Asset Privatization Trust v.

CA
G.R. No. 121171
December 29, 1998,
Kapunan, J.

Facts:
 R.A. No. 1828 as amended by R.A. No. 2077 and 4167: authorized the development,
exploration and utilization of the mineral deposits in the Surigao Mineral Reservation

 By virtue of such laws, a Memorandum of Agreement was made, whereby the Republic
of the Philippines thru the Surigao Mineral Reservation Board, granted MMIC the
exclusive right to explore, develop and exploit nickel, cobalt and other minerals in the
Surigao mineral reservation. MMIC (Marinduque Mining and Industrial
Corporation) is a domestic corporation engaged in mining with respondents Jesus S.
Cabarrus, Sr. as President and among its original stockholders.

 The Philippine Government undertook to support the financing of MMIC by

purchase of MMIC debenture and extension of guarantees. Further, the Philippine
Government obtained a firm commitment from the DBP and/or other government
financing institutions to subscribed in MMIC and issue guarantee/s for foreign loans or
deferred payment arrangements secured from the US Eximbank, Asian Development
Bank, Kobe Steel, of amount not exceeding US$100 Million.

 DBP approved guarantees in favor of MMIC and subsequent requests for guarantees were
based on the unutilized portion of the Government commitment. Thereafter, the
Government extended accommodations to MMIC in various amounts.

 On July 13, 1981, MMIC, PNB and DBP executed a Mortgage Trust Agreement
whereby MMIC, as mortgagor, agreed to constitute a mortgage in favor of PNB and DBP
as mortgagees, over all MMIC’s assets, subject of real estate and chattel mortgage
executed by the mortgagor, and additional assets described and identified, including
assets of whatever kind, nature or description, which the mortgagor may acquire whether
in substitution of, in replenishment, or in addition thereto.

 Article IV of the Mortgage Trust Agreement provides for Events of Default, which
expressly includes the event that the MORTGAGOR shall fail to pay any amount secured
by this Mortgage Trust Agreement when due. Article V of the Mortgage Trust
Agreement prescribes in detail, circumstances by which the mortgagor may be declared
in default, the procedure therefor, waiver of period to foreclose, authority of Trustee
before, during and after foreclosure, including taking possession of the mortgaged
properties.
 By 1984, DBP and PNB’s financial exposure both in loans and in equity in MMIC had
reached tremendous proportions, and MMIC was having a difficult time meeting its
financial obligations.

 MMIC had an outstanding loan with DBP in the amount of P13,792,607,565.92 as of

August 31, 1984 and in the amount of P8,789,028,249.38 as of July 15, 1984 or a total
Government exposure of P22,668,537,770.05, Philippine Currency.

 Thus, a financial restructuring plan (FRP) designed to reduce MMIC'’ interest

expense through debt conversion to equity was drafted by the Sycip Gorres Velayo
accounting firm. On April 30, 1984, the FRP was approved by the Board of Directors of
the MMIC. However, the proposed FRP had never been formally adopted, approved or
ratified by either PNB or DBP.

 In August and September 1984, as the various loans and advances made by DBP and
PNB to MMIC had become overdue and since any restructuring program relative to the
loans was no longer feasible, and in compliance with the directive of Presidential Decree
No. 385, DBP and PNB as mortgagees of MMIC assets, decided to exercise their
right to extrajudicially foreclose the mortgages in accordance with the Mortgage
Trust Agreement.

 The foreclosed assets were sold to PNB as the lone bidder and were assigned to three
newly formed corporations, namely, Nonoc Mining Corporation, Maricalum Mining
and Industrial Corporation, and Island Cement Corporation. In 1986, these assets
were transferred to the Asset Privatization Trust (APT).

 On February 28, 1985, Jesus S. Cabarrus, Sr., together with the other stockholders of
MMIC, filed a derivative suit against DBP and PNB for Annulment of Foreclosures,
Specific Performance and Damages. The suit, docketed as Civil Case No. 9900, prayed
that the court: (1) annul the foreclosure, restore the foreclosed assets to MMIC, and
require the banks to account for their use and operation in the interim; (2) direct the banks
to honor and perform their commitments under the alleged FRP; and (3) pay moral and
exemplary damages, attorney’s fees, litigation expenses and costs.

 In the course of the trial, private respondents and petitioner APT, as successor of the DBP
and PNB’s interest in MMIC, mutually agreed to submit the case to arbitration by
entering into a “Compromise and Arbitration Agreement,”

 In withdrawing their dispute form the court and in choosing to resolve it through
arbitration, the parties have agreed that:

(a) their respective money claims shall be reduced to purely money claims; and
 (b) as successor and assignee of the PNB and DBP interest in MMIC and the
MMIC accounts, APT shall likewise succeed to the rights and obligations of PNB
and DBP in respect of the controversy subject of Civil Case No. 9900 to be
transferred to arbitration and any arbitral award/order against either PNB and/or
DBP shall be the responsibility of, be discharged by and be enforceable against
APT, the partied having agreed to drop PNB and DBP from the arbitration.

 The Compromise Agreement was limited to the following Issues.

(a) Whether PLAINTIFFS have the capacity or the personality to institute this
derivative suit in behalf of the MMIC or its directors;

(b) Whether or not the actions leading to, and including, the PNB-DBP foreclosure of
the MMIC assets were proper, valid and in good faith

 The Court approves the compromise agreement and dismissed the complaint

 The Arbitration Committee was composed of retired Supreme Court Justice Abraham
Sarmiento as Chairman, Atty. Jose C. Sison and former Court of Appeals Justice
Magdangal Elma as Members.

 The Arbitration Committee ruled in favor of the MMIC. The decision is final and
executor. The foreclosure was rendered invalid and the MMIC debts remain outstanding
an unpaid. (The total outstanding obligation due to DBP and PNB as of the date of
foreclosure is P22,668,537,770.05, more or less.)

 APT (as substitute of DBP And PNB) is entitled to, collect the outstanding obligations of
MMIC to PNB and DBP amounting to P22,668.537,770.05, more or less, with interest
thereon as stipulated in the loan documents from the date of foreclosure up to the time
they are fully paid less the proportionate liability of DBP as owner of 87% of the total
capitalization of MMIC under the FRP. Simply put, DBP shall share in the award of
damages to, and in obligations of MMIC in proportion to its 87% equity in the total
capital stock of MMIC.

 Both parties field their MR, but such were denied.

 The private respondents filed an “Application/Motion for Confirmation of Arbitration

Award.” On November 28, 1994, the trial court confirmed the award of the Arbitral
Committee.

 Petitioner filed its MR but it was denied for having been filed out of time. APT received
a copy of the Order of the Court on December 6, 1994, the Motion for Reconsideration
thereof filed by the defendant APT on December 27, 1994, or after the lapse of 21 days.
Hence, already beyond the 15 – day reglementary period
  On February 7, 1995, petitioner received private respondents’ motion for Execution
and Appointment of Custodian of Proceeds of Execution dated February 6, 1995.

 The petitioner filed with the CA aan action for certiorari with TRO alleging gravwe
abuse of discretion. But, the same was denied.

Hence, this petition

Issues & RMakati uling:

1. Does the RTC of Makati, Branch 62 have jurisdiction to comfirm the arbitral award?
 None. The correct procedure was for the parties to go back to the court where the
case was pending to have the award confirmed by said court. However, Branch
62 made the fatal mistake of issuing a final order dismissing the case. While
Branch 62 should have merely suspended the case and not dismissed it,
neither of the parties questioned said dismissal. Thus, both parties as well as
said court are bound by such error.

2. Is APT estopped for questioning the jurisdiction of the RTC?

 NO. The rule is that “Where the court itself clearly has no jurisdiction over the
subject matter or the nature of the action, the invocation of this defense may be
done at any time. It is neither for the courts nor for the parties to violate or
disregard that rule, let alone to confer that jurisdiction, this matter being
legislative in character.” As a rule the, neither waiver nor estoppel shall apply to
confer jurisdiction upon a court barring highly meritorious and exceptional
circumstances. One such exception was enunciated in Tijam vs. Sibonghanoy,
where it was held that “after voluntarily submitting a cause and encountering an
adverse decision on the merits, it is too late for the loser to question the
jurisdiction or power of the court."

3. Is the appeal to the CA thru certiorari proper?

 Yes. Section 29 of Republic Act No. 876 provides that an appeal may be taken
from an order made in a proceeding under this Act, or from a judgment entered
upon an award through certiorari proceedings, but such appeals shall be limited
to question of law. The provision does not preclude a party aggrieved by the
arbitral award from resorting to the extraordinary remedy of certiorari under Rule
65 of the Rules of Court where, as in this case, the Regional Trial Court to which
the award was submitted for confirmation has acted without jurisdiction, or with
grave abuse of discretion and there is no appeal, nor any plain, speedy remedy in
the course of law.

4. What is the nature and limits of the Arbitrator’s power?

 As a rule, the award of an arbitrator cannot be set aside for mere errors of
judgment either as to the law or as to the facts. Courts are without power to
amend or overrule merely because of disagreement with matters of law or facts
determined by the arbitrators. They will not review the findings of law and fact
contained in an award, and will not undertake to substitute their judgment for that
of the arbitrators, since any other rule would make an award the commencement,
not the end, of litigation. Errors of law and fact, or an erroneous decision of
matters submitted to the judgment of the arbitrators, are insufficient to invalidate
an award fairly and honestly made. Judicial review of an arbitration is, thus, more
limited than judicial review of a trial.

 Nonetheless, the arbitrators’ awards is not absolute and without exceptions. The
arbitrators cannot resolve issues beyond the scope of the submission agreement.
The parties to such an agreement are bound by the arbitrators’ award only to the
extent and in the manner prescribed by the contract and only if the award is
rendered in conformity thereto. Thus, Sections 24 and 25 of the Arbitration Law
provide grounds for vacating, rescinding or modifying an arbitration
award. Where the conditions described in Articles 2038, 2039 and 2040 of the
Civil Code applicable to compromises and arbitration are attendant, the arbitration
award may also be annulled.

 SEC. 24. Grounds for vacating award:

(a) The award was procured by corruption, fraud, or other undue means; or

(b) That there was evident partiality or corruption in arbitrators or any of

them; or

(c) That the arbitrators were guilty of misconduct in refusing to postpone

the hearing upon sufficient cause shown, or in refusing to hear evidence
pertinent and material to the controversy; that one or more of the
arbitrators was disqualified to act as such under section nine hereof, and
willfully refrained from disclosing such disqualifications or any other
misbehavior by which the rights of any party have been materially
prejudiced; or

(d) That the arbitrators exceeded their powers, or so imperfectly executed

them, that a mutual, final and definite award upon the subject matter
submitted to them was not made. (Underscoring ours).

 Section 25 Grounds for modifying or correcting award :

(a) Where there was an evident miscalculation of figures, or an evident
mistake in the description of any person, thing or property referred to in
the award; or
 (b) Where the arbitrators have awarded upon a matter not submitted to
them, not affecting the merits of the decision upon the matter submitted; or

(c) Where the award is imperfect in a matter of form not affecting the
merits of the controversy, and if it had been a commissioner’s report, the
defect could have been amended or disregarded by the court.

5. Was there a FRP? Was the foreclosure of the mortgage valid?

 No FRP; valid foreclosure (The foreclosure was not a wrongful act of the
banks and, therefore, could not be the basis of any award of damages. There
was no financial restructuring agreement to speak of that could have
constituted an impediment to the exercise of the bank’s right to foreclose.)

 The drawing up of the FRP is the best proof of this. When MMIC adopted a
restructuring program for its loan, it only meant that these loans were already
due and unpaid. If these loans were restructurable because they were already
due and unpaid, they are likewise “forecloseable”. The option is with the
PNB-DBP on what steps to take.

 The mere fact that MMIC adopted the FRP does not mean that DBP-PNB lost
the option to foreclose. Neither does it mean that the FRP is legally binding
and implementable. It must be pointed that said FRP will, in effect, supersede
the existing and past due loans of MMIC with PNB-DBP. It will become the
new loan agreement between the lenders and the borrowers. As in all other
contracts, there must therefore be a meeting of minds of the parties; the PNB
and DBP must have to validly adopt and ratify such FRP before they can be
bound by it; before it can be implemented. In this case, not an iota of proof
has been presented by the PLAINTIFFS showing that PNB and DBP ratified
and adopted the FRP. PLAINTIFFS simply relied on a legal doctrine of
promissory estoppel to support its allegation in this regard.

 Moreover, PNB and DBP had to initiate foreclosure proceedings as mandated

by P.D. No. 385, which took effect on January 31, 1974. The decree requires
government financial institutions to foreclose collaterals for loans where the
arrearages amount to 20% of the total outstanding obligations.

6. Did the arbiters overstepp their powers by declaring a valid FRP?

 YES.

 In submitting the case to arbitration, the parties had mutually agreed to

limit the issue to the “validity of the foreclosure” and to transform the
reliefs prayed for therein into pure money claims.There is absolutely no
evidence that the DBP and PNB agreed, expressly or impliedly, to the
proposed FRP. It cannot be overemphasized that a FRP, as a contract,
requires the consent of the parties thereto. The contract must bind both
contracting parties. Private respondents even by their own admission
 recognized that the FRP had yet not been carried out and that the loans of
MMIC had not yet been converted into equity.

 However, the arbitration Committee not only declared the FRP valid and
effective, but also converted the loans of MMIC into equity raising the
equity of DBP to 87%.

7. Did the Arbiters exceed their authority in awarding damages to MMIC, which is not
impleaded as a party to the derivative suit?
 Yes. MMIC was not joined as a party plaintiff or party defendant at any stage of
the proceedings. As it is, the award of damages to MMIC, which was not a party
before the Arbitration Committee, is a complete nullity.

 Settled is the doctrine that in a derivative suit, the corporation is the real party in
interest while the stockholder filing suit for the corporation’s behalf is only
nominal party. The corporation should be included as a party in the suit.

 An individual stockholder is permitted to institute a derivative suit on behalf of

the corporation wherein he holds stock in order to protect or vindicate corporate
rights, whenever the officials of the corporation refuse to sue, or are the ones to be
sued or hold the control of the corporation. In such actions, the suing stockholder
is regarded as a nominal party, with the corporation as the real party in interest

 It is a condition sine qua non that the corporation be impleaded as a party because
not only is the corporation an indispensible party, but it is also the present rule
that it must be served with process. In other words the corporations must be
joined as party because it is its cause of action that is being litigated and because
judgment must be a res ajudicata against it.

 The reasons given for not allowing direct individual suit are:

(1) to allow shareholders to sue separately would conflict with the

separate corporate entity principle;

(2) the prior rights of the creditors may be prejudiced.

(3) the filing of such suits would conflict with the duty of the
management to sue for the protection of all concerned;

(4) it would produce wasteful multiplicity of suits; and

(5) it would involve confusion in a ascertaining the effect of partial

recovery by an individual on the damages recoverable by the corporation
for the same act.
7. Is the award of moral damages to Jesus Cabarrus, Sr. proper?
 NO.

 Cabarrus’ cause of action for the seizure of the assets belonging to IEI, of which
he is the majority stockholder, having been ventilated in a complaint he
previously filed with the RTC, from which he obtained actual damages, he was
barred res judicata from filing a similar case in another court, this time asking for
moral damages which he failed to get from the earlier case. Worse, private
respondents violated the rule against non-forum shopping.

 It is a basic postulate that a corporation has a personality separate and distinct

from its stockholders. The properties foreclosed belonged to MMIC, not to its
stockholders. Hence, if wrong was committed in the foreclosure, it was done
against the corporation.

 Another reason is that Jesus S. Cabarrus, Sr. cannot directly claim those
damages for himself that would result in the appropriation by, and the distribution
to, him part of the corporation’s assets before the dissolution of the corporation
and the liquidation of its debts and liabilities.
REYNALDO T. COMETA and STATE INVESTMENT TRUST, INC., petitioners, vs.
COURT OF APPEALS, HON.GEORGE MACLI-ING, in his capacity as Presiding
Judge, Regional Trial Court, Quezon City Branch 100, REYNALDO S.
GUEVARA and HONEYCOMB BUILDERS, INC. respondents.

G.R. No. 124062, 1999 Jan 21, 2nd Division

MENDOZA, J.

Facts:

Petitioner State Investment Trust, Inc. (SITI), formerly State

Investment House, Inc. (SIHI), is an investment house engaged in
quasi-banking activities. Petitioner Reynaldo Cometa is its president.
Private respondent Honeycomb Builders, Inc. (HBI), on the other hand,
is a corporation engaged in the business of developing, constructing,
and selling townhouses and condominium units. Private respondent
Reynaldo Guevara is president of HBI and chairman of the board of
directors of Guevent Industrial Development Corp. (GIDC).

Sometime in 1979, petitioner SITI extended loans in various amounts to

GIDC which the latter failed to pay on the dates they became due. For
this reason, a rehabilitation plan was agreed upon for GIDC under
which it mortgaged several parcels of land to petitioner SITI. Among
those mortgaged was a Mandaluyong lot covered by TCT No. 462855
(20510). However, GIDC again defaulted. Hence, petitioner SITI
foreclosed the mortgages and, in the foreclosure sale, acquired the
properties as highest bidder.

Alleging irregularities in the foreclosure of the mortgages and the

sale of properties to petitioner SITI, GIDC filed a case entitled
"Guevent Industrial Development Corp. et al., plaintiffs v. State
Investment House Inc. et al., defendants," in the Regional Trial Court
of Pasig. The case was eventually settled through a compromise
agreement which became the basis of the trial court’s judgment. A
dispute later arose concerning the interpretation of the compromise
agreement, as respondent HBI offered to purchase from GIDC the lot
covered by TCT No. 462855 (20510) and the latter agreed but petitioner
SITI (the mortgagee) refused to give its consent to the sale and
release its lien on the property. For this reason, GIDC asked the
trial court for a clarification of its decision.

Subsequently, the trial court directed petitioner SITI to accept the

offer of respondent HBI to purchase the property covered by TCT No.
462855 (20510). Petitioner SITI appealed the order to the Court of
Appeals which affirmed the same. On appeal to this Court, the decision
of the Court of Appeals was affirmed.

Meanwhile, respondent HBI applied to the Housing and Land Use

Regulatory Board (HLURB) for a permit to develop the property in
question. Its application was granted, on account of which respondent
HBI built a condominium on the property called "RSG Condominium
Gueventville II." When respondent HBI applied for a license to sell
the condominium units it was required by the HLURB to submit an
Affidavit of Undertaking which in effect stated that the mortgagee
(SITI) of the property to be developed agrees to release the mortgage
on the said property as soon as the full purchase price of the same is
paid by the buyer. Respondent HBI submitted the required affidavit
purportedly executed by petitioner Cometa as president of SITI
(mortgagee).

Petitioner Cometa denied, however, that he ever executed the

affidavit. He asked the National Bureau of Investigation for
assistance to determine the authenticity of the signature on the
affidavit. The NBI found Cometa’s signature on the Affidavit of
Undertaking to be a forgery on the basis of which a complaint for
falsification of public document was filed against HBI president
Guevara. However, the Rizal Provincial Prosecutor’s Office found no
probable cause against private respondent Guevara and accordingly
dismissed the complaint.

Petitioners appealed the matter to then Secretary of Justice Franklin

Drilon who reversed the Provincial Prosecutor’s Office and ordered it
to file an information against private respondent Guevara for
falsification of public document. Private respondent Guevara moved for
a reconsideration of the aforesaid resolution, but his motion was
denied.

An information for Falsification of Public Document was thus filed

against private respondent Guevara in the Regional Trial Court of
Makati. After the prosecution presented its evidence, Guevara filed a
demurrer to evidence which the trial court granted.

Following the dismissal of the criminal case against him, private

respondents Reynaldo S. Guevara and HBI filed a complaint for
malicious prosecution against petitioners Cometa and SITI in the
Regional Trial Court of Quezon City.

Petitioners SITI and Cometa filed their respective answers. After the
pre-trial of the case, they filed a joint motion to dismiss with
alternative motion to drop respondent HBI as a party plaintiff, upon
the following grounds:

1. The complaint states no cause of action.

2. Secretary Drilon, Undersecretary Bello and the prosecutor, not

impleaded herein, are the real parties in-interest-defendants, which
again makes the complaint lack a cause of action. At the least, the
above public official are indispensable parties, and their non-
inclusion renders this court without jurisdiction over the case.

3. The action seeks to impose a penalty on the right to litigate and

for that reason is unconstitutional and against settled public policy.
The trial court, through Judge George Macli-ing, denied petitioners’
joint motion for the reasons that there are sufficient allegations of
cause of action in the Complaint, and in the interest of justice, the
Plaintiff thru counsel should be given an opportunity to introduce
proof in support of his allegations, which could at best be attained
thru a full blown hearing on the merits of the case. The defense of
lack of cause of action, and that defendants are not the real parties
in interest, in the considered opinion of this Court, are matters of
defense, which will be considered, after the contending parties thru
counsel shall have rested their cases, and the case submitted for
Decision.

As regards the Alternative Motion to Drop Honeycomb Builders, Inc. as

Party Plaintiff, the Complaint shows that Reynaldo Guevara, is the
President, Chairman of the Board and Majority Stockholder of HBI, the
same will likewise be taken into consideration when proofs will be
introduced for or against this particular matter. At this point in
time, the trial court let Honeycomb Builders, Inc. remain as party
plaintiff.

Petitioners, in separate motions, asked for a reconsideration but

their motions were denied. They then filed a petition for certiorari
and prohibition. The Court of Appeals immediately issued a temporary
restraining order upon petitioners’ posting of a P1,000.00 bond,

issued a writ of preliminary injunction enjoining the trial court from

conducting further proceedings in the case. The Court of Appeals
rendered its decision denying the petition for certiorari and
prohibition of petitioners. Petitioners filed a motion for
reconsideration but the appellate court denied their motion in a
resolution.

Hence, this petition.

ISSUE:

Whether the private respondent HBI should have been dropped as a party
plaintiff upon petitioners’ motion therefor.

RULING:

NO.

It is contended that HBI is not a real-party-in-interest, whatever

interest it may have being purely speculative. On this point, The
Court held the Court of Appeals correctly ruled:

Section 11 of Rule 3 of the Rules of Court provides:

Misjoinder and non-joinder of parties. Misjoinder of parties is not a

ground for dismissal of an action. Parties may be dropped or added by
order of the court or on motion of any party or on its own initiative
at any stage of the action and on such terms as are just.

. . . .

Given (1) the foregoing rule, (2), the fact that Guevara, in his
capacity as president of HBI, filed HBI’s application to sell at the
HLURB and it was in the same capacity and in connection with the
application that he was criminally charged, and (3) the allegations in
the complaint including that stating that by the filing of the
criminal case against Guevara, "the application of HBI with the HLURB
for a regular license to sell the condominium units . . . had been
delayed," resulting in the corresponding delay in the sale thereof on
account of which "plaintiffs incurred over runs in development,
marketing and financial costs and charges, resulting in actual
damages," the deferral by public respondent of petitioners’ motion to
drop HBI as party plaintiff cannot be said to have been attended with
grave abuse of discretion. It bears emphasis that the phraseology of
Section 11 of Rule 3 is that "parties may be dropped . . . at any
stage of the action."

It is true that a criminal case can only be filed against the officers
of a corporation and not against the corporation itself. It does not
follow from this, however, that the corporation cannot be a real-
party-in-interest for the purpose of bringing a civil action for
malicious prosecution.

Lastly, the statement of the judge in the assailed order that "the
defense of lack of cause of action and that the defendants are not the
real parties in interest .... are matters of defense" was correctly
held by the appellate court as mere dictum, said judge having earlier
stated in the same order that "there are sufficient allegations of
causes of action in the Complaint."

WHEREFORE, the decision of the Court of Appeals is AFFIRMED.

SC: IRT malicious prosecution..may cause of action

MR of the case. G.R. No. 124062, 1999 Dec 29.. wala raw cause of
action
FRANCISCO S. TATAD, JOHN H. OSMENA and RODOLFO G. BIAZON,
petitioners,
vs.
HON. JESUS B. GARCIA, JR., in his capacity as the Secretary of the
Department of Transportation and Communications, and EDSA LRT
CORPORATION, LTD., respondents.

FACTS: Petitioners Francisco S. Tatad, John H. Osmena and Rodolfo G. Biazon

are members of the Philippine Senate and are suing in their capacities as
Senators and as taxpayers. Respondent Jesus B. Garcia, Jr. is the incumbent
Secretary of the Department of Transportation and Communications (DOTC),
while private respondent EDSA LRT Corporation, Ltd. is a private corporation
organized under the laws of Hongkong.

The petition, under Rule 65 of the Revised Rules of Court, was filed to
prohibit respondents from further implementing and enforcing the "Revised
and Restated Agreement to Build, Lease and Transfer a Light Rail Transit
System for EDSA" dated April 22, 1992, and the "Supplemental Agreement to
the 22 April 1992 Revised and Restated Agreement To Build, Lease and
Transfer a Light Rail Transit System for EDSA" dated May 6, 1993.

In 1989, DOTC planned to construct a light railway transit line along EDSA, a
major thoroughfare in Metropolitan Manila, which shall traverse the cities of
Pasay, Quezon, Mandaluyong and Makati. The plan, referred to as EDSA Light
Rail Transit III (EDSA LRT III), was intended to provide a mass transit system
along EDSA and alleviate the congestion and growing transportation problem
in the metropolis.

[On March 3, 1990, a letter of intent was sent by the Eli Levin Enterprises,
Inc., represented by Elijahu Levin to DOTC Secretary Oscar Orbos, proposing
to construct the EDSA LRT III on a Build-Operate-Transfer (BOT) basis.

On March 15, 1990, Secretary Orbos invited Levin to send a technical team
to discuss the project with DOTC.]

On July 9, 1990, Republic Act No. 6957 entitled "An Act Authorizing the
Financing, Construction, Operation and Maintenance of Infrastructure
Projects by the Private Sector, and For Other Purposes," was signed by
President Corazon C. Aquino. Referred to as the Build-Operate-Transfer (BOT)
Law, it took effect on October 9, 1990.

Republic Act No. 6957 provides for two schemes for the financing,
construction and operation of government projects through private initiative
and investment: Build-Operate-Transfer (BOT) or Build-Transfer (BT).
Department Orders Nos. 91-494 and 91-496 were issued later, respectively
creating the Prequalification Bids and Awards Committee (PBAC) and the
Technical Committee.

After its constitution, the PBAC issued guidelines for the prequalification of
contractors for the financing and implementation of the project The notice,
advertising the prequalification of bidders, was published in three
newspapers of general circulation once a week for three consecutive weeks
starting February 21, 1991.

The deadline set for submission of prequalification documents was March 21,
1991, later extended to April 1, 1991. Five groups responded to the invitation
namely, ABB Trazione of Italy, Hopewell Holdings Ltd. of Hongkong, Mansteel
International of Mandaue, Cebu, Mitsui & Co., Ltd. of Japan, and EDSA LRT
Consortium, composed of ten foreign and domestic corporations: namely,
Kaiser Engineers International, Inc., ACER Consultants (Far East) Ltd. and
Freeman Fox, Tradeinvest/CKD Tatra of the Czech and Slovak Federal
Republics, TCGI Engineering All Asia Capital and Leasing Corporation, The
Salim Group of Jakarta, E. L. Enterprises, Inc., A.M. Oreta & Co. Capitol
Industrial Construction Group, Inc, and F. F. Cruz & co., Inc.

On the last day for submission of prequalification documents, the

prequalification criteria proposed by the Technical Committee were adopted
by the PBAC. The approved criteria totalling 100 percent, are as follows: (a)
Legal aspects — 10 percent; (b) Management/Organizational capability — 30
percent; and (c) Financial capability — 30 percent; and (d) Technical
capability — 30 percent.

After evaluating the prequalification, bids, the PBAC issued a Resolution on

May 9, 1991 declaring that of the five applicants, only the EDSA LRT
Consortium "met the requirements of garnering at least 21 points per criteria
[sic], except for Legal Aspects, and obtaining an over-all passing mark of at
least 82 points". The Legal Aspects referred to provided that the BOT/BT
contractor-applicant meet the requirements specified in the Constitution and
other pertinent laws.

President Aquino was given two letters by the Exec Sec dated May 31, 1991
and June 14, 1991, respectively recommending the award of the EDSA LRT III
project to the sole complying bidder, the EDSA LRT Consortium, and
requesting for authority to negotiate with the said firm for the contract
pursuant to paragraph 14(b) of the Implementing Rules and Regulations of
the BOT Law.

In July 1991, Executive Secretary Orbos, acting on instructions of the

President, issued a directive to the DOTC to proceed with the negotiations.
On July 16, 1991, the EDSA LRT Consortium submitted its bid proposal to
DOTC.

Finding this proposal to be in compliance with the bid requirements, DOTC

and respondent EDSA LRT Corporation, Ltd., in substitution of the EDSA LRT
Consortium, entered into an "Agreement to Build, Lease and Transfer a Light
Rail Transit System for EDSA" under the terms of the BOT Law.

Secretary Prado, thereafter, requested presidential approval of the contract.

In a letter dated March 13, 1992, Executive Secretary Franklin Drilon, who
replaced Executive Secretary Orbos, informed Secretary Prado that the
President could not grant the requested approval for the following reasons:
(1) that DOTC failed to conduct actual public bidding in compliance with
Section 5 of the BOT Law; (2) that the law authorized public bidding as the
only mode to award BOT projects, and the prequalification proceedings was
not the public bidding contemplated under the law; (3) that Item 14 of the
Implementing Rules and Regulations of the BOT Law which authorized
negotiated award of contract in addition to public bidding was of doubtful
legality; and (4) that congressional approval of the list of priority projects
under the BOT or BT Scheme provided in the law had not yet been granted at
the time the contract was awarded (Rollo, pp. 178-179).

In view of the comments of Executive Secretary Drilon, the DOTC and private
respondents re-negotiated the agreement. On April 22, 1992, the parties
entered into a "Revised and Restated Agreement to Build, Lease and Transfer
a Light Rail Transit System for EDSA". Later on: "Supplemental Agreement to
the 22 April 1992 Revised and Restated Agreement to Build, Lease and
Transfer a Light Rail Transit System for EDSA" so as to "clarify their
respective rights and responsibilities" and to submit [the] Supplemental
Agreement to the President, of the Philippines for his approval" (Rollo, pp. 79-
80).

Secretary Garcia submitted the two Agreements to President Fidel V. Ramos

for his consideration and approval. FVR approved the same.

According to the agreements, these are among the stipulations:

1. EDSA LRT III will use light rail vehicles from the Czech and Slovak Federal
Republics.
2. The system will have its own power facility .
3. Private respondents shall undertake and finance the entire project
required for a complete operational light rail transit system
4. Upon full or partial completion and viability thereof, private respondent
shall deliver the use and possession of the completed portion to DOTC which
shall operate the same.
5.DOTC shall pay private respondent rentals on a monthly basis through an
Irrevocable Letter of Credit. The rentals shall be determined by an
independent and internationally accredited inspection firm to be appointed
by the parties.
6. Private respondent's capital shall be recovered from the rentals to be paid
by the DOTC which, in turn, shall come from the earnings of the EDSA LRT III.
7. After 25 years and DOTC shall have completed payment of the rentals,
ownership of the project shall be transferred to the latter for a consideration
of only U.S. $1.00.

ISSUE:
Whether or not the grant is unconstitutional on account of the
corporation's alleged foreign nationality.

HELD:
The question posed by petitioners is:

Can respondent EDSA LRT Corporation, Ltd., a foreign corporation own EDSA
LRT III; a public utility?

The phrasing of the question is erroneous; it is loaded. What private

respondent owns are the rail tracks, rolling stocks like the coaches,
rail stations, terminals and the power plant, not a public utility.
While a franchise is needed to operate these facilities to serve the public,
they do not by themselves constitute a public utility. What constitutes a
public utility is not their ownership but their use to serve the public (Iloilo Ice
& Cold Storage Co. v. Public Service Board, 44 Phil. 551, 557 558 [1923]).

The Constitution, in no uncertain terms, requires a franchise for the

operation of a public utility. However, it does not require a franchise before
one can own the facilities needed to operate a public utility so long as it does
not operate them to serve the public.

Section 11 of Article XII of the Constitution provides:

No franchise, certificate or any other form of authorization for the operation

of a public utility shall be granted except to citizens of the Philippines or to
corporations or associations organized under the laws of the Philippines at
least sixty per centum of whose capital is owned by such citizens, nor shall
such franchise, certificate or authorization be exclusive character or for a
longer period than fifty years . . .

In law, there is a clear distinction between the "operation" of a public utility

and the ownership of the facilities and equipment used to serve the public.
Ownership is defined as a relation in law by virtue of which a thing pertaining
to one person is completely subjected to his will in everything not prohibited
by law or the concurrence with the rights of another (Tolentino, II
Commentaries and Jurisprudence on the Civil Code of the Philippines 45
[1992]).

The exercise of the rights encompassed in ownership is limited by law so that

a property cannot be operated and used to serve the public as a public utility
unless the operator has a franchise. The operation of a rail system as a
public utility includes the transportation of passengers from one point to
another point, their loading and unloading at designated places and the
movement of the trains at pre-scheduled times (cf. Arizona Eastern R.R. Co.
v. J.A.. Matthews, 20 Ariz 282, 180 P.159, 7 A.L.R. 1149 [1919] ;United States
Fire Ins. Co. v. Northern P.R. Co., 30 Wash 2d. 722, 193 P. 2d 868, 2 A.L.R. 2d
1065 [1948]).

The right to operate a public utility may exist independently and

separately from the ownership of the facilities thereof. One can own
said facilities without operating them as a public utility, or
conversely, one may operate a public utility without owning the
facilities used to serve the public. The devotion of property to serve
the public may be done by the owner or by the person in control
thereof who may not necessarily be the owner thereof.

This dichotomy between the operation of a public utility and the ownership of
the facilities used to serve the public can be very well appreciated when we
consider the transportation industry. Enfranchised airline and shipping
companies may lease their aircraft and vessels instead of owning them
themselves.

While private respondent is the owner of the facilities necessary to

operate the EDSA. LRT III, it admits that it is not enfranchised to
operate a public utility (Revised and Restated Agreement, Sec. 3.2; Rollo,
p. 57). In view of this incapacity, private respondent and DOTC agreed that
on completion date, private respondent will immediately deliver possession
of the LRT system by way of lease for 25 years, during which period DOTC
shall operate the same as a common carrier and private respondent shall
provide technical maintenance and repair services to DOTC (Revised and
Restated Agreement, Secs. 3.2, 5.1 and 5.2; Rollo, pp. 57-58, 61-62).
Technical maintenance consists of providing (1) repair and maintenance
facilities for the depot and rail lines, services for routine clearing and
security; and (2) producing and distributing maintenance manuals and
drawings for the entire system (Revised and Restated Agreement, Annex F).

Private respondent shall also train DOTC personnel for familiarization with
the operation, use, maintenance and repair of the rolling stock, power plant,
substations, electrical, signaling, communications and all other equipment as
supplied in the agreement (Revised and Restated Agreement, Sec. 10; Rollo,
pp. 66-67). Training consists of theoretical and live training of DOTC
operational personnel which includes actual driving of light rail vehicles
under simulated operating conditions, control of operations, dealing with
emergencies, collection, counting and securing cash from the fare collection
system (Revised and Restated Agreement, Annex E, Secs. 2-3). Personnel of
DOTC will work under the direction and control of private respondent only
during training (Revised and Restated Agreement, Annex E, Sec. 3.1). The
training objectives, however, shall be such that upon completion of the EDSA
LRT III and upon opening of normal revenue operation, DOTC shall have in
their employ personnel capable of undertaking training of all new and
replacement personnel (Revised and Restated Agreement, Annex E Sec. 5.1).
In other words, by the end of the three-year construction period and upon
commencement of normal revenue operation, DOTC shall be able to operate
the EDSA LRT III on its own and train all new personnel by itself.

Fees for private respondent' s services shall be included in the rent, which
likewise includes the project cost, cost of replacement of plant equipment
and spare parts, investment and financing cost, plus a reasonable rate of
return thereon (Revised and Restated Agreement, Sec. 1; Rollo, p. 54).

Since DOTC shall operate the EDSA LRT III, it shall assume all the
obligations and liabilities of a common carrier. For this purpose, DOTC
shall indemnify and hold harmless private respondent from any losses,
damages, injuries or death which may be claimed in the operation or
implementation of the system, except losses, damages, injury or death due
to defects in the EDSA LRT III on account of the defective condition of
equipment or facilities or the defective maintenance of such equipment
facilities (Revised and Restated Agreement, Secs. 12.1 and 12.2; Rollo, p.
68).

In sum, private respondent will not run the light rail vehicles and collect fees
from the riding public. It will have no dealings with the public and the public
will have no right to demand any services from it.

It is well to point out that the role of private respondent as lessor during the
lease period must be distinguished from the role of the Philippine Gaming
Management Corporation (PGMC) in the case of Kilosbayan Inc. v. Guingona,
232 SCRA 110 (1994). Therein, the Contract of Lease between PGMC and the
Philippine Charity Sweepstakes Office (PCSO) was actually a collaboration or
joint venture agreement prescribed under the charter of the PCSO. In the
Contract of Lease; PGMC, the lessor obligated itself to build, at its own
expense, all the facilities necessary to operate and maintain a nationwide on-
line lottery system from whom PCSO was to lease the facilities and operate
the same. Upon due examination of the contract, the Court found that
PGMC's participation was not confined to the construction and setting up of
the on-line lottery system. It spilled over to the actual operation thereof,
becoming indispensable to the pursuit, conduct, administration and control
of the highly technical and sophisticated lottery system. In effect, the PCSO
leased out its franchise to PGMC which actually operated and managed the
same.

Indeed, a mere owner and lessor of the facilities used by a public

utility is not a public utility (Providence and W.R. Co. v. United States, 46
F. 2d 149, 152 [1930]; Chippewa Power Co. v. Railroad Commission of
Wisconsin, 205 N.W. 900, 903, 188 Wis. 246 [1925]; Ellis v. Interstate
Commerce Commission, Ill 35 S. Ct. 645, 646, 237 U.S. 434, 59 L. Ed. 1036
[1914]). Neither are owners of tank, refrigerator, wine, poultry and beer cars
who supply cars under contract to railroad companies considered as public
utilities (Crystal Car Line v. State Tax Commission, 174 p. 2d 984, 987
[1946]).

Even the mere formation of a public utility corporation does not ipso
facto characterize the corporation as one operating a public utility.
The moment for determining the requisite Filipino nationality is
when the entity applies for a franchise, certificate or any other form
of authorization for that purpose (People v. Quasha, 93 Phil. 333 [1953]).
) Philippine Long Distance Telephone Co. v. National Telecommunications
Commission
190 SCRA 717 (1990)

Facts:
Rep. Act No. 2090, was enacted, otherwise known as "An Act Granting Felix
Alberto and Company, Incorporated, a Franchise to Establish Radio Stations for
Domestic and Transoceanic Telecommunications." Felix Alberto & Co., Inc. (FACI) was
the original corporate name, which was changed to ETCI with the amendment of the
Articles of Incorporation in 1964. Much later, "CELLCOM, Inc." was the name sought to be
adopted before the Securities and Exchange Commission, but this was withdrawn and
abandoned.

Alleging urgent public need, ETCI filed an application with public respondent NTC
for the issuance of a Certificate of Public Convenience and Necessity (CPCN) to
construct, install, establish, operate and maintain a Cellular Mobile Telephone System
and an Alpha Numeric Paging System in Metro Manila and in the Southern Luzon
regions, with a prayer for provisional authority to operate Phase A of its proposal within
Metro Manila.

PLDT filed an Opposition with a Motion to Dismiss, based primarily on the

following grounds: (1) ETCI is not capacitated or qualified under its legislative franchise to
operate a systemwide telephone or network of telephone service such as the one
proposed in its application; (2) ETCI lacks the facilities needed and indispensable to the
successful operation of the proposed cellular mobile telephone system; (3) PLDT has itself
a pending application with NTC, Case No. 86-86, to install and operate a Cellular Mobile
Telephone System for domestic and international service not only in Manila but also in the
provinces and that under the "prior operator" or "protection of investment" doctrine, PLDT
has the priority or preference in the operation of such service; and (4) the provisional
authority, if granted, will result in needless, uneconomical and harmful duplication, among
others.
 NTC overruled PLDT's Opposition and declared that Rep. Act No. 2090 (1958)
should be liberally construed as to include among the services under said franchise the
operation of a cellular mobile telephone service.

In the same Order, ETCI was required to submit the certificate of registration of
its Articles of Incorporation with the Securities and Exchange Commission, the present
capital and ownership structure of the company and such other evidence, oral or
documentary, as may be necessary to prove its legal, financial and technical capabilities
as well as the economic justifications to warrant the setting up of cellular mobile
telephone and paging systems. The continuance of the hearings was also directed.

After evaluating the reconsideration sought by PLDT, the NTC maintained its ruling
that liberally construed, applicant's franchise carries with it the privilege to operate and
maintain a cellular mobile telephone service.

NTC issued the first challenged Order. Opining that "public interest, convenience
and necessity further demand a second cellular mobile telephone service provider and
finds PRIMA FACIE evidence showing applicant's legal, financial and technical capabilities
to provide a cellular mobile service using the AMPS system," NTC granted ETCI
provisional authority to install, operate and maintain a cellular mobile telephone
system initially in Metro Manila, Phase A only, subject to the terms and conditions set
forth in the same Order. One of the conditions prescribed (Condition No. 5) was that,
within ninety (90) days from date of the acceptance by ETCI of the terms and
conditions of the provisional authority, ETCI and PLDT "shall enter into an
interconnection agreement for the provision of adequate interconnection facilities
between applicant's cellular mobile telephone switch and the public switched
telephone network and shall jointly submit such interconnection agreement to the
Commission for approval."
 In a "Motion to Set Aside the Order" granting provisional authority, PLDT alleged
essentially that the interconnection ordered was in violation of due process and that
the grant of provisional authority was jurisdictionally and procedurally infirm.
NTC denied reconsideration and set the date for continuation of the hearings on
the main proceedings. This is the second questioned Order.

PLDT urges us now to annul the NTC Orders and to order ETCI to desist from,
suspend, and/or discontinue any and all acts intended for its implementation.

On 15 June 1989, we resolved to dismiss the petition for its failure to comply fully
with the requirements of Circular No. 1-88. Upon satisfactory showing, however, that there
was, in fact, such compliance, we reconsidered the order, reinstated the Petition, and
required the respondents NTC and ETCI to submit their respective Comments.

We issued a Temporary Restraining Order enjoining NTC to "Cease and Desist

from all or any of its on-going proceedings and ETCI from continuing any and all acts
intended or related to or which will amount to the implementation/execution of its
provisional authority."

We required PLDT to post a bond of P 5M. It has complied, with the statement that
it was "post(ing) the same on its agreement and/or consent to have the same forfeited in
favor of Private Respondent ETCI/CELLCOM should the instant Petition be dismissed for
lack of merit." ETCI took exception to the sufficiency of the bond considering its initial
investment of approximately P 225M, but accepted the forfeiture proferred.

ETCI moved to have the TRO lifted, which we denied. We stated, however, that
the inaugural ceremony ETCI had scheduled for that day could proceed, as the same was
not covered by the TRO.

Issues:

1) Does NTC have jurisdiction in granting provisional authority to ETCI?

 2) Does ETCI have franchise to be authorized as a corporate entity to operate a
public utility, legislative or otherwise, to establish and operate a
telecommunications system.

3) Is the transfer of shares of stock of a corporation holding a CPCN valid? (Stock

transactions of a public service enterprise contrary to and/or in direct violation
of Section 20(h) of the Public Service Act.)

4) Were the principle and procedure of interconnection validly applied in this

case?

Ruling:

1) There can be no question that the NTC is the regulatory agency of the
national government with jurisdiction over all telecommunications entities. It is legally
clothed with authority and given ample discretion to grant a provisional permit or
authority. In fact, NTC may, on its own initiative, grant such relief even in the absence
of a motion from an applicant.

What the NTC granted was such a provisional authority, with a definite expiry
period of eighteen (18) months unless sooner renewed, and which may be revoked,
amended or revised by the NTC. It is also limited to Metro Manila only.

The provisional authority was issued after due hearing, reception of evidence and
evaluation thereof, with the hearings attended by various oppositors, including PLDT. It was
granted only after a prima facie showing that ETCI has the necessary legal, financial and technical
capabilities and that public interest, convenience and necessity so demanded.

PLDT argues, however, that a provisional authority is nothing short of a Certificate of Public
Convenience and Necessity (CPCN) and that it is merely a "distinction without a difference." That is
not so. Basic differences do exist, which need not be elaborated on. What should be borne in mind
is that provisional authority would be meaningless if the grantee were not allowed to operate.
Moreover, it is clear from the itself that its scope is limited only to the first phase, out of four, of the
proposed nationwide telephone system. The installation and operation of an alpha numeric paging
system was not authorized. The provisional authority is not exclusive. Its lifetime is limited

and may be revoked by the NTC at any time in accordance with law. The initial
expenditure of P130M more or less, is rendered necessary even under a provisional authority to
enable ETCI to prove its capability.

2) Rep. Act No. 2090 grants ETCI (formerly FACI) "the right and privilege of constructing,
installing, establishing and operating in the entire Philippines radio stations for reception and
transmission of messages on radio stations in the foreign and domestic public fixed point-to-point
and public base, aeronautical and land mobile stations, ... with the corresponding relay stations for
the reception and transmission of wireless messages on radiotelegraphy and/or radiotelephony ...."
PLDT maintains that the scope of the franchise is limited to "radio stations" and
excludes telephone services such as the establishment of the proposed Cellular
Mobile Telephone System (CMTS). However, in its order, the NTC construed the
technical term "radiotelephony" liberally as to include the operation of a cellular
mobile telephone system.

3) PLDT contends that the transfers in 1987 of the shares of stock to the new
stockholders amount to a transfer of ETCI's franchise, which needs Congressional approval
pursuant to Rep. Act No. 2090, and since such approval had not been obtained, ETCI's franchise
had been invalidated. The provision relied on reads, in part, as follows:

SECTION 10. The grantee shall not lease, transfer, grant the usufruct of, sell or assign this
franchise nor the rights and privileges acquired thereunder to any person, firm, company,
corporation or other commercial or legal entity nor merge with any other person, company or
corporation organized for the same purpose, without the approval of the Congress of the
Philippines first had. ...

It should be noted, however, that the foregoing provision is, directed to the "grantee" of the
franchise, which is the corporation itself and refers to a sale, lease, or assignment of that franchise.
It does not include the transfer or sale of shares of stock of a corporation by the latter's
stockholders.
 The sale of shares of stock of a public utility is governed by another law, i.e., Section 20(h)
of the Public Service Act (Commonwealth Act No. 146). Pursuant thereto, the Public Service

Commission (now the NTC) is the government agency vested with the authority to
approve the transfer of more than 40% of the subscribed capital stock of a
telecommunications company to a single transferee.

In other words, transfers of shares of a public utility corporation need only NTC
approval, not Congressional authorization. What transpired in ETCI were a series of
transfers of shares starting in 1964 until 1987. The approval of the NTC may be
deemed to have been met when it authorized the issuance of the provisional authority
to ETCI. There was full disclosure before the NTC of the transfers. In fact, the NTC
Order of 12 November 1987 required ETCI to submit its "present capital and
ownership structure." Further, ETCI even filed a Motion before the NTC, more than a year prior
to the grant of provisional authority, seeking approval of the increase in its capital stock from
P360,000.00 to P40M, and the stock transfers made by its stockholders.

A distinction should be made between shares of stock, which are owned by stockholders,
the sale of which requires only NTC approval, and the franchise itself which is owned by the
corporation as the grantee thereof, the sale or transfer of which requires Congressional sanction.
Since stockholders own the shares of stock, they may dispose of the same as they see fit. They
may not, however, transfer or assign the property of a corporation, like its franchise. In other words,
even if the original stockholders had transferred their shares to another group of shareholders, the
franchise granted to the corporation subsists as long as the corporation, as an entity, continues to
exist The franchise is not thereby invalidated by the transfer of the shares. A corporation has a
personality separate and distinct from that of each stockholder. It has the right of continuity or
perpetual succession (Corporation Code, Sec. 2).

4) In the provisional authority granted by NTC to ETCI, one of the conditions imposed
was that the latter and PLDT were to enter into an interconnection agreement to be jointly
submitted to NTC for approval.

PLDT vehemently opposes interconnection with its own public switched telephone
network. It contends: that while PLDT welcomes interconnections in the furtherance of public
interest, only parties who can establish that they have valid and subsisting legislative franchises are
entitled to apply for a CPCN or provisional authority, absent which, NTC has no jurisdiction to grant
them the CPCN or interconnection with PLDT; that the 73 telephone systems operating all over the
Philippines have a viability and feasibility independent of any interconnection with PLDT; that "the
NTC is not empowered to compel such a private raid on PLDT's legitimate income arising out of its
gigantic investment;" that "it is not public interest, but purely a private and selfish interest which will
be served by an interconnection under ETCI's terms;" and that "to compel PLDT to interconnect
merely to give viability to a prospective competitor, which cannot stand on its own feet, cannot be
justified in the name of a non-existent public need" (PLDT Memorandum, pp. 48 and 50).

PLDT cannot justifiably refuse to interconnect.

Rep. Act No. 6849, or the Municipal Telephone Act of 1989, approved on 8 February 1990,
mandates interconnection providing as it does that "all domestic telecommunications carriers or
utilities ... shall be interconnected to the public switch telephone network." Such regulation of the
use and ownership of telecommunications systems is in the exercise of the plenary police power of
the State for the promotion of the general welfare.

The interconnection which has been required of PLDT is a form of "intervention" with
property rights dictated by "the objective of government to promote the rapid expansion of
telecommunications services in all areas of the Philippines, ... to maximize the use of
telecommunications facilities available, ... in recognition of the vital role of communications in
nation building ... and to ensure that all users of the public telecommunications service have
access to all other users of the service wherever they may be within the Philippines at an
acceptable standard of service and at reasonable cost" (DOTC Circular No. 90-248).
Undoubtedly, the encompassing objective is the common good. The NTC, as the
regulatory agency of the State, merely exercised its delegated authority to regulate
the use of telecommunications networks when it decreed interconnection.

The NTC order to interconnect allows the parties themselves to discuss and agree upon
the specific terms and conditions of the interconnection agreement instead of the NTC itself laying
down the standards of interconnection which it can very well impose. Thus it is that PLDT

cannot justifiably claim denial of clue process . It has been heard. It will continue to be heard
in the main proceedings. It will surely heard in the negotiations concerning the interconnection
agreement.

As disclosed during the hearing, the interconnection sought by ETCI is by no

means a "parasitic dependence" on PLDT. The ETCI system can operate on its own
even without interconnection, but it will be limited to its own subscribers. What
interconnection seeks to accomplish is to enable the system to reach out to the
greatest number of people possible in line with governmental policies laid down.
Cellular phones can access PLDT units and vice versa in as wide an area as
attainable. With the broader reach, public interest and convenience will be better served. To be
sure, ETCI could provide no mean competition (although PLDT maintains that it has nothing to fear
from the "innocuous interconnection"), and eat into PLDT's own toll revenue cream PLDT revenue,"
in its own words), but all for the eventual benefit of all that the system can reach.
LIM v. CA

FACTS: Petitioner Rufina Luy Lim is the surviving spouse of the late Pastor Y. Lim whose estate is the subject of
probate proceedings, entitled, "In Re: Intestate Estate of Pastor Y. Lim Rufina Luy Lim, represented by George Luy,
Petitioner".
Private respondents Auto Truck Corporation, Alliance Marketing Corporation, Speed Distributing, Inc., Active
Distributing, Inc. and Action Company are corporations formed, organized and existing under Philippine laws and
which owned real properties covered under the Torrens system.
On 11 June 1994, Pastor Y. Lim died intestate. Herein petitioner, as surviving spouse and duly represented by her
nephew George Luy, filed on 17 March 1995, a joint petition[5] for the administration of the estate of Pastor Y. Lim
before the Regional Trial Court of Quezon City.
Private respondent corporations, whose properties were included in the inventory of the estate of Pastor Y. Lim, then
filed a motion[6] for the lifting of lis pendens and motion[7] for exclusion of certain properties from the estate of
the decedent.
In an order[8] dated 08 June 1995, the Regional Trial Court of Quezon City, Branch 93, sitting as a probate court,
granted the private respondents’ twin motions.
Subsequently, Rufina Luy Lim filed a verified amended petition; among other things: "Although the above business
entities dealt and engaged in business with the public as corporations, all their capital, assets and equity were
however, personally owned by the late Pastor Y Lim. Hence the alleged stockholders and officers appearing in the
respective articles of incorporation of the above business entities were mere dummies of Pastor Y. Lim, and they
were listed therein only for purposes of registration with the Securities and Exchange Commission."
+ "...[certain] properties and/or real interests left by the late Pastor Y. Lim, are all conjugal in nature, having been
acquired by him during the existence of his marriage with petitioner."
lis pendens - restored
04 September 1995: the probate court appointed Rufina Lim as special administrator[11] and Miguel Lim and
Lawyer Donald Lee, as co-special administrators of the estate of Pastor Y. Lim, after which letters of administration
were accordingly issued.
12 September 1995: the probate court denied anew private respondents’ motion for exclusion
Private respondent filed a special civil action for certiorari[14], with an urgent prayer for a restraining order or writ
of preliminary injunction, before the Court of Appeals questioning the orders of the Regional Trial Court, sitting as a
probate court.
18 April 1996: the Court of Appeals, finding in favor of herein private respondents.
ISSUE: May a corporation, in its universality, be the proper subject of and be included in the inventory of the estate
of a deceased person?
HELD:
NO.
Moreover, petitioner urges that not only the properties of private respondent corporations are properly part of the
decedent’s estate but also the private respondent corporations themselves. To rivet such flimsy contention,
petitioner cited that the late Pastor Y. Lim during his lifetime, organized and wholly-owned the five corporations,
which are the private respondents in the instant case.[25] Petitioner thus attached as Annexes "F"[26] and "G"[27]
of the petition for review affidavits executed by Teresa Lim and Lani Wenceslao which among others, contained
averments that the incorporators of Uniwide Distributing, Inc. included on the list had no actual participation in the
organization and incorporation of the said corporation. The affiants added that the persons whose names appeared
on the articles of incorporation of Uniwide Distributing, Inc., as incorporators thereof, are mere dummies since they
have not actually contributed any amount to the capital stock of the corporation and have been merely asked by
the late Pastor Y. Lim to affix their respective signatures thereon.

It is settled that a corporation is clothed with personality separate and distinct from that of the persons composing
it. It may not generally be held liable for that of the persons composing it. It may not be held liable for the personal
indebtedness of its stockholders or those of The entities connected with it.[28]
Rudimentary is the rule that a corporation is invested by law with a personality distinct and separate from its
stockholders or members. In the same vein, a corporation by legal fiction and convenience is an entity shielded by
a protective mantle and imbued by law with a character alien to the persons comprising it.
Nonetheless, the shield is not at all times invincible. Thus, in FIRST PHILIPPINE INTERNATIONAL BANK vs. COURT OF
APPEALS, We enunciated:
"x x x When the fiction is urged as a means of perpetrating a fraud or an illegal act or as a vehicle for the evasion of
an existing obligation, the circumvention of statutes, the achievement or perfection of a monopoly or generally the
perpetration of knavery or crime, the veil with which the law covers and isolates the corporation from the members
or stockholders who compose it will be lifted to allow for its consideration merely as an aggregation of individuals. x
x x"

Piercing the veil of corporate entity requires the court to see through the protective shroud which exempts its
stockholders from liabilities that ordinarily, they could be subject to, or distinguishes one corporation from a
seemingly separate one, were it not for the existing corporate fiction.
The corporate mask may be lifted and the corporate veil may be pierced when a corporation is just but the alter ego
of a person or of another corporation. Where badges of fraud exist, where public convenience is defeated; where a
wrong is sought to be justified thereby, the corporate fiction or the notion of legal entity should come to naught.
Further, the test in determining the applicability of the doctrine of piercing the veil of corporate fiction is as follows:
1) Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy
and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had
at the time no separate mind, will or existence of its own; (2) Such control must have been used by the defendant
to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and
unjust act in contravention of plaintiffs legal right; and (3) The aforesaid control and breach of duty must
proximately cause the injury or unjust loss complained of. The absence of any of these elements prevent "piercing
the corporate veil".
Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a
corporation is not of itself a sufficient reason for disregarding the fiction of separate corporate personalities.
Moreover, to disregard the separate juridical personality of a corporation, the wrong-doing must be clearly and
convincingly established. It cannot be presumed.
--failed to adduce sufficient evidence
 Palting v. San Jose Petroleum Incorporated

G.R. No. L-14441, 17 December 1966

En Banc, Barrera, J.:

 Facts:
 This is a petition for review of the order of August 29, 1958, later supplemented and amplified by another dated
September 9, 1958, of the Securities and Exchange Commission denying the opposition to, and instead,
granting the registration, and licensing the sale in the Philippines, of 5,000,000 shares of the capital stock of the
respondent-appellee San Jose Petroleum, Inc. (hereafter referred to as SAN JOSE PETROLEUM), a corporation
organized and existing in the Republic of Panama.
 On September 7, 1956, SAN JOSE PETROLEUM filed with the Philippine Securities and Exchange
Commission a sworn registration statement, for the registration and licensing for sale in the Philippines Voting
Trust Certificates representing 2,000,000 shares of its capital stock of a par value of $0.35 a share, at P1.00 per
share.
- It was alleged that the entire proceeds of the sale of said securities will be devoted or used exclusively to
finance the operations of San Jose Oil Company, Inc. (a domestic mining corporation hereafter to be
referred to as SAN JOSE OIL) which has 14 petroleum exploration concessions covering an area of a little
less than 1,000,000 hectares, located in the provinces of Pangasinan, Tarlac, Nueva Ecija, La Union, Iloilo,
Cotabato, Davao and Agusan.
- It was the express condition of the sale that every purchaser of the securities shall not receive a stock
certificate, but a registered or bearer-voting-trust certificate from the voting trustees named therein James
L. Buckley and Austin G.E. Taylor, the first residing in Connecticut, U.S.A., and the second in New York
City.
 While this application for registration was pending consideration by the Securities and Exchange Commission,
SAN JOSE PETROLEUM filed an amended Statement on June 20, 1958, for registration of the sale in the
Philippines of its shares of capital stock, which was increased from 2,000,000 to 5,000,000, at a reduced
offering price of from P1.00 to P0.70 per share.
- At this time the par value of the shares has also been reduced from $.35 to $.01 per share.
 Pedro R. Palting and others, allegedly prospective investors in the shares of SAN JOSE PETROLEUM, filed
with the Securities and Exchange Commission an opposition to registration and licensing of the securities on the
grounds that
(1) the tie-up between the issuer, SAN JOSE PETROLEUM, a Panamanian corporation and SAN JOSE
OIL, a domestic corporation, violates the Constitution of the Philippines, the Corporation Law and the
Petroleum Act of 1949;
(2) the issuer has not been licensed to transact business in the Philippines;
(3) the sale of the shares of the issuer is fraudulent, and works or tends to work a fraud upon Philippine
purchasers; and
(4) the issuer as an enterprise, as well as its business, is based upon unsound business principles.
 Answering the foregoing opposition of Palting, et al., the registrant SAN JOSE PETROLEUM claimed that it
was a "business enterprise" enjoying parity rights under the Ordinance appended to the Constitution, which
parity right, with respect to mineral resources in the Philippines, may be exercised, pursuant to the Laurel-
Langley Agreement, only through the medium of a corporation organized under the laws of the Philippines.
- Thus, registrant which is allegedly qualified to exercise rights under the Parity Amendment, had to do so
through the medium of a domestic corporation, which is the SAN JOSE OIL.
- It refused the contention that the Corporation Law was being violated, by alleging that Section 13 thereof
applies only to foreign corporations doing business in the Philippines, and registrant was not doing business
here.
 - The mere fact that it was a holding company of SAN JOSE OIL and that registrant undertook the financing
of and giving technical assistance to said corporation did not constitute transaction of business in the
Philippines.
- Registrant also denied that the offering for sale in the Philippines of its shares of capital stock was
fraudulent or would work or tend to work fraud on the investors.
 On August 29, 1958, and on September 9, 1958 the Securities and Exchange Commissioner issued the orders
object of the present appeal.

 Issues:
1. Whether or not petitioner Pedro R. Palting, as a "prospective investor" in respondent's securities, has personality
to file the present petition for review of the order of the Securities and Exchange Commission.
2. Whether or not the issue raised herein is already moot and academic;
3. Whether or not the "tie-up" between the respondent SAN JOSE PETROLEUM, a foreign corporation,
and SAN JOSE OIL COMPANY, INC., a domestic mining corporation, is violative of the Constitution,
the Laurel-Langley Agreement, the Petroleum Act of 1949, and the Corporation Law; and
4. Whether or not the sale of respondent's securities is fraudulent, or would work or tend to work fraud to
purchasers of such securities in the Philippines.

 Ruling:

1. YES.

 Our Securities Act in Section 7(c) thereof, requires the publication and notice of the registration statement.
Pursuant thereto, the Securities and Exchange Commissioner caused the publication of an order in part reading
as follows:
- Any person who is opposed with this petition must file his written opposition with this Commission within
said period (2 weeks). . . .
 In other words, as construed by the administrative office entrusted with the enforcement of the Securities
Act, any person (who may not be "aggrieved" or "interested" within the legal acceptation of the word) is
allowed or permitted to file an opposition to the registration of securities for sale in the Philippines. And
this is in consonance with the generally accepted principle that Blue Sky Laws are enacted to protect
investors and prospective purchasers and to prevent fraud and preclude the sale of securities which are in
fact worthless or worth substantially less than the asking price.
 It is for this purpose that herein petitioner duly filed his opposition giving grounds therefor. Respondent
SAN JOSE PETROLEUM was required to reply to the opposition. Subsequently both the petition and
the opposition were set for hearing during which the petitioner was allowed to actively participate and
did so by cross-examining the respondent's witnesses and filing his memorandum in support of his
opposition. He therefore to all intents and purposes became a party to the proceedings.
 And under the New Rules of Court, such a party can appeal from a final order, ruling or decision of the
Securities and Exchange Commission. This new Rule eliminating the word "aggrieved" appearing in the old
Rule, being procedural in nature, and in view of the express provision of Rule 144 that the new rules made
effective on January 1, 1964 shall govern not only cases brought after they took effect but all further
proceedings in cases then pending, except to the extent that in the opinion of the Court their application would
not be feasible or would work injustice, in which event the former procedure shall apply, we hold that the
present appeal is properly within the appellate jurisdiction of this Court.
 The order allowing the registration and sale of respondent's securities is clearly a final order that is appealable.
The mere fact that such authority may be later suspended or revoked, depending on future developments, does
not give it the character of an interlocutory or provisional ruling. And the fact that seven days after the
publication of the order, the securities are deemed registered (Sec. 7, Com. Act 83, as amended), points to the
finality of the order. Rights and obligations necessarily arise therefrom if not reviewed on appeal.
 Our position on this procedural matter — that the order is appealable and the appeal taken here is proper — is
strengthened by the intervention of the Solicitor General, under Section 23 of Rule 3 of the Rules of Court, as
the constitutional issues herein presented affect the validity of Section 13 of the Corporation Law, which,
according to the respondent, conflicts with the Parity Ordinance and the Laurel-Langley Agreement
recognizing, it is claimed, its right to exploit our petroleum resources notwithstanding said provisions of the
Corporation Law.

2. NO.

 Respondent likewise contends that since the order of Registration/Licensing dated September 9, 1958 took
effect 30 days from September 3, 1958, and since no stay order has been issued by the Supreme Court,
respondent's shares became registered and licensed under the law as of October 3, 1958.
 Consequently, it is asserted, the present appeal has become academic. Frankly we are unable to follow
respondent's argumentation. First it claims that the order of August 29 and that of September 9, 1958 are not
final orders and therefor are not appealable. Then when these orders, according to its theory became final and
were implemented, it argues that the orders can no longer be appealed as the question of registration and
licensing became moot and academic.
 But the fact is that because of the authority to sell, the securities are, in all probabilities, still being traded
in the open market. Consequently the issue is much alive as to whether respondent's securities should
continue to be the subject of sale. The purpose of the inquiry on this matter is not fully served just
because the securities had passed out of the hands of the issuer and its dealers. Obviously, so long as the
securities are outstanding and are placed in the channels of trade and commerce, members of the
investing public are entitled to have the question of the worth or legality of the securities resolved one
way or another.
 But more fundamental than this consideration, we agree with the late Senator Claro M. Recto, who appeared as
amicus curiae in this case, that while apparently the immediate issue in this appeal is the right of respondent
SAN JOSE PETROLEUM to dispose of and sell its securities to the Filipino public, the real and ultimate
controversy here would actually call for the construction of the constitutional provisions governing the
disposition, utilization, exploitation and development of our natural resources. And certainly this is
neither moot nor academic.

3. YES.

 We now come to the meat of the controversy — the "tie-up" between SAN JOSE OIL on the one hand, and the
respondent SAN JOSE PETROLEUM and its associates, on the other.
 The relationship of these corporations involved or affected in this case is admitted and established through the
papers and documents which are parts of the records:
- SAN JOSE OIL, is a domestic mining corporation, 90% of the outstanding capital stock of which is owned
by respondent SAN JOSE PETROLEUM, a foreign (Panamanian) corporation, the majority interest of
which is owned by OIL INVESTMENTS, Inc., another foreign (Panamanian) company.
- This latter corporation in turn is wholly (100%) owned by PANTEPEC OIL COMPANY, C.A., and
PANCOASTAL PETROLEUM COMPANY, C.A., both organized and existing under the laws of
Venezuela.
- As of September 30, 1956, there were 9,976 stockholders of PANCOASTAL PETROLEUM found in 49
American states and U.S. territories, holding 3,476,988 shares of stock; whereas, as of November 30, 1956,
PANTEPEC OIL COMPANY was said to have 3,077,916 shares held by 12,373 stockholders scattered in
49 American state.
 - In the two lists of stockholders, there is no indication of the citizenship of these stockholders, or of the total
number of authorized stocks of each corporation, for the purpose of determining the corresponding
percentage of these listed stockholders in relation to the respective capital stock of said corporation.
 Article XIII, Section 1 of the Philippine Constitution provides:
- SEC. 1. All agricultural, timber, and mineral lands of the public domain, waters, minerals, coal, petroleum,
and other mineral oils, all forces of potential energy, and other natural resources of the Philippines belong
to the State, and their disposition, exploitation, development, or utilization shall be limited to citizens of the
Philippines, or to corporations or associations at least sixty per centum of the capital of which is owned by
such citizens, subject to any existing right, grant, lease or concession at the time of the inauguration of this
Government established under this Constitution. . . . (Emphasis supplied)
 In the 1946 Ordinance Appended to the Constitution, this right (to utilize and exploit our natural resources) was
extended to citizens of the United States, thus:
- Notwithstanding the provisions of section one, Article Thirteen, and section eight, Article Fourteen, of the
foregoing Constitution, during the effectivity of the Executive Agreement entered into by the President of
the Philippines with the President of the United States on the fourth of July, nineteen hundred and forty-six,
pursuant to the provisions of Commonwealth Act Numbered Seven hundred and thirty-three, but in no case
to extend beyond the third of July, nineteen hundred and seventy-four, the disposition, exploitation,
development, and utilization of all agricultural, timber, and mineral lands of the public domain, waters,
minerals, coal, petroleum, and other mineral oils, all forces of potential energy, and other natural resources
of the Philippines, and the operation of public utilities shall, if open to any person, be open to citizens of the
United States, and to all forms of business enterprises owned or controlled, directly or indirectly, by
citizens of the United States in the same manner as to, and under the same conditions imposed upon,
citizens of the Philippines or corporations or associations owned or controlled by citizens of the Philippines
(Emphasis supplied.)
 In the 1954 Revised Trade Agreement concluded between the United States and the Philippines, also known as
the Laurel-Langley Agreement, embodied in Republic Act 1355, the following provisions appear:
- The disposition, exploitation, development and utilization of all agricultural, timber, and mineral lands of
the public domain, waters, minerals, coal, petroleum and other mineral oils, all forces and sources of
potential energy, and other natural resources of either Party, and the operation of public utilities, shall, if
open to any person, be open to citizens of the other Party and to all forms of business enterprise owned or
controlled, directly or indirectly, by citizens of such other Party in the same manner as to and under the
same conditions imposed upon citizens or corporations or associations owned or controlled by citizens of
the Party granting the right.
- 2. The rights provided for in Paragraph 1 may be exercised, . . . in the case of citizens of the United States,
with respect to natural resources in the public domain in the Philippines, only through the medium of a
corporation organized under the laws of the Philippines and at least 60% of the capital stock of which is
owned or controlled by citizens of the United States. . . .
- 3. The United States of America reserves the rights of the several States of the United States to limit the
extent to which citizens or corporations or associations owned or controlled by citizens of the Philippines
may engage in the activities specified in this Article. The Republic of the Philippines reserves the power to
deny any of the rights specified in this Article to citizens of the United States who are citizens of States, or
to corporations or associations at least 60% of whose capital stock or capital is owned or controlled by
citizens of States, which deny like rights to citizens of the Philippines, or to corporations or associations
which are owned or controlled by citizens of the Philippines. . . . (Emphasis supplied.)
- Re-stated, the privilege to utilize, exploit, and develop the natural resources of this country was granted, by
Article XIII of the Constitution, to Filipino citizens or to corporations or associations 60% of the capital of
which is owned by such citizens. With the Parity Amendment to the Constitution, the same right was
extended to citizens of the United States and business enterprises owned or controlled directly or indirectly,
by citizens of the United States.
 There could be no serious doubt as to the meaning of the word "citizens" used in the aforementioned
provisions of the Constitution. The right was granted to 2 types of persons: natural persons (Filipino or
American citizens) and juridical persons (corporations 60% of which capital is owned by Filipinos and
business enterprises owned or controlled directly or indirectly, by citizens of the United States). In
American law, "citizen" has been defined as "one who, under the constitution and laws of the United States, has
a right to vote for representatives in congress and other public officers, and who is qualified to fill offices in the
 gift of the people. A citizen is — One of the sovereign people. A constituent member of the sovereignty,
synonymous with the people." A member of the civil state entitled to all its privileges.
 These concepts clarified, is herein respondent SAN JOSE PETROLEUM an American business
enterprise entitled to parity rights in the Philippines? The answer must be in the negative, for the
following reasons:
- Firstly — It is not owned or controlled directly by citizens of the United States, because it is owned
and controlled by a corporation, the OIL INVESTMENTS, another foreign (Panamanian)
corporation.
- Secondly — Neither can it be said that it is indirectly owned and controlled by American citizens
through the OIL INVESTMENTS, for this latter corporation is in turn owned and controlled, not by
citizens of the United States, but still by two foreign (Venezuelan) corporations, the PANTEPEC OIL
COMPANY and PANCOASTAL PETROLEUM.
- Thirdly — Although it is claimed that these two last corporations are owned and controlled
respectively by 12,373 and 9,979 stockholders residing in the different American states, there is no
showing in the certification furnished by respondent that the stockholders of PANCOASTAL or those
of them holding the controlling stock, are citizens of the United States.
- Fourthly — Granting that these individual stockholders are American citizens, it is yet necessary to
establish that the different states of which they are citizens, allow Filipino citizens or corporations or
associations owned or controlled by Filipino citizens, to engage in the exploitation, etc. of the natural
resources of these states (see paragraph 3, Article VI of the Laurel-Langley Agreement, supra).
Respondent has presented no proof to this effect.
- Fifthly — But even if the requirements mentioned in the two immediately preceding paragraphs are
satisfied, nevertheless to hold that the set-up disclosed in this case, with a long chain of intervening
foreign corporations, comes within the purview of the Parity Amendment regarding business
enterprises indirectly owned or controlled by citizens of the United States, is to unduly stretch and
strain the language and intent of the law. For, to what extent must the word "indirectly" be carried?
Must we trace the ownership or control of these various corporations ad infinitum for the purpose of
determining whether the American ownership-control-requirement is satisfied? Add to this the
admitted fact that the shares of stock of the PANTEPEC and PANCOASTAL which are allegedly
owned or controlled directly by citizens of the United States, are traded in the stock exchange in New
York, and you have a situation where it becomes a practical impossibility to determine at any given
time, the citizenship of the controlling stock required by the law. In the circumstances, we have to
hold that the respondent SAN JOSE PETROLEUM, as presently constituted, is not a business
enterprise that is authorized to exercise the parity privileges under the Parity Ordinance, the Laurel-
Langley Agreement and the Petroleum Law. Its tie-up with SAN JOSE OIL is, consequently, illegal.
 What, then, would be the Status of SAN JOSE OIL, about 90% of whose stock is owned by SAN JOSE
PETROLEUM? This is a query which we need not resolve in this case as SAN JOSE OIL is not a party and it is
not necessary to do so to dispose of the present controversy. But it is a matter that probably the Solicitor
General would want to look into.
 There is another issue which has been discussed extensively by the parties. This is whether or not an American
mining corporation may lawfully "be in anywise interested in any other corporation (domestic or foreign)
organized for the purpose of engaging in agriculture or in mining," in the Philippines or whether an American
citizen owning stock in more than one corporation organized for the purpose of engaging in agriculture or in
mining, may own more than 15% of the capital stock then outstanding and entitled to vote, of each of such
corporations, in view of the express prohibition contained in Section 13 of the Philippine Corporation Law.
- In view of the conclusions we have already arrived at, we deem it not indispensable for us to pass upon this
legal question, especially taking into account the statement of the respondent (SAN JOSE PETROLEUM)
that it is essentially a holding company, and as found by the Securities and Exchange Commissioner, its
principal activity is limited to the financing and giving technical assistance to SAN JOSE OIL.

4. YES.
 Respondent SAN JOSE PETROLEUM, whose shares of stock were allowed registration for sale in the
Philippines, was incorporated under the laws of Panama in April, 1956 with an authorized capital stock of
$500,000.00, American currency, divided into 50,000,000 shares at par value of $0.01 per share.
 By virtue of a 3-party Agreement of June 14, 1956, respondent was supposed to have received from OIL
INVESTMENTS 8,000,000 shares of the capital stock of SAN JOSE OIL (at par value of $0.01 per share), plus
a note for $250,000.00 due in 6 months, for which respondent issued in favor of OIL INVESTMENTS
16,000,000 shares of its capital stock, at $0.01 per share or with a value of $160,000.00, plus a note for
$230,297.97 maturing in 2 years at 6% per annum interest,9 and the assumption of payment of the unpaid price
of 7,500,000 (of the 8,000,000 shares of SAN JOSE OIL).
 On June 27, 1956, the capitalization of SAN JOSE PETROLEUM was increased from $500,000.00 to
$17,500,000.00 by increasing the par value of the same 50,000,000 shares, from $0.01 to $0.35. Without any
additional consideration, the 16,000,000 shares of $0.01 previously issued to OIL INVESTMENTS with a total
value of $160,000.00 were changed with 16,000,000 shares of the recapitalized stock at $0.35 per share, or
valued at $5,600,000.00. And, to make it appear that cash was received for these re-issued 16,000,000 shares,
the board of directors of respondent corporation placed a valuation of $5,900,000.00 on the 8,000,000 shares of
SAN JOSE OIL (still having par value of $0.10 per share) which were received from OIL INVESTMENTS as
part-consideration for the 16,000,000 shares at $0.01 per share.
 In the Balance Sheet of respondent, dated July 12, 1956, from the $5,900,000.00, supposedly the value of the
8,000,000 shares of SAN JOSE OIL, the sum of $5,100,000.00 was deducted, corresponding to the alleged
difference between the "value" of the said shares and the subscription price thereof which is $800,000.00 (at
$0.10 per share). From this $800,000.00, the subscription price of the SAN JOSE OIL shares, the amount of
$319,702.03 was deducted, as allegedly unpaid subscription price, thereby giving a difference of $480,297.97,
which was placed as the amount allegedly paid in on the subscription price of the 8,000,000 SAN JOSE OIL
shares. Then, by adding thereto the note receivable from OIL INVESTMENTS, for $250,000.00 (part-
consideration for the 16,000,000 SAN JOSE PETROLEUM shares), and the sum of $6,516.21, as deferred
expenses, SAN JOSE PETROLEUM appeared to have assets in the sum of $736,814.18.
 These figures are highly questionable. Take the item $5,900,000.00 the valuation placed on the 8,000,000
shares of SAN JOSE OIL. There appears no basis for such valuation other than belief by the board of directors
of respondent that "should San Jose Oil Company be granted the bulk of the concessions applied for upon
reasonable terms, that it would have a reasonable value of approximately $10,000,000." Then, of this amount,
the subscription price of $800,000.00 was deducted and called it "difference between the (above) valuation and
the subscription price for the 8,000,000 shares." Of this $800,000.00 subscription price, they deducted the sum
of $480,297.97 and the difference was placed as the unpaid portion of the subscription price. In other words, it
was made to appear that they paid in $480,297.97 for the 8,000,000 shares of SAN JOSE OIL. This amount
($480,297.97) was supposedly that $250,000.00 paid by OIL INVESMENTS for 7,500,000 shares of SAN
JOSE OIL, embodied in the June 14 Agreement, and a sum of $230,297.97 the amount expended or advanced
by OIL INVESTMENTS to SAN JOSE OIL. And yet, there is still an item among respondent's liabilities, for
$230,297.97 appearing as note payable to Oil Investments, maturing in two (2) years at six percent (6%) per
annum. As far as it appears from the records, for the 16,000,000 shares at $0.35 per share issued to OIL
INVESTMENTS, respondent SAN JOSE PETROLEUM received from OIL INVESTMENTS only the note for
$250,000.00 plus the 8,000,000 shares of SAN JOSE OIL, with par value of $0.10 per share or a total of
$1,050,000.00 — the only assets of the corporation. In other words, respondent actually lost $4,550,000.00,
which was received by OIL INVESTMENTS.
 But this is not all. Some of the provisions of the Articles of Incorporation of respondent SAN JOSE
PETROLEUM are noteworthy; viz:
- the directors of the Company need not be shareholders;
- that in the meetings of the board of directors, any director may be represented and may vote through a
proxy who also need not be a director or stockholder; and
- that no contract or transaction between the corporation and any other association or partnership will be
affected, except in case of fraud, by the fact that any of the directors or officers of the corporation is
interested in, or is a director or officer of, such other association or partnership, and that no such contract or
transaction of the corporation with any other person or persons, firm, association or partnership shall be
affected by the fact that any director or officer of the corporation is a party to or has an interest in, such
contract or transaction, or has in anyway connected with such other person or persons, firm, association or
partnership; and finally, that all and any of the persons who may become director or officer of the
corporation shall be relieved from all responsibility for which they may otherwise be liable by reason of
 any contract entered into with the corporation, whether it be for his benefit or for the benefit of any other
person, firm, association or partnership in which he may be interested.
 These provisions are in direct opposition to our corporation law and corporate practices in this country.
These provisions alone would outlaw any corporation locally organized or doing business in this
jurisdiction.
- Consider the unique and unusual provision that no contract or transaction between the company and
any other association or corporation shall be affected except in case of fraud, by the fact that any of
the directors or officers of the company may be interested in or are directors or officers of such other
association or corporation; and that none of such contracts or transactions of this company with any
person or persons, firms, associations or corporations shall be affected by the fact that any director
or officer of this company is a party to or has an interest in such contract or transaction or has any
connection with such person or persons, firms associations or corporations; and that any and all
persons who may become directors or officers of this company are hereby relieved of all
responsibility which they would otherwise incur by reason of any contract entered into which this
company either for their own benefit, or for the benefit of any person, firm, association or
corporation in which they may be interested.
 The impact of these provisions upon the traditional judiciary relationship between the directors and the
stockholders of a corporation is too obvious to escape notice by those who are called upon to protect the
interest of investors. The directors and officers of the company can do anything, short of actual fraud,
with the affairs of the corporation even to benefit themselves directly or other persons or entities in which
they are interested, and with immunity because of the advance condonation or relief from responsibility
by reason of such acts. This and the other provision which authorizes the election of non-stockholders as
directors, completely disassociate the stockholders from the government and management of the business
in which they have invested.
 To cap it all on April 17, 1957, admittedly to assure continuity of the management and stability of SAN JOSE
PETROLEUM, OIL INVESTMENTS, as holder of the only subscribed stock of the former corporation and
acting "on behalf of all future holders of voting trust certificates," entered into a voting trust agreement with
James L. Buckley and Austin E. Taylor, whereby said Trustees were given authority to vote the shares
represented by the outstanding trust certificates (including those that may henceforth be issued) in the following
manner:
- At all elections of directors, the Trustees will designate a suitable proxy or proxies to vote for the election
of directors designated by the Trustees in their own discretion, having in mind the best interests of the
holders of the voting trust certificates, it being understood that any and all of the Trustees shall be eligible
for election as directors;
- On any proposition for removal of a director, the Trustees shall designate a suitable proxy or proxies to vote
for or against such proposition as the Trustees in their own discretion may determine, having in mind the
best interest of the holders of the voting trust certificates;
- With respect to all other matters arising at any meeting of stockholders, the Trustees will instruct such
proxy or proxies attending such meetings to vote the shares of stock held by the Trustees in accordance
with the written instructions of each holder of voting trust certificates. (Emphasis supplied.)
 It was also therein provided that the said Agreement shall be binding upon the parties thereto, their successors,
and upon all holders of voting trust certificates.
 And these are the voting trust certificates that are offered to investors as authorized by Security and
Exchange Commissioner. It can not be doubted that the sale of respondent's securities would, to say the
least, work or tend to work fraud to Philippine investors.

 FOR ALL THE FOREGOING CONSIDERATIONS, the motion of respondent to dismiss this appeal, is denied
and the orders of the Securities and Exchange Commissioner, allowing the registration of Respondent's
securities and licensing their sale in the Philippines are hereby set aside. The case is remanded to the Securities
and Exchange Commission for appropriate action in consonance with this decision. With costs. Let a copy of
this decision be furnished the Solicitor General for whatever action he may deem advisable to take in the
premises. So ordered.
ADALIA B. FRANCISCO and MERRYLAND DEVELOPMENT CORPORATION, petitioners, vs. RITA C. MEJIA,
as Executrix of
Testate Estate of ANDREA CORDOVA VDA. DE GUTIERREZ, respondent.
Facts: Andrea Cordova Vda. de Gutierrez (Gutierrez) was the registered owner of a parcel of which was later
subdivided into five lots. The original certificate was cancelled and five TCTs were then issued - TCT No. 7123-
TCT No. 7127.
On 21 December 1964, Gutierrez and Cardale Financing and Realty Corporation (Cardale) executed a Deed
of Sale with Mortgage relating to the four lots for the consideration of P800,000.00. Upon the execution of the
deed, Cardale paid Gutierrez P171,000.00. It was agreed that the balance of P629,000.00 would be paid in several
installments within five years from the date of the deed, at an interest of nine percent per annum “based on the
successive unpaid principal balances.” Thereafter, the titles of Gutierrez were cancelled and in lieu thereof TCT Nos.
7531 to 7534 were issued in favor of Cardale.
To secure payment of the balance of the purchase price, Cardale constituted a mortgage on three of the
four parcels of land. The encumbrance was annotated upon the certificates of title and the owner’s duplicate
certificates. The owner’s duplicates were retained by Gutierrez.
Since Cardale failed to settle its mortgage obligation, Gutierrez filed a complaint for rescission of the
contract with thr RTC (Civil Case No. Q-12366). During the pendency of the rescission case, Gutierrez died and was
substituted by her executrix, respondent Rita C. Mejia (Mejia). In 1971, plaintiff’s presentation of evidence
was terminated. However, Cardale, which was represented by petitioner Adalia B. Francisco (Francisco) in
her capacity as Vice-President and Treasurer of Cardale, lost interest in proceeding with the presentation of
its evidence and the case lapsed into inactive status for a period of about fourteen years.
In the meantime, the mortgaged parcels of land covered became delinquent in the payment of real estate
taxes which culminated in their levy and auction sale in satisfaction of the tax arrears. The highest bidder
for the three parcels of land was petitioner Merryland Development Corporation (Merryland), whose
President and majority stockholder is Francisco. A memorandum based upon the certificate of sale was then
made upon the original copies of the TCTs.
Before the expiration of the one year redemption period, Mejia filed a Motion for Decision with the trial
court. The hearing of said motion was deferred, however, due to a Motion for Postponement filed by Cardale
through Francisco, who signed the motion in her capacity as “officer-in-charge,” claiming that Cardale needed time
to hire new counsel. However, Francisco did not mention the tax delinquencies and sale in favor of Merryland.
Subsequently, the redemption period expired and Merryland, acting through Francisco, filed petitions for
consolidation of title and the issuance of new transfer certificates of title “free from any encumbrance or third-party
claim whatsoever” in favor of Merryland. Pursuant to such orders, the Register of Deeds of Caloocan City issued
new transfer certificates of title in the name of Merryland which did not bear a memorandum of the mortgage liens
in favor of Gutierrez.
Thereafter, Francisco filed in Civil Case No. Q-12366 an undated Manifestation to the effect that the
properties subject of the mortgage had been levied upon by the local government of Caloocan City and sold at a tax
delinquency sale. Francisco further claimed that the delinquency sale had rendered the issues in Civil Case No. Q-
12366 moot and academic. Agreeing with Francisco, the trial court dismissed the case, explaining that since
the properties mortgaged to Cardale had been transferred to Merryland which was not a party to the
case for rescission, it would be more appropriate for the parties to resolve their controversy in
another action.
Mejia, in her capacity as executrix of the Estate of Gutierrez, filed with the RTC of Quezon City
a complaint for damages with prayer for preliminary attachment (Civil Case No. Q-49766) against
Francisco, Merryland and the Register of Deeds of Caloocan City.
The trial court rendered a decision in favor of the defendants, dismissing the complaint for damages
filed by Mejia. It was held that plaintiff Mejia, as executrix of Gutierrez’s estate, failed to establish by clear and
convincing evidence her allegations that Francisco controlled Cardale and Merryland and that she had employed
fraud by intentionally causing Cardale to default in its payment of real property taxes on the mortgaged properties
so that Merryland could purchase the same by means of a tax delinquency sale.
The Court of Appeals reversed the trial court, holding that the corporate veil of Cardale and
Merryland must be pierced in order to hold Francisco and Merryland solidarily liable since these two
corporations were used as dummies by Francisco, who employed fraud in allowing Cardale to default
on the realty taxes for the properties mortgaged to Gutierrez so that Merryland could acquire the
same free from all liens and encumbrances in the tax delinquency sale and, as a consequence thereof,
frustrating Gutierrez’s rights as a mortgagee over the subject properties.
In its petition for certiorari, petitioners argue that there is no law requiring the mortgagor to inform the
mortgagee of the tax delinquencies, if any, of the mortgaged properties. Moreover, petitioners claim that Cardale’s
failure to pay the realty taxes, per se, does not constitute fraud since it was not proven that Cardale was capable of
paying the taxes. Petitioners also contend that if Mejia, as executrix of Gutierrez’s estate, was not remiss in her
duty to pursue Civil Case No. 12366, she could have easily learned of the non-payment of realty taxes on the
subject properties and of the auction sale that followed and thus, have redeemed the properties or availed of some
other remedy to conserve the estate of Gutierrez. In addition, Mejia could have annotated a notice of lis pendens
on the titles of the mortgaged properties, but she failed to do so. It is the stand of petitioners that respondent has
not adduced any proof that Francisco controlled both Cardale and Merryland and that she used these two
corporations to perpetuate a fraud upon Gutierrez or her estate. Petitioners maintain that the “evidence shows that,
apart form the meager share of petitioner Francisco, the stockholdings of both corporations comprise other
shareholders, and the stockholders of either of them, aside from petitioner Francisco, are composed of different
persons.” As to Civil Case No. 12366, petitioners insist that the decision of the trial court in that case constitutes res
judicata to the instant case.
Issue: Whether or not Francisco and Merryland are liable to the estate of Gutierrez.
Ruling: Only Francisco.
It is dicta in corporation law that a corporation is a juridical person with a separate and distinct personality
from that of the stockholders or members who compose it. However, when the legal fiction of the separate
corporate personality is abused, such as when the same is used for fraudulent or wrongful ends, the courts have not
hesitated to pierce the corporate veil. One of the earliest formulations of this doctrine of piercing the corporate veil
was made in the American case of United States v. Milwaukee Refrigerator Transit Co. -

If any general rule can be laid down, in the present state of authority, it is that a corporation will
be looked upon as a legal entity as a general rule, and until sufficient reason to the contrary
appears; but, when the notion of legal entity is used to defeat public convenience, justify wrong,
protect fraud, or defend crime, the law will regard the corporation as an association of persons.

Since then a good number of cases have firmly implanted this doctrine in Philippine jurisprudence. One such case is
Umali v. Court of Appeals wherein the Court declared that –

Under the doctrine of piercing the veil of corporate entity, when valid grounds therefore exist, the
legal fiction that a corporation is an entity with a juridical personality separate and distinct from
its members or stockholders may be disregarded. In such cases, the corporation will be
considered as a mere association of persons. The members or stockholders of the corporation will
be considered as the corporation, that is, liability will attach directly to the officers and
stockholders. The doctrine applies when the corporate fiction is used to defeat public
convenience, justify wrong, protect fraud, or defend crime, or when it is made as a shield to
confuse the legitimate issues, or where a corporation is the mere alter ego or business conduit of
a person, or where the corporation is so organized and controlled and its affairs are so conducted
as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.

With specific regard to corporate officers, the general rule is that the officer cannot be held
personally liable with the corporation, whether civilly or otherwise, for the consequences of his acts, if
he acted for and in behalf of the corporation, within the scope of his authority and in good faith . In
such cases, the officer’s acts are properly attributed to the corporation. However, if it is proven that the officer
has used the corporate fiction to defraud a third party, or that he has acted negligently, maliciously or
in bad faith, then the corporate veil shall be lifted and he shall be held personally liable for the
particular corporate obligation involved.
The Court is convinced that the totality of the circumstances appertaining conduce to the
inevitable conclusion that petitioner Francisco acted in bad faith.
The events leading up to the loss by the Gutierrez estate of its mortgage security attest to this.
ü It has been established that Cardale failed to comply with its obligation to pay the balance of the purchase
price for the four parcels of land it bought from Gutierrez, which obligation was secured by a mortgage
upon the lands.
ü This prompted Gutierrez to file an action for rescission of the Deed of Sale with Mortgage (Civil Case No.
Q-12366), but the case dragged on for about fourteen years when Cardale, as represented by Francisco,
who was Vice-President and Treasurer of the same, lost interest in completing its presentation of evidence.
ü Even before 1984 when Mejia, in her capacity as executrix of Gutierrez’s estate, filed a Motion for Decision
with the trial court, there is no question that Francisco knew that the properties subject of the mortgage
had become tax delinquent.
ü In fact, as treasurer of Cardale, Francisco herself was the officer charged with the responsibility of paying
the realty taxes on the corporation’s properties. This was admitted by the trial court in its decision.
ü In addition, notices dated 9 July 1982 from the City Treasurer of Caloocan demanding payment of the tax
arrears on the subject properties and giving warning that if the realty taxes were not paid within the given
period then such properties would be sold at public auction to satisfy the tax delinquencies were sent
directly to Francisco’s address in White Plains, Quezon City. Thus, as early as 1982, Francisco could have
informed the Gutierrez estate or the trial court in Civil Case No. Q-12366 of the tax arrears and of the
notice from the City Treasurer so that the estate could have taken the necessary steps to prevent the
auction sale and to protect its interests in the mortgaged properties, but she did no such thing.
ü Finally, in 1983, the properties were levied upon and sold at public auction wherein Merryland - a
corporation where Francisco is a stockholder and concurrently acts as President and director - was the
highest bidder.
ü When Mejia filed the Motion for Decision in Civil Case No. Q-12366, the period for redeeming the
properties subject of the tax sale had not yet expired.
ü Under the Realty Property Tax Code, pursuant to which the tax levy and sale were prosecuted, both the
delinquent taxpayer and in his absence, any person holding a lien or claim over the property shall have
the right to redeem the property within one year from the date of registration of the sale. However, if
these persons fail to redeem the property within the time provided, then the purchaser acquires the
property “free from any encumbrance or third party claim whatsoever.” Cardale made no attempts to
redeem the mortgaged property during this time.
ü Moreover, instead of informing Mejia or the trial court in Q-12366 about the tax sale, the records show
that Francisco filed a Motion for Postponement in behalf of Cardale - even signing the motion in her
capacity as “officer-in-charge” - which worked to defer the hearing of Mejia’s Motion for Decision. No
mention was made by Francisco of the tax sale in the motion for postponement.
ü Only after the redemption period had expired did Francisco decide to reveal what had transpired by filing a
Manifestation stating that the properties subject of the mortgage in favor of Gutierrez had been sold at a
 tax delinquency sale; however, Francisco failed to mention that it was Merryland that acquired the
properties since she was probably afraid that if she did so the court would see behind her fraudulent
scheme. In this regard, it is also significant to note that it was Francisco herself who filed the petitions for
consolidation of title and who helped secure for Merryland titles over the subject properties “free from any
encumbrance or third-party claim whatsoever.”
It is exceedingly apparent to the Court that the totality of Franciso’s actions clearly betray an intention to
conceal the tax delinquencies, levy and public auction of the subject properties from the estate of Gutierrez and the
trial court in Civil Case No. Q-12366 until after the expiration of the redemption period when the remotest possibility
for the recovery of the properties would be extinguished.[28] Consequently, Francisco had effectively deprived the
estate of Gutierrez of its rights as mortgagee over the three parcels of land which were sold to Cardale. If Francisco
was acting in good faith, then she should have disclosed the status of the mortgaged properties to the trial court in
Civil Case No. Q-12366 - especially after Mejia had filed a Motion for Decision, in response to which she filed a
motion for postponement wherein she could easily have mentioned the tax sale - since this action directly affected
such properties which were the subject of both the sale and mortgage.
That Merryland acquired the property at the public auction only serves to shed more light upon Francisco’s
fraudulent purposes. Based on the findings of the Court of Appeals, Francisco is the controlling stockholder and
President of Merryland. Thus, aside from the instrumental role she played as an officer of Cardale, in evading that
corporation’s legitimate obligations to Gutierrez, it appears that Francisco’s actions were also oriented towards
securing advantages for another corporation in which she had a substantial interest.
The Court cannot agree, however, with the Court of Appeals’ decision to hold Merryland solidarily liable
with Francisco. The only act imputable to Merryland in relation to the mortgaged properties is that it purchased the
same and this by itself is not a fraudulent or wrongful act. No evidence has been adduced to establish that
Merryland was a mere alter ego or business conduit of Francisco. Time and again it has been reiterated that
mere ownership by a single stockholder or by another corporation of all or nearly all of the capital
stock of a corporation is not of itself sufficient ground for disregarding the separate corporate
personality. Neither has it been alleged or proven that Merryland is so organized and controlled and
its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of
Cardale. Even assuming that the businesses of Cardale and Merryland are interrelated, this alone is
not justification for disregarding their separate personalities, absent any showing that Merryland was
purposely used as a shield to defraud creditors and third persons of their rights. Thus, Merryland’s
separate juridical personality must be upheld.
----
Finally, contrary to petitioner’s assertions, The Court agrees with the Court of Appeals that the decision of
the trial court in Civil Case No. Q-12366 does not constitute res judicata insofar as the present case is concerned
because the decision in the first case was not a judgment on the merits. Rather, it was merely based upon the
premise that since Cardale had been dissolved and the property acquired by another corporation, the action for
rescission would not prosper. As a matter of fact, it was even expressly stated by the trial court that the parties
should ventilate their issues in another action.
The Court of Appeals is hereby accordingly MODIFIED so as to hold ADALIA FRANCISCO solely liable to the
estate of Gutierrez for the amount of P4,314,271.43 and for interest on the unpaid balance of the purchase price (in
the amount of P629,000.00) at the rate of nine percent (9%) per annum computed from January, 1989 until fully
satisfied. MERRYLAND is hereby absolved from all liability.