5. separate juridical personality and doctrine of piercing the veil of corporate fictions

CORPORATION LAW REVIEWER (2013-‐2014) ATTY. JOSE MARIA G. HOFILEÑA

NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

SEPARATE JURIDICAL PERSONALITY AND DOCTRINE OF PIERCING THE VEIL OF CORPORATE FICTION

I. MAIN DOCTRINE: A Corporation Has A Personality Separate and Distinct from its Stockholders or Members. (Sec. 2; Article 44, Civil Code) Section 2. Corporation defined. A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence. CIVIL CODE Article 44. The following are juridical persons: 1. The State and its political subdivisions; 2. Other corporations, institutions and entities for public interest or purpose, created by law; their personality begins as soon as they have been constituted according to law; 3. Corporations, partnerships and associations for private interest or purpose to which the law grants a juridical personality, separate and distinct from that of each shareholder, partner or member. (35a) A. Importance of Main Doctrine:

• A corporation, upon coming into existence, is invested by law with a personality separate and distinct from those persons

composing it as well as from any other legal entity to which it may be related, with the following consequences:

1. The first consequence of the doctrine of legal entity of the separate personality of the corporation may not be made to answer for acts and liabilities of its stockholders or those of legal entities to which it may be connected or vice versa. General Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007);1

2. This separate and distinct personality is, however, merely a fiction created by law for conveyance and to promote the “ends of justice.” LBP v. Court of Appeals, 364 SCRA 375 (2001).2

B. Applications:

1. Majority Equity Ownership and Interlocking Directorship: • Mere ownership by a single stockholder or by another

corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality. Sunio v. NLRC , 127 SCRA 390 (1984).3

1 McLeod v. NLRC, 512 SCRA 222 (2007); Uy v. Villanueva, 526 SCRA 73 (2007); Pantranco Employees Association (PEA-‐ PTGWO) v. NLRC, 581 SCRA 598 (2009); Shrimp Specialists, Inc. v. Fuji-‐Triumph Agri-‐Industrial Corp., 608 SCRA 1 (2009). 2 Martinez v. Court of Appeals, 438 SCRA 139 (2004); Prudential Bank v. Alviar, 464 SCRA 353 (2005); EDSA Shangri-‐La Hotel and Resorts, Inc. v. BF Corp., 556 SCRA 25 (2008); Siain Enterprises, Inc v. Cupertino Realty Corp., 590 SCRA 435 (2009). 3 Asionics Philippines, Inc. v. NLRC, 290 SCRA 164 (1998); Francisco v. Mejia, 362 SCRA 738 (2001); Matutina Integrated Wood Products, Inc. v. CA, 263 SCRA 490 (1996); Manila Hotel Corp. v. NLRC, 343 SCRA 1 (2000); Secosa v. Heirs of Erwin Suarez Fancisco, 433 SCRA 273 (2004); EDSA Shangri-‐La Hotel and Resorts, Inc.



• Ownership of a majority of capital stock and the fact that majority of directors of a corporation are the directors of another corporation creates no employer-‐employee relationship with the latter’s employees. DBP v. NLRC, 186 SCRA 841 (1990).1

• Having interlocking directors, corporate officers and shareholders is not enough justification to pierce the veil of corporate fiction in the absence of fraud or other public policy considerations. Velarde v. Lopez, 419 SCRA 422 (2004).2

2. Being Corporate Officer: • Being an officer or stockholder of a corporation does not by

itself make one’s property also that of the corporation, and vice-‐versa, for they are separate entities, and that shareholders who are officers are in no legal sense the owners of corporate property which is owned by the corporation as a distinct legal person. Good Earth Emporium, Inc. v. CA, 194 SCRA 544 (1991).3

• The mere fact that one is President does not render the property he owns the property of the corporation, since the president, as an individual, and the corporation are separate

v. BF Corp., 556 SCRA 25 (2008); Pantranco Employees Association (PEA-‐PTGWO) v. NLRC, 581 SCRA 598 (2009). 1 Also Suldao v. Cimech System Construction, Inc., 506 SCRA 256 (2006); Union Bank of the Philippines v. Ong, 491 SCRA 581 (2006); Shrimp Specialists, Inc. v. Fuji-‐Triumph Agri-‐Industrial Corp., 608 SCRA 1 (2009); Hacienda Luisita, Inc. v. Presidential Agrarian Reform Council, 660 SCRA 525 (2011). 2 Also Sesbreno v. Court of Appeals, 222 SCRA 466 (1993); “G” Holdings, Inc. v. National Mines and Allied Workers Union Local, 103 (NAMAWU), 604 SCRA 73 (2010). 3 Bautista v. Auto Plus Traders, Inc. 561 SCRA 223 (2008); Prisma Construction & Dev. Corp. v. Menchavez, 614 SCRA 590 (2010).

entities. Cruz v. Dalisay, 152 SCRA 487 (1987); Booc v. Bantuas, 354 SCRA 279 (2001).

• It is hornbook law that corporate personality is a shield against personal liability of its officers – a corporate officer and his spouse cannot be made personally liable under a trust receipt where he entered into and signed the contract clearly in his official capacity. Intestate Estate of Alexander T. Ty v. Court of Appeals, 356 SCRA 61 (2001).4

• The President of the corporation which becomes liable for the accident caused by its truck driver cannot be held solidarily liable for the judgment obligation arising from quasi-‐delict, since the fact alone of being President is not sufficient to hold him solidarily liable for the liabilities adjudged against the corporation and its employee. Secosa v. Heirs of Erwin Suarez Fancisco, 433 SCRA 273 (2004).

• When the compulsory counterclaim filed against corporate officers for their alleged fraudulent act indicate that such corporate officers are indispensable parties in the litigation, the original inclusion of the corporation in the suit does not thereby allow the denial of a specific counter-‐claim being filed to make the corporate officers personally liable. A corporation has a legal personality entirely separate and distinct from that of its officers and cannot act for and on their behalf, without being so authorized. Lafarge Cement Phils., Inc. v. Continental Cement Corp., 443 SCRA 522 (2004).

3. Dealings Between Corporation and Stockholders:

4 Consolidated Bank and Trust Corp. v. Court of Appeals, 356 SCRA 671 (2001).�



• The fact that the majority stockholder had used his own money to pay part of the loan of the corporation cannot be used as the basis to pierce: “It is understandable that a shareholder would want to help his corporation and in the process, assure that his stakes in the said corporation are secured.” LBP v. Court of Appeals, 364 SCRA 375 (2001).

• Use of a controlling stockholder’s initials in the corporate name is not sufficient reason to pierce, since by that practice alone does it mean that the said corporation is merely a dummy of the individual stockholder, provided such act is lawful. LBP v. Court of Appeals, 364 SCRA 375 (2001).

• Just because two foreign companies came from the same country and closely worked together on certain projects would the conclusion arise that one was the conduit of the other, thus piercing the veil of corporate fiction. Marubeni Corp. v. Lirag, 362 SCRA 620 (2001).

4. On the Properties of the Corporation: • The creation by DBP as the mother company of the three mining

corporations to manage and operate the assets acquired in the foreclosure sale lest they deteriorate from non-‐use and lose their value, does not indicate fraud or wrongdoing and will not constitute application of the piercing doctrine. DBP v. Court of Appeals, 363 SCRA 307 (2001).

5. On Privileges Enjoyed: • The tax exemption clause in the charter of a corporation cannot

be extended to nor enjoyed even by the controlling stockholders. Manila Gas Corp. v. Collector of Internal Revenue, 62 Phil. 895 (1936).

6. Obligations and Debts:

• Debts incurred by directors, officers, and employees acting as corporate agents are not their direct liability but of the corporation they represent. Crisologo v. People, 686 SCRA 782 (2012); Heirs of Fe Tan Uy v. International Exchange Bank, 690 SCRA 519 (2013).

o Corporate debt or credit is not the debt or credit of the stockholder nor is the stockholder's debt or credit that of the corporation. Traders Royal Bank v. CA, 177 SCRA 789 (1989).

o A corporation has no legal standing to file a suit for recovery of certain parcels of land owned by its members in their individual capacity, even when the corporation is organized for the benefit of the members. Sulo ng Bayan v. Araneta, Inc., 72 SCRA 347 (1976).

o Stockholders have no personality to intervene in a collection case covering the loans of the corporation since the interest of shareholders in corporate property is purely inchoate. Saw v. CA, 195 SCRA 740 (1991); and vice-‐versa Francisco Motors Corp. v. Court of Appeals, 309 SCRA 72 (1999).

• The majority stockholder cannot be held personality liable for the attorney’s fees charged by a lawyer for representing the corporation. Laperal Dev. Corp. v. CA, 223 SCRA 261 (1993).

• The obligations of a stockholder in one corporation cannot be offset from the obligation of the stockholder in a second corporation, since the corporation has a separate juridical personality. CKH Industrial and Dev. Corp v. Court of Appeals, 272 SCRA 333 (1997).



• A corporate defendant against whom a writ of possession has been issued, cannot use the fact that it has obtained controlling equities in the corporate plaintiffs to suspend enforcement of the writ, for they are separate juridical persons, and thus their separate business and proprietary interests remain. Silverio, Jr. v. Filipino Business Consultants, Inc., 466 SCRA 584 (2005).

II. PIERCING THE VEIL OF CORPORATE FICTION: A. Source of Incantation: U.S. v. Milwaukee Refrigerator Transit Co., 142 Fed. 247 (1905).

U.S. v. Milwaukee Refrigerator Transit Co.

Facts: The Elkins Act was enacted to prohibit railroads from giving and receiving of unlawful rebates. After the enactment of the said Act, officers of a brewing company, who were also its controlling stockholders, organized a transit company named Milwaukee Refrigerator Transit, et al and became its officers and the owners of all of its stock. On behalf of the brewing company, the officers contracted with the transit company to make all the shipments for the brewing company. The transit company contracted for shipments with interstate carriers, where they would only pay it from 1/10 to 1/8 of the published rate, for the transportation, supposedly as a commission for obtaining the business, but was known really a rebate for the benefit of the brewing company. Issue: Whether or not a corporation organized and owned by the officers and stockholders of another is in fact an independent

corporation. Held: NO. The transit company was created with intent to evade the law making the transit company as a mere alter ego of the brewing corporation, both being substantially identical in interest and control, and the brewing company the ultimate beneficiary. It clearly appears that the shipper practically controls the transit company, and this shows a sufficient identity of interest among the shareholders of both. Doctrine: As a general rule, a corporation will be looked upon as a legal entity, until sufficient reason to the contrary appears. An exception to this is when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, defend crime, the law will regard the corporation as an association of persons; and, where one corporation was organized and is owned by the officers and stockholders of another, making their interests identical, they may be treated as identical when the interests of justice require it.

• As a general rule, a corporation will be looked upon as a legal entity, unless and until sufficient reason to the contrary appears. When the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons. Also, the corporate entity may be disregarded in the interest of justice in such cases as fraud that may work inequities among members of the corporation internally, involving no rights of the public or third persons. In both instances, there must have been fraud and proof of it. For the separate juridical personality of a corporation to be disregarded, the wrong-‐doing must be clearly



and convincingly established. It cannot be presumed. Suldao v. Cimech System Construction, Inc., 506 SCRA 256 (2006).

• The legal fiction of separate corporate existence is not at all times invincible and the same may be pierced when employed as a means to perpetrate a fraud, confuse legitimate issues, or used as a vehicle to promote unfair objectives or to shield an otherwise blatant violation of the prohibition against forum-‐ shopping. While it is settled that the piercing of the corporate veil has to be done with caution, this corporate fiction may be disregarded when necessary in the interest of justice. Rovels Enterprises, Inc. v. Ocampo, 391 SCRA 176 (2002).

o The notion of corporate entity will be pierced or disregarded and the individuals composing it will be treated as identical if the corporate entity is being used as a cloak or cover for fraud or illegality; as a justification for a wrong; or as an alter ego, an adjunct, or a business conduit for the sole benefit of the stockholders. Gochan v. Young, 354 SCRA 207 (2001).1

B. Objectives and Effect of the Application of the Doctrine

• Under the doctrine of “piercing the veil of corporate fiction,” the courts look at the corporation as a mere collection of individuals or an aggregation of persons undertaking business as a group, disregarding the separate juridical personality of the

1 DBP v. Court of Appeals, 357 SCRA 626, 358 SCRA 501, 363 SCRA 307 (2001); Velarde v. Lopez, 419 SCRA 422 (2004); R & E Transport, Inc. v. Latag, 422 SCRA 698 (2004);.Secosa v. Heirs of Erwin Suarez Fancisco, 433 SCRA 273 (2004); Martinez v. Court of Appeals, 438 SCRA 139 (2004); McLeod v. NLRC, 512 SCRA 222 (2007); Siain Enterprises, Inc v. Cupertino Realty Corp., 590 SCRA 435 (2009).

corporation unifying the group. Traders Royal Bank v. Court of Appeals, 269 SCRA 15 (1997).2

Traders Royal Bank v. Court of Appeals

Facts: Central Bank Certificates of Indebtedness (CBCIs) under the name of Filriters were transferred by the Filriters Senior Vice President for Treasury Alfredo Banaria to PhilFinance (a company which also owns 90% of Filriters). PhilFinace then entered into a repurchase agreement with the petitioner Traders Royal Bank (TRB) wherein PhilFinace sold the CBCIs to TRB then pay installments to buy back the same. PhilFinance defaulted in its payments and hence, forfeited the CBCIs in favor of TRB. TRB sought to transfer the CBCIs (still under the name of Filriters) under its name but was refused by the Central Bank. Filriters interposed the defense of invalidity of the initial transfer to Philfinance. The initial transfer was done by Banaria without any board resolution knowledge or consent of the Board of Directors, and without authority from the Insurance Commissioner.

Filriters à Philfinance à Trader’s Royal Bank Issue: Whether or not the veil of corporate entity must be pierce on the basis of the allegation that Filriters was 90% owned by PhilFinace and that although they are separate entities on paper, they have used their corporate fiction to defraud TRB. Held: NO. The corporate separateness between Filriters and Philfinance

2 Pantranco Employees Association (PEA-‐PTGWO) v. NLRC, 581 SCRA 598 (2009)



remains, despite the petitioners insistence on the contrary. For one, other than the allegation that Filriters is 90% owned by Philfinance, and the identity of one shall be maintained as to the other, there is nothing else which could lead the court under circumstance to disregard their corporate personalities. The fact that Filfinance owns majority shares in Filriters is not by itself a ground to disregard the independent corporate status of Filriters. In the case at bar, there is sufficient showing that the petitioner was not defrauded at all when it acquired the subject certificate of indebtedness from Philfinance. On its face the subject certificates states that it is registered in the name of Filriters. This should have put the petitioner on notice, and prompted it to inquire from Filriters as to Philfinance's title over the same or its authority to assign the certificate. As it is, there is no showing to the effect that petitioner had any dealings whatsoever with Filriters, nor did it make inquiries as to the ownership of the certificate. Because the transfer of the CBCIs from Filriters to PhilFinance was fictitious, PhilFinance had no title to convey to TRB. Consequently, the title of Filriters over the CBCIs must be upheld over the interest claimed by TRB. Doctrine: This doctrine may not be employed by a corporation to be able to complete its claims against another corporation, and cannot therefore be employed by the claimant who does not interpose to be the victim of any wrong or fraud. In order to pierce the veil of corporate entity, the court must be sure that the corporate fiction was misused to such an extent that injustice, fraud or crime was committed upon another, disregarding, thus, his, her, or its rights. It is the protection of the interests of innocent third persons dealing with the corporate entity

which the law aims to protect by this doctrine. (“Victim Standing”)

• “The rationale behind piercing a corporation’s identity in a given case is to remove the barrier between the corporation from the persons comprising it to thwart the fraudulent and illegal schemes of those who use the corporate personality as a shield for undertaking certain proscribed activities. However, in the case at bar, instead of holding certain individuals or person responsible for an alleged corporate act, the situation has been reversed. It is the petitioner as a corporation which is being ordered to answer for the personal liability of certain individual directors, officers and incorporators concerned. Hence, it appears to us that the doctrine has been turned upside down because of its erroneous invocation.” Francisco Motors Corp. v. CA, 309 SCRA 72 (1999).

Francisco Motors Corp. v. CA

Facts: Francisco Motors Corporation (FMC) filed a complaint against Spouses Gregorio and Librada Manuel to recover a sum of money representing the balance of the jeep body purchased, and an additional sum representing the unpaid balance on the cost of repair of the vehicle. Spouses Manuel interposed a counterclaim for unpaid legal services by Gregorio Manuel, which was not paid by the incorporators, directors and officers of the FMC. Manuel alleges that he represented members of the Francisco family in the intestate estate proceedings of the late Benita Trinidad. However, after the termination of the proceedings, his services were not paid. Said family members, he said, were also incorporators, directors and officers of petitioner.



Issue: Whether or not the doctrine of “piercing the veil of corporate fiction” can be applied to hold the company liable for unpaid legal services rendered to its incorporators in an intestate proceeding. Held: NO. Gregorio Manuel his services were solicited as counsel for members of the Francisco family to represent them in the intestate proceedings over Benita Trinidad’s estate. These estate proceedings did not involve any business of FMC. His move to recover unpaid legal fees through a counterclaim against Francisco Motors Corporation, to offset the unpaid balance of the purchase and repair of a jeep body could only result from an obvious misapprehension that FMC’s corporate assets could be used to answer for the liabilities of its individual directors, officers, and incorporators. Such result if permitted could easily prejudice the corporation. Whatever obligation said incorporators, directors and officers of the corporation had incurred, it was incurred in their personal capacity. In conclusion, FMC cannot be held responsible. Doctrine: The rationale behind piercing a corporation’s identity in a given case is to remove the barrier between the corporation from the persons comprising it to thwart the fraudulent and illegal schemes of those who use the corporate personality as a shield for undertaking certain proscribed activities.

• Atty. Hofileña à Can there be a situation whereby the Court will allow a case against an individual to be a basis for reaching the corporation’s assets? YES. But not on the sole basis that you personally don’t have properties to satisfy your personal obligations. There may conceivably be situations wherein the

individual hid his assets in a corporation. See Emilio Cano Enterprises v. CIR, 13 SCRA 291 (1965).

• Another formulation of this doctrine is that when two (2) business enterprises are owned, conducted and controlled by the same parties, both law and equity will, when necessary to protect the rights of third parties, disregard the legal fiction that two corporations are distinct entitled and treat them as identical or one and the same. General Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007).1

o The attempt to make the security agencies appear as two separate entities, when in reality they were but one, was a devise to defeat the law [i.e., in this case to avoid liabilities under labor laws] and should not be permitted. Enriquez Security Services, Inc. v. Cabotaje, 496 SCRA 169 (2006).

1. Recent Attempts to Narrow the Objectives for Availing of Piercing:

• Piercing is not allowed unless the remedy sought is to make the officer or another corporation pecuniarily liable for corporate debts. Indophil Textile Mill Workers Union-‐PTGWO v. Calica, 205 SCRA 697 (1992).

Indophil Textile Mill Workers Union-‐PTGWO v. Calica

Facts: Indophil Textile and the petitioner executed a Collective Bargaining Agreement (CBA) whereby the petitioner is the exclusive

1 Marques v. Far East Bank and Trust Co., 639 SCRA 312 (2011); Sarona v. NLRC, 663 SCRA 394 (2012); PNB v. Hydro Resources Contractors Corp., 693 SCRA 294 (2013).



bargaining agent of all the rank-‐and-‐file employees of Indophil Textile Mills, Incorporated. Later, Indophil Acrylic Manufacturing Corporation was formed, and its employees also unionized and executed a CBA with the said corporation. In 1990 or a year after the workers of Acrylic have been unionized and a CBA executed, the petitioner union claimed that the plant facilities built and set up by Acrylic should be considered as an extension or expansion of the facilities of respondent Company. Issue: Whether or not Indophil Acrylic is but an extension of Indophil Textile, and as such the workers of Indophil Acrylic may be considered as part of the bargaining unit of Indophil Textile. Held: NO. The fact that the businesses of private respondent and Acrylic are related, that some of the employees of the private respondent are the same persons manning and providing for auxiliary services to the units of Acrylic, and that the physical plants, offices and facilities are situated in the same compound, it is our considered opinion that these facts are not sufficient to justify the piercing of the corporate veil of Acrylic. Hence, Indophil Acrylic not being an extension or expansion of private respondent, Indophil Textile, the rank-‐ and-‐file employees of Acrylic should not be recognized as the bargaining representative of private respondent. � Doctrine: We already emphasized that "the legal corporate entity is disregarded only if it is sought to hold the officers and stockholders directly liable for a corporate debt or obligation." In the instant case, petitioner does not seek to impose a claim against the members of the Acrylic.

• BUT SEE: La Campana Coffee Factory v. Kaisahan ng Manggagawa, 93 Phil. 160 (1953).

La Campana Coffee Factory v. Kaisahan ng Manggagawa

Facts: Tan Tong and his family own two corporations, namely: La Campana Gaugau Packing (The Gaugau Corporation) and La Campana Coffee Factory, Inc. (The Coffee Corporation). Both are located in the same office in Espana. In 1951, the laborers of the two corporations of Tan Tong formed a labor union named as Kaisahan ng Manggagawa sa La Compana (The Kaisahan). The 66 members of which are under one payroll of the two corporations. A dispute arose between Tan Tong and Kaisahan when they could not agree concerning increased wages under the corporate bargaining agreement, and this was given to the Court of Industrial Relations. Tan Tong now pushes for the dismissal of the case in the Court of Industrial Relations for lack of jurisdiction. The claim that the number of workers in the La Campana Coffee Factory is only 14 and the Court of Industrial Relations requires that to have jurisdiction over a dispute, an organization must have at least 31 members. Issue: Whether or not La Campana Gaugau Packing (The Gaugau Corporation) and La Campana Coffee Factory, Inc. (The Coffee Corporation) are one and the same, and therefore the dispute would be within the jurisdiction of the Court of Industrial Relations. Held: YES. It has been proven that the corporations owned by Tan Tong are merely one and the same. This is for the fact that they are based in



only one office, its goods (gaugau and coffee) are stored in one place and in one warehouse, delivery trucks indicate deliveries of both gaugau and coffee. It is also stated that the employees receive their salaries from only one payroll and from one Natividad Garcia, Tan Tong’s secretary. In this case, the court treats the two companies as one. Therefore, the count of employees should be taken as a whole, which is 66, very well above the minimum number required for the Court of Industrial Relations to acquire jurisdiction. Doctrine: The law treats two corporations as one, in a case filed against them, when they have only one management, set of shareholders, office, and payroll.

2. Applicable to “Third-‐Parties”: • That respondents are not stockholders of the sister corporations

does not make them non-‐parties to this case, since it is alleged that the sister corporations are mere alter egos of the directors-‐petitioners, and that the sister corporations acquired the properties sought to be reconveyed to FGSRC in violation of directors-‐petitioners’ fiduciary duty to FGSRC. The notion of corporate entity will be pierced and the individuals composing it will be treated as identical if the corporate entity is being used as a cloak or cover for fraud or illegality; as a justification for a wrong; or as an alter ego, an adjunct, or a business conduit for the sole benefit of the stockholders. Gochan v. Young, 354 SCRA 207 (2001).

Gochan v. Young

Facts: Felix Gochan and Sons Realty Corporation (FGSRC) was registered under the SEC on June, 1951 with Felix Gochan, Sr. as one of the incorporators. Felix’s daughter, Alice, is the mother of the respondents. Upon the death of Alice and later her husband, the certificates were still under the name of John Young Sr., not their children. Four years later, the Uys and the Youngs filed a complaint against the directors of FGSRC with the SEC alleging that the directors were using the corporation for fraudulent purposes. FGSRC apparently sold some of its real properties to 2 other corporations, with these corporations having the same directors as FGSRC. Issue: Whether or not a derivative may be brought by the Uys in behalf of the corporation against the FGSRC directors. Held: YES. As the complaint already avers that the corporation suffered damage as a result of the action of the directors, the derivative suit could prosper. The complainants need not be stockholders of the two other corporations in order to make them parties to the case. On the complaint, it was stated that the directors were using those 2 other corporations as alter-‐egos, and the Uys and Youngs wanted the lands sold to these two corporations reconveyed in the name of FGSRC. The other two corporations to whom the properties were being transferred have the same stockholders, and the fact that they were not stockholders in those companies cannot prevent Uy and Young from suing them since FGSRC and those two companies would be one the same. There was an intent to defraud Uy and Young by hiding the properties in the other corporations. Doctrine: The notion of corporate entity will be pierced or disregarded



and the individuals composing it will be treated as identical if, as alleged here, the corporate entity is being used as a cloak or cover for fraud or illegality; as a justification for a wrong; or as an alter-‐ego, an adjunct, or a business conduit for the sole benefit of the stockholders. C. Nature of the Piercing Doctrine as an Equitable Remedy: The doctrine of piercing the corporate veil is an equitable doctrine developed to address situations where the separate corporate personality of a corporation is abused or used for wrongful purposes. PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001). CONSEQUENTLY:

PNB v. Ritratto Group, Inc. Facts: PNB International Finance Ltd. (PNB-‐IFL), a subsidiary company of PNB, extended credit to Ritratto and secured by the real estate mortgages on four parcels of land. Since there was default, PNB-‐IFL (thru PNB as its attorney-‐in-‐fact) foreclosed the properties and were subject to public auction. Ritratto Group filed a complaint for injunction against PNB claiming that that PNB is merely an alter ego or a business conduit of PNB-‐IFL that is why it is being impleaded in the case. Issue: Whether or not PNB is a mere alter-‐ego of PNB-‐IFL. Held: NO. The contract questioned is one entered into between respondent and PNB-‐IFL. PNB is a mere attorney-‐in-‐ fact for the PNB-‐IFL with full power and authority to foreclose on the properties mortgaged to secure their loan obligations with PNB-‐IFL. In other words, PNB is an agent with limited authority and specific duties. It is not privy to the loan contracts entered into by respondents and PNB-‐IFL.

In any case, the parent-‐subsidiary relationship between PNB and PNB-‐IFL is not the significant legal relationship involved in this case since the petitioner was not sued as the parent company of PNB-‐IFL. Rather, the petitioner was sued because it acted as an attorney-‐in-‐fact of PNB-‐IFL in initiating the foreclosure proceedings. A suit against an agent cannot without compelling reasons be considered a suit against the principal. Doctrine: The Circumstance rendering the subsidiary an instrumentality. It is manifestly impossible to catalogue the infinite variations of fact that can arise but there are certain common circumstances which are important and which, if present in the proper combination, are controlling. These are as follows:

1. The parent corporation owns all or most of the capital stock of the subsidiary.

2. The parent and subsidiary corporations have common directors or officers.

3. The parent corporation finances the subsidiary. 4. The parent corporation subscribes to all the capital stock of the

subsidiary or otherwise causes its incorporation. 5. The subsidiary has grossly inadequate capital. 6. The parent corporation pays the salaries and other expenses or

losses of the subsidiary. 7. The subsidiary has substantially no business except with the

parent corporation or no assets except those conveyed to or by the parent corporation.

8. In the papers of the parent corporation or in the statements of its officers, the subsidiary is described as a department or division of the parent corporation, or its business or financial



responsibility is referred to as the parent corporation’s own. 9. The parent corporation uses the property of the subsidiary as its

own. 10. The directors or executives of the subsidiary do not act

independently in the interest of the subsidiary but take their orders from the parent corporation.

11. The formal legal requirements of the subsidiary are not observed.

NOTE: Atty. Hofileña à What level of control is necessary for a subsidiary company to be considered as a mere alter-‐ego of the parent company? Domination. The parent corporation must dominate the subsidiary, and it must be the reason behind the latter’s incorporation.

1. It is a Remedy of Last Resort: Piercing the corporate veil is

remedy of last resort and is not available when other remedies are still available. Umali v. Court of Appeals, 189 SCRA 529 (1990).

Umali v. Court of Appeals

Facts: The Castillo family owns a parcel of land in Lucena City which was mortgaged to the Development Bank of the Philippines. For failing to pay, the property was about to be foreclosed. Santiago Rivera, nephew of Mauricia Castillo, proposed that the 4 lots adjacent to the mortgaged property be converted into a subdivision to raise funds to redeem the mortgaged lot. Thus, Castillo and Rivera executed an agreement whereby Rivera would pay the Castillos for the development project.

Rivera then approached Modesto Cervantes, president of Bormaheco, and bought a Caterpillar Tractor, which was also the chattel mortgage in favor of Bormaheco. This sale was secured by Insurance Corporation of the Philippines, and re-‐insured by an Agreement of Counter Guaranty whereby as security for the bond given by ICP, the Castillos mortgaged to ICP the 4 parcels of land. The 4 parcels of land were foreclosed by ICP for violation of the terms and conditions of the Counter Guaranty. These were then sold by ICP to Phil. Machinery Parts Manufacturing Co. (also owned by Modesto Cervantes) who then sent a letter to Mauricia Castillo asking her to vacate the property. The heirs of the late Felipe Castillo filed an action for annulment of title before the CFI of Quezon contending that all the aforementioned transactions are void for being entered into in fraud and without the consent and approval of the CFI of Quezon before whom the administration proceedings was proceeding. Issue: Whether or not the doctrine of piercing the veil of corporate entity should be applied against the respondent-‐Corporations. Held: NO. In the case at bar, petitioners seek to pierce the veil of corporate entity of Bormaheco, ICP and PM Parts, alleging that these corporations employed fraud in causing the foreclosure and subsequent sale of the real properties belonging to petitioners. While we do not discount the possibility of the existence of fraud in the foreclosure proceeding, neither are we inclined to apply the doctrine invoked by petitioners in granting the relief sought. Petitioners are merely seeking the declaration of the nullity of the foreclosure sale, which relief may be



obtained without having to disregard the aforesaid corporate fiction attaching to respondent corporations. Secondly, petitioners failed to establish by clear and convincing evidence that private respondents were purposely formed and operated, and thereafter transacted with petitioners, with the sole intention of defrauding the latter. It must be noted that Modesto N. Cervantes served as Vice-‐President of Bormaheco and, later, as President of PM Parts. On this fact alone, it cannot be said that PM Parts had no knowledge of the aforesaid several transactions executed between Bormaheco and petitioners. Doctrine: The mere fact that the businesses of two or more corporations are interrelated is not a justification for disregarding their separate personalities, absent sufficient showing that the corporate entity was purposely used as a shield to defraud creditors and third persons of their rights.

• It is essential that the “corporate fiction” is the very means by which to defeat public convenience, justify wrong, protect fraud and defend crime. Jardine Davies, Inc. v. JRB Realty, Inc., 463 SCRA 555, 565 (2005).

2. Can Be Availed-‐of Only to Prevent Fraud: Piercing doctrine is meant to prevent fraud, and cannot be employed when the net result would be to perpetrate fraud or a wrong. Gregorio Araneta, Inc. v. Tuason de Paterno and Vidal, 91 Phil. 786 (1952).

• The theory of corporate entity was not meant to promote unfair objectives or otherwise, nor to shield them. Villanueva v. Adre, 172 SCRA 876 (1989).

3. Piercing Doctrine Not Applicable to Theorizing or to Advance/Create New Rights or Interest: Piercing of the veil of corporate fiction is not allowed when it is resorted under a theory of co-‐ownership to justify continued use and possession by stockholders of corporate properties. Boyer-‐Roxas v. Court of Appeals, 211 SCRA 470 (1992).

Boyer-‐Roxas v. Court of Appeals

Facts: Two separate ejectment cases were filed against Guillermo Roxas and Rebecca Boyer-‐Roxas, respectively by the Heirs of Eugenia V. Roxas, Incorporated. The corporation alleges that both Guillermo and Rebecca are occupying houses within a resort owned by the corporation, and this was only tolerated. In their answers, Guillermo and Rebecca alleged that they were also heirs of Eugenia Roxas and as such they have a share in the resort, and that they have the right to stay in the property. According to them, the veil of corporate fiction must be pierced insofar as it does not allow them to possess the properties owned by the corporation even though they are “co-‐owners” of the corporation and its properties along with other stockholders. Issue: Whether or not the corporate veil must be pierced. Held: NO. The fact that the corporation was incorporated with the estate left by Eugenia Roxas as capital, and that Rebecca/Guillermo, as heirs of Roxas, were stockholders of the company, do not justify the piercing of the corporate veil. Even if the former manager of the



Corporation granted permission to Rebecca/Guillermo to possess the property, the Corporation is not forever bound by this permission. In the absence of any contract between the Corporation and Rebecca/Guillermo regarding the length of their possession, the Board may at any time revoke the permission through a board resolution, as what they did in the case at bar. Doctrine: Properties registered in the name of the corporation are owned by it as an entity separate and distinct from its members. While shares of stock constitute personal property, they do not represent property of the corporation. A stockholder is not entitled to possess any definite property of the corporation.

• BUT SEE: Siain Enterprises, Inc v. Cupertino Realty Corp., 590 SCRA 435 (2009).

Siain Enterprises, Inc v. Cupertino Realty Corp.

Facts: Siain Enterprises obtained a loan (and executed a promissory note) from Cupertino Realty Corporation secured by a mortgage over two parcels of land and other machineries and equipment. Another promissory note in favor of Cupertino was executed by Cua Le Leng (President of Siain Enterprises) where the latter was bound in her personal capacity. Later, Cupertino instituted foreclosure proceedings, but Siain Enterprises claim that the amended real estate mortgage was null and void because it never received the P160M loan. The lower courts ruled in favor of Cupertino and applied the doctrine of “piercing the veil of corporate fiction” to preclude Siain Enterprises from disavowing the receipt of the loan and paying its obligation under the

amended real estate mortgage. Issue: Whether or not the doctrine of “piercing the veil of corporate fiction” was properly applied. Held: YES. Cupertino presented overwhelming evidence that Siain Enterprises Inc., and its affiliate corporations (Yuyek and Siain Transport) had received the proceeds of the loan which was the consideration of the amended real estate mortgage. Moreover, it was established in the lower courts that Siain Enterprises and Yuyek had a common set of incorporators, stockholders and board of directors, the same bookkeeper and accountant, the same office address and the same majority stockholder which is Cua Le Leng. Cua Le Leng had the unlimited liability to use Siain Transport’s funds to pay the obligations incurred by Siain Enterprises. Thus, it is clear that Siain Enterprises, Siain Transport and Yuyek are characterized by oneness of operations vested in Cua Le Leng alone. Consequently, these corporations were proven to be mere alter-‐egos of Cua Le Leng. Doctrine: Where clear evidence presented support the fact that a corporation’s affiliates have received large amounts which became the consideration for the company execution of a real estate mortgage over its properties, then the piercing doctrine shall be applied to support the fact that the real estate mortgage was valid and supported by proper consideration.

• The piercing cannot be availed of in order to dislodge from SEC’s jurisdiction a petition for suspension of payments filed under P.D. 902-‐A, on the ground that the petitioning individuals should



be treated as the real petitioners to the exclusion of the petitioning corporate debtor: “doctrine only applies when such corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime.” Union Bank v. Court of Appeals, 290 SCRA 198 (1998).

• Application of the piercing of the subsidiary company to merge it with the holding company cannot be allowed to support a theory of set-‐off or compensation, there being no allegation much less any proof of fraud. Nisce v. Equitable PCI Bank, Inc., 516 SCRA 231 (2007).

• An employee who has officially retired from the company and availed of her retirement benefit, but who continued to be employed as a consultant with affiliate companies, cannot employ piercing in order to treat her stint with the affiliate companies as part of her employment with the main company she retired from — there is no fraud or employment of unfair shielding. Rivera v. United Laboratories, Inc., 586 SCRA 269 (2009).

4. Basis Must Be Clear Evidence • To disregard the separate juridical personality of a corporation,

it is elementary that the wrongdoing cannot be presumed and must be clearly and convincingly established. Application of the doctrine of piercing the corporate veil should be done with caution. A court should be mindful of the milieu where it is to be applied. It must be certain that the corporate fiction was misused to such an extent that injustice, fraud, or crime was committed against another, in disregard of its rights. The wrongdoing must be clearly and convincingly established; it cannot be presumed. Otherwise, an injustice that was never

unintended may result from an erroneous application. PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002).1 Thus:

o The organization of the corporation at the time when the relationship between the landowner and the developer were still cordial cannot be used as a basis to hold the corporation liable later on for the obligations of the landowner to the developer under the mere allegation that the corporation is being used to evade the performance of obligation by one of its major stockholders. Luxuria Homes, Inc. v. Court of Appeals, 302 SCRA 315 (1999).

o In this case, the Court finds that the Remington failed to discharge its burden of proving bad faith on the part of Marinduque Mining and its transferees in the mortgage and foreclosure of the subject properties to justify the piercing of the corporate veil. DBP v. Court of Appeals, 363 SCRA 307 (2001).2

o Neither has it been alleged or proven that Merryland is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency conduit or adjunct of Cardale. Even assuming that the businesses of Cardale and Merryland are interrelated, this alone is not justification for

1 General Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007); Pantranco Employees Association (PEA-‐ PTGWO) v. NLRC, 581 SCRA 598 (2009); Halley v. Printwell, Inc. 649 SCRA 116 (2011).�� 2 Also McLeod v. NLRC, 512 SCRA 222 (2007); Uy v. Villanueva, 526 SCRA 73 (2007).



disregarding their separate personalities, absent any showing that Merryland was purposely used as a shield to defraud creditors and third persons of their rights. Francisco v. Mejia, 362 SCRA 738 (2001).1

o The mere assertion by a Filipino litigant against the existence of a “tandem” between two Japanese corporations cannot be the basis for piercing, which can only be applied by showing wrongdoing by clear and convincing evidence. Marubeni Corp. v. Lirag, 362 SCRA 620 (2001).

• The party seeking to pierce has the burden of presenting clear and convincing evidence to justify the setting aside of the separate corporate personality rule. The question of whether a corporation is a mere alter ego is a purely one of fact, and the burden is on the party who alleges it. PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002).2

5. Piercing is a power belonging to the court and cannot be assumed improvidently by a sheriff. Cruz v. Dalisay, 152 SCRA 482 (1987); D.R. CATC Services v. Ramos, 477 SCRA 18 (2005).

6. Piercing Has Only Res Judicata Effect: Application of the doctrine to a particular case does not deny the corporation of legal personality for any and all purposes, but only for the particular transaction or instance, or the particular obligation

1 Also Ramoso v. Court of Appeals, 347 SCRA 463 (2000); Guatson Int’l Travel and Tours, Inc. v. NLRC, 230 SCRA 815 (1990). 2 Also Concept Builders, Inc. v. NLRC, 257 SCRA 149 (1996); Heirs of Ramon Durano, Sr. v. Uy, 344 SCRA 238 (2000); MR Holdings, Ltd. V. Bajar, 380 SCRA 617 (2002); Ramirez v. Mar Fishing Co., Inc., 672 SCRA 137 (2012).

for which the doctrine was applied. Koppel (Phil.) Inc. v. Yatco, 77 Phil. 496 (1946).3

• The application of the piercing doctrine does not attach to the person of the corporation, but merely an equity remedy that pertains to the transactions in controversy.4

• When the doctrine is applied, the consequences would be that the members or stockholders of the corporation will be considered as the corporation, that is, liability will attach directly to the officers and stockholders. Umali v. Court of Appeals, 189 SCRA 529 (1990).

D. CLASSIFICATION OF PIERCING CASES:

• DEFEAT OF PUBLIC CONVENIENCE (EQUITY PIERCING): When the application of the separate corporate personality would be inconsistent with the business purpose of the legal fiction, or when piercing the corporate fiction is necessary to achieve justice or equity for those who deal in good faith with the corporation, or when the use of the separate juridical personality is used to confuse legitimate issues.

• FRAUD PIERCING: When corporate entity used to commit a crime, to undertake fraud or do a wrong, or that the corporate veil is used as a means to evade the consequences of one’s criminal or fraudulent acts.

3 Tantoco v. Kaisahan ng Mga Manggagawa sa La Campana, 106 Phil. 198 (1959); Francisco v. Mejia, 362 SCRA 738 (2001). 4 Villanueva, C. L., & Villanueva-‐Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store.



• ALTER-‐EGO PIERCING: When corporate entity merely a farce since the corporation is merely the alter ego, business conduit, or instrumentality of a person or another entity.

• Authorities are agreed on at least three (3) basic areas where piercing the veil, with which the law covers and isolates the corporation from any other legal entity to which it may be related, is allowed. These are: 1) defeat of public convenience, as when the corporation is used as vehicle for the evasion of existing obligation; 2) fraud cases or when the corporate entity is used to justify wrong, protect fraud, or defend a crime; or 3) alter ego cases, where the 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. General Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007)1 citing VILLANUEVA, COMMERCIAL LAW REVIEW (2004 ed), at p. 576.

General Credit Corp. v. Alsons Dev. and Investment Corp.

Facts: General Credit Corp (GCC), then known as Commercial Credit Corp (CCC), established CCC franchise companies in different urban centers in the country. CCC Equity Corporation (EQUITY) was organized by GCC for the purpose of taking over the operations and management of the various franchise companies. Alsons Devt & Investment Corp

1 Also Pantranco Employees Association (PEA-‐PTGWO) v. NLRC, 581 SCRA 598 (2009); Prisma Construction & Dev. Corp. v. Menchavez, 614 SCRA 590 (2010); Sarona v. NLRC, 663 SCRA 394 (2012).

(ALSONS) and the Alcantara Family each owned shares in the aforesaid GCC franchise companies, e.g., CCC Davao and CCC Cebu. In December 1980, ALSONS and the Alcantara Family sold their shareholdings (101,953shares) in the CCC franchise companies to EQUITY for P2M, for which EQUITY issued a “bearer” promissory note for P2M with a one-‐year maturity date and 18% interest per annum. Some four years later, the Alcantara Family assigned its rights and interests over the bearer note to ALSONS. Even before the execution of the assignment deal, letters for demand for interest payment were already sent to EQUITY through its President, Wilfredo Labayen, who pleaded inability to pay the stipulated interest, EQUITY no longer having assets or property neither to settle its obligation nor being extended financial support by GCC. On January 14, 1986, ALSONS filed a complaint for a sum of money against EQUITY and GCC. GCC was impleaded as party-‐defendant since EQUITY has been organized as a tool and mere conduit of GCC. Issue: Whether or not the doctrine of “Piercing the Veil of Corporate Fiction” should be applied Held: YES. The relationship of GCC and EQUITY have been that of “parent-‐subsidiary corporations”, the doctrine is applicable in the case at bar. There are at least 20 documented circumstances and transactions which, taken together, strongly support the conclusion that EQUITY was an adjunct / instrumentality / business conduit of GCC — i.e. commonality of directors, officers and stockholders, sharing of office



between GCC and EQUITY, financing and management arrangements allowing GCC to handle the funds of EQUITY, virtual control of GCC over finances, business policies and practices of EQUITY, and the establishment of EQUITY by GCC to circumvent CB rules. Doctrine: Another formulation of this doctrine is that when 2 business enterprises are owned, conducted and controlled by the same parties, both law and equity will disregard the legal fiction that 2 corporations are distinct entities and treat them as one and the same, when necessary to protect third parties’ rights.

1. Rundown on Piercing Application: • This Court pierced the corporate veil to ward off a judgment

credit, to avoid inclusion of corporate assets as part of the estate of the decedent, to escape liability arising for a debt, or to perpetuate fraud and/or confuse legitimate issues either to promote or to shield unfair objectives to cover up an otherwise blatant violation of the prohibition against forum shopping. Only is these and similar instances may the veil be pierced and disregarded. PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002).

2. Summary of Probative Factors: Concept Builders, Inc. v. NLRC, 257 SCRA 149 (1996).1

• The absence of these elements prevents piercing the corporate veil. Lim v. Court of Appeals, 323 SCRA 102 (200).2

1 PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001); Velarde v. Lopez, 419 SCRA 422 (2004); Jardine Davies, Inc. v. JRB Realty, Inc., 463 SCRA 555 (2005); Pantranco Employees Association (PEA-‐PTGWO) v. NLRC, 581 SCRA 598 (2009).

Concept Builders, Inc. v. NLRC

Facts: Concept Builders Inc. was engaged in the construction business and lost in a case before the NLRC concerning the termination of private respondents whom it had employed as laborers, carpenters and riggers in a project which Concept claims was finished, but upon inspection was found to be the contrary. The Labor Arbiter rendered judgment against Concept requiring it to pay private respondents back wages. The Sheriff then tried to execute the writ of execution but found that the office previously occupied by Concept is now occupied by Hydro Phils. Inc. – a manufacturing company allegedly owned by the same stockholders. Issue: Whether or not the doctrine of piercing the corporate veil is applicable to this case. Held: YES. While petitioners claimed it ceased operations in 1986, it filed an Information Sheet with the SEC in 1987 stating that its office address is their old address. Both information sheets were filed by Virgilio Casino, the same corporate secretary. They had the same President, Board of Directors and substantially the same subscribers. Clearly, petitioner ceased its business operations in order to evade the payment to private respondents of back wages and to bar their reinstatement to their former positions. HPPI is obviously a business conduit of Concept Builders and its emergence was skillfully orchestrated to avoid the latter’s financial liability.

2 Child Learning Center, Inc. v. Tagorio, 475 SCRA 236 (2005); General Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007); Nisce v. Equitable PCI Bank, Inc., 516 SCRA 231 (2007).



Doctrine: Probative factors of identity that will justify the application of the doctrine:

1. Stock membership by one or common ownership of both 2. Identity of directors and officers (management) 3. Manner of keeping corporate books and records (management) 4. Methods of conducting business (management).

3. Distinction Between Fraud Piercing and Alter-‐ego Piercing:

Lipat v. Pacific Banking Corp., 402 SCRA 339 (2003).

Lipat v. Pacific Banking Corp. Facts: Spouses Lipat (Alfredo and Estelita) owns Belas Export Trading (BET), a single proprietorship engaged in garment manufacturing in Quezon City. The Lipats also owned the Mystical Fashions in the United States, which sells goods imported from the Philippines through BET. Estelita designated her daughter, Teresita, to manage BET in the Philippines while she was managing Mystical Fashions in the United States. In order to facilitate the convenient operation of BET, Estelita executed a special power of attorney appointing Teresita as her attorney-‐in-‐fact to obtain loans. By virtue of this SPA, Teresita obtained a sizeable loan from Pacific Bank. Three months after the loan, BET was incorporated into a family corporation named Belas Export Corporation (BEC), engaged in the same business and utilized the same properties. The loan was restructured in the name of BEC and secured with Lipat’s property.

BEC defaulted, and the bank foreclosed on the real mortgage. The spouses Lipat claim that the loan obtained by Teresita were ultra vires acts because they were executed without the requisite board resolution of the Board of Directors of BEC. Issue: Whether or not the doctrine of piercing the veil of corporate fiction applies in this case. Held: YES. In finding the Lipats’ mortgaged property liable for the obligations of BEC, both courts below relied upon the alter ego doctrine or instrumentality rule. Evidence suggests an alter ego case in the sense that: (1) the spouses are the owners and majority shareholders of BET and BEC; (2) both firms were managed by their daughter, Teresita; (3) both firms were engaged in the garment business, supplying products to Mystical Fashion, a US firm established by Estelita; (4) both firms held office in the same building owned by the Lipats; (5) BEC is a family corporation with the Lipats as its majority stockholders; (6) the business operations of the BEC were so merged with those of Mrs. Lipat such that they were practically indistinguishable; (7) the corporate funds were held by Estelita Lipat and the corporation itself had no visible assets; (8) the board of directors of BEC was composed of the Burgos and Lipat family members; (9) Estelita had full control over the activities of and decided business matters of the corporation; and that (10) Estelita Lipat had benefited from the loans secured from Pacific Bank to finance her business abroad and from the export bills secured by BEC for the account of Mystical Fashion. It could not have been coincidental that BET and BEC are so intertwined with each other in terms of ownership,



business purpose, and management. Doctrine: When the corporation is the mere alter ego or business conduit of a person, the separate personality of the corporation may be disregarded. E. DEFEAT OF PUBLIC CONVENIENCE (EQUITY PIERCING): Juridical Personality Cannot Be Employed:

1. To Confuse Legitimate Issues: Telephone Engineering and Service Co., Inc. V. WCC, 104 SCRA 354 (1981).

Telephone Engineering and Service Co., Inc. V. WCC

Facts: Petitioner engaged in the business of manufacturing telephone equipment. Its sister company, the Utilities Management Corporation (UMACOR), with offices in the same location. UMACOR is also under the management of Jose Luis Santiago. UMACOR employed the late Pacifica L. Gatus as Purchasing Agent. Then was detailed with petitioner company. He reported back to UMACOR and after 2 years he contracted illness and died of "liver cirrhosis with malignant degeneration." Respondent Leonila S. Gatus, filed a "Notice and Claim for Compensation" with Workmen's Compensation Commission sub-‐office, alleging that her husband was an employee of TESCO, and that he died of liver cirrhosis. UMACOR submitted an Employer's Report of Accident or Sickness which indicated that the employee contracted illness in regular occupation. On this basis, the Acting Referee awarded death benefits plus burial expenses in favor of the heirs of Gatus.

TESCON contested the judgment claiming that the admission made in the "Employer's Report of Accident or Sickness" was due to honest mistake and/or excusable negligence on its part, and that the illness for which compensation is sought is not an occupational disease, hence, not compensable under the law. Issue: Whether or not TESCO may be held liable for the death. Held: YES. TESCO'S denial at this stage that it is the employer of the deceased is obviously an afterthought, a devise to defeat the law and evade its obligations. This denial also constitutes a change of theory on appeal which is not allowed in this jurisdiction. The Court pierced the veil between TESCO and UMARCO in the interest of justice and equity. Doctrine: Although respect for the corporate personality as such, is the general rule, there are exceptions. In appropriate cases, the veil of corporate fiction may be pierced as when the same is made as a shield to confuse the legitimate issues.

2. To Raise Legal Technicalities: Emilio Cano Enterprises v. CIR, 13 SCRA 291 (1965).

Emilio Cano Enterprises v. CIR

Facts: A complaint for unfair labor practice was filed By Honorata Cruz against Emilio, Ariston and Rodolfo Cano as president and proprietor, field supervisor and manager, respectively, of Emilio Cano Enterprises, Inc. An order of execution was issued to reinstate Honorata and to deposit with the court the amount P7,222.58 within 10 days from



receipt of the order, failing which the court will order either a levy on respondents’ properties or the filing of an action for contempt of court. (The order of execution was directed against the properties of Emilio Cano Enterprises, Inc.) Issue: Whether or not the judgment against Emilio and Rodolfo in their capacity as officials of the corporation can be made effective against the property of the latter which was not a party to the case. Held: YES. While it is an undisputed rule that a corporation has a personality separate and distinct from its members or stockholders because of a fiction of the law, here we should not lose sight of the fact that the Emilio Cano Enterprises, Inc. is a closed family corporation where the incorporators and directors belong to one single family. Here is an instance where the corporation and its members can be considered as one. And to hold such entity liable for the acts of its members is not to ignore the legal fiction but merely to give meaning to the principle that such fiction cannot be invoked if its purpose is to use it as a shield to further an end subversive of justice. Doctrine: And so it has been held that while a corporation is a legal entity existing separate and apart from the persons composing it, that concept cannot be extended to a point beyond its reason and policy, and when invoked in support of an end subversive of this policy it should be disregarded by the courts.

• One cannot evade civil liability by incorporating properties or the business. Palacio v. Fely Transportation Co., 5 SCRA 1011 (1962).1

• Where a debtor registers his residence to a family corporation in exchange of shares of stock and continues to live therein, then the separate juridical personality may be disregarded. PBCom v. CA, 195 SCRA 567 (1991).

• Where corporate fiction was used to perpetrate social injustice or as a vehicle to evade obligations or confuse the legitimate issues (as in this case where the actions of management of the two corporations created confusion as to the proper employer of claimants), the two corporations would be merged as one. Azcor Manufacturing, Inc. v. NLRC, 303 SCRA 26 (1999).

• The corporate veil cannot be used to blatantly violate the prohibition against forum-‐shopping. Where the corporation itself has not been remiss in vigorously prosecuting or defending corporate causes and in using and applying remedies available to it, then shareholders, whether suing as the majority in direct actions or as the minority in a derivative suit, cannot be allowed to pursue the same claims. First Philippine International Bank v. Court of Appeals, 252 SCRA 259 (1996).

3. The Case for Thinly-‐Capitalized Corporations: McConnel v. CA, 1 SCRA 722 (1961).

McConnel v. CA

Facts: Park Rite Co. (PRC) leased from Rafael Samanillo a vacant lot

1 Also Mendoza and Yotoko v. Banco Real Dev. Bank, 470 SCRA 86 (2005).��



which was used for parking motor vehicles for consideration. It turned out that in operating its parking business, the corporation occupied and used not only the Samanillo lot it had leased but also an adjacent lot belonging to Padilla (respondent) without the owner’s knowledge and consent. Padilla wanted payment for the use and occupation of the lot. Judgment was rendered against Park Rite, but it was found to be without any assets apart from the money deposited with the Court. The judgment creditors then filed suit in the CFI Manila against the corporation and its past and present stockholders, to recover from them, jointly and severally, the unsatisfied balance of the judgment, plus legal interest and costs. Issue: Whether or not there was justification for disregarding the corporate entity of Park Rite Co., Inc. and holding its controlling stockholders personally responsible for a judgment against the corp. Held: YES. The evidence clearly shows that these persons completely dominated and controlled the corporation and that the functions of the corporation were solely for their benefits. It is obvious from the sharing that only 1 or 2 people possess the majority shares. Other incorporators had about 1 or 2 each which were merely qualifying shares. That the corporation was a mere extension of their personality is shown by the fact that the office of Cirilo Paredes and that of Park Rite Co., Inc. were located in the same building, in the same floor and in the same room — at 507 Wilson Building. This is further shown by the fact that the funds of the corporation were kept by Cirilo Paredes in his own name. The facts show that the corporation is a mere instrumentality of the individual stockholder’s; hence the latter must individually answer for

the corporate obligations. Doctrine: While the mere ownership of all or nearly all of the capital stock of a corporation is a mere business conduit of the stockholder, that conclusion is amply justified where it is shown that the operations of the corporation were so merged with those of the stockholders as to be practically indistinguishable from them.

• The DOJ Resolution explicitly identified the false pretense, fraudulent act or fraudulent means perpetrated upon the investing public who were made to believe that ASBHI had the financial capacity to repay the loans it enticed petitioners to extend, despite the fact that “it had an authorized capital stock of only P500,000.00 and paid up capital of only P125,000.00),” with the deficient capitalization evidenced by its articles of incorporation, the treasurer’s affidavit, the audited financial statements. “Moreover, respondent’s argument assumes that there is legal obligation on the part of petitioners to undertake an investigation of ASBHI before agreeing to provide the loans. There is no such obligation. It is unfair to expect a person to procure every available public record concerning an applicant for credit to satisfy himself of the latter’s financial standing. At least, that is not the way an average person takes care of his concerns.” Gabionza v. Court of Appeals, 565 SCRA 38 (2008).

• Where the corporation was under the control of its stockholders who ran-‐up quite a high obligation with the printing company knowing fully well that their corporation was not in a position to pay for the accounts, and where in fact they personally benefited from the operations of the company to which they



never paid their subscription in full, would constitute piercing of the veil to allow the creditor to be able to collect what otherwise were debts owed by the company which has no visible assets and has ceased all operations. Halley v. Printwell, Inc. 649 SCRA 116 (2011).

Halley v. Printwell, Inc.

Facts: BMPI (Business Media Philippines Inc.) is a corporation under the control of its stockholders, including Donnina Halley. In the course of its business, BMPI commissioned PRINTWELL to print Philippines, Inc. (a magazine published and distributed by BMPI). BMPI placed several orders amounting to P3160,000 but was only able to pay P25,000. PRINTWELL sued BMPI for collection of the unpaid balance and later on impleaded BMPI’s original stockholders and incorporators to recover on their unpaid subscriptions. Issue: Whether or not a stockholder (Halley in this case) who was in active management of the business of the corporation and still has unpaid subscriptions should be made liable for the debts of the corporation by piercing the veil of corporate fiction Held: YES. Such stockholder should be made liable up to the extent of her unpaid subscription. It was found that at the time the obligation was incurred, BMPI was under the control of its stockholders who know fully well that the corporation was not in a position to pay its account (thinly capitalized). And, that the stockholders personally benefited from the operations of the corporation even though they never paid their subscriptions in full.

Doctrine: TRUST FUND DOCTRINE. Under which corporate debtors might look to the unpaid subscriptions for the satisfaction of unpaid corporate debts. Subscriptions to the capital of a corporation constitutes a trust fund for the payment of the creditors (by mere analogy) In reality, corporation is a simple debtor. The 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. 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.

4. Avoidance or Minimization of Taxes: Yutivo Sons Hardware v. Court of Tax Appeals 1 SCRA 160 (1961); Liddell & Co. v. Collector of Internal Revenue, 2 SCRA 632 (1961).

Yutivo Sons Hardware v. Court of Tax Appeals

Facts: Yutivo Sons Hardware Co. is a company engaged in the importation and sale of hardware supplies and equipment. The former bought a number of cars from General Motors Overseas Corporation. As importer, GM paid sales tax prescribed by sections 184, 185 and 186 of the Tax Code on the basis of its selling price to Yutivo. Said tax being collected only once on original sales, Yutivo paid no further sales tax on its sales to the public. Eventually, Yutivo sold exclusively to Southern Motors, which was organized to engage in the business of selling cars, trucks, and spare parts to the public.



When GM decided to withdraw from the Philippines, it appointed Yutivo as importer for the Visayas and Mindanao, and Yutivo continued its previous arrangement of selling exclusively to SM. In the same way that GM used to pay sales taxes based on its sales to Yutivo, the latter, as importer, paid sales tax prescribed on the basis of its selling price to SM, and since such sales tax, as already stated, is collected only once on original sales, SM paid no sales tax on its sales to the public. After some time, the CIR made an assessment on Yutivo and demanded from the latter P1,804,769.85 as deficiency sales tax, claiming that the taxable sales were the retail sales by SM to the public and not the sales at wholesale made by Yutivo to the latter inasmuch as SM and Yutivo were one and the same corporation, the former being the subsidiary of the latter. Issue: Whether or not Southern Motors was a mere adjunct of Yutivo. Held: YES. Briefly stated, Yutivo financed principally, if not wholly, the business of SM and actually extended all the credit to the latter not only in the form of starting capital but also in the form of credits extended for the cars and vehicles allegedly sold by Yutivo to SM as well as advances or loans for the expenses of the latter when the capital had been exhausted. The funds of SM were all merged in the cash fund of Yutivo. At all times, Yutivo, through officers and directors common to it and SM, exercised full control over the cash funds, policies, expenditures and obligations of the latter. Southern Motors being but a mere instrumentality, or adjunct of Yutivo, the Court CTA correctly disregarded the technical defense of separate corporate entity in order

to arrive at the true tax liability of Yutivo. Doctrine:

• Use of nominees to constitute the corporation for the benefit of the controlling stockholder who sought to avoid payment of taxes. Marvel Building v. David, 9 Phil. 376 (1951).

• The plea to pierce the veil of corporate fiction on the allegation that the corporations true purpose is to avoid payment by the incorporating spouses of the estate taxes on the properties transferred to the corporations: “With regard to their claim that [the companies] Ellice and Margo were meant to be used as mere tools for the avoidance of estate taxes, suffice it to say that the legal right of a taxpayer to reduce the amount of what otherwise could be his taxes or altogether avoid them, by means which the law permits, cannot be doubted.” Gala v. Ellice Agro-‐Industrial Corp., 418 SCRA 431 (2003).

• HOWEVER: The mere existence of parent-‐subsidiary relations, or the fact that one corporation is affiliated with another corporation does not justify piercing based on serving public convenience. Comm. of Internal Revenue v. Norton and Harrison, 11 SCRA 704 (1954).1

F. FRAUD CASES:

• When the legal fiction of the separate corporate personality is abused, such as when the same is used for fraudulent or

1 Tomas Lao Construction v. NLRC, 278 SCRA 716 (1997). Marques v. Far East Bank and Trust Co., 639 SCRA 312 (2011).



wrongful ends, the courts have not hesitated to pierce the corporate veil. Francisco v. Mejia, 362 SCRA 738 (2001).

Francisco v. Mejia

Facts: Andrea Gutierrez was the owner of a parcel of land in Caloocan. This property was subdivided into five lots, four of which are the subject of this controversy. The four lots were sold to Cardale Financing and Realty Corporation which made an initial payment, and the balance was secured by 3 of 4 lots mortgaged to Gutierrez herself. When Cardale failed to pay, Gutierrez filed a suit for rescission. Cardale was represented by its VP and Treasurer, herein petitioner Adalia Francisco. The case dragged on for 14 years, during which the taxes for the mortgaged properties were not paid. As a result, the government levied upon them. They became subject of an auction sale. The highest bidder was Merryland Development Corporation, whose President was also Adalia Francisco. Because of these, Rita Mejia, the administrator of Gutierrez’s estate, filed a complaint for damages against Francisco for fraud. Issue: Whether or not Francisco may be held liable. Held: YES, it was evident that Francisco was in bad faith, not informing Gutierrez’s estate of the tax delinquencies. Apparently, Francisco made use of her involvement in Cardale and Merryland to secure an advantage for the latter. Cardale as the mortgagor had the duty of paying the taxes for the properties. Evidence showed that Francisco as Cardale’s Treasurer, intended to conceal the delinquency in the

payment of taxes so that the properties may be levied upon and be the subject of an auction where Merryland could bid, which was exactly what happened. Doctrines: With specific regard to corporate officers, the general rule is that the officer cannot be held personally liable with the corporation, whether civilly or otherwise, for the consequences of his acts, if he acted for and in behalf of the corporation, within the scope of his authority and in good faith. In such cases, the officer’s acts are properly attributed to the corporation. However, if it is proven that the officer has used the corporate fiction to defraud a third party, or that he has acted negligently, maliciously or in bad faith, then the corporate veil shall be lifted and he shall be held personally liable for the particular corporate obligation involved.

• The general rule is that obligations incurred by a corporation, acting through its directors, officers or employees, are its sole liabilities. However, there would be piercing of the veil when the corporation is used by any of them as a cloak or cover for fraud or illegality or injustice. Here, the fraud was committed by petitioners to the prejudice of respondent bank. Mendoza v. Banco Real Dev. Bank, 470 SCRA 86 (2005).

• Fraud and bad faith on the part of certain corporate officers or stockholders may warrant the piercing of the veil of corporate fiction so that the said individual may not seek refuge therein, but may be held individually and personally liable for his or her actions. Lafarge Cement Phils., Inc. v. Continental Cement Corp., 443 SCRA 522 (2004).



• However, mere allegation of fraud or bad faith, without evidence supporting such claims cannot warrant the piercing of the corporate veil. DBP v. Court of Appeals, 357 SCRA 626, 358 SCRA 501, 363 SCRA 307 (2001).

1. Acts by Controlling Shareholder: • The fact that a corporation owns all of the stocks of another

corporation, taken alone, is not sufficient to justify their being treated as one entity. If used to perform legitimate functions, a subsidiary’s separate existence shall be respected, and the liability of the parent corporation, as well as the subsidiary shall be confined to those arising in their respective business. Nisce v. Equitable PCI Bank, Inc., 516 SCRA 231 (2007).1

• Where a stockholder, who has absolute control over the business and affairs of the corporation, entered into a contract with another corporation through fraud and false representations, such stockholder shall be liable solidarily with co-‐defendant corporation even when the contract sued upon was entered into on behalf of the corporation. Namarco v. Associated Finance Co., 19 SCRA 962 (1967).

• Where the corporation is used as a means to appropriate a property by fraud which property was later resold to the controlling stockholders, then piercing should be allowed. Heirs of Ramon Durano, Sr. v. Uy, 344 SCRA 238 (2000).

2. Tax Evasion or Fraud: • In a number of cases, the Court has shredded the veil of

corporate identity and ruled that where a corporation is merely an adjunct, business conduit or alter ego of another corporation

1 Marques v. Far East Bank and Trust Co., 639 SCRA 312 (2011).

or when they practice fraud on internal revenue laws, the fiction of their separate and distinct corporate identities shall be disregarded, and both entities treated as one taxable person, subject to assessment for the same taxable transaction. Commissioner of Internal Revenue v. Menguito, 565 SCRA 461 (2008).

3. Guiding Principles in Fraud Cases:

Why is there inordinate showing of alter-‐ego elements? 1. There must have been fraud or an evil motive in the affected

transaction, and the mere proof of control of the corporation by itself would not authorize piercing;

2. The corporate fiction is used as a means to commit the fraud or avoid the consequences thereof; and

3. The main action should seek for the enforcement of pecuniary claims pertaining to the corporation against corporate officers or stockholders.

• Respondent corporations may be engaged in the same business or even share the same address, or have interlocking incorporators, directors or officers, in the absence of fraud or other public policy consideration, does not warrant piercing the veil of corporate fiction. McLeod v. NLRC, 512 SCRA 222 (2007), quoting from Indophil Textile Mill Workers Union v. Calica, 205 SCRA 697 (1992), and Del Rosario v. NLRC, 187 SCRA 777 (1990); Heirs of Fe Tan Uy v. International Exchange Bank, 690 SCRA 519 (2013).

• Mere substantial identity of incorporators of two corporations does not necessarily imply fraud, nor warrant the piercing of the



veil of corporate fiction. In the absence of clear and convincing evidence to show that the corporate personalities were used to perpetuate fraud, or circumvent the law, the corporations are to be rightly treated as distinct and separate from each other. To disregard the said separate juridical personality of a corporation, the wrongdoing must be proven clearly and convincingly. Laguio v. NLRC, 262 SCRA 715 (1996).1

G. ALTER-‐EGO CASES:

1. Using Corporation as Conduit or Alter Ego: • Where the capital stock is owned by one person and it functions

only for the benefit of such individual owner, the corporation and the individual should be deemed the same. Arnold v. Willets and Patterson, Ltd., 44 Phil. 634 (1923).

Arnold v. Willets and Patterson, Ltd.

Facts: Willits & Patterson was a partnership organized in San Francisco, California. In 1916, they engaged the services of Arnold to be their agent in the Philippines who will enjoy profit-‐sharing and a fixed salary. Arnold was to be Willits & Patterson’s agent for five years, and he was tasked to operate a certain oil mill. Sometime later, Patterson retired, and Willits then created a new corporation under the same name. Under this corporation, Willits owned practically all the shares except those nominal shares needed to qualify directors. Willits also created another corporation in the

1 Martinez v. Court of Appeals, 438 SCRA 130 (2004).

Philippines with the same name. Again, he owned practically all the shares (legally, the San Francisco corporation owned all the assets and liabilities of the Manila corporation). Sometime in 1919, Willits and Arnold entered into another contract, marked Exhibit B, which clarified Arnold’s mode of compensation. Willits’ corporation went through financial trouble, and its creditors committee refused to honor Exhibit B because according to it, the corporation never allowed or acceded to such a contract or understanding, and that Willits signed it without authority. Issue: Whether or not Exhibit B is binding upon the corporation and the creditors’ committee despite the lack of approval from the Board Held: YES. The approval of the Board is not needed since it is evident that Willis owns and controls the corporation. Willit’s actions were done not just to benefit him as a shareholder but to control the whole corporation and to affect the transaction of its business, in the same manner as if it had been clothed with all the formalities of a corporate act. Also, Exhibit B came into effect in 1919 and since then, was used by the corporation in determining Arnold’s salary and dues. There was no objection ever raised against it except two years later, in 1921, by the creditors’ committee. It’s a well-‐settled doctrine that acts of officers, though unauthorized, may be ratified by the corporation where the latter acquiesces to the act. Here, the creditors’ committee cannot object to Exhibit B because the corporation has in effect ratified its validity by applying it for two years. Doctrine: When the stock of a corporation owned by one individual and



the corporation functions for his benefit, the corporation and individual should be deemed the same.

• A corporation has a personality separate and distinct from the persons composing it, as well as from any other legal entity to which it may be related. Equally well-‐settled is the principle that the corporate mask may be removed or the corporate veil pierced when the corporation is just an alter ego of a person or of another corporation. Sarona v. NLRC, 663 SCRA 394 (2012).

o When corporation is merely an adjunct, business conduit or alter ego of another corporation, the fiction of separate and distinct corporation entities should be disregarded. Tan Boon Bee & Co. v. Jarencio, 163 SCRA 205 (1988).1

• The fictive veil of corporate personality holds lesser sway for subsidiary corporations whose shares are wholly if not almost wholly owned by its parent company. The structural and systems overlap inherent in parent and subsidiary relations often render the subsidiary as mere local branch, agency or adjunct of the foreign parent. Thus, when the foreign parent company leased a large parcel of land purposely for the benefit of its subsidiary, which took over possession of the leased premises, the subsidiary was a mere alter ego of ESSO Eastern. Mariano v. Petron Corp., 610 SCRA 487 (2010).

• The fact that a corporation owns all of the stocks of another corporation, taken alone, is not sufficient to justify their being treated as one entity. If used to perform legitimate functions, a

1 General Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007).��

subsidiary’s separate existence shall be respected, and the liability of the parent corporation, as well as the subsidiary shall be confined to those arising in their respective business. A corporation has a separate personality distinct from its stockholders and from other corporations to which it may be conducted — a legal fiction created by law for convenience and to prevent injustice. Nisce v. Equitable PCI Bank, Inc., 516 SCRA 231 (2007).

2. Mixing-‐up Operations; Disrespect to the Corporate Entity: • Mixing of personal accounts with corporate bank deposit

accounts. Ramirez Telephone Corp. v. Bank of America, 29 SCRA 191 (1969).

• Where two business enterprises are owned, conducted, and controlled by the same parties, both law and equity will, when necessary to protect the rights of third persons, disregard the legal fiction that two corporations are distinct entities and treat them as identical. Sibagat Timber Corp. v. Garcia, 216 SCRA 70 (1992).

• Employment of same workers; single place of business, etc., may indicate alter ego situation. Shoemart v. NLRC, 225 SCRA 311 (1993).

Shoemart v. NLRC

Facts: Moris Industries was engaged in manufacture of leather goods. In 1985, 56 out of 74 workers decided to form the Moris Industries Union. When the Union contacted Moris in order to fix a collective bargaining agreement, Moris suddenly shut down and ceased operations two days later. Because of this, the Union filed a case with the NLRC against Moris



for unfair labor practice, recovery of wage differentials and other monetary benefits. Shoemart, and its president, Henry Sy, was also impleaded because according to the Union, Shoemart and Moris had only one juridical personality. Issue: Whether or not the NLRC correctly applied the piercing doctrine by holding SM liable together with Moris Held: YES. The facts show that Moris was the mere alter ego of SM. Thus, in order to protect the rights of the workers, the NLRC properly applied the piercing of the corporate veil doctrine. And since Moris doesn’t exist anymore to rehire the workers, who also can’t work for SM because of a difference in expertise of labor, then the SC deemed it proper to hold SM solidarily liable with Moris for separation pay.

1. The Union presented one Cresencio Edic as a witness. Edic testified that he was first hired by the persons who owned SM to make samples to be displayed on the store windows. When he was promoted as over-‐all supervisor, the factory was transferred, the production division was separately incorporated and underwent many name changes. However, the owners remained the same.

2. An examination of the Incorporation papers of SM Shoe Mart and Moris Manufacturing show (sic) that except for Elizabeth Sy — all other five (5) incorporators and directors of Morris Industries are major stockholders of SM Shoe Mart as of July 20, 1985;

3. The SM Shoe Mart is the exclusive buyer of all of Moris' products;

4. Both are housed in one building and Moris for many years has been using the payrolls of SM Shoe Mart. SM glibly excuses this fact by alleging that this was done without its knowledge. We, however, considering the close relationship of parties, find this incredible.

Doctrine: See above.

• The facts that two corporations may be sister companies, and that they may be sharing personnel and resources, without more, is insufficient to prove that their separate corporate personalities are being used to defeat public convenience, justify wrong, protect fraud, or defend crime. Padilla v. Court of Appeals, 370 SCRA 208 (2001).

Padilla v. Court of Appeals

Facts: Susana Realty Inc. (SRI) sold to Light Rail Transit Authority (LRTA) several parcels of land along Taft Avenue whereby SRI had a right of first refusal in case LRTA decided to develop the land. LRTA contracted with Phoenix-‐Omega Development and Management Corporation (Phoenix-‐Omega) to develop the land to which SRI later agreed on the condition that all plans must be approved by it. Phoenix-‐Omega then assigned its rights to PKA Development and Management Corporation (PKA) whose President and General Manager is Padilla (who is at the same time Chairman of the Board of Phoenix-‐Omega). So now, PKA was in charge of developing the properties. However, it continuously failed to and eventually its building permit was revoked for



defects in construction. PKA then filed for rescission of the contract, alleging that SRI maliciously withheld approval of the plans, which in turn led to PKA being unable to comply with its obligations. However, the judgment went in favor of SRI. The contract was rescinded, and PKA was ordered to indemnify SRI for damages. The properties were returned to SRI, but PKA failed to pay the monetary awards. Thus, SRI filed a motion for the issuance of an alias writ against Padilla and Phoenix-‐Omega, saying that they were one and the same entity with PKA. Padilla and Phoenix-‐Omega claimed they were denied due process because Phoenix was not given its days in Court. Issue: Whether or not Padilla’s participation in the proceedings as PKA’s President and General Manager could be construed as the opportunity to be heard in court of Padilla and Phoenix-‐Omega Held: NO. Padilla and Phoenix-‐Omega were not given their day in court. It is clear that Padilla participated in the proceedings as General Manager of PKA and not in any other capacity. The fact that he was the Chairman of the Board of Phoenix-‐Omega cannot equate to participation by Phoenix-‐Omega in the same proceedings. Phoenix-‐Omega was never a party to the case and so could not have participated therein. PKA and Phoenix-‐Omega are admittedly sister companies, and may be sharing personnel and resources, but there was no allegation, much less positive proof, that their separate corporate personalities were being used to defeat public convenience, justify wrong, protect fraud, or defend crime.

Doctrine: For the separate juridical personality of a corporation to be disregarded, the wrongdoing must be clearly and convincingly established. It cannot be presumed. In this case, there was no reason to justify piercing the corporate veil.

3. Guiding Principles in Alter-‐Ego Cases: • Doctrine applies even in the absence of evil intent, because of

the direct violation of a central corporate law principle of separating ownership from management;

• Doctrine in such cased is based on estoppel: if stockholders do not respect the separate entity, others cannot also be expected to be bound by the separate juridical entity;

• Piercing in alter ego cases may prevail even when no monetary claims are sought to be enforced against the stockholders or officers of the corporation.

• HOWEVER: The mere existence of a parent-‐subsidiary relationship between two corporation, or that one corporation is affiliated with another company does not by itself allow the application of the alter-‐ego piercing doctrine. Koppel (Phil.), Inc. v. Yatco, 77 Phil. 97 (1946); PHIVIDEC v. Court of Appeals, 181 SCRA 669 (1990).

• A subsidiary corporation has an independent and separate juridical personality, distinct from that of its parent company, hence, any claim or suit against the latter does not bind the former and vice-‐ versa. Jardine Davies, Inc. v. JRB Realty, Inc., 463 SCRA 555 (2005).1

1 Fortune v. Quinsayas, 690 SCRA 336 (2013).



o If used to perform legitimate functions, a subsidiary’s separate existence shall be respected, and the liability of the parent corporation as well as the subsidiary will be confined to those arising in their respective businesses. Even when the parent corporation agreed to the terms to support a standby credit agreement in favor of the subsidiary, does not mean that its personality has merged with that of the subsidiary. MR. Holdings, Ltd. V. Bajar, 380 SCRA 617 (2002).

H. PIERCING DOCTRINE AND THE DUE PROCESS CLAUSE

1. Need to Bring a New Case Against the Officer. McConnel v. CA, 1 SCRA 723 (1961).

• A suit against individual shareholders is not a suit against the corporation. Failure to implead the corporations as defendants and merely annexing a list of such corporations to the complaints is a violation of due process for it would in effect be disregarding their distinct and separate personality without a hearing. PCGG v. Sandiganbayan, 365 SCRA 538 (2001).

• Although both lower courts found sufficient basis for the conclusion that PKA and Phoenix Omega were one and the same, and the former is merely a conduit of the other the Supreme Court held void the application of a writ of execution on a judgment held only against PKA, since the RTC obtained no jurisdiction over the person of Phoenix Omega which was never summoned as formal party to the case. The general principle is that no person shall be affected by any proceedings to which he is a stranger, and strangers to a case are not bound by the

judgment rendered by the court. Padilla v. Court of Appeals, 370 SCRA 208 (2001).

2. When corporate officers are sued in their official capacity, the corporation which was not made a party, is not denied due process. Emilio Cano Enterprises v. CIR, 13 SCRA 291 (1965).

• “We suggest as much in Arcilla v. Court of Appeals, (215 SCRA 120 [1992]), an appellate proceedings involving petitioner Arcilla’s bid to avoid the adverse CA decision on argument that he is not personally liable for the amount adjudged since the same constitutes a corporate liability which nevertheless cannot be enforced against the corporation which has not been impleaded as a party below. Violago v. BA Finance Corp., 559 SCRA 69 (2008).

3. Provided that evidential basis has been adduced during trial to apply the piercing doctrine. Jacinto v. Court of Appeals, 198 SCRA 211 (1991).1

Jacinto v. Court of Appeals

Facts: The case is an appeal concerning the decision of the Regional Trial Court ordering Inland Industries Inc. and Roberto Jacinto to pay jointly and severally Metropolitan Bank and Trust Co. The Bank claims that Roberto Jacinto can be held personally liable because he is the President and General Manager of Inland Industries Inc. and his wife owns a majority of its shares. While on the face of the complaint there is no specific allegation that the corporation is a mere alter ego of petitioner, subsequent developments, from the stipulation of facts up to the

1 Arcilla v. Court of Appeals, 215 SCRA 120 (1992).



presentation of evidence and the examination of witnesses, unequivocally show that respondent Metropolitan Bank and Trust Company sought to prove that petitioner and the corporation are one or that he is the corporation. No serious objection was heard from petitioner. Issue: Whether or not the application of piercing the veil was supported with evidence. Held: YES. Roberto A. Jacinto, it would appear that he is in fact, the corporation itself known as Inland Industries, Inc. Aside from the fact that he is admittedly the President and General Manager of the corporation and a substantial stockholder thereof, it was defendant Roberto A. Jacinto who dealt entirely with the plaintiff in those transactions. In the Trust Receipts that he signed supposedly in behalf of Inland Industries, Inc., it is not even mentioned that he did so in this official capacity. Doctrine: When evidence is presented by one party, with the express or implied consent of the adverse party, as to issues not alleged in the pleadings, judgment may be rendered validly as regards those issues, which shall be considered as if they have been raised in the pleadings. There is implied consent to the evidence thus presented when the adverse party fails to object thereto. NOTE: Atty. Hofileña GENERAL RULE: The Corporation has a personality separate from officers, stockholders and related companies. EXCEPTION: When it is necessary to advance the cause of justice, the

Court may deny your right to claim a separate personality. 1. Commit a fraud à Bogus NGOs; so long as the fraud is proved,

the Court will deny separate personality, provided that it was committed/concealed thru the use of separate personality.

2. Alter-‐ego/Instrumentalities à The Court has pierced the veil in occasions where the act committed is short of fraud on the ground of interlinking which indicates that the subsidiary company is but an alter-‐ego.

3. Defeating public convenience, equity and justice à As such, piercing of the corporate veil should be a last resort. If there is another way, the Courts should take that path in order to preserve such an important feature of the corporate.

4. There is no hard and fast rule regarding piercing. It is subject to the circumstances of the case, and (unfortunately?) dependent on who the Justices are.

5. These cases of piercing the corporate veil, when the Court says that the stockholder shares the same personality as the corporation, that is good for purposes of the issue that is being rule upon. But it does not result in a complete denial of the separate personality of the corporate entity for matters unrelated to the issue.

5. separate juridical personality and doctrine of piercing the veil of corporate fictions

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