Republic of the Philippines

Supreme Court
Manila

THIRD DIVISION


MATLING INDUSTRIAL
AND COMMERCIAL
CORPORATION,
RICHARD K. SPENCER,
CATHERINE SPENCER,
AND ALEX MANCILLA,
Petitioners,


-versus -


RICARDO R. COROS,
Respondent.

G.R. No. 157802

Present:

CARPIO MORALES, Chairperson,
BRION,
BERSAMIN,
VILLARAMA, JR., and
SERENO, JJ.


Promulgated:

October 13, 2010
x-----------------------------------------------------------------------------------------x

D E C I S I O N


BERSAMIN, J .:

This case reprises the jurisdictional conundrum of whether a complaint for
illegal dismissal is cognizable by the Labor Arbiter (LA) or by the Regional Trial
Court (RTC). The determination of whether the dismissed officer was a regular
employee or a corporate officer unravels the conundrum. In the case of the regular
employee, the LA has jurisdiction; otherwise, the RTC exercises the legal authority
to adjudicate.

In this appeal via petition for review on certiorari, the petitioners challenge
the decision dated September 13, 2002
[1]
and the resolution dated April 2,
2003,
[2]
both promulgated in C.A.-G.R. SP No. 65714 entitled Matling Industrial
and Commercial Corporation, et al. v. Ricardo R. Coros and National Labor
Relations Commission, whereby by the Court of Appeals (CA) sustained the ruling
of the National Labor Relations Commission (NLRC) to the effect that the LA had
jurisdiction because the respondent was not a corporate officer of petitioner
Matling Industrial and Commercial Corporation (Matling).

Antecedents


After his dismissal by Matling as its Vice President for Finance and
Administration, the respondent filed on August 10, 2000 a complaint for illegal
suspension and illegal dismissal against Matling and some of its corporate officers
(petitioners) in the NLRC, Sub-Regional Arbitration Branch XII, Iligan City.
[3]


The petitioners moved to dismiss the complaint,
[4]
raising the ground, among
others, that the complaint pertained to the jurisdiction of the Securities and
Exchange Commission (SEC) due to the controversy being intra-corporate
inasmuch as the respondent was a member of Matlings Board of Directors aside
from being its Vice-President for Finance and Administration prior to his
termination.

The respondent opposed the petitioners motion to dismiss,
[5]
insisting that
his status as a member of Matlings Board of Directors was doubtful, considering
that he had not been formally elected as such; that he did not own a single share of
stock in Matling, considering that he had been made to sign in blank an undated
indorsement of the certificate of stock he had been given in 1992; that Matling had
taken back and retained the certificate of stock in its custody; and that even
assuming that he had been a Director of Matling, he had been removed as the Vice
President for Finance and Administration, not as a Director, a fact that the notice of
his termination dated April 10, 2000 showed.

On October 16, 2000, the LA granted the petitioners motion to
dismiss,
[6]
ruling that the respondent was a corporate officer because he was
occupying the position of Vice President for Finance and Administration and at the
same time was a Member of the Board of Directors of Matling; and that,
consequently, his removal was a corporate act of Matling and the controversy
resulting from such removal was under the jurisdiction of the SEC, pursuant to
Section 5, paragraph (c) of Presidential Decree No. 902.

Ruling of the NLRC

The respondent appealed to the NLRC,
[7]
urging that:

I
THE HONORABLE LABOR ARBITER COMMITTED GRAVE
ABUSE OF DISCRETION GRANTING APPELLEES MOTION TO
DISMISS WITHOUT GIVING THE APPELLANT
ANOPPORTUNITY TO FILE HIS OPPOSITION THERETO
THEREBY VIOLATING THE BASIC PRINCIPLE OF DUE
PROCESS.

II
THE HONORABLE LABOR ARBITER COMMITTED AN ERROR
IN DISMISSING THE CASE FOR LACK OF JURISDICTION.

On March 13, 2001, the NLRC set aside the dismissal, concluding that the
respondents complaint for illegal dismissal was properly cognizable by the LA,
not by the SEC, because he was not a corporate officer by virtue of his position in
Matling, albeit high ranking and managerial, not being among the positions listed
in Matlings Constitution and By-Laws.
[8]
The NLRC disposed thuswise:

WHEREFORE, the Order appealed from is SET ASIDE. A new
one is entered declaring and holding that the case at bench does not
involve any intracorporate matter. Hence, jurisdiction to hear and act on
said case is vested with the Labor Arbiter, not the SEC, considering that
the position of Vice-President for Finance and Administration being held
by complainant-appellant is not listed as among respondent's corporate
officers.

Accordingly, let the records of this case be REMANDED to the
Arbitration Branch of origin in order that the Labor Arbiter below could
act on the case at bench, hear both parties, receive their respective
evidence and position papers fully observing the requirements of due
process, and resolve the same with reasonable dispatch.

SO ORDERED.


The petitioners sought reconsideration,
[9]
reiterating that the respondent,
being a member of the Board of Directors, was a corporate officer whose removal
was not within the LAs jurisdiction.

The petitioners later submitted to the NLRC in support of the motion for
reconsideration the certified machine copies of Matlings Amended Articles of
Incorporation and By Laws to prove that the President of Matling was thereby
granted full power to create new offices and appoint the officers thereto, and
the minutes of special meeting held on June 7, 1999 by Matlings Board of
Directors to prove that the respondent was, indeed, a Member of the Board of
Directors.
[10]


Nonetheless, on April 30, 2001, the NLRC denied the petitioners motion for
reconsideration.
[11]


Ruling of the CA

The petitioners elevated the issue to the CA by petition for certiorari,
docketed as C.A.-G.R. No. SP 65714, contending that the NLRC committed grave
abuse of discretion amounting to lack of jurisdiction in reversing the correct
decision of the LA.

In its assailed decision promulgated on September 13, 2002,
[12]
the CA
dismissed the petition for certiorari, explaining:

For a position to be considered as a corporate office, or, for that
matter, for one to be considered as a corporate officer, the position must,
if not listed in the by-laws, have been created by the corporation's board
of directors, and the occupant thereof appointed or elected by the same
board of directors or stockholders. This is the implication of the ruling
in Tabang v. National Labor Relations Commission, which reads:

The president, vice president, secretary and treasurer are
commonly regarded as the principal or executive officers of a
corporation, and modern corporation statutes usually designate
them as the officers of the corporation. However, other offices
are sometimes created by the charter or by-laws of a corporation,
or the board of directors may be empowered under the by-laws
of a corporation to create additional offices as may be necessary.

It has been held that an 'office' is created by the charter of the
corporation and the officer is elected by the directors or
stockholders. On the other hand, an 'employee' usually occupies
no office and generally is employed not by action of the
directors or stockholders but by the managing officer of the
corporation who also determines the compensation to be paid to
such employee.

This ruling was reiterated in the subsequent cases of Ongkingco v.
National Labor Relations Commission and De Rossi v. National Labor
Relations Commission.

The position of vice-president for administration and finance,
which Coros used to hold in the corporation, was not created by the
corporations board of directors but only by its president or executive
vice-president pursuant to the by-laws of the corporation. Moreover,
Coros appointment to said position was not made through any act of the
board of directors or stockholders of the corporation. Consequently, the
position to which Coros was appointed and later on removed from, is not
a corporate office despite its nomenclature, but an ordinary office in the
corporation.

Coros alleged illegal dismissal therefrom is, therefore, within the
jurisdiction of the labor arbiter.

WHEREFORE, the petition for certiorari is hereby DISMISSED.

SO ORDERED.
The CA denied the petitioners motion for reconsideration on April 2,
2003.
[13]


Issue

Thus, the petitioners are now before the Court for a review on certiorari,
positing that the respondent was a stockholder/member of the Matlings Board of
Directors as well as its Vice President for Finance and Administration; and that the
CA consequently erred in holding that the LA had jurisdiction.

The decisive issue is whether the respondent was a corporate officer of
Matling or not. The resolution of the issue determines whether the LA or the RTC
had jurisdiction over his complaint for illegal dismissal.

Ruling

The appeal fails.

I
The Law on Jurisdiction in Dismissal Cases

As a rule, the illegal dismissal of an officer or other employee of a private
employer is properly cognizable by the LA. This is pursuant to Article 217 (a) 2 of
the Labor Code, as amended, which provides as follows:

Article 217. Jurisdiction of the Labor Arbiters and the
Commission. - (a) Except as otherwise provided under this Code, the
Labor Arbiters shall have original and exclusive jurisdiction to hear
and decide, within thirty (30) calendar days after the submission of the
case by the parties for decision without extension, even in the absence of
stenographic notes, the following cases involving all workers, whether
agricultural or non-agricultural:

1. Unfair labor practice cases;

2. Termination disputes;

3. If accompanied with a claim for reinstatement, those cases that
workers may file involving wages, rates of pay, hours of work and other
terms and conditions of employment;

4. Claims for actual, moral, exemplary and other forms of
damages arising from the employer-employee relations;

5. Cases arising from any violation of Article 264 of this Code,
including questions involving the legality of strikes and lockouts; and

6. Except claims for Employees Compensation, Social Security,
Medicare and maternity benefits, all other claims arising from employer-
employee relations, including those of persons in domestic or household
service, involving an amount exceeding five thousand pesos (P5,000.00)
regardless of whether accompanied with a claim for reinstatement.

(b) The Commission shall have exclusive appellate jurisdiction
over all cases decided by Labor Arbiters.

(c) Cases arising from the interpretation or implementation of
collective bargaining agreements and those arising from the
interpretation or enforcement of company personnel policies shall be
disposed of by the Labor Arbiter by referring the same to the grievance
machinery and voluntary arbitration as may be provided in said
agreements. (As amended by Section 9, Republic Act No. 6715, March
21, 1989).


Where the complaint for illegal dismissal concerns a corporate officer,
however, the controversy falls under the jurisdiction of the Securities and
Exchange Commission (SEC), because the controversy arises out of intra-
corporate or partnership relations between and among stockholders, members, or
associates, or between any or all of them and the corporation, partnership, or
association of which they are stockholders, members, or associates, respectively;
and between such corporation, partnership, or association and the State insofar as
the controversy concerns their individual franchise or right to exist as such entity;
or because the controversy involves the election or appointment of a director,
trustee, officer, or manager of such corporation, partnership, or
association.
[14]
Such controversy, among others, is known as an intra-corporate
dispute.

Effective on August 8, 2000, upon the passage of Republic Act No.
8799,
[15]
otherwise known as The Securities Regulation Code,

the SECs
jurisdiction over all intra-corporate disputes was transferred to the RTC, pursuant
to Section 5.2 of RA No. 8799, to wit:

5.2. The Commissions jurisdiction over all cases enumerated under
Section 5 of Presidential Decree No. 902-A is hereby transferred to the
Courts of general jurisdiction or the appropriate Regional Trial
Court: Provided, that the Supreme Court in the exercise of its authority
may designate the Regional Trial Court branches that shall exercise
jurisdiction over these cases. The Commission shall retain jurisdiction
over pending cases involving intra-corporate disputes submitted for
final resolution which should be resolved within one (1) year from
the enactment of this Code.The Commission shall retain jurisdiction
over pending suspension of payments/rehabilitation cases filed as of 30
June 2000 until finally disposed.


Considering that the respondents complaint for illegal dismissal was
commenced on August 10, 2000, it might come under the coverage of Section 5.2
of RA No. 8799,supra, should it turn out that the respondent was a corporate, not a
regular, officer of Matling.

II
Was the Respondents Position of Vice President
for Administration and Finance a Corporate Office?

We must first resolve whether or not the respondents position as Vice
President for Finance and Administration was a corporate office. If it was, his
dismissal by the Board of Directors rendered the matter an intra-corporate dispute
cognizable by the RTC pursuant to RA No. 8799.

The petitioners contend that the position of Vice President for Finance and
Administration was a corporate office, having been created by Matlings President
pursuant to By-Law No. V, as amended,
[16]
to wit:

BY LAW NO. V

Officers

The President shall be the executive head of the corporation; shall
preside over the meetings of the stockholders and directors; shall
countersign all certificates, contracts and other instruments of the
corporation as authorized by the Board of Directors; shall have full
power to hire and discharge any or all employees of the
corporation; shall have full power to create new offices and to
appoint the officers thereto as he may deem proper and necessary in
the operations of the corporation and as the progress of the business
and welfare of the corporation may demand; shall make reports to the
directors and stockholders and perform all such other duties and
functions as are incident to his office or are properly required of him by
the Board of Directors. In case of the absence or disability of the
President, the Executive Vice President shall have the power to exercise
his functions.


The petitioners argue that the power to create corporate offices and to
appoint the individuals to assume the offices was delegated by Matlings Board of
Directors to its President through By-Law No. V, as amended; and that any office
the President created, like the position of the respondent, was as valid and effective
a creation as that made by the Board of Directors, making the office a corporate
office. In justification, they cite Tabang v. National Labor Relations
Commission,
[17]
which held that other offices are sometimes created by the charter
or by-laws of a corporation, or the board of directors may be empowered under the
by-laws of a corporation to create additional officers as may be necessary.

The respondent counters that Matlings By-Laws did not list his position as
Vice President for Finance and Administration as one of the corporate offices; that
Matlings By-Law No. III listed only four corporate officers, namely: President,
Executive Vice President, Secretary, and Treasurer;
[18]
that the corporate offices
contemplated in the phrase and such other officers as may be provided for in the
by-laws found in Section 25 of the Corporation Code should be clearly and
expressly stated in the By-Laws; that the fact that Matlings By-Law No. III dealt
with Directors & Officers while its By-Law No. V dealt with Officers proved that
there was a differentiation between the officers mentioned in the two provisions,
with those classified under By-Law No. V being ordinary or non-
corporate officers; and that the officer, to be considered as a corporate officer,
must be elected by the Board of Directors or the stockholders, for the President
could only appoint an employee to a position pursuant to By-Law No. V.

We agree with respondent.

Section 25 of the Corporation Code provides:

Section 25. Corporate officers, quorum.--Immediately after their
election, the directors of a corporation must formally organize by the
election of a president, who shall be a director, a treasurer who may or
may not be a director, a secretary who shall be a resident and citizen of
the Philippines, and such other officers as may be provided for in the
by-laws. Any two (2) or more positions may be held concurrently by the
same person, except that no one shall act as president and secretary or as
president and treasurer at the same time.
The directors or trustees and officers to be elected shall perform the
duties enjoined on them by law and the by-laws of the corporation.
Unless the articles of incorporation or the by-laws provide for a greater
majority, a majority of the number of directors or trustees as fixed in the
articles of incorporation shall constitute a quorum for the transaction of
corporate business, and every decision of at least a majority of the
directors or trustees present at a meeting at which there is a quorum shall
be valid as a corporate act, except for the election of officers which shall
require the vote of a majority of all the members of the board.

Directors or trustees cannot attend or vote by proxy at board
meetings.


Conformably with Section 25, a position must be expressly mentioned in the
By-Laws in order to be considered as a corporate office. Thus, the creation of an
office pursuant to or under a By-Law enabling provision is not enough to make a
position a corporate office. Guerrea v. Lezama,
[19]
the first ruling on the matter,
held that the only officers of a corporation were those given that character either by
the Corporation Code or by the By-Laws; the rest of the corporate officers could
be considered only as employees or subordinate officials. Thus, it was held
in Easycall Communications Phils., Inc. v. King:
[20]


An office is created by the charter of the corporation and the
officer is elected by the directors or stockholders. On the other hand, an
employee occupies no office and generally is employed not by the action
of the directors or stockholders but by the managing officer of the
corporation who also determines the compensation to be paid to such
employee.

In this case, respondent was appointed vice president for
nationwide expansion by Malonzo, petitioner's general manager, not by
the board of directors of petitioner. It was also Malonzo who determined
the compensation package of respondent. Thus, respondent was an
employee, not a corporate officer. The CA was therefore correct in
ruling that jurisdiction over the case was properly with the NLRC, not
the SEC (now the RTC).

This interpretation is the correct application of Section 25 of
the Corporation Code, which plainly states that the corporate officers are the
President, Secretary, Treasurerand such other officers as may be provided for in
the By-Laws. Accordingly, the corporate officers in the context of PD No. 902-A
are exclusively those who are given that character either by the Corporation
Code or by the corporations By-Laws.

A different interpretation can easily leave the way open for the Board of
Directors to circumvent the constitutionally guaranteed security of tenure of the
employee by the expedient inclusion in the By-Laws of an enabling clause on the
creation of just any corporate officer position.

It is relevant to state in this connection that the SEC, the primary agency
administering the Corporation Code, adopted a similar interpretation of Section 25
of theCorporation Code in its Opinion dated November 25, 1993,
[21]
to wit:

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

Moreover, the Board of Directors of Matling could not validly delegate the
power to create a corporate office to the President, in light of Section 25 of
the Corporation Code requiring the Board of Directors itself to elect the corporate
officers. Verily, the power to elect the corporate officers was a discretionary
power that the law exclusively vested in the Board of Directors, and could not be
delegated to subordinate officers or agents.
[22]
The office of Vice President for
Finance and Administration created by Matlings President pursuant to By Law No.
V was an ordinary, not a corporate, office.

To emphasize, the power to create new offices and the power to appoint the
officers to occupy them vested by By-Law No. V merely allowed Matlings
President to create non-corporate offices to be occupied by ordinary employees of
Matling. Such powers were incidental to the Presidents duties as the executive
head of Matling to assist him in the daily operations of the business.

The petitioners reliance on Tabang, supra, is misplaced. The statement
in Tabang, to the effect that offices not expressly mentioned in the By-Laws but
were created pursuant to a By-Law enabling provision were also considered
corporate offices, was plainly obiter dictum due to the position subject of the
controversy being mentioned in the By-Laws. Thus, the Court held therein that the
position was a corporate office, and that the determination of the rights and
liabilities arising from the ouster from the position was an intra-corporate
controversy within the SECs jurisdiction.

In Nacpil v. Intercontinental Broadcasting Corporation,
[23]
which may be
the more appropriate ruling, the position subject of the controversy was not
expressly mentioned in the By-Laws, but was created pursuant to a By-Law
enabling provision authorizing the Board of Directors to create other offices that
the Board of Directors might see fit to create. The Court held there that the
position was a corporate office, relying on the obiter dictum in Tabang.

Considering that the observations earlier made herein show that the
soundness of their dicta is not unassailable, Tabang and Nacpil should no longer
be controlling.

III
Did Respondents Status as Director and
Stockholder Automatically Convert his Dismissal
into an Intra-Corporate Dispute?

Yet, the petitioners insist that because the respondent was a
Director/stockholder of Matling, and relying on Paguio v. National Labor
Relations Commission
[24]
andOngkingko v. National Labor Relations
Commission,
[25]
the NLRC had no jurisdiction over his complaint, considering that
any case for illegal dismissal brought by a stockholder/officer against the
corporation was an intra-corporate matter that must fall under the jurisdiction of
the SEC conformably with the context of PD No. 902-A.

The petitioners insistence is bereft of basis.

To begin with, the reliance on Paguio and Ongkingko is misplaced. In both
rulings, the complainants were undeniably corporate officers due to their positions
being expressly mentioned in the By-Laws, aside from the fact that both of them
had been duly elected by the respective Boards of Directors. But the herein
respondents position of Vice President for Finance and Administration was not
expressly mentioned in the By-Laws; neither was the position of Vice President for
Finance and Administration created by Matlings Board of Directors. Lastly, the
President, not the Board of Directors, appointed him.


True it is that the Court pronounced in Tabang as follows:

Also, an intra-corporate controversy is one which arises between a
stockholder and the corporation. There is no distinction, qualification or
any exemption whatsoever. The provision is broad and covers all kinds
of controversies between stockholders and corporations.
[26]


However, the Tabang pronouncement is not controlling because it is too
sweeping and does not accord with reason, justice, and fair play. In order to
determine whether a dispute constitutes an intra-corporate controversy or not, the
Court considers two elements instead, namely: (a) the status or relationship of the
parties; and (b) the nature of the question that is the subject of their
controversy. This was our thrust in Viray v. Court of Appeals:
[27]


The establishment of any of the relationships mentioned above will
not necessarily always confer jurisdiction over the dispute on the SEC to
the exclusion of regular courts. The statement made in one case that the
rule admits of no exceptions or distinctions is not that absolute. The
better policy in determining which body has jurisdiction over a case
would be to consider not only the status or relationship of the parties but
also the nature of the question that is the subject of their controversy.

Not every conflict between a corporation and its stockholders
involves corporate matters that only the SEC can resolve in the exercise
of its adjudicatory or quasi-judicial powers. If, for example, a person
leases an apartment owned by a corporation of which he is a stockholder,
there should be no question that a complaint for his ejectment for non-
payment of rentals would still come under the jurisdiction of the regular
courts and not of the SEC. By the same token, if one person injures
another in a vehicular accident, the complaint for damages filed by the
victim will not come under the jurisdiction of the SEC simply because of
the happenstance that both parties are stockholders of the same
corporation. A contrary interpretation would dissipate the powers of the
regular courts and distort the meaning and intent of PD No. 902-A.


In another case, Mainland Construction Co., Inc. v. Movilla,
[28]
the Court
reiterated these determinants thuswise:
In order that the SEC (now the regular courts) can take cognizance
of a case, the controversy must pertain to any of the following
relationships:

a) between the corporation, partnership or association and the
public;

b) between the corporation, partnership or association and its
stockholders, partners, members or officers;

c) between the corporation, partnership or association and the
State as far as its franchise, permit or license to operate is
concerned; and

d) among the stockholders, partners or associates themselves.

The fact that the parties involved in the controversy are all
stockholders or that the parties involved are the stockholders and the
corporation does not necessarily place the dispute within the ambit of the
jurisdiction of SEC. The better policy to be followed in determining
jurisdiction over a case should be to consider concurrent factors such as
the status or relationship of the parties or the nature of the question that
is the subject of their controversy. In the absence of any one of these
factors, the SEC will not have jurisdiction. Furthermore, it does not
necessarily follow that every conflict between the corporation and its
stockholders would involve such corporate matters as only the SEC can
resolve in the exercise of its adjudicatory or quasi-judicial powers.
[29]



The criteria for distinguishing between corporate officers who may be
ousted from office at will, on one hand, and ordinary corporate employees who
may only be terminated for just cause, on the other hand, do not depend on the
nature of the services performed, but on the manner of creation of the office. In
the respondents case, he was supposedly at once an employee, a stockholder, and
a Director of Matling. The circumstances surrounding his appointment to office
must be fully considered to determine whether the dismissal constituted an intra-
corporate controversy or a labor termination dispute. We must also consider
whether his status as Director and stockholder had any relation at all to his
appointment and subsequent dismissal as Vice President for Finance and
Administration.

Obviously enough, the respondent was not appointed as Vice President for
Finance and Administration because of his being a stockholder or Director of
Matling. He had started working for Matling on September 8, 1966, and had been
employed continuously for 33 years until his termination on April 17, 2000, first as
a bookkeeper, and his climb in 1987 to his last position as Vice President for
Finance and Administration had been gradual but steady, as the following
sequence indicates:

1966 Bookkeeper
1968 Senior Accountant
1969 Chief Accountant
1972 Office Supervisor
1973 Assistant Treasurer
1978 Special Assistant for Finance
1980 Assistant Comptroller
1983 Finance and Administrative Manager
1985 Asst. Vice President for Finance and Administration
1987 to April 17, 2000 Vice President for Finance and
Administration


Even though he might have become a stockholder of Matling in 1992, his
promotion to the position of Vice President for Finance and Administration in
1987 was by virtue of the length of quality service he had rendered as an employee
of Matling. His subsequent acquisition of the status of Director/stockholder had no
relation to his promotion. Besides, his status of Director/stockholder was
unaffected by his dismissal from employment as Vice President for Finance and
Administration.

In Prudential Bank and Trust Company v. Reyes,
[30]
a case involving a lady
bank manager who had risen from the ranks but was dismissed, the Court held that
her complaint for illegal dismissal was correctly brought to the NLRC, because she
was deemed a regular employee of the bank. The Court observed thus:

It appears that private respondent was appointed Accounting Clerk
by the Bank on July 14, 1963. From that position she rose to become
supervisor. Then in 1982, she was appointed Assistant Vice-President
which she occupied until her illegal dismissal on July 19, 1991. The
banks contention that she merely holds an elective position and that
in effect she is not a regular employee is belied by the nature of her
work and her length of service with the Bank. As earlier stated, she
rose from the ranks and has been employed with the Bank since 1963
until the termination of her employment in 1991. As Assistant Vice
President of the Foreign Department of the Bank, she is tasked, among
others, to collect checks drawn against overseas banks payable in foreign
currency and to ensure the collection of foreign bills or checks purchased,
including the signing of transmittal letters covering the same. It has been
stated that the primary standard of determining regular employment is
the reasonable connection between the particular activity performed by
the employee in relation to the usual trade or business of the employer.
Additionally, an employee is regular because of the nature of work and
the length of service, not because of the mode or even the reason for
hiring them. As Assistant Vice-President of the Foreign Department of
the Bank she performs tasks integral to the operations of the bank and
her length of service with the bank totaling 28 years speaks volumes of
her status as a regular employee of the bank. In fine, as a regular
employee, she is entitled to security of tenure; that is, her services may
be terminated only for a just or authorized cause. This being in truth a
case of illegal dismissal, it is no wonder then that the Bank endeavored
to the very end to establish loss of trust and confidence and serious
misconduct on the part of private respondent but, as will be discussed
later, to no avail.

WHEREFORE, we deny the petition for review on certiorari, and affirm
the decision of the Court of Appeals.

Costs of suit to be paid by the petitioners.


Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 84197 July 28, 1989
PIONEER INSURANCE & SURETY CORPORATION, petitioner,
vs.
THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY EQUIPMENT, INC.,
(BORMAHECO), CONSTANCIO M. MAGLANA and JACOB S. LIM, respondents.
G.R. No. 84157 July 28, 1989
JACOB S. LIM, petitioner,
vs.
COURT OF APPEALS, PIONEER INSURANCE AND SURETY CORPORATION, BORDER
MACHINERY and HEAVY EQUIPMENT CO., INC,, FRANCISCO and MODESTO CERVANTES
and CONSTANCIO MAGLANA,respondents.
Eriberto D. Ignacio for Pioneer Insurance & Surety Corporation.
Sycip, Salazar, Hernandez & Gatmaitan for Jacob S. Lim.
Renato J. Robles for BORMAHECO, Inc. and Cervanteses.
Leonardo B. Lucena for Constancio Maglana.

GUTIERREZ, J R., J .:
The subject matter of these consolidated petitions is the decision of the Court of Appeals in CA-G.R.
CV No. 66195 which modified the decision of the then Court of First Instance of Manila in Civil Case
No. 66135. The plaintiffs complaint (petitioner in G.R. No. 84197) against all defendants
(respondents in G.R. No. 84197) was dismissed but in all other respects the trial court's decision
was affirmed.
The dispositive portion of the trial court's decision reads as follows:
WHEREFORE, judgment is rendered against defendant Jacob S. Lim requiring Lim
to pay plaintiff the amount of P311,056.02, with interest at the rate of 12% per annum
compounded monthly; plus 15% of the amount awarded to plaintiff as attorney's fees
from July 2,1966, until full payment is made; plus P70,000.00 moral and exemplary
damages.
It is found in the records that the cross party plaintiffs incurred additional
miscellaneous expenses aside from Pl51,000.00,,making a total of P184,878.74.
Defendant Jacob S. Lim is further required to pay cross party plaintiff, Bormaheco,
the Cervanteses one-half and Maglana the other half, the amount of Pl84,878.74 with
interest from the filing of the cross-complaints until the amount is fully paid; plus
moral and exemplary damages in the amount of P184,878.84 with interest from the
filing of the cross-complaints until the amount is fully paid; plus moral and exemplary
damages in the amount of P50,000.00 for each of the two Cervanteses.
Furthermore, he is required to pay P20,000.00 to Bormaheco and the Cervanteses,
and another P20,000.00 to Constancio B. Maglana as attorney's fees.
xxx xxx xxx
WHEREFORE, in view of all above, the complaint of plaintiff Pioneer against
defendants Bormaheco, the Cervanteses and Constancio B. Maglana, is dismissed.
Instead, plaintiff is required to indemnify the defendants Bormaheco and the
Cervanteses the amount of P20,000.00 as attorney's fees and the amount of
P4,379.21, per year from 1966 with legal rate of interest up to the time it is paid.
Furthermore, the plaintiff is required to pay Constancio B. Maglana the amount of
P20,000.00 as attorney's fees and costs.
No moral or exemplary damages is awarded against plaintiff for this action was filed
in good faith. The fact that the properties of the Bormaheco and the Cervanteses
were attached and that they were required to file a counterbond in order to dissolve
the attachment, is not an act of bad faith. When a man tries to protect his rights, he
should not be saddled with moral or exemplary damages. Furthermore, the rights
exercised were provided for in the Rules of Court, and it was the court that ordered it,
in the exercise of its discretion.
No damage is decided against Malayan Insurance Company, Inc., the third-party
defendant, for it only secured the attachment prayed for by the plaintiff Pioneer. If an
insurance company would be liable for damages in performing an act which is clearly
within its power and which is the reason for its being, then nobody would engage in
the insurance business. No further claim or counter-claim for or against anybody is
declared by this Court. (Rollo - G.R. No. 24197, pp. 15-16)
In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the airline business as owner-
operator of Southern Air Lines (SAL) a single proprietorship.
On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered into and
executed a sales contract (Exhibit A) for the sale and purchase of two (2) DC-3A Type aircrafts and
one (1) set of necessary spare parts for the total agreed price of US $109,000.00 to be paid in
installments. One DC-3 Aircraft with Registry No. PIC-718, arrived in Manila on June 7,1965 while
the other aircraft, arrived in Manila on July 18,1965.
On May 22, 1965, Pioneer Insurance and Surety Corporation (Pioneer, petitioner in G.R. No. 84197)
as surety executed and issued its Surety Bond No. 6639 (Exhibit C) in favor of JDA, in behalf of its
principal, Lim, for the balance price of the aircrafts and spare parts.
It appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco), Francisco and
Modesto Cervantes (Cervanteses) and Constancio Maglana (respondents in both petitions)
contributed some funds used in the purchase of the above aircrafts and spare parts. The funds were
supposed to be their contributions to a new corporation proposed by Lim to expand his airline
business. They executed two (2) separate indemnity agreements (Exhibits D-1 and D-2) in favor of
Pioneer, one signed by Maglana and the other jointly signed by Lim for SAL, Bormaheco and the
Cervanteses. The indemnity agreements stipulated that the indemnitors principally agree and bind
themselves jointly and severally to indemnify and hold and save harmless Pioneer from and against
any/all damages, losses, costs, damages, taxes, penalties, charges and expenses of whatever kind
and nature which Pioneer may incur in consequence of having become surety upon the bond/note
and to pay, reimburse and make good to Pioneer, its successors and assigns, all sums and amounts
of money which it or its representatives should or may pay or cause to be paid or become liable to
pay on them of whatever kind and nature.
On June 10, 1965, Lim doing business under the name and style of SAL executed in favor of
Pioneer as deed of chattel mortgage as security for the latter's suretyship in favor of the former. It
was stipulated therein that Lim transfer and convey to the surety the two aircrafts. The deed (Exhibit
D) was duly registered with the Office of the Register of Deeds of the City of Manila and with the
Civil Aeronautics Administration pursuant to the Chattel Mortgage Law and the Civil Aeronautics Law
(Republic Act No. 776), respectively.
Lim defaulted on his subsequent installment payments prompting JDA to request payments from the
surety. Pioneer paid a total sum of P298,626.12.
Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel mortgage before the
Sheriff of Davao City. The Cervanteses and Maglana, however, filed a third party claim alleging that
they are co-owners of the aircrafts,
On July 19, 1966, Pioneer filed an action for judicial foreclosure with an application for a writ of
preliminary attachment against Lim and respondents, the Cervanteses, Bormaheco and Maglana.
In their Answers, Maglana, Bormaheco and the Cervanteses filed cross-claims against Lim alleging
that they were not privies to the contracts signed by Lim and, by way of counterclaim, sought for
damages for being exposed to litigation and for recovery of the sums of money they advanced to Lim
for the purchase of the aircrafts in question.
After trial on the merits, a decision was rendered holding Lim liable to pay Pioneer but dismissed
Pioneer's complaint against all other defendants.
As stated earlier, the appellate court modified the trial court's decision in that the plaintiffs complaint
against all the defendants was dismissed. In all other respects the trial court's decision was affirmed.
We first resolve G.R. No. 84197.
Petitioner Pioneer Insurance and Surety Corporation avers that:
RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT
DISMISSED THE APPEAL OF PETITIONER ON THE SOLE GROUND THAT
PETITIONER HAD ALREADY COLLECTED THE PROCEEDS OF THE
REINSURANCE ON ITS BOND IN FAVOR OF THE JDA AND THAT IT CANNOT
REPRESENT A REINSURER TO RECOVER THE AMOUNT FROM HEREIN
PRIVATE RESPONDENTS AS DEFENDANTS IN THE TRIAL COURT. (Rollo - G. R.
No. 84197, p. 10)
The petitioner questions the following findings of the appellate court:
We find no merit in plaintiffs appeal. It is undisputed that plaintiff Pioneer had
reinsured its risk of liability under the surety bond in favor of JDA and subsequently
collected the proceeds of such reinsurance in the sum of P295,000.00. Defendants'
alleged obligation to Pioneer amounts to P295,000.00, hence, plaintiffs instant action
for the recovery of the amount of P298,666.28 from defendants will no longer prosper.
Plaintiff Pioneer is not the real party in interest to institute the instant action as it does
not stand to be benefited or injured by the judgment.
Plaintiff Pioneer's contention that it is representing the reinsurer to recover the
amount from defendants, hence, it instituted the action is utterly devoid of merit.
Plaintiff did not even present any evidence that it is the attorney-in-fact of the
reinsurance company, authorized to institute an action for and in behalf of the latter.
To qualify a person to be a real party in interest in whose name an action must be
prosecuted, he must appear to be the present real owner of the right sought to be
enforced (Moran, Vol. I, Comments on the Rules of Court, 1979 ed., p. 155). It has
been held that the real party in interest is the party who would be benefited or injured
by the judgment or the party entitled to the avails of the suit (Salonga v. Warner
Barnes & Co., Ltd., 88 Phil. 125, 131). By real party in interest is meant a present
substantial interest as distinguished from a mere expectancy or a future, contingent,
subordinate or consequential interest (Garcia v. David, 67 Phil. 27; Oglleaby v.
Springfield Marine Bank, 52 N.E. 2d 1600, 385 III, 414; Flowers v. Germans, 1 NW
2d 424; Weber v. City of Cheye, 97 P. 2d 667, 669, quoting 47 C.V. 35).
Based on the foregoing premises, plaintiff Pioneer cannot be considered as the real
party in interest as it has already been paid by the reinsurer the sum of P295,000.00
the bulk of defendants' alleged obligation to Pioneer.
In addition to the said proceeds of the reinsurance received by plaintiff Pioneer from
its reinsurer, the former was able to foreclose extra-judicially one of the subject
airplanes and its spare engine, realizing the total amount of P37,050.00 from the sale
of the mortgaged chattels. Adding the sum of P37,050.00, to the proceeds of the
reinsurance amounting to P295,000.00, it is patent that plaintiff has been overpaid in
the amount of P33,383.72 considering that the total amount it had paid to JDA totals
to only P298,666.28. To allow plaintiff Pioneer to recover from defendants the
amount in excess of P298,666.28 would be tantamount to unjust enrichment as it has
already been paid by the reinsurance company of the amount plaintiff has paid to
JDA as surety of defendant Lim vis-a-vis defendant Lim's liability to JDA. Well settled
is the rule that no person should unjustly enrich himself at the expense of another
(Article 22, New Civil Code). (Rollo-84197, pp. 24-25).
The petitioner contends that-(1) it is at a loss where respondent court based its finding that petitioner
was paid by its reinsurer in the aforesaid amount, as this matter has never been raised by any of the
parties herein both in their answers in the court below and in their respective briefs with respondent
court; (Rollo, p. 11) (2) even assuming hypothetically that it was paid by its reinsurer, still none of the
respondents had any interest in the matter since the reinsurance is strictly between the petitioner
and the re-insurer pursuant to section 91 of the Insurance Code; (3) pursuant to the indemnity
agreements, the petitioner is entitled to recover from respondents Bormaheco and Maglana; and (4)
the principle of unjust enrichment is not applicable considering that whatever amount he would
recover from the co-indemnitor will be paid to the reinsurer.
The records belie the petitioner's contention that the issue on the reinsurance money was never
raised by the parties.
A cursory reading of the trial court's lengthy decision shows that two of the issues threshed out were:
xxx xxx xxx
1. Has Pioneer a cause of action against defendants with respect to so much of its
obligations to JDA as has been paid with reinsurance money?
2. If the answer to the preceding question is in the negative, has Pioneer still any
claim against defendants, considering the amount it has realized from the sale of the
mortgaged properties? (Record on Appeal, p. 359, Annex B of G.R. No. 84157).
In resolving these issues, the trial court made the following findings:
It appearing that Pioneer reinsured its risk of liability under the surety bond it had
executed in favor of JDA, collected the proceeds of such reinsurance in the sum of
P295,000, and paid with the said amount the bulk of its alleged liability to JDA under
the said surety bond, it is plain that on this score it no longer has any right to collect
to the extent of the said amount.
On the question of why it is Pioneer, instead of the reinsurance (sic), that is suing
defendants for the amount paid to it by the reinsurers, notwithstanding that the cause
of action pertains to the latter, Pioneer says: The reinsurers opted instead that the
Pioneer Insurance & Surety Corporation shall pursue alone the case.. . . . Pioneer
Insurance & Surety Corporation is representing the reinsurers to recover the amount.'
In other words, insofar as the amount paid to it by the reinsurers Pioneer is suing
defendants as their attorney-in-fact.
But in the first place, there is not the slightest indication in the complaint that Pioneer
is suing as attorney-in- fact of the reinsurers for any amount. Lastly, and most
important of all, Pioneer has no right to institute and maintain in its own name an
action for the benefit of the reinsurers. It is well-settled that an action brought by an
attorney-in-fact in his own name instead of that of the principal will not prosper, and
this is so even where the name of the principal is disclosed in the complaint.
Section 2 of Rule 3 of the Old Rules of Court provides that 'Every
action must be prosecuted in the name of the real party in interest.'
This provision is mandatory. The real party in interest is the party who
would be benefitted or injured by the judgment or is the party entitled
to the avails of the suit.
This Court has held in various cases that an attorney-in-fact is not a
real party in interest, that there is no law permitting an action to be
brought by an attorney-in-fact. Arroyo v. Granada and Gentero, 18
Phil. Rep. 484; Luchauco v. Limjuco and Gonzalo, 19 Phil. Rep. 12;
Filipinos Industrial Corporation v. San Diego G.R. No. L- 22347,1968,
23 SCRA 706, 710-714.
The total amount paid by Pioneer to JDA is P299,666.29. Since Pioneer has
collected P295,000.00 from the reinsurers, the uninsured portion of what it paid to
JDA is the difference between the two amounts, or P3,666.28. This is the amount for
which Pioneer may sue defendants, assuming that the indemnity agreement is still
valid and effective. But since the amount realized from the sale of the mortgaged
chattels are P35,000.00 for one of the airplanes and P2,050.00 for a spare engine, or
a total of P37,050.00, Pioneer is still overpaid by P33,383.72. Therefore, Pioneer has
no more claim against defendants. (Record on Appeal, pp. 360-363).
The payment to the petitioner made by the reinsurers was not disputed in the appellate court.
Considering this admitted payment, the only issue that cropped up was the effect of payment made
by the reinsurers to the petitioner. Therefore, the petitioner's argument that the respondents had no
interest in the reinsurance contract as this is strictly between the petitioner as insured and the
reinsuring company pursuant to Section 91 (should be Section 98) of the Insurance Code has no
basis.
In general a reinsurer, on payment of a loss acquires the same rights by subrogation
as are acquired in similar cases where the original insurer pays a loss (Universal Ins.
Co. v. Old Time Molasses Co. C.C.A. La., 46 F 2nd 925).
The rules of practice in actions on original insurance policies are in general
applicable to actions or contracts of reinsurance. (Delaware, Ins. Co. v. Pennsylvania
Fire Ins. Co., 55 S.E. 330,126 GA. 380, 7 Ann. Con. 1134).
Hence the applicable law is Article 2207 of the new Civil Code, to wit:
Art. 2207. If the plaintiffs property has been insured, and he has received indemnity
from the insurance company for the injury or loss arising out of the wrong or breach
of contract complained of, the insurance company shall be subrogated to the rights of
the insured against the wrongdoer or the person who has violated the contract. If the
amount paid by the insurance company does not fully cover the injury or loss, the
aggrieved party shall be entitled to recover the deficiency from the person causing
the loss or injury.
Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines, Inc. v. Heald Lumber Co.
(101 Phil. 1031 [1957]) which we subsequently applied in Manila Mahogany Manufacturing
Corporation v. Court of Appeals(154 SCRA 650 [1987]):
Note that if a property is insured and the owner receives the indemnity from the
insurer, it is provided in said article that the insurer is deemed subrogated to the
rights of the insured against the wrongdoer and if the amount paid by the insurer
does not fully cover the loss, then the aggrieved party is the one entitled to recover
the deficiency. Evidently, under this legal provision, the real party in interest with
regard to the portion of the indemnity paid is the insurer and not the insured.
(Emphasis supplied).
It is clear from the records that Pioneer sued in its own name and not as an attorney-in-fact of the
reinsurer.
Accordingly, the appellate court did not commit a reversible error in dismissing the petitioner's
complaint as against the respondents for the reason that the petitioner was not the real party in
interest in the complaint and, therefore, has no cause of action against the respondents.
Nevertheless, the petitioner argues that the appeal as regards the counter indemnitors should not
have been dismissed on the premise that the evidence on record shows that it is entitled to recover
from the counter indemnitors. It does not, however, cite any grounds except its allegation that
respondent "Maglanas defense and evidence are certainly incredible" (p. 12, Rollo) to back up its
contention.
On the other hand, we find the trial court's findings on the matter replete with evidence to
substantiate its finding that the counter-indemnitors are not liable to the petitioner. The trial court
stated:
Apart from the foregoing proposition, the indemnity agreement ceased to be valid
and effective after the execution of the chattel mortgage.
Testimonies of defendants Francisco Cervantes and Modesto Cervantes.
Pioneer Insurance, knowing the value of the aircrafts and the spare parts involved,
agreed to issue the bond provided that the same would be mortgaged to it, but this
was not possible because the planes were still in Japan and could not be mortgaged
here in the Philippines. As soon as the aircrafts were brought to the Philippines, they
would be mortgaged to Pioneer Insurance to cover the bond, and this indemnity
agreement would be cancelled.
The following is averred under oath by Pioneer in the original complaint:
The various conflicting claims over the mortgaged properties have
impaired and rendered insufficient the security under the chattel
mortgage and there is thus no other sufficient security for the claim
sought to be enforced by this action.
This is judicial admission and aside from the chattel mortgage there is no other
security for the claim sought to be enforced by this action, which necessarily means
that the indemnity agreement had ceased to have any force and effect at the time
this action was instituted. Sec 2, Rule 129, Revised Rules of Court.
Prescinding from the foregoing, Pioneer, having foreclosed the chattel mortgage on
the planes and spare parts, no longer has any further action against the defendants
as indemnitors to recover any unpaid balance of the price. The indemnity agreement
was ipso jure extinguished upon the foreclosure of the chattel mortgage. These
defendants, as indemnitors, would be entitled to be subrogated to the right of Pioneer
should they make payments to the latter. Articles 2067 and 2080 of the New Civil
Code of the Philippines.
Independently of the preceding proposition Pioneer's election of the remedy of
foreclosure precludes any further action to recover any unpaid balance of the price.
SAL or Lim, having failed to pay the second to the eight and last installments to JDA
and Pioneer as surety having made of the payments to JDA, the alternative remedies
open to Pioneer were as provided in Article 1484 of the New Civil Code, known as
the Recto Law.
Pioneer exercised the remedy of foreclosure of the chattel mortgage both by
extrajudicial foreclosure and the instant suit. Such being the case, as provided by the
aforementioned provisions, Pioneer shall have no further action against the
purchaser to recover any unpaid balance and any agreement to the contrary is void.'
Cruz, et al. v. Filipinas Investment & Finance Corp. No. L- 24772, May 27,1968, 23
SCRA 791, 795-6.
The operation of the foregoing provision cannot be escaped from through the
contention that Pioneer is not the vendor but JDA. The reason is that Pioneer is
actually exercising the rights of JDA as vendor, having subrogated it in such rights.
Nor may the application of the provision be validly opposed on the ground that these
defendants and defendant Maglana are not the vendee but indemnitors. Pascual, et
al. v. Universal Motors Corporation, G.R. No. L- 27862, Nov. 20,1974, 61 SCRA 124.
The restructuring of the obligations of SAL or Lim, thru the change of their maturity
dates discharged these defendants from any liability as alleged indemnitors. The
change of the maturity dates of the obligations of Lim, or SAL extinguish the original
obligations thru novations thus discharging the indemnitors.
The principal hereof shall be paid in eight equal successive three
months interval installments, the first of which shall be due and
payable 25 August 1965, the remainder of which ... shall be due and
payable on the 26th day x x x of each succeeding three months and
the last of which shall be due and payable 26th May 1967.
However, at the trial of this case, Pioneer produced a memorandum executed by
SAL or Lim and JDA, modifying the maturity dates of the obligations, as follows:
The principal hereof shall be paid in eight equal successive three
month interval installments the first of which shall be due and payable
4 September 1965, the remainder of which ... shall be due and
payable on the 4th day ... of each succeeding months and the last of
which shall be due and payable 4th June 1967.
Not only that, Pioneer also produced eight purported promissory notes bearing
maturity dates different from that fixed in the aforesaid memorandum; the due date of
the first installment appears as October 15, 1965, and those of the rest of the
installments, the 15th of each succeeding three months, that of the last installment
being July 15, 1967.
These restructuring of the obligations with regard to their maturity dates, effected
twice, were done without the knowledge, much less, would have it believed that
these defendants Maglana (sic). Pioneer's official Numeriano Carbonel would have it
believed that these defendants and defendant Maglana knew of and consented to
the modification of the obligations. But if that were so, there would have been the
corresponding documents in the form of a written notice to as well as written
conformity of these defendants, and there are no such document. The consequence
of this was the extinguishment of the obligations and of the surety bond secured by
the indemnity agreement which was thereby also extinguished. Applicable by
analogy are the rulings of the Supreme Court in the case of Kabankalan Sugar Co. v.
Pacheco, 55 Phil. 553, 563, and the case of Asiatic Petroleum Co. v. Hizon David, 45
Phil. 532, 538.
Art. 2079. An extension granted to the debtor by the creditor without
the consent of the guarantor extinguishes the guaranty The mere
failure on the part of the creditor to demand payment after the debt
has become due does not of itself constitute any extension time
referred to herein, (New Civil Code).'
Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-563, M.F. Stevenson & Co.,
Ltd., v. Climacom et al. (C.A.) 36 O.G. 1571.
Pioneer's liability as surety to JDA had already prescribed when Pioneer paid the
same. Consequently, Pioneer has no more cause of action to recover from these
defendants, as supposed indemnitors, what it has paid to JDA. By virtue of an
express stipulation in the surety bond, the failure of JDA to present its claim to
Pioneer within ten days from default of Lim or SAL on every installment, released
Pioneer from liability from the claim.
Therefore, Pioneer is not entitled to exact reimbursement from these defendants thru
the indemnity.
Art. 1318. Payment by a solidary debtor shall not entitle him to
reimbursement from his co-debtors if such payment is made after the
obligation has prescribed or became illegal.
These defendants are entitled to recover damages and attorney's fees from Pioneer
and its surety by reason of the filing of the instant case against them and the
attachment and garnishment of their properties. The instant action is clearly
unfounded insofar as plaintiff drags these defendants and defendant Maglana.'
(Record on Appeal, pp. 363-369, Rollo of G.R. No. 84157).
We find no cogent reason to reverse or modify these findings.
Hence, it is our conclusion that the petition in G.R. No. 84197 is not meritorious.
We now discuss the merits of G.R. No. 84157.
Petitioner Jacob S. Lim poses the following issues:
l. What legal rules govern the relationship among co-investors whose agreement was
to do business through the corporate vehicle but who failed to incorporate the entity
in which they had chosen to invest? How are the losses to be treated in situations
where their contributions to the intended 'corporation' were invested not through the
corporate form? This Petition presents these fundamental questions which we
believe were resolved erroneously by the Court of Appeals ('CA'). (Rollo, p. 6).
These questions are premised on the petitioner's theory that as a result of the failure of respondents
Bormaheco, Spouses Cervantes, Constancio Maglana and petitioner Lim to incorporate, a de
facto partnership among them was created, and that as a consequence of such relationship all must
share in the losses and/or gains of the venture in proportion to their contribution. The petitioner,
therefore, questions the appellate court's findings ordering him to reimburse certain amounts given
by the respondents to the petitioner as their contributions to the intended corporation, to wit:
However, defendant Lim should be held liable to pay his co-defendants' cross-claims
in the total amount of P184,878.74 as correctly found by the trial court, with interest
from the filing of the cross-complaints until the amount is fully paid. Defendant Lim
should pay one-half of the said amount to Bormaheco and the Cervanteses and the
other one-half to defendant Maglana. It is established in the records that defendant
Lim had duly received the amount of Pl51,000.00 from defendants Bormaheco and
Maglana representing the latter's participation in the ownership of the subject
airplanes and spare parts (Exhibit 58). In addition, the cross-party plaintiffs incurred
additional expenses, hence, the total sum of P 184,878.74.
We first state the principles.
While it has been held that as between themselves the rights of the stockholders in a
defectively incorporated association should be governed by the supposed charter
and the laws of the state relating thereto and not by the rules governing partners
(Cannon v. Brush Electric Co., 54 A. 121, 96 Md. 446, 94 Am. S.R. 584), it is
ordinarily held that persons who attempt, but fail, to form a corporation and who carry
on business under the corporate name occupy the position of partners inter se
(Lynch v. Perryman, 119 P. 229, 29 Okl. 615, Ann. Cas. 1913A 1065). Thus, where
persons associate themselves together under articles to purchase property to carry
on a business, and their organization is so defective as to come short of creating a
corporation within the statute, they become in legal effect partners inter se, and their
rights as members of the company to the property acquired by the company will be
recognized (Smith v. Schoodoc Pond Packing Co., 84 A. 268,109 Me. 555; Whipple
v. Parker, 29 Mich. 369). So, where certain persons associated themselves as a
corporation for the development of land for irrigation purposes, and each conveyed
land to the corporation, and two of them contracted to pay a third the difference in the
proportionate value of the land conveyed by him, and no stock was ever issued in the
corporation, it was treated as a trustee for the associates in an action between them
for an accounting, and its capital stock was treated as partnership assets, sold, and
the proceeds distributed among them in proportion to the value of the property
contributed by each (Shorb v. Beaudry, 56 Cal. 446). However, such a relation does
not necessarily exist, for ordinarily persons cannot be made to assume the relation of
partners, as between themselves, when their purpose is that no partnership shall
exist (London Assur. Corp. v. Drennen, Minn., 6 S.Ct. 442, 116 U.S. 461, 472, 29
L.Ed. 688), and it should be implied only when necessary to do justice between the
parties; thus, one who takes no part except to subscribe for stock in a proposed
corporation which is never legally formed does not become a partner with other
subscribers who engage in business under the name of the pretended corporation,
so as to be liable as such in an action for settlement of the alleged partnership and
contribution (Ward v. Brigham, 127 Mass. 24). A partnership relation between certain
stockholders and other stockholders, who were also directors, will not be implied in
the absence of an agreement, so as to make the former liable to contribute for
payment of debts illegally contracted by the latter (Heald v. Owen, 44 N.W. 210, 79
Iowa 23). (Corpus Juris Secundum, Vol. 68, p. 464). (Italics supplied).
In the instant case, it is to be noted that the petitioner was declared non-suited for his failure to
appear during the pretrial despite notification. In his answer, the petitioner denied having received
any amount from respondents Bormaheco, the Cervanteses and Maglana. The trial court and the
appellate court, however, found through Exhibit 58, that the petitioner received the amount of
P151,000.00 representing the participation of Bormaheco and Atty. Constancio B. Maglana in the
ownership of the subject airplanes and spare parts. The record shows that defendant Maglana gave
P75,000.00 to petitioner Jacob Lim thru the Cervanteses.
It is therefore clear that the petitioner never had the intention to form a corporation with the
respondents despite his representations to them. This gives credence to the cross-claims of the
respondents to the effect that they were induced and lured by the petitioner to make contributions to
a proposed corporation which was never formed because the petitioner reneged on their agreement.
Maglana alleged in his cross-claim:
... that sometime in early 1965, Jacob Lim proposed to Francisco Cervantes and
Maglana to expand his airline business. Lim was to procure two DC-3's from Japan
and secure the necessary certificates of public convenience and necessity as well as
the required permits for the operation thereof. Maglana sometime in May 1965, gave
Cervantes his share of P75,000.00 for delivery to Lim which Cervantes did and Lim
acknowledged receipt thereof. Cervantes, likewise, delivered his share of the
undertaking. Lim in an undertaking sometime on or about August 9,1965, promised
to incorporate his airline in accordance with their agreement and proceeded to
acquire the planes on his own account. Since then up to the filing of this answer, Lim
has refused, failed and still refuses to set up the corporation or return the money of
Maglana. (Record on Appeal, pp. 337-338).
while respondents Bormaheco and the Cervanteses alleged in their answer, counterclaim, cross-
claim and third party complaint:
Sometime in April 1965, defendant Lim lured and induced the answering defendants
to purchase two airplanes and spare parts from Japan which the latter considered as
their lawful contribution and participation in the proposed corporation to be known as
SAL. Arrangements and negotiations were undertaken by defendant Lim. Down
payments were advanced by defendants Bormaheco and the Cervanteses and
Constancio Maglana (Exh. E- 1). Contrary to the agreement among the defendants,
defendant Lim in connivance with the plaintiff, signed and executed the alleged
chattel mortgage and surety bond agreement in his personal capacity as the alleged
proprietor of the SAL. The answering defendants learned for the first time of this
trickery and misrepresentation of the other, Jacob Lim, when the herein plaintiff
chattel mortgage (sic) allegedly executed by defendant Lim, thereby forcing them to
file an adverse claim in the form of third party claim. Notwithstanding repeated oral
demands made by defendants Bormaheco and Cervanteses, to defendant Lim, to
surrender the possession of the two planes and their accessories and or return the
amount advanced by the former amounting to an aggregate sum of P 178,997.14 as
evidenced by a statement of accounts, the latter ignored, omitted and refused to
comply with them. (Record on Appeal, pp. 341-342).
Applying therefore the principles of law earlier cited to the facts of the case, necessarily, no de facto
partnership was created among the parties which would entitle the petitioner to a reimbursement of
the supposed losses of the proposed corporation. The record shows that the petitioner was acting on
his own and not in behalf of his other would-be incorporators in transacting the sale of the airplanes
and spare parts.
WHEREFORE, the instant petitions are DISMISSED. The questioned decision of the Court of
Appeals is AFFIRMED.
SO ORDERED.


SECOND DIVISION


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




- versus -








ALFREDO M. JOSON,
Respondent.
G.R
.
No.
171
993

Pres
ent:

CA
RPI
O,J.
,

C
hair
pers
on,
BRI
ON,
PER
EZ,
SER
EN
O,
and
RE
YES
, JJ.


Pro
mul
gate
d:

Dec
emb
er
12,
201
1

x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

D E C I S I O N


PEREZ, J.:


In this Petition for Review on Certiorari under Rule 45 of the Rules of Court,
herein petitioners Marc II Marketing, Inc. and Lucila V. Joson assailed the
Decision
[1]
dated 20 June 2005 of the Court of Appeals in CA-G.R. SP No. 76624
for reversing and setting aside the Resolution
[2]
of the National Labor Relations
Commission (NLRC) dated 15 October 2002, thereby affirming the Labor
Arbiters Decision
[3]
dated 1 October 2001 finding herein respondent Alfredo M.
Josons dismissal from employment as illegal. In the questioned Decision, the
Court of Appeals upheld the Labor Arbiters jurisdiction over the case on the basis
that respondent was not an officer but a mere employee of petitioner Marc II
Marketing, Inc., thus, totally disregarding the latters allegation of intra-corporate
controversy. Nonetheless, the Court of Appeals remanded the case to the NLRC
for further proceedings to determine the proper amount of monetary awards that
should be given to respondent.

Assailed as well is the Court of Appeals Resolution
[4]
dated 7 March
2006denying their Motion for Reconsideration.

Petitioner Marc II Marketing, Inc. (petitioner corporation) is a corporation
duly organized and existing under and by virtue of the laws of the Philippines. It is
primarily engaged in buying, marketing, selling and distributing in retail or
wholesale for export or import household appliances and products and other
items.
[5]
It took over the business operations of Marc Marketing, Inc. which was
made non-operational following its incorporation and registration with the
Securities and Exchange Commission (SEC). Petitioner Lucila V. Joson (Lucila)
is the President and majority stockholder of petitioner corporation. She was also
the former President and majority stockholder of the defunct Marc Marketing, Inc.

Respondent Alfredo M. Joson (Alfredo), on the other hand, was the General
Manager, incorporator, director and stockholder of petitioner corporation.

The controversy of this case arose from the following factual milieu:
Before petitioner corporation was officially incorporated,
[6]
respondent has
already been engaged by petitioner Lucila, in her capacity as President of Marc
Marketing, Inc., to work as the General Manager of petitioner corporation. It was
formalized through the execution of a Management Contract
[7]
dated 16 January
1994 under the letterhead of Marc Marketing, Inc.
[8]
as petitioner corporation is yet
to be incorporated at the time of its execution. It was explicitly provided therein
that respondent shall be entitled to 30% of its net income for his work as General
Manager. Respondent will also be granted 30% of its net profit to compensate for
the possible loss of opportunity to work overseas.
[9]


Pending incorporation of petitioner corporation, respondent was designated
as the General Manager of Marc Marketing, Inc., which was then in the process of
winding up its business. For occupying the said position, respondent was among
its corporate officers by the express provision of Section 1, Article IV
[10]
of its by-
laws.
[11]


On 15 August 1994, petitioner corporation was officially incorporated and
registered with the SEC. Accordingly, Marc Marketing, Inc. was made non-
operational. Respondent continued to discharge his duties as General Manager but
this time under petitioner corporation.

Pursuant to Section 1, Article IV
[12]
of petitioner corporations by-laws,
[13]
its
corporate officers are as follows: Chairman, President, one or more Vice-
President(s), Treasurer and Secretary. Its Board of Directors, however, may, from
time to time, appoint such other officers as it may determine to be necessary or
proper.

Per an undated Secretarys Certificate,
[14]
petitioner corporations Board of
Directors conducted a meeting on 29 August 1994 where respondent was
appointed as one of its corporate officers with the designation or title of General
Manager to function as a managing director with other duties and responsibilities
that the Board of Directors may provide and authorized.
[15]


Nevertheless, on 30 June 1997, petitioner corporation decided to stop and
cease its operations, as evidenced by an Affidavit of Non-Operation
[16]
dated 31
August 1998, due to poor sales collection aggravated by the inefficient
management of its affairs. On the same date, it formally informed respondent of
the cessation of its business operation. Concomitantly, respondent was apprised of
the termination of his services as General Manager since his services as such
would no longer be necessary for the winding up of its affairs.
[17]


Feeling aggrieved, respondent filed a Complaint for Reinstatement and
Money Claim against petitioners before the Labor Arbiter which was docketed as
NLRC NCR Case No. 00-03-04102-99.

In his complaint, respondent averred that petitioner Lucila dismissed him
from his employment with petitioner corporation due to the feeling of hatred she
harbored towards his family. The same was rooted in the filing by petitioner
Lucilas estranged husband, who happened to be respondents brother, of a Petition
for Declaration of Nullity of their Marriage.
[18]


For the parties failure to settle the case amicably, the Labor Arbiter required
them to submit their respective position papers. Respondent complied but
petitioners opted to file a Motion to Dismiss grounded on the Labor Arbiters lack
of jurisdiction as the case involved an intra-corporate controversy, which
jurisdiction belongs to the SEC [now with the Regional Trial Court
(RTC)].
[19]
Petitioners similarly raised therein the ground of prescription of
respondents monetary claim.

On 5 September 2000, the Labor Arbiter issued an Order
[20]
deferring the
resolution of petitioners Motion to Dismiss until the final determination of the
case. The Labor Arbiter also reiterated his directive for petitioners to submit
position paper. Still, petitioners did not comply. Insisting that the Labor Arbiter
has no jurisdiction over the case, they instead filed an Urgent Motion to Resolve
the Motion to Dismiss and the Motion to Suspend Filing of Position Paper.

In an Order
[21]
dated 15 February 2001, the Labor Arbiter denied both
motions and declared final the Order dated 5 September 2000. The Labor Arbiter
then gave petitioners a period of five days from receipt thereof within which to file
position paper, otherwise, their Motion to Dismiss will be treated as their position
paper and the case will be considered submitted for decision.

Petitioners, through counsel, moved for extension of time to submit position
paper. Despite the requested extension, petitioners still failed to submit the
same. Accordingly, the case was submitted for resolution.

On 1 October 2001, the Labor Arbiter rendered his Decision in favor of
respondent. Its decretal portion reads as follows:

WHEREFORE, premises considered, judgment is hereby
rendered declaring [respondents] dismissal from employment
illegal. Accordingly, [petitioners] are hereby ordered:

1. To reinstate [respondent] to his former or equivalent position
without loss of seniority rights, benefits, and privileges;
2. Jointly and severally liable to pay [respondents] unpaid
wages in the amount of P450,000.00 per month from [26
March 1996] up to time of dismissal in the total amount
of P6,300,000.00;
3. Jointly and severally liable to pay [respondents] full
backwages in the amount of P450,000.00 per month from date
of dismissal until actual reinstatement which at the time of
promulgation amounted to P21,600,000.00;
4. Jointly and severally liable to pay moral damages in the
amount ofP100,000.00 and attorneys fees in the amount of
5% of the total monetary award.
[22]
[Emphasis supplied.]

In the aforesaid Decision, the Labor Arbiter initially resolved petitioners
Motion to Dismiss by finding the ground of lack of jurisdiction to be without
merit. The Labor Arbiter elucidated that petitioners failed to adduce evidence to
prove that the present case involved an intra-corporate controversy. Also,
respondents money claim did not arise from his being a director or stockholder of
petitioner corporation but from his position as being its General Manager. The
Labor Arbiter likewise held that respondent was not a corporate officer under
petitioner corporations by-laws. As such, respondents complaint clearly arose
from an employer-employee relationship, thus, subject to the Labor Arbiters
jurisdiction.

The Labor Arbiter then declared respondents dismissal from employment as
illegal. Respondent, being a regular employee of petitioner corporation, may only
be dismissed for a valid cause and upon proper compliance with the requirements
of due process. The records, though, revealed that petitioners failed to present any
evidence to justify respondents dismissal.

Aggrieved, petitioners appealed the aforesaid Labor Arbiters Decision to
the NLRC.

In its Resolution dated 15 October 2002, the NLRC ruled in favor of
petitioners by giving credence to the Secretarys Certificate, which evidenced
petitioner corporations Board of Directors meeting in which a resolution was
approved appointing respondent as its corporate officer with designation as
General Manager. Therefrom, the NLRC reversed and set aside the Labor
Arbiters Decision dated 1 October 2001 and dismissed respondents Complaint
for want of jurisdiction.
[23]


The NLRC enunciated that the validity of respondents appointment and
termination from the position of General Manager was made subject to the
approval of petitioner corporations Board of Directors. Had respondent been an
ordinary employee, such board action would not have been required. As such, it is
clear that respondent was a corporate officer whose dismissal involved a purely
intra-corporate controversy. The NLRC went further by stating that respondents
claim for 30% of the net profit of the corporation can only emanate from his right
of ownership therein as stockholder, director and/or corporate officer. Dividends
or profits are paid only to stockholders or directors of a corporation and not to any
ordinary employee in the absence of any profit sharing scheme. In addition, the
question of remuneration of a person who is not a mere employee but a stockholder
and officer of a corporation is not a simple labor problem. Such matter comes
within the ambit of corporate affairs and management and is an intra-corporate
controversy in contemplation of the Corporation Code.
[24]


When respondents Motion for Reconsideration was denied in another
Resolution
[25]
dated 23 January 2003, he filed a Petition for Certiorari with the
Court of Appeals ascribing grave abuse of discretion on the part of the NLRC.

On 20 June 2005, the Court of Appeals rendered its now assailed Decision
declaring that the Labor Arbiter has jurisdiction over the present controversy. It
upheld the finding of the Labor Arbiter that respondent was a mere employee of
petitioner corporation, who has been illegally dismissed from employment without
valid cause and without due process. Nevertheless, it ordered the records of the
case remanded to the NLRC for the determination of the appropriate amount of
monetary awards to be given to respondent. The Court of Appeals, thus, decreed:

WHEREFORE, the petition is by us PARTIALLY
GRANTED. The Labor Arbiter is DECLARED to have jurisdiction
over the controversy. The records are REMANDED to the NLRC for
further proceedings to determine the appropriate amount of monetary
awards to be adjudged in favor of [respondent]. Costs against the
[petitioners] in solidum.
[26]


Petitioners moved for its reconsideration but to no avail.
[27]


Petitioners are now before this Court with the following assignment of
errors:

I.
THE COURT OF APPEALS ERRED AND COMMITTED GRAVE
ABUSE OF DISCRETION IN DECIDING THAT THE NLRC HAS
THE JURISDICTION IN RESOLVING A PURELY INTRA-
CORPORATE MATTER WHICH IS COGNIZABLE BY THE
SECURITIES AND EXCHANGE COMMISSION/REGIONAL TRIAL
COURT.


II.

ASSUMING, GRATIS ARGUENDO, THAT THE NLRC HAS
JURISDICTION OVER THE CASE, STILL THE COURT OF
APPEALS SERIOUSLY ERRED IN NOT RULING THAT THERE IS
NO EMPLOYER-EMPLOYEE RELATIONSHIP BETWEEN
[RESPONDENT] ALFREDO M. JOSON AND MARC II
MARKETING, INC. [PETITIONER CORPORATION].


III.

ASSUMING GRATIS ARGUENDO THAT THE NLRC HAS
JURISDICTION OVER THE CASE, THE COURT OF APPEALS
ERRED IN NOT RULING THAT THE LABOR ARBITER
COMMITTED GRAVE ABUSE OF DISCRETION IN AWARDING
MULTI-MILLION PESOS IN COMPENSATION AND
BACKWAGES BASED ON THE PURPORTED GROSS INCOME OF
[PETITIONER CORPORATION].


IV.

THE COURT OF APPEALS SERIOUSLY ERRED AND
COMMITTED GRAVE ABUSE OF DISCRETION IN NOT MAKING
ANY FINDINGS AND RULING THAT [PETITIONER LUCILA]
SHOULD NOT BE HELD SOLIDARILY LIABLE IN THE ABSENCE
OF EVIDENCE OF MALICE AND BAD FAITH ON HER PART.
[28]


Petitioners fault the Court of Appeals for having sustained the Labor
Arbiters finding that respondent was not a corporate officer under petitioner
corporations by-laws. They insist that there is no need to amend the corporate by-
laws to specify who its corporate officers are. The resolution issued by petitioner
corporations Board of Directors appointing respondent as General Manager,
coupled with his assumption of the said position, positively made him its corporate
officer. More so, respondents position, being a creation of petitioner
corporations Board of Directors pursuant to its by-laws, is a corporate office
sanctioned by the Corporation Code and the doctrines previously laid down by this
Court. Thus, respondents removal as petitioner corporations General Manager
involved a purely intra-corporate controversy over which the RTC has jurisdiction.

Petitioners further contend that respondents claim for 30% of the net profit
of petitioner corporation was anchored on the purported Management Contract
dated16 January 1994. It should be noted, however, that said Management
Contract was executed at the time petitioner corporation was still nonexistent and
had no juridical personality yet. Such being the case, respondent cannot invoke
any legal right therefrom as it has no legal and binding effect on petitioner
corporation. Moreover, it is clear from the Articles of Incorporation of petitioner
corporation that respondent was its director and stockholder. Indubitably,
respondents claim for his share in the profit of petitioner corporation was based on
his capacity as such and not by virtue of any employer-employee relationship.

Petitioners further avow that even if the present case does not pose an intra-
corporate controversy, still, the Labor Arbiters multi-million peso awards in favor
of respondent were erroneous. The same was merely based on the latters self-
serving computations without any supporting documents.

Finally, petitioners maintain that petitioner Lucila cannot be held solidarily
liable with petitioner corporation. There was neither allegation nor iota of
evidence presented to show that she acted with malice and bad faith in her dealings
with respondent. Moreover, the Labor Arbiter, in his Decision, simply concluded
that petitioner Lucila was jointly and severally liable with petitioner corporation
without making any findings thereon. It was, therefore, an error for the Court of
Appeals to hold petitioner Lucila solidarily liable with petitioner corporation.

From the foregoing arguments, the initial question is which between the
Labor Arbiter or the RTC, has jurisdiction over respondents dismissal as General
Manager of petitioner corporation. Its resolution necessarily entails the
determination of whether respondent as General Manager of petitioner corporation
is a corporate officer or a mere employee of the latter.

While Article 217(a)2
[29]
of the Labor Code, as amended, provides that it is
the Labor Arbiter who has the original and exclusive jurisdiction over cases
involving termination or dismissal of workers when the person dismissed or
terminated is a corporate officer, the case automatically falls within the province of
the RTC. The dismissal of a corporate officer is always regarded as a corporate act
and/or an intra-corporate controversy.
[30]

Under Section 5
[31]
of Presidential Decree No. 902-A, intra-corporate
controversies are those controversies arising out of intra-corporate or partnership
relations, between and among stockholders, members or associates; between any or
all of them and the corporation, partnership or association of which they are
stockholders, members or associates, respectively; and between such corporation,
partnership or association and the State insofar as it concerns their individual
franchise or right to exist as such entity. It also includes controversies in the
election or appointments of directors, trustees, officers or managers of such
corporations, partnerships or associations.
[32]


Accordingly, in determining whether the SEC (now the RTC) has
jurisdiction over the controversy, the status or relationship of the parties and the
nature of the question that is the subject of their controversy must be taken into
consideration.
[33]


In Easycall Communications Phils., Inc. v. King, this Court held that in the
context of Presidential Decree No. 902-A, corporate officers are those officers of
a corporation who are given that character either by the Corporation Code or
by the corporations by-laws. Section 25
[34]
of the Corporation Code specifically
enumerated who are these corporate officers, to wit: (1) president; (2) secretary; (3)
treasurer; and (4) such other officers as may be provided for in the by-
laws.
[35]


The aforesaid Section 25 of the Corporation Code, particularly the phrase
such other officers as may be provided for in the by-laws, has been clarified and
elaborated in this Courts recent pronouncement in Matling Industrial and
Commercial Corporation v. Coros, where it held, thus:

Conformably with Section 25, a position must be expressly
mentioned in the [b]y-[l]aws in order to be considered as a corporate
office. Thus, the creation of an office pursuant to or under a [b]y-
[l]aw enabling provision is not enough to make a position a
corporate office. [In] Guerrea v. Lezama [citation omitted] the first
ruling on the matter, held that the only officers of a corporation were
those given that character either by the Corporation Code or by the
[b]y-[l]aws; the rest of the corporate officers could be considered
only as employees or subordinate officials. Thus, it was held
in Easycall Communications Phils., Inc. v. King [citation omitted]:

An "office" is created by the charter of the
corporation and the officer is elected by the directors or
stockholders. On the other hand, anemployee occupies no office
and generally is employed not by the action of the directors or
stockholders but by the managing officer of the corporation
who also determines the compensation to be paid to such
employee.

x x x x

This interpretation is the correct application of Section 25 of
the Corporation Code, which plainly states that the corporate officers
are the President, Secretary, Treasurer and such other officers as may be
provided for in the [b]y-[l]aws.Accordingly, the corporate officers in
the context of PD No. 902-A are exclusively those who are given that
character either by the Corporation Code or by the corporations
[b]y[l]aws.

A different interpretation can easily leave the way open for
the Board of Directors to circumvent the constitutionally guaranteed
security of tenure of the employee by the expedient inclusion in the
[b]y-[l]aws of an enabling clause on the creation of just any
corporate officer position.

It is relevant to state in this connection that the SEC, the primary
agency administering the Corporation Code, adopted a similar
interpretation of Section 25 of the Corporation Code in its Opinion
dated November 25, 1993 [citation omitted], to wit:

Thus, pursuant to the above provision (Section 25 of the
Corporation Code), whoever are the corporate officers
enumerated in the by-laws are the exclusive Officers of the
corporation and the Board has no power to create other
Offices without amending first the corporate [b]y-
laws.However, the Board may create appointive positions
other than the positions of corporate Officers, but the persons
occupying such positions are not considered as corporate
officers within the meaning of Section 25 of the Corporation
Code and are not empowered to exercise the functions of the
corporate Officers, except those functions lawfully delegated to
them. Their functions and duties are to be determined by the
Board of Directors/Trustees.
[36]
[Emphasis supplied.]

A careful perusal of petitioner corporations by-laws, particularly paragraph
1, Section 1, Article IV,
[37]
would explicitly reveal that its corporate officers are
composed only of: (1) Chairman; (2) President; (3) one or more Vice-President; (4)
Treasurer; and (5) Secretary.
[38]
The position of General Manager was not
among those enumerated.

Paragraph 2, Section 1, Article IV of petitioner corporations by-laws,
empowered its Board of Directors to appoint such other officers as it may
determine necessary or proper.
[39]
It is by virtue of this enabling provision that
petitioner corporations Board of Directors allegedly approved a resolution to
make the position of General Manager a corporate office, and, thereafter,
appointed respondent thereto making him one of its corporate officers. All of these
acts were done without first amending its by-laws so as to include the General
Manager in its roster of corporate officers.

With the given circumstances and in conformity with Matling Industrial and
Commercial Corporation v. Coros, this Court rules that respondent was not a
corporate officer of petitioner corporation because his position as General Manager
was not specifically mentioned in the roster of corporate officers in its corporate
by-laws. The enabling clause in petitioner corporations by-laws empowering its
Board of Directors to create additional officers, i.e., General Manager, and the
alleged subsequent passage of a board resolution to that effect cannot make such
position a corporate office. Matling clearly enunciated that the board of directors
has no power to create other corporate offices without first amending the corporate
by-laws so as to include therein the newly created corporate office. Though the
board of directors may create appointive positions other than the positions of
corporate officers, the persons occupying such positions cannot be viewed as
corporate officers under Section 25 of the Corporation Code.
[40]
In view thereof,
this Court holds that unless and until petitioner corporations by-laws is amended
for the inclusion of General Manager in the list of its corporate officers, such
position cannot be considered as a corporate office within the realm of Section 25
of the Corporation Code.

This Court considers that the interpretation of Section 25 of the Corporation
Code laid down in Matling safeguards the constitutionally enshrined right of every
employee to security of tenure. To allow the creation of a corporate officer
position by a simple inclusion in the corporate by-laws of an enabling clause
empowering the board of directors to do so can result in the circumvention of that
constitutionally well-protected right.
[41]


It is also of no moment that respondent, being petitioner corporations
General Manager, was given the functions of a managing director by its Board of
Directors. As held in Matling, the only officers of a corporation are those
given that character either by the Corporation Code or by the corporate by-laws. It
follows then that the corporate officers enumerated in the by-laws are the exclusive
officers of the corporation while the rest could only be regarded as mere employees
or subordinate officials.
[42]
Respondent, in this case, though occupying a high
ranking and vital position in petitioner corporation but which position was not
specifically enumerated or mentioned in the latters by-laws, can only be regarded
as its employee or subordinate official. Noticeably, respondents compensation as
petitioner corporations General Manager was set, fixed and determined not by the
latters Board of Directors but simply by its President, petitioner Lucila. The same
was not subject to the approval of petitioner corporations Board of
Directors. This is an indication that respondent was an employee and not a
corporate officer.

To prove that respondent was petitioner corporations corporate officer,
petitioners presented before the NLRC an undated Secretarys Certificate showing
that corporations Board of Directors approved a resolution making respondents
position of General Manager a corporate office. The submission, however, of the
said undated Secretarys Certificate will not change the fact that respondent was an
employee. The certification does not amount to an amendment of the by-laws
which is needed to make the position of General Manager a corporate office.

Moreover, as has been aptly observed by the Court of Appeals, the board
resolution mentioned in that undated Secretarys Certificate and the latter itself
were obvious fabrications, a mere afterthought. Here we quote with conformity
the Court of Appeals findings on this matter stated in this wise:

The board resolution is an obvious fabrication. Firstly, if it had
been in existence since [29 August 1994], why did not [herein
petitioners] attach it to their [M]otion to [D]ismiss filed on [26 August
1999], when it could have been the best evidence that [herein
respondent] was a corporate officer? Secondly, why did they report the
[respondent] instead as [herein petitioner corporations] employee to the
Social Security System [(SSS)] on [11 October 1994] or a later date than
their [29 August 1994] board resolution? Thirdly, why is there no
indication that the [respondent], the person concerned himself, and the
[SEC] were furnished with copies of said board resolution? And, lastly,
why is the corporate [S]ecretarys [C]ertificate not notarized in keeping
with the customary procedure? That is why we called it manipulative
evidence as it was a shameless sham meant to be thrown in as a wild
card to muddle up the [D]ecision of the Labor Arbiter to the end that it
be overturned as the latter had firmly pointed out that [respondent] is not
a corporate officer under [petitioner corporations by-laws]. Regrettably,
the [NLRC] swallowed the bait hook-line-and sinker. It failed to see
through its nature as a belatedly manufactured evidence. And even on
the assumption that it were an authentic board resolution, it did not
make [respondent] a corporate officer as the board did not first and
properly create the position of a [G]eneral [M]anager by amending
its by-laws.

(2) The scope of the term officer in the phrase and such
other officers as may be provided for in the by-laws[] (Sec. 25,
par. 1), would naturally depend much on the provisions of the by-
laws of the corporation. (SEC Opinion, [4 December 1991.]) If
the by-laws enumerate the officers to be elected by the board, the
provision is conclusive, and the board is without power to
create new offices without amending the by-laws. (SEC
Opinion, [19 October 1971.])

(3) If, for example, the general manager of a corporation is
not listed as an officer, he is to be classified as an employee
although he has always been considered as one of the principal
officers of a corporation [citing De Leon, H. S., The Corporation
Code of the Philippines Annotated, 1993 Ed., p.
215.]
[43]
[Emphasis supplied.]


That respondent was also a director and a stockholder of petitioner
corporation will not automatically make the case fall within the ambit of intra-
corporate controversy and be subjected to RTCs jurisdiction. To reiterate, not all
conflicts between the stockholders and the corporation are classified as intra-
corporate. Other factors such as the status or relationship of the parties and the nature
of the question that is the subject of the controversy
[44]
must be considered in
determining whether the dispute involves corporate matters so as to regard them as intra-
corporate controversies.
[45]
As previously discussed, respondent was not a corporate
officer of petitioner corporation but a mere employee thereof so there was no intra-
corporate relationship between them. With regard to the subject of the controversy or
issue involved herein, i.e., respondents dismissal as petitioner corporations General
Manager, the same did not present or relate to an intra-corporate dispute. To note, there
was no evidence submitted to show that respondents removal as petitioner
corporations General Manager carried with it his removal as its director and
stockholder. Also, petitioners allegation that respondents claim of 30% share of
petitioner corporations net profit was by reason of his being its director and
stockholder was without basis, thus, self-serving. Such an allegation was
tantamount to a mere speculation for petitioners failure to substantiate the same.

In addition, it was not shown by petitioners that the position of General
Manager was offered to respondent on account of his being petitioner corporations
director and stockholder. Also, in contrast to NLRCs findings, neither petitioner
corporations by-laws nor the Management Contract stated that respondents
appointment and termination from the position of General Manager was subject to
the approval of petitioner corporations Board of Directors. If, indeed, respondent
was a corporate officer whose termination was subject to the approval of its Board
of Directors, why is it that his termination was effected only by petitioner Lucila,
President of petitioner corporation? The records are bereft of any evidence to
show that respondents dismissal was done with the conformity of petitioner
corporations Board of Directors or that the latter had a hand on respondents
dismissal. No board resolution whatsoever was ever presented to that effect.

With all the foregoing, this Court is fully convinced that, indeed, respondent,
though occupying the General Manager position, was not a corporate officer of
petitioner corporation rather he was merely its employee occupying a high-ranking
position.

Accordingly, respondents dismissal as petitioner corporations General
Manager did not amount to an intra-corporate controversy. Jurisdiction therefor
properly belongs with the Labor Arbiter and not with the RTC.

Having established that respondent was not petitioner corporations
corporate officer but merely its employee, and that, consequently, jurisdiction
belongs to the Labor Arbiter, this Court will now determine if respondents
dismissal from employment is illegal.

It was not disputed that respondent worked as petitioner corporations
General Manager from its incorporation on 15 August 1994 until he was dismissed
on 30 June 1997. The cause of his dismissal was petitioner corporations cessation
of business operations due to poor sales collection aggravated by the inefficient
management of its affairs.

In termination cases, the burden of proving just and valid cause for
dismissing an employee from his employment rests upon the employer. The
latter's failure to discharge that burden would necessarily result in a finding that the
dismissal is unjustified.
[46]


Under Article 283 of the Labor Code, as amended, one of the authorized
causes in terminating the employment of an employee is the closing or
cessation of operation of the establishment or undertaking. Article 283 of the
Labor Code, as amended, reads, thus:

ART. 283. Closure of establishment and reduction of
personnel. The employer may also terminate the employment of any
employee due to the installation of labor saving-devices, redundancy,
retrenchment to prevent losses or the closing or cessation of operation
of the establishment or undertaking unless the closing is for the
purpose of circumventing the provisions of this Title, by serving a
written notice on the workers and the Department of Labor and
Employment at least one (1) month before the intended date thereof. x x
x In case of retrenchment to prevent losses and in cases of closures or
cessation of operations of establishment or undertaking not due to
serious business losses or financial reverses, the separation pay shall
be equivalent to one (1) month pay or to at least one-half (1/2) month
pay for every year of service, whichever is higher. A fraction of at
least six (6) months shall be considered one (1) whole
year. [Emphasis supplied.]

From the afore-quoted provision, the closure or cessation of operations of
establishment or undertaking may either be due to serious business losses or
financial reverses or otherwise. If the closure or cessation was due to serious
business losses or financial reverses, it is incumbent upon the employer to
sufficiently and convincingly prove the same. If it is otherwise, the employer can
lawfully close shop anytime as long as it was bona fide in character and not
impelled by a motive to defeat or circumvent the tenurial rights of employees and
as long as the terminated employees were paid in the amount corresponding to
their length of service.
[47]


Accordingly, under Article 283 of the Labor Code, as amended, there
arethree requisites for a valid cessation of business operations: (a) service of
awritten notice to the employees and to the Department of Labor and
Employment (DOLE) at least one month before the intended date thereof; (b)
the cessation of business must be bona fide in character; and (c) payment to the
employees of termination pay amounting to one month pay or at least one-half
month pay for every year of service, whichever is higher.

In this case, it is obvious that petitioner corporations cessation of business
operations was not due to serious business losses. Mere poor sales collection,
coupled with mismanagement of its affairs does not amount to serious business
losses. Nonetheless, petitioner corporation can still validly cease or close its
business operations because such right is legally allowed, so long as it was not
done for the purpose of circumventing the provisions on termination of
employment embodied in the Labor Code.
[48]
As has been stressed by this Court
in Industrial Timber Corporation v. Ababon, thus:
Just as no law forces anyone to go into business, no law can compel
anybody to continue the same. It would be stretching the intent and
spirit of the law if a court interferes with management's prerogative to
close or cease its business operations just because the business is not
suffering from any loss or because of the desire to provide the workers
continued employment.
[49]


A careful perusal of the records revealed that, indeed, petitioner corporation
has stopped and ceased business operations beginning 30 June 1997. This was
evidenced by a notarized Affidavit of Non-Operation dated 31 August 1998. There
was also no showing that the cessation of its business operations was done in bad
faith or to circumvent the Labor Code. Nevertheless, in doing so, petitioner
corporation failed to comply with the one-month prior written notice rule. The
records disclosed that respondent, being petitioner corporations employee, and the
DOLE were not given a written notice at least one month before petitioner
corporation ceased its business operations. Moreover, the records clearly show
that respondents dismissal was effected on the same date that petitioner
corporation decided to stop and cease its operation. Similarly, respondent was not
paid separation pay upon termination of his employment.

As respondents dismissal was not due to serious business losses, respondent
is entitled to payment of separation pay equivalent to one month pay or at least
one-half month pay for every year of service, whichever is higher. The rationale
for this was laid down in Reahs Corporation v. National Labor Relations
Commission,
[50]
thus:

The grant of separation pay, as an incidence of termination of
employment under Article 283, is a statutory obligation on the part
of the employer and a demandable right on the part of the employee,
except only where the closure or cessation of operations was due to
serious business losses or financial reverses and there is sufficient proof
of this fact or condition. In the absence of such proof of serious
business losses or financial reverses, the employer closing his
business is obligated to pay his employees and workers their
separation pay.

The rule, therefore, is that in all cases of business closure or
cessation of operation or undertaking of the employer, the affected
employee is entitled to separation pay. This is consistent with the
state policy of treating labor as a primary social economic force,
affording full protection to its rights as well as its welfare. The
exception is when the closure of business or cessation of operations is
due to serious business losses or financial reverses duly proved, in which
case, the right of affected employees to separation pay is lost for obvious
reasons.
[51]
[Emphasis supplied.]

As previously discussed, respondents dismissal was due to an authorized
cause, however, petitioner corporation failed to observe procedural due process in
effecting such dismissal. In Culili v. Eastern Telecommunications Philippines,
Inc.,
[52]
this Court made the following pronouncements, thus:

x x x there are two aspects which characterize the concept of due
process under the Labor Code: one is substantive whether the
termination of employment was based on the provision of the Labor
Code or in accordance with the prevailing jurisprudence; the other
is procedural the manner in which the dismissal was effected.

Section 2(d), Rule I, Book VI of the Rules Implementing the Labor Code
provides:

(d) In all cases of termination of employment, the following
standards of due process shall be substantially observed:

x x x x

For termination of employment as defined in Article
283 of the Labor Code, the requirement of due process
shall be deemed complied with upon service of a written
notice to the employee and the appropriate Regional
Office of the Department of Labor and Employment at
least thirty days before effectivity of the
termination, specifying the ground or grounds for
termination.

In Mayon Hotel & Restaurant v. Adana, [citation omitted] we observed:

The requirement of law mandating the giving of
notices was intended not only to enable the employees to
look for another employment and therefore ease the impact
of the loss of their jobs and the corresponding income, but
more importantly, to give the Department of Labor and
Employment (DOLE) the opportunity to ascertain the
verity of the alleged authorized cause of
termination.
[53]
[Emphasis supplied].


The records of this case disclosed that there was absolutely no written notice
given by petitioner corporation to the respondent and to the DOLE prior to the
cessation of its business operations. This is evident from the fact that petitioner
corporation effected respondents dismissal on the same date that it decided to stop
and cease its business operations. The necessary consequence of such failure to
comply with the one-month prior written notice rule, which constitutes a violation
of an employees right to statutory due process, is the payment of indemnity in the
form of nominal damages.
[54]
In Culili v. Eastern Telecommunications Philippines,
Inc., this Court further held:

In Serrano v. National Labor Relations Commission [citation
omitted], we noted that a job is more than the salary that it carries.
There is a psychological effect or a stigma in immediately finding ones
self laid off from work. This is exactly why our labor laws have
provided for mandating procedural due process clauses. Our laws,while
recognizing the right of employers to terminate employees it cannot
sustain, also recognize the employees right to be properly informed
of the impending severance of his ties with the company he is
working for. x x x.

x x x Over the years, this Court has had the opportunity to reexamine the
sanctions imposed upon employers who fail to comply with the
procedural due process requirements in terminating its employees.
In Agabon v. National Labor Relations Commission [citation omitted],
this Court reverted back to the doctrine in Wenphil Corporation v.
National Labor Relations Commission [citation omitted] and held
thatwhere the dismissal is due to a just or authorized cause, but
without observance of the due process requirements, the dismissal
may be upheld but the employer must pay an indemnity to the
employee. The sanctions to be imposed however, must be stiffer than
those imposed in Wenphil to achieve a result fair to both the employers
and the employees.

In Jaka Food Processing Corporation v. Pacot [citation omitted],
this Court, taking a cue from Agabon, held that since there is a clear-cut
distinction between a dismissal due to a just cause and a dismissal due to
an authorized cause, the legal implications for employers who fail to
comply with the notice requirements must also be treated differently:

Accordingly, it is wise to hold that: (1) if the dismissal is
based on a just cause under Article 282 but the employer failed to
comply with the notice requirement, the sanction to be imposed
upon him should be tempered because the dismissal process was,
in effect, initiated by an act imputable to the employee; and (2) if
the dismissal is based on an authorized cause under Article 283
but the employer failed to comply with the notice requirement, the
sanction should be stiffer because the dismissal process was
initiated by the employer's exercise of his management
prerogative.
[55]
[Emphasis supplied.]


Thus, in addition to separation pay, respondent is also entitled to an award of
nominal damages. In conformity with this Courts ruling in Culili v. Eastern
Telecommunications Philippines, Inc. and Shimizu Phils. Contractors, Inc. v.
Callanta, both citing Jaka Food Processing Corporation v. Pacot,
[56]
this Court
fixed the amount of nominal damages to P50,000.00.

With respect to petitioners contention that the Management Contract
executed between respondent and petitioner Lucila has no binding effect on
petitioner corporation for having been executed way before its incorporation, this
Court finds the same meritorious.

Section 19 of the Corporation Code expressly provides:

Sec. 19. Commencement of corporate existence. - A private
corporation formed or organized under this Code commences to have
corporate existence and juridical personality and is deemed
incorporated from the date the Securities and Exchange
Commission issues a certificate of incorporation under its official
seal; and thereupon the incorporators, stockholders/members and their
successors shall constitute a body politic and corporate under the name
stated in the articles of incorporation for the period of time mentioned
therein, unless said period is extended or the corporation is sooner
dissolved in accordance with law. [Emphasis supplied.]


Logically, there is no corporation to speak of prior to an entitys
incorporation. And no contract entered into before incorporation can bind the
corporation.

As can be gleaned from the records, the Management Contract dated 16
January 1994 was executed between respondent and petitioner Lucila months
before petitioner corporations incorporation on 15 August 1994. Similarly, it was
done when petitioner Lucila was still the President of Marc Marketing,
Inc. Undeniably, it cannot have any binding and legal effect on petitioner
corporation. Also, there was no evidence presented to prove that petitioner
corporation adopted, ratified or confirmed the Management Contract. It is for the
same reason that petitioner corporation cannot be considered estopped from
questioning its binding effect now that respondent was invoking the same against
it. In no way, then, can it be enforced against petitioner corporation, much less, its
provisions fixing respondents compensation as General Manager to 30% of
petitioner corporations net profit. Consequently, such percentage cannot be the
basis for the computation of respondents separation pay. This finding, however,
will not affect the undisputed fact that respondent was, indeed, the General
Manager of petitioner corporation from its incorporation up to the time of his
dismissal.

Accordingly, this Court finds it necessary to still remand the present case to
the Labor Arbiter to conduct further proceedings for the sole purpose of
determining the compensation that respondent was actually receiving during the
period that he was the General Manager of petitioner corporation, this, for the
proper computation of his separation pay.
As regards petitioner Lucilas solidary liability, this Court affirms the
same.

As a rule, corporation has a personality separate and distinct from its officers,
stockholders and members such that corporate officers are not personally liable
for their official acts unless it is shown that they have exceeded their
authority. However, this corporate veil can be pierced when the notion of the
legal entity is used as a means to perpetrate fraud, an illegal act, as a vehicle for the
evasion of an existing obligation, and to confuse legitimate issues. Under the
Labor Code, for instance, when a corporation violates a provision declared to be
penal in nature, the penalty shall be imposed upon the guilty officer or officers of
the corporation.
[57]


Based on the prevailing circumstances in this case, petitioner Lucila, being
the President of petitioner corporation, acted in bad faith and with malice in
effecting respondents dismissal from employment. Although petitioner
corporation has a valid cause for dismissing respondent due to cessation of
business operations, however, the latters dismissal therefrom was done abruptly
by its President, petitioner Lucila. Respondent was not given the required one-
month prior written notice that petitioner corporation will already cease its
business operations. As can be gleaned from the records, respondent was
dismissed outright by petitioner Lucila on the same day that petitioner corporation
decided to stop and cease its business operations. Worse, respondent was not
given separation pay considering that petitioner corporations cessation of business
was not due to business losses or financial reverses.

WHEREFORE, premises considered, the Decision and Resolution dated 20
June 2005 and 7 March 2006, respectively, of the Court of Appeals in CA-G.R. SP
No. 76624 are hereby AFFIRMED with the MODIFICATION finding
respondents dismissal from employment legal but without proper observance of
due process. Accordingly, petitioner corporation, jointly and solidarily liable with
petitioner Lucila, is hereby ordered to pay respondent the following; (1) separation
pay equivalent to one month pay or at least one-half month pay for every year of
service, whichever is higher, to be computed from the commencement of
employment until termination; and (2) nominal damages in the amount
ofP50,000.00.

This Court, however, finds it proper to still remand the records to the Labor
Arbiter to conduct further proceedings for the sole purpose of determining the
compensation that respondent was actually receiving during the period that he was
the General Manager of petitioner corporation for the proper computation of his
separation pay.

Costs against petitioners.

SO ORDERED.