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Hall vs. Piccio[GR L-2598, 29 June 1950]En Banc, Bengzon (J): 5 concur

Facts: On 28 May 1947, C. Arnold Hall and Bradley P. Hall, and Fred Brown, Emma Brown, Hipolita D. Chapman and Ceferino S. Abella, signed and acknowledged in Leyte, the article of incorporation of the Far Eastern Lumber and Commercial Co., Inc., organized to engage in a general lumber business to carry on as general contractors, operators and managers, etc. Attached to the article was an affidavit of the treasurer stating that 23,428 shares of stock had been subscribed and fully paid with certain properties transferred to the corporation described in a list appended thereto. Immediately after the execution of said articles of incorporation, the corporation proceeded to do business with the adoption of by-laws and the election of its officers. On 2 December 1947, the said articles of incorporation were filed in the office of the Securities and Exchange Commissioner, for the issuance of the corresponding certificate of incorporation. On 22 March 1948, pending action on the articles of incorporation by the aforesaid governmental office, Fred Brown, Emma Brown, Hipolita D. Chapman and Ceferino S. Abella filed before the Court of First Instance of Leyte the civil case, alleging among other things that the Far Eastern Lumber and Commercial Co. was an unregistered partnership; that they wished to have it dissolved because of bitter dissension among the members, mismanagement and fraud by the managers and heavy financial losses. C. Arnold Hall and Bradley P. Hall, filed a motion to dismiss, contesting the court's jurisdiction and the sufficiently of the cause of action. After hearing the parties, the Hon. Edmund S. Piccio ordered the dissolution of the company; and at the request of Brown, et. al., appointed Pedro A. Capuciong as the receiver of the properties thereof, upon the filing of a P20,000 bond. Hall and Hall offered to file a counter-bond for the discharge of the receiver, but Judge Piccio refused to accept the offer and to discharge the receiver. Whereupon, Hall and Hall instituted the present special civil action with the Supreme Court.

Issue: Whether Brown, et. al. may file an action to cause the dissolution of the Far Eastern Lumber and Commercial Co., without State intervention.

Held: The Securities and Exchange Commission has not issued the corresponding certificate of incorporation. The personality of a corporation begins to exist only from the moment such certificate is issued — not before. Not having obtained the certificate of incorporation, the Far Eastern Lumber and Commercial Co. — even its stockholders — may not probably claim "in good faith" to be a corporation. Under the statue it is to be noted that it is the issuance of a certificate of incorporation by the Director of the Bureau of Commerce and Industry which calls a corporation into being. The immunity if collateral attack is granted to corporations "claiming in good faith to be a corporation under this act." Such a claim is compatible with the existence of errors and irregularities; but not with a total or substantial disregard of the law. Unless there has been an evident attempt to comply with the law the claim to be a corporation "under this act" could not be made "in good faith."

This is not a suit in which the corporation is a party. This is a litigation between stockholders of the alleged corporation, for the purpose of obtaining its dissolution. Even the existence of a de jure corporation may be terminated in a private suit for its dissolution between stockholders, without the intervention of the state.

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ABS-CBN BROADCASTING CORPORATION VS. COURT OF APPEALS301 SCRA 572

FACTS:1. Petitioner ABS-CBN and respondent VIVA executed a Film Exhibition Agreement whereby VIVA gave ABS-CBN an exclusive right to exhibit some Viva Films.2. Viva, through defendant Vicente del Rosario offered ABS-CBN, through its vice-president Charo Santos-Concio a list of film packages from which ABS-CBN may exercise its right of first refusal.3. ABS-CBN did not accept the list of film packages.4. Del Rosario and Senior Vice President for Finance, Mr. Graciano Gozon, of Republic Broadcasting Corporation discussed the terms and conditions of Viva’s offer to sell the 104 films, after the rejection of the same package by ABS-CBN. 5. After the rejection of ABS-CBN and following several negotiations and meetings defendant Del Rosario and Viva’s President Teresita Cruz, in consideration of P 60 Million, signed a letter or agreement granting RBS (GMA 7) the exclusive right to air 104 Via-produced and/or acquired films including the 14 films subject of the present case.6. ABS-CBN filed before the RTC a complaint for specific performance with a prayer for a writ of preliminary injunction and/or temporary restraining order against private respondents RBS, VIVA and Vicente del Rosario.7. The RTC issued the TRO enjoining private respondent from proceeding with the airing, broadcasting, and televising of the 14 VIVA films subject of the controversy.8. A civil case was filed by ABS-CBN against VIVA et al.9. The RTC rendered a decision in favor of RBS and VIVA and against ABS-CBN and ordered it to pay:a) 1 Million – attorney’s feesb) 5 Million – moral damagesc) 5 million – exemplary damages10. According to the RTC, there was no meeting of minds on the price and terms of the offers because the alleged agreement between Lopez III and del Rosario was subject to the approval of the VIVA Board of Directors, and said agreement was disapproved during a Board Meeting.11. On appeal to the CA, the Appellate Court agreed with the RTC that the contract between ABS-CBN and VIVA was not perfected, absent the approval by the VIVA Board of Directors of whatever Del Rosario, its agent, might have agreed with Lopez.12. The appellate court did not also believe ABS-CBN’s evidence that Lopez III actually wrote down such an agreement on a" napkin", as the same was never produced in court.13. Respondent Court sustained the award of actual damages there being adequate proof of the pecuniary loss which RBS had suffered as a result of the filing of the complaint by ABS-CBN.14. As to the award from moral damages, the Ca found reasonable basis therefore, holding that RBS’ reputation was debased by the filing of the complaint and by the non-showing of the film “Maging Sino Ka Man”.15. Respondent Court also held that exemplary damages were correctly imposed by way of example or correction for the public good in view of the filing of the complaint despite petitioner’s knowledge the contract with VIVA had not been perfected.16. The appellate court, however, reduced the awards for moral damages to P 2 Million, exemplary damages to P 2 Million, and attorney’s fees to P 500,000.0017. Motion for reconsideration was denied.18. Hence this petition.

ISSUE:Was the award of actual and compensatory damages proper?

Whether or not the award of moral and exemplary damages proper?

Was the award of attorney’s fees in favor of RBS proper?

HELD:Chapter 2, Title XVIII, Book IV of the Civil Code is the specific law on actual or compensatory damages. Except as provided by law or by stipulation, one is entitled to compensation for actual

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damages only for such pecuniary loss suffered by him as he has duly proved. The indemnification shall comprehend not only the value of the loss suffered, but also that of the profits that the obligee failed to obtain. In contracts and quasi contracts the damages which may be awarded are dependent on whether the obligor acted with good faith or otherwise. In case of good faith, the damages recoverable are those which are the natural and probable consequences of the breach of the obligation and which the parties have foreseen or could have reasonably foreseen at the time of the constitution of the obligation. If the obligor acted with fraud, bad, faith, malice, or wanton attitude, he shall be responsible for all damages which may be reasonably attributed to the non-performance of the obligation.

Actual damages may likewise be recovered for loss or impairment of earning capacity in cases of temporary or permanent personal injury, of for injury to the plaintiff, business standing or commercial credit.

The claim of RBS for actual damages did not arise from contract, quasi-contract, delict, or quasi delict. It arose from the fact of filing of the complaint despite ABS-CBN’s alleged knowledge of lack of cause of action.

Needless to state the ward of actual damages cannot be comprehended under the above law on actual damages. RBS could only probably take refuge under Articles 19, 20, and 21 of the Civil Code.

As regards attorney’s fees, the law is clear that in the absence of stipulation, attorney's fees may be recovered as actual or compensatory damages under any of the circumstance provided for in Article 2208 of the Civil Code.

The general rule is that attorney's fees cannot be recovered as part of damages because of the policy that no premium should be placed on the right to litigate. They are not to be awarded every time a party wins a suit. The power of the court to award attorney’s fees under Article 2208 demands, factual, legal, and equitable justification. Even when a claimant is compelled to litigate with third persons or to incur expense to protect his right, still attorney’s fees may not be awarded where no sufficient showing of bad faith could be reflected in a party’s; persistence is a case other than an erroneous conviction of the righteousness of his cause.

As to moral damages the law is Section 1, chapter 3, Title XVIII, Book IV of the Civil Code. Article 2217 thereof defines what are included in moral damages, while Article 2210 enumerated the cases where they me be recovered. Article 2220 provides that moral damages may be recovered in breaches of contract where the defendant acted fraudulently or in bad faith. RBS’s claim for moral damages could possibly fall only under item (10) of Article 2219.

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

The award of moral damages cannot be granted in favor of a corporation because, being an artificial person and having existence only in legal contemplation, it has no feeling, no emotions, no sense. It cannot, therefore experience physical suffering and mental anguish, which can be experienced only by one having a nervous system.

The basic law on exemplary damages is Section 5, Chapter 3, Tile XVIII, Book IV of the Civil Code. These are imposed by way of example or correction for the public good, in addition to moral, temperate, liquidated, or compensatory damages. They are recoverable in criminal cases as part of the civil liability when the crime was committed with one or more aggravating circumstances; in quasi-delicts, if the defendant acted with gross negligence; and in contracts and quasi-contracts, if the defendant acted in a wanton, fraudulent, reckless, oppressive or malevolent manner.

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It may be reiterated that the claim of RBS against ABS-CBN is not based on contract, quasi-contract, delict, or quasi delict. Hence the claims for moral and exemplary damages can only be based on Article 19, 20 and 21 of the Civil Code.

PRIME WHITE CEMENT CORPORATION, Petitioner, vs. HONORABLE INTERMEDIATE APPELLATE COURT and ALEJANDRO TE, Respondents.

CAMPOS, JR., J.:

Before Us is a Petition for Review on Certiorari filed by petitioner Prime White Cement Corporation seeking the reversal of the decision * of the then Intermediate Appellate Court, the dispositive portion of which reads as follows:

WHEREFORE, in view of the foregoing, the judgment appealed from is hereby affirmed in toto. 1

virtual law library

The facts, as found by the trial court and as adopted by the respondent Court are hereby quoted, to wit:

On or about the 16th day of July, 1969, plaintiff and defendant corporation thru its President, Mr. Zosimo Falcon and Justo C. Trazo, as Chairman of the Board, entered into a dealership agreement (Exhibit A) whereby said plaintiff was obligated to act as the exclusive dealer and/or distributor of the said defendant corporation of its cement products in the entire Mindanao area for a term of five (5) years and proving (sic) among others that:

a. The corporation shall, commencing September, 1970, sell to and supply the plaintiff, as dealer with 20,000 bags (94 lbs/bag) of white cement per month; virtual law library

b. The plaintiff shall pay the defendant corporation P9.70, Philippine Currency, per bag of white cement, FOB Davao and Cagayan de Oro ports; virtual law library

c. The plaintiff shall, every time the defendant corporation is ready to deliver the good, open with any bank or banking institution a confirmed, unconditional, and irrevocable letter of credit in favor of the corporation and that upon certification by the boat captain on the bill of lading that the goods have been loaded on board the vessel bound for Davao the said bank or banking institution shall release the corresponding amount as payment of the goods so shipped.

Right after the plaintiff entered into the aforesaid dealership agreement, he placed an advertisement in a national, circulating newspaper the fact of his being the exclusive dealer of the defendant corporation's white cement products in Mindanao area, more particularly, in the Manila Chronicle dated August 16, 1969 (Exhibits R and R-1) and was even congratulated by his business associates, so much so, he was asked by some of his businessmen friends and close associates if they can be hissub-dealer in the Mindanao area.virtualawlibrary virtual law library

Relying heavily on the dealership agreement, plaintiff sometime in the months of September, October, and December, 1969, entered into a written agreement with several hardware stores dealing in buying and selling white cement in the Cities of Davao and Cagayan de Oro which would thus enable him to sell his allocation of 20,000 bags regular supply of the said commodity, by September, 1970 (Exhibits O, O-1, O-2, P, P-1, P-2, Q, Q-1 and Q-2). After the plaintiff was assured by his supposed buyer that his allocation of 20,000 bags of white cement can be disposed of, he informed the defendant corporation in his letter dated August 18, 1970 that he is

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making the necessary preparation for the opening of the requisite letter of credit to cover the price of the due initial delivery for the month of September, 1970 (Exhibit B), looking forward to the defendant corporation's duty to comply with the dealership agreement. In reply to the aforesaid letter of the plaintiff, the defendant corporation thru its corporate secretary, replied that the board of directors of the said defendant decided to impose the following conditions:

a. Delivery of white cement shall commence at the end of November, 1970; virtual law library

b. Only 8,000 bags of white cement per month for only a period of three (3) months will be delivered; virtual law library

c. The price of white cement was priced at P13.30 per bag; virtual law library

d. The price of white cement is subject to readjustment unilaterally on the part of the defendant; virtual law library

e. The place of delivery of white cement shall be Austurias (sic); virtual law library

f. The letter of credit may be opened only with the Prudential Bank, Makati Branch; virtual law library

g. Payment of white cement shall be made in advance and which payment shall be used by the defendant as guaranty in the opening of a foreign letter of credit to cover costs and expenses in the procurement of materials in the manufacture of white cement. (Exhibit C).

xxx xxx xxx virtual law library

Several demands to comply with the dealership agreement (Exhibits D, E, G, I, R, L, and N) were made by the plaintiff to the defendant, however, defendant refused to comply with the same, and plaintiff by force of circumstances was constrained to cancel his agreement for the supply of white cement with third parties, which were concluded in anticipation of, and pursuant to the said dealership agreement.virtualawlibrary virtual law library

Notwithstanding that the dealership agreement between the plaintiff and defendant was in force and subsisting, the defendant corporation, in violation of, and with evident intention not to be bound by the terms and conditions thereof, entered into an exclusive dealership agreement with a certain Napoleon Co for the marketing of white cement in Mindanao (Exhibit T) hence, this suit. (Plaintiff's Record on Appeal, pp. 86-90). 2 virtual law library

After trial, the trial court adjudged the corporation liable to Alejandro Te in the amount of P3,302,400.00 as actual damages, P100,000.00 as moral damages, and P10,000.00 as and for attorney's fees and costs. The appellate court affirmed the said decision mainly on the following basis, and We quote:

There is no dispute that when Zosimo R. Falcon and Justo B. Trazo signed the dealership agreement Exhibit "A", they were the President and Chairman of the Board, respectively, of defendant-appellant corporation. Neither is the genuineness of the said agreement contested. As a matter of fact, it appears on the face of the contract itself that both officers were duly authorized to enter into the said agreement and signed the same for and in behalf of the corporation. When they, therefore, entered into the said transaction they created the impression that they were duly clothed with the authority to do so. It cannot now be said that the disputed agreement which possesses all the essential requisites of a valid contract was never intended to bind the corporation as this avoidance is barred by the principle of estoppel. 3 virtual law library

In this petition for review, petitioner Prime White Cement Corporation made the following assignment of errors. 4

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THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE COURT ARE UNPRECEDENTED DEPARTURES FROM THE CODIFIED PRINCIPLE THAT CORPORATE OFFICERS

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COULD ENTER INTO CONTRACTS IN BEHALF OF THE CORPORATION ONLY WITH PRIOR APPROVAL OF THE BOARD OF DIRECTORS.

II virtual law library

THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE COURT ARE CONTRARY TO THE ESTABLISHED JURISPRUDENCE, PRINCIPLE AND RULE ON FIDUCIARY DUTY OF DIRECTORS AND OFFICERS OF THE CORPORATION.

III virtual law library

THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE COURT DISREGARDED THE PRINCIPLE AND JURISPRUDENCE, PRINCIPLE AND RULE ON UNENFORCEABLE CONTRACTS AS PROVIDED IN ARTICLE 1317 OF THE NEW CIVIL CODE.

IV virtual law library

THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE COURT DISREGARDED THE PRINCIPLE AND JURISPRUDENCE AS TO WHEN AWARD OF ACTUAL AND MORAL DAMAGES IS PROPER.

V virtual law library

IN NOT AWARDING PETITIONER'S CAUSE OF ACTION AS STATED IN ITS ANSWER WITH SPECIAL AND AFFIRMATIVE DEFENSES WITH COUNTERCLAIM THE INTERMEDIATE APPELLATE COURT HAS CLEARLY DEPARTED FROM THE ACCEPTED USUAL, COURSE OF JUDICIAL PROCEEDINGS.

There is only one legal issue to be resolved by this Court: whether or not the "dealership agreement" referred by the President and Chairman of the Board of petitioner corporation is a valid and enforceable contract. We do not agree with the conclusion of the respondent Court that it is.virtualawlibrary virtual law library

Under the Corporation Law, which was then in force at the time this case arose, 5 as well as under the present Corporation Code, all corporate powers shall be exercised by the Board of Directors, except as otherwise provided by law. 6 Although it cannot completely abdicate its power and responsibility to act for the juridical entity, the Board may expressly delegate specific powers to its President or any of its officers. In the absence of such express delegation, a contract entered into by its President, on behalf of the corporation, may still bind the corporation if the board should ratify the same expressly or impliedly. Implied ratification may take various forms - like silence or acquiescence; by acts showing approval or adoption of the contract; or by acceptance and retention of benefits flowing therefrom. 7 Furthermore, even in the absence of express or implied authority by ratification, the President as such may, as a general rule, bind the corporation by a contract in the ordinary course of business, provided the same is reasonable under the circumstances. 8 These rules are basic, but are all general and thus quite flexible. They apply where the President or other officer, purportedly acting for the corporation, is dealing with a third person, i. e., a person outside the corporation.virtualawlibrary virtual law library

The situation is quite different where a director or officer is dealing with his own corporation. In the instant case respondent Te was not an ordinary stockholder; he was a member of the Board of Directors and Auditor of the corporation as well. He was what is often referred to as a "self-dealing" director.virtualawlibrary virtual law library

A director of a corporation holds a position of trust and as such, he owes a duty of loyalty to his corporation. 9 In case his interests conflict with those of the corporation, he cannot sacrifice the latter to his own advantage and benefit. As corporate managers, directors are committed to seek the maximum amount of profits for the corporation. This trust relationship "is not a matter of statutory or technical law. It springs from the fact that directors have the control and guidance of corporate affairs and property and hence of the property interests of the stockholders." 10 In the case of Gokongwei v. Securities and Exchange Commission, this Court quoted with favor from Pepper v. Litton, 11 thus:

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. . . He cannot by the intervention of a corporate entity violate the ancient precept against serving two masters. . . . He cannot utilize his inside information and his strategic position for his own preferment. He cannot violate rules of fair play by doing indirectly through the corporation what he could not do directly. He cannot use his power for his personal advantage and to the detriment of the stockholders and creditors no matter how absolute in terms that power may be and no matter how meticulous he is to satisfy technical requirements. For that power is at all times subject to the equitable limitation that it may not be exercised for the aggrandizement, preference, or advantage of the fiduciary to the exclusion or detriment of the cestuis. . . . .

On the other hand, a director's contract with his corporation is not in all instances void or voidable. If the contract is fair and reasonable under the circumstances, it may be ratified by the stockholders provided a full disclosure of his adverse interest is made. Section 32 of the Corporation Code provides, thus:

Sec. 32. Dealings of directors, trustees or officers with the corporation. - A contract of the corporation with one or more of its directors or trustees or officers is voidable, at the option of such corporation, unless all the following conditions are present: virtual law library

1. That the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting; virtual law library

2. That the vote of such director or trustee was not necessary for the approval of the contract; virtual law library

3. That the contract is fair and reasonable under the circumstances; and virtual law library

4. That in the case of an officer, the contract with the officer has been previously authorized by the Board of Directors.virtualawlibrary virtual law library

Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a director or trustee, such contract may be ratified by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of two-thirds (2/3) of the members in a meeting called for the purpose: Provided, That full disclosure of the adverse interest of the directors or trustees involved is made at such meeting: Provided, however, That the contract is fair and reasonable under the circumstances.

Although the old Corporation Law which governs the instant case did not contain a similar provision, yet the cited provision substantially incorporates well-settled principles in corporate law. 12 virtual law library

Granting arguendo that the "dealership agreement" involved here would be valid and enforceable if entered into with a person other than a director or officer of the corporation, the fact that the other party to the contract was a Director and Auditor of the petitioner corporation changes the whole situation. First of all, We believe that the contract was neither fair nor reasonable. The "dealership agreement" entered into in July, 1969, was to sell and supply to respondent Te 20,000 bags of white cement per month, for five years starting September, 1970, at the fixed price of P9.70 per bag. Respondent Te is a businessman himself and must have known, or at least must be presumed to know, that at that time, prices of commodities in general, and white cement in particular, were not stable and were expected to rise. At the time of the contract, petitioner corporation had not even commenced the manufacture of white cement, the reason why delivery was not to begin until 14 months later. He must have known that within that period of six years, there would be a considerable rise in the price of white cement. In fact, respondent Te's own Memorandum shows that in September, 1970, the price per bag was P14.50, and by the middle of 1975, it was already P37.50 per bag. Despite this, no provision was made in the "dealership agreement" to allow for an increase in price mutually acceptable to the parties. Instead, the price was pegged at P9.70 per bag for the whole five years of the contract. Fairness on his part as a director of the corporation from whom he was to buy the cement, would require such a provision. In fact, this unfairness in the contract is also a basis which renders a contract entered into by the President, without authority from the Board of

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Directors, void or voidable, although it may have been in the ordinary course of business. We believe that the fixed price of P9.70 per bag for a period of five years was not fair and reasonable. Respondent Te, himself, when he subsequently entered into contracts to resell the cement to his "new dealers" Henry Wee 13 and Gaudencio Galang 14 stipulated as follows:

The price of white cement shall be mutually determined by us but in no case shall the same be less than P14.00 per bag (94 lbs).

The contract with Henry Wee was on September 15, 1969, and that with Gaudencio Galang, on October 13, 1967. A similar contract with Prudencio Lim was made on December 29, 1969. 15 All of these contracts were entered into soon after his "dealership agreement" with petitioner corporation, and in each one of them he protected himself from any increase in the market price of white cement. Yet, except for the contract with Henry Wee, the contracts were for only two years from October, 1970. Why did he not protect the corporation in the same manner when he entered into the "dealership agreement"? For that matter, why did the President and the Chairman of the Board not do so either? As director, specially since he was the other party in interest, respondent Te's bounden duty was to act in such manner as not to unduly prejudice the corporation. In the light of the circumstances of this case, it is to Us quite clear that he was guilty of disloyalty to the corporation; he was attempting in effect, to enrich himself at the expense of the corporation. There is no showing that the stockholders ratified the "dealership agreement" or that they were fully aware of its provisions. The contract was therefore not valid and this Court cannot allow him to reap the fruits of his disloyalty.virtualawlibrary virtual law library

As a result of this action which has been proven to be without legal basis, petitioner corporation's reputation and goodwill have been prejudiced. However, there can be no award for moral damages under Article 2217 and succeeding articles on Section 1 of Chapter 3 of Title XVIII of the Civil Code in favor of a corporation.virtualawlibrary virtual law library

In view of the foregoing, the Decision and Resolution of the Intermediate Appellate Court dated March 30, 1984 and August 6, 1984, respectively, are hereby SET ASIDE. Private respondent Alejandro Te is hereby ordered to pay petitioner corporation the sum of P20,000.00 for attorney's fees, plus the cost of suit and expenses of litigation.virtualawlibrary virtual law library

Gokongwei vs. Securities and Exchange Commission

Facts: [SEC Case 1375] On 22 October 1976, John Gokongwei Jr., as stockholder of San Miguel Corporation, filed with the Securities and Exchange Commission (SEC) a petition for "declaration of nullity of amended by-laws, cancellation of certificate of filing of amended by-laws, injunction and damages with prayer for a preliminary injunction" against the majority of the members of the Board of Directors and San Miguel Corporation as an unwilling petitioner. As a first cause of action, Gokongwei alleged that on 18 September 1976, Andres Soriano, Jr., Jose M. Soriano, Enrique Zobel, Antonio Roxas, Emeterio Buñao, Walthrode B. Conde, Miguel Ortigas, and Antonio Prieto amended by bylaws of the corporation, basing their authority to do so on a resolution of the stockholders adopted on 13 March 1961, when the outstanding capital stock of the corporation was only P70,139.740.00, divided into 5,513,974 common shares at P10.00 per share and 150,000 preferred shares at P100.00 per share. At the time of the amendment, the outstanding and paid up shares totalled 30,127,043, with a total par value of P301,270,430.00. It was contended that according to section 22 of the Corporation Law and Article VIII of the by-laws of the corporation, the power to amend, modify, repeal or adopt new by-laws may be delegated to the Board of Directors only by the affirmative vote of stockholders representing not less than 2/3 of the subscribed and paid up capital stock of the corporation, which 2/3 should have been computed on the basis of the capitalization at the time of the amendment. Since the amendment was based on the 1961 authorization, Gokongwei contended that the Board acted without authority and in usurpation of the power of the stockholders. As a second cause of action, it was alleged that the authority granted in 1961 had already been exercised in 1962 and 1963, after which the authority of the Board ceased to exist. As a third cause of action, Gokongwei averred

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that the membership of the Board of Directors had changed since the authority was given in 1961, there being 6 new directors. As a fourth cause of action, it was claimed that prior to the questioned amendment, Gokogwei had all the qualifications to be a director of the corporation, being a substantial stockholder thereof; that as a stockholder, Gokongwei had acquired rights inherent in stock ownership, such as the rights to vote and to be voted upon in the election of directors; and that in amending the by-laws, Soriano, et. al. purposely provided for Gokongwei's disqualification and deprived him of his vested right as afore-mentioned, hence the amended by-laws are null and void. As additional causes of action, it was alleged that corporations have no inherent power to disqualify a stockholder from being elected as a director and, therefore, the questioned act is ultra vires and void; that Andres M. Soriano, Jr. and/or Jose M. Soriano, while representing other corporations, entered into contracts (specifically a management contract) with the corporation, which was avowed because the questioned amendment gave the Board itself the prerogative of determining whether they or other persons are engaged in competitive or antagonistic business; that the portion of the amended by-laws which states that in determining whether or not a person is engaged in competitive business, the Board may consider such factors as business and family relationship, is unreasonable and oppressive and, therefore, void; and that the portion of the amended by-laws which requires that "all nominations for election of directors shall be submitted in writing to the Board of Directors at least five (5) working days before the date of the Annual Meeting" is likewise unreasonable and oppressive. It was, therefore, prayed that the amended by-laws be declared null and void and the certificate of filing thereof be cancelled, and that Soriano, et. al. be made to pay damages, in specified amounts, to Gokongwei. On 28 October 1976, in connection with the same case, Gokongwei filed with the Securities and Exchange Commission an "Urgent Motion for Production and Inspection of Documents", alleging that the Secretary of the corporation refused to allow him to inspect its records despite request made by Gokongwei for production of certain documents enumerated in the request, and that the corporation had been attempting to suppress information from its stockholders despite a negative reply by the SEC to its query regarding their authority to do so. The motion was opposed by Soriano, et. al. The Corporation, Soriano, et. al. filed their answer, and their opposition to the petition, respectively. Meanwhile, on 10 December 1976, while the petition was yet to be heard, the corporation issued a notice of special stockholders' meeting for the purpose of "ratification and confirmation of the amendment to the By-laws", setting such meeting for 10 February 1977. This prompted Gokongwei to ask the SEC for a summary judgment insofar as the first cause of action is concerned, for the alleged reason that by calling a special stockholders' meeting for the aforesaid purpose, Soriano, et. al. admitted the invalidity of the amendments of 18 September 1976. The motion for summary judgment was opposed by Soriano, et. al. Pending action on the motion, Gokongwei filed an "Urgent Motion for the Issuance of a Temporary Restraining Order", praying that pending the determination of Gokongwei's application for the issuance of a preliminary injunction and or Gokongwei's motion for summary judgment, a temporary restraining order be issued, restraining Soriano, et. al. from holding the special stockholders' meeting as scheduled. This motion was duly opposed by Soriano, et. al. On 10 February 1977, Cremation issued an order denying the motion for issuance of temporary restraining order. After receipt of the order of denial, Soriano, et. al. conducted the special stockholders' meeting wherein the amendments to the by-laws were ratified. On 14 February 1977, Gokongwei filed a consolidated motion for contempt and for nullification of the special stockholders' meeting. A motion for reconsideration of the order denying Gokongwei's motion for summary judgment was filed by Gokongwei before the SEC on 10 March 1977.

[SEC Case 1423] Gokongwei alleged that, having discovered that the corporation has been investing corporate funds in other corporations and businesses outside of the primary purpose clause of the corporation, in violation of section 17-1/2 of the Corporation Law, he filed with SEC, on 20 January 1977, a petition seeking to have Andres M. Soriano, Jr. and Jose M. Soriano, as well as the corporation declared guilty of such violation, and ordered to account for such investments and to answer for damages. On 4 February 1977, motions to dismiss were filed by Soriano, et. al., to which a consolidated motion to strike and to declare Soriano, et. al. in default and an opposition ad abundantiorem cautelam were filed by Gokongwei. Despite the fact that said motions were filed as early as 4 February 1977, the Commission acted thereon only on 25 April 1977, when it denied Soriano, et. al.'s motions to dismiss and gave them two (2) days within

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which to file their answer, and set the case for hearing on April 29 and May 3, 1977. Soriano, et. al. issued notices of the annual stockholders' meeting, including in the Agenda thereof, the "reaffirmation of the authorization to the Board of Directors by the stockholders at the meeting on 20 March 1972 to invest corporate funds in other companies or businesses or for purposes other than the main purpose for which the Corporation has been organized, and ratification of the investments thereafter made pursuant thereto." By reason of the foregoing, on 28 April 1977, Gokongwei filed with the SEC an urgent motion for the issuance of a writ of preliminary injunction to restrain Soriano, et. al. from taking up Item 6 of the Agenda at the annual stockholders' meeting, requesting that the same be set for hearing on 3 May 1977, the date set for the second hearing of the case on the merits. The SEC, however, cancelled the dates of hearing originally scheduled and reset the same to May 16 and 17, 1977, or after the scheduled annual stockholders' meeting. For the purpose of urging the Commission to act, Gokongwei filed an urgent manifestation on 3 May 1977, but this notwithstanding, no action has been taken up to the date of the filing of the instant petition.

Gokongwei filed a petition for petition for certiorari, mandamus and injunction, with prayer for issuance of writ of preliminary injunction, with the Supreme Court, alleging that there appears a deliberate and concerted inability on the part of the SEC to act.

Issue [1]: Whether the corporation has the power to provide for the (additional) qualifications of its directors.

Held [1]: It is recognized by all authorities that "every corporation has the inherent power to adopt by-laws 'for its internal government, and to regulate the conduct and prescribe the rights and duties of its members towards itself and among themselves in reference to the management of its affairs.'" In this jurisdiction under section 21 of the Corporation Law, a corporation may prescribe in its by-laws "the qualifications, duties and compensation of directors, officers and employees." This must necessarily refer to a qualification in addition to that specified by section 30 of the Corporation Law, which provides that "every director must own in his right at least one share of the capital stock of the stock corporation of which he is a director." Any person "who buys stock in a corporation does so with the knowledge that its affairs are dominated by a majority of the stockholders and that he impliedly contracts that the will of the majority shall govern in all matters within the limits of the act of incorporation and lawfully enacted by-laws and not forbidden by law." To this extent, therefore, the stockholder may be considered to have "parted with his personal right or privilege to regulate the disposition of his property which he has invested in the capital stock of the corporation, and surrendered it to the will of the majority of his fellow incorporators. It can not therefore be justly said that the contract, express or implied, between the corporation and the stockholders is infringed by any act of the former which is authorized by a majority." Pursuant to section 18 of the Corporation Law, any corporation may amend its articles of incorporation by a vote or written assent of the stockholders representing at least two-thirds of the subscribed capital stock of the corporation. If the amendment changes, diminishes or restricts the rights of the existing shareholders, then the dissenting minority has only one right, viz.: "to object thereto in writing and demand payment for his share." Under section 22 of the same law, the owners of the majority of the subscribed capital stock may amend or repeal any by-law or adopt new by-laws. It cannot be said, therefore, that Gokongwei has a vested right to be elected director, in the face of the fact that the law at the time such right as stockholder was acquired contained the prescription that the corporate charter and the by-law shall be subject to amendment, alteration and modification.

Issue [2]: Whether the disqualification of a competitor from being elected to the Board of Directors is a reasonable exercise of corporate authority.

Held[2]: Although in the strict and technical sense, directors of a private corporation are not regarded as trustees, there cannot be any doubt that their character is that of a fiduciary insofar as the corporation and the stockholders as a body are concerned. As agents entrusted with the management of the corporation for the collective benefit of the stockholders, "they occupy a fiduciary relation, and in this sense the relation is one of trust." "The ordinary trust relationship of directors of a corporation and stockholders is not a matter of statutory or technical law. It springs

11

from the fact that directors have the control and guidance of corporate affairs and property and hence of the property interests of the stockholders. Equity recognizes that stockholders are the proprietors of the corporate interests and are ultimately the only beneficiaries thereof." A director is a fiduciary. Their powers are powers in trust. He who is in such fiduciary position cannot serve himself first and his cestuis second. He cannot manipulate the affairs of his corporation to their detriment and in disregard of the standards of common decency. He cannot by the intervention of a corporate entity violate the ancient precept against serving two masters. He cannot utilize his inside information and strategic position for his own preferment. He cannot violate rules of fair play by doing indirectly through the corporation what he could not do so directly. He cannot violate rules of fair play by doing indirectly through the corporation what he could not do so directly. He cannot use his power for his personal advantage and to the detriment of the stockholders and creditors no matter how absolute in terms that power may be and no matter how meticulous he is to satisfy technical requirements. For that power is at all times subject to the equitable limitation that it may not be exercised for the aggrandizement, preference, or advantage of the fiduciary to the exclusion or detriment of the cestuis. The doctrine of "corporate opportunity" is precisely a recognition by the courts that the fiduciary standards could not be upheld where the fiduciary was acting for two entities with competing interests. This doctrine rests fundamentally on the unfairness, in particular circumstances, of an officer or director taking advantage of an opportunity for his own personal profit when the interest of the corporation justly calls for protection. It is not denied that a member of the Board of Directors of the San Miguel Corporation has access to sensitive and highly confidential information, such as: (a) marketing strategies and pricing structure; (b) budget for expansion and diversification; (c) research and development; and (d) sources of funding, availability of personnel, proposals of mergers or tie-ups with other firms. It is obviously to prevent the creation of an opportunity for an officer or director of San Miguel Corporation, who is also the officer or owner of a competing corporation, from taking advantage of the information which he acquires as director to promote his individual or corporate interests to the prejudice of San Miguel Corporation and its stockholders, that the questioned amendment of the by-laws was made. Certainly, where two corporations are competitive in a substantial sense, it would seem improbable, if not impossible, for the director, if he were to discharge effectively his duty, to satisfy his loyalty to both corporations and place the performance of his corporation duties above his personal concerns. The offer and assurance of Gokongwei that to avoid any possibility of his taking unfair advantage of his position as director of San Miguel Corporation, he would absent himself from meetings at which confidential matters would be discussed, would not detract from the validity and reasonableness of the by-laws involved. Apart from the impractical results that would ensue from such arrangement, it would be inconsistent with Gokongwei's primary motive in running for board membership — which is to protect his investments in San Miguel Corporation. More important, such a proposed norm of conduct would be against all accepted principles underlying a director's duty of fidelity to the corporation, for the policy of the law is to encourage and enforce responsible corporate management.

Issue [3]: Whether the SEC gravely abused its discretion in denying Gokongwei's request for an examination of the records of San Miguel International, Inc., a fully owned subsidiary of San Miguel Corporation.

Held [3]: Pursuant to the second paragraph of section 51 of the Corporation Law, "(t)he record of all business transactions of the corporation and minutes of any meeting shall be open to the inspection of any director, member or stockholder of the corporation at reasonable hours." The stockholder's right of inspection of the corporation's books and records is based upon their ownership of the assets and property of the corporation. It is, therefore, an incident of ownership of the corporate property, whether this ownership or interest be termed an equitable ownership, a beneficial ownership, or a quasi-ownership. This right is predicated upon the necessity of self-protection. It is generally held by majority of the courts that where the right is granted by statute to the stockholder, it is given to him as such and must be exercised by him with respect to his interest as a stockholder and for some purpose germane thereto or in the interest of the corporation. In other words, the inspection has to be germane to the petitioner's interest as a stockholder, and has to be proper and lawful in character and not inimical to the interest of the

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corporation. The "general rule that stockholders are entitled to full information as to the management of the corporation and the manner of expenditure of its funds, and to inspection to obtain such information, especially where it appears that the company is being mismanaged or that it is being managed for the personal benefit of officers or directors or certain of the stockholders to the exclusion of others." While the right of a stockholder to examine the books and records of a corporation for a lawful purpose is a matter of law, the right of such stockholder to examine the books and records of a wholly-owned subsidiary of the corporation in which he is a stockholder is a different thing. Stockholders are entitled to inspect the books and records of a corporation in order to investigate the conduct of the management, determine the financial condition of the corporation, and generally take an account of the stewardship of the officers and directors. herein, considering that the foreign subsidiary is wholly owned by San Miguel Corporation and, therefore, under Its control, it would be more in accord with equity, good faith and fair dealing to construe the statutory right of petitioner as stockholder to inspect the books and records of the corporation as extending to books and records of such wholly owned subsidiary which are in the corporation's possession and control.

Issue [4]: Whether the SEC gravely abused its discretion in allowing the stockholders of San Miguel Corporation to ratify the investment of corporate funds in a foreign corporation.

Held [4]: Section 17-1/2 of the Corporation Law allows a corporation to "invest its funds in any other corporation or business or for any purpose other than the main purpose for which it was organized" provided that its Board of Directors has been so authorized by the affirmative vote of stockholders holding shares entitling them to exercise at least two-thirds of the voting power. If the investment is made in pursuance of the corporate purpose, it does not need the approval of the stockholders. It is only when the purchase of shares is done solely for investment and not to accomplish the purpose of its incorporation that the vote of approval of the stockholders holding shares entitling them to exercise at least two-thirds of the voting power is necessary. As stated by the corporation, the purchase of beer manufacturing facilities by SMC was an investment in the same business stated as its main purpose in its Articles of Incorporation, which is to manufacture and market beer. It appears that the original investment was made in 1947-1948, when SMC, then San Miguel Brewery, Inc., purchased a beer brewery in Hongkong (Hongkong Brewery & Distillery, Ltd.) for the manufacture and marketing of San Miguel beer thereat. Restructuring of the investment was made in 1970-1971 thru the organization of SMI in Bermuda as a tax free reorganization. Assuming arguendo that the Board of Directors of SMC had no authority to make the assailed investment, there is no question that a corporation, like an individual, may ratify and thereby render binding upon it the originally unauthorized acts of its officers or other agents. This is true because the questioned investment is neither contrary to law, morals, public order or public policy. It is a corporate transaction or contract which is within the corporate powers, but which is defective from a purported failure to observe in its execution the requirement of the law that the investment must be authorized by the affirmative vote of the stockholders holding two-thirds of the voting power. This requirement is for the benefit of the stockholders. The stockholders for whose benefit the requirement was enacted may, therefore, ratify the investment and its ratification by said stockholders obliterates any defect which it may have had at the outset. Besides, the investment was for the purchase of beer manufacturing and marketing facilities which is apparently relevant to the corporate purpose. The mere fact that the corporation submitted the assailed investment to the stockholders for ratification at the annual meeting of 10 May 1977 cannot be construed as an admission that the corporation had committed an ultra vires act, considering the common practice of corporations of periodically submitting for the ratification of their stockholders the acts of their directors, officers and managers.

Montelibano et al. v. BACOLOD-MURCIA MILLING CO., INC.(1962)

1)

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Montelibano et al. are sugar planters who had an existing milling contract w/ BACOLOD-MURCIA MILLING CO., INC. and wherein it was proposed that they amend their milling contract so that they share 60%(planter) and 40%(miller) and extending their original contract from 30 to 45 years.

2)

BACOLOD-MURCIA MILLING CO., INC. adopted a resolution (as a supplement to the Amended Milling Contract) P(9) of which states that whatever concessions other millers grant to the said planters will also be matched by it.

3)

3 millers granted a 62.5% share to the planters.

4)

The planters asked the BACOLOD-MURCIA MILLING CO., INC. for

the same share invoking P(9) of the BACOLOD-MURCIA MILLING CO.,

INC.resolution.

5)

BACOLOD-MURCIA MILLING CO., INC.DEFENSE:

The stipulations contained in the resolution were made w/o consideration; therefore the resolution is null and void being in effect a donation that was ultra vires and beyond the powers of the corporate directors to adopt.

HELD:

The resolution in question was passed in GF by the BOD, it is valid and binding, and WON it will cause losses or decrease the profits of the central, the court has no authority to review them.

The BOD of BACOLOD-MURCIA MILLING CO., INC. had authority to modify the proposed terms of the Amended Milling Contract for the purpose of making its terms more acceptable to the other contracting parties.

RATIO:

1)

It is a well-known rule of law that questions of policy or of management are left solely to the honest decision of officers and directors of a C and the court is w/o authority to substitute its judgment of the BOD; the B is the business manager of the C and so long as it acts in GF its orders are not reviewable by the courts.

2)

It is a question, therefore, in each case of the logical relation of the act to the corporate purpose expressed in the charter. …. The test to be applied is whether the act in question is in direct and immediate furtherance of the C’s business, fairly incident to the express powers and reasonably necessary to their exercise. If so he C has the power to do it; otherwise not.

PHILIPPINE STOCK EXCHANGE, INC., Petitioner, vs. THE HONORABLE COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION and PUERTO AZUL LAND, INC., Respondents.

The Securities and Exchange Commission is the government agency, under the direct general supervision of the Office of the President,1 with the immense task of enforcing the Revised

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Securities Act, and all other duties assigned to it by pertinent laws. Among its inumerable functions, and one of the most important, is the supervision of all corporations, partnerships or associations, who are grantees or primary franchise and/or a license or permit issued by the government to operate in the Philippines.2 Just how far this regulatory authority extends, particularly, with regard to the Petitioner Philippine Stock Exchange, Inc. is the issue in the case at bar.In this Petition for Review of Certiorari, petitioner assails the resolution of the respondent Court of Appeals, dated June 27, 1996, which affirmed the decision of the Securities and Exchange Commission ordering the petitioner Philippine Stock Exchange, Inc. to allow the private respondent Puerto Azul Land, Inc. to be listed in its stock market, thus paving the way for the public offering of PALIs shares.The facts of the case are undisputed, and are hereby restated in sum.

The Puerto Azul Land, Inc. (PALI), a domestic real estate corporation, had sought to offer its shares to the public in order to raise funds allegedly to develop its properties and pay its loans with several banking institutions. In January, 1995, PALI was issued a Permit to Sell its shares to the public by the Securities and Exchange Commission (SEC). To facilitate the trading of its shares among investors, PALI sought to course the trading of its shares through the Philippine Stock Exchange, Inc. (PSE), for which purpose it filed with the said stock exchange an application to list its shares, with supporting documents attached.On February 8, 1996, the Listing Committee of the PSE, upon a perusal of PALIs application, recommended to the PSEs Board of Governors the approval of PALIs listing application.

On February 14, 1996, before it could act upon PALIs application, the Board of Governors of PSE received a letter from the heirs of Ferdinand E. Marcos, claiming that the late President Marcos was the legal and beneficial owner of certain properties forming part of the Puerto Azul Beach Hotel and Resort Complex which PALI claims to be among its assets and that the Ternate Development Corporation, which is among the stockholders of PALI, likewise appears to have been held and continue to be held in trust by one Rebecco Panlilio for then President Marcos and now, effectively for his estate, and requested PALIs application to be deferred. PALI was requested to comment upon the said letter.

PALIs answer stated that the properties forming part of Puerto Azul Beach Hotel and Resort Complex were not claimed by PALI as its assets. On the contrary, the resort is actually owned by Fantasia Filipina Resort, Inc. and the Puerto Azul Country Club, entities distinct from PALI. Furthermore, the Ternate Development Corporation owns only 1.20% of PALI. The Marcoses responded that their claim is not confined to the facilities forming part of the Puerto Azul Hotel and Resort Complex, thereby implying that they are also asserting legal and beneficial ownership of other properties titled under the name of PALI.

On February 20, 1996, the PSE wrote Chairman Magtanggol Gunigundo of the Presidential Commission on Good Government (PCGG) requesting for comments on the letter of the PALI and the Marcoses. On March 4, 1996, the PSE was informed that the Marcoses received a Temporary Restraining Order on the same date, enjoining the Marcoses from, among others, further impeding, obstructing, delaying or interfering in any manner by or any means with the consideration, processing and approval by the PSE of the initial public offering of PALI. The TRO was issued by Judge Martin S. Villarama, Executive Judge of the RTC of Pasig City in Civil Case No. 65561, pending in Branch 69 thereof.

In its regular meeting held on March 27, 1996, the Board of Governors of the PSE reached its decision to reject PALIs application, citing the existence of serious claims, issues and circumstances surrounding PALIs ownership over its assets that adversely affect the suitability of listing PALIs shares in the stock exchange.On April 11, 1996, PALI wrote a letter to the SEC addressed to the then Acting Chairman, Perfecto R. Yasay, Jr., bringing to the SECs attention the action taken by the PSE in the application of PALI for the listing of its shares with the PSE, and requesting that the SEC, in the exercise of its supervisory and regulatory powers over stock exchanges under Section 6(j) of P.D. No. 902-A, review the PSEs action on PALIs listing application and institute such measures as are just and proper and under the circumstances.

On the same date, or on April 11, 1996, the SEC wrote to the PSE, attaching thereto the letter of PALI and directing the PSE to file its comments thereto within five days from its receipt and for its authorized representative to appear for an inquiry on the matter. On April 22, 1996, the PSE submitted a letter to the SEC containing its comments to the April 11, 1996 letter of PALI.

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On April 24, 1996, the SEC rendered its Order, reversing the PSEs decision. The dispositive portion of the said order reads:

WHEREFORE, premises considered, and invoking the Commissioners authority and jurisdiction under Section 3 of the Revised Securities Act, in conjunction with Section 3, 6(j) and 6(m) of the Presidential Decree No. 902-A, the decision of the Board of Governors of the Philippine Stock Exchange denying the listing of shares of Puerto Azul Land, Inc., is hereby set aside, and the PSE is hereby ordered to immediately cause the listing of the PALI shares in the Exchange, without prejudice to its authority to require PALI to disclose such other material information it deems necessary for the protection of the investing public.This Order shall take effect immediately.

SO ORDERED.PSE filed a motion for reconsideration of the said order on April 29, 1996, which was, however denied by the Commission in its May 9, 1996 Order which states:WHEREFORE, premises considered, the Commission finds no compelling reason to consider its order dated April 24, 1996, and in the light of recent developments on the adverse claim against the PALI properties, PSE should require PALI to submit full disclosure of material facts and information to protect the investing public. In this regard, PALI is hereby ordered to amend its registration statements filed with the Commission to incorporate the full disclosure of these material facts and information.

Dissatisfied with this ruling, the PSE filed with the Court of Appeals on May 17, 1996 a Petition for Review (with application for Writ of Preliminary Injunction and Temporary Restraining Order), assailing the above mentioned orders of the SEC, submitting the following as errors of the SEC:

I. SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE OF DISCRETION IN ISSUING THE ASSAILED ORDERS WITHOUT POWER, JURISDICTION, OR AUTHORITY; SEC HAS NO POWER TO ORDER THE LISTING AND SALE OF SHARES OF PALI WHOSE ASSETS ARE SEQUESTERED AND TO REVIEW AND SUBSTITUTE DECISIONS OF PSE ON LISTING APPLICATIONS;

II. SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE OF DISCRETION IN FINDING THAT PSE ACTED IN AN ARBITRARY AND ABUSIVE MANNER IN DISAPPROVING PALIS LISTING APPLICATION;

III. THE ASSAILED ORDERS OF SEC ARE ILLEGAL AND VOID FOR ALLOWING FURTHER DISPOSITION OF

IV. PROPERTIES IN CUSTODIA LEGIS AND WHICH FORM PART OF NAVAL/MILITARY RESERVATION; AND

V. THE FULL DISCLOSURE OF THE SEC WAS NOT PROPERLY PROMULGATED AND ITS IMPLEMENTATION AND APPLICATION IN THIS CASE VIOLATES THE DUE PROCESS CLAUSE OF THE CONSTITUTION.

On June 4, 1996, PALI filed its Comment to the Petition for Review and subsequently, a Comment and Motion to Dismiss. On June 10, 1996, PSE filed its Reply to Comment and Opposition to Motion to Dismiss.On June 27, 1996, the Court of Appeals promulgated its Resolution dismissing the PSEs Petition for Review. Hence, this Petition by the PSE.

The appellate court had ruled that the SEC had both jurisdiction and authority to look into the decision of the petitioner PSE, pursuant to Section 33 of the Revised Securities Act in relation to Section 6(j) and 6(m)4 of P.D. No. 902-A, and Section 38(b)5 of the Revised Securities Act, and for the purpose of ensuring fair administration of the exchange. Both as a corporation and as a stock exchange, the petitioner is subject to public respondents jurisdiction, regulation and control. Accepting the argument that the public respondent has the authority merely to supervise or regulate, would amount to serious consequences, considering that the petitioner is a stock exchange whose business is impressed with public interest. Abuse is not remote if the public respondent is left without any system of control. If the securities act vested the public respondent with jurisdiction and control over all corporations; the power to authorize the

16

establishment of stock exchanges; the right to supervise and regulate the same; and the power to alter and supplement rules of the exchange in the listing or delisting of securities, then the law certainly granted to the public respondent the plenary authority over the petitioner; and the power of review necessarily comes within its authority.

All in all, the court held that PALI complied with all the requirements for public listing, affirming the SECs ruling to the effect that:

x x x the Philippine Stock Exchange has acted in an arbitrary and abusive manner in disapproving the application of PALI for listing of its shares in the face of the following considerations:

1. PALI has clearly and admittedly complied with the Listing Rules and full disclosure requirements of the Exchange;

2.3. In applying its clear and reasonable standards on the suitability for listing of shares, PSE

has failed to justify why it acted differently on the application of PALI, as compared to the IPOs of other companies similarly that were allowed listing in the Exchange;

4. It appears that the claims and issues on the title to PALIs properties were even less serious than the claims against the assets of the other companies in that, the assertions of the Marcoses that they are owners of the disputed properties were not substantiated enough to overcome the strength of a title to properties issued under the Torrens System as evidence of ownership thereof;

4. No action has been filed in any court of competent jurisdiction seeking to nullify PALIs ownership over the disputed properties, neither has the government instituted recovery proceedings against these properties. Yet the import of PSEs decision in denying PALIs application is that it would be PALI, not the Marcoses, that must go to court to prove the legality of its ownership on these properties before its shares can be listed.

In addition, the argument that the PALI properties belong to the Military/Naval Reservation does not inspire belief. The point is, the PALI properties are now titled. A property losses its public character the moment it is covered by a title. As a matter of fact, the titles have long been settled by a final judgment; and the final decree having been registered, they can no longer be re-opened considering that the one year period has already passed. Lastly, the determination of what standard to apply in allowing PALIs application for listing, whether the discretion method or the system of public disclosure adhered to by the SEC, should be addressed to the Securities Commission, it being the government agency that exercises both supervisory and regulatory authority over all corporations.

On August 15, 1996, the PSE, after it was granted an extension, filed an instant Petition for Review on Certiorari, taking exception to the rulings of the SEC and the Court of Appeals. Respondent PALI filed its Comment to the petition on October 17, 1996. On the same date, the PCGG filed a Motion for Leave to file a Petition for Intervention. This was followed up by the PCGGs Petition for Intervention on October 21, 1996. A supplemental Comment was filed by PALI on October 25, 1997. The Office of the Solicitor General, representing the SEC and the Court of Appeals, likewise filed its Comment on December 26, 1996. In answer to the PCGGs motion for leave to file petition for intervention, PALI filed its Comment thereto on January 17, 1997, whereas the PSE filed its own Comment on January 20, 1997.

On February 25, 1996, the PSE filed its Consolidated Reply to the comments of respondent PALI (October 17, 1996) and the Solicitor General (December 26, 1996). On may 16, 1997, PALI filed its Rejoinder to the said consolidated reply of PSE.

PSE submits that the Court of Appeals erred in ruling that the SEC had authority to order the PSE to list the shares of PALI in the stock exchange. Under presidential decree No. 902-A, the powers of the SEC over stock exchanges are more limited as compared to its authority over ordinary corporations. In connection with this, the powers of the SEC over stock exchanges under the Revised Securities Act are specifically enumerated, and these do not include the power to reverse the decisions of the stock exchange. Authorities are in abundance even in the United States, from which the countrys security policies are patterned, to the effect of giving the Securities Commission less control over stock exchanges, which in turn are given more lee-way in making the decision whether or not to allow corporations to offer their stock to the public through the stock exchange. This is in accord with the business judgment rule whereby the SEC

17

and the courts are barred from intruding into business judgments of corporations, when the same are made in good faith. The said rule precludes the reversal of the decision of the PSE to deny PALIs listing application, absent a showing a bad faith on the part of the PSE. Under the listing rule of the PSE, to which PALI had previously agreed to comply, the PSE retains the discretion to accept or reject applications for listing. Thus, even if an issuer has complied with the PSE listing rules and requirements, PSE retains the discretion to accept or reject the issuers listing application if the PSE determines that the listing shall not serve the interests of the investing public.

Moreover, PSE argues that the SEC has no jurisdiction over sequestered corporations, nor with corporations whose properties are under sequestration. A reading of Republic of the Philippines vs. Sandiganbayan, G.R. No. 105205, 240 SCRA 376, would reveal that the properties of PALI, which were derived from the Ternate Development Corporation (TDC) and the Monte del Sol Development Corporation (MSDC), are under sequestration by the PCGG, and the subject of forfeiture proceedings in the Sandiganbayan. This ruling of the Court is the law of the case between the Republic and the TDC and MSDC. It categorically declares that the assets of these corporations were sequestered by the PCGG on March 10, 1986 and April 4, 1988.

It is, likewise, intimidated that the Court of Appeals sanction that PALIs ownership over its properties can no longer be questioned, since certificates of title have been issued to PALI and more than one year has since lapsed, is erroneous and ignores well settled jurisprudence on land titles. That a certificate of title issued under the Torrens System is a conclusive evidence of ownership is not an absolute rule and admits certain exceptions. It is fundamental that forest lands or military reservations are non-alienable. Thus, when a title covers a forest reserve or a government reservation, such title is void.

PSE, likewise, assails the SECs and the Court of Appeals reliance on the alleged policy of full disclosure to uphold the listing of the PALIs shares with the PSE, in the absence of a clear mandate for the effectivity of such policy. As it is, the case records reveal the truth that PALI did not comply with the listing rules and disclosure requirements. In fact, PALIs documents supporting its application contained misrepresentations and misleading statements, and concealed material information. The matter of sequestration of PALIs properties and the fact that the same form part of military/naval/forest reservations were not reflected in PALIs application.

It is undeniable that the petitioner PSE is not an ordinary corporation, in that although it is clothed with the marking of a corporate entity, its functions as the primary channel through which the vessels of capital trade ply. The PSEs relevance to the continued operation and filtration of the securities transactions in the country gives it a distinct color of importance such that government intervention in its affairs becomes justified, if not necessary. Indeed, as the only operational stock exchange in the country today, the PSE enjoys a monopoly of securities transactions, and as such, it yields an immense influence upon the countrys economy.

Due to this special nature of stock exchanges, the countrys lawmakers has seen it wise to give special treatment to the administration and regulation of stock exchanges.6chanroblesvirtuallawlibraryThese provisions, read together with the general grant of jurisdiction, and right of supervision and control over all corporations under Sec. 3 of P.D. 902-A, give the SEC the special mandate to be vigilant in the supervision of the affairs of stock exchanges so that the interests of the investing public may be fully safeguarded.

Section 3 of Presidential Decree 902-A, standing alone, is enough authority to uphold the SECs challenged control authority over the petitioner PSE even as it provides that the Commission shall have absolute jurisdiction, supervision, and control over all corporations, partnerships or associations, who are the grantees of primary franchises and/or a license or permit issued by the government to operate in the Philippines The SECs regulatory authority over private corporations encompasses a wide margin of areas, touching nearly all of a corporations concerns. This authority springs from the fact that a corporation owes its existence to the concession of its corporate franchise from the state.

The SECs power to look into the subject ruling of the PSE, therefore, may be implied from or be considered as necessary or incidental to the carrying out of the SECs express power to insure fair dealing in securities traded upon a stock exchange or to ensure the fair administration of such exchange.7 It is, likewise, observed that the principal function of the SEC is the supervision and control over corporations, partnerships and associations with the end in view that investment in

18

these entities may be encouraged and protected, and their activities pursued for the promotion of economic development.8chanroblesvirtuallawlibrary

Thus, it was in the alleged exercise of this authority that the SEC reversed the decision of the PSE to deny the application for listing in the stock exchange of the private respondent PALI. The SECs action was affirmed by the Court of Appeals.

We affirm that the SEC is the entity with the primary say as to whether or not securities, including shares of stock of a corporation, may be traded or not in the stock exchange. This is in line with the SECs mission to ensure proper compliance with the laws, such as the Revised Securities Act and to regulate the sale and disposition of securities in the country.9 As the appellate court explains:

Paramount policy also supports the authority of the public respondent to review petitioners denial of the listing. Being a stock exchange, the petitioner performs a function that is vital to the national economy, as the business is affected with public interest. As a matter of fact, it has often been said that the economy moves on the basis of the rise and fall of stocks being traded. By its economic power, the petitioner certainly can dictate which and how many users are allowed to sell securities thru the facilities of a stock exchange, if allowed to interpret its own rules liberally as it may please. Petitioner can either allow or deny the entry to the market of securities. To repeat, the monopoly, unless accompanied by control, becomes subject to abuse; hence, considering public interest, then it should be subject to government regulation.

The role of the SEC in our national economy cannot be minimized. The legislature, through the Revised Securities Act, Presidential Decree No. 902-A, and other pertinent laws, has entrusted to it the serious responsibility of enforcing all laws affecting corporations and other forms of associations not otherwise vested in some other government office.1010chanroblesvirtuallawlibrary

This is not to say, however, that the PSEs management prerogatives are under the absolute control of the SEC. The PSE is, after all, a corporation authorized by its corporate franchise to engage in its proposed and duly approved business. One of the PSEs main concerns, as such, is still the generation of profit for its stockholders. Moreover, the PSE has all the rights pertaining to corporations, including the right to sue and be sued, to hold property in its own name, to enter (or not to enter) into contracts with third persons, and to perform all other legal acts within its allocated express or implied powers.

A corporation is but an association of individuals, allowed to transact under an assumed corporate name, and with a distinct legal personality. In organizing itself as a collective body, it waives no constitutional immunities and perquisites appropriate to such body.1111 As to its corporate and management decisions, therefore, the state will generally not interfere with the same. Questions of policy and of management are left to the honest decision of the officers and directors of a corporation, and the courts are without authority to substitute their judgment for the judgment of the board of directors. The board is the business manager of the corporation, and so long as it acts in good faith, its orders are not reviewable by the courts.1212chanroblesvirtuallawlibraryThus, notwithstanding the regulatory power of the SEC over the PSE, and the resultant authority to reverse the PSEs decision in matters of application for listing in the market, the SEC may exercise such power only if the PSEs judgment is attended by bad faith. In board of Liquidators v. Kalaw,1313 it was held that bad faith does not simply connote bad judgment or negligence. It imports a dishonest purpose or some moral obliquity and conscious doing of wrong. It means a breach of a known duty through some motive or interest of ill will, partaking of the nature of fraud.

In reaching its decision to deny the application for listing of PALI, the PSE considered important facts, which in the general scheme, brings to serious question the qualification of PALI to sell its shares to the public through the stock exchange. During the time for receiving objections to the application, the PSE heard from the representative of the late President Ferdinand E. Marcos and his family who claim the properties of the private respondent to be part of the Marcos estate. In time, the PCGG confirmed this claim. In fact, an order of sequestration has been issued covering the properties of PALI, and suit for reconveyance to the state has been filed in the Sandiganbayan Court. How the properties were effectively transferred, despite the sequestration order, from the TDC and MSDC to Rebecco Panlilio, and to the private respondent PALI, in only a short span of time, are not yet explained to the Court, but it is clear that such circumstances give rise to serious doubt as to the integrity of PALI as a stock issuer. The petitioner was in the right

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when it refused application of PALI, for a contrary ruling was not to the best interest of the general public. The purpose of the Revised Securities Act, after all, is to give adequate and effective protection to the investing public against fraudulent representations, or false promises, and the imposition of worthless ventures.1414chanroblesvirtuallawlibrary

It is to be observed that the U.S. Securities Act emphasized its avowed protection to acts detrimental to legitimate business, thus:

The Securities Act, often referred to as the truth in securities Act, was designed not only to provide investors with adequate information upon which to base their decisions to buy and sell securities, but also to protect legitimate business seeking to obtain capital through honest presentation against competition form crooked promoters and to prevent fraud in the sale of securities. (Tenth Annual Report, U.S. Securities and Exchange Commission, p. 14).As has been pointed out, the effects of such an act are chiefly (1) prevention of excesses and fraudulent transactions, merely by requirement of that details be revealed; (2) placing the market during the early stages of the offering of a security a body of information, which operating indirectly through investment services and expert investors, will tend to produce a more accurate appraisal of a security. x x x. Thus, the Commission may refuse to permit a registration statement to become effective if it appears on its face to be incomplete or inaccurate in any material respect, and empower the Commission to issue a stop order suspending the effectiveness of any registration statement which is found to include any untrue statement of a material fact or to omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. (Idem).

Also, as the primary market for securities, the PSE has established its name and goodwill, and it has the right to protect such goodwill by maintaining a reasonable standard of propriety in the entities who choose to transact through its facilities. It was reasonable for PSE, therefore, to exercise its judgment in the manner it deems appropriate for its business identity, as long as no rights are trampled upon, and public welfare is safeguarded.

In this connection, it is proper to observe that the concept of government absolutism in a thing of the past, and should remain so.

The observation that the title of PALI over its properties is absolute and can no longer be assailed is of no moment. At this juncture, there is the claim that the properties were owned by the TDC and MSDC and were transferred in violation of sequestration orders, to Rebecco Panlilio and later on to PALI, besides the claim of the Marcoses that such properties belong to Marcos estate, and were held only in trust by Rebecco Panlilio. It is also alleged by the petitioner that these properties belong to naval and forest reserves, and therefore beyond private dominion. If any of these claims is established to be true, the certificates of title over the subject properties now held by PALI may be disregarded, as it is an established rule that a registration of a certificate of title does not confer ownership over the properties described therein to the person named as owner. The inscription in the registry, to be effective, must be made in good faith. The defense of indefeasibility of a Torrens Title does not extend to a transferee who takes the certificate of title with notice of a flaw.

In any case, for the purpose of determining whether PSE acted correctly in refusing the application of PALI, the true ownership of the properties of PALI need not be determined as an absolute fact. What is material is that the uncertainty of the properties ownership and alienability exists, and this puts to question the qualification of PALIs public offering. In sum, the Court finds that the SEC had acted arbitrarily in arrogating unto itself the discretion of approving the application for listing in the PSE of the private respondent PALI, since this is a matter addressed to the sound discretion of the PSE, a corporate entity, whose business judgments are respected in the absence of bad faith.

The question as to what policy is, or should be relied upon in approving the registration and sale of securities in the SEC is not for the Court to determine, but is left to the sound discretion of the Securities and Exchange Commission. In mandating the SEC to administer the Revised Securities Act, and in performing its other functions under pertinent laws, the Revised Securities Act, under Section 3 thereof, gives the SEC the power to promulgate such rules and regulations as it may consider appropriate in the public interest for the enforcement of the said laws. The second paragraph of Section 4 of the said law, on the other hand, provides that no security, unless exempt by law, shall be issued, endorsed, sold, transferred or in any other manner conveyed to the public, unless registered in accordance with the rules and regulations that shall be promulgated in the public interest and for the protection of investors by the Commission.

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Presidential Decree No. 902-A, on the other hand, provides that the SEC, as regulatory agency, has supervision and control over all corporations and over the securities market as a whole, and as such, is given ample authority in determining appropriate policies. Pursuant to this regulatory authority, the SEC has manifested that it has adopted the policy of full material disclosure where all companies, listed or applying for listing, are required to divulge truthfully and accurately, all material information about themselves and the securities they sell, for the protection of the investing public, and under pain of administrative, criminal and civil sanctions. In connection with this, a fact is deemed material if it tends to induce or otherwise effect the sale or purchase of its securities.1515 While the employment of this policy is recognized and sanctioned by laws, nonetheless, the Revised Securities Act sets substantial and procedural standards which a proposed issuer of securities must satisfy.1616 Pertinently, Section 9 of the Revised Securities Act sets forth the possible Grounds for the Rejection of the registration of a security:

- - The Commission may reject a registration statement and refuse to issue a permit to sell the securities included in such registration statement if it finds that - -(1) The registration statement is on its face incomplete or inaccurate in any material respect or includes any untrue statement of a material fact or omits to state a material facts required to be stated therein or necessary to make the statements therein not misleading; or (2) The issuer or registrant - -(i) is not solvent or not is sound financial condition;(ii) has violated or has not complied with the provisions of this Act, or the rules promulgated pursuant thereto, or any order of the Commission;(iii) has failed to comply with any of the applicable requirements and conditions that the Commission may, in the public interest and for the protection of investors, impose before the security can be registered;(iv) had been engaged or is engaged or is about to engaged in fraudulent transactions;(v) is in any was dishonest of is not of good repute; or(vi) does not conduct its business in accordance with law or is engaged in a business that is illegal or contrary or government rules and regulations.

(3) The enterprise or the business of the issuer is not shown to be sound or to be based on sound business principles;(4) An officer, member of the board of directors, or principal stockholder of the issuer is disqualified to such officer, director or principal stockholder; or(5) The issuer or registrant has not shown to the satisfaction of the Commission that the sale of its security would not work to the prejudice to the public interest or as a fraud upon the purchaser or investors. (Emphasis Ours)

A reading of the foregoing grounds reveals the intention of the lawmakers to make the registration and issuance of securities dependent, to a certain extent, on the merits of the securities themselves, and of the issuer, to be determined by the Securities and Exchange Commission. This measure was meant to protect the interest of the investing public against fraudulent and worthless securities, and the SEC is mandated by law to safeguard these interests, following the policies and rules therefore provided. The absolute reliance on the full disclosure method in the registration of securities is, therefore, untenable. At it is, the Court finds that the private respondent PALI, on at least two points (nos. 1 and 5) has failed to support the propriety of the issue of its shares with unfailing clarity, thereby lending support to the conclusion that the PSE acted correctly in refusing the listing of PALI in its stock exchange. This does not discount the effectivity of whatever method the SEC, in the exercise of its vested authority, chooses in setting the standard for public offerings of corporations wishing to do so. However, the SEC must recognize and implement the mandate of the law, particularly the Revised Securities Act, the provisions of which cannot be amended or supplanted my mere administrative issuance.

In resum, the Court finds that the PSE has acted with justified circumspection, discounting, therefore, any imputation of arbitrariness and whimsical animation on its part. Its action in refusing to allow the listing of PALI in the stock exchange is justified by the law and by the circumstances attendant to this case.ACCORDINGLY, in view of the foregoing considerations, the Court hereby GRANTS the Petition for Review on Certiorari. The decisions of the Court of Appeals and the Securities and Exchage Commission dated July 27, 1996 and April 24, 1996, respectively, are hereby REVERSED and SET ASIDE, and a new Judgment is hereby ENTERED, affirming the decision of the Philippine Stock Exchange to deny the application for listing of the private respondent Puerto Azul Land, Inc.

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16ISLAMIC DIRECTORATE OF THE PHILIPPINES, MANUEL F. PEREA and SECURITIES & EXCHANGE COMMISSION, Petitioners, vs. COURT OF APPEALS and IGLESIA NI CRISTO, Respondents.

The subject of this petition for review is the Decision of the public respondent Court of Appeals,1 dated October 28, 1994, setting aside the portion of the Decision of the Securities and Exchange Commission (SEC, for short) in SEC Case No. 4012 which declared null and void the sale of two (2) parcels of land in Quezon City covered by the Deed of Absolute Sale entered into by and between private respondent Iglesia Ni Cristo (INC, for short) and the Islamic Directorate of the Philippines, Inc., Carpizo Group, (IDP, for short).

The following facts appear of record.

Petitioner IDP-Tamano Group alleges that sometime in 1971, Islamic leaders of all Muslim major tribal groups in the Philippines headed by Dean Cesar Adib Majul organized and incorporated the ISLAMIC DIRECTORATE OF THE PHILIPPINES (IDP), the primary purpose of which is to establish an Islamic Center in Quezon City for the construction of a Mosque (prayer place), Madrasah (Arabic School), and other religious infrastructures so as to facilitate the effective practice of Islamic faith in the area.2chanroblesvirtuallawlibrary

Towards this end, that is, in the same year, the Libyan government donated money to the IDP to purchase land at Culiat, Tandang Sora, Quezon City, to be used as a Center for the Islamic populace. The land, with an area of 49,652 square meters, was covered by two titles: Transfer Certificate of Title Nos. RT-26520 (176616)3 and RT-26521 (170567),4 both registered in the name of IDP.

It appears that in 1971, the Board of Trustees of the IDP was composed of the following per Article 6 of its Articles of Incorporation:

Senator Mamintal Tamano5chanroblesvirtuallawlibrary

Congressman Ali Dimaporo

Congressman Salipada Pendatun

Dean Cesar Adib Majul

Sultan Harun Al-Rashid Lucman

Delegate Ahmad Alonto

Commissioner Datu Mama Sinsuat

Mayor Aminkadra Abubakar6chanroblesvirtuallawlibrary

According to the petitioner, in 1972, after the purchase of the land by the Libyan government in the name of IDP, Martial Law was declared by the late President Ferdinand Marcos. Most of the members of the 1971 Board of Trustees like Senators Mamintal Tamano, Salipada Pendatun, Ahmad Alonto, and Congressman Al-Rashid Lucman flew to the Middle East to escape political persecution.

Thereafter, two Muslim groups sprung, the Carpizo Group, headed by Engineer Farouk Carpizo, and the Abbas Group, led by Mrs. Zorayda Tamano and Atty. Firdaussi Abbas. Both groups claimed to be the legitimate IDP. Significantly, on October 3, 1986, the SEC, in a suit between these two contending groups, came out with a Decision in SEC Case No. 2687 declaring the election of both the Carpizo Group and the Abbas Group as IDP board members to be null and void. The dispositive portion of the SEC Decision reads:

WHEREFORE, judgment is hereby rendered declaring the elections of both the petitioners7 and respondents8 as null and void for being violative of the Articles of Incorporation of petitioner corporation. With the nullification of the election of the respondents, the approved by-laws which they certified to this Commission as members of the Board of Trustees must necessarily be likewise declared null and void. However, before any election of the members of the Board of Trustees could be conducted, there must be an approved by-laws to govern the internal government of the association including the conduct of election. And since the election of both petitioners and respondents have been declared null and void, a vacuum is created as to who should adopt the by-laws and certify its adoption. To remedy this unfortunate situation that the association has found itself in, the members of the petitioning corporation are hereby authorized to prepare and adopt their by-laws for submission to the Commission. Once approved, an election of the members of the Board of Trustees shall immediately be called pursuant to the approved by-laws.

Neither group, however, took the necessary steps prescribed by the SEC in its October 3, 1986 Decision, and, thus, no valid election of the members of the Board of Trustees of IDP was ever called. Although the Carpizo Group10 attempted to submit a set of by-laws, the SEC found that, aside from Engineer Farouk Carpizo and Atty. Musib Buat, those who prepared and adopted the by-laws were not bona fide members of the IDP, thus rendering the adoption of the by-laws likewise null and void.

On April 20, 1989, without having been properly elected as new members of the Board of Trustees of IDP, the Carpizo Group caused to be signed an alleged Board Resolution11 of the IDP, authorizing the sale of the subject two parcels of land to the private respondent INC for a consideration of P22,343,400.00, which sale was evidenced by a Deed of Absolute Sale12 dated April 20, 1989.

On May 30, 1991, the petitioner 1971 IDP Board of Trustees headed by former Senator Mamintal Tamano, or the Tamano Group, filed a petition before the SEC, docketed as SEC Case No. 4012, seeking to declare null and void the Deed of Absolute Sale signed by the Carpizo Group and the INC since the group of Engineer Carpizo was not the legitimate Board of Trustees of the IDP.

Meanwhile, private respondent INC, pursuant to the Deed of Absolute Sale executed in its favor, filed an action for Specific Performance with Damages against the vendor, Carpizo Group, before Branch 81 of the Regional Trial Court of Quezon City, docketed as Civil Case No. Q-90-6937, to compel said group to clear the property of squatters and deliver complete and full physical possession thereof to INC. Likewise, INC filed a motion in the same case to compel one Mrs. Leticia P. Ligon to produce and surrender to the Register of Deeds of Quezon City the owners duplicate copy of TCT Nos. RT-26521 and RT-26520 covering the aforementioned two parcels of land, so that the sale in INCs favor may be registered and new titles issued in the name of INC. Mrs. Ligon was alleged to be the mortgagee of the two parcels of land executed in her favor by certain Abdulrahman R.T.

Linzag and Rowaida Busran-Sampaco claimed to be in behalf of the Carpizo Group.

The IDP-Tamano Group, on June 11, 1991, sought to intervene in Civil Case No. Q-90-6937 averring, inter alia:

xxx xxx xxx

2. That the Intervenor has filed a case before the Securities and Exchange Commission (SEC) against Mr. Farouk Carpizo, et, al., who, through false schemes and machinations, succeeded in executing the Deed of Sale between the IDP and the Iglesia Ni Kristo (plaintiff in the instant case) and which Deed of Sale is the subject of the case at bar;

3. That the said case before the SEC is docketed as Case No. 04012, the main issue of which is whether or not the aforesaid Deed of Sale between IDP and the Iglesia ni Kristo is null and void, hence, Intervenors legal interest in the instant case. A copy of the said case is hereto attached as Annex A;

4. That, furthermore, Intervenor herein is the duly constituted body which can lawfully and legally represent the Islamic Directorate of the Philippines;

xxx xxx xxx.13chanroblesvirtuallawlibrary

Private respondent INC opposed the motion arguing, inter alia, that the issue sought to be litigated by way of intervention is an intra-corporate dispute which falls under the jurisdiction of the SEC.14chanroblesvirtuallawlibrary

Judge Celia Lipana-Reyes of Branch 81, Regional Trial Court of Quezon City, denied petitioners motion to intervene on the ground of lack of juridical personality of the IDP-Tamano Group and that the issues being raised by way of intervention are intra-corporate in nature, jurisdiction thereto properly pertaining to the SEC.15chanroblesvirtuallawlibrary

Apprised of the pendency of SEC Case No. 4012 involving the controverted status of the IDP-Carpizo Group but without waiting for the outcome of said case, Judge Reyes, on September 12, 1991, rendered Partial Judgment in Civil Case No. Q-90-6937 ordering the IDP-Carpizo Group to comply with its obligation under the Deed of Sale of clearing the subject lots of squatters and of delivering the actual possession thereof to INC.16chanroblesvirtuallawlibrary

Thereupon, Judge Reyes in another Order, dated March 2, 1992, pertaining also to Civil Case No. Q-90-6937, treated INC as the rightful owner of the real properties and disposed as follows:

WHEREFORE, Leticia P. Ligon is hereby ordered to produce and/or surrender to plaintiff17 the owners copy of RT-26521 (170567) and RT-26520 (176616) in open court for the registration of the Deed of Absolute Sale in the latters name and the annotation of the mortgage executed in her favor by herein defendant Islamic Directorate of the Philippines on the new transfer certificate of title to be issued to plaintiff.

SO ORDERED.18chanroblesvirtuallawlibrary

On April 6, 1992, the above Order was amended by Judge Reyes directing Ligon to deliver the owners duplicate copies of TCT Nos. RT-26521 (170567) and RT-26520 (176616) to the Register of Deeds of Quezon City for the purposes stated in the Order of March 2, 1992.19chanroblesvirtuallawlibrary

Mortgagee Ligon went to the Court of Appeals, thru a petition for certiorari, docketed as CA-G.R. No. SP-27973, assailing the foregoing Orders of Judge Reyes. The appellate court dismissed her petition on October 28, 1992.20chanroblesvirtuallawlibrary

Undaunted, Ligon filed a petition for review before the Supreme Court which was docketed as G.R. No. 107751.

In the meantime, the SEC, on July 5, 1993, finally came out with a Decision in SEC Case No. 4012 in this wise:

1. Declaring the by-laws submitted by the respondents21 as unauthorized, and hence, null and void.

2. Declaring the sale of the two (2) parcels of land in Quezon City covered by the Deed of Absolute Sale entered into by Iglesia ni Kristo and the Islamic Directorate of the Philippines, Inc.22 null and void.

3. Declaring the election of the Board of Directors23 of the corporation from 1986 to 1991 as null and void;

4. Declaring the acceptance of the respondents, except Farouk Carpizo and Musnib Buat, as members of the IDP null and void.

Private respondent INC filed a Motion for Intervention, dated September 7, 1993, in SEC Case No. 4012, but the same was denied on account of the fact that the decision of the case had become final and executory, no appeal having been taken therefrom.25chanroblesvirtuallawlibrary

INC elevated SEC Case No. 4012 to the public respondent Court of Appeals by way of a special civil action for certiorari, docketed as CA-G.R. SP No. 33295. On October 28, 1994, the court a quo promulgated a Decision in CA-G.R. SP No. 33295 granting INCs petition. The portion of the SEC Decision in SEC Case No. 4012 which declared the sale of the two (2) lots in question to INC as void was ordered set aside by the Court of Appeals.

Thus, the IDP-Tamano Group brought the instant petition for review, dated December 21, 1994, submitting that the Court of Appeals gravely erred in:

1) Not upholding the jurisdiction of the SEC to declare the nullity of the sale;

2) Encouraging multiplicity of suits; and

3) Not applying the principles of estoppel and laches.26chanroblesvirtuallawlibrary

While the above petition was pending, however, the Supreme Court rendered judgment in G.R. No. 107751 on the petition filed by Mrs. Leticia P. Ligon. The Decision, dated June 1, 1995, denied the Ligon petition and affirmed the October 28, 1992 Decision of the Court of Appeals in CA-G.R. No. SP-27973 which sustained the Order of Judge Reyes compelling mortgagee Ligon to surrender the owners duplicate copies of TCT Nos. RT-26521 (170567) and RT-26520 (176616) to the Register of Deeds of Quezon City so that the Deed of Absolute Sale in INCs favor may be properly registered.

Before we rule upon the main issue posited in this petition, we would like to point out that our disposition in G.R. No. 107751 entitled, Ligon v. Court of Appeals, promulgated on June 1, 1995, in no wise constitutes res judicata such that the petition under consideration would be barred if it were the case. Quite the contrary, the requisites of res judicata do not obtain in the case at bench.

Section 49, Rule 39 of the Revised Rules of Court lays down the dual aspects of res judicata in actions in personam, to wit:

Effect of judgment. - The effect of a judgment or final order rendered by a court or judge of the Philippines, having jurisdiction to pronounce the judgment or order, may be as follows:

xxx xxx xxx

(b) In other cases the judgment or order is, with respect to the matter directly adjudged or as to any other matter that could have been raised in relation thereto, conclusive between the parties and their successors in interest by title subsequent to the commencement of the action or special proceeding, litigating for the same thing and under the same title and in the same capacity;

(c) In any other litigation between the same parties or their successors in interest, that only is deemed to have been adjudged in a former judgment which appears upon its face to have been so adjudged, or which was actually and necessarily included therein or necessary thereto.

Section 49(b) enunciates the first concept of res judicata known as bar by prior judgment, whereas, Section 49(c) is referred to as conclusiveness of judgment.

There is bar by former judgment when, between the first case where the judgment was rendered, and the second case where such judgment is invoked, there is identity of parties, subject matter and cause of action. When the three identities are present, the judgment on the merits rendered in the first constitutes an absolute bar to the subsequent action. But where between the first case wherein judgment is rendered and the second case wherein such judgment is invoked, there is only identity of parties but there is no identity of cause of action, the judgment is conclusive in the second case, only as to those matters actually and directly controverted and determined, and not as to matters merely involved therein. This is what is termed conclusiveness of judgment.27chanroblesvirtuallawlibrary

Neither of these concepts of res judicata find relevant application in the case at bench. While there may be identity of subject matter (IDP property) in both cases, there is no identity of parties. The principal parties in G.R. No. 107751 were mortgagee Leticia P. Ligon, as petitioner, and the Iglesia Ni Cristo, as private respondent. The IDP, as represented by the 1971 Board of Trustees or the Tamano Group, was only made an ancillary party in G.R. No. 107751 as intervenor.28 It was never originally a principal party thereto. It must be noted that intervention is not an independent action, but is merely collateral, accessory, or ancillary to the principal action. It is just an interlocutory proceeding dependent on or subsidiary to the case between the original parties.29 Indeed, the IDP-Tamano Group cannot be considered a principal party in G.R. No. 107751 for purposes of applying the principle of res judicata since the contrary goes against the true import of the action of intervention as a mere subsidiary proceeding without an independent life apart from the principal action as well as the intrinsic character of the intervenor as a mere subordinate party in the main case whose right may be said to be only in aid of the right of the original party.30 It is only in the present case, actually, where the IDP-Tamano Group became a principal party, as petitioner, with the Iglesia Ni Cristo, as private respondent. Clearly, there is no identity of parties in both cases.

In this connection, although it is true that Civil Case No. Q-90-6937, which gave rise to G.R. No. 107751, was entitled, Iglesia Ni Kristo, Plaintiff v. Islamic Directorate of the Philippines, Defendant,31 the IDP can not be considered essentially a formal party thereto for the simple reason that it was not duly represented by a legitimate Board of Trustees in that case. As a necessary consequence, Civil Case No. Q-90-6937, a case for Specific Performance with Damages, a mere action in personam, did not become final and executory insofar as the true IDP is concerned since petitioner corporation, for want of legitimate representation, was effectively deprived of its day in court in said case. Res inter alios judicatae nullum aliis praejudicium faciunt. Matters adjudged in a cause do not prejudice those who were not parties to it.32 Elsewise put, no person (natural or juridical) shall be affected by a proceeding to which he is a stranger.33chanroblesvirtuallawlibrary

Granting arguendo, that IDP may be considered a principal party in Ligon, res judicata as a bar by former judgment will still not set in on the ground that the cause of action in the two cases are different. The cause of action in G.R. No. 107751 is the surrender of the owners duplicate copy of the transfer certificates of title to the rightful possessor thereof, whereas the cause of action in the present case is the validity of the Carpizo Group-INC Deed of Absolute Sale.

Res Judicata in the form of conclusiveness of judgment cannot likewise apply for the reason that any mention at all in Ligon as to the validity of the disputed Carpizo Board-INC sale may only be deemed incidental to the resolution of the primary issue posed in said case which is: Who between Ligon and INC has the better right of possession over the owners duplicate copy of the TCTs covering the IDP property? G.R. No. 107751 cannot be considered determinative and conclusive on the matter of the validity of the sale for this particular issue was not the principal thrust of Ligon. To rule otherwise would be to cause grave and irreparable injustice to IDP which never gave its consent to the sale, thru a legitimate Board of Trustees.

In any case, while it is true that the principle of res judicata is a fundamental component of our judicial system, it should be disregarded if its rigid application would involve the sacrifice of justice to technicality.34chanroblesvirtuallawlibrary

The main question though in this petition is: Did the Court of Appeals commit reversible error in setting aside that portion of the SECs Decision in SEC Case No. 4012 which declared the sale of two (2) parcels of land in Quezon City between the IDP-Carpizo Group and private respondent INC null and void?

We rule in the affirmative.

There can be no question as to the authority of the SEC to pass upon the issue as to who among the different contending groups is the legitimate Board of Trustees of the IDP since this is a matter properly falling within the original and exclusive jurisdiction of the SEC by virtue of Sections 3 and 5(c) of Presidential Decree No. 902-A:

Section 3. The Commission shall have absolute jurisdiction, supervision and control over all corporations, partnerships or associations, who are the grantees of primary franchises and/or a license or permit issued by the government to operate in the Philippines xxx xxx.

x x x

Section 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over corporations, partnerships and other forms of associations registered with it as expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction to hear and decide cases involving:

x x x

c) Controversies in the selection or appointment of directors, trustees, officers, or managers of such corporations, partnerships or associations. x x x.

If the SEC can declare who is the legitimate IDP Board, then by parity of reasoning, it can also declare who is not the legitimate IDP Board. This is precisely what the SEC did in SEC Case No. 4012 when it adjudged the election of the Carpizo Group to the IDP Board of Trustees to be null and void.35 By this ruling, the SEC in effect made the unequivocal finding that the IDP-Carpizo Group is a bogus Board of Trustees. Consequently, the Carpizo Group is bereft of any authority whatsoever to bind IDP in any kind of transaction including the sale or disposition of IDP property.

It must be noted that SEC Case No. 4012 is not the first case wherein the SEC had the opportunity to pass upon the status of the Carpizo Group. As far back as October 3, 1986, the SEC, in Case No. 2687,36 in a suit between the Carpizo Group and the Abbas Group, already declared the election of the Carpizo Group (as well as the Abbas Group) to the IDP Board as null and void for being violative of the Articles of Incorporation.37 Nothing thus becomes more settled than that the IDP-Carpizo Group with whom private respondent INC contracted is a fake Board.

Premises considered, all acts carried out by the Carpizo Board, particularly the sale of the Tandang Sora property, allegedly in the name of the IDP, have to be struck down for having been done without the consent of the IDP thru a legitimate Board of Trustees. Article 1318 of the New Civil Code lays down the essential requisites of contracts:

There is no contract unless the following requisites concur:

(1) Consent of the contracting parties;

(2) Object certain which is the subject matter of the contract;

(3) Cause of the obligation which is established.

All these elements must be present to constitute a valid contract. For, where even one is absent, the contract is void. As succinctly put by Tolentino, consent is essential for the existence of a contract, and where it is wanting, the contract is non-existent.38 In this case, the IDP, owner of the subject parcels of land, never gave its consent, thru a legitimate Board of Trustees, to the disputed Deed of Absolute Sale executed in favor of INC. This is, therefore, a case not only of vitiated consent, but one where consent on the part of one of the supposed contracting parties is totally wanting. Ineluctably, the subject sale is void and produces no effect whatsoever.

The Carpizo Group-INC sale is further deemed null and void ab initio because of the Carpizo Groups failure to comply with Section 40 of the Corporation Code pertaining to the disposition of all or substantially all assets of the corporation:

Sec. 40. Sale or other disposition of assets. - Subject to the provisions of existing laws on illegal combinations and monopolies, a corporation may, by a majority vote of its board of directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets, including its goodwill, upon terms and conditions and for such consideration, which may be money, stocks, bonds or other instruments for the payment of money or other property or consideration, as its board of directors or trustees may deem expedient, when authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock; or in case of non-stock corporation, by the vote of at least two-thirds (2/3) of the members, in a stockholders or members meeting duly called for the purpose. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder may exercise his appraisal right under the conditions provided in this Code.

A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated.

x x x .

The Tandang Sora property, it appears from the records, constitutes the only property of the IDP. Hence, its sale to a third-party is a sale or disposition of all the corporate property and assets of IDP falling squarely within the contemplation of the foregoing section. For the sale to be valid, the majority vote of the legitimate Board of Trustees, concurred in by the vote of at least 2/3 of the bona fide members of the corporation should have been obtained. These twin requirements were not met as the Carpizo Group which voted to sell the Tandang Sora property was a fake Board of Trustees, and those whose names and signatures were affixed by the Carpizo Group together with the sham Board Resolution authorizing the negotiation for the sale were, from all indications, not bona fide members of the IDP as they were made to appear to be. Apparently, there are only fifteen (15) official members of the petitioner corporation including the eight (8) members of the Board of Trustees.39chanroblesvirtuallawlibrary

All told, the disputed Deed of Absolute Sale executed by the fake Carpizo Board and private respondent INC was intrinsically void ab initio.

Private respondent INC nevertheless questions the authority of the SEC to nullify the sale for being made outside of its jurisdiction, the same not being an intra-corporate dispute.

The resolution of the question as to whether or not the SEC had jurisdiction to declare the subject sale null and void is rendered moot and academic by the inherent nullity of the highly dubious sale due to lack of consent of the IDP, owner of the subject property. No end of substantial justice will be served if we reverse the SECs conclusion on the matter, and remand the case to the regular courts for further litigation over an issue which is already determinable based on what we have in the records.

It is unfortunate that private respondent INC opposed the motion for intervention filed by the 1971 Board of Trustees in Civil Case No. Q-90-6937, a case for Specific Performance with Damages between INC and the Carpizo Group on the subject Deed of Absolute Sale. The legitimate IDP Board could have been granted ample opportunity before the regional trial court to shed light on the true status of the Carpizo Board and settled the matter as to the validity of the sale then and there. But INC, wanting to acquire the property at all costs and threatened by the participation of the legitimate IDP Board in the civil suit, argued for the denial of the motion averring, inter alia, that the issue sought to be litigated by the movant is intra-corporate in nature and outside the jurisdiction of the regional trial court.40 As a result, the motion for intervention was denied. When the Decision in SEC Case No. 4012, came out nullifying the sale, INC came forward, this time, quibbling over the issue that it is the regional trial court, and not the SEC, which has jurisdiction to rule on the validity of the sale. INC is here trifling with the courts. We cannot put a premium on this clever legal maneuverings of private respondent which, if countenanced, would result in a failure of justice.

Furthermore, the Court observed that the INC bought the questioned property from the Carpizo Group without even seeing the owners duplicate copy of the titles covering the property. This is very strange considering that the subject lot is a large piece of real property in Quezon City worth millions, and that under the Torrens System of Registration, the minimum requirement for one to be a good faith buyer for value is that the vendee at least sees the owners duplicate copy of the title and relies upon the same.41 The private respondent presumably knowledgeable on the aforesaid working of the Torrens System, did not take heed of this and nevertheless went through with the sale with undue haste. The unexplained eagerness of INC to buy this valuable piece of land in Quezon City without even being presented with the owners copy of the titles casts very serious doubt on the rightfulness of its position as vendee in the transaction.

WHEREFORE, the petition is GRANTED. The Decision of the public respondent Court of Appeals dated October 28, 1994 in CA-G.R. SP No. 33295 is SET ASIDE. The Decision of the Securities and Exchange Commission dated July 5, 1993 in SEC Case No. 4012 is REINSTATED. The Register of Deeds of Quezon City is hereby ordered to cancel the registration of the Deed of Absolute Sale in the name of respondent Iglesia Ni Cristo, if one has already been made. If new titles have been issued in the name of Iglesia Ni Cristo, the register of Deeds is hereby ordered to cancel the same, and issue new ones in the name of petitioner Islamic Directorate of the Philippines. Petitioner corporation is ordered to return to private respondent whatever amount has been initially paid by INC as consideration for the property with legal interest, if the same was actually received by IDP. Otherwise, INC may run after Engineer Farouk Carpizo and his group for the amount of money paid.

SO ORDERED.

DETECTIVE & PROTECTIVE BUREAU, INC., Petitioner, vs. THE HONORABLE GAUDENCIO CLORIBEL, in his capacity as Presiding Judge of Branch VI, Court of First Instance of Manila, and FAUSTINO S. ALBERTO, Respondents.

The complaint, in Civil Case No. 56949 of the Court of First Instance of Manila, dated May 4, 1964, filed by Detective and Protective Bureau, Inc., therein plaintiff (petitioner herein) against Fausto S. Alberto, therein defendant (respondent herein), for accounting with preliminary injunction and receivership, alleged that plaintiff was a corporation duly organized and existing under the laws of the Philippines; that defendant was managing director of plaintiff corporation from 1952 until January 14, 1964; that in June, 1963, defendant illegally seized and took control of all the assets as well as the books, records, vouchers and receipts of the corporation from the accountant-cashier, concealed them illegally and refused to allow any member of the corporation to see and examine the same; that on January 14, 1964, the stockholders, in a meeting, removed defendant as managing director and elected Jose de la Rosa in his stead; that defendant not only had refused to vacate his office and to deliver the assets and books to Jose de la Rosa, but also continued to perform unauthorized acts for and in behalf of plaintiff corporation; that defendant had been required to submit a financial statement and to render an accounting of his administration from 1952 but defendant has failed to do so; that defendant, contrary to a resolution adopted by the Board of Directors on November 24, 1963, had been illegally disposing of corporate funds; that defendant, unless immediately restrained ex-parte, would continue discharging the functions of managing director; and that it was necessary to appoint a receiver to take charge of the assets and receive the income of the corporation. Plaintiff prayed that a preliminary injunction ex-parte be issued restraining defendant from exercising the functions of managing director and from

disbursing and disposing of its funds; that Jose M. Barredo be appointed receiver; that, after judgment, the injunction be made permanent and defendant be ordered to render an accounting.chanroblesvirtualawlibrary chanrobles virtual law library

Herein respondent Judge, the Honorable Gaudencio Cloribel, set for hearing plaintiff's prayer for ancillary relief and required the parties to submit their respective memoranda. On June 18, 1964, respondent Judge granted the writ of preliminary injunction prayed for, conditioned upon plaintiff's filing a bond of P5,000.00. Plaintiff filed the bond, but while the same was pending approval defendant Fausto S. Alberto filed, on July 1, 1964, a motion to admit a counter-bond for the purpose of lifting the order granting the writ of preliminary injunction. Inspite of the opposition filed by plaintiff, respondent Judge issued, on August 5, 1964, an order admitting the counterbond and setting aside the writ of preliminary injunction.chanroblesvirtualawlibrary chanrobles virtual law library

On the belief that the order approving the counter-bond and lifting the writ of preliminary injunction was contrary to law and the act of respondent Judge constituted a grave abuse of discretion, and that there was no plain, speedy and adequate remedy available to it, plaintiff filed with this Court the instant petition for certiorari, praying that a writ of preliminary injunction enjoining defendant Fausto S. Albert from exercising the functions of managing director be issued, and that the order dated August 5, 1964 of respondent Judge approving the counter-bond and lifting the writ of preliminary injunction he had previously issued be set aside and declared null and void. The Court gave due course to the petition but did not issue a preliminary injunction.chanroblesvirtualawlibrary chanrobles virtual law library

In his answer, now respondent Fausto S. Alberto traversed the material allegations of the petition, justified the order complained of, and prayed for the dismissal of the petition.chanroblesvirtualawlibrary chanrobles virtual law library

From the pleadings, it appears that the only issue to be resolved is whether the order of respondent Judge dated August 5, 1964, admitting and approving the counter-bond of P5,000 and setting aside the writ of preliminary injunction granted in his order dated June 18, 164, was issued contrary to law and with grave abuse of discretion.chanroblesvirtualawlibrary chanrobles virtual law library

Now petitioner contends that the setting aside of the order granting the writ was contrary to law and was done with a grave abuse of discretion, because: (1) the motion to admit defendant's counter-bond was not supported by affidavits showing why the counter-bond should be admitted, as required by Section 6 of Rule 58; (2) the preliminary injunction was not issued ex-parte but after hearing, and the admission of the counter-bond rendered said writ ineffective; (3) the writ was granted in accordance with Rule 58 of the Rules of Court and established precedents' (4) public interest required that the writ be not set aside because respondent had arrogated unto himself all the powers of petitioning corporation, to the irreparable damage of the corporation; and that (5) the counter-bond could not compensate petitioner's damage.chanroblesvirtualawlibrary chanrobles virtual law library

1. The first reason given by petitioner in support of its contention that the dissolution of the writ of preliminary injunction was contrary to law is that the motion to admit respondent's counter-bond for the dissolution of the writ was not supported by affidavits as required by section 6 of Rule 58 of the Rules of Court. The controverted motion, however, does not appear in the record. However, the record shows that respondent Alberto had filed a verified answer to the complaint and a verified opposition to the issuance of the writ of preliminary injunction.chanroblesvirtualawlibrary chanrobles virtual law library

Regarding the necessity of verification of the motion for dissolution of a writ of preliminary injunction, this Court has ruled that the requirement of verification is not

absolute but is dependent on the circumstances obtaining in a particular case. In the case of Sy Sam Bio, et al. vs. Barrios and Buyson Lampa,1 the only question raised was whether the respondent Judge exceeded his jurisdiction and abused his discretion in setting aside an order directing the issuance of a writ of preliminary injunction. In maintaining the affirmative, petitioners in that case alleged that the questioned order was issued in violation of the provisions of Section 169 of Act 190(which is one of the sources of Sec. 6 of Rule 58 of the revised Rules of Court)inasmuch as the Judge set aside said order and directed the dissolution of the preliminary injunction without any formal petition of the parties and without having followed the procedure prescribed by the statute. There was, however, a verbal application for the dissolution of the writ, based upon the ground of the in suficiency of the complaint which was the basis of the application for the issuance of said writ of preliminary injunction. This Court said:

Section 169 of Act 1909 does not prescribe the manner of filing the application to annul or modify a writ of preliminary injunction. It simply states that if a temporary injunction be granted without notice, the defendant, at any time before trial, may apply, upon reasonable notice to the adverse party, to the judge who granted the injunction, or to the judge of the court of which the action was brought, to dissolve or modify the same.

On the strength of the decision in the above-cited case, this Court in Caluya, et al. vs. Ramos, et al.,2 said;

Petitioners' criticism that the motion to dissolve filed by the defendants in Civil Case No. 4634 was not verified, is also groundless inasmuch as even an indirect verbal application for the dissolution of an ex parte order of preliminary injunction has been held to be a sufficient compliance with the provisions of Section 6 of Rule 60 (Moran, Comments on the Rules of Court, Second Edition, Vol. II, p. 65, citing the case of Sy Yam Bio v. Barrios, etc., 63 Phil. 206), the obvious reason being that said rule does not prescribe the form by which an application for the dissolution or modification of an order of preliminary injunction should be presented.

If according to the above rulings, Section 6 of Rule 60 (now sec. 6, Rule 58) of the Rules of Court did not require any form for the application for the dissolution of the writ of preliminary injunction, then respondent Fausto Alberto's motion to lift the preliminary injunction in the court below need not be verified, and much less must the motion be supported by affidavits, as urged by petitioner.chanroblesvirtualawlibrary chanrobles virtual law library

However, in Canlas, et al. vs. Aquino, et al.,3 this Court ruled that a motion for the dissolution of a writ of preliminary injunction should be verified. In that case, respondent Tayag filed an unverified motion for the dissolution of a writ of preliminary injunction, alleging that the same "would work great damage to the defendant who had already spend a considerable sum of money" and that petitioners "can be fully compensated for any damages that they may suffer." The court granted the motion and dissolved the preliminary injunction. In an original action for a writ of certiorari filed with this Court to annual said order, this Court remarked in part:

Petitioners herein are entitled to the writ prayed for. The motion of respondent Tayag for the dissolution of the writ of preliminary injunction issued on October 22, 1959, was unverified....

From the precedents quoted above, as well as from the terminology of Section 6 of Rule 58 of the new Rules of Court, it is evident that whether the application for the dissolution of the writ of preliminary injunction must be verified or not depends upon the ground upon which such application is based. If the application is based on the insufficiency of the complaint, the motion need not be verified. If the motion is based on the ground that the injunction would cause great damage to defendant while the plaintiff can be fully compensated for such damages as he may suffer, the motion should be

verified.chanroblesvirtualawlibrary chanrobles virtual law library

In the instant case, it is alleged by petitioner that the motion for the dissolution of the writ of preliminary injunction was not verified. This allegation was not denied in the answer. But because said motion does not appear in the record of the case now before this Court, We cannot determine what are the grounds for the dissolution that are alleged therein, and so We cannot rule on whether the motion should have been verified or not. This Court, therefore, has to rely on the order of respondent Judge, dated August 5, 1964, which states that "the filing of the counter-bond is in accordance with law." Consequently, the first ground alleged by petitioner must be brushed aside.chanroblesvirtualawlibrary chanrobles virtual law library

2. The second and third reasons alleged by petitioner in its petition for certiorari assume that a preliminary injunction issued after hearing and in accordance with Rule 58 cannot be set aside. This contention is untenable. The provision of Section 6 of Rule 58 that "the injunction may be refused, or, if granted ex parte, may be dissolved" can not be construed as putting beyond the reach of the court the dissolution of an injunction which was granted after hearing. The reason is because a writ of preliminary injunction is an interlocutory order, and as such it is always under the control of the court before final judgment. Thus, in Caluya, et al. vs. Ramos, et al.,4 this Court said:

The first contention of the petitioners is that, as said injunction was issued after a hearing, the same cannot be dissolved, specially on the strength of an unverified motion for dissolution and in the absence to support it. Reliance is placed on Section 6 of Rule 60 of the Rules of Court which provides that "the injunction may be reduced, or, if granted ex parte, maybe dissolved," thereby arguing that if an injunction is not issued ex parte the same cannot be dissolved. The contention is clearly erroneous. Although said section prescribes the grounds for objecting to, or for moving the dissolution of, a preliminary injunction prior to its issuance or after its granting ex parte, it does not thereby outlaw a dissolution if the injunction has been issued after a hearing. This is to be so, because a writ of preliminary injunction is an interlocutory order which is always under the control of the court before final judgment. (Manila Electric Company vs. Artiaga and Green, 50 Phil. 144, 147).

This Court has also ruled that the dissolution of a writ of preliminary injunction issued after hearing, even if the dissolution is ordered without giving the other party an opportunity to be heard, does not constitute an abuse of discretion and may be cured not by certiorari but by appeal. In Clarke vs. Philippine Ready Mix Concrete Co., Inc., et al.,5 one of the issues presented was whether a writ of preliminary injunction granted the plaintiff by a trial court after hearing, might be dissolved upon an ex parte application by the defendant, and this Court ruled that:

The action of a trial court in dissolving a writ of preliminary injunction already issued after hearing, without giving petitioner an opportunity to be heard, does not constitute lack or excess of jurisdiction or an abuse of discretion, and any irregularity committed by the trial court on this score may be cured not by certiorari but by appeal.

3. The fourth reason alleged by petitioner in support of its stand is that public interest demanded that the writ enjoining respondent Fausto Alberto from exercising the functions of managing director be maintained. Petitioner contended that respondent Alberto had arrogated to himself the power of the Board of Directors of the corporation because he refused to vacate the office and surrender the same to Jose de la Rosa who had been elected managing director by the Board to succeed him. This assertion, however, was disputed by respondent Alberto who stated that Jose de la Rosa could not be elected managing director because he did not own any stock in the corporation.chanroblesvirtualawlibrary chanrobles virtual law library

There is in the record no showing that Jose de la Rosa owned a share of stock in the corporation. If he did not own any share of stock, certainly he could not be a director pursuant to the mandatory provision of Section 30 of the Corporation Law, which in part provides: chanrobles virtual law library

There is in the record no showing that Jose de la Rosa owned a share of stock in the corporation. If he did not own any share of stock, certainly he could not be a director pursuant to the mandatory provision of Section 30 of the Corporation Law, which in part provides:

Sec. 30. Every director must own in his own right at least one share of the capital stock of the stock corporation of which he is a director, which stock shall stand in his name on the books of the corporations....

If he could not be a director, he could also not be a managing director of the corporation, pursuant to Article V, Section 3 of the By-Laws of the Corporation which provides that:

The manager shall be elected by the Board of Directors from among its members.... (Record, p. 48)

If the managing director-elect was not qualified to become managing director, respondent Fausto Alberto could not be compelled to vacate his office and cede the same to the managing director-elect because the by-laws of the corporation provides in Article IV, Section 1 that "Directors shall serve until the election and qualification of their duly qualified successor." chanrobles virtual law library

4. The fifth reason alleged by herein petitioner in support of its contention that respondent Judge gravely abused his discretion when he lifted the preliminary injunction upon the filing of the counter-bond was that said counter-bond could not compensate for the irreparable damage that the corporation would suffer by reason of the continuance of respondent Fausto Alberto as managing director of the corporation. Respondent Alberto, on the contrary, contended that he really was the owner of the controlling interest in the business carried on the name of the petitioner, having invested therein a total of P57,727.29 as against the sum of P4,000 only invested by one other director, Jose M. Barredo. We find that there was a question as to who own the controlling interest in the corporation. Where ownership is in dispute, the party in control or possession of the disputed interest is presumed to have the better right until the contrary is adjudged, and hence that party should not be deprived of the control or possession until the court is prepared to adjudicate the controverted right in favor of the other party.6 chanrobles virtual law library

Should it be the truth that respondent Alberto is the controlling stockholder, then the damages said respondent would suffer would be the same, if not more, as the damages that the corporation would suffer if the injunction were maintained. If the bond of P5,000 filed by petitioner for the injunction would be sufficient to answer for the damages that would be suffered by respondent Alberto by reason of the injunction, there seems to be no reason why the same amount would not be sufficient to answer for the damages that might be suffered by the petitioning corporation by reason of the lifting of the injunction. The following ruling of this Court has a persuasive application in this case:

The rule that a court should not, by means of a preliminary injunction, transfer property in litigation from the possession of one party to another is more particularly applicable where the legal title is in dispute and the party having possession asserts ownership in himself.7

Let it be stated, in relation to all the reason given by petitioner, that it is a settled rule that the issuance of the writ of preliminary injunction as an ancillary or preventive remedy to secure the rights of a party in a pending case is entirely within the discretion

of the court taking cognizance of the case - the only limitation being that this discretion should be exercised based upon the grounds and in the manner provided by law,8 and it is equally well settled that a wide latitude is given under Section 7 of Rule 58 of the Rules of Court to the trial court to modify or dissolve the injunction as justice may require. The court which is to exercise that discretion is the trial court, not the appellate court.9 The exercise of sound judicial discretion by the lower court in injunctive matters should not be interfered with except in cases of manifest abuse.10 In the instant case, We find that petitioner failed to show manifest abuse of discretion by respondent Judge in setting aside the writ of preliminary injunction.chanroblesvirtualawlibrary chanrobles virtual law library

There is, however, one vital reason why the instant petition for certiorari should be denied. And it is, that from the order dissolving the writ of preliminary injunction, the petitioner has gone directly to this Court without giving the respondent Judge (or trial court) a chance or opportunity to correct his error, if any, in an appropriate motion for reconsideration. An omission to comply with this procedural requirement justifies a denial of the writ applied for.11 chanrobles virtual law library

The instant case is not one of the exceptions in the application of this rule, which are: where the questions of jurisdiction has been squarely raised, argued before, submitted to, and met and decided by the respondent court; where the questioned order is a patent nullity; and where there is a deprivation of the petitioner's fundamental right to due process.12

It being our considered view that respondent Judge had not committed grave abuse of discretion in issuing the order dated August 5, 1964 lifting the writ of preliminary injunction which had previously been granted in the order dated June 18, 1964, and the herein petition for certiorari having been filed without previously complying with a well settled procedural requirement, there is no alternative for this Court but to order its dismissal.

WHEREFORE, the instant petition for certiorari with preliminary injunction is dismissed, with costs againsts the petitioner. It is so ordered.

J. F. RAMIREZ, plaintiff-appellee,vs.THE ORIENTALIST CO., and RAMON J. FERNANDEZ, defendants-appellants.

The Orientalist Company is a corporation, duly organized under the laws of the Philippine Islands, and in 1913 and 1914, the time of the occurrences which gave rise to this lawsuit, was engaged in the business of maintaining and conducting a theatre in the city of Manila for the exhibition of cinematographic films. Under the articles of incorporation the company is authorized to manufacture, buy, or otherwise obtain all accessories necessary for conducting such a business. The plaintiff J. F. Ramirez was, at the same time, a resident of the city of Paris, France, and was engaged in the business of marketing films for a manufacturer or manufacturers, there engaged in the production or distribution of cinematographic material. In this enterprise the plaintiff was represented in the city of Manila by his son, Jose Ramirez.

In the month of July, 1913, certain of the directors of the Orientalist Company, in Manila, became apprised of the fact that the plaintiff in Paris had control of the agencies for two different marks of films, namely, the "Eclair Films" and the "Milano Films;" and negotiations were begun with said officials of the Orientalist Company by Jose Ramirez, as agent of the plaintiff, for the purpose of placing the exclusive agency of these films in the hands of the Orientalist Company. The defendant Ramon J. Fernandez, one of the directors of the Orientalist Company and also its treasure, was chiefly active in this matter, being moved by the suggestions and representations of Vicente Ocampo, manage of the Oriental Theater, to the effect that the securing of the said films was necessary to the success of the corporation.

Near the end of July of the year aforesaid, Jose Ramirez, as representative of his father, placed in the hands of Ramon J. Fernandez an offer, dated July 4, 1913, stating detail the terms upon which the plaintiff would undertake to supply from Paris the aforesaid films. This officer was declared to be good until the end of July; and as only about for the Orientalist Company to act on the matter speedily, if it desired to take advantage of said offer. Accordingly, Ramon J. Fernandez, on July 30, had an informal conference with all the members of the company's board of directors except one, and with approval of those with whom he had communicated, addressed a letter to Jose Ramirez, in Manila, accepting the offer contained in the memorandum of July 4th for the exclusive agency of the Eclair films. A few days later, on August 5, he addressed another letter couched in the same terms, likewise accepting the office of the exclusive agency for the Milano Films.

The memorandum offer contained a statement of the price at which the films would be sold, the quantity which the representative of each was required to take and information concerning the manner and intervals of time for the respective shipments. The expenses of packing, transportation and other incidentals were to be at the cost of the purchaser. There was added a clause in which J. F. Ramirez described his function in such transactions as that of a commission agent and stated that he would see to the prompt shipment of the films, would pay the manufacturer, and take care that the films were insured — his commission for such services being fixed at 5 per cent.

What we consider to be the most portion of the two letters of acceptance written by R. J. Fernandez to Jose Ramirez is in the following terms:

We willingly accepted the officer under the terms communicated by your father in his letter dated at Paris on July 4th of the present year.

These communications were signed in the following form, in which it will be noted the separate signature of R. J. Fernandez, as an individual, is placed somewhat below and to the left of the signature of the Orientalist Company as singed by R. J. Fernandez, in the capacity of treasurer:

THE ORIENTALIST COMPANY,

By R. J. FERNANDEZ,

Treasurer,

R. J. FERNANDEZ RByAMT.

Both of these letters also contained a request that Jose Ramirez should at once telegraph to his father in Paris that his offer had been accepted by the Orientalist Company and instruct him to make a contract with the film companies, according to the tenor of the offer, and in the capacity of attorney-in-fact for the Orientalist Company. The idea behind the latter suggestion apparently was that the contract for the films would have to be made directly between the film-producing companies and the Orientalist Company; and it seemed convenient, in order to save time, that the Orientalist Company should clothed J. F. Ramirez with full authority as its attorney-in-fact. This idea was never given effect; and so far as the record shows, J. F. Ramirez himself procured the films upon his own responsibility, as he indicated in the officer of July 4 that he would do, with the result that the only contracting parties in this case are J. F. Ramirez of the one part, and the Orientalist Company, with Ramon J. Fernandez of the other.

In due time the films began to arrive in Manila, a draft for the cost and expenses incident to each shipment being attached to the proper bill of lading. It appears that the Orientalist Company was without funds to meet these obligations and the first few drafts were dealt with in the following manner: The drafts, upon presented through the bank, were accepted in the name of the Orientalist Company by its president B. Hernandez, and were taken up by the latter with his own funds. As the drafts had thus been paid by B. Hernandez, the films which had been procured by he payment of said drafts were treated by him as his own property; and they in fact never came into the actual possession of the Orientalist Company as owner at all, though it is true Hernandez rented the films to the Orientalist Company and they were exhibited by it in the Oriental Theater under an arrangement which was made between him and the theater's manager.

During the period between February 27, 1914, and April 30, 1914, there arrived in the city of Manila several remittances of films from Paris, and it is these shipments which have given occasion for the present action. All of the drafts accompanying these films were drawn, as on former occasions, upon the Orientalist Company; and all were accepted in the name of B. Hernandez, except the last, which was accepted by B. Hernandez individually. None of the drafts thus accepted were taken up by the drawee or by B. Hernandez when they fell due; and it was finally necessary for the plaintiff himself to take them up as dishonored by non-payment.

Thereupon this action was instituted by the plaintiff on May 19, 1914, against the Orientalist Company, and Ramon J. Fernandez. As the films which accompanied the dishonored were liable to deteriorate, the court, upon application of the plaintiff, and apparently without opposition on the part of the defendants, appointed a receiver who took charge of the films and sold them. The amount realized from this sale was applied to the satisfaction of the plaintiff's claim and was accordingly delivered to him in part payment thereof. At trial judgment was given for the balance due to the plaintiff, namely P6,018.93, with interest from May 19, 1914, the date of the institution of the action. In the judgment of the trial court the Orientalist Company was declared to be a principal debtor and Ramon J. Fernandez was declared to be liable subsidiarily as guarantor. From this judgment both of the parties defendant appealed.

In this Court neither of the parties appellant make any question with respect to the right of the plaintiff to recover from somebody the amount awarded by the lower court; but

each of the defendants insists the other is liable for the whole. It results that the real contention upon this appeal is between the two defendants.

It is stated in the brief of the appellant Ramon J. Fernandez and the statement is not challenged by the Orientalist Company that the judgment has already been executed as against the company is exclusively and primarily liable the entire indebtedness, the question as to the liability of Ramon J. Fernandez would be academic. But if the latter is liable as principal obligor for the whole or any part of the debt, it will be necessary to modify the judgment in order to adjust the rights of the defendants in accordance with such finding.

It will be noted that the action is primarily founded upon the liability created by the letters dated July 30th and August 5, 1913, in connection with the plaintiff's offer of July 4, 1913; and both of the letters mentioned are copied into the complaint as the foundation of the action. The action is not based upon the dishonored drafts which were accepted by B. Hernandez in the name of the Orientalist Company; and although these drafts, as well as the last draft, which was accepted by B. Hernandez individually, have been introduced in evidence, this was evidently done for the purpose of proving the amount of damages which the plaintiff was entitled to recover.

In the discussion which is to follow we shall consider, first, the question of the liability of the corporation upon the contracts contained in the letters of July 30 and August 5, 1913, and, secondly the question of the liability of Ramon J. Fernandez, based upon his personal signature to the same documents.

As to the liability of the corporation a preliminary point of importance arises upon the pleadings. The action, as already stated, is based upon documents purporting to be signed by the Orientalist Company, and copies of the documents are set out in the complaint. It was therefore incumbent upon the corporation, if it desired to question the authority of Fernandez to bind it, to deny the due execution of said contracts under oath, as prescribed in section 103 of the Code of Civil procedure. Said section, in the part pertinent to the situation now under consideration, reads as follows:

When an action is brought upon a written instrument and the complaint contains or has annexed or has annexed a copy of such instrument, the genuineness and due execution of the instrument shall be deemed admitted, unless specifically denied under oath in the answer.

No sworn answer denying the genuineness and due execution of the contracts in question or questioning the authority of Ramon J. Fernandez to bind the Orientalist Company was filed in this case; but evidence was admitted without objection from the plaintiff, tending to show that Ramon J. Fernandez had no such authority. This evidence consisted of extracts from the minutes of the proceedings of the company's board of directors and also of extracts from the minutes of the proceedings of the company's stockholders, showing that the making of this contract had been under consideration in both bodies and that the authority to make the same had been withheld by the stockholders. It therefore becomes necessary for us to consider whether the administration resulting from the failure of the defendant company to deny the execution of the contracts under oath is binding upon it for all purposes of this lawsuit, or whether such failure should be considered a mere irregularity of procedure which was waived when the evidence referred to was admitted without objection from the plaintiff. The proper solution of this problem makes it necessary to consider carefully the principle underlying the provision above quoted.

That the situation was one in which an answer under oath denying the authority of the agent should have been interposed, supposing that the company desired to contest this point, is not open to question. In the case of Merchant vs. International Banking Corporation, (6 Phil. Rep., 314), it appeared that one Brown has signed the name of the defendant bank as guarantor of a promissory note. The bank was sued upon this guaranty and at the hearing attempted to prove that Brown had no authority to bind the bank by such contract. It was held that buy failing to deny the contract under oath, the bank had admitted the genuineness and due execution thereof, and that this admission extended not only to the authenticity of the signature of Brown but also to his authority. Said Justice Willard: "The failure of the defendant to deny the genuineness and due

execution of this guaranty under oath was an admission not only of the signature of Brown, but also his authority to make the contract in behalf of the defendant and of the power the contract in behalf of the defendant and of the power of the defendant to enter into such a contract.

The rule thus stated is in entire accord with the doctrine prevailing in the United States, as will be seen by reference to the following, among other authorities:

The case of Barrett Mining Co. vs. Tappan (2 Colo., 124) was an action against a mining corporation upon an appeal bond. The name of the company had been affixed to the obligation by an agent, and no sufficient affidavit was filed by the corporation questioning its signature or the authority of the agent to bind the company. It was held that the plaintiff did not have to prove the due execution of the bond and that the corporation as to be taken as admitting the authority of the agent to make the signature. Among other things the court said: "But it is said that the authority of Barrett to execute the bond is distinguishable from the signing and, although the signature must be denied under oath, the authority of the agent need not be. Upon this we observe that the statute manifestly refers to the legal effect of the signature, rather than the manual act of singing. If the name of the obligor, in a bond, is subscribed by one in his presence, and by his direction, the effect is the same as if his name should be signed with his own hand, and under such circumstances we do not doubt that the obligor must deny his signature under oath, in order to put the obligee to proof of the fact. Quit facit per aliam facit per se, and when the name is signed by one thereunto authorized, it is as much as the signature of the principal as if written with his own hand. Therefore, if the principal would deny the authority of the agent, as the validity of the signature is thereby directly attacked, the denial must be under oath.

In Union Dry Company vs. Reid (26 Ga., 107), an action was brought upon a promissory note purporting to have been given by on A. B., as the treasurer of the defendant company. Said the court: "Under the Judiciary Act of 1799, requiring the defendant to deny on oath an instrument of writing, upon which he is sued, the plea in this case should have been verified.

If the person who signed this note for the company, and upon which they are sued, was not authorized to make it, let them say so upon oath, and the onus is then on the plaintiff to overcome the plea."

It should be noted that the provision contained in section 103 of our Code of Civil Procedure is embodied in some form or other in the statutes of probably all of the American States, and it is not by any means peculiar to the laws of California, though it appears to have been taken immediately from the statutes of that State. (Secs. 447, 448, California Code of Civil Procedure.)

There is really a broader question here involved than that which relates merely to the formality of verifying the answer with an affidavit. This question arises from the circumstance that the answer of the corporation does not in any was challenge the authority of Ramon J. Fernandez to bind it by the contracts in question and does not set forth, as a special defense, any such lack of authority in him. Upon well-established principles of pleading lack of authority in an officer of a corporation to bind it by a contract executed by him in its name is a defense which should be specially pleaded — and this quite apart from the requirement, contained in section 103, that the answer setting up such defense should be verified by oath. But is should not here escape observation that section 103 also requires — in denial contemplated in that section shall be specific. An attack on the instrument in general terms is insufficient, even though the answer is under oath. (Songco vs. Sellner, 37 Phil. Rep., 254.)

In the first edition of a well-known treatise on the laws of corporations we find the following proposition:

If an action is brought against a corporation upon a contract alleged to be its contract, if it desires to set up the defense that the contract was executed by one not authorized as its agent, it must plead non est factum. (Thompson on Corporations, 1st ed., vol. 6, sec. 7631.)

Again, says the same author:

A corporation can not avail itself of the defense that it had no power to enter into the obligation to enforce which the suit is brought, unless it pleads that defense. This principle applies equally where the defendant intends to challenge the power of its officer or agent to execute in its behalf the contract upon which the action brought and where it intends to defend on the ground of total want of power in the corporation to make such a contract. (Opus citat. sec. 7619.)

In Simon vs. Calfee (80 Ark., 65), it was said:

Though the power of the officers of a business corporation to issue negotiable paper in its name is not presumed, such corporation can not avail itself of a want of power in its officers to bind it unless the defense was made on such ground OatBsa8g.

The rule has been applied where the question was whether corporate officer, having admitted power to make a contract, had in the particular instance exceeded that authority, (Merill vs. Consumers' Coal Co., 114 N.Y., 216); and it has been held that where the answer in a suit against a corporation on its note relies simply on the want of power of the corporation to issue notes, the defendant can not afterwards object that the plaintiff has not shown that the officer executing the note were empowered to do so. (Smith vs. Eureka Flour Mills Co., 6 Cal., 1.)

The reason for the rule enunciated in the foregoing authorities will, we think, be readily appreciated. In dealing with corporations the public at large is bound to rely to a large extent upon outward appearances. If a man is found acting for a corporation with the external indicia of authority, any person, not having notice of want of authority, may usually rely upon those appearances; and if it be found that the directors had permitted the agent to exercise that authority and thereby held him out as a person competent to bind the corporation, or had acquiesced in a contract and retained the benefit supposed to have been conferred by it, the corporation will be bound, notwithstanding the actual authority may never have been granted. The public is not supposed nor required to know the transactions which happen around the table where the corporate board of directors or the stockholders are from time to time convoked. Whether a particular officer actually possesses the authority which he assumes to exercise is frequently known to very few, and the proof of it usually is not readily accessible to the stranger who deals with the corporation on the faith of the ostensible authority exercised by some of the corporate officers. It is therefore reasonable, in a case where an officer of a corporation has made a contract in its name, that the corporation should be required, if it denies his authority, to state such defense in its answer. By this means the plaintiff is apprised of the fact that the agent's authority is contested; and he is given an opportunity to adduce evidence showing either that the authority existed or that the contract was ratified and approved.

We are of the opinion that the failure of the defendant corporation to make any issue in its answer with regard to the authority of Ramon J. Fernandez to bind it, and particularly its failure to deny specifically under oath the genuineness and due execution of the contracts sued upon, have the effect of elimination the question of his authority from the case, considered as a matter of mere pleading. The statute (sec. 103) plainly says that if a written instrument, the foundation of the suit, is not denied upon oath, it shall be deemed to be admitted. It is familiar doctrine that an admission made in a pleading can not be controverted by the party making such admission; and all proof submitted by him contrary thereto or inconsistent therewith should simply be ignored by the court, whether objection is interposed by the opposite party or not. We can see no reason why a constructive admission, created by the express words of the statute, should be considered to have less effect than any other admission N396O2a.

The parties to an action are required to submit their respective contentions to the court in their complaint and answer. These documents supply the materials which the court must use in order to discover the points of contention between the parties; and where the statute says that the due execution of a document which supplies the foundation of an action is to be taken as admitted unless denied under oath, the failure of the defendant to make such denial must be taken to operate as a conclusive admission, so long as the pleadings remain that form.

It is true that it is declared in section 109 of the Code of Civil Procedure that immaterial variances between the allegations of a pleading and the proof shall be disregarded and the facts shall be found according to the evidence. The same section, however, recognizes the necessity for an amendment of the pleadings. And judgment must be in conformity with the case made in conformity with the case made in the pleadings and established by the proof, and relief can not be granted that is substantially inconsistent with either. A party can no more succeed upon a case proved but not alleged than upon a case alleged but nor proved. This rule of course operates with like effect upon both parties, and applies equality to the defendants special defense as to the plaintiffs cause of action.

Of course this Court, under section 109 of the Code of Civil Procedure, has authority even now to permit the answer of the defendant to be amended; and if we believed that the interests of justice so required, we would either exercise that authority or remand the cause for a new trial in court below. As will appear further on in this opinion, however, we think that the interests of justice will best be promoted by deciding the case, without more ado, upon the issues presented in the record as it now stands.

That we may not appear to have overlooked the matter, we will observe that two cases are cited from California in which the Supreme Court of the State has held that where a release is pleaded by way of defense and evidence tending to destroy its effect is introduced without objection, the circumstance that it was not denied under oath is immaterial. In the earlier of these cases, Crowley, vs. Railroad Co. (60 Cal., 628), an action was brought against a railroad company to recover damages for the death of the plaintiff's minor son, alleged to have been killed by the negligence of the defendant. The defendant company pleaded by way of defense a release purporting to be signed by the plaintiff, and in its answer inserted a copy of the release. The execution of the release was not denied under oath; but at the trial evidence was submitted on behalf of the plaintiff tending to show that at the time he signed the release, he was incompetent by reason of drunkenness to bind himself thereby. It was held that inasmuch as this evidence had been submitted by the plaintiff without objection, it was proper for the court to consider it. We do not question the propriety of that decision, especially as the issue had been passed upon by a jury; but we believe that the decision would have been more soundly planted if it had been said that the incapacity of the plaintiff, due to his drunken condition, was a matter which did not involve either the genuineness or due execution of the release. Like the defenses of fraud, coercion, imbecility, and mistake, it was a matter which could be proved under the general issue and did not have to be set up in a sworn reply. (Cf. Moore vs. Copp, 119 Cal., 429, 432, 433.) A somewhat similar explanation can, we think, be given of the case of Clark vs. Child in which the rule declared in the earlier case was followed. With respect to both decisions which we merely observe that upon point of procedure which they are supposed to maintain, the reasoning of the court is in our opinion unconvincing.

We shall now consider the liability of the defendant company on the merits just as if that liability had been properly put in issue by a specific answer under oath denying the authority of Fernandez go to bind it. Upon this question it must at the outset be premised that Ramon J. Fernandez, as treasurer, had no independent authority to bind the company by signing its name to the letters in question. It is declared by signing its name to the letters in question. It is declared in section 28 of the Corporation Law that corporate power shall be exercised, and all corporate business conducted by the board of directors; and this principle is recognized in the by-laws of the corporation in question which contain a provision declaring that the power to make contracts shall be vested in the board of directors. It is true that it is also declared in the same by-laws that the president shall have the power, and it shall be his duty, to sign contract; but this has reference rather to the formality of reducing to proper form the contract which are authorized by the board and is not intended to confer an independent power to make contract binding on the corporation.

The fact that the power to make corporate contract is thus vested in the board of directors does not signify that a formal vote of the board must always be taken before contractual liability can be fixed upon a corporation; for the board can create liability, like an individual, by other means than by a formal expression of its will. In this connection the case of Robert Gair Co. vs. Columbia Rice Packing Co. (124 La., 194) is instructive. If there appeared that the secretary of the defendant corporation had signed an obligation

on its behalf binding it as guarantor of the performance of an important contract upon which the name of another corporation appeared as principal. The defendant company set up by way of defense that is secretary had no authority to bind it by such an engagement. The court found that the guaranty was given with the knowledge and consent of the president and directors, and that this consent of the president and directors, and that this consent was given with as much observance of formality as was customary in the transaction of the business of the company. It was held that, so far as the authority of the secretary was concerned, the contract was binding. In discussing this point, the court quoted with approval the following language form one of its prior decisions:

The authority of the subordinate agent of a corporation often depends upon the course of dealings which the company or its director have sanctioned. It may be established sometimes without reference to official record of the proceedings of the board, by proof of the usage which the company had permitted to grow up in business, and of the acquiescence of the board charged with the duty of supervising and controlling the company's business 0tnl.

It appears in evidence, in the case now before us, that on July 30, the date upon which the letter accepting the offer of the Eclair films was dispatched the board of directors of the Orientalist Company convened in special session in the office of Ramon J. Fernandez at the request of the latter. There were present the four members, including the president, who had already signified their consent to the making of the contract. At this meeting, as appears from the minutes, Fernandez informed the board of the offer which had been received from the plaintiff with reference to the importation of films. The minutes add that terms of this offer were approved; but at the suggestion of Fernandez it was decided to call a special meeting of the stockholders to consider the matter and definite action was postponed.

The stockholders meeting was convoked upon September 18, 1913, upon which occasion Fernandez informed those present of the offer in question and of the terms upon which the films could be procured. He estimated that the company would have to make an outlay of about P5,500 per month, if the offer for the two films should be accepted by it.

The following extracts from the minutes of this meeting are here pertinent:

Mr. Fernandez informed the stockholders that, in view of the urgency of the matter and for the purpose of avoiding that other importers should get ahead of the corporation in this regard, he and Messrs. B. Hernandez, Leon Monroy, and Dr. Papa met for the purpose of considering the acceptance of the offer together with the responsibilities attached thereto, made to the corporation by the film manufacturers of Eclair and Milano of Paris and Italy respectively, inasmuch as the first shipment of films was then expected to arrive.

At the same time he informed the said stockholders that he had already made arrangements with respect to renting said films after they have been once exhibited in the Cine Oriental, and that the corporation could very well meet the expenditure involved and net a certain profit, but that, if we could enter into a contract with about nine cinematographs, big gains would be obtained through such a step.

The possibility that the corporation might not see fit to authorize the contract, or might for lack of funds be unable to make the necessary outlay, was foreseen; and in such contingency the stockholders were informed, that the four gentlemen above mentioned (Hernandez, Fernandez, Monroy, and Papa) "would continue importing said films at their own account and risk, and shall be entitled only to a compensation of 10 per cent of their outlay in importing the films, said payment to be made in shares of said corporation, inasmuch as the corporation is lacking available funds for the purpose, and also because there are 88 shares of stock remaining still unsold."

In view of this statement, the stockholders adopted a resolution to the effect that the agencies of the Eclair and Milano films should be accepted, if the corporation could obtain the money with which to meet the expenditure involved, and to this end appointed a committee to apply to the bank for a credit. The evidence shows that an attempt was made, on behalf of the corporation, to obtain a credit of P10,000 from the Bank of the

Philippine Islands for the purpose indicated, but the bank declined to grant his credit. Thereafter another special meeting of the shareholders of the defendant corporation was called at which the failure of their committee to obtain a credit from the bank was made known. A resolution was thereupon passed to the effect that the company should pay to Hernandez, Fernandez, Monroy, and Papa an amount equal to 10 per cent of their outlay in importing the films, said payment to be made in shares of the company in accordance with the suggestion made at the previous meeting. At the time this meeting was held three shipment of the films had already been received in Manila.

We believe it is a fair inference from the recitals of the minutes of the stockholders meeting of September 18, and especially from the first paragraph above quoted, that this body was then cognizant that the officer had already been accepted in the name of the Orientalist Company and that the films which were then expected to arrive were being imported by virtue of such acceptance. Certainly four members of the board of directors there present were aware of this fact, as the letter accepting the offer had been sent with their knowledge and consent. In view of this circumstance, a certain doubt arises whether they meant to utilize the financial assistance of the four so-called importers in order that the corporation might bet the benefit of the contract for the films, just as it would have utilized the credit of the bank if such credit had been extended. If such was the intention of the stockholders their action amounted to a virtual, though indirect, approval of the contract. It is not however, necessary to found the judgment on this interpretation of the stockholders proceedings, inasmuch as we think for reasons presently to be stated, that the corporation is bound, and we will here assume that in the end the contract were not approved by the stockholders.

It will be observed that Ramon J. Fernandez was the particular officer and member of the board of directors who was most active in the effort to secure the films for the corporation. The negotiations were conducted by him with the knowledge and consent of other members of the board; and the contract was made with their prior approval. As appears from the papers in this record, Fernandez was the person to who keeping was confided the printed stationery bearing the official style of the corporation, as well as rubber stencil with which the name of the corporation could be signed to documents bearing its name.

Ignoring now, for a moment, the transactions of the stockholders, and reverting to the proceedings of the board of directors of the Orientalist Company, we find that upon October 27, 1913, after Fernandez had departed from the Philippine Islands, to be absent for many months, said board adopted a resolution conferring the following among other powers on Vicente Ocampo, the manager of the Oriental theater, namely:

(1) To rent a box for the films in the "Kneeler Building."

(4) To be in charge of the films and of the renting of the same.

(5) To advertise in the different newspapers that we are importing films to be exhibited in the Cine Oriental.

(6) Not to deliver any film for rent without first receiving the rental therefor or the guaranty for the payment thereof.

(7) To buy a book and cards for indexing the names of the films.

(10) Upon the motion of Mr. Ocampo, it was decided to give ample powers to the Hon. R. Acuña to enter into agreements with cinematograph proprietors in the provinces for the purpose of renting films from us.

It thus appears that the board of directors, before the financial inability of the corporation to proceed with the project was revealed, had already recognized the contract as being in existence and had proceeded to take the steps necessary to utilize the films. Particularly suggestive is the direction given at this meeting for the publication of announcements in the newspapers to the effect that the company was engaged in importing films. In the light of all the circumstances of the case, we are of the opinion that the contracts in question were thus inferentially approved by the company's board of directors and that the company is bound unless the subsequent failure of the stockholders to approve said

contracts had the effect of abrogating the liability thus created.

Both upon principle and authority it is clear that the action of the stockholders, whatever its character, must be ignored. The functions of the stockholders of a corporation are, it must be remembered, of a limited nature. The theory of a corporation is that the stockholders may have all the profits but shall turn over the complete management of the enterprise to their representatives and agents, called directors. Accordingly, there is little for the stockholders to do beyond electing directors, making by-laws, and exercising certain other special powers defined by-law. In conformity with this idea it is settled that contract between a corporation and third person must be made by the director and not by the stockholders. The corporation, in such matters, is represented by the former and not by the latter. (Cook on Corporations, sixth ed., secs. 708, 709.) This conclusion is entirely accordant with the provisions of section 28 of our Corporation Law already referred to. It results that where a meeting of the stockholders is called for the purpose of passing on the propriety of making a corporate contract, its resolutions are at most advisory and not in any wise binding on the board.

In passing upon the liability of a corporation in cases of this kind it is always well to keep in mind the situation as it presents itself to the third party with whom the contract is made. Naturally he can have little or no information as to what occurs in corporate meetings; and he must necessarily rely upon the external manifestations of corporate consent. The integrity of commercial transactions can only be maintained by holding the corporation strictly to the liability fixed upon it by its agents in accordance with law, and we would be sorry to announce a doctrine which would permit the property of a man in the city of Paris to be whisked out of his hands and carried into a remote quarter of the earth without recourse against the corporations whose name and authority had been used in the manner disclosed in this case. As already observed, it is familiar doctrine that if a corporation knowingly permits one of its officer, or any other agent, to do acts within the scope of an apparent authority, and thus hold him out to the public as possessing power to do those acts, the corporation will as against any one who has in good faith dealt with the corporation through such agent, be estopped from denying his authority; and where it is said "if the corporation permits" this means the same as "if the thing is permitted by the directing power of the corporation."

It being determined that the corporation is bound by the contract in question, it remains to consider the character of the liability assumed by R. J. Fernandez, in affixing his personal signature to said contract. The question here is whether Fernandez is liable jointly with the Orientalists Company as a principal obligor, or whether his liability is that of a guarantor merely.

As appears upon the face of the contracts, the signature of Fernandez, in his individual capacity, is not in line with the signature of the Orientalist Company, but is set off to the left of the company's signature and somewhat who sign contracts in some capacity other than that of principal obligor to place their signature alone would justify a court in holding that Fernandez here took upon himself the responsibility of a guarantor rather than that of a principal obligor. We do, however, think, that the form in which the contract is signed raises a doubt as to what the real intention was; and we feel justified, in looking to the evidence to discover that intention. In this connection it is entirely clear, from the testimony of both Ramirez and Ramon J. Fernandez, that the responsibility of the latter was intended to be that of guarantor. There is, to be sure, a certain difference between these witnesses as to the nature of this guaranty, inasmuch as Fernandez would have us believe that his name was signed as a guaranty that the contract would be approved by the corporation, while Ramirez says that the name was put on the contract for the purpose of guaranteeing, not the approval of the contract, but its performance. We are convinced that the latter was the real intention of the contracting parties.

We are not unmindful of the force of that rule of law which declares that oral evidence is admissible to show the character in which the signature was affixed. This conclusion is perhaps supported by the language of the second paragraph of article 1281 of the Civil Code, which declares that if the words of a contract should appear contrary to the evident intention of the parties, the intention shall prevail. But the conclusion reached is, we think, deducible from the general principle that in case of ambiguity parol evidence is admissible to show the intention of the contracting parties.

It should be stated in conclusion that as the issues in this case have been framed, the only question presented to this court is: To what extent are the signatory parties to the contract liable to the plaintiff J. F. Ramirez? No contentious issue is raised directly between the defendants, the Orientalist Company and Ramon H. Fernandez; nor does the present the present action involve any question as to the undertaking of Fernandez and his three associates to effect the importation of the films upon their own account and risk. Whether they may be bound to hold the company harmless is a matter upon which we express no opinion.

The judgment appealed from is affirmed, with costs equally against the two appellant. So ordered

PREMIUM MARBLE RESOURCES, INC., petitioner, vs. THE COURT OF APPEALS and INTERNATIONAL CORPORATE BANK, respondents.

Assailed in the instant petition for review is the decision[1] of the Court of Appeals in CA-G.R. CV No. 16810 dated September 28, 1990 which affirmed the trial court’s dismissal of petitioners’ complaint for damages.

The antecedents:

On July 18, 1986, Premium Marble Resources, Inc. (Premium for brevity), assisted by Atty. Arnulfo Dumadag as counsel, filed an action for damages against International Corporate Bank which was docketed as Civil Case No. 14413. The complaint states, inter alia:

“3. Sometime in August to October 1982, Ayala Investment and Development Corporation issued three (3) checks [Nos. 097088, 097414 & 27884] in the aggregate amount of P31,663.88 payable to the plaintiff and drawn against Citibank;

x x x

“5. On or about August to October 1982, former officers of the plaintiff corporation headed by Saturnino G. Belen, Jr., without any authority whatsoever from the plaintiff deposited the above-mentioned checks to the current account of his conduit corporation, Intervest Merchant Finance (Intervest, for brevity) which the latter maintained with the defendant bank under account No. 0200-02027-8;

“6. Although the checks were clearly payable to the plaintiff corporation and crossed on their face and for payee’s account only, defendant bank accepted the checks to be deposited to the current account of Intervest and thereafter presented the same for collection from the drawee bank which subsequently cleared the same thus allowing Intervest to make use of the funds to the prejudice of the plaintiff;

x x x

“14. The plaintiff has demanded upon the defendant to restitute the amount representing the value of the checks but defendant refused and continue to refuse to honor plaintiff’s demands up to the present;

“15. As a result of the illegal and irregular acts perpetrated by the defendant bank, the plaintiff was damaged to the extent of the amount of P31,663.88.”

Premium prayed that judgment be rendered ordering defendant bank to pay the amount of P31,663.88 representing the value of the checks plus interest, P100,000.00 as exemplary damages; and P30,000.00 as attorney’s fees.

In its Answer International Corporate Bank alleged, inter alia, that Premium has no capacity/personality/authority to sue in this instance and the complaint should, therefore, be dismissed for failure to state a cause of action.

A few days after Premium filed the said case, Printline Corporation, a sister company of Premium also filed an action for damages against International Corporate Bank docketed as Civil Case No. 14444. Thereafter, both civil cases were consolidated.

Meantime, the same corporation, i.e., Premium, but this time represented by Siguion Reyna, Montecillio and Ongsiako Law Office as counsel, filed a motion to dismiss on the ground that the filing of the case was without authority from its duly constituted board of directors as shown by the excerpt of the minutes of the Premium’s board of directors’ meeting.[2]

In its opposition to the motion to dismiss, Premium thru Atty. Dumadag contended that the persons who signed the board resolution namely Belen, Jr., Nograles & Reyes, are not directors of the corporation and were allegedly former officers and stockholders of Premium who were dismissed for various irregularities and fraudulent acts; that Siguion Reyna Law office is the lawyer of Belen and Nograles and not of Premium and that the Articles of Incorporation of Premium shows that Belen, Nograles and Reyes are not majority stockholders.

On the other hand, Siguion Reyna Law firm as counsel of Premium in a rejoinder, asserted that it is the general information sheet filed with the Securities and Exchange Commission, among others, that is the best evidence that would show who are the stockholders of a corporation and not the Articles of Incorporation since the latter does not keep track of the many changes that take place after new stockholders subscribe to corporate shares of stocks.

In the interim, defendant bank filed a manifestation that it is adopting in toto Premium’s motion to dismiss and, therefore, joins it in praying for the dismissal of the present case on the ground that Premium lacks authority from its duly constituted board of directors to institute the action.

In its Order, the lower court concluded that:

“Considering that the officers (directors) of plaintiff corporation enumerated in the Articles of Incorporation, filed on November 9, 1979, were ‘to serve until their successors are elected and qualified’ and considering further that as of March 4, 1981, the officers of the plaintiff corporation were Alberto Nograles, Fernando Hilario, Augusto Galace, Jose L.R. Reyes, Pido Aguilar and Saturnino Belen, Jr., who presumably are the officers represented by the Siguion Reyna Law Firm, and that together with the defendants, they are moving for the dismissal of the above-entitled case, the Court finds that the officers represented by Atty. Dumadag do not as yet have the legal capacity to sue for and in behalf of the plaintiff corporation and/or the filing of the present action (Civil Case 14413) by them before Case No. 2688 of the SEC could be decided is a premature exercise of authority or assumption of legal capacity for and in behalf of plaintiff corporation.

“The issues raised in Civil Case No. 14444 are similar to those raised in Civil Case No. 14413. This Court is of the opinion that before SEC Case No. 2688 could be decided, neither the set of officers represented by Atty. Dumadag nor that set represented by the Siguion Reyna, Montecillo and Ongsiako Law Office, may prosecute cases in the name of the plaintiff corporation.

“It is clear from the pleadings filed by the parties in these two cases that the existence of a cause of action against the defendants is dependent upon the resolution of the case involving intra-corporate controversy still pending before the SEC.”[3]

On appeal, the Court of Appeals affirmed the trial court’s Order[4] which dismissed the consolidated cases. Hence, this petition.

Petitioner submits the following assignment of errors:

I

“The Court of Appeals erred in giving due course to the motion to dismiss filed by the Siguion Reyna Law Office when the said motion is clearly filed not in behalf of the petitioner but in behalf of the group of Belen who are the clients of the said law office.

II

“The Court of Appeals erred in giving due course to the motion to dismiss filed by the Siguion Reyna Law Office in behalf of petitioner when the said law office had already appeared in other cases wherein the petitioner is the adverse party.

III

“The Court of Appeals erred when it ruled that undersigned counsel was not authorized by the Board of Directors to file Civil Case Nos. 14413 and 14444.

IV

“The Court of Appeals erred in concluding that under SEC Case No. 2688 the incumbent directors could not act for and in behalf of the corporation.

V

“The Court of Appeals is without jurisdiction to prohibit the incumbent Board of Directors from acting and filing this case when the SEC where SEC Case No. 2688 is pending has not even made the prohibition.”

We find the petition without merit.

The only issue in this case is whether or not the filing of the case for damages against private respondent was authorized by a duly constituted Board of Directors of the petitioner corporation.

Petitioner, through the first set of officers, viz., Mario Zavalla, Oscar Gan, Lionel Pengson, Jose Ma. Silva, Aderito Yujuico and Rodolfo Millare, presented the Minutes[5] of the meeting of its Board of Directors held on April 1, 1982, as proof that the filing of the case against private respondent was authorized by the Board. On the other hand, the second set of officers, viz., Saturnino G. Belen, Jr., Alberto C. Nograles and Jose L.R. Reyes, presented a Resolution[6] dated July 30, 1986, to show that Premium did not authorize the filing in its behalf of any suit against the private respondent International Corporate Bank.

Later on, petitioner submitted its Articles of Incorporation[7] dated November 6, 1979 with the following as Directors: Mario C. Zavalla, Pedro C. Celso, Oscar B. Gan, Lionel Pengson, and Jose Ma. Silva.

However, it appears from the general information sheet and the Certification issued by the SEC on August 19, 1986[8] that as of March 4, 1981, the officers and members of the board of directors of the Premium Marble Resources, Inc. were:

Alberto C. Nograles — President/Director

Fernando D. Hilario — Vice President/Director

Augusto I. Galace — Treasurer

Jose L.R. Reyes — Secretary/Director

Pido E. Aguilar — Director

Saturnino G. Belen, Jr. — Chairman of the Board.

While the Minutes of the Meeting of the Board on April 1, 1982 states that the newly elected officers for the year 1982 were Oscar Gan, Mario Zavalla, Aderito Yujuico and Rodolfo Millare, petitioner failed to show proof that this election was reported to the SEC. In fact, the last entry in their General Information Sheet with the SEC, as of 1986 appears to be the set of officers elected in March 1981.

We agree with the finding of public respondent Court of Appeals, that “in the absence of any board resolution from its board of directors the [sic] authority to act for and in behalf of the corporation, the present action must necessarily fail. The power of the corporation to sue and be sued in any court is lodged with the board of directors that exercises its corporate powers. Thus, the issue of authority and the invalidity of plaintiff-appellant’s subscription which is still pending, is a matter that is also addressed, considering the premises, to the sound judgment of the Securities & Exchange Commission.”[9]

By the express mandate of the Corporation Code (Section 26), all corporations duly organized pursuant thereto are required to submit within the period therein stated (30 days) to the Securities and Exchange Commission the names, nationalities and residences of the directors, trustees and officers elected.

Sec. 26 of the Corporation Code provides, thus:

“Sec. 26. Report of election of directors, trustees and officers. — Within thirty (30) days after the election of the directors, trustees and officers of the corporation, the secretary, or any other officer of the corporation, shall submit to the Securities and Exchange Commission, the names, nationalities and residences of the directors, trustees and officers elected. xxx”

Evidently, the objective sought to be achieved by Section 26 is to give the public information, under sanction of oath of responsible officers, of the nature of business, financial condition and operational status of the company together with information on its key officers or managers so that those dealing with it and those who intend to do business with it may know or have the means of knowing facts concerning the corporation’s financial resources and business responsibility.[10]

The claim, therefore, of petitioners as represented by Atty. Dumadag, that Zaballa, et al., are the incumbent officers of Premium has not been fully substantiated. In the absence of an authority from the board of directors, no person, not even the officers of the corporation, can validly bind the corporation.[11]

We find no reversible error in the decision sought to be reviewed.

ACCORDINGLY, for lack of merit, the petition is hereby DENIED.

Grace Christian High School vs. Court of Appeals

Facts: Grace Christian High School is an educational institution offering preparatory, kindergarten and secondary courses at the Grace Village in Quezon City. Grace Village Association, Inc., on the other hand, is an organization of lot and/or building owners, lessees and residents at Grace Village, while Alejandro G. Beltran and Ernesto L. Go were its president and chairman of the committee on election, respectively, in 1990, when this suit was brought. As adopted in 1968, the by-laws of the association provided in Article IV, that "the annual meeting of the members of the Association shall be held on the first

Sunday of January in each calendar year at the principal office of the Association at 2:00 P.M. where they shall elect by plurality vote and by secret balloting, the Board of Directors, composed of 11 members to serve for one year until their successors are duly elected and have qualified." It appears, that on 20 December 1975, a committee of the board of directors prepared a draft of an amendment to the by-laws, providing that "The Annual Meeting of the members of the Association shall be held on the second Thursday of January of each year. Each Charter or Associate Member of the Association is entitled to vote. He shall be entitled to as many votes as he has acquired thru his monthly membership fees only computed on a ratio of TEN (P10.00) PESOS for one vote. The Charter and Associate Members shall elect the Directors of the Association. The candidates receiving the first 14 highest number of votes shall be declared and proclaimed elected until their successors are elected and qualified. GRACE CHRISTIAN HIGH SCHOOL representative is a permanent Director of the ASSOCIATION." This draft was never presented to the general membership for approval. Nevertheless, from 1975, after it was presumably submitted to the board, up to 1990, Grace Christian High School was given a permanent seat in the board of directors of the association. On 13 February 1990, the association's committee on election in a letter informed James Tan, principal of the school, that "it was the sentiment that all directors should be elected by members of the association" because "to make a person or entity a permanent Director would deprive the right of voters to vote for 15 members of the Board," and "it is undemocratic for a person or entity to hold office in perpetuity." For this reason, Tan was told that "the proposal to make the Grace Christian High School representative as a permanent director of the association, although previously tolerated in the past elections should be reexamined." Following this advice, notices were sent to the members of the association that the provision on election of directors of the 1968 by-laws of the association would be observed. The school requested the chairman of the election committee to change the notice of election by following the procedure in previous elections, claiming that the notice issued for the 1990 elections ran "counter to the practice in previous years" and was "in violation of the by-laws (of 1975)" and "unlawfully deprive[d] Grace Christian High School of its vested right [to] a permanent seat in the board." As the association denied its request, the school brought suit for mandamus in the Home Insurance and Guaranty Corporation to compel the board of directors of the association to recognize its right to a permanent seat in the board. The school based its claim on the following portion of the proposed amendment which, it contended, had become part of the by-laws of the association as Article VI, paragraph 2. It appears that the opinion of the Securities and Exchange Commission on the validity of this provision was sought by the association and that in reply to the query, the SEC rendered an opinion to the effect that the practice of allowing unelected members in the board was contrary to the existing by-laws of the association and to §92 of the Corporation Code. The association cited the SEC opinion, among others, in its answer. A preliminary conference was held on 29 March 1990 but nothing substantial was agreed upon. A subsequent meeting was held on 17 April 1990, but the parties failed to reach an agreement. Instead, the board adopted a resolution declaring the 1975 provision null and void for lack of approval by members of the association and the 1968 by-laws to be effective. On 20 June 1990, the hearing officer of the HIGC rendered a decision dismissing the school's action. The appeals board of the HIGC affirmed the decision of the hearing officer in its resolution dated 13 September 1990. Petitioner appealed to the Court of Appeals but the school again lost as the appellate court on 9 February 1993, affirmed the decision of the HIGC. The school filed the petition for review.

Issue: Whether the school's representative should be elected to have the right to sit in the board of directors of Grace Village Association, Inc. as a member thereof.

Held: It is actually §§28 and 29 of the Corporation Law — § 23 of the present law; not §92 of the present law or §29 of the former one — which require members of the boards of directors of corporations to be elected. The board of directors of corporations must be elected from among the stockholders or members. There may be corporations in which there are unelected members in the board but it is clear that in the examples cited by the school, the unelected members sit as ex officio members, i.e., by virtue of and for as long as they hold a particular office. But in the case of the school itself, there is no reason at all for its representative to be given a seat in the board. Nor does the school claim a right to such seat by virtue of an office held. In fact it was not given such seat in the beginning. It was only in 1975 that a proposed amendment to the by-laws sought to give it one. Since the provision in question is contrary to law, the fact that for 15 years it has not

been questioned or challenged but, on the contrary, appears to have been implemented by the members of the association cannot forestall a later challenge to its validity. Neither can it attain validity through acquiescence because, if it is contrary to law, it is beyond the power of the members of the association to waive its invalidity. For that matter the members of the association may have formally adopted the provision in question, but their action would be of no avail because no provision of the by-laws can be adopted if it is contrary to law. It is probable that, in allowing the school's representative to sit on the board, the members of the association were not aware that this was contrary to law. It should be noted that they did not actually implement the provision in question except perhaps insofar as it increased the number of directors from 11 to 15, but certainly not the allowance of the school's representative as an unelected member of the board of directors. It is more accurate to say that the members merely tolerated the school's representative and tolerance cannot be considered ratification. Nor can the school claim a vested right to sit in the board on the basis of "practice." Practice, no matter how long continued, cannot give rise to any vested right if it is contrary to law. Even less tenable is the school's claim that its right is "coterminus with the existence of the association."

Western Institute of Technology Inc. vs. Salas[GR 113032, 21 August 1997]First Division, Hermosisima Jr. (J): 4 concur

Facts: Ricardo T. Salas, Salvador T. Salas, Soledad Salas-Tubilleja, Antonio S. Salas, and Richard S. Salas, belonging to the same family, are the majority and controlling members of the Board of Trustees of Western Institute of Technology, Inc. (WIT), a stock corporation engaged in the operation, among others, of an educational institution. According to Homero L. Villasis, Dimas Enriquez, peston F. Villasis, and Reginald F. Villasis, the minority stockholders of WIT, sometime on 1 June 1986 in the principal office of WIT at La Paz, Iloilo City, a Special Board Meeting was held. In attendance were other members of the Board including Reginald Villasis. Prior to said Special Board Meeting, copies of notice thereof, dated 24 May 1986, were distributed to all Board Members. The notice allegedly indicated that the meeting to be held on 1 June 1986 included Item 6 which states that "Possible implementation of Art. III, Sec. 6 of the Amended By-Laws of Western Institute of Technology, Inc. on compensation of all officers of the corporation." In said meeting, the Board of Trustees passed Resolution 48, series 1986, granting monthly compensation to Salas, et. al. as corporate officers retroactive 1 June 1985, in the following amounts: “Chairman 9,000.00/month, Vice Chairman P3,500.00/month, Corporate Treasurer P3,500.00/month and Corporate Secretary P3,500.00/month, retroactive June 1, 1985 and the ten percentum of the net profits shall be distributed equally among the ten members of the Board of Trustees. This shall amend and supercede any previous resolution.” A few years later, or on 13 March 1991, Homero Villasis, Preston Villasis, Reginald Villasis and Dimas Enriquez filed an affidavit-complaint against Salas, et. al. before the Office of the City Prosecutor of Iloilo, as a result of which 2 separate criminal informations, one for falsification of a public document under Article 171 of the Revised Penal Code and the other for estafa under Article 315, par. 1(b) of the RPC, were filed before Branch 33 of the Regional Trial Court of Iloilo City. The charge for falsification of public document was anchored on Salas, et. al.'s submission of WIT's income statement for the fiscal year 1985-1986 with the Securities and Exchange Commission (SEC) reflecting therein the disbursement of corporate funds for the compensation of Salas, et. al. based on Resolution 4, series of 1986, making it appear that the same was passed by the board on 30 March 1986, when in truth, the same was actually passed on 1 June 1986, a date not covered by the corporation's fiscal year 1985-1986 (beginning May 1, 1995 and ending April 30, 1986). Thereafter, trial for the two criminal cases (Criminal Cases 37097 and 37098), was consolidated. After a full-blown hearing, Judge Porfirio Parian handed down a verdict of acquittal on both counts dated 6 September 1993 without imposing any civil liability against the accused therein. Villasis, et. al. filed a Motion for Reconsideration of the civil aspect of the RTC Decision which was, however, denied in an Order dated 23 November 1993. Villasis, et. al. filed the petition for review on certiorari. Significantly on 8 December 1994, a Motion for Intervention, dated 2 December 1994, was filed before this Court by Western Institute of Technology, Inc., disowning its inclusion in the petition and submitting that Atty. Tranquilino R. Gale,

counsel for Villasis, et. al., had no authority whatsoever to represent the corporation in filing the petition. Intervenor likewise prayed for the dismissal of the petition for being utterly without merit. The Motion for Intervention was granted on 16 January 1995.

Issue: Whether the grant of compensation to Salas, et. al. is proscribed under Section 30 of the Corporation Code.

Held: Directors or trustees, as the case may be, are not entitled to salary or other compensation when they perform nothing more than the usual and ordinary duties of their office. This rule is founded upon a presumption that directors/trustees render service gratuitously, and that the return upon their shares adequately furnishes the motives for service, without compensation. Under Section 30 of the Corporation Code, there are only two (2) ways by which members of the board can be granted compensation apart from reasonable per diems: (1) when there is a provision in the by-laws fixing their compensation; and (2) when the stockholders representing a majority of the outstanding capital stock at a regular or special stockholders' meeting agree to give it to them. Also, the proscription, however, against granting compensation to director/trustees of a corporation is not a sweeping rule. Worthy of note is the clear phraseology of Section 30 which state: "[T]he directors shall not receive any compensation, as such directors." The phrase as such directors is not without significance for it delimits the scope of the prohibition to compensation given to them for services performed purely in their capacity as directors or trustees. The unambiguous implication is that members of the board may receive compensation, in addition to reasonable per diems, when they render services to the corporation in a capacity other than as directors/trustees. Herein, resolution 48, s. 1986 granted monthly compensation to Salas, et. al. not in their capacity as members of the board, but rather as officers of the corporation, more particularly as Chairman, Vice-Chairman, Treasurer and Secretary of Western Institute of Technology. Clearly, therefore, the prohibition with respect to granting compensation to corporate directors/trustees as such under Section 30 is not violated in this particular case. Consequently, the last sentence of Section 30 which provides that "In no case shall the total yearly compensation of directors, as such directors, exceed ten (10%) percent of the net income before income tax of the corporation during the preceding year" does not likewise find application in this case since the compensation is being given to Salas, et. al. in their capacity as officers of WIT and not as board members.

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs.HONORABLE COURT OF APPEALS and REMINGTON INDUSTRIAL SALES CORPORATION, respondents.

KAPUNAN, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court, seeking a review of the Decision of the Court of Appeals dated October 6, 1995 and the Resolution of the same court dated August 29, 1996.

The facts are as follows:

Marinduque Mining-Industrial Corporation (Marinduque Mining), a corporation engaged in the manufacture of pure and refined nickel, nickel and cobalt in mixed sulfides; copper ore/concentrates, cement and pyrite conc., obtained from the Philippine National Bank (PNB) various loan accommodations. To secure the loans, Marinduque Mining executed on October 9, 1978 a Deed of Real Estate Mortgage and Chattel Mortgage in favor of PNB. The mortgage covered all of Marinduque Mining's real properties, located at Surigao del Norte, Sipalay, Negros Occidental, and at Antipolo, Rizal, including the improvements thereon. As of November 20, 1980, the loans extended by PNB amounted to P4 Billion, exclusive of interest and charges.1

On July 13, 1981, Marinduque Mining executed in favor of PNB and the Development Bank of the Philippines (DBP) a second Mortgage Trust Agreement. In said agreement, Marinduque Mining mortgaged to PNB and DBP all its real properties located at Surigao del Norte, Sipalay, Negros Occidental, and Antipolo, Rizal, including the improvements thereon. The mortgage also covered all of Marinduque Mining's chattels, as well as assets of whatever kind, nature and description which Marinduque Mining may subsequently acquire in substitution or replenishment or in addition to the properties covered by the previous Deed of Real and Chattel Mortgage dated October 7, 1978. Apparently, Marinduque Mining had also obtained loans totaling P2 Billion from DBP, exclusive of interest and charges.2

On April 27, 1984, Marinduque Mining executed in favor of PNB and DBP an Amendment to Mortgage Trust Agreement by virtue of which Marinduque Mining mortgaged in favor of PNB and DBP all other real and personal properties and other real rights subsequently acquired by Marinduque Mining.3

For failure of Marinduque Mining to settle its loan obligations, PNB and DBP instituted sometime on July and August 1984 extrajudicial foreclosure proceedings over the mortgaged properties.

The events following the foreclosure are narrated by DBP in its petition, as follows:

In the ensuing public auction sale conducted on August 31, 1984, PNB and DBP emerged and were declared the highest bidders over the foreclosed real properties, buildings, mining claims, leasehold rights together with the improvements thereon as well as machineries [sic] and equipments [sic] of MMIC located at Nonoc Nickel Refinery Plant at Surigao del Norte for a bid price of P14,238,048,150.00 [and] [o]ver the foreclosed chattels of MMIC located at Nonoc Refinery Plant at Surigao del Norte, PNB and DBP as highest bidders, bidded for P170,577,610.00 (Exhs. "5" to "5-A", "6", "7" to "7-AA-" PNB/DBP). For the foreclosed real properties together with all the buildings, major machineries & equipment and other improvements of MMIC located at Antipolo, Rizal, likewise held on August 31, 1984, were sold to PNB and DBP as highest bidders in the sum of P1,107,167,950.00 (Exhs. "10" to "10-X"-PNB/ DBP).

At the auction sale conducted on September 7, 1984[,] over the foreclosed real properties, buildings, & machineries/equipment of MMIC located at Sipalay, Negros Occidental were sold to PNB and DBP, as highest bidders, in the amount of P2,383,534,000.00 and P543,040.000.00 respectively (Exhs. "8" to "8-BB", "9" to "90-GGGGGG"-PNB/DBP).

Finally, at the public auction sale conducted on September 18, 1984 on the foreclosed personal properties of MMIC, the same were sold to PNB and DBP as the highest bidder in the sum of P678,772,000.00 (Exhs. "11" and "12-QQQQQ"-PNB).

PNB and DBP thereafter thru a Deed of Transfer dated August 31, 1984, purposely, in order to ensure the continued operation of the Nickel refinery plant and to prevent the deterioration of the assets foreclosed, assigned and transferred to Nonoc Mining and Industrial Corporation all their rights, interest and participation over the foreclosed properties of MMIC located at Nonoc Island, Surigao del Norte for an initial consideration of P14,361,000,000.00 (Exh. "13"-PNB).

Likewise, thru [sic] a Deed of Transfer dated June 6, 1984, PNB and DBP assigned and transferred in favor of Maricalum Mining Corp. all its rights, interest and participation over the foreclosed properties of MMIC at Sipalay, Negros Occidental for an initial consideration of P325,800,000.00 (Exh. "14"-PNB/DBP).

On February 27, 1987, PNB and DBP, pursuant to Proclamation No. 50 as amended, again assigned, transferred and conveyed to the National Government thru [sic] the Asset Privatization Trust (APT) all its existing rights and interest over the assets of MMIC, earlier assigned to Nonoc Mining and Industrial Corporation, Maricalum Mining Corporation and Island Cement Corporation (Exh. "15" & "15-A" PNB/DBP).4

In the meantime, between July 16, 1982 to October 4, 1983, Marinduque Mining purchased and caused to be delivered construction materials and other merchandise from Remington Industrial Sales Corporation (Remington) worth P921,755.95. The purchases remained unpaid as of August 1, 1984 when Remington filed a complaint for a sum of money and damages against Marinduque Mining for the value of the unpaid construction materials and other merchandise purchased by Marinduque Mining, as well as interest, attorney's fees and the costs of suit.

On September 7, 1984, Remington's original complaint was amended to include PNB and DBP as co-defendants in view of the foreclosure by the latter of the real and chattel mortgages on the real and personal properties, chattels, mining claims, machinery, equipment and other assets of Marinduque Mining.5

On September 13, 1984, Remington filed a second amended complaint to include as additional defendant, the Nonoc Mining and Industrial Corporation (Nonoc Mining). Nonoc Mining is the assignee of all real and personal properties, chattels, machinery, equipment and all other assets of Marinduque Mining at its Nonoc Nickel Factory in Surigao del Norte.6

On March 26, 1986, Remington filed a third amended complaint including the Maricalum Mining Corporation (Maricalum Mining) and Island Cement Corporation (Island Cement) as co-defendants. Remington asserted that Marinduque Mining, PNB, DBP, Nonoc Mining, Maricalum Mining and Island Cement must be treated in law as one and the same entity by disregarding the veil of corporate fiction since:

1. Co-defendants NMIC, Maricalum and Island Cement which are newly created entities are practically owned wholly by defendants PNB and DBP, and managed by their officers, aside from the fact that the aforesaid co-defendants NMIC, Maricalum and Island Cement were organized in such a hurry and in such suspicious circumstances by co-defendants PNB and DBP after the supposed extrajudicial foreclosure of MMIC's assets as to make their supposed projects assets, machineries and equipment which were originally owned by co-defendant MMIC beyond the reach of creditors of the latter.

2. The personnel, key officers and rank-and-file workers and employees of co-defendants NMIC, Maricalum and Island Cement creations of co-defendants PNB and DBP were the personnel of co-defendant MMIC such that . . . practically there has only been a change of name for all legal purpose and intents

3. The places of business not to mention the mining claims and project premises of co-defendants NMIC, Maricalum and Island Cement likewise used to be the places of business, mining claims and project premises of co-defendant MMIC as to make the aforesaid co-defendants NMIC, Maricalum and Island Cement mere adjuncts and subsidiaries of co-defendants PNB and DBP, and subject to their control and management.

On top of everything, co-defendants PNB, DBP NMIC, Maricalum and Island Cement being all corporations created by the government in the pursuit of business ventures should not be allowed to ignore, x x x or obliterate with impunity nay illegally, the financial obligations of x x x MMIC whose operations co-defendants PNB and DBP had highly financed before the alleged extrajudicial foreclosure of defendant MMIC's assets, machineries and equipment to the extent that major policies of co-defendant MMIC were being decided upon by co-defendants PNB and DBP as major financiers who were represented in its board of directors forming part of the majority thereof which through the alleged extrajudicial foreclosure culminated in a complete take-over by co-defendants PNB and DBP bringing about the organization of their co-defendants NMIC, Maricalum and Island Cement to which were transferred all the assets, machineries and pieces of equipment of co-defendant MMIC used in its nickel mining project in Surigao del Norte, copper mining operation in Sipalay, Negros Occidental and cement factory in Antipolo, Rizal to the prejudice of creditors of co-defendant MMIC such as plaintiff Remington Industrial Sales Corporation whose stockholders, officers and rank-and-file workers

in the legitimate pursuit of its business activities, invested considerable time, sweat and private money to supply, among others, co-defendant MMIC with some of its vital needs for its operation, which co-defendant MMIC during the time of the transactions material to this case became x x x co-defendants PNB and DBP's instrumentality, business conduit, alter ego, agency (sic), subsidiary or auxiliary corporation, by virtue of which it becomes doubly necessary to disregard the corporation fiction that co-defendants PNB, DBP, MMIC, NMIC, Maricalum and Island Cement, six (6) distinct and separate entities, when in fact and in law, they should be treated as one and the same at least as far as plaintiff's transactions with co-defendant MMIC are concerned, so as not to defeat public convenience, justify wrong, subvert justice, protect fraud or confuse legitimate issues involving creditors such as plaintiff, a fact which all defendants were as (sic) still are aware of during all the time material to the transactions subject of this case.7

On April 3, 1989, Remington filed a motion for leave to file a fourth amended complaint impleading the Asset Privatization Trust (APT) as co-defendant. Said fourth amended complaint was admitted by the lower court in its Order dated April 29, 1989.

On April 10, 1990, the Regional Trial Court (RTC) rendered a decision in favor of Remington, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff, ordering the defendants Marinduque Mining & Industrial Corporation, Philippine National Bank, Development Bank of the Philippines, Nonoc Mining and Industrial Corporation, Maricalum Mining Corporation, Island Cement Corporation and Asset Privatization Trust to pay, jointly and severally, the sum of P920,755.95, representing the principal obligation, including the stipulated interest as of June 22, 1984, plus ten percent (10%) surcharge per annum by way of penalty, until the amount is fully paid; the sum equivalent to 10% of the amount due as and for attorney's fees; and to pay the costs.8

Upon appeal by PNB, DBP, Nonoc Mining, Maricalum Mining, Island Cement and APT, the Court of Appeals, in its Decision dated October 6, 1995, affirmed the decision of the RTC. Petitioner filed a Motion for Reconsideration, which was denied in the Resolution dated August 29, 1996.

Hence, this petition, DBP maintaining that Remington has no cause of action against it or PNB, nor against their transferees, Nonoc Mining, Island Cement, Maricalum Mining, and the APT.

On the other hand, private respondent Remington submits that the transfer of the properties was made in fraud of creditors. The presence of fraud, according to Remington, warrants the piercing of the corporate veil such that Marinduque Mining and its transferees could be considered as one and the same corporation. The transferees, therefore, are also liable for the value of Marinduque Mining's purchases.

In Yutivo Sons Hardware vs. Court of Tax Appeals,9 cited by the Court of Appeals in its decision,10 this Court declared:

It is an elementary and fundamental principle of corporation law that a corporation is an entity separate and distinct from its stockholders and from other corporations to which it may be connected. However, 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 or in case of two corporations, merge them into one". (Koppel [Phils.], Inc., vs. Yatco, 71 Phil. 496, citing 1 Fletcher Encyclopedia of Corporation, Permanent Ed., pp. 135-136; U.S. vs. Milwaukee Refrigeration Transit Co., 142 Fed., 247, 255 per Sanborn, J.). x x x.

In accordance with the foregoing rule, this Court has disregarded the separate personality of the corporation where the corporate entity was used to escape liability to third parties.11 In this case, however, we do not find any fraud on the part of Marinduque Mining and its transferees to warrant the piercing of the corporate veil.

It bears stressing that PNB and DBP are mandated to foreclose on the mortgage when the past due account had incurred arrearages of more than 20% of the total outstanding obligation. Section 1 of Presidential Decree No. 385 (The Law on Mandatory Foreclosure) provides:

It shall be mandatory for government financial institutions, after the lapse of sixty (60) days from the issuance of this decree, to foreclose the collateral and/or securities for any loan, credit accommodation, and/or guarantees granted by them whenever the arrearages on such account, including accrued interest and other charges, amount to at least twenty percent (20%) of the total outstanding obligations, including interest and other charges, as appearing in the books of account and/or related records of the financial institution concerned. This shall be without prejudice to the exercise by the government financial institution of such rights and/or remedies available to them under their respective contracts with their debtors, including the right to foreclose on loans, credits, accommodations and/or guarantees on which the arrearages are less than twenty (20%) percent.

Thus, PNB and DBP did not only have a right, but the duty under said law, to foreclose upon the subject properties. The banks had no choice but to obey the statutory command.

The import of this mandate was lost on the Court of Appeals, which reasoned that under Article 19 of the Civil Code, "Every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith." The appellate court, however, did not point to any fact evidencing bad faith on the part of the Marinduque Mining and its transferees. Indeed, it skirted the issue entirely by holding that the question of actual fraudulent intent on the part of the interlocking directors of DBP and Marinduque Mining was irrelevant because:

As aptly stated by the appellee in its brief, "x x x where the corporations have directors and officers in common, there may be circumstances under which their interest as officers in one company may disqualify them in equity from representing both corporations in transactions between the two. Thus, where one corporation was 'insolvent and indebted to another, it has been held that the directors of the creditor corporation were disqualified, by reason of self-interest, from acting as directors of the debtor corporation in the authorization of a mortgage or deed of trust to the former to secure such indebtedness x x x" (page 105 of the Appellee's Brief). In the same manner that "x x x when the corporation is insolvent, its directors who are its creditors can not secure to themselves any advantage or preference over other creditors. They can not thus take advantage of their fiduciary relation and deal directly with themselves, to the injury of others in equal right. If they do, equity will set aside the transaction at the suit of creditors of the corporation or their representatives, without reference to the question of any actual fraudulent intent on the part of the directors, for the right of the creditors does not depend upon fraud in fact, but upon the violation of the fiduciary relation to the directors." x x x (page 106 of the Appellee's Brief)

We also concede that "x x x directors of insolvent corporation, who are creditors of the company, can not secure to themselves any preference or advantage over other creditors in the payment of their claims. It is not good morals or good law. The governing body of officers thereof are charged with the duty of conducting its affairs strictly in the interest of its existing creditors, and it would be a breach of such trust for them to undertake to give any one of its members any advantage over any other creditors in securing the payment of his debts in preference to all others. When validity of these mortgages, to secure debts upon which the directors were indorsers, was questioned by other creditors of the corporation, they should have been classed as instruments rendered void by the legal principle which prevents directors of an insolvent corporation from giving themselves a preference over outside creditors. x x x" (page 106-107 of the Appellee's Brief.)12

The Court of Appeals made reference to two principles in corporation law. The first pertains to transactions between corporations with interlocking directors resulting in the

prejudice to one of the corporations. This rule does not apply in this case, however, since the corporation allegedly prejudiced (Remington) is a third party, not one of the corporations with interlocking directors (Marinduque Mining and DBP).

The second principle invoked by respondent court involves "directors x x x who are creditors" which is also inapplicable herein. Here, the creditor of Marinduque Mining is DBP, not the directors of Marinduque Mining.

Neither do we discern any bad faith on the part of DBP by its creation of Nonoc Mining, Maricalum and Island Cement. As Remington itself concedes, DBP is not authorized by its charter to engage in the mining business.13 The creation of the three corporations was necessary to manage and operate the assets acquired in the foreclosure sale lest they deteriorate from non-use and lose their value. In the absence of any entity willing to purchase these assets from the bank, what else would it do with these properties in the meantime? Sound business practice required that they be utilized for the purposes for which they were intended.

Remington also asserted in its third amended complaint that the use of Nonoc Mining, Maricalum and Island Cement of the premises of Marinduque Mining and the hiring of the latter's officers and personnel also constitute badges of bad faith.

Assuming that the premises of Marinduque Mining were not among those acquired by DBP in the foreclosure sale, convenience and practicality dictated that the corporations so created occupy the premises where these assets were found instead of relocating them. No doubt, many of these assets are heavy equipment and it may have been impossible to move them. The same reasons of convenience and practicality, not to mention efficiency, justified the hiring by Nonoc Mining, Maricalum and Island Cement of Marinduque Mining's personnel to manage and operate the properties and to maintain the continuity of the mining operations.

To reiterate, the doctrine of piercing the veil of corporate fiction applies only when such corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime.14 To disregard the separate juridical personality of a corporation, the wrongdoing must be clearly and convincingly established. It cannot be presumed.15 In this case, the Court finds that 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.

The Court of Appeals also held that there exists in Remington's favor a "lien" on the unpaid purchases of Marinduque Mining, and as transferee of these purchases, DBP should be held liable for the value thereof.

In the absence of liquidation proceedings, however, the claim of Remington cannot be enforced against DBP. Article 2241 of the Civil Code provides:

ARTICLE 2241. With reference to specific movable property of the debtor, the following claims or liens shall be preferred:

xxx           xxx           xxx

(3) Claims for the unpaid price of movables sold, on said movables, so long as they are in the possession of the debtor, up to the value of the same; and if the movable has been resold by the debtor and the price is still unpaid, the lien may be enforced on the price; this right is not lost by the immobilization of the thing by destination, provided it has not lost its form, substance and identity, neither is the right lost by the sale of the thing together with other property for a lump sum, when the price thereof can be determined proportionally;

(4) Credits guaranteed with a pledge so long as the things pledged are in the hands of the creditor, or those guaranteed by a chattel mortgage, upon the things pledged or mortgaged, up to the value thereof;

xxx           xxx           xxx

In Barretto vs. Villanueva,16 the Court had occasion to construe Article 2242, governing claims or liens over specific immovable property. The facts that gave rise to the case were summarized by this Court in its resolution as follows:

x x x Rosario Cruzado sold all her right, title, and interest and that of her children in the house and lot herein involved to Pura L. Villanueva for P19,000.00. The purchaser paid P1,500 in advance, and executed a promissory note for the balance of P17,500.00. However, the buyer could only pay P5,500 on account of the note, for which reason the vendor obtained judgment for the unpaid balance. In the meantime, the buyer Villanueva was able to secure a clean certificate of title (No. 32626), and mortgaged the property to appellant Magdalena C. Barretto, married to Jose C. Baretto, to secure a loan of P30,000.03, said mortgage having been duly recorded.

Pura Villanueva defaulted on the mortgage loan in favor of Barretto. The latter foreclosed the mortgage in her favor, obtained judgment, and upon its becoming final asked for execution on 31 July 1958. On 14 August 1958, Cruzado filed a motion for recognition for her "vendor's lien" in the amount of P12,000.00, plus legal interest, invoking Articles 2242, 2243, and 2249 of the new Civil Code. After hearing, the court below ordered the "lien" annotated on the back of Certificate of Title No. 32526, with the proviso that in case of sale under the foreclosure decree the vendor's lien and the mortgage credit of appellant Barretto should be paid pro rata from the proceeds. Our original decision affirmed this order of the Court of First Instance of Manila.

In its decision upholding the order of the lower court, the Court ratiocinated thus:

Article 2242 of the new Civil Code enumerates the claims, mortgages and liens that constitute an encumbrance on specific immovable property, and among them are:

"(2) For the unpaid price of real property sold, upon the immovable sold"; and

"(5) Mortgage credits recorded in the Registry of Property."

Article 2249 of the same Code provides that "if there are two or more credits with respect to the same specific real property or real rights, they shall be satisfied pro-rata, after the payment of the taxes and assessments upon the immovable property or real rights."

Application of the above-quoted provisions to the case at bar would mean that the herein appellee Rosario Cruzado as an unpaid vendor of the property in question has the right to share pro-rata with the appellants the proceeds of the foreclosure sale.

xxx           xxx           xxx

As to the point made that the articles of the Civil Code on concurrence and preference of credits are applicable only to the insolvent debtor, suffice it to say that nothing in the law shows any such limitation. If we are to interpret this portion of the Code as intended only for insolvency cases, then other creditor-debtor relationships where there are concurrence of credits would be left without any rules to govern them, and it would render purposeless the special laws on insolvency.17

Upon motion by appellants, however, the Court reconsidered its decision. Justice J.B.L. Reyes, speaking for the Court, explained the reasons for the reversal:

A. The previous decision failed to take fully into account the radical changes introduced by the Civil Code of the Philippines into the system of priorities among creditors ordained by the Civil Code of 1889.

Pursuant to the former Code, conflicts among creditors entitled to preference as to specific real property under Article 1923 were to be resolved according to an order of priorities established by Article 1927, whereby one class of creditors could exclude the creditors of lower order until the claims of the former were fully satisfied out of the proceeds of the sale of the real property subject of the preference, and could even exhaust proceeds if necessary.

Under the system of the Civil Code of the Philippines, however, only taxes enjoy a similar absolute preference. All the remaining thirteen classes of preferred creditors under Article 2242 enjoy no priority among themselves, but must be paid pro rata, i.e., in proportion to the amount of the respective credits. Thus, Article 2249 provides:

"If there are two or more credits with respect to the same specific real property or real rights, they shall be satisfied pro rata, after the payment of the taxes and assessments upon the immovable property or real rights."

But in order to make this prorating fully effective, the preferred creditors enumerated in Nos. 2 to 14 of Article 2242 (or such of them as have credits outstanding) must necessarily be convened, and the import of their claims ascertained. It is thus apparent that the full application of Articles 2249 and 2242 demands that there must be first some proceeding where the claims of all the preferred creditors may be bindingly adjudicated, such as insolvency, the settlement of decedent's estate under Rule 87 of the Rules of Court, or other liquidation proceedings of similar import.

This explains the rule of Article 2243 of the new Civil Code that —

"The claims or credits enumerated in the two preceding articles shall be considered as mortgages or pledges of real or personal property, or liens within the purview of legal provisions governing insolvency x x x (Italics supplied).

And the rule is further clarified in the Report of the Code Commission, as follows

"The question as to whether the Civil Code and the Insolvency Law can be harmonized is settled by this Article (2243). The preferences named in Articles 2261 and 2262 (now 2241 and 2242) are to be enforced in accordance with the Insolvency Law." (Italics supplied)

Thus, it becomes evident that one preferred creditor's third-party claim to the proceeds of a foreclosure sale (as in the case now before us) is not the proceeding contemplated by law for the enforcement of preferences under Article 2242, unless the claimant were enforcing a credit for taxes that enjoy absolute priority. If none of the claims is for taxes, a dispute between two creditors will not enable the Court to ascertain the pro rata dividend corresponding to each, because the rights of the other creditors likewise enjoying preference under Article 2242 can not be ascertained. Wherefore, the order of the Court of First Instance of Manila now appealed from, decreeing that the proceeds of the foreclosure sale be apportioned only between appellant and appellee, is incorrect, and must be reversed. [Emphasis supplied]

The ruling in Barretto was reiterated in Phil. Savings Bank vs. Hon. Lantin, Jr., etc., et al.,18

and in two cases both entitled Development Bank of the Philippines vs. NLRC.19

Although Barretto involved specific immovable property, the ruling therein should apply equally in this case where specific movable property is involved. As the extrajudicial foreclosure instituted by PNB and DBP is not the liquidation proceeding contemplated by the Civil Code, Remington cannot claim its pro rata share from DBP.

WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals dated October 6, 1995 and its Resolution promulgated on August 29, 1996 is REVERSED and SET ASIDE. The original complaint filed in the Regional Trial Court in CV Case No. 84-25858 is hereby DISMISSED.

E. B. VILLAROSA & PARTNER CO., LTD., petitioner, vs.HON. HERMINIO I. BENITO, in his capacity as Presiding Judge, RTC, Branch 132, Makati City and IMPERIAL DEVELOPMENT CORPORATION, respondent.

Before this Court is a petition for certiorari and prohibition with prayer for the issuance of a temporary restraining order and/or writ of preliminary injunction seeking to annul and set aside the Orders dated August 5, 1998 and November 20, 1998 of the public respondent Judge Herminio I. Benito of the Regional Trial Court of Makati City, Branch 132 and praying that the public respondent court be ordered to desist from further proceeding with Civil Case No. 98-824.

Petitioner E.B. Villarosa & Partner Co., Ltd. is a limited partnership with principal office address at 102 Juan Luna St., Davao City and with branch offices at 2492 Bay View Drive, Tambo, Parañaque, Metro Manila and Kolambog, Lapasan, Cagayan de Oro City. Petitioner and private respondent executed a Deed of Sale with Development Agreement wherein the former agreed to develop certain parcels of land located at Barrio Carmen, Cagayan de Oro belonging to the latter into a housing subdivision for the construction of low cost housing units. They further agreed that in case of litigation regarding any dispute arising therefrom, the venue shall be in the proper courts of Makati.

On April 3, 1998, private respondent, as plaintiff, filed a Complaint for Breach of Contract and Damages against petitioner, as defendant, before the Regional Trial Court of Makati allegedly for failure of the latter to comply with its contractual obligation in that, other than a few unfinished low cost houses, there were no substantial developments therein.1

Summons, together with the complaint, were served upon the defendant, through its Branch Manager Engr. Wendell Sabulbero at the stated address at Kolambog, Lapasan, Cagayan de Oro City2 but the Sheriff's Return of Service3 stated that the summons was duly served "upon defendant E.B. Villarosa & Partner Co., Ltd. thru its Branch Manager Engr. WENDELL SALBULBERO on May 5, 1998 at their new office Villa Gonzalo, Nazareth, Cagayan de Oro City, and evidenced by the signature on the face of the original copy of the summons.1âwphi1.nêt

On June 9, 1998, defendant filed a Special Appearance with Motion to Dismiss4 alleging that on May 6, 1998, "summons intended for defendant" was served upon Engr. Wendell Sabulbero, an employee of defendant at its branch office at Cagayan de Oro City. Defendant prayed for the dismissal of the complaint on the ground of improper service of summons and for lack of jurisdiction over the person of the defendant. Defendant contends that the trial court did not acquire jurisdiction over its person since the summons was improperly served upon its employee in its branch office at Cagayan de Oro City who is not one of those persons named in Section 11, Rule 14 of the 1997 Rules of Civil Procedure upon whom service of summons may be made.

Meanwhile, on June 10, 1998, plaintiff filed a Motion to Declare Defendant in Default5 alleging that defendant has failed to file an Answer despite its receipt allegedly on May 5, 1998 of the summons and the complaint, as shown in the Sheriffs Return.

On June 22, 1998, plaintiff filed an Opposition to Defendant's Motion to Dismiss6 alleging that the records show that defendant, through its branch manager, Engr. Wendell Sabulbero actually received the summons and the complaint on May 8, 1998 as evidenced by the signature appearing on the copy of the summons and not on May 5,

1998 as stated in the Sheriffs Return nor on May 6, 1998 as stated in the motion to dismiss; that defendant has transferred its office from Kolambog, Lapasan, Cagayan de Oro to its new office address at Villa Gonzalo, Nazareth, Cagayan de Oro; and that the purpose of the rule is to bring home to the corporation notice of the filing of the action.

On August 5, 1998, the trial court issued an Order7 denying defendant's Motion to Dismiss as well as plaintiffs Motion to Declare Defendant in Default. Defendant was given ten (10) days within which to file a responsive pleading. The trial court stated that since the summons and copy of the complaint were in fact received by the corporation through its branch manager Wendell Sabulbero, there was substantial compliance with the rule on service of summons and consequently, it validly acquired jurisdiction over the person of the defendant.

On August 19, 1998, defendant, by Special Appearance, filed a Motion for Reconsideration8 alleging that Section 11, Rule 14 of the new Rules did not liberalize but, on the contrary, restricted the service of summons on persons enumerated therein; and that the new provision is very specific and clear in that the word "manager" was changed to "general manager", "secretary" to "corporate secretary", and excluding therefrom agent and director.

On August 27, 1998, plaintiff filed an Opposition to defendant's Motion for Reconsideration9 alleging that defendant's branch manager "did bring home" to the defendant-corporation the notice of the filing of the action and by virtue of which a motion to dismiss was filed; and that it was one (1) month after receipt of the summons and the complaint that defendant chose to file a motion to dismiss.

On September 4, 1998, defendant, by Special Appearance, filed a Reply10 contending that the changes in the new rules are substantial and not just general semantics.

Defendant's Motion for Reconsideration was denied in the Order dated November 20, 1998.11

Hence, the present petition alleging that respondent court gravely abused its discretion tantamount to lack or in excess of jurisdiction in denying petitioner's motions to dismiss and for reconsideration, despite the fact that the trial court did not acquire jurisdiction over the person of petitioner because the summons intended for it was improperly served. Petitioner invokes Section 11 of Rule 14 of the 1997 Rules of Civil Procedure.

Private respondent filed its Comment to the petition citing the cases Kanlaon Construction Enterprises Co., Inc. vs. NLRC12 wherein it was held that service upon a construction project manager is valid and in Gesulgon vs. NLRC13 which held that a corporation is bound by the service of summons upon its assistant manager.

The only issue for resolution is whether or not the trial court acquired jurisdiction over the person of petitioner upon service of summons on its Branch Manager.

When the complaint was filed by Petitioner on April 3, 1998, the 1997 Rules of Civil Procedure was already in force.14

Sec. 11, Rule 14 of the 1997 Rules of Civil Procedure provides that:

When the defendant is a corporation, partnership or association organized under the laws of the Philippines with a juridical personality, service may be made on the president, managing partner, general manager, corporate secretary, treasurer, or in-house counsel. (emphasis supplied).

This provision revised the former Section 13, Rule 14 of the Rules of Court which provided that:

Sec. 13. Service upon private domestic corporation or partnership. — If the defendant is a corporation organized under the laws of the Philippines or a

partnership duly registered, service may be made on the president, manager, secretary, cashier, agent, or any of its directors. (emphasis supplied).

Petitioner contends that the enumeration of persons to whom summons may be served is "restricted, limited and exclusive" following the rule on statutory construction expressio unios est exclusio alterius and argues that if the Rules of Court Revision Committee intended to liberalize the rule on service of summons, it could have easily done so by clear and concise language.

We agree with petitioner.

Earlier cases have uphold service of summons upon a construction project manager15; a corporation's assistant manager16; ordinary clerk of a corporation17; private secretary of corporate executives18; retained counsel19; officials who had charge or control of the operations of the corporation, like the assistant general manager20; or the corporation's Chief Finance and Administrative Officer21. In these cases, these persons were considered as "agent" within the contemplation of the old rule.22 Notably, under the new Rules, service of summons upon an agent of the corporation is no longer authorized.

The cases cited by private respondent are therefore not in point.

In the Kanlaon case, this Court ruled that under the NLRC Rules of Procedure, summons on the respondent shall be served personally or by registered mail on the party himself; if the party is represented by counsel or any other authorized representative or agent, summons shall be served on such person. In said case, summons was served on one Engr. Estacio who managed and supervised the construction project in Iligan City (although the principal address of the corporation is in Quezon City) and supervised the work of the employees. It was held that as manager, he had sufficient responsibility and discretion to realize the importance of the legal papers served on him and to relay the same to the president or other responsible officer of petitioner such that summons for petitioner was validly served on him as agent and authorized representative of petitioner. Also in the Gesulgon case cited by private respondent, the summons was received by the clerk in the office of the Assistant Manager (at principal office address) and under Section 13 of Rule 14 (old rule), summons may be made upon the clerk who is regarded as agent within the contemplation of the rule.

The designation of persons or officers who are authorized to accept summons for a domestic corporation or partnership is now limited and more clearly specified in Section 11, Rule 14 of the 1997 Rules of Civil Procedure. The rule now states "general manager" instead of only "manager"; "corporate secretary" instead of "secretary"; and "treasurer" instead of "cashier." The phrase "agent, or any of its directors" is conspicuously deleted in the new rule.

The particular revision under Section 11 of Rule 14 was explained by retired Supreme Court Justice Florenz Regalado, thus:23

. . . the then Sec. 13 of this Rule allowed service upon a defendant corporation to "be made on the president, manager, secretary, cashier, agent or any of its directors." The aforesaid terms were obviously ambiguous and susceptible of broad and sometimes illogical interpretations, especially the word "agent" of the corporation. The Filoil case, involving the litigation lawyer of the corporation who precisely appeared to challenge the validity of service of summons but whose very appearance for that purpose was seized upon to validate the defective service, is an illustration of the need for this revised section with limited scope and specific terminology. Thus the absurd result in the Filoil case necessitated the amendment permitting service only on the in-house counsel of the corporation who is in effect an employee of the corporation, as distinguished from an independent practitioner. (emphasis supplied).

Retired Justice Oscar Herrera, who is also a consultant of the Rules of Court Revision Committee, stated that "(T)he rule must be strictly observed. Service must be made to one named in (the) statute . . . .24

It should be noted that even prior to the effectivity of the 1997 Rules of Civil Procedure, strict compliance with the rules has been enjoined. In the case of Delta Motor Sales Corporation vs. Mangosing,25 the Court held:

A strict compliance with the mode of service is necessary to confer jurisdiction of the court over a corporation. The officer upon whom service is made must be one who is named in the statute; otherwise the service is insufficient. . . .

The purpose is to render it reasonably certain that the corporation will receive prompt and proper notice in an action against it or to insure that the summons be served on a representative so integrated with the corporation that such person will know what to do with the legal papers served on him. In other words, "to bring home to the corporation notice of the filing of the action." . . . .

The liberal construction rule cannot be invoked and utilized as a substitute for the plain legal requirements as to the manner in which summons should be served on a domestic corporation. . . . . (emphasis supplied).

Service of summons upon persons other than those mentioned in Section 13 of Rule 14 (old rule) has been held as improper.26 Even under the old rule, service upon a general manager of a firm's branch office has been held as improper as summons should have been served at the firm's principal office. In First Integrated Bonding & Inc. Co., Inc. vs. Dizon,27 it was held that the service of summons on the general manager of the insurance firm's Cebu branch was improper; default order could have been obviated had the summons been served at the firm's principal office.

And in the case of Solar Team Entertainment, Inc. vs. Hon. Helen Bautista Ricafort, et al.28

the Court succinctly clarified that, for the guidance of the Bench and Bar, "strictest" compliance with Section 11 of Rule 13 of the 1997 Rules of Civil Procedure (on Priorities in modes of service and filing) is mandated and the Court cannot rule otherwise, lest we allow circumvention of the innovation by the 1997 Rules in order to obviate delay in the administration of justice.

Accordingly, we rule that the service of summons upon the branch manager of petitioner at its branch office at Cagayan de Oro, instead of upon the general manager at its principal office at Davao City is improper. Consequently, the trial court did not acquire jurisdiction over the person of the petitioner.

The fact that defendant filed a belated motion to dismiss did not operate to confer jurisdiction upon its person. There is no question that the defendant's voluntary appearance in the action is equivalent to service of summons.29 Before, the rule was that a party may challenge the jurisdiction of the court over his person by making a special appearance through a motion to dismiss and if in the same motion, the movant raised other grounds or invoked affirmative relief which necessarily involves the exercise of the jurisdiction of the court.30 This doctrine has been abandoned in the case of La Naval Drug Corporation vs. Court of Appeals, et al.,31 which became the basis of the adoption of a new provision in the former Section 23, which is now Section 20 of Rule 14 of the 1997 Rules. Section 20 now provides that "the inclusion in a motion to dismiss of other grounds aside from lack of jurisdiction over the person of the defendant shall not be deemed a voluntary appearance." The emplacement of this rule clearly underscores the purpose to enforce strict enforcement of the rules on summons. Accordingly, the filing of a motion to dismiss, whether or not belatedly filed by the defendant, his authorized agent or attorney, precisely objecting to the jurisdiction of the court over the person of the defendant can by no means be deemed a submission to the jurisdiction of the court. There being no proper service of summons, the trial court cannot take cognizance of a case for lack of jurisdiction over the person of the defendant. Any proceeding undertaken by the trial court will consequently be null and void.32

WHEREFORE, the petition is hereby GRANTED. The assailed Orders of the public respondent trial court are ANNULLED and SET ASIDE. The public respondent Regional Trial Court of Makati, Branch 132 is declared without jurisdiction to take cognizance of Civil Case No. 98-824, and all its orders and issuances in connection therewith are hereby

ANNULLED and SET ASIDE.

SAFIC ALCAN & CIE, petitioner, vs.IMPERIAL VEGETABLE OIL CO., INC., respondent.

Petitioner Safic Alcan & Cie (hereinafter, "Safic") is a French corporation engaged in the international purchase, sale and trading of coconut oil. It filed with the Regional Trial Court of Manila, Branch XXV, a complaint dated February 26, 1987 against private respondent Imperial Vegetable Oil Co., Inc. (hereinafter, "IVO"), docketed as Civil Case No. 87- 39597. Petitioner Safic alleged that on July 1, 1986 and September 25, 1986, it placed purchase orders with IVO for 2,000 long tons of crude coconut oil, valued at US$222.50 per ton, covered by Purchase Contract Nos. A601446 and A601655, respectively, to be delivered within the month of January 1987. Private respondent, however, failed to deliver the said coconut oil and, instead, offered a "wash out" settlement, whereby the coconut oil subject of the purchase contracts were to be "sold back" to IVO at the prevailing price in the international market at the time of wash out. Thus, IVO bound itself to pay to Safic the difference between the said prevailing price and the contract price of the 2,000 long tons of crude coconut oil, which amounted to US$293,500.00. IVO failed to pay this amount despite repeated oral and written demands.

Under its second cause of action, Safic alleged that on eight occasions between April 24, 1986 and October 31, 1986, it placed purchase orders with IVO for a total of 4,750 tons of crude coconut oil, covered by Purchase Contract Nos. A601297A/B, A601384, A601385, A601391, A601415, A601681, A601683 and A601770A/B/C/. When IVO failed to honor its obligation under the wash out settlement narrated above, Safic demanded that IVO make marginal deposits within forty-eight hours on the eight purchase contracts in amounts equivalent to the difference between the contract price and the market price of the coconut oil, to compensate it for the damages it suffered when it was forced to acquire coconut oil at a higher price. IVO failed to make the prescribed marginal deposits on the eight contracts, in the aggregate amount of US$391,593.62, despite written demand therefor.

The demand for marginal deposits was based on the customs of the trade, as governed by the provisions of the standard N.I.O.P. Contract arid the FOSFA Contract, to wit:

N.I.O.P. Contract, Rule 54 - If the financial condition of either party to a contract subject to these rules becomes so impaired as to create a reasonable doubt as to the ability of such party to perform its obligations under the contract, the other party may from time to time demand marginal deposits to be made within forty-eight (48) hours after receipt of such demand, such deposits not to exceed the difference between the contract price and the market price of the goods covered by the contract on the day upon which such demand is made, such deposit to bear interest at the prime rate plus one percent (1%) per annum. Failure to make such deposit within the time specified shall constitute a breach of contract by the party upon whom demand for deposit is made, and all losses and expenses resulting from such breach shall be for the account of the party upon whom such demand is made. (Underscoring ours.)1

FOSFA Contract, Rule 54 - BANKRUPTCY/INSOLVENCY: If before the fulfillment of this contract either party shall suspend payment, commit an act of bankruptcy, notify any of his creditors that he is unable to meet his debts or that he has suspended payment or that he is about to suspend payment of his debts, convene, call or hold a meeting either of his creditors or to pass a resolution to go into liquidation (except for a voluntary winding up of a solvent company for the purpose of reconstruction or amalgamation) or shall apply for an official moratorium, have a petition presented for winding up or shal1i have a Receiver appointed, the contract

shall forthwith be closed either at the market price then current for similar goods or, at the option of the other party at a price to be ascertained by repurchase or resale and the difference between the contract price and such closing-out price shall be the amount which the other party shall be entitled to claim shall be liable to account for under this contract (sic). Should either party be dissatisfied with the price, the matter shall be referred to arbitration. Where no such resale or repurchase takes place, the closing-out price shall be fixed by a Price Settlement Committee appointed by the Federation. (Underscoring ours.)2

Hence, Safic prayed that IVO be ordered to pay the sums of US$293,500.00 and US$391,593.62, plus attorney's fees and litigation expenses. The complaint also included an application for a writ of preliminary attachment against the properties of IVO.

Upon Safic's posting of the requisite bond, the trial court issued a writ of preliminary attachment. Subsequently, the trial court ordered that the assets of IVO be placed under receivership, in order to ensure the preservation of the same.

In its answer, IVO raised the following special affirmative defenses: Safic had no legal capacity to sue because it was doing business in the Philippines without the requisite license or authority; the subject contracts were speculative contracts entered into by IVO's then President, Dominador Monteverde, in contravention of the prohibition by the Board of Directors against engaging in speculative paper trading, and despite IVO's lack of the necessary license from Central Bank to engage in such kind of trading activity; and that under Article 2018 of the Civil Code, if a contract which purports to be for the delivery of goods, securities or shares of stock is entered into with the intention that the difference between the price stipulated and the exchange or market price at the time of the pretended delivery shall be paid by the loser to the winner, the transaction is null and void.1âwphi1.nêt

IVO set up counterclaims anchored on harassment, paralyzation of business, financial losses, rumor-mongering and oppressive action. Later, IVO filed a supplemental counterclaim alleging that it was unable to operate its business normally because of the arrest of most of its physical assets; that its suppliers were driven away; and that its major creditors have inundated it with claims for immediate payment of its debts, and China Banking Corporation had foreclosed its chattel and real estate mortgages.

During the trial, the lower court found that in 1985, prior to the date of the contracts sued upon, the parties had entered into and consummated a number of contracts for the sale of crude coconut oil. In those transactions, Safic placed several orders and IVO faithfully filled up those orders by shipping out the required crude coconut oil to Safic, totaling 3,500 metric tons. Anent the 1986 contracts being sued upon, the trial court refused to declare the same as gambling transactions, as defined in Article 2018 of the Civil Code, although they involved some degree of speculation. After all, the court noted, every business enterprise carries with it a certain measure of speculation or risk. However, the contracts performed in 1985, on one hand, and the 1986 contracts subject of this case, on the other hand, differed in that under the 1985 contracts, deliveries were to be made within two months. This, as alleged by Safic, was the time needed for milling and building up oil inventory. Meanwhile, the 1986 contracts stipulated that the coconut oil were to be delivered within period ranging from eight months to eleven to twelve months after the placing of orders. The coconuts that were supposed to be milled were in all likelihood not yet growing when Dominador Monteverde sold the crude coconut oil. As such, the 1986 contracts constituted trading in futures or in mere expectations.

The lower court further held that the subject contracts were ultra vires and were entered into by Dominador Monteverde without authority from the Board of Directors. It distinguished between the 1985 contracts, where Safic likewise dealt with Dominador Monteverde, who was presumably authorized to bind IVO, and the 1986 contracts, which were highly speculative in character. Moreover, the 1985 contracts were covered by letters of credit, while the 1986 contracts were payable by telegraphic transfers, which were nothing more than mere promises to pay once the shipments became ready. For these reasons, the lower court held that Safic cannot invoke the 1985 contracts as an implied corporate sanction for the high-risk 1986 contracts, which were evidently entered

into by Monteverde for his personal benefit.

The trial court ruled that Safic failed to substantiate its claim for actual damages. Likewise, it rejected IVO's counterclaim and supplemental counterclaim.

Thus, on August 28, 1992, the trial court rendered judgment as follows:

WHEREFORE, judgment is hereby rendered dismissing the complaint of plaintiff Safic Alcan & Cie, without prejudice to any action it might subsequently institute against Dominador Monteverde, the former President of Imperial Vegetable Oil Co., Inc., arising from the subject matter of this case. The counterclaim and supplemental counterclaim of the latter defendant are likewise hereby dismissed for lack of merit. No pronouncement as to costs.

The writ of preliminary attachment issued in this case as well as the order placing Imperial Vegetable Oil Co., Inc. under receivership are hereby dissolved and set aside.3

Both IVO and Safic appealed to the Court of Appeals, jointly docketed as CA-G.R. CV No.40820.

IVO raised only one assignment of error, viz:

THE TRIAL COURT ERRED IN HOLDING 'I'HAT THE ISSUANCE OF THE WRIT OF PRELIMINARY ATTACHMENT WAS NOT THE MAIN CAUSE OF THE DAMAGES SUFFERED BY DEFENDANT AND IN NOT AWARDING DEFENDANT-APPELLANT SUCH DAMAGES.

For its part, Safic argued that:

THE TRIAL COURT ERRED IN HOLDING THAT IVO'S PRESIDENT, DOMINADOR MONTEVERDE, ENTERED INTO CONTRACTS WHICH WERE ULTRA VIRES AND WHICH DID NOT BIND OR MAKE IVO LIABLE.

THE TRIAL COURT ERRED IN HOLDING THA SAFIC WAS UNABLE TO PROVE THE DAMAGES SUFFERED BY IT AND IN NOT AWARDING SUCH DAMAGES.

THE TRIAL COURT ERRED IN NOT HOLDING THAT IVO IS LIABLE UNDER THE WASH OUT CONTRACTS.

On September 12, 1996, the Court of Appeals rendered the assailed Decision dismissing the, appeals and affirming the judgment appealed from in toto.4

Hence, Safic filed the instant petition for review with this Court, substantially reiterating the errors it raised before the Court of Appeals and maintaining that the Court of Appeals grievously erred when:

a. it declared that the 1986 forward contracts (i.e., Contracts Nos. A601446 and A60155 (sic) involving 2,000 long tons of crude coconut oil, and Contracts Nos. A60l297A/B, A601385, A60l39l, A60l4l5, A601681. A601683 and A60l770A/B/C involving 4,500 tons of crude coconut oil) were unauthorized acts of Dominador Monteverde which do not bind IVO in whose name they were entered into. In this connection, the Court of Appeals erred when (i) it ignored its own finding that (a) Dominador Monteverde, as IVO's President, had "an implied authority to make any contract necessary or appropriate to the contract of the ordinary business of the company"; and (b) Dominador Monteverde had validly entered into similar forward contracts for and on behalf of IVO in 1985; (ii) it distinguished between the 1986 forward contracts despite the fact that the Manila RTC has struck down IVO's objection to the 1986 forward contracts (i.e. that they were highly speculative paper trading which the IVO Board of Directors had prohibited Dominador Monteverde from engaging in because it is a form of gambling where the parties

do not intend actual delivery of the coconut oil sold) and instead found that the 1986 forward contracts were not gambling; (iii) it relied on the testimony of Mr. Rodrigo Monteverde in concluding that the IVO Board of Directors did not authorize its President, Dominador Monteverde, to enter into the 1986 forward contracts; and (iv) it did not find IVO, in any case, estopped from denying responsibility for, and liability under, the 1986 forward contracts because IVO had recognized itself bound to similar forward contracts which Dominador Monteverde entered into (for and on behalf of IVO) with Safic in 1985 notwithstanding that Dominador Monteverde was (like in the 1986 forward contracts) not expressly authorized by the IVO Board of Directors to enter into such forward contracts;

b. it declared that Safic was not able, to prove damages suffered by it, despite the fact that Safic had presented not only testimonial, but also documentary, evidence which proved the higher amount it had to pay for crude coconut oil (vis-à-vis the contract price it was to pay to IVO) when IVO refused to deliver the crude coconut oil bought by Safic under the 1986 forward contracts; and

c. it failed to resolve the issue of whether or not IVO is liable to Safic under the wash out contracts involving Contracts Nos. A601446 and A60155 (sic), despite the fact that Safic had properly raised the issue on its appeal, and the evidence and the law support Safic's position that IVO is so liable to Safic.

In fine, Safic insists that the appellate court grievously erred when it did not declare that IVO's President, Dominador Monteverde, validly entered into the 1986 contracts for and on behalf of IVO.

We disagree.

Article III, Section 3 [g] of the By-Laws5 of IVO provides, among others, that –

Section 3. Powers and Duties of the President. - The President shall be elected by the Board of Directors from their own number .

He shall have the following duties:

x x x x x x x x x

[g] Have direct and active management of the business and operation of the corporation, conducting the same according to, the orders, resolutions and instruction of the Board of Directors and according to his own discretion whenever and wherever the same is not expressly limited by such orders, resolutions and instructions.

It can be clearly seen from the foregoing provision of IVO's By-laws that Monteverde had no blanket authority to bind IVO to any contract. He must act according to the instructions of the Board of Directors. Even in instances when he was authorized to act according to his discretion, that discretion must not conflict with prior Board orders, resolutions and instructions. The evidence shows that the IVO Board knew nothing of the 1986 contracts6 and that it did not authorize Monteverde to enter into speculative contracts.7 In fact, Monteverde had earlier proposed that the company engage in such transactions but the IVO Board rejected his proposal.8 Since the 1986 contracts marked a sharp departure from past IVO transactions, Safic should have obtained from Monteverde the prior authorization of the IVO Board. Safic can not rely on the doctrine of implied agency because before the controversial 1986 contracts, IVO did not enter into identical contracts with Safic. The basis for agency is representation and a person dealing with an agent is put upon inquiry and must discover upon his peril the authority of the agent.9 In the case of Bacaltos Coal Mines v. Court of Appeals,10 we elucidated the rule on dealing with an agent thus:

Every person dealing with an agent is put upon inquiry and must discover upon his peril the authority of the agent. If he does not make such inquiry, he is chargeable with knowledge of the agent's authority, and his ignorance of that authority will not

be any excuse. Persons dealing with an assumed agent, whether the assumed agency be a general or special one, are bound at their peril, if they would hold the principal, to ascertain not only the fact of the agency but also the nature and extent of the authority, and in case either is controverted, the burden of proof is upon them to establish it.11

The most prudent thing petitioner should have done was to ascertain the extent of the authority of Dominador Monteverde. Being remiss in this regard, petitioner can not seek relief on the basis of a supposed agency.

Under Article 189812 of the Civil Code, the acts of an agent beyond the scope of his authority do not bind the principal unless the latter ratifies the same expressly or impliedly. It also bears emphasizing that when the third person knows that the agent was acting beyond his power or authority, the principal can not be held liable for the acts of the agent. If the said third person is aware of such limits of authority, he is to blame, and is not entitled to recover damages from the agent, unless the latter undertook to secure the principal's ratification.13

There was no such ratification in this case. When Monteverde entered into the speculative contracts with Safic, he did not secure the Board's approval.14 He also did not submit the contracts to the Board after their consummation so there was, in fact, no occasion at all for ratification. The contracts were not reported in IVO's export sales book and turn-out book.15 Neither were they reflected in other books and records of the corporation.16 It must be pointed out that the Board of Directors, not Monteverde, exercises corporate power.17 Clearly, Monteverde's speculative contracts with Safic never bound IVO and Safic can not therefore enforce those contracts against IVO.

To bolster its cause, Safic raises the novel point that the IVO Board of Directors did not set limitations on the extent of Monteverde's authority to sell coconut oil. It must be borne in mind in this regard that a question that was never raised in the courts below can not be allowed to be raised for the first time on appeal without offending basic rules of fair play, justice and due process.18 Such an issue was not brought to the fore either in the trial court or the appellate court, and would have been disregarded by the latter tribunal for the reasons previously stated. With more reason, the same does not deserve consideration by this Court.

Be that as it may, Safic's belated contention that the IVO Board of Directors did not set limitations on Monteverde's authority to sell coconut oil is belied by what appears on the record. Rodrigo Monteverde, who succeeded Dominador Monteverde as IVO President, testified that the IVO Board had set down the policy of engaging in purely physical trading thus:

Q. Now you said that IVO is engaged in trading. With whom does, it usually trade its oil?

A. I am not too familiar with trading because as of March 1987, I was not yet an officer of the corporation, although I was at the time already a stockholder, I think IVO is engaged in trading oil.

Q. As far as you know, what kind of trading was IVO engaged with?

A. It was purely on physical trading.

Q. How did you know this?

A. As a stockholder, rather as member of [the] Board of Directors, I frequently visited the plant and from my observation, as I have to supervise and monitor purchases of copras and also the sale of the same, I observed that the policy of the corporation is for the company to engaged (sic) or to purely engaged (sic) in physical trading.

Q. What do you mean by physical trading?

A. Physical Trading means - we buy and sell copras that are only available to us. We only have to sell the available stocks in our inventory.

Q. And what is the other form of trading?

Atty. Fernando

No basis, your Honor.

Atty. Abad

Well, the witness said they are engaged in physical trading and what I am saying [is] if there are any other kind or form of trading.

Court

Witness may answer if he knows.

Witness

A. Trading future[s] contracts wherein the trader commits a price and to deliver coconut oil in the future in which he is yet to acquire the stocks in the future.

Atty. Abad

Q. Who established the so-called physical trading in IVO?

A. The Board of Directors, sir.

Atty. Abad.

Q. How did you know that?

A. There was a meeting held in the office at the factory and it was brought out and suggested by our former president, Dominador Monteverde, that the company should engaged (sic) in future[s] contract[s] but it was rejected by the Board of Directors. It was only Ador Monteverde who then wanted to engaged (sic) in this future[s] contract[s].

Q. Do you know where this meeting took place?

A. As far as I know it was sometime in 1985.

Q. Do you know why the Board of Directors rejected the proposal of Dominador Monteverde that the company should engaged (sic) in future[s] contracts?

Atty. Fernando

Objection, your Honor, no basis.

Court

Why don't you lay the basis?

Atty. Abad

Q. Were you a member of the board at the time?

A. In 1975, I am already a stockholder and a member.

Q. Then would [you] now answer my question?

Atty. Fernando

No basis, your Honor. What we are talking is about 1985.

Atty. Abad

Q. When you mentioned about the meeting in 1985 wherein the Board of Directors rejected the future[s] contract[s], were you already a member of the Board of Directors at that time?

A. Yes, sir.

Q. Do you know the reason why the said proposal of Mr. Dominador Monteverde to engage in future[s] contract[s] was rejected by the Board of Directors?

A. Because this future[s] contract is too risky and it partakes of gambling.

Q. Do you keep records of the Board meetings of the company?

A. Yes, sir.

Q. Do you have a copy of the minutes of your meeting in 1985?

A. Incidentally our Secretary of the Board of Directors, Mr. Elfren Sarte, died in 1987 or 1988, and despite [the] request of our office for us to be furnished a copy he was not able to furnish us a copy.19

x x x x x x x x x

Atty. Abad

Q. You said the Board of Directors were against the company engaging in future[s] contracts. As far as you know, has this policy of the Board of Directors been observed or followed?

Witness

A. Yes, sir.

Q. How far has this Dominador Monteverde been using the name of I.V.0. in selling future contracts without the proper authority and consent of the company's Board of Directors?

A. Dominador Monteverde never records those transactions he entered into in connection with these future[s] contracts in the company's books of accounts.

Atty. Abad

Q. What do you mean by that the future[s] contracts were not entered into the books of accounts of the company?

Witness

A. Those were not recorded at all in the books of accounts of the company, sir.20

x x x x x x x x x

Q. What did you do when you discovered these transactions?

A. There was again a meeting by the Board of Directors of the corporation and that we agreed to remove the president and then I was made to replace him as president.

Q. What else?

A. And a resolution was passed disowning the illegal activities of the former president.21

Petitioner next argues that there was actually no difference between the 1985 physical contracts and the 1986 futures contracts.

The contention is unpersuasive for, as aptly pointed out by the trial court and sustained by the appellate court –

Rejecting IVO's position, SAFIC claims that there is no distinction between the 1985 and 1986 contracts, both of which groups of contracts were signed or authorized by IVO's President, Dominador Monteverde. The 1986 contracts, SAFIC would bewail, were similarly with their 1985 predecessors, forward sales contracts in which IVO had undertaken to deliver the crude coconut oil months after such contracts were entered into. The lead time between the closing of the deal and the delivery of the oil supposedly allowed the seller to accumulate enough copra to mill and to build up its inventory and so meet its delivery commitment to its foreign buyers. SAFIC concludes that the 1986 contracts were equally binding, as the 1985 contracts were, on IVO.

Subjecting the evidence on both sides to close scrutiny, the Court has found some remarkable distinctions between the 1985 and 1986 contracts. x x x

1. The 1985 contracts were performed within an average of two months from the date of the sale. On the other hand, the 1986 contracts were to be performed within an average of eight and a half months from the dates of the sale. All the supposed performances fell in 1987. Indeed, the contract covered by Exhibit J was to be performed 11 to 12 months from the execution of the contract. These pattern (sic) belies plaintiffs contention that the lead time merely allowed for milling and building up of oil inventory. It is evident that the 1986 contracts constituted trading in futures or in mere expectations. In all likelihood, the coconuts that were supposed to be milled for oil were not yet on their trees when Dominador Monteverde sold the crude oil to SAFIC.

2. The mode of payment agreed on by the parties in their 1985 contracts was uniformly thru the opening of a letter of credit LC by SAFIC in favor of IVO. Since the buyer's letter of credit guarantees payment to the seller as soon as the latter is able to present the shipping documents covering the cargo, its opening usually mark[s] the fact that the transaction would be consummated. On the other hand, seven out of the ten 1986 contracts were to be paid by telegraphic transfer upon presentation of the shipping documents. Unlike the letter of credit, a mere promise to pay by telegraphic transfer gives no assurance of [the] buyer's compliance with its contracts. This fact lends an uncertain element in the 1986 contracts.1âwphi1.nêt

3. Apart from the above, it is not disputed that with respect to the 1985 contracts, IVO faithfully complied with Central Bank Circular No. 151 dated April 1, 1963, requiring a coconut oil exporter to submit a Report of Foreign Sales within twenty-four (24) hours "after the closing of the relative sales contract" with a foreign buyer of coconut oil. But with respect to the disputed 1986 contracts, the parties stipulated during the hearing that none of these contracts were ever reported to the Central Bank, in violation of its above requirement. (See Stipulation of Facts dated June 13, 1990). The 1986 sales were, therefore suspect.

4. It is not disputed that, unlike the 1985 contacts, the 1986 contracts were never recorded either in the 1986 accounting books of IVO or in its annual financial

statement for 1986, a document that was prepared prior to the controversy. (Exhibits 6 to 6-0 and 7 to 7-1). Emelita Ortega, formerly an assistant of Dominador Monteverde, testified that they were strange goings-on about the 1986 contract. They were neither recorded in the books nor reported to the Central Bank. What is more, in those unreported cases where profits were made, such profits were ordered remitted to unknown accounts in California, U.S.A., by Dominador Monteverde.

x x x x x x x x x

Evidently, Dominador Monteverde made business or himself, using the name of IVO but concealing from it his speculative transactions.

Petitioner further contends that both the trial and appellate courts erred in concluding that Safic was not able to prove its claim for damages. Petitioner first points out that its wash out agreements with Monteverde where IVO allegedly agreed to pay US$293,500.00 for some of the failed contracts was proof enough and, second, that it presented purchases of coconut oil it made from others during the period of IVO's default.

We remain unconvinced. The so-called "wash out" agreements are clearly ultra vires and not binding on IVO. Furthermore, such agreements did not prove Safic's actual losses in the transactions in question. The fact is that Safic did not pay for the coconut oil that it supposedly ordered from IVO through Monteverede. Safic only claims that, since it was ready to pay when IVO was not ready to deliver, Safic suffered damages to the extent that they had to buy the same commodity from others at higher prices.

The foregoing claim of petitioner is not, however, substantiated by the evidence and only raises several questions, to wit: 1.] Did Safic commit to deliver the quantity of oil covered by the 1986 contracts to its own buyers? Who were these buyers? What were the terms of those contracts with respect to quantity, price and date of delivery? 2.] Did Safic pay damages to its buyers? Where were the receipts? Did Safic have to procure the equivalent oil from other sources? If so, who were these sources? Where were their contracts and what were the terms of these contracts as to quantity, price and date of delivery?

The records disclose that during the course of the proceedings in the trial court, IVO filed an amended motion22 for production and inspection of the following documents: a.] contracts of resale of coconut oil that Safic bought from IVO; b.] the records of the pooling and sales contracts covering the oil from such pooling, if the coconut oil has been pooled and sold as general oil; c.] the contracts of the purchase of oil that, according to Safic, it had to resort to in order to fill up alleged undelivered commitments of IVO; d.] all other contracts, confirmations, invoices, wash out agreements and other documents of sale related to (a), (b) and (c). This amended motion was opposed by Safic.23 The trial court, however, in its September 16, 1988 Order ,24 ruled that:

From the analysis of the parties' respective positions, conclusion can easily be drawn therefrom that there is materiality in the defendant's move: firstly, plaintiff seeks to recover damages from the defendant and these are intimately related to plaintiffs alleged losses which it attributes to the default of the defendant in its contractual commitments; secondly, the documents are specified in the amended motion. As such, plaintiff would entertain no confusion as to what, which documents to locate and produce considering plaintiff to be (without doubt) a reputable going concern in the management of the affairs which is serviced by competent, industrious, hardworking and diligent personnel; thirdly, the desired production and inspection of the documents was precipitated by the testimony of plaintiffs witness (Donald O'Meara) who admitted, in open court, that they are available. If the said witness represented that the documents, as generally described, are available, reason there would be none for the same witness to say later that they could not be produced, even after they have been clearly described.

Besides, if the Court may additionally dwell on the issue of damages, the production and inspection of the desired documents would be of tremendous help

in the ultimate resolution thereof. Plaintiff claims for the award of liquidated or actual damages to the tune of US$391,593.62 which, certainly, is a huge amount in terms of pesos, and which defendant disputes. As the defendant cannot be precluded in taking exceptions to the correctness and validity of such claim which plaintiffs witness (Donald O'Meara) testified to, and as, by this nature of the plaintiffs claim for damages, proof thereof is a must which can be better served, if not amply ascertained by examining the records of the related sales admitted to be in plaintiffs possession, the amended motion for production and inspection of the defendant is in order.

The interest of justice will be served best, if there would be a full disclosure by the parties on both sides of all documents related to the transactions in litigation.

Notwithstanding the foregoing ruling of the trial court, Safic did not produce the required documents, prompting the court a quo to assume that if produced, the documents would have been adverse to Safic's cause. In its efforts to bolster its claim for damages it purportedly sustained, Safic suggests a substitute mode of computing its damages by getting the average price it paid for certain quantities of coconut oil that it allegedly bought in 1987 and deducting this from the average price of the 1986 contracts. But this mode of computation if flawed .because: 1.] it is conjectural since it rests on average prices not on actual prices multiplied by the actual volume of coconut oil per contract; and 2.] it is based on the unproven assumption that the 1987 contracts of purchase provided the coconut oil needed to make up for the failed 1986 contracts. There is also no evidence that Safic had contracted to supply third parties with coconut oil from the 1986 contracts and that Safic had to buy such oil from others to meet the requirement.

Along the same vein, it is worthy to note that the quantities of oil covered by its 1987 contracts with third parties do not match the quantities of oil provided under the 1986 contracts. Had Safic produced the documents that the trial court required, a substantially correct determination of its actual damages would have been possible. This, unfortunately, was not the case. Suffice it to state in this regard that "[T]he power of the courts to grant damages and attorney's fees demands factual, legal and equitable justification; its basis cannot be left to speculation and conjecture."25

THE BOARD OF LIQUIDATORS1 representing THE GOVERNMENT OF THE REPUBLIC OF THE PHILIPPINES, Plaintiff-Appellant, vs. HEIRS OF MAXIMO M. KALAW,2 JUAN BOCAR,

ESTATE OF THE DECEASED CASIMIRO GARCIA,3 and LEONOR MOLL, Defendants-Appellees.

The National Coconut Corporation (NACOCO, for short) was chartered as a non-profit governmental organization on May 7, 1940 by Commonwealth Act 518 avowedly for the protection, preservation and development of the coconut industry in the Philippines. On August 1, 1946, NACOCO's charter was amended [Republic Act 5] to grant that corporation the express power "to buy, sell, barter, export, and in any other manner deal in, coconut, copra, and dessicated coconut, as well as their by-products, and to act as agent, broker or commission merchant of the producers, dealers or merchants" thereof. The charter amendment was enacted to stabilize copra prices, to serve coconut producers by securing advantageous prices for them, to cut down to a minimum, if not altogether eliminate, the margin of middlemen, mostly aliens.4 chanrobles virtual law library

General manager and board chairman was Maximo M. Kalaw; defendants Juan Bocar and Casimiro Garcia were members of the Board; defendant Leonor Moll became director only on December 22, 1947.chanroblesvirtualawlibrary chanrobles virtual law library

NACOCO, after the passage of Republic Act 5, embarked on copra trading activities. Amongst the scores of contracts executed by general manager Kalaw are the disputed contracts, for the delivery of copra, viz:

(a) July 30, 1947: Alexander Adamson & Co., for 2,000 long tons, $167.00: per ton, f. o. b., delivery: August and September, 1947. This contract was later assigned to Louis Dreyfus & Co. (Overseas) Ltd.chanroblesvirtualawlibrary chanrobles virtual law library

(b) August 14, 1947: Alexander Adamson & Co., for 2,000 long tons $145.00 per long ton, f.o.b., Philippine ports, to be shipped: September-October, 1947. This contract was also assigned to Louis

Dreyfus & Co. (Overseas) Ltd.chanroblesvirtualawlibrary chanrobles virtual law library

(c) August 22, 1947: Pacific Vegetable Co., for 3,000 tons, $137.50 per ton, delivery: September, 1947.chanroblesvirtualawlibrary chanrobles virtual law library

(d) September 5, 1947: Spencer Kellog & Sons, for 1,000 long tons, $160.00 per ton, c.i.f., Los Angeles, California, delivery: November, 1947.chanroblesvirtualawlibrary chanrobles virtual law library

(e) September 9, 1947: Franklin Baker Division of General Foods Corporation, for 1,500 long tons, $164,00 per ton, c.i.f., New York, to be shipped in November, 1947.chanroblesvirtualawlibrary chanrobles virtual law library

(f) September 12, 1947: Louis Dreyfus & Co. (Overseas) Ltd., for 3,000 long tons, $154.00 per ton, f.o.b., 3 Philippine ports, delivery: November, 1947.chanroblesvirtualawlibrary chanrobles virtual law library

(g) September 13, 1947: Juan Cojuangco, for 2,000 tons, $175.00 per ton, delivery: November and December, 1947. This contract was assigned to Pacific Vegetable Co.chanroblesvirtualawlibrary chanrobles virtual law library

(h) October 27, 1947: Fairwood & Co., for 1,000 tons, $210.00 per short ton, c.i.f., Pacific ports, delivery: December, 1947 and January, 1948. This contract was assigned to Pacific Vegetable Co.chanroblesvirtualawlibrary chanrobles virtual law library

(i) October 28, 1947: Fairwood & Co., for 1,000 tons, $210.00 per short ton, c.i.f., Pacific ports, delivery: January, 1948. This contract was assigned to Pacific Vegetable Co.

An unhappy chain of events conspired to deter NACOCO from fulfilling these contracts. Nature supervened. Four devastating typhoons visited the Philippines: the first in October, the second and third in November, and the fourth in December, 1947. Coconut trees throughout the country suffered extensive damage. Copra production decreased. Prices spiralled. Warehouses were destroyed. Cash requirements doubled. Deprivation of export facilities increased the time necessary to accumulate shiploads of copra. Quick turnovers became impossible, financing a problem.chanroblesvirtualawlibrary chanrobles virtual law library

When it became clear that the contracts would be unprofitable, Kalaw submitted them to the board for approval. It was not until December 22, 1947 when the membership was completed. Defendant Moll took her oath on that date. A meeting was then held. Kalaw made a full disclosure of the situation, apprised the board of the impending heavy losses. No action was taken on the contracts. Neither did the board vote thereon at the meeting of January 7, 1948 following. Then, on January 11, 1948, President Roxas made a statement that the NACOCO head did his best to avert the losses, emphasized that government concerns faced the same risks that confronted private companies, that NACOCO was recouping its losses, and that Kalaw was to remain in his post. Not long thereafter, that is, on January 30, 1948, the board met again with Kalaw, Bocar, Garcia and Moll in attendance. They unanimously approved the contracts hereinbefore enumerated.chanroblesvirtualawlibrary chanrobles virtual law library

As was to be expected, NACOCO but partially performed the contracts, as follows:

Buyers Tons Delivered

Undelivered

Pacific Vegetable Oil 2,386.45 4,613.55

Spencer Kellog None 1,000

Franklin Baker 1,000 500

Louis Dreyfus 800 2,200

Louis Dreyfus (Adamson contract of July 30, 1947)

1,150 850

Louis Dreyfus (Adamson Contract of August 14, 1947)

1,755 245

T O T A L S 7,091.45 9,408.55

The buyers threatened damage suits. Some of the claims were settled, viz: Pacific Vegetable Oil Co., in copra delivered by NACOCO, P539,000.00; Franklin Baker Corporation, P78,210.00; Spencer Kellog & Sons, P159,040.00.chanroblesvirtualawlibrary chanrobles virtual law library

But one buyer, Louis Dreyfus & Go. (Overseas) Ltd., did in fact sue before the Court of First Instance of Manila, upon claims as follows: For the undelivered copra under the July 30 contract (Civil Case 4459); P287,028.00; for the balance on the August 14 contract (Civil Case 4398), P75,098.63; for that per the September 12 contract reduced to judgment (Civil Case 4322, appealed to this Court in L-2829), P447,908.40. These cases culminated in an out-of-court amicable settlement when the Kalaw management was already out. The corporation thereunder paid Dreyfus P567,024.52 representing 70% of the total claims. With particular reference to the Dreyfus claims, NACOCO put up the defenses that: (1) the contracts were void because Louis Dreyfus & Co. (Overseas) Ltd. did not have license to do business here; and (2) failure to deliver was due to force majeure, the typhoons. To project the utter unreasonableness of this compromise, we reproduce in haec verba this finding below:

x x x However, in similar cases brought by the same claimant [Louis Dreyfus & Co. (Overseas) Ltd.] against Santiago Syjuco for non-delivery of copra also involving a claim of P345,654.68 wherein defendant set up same defenses as above, plaintiff accepted a promise of P5,000.00 only (Exhs. 31 & 32 Heirs.) Following the same proportion, the claim of Dreyfus against NACOCO should have been compromised for only P10,000.00, if at all. Now, why should defendants be held liable for the large sum paid as compromise by the Board of Liquidators? This is just a sample to show how unjust it would be to hold defendants liable for the readiness with which the Board of Liquidators disposed of the NACOCO funds, although there was much possibility of successfully resisting the claims, or at least settlement for nominal sums like what happened in the Syjuco case.5

All the settlements sum up to P1,343,274.52.chanroblesvirtualawlibrary chanrobles virtual law library

In this suit started in February, 1949, NACOCO seeks to recover the above sum of P1,343,274.52 from general manager and board chairman Maximo M. Kalaw, and directors Juan Bocar, Casimiro Garcia and Leonor Moll. It charges Kalaw with negligence under Article 1902 of the old Civil Code (now Article 2176, new Civil Code); and defendant board members, including Kalaw, with bad faith and/or breach of trust for having approved the contracts. The fifth amended complaint, on which this case was tried, was filed on July 2, 1959. Defendants resisted the action upon defenses hereinafter in this opinion to be discussed.chanroblesvirtualawlibrary chanrobles virtual law library

The lower court came out with a judgment dismissing the complaint without costs as well as defendants' counterclaims, except that plaintiff was ordered to pay the heirs of Maximo Kalaw the sum of P2,601.94 for unpaid salaries and cash deposit due the deceased Kalaw from NACOCO.chanroblesvirtualawlibrary chanrobles virtual law library

Plaintiff appealed direct to this Court.chanroblesvirtualawlibrary chanrobles virtual law library

Plaintiff's brief did not, question the judgment on Kalaw's counterclaim for the sum of P2,601.94.chanroblesvirtualawlibrary chanrobles virtual law library

Right at the outset, two preliminary questions raised before, but adversely decided by, the court below, arrest our attention. On appeal, defendants renew their bid. And this, upon established

jurisprudence that an appellate court may base its decision of affirmance of the judgment below on a point or points ignored by the trial court or in which said court was in error.6 chanrobles virtual law library

1. First of the threshold questions is that advanced by defendants that plaintiff Board of Liquidators has lost its legal personality to continue with this suit.chanroblesvirtualawlibrary chanrobles virtual law library

Accepted in this jurisdiction are three methods by which a corporation may wind up its affairs: (1) under Section 3, Rule 104, of the Rules of Court [which superseded Section 66 of the Corporation Law]7 whereby, upon voluntary dissolution of a corporation, the court may direct "such disposition of its assets as justice requires, and may appoint a receiver to collect such assets and pay the debts of the corporation;" (2) under Section 77 of the Corporation Law, whereby a corporation whose corporate existence is terminated, "shall nevertheless be continued as a body corporate for three years after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and of enabling it gradually to settle and close its affairs, to dispose of and convey its property and to divide its capital stock, but not for the purpose of continuing the business for which it was established;" and (3) under Section 78 of the Corporation Law, by virtue of which the corporation, within the three year period just mentioned, "is authorized and empowered to convey all of its property to trustees for the benefit of members, stockholders, creditors, and others interested."8 chanrobles virtual law library

It is defendants' pose that their case comes within the coverage of the second method. They reason out that suit was commenced in February, 1949; that by Executive Order 372, dated November 24, 1950, NACOCO, together with other government-owned corporations, was abolished, and the Board of Liquidators was entrusted with the function of settling and closing its affairs; and that, since the three year period has elapsed, the Board of Liquidators may not now continue with, and prosecute, the present case to its conclusion, because Executive Order 372 provides in Section 1 thereof that -

Sec.1. The National Abaca and Other Fibers Corporation, the National Coconut Corporation, the National Tobacco Corporation, the National Food Producer Corporation and the former enemy-owned or controlled corporations or associations, . . . are hereby abolished. The said corporations shall be liquidated in accordance with law, the provisions of this Order, and/or in such manner as the President of the Philippines may direct; Provided, however, That each of the said corporations shall nevertheless be continued as a body corporate for a period of three (3) years from the effective date of this Executive Order for the purpose of prosecuting and defending suits by or against it and of enabling the Board of Liquidators gradually to settle and close its affairs, to dispose of and, convey its property in the manner hereinafter provided.

Citing Mr. Justice Fisher, defendants proceed to argue that even where it may be found impossible within the 3 year period to reduce disputed claims to judgment, nonetheless, "suits by or against a corporation abate when it ceases to be an entity capable of suing or being sued" (Fisher, The Philippine Law of Stock Corporations, pp. 390-391). Corpus Juris Secundum likewise is authority for the statement that "[t]he dissolution of a corporation ends its existence so that there must be statutory authority for prolongation of its life even for purposes of pending litigation"9 and that suit "cannot be continued or revived; nor can a valid judgment be rendered therein, and a judgment, if rendered, is not only erroneous, but void and subject to collateral attack." 10 So it is, that abatement of pending actions follows as a matter of course upon the expiration of the legal period for liquidation, 11 unless the statute merely requires a commencement of suit within the added time. 12 For, the court cannot extend the time alloted by statute. 13 chanrobles virtual law library

We, however, express the view that the executive order abolishing NACOCO and creating the Board of Liquidators should be examined in context. The proviso in Section 1 of Executive Order 372, whereby the corporate existence of NACOCO was continued for a period of three years from the effectivity of the order for "the purpose of prosecuting and defending suits by or against it and of enabling the Board of Liquidators gradually to settle and close its affairs, to dispose of and convey its property in the manner hereinafter provided", is to be read not as an isolated provision but in conjunction with the whole. So reading, it will be readily observed that no time limit has been tacked to the existence of the Board of Liquidators and its function of closing the affairs of the various government owned corporations, including NACOCO.chanroblesvirtualawlibrary chanrobles virtual law library

By Section 2 of the executive order, while the boards of directors of the various corporations were abolished, their powers and functions and duties under existing laws were to be assumed and exercised by the Board of Liquidators. The President thought it best to do away with the boards of directors of the defunct corporations; at the same time, however, the President had chosen to see

to it that the Board of Liquidators step into the vacuum. And nowhere in the executive order was there any mention of the lifespan of the Board of Liquidators. A glance at the other provisions of the executive order buttresses our conclusion. Thus, liquidation by the Board of Liquidators may, under section 1, proceed in accordance with law, the provisions of the executive order, "and/or in such manner as the President of the Philippines may direct." By Section 4, when any property, fund, or project is transferred to any governmental instrumentality "for administration or continuance of any project," the necessary funds therefor shall be taken from the corresponding special fund created in Section 5. Section 5, in turn, talks of special funds established from the "net proceeds of the liquidation" of the various corporations abolished. And by Section, 7, fifty per centum of the fees collected from the copra standardization and inspection service shall accrue "to the special fund created in section 5 hereof for the rehabilitation and development of the coconut industry." Implicit in all these, is that the term of life of the Board of Liquidators is without time limit. Contemporary history gives us the fact that the Board of Liquidators still exists as an office with officials and numerous employees continuing the job of liquidation and prosecution of several court actions.chanroblesvirtualawlibrary chanrobles virtual law library

Not that our views on the power of the Board of Liquidators to proceed to the final determination of the present case is without jurisprudential support. The first judicial test before this Court is National Abaca and Other Fibers Corporation vs. Pore, L-16779, August 16, 1961. In that case, the corporation, already dissolved, commenced suit within the three-year extended period for liquidation. That suit was for recovery of money advanced to defendant for the purchase of hemp in behalf of the corporation. She failed to account for that money. Defendant moved to dismiss, questioned the corporation's capacity to sue. The lower court ordered plaintiff to include as co-party plaintiff, The Board of Liquidators, to which the corporation's liquidation was entrusted by Executive Order 372. Plaintiff failed to effect inclusion. The lower court dismissed the suit. Plaintiff moved to reconsider. Ground: excusable negligence, in that its counsel prepared the amended complaint, as directed, and instructed the board's incoming and outgoing correspondence clerk, Mrs. Receda Vda. de Ocampo, to mail the original thereof to the court and a copy of the same to defendant's counsel. She mailed the copy to the latter but failed to send the original to the court. This motion was rejected below. Plaintiff came to this Court on appeal. We there said that "the rule appears to be well settled that, in the absence of statutory provision to the contrary, pending actions by or against a corporation are abated upon expiration of the period allowed by law for the liquidation of its affairs." We there said that "[o]ur Corporation Law contains no provision authorizing a corporation, after three (3) years from the expiration of its lifetime, to continue in its corporate name actions instituted by it within said period of three (3) years." 14 However, these precepts notwithstanding, we, in effect, held in that case that the Board of Liquidators escapes from the operation thereof for the reason that "[o]bviously, the complete loss of plaintiff's corporate existence after the expiration of the period of three (3) years for the settlement of its affairs is what impelled the President to create a Board of Liquidators, to continue the management of such matters as may then be pending." 15 We accordingly directed the record of said case to be returned to the lower court, with instructions to admit plaintiff's amended complaint to include, as party plaintiff, the Board of Liquidators.chanroblesvirtualawlibrary chanrobles virtual law library

Defendants' position is vulnerable to attack from another direction.chanroblesvirtualawlibrary chanrobles virtual law library

By Executive Order 372, the government, the sole stockholder, abolished NACOCO, and placed its assets in the hands of the Board of Liquidators. The Board of Liquidators thus became the trustee on behalf of the government. It was an express trust. The legal interest became vested in the trustee - the Board of Liquidators. The beneficial interest remained with the sole stockholder - the government. At no time had the government withdrawn the property, or the authority to continue the present suit, from the Board of Liquidators. If for this reason alone, we cannot stay the hand of the Board of Liquidators from prosecuting this case to its final conclusion. 16 The provisions of Section 78 of the Corporation Law - the third method of winding up corporate affairs - find application.chanroblesvirtualawlibrary chanrobles virtual law library

We, accordingly, rule that the Board of Liquidators has personality to proceed as: party-plaintiff in this case.chanroblesvirtualawlibrary chanrobles virtual law library

2. Defendants' second poser is that the action is unenforceable against the heirs of Kalaw.chanroblesvirtualawlibrary chanrobles virtual law library

Appellee heirs of Kalaw raised in their motion to dismiss, 17 which was overruled, and in their nineteenth special defense, that plaintiff's action is personal to the deceased Maximo M. Kalaw, and may not be deemed to have survived after his death.18 They say that the controlling statute is Section 5, Rule 87, of the 1940 Rules of Court.19 which provides that "[a]ll claims for money against the decedent, arising from contract, express or implied", must be filed in the estate

proceedings of the deceased. We disagree.chanroblesvirtualawlibrary chanrobles virtual law library

The suit here revolves around the alleged negligent acts of Kalaw for having entered into the questioned contracts without prior approval of the board of directors, to the damage and prejudice of plaintiff; and is against Kalaw and the other directors for having subsequently approved the said contracts in bad faith and/or breach of trust." Clearly then, the present case is not a mere action for the recovery of money nor a claim for money arising from contract. The suit involves alleged tortious acts. And the action is embraced in suits filed "to recover damages for an injury to person or property, real or personal", which survive. 20 chanrobles virtual law library

The leading expositor of the law on this point is Aguas vs. Llemos, L-18107, August 30, 1962. There, plaintiffs sought to recover damages from defendant Llemos. The complaint averred that Llemos had served plaintiff by registered mail with a copy of a petition for a writ of possession in Civil Case 4824 of the Court of First Instance at Catbalogan, Samar, with notice that the same would be submitted to the Samar court on February 23, 1960 at 8:00 a.m.; that in view of the copy and notice served, plaintiffs proceeded to the said court of Samar from their residence in Manila accompanied by their lawyers, only to discover that no such petition had been filed; and that defendant Llemos maliciously failed to appear in court, so that plaintiffs' expenditure and trouble turned out to be in vain, causing them mental anguish and undue embarrassment. Defendant died before he could answer the complaint. Upon leave of court, plaintiffs amended their complaint to include the heirs of the deceased. The heirs moved to dismiss. The court dismissed the complaint on the ground that the legal representative, and not the heirs, should have been made the party defendant; and that, anyway, the action being for recovery of money, testate or intestate proceedings should be initiated and the claim filed therein. This Court, thru Mr. Justice Jose B. L. Reyes, there declared:

Plaintiffs argue with considerable cogency that contrasting the correlated provisions of the Rules of Court, those concerning claims that are barred if not filed in the estate settlement proceedings (Rule 87, sec. 5) and those defining actions that survive and may be prosecuted against the executor or administrator (Rule 88, sec. 1), it is apparent that actions for damages caused by tortious conduct of a defendant (as in the case at bar) survive the death of the latter. Under Rule 87, section 5, the actions that are abated by death are: (1) claims for funeral expenses and those for the last sickness of the decedent; (2) judgments for money; and (3) "all claims for money against the decedent, arising from contract express or implied." None of these includes that of the plaintiffs-appellants; for it is not enough that the claim against the deceased party be for money, but it must arise from "contract express or implied", and these words (also used by the Rules in connection with attachments and derived from the common law) were construed in Leung Ben vs. O'Brien, 38 Phil. 182, 189-194,

"to include all purely personal obligations other than those which have their source in delict or tort."

Upon the other hand, Rule 88, section 1, enumerates actions that survive against a decedent's executors or administrators, and they are: (1) actions to recover real and personal property from the estate; (2) actions to enforce a lien thereon; and (3) actions to recover damages for an injury to person or property. The present suit is one for damages under the last class, it having been held that "injury to property" is not limited to injuries to specific property, but extends to other wrongs by which personal estate is injured or diminished (Baker vs. Crandall, 47 Am. Rep. 126; also 171 A.L.R., 1395). To maliciously cause a party to incur unnecessary expenses, as charged in this case, is certainly injury to that party's property (Javier vs. Araneta, L-4369, Aug. 31, 1953).

The ruling in the preceding case was hammered out of facts comparable to those of the present. No cogent reason exists why we should break away from the views just expressed. And, the conclusion remains: Action against the Kalaw heirs and, for the matter, against the Estate of Casimiro Garcia survives.chanroblesvirtualawlibrary chanrobles virtual law library

The preliminaries out of the way, we now go to the core of the controversy.chanroblesvirtualawlibrary chanrobles virtual law library

3. Plaintiff levelled a major attack on the lower court's holding that Kalaw justifiedly entered into the controverted contracts without the prior approval of the corporation's directorate. Plaintiff leans heavily on NACOCO's corporate by-laws. Article IV (b), Chapter III thereof, recites, as amongst the duties of the general manager, the obligation: "(b) To perform or execute on behalf of the Corporation upon prior approval of the Board, all contracts necessary and essential to the proper accomplishment for which the Corporation was organized." chanrobles virtual law library

Not of de minimis importance in a proper approach to the problem at hand, is the nature of a general manager's position in the corporate structure. A rule that has gained acceptance through the years is that a corporate officer "intrusted with the general management and control of its business, has implied authority to make any contract or do any other act which is necessary or appropriate to the conduct of the ordinary business of the corporation. 21 As such officer, "he may, without any special authority from the Board of Directors perform all acts of an ordinary nature, which by usage or necessity are incident to his office, and may bind the corporation by contracts in matters arising in the usual course of business. 22 chanrobles virtual law library

The problem, therefore, is whether the case at bar is to be taken out of the general concept of the powers of a general manager, given the cited provision of the NACOCO by-laws requiring prior directorate approval of NACOCO contracts.chanroblesvirtualawlibrary chanrobles virtual law library

The peculiar nature of copra trading, at this point, deserves express articulation. Ordinary in this enterprise are copra sales for future delivery. The movement of the market requires that sales agreements be entered into, even though the goods are not yet in the hands of the seller. Known in business parlance as forward sales, it is concededly the practice of the trade. A certain amount of speculation is inherent in the undertaking. NACOCO was much more conservative than the exporters with big capital. This short-selling was inevitable at the time in the light of other factors such as availability of vessels, the quantity required before being accepted for loading, the labor needed to prepare and sack the copra for market. To NACOCO, forward sales were a necessity. Copra could not stay long in its hands; it would lose weight, its value decrease. Above all, NACOCO's limited funds necessitated a quick turnover. Copra contracts then had to be executed on short notice - at times within twenty-four hours. To be appreciated then is the difficulty of calling a formal meeting of the board.chanroblesvirtualawlibrary chanrobles virtual law library

Such were the environmental circumstances when Kalaw went into copra trading.chanroblesvirtualawlibrary chanrobles virtual law library

Long before the disputed contracts came into being, Kalaw contracted - by himself alone as general manager - for forward sales of copra. For the fiscal year ending June 30, 1947, Kalaw signed some 60 such contracts for the sale of copra to divers parties. During that period, from those copra sales, NACOCO reaped a gross profit of P3,631,181.48. So pleased was NACOCO's board of directors that, on December 5, 1946, in Kalaw's absence, it voted to grant him a special bonus "in recognition of the signal achievement rendered by him in putting the Corporation's business on a self-sufficient basis within a few months after assuming office, despite numerous handicaps and difficulties." chanrobles virtual law library

These previous contract it should be stressed, were signed by Kalaw without prior authority from the board. Said contracts were known all along to the board members. Nothing was said by them. The aforesaid contracts stand to prove one thing: Obviously, NACOCO board met the difficulties attendant to forward sales by leaving the adoption of means to end, to the sound discretion of NACOCO's general manager Maximo M. Kalaw.chanroblesvirtualawlibrary chanrobles virtual law library

Liberally spread on the record are instances of contracts executed by NACOCO's general manager and submitted to the board after their consummation, not before. These agreements were not Kalaw's alone. One at least was executed by a predecessor way back in 1940, soon after NACOCO was chartered. It was a contract of lease executed on November 16, 1940 by the then general manager and board chairman, Maximo Rodriguez, and A. Soriano y Cia., for the lease of a space in Soriano Building On November 14, 1946, NACOCO, thru its general manager Kalaw, sold 3,000 tons of copra to the Food Ministry, London, thru Sebastian Palanca. On December 22, 1947, when the controversy over the present contract cropped up, the board voted to approve a lease contract previously executed between Kalaw and Fidel Isberto and Ulpiana Isberto covering a warehouse of the latter. On the same date, the board gave its nod to a contract for renewal of the services of Dr. Manuel L. Roxas. In fact, also on that date, the board requested Kalaw to report for action all copra contracts signed by him "at the meeting immediately following the signing of the contracts." This practice was observed in a later instance when, on January 7, 1948, the board approved two previous contracts for the sale of 1,000 tons of copra each to a certain "SCAP" and a certain "GNAPO".chanroblesvirtualawlibrary chanrobles virtual law library

And more. On December 19, 1946, the board resolved to ratify the brokerage commission of 2% of Smith, Bell and Co., Ltd., in the sale of 4,300 long tons of copra to the French Government. Such ratification was necessary because, as stated by Kalaw in that same meeting, "under an existing resolution he is authorized to give a brokerage fee of only 1% on sales of copra made through brokers." On January 15, 1947, the brokerage fee agreements of 1-1/2% on three export contracts, and 2% on three others, for the sale of copra were approved by the board with a proviso

authorizing the general manager to pay a commission up to the amount of 1-1/2% "without further action by the Board." On February 5, 1947, the brokerage fee of 2% of J. Cojuangco & Co. on the sale of 2,000 tons of copra was favorably acted upon by the board. On March 19, 1947, a 2% brokerage commission was similarly approved by the board for Pacific Trading Corporation on the sale of 2,000 tons of copra.chanroblesvirtualawlibrary chanrobles virtual law library

It is to be noted in the foregoing cases that only the brokerage fee agreements were passed upon by the board, not the sales contracts themselves. And even those fee agreements were submitted only when the commission exceeded the ceiling fixed by the board.chanroblesvirtualawlibrary chanrobles virtual law library

Knowledge by the board is also discernible from other recorded instances.chanroblesvirtualawlibrary chanrobles virtual law library

When the board met on May 10, 1947, the directors discussed the copra situation: There was a slow downward trend but belief was entertained that the nadir might have already been reached and an improvement in prices was expected. In view thereof, Kalaw informed the board that "he intends to wait until he has signed contracts to sell before starting to buy copra."23 chanrobles virtual law library

In the board meeting of July 29, 1947, Kalaw reported on the copra price conditions then current: The copra market appeared to have become fairly steady; it was not expected that copra prices would again rise very high as in the unprecedented boom during January-April, 1947; the prices seemed to oscillate between $140 to $150 per ton; a radical rise or decrease was not indicated by the trends. Kalaw continued to say that "the Corporation has been closing contracts for the sale of copra generally with a margin of P5.00 to P7.00 per hundred kilos." 24 chanrobles virtual law library

We now lift the following excerpts from the minutes of that same board meeting of July 29, 1947:

521. In connection with the buying and selling of copra the Board inquired whether it is the practice of the management to close contracts of sale first before buying. The General Manager replied that this practice is generally followed but that it is not always possible to do so for two reasons: chanrobles virtual law library

(1) The role of the Nacoco to stabilize the prices of copra requires that it should not cease buying even when it does not have actual contracts of sale since the suspension of buying by the Nacoco will result in middlemen taking advantage of the temporary inactivity of the Corporation to lower the prices to the detriment of the producers.chanroblesvirtualawlibrary chanrobles virtual law library

(2) The movement of the market is such that it may not be practical always to wait for the consummation of contracts of sale before beginning to buy copra.chanroblesvirtualawlibrary chanrobles virtual law library

The General Manager explained that in this connection a certain amount of speculation is unavoidable. However, he said that the Nacoco is much more conservative than the other big exporters in this respect.25

Settled jurisprudence has it that where similar acts have been approved by the directors as a matter of general practice, custom, and policy, the general manager may bind the company without formal authorization of the board of directors. 26 In varying language, existence of such authority is established, by proof of the course of business, the usage and practices of the company and by the knowledge which the board of directors has, or must be presumed to have, of acts and doings of its subordinates in and about the affairs of the corporation. 27 So also,

x x x authority to act for and bind a corporation may be presumed from acts of recognition in other instances where the power was in fact exercised. 28 chanrobles virtual law library

x x x Thus, when, in the usual course of business of a corporation, an officer has been allowed in his official capacity to manage its affairs, his authority to represent the corporation may be implied from the manner in which he has been permitted by the directors to manage its business.29

In the case at bar, the practice of the corporation has been to allow its general manager to negotiate and execute contracts in its copra trading activities for and in NACOCO's behalf without prior board approval. If the by-laws were to be literally followed, the board should give its stamp of prior approval on all corporate contracts. But that board itself, by its acts and through

acquiescence, practically laid aside the by-law requirement of prior approval.chanroblesvirtualawlibrary chanrobles virtual law library

Under the given circumstances, the Kalaw contracts are valid corporate acts.chanroblesvirtualawlibrary chanrobles virtual law library

4. But if more were required, we need but turn to the board's ratification of the contracts in dispute on January 30, 1948, though it is our (and the lower court's) belief that ratification here is nothing more than a mere formality.chanroblesvirtualawlibrary chanrobles virtual law library

Authorities, great in number, are one in the idea that "ratification by a corporation of an unauthorized act or contract by its officers or others relates back to the time of the act or contract ratified, and is equivalent to original authority;" and that " [t]he corporation and the other party to the transaction are in precisely the same position as if the act or contract had been authorized at the time." 30 The language of one case is expressive: "The adoption or ratification of a contract by a corporation is nothing more or less than the making of an original contract. The theory of corporate ratification is predicated on the right of a corporation to contract, and any ratification or adoption is equivalent to a grant of prior authority." 31 chanrobles virtual law library

Indeed, our law pronounces that "[r]atification cleanses the contract from all its defects from the moment it was constituted." 32 By corporate confirmation, the contracts executed by Kalaw are thus purged of whatever vice or defect they may have. 33 chanrobles virtual law library

In sum, a case is here presented whereunder, even in the face of an express by-law requirement of prior approval, the law on corporations is not to be held so rigid and inflexible as to fail to recognize equitable considerations. And, the conclusion inevitably is that the embattled contracts remain valid.chanroblesvirtualawlibrary chanrobles virtual law library

5. It would be difficult, even with hostile eyes, to read the record in terms of "bad faith and/or breach of trust" in the board's ratification of the contracts without prior approval of the board. For, in reality, all that we have on the government's side of the scale is that the board knew that the contracts so confirmed would cause heavy losses.chanroblesvirtualawlibrary chanrobles virtual law library

As we have earlier expressed, Kalaw had authority to execute the contracts without need of prior approval. Everybody, including Kalaw himself, thought so, and for a long time. Doubts were first thrown on the way only when the contracts turned out to be unprofitable for NACOCO.chanroblesvirtualawlibrary chanrobles virtual law library

Rightfully had it been said that bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of wrong; it means breach of a known duty thru some motive or interest or ill will; it partakes of the nature of fraud.34 Applying this precept to the given facts herein, we find that there was no "dishonest purpose," or "some moral obliquity," or "conscious doing of wrong," or "breach of a known duty," or "Some motive or interest or ill will" that "partakes of the nature of fraud." chanrobles virtual law library

Nor was it even intimated here that the NACOCO directors acted for personal reasons, or to serve their own private interests, or to pocket money at the expense of the corporation. 35 We have had occasion to affirm that bad faith contemplates a "state of mind affirmatively operating with furtive design or with some motive of self-interest or ill will or for ulterior purposes." 36 Briggs vs. Spaulding, 141 U.S. 132, 148-149, 35 L. ed. 662, 669, quotes with approval from Judge Sharswood (in Spering's App., 71 Pa. 11), the following: "Upon a close examination of all the reported cases, although there are many dicta not easily reconcilable, yet I have found no judgment or decree which has held directors to account, except when they have themselves been personally guilty of some fraud on the corporation, or have known and connived at some fraud in others, or where such fraud might have been prevented had they given ordinary attention to their duties. . . ." Plaintiff did not even dare charge its defendant-directors with any of these malevolent acts.chanroblesvirtualawlibrary chanrobles virtual law library

Obviously, the board thought that to jettison Kalaw's contracts would contravene basic dictates of fairness. They did not think of raising their voice in protest against past contracts which brought in enormous profits to the corporation. By the same token, fair dealing disagrees with the idea that similar contracts, when unprofitable, should not merit the same treatment. Profit or loss resulting from business ventures is no justification for turning one's back on contracts entered into. The truth, then, of the matter is that - in the words of the trial court - the ratification of the contracts was "an act of simple justice and fairness to the general manager and the best interest of the corporation whose prestige would have been seriously impaired by a rejection by the board of

those contracts which proved disadvantageous." 37 chanrobles virtual law library

The directors are not liable." 38 chanrobles virtual law library

6. To what then may we trace the damage suffered by NACOCO.chanroblesvirtualawlibrary chanrobles virtual law library

The facts yield the answer. Four typhoons wreaked havoc then on our copra-producing regions. Result: Copra production was impaired, prices spiralled, warehouses destroyed. Quick turnovers could not be expected. NACOCO was not alone in this misfortune. The record discloses that private traders, old, experienced, with bigger facilities, were not spared; also suffered tremendous losses. Roughly estimated, eleven principal trading concerns did run losses to about P10,300,000.00. Plaintiff's witness Sisenando Barretto, head of the copra marketing department of NACOCO, observed that from late 1947 to early 1948 "there were many who lost money in the trade." 39 NACOCO was not immune from such usual business risk.chanroblesvirtualawlibrary chanrobles virtual law library

The typhoons were known to plaintiff. In fact, NACOCO resisted the suits filed by Louis Dreyfus & Co. by pleading in its answers force majeure as an affirmative defense and there vehemently asserted that "as a result of the said typhoons, extensive damage was caused to the coconut trees in the copra producing regions of the Philippines and according to estimates of competent authorities, it will take about one year until the coconut producing regions will be able to produce their normal coconut yield and it will take some time until the price of copra will reach normal levels;" and that "it had never been the intention of the contracting parties in entering into the contract in question that, in the event of a sharp rise in the price of copra in the Philippine market produce by force majeure or by caused beyond defendant's control, the defendant should buy the copra contracted for at exorbitant prices far beyond the buying price of the plaintiff under the contract." 40 chanrobles virtual law library

A high regard for formal judicial admissions made in court pleadings would suffice to deter us from permitting plaintiff to stray away therefrom, to charge now that the damage suffered was because of Kalaw's negligence, or for that matter, by reason of the board's ratification of the contracts. 41 chanrobles virtual law library

Indeed, were it not for the typhoons, 42 NACOCO could have, with ease, met its contractual obligations. Stock accessibility was no problem. NACOCO had 90 buying agencies spread throughout the islands. It could purchase 2,000 tons of copra a day. The various contracts involved delivery of but 16,500 tons over a five-month period. Despite the typhoons, NACOCO was still able to deliver a little short of 50% of the tonnage required under the contracts.chanroblesvirtualawlibrary chanrobles virtual law library

As the trial court correctly observed, this is a case of damnum absque injuria. Conjunction of damage and wrong is here absent. There cannot be an actionable wrong if either one or the other is wanting. 43 chanrobles virtual law library

7. On top of all these, is that no assertion is made and no proof is presented which would link Kalaw's acts - ratified by the board - to a matrix for defraudation of the government. Kalaw is clear of the stigma of bad faith. Plaintiff's corporate counsel 44 concedes that Kalaw all along thought that he had authority to enter into the contracts, that he did so in the best interests of the corporation; that he entered into the contracts in pursuance of an overall policy to stabilize prices, to free the producers from the clutches of the middlemen. The prices for which NACOCO contracted in the disputed agreements, were at a level calculated to produce profits and higher than those prevailing in the local market. Plaintiff's witness, Barretto, categorically stated that "it would be foolish to think that one would sign (a) contract when you are going to lose money" and that no contract was executed "at a price unsafe for the Nacoco." 45 Really, on the basis of prices then prevailing, NACOCO envisioned a profit of around P752,440.00. 46 chanrobles virtual law library

Kalaw's acts were not the result of haphazard decisions either. Kalaw invariably consulted with NACOCO's Chief Buyer, Sisenando Barretto, or the Assistant General Manager. The dailies and quotations from abroad were guideposts to him.chanroblesvirtualawlibrary chanrobles virtual law library

Of course, Kalaw could not have been an insurer of profits. He could not be expected to predict the coming of unpredictable typhoons. And even as typhoons supervened Kalaw was not remissed in his duty. He exerted efforts to stave off losses. He asked the Philippine National Bank to implement its commitment to extend a P400,000.00 loan. The bank did not release the loan, not

even the sum of P200,000.00, which, in October, 1947, was approved by the bank's board of directors. In frustration, on December 12, 1947, Kalaw turned to the President, complained about the bank's short-sighted policy. In the end, nothing came out of the negotiations with the bank. NACOCO eventually faltered in its contractual obligations.chanroblesvirtualawlibrary chanrobles virtual law library

That Kalaw cannot be tagged with crassa negligentia or as much as simple negligence, would seem to be supported by the fact that even as the contracts were being questioned in Congress and in the NACOCO board itself, President Roxas defended the actuations of Kalaw. On December 27, 1947, President Roxas expressed his desire "that the Board of Directors should reelect Hon. Maximo M. Kalaw as General Manager of the National Coconut Corporation." 47 And, on January 7, 1948, at a time when the contracts had already been openly disputed, the board, at its regular meeting, appointed Maximo M. Kalaw as acting general manager of the corporation.chanroblesvirtualawlibrary chanrobles virtual law library

Well may we profit from the following passage from Montelibano vs. Bacolod-Murcia Milling Co., Inc., L-15092, May 18, 1962: chanrobles virtual law library

"They (the directors) hold such office charged with the duty to act for the corporation according to their best judgment, and in so doing they cannot be controlled in the reasonable exercise and performance of such duty. Whether the business of a corporation should be operated at a loss during a business depression, or closed down at a smaller loss, is a purely business and economic problem to be determined by the directors of the corporation, and not by the court. It is a well known rule of law that questions of policy of management are left solely to the honest decision of officers and directors of a corporation, and the court is without authority to substitute its judgment for the judgment of the board of directors; the board is the business manager of the corporation, and so long as it acts in good faith its orders are not reviewable by the courts." (Fletcher on Corporations, Vol. 2, p. 390.) 48 chanrobles virtual law library

Kalaw's good faith, and that of the other directors, clinch the case for defendants. 49 chanrobles virtual law library

Viewed in the light of the entire record, the judgment under review must be, as it is hereby, affirmed.

LOPEZ REALTY, INC., AND ASUNCION LOPEZ GONZALES, petitioners, vs.FLORENTINA FONTECHA, ET AL., AND THE NATIONAL LABOR RELATIONS COMMISSION, respondents.

 The controversy at bench arose from a complaint filed by private respondents, 1 namely, Florentina Fontecha, Mila Refuerzo, Marcial Mamaril, Perfecto Bautista, Edward Mamaril, Marissa Pascual and Allan Pimentel, against their employer Lopez Realty Incorporated (petitioner) and its majority stockholder, Asuncion Lopez Gonzales, for alleged non-payment of their gratuity pay and other benefits. 2 The case was docketed as NLRC-NCR Case No. 2-2176-82.

Lopez Realty, Inc., is a corporation engaged in real estate business, while petitioner Asuncion Lopez Gonzales is one of its majority shareholders. Her interest in the company vis-a-vis the other shareholders is as follows:

1 Asuncion Lopez Gonzales 7831 shares

2 Teresita Lopez Marquez 7830 shares

3 Arturo F. Lopez 7830 shares

4 Rosendo de Leon 4 shares

5 Benjamin Bernardino 1 share

6 Leo Rivera 1 share

Except for Arturo F. Lopez, the rest of the shareholders also sit as members of the Board of Directors.

As found by the Labor arbiter. 3 sometime in 1978, Arturo Lopez submitted a proposal relative to the distribution of certain assets of petitioner corporation among its three (3) main shareholders. The proposal had three (3) aspects, viz: (1) the sale of assets of the company to pay for its obligations; (2) the transfer of certain assets of the company to its three (3) main shareholders, while some other assets shall remain with the company; and (3) the reduction of employees with provision for their gratuity pay. The proposal was deliberated upon and approved in a special meeting of the board of directors held on April 17, 1978.

It appears that petitioner corporation approved two (2) resolutions providing for the gratuity pay of its employees, viz: (a) Resolution No. 6, Series of 1980, passed by the stockholders in a special meeting held on September 8, 1980, resolving to set aside, twice a year, a certain sum of money for the gratuity pay of its retiring employees and to create a Gratuity Fund for the said contingency; and (b) Resolution No. 10, Series of 1980, setting aside the amount of P157,750.00 as Gratuity Fund covering the period from 1950 up to 1980.

Meanwhile, on July 28, 1981, board member and majority stockholder Teresita Lopez Marquez died.

On August 17, 1981, except for Asuncion Lopez Gonzales who was then abroad, the remaining members of the Board of Directors, namely: Rosendo de Leon, Benjamin Bernardino, and Leo Rivera, convened a special meeting and passed a resolution which reads:

Resolved, as it is hereby resolved that the gratuity (pay) of the employees be given as follows:

(a) Those who will be laid off be given the full amount of gratuity;

(b) Those who will be retained will receive 25% of their gratuity (pay) due on September 1, 1981, and another 25% on January 1, 1982, and 50% to be retained by the office in the meantime. (emphasis supplied)

Private respondents were the retained employees of petitioner corporation. In a letter, dated August 31, 1981, private respondents requested for the full payment of their gratuity pay. Their request was granted in a special meeting held on September 1, 1981. The relevant, portion of the minutes of the said board meeting reads:

In view of the request of the employees contained in the letter dated August 31, 1981, it was also decided that, all those remaining employees will receive another 25% (of their gratuity) on or before October 15, 1981 and another 25% on or before the end of November, 1981 of their respective gratuity.

At that, time, however, petitioner Asuncion Lopez Gonzales was still abroad. Allegedly, while she was still out of the country, she sent a cablegram to the corporation, objecting to certain matters taken up by the board in her absence, such as the sale of some of the assets of the corporation. Upon her return, she flied a derivative suit with the Securities and Exchange Commission (SEC) against majority shareholder Arturo F. Lopez.

Notwithstanding the "corporate squabble" between petitioner Asuncion Lopez Gonzales and Arturo Lopez, the first two (2) installments of the gratuity pay of private respondents Florentina Fontecha, Mila Refuerzo, Marcial Mamaril and Perfecto Bautista were paid by petitioner corporation.

Also, petitioner corporation had prepared the cash vouchers and checks for the third installments of gratuity pay of said private respondents (Florentina Fontecha, Mila Refuerzo, Marcial Mamaril and Perfecto Bautista). For some reason, said vouchers were cancelled by petitioner Asuncion Lopez Gonzales.

Likewise, the first, second and third installments of gratuity pay of the rest of private respondents, particularly, Edward Mamaril, Marissa Pascual and Allan Pimentel, were prepared but cancelled by petitioner Asuncion Lopez Gonzales. Despite private respondents' repeated demands for their gratuity pay, corporation refused to pay the same. 4

On July 23, 1984, Labor Arbiter Raymundo R. Valenzuela rendered judgment in favor of private respondents. 5

Petitioners appealed the adverse ruling of the Labor arbiter to public respondent National Labor Relations Commission. The appeal focused on the alleged non-ratification and non-approval of the assailed August 17, 1981 and September 1, 1981 Board Resolutions during the Annual Stockholders' Meeting held on March 1, 1982. Petitioners further insisted that the payment of the gratuity to some of the private respondents was a mere "mistake" on the part of petitioner corporation since, pursuant to Resolution No. 6, dated September 8, 1980, and Resolution No. 10, dated October 6, 1980, said gratuity pay should be given only upon the employees' retirement.

On November 20, 1985, public respondent, through its Second Division, dismissed the appeal for lack of merit, the pertinent portion of which states: 6

We cannot agree with the contention of respondents (petitioners') that the Labor Arbiter a quo committed abuse of discretion in his decision.

Respondents' (petitioners') contention that, the two (2) resolutions dated 17 August 1981 and 1 September 1981 . . . which were not approved in the annual stockholders meeting had no force and effect, deserves scant consideration. The records show that the stockholders did not revoke nor nullify these resolutions granting gratuities to complainants.

On record, it appears that the said resolutions arose from the legitimate creation of the Board of Directors who steered the corporate affairs of the corporation. . . .

Respondents' (petitioners') allegation that the three (3) complainants, Mila E. Refuerzo, Marissa S. Pascual and Edward Mamaril, who had resigned after filing the complaint on February 8, 1982, were precluded to (sic) receive gratuity because the said resolutions referred to only retiring employee could not be given credence. A reading of Resolutions dated 17 August 1981 and 1 September 1981 disclosed that there were periods mentioned for the payment of complainants' gratuities. This disproves respondents' argument allowing gratuities upon retirement of employees. Additionally, the proposed distribution of assets (Exh. C-1) filed by Mr. Arturo F. Lopez also made mention of gratuity pay, " . . . (wherein) an employee who desires to resign from the LRI will be given the gratuity pay he or she earned." (Emphasis supplied) Let us be reminded, too, that the complainants' resignation was not voluntary but it was pressurized (sic) due to "power struggle" which was evident between Arturo Lopez and Asuncion Gonzales.

The respondents' (petitioners') contention of a mistake to have been committed in granting the first two (2) installments of gratuities to complainants Perfecto Bautista, Florentina Fontecha, Marcial Mamaril and Mila Refuerzo, (has) no legal leg to stand on. The record is bereft of any evidence that the Board of Directors had passed a resolution nor is there any minutes of whatever nature proving mistakes in the award of damages (sic).

With regard to the award of service incentive leave and others, the Commission finds no cogent reason to disturb the appealed decision.

We affirm.

WHEREFORE, let the appealed decision be, as it is hereby, AFFIRMED and let the instant appeal (be) dismissed for lack of merit.

SO ORDERED.

Petitioners reconsidered. 7 In their motion for reconsideration, petitioners assailed the validity of the board resolutions passed on August 17, 1981 and September 1, 1981, respectively, and claimed, for the first time, that petitioner Asuncion Lopez Gonzales was not notified of the special board meetings held on said dates. The motion for reconsideration was denied by the Second Division on July 24, 1986.

On September 4, 1986, petitioners filed another motion for reconsideration. Again, the motion was denied by public respondent in a Minute Resolution dated November 19, 1986.

8

Hence, the petition. As prayed for, we issued a Temporary Restraining Order, 9 enjoining public respondent from enforcing or executing the Resolution, dated November 20, 1986 (sic), in NLRC-NCR-2-2176-82. 10

The sole issue is whether or not public respondent acted with grave abuse of discretion in holding that private respondents are entitled to receive their gratuity pay under the assailed board resolutions dated August 17, 1951 and September 1, 1981.

Petitioners contend that the board resolutions passed on August 17, 1981 and September 1, 1981, granting gratuity pay to their retained employees, are ultra vires on the ground that petitioner Asuncion Lopez Gonzales was not duly notified of the said special meetings. They aver, further, that said board resolutions were not ratified by the stockholders of the corporation pursuant to Section 28 1/2 of the Corporation Law (Section 40 of the Corporation Code). They also insist that the gratuity pay must be given only to the retiring employees, to the exclusion of the retained employees or those who voluntarily resigned from their posts.

At the outset, we note that petitioners allegation on lack of notice to petitioner Asuncion Lopez Gonzales was raised for the first time in the in their motion for reconsideration filed before public respondent National Labor Relations Commission, or after said public respondent had affirmed the decision of the labor arbiter. To stress, in their appeal before the NLRC, petitioners never raised the issue of lack of notice to Asuncion Lopez Gonzales. The appeal dealt with (a) the failure of the stockholders to ratify the assailed resolutions and (b) the alleged "mistake" committed by petitioner corporation in giving the gratuity pay to some of its employees who are yet to retire from employment.

In their comment, 11 private respondents maintain that the new ground of lack of notice was not raised before the labor arbiter, hence, petitioners are barred from raising the same on appeal. Private respondents claim, further, that such failure on the part of petitioners, had deprived them the opportunity to present evidence that, in a subsequent special board meeting held on September 29, 1981, the subject resolution dated September 1, 1981, was unanimously approved by the board of directors of petitioner corporation, including petitioner Asuncion Lopez Gonzales. 12

Indeed, it would be offensive to the basic rules of fair play and justice to allow petitioners to raise questions which have not been passed upon by the labor arbiter and the public respondent NLRC. It is well settled that questions not raised in the lower courts cannot, be raised for the first time on appeal. 13 Hence, petitioners may not invoke any other ground, other than those it specified at the labor arbiter level, to impugn the validity of the subject resolutions.

We now come to petitioners' argument that the resolutions passed by the board of directors during the special meetings on August 1, 1981, and September 1, 1981, were ultra vires for lack of notice.

The general rule is that a corporation, through its board of directors, should act in the manner and within the formalities, if any, prescribed by its charter or by the general law. 14 Thus, directors must act as a body in a meeting called pursuant to the law or the corporation's by-laws, otherwise, any action taken therein may be questioned by any

objecting director or shareholder. 15

Be that as it may, jurisprudence 16 tells us that an action of the board of directors during a meeting, which was illegal for lack of notice, may be ratified either expressly, by the action of the directors in subsequent legal meeting, or impliedly, by the corporation's subsequent course of conduct. Thus, in one case, 17 it was held:

. . . In 2 Fletcher, Cyclopedia of the Law of Private Corporations (Perm. Ed.) sec. 429, at page 290, it is stated:

Thus, acts of directors at a meeting which was illegal because of want of notice may be ratified by the directors at a subsequent legal meeting, or by the corporations course of conduct. . .

Fletcher, supra, further states in sec. 762, at page 1073-1074:

Ratification by directors may be by an express resolution or vote to that effect, or it may be implied from adoption of the act, acceptance or acquiescence. Ratification may be effected by a resolution or vote of the board of directors expressly ratifying previous acts either of corporate officers or agents; but it is not necessary, ordinarily, to show a meeting and formal action by the board of directors in order to establish a ratification.

In American Casualty Co., v. Dakota Tractor and Equipment Co., 234 F. Supp. 606, 611 (D.N.D. 1964), the court stated:

Moreover, the unauthorized acts of an officer of a corporation may be ratified by the corporation by conduct implying approval and adoption of the act in question. Such ratification may be express or may be inferred from silence and inaction.

In the case at bench, it was established that petitioner corporation did not issue any resolution revoking nor nullifying the board resolutions granting gratuity pay to private respondents. Instead, they paid the gratuity pay, particularly, the first two (2) installments thereof, of private respondents Florentina Fontecha, Mila Refuerzo, Marcial Mamaril and Perfecto Bautista.

Despite the alleged lack of notice to petitioner Asuncion Lopez Gonzales at that time the assailed resolutions were passed, we can glean from the records that she was aware of the corporation's obligation under the said resolutions. More importantly, she acquiesced thereto. As pointed out by private respondents, petitioner Asuncion Lopez Gonzales affixed her signature on Cash Voucher Nos. 81-10-510 and 81-10-506, both dated October 15, 1981, evidencing the 2nd installment of the gratuity pay of private respondents Mila Refuerzo and Florentina Fontecha. 18

We hold, therefore, that the conduct of petitioners after the passage of resolutions dated August, 17, 1951 and September 1, 1981, had estopped them from assailing the validity of said board resolutions.

Assuming, arguendo, that there was no notice given to Asuncion Lopez Gonzalez during the special meetings held on August 17, 1981 and September 1, 1981, it is erroneous to state that the resolutions passed by the board during the said meetings were ultra vires. In legal parlance, "ultra vires" act refers to one which is not within the corporate powers conferred by the Corporation Code or articles of incorporation or not necessary or incidental in the exercise of the powers so conferred. 19

The assailed resolutions before us cover a subject which concerns the benefit and welfare of the company's employees. To stress, providing gratuity pay for its employees is one of the express powers of the corporation under the Corporation Code, hence, petitioners cannot invoke the doctrine of ultra vires to avoid any liability arising from the issuance the subject resolutions. 20

We reject petitioners' allegation that private respondents, namely, Mila Refuerzo, Marissa Pascual and Edward Mamaril who resigned from petitioner corporation after the filing of the

case, are precluded from receiving their gratuity pay. Pursuant to board resolutions dated August 17, 1981 and September 1, 1981, respectively, petitioner corporation obliged itself to give the gratuity pay of its retained employees in four (4) installments: on September 1, 1981; October 15, 1981; November, 1981; and January 1, 1982. Hence, at the time the aforenamed private respondents tendered their resignation, the aforementioned private respondents were already entitled to receive their gratuity pay.

Petitioners try to convince us that the subject resolutions had no force and effect in view of the non-approval thereof during the Annual Stockholders' Meeting held on March 1, 1982. To strengthen their position, petitioners cite section 28 1/2 of the Corporation Law (Section 40 of the Corporation Code). We are not persuaded.

The cited provision is not applicable to the case at bench as it refers to the sale, lease, exchange or disposition of all or substantially all of the corporation's assets, including its goodwill. In such a case, the action taken by the board of directors requires the authorization of the stockholders on record.

It will be observed that, except far Arturo Lopez, the stockholders of petitioner corporation also sit as members of the board of directors. Under the circumstances in field, it will be illogical and superfluous to require the stockholders' approval of the subject resolutions. Thus, even without the stockholders' approval of the subject resolutions, petitioners are still liable to pay private respondents' gratuity pay.

IN VIEW WHEREOF, the instant petition is DISMISSED for lack of merit and the temporary restraining order we issued on February 9, 1987 is LIFTED. Accordingly, the assailed resolution of the National Labor Relations Commission in NLRC-NCR-2176-82 is AFFIRMED. This decision is immediately executory. Costs against petitioners.

ALFREDO MONTELIBANO and ALEJANDRO MONTELIBANO, petitioners, -versus-

BACOLOD MURCIA MILLING CO., INC., and HON. INTERMEDIATE APPELLATE COURT, respondents.

Ledesma, Saludo and Associates for petitioners.

Barredo, Reyno and Tomacruz for respondents.

R E S O L U T I O N

 

AQUINO, J.:

This case is about the timeliness of a motion for execution pending appeal. The trial court's decision, which awarded certain amounts to the Montelibanos as increase in their shares of the sugar and molasses for the crop-years 1956-57 to 1964-65, was served on the Montelibanos and Bacolod-Murcia Milling Co., Inc. on December 19 and 21, 1983, respectively.

Bacolod-Murcia Milling filed its notice of appeal on January 4, 1984 or on the fourteenth day. On January 6, 1984, or 18 days after service of the decision, the Montelibanos filed a motion for execution pending appeal.

The trial court granted the motion. The Appellate Court reversed the trial court and enjoined the execution pending appeal. The Montelibanos appealed to this Court. The appeal was filed late.

The first extension of 30 days was granted with the warning that no further extension would be granted. For that reason, the second and third extension were denied in this Court's resolution of March 13, 1985. The Montelibanos filed a motion to admit their petition for review.

We hold that the Appellate Court acted correctly in holding that the motion for execution pending appeal was filed late. It should have been filed before the perfection of the appeal or within the fifteen-day period.

Section 23 of the Interim Rules for the Implementation of the Judiciary Revamp Law, Batas Pambansa Blg. 129, provides that "in cases where appeal is taken, the perfection of the appeal shall be upon the expiration of the last day to appeal by any party."

That means that the appeal of Bacolod-Murcia Milling was perfected, not on January 4, 1984, when it filed its notice of appeal but on January 5, 1984, the expiration of its last day to appeal which is later than the period to appeal of the Montelibanos. When the Montelibanos filed their motion, the appeal of Bacolod-Murcia was already-perfected. The motion could not be entertained anymore.

In their instant petition for review, the Montelibanos miss the point of the Appellate Court in denying the execution pending appeal. It should be underscored that the motion was denied because the trial court had no more jurisdiction to grant execution pending appeal since the appeal of Bacolod-Murcia Milling was already perfected when the Montelibanos filed their motion. The absence of good reasons to justify execution was not the cause of the denial.

Consequently, the instant petition is dismissed for having been filed out of time and for lack of merit.

SO ORDERED.

ALFREDO MONTELIBANO, ET AL., plaintiffs-appellants, vs.THE BACOLOD-MURCIA MILLING CO., defendants-appellants.

Parties plaintiffs and defendant appeal from a judgment of the Court of First Instance of Negros Occidental dismissing plaintiff's complaint for the recovery of P4,712,501.89, representing the value of sugar alleged to belong to them and existing in defendant's warehouse at the time of the liberation, and ordering plaintiff Alfredo Montelibano to pay defendant the sum of P35,163.06, plus legal interest thereon from April, 1945, until fully paid. Plaintiffs appeal from the judgment of dismissal, and defendant from the judgment in so far as it fixes at P35,163.06 as the amount defendant is entitled to recover from plaintiff Alfredo Montelibano.

Plaintiffs are sugar planters, members of the Bacolod Murcia Planters' Association, Inc., or assignees of sugar planters. The former have contracts with the defendant corporation, hereinafter known as the Central, for the delivery of their sugar cane to the sugar mill of the defendant for milling and processing into sugar. In accordance with the contracts, which the planters had signed with the defendant, the sugar processed from the sugar cane delivered by each planter was to be divided between the planter and the Central in the following proportion, namely, 60% for the planter and 40% for the Central. The Central was to furnish the planter, from time to time as the milling progressed, with information as to the share of sugar that the planter was entitled to receive, furnishing the planter with quedans or warehouses receipts therefor. After the milling, and for a period of 90 days, the Central was to keep the sugar in its warehouse free of charge; thereafter the planter was to pay five centavos per picul per month for storage, aside from such expenses of conservation and repacking as may be incurred in relation to the sugar upon presentation of his warehouse receipt (Exhibit KK).

At the time of the occupation of Negros Occidental by the Japanese forces on May 21, 1942, there were on deposit at the Central's warehouse 664,091.22 piculs of sugar, of which 128,452.24 belonged to the plaintiffs, 284,425.81 to the defendant Central, and the balance to planters not parties to the action (Exhibit C, C-1, C-2 and C-3. On February 10, 1943 (18th year of Showa February 10), the Japanese Military Administration, Visayan Branch, designated Fidel Henares, president of the Sugar Planters' Association, with the following authority:

. . . hereby authorized to sell and dispose of all sugar to the Mitsui Bussan Kaisha, the authorized purchaser of the Philippine Military Administration, and in addition granting the following powers:

To contract, deliver, to receive payments, to pay various accounts to the members of the Planters' Association; and to open accounts, to contract overdraft accounts with the Bank of Taiwan, and perform such other powers as may be necessary in the premises. (Exhibit RH, Annex A, Annex A-1, Exhibit 19).

Thereafter the Japanese Military Administration issued a regulation governing purchases of sugar by the Military Administration (Exhibit JJ) by virtue of which, upon purchase of sugar by the Military Administration, any claim of the Philippine National Bank or of any other enemy corporation thereto shall be automatically cancelled, and the sugar thus purchased deposited as new "Renegesis a/c" in the name of the vendee, the Bank of Taiwan, Ltd.

Planters or owners of the sugar were authorized , if they chose, to borrow funds from the Bank of Taiwan, Ltd. According to regulations issued by the Executive Commission under the Military Administration, the checks in payment of the sugar which, however, were to be deposited with said bank and set-off against the mortgages on old crop loans of the planters as Farmer Rehabilitation Funds. New crop loans could be granted within the limits of the proceeds of their sugar sold (Exhibit 23).

As early as February 24, 1943, the Mitsui Bussan Kaisha, Ltd., notified the president of the Planters' Association that it was buying all the sugar of the planters, whether they could be located or not (Exhibit II). Warehouse orders for release of sugar he had sold were issued at the request of the president of the Planter's Association on the following dates and for the following amounts:

February 17, 1943   22,724.09 piculs (Exhibit 62)

March 6, 1943 275,580.35 piculs (Exhibit 22)

March 27, 1943         575.84 piculs (Exhibit 63)

April 20, 1943     4,105.92 piculs (Exhibit 54)

May 17, 1943   22,698.31 piculs (Exhibit 65 C)

May 18, 1943     6,240.92 piculs (Exhibit 6 B)

As for the share of the Central in the sugar, Exhibit E shows that as early as April 21, 1943, as much as a total of 272,601 piculs had been sold to the Mitsui Bussan Kaisha, and by the end of December, 1943, a full total of 272,801.07 piculs. There was, however, still a balance of 12,153.05 piculs as of December, 1943 (Exhibit 1, p. 3).

From the time of Mitsui Bussan Kaisha made purchases it began withdrawing sugar from the Central in sacks. Withdrawals were made during the years 1943 and 1944 (Exhibit 72, 73, 74), but without indication as to whose sugar each withdrawal was being made. As the sugar belonging to the planters and that of the Central were mixed up, and there being nothing to show what the vendee was withdrawing, it could not be determined whose sugar had been actually sold or withdrawn. It is a fact admitted by both parties, however, that at the time of the liberation, notwithstanding the sales and withdrawals, there were around 150,000 piculs of sugar was impounded by the U. S. Enemy Property Custodian, but upon representation of the parties the same was finally released. And upon resolution of the majority of the planters, it was agreed that 60 per cent thereof among them according to the sugar they had on deposit in the Central prior to the military occupation, irrespective of whether they had been paid their sugar or not during the occupation, and the balance of 40 per cent to be assigned to the Central to be disposed by it, but the proceed were to be kept by it in trust subject to the results of this litigation. The share of the defendant in this distribution was 93,663.60 piculs (Exhibit H) and that of the plaintiffs 35,405.35 piculs.

After liberation (around March to June, 1945) and before the proration above set forth, plaintiff Alfredo Montelibano withdrew from the warehouse some 12,789 piculs. Of these around 5,115.60 piculs were the share of the defendant Central. Montelibano received a bill of P45,273.06 for the value of this sugar, and he proposed to pay the said amount in installments. A first payment of P10,000 was made. The amount of the bill was based on a basic price of P8.85 per picul. The balance of the price has not yet been paid by plaintiff Alfredo Montelibano.

The present action of plaintiffs is predicated on the claim that the defendant has already been fully paid for its share of the sugar in the warehouse, as it had sold during the period from April, 1943, to March, 1945, some 284,601 piculs, in excess of around 175.19 piculs of its own share, and had received the total price of this amount (P2,410,790.03), so that the sugar remaining at the time of the liberation pertained and belonged exclusively to plaintiffs and the other planters. It is contended that of the 129,452.24 piculs that plaintiffs owned at the time of the military occupation, only 35,405.35 piculs had actually been taken advantage of by them (that which they received by the proration), so that the remaining 94,046.89 piculs should be charged against the balance of the sugar and which was adjudicated to the Central as its share in the proration, the value of which was P4,712,501.89. Moral justification for this claim of the plaintiffs is sought for in the fact that the defendant Central had actually sold its share and received in full the price thereof, which is not the case with the plaintiffs, who have not been paid for, or credited with, the value of their own. The defense is that all the sugar plaintiffs had in the Central's warehouse at the time of the military occupation was ordered by the Japanese Military Administration to be sold by the through the president, which it did itself appoint, in the same manner that the defendant was obliged to sell its own sugar to the buyer of the Military Administration, and that all the sugar that plaintiffs had in the warehouse had, therefore, been sold and delivered through said president of the plaintiffs, so that the latter had no more sugar in the warehouse at the time of the liberation. The defendant presented a counterclaim against plaintiff Alfredo Montelibano for the value of the 5,115.60 piculs of the defendant which he appropriated and which they claim to be valued at P248,337. The right of the defendant to said sugar is denied, and instead plaintiff Montelibano demands the return of the P10,000 which he claims was erroneously paid to defendant.

The trial court found that the sugar remaining in the central's warehouse at the time of the liberation was already purchased by the Military Administration, but it could not withdraw the

same by reason of the advent of the liberation; that as the sugar of the parties were all mixed up, none of the owners could claim exclusive ownership of those remaining in the warehouse, and their rights thereto should be governed by the provision of Article 381 of the Spanish Civil Code. This, the court said, the parties had already accepted and carried out by the proration. The court also held that the taking of the sugar belonging to both plaintiffs and defendant was an act of confiscation by the Japanese Military Government, which was legal and valid in accordance with the ruling in the case of Hodges vs. Lacson, 46 Official Gazette (No. 3) 1148, from which no recourse may be had by the parties against the Japanese Government or against the defendant. The plaintiffs' action was, therefore, dismissed and the defendant absolved therefrom.

As to the counterclaim, the court found the same to be justified, and it sentenced Montelibano to pay for its value, which the court, however, fixed at P8.80 per picul only. It, therefore, rendered judgment against Montelibano, ordering him to pay defendant the balance of its value, i.e., P35,163.06.

Plaintiffs have appealed from the judgment dismissing their action, while defendant has also appealed from the amount adjudge on its counterclaim, asserting that the price of the sugar taken by Montelibano should have been fixed at P256,291.56 at the rate of P50.10 per picul.

Plaintiffs-appellants rely on the following legal propositions: that the purchase of plaintiffs' sugar during the Japanese Military Occupation was neither an act of confiscation nor of requisition, but a voluntary sale, but as there was no consent of the plaintiffs thereto or consideration paid for the sugar, none of plaintiffs' sugar should be considered as sold; that, on the other hand, defendant's sale of its sugar was validly made and it had received in full the value thereof, hence the sugar remaining in the Central's warehouse at the time of the liberation should belong to plaintiffs, to the exclusion of the Central.

In our opinion, the determination of the nature or validity of the act of the Japanese Military Administration in purchasing plaintiffs' sugar from the president of the planters, whom it appointed without the planters or owners consent, is absolutely immaterial; whether the act of purchase was an act of confiscation of enemy property by the military occupant, or one of requisition, or one of voluntary sale, is beside the fundamental issue, which we find to be: Who are the legal owners of the sugar existing in the Central's warehouse at the time of the liberation? Irrespective of the legality or illegality of the purchase of plaintiffs' sugar (by the Japanese Military Administration, for which defendant may not certainly be made responsible, the fact remains that in consequence thereof of warehouse orders for the release of plaintiffs' sugar were issued and sugar actually taken from the warehouse. Also by the sale of defendants' sugar, release were authorized to the purchaser and withdrawals made. But evidently the delivery of all the sugar sold by both was not completed, as some 150,000 piculs remained thereafter. As to this sugar (remaining), we hold that title thereto remained in the original owners, because ownership of personal property sold is not transferred until actual delivery — non nudis pactis, sed traditione dominia rerum transferuntur. (Fidelity and Deposit Co. vs. Wilson, 8 Phil., 51; Crusado vs. Bustos, 34 Phil., 17.)

It also follows that as the sugar of the plaintiffs and of the other planters and of the Central were stored together in one single mass, without separation of identification, and as it appears that the Mitsui Bussan Kaisha mad withdrawals of sugar from the Central's warehouse without express statement as to whose sugar was being withdrawn, whether the planters' or the Central's, it is absolutely impossible, physically or legally, to determine whose sugar it was that remained after the withdrawals. There is no legal basis for plaintiffs' proposition that as the taking of their sugar was without their consent, and that of the defendant's with its consent, all that remained is theirs. The only legal solution is, as the mass of sugar in the warehouse was owned in common, and as it is not possible to determine whose sugar was withdrawn and whose was not, the mass remaining must pertain to the original owners in the proportion of the original amounts owned by each of them. This is the solution expressly indicated by the law (article 381, Spanish Civil Code), and the one most consistent with justice and equity.

ART. 381. If, by the will of their owners, two things of identical or dissimilar nature are mixed, or if the mixture occurs accidentally, and in the latter case the things can not be separated without injury each owner shall acquire a right in the mixture proportionate to the part belonging to him, according to the value of the things mixed or commingled. (Spanish Civil Code)

The 778 cavans and 38 kilos of palay belonging to the plaintiff Urbano Santos, having been mixed with 1,026 cavans and 9 kilos of palay belonging to the defendant Pablo Tiongson in Jose C. Bernabe's warehouse; the sheriff having found only 924 cavans and 31 1/2 kilos of palay in said warehouse at the time of the attachment thereof; and there being no means of separating from 924 cavans and 31 1/2 kilos of palay belonging to Urbano Santos and

those belonging to Pablo Tiongson, the following rule prescribed in article 381 of the Civil Code for cases of this nature, is applicable.

ART. 381. If, by the will of their owners, two things of identical or dissimilar nature are mixed or if the mixture occurs accidentally, if in the latter case the things can not be separated without injury, each owner shall acquire a right in the mixture proportionate to the part belonging to him according to the value of the things mixed or commingled.

The number of kilos in a cavan not having been determined, we will take the proportion only of the 924 cavans of palay which were attached and sold, thereby giving Urbano Santos, who deposited 778 cavans, 398.49 thereof, and Pablo Tiongson, who deposited 1,026 cavans, 525.51 or the value thereof at the rate of P3 per cavan. (Santos vs. Bernabe, 54 Phil., 19, 22)

Lastly, article 393 of the Civil Code, referring to common ownership, provides that the share of the participants in the benefits, as well as in the charges, shall be proportionate to their respective interests.

This being the rule, it is obvious that whenever an undivided property gains an increase in its area, all the co-owners shall be entitled to participate in the benefits to be proportionate to their shares; if it suffers diminution they shall have to share, too, the charges in accordance with their interest. (Tarnate vs. Tarnate, 46 Off. Gaz. (No. 9) 4397,4403-4404)

If goods of the same kind owned by various persons are so mixed with the mutual consent of the owners that the portions or shares of the various owners in the mixture are indistinguishable, the owners become tenants in common of the mixture, each having an interest in common in proportion to his respective shares. This is the rule of the civil law. The doctrine finds its most frequent application where several owners deposit grain in a warehouse although it of course exists wherever the goods of two or more parties are indistinguishably mingled by common consent, as where quantities of oil belonging to different persons are stored in a tank. In such cases, in the event of partial loss, there will be prorated distribution of the loss. Where such a confusion arises it seldom causes inconvenience, embarrassment, or dispute, for the separation of the intermingled goods into the aliquot shares of the owners is merely a matter of measuring, weighing, counting, or selecting, and in all such cases it is certain that he is entitled to receive back a like quantity. Since they are tenants in common, however, the co-owners are subject to stand their pro rata share of any loss which may accrue to the general property from diminution, decay, or other causes. (11 Am. Jur. 532-533.)

There can be no doubt that, where the volume of grain, stored in an elevator, or of oil stored in a tank, is made up of contributions from different owners, and becomes "common stock." its partial destruction by fire, resulting from lightning or other fortuitous cause must necessitate a pro rata distribution of the loss. ... (Jennings-Heywood Oil Syndicate vs. Houssiere-Latrelle Oil Co., et al., Ann. Cas. 1913 E. 679, 690.)

With respect to defendant's counterclaim, we agree with the trial court that the evidence submitted shows that P8.85 is the fair price of the sugar taken by plaintiff Alfredo Montelibano. Defendant's own original bill fixed this as a price for said sugar (Exhibit 49), and sales made to third persons at the time the sugar was withdrawn were at prices fluctuating around this sum. We find no reason, therefore, for disturbing the judgment in relation thereto.

For the foregoing considerations, the judgment appealed from is hereby affirmed, both in so far as it dismisses the complaint and in so far as it awards the sum of P35,163.06 on defendant's counterclaim against plaintiff Alfredo Montelibano, with costs against the plaintiffs-appellants.