquired by the
surviving corporation.28 This is particularly true in this case. Based on the findings of
fact of the RTC, as affirmed by the CA, under the terms of the merger or consolidation,
Global assumed all the liabilities and obligations of ABC as if it had incurred such
liabilities or obligations itself. In the same way, Global also has the right to exercise all
defenses, rights, privileges, and counter-claims of every kind and nature which ABC may
have or invoke under the law. These findings of fact were never contested by Global in
any of its pleadings filed before this Court.

CARGILL, INC. VS. INTRA STRATA ASSURANCE CORP., G.R. NO. 168266
MARCH 15, 2010

Facts:
Petitioner Cargill, Inc. (petitioner) is a corporation organized and existing under
the laws of the State of Delaware, United States of America.
Cargill, executed a contract with Northern Mindanao Corporation (NMC) a
domestic corporation, whereby NMC, agreed to sell to petitioner molasses.
The contract provides that petitioner would open a Letter of Credit with the Bank
of Philippine Islands. 
 Several amendments of the contract was introduced but on the last amendment,
the it required NMC to put up a bond to guarantee performance and delivery of mollases
on the prescribed period.
CORPORATION SOLE
Iglesia Evangelica Metodista En Las Islas Filipinas, Inc. v. Juane, G.R. Nos. 172447, Sept
18, 2009

INTRA-CORPORATE DISPUTE
Renato Real vs. Sangu Philippines, Inc., et. al., G.R. No. 168757, Jan. 19, 2011

Oscar C. Reyes vs. Hon. Regional Trial Court of Makati, et. al., G.R. No. 165744, August
11, 2008

Raul C. Cosare v. Broadcom Asia, Inc., et al., G.R. No. 201298, Feb. 5, 2014

Belo Medical Group, Inc. vs. Jose Santos, et. al., G.R. No. 185894. August 30, 2017

CASES IN SECURITIES REGULATION CODE

PHILIPPINE VETERANS BANK VS. JUSTINA CALLANGAN, ET. AL., G.R.
NO. 191995, AUGUST 3, 2011

FACTS:

Respondent Justina F. Callangan, the SEC Director for Corporation Finance

Department, sent the Petitioner a letter, informing it that it qualifies as a “public
company” under the Securities Regulation Code (SRC), thus, the Bank is required to
comply with the reportorial requirements set forth of the SRC.

The Bank responded by explaining that it should not be considered a “public

company” because it is a private company whose shares of stock are available only to a
limited class or sector, such as to World War II veterans, and not to the general public.

Director Callangan rejected the Bank’s explanation and assessed it with a penalty
for failing to comply with the SRC reportorial requirements.

The Bank moved for the reconsideration of the assessment, but Director
Callangan denied the motion.
  The SEC En Banc also dismissed the Bank’s appeal for lack of merit prompting
the Bank to file a petition for review with the Court of Appeals (CA).

The CA dismissed the petition and affirmed the assailed SEC ruling with the
modification that the assessment of the penalty be recomputed.

           The CA also denied the Bank’s motion for reconsideration, opening the way for the
Bank’s petition for review on certiorari filed with this Court.

However, the Court denied the Bank’s petition for failure to show any reversible
error in the assailed CA decision and resolution.

ISSUE: 

Whether the bank is a public company which is subject to the reportorial

requirements of the SRC.

HELD: 

Yes. The bank is a public company which is subject to the reportorial

requirements of the SRC.

Under the SRC, the reportorial requirements shall apply to the following:

1. An issuer with assets of at least Fifty million pesos (P50,000,000.00) or such

other amount as the Commission shall prescribe;
2. and having two hundred (200) or more holders each holding at least one
hundred (100) shares of a class of its equity securities.

The records establish that the Bank has assets exceeding P50,000,000.00 and
has 395,998 shareholders, hence, it must comply with the reportorial requirements set
of the SRC.
The SC further ruled that, a “Public company" is not limited to a company whose
shares of stock are publicly listed; even companies like the Bank, whose shares are
offered only to a specific group of people, are considered a public company, provided
they meet the requirements enumerated above.
The Bank's obligation to provide its stockholders with copies of its annual report
is for the benefit of the veterans-stockholders, as it gives these stockholders access to
information on the Bank's financial status and operations, resulting in greater
transparency on the part of the Bank.
While compliance with this requirement will undoubtedly cost the Bank
money, the benefit provided to the shareholders clearly outweigh the expense. For
many stockholders, these annual reports are the only means of keeping in touch with the
state of health of their investments; to them, these are invaluable and continuing links
with the Bank that immeasurably contribute to the transparency in public companies
that the law envisions.

PHIL. STOCK EXCHANGE, INC. VS. THE HON. COURT OF APPEALS, ET.
AL., G.R. NO. 125469, OCT. 27, 1997

Facts:

Puerto Azul Land Inc. (PALI) a domestic real estate corporation, had sought to
offer its shares to the public to raise funds allegedly to develop its properties and pay its
loans with several banking institutions.

PALI was issued a PERMIT TO SELL its shares to the public by the SEC.

PALI filed an application to list its shares with the Philippine Stock Exchange,
Inc. (PSE) to facilitate the trading of its shares.

PSE listing committee recommended the approval of PALI’s application to the

PSE’s Board of Governors.

Before the committee could act on the application, the board received a letter
from the heirs of Ferdinand Marcos requesting to defer PALI’s application, claiming that
the late president was the legal and beneficial owner of the certain properties forming
part of the PALI.

The board of governors of the PSE reached its decision rejecting PALI’s
application citing the serious claims surrounding PALI’s ownership over its assets that
affect the suitability of listing PALI’s shares on the stock exchange.

PALI wrote a letter to the SEC bringing to their attention the action taken by PSE
on its application for the listing of shares and requesting the SEC to exercise its
supervisory and regulatory powers over stock exchanges and to institute such measures
as are just and proper under the circumstances.

The SEC rendered its order reversing the PSE decision allowing the listing of
PALI shares to the Exchange, without prejudice to its authority to require PALI to
disclose material information it deems necessary for the protection of the public.
 PSE filed an appeal before the CA contending that SEC has no power to order the
listing and sale of shares of PALI whose assets are sequestered and to review and
substitute decisions of the PSE on listing applications.

The CA affirmed SEC and held that PALI complied with all the requirements
for public listing.

Issue:

Whether or not the SEC has the authority to cause the listing of the shares of
PALI in the stock exchange?

Held:

No. While the SEC is the entity with the primary say as to whether or not
securities, including shares of stock of a corporation, may be traded in the stock
exchange. This is not to say, however, that the PSE’s management prerogatives are
under absolute control of the SEC. Thus, notwithstanding the regulatory power of the
SEC over the PSE, and the resultant authority to reverse the PSE’s decision in matters of
application for listing in the market, the SEC may exercise such power only if the
PSE’s judgment is attended by bad faith.

In reaching its decision to deny the application for listing of PALI, the PSE
considered important facts, heard from representatives of both sides, and, through the
Philippine Commission on Good Governance (PCGG), confirmed the claim of the heirs
of the late president. The petitioner was in the right when it refused the
application of PALI for a contrary ruling was not to the best interest of the
general public.

The Court finds that the SEC had acted arbitrarily in arrogating unto itself the
discretion of approving the application for listing in the PSE of the private respondent
PALI, since this is a matter addressed to the sound discretion of the PSE, a corporation
entity, whose business judgments are respected in the absence of bad faith.

BAVIERA V. PAGLINAWAN G.R. NO. 168380, 8 FEBRUARY 2007, 515

SCRA 515

Facts:

Manuel Baviera, petitioner in this case was the former head of the HR Service
Delivery and Industrial Relations of Standard Chartered Bank-Philippines. SCB did not
comply with the conditions set forth by the BSP. Although unregistered with SEC, SCB
continued to sell securities to some investors.

Petitioner entered into an Investment Trust Agreement with SCB wherein he

purchased 8,ooo US dollars worth of securities upon the bank’s promise of return of his
investment and a guarantee that his money is safe.

However, petitioner learned that the value of his investment went down, thus, he
tried to withdraw his investment but was persuaded by bank personnel to hold on it for
another 6 months in view of the possibility that the market would pick up. However, the
pertitioner’s investment continue to went down.

Petitioner then filed with the BSP a complaint demanding compensation for his
investment but SCB denied his demand stating that his investment is regular.

Petitioner filed with the DOJ a complaint charging the officers of SCB with
sybdicated estafa.

DOJ dismissed the complaint stating that the case should be filed first before the
SEC.

On appeal, CA sustained the ruling of DOJ that the case should be filed initially
with the SEC.

Issue:

whether the CA erred in ruling that the DoJ did not commit grave abuse of discretion in
dismissing Baviera’s complaint.

Held:
The CA was correct in ruling that the DoJ did not commit grave abuse of
discretion in dismissing Baviera’s complaint for violation of the SRC.

According to the High Court, “[a] criminal charge for violation of the Securities
Regulation Code is a specialized dispute. Hence, it must first be referred to an
administrative agency of special competence, i.e., the SEC. Under the doctrine of
primary jurisdiction, courts will not determine a controversy involving a question within
the jurisdiction of the administrative tribunal, where the question demands the exercise
of sound administrative discretion requiring the specialized knowledge and expertise of
said administrative tribunal to determine technical and intricate matters of fact.”
 NO. The Court of Appeals held that under Section 53.1 of the said Code provides,
a criminal complaint for violation of any law or rule administered by the SEC must first
be filed with the latter. If the Commission finds that there is probable cause, then it
should refer the case to the DOJ. Since petitioner failed to comply with the foregoing
procedural requirement, the DOJ did not gravely abuse its discretion in dismissing his
complaint. Under the doctrine of primary jurisdiction, courts will not determine a
controversy involving a question within the jurisdiction of the administrative tribunal,
where the question demands the exercise of sound administrative discretion requiring
the specialized knowledge and expertise of said administrative tribunal to determine
technical and intricate matters of fact
(For Syndicated Estafa);

SEC VS. CA, 246 SCRA 738 (1995)

FACTS:

Cualoping Securities Corporation is a stockbroker while Fidelity Stock Transfer,

Inc. is the stock transfer agent of Philex Mining Corporation.

The certificates of stock of Philex were stolen from the premises of Fidelity.

Later, the stolen certificates were found in the hands of a messenger named
Agustin Lopez of New world security Inc. an entirely different stock brokerage firm.

Accordingly, lopez bought the certificates to Cualoping with stamped in each

certificate stating “Indorsement Guaranteed” and thereafter traded the same with the
stock exchange.

After the sale of the stocks represent by said certificates to different buyers, the
same were delivered to Fidelity for the cancellation and for issuance of new certificates
in the name of the new buyers.

Fidelity rejected for reasons that the signatures of the owners were forged and
thus the cancellation and re issuance cannot be effected.

Fidelity sought the opinion of the SEC on the matter.

SEC ordered Fidelity to replace all the subject shares and Cualoping to pay a fine
for violation of the RSA.

Fidelity and Cualoping appealed to CA, which reverse the SEC order.
Issue:

WON CA is correct in reversing the order of SEC directing Fidelity to replace the
certificates.

Held:

The SC see nothing erroneous in the decision of the CA.

The stockholders who have been deprived of their certificates of stock or the
persons to whom the forged certificates have ultimately been transferred by the
supposed indorsee thereof are yet to initiate, if minded, an appropriate adversarial
action. Neither have they been made parties to the proceedings now at bench. A
justiciable controversy such as can occasion an exercise of SEC's exclusive jurisdiction
would require an assertion of a right by a proper party against another who, in turn,
contests it.5 It is one instituted by and against parties having interest in the subject
matter appropriate for judicial determination predicated on a given state of facts. That
controversy must be raised by the party entitled to maintain the action. He is the person
to whom the right to seek judicial redress or relief belongs which can be enforced
against the party correspondingly charged with having been responsible for, or to have
given rise to, the cause of action. A person or entity tasked with the power to adjudicate
stands neutral and impartial and acts on the basis of the admissible representations of
the contending parties.

In the case at bench, the proper parties that can bring the controversy and can
cause an exercise by the SEC of its original and exclusive jurisdiction would be all or any
of those who are adversely affected by the transfer of the pilfered certificates of stock.
Any peremptory judgment by the SEC, without such proceedings having first been
initiated, would be precipitate. We thus see nothing erroneous in the decision of the
Court of Appeals, albeit not for the reason given by it, to set aside the SEC's adjudication
"without prejudice" to the right of persons injured to file the necessary proceedings for
appropriate relief.

SEC VS. PERFORMANCE FOREIGN EXCHANGE CORP., G.R. NO. 154131,

JULY 20, 2006
.
FACTS:

Performance Foreign Exchange Corporation, respondent herein, is a domestic

corporation duly registered with SEC and engaged as its primary purpose to operate
as a broker/agent between market participants in transactions involving, but not limited
to, foreign exchange, deposits, interest rate instruments, and similar or derivative
products, other than acting as a broker for the trading of securities pursuant to the
Revised Securities Act of the Philippines.

The respondent secondary purpose is to engage in money changer or exchanging

foreign currencies.

The Director of Compliance and Enforcement Department of the SEC issued a

Cease and Desist Order against respondent alleging that in their inquiry it showed that
respondent was engaged in the trading of foreign currency futures contracts in behalf of
its clients without the necessary license which transaction can be deemed as a direct
violation of RSA.

The respondent filed a motion to SEC to lift the said order. SEC Chairman
Bautista, in her desire to know with certainty the nature of respondent’s business, sent a
letter to the BSP, requesting a definitive statement that respondent’s business
transactions are a form of financial derivatives and, therefore, can only be undertaken
by banks or non-bank financial intermediaries performing quasi-banking functions.

However, SEC issued an Order denying respondent’s motion for the lifting of the
Cease-and-Desist Order without waiting for BSP’s determination of the matter.
Thereafter, SEC issued an order making the Cease-and-Desist Order permanent.

Respondent filed with the Court of Appeals a Petition for Certiorari. It alleged
that SEC grave abuse of discretion when it issued the Cease-and-Desist Order and its
subsequent Order making the same permanent without waiting for the BSP’s
determination of the real nature of its business operations; and that petitioner’s Orders,
issued without any factual basis, violated its (respondent’s) fundamental right to due
process.

BSP, in answer to SEC Chairman letter-request stated that respondent’s business

activity does not fall under the category of futures trading "and" cannot be classified as
financial derivatives transactions.

CA ruled that SEC acted with grave abuse of discretion when it issued its
challenged Orders without a positive factual finding that respondent violated the
Securities Regulation Code. Hence, this petition.

ISSUE:

Whether or not SEC acted with grave abuse of discretion in issuing the Cease-and-Desist
Order and its subsequent Order making it permanent.

HELD:
 YES. SEC acted with grave abuse of discretion in issuing the Cease-and-Desist
Order and its subsequent Order making it permanent.

Under the SRC, there are two essential requirements that must be complied with
by the SEC before it may issue a cease and desist order:

First, it must conduct proper investigation or verification; and

Second, there must be a finding that the act or practice, unless restrained, will
operate as a fraud on investors or is otherwise likely to cause grave or irreparable
injury or prejudice to the investing public.

Here, the first requirement is not present. Petitioner did not conduct proper
investigation or verification before it issued the challenged orders. The
clarificatory conference undertaken by petitioner regarding respondent’s business
operations cannot be considered a proper investigation or verification process to justify
the issuance of the Cease-and-Desist Order. It was merely an initial stage of such
process, considering that after it issued the said order following the clarificatory
conference, petitioner still sought verification from the BSP on the nature of
respondent’s business activity Petitioner’s act of referring the matter to the BSP is an
essential part of the investigation and verification process. In fact, such referral
indicates that petitioner concedes to the BSP’s expertise in determining the nature of
respondent’s business.

It bears stressing, however, that such investigation and verification, to be proper,

must be conducted by petitioner before, not after, issuing the Cease-and-Desist Order in
question. This, petitioner utterly failed to do.

The issuance of such order even before it could finish its investigation and
verification on respondent’s business activity obviously contravenes Section 64 of R.A.
No. 8799 earlier quoted. And worst, without waiting for BSP’s action, petitioner
proceeded to issue its Order dated April 23, 2001 making the Cease and Desist Order
permanent.

In the same Order, petitioner further directed respondent "to show cause x x x
why its certificate of registration should not be revoked for alleged violation of the
Securities Regulation Code and/or Presidential Decree No. 902-A, specifically on the
ground of serious misrepresentation as to what the corporation can do or is doing to the
great prejudice or damage to the general public." Obviously, without BSP’s
determination of the nature of respondent’s business, there was no factual and legal
basis to justify the issuance of such order.
 Which brings us to the second requirement. Before a cease-and-desist order may
be issued by the SEC, there must be a showing that the act or practice sought to be
restrained will operate as a fraud on investors or is likely to cause grave, irreparable
injury or prejudice to the investing public. Such requirement implies that the act to be
restrained has been determined after conducting the proper investigation/verification.
In this case, the nature of the act to be restrained can only be determined after the BSP
shall have submitted its findings to petitioner. However, there is nothing in the
questioned Orders that shows how the public is greatly prejudiced or damaged by
respondent’s business operation.

UNION BANK OF THE PHILIPPINES VS. SEC, G.R. NO. 138949, JUNE 6,
2001
Facts:

Petitioner, through Counsel and Corporate Secretary, sought the opinion of

Chairman Perfecto Yasay, Jr. of respondent Commission as to the applicability and
coverage of the Full Material Disclosure Rule on Banks, contending that said rules, in
effect, amend Section 5 (a) (3) of the Revised Securities Act which exempts securities
issued or guaranteed by banking institutions from the registration requirement
provided by Section 4 of the same Act.

In reply thereto, Chairman Yasay informed petitioner that while the

requirements of registration do not apply to securities of banks, it does not however
exempt banks with a class of securities listed for trading on the Philippine Stock
Exchange, Inc. from filing of various reports with the Commission.

Not satisfied, petitioner referred the matter to the PSE for clarification.

Due to the petitioner’s failure to submit reports to the SEC, petitioner was given a
show cause order with assessment for fine.

Petitioner assailed the assessment by respondent contending that they should not
be required to submit those reports as they are exempted from the said requirements.

ISSUE: 
WON petitioner is required to comply with the respondent SEC’s full disclosure rules.

Held:

Yes, petitioner is required to comply with the respondent SEC’s full disclosure
rules.
 This provision exempts from registration the securities issued by banking or
financial institutions mentioned in the law. Nowhere in the provision state or even
imply that petitioner, as a listed corporation, is exempt from complying with the reports
required by the assailed RSA Implementing Rules.

The exemption from the registration requirement enjoyed by petitioner does not
necessarily connote that [it is] exempted from the other reportorial requirements.
Having confined the exemption enjoyed by petitioner merely to the initial requirement
of registration of securities for public offering, and not [to] the subsequent filing of
various periodic reports, respondent Commission, as the regulatory agency, is able to
exercise its power of supervision and control over corporations and over the securities
market as a whole. Otherwise, the objectives of the ‘Full Material Disclosure’ policy
would be defeated since petitioner corporation and its dealings would be totally beyond
the reach of respondent Commission and the investing public."

It must be emphasized that petitioner is a commercial banking corporation 10

listed in the stock exchange. Thus, it must adhere not only to banking and other allied
special laws, but also to the rules promulgated by Respondent SEC, the government
entity tasked not only with the enforcement of the Revised Securities Act, 11 but also
with the supervision of all corporations, partnerships or associations which are grantees
of government-issued primary franchises and/or licenses or permits to operate in the
Philippines.

RSA Rules 11(a)-1, 34(a)-1 and 34(c)-1 require the submission of certain reports
to ensure full, fair and accurate disclosure of information for the protection of the
investing public. These Rules were issued by respondent pursuant to the authority
conferred upon it by Section 3 of the RSA.

The said Rules do not amend Section 5(a)(3) of the Revised Securities Act,
because they do not revoke or amend the exemption from registration of the securities
enumerated thereunder. They are reasonable regulations imposed upon petitioner as a
banking corporation trading its securities in the stock market.

That petitioner is under the supervision of the Bangko Sentral ng Pilipinas (BSP)
and the Philippine Stock Exchange (PSE) does not exempt it from complying with the
continuing disclosure requirements embodied in the assailed Rules. Petitioner, as a
bank, is primarily subject to the control of the BSP; and as a corporation trading its
securities in the stock market, it is under the supervision of the SEC. It must be pointed
out that even the PSE is under the control and supervision of Respondent. 14 There is no
over-supervision here. Each regulating authority operates within the sphere of its
powers. That stringent requirements are imposed is understandable, considering the
paramount importance given to the interests of the investing public.
 Otherwise stated, the mere fact that in regard to its banking functions, petitioner
is already subject to the supervision of the BSP does not exempt the former from
reasonable disclosure regulations issued by the SEC. These regulations are meant to
assure full, fair and accurate disclosure of information for the protection of investors in
the stock market. Imposing such regulations is a function within the jurisdiction of the
SEC. Since petitioner opted to trade its shares in the exchange, then it must abide by the
reasonable rules imposed by the SEC.

POWER HOMES UNLIMITED CORP. vs SEC, 546 SCRA 567 (2008)

FACTS:

Power Homes (P) was engaged in managing real estate properties for subdivision
& allied purposes and in the purchase, exchange, and/or sale of such through network
marketing.

Public Respondent SEC acted on the letters of Respondent Noel Manero and a
certain Romulo Munsayac, Jr. Manero alleged that in a seminar he attended, Petitioner
claimed that it sells properties that were inexistent and without any broker’s license.

Munsayac on the other hand, inquired whether Petitioner’s business is legitimate

or not. After investigation, Public Respondent SEC found out that Petitioner is engaged
in the sale or offer for sale or distribution of investment contracts, which are considered
securities under Sec. 3.1 (b) of Republic Act (R.A.) No. 8799 (The Securities Regulation
Code), but failed to register them in violation of Sec. 8.1 of the same Act,

Public Respondent SEC issued a Cease and Desist Order against Petitioner.
Petitioner filed this petition for review after the Court of Appeals denied its petition for
lack of merit and affirmed in toto Public Respondent’s Cease and Desist Order.

ISSUES:

Whether or not Petitioner’s business constitutes an investment contract which should be

registered with Public Respondent SEC before its sale or offer for sale or distribution to
the public.

RULING:

To determine whether a transaction falls within the scope of an investment

contract, the Court made use of the Howey Test which provides that an investment
contract requires a transaction, contract, or scheme whereby a person:
 (1) makes an investment of money,
(2) in a common enterprise,
(3) with the expectation of profits,
(4) to be derived solely from the efforts of others.

In this case the Court therefore ruled that the business operation or the scheme of
Petitioner constitutes an investment contract that is a security define under the SRC.
Thus, it must be registered with Public Respondent SEC before its sale or offer for
sale or distribution to the public.
As petitioner failed to register the same, its offering to the public was rightfully
enjoined by Public Respondent SEC.
The CDO was proper even without a finding of fraud. PETITION IS DENIED.

SEC VS. PROSPERITY.COM, INC., G.R. NO. 164197, JANUARY 25, 2012

Facts:

Prosperity.Com, Inc. (PCI) sold computer software and hosted websites without
providing internet service. To make a profit, PCI devised a scheme in which a buyer
could acquire from it an internet website of a 15-Mega Byte (MB) capacity. At the same
time, by referring to PCI his own down-line buyers, a first-time buyer could earn
commissions, interest in real estate in the Philippines and in the United States, and
insurance coverage.

In 2001, discontented elements of Golconda Ventures, Inc. filed a complaint with

the SEC against PCI, alleging that the latter had taken over GVI’s operations. After
hearing, the SEC issued a CDO against PCI.

The SEC ruled that PCI’s scheme constitutes an Investment contract and,
following the Securities Regulations Code, it should have first registered such contract
or securities with the SEC.

PCI filed with the Court of Appeals and CA rendered a decision, granting PCI’s
petition and setting aside the SEC-issued CDO. The CA ruled that, following the Howey
test, PCI’s scheme did not constitute an investment contract that needs registration
pursuant to R.A. 8799, hence, this petition by the SEC.
 ISSUE:

Whether or not PCI’s scheme constitutes an investment contract that requires

registration under R.A. 8799.

RULING:

The Supreme Court DENIED the petition and AFFIRMED the decision of the
Court of Appeals.

PCI’s scheme does not require registration under R.A. 8799. The United States
Supreme Court held in Securities and Exchange Commission v. W.J. Howey Co. that, for
an investment contract to exist, the following elements, referred to as the Howey test
must concur:

(1) a contract, transaction, or scheme;

(2) an investment of money;
(3) investment is made in a common enterprise;
(4) expectation of profits; and
(5) profits arising primarily from the efforts of others.

Thus, to sustain the SEC position in this case, PCI’s scheme or contract with its
buyers must have all these elements.

Here, PCI’s clients do not make such investments. They buy a product of some
value to them: an Internet website of a 15-MB capacity. The client can use this website to
enable people to have internet access to what he has to offer to them, say, some skin
cream.

The buyers of the website do not invest money in PCI that it could use for
running some business that would generate profits for the investors.

The price of US$234.00 is what the buyer pays for the use of the website, a
tangible asset that PCI creates, using its computer facilities and technical skills.

The CA is right in ruling that the last requisite in the Howey test is lacking in the
marketing scheme that PCI has adopted. Evidently, it is PCI that expects profit from the
network marketing of its products. PCI is correct in saying that the US$234 it gets from
its clients is merely a consideration for the sale of the websites that it provides.

SEC VS. OUDINE SANTOS, G.R. NO. 195542, MARCH 19, 2014

FACTS:
                In 2007, another investment scam was exposed involving
Performance Investment Products Corporation (PIPC) a foreign corporation registered
in the British Virgin Islands.

                Because the head of PIPC Corporation had gone missing, the SEC was flooded
with complaints from individuals against PIPC Corporation, its directors, officers,
employees, agents and brokers for alleged violation of the SRC.

Santos was charged in the complaints in her capacity as investment consultant of

PIPC Corporation.

                On her defense, Santos alleged that she was merely an employee of PIPC thus
should not be personally liable.

ISSUE:

                Whether or not Santos violated SRC which punishes unregistered broker

or dealer who engage in business of buying or selling securities.

HELD:

                YES. The Court held that Santos acted as an agent or salesman of

PIPC Corporation making her liable under Sec. 28 of SRC.

                 There is no question that Santos was in the employ of PIPC Corporation

and/or PIPC–BVI, a corporation which sold or offered for sale unregistered securities in
the Philippines.  To escape probable culpability, Santos claims that she was a mere
clerical employee of PIPC Corporation and/or PIPC–BVI and was never an agent or
salesman who actually solicited the sale of or sold unregistered securities issued by PIPC
Corporation and/or PIPC–BVI.

                Solicitation is the act of seeking or asking for business or information; it is not a
commitment to an agreement.

                Santos, by the very nature of her function as what she now

unaffectedly calls an information provider, brought about the sale of
securities made by PIPC Corporation and/or PIPC–BVI to certain
individuals, specifically private complainants Sy and Lorenzo by providing
information on the investment products of PIPC Corporation and/or PIPC–
BVI with the end in view of PIPC Corporation closing a sale.

                While Santos was not a signatory to the contracts on Sy’s or

Lorenzo’s investments, Santos procured the sale of these unregistered
securities to the 2 complainants by providing information on
the investment products being offered for sale by PIPC Corporation and/or
PIPC–BVI and convincing them to invest therein.

               Thus, Santos violated Sec. 28 of SRC. Its elements are as follows:

1. Engaging in the business of buying or selling securities in the Philippines as a

broker or dealer;
2. Acting as a salesman; or
3. Acting as an associated person of any broker or dealer, unless registered as such
with the SEC.

____________________________________________________________
CASE LIST IN INSURANCE LAW
INTERPRETATION
GAISANO CAGAYAN, INC. VS. INSURANCE CO. OF NORTH AMERICA,
G.R. NO. 147839, JUNE 8, 2006

FACTS: 

Intercapitol Marketing Corporation (IMC) is the maker of Wrangler Blue Jeans.

Levi Strauss (Phils.) Inc. (LSPI) is the local distributor of products bearing trademarks
owned by Levi Strauss & Co..

IMC and LSPI separately obtained from respondent fire insurance policies.

Petitioner is a customer and dealer of the products of IMC and LSPI. On February
25, 1991, the Gaisano Superstore Complex in Cagayan de Oro City, owned by petitioner,
was consumed by fire. Included in the items lost or destroyed in the fire were stocks of
ready-made clothing materials sold and delivered by IMC and LSPI.

On February 4, 1992, respondent filed a complaint for damages against

petitioner. It alleges that IMC and LSPI filed with respondent their claims under their
respective fire insurance policies with book debt endorsements; that as of February 25,
1991, the unpaid accounts of petitioner on the sale and delivery of ready-made clothing
materials with IMC was P2,119,205.00 while with LSPI it was P535,613.00; that
respondent paid the claims of IMC and LSPI and, by virtue thereof, respondent was
subrogated to their rights against petitioner; that respondent made several demands for
payment upon petitioner but these went unheeded.
 In its Answer with Counter Claim dated July 4, 1995, petitioner contends that it
could not be held liable because the property covered by the insurance policies were
destroyed due to fortuities event or force majeure; that respondent’s right of
subrogation has no basis inasmuch as there was no breach of contract committed by it
since the loss was due to fire which it could not prevent or foresee; that IMC and LSPI
never communicated to it that they insured their properties; that it never consented to
paying the claim of the insured.

Issue:

Whether or not the Insurance Company of North America can claim against Gaisano
Cagayan for the debt that was insured.

Ruling:

In this case, the questioned insurance policies provide coverage for "book debts
in connection with ready-made clothing materials which have been sold or delivered to
various customers and dealers of the Insured anywhere in the Philippines."; and defined
book debts as the "unpaid account still appearing in the Book of Account of the Insured
45 days after the time of the loss covered under this Policy." Nowhere is it provided
in the questioned insurance policies that the subject of the insurance is the
goods sold and delivered to the customers and dealers of the insured.

Thus, what were insured against were the accounts of IMC and LSPI
with petitioner which remained unpaid 45 days after the loss through fire,
and not the loss or destruction of the goods delivered.

Petitioner argues that IMC bears the risk of loss because it expressly reserved
ownership of the goods by stipulating in the sales invoices that "it is further agreed that
merely for purpose of securing the payment of the purchase price the above described
merchandise remains the property of the vendor until the purchase price thereof is fully
paid."

The present case clearly falls under paragraph (1), Article 1504 of the Civil Code:

ART. 1504. Unless otherwise agreed, the goods remain at the seller's risk until the
ownership therein is transferred to the buyer, but when the ownership therein is
transferred to the buyer the goods are at the buyer's risk whether actual delivery has
been made or not, except that:

(1) Where delivery of the goods has been made to the buyer or to a bailee for the buyer,
in pursuance of the contract and the ownership in the goods has been retained by the
seller merely to secure performance by the buyer of his obligations under the contract,
the goods are at the buyer's risk from the time of such delivery;
 Thus, when the seller retains ownership only to insure that the buyer will pay its
debt, the risk of loss is borne by the buyer. Accordingly, petitioner bears the risk of loss
of the goods delivered.

IMC and LSPI did not lose complete interest over the goods. They have an insurable
interest until full payment of the value of the delivered goods.

Section 13 of our Insurance Code defines insurable interest as "every

interest in property, whether real or personal, or any relation thereto, or
liability in respect thereof, of such nature that a contemplated peril might
directly damnify the insured." Parenthetically, under Section 14 of the same Code,
an insurable interest in property may consist in: (a) an existing interest; (b) an
inchoate interest founded on existing interest; or (c) an expectancy,
coupled with an existing interest in that out of which the expectancy arises.

In this case, the insurable interest of IMC and LSPI pertain to the unpaid
accounts appearing in their Books of Account 45 days after the time of the loss covered
by the policies.

The next question is: Is petitioner liable for the unpaid accounts?

As held earlier, petitioner bears the loss under Article 1504 (1) of the Civil Code.

Moreover, it must be stressed that the insurance in this case is not for loss of
goods by fire but for petitioner's accounts with IMC and LSPI that remained unpaid 45
days after the fire. Accordingly, petitioner's obligation is for the payment of money. As
correctly stated by the CA, where the obligation consists in the payment of money, the
failure of the debtor to make the payment even by reason of a fortuitous event shall not
relieve him of his liability.

Under Article 1263 of the Civil Code, "in an obligation to deliver a generic thing,
the loss or destruction of anything of the same kind does not extinguish the obligation."
If the obligation is generic in the sense that the object thereof is designated merely by its
class or genus without any particular designation or physical segregation from all others
of the same class, the loss or destruction of anything of the same kind even without the
debtor's fault and before he has incurred in delay will not have the effect of
extinguishing the obligation. This rule is based on the principle that the genus of a thing
can never perish. Genus nunquan perit. An obligation to pay money is generic;
therefore, it is not excused by fortuitous loss of any specific property of the
debtor.

Thus, whether fire is a fortuitous event or petitioner was negligent are matters
immaterial to this case. What is relevant here is whether it has been established that
petitioner has outstanding accounts with IMC and LSPI.

With respect to IMC, the respondent has adequately established its claim. The
subrogation receipt, by itself, is sufficient to establish not only the relationship of
respondent as insurer and IMC as the insured, but also the amount paid to settle the
insurance claim. The right of subrogation accrues simply upon payment by the
insurance company of the insurance claim. Respondent's action against petitioner is
squarely sanctioned by Article 2207 of the Civil Code which provides:

Art. 2207. If the plaintiff's property has been insured, and he has received
indemnity from the insurance company for the injury or loss arising out of the wrong or
breach of contract complained of, the insurance company shall be subrogated to the
rights of the insured against the wrongdoer or the person who has violated the contract.
xxx

As to LSPI, respondent failed to present sufficient evidence to prove its cause of

action. There is no proof of full settlement of the insurance claim of LSPI; no
subrogation receipt was offered in evidence. Thus, there is no evidence that respondent
has been subrogated to any right which LSPI may have against petitioner. Failure to
substantiate the claim of subrogation is fatal to petitioner's case for recovery of the
amount of P535,613.00.

The petition is partly GRANTED. The assailed of the Court of Appeals

are AFFIRMED with the MODIFICATION that the order to pay the amount
of P535,613.00 to respondent is DELETED for lack of factual basis.

MALAYAN INSURANCE CORP. VS. CA, G.R. NO. 119599, MARCH 20, 1997,
270 SCRA 242, 254

Facts:
TKC Marketing imported 3,000 metric tons of soya from Brazil to Manila. It was
insured against the risk of loss by Malayan at the value of almost 20 million pesos. The
vessel, however, was arrested and detained in South Africa because of a lawsuit
regarding the possession of the soya. TKC notified Malayan of the incident and claim for
the recovery of the amount, but the latter claimed that it was not the peril covered by the
policy.
The soya was sold in Africa for Php 10 million, but TKC wanted Malayan to
shoulder the remaining value of 10 million as well.
Petitioner filed suit due to Malayan’s refusal to pay. Malayan claimed that arrest
by civil authorities wasn’t covered by the policy. The trial court ruled in TKC’s favor
with damages to boot. The appellate court affirmed the decision under the reason that
clause 12 of the policy regarding an excepted risk due to arrest by civil authorities was
deleted by Section 1.1 of the Institute War Clauses which covered ordinary arrests by
civil authorities. Failure of the cargo to arrive was also covered by the Theft, Pilferage,
and Non-delivery Clause of the contract. Hence this petition.
Issues:
WON the arrest of the vessel was a risk covered under the subject insurance policies.

Held:

Yes. Petition dismissed.

Section 12 or the "Free from Capture & Seizure Clause" states:  "Warranted free of
capture, seizure, arrest, restraint or detainment, and the consequences thereof or of any
attempt thereat… Should Clause 12 be deleted, the relevant current institute
war clauses shall be deemed to form part of this insurance.”

This was really replaced by the subsection 1.1 of section 1 of Institute

War Clauses (Cargo) which included “the risks excluded from the standard form of
English Marine Policy by the clause warranted free of capture, seizure, arrest, restraint
or detainment, and the consequences thereof of hostilities or warlike operations,
whether there be a declaration of war or not.”
The petitioner’s claim that the Institute War Clauses can be operative in case of
hostilities or warlike operations on account of its heading "Institute War Clauses" is not
tenable. It reiterated the CA’s stand that “its interpretation in recent years to include
seizure or detention by civil authorities seems consistent with the general purposes of
the clause.” This interpretation was regardless of the fact whether the arrest was in war
or by civil authorities.
The petitioner was said to have confused the Institute War clauses and the F.C.S.
in English law. “It stated that "the F.C. & S. Clause was "originally incorporated in
insurance policies to eliminate the risks of warlike operations". It also averred that the
F.C. & S. Clause applies even if there be no war or warlike operations.  In the same vein,
it contended that subsection 1.1 of Section 1 of the Institute War Clauses (Cargo)
"pertained exclusively to warlike operations" and yet it also stated that "the deletion of
the F.C. & S. Clause and the consequent incorporation of subsection 1.1 of Section 1 of
the Institute War Clauses (Cargo) was to include "arrest, etc. even if it were not a result
of hostilities or warlike operations."
The court found that the insurance agency tried to interpret executive and
political acts as those not including ordinary arrests in the exceptions of the FCS clause ,
and claims that the War Clauses now included executive and political acts without
including ordinary arrests in the new stipulation.
“A strained interpretation which is unnatural and forced, as to lead to an absurd
conclusion or to render the policy nonsensical, should, by all means, be avoided.”
2. Indemnity and liability insurance policies are construed in accordance with the
general rule of resolving any ambiguity therein in favor of the insured, where the
contract or policy is prepared by the insurer. A contract of insurance, being a contract
of adhesion, means that any ambiguity should be resolved against the insurer.

GULF RESORTS, INC. VS. PHIL. CHARTER INS. 485 SCRA 551

Facts:

Petitioner Gulf Resorts, owned by Playa Resorts at Agoo La Union entered into an
insurance contract with the respondent American Home Assurance Company which
insured Plaza resorts properties against loss or damage due to earthquakes.

In 1990, an earthquake struck Central Luzon and the properties in Playa Resort
were damaged including the 2 swimming pools.

On the same year, Gulf Resorts filed its formal demand for settlement of damage
to all of its properties in the Agoo Playa Resort, but American Home Assurance
Company denied the claim on the ground that its insurance policy only covered the two
swimming pools of Playa Resort against earthquake shock, and not the other properties
damaged by the said earthquake.

On the other hand, petitioner contended that pursuant to the rider attached to
the policy titled "Extended Coverage Endorsement (To Include the Perils of Explosion,
Aircraft, Vehicle and Smoke), no qualifications were placed on the scope of the
earthquake shock coverage, thus, the policy extended earthquake shock coverage to all
of the insured properties.

Petitioner filed a complaint with the RTC asking for payment for the
lost/damaged properties against the insurer, however, RTC ruled in favor of the insurer,
stating that the insurance coverage against the earthquake is limited only to the two
swimming pools and does not extend against the other properties damaged by the
earthquake.

On appeal, CS affirmed the RTC decision.

Issue:

Whether the insurance policy only the two swimming pools are covered and not
all the properties are insured against the risk of earthquake shock.

Held:
 The Supreme Court held that the insurance policy issued to Gulf Resorts is only
limited to the two swimming pools and the other properties of Playa Resort are not
covered by the property insurance issued by American Home Assurance Company
(AHAC-AIU). The Court held that there is no ambiguity in the insurance contract and
the earthquake shock rider, as Gulf Resorts stated that the swimming pools are the only
items covered by the insurance against loss due to earthquakes.

The Court stated that provisions in the insurance policy should be examined and
interpreted in consonance with each other, and should not be construed piecemeal. All
parts of the insurance contract reflect the true intent of the parties.

The Supreme Court also defined contracts of adhesion as contracts where one
party prepares the stipulations in the contract while the other party merely affixes
his/her signature thereto, citing the case of Philippine National Bank vs. Court of
Appeals (196 SCRA 536). Any ambiguity is resolved against the insurer (who prepared
the contract) and construed liberally in the insured’s favor.

However, since the policy and its riders are clear about the insurance coverage
against earthquake shock, the Gulf Resorts cannot use the doctrine of contract of
adhesion and liberal interpretation of insurance contract in the insured’s favor in case of
ambiguity.

SIMON DE LA CRUZ VS. THE CAPITAL INS. AND SURETY INC., G.R. NO.
L-21574, JUNE 30, 1966

Facts:

Eduardo Dela Cruz, a holder of an accident insurance policy by respondent

Capital Insurance and Surety Co, Inc.

Eduardo Dela Cruz participated in a boxing contest for general entertainment.

His opponent is likewise a non-professional, of the same height and size. In the course
of his bout, Eduardo slipped and was hit by his opponent causing him to fall with his
head hitting the rope of the ring. He was brought to the hospital the following day, and
was told that the cause of his death was hemorrhage, intracranial, left.

Simon De La Cruz (petititoner), the father of Eduardo and was the named
beneficiary under the policy , filed a claim with the insurance company for payment of
the indemnity under the insurance policy.

The claim was denied.

 Simon instituted a case for specific performance with the RTC. The insurance
company contended that the death of the insured caused by his participation in a boxing
contest, was not accidental and, therefore, not covered by insurance. RTC ruled in favor
of the insurer. The insurer further contends that while the death of the insured was due
to head injury, said injury was sustained because of his voluntary participation in the
contest. It is claimed that the participation in the boxing contest was the "means" that
produced the injury which, in turn, caused the death of the insured. And, since his
inclusion in the boxing card was voluntary on the part of the insured, he cannot be
considered to have met his death by "accidental means".

Issue:

Whether the cause of death of Eduardo is an accident under the contemplation of

the accident insurance policy.

Held.

Yes. The terms "accident" and "accidental", as used in insurance contracts, have
not acquired any technical meaning, and are construed by the courts in their ordinary
and common acceptation. Thus, the terms have been taken to mean that which happen
by chance or fortuitously, without intention and design, and which is unexpected,
unusual, and unforeseen. An accident is an event that takes place without one's foresight
or expectation — an event that proceeds from an unknown cause, or is an unusual effect
of a known cause and, therefore, not expected.

In the present case, while the participation of the insured in the boxing contest is
voluntary, the injury was sustained when he slid, giving occasion to the infliction by his
opponent of the blow that threw him to the ropes of the ring. Without this unfortunate
incident, that is, the unintentional slipping of the deceased, perhaps he could not have
received that blow in the head and would not have died. The fact that boxing is attended
with some risks of external injuries does not make any injuries received in the course of
the game not accidental. In boxing as in other equally physically rigorous sports, such as
basketball or baseball, death is not ordinarily anticipated to result. If, therefore, it ever
does, the injury or death can only be accidental or produced by some unforeseen
happening or event as what occurred in this case.

BENEFICIARIES
HEIRS OF LORETO C. MARAMAG VS. EVA VERNA DE GUZMAN, ET.AL.,
G.R. NO. 181132, JUNE 5, 2009

The case stems from a petition filed against respondents with the Regional Trial
Court, Branch 29, for revocation and/or reduction of insurance proceeds for being void
and/or inofficious, with prayer for a temporary restraining order (TRO) and a writ of
preliminary injunction.

Petitioner Vicenta Maramag (heir of deceased) alleges that

(1) petitioners were the legitimate wife and children of Loreto

Maramag (Loreto), while respondents were Loreto’s
illegitimate family;

(2) Eva de Guzman Maramag (Eva) was a concubine of Loreto

and a suspect in the killing of the latter, thus, she is
disqualified to receive any proceeds from his insurance
policies from Insular Life Assurance Company, Ltd.
(Insular) and Great Pacific Life Assurance Corporation
(Grepalife);

(3) the illegitimate children of Loreto—Odessa, Karl Brian,

and Trisha Angelie—were entitled only to one-half of the
legitime of the legitimate children, thus, the proceeds
released to Odessa and those to be released to Karl Brian
and Trisha Angelie were inofficious and should be
reduced; and

(4) petitioners could not be deprived of their legitimes, which

should be satisfied first.

In answer, Insular admitted that Loreto misrepresented Eva

as his legitimate wife and Odessa, Karl Brian, and Trisha
Angelie as his legitimate children, and that they filed
their claims for the insurance proceeds of the insurance
policies; that when it ascertained that Eva was not the
legal wife of Loreto, it disqualified her as a beneficiary
and divided the proceeds among Odessa, Karl Brian, and
Trisha Angelie, as the remaining designated and further
claimed that it was bound to honor the insurance policies
designating the children of Loreto with Eva as
 beneficiaries pursuant to Section 53 of the Insurance
Code.

In its own answer with compulsory counterclaim, Grepalife alleged that Eva was
not designated as an insurance policy beneficiary; that the claims filed by Odessa, Karl
Brian, and Trisha Angelie were denied because Loreto was ineligible for insurance due
to a misrepresentation in his application form that he was born on December 10, 1936
and, thus, not more than 65 years old when he signed it in September 2001; that the
case was premature, there being no claim filed by the legitimate family of Loreto; and
that the law on succession does not apply where the designation of insurance
beneficiaries is clear.

Both Insular and Grepalife countered that the insurance proceeds belong
exclusively to the designated beneficiaries in the policies, not to the estate or to the heirs
of the insured. Grepalife also reiterated that it had disqualified Eva as a beneficiary
when it ascertained that Loreto was legally married to Vicenta Pangilinan Maramag. The
Trial Court ruled for the Petitioners since Eva was not able to file an answer nor
unknown to their whereabouts.
TC’s Ruling: It is very clear under Sec. 53 thereof that the insurance proceeds
shall be applied exclusively to the proper interest of the person in whose name or for
whose benefit it is made, unless otherwise specified in the policy. MR: Insular and
Grepalife filed their respective motions for reconsideration, arguing, in the main, that
the petition failed to state a cause of action. Insular further averred that the proceeds
were divided among the three children as the remaining named beneficiaries.
Grepalife, for its part, also alleged that the premiums paid had already been
refunded. In granting the motions for reconsideration of Insular and Grepalife, the trial
court considered the allegations of Insular that Loreto revoked the designation of Eva in
one policy and that Insular disqualified her as a beneficiary in the other policy such that
the entire proceeds would be paid to the illegitimate children of Loreto with Eva
pursuant to Section 53 of the Insurance Code Petitioners appealed the June 16, 2005
Resolution to the CA, but it dismissed the appeal for lack of jurisdiction, holding that the
decision of the trial court dismissing the complaint for failure to state a cause of action
involved a pure question of law.
The appellate court also noted that petitioners did not file within the
reglementary period a motion for reconsideration of the trial court’s Resolution, dated
September 21, 2004, dismissing the complaint as against Odessa, Karl Brian, and Trisha
Angelie; thus, the said Resolution had already attained finality.
ISSUE:
 Are the members of the legitimate family entitled to the proceeds of the insurance
for the concubine?
HELD:
The petition should be denied. In this case, it is clear from the petition filed
before the trial court that, although petitioners are the legitimate heirs of Loreto, they
were not named as beneficiaries in the insurance policies issued by Insular and
Grepalife. The basis of petitioners’ claim is that Eva, being a concubine of Loreto and a
suspect in his murder, is disqualified from being designated as beneficiary of the
insurance policies, and that Eva’s children with Loreto, being illegitimate children, are
entitled to a lesser share of the proceeds of the policies.
They also argued that pursuant to Section 12 of the Insurance Code, Eva’s share
in the proceeds should be forfeited in their favor, the former having brought about the
death of Loreto. Thus, they prayed that the share of Eva and portions of the shares of
Loreto’s illegitimate children should be awarded to them, being the legitimate heirs of
Loreto entitled to their respective legitimes.
It is evident from the face of the complaint that petitioners are not entitled to a
favorable judgment in light of Article 2011 of the Civil Code which expressly provides
that insurance contracts shall be governed by special laws, i.e., the Insurance Code.
Section 53 of the Insurance Code states— SECTION 53. The insurance proceeds shall be
applied exclusively to the proper interest of the person in whose name or for whose
benefit it is made unless otherwise specified in the policy.
Pursuant thereto, it is obvious that the only persons entitled to claim the
insurance proceeds are either the insured, if still alive; or the beneficiary, if the insured
is already deceased, upon the maturation of the policy.
The exception to this rule is a situation where the insurance contract was
intended to benefit third persons who are not parties to the same in the form of
favorable stipulations or indemnity. In such a case, third parties may directly sue and
claim from the insurer. Petitioners are third parties to the insurance contracts with
Insular and Grepalife and, thus, are not entitled to the proceeds thereof.
Accordingly, respondents Insular and Grepalife have no legal obligation to turn
over the insurance proceeds to petitioners. The revocation of Eva as a beneficiary in one
policy and her disqualification as such in another are of no moment considering that the
designation of the illegitimate children as beneficiaries in Loreto’s insurance policies
remains valid.
Because no legal proscription exists in naming as beneficiaries the children of
illicit relationships by the insured, the shares of Eva in the insurance proceeds, whether
forfeited by the court in view of the prohibition on donations under Article 739 of the
Civil Code or by the insurers themselves for reasons based on the insurance contracts,
must be awarded to the said illegitimate children, the designated beneficiaries, to the
exclusion of petitioners. It is only in cases where the insured has not designated any
beneficiary, or when the designated beneficiary is disqualified by law to receive the
proceeds, that the insurance policy proceeds shall redound to the benefit of the estate of
the insured. Petition Denied. 

 SECTION 53. The insurance proceeds shall be applied exclusively to the

proper interest of the person in whose name or for whose benefit it is made
unless otherwise specified in the policy.
 GR: only persons entitled to claim the insurance proceeds are either
the insured, if still alive; or the beneficiary, if the insured is already
deceased, upon the maturation of the policy.
 EX: situation where the insurance contract was intended to benefit
third persons who are not parties to the same in the form of favorable
stipulations or indemnity. In such a case, third parties may directly sue
and claim from the insurer
 It is only in cases where the insured has not designated any beneficiary, or
when the designated beneficiary is disqualified by law to receive the proceeds,
that the insurance policy proceeds shall redound to the benefit of the estate of
the insured

THE INSULAR LIFE ASS. CO., LTD. V. EBRADO, NO. L-44059, OCT. 28,
1977, 80 SCRA 181

Facts:

Buenaventura Cristor Ebrado was issued by The Life Assurance Co., Ltd. on a
whole-life with a, rider for Accidental Death designating respondent Capriona Ebrado as
the revocable beneficiary in his policy referred by him as his wife.

When Buenaventura C. Ebrado died as a result of an accident when he was hit by

a failing branch of a tree, Carponia T. Ebrado filed with the insurer a claim for the
proceeds of the Policy as the designated beneficiary.

Pascuala Vda. de Ebrado also filed her claim as the widow of the deceased
insured. She asserts that she is the one entitled to the insurance proceeds, not the
common-law wife, Carponia T. Ebrado.

In doubt as to whom the insurance proceeds shall be paid, the insurer, The
Insular Life Assurance Co., Ltd. commenced an action for Interpleader before the Court
of First Instance of Rizal.
 The trial court rendered judgment declaring among others, Carponia T. Ebrado
disqualified from becoming beneficiary of the insured Buenaventura Cristor Ebrado and
directing the payment of the insurance proceeds to the estate of the deceased insured. 

Carponia T. Ebrado appealed to the Court of Appeals which affirmed the

judgment of the lower court.

Issue:

 Can a common-law wife named as beneficiary in the life insurance policy of a

legally married man claim the proceeds thereof in case of death of the latter?

Held:

No. Carponia T. Ebrado is hereby declared disqualified to be the beneficiary of

the late Buenaventura C. Ebrado in his life insurance policy.
As a consequence, the proceeds of the policy are hereby held payable to the estate
of the deceased insured. Costs against Carponia T. Ebrado.

A common-law wife named as a beneficiary in the life insurance policy of a legally

married man cannot claim the proceeds thereof in case the death of the latter.

The contract of insurance is govern by the provisions of the new civil code on
matters not specifically provided for in the insurance code. Rather, the general rules of
civil law should be applied to resolve this void in the Insurance Law.

Article 2011 of the New Civil Code states: “The contract of insurance is governed
by special laws. Matters not expressly provided for in such special laws shall be
regulated by this Code.” When not otherwise specifically provided for by the Insurance
Law, the contract of life insurance is governed by the general rules of the civil law
regulating contracts.

And under Article 2012 of the same Code, “any person who is forbidden from
receiving any donation under Article 739 cannot be named beneficiary of a fife
insurance policy by the person who cannot make a donation to him.
 Common-law spouses are, definitely, barred from receiving donations from each
other. Also conviction for adultery or concubinage is not required as only preponderance
of evidence is necessary.

“In essence, a life insurance policy is no different from a civil donation insofar as
the beneficiary is concerned. Both are founded upon the same consideration: liberality.
A beneficiary is like a donee, because the premiums of the policy which the insured pays
out of liberality, the beneficiary will receive the proceeds or profits of said insurance.

INSURABLE INTEREST
SPS. NILO CHA AND STELLA UY CHA, ET. AL. VS. COURT OF APPEALS,
ET. AL., G.R. NO. 124520. AUG. 18, 1997
Facts:
Petitioner-spouses Nilo Cha and Stella Uy-Cha, as lessees, entered into a lease
contract with private respondent CKS Development Corporation (hereinafter CKS), as
lessor.
One of the stipulations of the one (1) year lease contract states that The LESSEE
shall not insure against fire the chattels, merchandise, textiles, goods and effects placed
at any stall or store or space in the leased premises without first obtaining the written
consent and approval of the LESSOR. If the LESSEE obtain(s) the insurance thereof
without the consent of the LESSOR then the policy is deemed assigned and transferred
to the LESSOR for its own benefit.
Notwithstanding the above stipulation in the lease contract, the Cha spouses
insured against loss by fire the merchandise inside the leased premises with the United
Insurance Co., Inc. (hereinafter United) without the written consent of private
respondent CKS.
As the lease contract was about to expire, fire broke out inside the leased
premises.
When CKS learned of the insurance earlier procured by the Cha spouses (without
its consent), it wrote the insurer (United) a demand letter asking that the proceeds of
the insurance contract (between the Cha spouses and United) be paid directly to CKS,
based on its lease contract with the Cha spouses.
United refused to pay CKS. Hence, the latter filed a complaint against the Cha
spouses and United.
The RTC of Manila rendered a decision ordering therein defendant United to pay
CKS the insurance proceeds.
 On appeal, respondent Court of Appeals affirmed the trial court’s decision.
Issue:
W/N the CKS has insurable interest because the spouses Cha violated the
stipulation in the contract of lease.

Held:
No, CA decision was reversed and set aside.
The Insurance Code provides that “No contract or policy of insurance on property
shall be enforceable except for the benefit of some person having an insurable interest in
the property insured.”
A non-life insurance policy such as the fire insurance policy taken by petitioner-
spouses over their merchandise is primarily a contract of indemnity.
Insurable interest in the property insured must exist at the time the insurance
takes effect and at the time the loss occurs.[4] The basis of such requirement of
insurable interest in property insured is based on sound public policy: to prevent a
person from taking out an insurance policy on property upon which he has no insurable
interest and collecting the proceeds of said policy in case of loss of the property. In such
a case, the contract of insurance is a mere wager which is void under Section 25 of the
Insurance Code, which provides that “Every stipulation in a policy of Insurance for the
payment of loss, whether the person insured has or has not any interest in the property
insured, or that the policy shall be received as proof of such interest, and every policy
executed by way of gaming or wagering, is void.”
In the present case, it cannot be denied that CKS has no insurable
interest in the goods and merchandise inside the leased premises under the
provisions of Section 17 of the Insurance Code which provide: “The measure
of an insurable interest in property is the extent to which the insured might
be damnified by loss of injury thereof."
Therefore, respondent CKS cannot, under the Insurance Code a
special law be validly a beneficiary of the fire insurance policy taken by the
petitioner-spouses over their merchandise. This insurable interest over
said merchandise remains with the insured, the Cha spouses.
The automatic assignment of the policy to CKS under the provision of the lease
contract previously quoted is void for being contrary to law and/or public policy.
The proceeds of the fire insurance policy thus rightfully belong to the spouses
Nilo Cha and Stella Uy-Cha (herein copetitioners).
 The insurer (United) cannot be compelled to pay the proceeds of the fire
insurance policy to a person (CKS) who has no insurable interest in the property
insured. Disposition: The decision of the Court of Appeals was SET ASIDE and a new
decision was entered, awarding the proceeds of the fire insurance policy to petitioners
Nilo Cha and Stella Uy-Cha.

GAISANO CAGAYAN, INC. VS. INS. CO. OF NORTH AMERICA, G.R. NO.
147839, JUNE 8, 2006
Facts:
Intercapitol Marketing Corporation (IMC) is the maker of Wrangler Blue Jeans.
While Levi Strauss (Phils.) Inc. (LSPI) is the local distributor of products bearing
trademarks owned by Levi Strauss & Co. IMC and LSPI separately obtained from
respondent Insurance Company of North America (ICNA) fire insurance policies for
their book debt endorsements related to their ready-made clothing materials which have
been sold or delivered to various customers and dealers of the Insured anywhere in the
Philippines which are unpaid45 days after the time of the loss.

Petitioner Gaisano Cagayan, Inc. is a customer and dealer of IMC and LSPI
products. It owns the Gaisano Superstore Complex which was consumed by fire in 1991.
Included in the items destroyed in the fire were stocks of ready-made clothing materials
sold and delivered by IMC and LSPI.

Respondent filed a complaint for damages against Gaisano Cagayan, Inc. alleging
that IMC and LSPI filed their claims under their respective fire insurance policies which
it paid, thus it was subrogated to their rights. Petitioner averred it not be held liable
because the items were destroyed due to fortuitous event or force majeure. The RTC
ruled that IMC and LSPI retained ownership of the delivered goods until fully paid, it
must bear the loss (res perit domino). The CA ruled otherwise and ordered petitioner to
pay respondent Php 2,119,205.60 and Php 535,613.00 the amount paid by the latter to
IMC and LSPI, respectively.

ISSUE

WON respondent may claim against petitioner for the insured debt.

HELD

Yes, but the order to pay Php 535,613 is deleted for lack of factual basis.

The insurance policy is clear that the subject of the insurance is the book debts
and not goods sold and delivered to the customers and dealers of the insured.
 Under Art. 1504 of the Civil code, unless otherwise agreed, the goods remain at
the seller's risk until the ownership therein is transferred to the buyer, but when the
ownership therein is transferred to the buyer the goods are at the buyer's risk whether
actual delivery has been made or not; except where delivery of the goods has
been made to the buyer or to a bailee for the buyer, in pursuance of the
contract and the ownership in the goods has been retained by the seller
merely to secure performance by the buyer of his obligations under the
contract, the goods are at the buyer's risk from the time of such delivery.

IMC and LSPI did not lose complete interest over the goods. They have an
insurable interest until full payment of the value of the delivered goods. Unlike the civil
law concept of res perit domino, where ownership is the basis for consideration of who
bears the risk of loss, in property insurance, one's interest is not determined by concept
of title, but whether insured has substantial economic interest in the property.

Section 13 of our Insurance Code defines insurable interest as "every interest in

property, whether real or personal, or any relation thereto, or liability in respect thereof,
of such nature that a contemplated peril might directly damnify the insured."
Parenthetically, under Section 14 of the same Code, an insurable interest in property
may consist in: (a) an existing interest; (b) an inchoate interest founded on existing
interest; or (c) an expectancy, coupled with an existing interest in that out of which the
expectancy arises.

Anyone who derives a benefit from its existence or would suffer loss from its
destruction has an insurable interest in the said property.

The rationale that an obligor should be held exempt from liability when the loss
occurs thru a fortuitous event only holds true when the obligation consists in the
delivery of a determinate thing and there is no stipulation holding him liable even in
case of fortuitous event. It does not apply when the obligation is pecuniary in nature.

Re: deletion of Php 535,613.00

The subrogation receipt, by itself, is sufficient to establish not only the

relationship of respondent as insurer and IMC as the insured, but also the amount paid
to settle the insurance claim

Art. 2207 of the Civil Code states that if the plaintiff's property has been insured,
and he has received indemnity from the insurance company for the injury or loss arising
out of the wrong or breach of contract complained of, the insurance company shall be
subrogated to the rights of the insured against the wrongdoer or the person who has
violated the contract.
 However, LSPI failed to offer any subrogation receipt as evidence.
Failure to substantiate the claim of subrogation is fatal to petitioner's case for recovery
of the amount of P535,613.00.

GREAT PACIFIC LIFE ASS. CORP. VS. CA AND LEUTERIO, G.R. NO.
113899. OCT. 13, 1999
FACTS:

Great Pacific Life Assurance Corporation (Grepalife) executed a contract of group

life insurance with Development Bank of the Philippines (DBP) wherein Grepalife
agreed to insure the lives of eligible housing loan mortgagors of DBP.

One such loan mortgagor is Dr. Wilfredo Leuterio. In an application form, Dr.
Leuterio answered questions concerning his test, attesting among others that he does
not have any heart conditions and that he is in good health to the best of his knowledge.

However, after about a year, Dr. Leuterio died due to “massive cerebral
hemorrhage.” When DBP submitted a death claim to Grepalife, the latter denied the
claim, alleging that Dr. Leuterio did not disclose he had been suffering from
hypertension, which caused his death.

Allegedly, such non-disclosure constituted concealment that justified the denial

of the claim. Hence, the widow of the late Dr. Leuterio filed a complaint against
Grepalife for “Specific Performance with Damages.”

Both the trial court and the Court of Appeals found in favor of the widow and
ordered Grepalife to pay DBP.
 ISSUE:

Whether the CA erred in holding Grepalife liable to DBP as beneficiary in a group

life insurance contract from a complaint filed by the widow of the decedent/mortgagor

HELD:

The rationale of a group of insurance policy of mortgagors, otherwise known as

the “mortgage redemption insurance,” is a device for the protection of both the
mortgagee and the mortgagor.

On the part of the mortgagee, it has to enter into such form of contract so that in
the event of the unexpected demise of the mortgagor during the subsistence of the
mortgage contract, the proceeds from such insurance will be applied to the payment of
the mortgage debt, thereby relieving the heirs of the mortgagor from paying the
obligation.
In a similar vein, ample protection is given to the mortgagor under such a
concept so that in the event of death, the mortgage obligation will be extinguished by the
application of the insurance proceeds to the mortgage indebtedness.

In this type of policy insurance, the mortgagee is simply an appointee of the

insurance fund. Such loss-payable clause does not make the mortgagee a party to the
contract.

The insured, being the person with whom the contract was made, is primarily the
proper person to bring suit thereon.

Subject to some exceptions, insured may thus sue, although the policy is taken
wholly or in part for the benefit of another person, such as a mortgagee. And since a
policy of insurance upon life or health may pass by transfer, will or succession to any
person, whether he has an insurable interest or not, and such person may recover it
whatever the insured might have recovered, the widow of the decedent Dr. Leuterio may
file the suit against the insurer, Grepalife.
 WHEREFORE, the petition is hereby DENIED. The Decision and Resolution of
the Court of Appeals in CA-G.R. CV 18341 is AFFIRMED with MODIFICATION that the
petitioner is ORDERED to pay the insurance proceeds amounting to Eighty-six
thousand, two hundred (P86,200.00) pesos to the heirs of the insured, Dr. Wilfredo
Leuterio (deceased), upon presentation of proof of prior settlement of mortgagor's
indebtedness to Development Bank of the Philippines. Costs against
petitioner.1âwphi1.nêt SO ORDERED.
VICENTE ONG LIM SING, JR. VS. FEB LEASING & FINANCE CORP., G.R.
NO. 168115, JUNE 8, 2007

Facts: 

On March 9, 1995, FEB Leasing and Finance Corporation (FEB) entered into a
lease of equipment and motor vehicles with JVL Food Products (JVL). On the same
date, Vicente Ong Lim Sing, Jr. (Lim) executed an Individual Guaranty Agreement with
FEB to guarantee the prompt and faithful performance of the terms and conditions of
the aforesaid lease agreement.

Corresponding Lease Schedules with Delivery and Acceptance Certificates over

the equipment and motor vehicles formed part of the agreement. Under the contract,
JVL was obliged to pay FEB an aggregate gross monthly rental of One Hundred Seventy
Thousand Four Hundred Ninety-Four Pesos (P 170,494.00).

 JVL defaulted in the payment of the monthly rentals. As of July 31, 2000, the
amount in arrears, including penalty charges and insurance premiums, amounted to
Three Million Four Hundred Fourteen Thousand Four Hundred Sixty Eight and 75/100
Pesos (P3,414,468.75).

On August 23, 2000, FEB sent a letter to JVL demanding payment of the said
amount. However, JVL failed to pay.

Issue: 

Whether or not JVL as the lessee have an insurable interest over the leased items.

Held: 

Yes. The stipulation in Section 14 of the lease contract, that the equipment shall
be insured at the cost and expense of the lessee against loss, damage, or destruction
from fire, theft, accident, or other insurable risk for the full term of the lease, is a
binding and valid stipulation.
 Petitioner, as a lessee, has an insurable interest in the equipment and motor
vehicles leased. Section 17 of the Insurance Code provides that the measure of an
insurable interest in property is the extent to which the insured might be damnified by
loss or injury thereof.

It cannot be denied that JVL will be directly damnified in case of loss, damage, or
destruction of any of the properties leased.

It has also been held that the test of insurable interest in property is whether the
assured has a right, title or interest therein that he will be benefited by its preservation
and continued existence or suffer a direct pecuniary loss from its destruction or injury
by the peril insured against.

CONCEALMENT

GREAT PACIFIC LIFE ASS. CORP. VS. CA AND MEDARDA V. LEUTERIO

,G.R. NO. 113899. OCT. 13, 1999

Facts:
A contract of group life insurance was executed between petitioner Great Pacific
and Development Bank Grepalife agreed to insure the lives of eligible housing loan
mortgagors of DBP.
Wilfredo Leuterio, a physician and a housing debtor of DBP, applied for membership in
the group life insurance plan.  In an application form, Dr. Leuterio answered questions
concerning his health condition as follows:

“7.  Have you ever had, or consulted, a physician for a heart condition, high blood
pressure, cancer, diabetes, lung, kidney or stomach disorder or any other physical
impairment?

8.  Are you now, to the best of your knowledge, in good health?”

Grepalife issued a coverage to the value of P86,200.00 pesos.

Dr. Leuterio died due to “massive cerebral hemorrhage.” DBP submitted a death claim
to Grepalife.  Grepalife denied the claim alleging that Dr. Leuterio was not physically
healthy when he applied for an insurance coverage.  Grepalife insisted that Dr. Leuterio
did not disclose he had been suffering from hypertension, which caused his death. 
Allegedly, such non-disclosure constituted concealment that justified the denial of the
claim.

The widow, respondent Medarda V. Leuterio, filed against Grepalife.

The trial court rendered a decision in favor of respondent widow and against Grepalife. 
The Court of Appeals sustained the trial court’s decision. 

Issues:

1. Whether the Court of Appeals erred in holding petitioner liable to DBP as beneficiary
in a group life insurance contract from a complaint filed by the widow of the
decedent/mortgagor?

2. Whether the Court of Appeals erred in not finding that Dr. Leuterio
concealed that he had hypertension, which would vitiate the insurance
contract?

3. Whether the Court of Appeals erred in holding Grepalife liable in the amount of
eighty six thousand, two hundred (P86,200.00) pesos without proof of the actual
outstanding mortgage payable by the mortgagor to DBP.

Held: No to all three. Petition dismissed.

Ratio:

1. Petitioner alleges that the complaint was instituted by the widow of Dr. Leuterio, not
the real party in interest, hence the trial court acquired no jurisdiction over the case.  It
argues that when the Court of Appeals affirmed the trial court’s judgment, Grepalife was
held liable to pay the proceeds of insurance contract in favor of DBP, the indispensable
party who was not joined in the suit.
The insured private respondent did not cede to the mortgagee all his rights or interests
in the insurance, the policy stating that:  “In the event of the debtor’s death before his
indebtedness with the Creditor [DBP] shall have been fully paid, an amount to pay the
outstanding indebtedness shall first be paid to the creditor and the balance of sum
assured, if there is any, shall then be paid to the beneficiary/ies designated by the
debtor.” When DBP’s claim was denied, it collected the debt from the mortgagor and
took the necessary action of foreclosure on the residential lot of private respondent.

Gonzales vs. Yek Tong Lin- Insured, being the person with whom the contract was
made, is primarily the proper person to bring suit thereon.  Insured may thus sue,
although the policy is taken wholly or in part for the benefit of another person named or
unnamed, and although it is expressly made payable to another as his interest may
appear or otherwise.  Although a policy issued to a mortgagor is taken out for the benefit
of the mortgagee and is made payable to him, yet the mortgagor may sue thereon in his
own name, especially where the mortgagee’s interest is less than the full amount
recoverable under the policy. Insured may be regarded as the real party in interest,
although he has assigned the policy for the purpose of collection, or has assigned as
collateral security any judgment he may obtain.
And since a policy of insurance upon life or health may pass by transfer, will or
succession to any person, whether he has an insurable interest or not, and such person
may recover it whatever the insured might have recovered,[14] the widow of the
decedent Dr. Leuterio may file the suit against the insurer, Grepalife.

2. The medical findings were not conclusive because Dr. Mejia did
not conduct an autopsy on the body of the decedent.  The medical certificate
stated that hypertension was “the possible cause of death.” Hence, the
statement of the physician was properly considered by the trial court as
hearsay.
Contrary to appellant’s allegations, there was no sufficient proof that the
insured had suffered from hypertension.  Aside from the statement of the
insured’s widow who was not even sure if the medicines taken by Dr.
Leuterio were for hypertension, the appellant had not proven nor produced
any witness who could attest to Dr. Leuterio’s medical history.

Appellant insurance company had failed to establish that there was

concealment made by the insured, hence, it cannot refuse payment of the
claim.”
The fraudulent intent on the part of the insured must be established to
entitle the insurer to rescind the contract. Misrepresentation as a defense
of the insurer to avoid liability is an affirmative defense and the duty to
establish such defense by satisfactory and convincing evidence rests upon
the insurer.

3. A life insurance policy is a valued policy. Unless the interest of a person insured is
susceptible of exact pecuniary measurement, the measure of indemnity under a policy of
insurance upon life or health is the sum fixed in the policy. The mortgagor paid the
premium according to the coverage of his insurance.
In the event of the debtor’s death before his indebtedness with the creditor shall have
been fully paid, an amount to pay the outstanding indebtedness shall first be paid to the
creditor.
DBP foreclosed one of the deceased person’s lots to satisfy the mortgage. Hence, the
insurance proceeds shall inure to the benefit of the heirs of the deceased person or his
beneficiaries.

GREAT PACIFIC LIFE ASS. CO. VS. CA AND NGO HING, G.R. NO. L-31845,
APRIL 30, 1979

FACTS: 

It appears that on March 14, 1957, private respondent Ngo Hing filed an application
with the Great Pacific Life Assurance Company (hereinafter referred to as Pacific Life)
for a twenty-year endowment policy in the amount of P50,000.00 on the life of his one-
year old daughter Helen Go. Said respondent supplied the essential data which
petitioner Lapulapu D. Mondragon, Branch Manager of the Pacific Life in Cebu City
wrote on the corresponding form in his own handwriting (Exhibit I-M). Mondragon
finally type-wrote the data on the application form which was signed by private
respondent Ngo Hing. The latter paid the annual premium, the sum of P1,077.75 going
over to the Company, but he retained the amount of P1,317.00 as his commission for
being a duly authorized agent of Pacific Life. Upon the payment of the insurance
premium, the binding deposit receipt (Exhibit E) was issued to private respondent Ngo
Hing. Likewise, petitioner Mondragon handwrote at the bottom of the back page of the
application form his strong recommendation for the approval of the insurance
application. Then on April 30, 1957, Mondragon received a letter from Pacific Life
disapproving the insurance application (Exhibit 3-M). The letter stated that the said life
insurance application for 20-year endowment plan is not available for minors below
seven years old, but Pacific Life can consider the same under the Juvenile Triple Action
Plan, and advised that if the offer is acceptable, the Juvenile Non-Medical Declaration
be sent to the Company.
The non-acceptance of the insurance plan by Pacific Life was allegedly not
communicated by petitioner Mondragon to private respondent Ngo Hing. Instead, on
May 6, 1957, Mondragon wrote back Pacific Life again strongly recommending the
approval of the 20-year endowment life insurance on the ground that Pacific Life is the
only insurance company not selling the 20-year endowment insurance plan to children,
pointing out that since 1954 the customers, especially the Chinese, were asking for such
coverage (Exhibit 4-M).

It was when things were in such state that on May 28, 1957 Helen Go died of influenza
with complication of broncho-pneumonia. Thereupon, private respondent sought the
payment of the proceeds of the insurance, but having failed in his effort, he filed the
action for the recovery of the same before the Court of First Instance of Cebu, which
rendered the adverse decision as earlier referred to against both petitioners.

ISSUES: 

(1) whether the binding deposit receipt (Exhibit E) constituted a temporary contract of
the life insurance in question; NO

REPORT THIS AD
REPORT THIS AD
(2) whether private respondent Ngo Hing concealed the state of health and physical
condition of Helen Go, which rendered void the aforesaid Exhibit E. YES.

HELD:  INSURANCE CONTRACT; “BINDING DEPOSIT RECEIPT.” — Where the

binding deposit receipt is intended to be merely a provisional or temporary insurance
contract, and that the receipt merely acknowledged, on behalf of the insurance
company, that the latter’s branch office had received from the applicant the insurance
premium and had accepted the application subject for processing by the insurance
company, such binding deposit receipt does not become in force until the application is
approved.

PERFECTION OF CONTRACT. — A binding deposit receipt which is merely conditional

does not insure outright. Thus, where an agreement is made between the applicant and
the agent, no liability will attack until the principal approves the risk and a receipt is
given by the agent. The acceptance is merely conditional, and is subordinated to the act
of the company in approving or rejecting the application.
MEETING OF THE MIND. — A contract of insurance, like other contracts, must be
assented to by both parties either in person or by their agents. The contract, to be
binding from the date of the application, must have been a completed contract, one that
leaves nothing to be done, nothing to be completed, nothing to be passed upon, or
determined, before it shall take effect. There can be no contract of insurance unless the
minds of the parties have met in agreement.

FAILURE OF AGENT TO COMMUNICATE THE REJECTION TO APPLICANT. — The

failure of the insurance company’s agent to communicate to the applicant the rejection
of the insurance application would not have any adverse effect on the allegedly perfected
temporary contract. In the first place, there was no contract perfected between the
parties who had no meeting of their minds. Private respondent, being an authorized
agent is indubitably aware that said company does not offer the life insurance applied
for. When he filed the insurance application in dispute he was therefore only taking a
chance that the company will approve the recommendation of the agent for the
acceptance and approval of the application in question. Secondly, having an insurable
interest on the life of his daughter, aside from being an insurance agent and office
associate of the branch, the applicant must have known and followed the progress on
the processing of such application and could not pretend ignorance of the Company’s
rejection of the 20-year endowment life insurance application.

CONCEALMENT OF MATERIAL FACT. — The contract of insurance is one of perfect

good faith (uberrima fides meaning good faith; absolute and perfect candor or openness
and honestly; the absence of any concealment or deception, however slight [Black’s Law
Dictionary, 2nd Edition], not for the insured alone but equally so for the insurer.
Concealment is a neglect to communicate that which a party knows and ought to
communicate (Section 25, Act 2427). Whether intentional or unintentional, the
concealment entities the insurer to rescind the contract of insurance.

CASE AT BAR. — The failure of the father who applied for a life insurance policy on the
life of his daughter to divulge the fact that his daughter is a mongoloid, a congenital
physical defect that could never be disguised, constitutes such concealment as to render
the policy void. And where the applicant himself is an insurance agent, he ought to
know, as he surely must have known, his duty and responsibility to supply such a
material fact, and his failure to divulge such significant fact is deemed to have been done
in bad faith.

SATURNINO VS. PHIL. AMERICAN LIFE 7, SCRA 316, 319

Facts:

>  2 months prior to the insurance of the policy, Saturnino was operated on for cancer,
involving complete removal of the right breast, including the pectoral muscles and the
glands, found in the right armpit.

>  Notwithstanding the fact of her operation, Saturnino did not make a disclosure
thereof in her application for insurance.

>  She stated therein that she did not have, nor had she ever had, among others listed in
the application, cancer or other tumors; that she had not consulted any physician,
undergone any operation or suffered any injury within the preceding 5 years.

>  She also stated that she had never been treated for, nor did she ever have any illness
or disease peculiar to her sex, particularly of the breast, ovaries, uterus and menstrual
disorders.

>  The application also recited that the declarations of Saturnino constituted a further
basis for the issuance of the policy.

Issue: Whether or not the failure of Saturnino to disclose the severity of his previous
illness is material to the avoidance of the insurance policy.

Held: Yes. In the application for insurance signed by the insured in this case, she
agreed to submit to a medical examination by a duly appointed examiner of appellee if
in the latter’s opinion such examination was necessary as further evidence of
insurability. In not asking her to submit to a medical examination, appellants maintain,
appellee was guilty of negligence, which precluded it from finding about her actual state
of health. No such negligence can be imputed to appellee. It was precisely because the
insured had given herself a clean bill of health that appellee no longer considered an
actual medical checkup necessary.

In the first place the concealment of the fact of the operation itself was fraudulent, as
there could not have been any mistake about it, no matter what the ailment. Secondly, in
order to avoid a policy it is not necessary to show actual fraud on the part of the insured.

In this jurisdiction a concealment, whether intentional or unintentional, entitles the

insurer to rescind the contract of insurance, concealment being defined as “negligence
to communicate that which a party knows and ought to communicate” (Sections 24 &
26, Act No. 2427). In the case of Argente v. West Coast Life Insurance Co., 51 Phil. 725,
732, this Court said, quoting from Joyce, The Law of Insurance, 2nd ed., Vol. 3:
“The basis of the rule vitiating the contract in cases of concealment is that it misleads or
deceives the insurer into accepting the risk, or accepting it at the rate of premium agreed
upon. The insurer, relying upon the belief that the assured will disclose every material
fact within his actual or presumed knowledge, is misled into a belief that the
circumstance withheld does not exist, and he is thereby induced to estimate the risk
upon a false basis that it does not exist.”

MA. LOURDES S. FLORENDO VS. PHILAM PLANS, INC., ET. AL., G.R. NO.
186983, FEB. 22, 2012

FACTS:

Manuel Florendo filed an application for comprehensive pension plan with respondent
Philam Plans, Inc. (Philam Plans).

Manuel signed the application and left to Perla the task of supplying the information
needed in the application.

Respondent Ma. Celeste Abcede, Perla’s daughter, signed the application as sales
counselor.

Philam Plans issued Pension Plan Agreement to Manuel, with petitioner Ma. Lourdes S.
Florendo, his wife, as beneficiary. In time, Manuel paid his quarterly premiums. Eleven
months later, Manuel died of blood poisoning.

Subsequently, Lourdes filed a claim with Philam Plans for the payment of the benefits
under her husband’s plan but Philam Plans declined her claim prompting her to file the
present action against the pension plan company before the Regional Trial Court (RTC)
of Quezon City and ruled in favor of Ma. Lourdes.

However, the Court of Appeals then reversed the RTC decision. Hence this appeal.

ISSUE:

Whether or not Ma. Lourdes could claim benefits as the beneficiary of her husband
under the insurance plan despite consideration that her husband Manuel concealed the
true condition of his health.

RULING:

The Supreme Court answers this to the negative and the AFFIRMED in its entirety the
decision of the Court of Appeals.
The comprehensive pension plan that Philam Plans issued contains a one-year
incontestability period. It states:

VIII. INCONTESTABILITY

After this Agreement has remained in force for one (1) year, we can no longer contest for
health reasons any claim for insurance under this Agreement, except for the reason that
installment has not been paid (lapsed), or that you are not insurable at the time you
bought this pension program by reason of age. If this Agreement lapses but is reinstated
afterwards, the one (1) year contestability period shall start again on the date of
approval of your request for reinstatement.

The above incontestability clause precludes the insurer from disowning liability
under the policy it issued on the ground of concealment or misrepresentation regarding
the health of the insured after a year of its issuance.

Since Manuel died on the eleventh month following the issuance of his plan, the
one year incontestability period has not yet set in. Consequently, Philam Plans was not
barred from questioning Lourdes’ entitlement to the benefits of her husband’s pension
plan.

Sun Life of Canada (Phils.), Inc. vs. Ma. Daisy's. Sibya, et. al., G.R. No. 211212, June 08,
2016