Case Digests

J. Del Castillo

General Banking Law of 2000

Diligence Required of Banks

Philippine National Bank v. Sps. Chea Chee Chong

G.R. No. 170865, April 25, 2012; Del Castillo, J:

PNB’s act of releasing the proceeds of the check prior to the lapse of the 15-day clearing period
(construed as 15 banking days) was the proximate cause of the loss. The Court held that the payment
of the amounts of checks without previously clearing them with the drawee bank especially so where
the drawee bank is a foreign bank and the amounts involved were large is contrary to normal or
ordinary banking practice.

It bears stressing that “the diligence required of banks is more than that of a Roman pater familias or
a good father of a family. The highest degree of diligence is expected.” PNB miserably failed to do its
duty of exercising extraordinary diligence and reasonable business prudence. The disregard of its own
banking policy amounts to gross negligence, which the law defines as “negligence characterized by
the want of even slight care, acting or omitting to act in a situation where there is duty to act, not
inadvertently but wilfully and intentionally with a conscious indifference to consequences in so far as
other persons may be affected.” With regard to collection or encashment of checks, suffice it to say
that the law imposes on the collecting bank the duty to scrutinize diligently the checks deposited with
it for the purpose of determining their genuineness and regularity. “The collecting bank, being
primarily engaged in banking, holds itself out to the public as the expert on this field, and the law thus
holds it to a high standard of conduct.” A bank is expected to be an expert in banking procedures and
it has the necessary means to ascertain whether a check, local or foreign, is sufficiently funded.

Facts:

Ofelia Cheah (Ofelia) and her friend Adelina Guarin (Adelina) were having a conversation in the
latter’s office when Adelina’s friend, Filipina Tuazon (Filipina), approached her to ask if she could
have Filipina’s check cleared and encashed for a service fee of 2.5%. The check is Bank of America
Check No. 190 under the account of Alejandria Pineda and Eduardo Rosales and drawn by Atty.
Eduardo Rosales against Bank of America Alhambra Branch in California, USA, with a face amount
of $300,000.00, payable to cash. Because Adelina does not have a dollar account in which to deposit
the check, she asked Ofelia if she could accommodate Filipina’s request since she has a joint dollar
savings account with her Malaysian husband Cheah Chee Chong (Chee Chong) with PNB.

That same day, Ofelia and Adelina went to PNB Buendia Branch. Assured that the deposit and
subsequent clearance of the check is a normal transaction, Ofelia deposited Filipina’s check. PNB
then sent it for clearing through its correspondent bank, Philadelphia National Bank. Five days
later, PNB received a credit advice from Philadelphia National Bank that the proceeds of the subject
check had been temporarily credited to PNB’s account. Thereafter, Garin called up Ofelia to inform
her that the check had already been cleared. The following day, PNB Buendia Branch, after
deducting the bank charges, credited $299,248.37 to the account of the spouses Cheah. Acting on
Adelina’s instruction to withdraw the credited amount, Ofelia that day personally withdrew

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$180,000.00. Adelina was able to withdraw the remaining amount the next day after having been
authorized by Ofelia. Filipina received all the proceeds.

Thereafter, Philadelphia National Bank contacted PNB and informed the latter that the check was
returned due to insufficiency of funds. PNB was demanding the return of the money but the same
can no longer be returned.

Meanwhile, the spouses Cheah have been constantly meeting with the bank officials to discuss
matters regarding the incident and the recovery of the value of the check while the cases against
the alleged perpetrators remain pending. Chee Chong in the end signed a PNB drafted letter which
states that the spouses Cheah are offering their condominium units as collaterals for the amount
withdrawn. Under this setup, the amount withdrawn would be treated as a loan account with
deferred interest while the spouses try to recover the money from those who defrauded them.
Apparently, Chee Chong signed the letter after the Vice President and Manager of PNB Buendia
Branch asked the spouses Cheah to help him and the other bank officers as they were in danger of
losing their jobs because of the incident.

Although some of the officers of PNB were amenable to the proposal, the same did not materialize.
Subsequently, PNB sent a demand letter to spouses Cheah for the return of the amount of the
check, froze their peso and dollar deposits and filed a complaint against them for Sum of Money
with the Regional Trial Court (RTC) of Manila. In said complaint, PNB demanded payment of
around P8,202,220.44, plus interests and attorney’s fees, from the spouses Cheah. The RTC ruled in
favor of PNB and held Sps. Cheah guilty of contributory negligence.

Sps. Cheah appealed to the CA. The latter held the parties equally liable for the loss, hence, this
petition.

Issue: Whether PNB can be held liable for the loss.

Held: Yes. PNB’s act of releasing the proceeds of the check prior to the lapse of the 15-day clearing
period (construed as 15 banking days) was the proximate cause of the loss. The Court held that the
payment of the amounts of checks without previously clearing them with the drawee bank
especially so where the drawee bank is a foreign bank and the amounts involved were large is
contrary to normal or ordinary banking practice.

The Court further reiterated that before the check shall have been cleared for deposit, the collecting
bank can only ‘assume’ at its own risk that the check would be cleared and paid out. The delay in
the receipt by PNB Buendia Branch of the November 13, 1992 SWIFT message notifying it of the
dishonor of the subject check is of no moment, because had PNB Buendia Branch waited for the
expiration of the clearing period and had never released during that time the proceeds of the check,
it would have already been duly notified of its dishonor. Clearly, PNB’s disregard of its preventive
and protective measure against the possibility of being victimized by bad checks had brought upon
itself the injury of losing a significant amount of money.

Land Bank of the Philippines vs. Emmanuel Oñate

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G.R. No. 192371; January, J. Del Castillo

A bank who mismanages the trust accounts of its client cannot benefit from the inaccuracies
of the reports resulting therefrom. It cannot impute the consequence of its negligence to the client.
The bank must record every single transaction accurately, down to the last centavo and as promptly
as possible. This has to be done if the account is to reflect at any given time the amount of money the
depositor can dispose of as he sees fit, confident that the bank will deliver it as and to whomever he
directs.

Facts:

Oñate opened and maintained seven trust accounts with Land Bank. Each trust account was
covered by an Investment Management Account (IMA) with Full Discretion and has a
corresponding passbook where deposits and withdrawals were recorded.

In a letter dated October 1981, Land Bank demanded from Oñate the return of P4 million it claimed
to have been inadvertently deposited to Trust Account No. 01-125 as additional funds. Oñate
refused. To settle the matter, a meeting was held, but the parties failed to reach an agreement. Since
then, the issue of “miscrediting” remained unsettled. Subsequently, Land Bank unilaterally applied
the outstanding balance in all of Oñate’s trust accounts against his resulting indebtedness reason
of the miscrediting of funds. Although it exhausted the funds in all of Oñate’s trust accounts, Land
Bank was able to debit the amount of P1,528,583.48 only. To recover the remaining balance of
Oñate’s indebtedness, Land Bank filed a Complaint for Sum of Money.

In his Answer, Oñate asserted that the set-off was without legal and factual bases. He maintained
that all the funds in his accounts came from legitimate sources and that he was totally unaware of
and had nothing to do with the alleged miscrediting.

RTC issued and Order creating a Board of Commissioners for the purpose of examining the records
of Oñate’s seven trust accounts, as well as to determine the total amount of deposits, withdrawals,
funds invested, earnings, and expenses incurred. Subsequently, the Board submitted a consolidated
report which revealed that there were undocumented and over withdrawals and drawings from
Oñate’s trust accounts.

In his comment, Oñate asserted that the undocumented withdrawals mentioned in the
consolidated report should not be considered as cash outflows. Rather, they should be treated as
unauthorized transactions and the amounts subject thereof must be credited back to his accounts.
Land Bank for its part did not object to the Board’s findings.

Eventually, RTC rendered a decision dismissing Land Bank’s Complaint. On appeal, the CA affirmed
RTC’s ruling. Land Bank filed a Motion for Reconsideration, but was denied. Hence, the petition
for review.Land Bank argues that Oñate is not entitled to the undocumented withdrawals and
insisted that it made proper accounting and apprised Oñate of the status of his investments in
accordance with the terms of the IMAs. According to the bank, it made a full disclosure in its
demand letter that the total outstanding balance of all the trust accounts amounted to P1,471,416.52,
but that the same was setoff to recoup the "miscredited" funds. It faults Oñate for not interposing

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any objection as his silence constitutes as his approval after 30 days from receipt thereof. Land Bank
asseverates that Oñate could have also inspected and audited the records of his accounts at any
reasonable time. But he never did.For his part, Oñate refuted Land Bank’s claim to negative
balances and over withdrawals and posited that the bank cannot benefit from its own negligence
in mismanaging the trust accounts.

Issue:

Whether or not the bank can be held liable for the inaccuracies of the reports.

Ruling:

In Simex International (Manila), Inc. v. Court of Appeals, we elucidated on the nature of banking
business and the responsibility of banks:

The banking system is an indispensable institution in the modern world and plays a
vital role in the economic life of every civilized nation. Whether as mere passive
entities for the safekeeping and saving of money or as active instruments of business
and commerce, banks have become an ubiquitous presence among the people, who
have come to regard them with respect and even gratitude and, most of all,
confidence. Thus, even the humble wage-earner has not hesitated to entrust his life’s
savings to the bank of his choice, knowing that they will be safe in its custody and
will even earn some interest for him. The ordinary person, with equal faith, usually
maintains a modest checking account for security and convenience in the settling
of his monthly bills and the payment of ordinary expenses. As for business entities
like the petitioner, the bank is a trusted and active associate that can help in the
running of their affairs, not only in the form of loans when needed but more often
in the conduct of their day-to-day transactions like the issuance or encashment of
checks.

In every case, the depositor expects the bank to treat his account with the utmost
fidelity, whether such account consists only of a few hundred pesos or of millions.
The bank must record every single transaction accurately, down to the last centavo
and as promptly as possible. This has to be done if the account is to reflect at any
given time the amount of money the depositor can dispose of as he sees fit, confident
that the bank will deliver it as and to whomever he directs.

The point is that as a business affected with public interest and because of the nature
of its functions, the bank is under obligations to treat the accounts of its depositors
with meticulous care, always having in mind the fiduciary nature of their
relationship.

As to the conceded inaccuracies in the reports, we cannot allow Land Bank to benefit therefrom.
Time and again, we have cautioned banks to spare no effort in ensuring the integrity of the records
of its clients. And in Philippine National Bank v. Court of Appeals, we held that "as between parties
where negligence is imputable to one and not to the other, the former must perforce bear the

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consequences of its neglect." In this case, the Board could have submitted a more accurate report
had Land Bank faithfully complied with its duty of maintaining a complete and accurate record of
Oñate’s accounts. But the Board could not find and present the corresponding slips for the
withdrawals reflected in the passbooks. In addition, Land Bank was less than cooperative when the
Board was examining the records of Oñate’s accounts. It did not give the Board enough leeway to
go over the records systematically or in orderly fashion. Hence, we cannot allow Land Bank to
benefit from possible inaccuracies in the report.

PHILIPPINE NATIONAL BANK v. F.F. CRUZ AND CO., INC.

G.R. No. 173259, 25 July 2011, FIRST DIVISION (Del Castillo, J.)

In Philippine Bank of Commerce v. Court of Appeals and The Consolidated Bank & Trust Corporation
v. Court of Appeals, where the bank’s negligence is the proximate cause of the loss and the depositor
is guilty of contributory negligence, the Court allocated the damages between the bank and the
depositor on a 60-40 ratio. The same ruling applies in this case considering that, as shown above,
PNB’s negligence is the proximate cause of the loss while the issue as to FFCCI’s contributory
negligence has been settled with finality in G.R. No. 173278.

FACTS:

F.F. Cruz and Co., Inc. (FFCCI) had a combo account with Philippine National Bank (PNB)
with President Felipe Cruz and Secretary-Treasurer Angelita Cruz as signatories. Both went to the
United States of America and while they were out of the country, two checks were presented to
PNB which were approved and debited from the account of FFCCI.

When Angelita returned she discovered the amounts debited from their account and
requested PNB to credit back the amount lost. PNB refused. FFCCI then instituted a case against
PNB and FFCCI’s accountant for damages. In its defense, PNB alleged that it exercised due diligence
because it followed the standard banking procedure. PNB concedes the absence of the signature of
the bank verifier but argued that the same was the result of inadvertence. PNB states that the
testimonies of its branch manager and branch cashier are sufficient to establish that the signature
verification process was duly followed. In addition, it was FFCCI which was negligent because of its
delay in reporting to PNB the anomalous transaction.

The RTC held that PNB should bear the whole loss while the CA ruled that PNB and FFCCI
should bear the loss in a 60%-40% ratio, respectively.

ISSUE:
Whether or not PNB is guilty of negligence

RULING:

YES. The banking business is impressed with public trust and consequently, a higher degree
of diligence is expected of banks. PNB failed to meet the high standard of diligence required by the
circumstances to prevent the fraud.

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PNB was negligent with respect to its failure to detect the forgeries which could have
prevented the loss. It was admitted that PNB’s employees received training on detecting forgeries
from the NBI. However, Emmanuel Guzman, then NBI senior document examiner, testified, as an
expert witness, that the forged signatures in the subject applications for managers check contained
noticeable and significant differences from the genuine signatures of FFCCI’s authorized signatories
and that the forgeries should have been detected by a trained signature verifier of any bank.

PNB also failed to make the proper verification because the applications for the manager’s
check do not bear the signature of the bank verifier. The contention of PNB is untenable. PNB did
not even present the account analyst, whose principal duty is to determine the genuineness of the
signature, to explain the failure to sign the box for signature and balance verification, thus, casting
doubt as to whether he or she did indeed verify the signatures thereon.

In Philippine Bank of Commerce v. Court of Appeals and The Consolidated Bank & Trust
Corporation v. Court of Appeals, where the bank’s negligence is the proximate cause of the loss and
the depositor is guilty of contributory negligence, the Court allocated the damages between the
bank and the depositor on a 60-40 ratio. The same ruling applies in this case considering that, as
shown above, PNB’s negligence is the proximate cause of the loss while the issue as to FFCCI’s
contributory negligence has been settled with finality in G.R. No. 173278.

Corporation Law

Doctrine of Piercing the Corporate Veil

Vicmar Development Corporation vs. Elarcosa

G.R. No. 202215, December 9, 2015, SECOND DIVISION, DEL CASTILLO, J.

Where it appears that business enterprises are owned, conducted and controlled by the same parties,
law and equity will disregard the legal fiction that these corporations are distinct entities and shall
treat them as one. This is in order to protect the rights of third persons, as in this case, to safeguard
the rights of respondents.

FACTS:

This case stemmed from a Complaint for illegal dismissal and money claims filed respondents
against Vicmar Development Corporation (Vicmar).

Respondents alleged that Vicmar, a domestic corporation engaged in manufacturing of plywood for
export and for local sale. They averred that Vicmar has two branches, Top Forest Developers,
Incorporated (TFDI) and Greenwood International Industries, Incorporated (GIII) located in the
same compound where Vicmar operated.

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In their defense, Vicmar contends that some of the respondents were extra workers of TFDI, not
Vicmar.

Issue:

Is the contention of Vicmar tenable?

Ruling:

No. Petitioners failed to refute the contention that Vicmar and its branches have the same owner
and management — which included one resident manager, one administrative department, one
and the same personnel and finance sections. Notably, all respondents were employed by the same
plant manager, who signed their identification cards some of whom were under Vicmar, and the
others under TFDI.

Where it appears that business enterprises are owned, conducted and controlled by the same
parties, law and equity will disregard the legal fiction that these corporations are distinct entities
and shall treat them as one. This is in order to protect the rights of third persons, as in this case, to
safeguard the rights of respondents.

DUTCH MOVERS, INC., CESAR LEE and YOLANDA LEE v. EDILBERTO LEQUIN,
CHRISTOPHER R. SALVADOR, REYNALDO L. SINGSING, and RAFFY B. MASCARDO
G.R. No. 210032, April 25, 2017, DEL CASTILLO, J.

Piercing the veil of corporate fiction is allowed, and responsible persons may be impleaded, and be
held solidarily liable even after final judgment and on execution, provided that such persons
deliberately used the corporate vehicle to unjustly evade the judgment obligation, or resorted to fraud,
bad faith, or malice in evading their obligation.

Facts:

An illegal dismissal Complaint was filed by Lequin. et. al against Dutch Movers, Inc. (DMI), and/or
Spouses Lee, its alleged President/Owner, and Manager respectively. NLRC ruled that they were
illegally dismissed. Pending the resolution of the Writ of Execution, Lequin. et. al filed a
Manifestation and Motion to Implead stating that upon investigation, they discovered that
DMI no longer operates. They, nonetheless, insisted that Spouses Lee — who managed and
operated DMI, and consistently represented to respondents that they were the owners of DMI —
continue to work at Toyota Alabang, which they also own and operate. They further averred that
the Articles of Incorporation (AOI) of DMI ironically did not include petitioners as its directors or
officers; and those named directors and officers were persons unknown to them. They likewise
claimed that per inquiry with the SEC and the DOLE, they learned that DMI did not file any notice
of business closure; and the creation and operation of DMI was attended with fraud making it
convenient for petitioners to evade their legal obligations to them.

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Issue:

Whether or not the corporate fiction can be pierced even after the judgment against it has become
final and executory.

Held:

Yes. The veil of corporate fiction must be pierced and accordingly, petitioners should be held
personally liable for judgment awards because the peculiarity of the situation shows that they
controlled DMI; they actively participated in its operation such that DMI existed not as a separate
entity but only as business conduit of petitioners. As will be shown below, petitioners controlled
DMI by making it appear to have no mind of its own, and used DMI as shield in evading legal
liabilities, including payment of the judgment awards in favor of respondents.

Piercing the veil of corporate fiction is allowed, and responsible persons may be impleaded, and be
held solidarily liable even after final judgment and on execution, provided that such persons
deliberately used the corporate vehicle to unjustly evade the judgment obligation, or resorted to
fraud, bad faith, or malice in evading their obligation.

In this case, petitioners were impleaded from the inception of this case. They had ample
opportunity to debunk the claim that they illegally dismissed respondents, and that they should be
held personally liable for having controlled DMI and actively participated in its management, and
for having used it to evade legal obligations to respondents.

While it is true that one's control does not by itself result in the disregard of corporate fiction;
however, considering the irregularity in the incorporation of DMI, then there is sufficient basis to
hold that such corporation was used for an illegal purpose, including evasion of legal duties to its
employees, and as such, the piercing of the corporate veil is warranted. The act of hiding behind
the cloak of corporate fiction will not be allowed in such situation where it is used to evade one's
obligations, which "equitable piercing doctrine was formulated to address and prevent."

Clearly, petitioners should be held liable for the judgment awards as they resorted to such scheme
to countermand labor laws by causing the incorporation of DMI but without any indication that
they were part thereof. While such device to defeat labor laws may be deemed ingenious and
imaginative, the Court will not hesitate to draw the line, and protect the right of workers to security
of tenure, including ensuring that they will receive the benefits they deserve when they fall victims
of illegal dismissal.

Liability of Corporate Officers and Directors

FEDERATED LPG DEALERS ASSOCIATION, Petitioner, -versus- MA. CRISTINA L. DEL

ROSARIO, CELSO E. ESCOBIDO U, SHIELA M. ESCOBIDO, and RESTY P. CAPILI,
Respondents.
G.R. No. 202639, November 9, 2016, SECOND DIVISION, DEL CASTILLO, J.

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In the case of Ty v. NBI Supervising Agent De Jemil, the Court ruled that a member of the Board of
Directors of a corporation, cannot, by mere reason of such membership, be held liable for the
corporation's probable violation of BP 33.

FACTS:

Respondent Antonio is the General Manager of ACCS Ideal Gas Corporation (ACCS) while the other
respondents are members of the Board of Directors.

Atty. Adarlo wrote the CIDG-AFCCD informing the latter that ACCS, which allegedly has been
refilling branded LPG cylinders in its refilling plant, has no authority to refill per certifications from
gas companies owning the branded LPG cylinders.

Having reasonable grounds to believe that ACCS was in violation of BP 33, P/Supt. Esguerra filed
with the Regional Trial Court (RTC) of Manila applications for search warrant against the officers
of ACCS. This resulted in the seizure of an electric motor, a hose with filling head, scales, v-belt,
vapor compressor, booklets of various receipts, and 73 LPG cylinders of various brands and sizes,
four of which were filled, i.e., two Superkalan 3.7 kg. LPG cylinders, one Shellane 11 kg. LPG cylinder,
and one Totalgaz 11 kg. cylinder. Inspection and evaluation of the said filled LPG cylinders showed
that they were underfilled by 0.5 kg. to 0.9 kg.

Complaint-Affidavits were filed before the Department of Justice (DOJ) against Antonio and
respondents for illegal trading of petroleum products and for underfilling of LPG cylinders under
Section 2(a) and 2(c), respectively, of BP 33, as amended. Secretary of Justice approved the finding
of probable cause albeit only against Antonio. P/Supt. Esguerra and petitioner elevated the matter
to the CA through a certiorari petition. They contended that the Secretary of Justice acted with
grave abuse of discretion amounting to lack of or in excess of jurisdiction in affirming the dropping
of other respondents from the complaints. CA, however, sustatined the Secretary of Justice.

ISSUE:

Can respondents, as members of the Board of Directors of ACCS, be criminally prosecuted for the
latter's alleged violation/s of BP 33 as amended?

RULING;

Respondents cannot be prosecuted for ACCS' alleged violations of BP 33. They were thus
correctly dropped as respondents in the complaints.

The CA ratiocinated that by the election or designation of Antonio as General Manager of ACCS,
the daily business operations of the corporation were vested in his hands and had ceased to be the
responsibility of respondents as members of the Board of Directors. Respondents, therefore, were
not officers charged with the management of the business affairs who could be held liable pursuant
to paragraph 3, Section 4 of BP 33, as amended, which states that:

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When the offender is a corporation, partnership, or other juridical person, the president,
the general manager, managing partner, or such other officer charged with the management
of the business affairs thereof, or employee responsible for the violation shall be criminally
liable. xxx

In the case of Ty v. NBI Supervising Agent De Jemil, the Court ruled that a member of the Board of
Directors of a corporation, cannot, by mere reason of such membership, be held liable for the
corporation's probable violation of BP 33. If one is not the President, General Manager or Managing
Partner, it is imperative that it first be shown that he/she falls under the catch-all ''such other officer
charged with the management of the business affairs," before he/she can be prosecuted. However,
it must be stressed, that the matter of being an officer charged with the management of the business
affairs is a factual issue which must be alleged and supposed by evidence. Here, there is no dispute
that neither of the respondents was the President, General Manager, or Managing Partner of ACCS.
Hence, it becomes incumbent upon petitioner to show that respondents were officers charged with
the management of the business affairs. However, the Complaint-Affidavit attached to the records
merely states that respondents were members of the Board of Directors based on the AOI of ACCS.
There is no allegation whatsoever that they were in-charge of the management of the corporation's
business affairs.

At any rate, the Court has gone through the By-Laws of ACCS and found nothing therein which
would suggest that respondents were directly involved in the day-to-day operations of the
corporation. The By-laws contains a general statement that the corporate powers of ACCS shall be
exercised, all business conducted, and all property of the corporation controlled and held by the
Board of Directors. Notably, however, the bylaws likewise significantly vests the Board with specific
powers that were generally concerned with policy making from which it can reasonably be deduced
that the Board only concerns itself in the business affairs by setting administrative and operational
policies.

Clearly, therefore, it is only Antonio, who undisputedly was the General Manager - a position among
those expressly mentioned as criminally liable under paragraph 4, Section 3 of BP 33, as amended -
can be prosecuted for ACCS' perceived violations of the said law. Respondents who were mere
members of the Board of Directors and not shown to be charged with the management of the
business affairs were thus correctly dropped as respondents in the complaints.

HARPOON MARINE SERVICES, INC., et al. v. FERNAN H. FRANCISCO

G.R. No. 167751, 02 March 2011, THIRD DIVISION (Del Castillo, J.)

As held in the case of MAM Realty Development Corporation v. National Labor Relations
Commission, “obligations incurred by corporate officers, acting as such corporate agents, are not
theirs but the direct accountabilities of the corporation they represent.” As such, they should not be
generally held jointly and solidarily liable with the corporation. The general rule is grounded on the
theory that a corporation has a legal personality separate and distinct from the persons comprising
it. To warrant the piercing of the veil of corporate fiction, the officer’s bad faith or wrongdoing “must
be established clearly and convincingly” as “bad faith is never presumed.”

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FACTS:

Harpoon Marine Service Inc. is a company engaged in ship building and ship repair with Rosit as
its President. The company hired Fernan Franciso in 1992 as Yard Supervisor to oversee and
supervise all the projects. Francisco left in 1998 but was later rehired and assumed his previous
position a year after.

According to Francisco, he was unceremoniously dismissed by the President, Rosit, because the
company could no longer afford his salary but promised that he would still be paid his separation
pay and accrued commissions. However, only his separation pay was given so he filed a complaint
for illegal dismissal.

Harpoon argued that Francisco incurred excessive absences and tardiness. He even sought
employment from another company engaged in the same line of business which resulted in serious
damage to Harpoon in the form of unfinished projects. Harpoon denied the termination and said
that Francisco abandoned his work.

ISSUES:

Whether or not Rosit is liable for Francisco’s dismissal.

RULING:

NO. Rosit could not be held solidarily liable with Harpoon for lack of substantial evidence of bad
faith and malice on his part. Rosit’s actuations only show the illegality of the manner of effecting
Francisco’s termination but do not point to any malice or bad faith on his part. Besides, good faith
is still presumed. In addition, liability only attaches if the officer has assented to patently unlawful
acts of the corporation.

As held in the case of MAM Realty Development Corporation v. National Labor Relations
Commission, “obligations incurred by corporate officers, acting as such corporate agents, are not
theirs but the direct accountabilities of the corporation they represent.” As such, they should not
be generally held jointly and solidarily liable with the corporation. The general rule is grounded on
the theory that a corporation has a legal personality separate and distinct from the persons
comprising it. To warrant the piercing of the veil of corporate fiction, the officer’s bad faith or
wrongdoing “must be established clearly and convincingly” as “bad faith is never presumed.”

GIRLY G. ICO vs. SYSTEMS TECHNOLOGY INSTITUTE, INC., MONICO V.

JACOB and PETER K. FERNANDEZ
G.R. No. 185100, July 9, 2014, J. Del Castillo

A corporation, as a juridical entity, may act only through its directors, officers and employees.
Obligations incurred as a result of the directors’ and officers’ acts as corporate agents, are not their
personal liability but the direct responsibility of the corporation they represent. As a rule, they are

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only solidarily liable with the corporation for the illegal termination of services of employees if they
acted with malice or bad faith.

To hold a director or officer personally liable for corporate obligations, two requisites must
concur: (1) it must be alleged in the complaint that the director or officer assented to patently unlawful
acts of the corporation or that the officer was guilty of gross negligence or bad faith; and (2) there
must be proof that the officer acted in bad faith.

Facts:

Systems Technology Institute, Inc. (STI) is an educational institution duly incorporated,

organized, and existing under Philippine laws. Monico V. Jacob (Jacob) and Peter K. Fernandez
(Fernandez) are STI officers, the former being the President and Chief Executive Officer (CEO) and
the latter Senior Vice-President. STI offers pre-school, elementary, secondary and tertiary
education, as well as post-graduate courses either through franchisees or STI wholly-owned
schools.

Girly G. Ico (Ico), a masteral degree holder with doctorate units earned, was hired as Faculty
Member by STI College Makati (Inc.), which operates STI College-Makati (STI-Makati). STI College
Makati (Inc.) is a wholly-owned subsidiary of STI. Ico was subsequent promoted as Dean of STI
College- Parañaque and, thereafter, as Chief Operating Officer (COO) of STI-Makati.

However, after the merger between STI and STI College Makati (Inc.), Ico received a
memorandum cancelling her COO assignment at STI-Makati, citing management’s decision to
undertake an "organizational restructuring" in line with the merger of STI and STI-Makati. Further
ordering Ico to report to turn over her work to one Victoria Luz (Luz), who shall function as STI-
Makati’s School Administrator. According to STI, the "organizational re-structuring" was
undertaken "in order to streamline operations. In the process, the positions of Chief Executive
Officer and Chief Operating Officer of STI Makati were abolished."

Furthermore, the STI’s Corporate Auditor/Audit Advisory Group conducted an audit of STI-
Makati covering the whole period of Ico’s stint as COO/School Administrator therein. In a report
(Audit Report) later submitted to Fernandez, the auditors claim to have discovered several
irregularities. In another memorandum, it was recommended that an investigation committee be
formed to investigate Ico for grave abuse of authority, falsification, gross dishonesty, maligning and
causing intrigues, and other charges. Fernandez recommended that Ico be placed under preventive
suspension pending investigation. Hence, pursuant to said recommendation, Ico was placed under
preventive suspension and banning her entry to any of STI’s premises.

Labor Arbiter (LA) found Ico to have been illegally constructively and in bad faith dismissed
by respondents in her legally acquired status as regular employee thus, ordering respondents
SYSTEMS TECHNOLOGY INSTITUTE, INC. and/or MONICO V. JACOB, PETER K. FERNANDEZ
in solido to reinstate her to her former position and pay Ico’s full back wages plus damages. On
appeal, NLRC reversed the ruling of the LA. On petition for certiorari by Ico before the CA, CA
affirmed the ruling of the NLRC, hence, this petition.

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Issue:

Whether Jacob, as officer of STI, may be held solidarily liable with STI.

Ruling:

Nonetheless, the Court fails to discern any bad faith or negligence on the part of respondent
Jacob. The principal character that figures prominently in this case is Fernandez; he alone
relentlessly caused petitioner’s hardships and suffering. He alone is guilty of persecuting petitioner.
Indeed, some of his actions were without sanction of STI itself, and were committed outside of the
authority given to him by the school; they bordered on the personal, rather than official. His
superior, Jacob, may have been, for the most part, clueless of what Fernandez was doing to
petitioner. After all, Fernandez was the Head of the Academic Services Group of the EMD, and
petitioner directly reported to him at the time; his position enabled him to pursue a course of action
with petitioner that Jacob was largely unaware of.

A corporation, as a juridical entity, may act only through its directors, officers and
employees. Obligations incurred as a result of the directors’ and officers’ acts as corporate agents,
are not their personal liability but the direct responsibility of the corporation they represent. As a
rule, they are only solidarily liable with the corporation for the illegal termination of services of
employees if they acted with malice or bad faith.

To hold a director or officer personally liable for corporate obligations, two requisites must
concur: (1) it must be alleged in the complaint that the director or officer assented to patently
unlawful acts of the corporation or that the officer was guilty of gross negligence or bad faith; and
(2) there must be proof that the officer acted in bad faith.

Hence, Jacob is absolved from any liability.

Derivative Suit

Forest Hills Golf and Country Club, Inc. vs. Fil-Estate Properties, Inc.
G.R. No. 206649 July 20, 2016, Second Division, Del Castillo, J.

The fact that petitioner FHGCCI denominated the Complaint as a derivative suit for specific
performance is sufficient reason for the RTC to dismiss it for lack of jurisdiction, as the RTC where
the Complaint was raffled is not a special commercial court. Upon the enactment of RA No. 8799,
jurisdiction over intra-corporate disputes, including derivatives suits, is now vested in the RTCs
designated as special commercial courts by this Court pursuant to A.M. No. 00-11-03-SC promulgated
on November 21, 2000.

In Gonzales v. GJH Land, Inc., 774 SCRA 242 (2015), we laid down the guidelines to be observed if a
commercial case filed before the proper RTC is wrongly raffled to its regular branch. In that case, we
said that if the RTC has no internal branch designated as a Special Commercial Court, the proper
recourse is to refer the case to the nearest RTC with a designated Special Commercial Court branch

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within the judicial region. Upon referral, the RTC to which the case was referred to should re-docket
the case as a commercial case. And if the said RTC has only one branch designated as a Special
Commercial Court, it should assign the case to the sole special branch.

FACTS:

On March 31, 1993, Kingsville Construction and Development Corporation (Kingsville) and Kings
Properties Corporation (KPC) entered into a project agreement with respondent Fil-Estate
Properties, Inc. (FEPI), whereby the latter agreed to finance and cause the development of several
parcels of land owned by Kingsville in Antipolo, Rizal, into Forest Hills Residential Estates and Golf
and Country Club, a first-class residential area/golf-course/commercial center. 6 Under the
agreement, respondent FEPI was tasked to incorporate petitioner Forest Hills Golf and Country
Club, Inc. (FHGCCI) with an authorized stock of 3,600 shares; and to perform the development and
construction work and other undertakings as full payment of its subscription to the authorized
capital stock of the club.

On July 10, 1995, respondent FEPI assigned its rights and obligations over the project to a related
corporation, respondent Fil-Estate Golf Development, Inc. (FEGDI).

Due to the delayed construction of the second 18-Hole Golf Course, Madrid, a stockholder, wrote
two demand letters dated October 29, 2009 and March 15, 2010 to the Board of Directors of
petitioner FHGCCI asking them to initiate the appropriate legal action against respondents FEPI
and FEGDI. The Board of Directors, however, failed and/or refused to act on the demand letters.

Madrid, in a derivative capacity on behalf of petitioner FHGCCI, filed with the RTC of Antipolo City
(a regular court) a Complaint for Specific Performance with Damages.

RTC issued an Order dismissing the case for lack of jurisdiction.

Issue:

Is the dismissal proper?

Ruling:

Yes. The fact that petitioner FHGCCI denominated the Complaint as a derivative suit for specific
performance is sufficient reason for the RTC to dismiss it for lack of jurisdiction, as the RTC where
the Complaint was raffled is not a special commercial court. Upon the enactment of RA No. 8799,
jurisdiction over intra-corporate disputes, including derivatives suits, is now vested in the RTCs
designated as special commercial courts by this Court pursuant to A.M. No. 00-11-03-SC
promulgated on November 21, 2000.

Petitioner FHGCCI's contention that the instant case does not involve an intra-corporate
controversy as it was filed against respondents FEPI and FEGDI as developers, and not as
shareholders of the corporation holds no water. Apparent in the Complaint are allegations of the
interlocking directorships of the Board of Directors of petitioner FHGCCI and respondents FEPI

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and FEGDI, the conflict of interest of the Board of Directors of petitioner FHGCCI, and their bad
faith in carrying out their duties. Likewise alleged is that respondent FEPI and, later, respondent
FEGDI are shareholders of petitioner FHGCCI which under the project agreement, respondent FEPI
was tasked to perform the development and construction work and other obligations and
undertakings of the project as full payment of its subscription to the authorized capital stock of
petitioner FHGCCI, which it later assigned to respondent FEGDI. Considering these allegations, we
find that, contrary to the claim of petitioner FHGCCI, there are unavoidably intra-corporate
controversies intertwined in the specific performance case.

In Gonzales v. GJH Land, Inc., we laid down the guidelines to be observed if a commercial case filed
before the proper RTC is wrongly raffled to its regular branch. In that case, we said that if the RTC
has no internal branch designated as a Special Commercial Court, the proper recourse is to refer
the case to the nearest RTC with a designated Special Commercial Court branch within the judicial
region. Upon referral, the RTC to which the case was referred to should redocket the case as a
commercial case. And if the said RTC has only one branch designated as a Special Commercial
Court, it should assign the case to the sole special branch.

Furthermore, the Complaint filed by petitioner FHGCCI failed to comply with the requisites for a
valid derivative suit.

Corollarily, "[f]or a derivative suit to prosper, it is required that the minority stockholder suing for
and on behalf of the corporation must allege in his complaint that he is suing on a derivative cause
of action on behalf of the corporation and all other stockholders similarly situated who may wish
to join him in the suit." It is also required that the stockholder "should have exerted all reasonable
efforts to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules
governing the corporation or partnership to obtain the relief he desires [and that such fact is
alleged] with particularity in the complaint." The purpose for this rule is "to make the derivative
suit the final recourse of the stockholder, after all other remedies to obtain the relief sought had
failed." Finally, the stockholder is also required "to allege, explicitly or otherwise, the fact that there
were no appraisal rights available for the acts complained of, as well as a categorical statement that
the suit is not a nuisance or a harassment suit."

In this case, Madrid, as a shareholder of petitioner FHGCCI, failed to allege with particularity in the
Complaint, and even in the Amended Complaint, that he exerted all reasonable efforts to exhaust
all remedies available under the articles of incorporation, by-laws, or rules governing the
corporation; that no appraisal rights are available for the acts or acts complained of; and that the
suit is not a nuisance or a harassment suit. Although the Complaint alleged that demand letters
were sent to the Board of Directors of petitioner FHGCCI and that these were unheeded, these
allegations will not suffice.

Intra-corporate Dispute

Aguirre II v. FQB+7, Inc.,

G.R. No. 170770, January 9, 2013, Second Division, Del Castillo, J.

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The dissolution of the corporation simply prohibits it from continuing its business. However, despite
such dissolution, the parties involved in the litigation are still corporate actors. The dissolution does
not automatically convert the parties into total strangers or change their intra-corporate
relationships. Neither does it change or terminate existing causes of action, which arose because of
the corporate ties between the parties. Thus, a cause of action involving an intra-corporate
controversy remains and must be filed as an intra-corporate dispute despite the subsequent
dissolution of the corporation.

Facts:

On October 5, 2004, Vitaliano filed, in his individual capacity and on behalf of FQB+7, Inc. (FQB+7),
a Complaint for intra-corporate dispute, injunction, inspection of corporate books and records, and
damages, against respondents Nathaniel D. Bocobo (Nathaniel), Priscila D. Bocobo (Priscila), and
Antonio De Villa (Antonio).The Complaint alleged that, sometime in April 2004, Vitaliano
discovered a General Information Sheet (GIS) of FQB+7, dated September 6, 2002, in the Securities
and Exchange Commission (SEC) records. Vitaliano alleged that there were substantive changes
found in the GIS, respecting the composition of directors and subscribers of FQB+7. Further, the
GIS reported that FQB+7's stockholders held their annual meeting on September 3, 2002, which
according to Vitaliano, did not occur.This GIS was filed by respondents Nathaniel and Priscila
as FQB+7's president and secretary/treasurer, respectively.

On September 27, 2004, Nathaniel, in the exercise of his power as FQB+7's president, appointed
Antonio as the corporation's attorney-in-fact, with power of administration over the corporation's
farm in Quezon Province.

Characterizing Nathaniel's, Priscila's, and Antonio's continuous representation of the corporation

as a usurpation of the management powers and prerogatives of the "real" Board of Directors, the
Complaint asked for an injunction against them and for the nullification of all their previous actions
as purported directors, including the GIS they had filed with the SEC.

In addition, the Vitaliano also prayed in his Complaint for his declaration as a stockholder of
FQB+7 owning fifty (50) shares of stock thereof and to allowing him to inspect books and records
of the company. The Complaint also sought damages for the plaintiffs and a declaration of
Vitaliano's right to inspect the corporate records.

The respondents questioned the jurisdiction of the Regional Trial Court (RTC). They averred that
SEC had already revoked FQB+7's Certificate of Registration and is already in the stage of
liquidation.

The RTC granted the injunction in favor of Vitaliano. However, the Court of Appeals (CA) dismissed
Vitaliano’s complaint before the RTC for lack of jurisdiction. CA ruled that based on the prayers in
the Complaint, petitioners seek a determination of the real Board that can take over the
management of the corporation's farm, not to sit as a liquidation Board. Thus, contrary to
petitioners' claims, their Complaint is not geared towards liquidation but a continuance of the
corporation's business.

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Issues:

1. Whether the Complaint seeks to continue the dissolved corporation's business.

2. Whether the RTC has jurisdiction over an intra-corporate dispute involving a dissolved
corporation.

Ruling:

1. No, the complaint does not seek to continue the dissolved corporation.

Section 122 of the Corporation Code prohibits a dissolved corporation from continuing its business,
but allows it to continue with a limited personality in order to settle and close its affairs, including
its complete liquidation.

The Supreme Court ruled that the Complaint does not aim to continue the corporate business, but
to determine and vindicate an alleged stockholder's right to the return of his stockholdings and to
participate in the election of directors, and a corporation's right to remove usurpers and strangers
from its affairs.||| these issues mooted by the dissolution of the corporation.
A corporation's board of directors is not rendered functus officio by its dissolution. Since Section
122 allows a corporation to continue its existence for a limited purpose, necessarily there must be a
board that will continue acting for and on behalf of the dissolved corporation for that purpose. In
fact, Section 122 authorizes the dissolved corporation's board of directors to conduct its liquidation
within three years from its dissolution. Jurisprudence has even recognized the board's authority to
act as trustee for persons in interest beyond the said three-year period. Thus, the determination of
which group is the bona fide or rightful board of the dissolved corporation will still provide practical
relief to the parties involved.

The same is true with regard to Vitaliano's shareholdings in the dissolved corporation. A party's
stockholdings in a corporation, whether existing or dissolved, is a property right which he may
vindicate against another party who has deprived him thereof. The corporation's dissolution does
not extinguish such property right. Section 145 of the Corporation Code ensures the protection of
this right.

2. Yes, RTC maintains jurisdiction on intra-corporate case of dissolved corporations.

The CA's ruling is founded on the assumptions that intra-corporate controversies continue only in
existing corporations; that when the corporation is dissolved, these controversies cease to be intra-
corporate and need no longer be resolved; and that the status quo in the corporation at the time of
its dissolution must be maintained. The Court finds no basis for the said assumptions.

It bears reiterating that Section 145 of the Corporation Code protects, among others, the rights and
remedies of corporate actors against other corporate actors. The statutory provision assures an
aggrieved party that the corporation's dissolution will not impair, much less remove, his/her rights
or remedies against the corporation, its stockholders, directors or officers. It also states that
corporate dissolution will not extinguish any liability already incurred by the corporation, its
stockholders, directors, or officers. In short, Section 145 preserves a corporate actor's cause of action

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and remedy against another corporate actor. In so doing, Section 145 also preserves the nature of
the controversy between the parties as an intra-corporate dispute.

The dissolution of the corporation simply prohibits it from continuing its business. However,
despite such dissolution, the parties involved in the litigation are still corporate actors. The
dissolution does not automatically convert the parties into total strangers or change their intra-
corporate relationships. Neither does it change or terminate existing causes of action, which arose
because of the corporate ties between the parties. Thus, a cause of action involving an intra-
corporate controversy remains and must be filed as an intra-corporate dispute despite the
subsequent dissolution of the corporation.

Insurance Law

Incontestability Clause

THE INSULAR LIFE ASSURANCE COMPANY, LTD., Petitioner, v. PAZ Y. KHU, FELIPE Y.
KHU, JR., AND FREDERICK Y. KHU, Respondents.
G.R. No. 195176, April 18, 2016, DEL CASTILLO, J.

The date of last reinstatement mentioned in Section 48 of the Insurance Code pertains to the date that
the insurer approved' the application for reinstatement. However, in light of the ambiguity in the
insurance documents to this case, this Court adopts the interpretation favorable to the insured in
determining the date when the reinstatement was approved.

FACTS:

Felipe N. Khu, Sr. (Felipe) applied for a life insurance policy with Insular. Felipe accomplished the
required medical questionnaire wherein he did not declare any illness or adverse medical condition.
Insular Life thereafter issued him Policy Number A000015683 with a face value of P1 million. This
took effect on June 22, 1997.

Felipe's policy lapsed due to non-payment of the premium covering the period from June 22, 1999
to June 23, 2000.

On September 7, 1999, Felipe applied for the reinstatement of his policy. Insular Life advised Felipe
that his application for reinstatement may only be considered if he agreed to certain conditions
such as payment of additional premium and the cancellation of the riders pertaining to premium
waiver and accidental death benefits. Felipe agreed to these conditions and paid the agreed additional
premium on December 27, 1999. Insular Life issued Endorsement No. PN-A000015683 reinstating
the policy of Felipe.

On September 22, 2001, Felipe died.

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Paz Y. Khu, Felipe Y. Khu, Jr. .and Frederick Y. Khu (collectively, Felipe's beneficiaries or
respondents) filed with Insular Life a claim for benefit under the reinstated policy. This claim was
denied. Instead, Insular Life advised Felipe's beneficiaries that it had decided to rescind the
reinstated policy on the grounds of concealment and misrepresentation by Felipe. Hence,
respondents instituted a complaint for specific performance with damages.

In its Answer, Insular Life countered that Felipe did not disclose the ailments that he already had
prior to his application for reinstatement of his insurance policy; and that it would not have
reinstated the insurance policy had Felipe disclosed the material information on his adverse health
condition.

RTC ruled in favor of herein respondents and ordered Insular life to pay the beneficiaries. CA
dismissed the appeal of Insular life.

In praying for the reversal of the CA Decision, Insular Life basically argues that respondents should
not be allowed to recover on the reinstated insurance policy because the two-year contestability
period had not yet lapsed inasmuch as the insurance policy was reinstated only on December 27, 1999,
whereas Felipe died on September 22, 2001.

Respondents maintain that the insurance policy was reinstated effective June 22, 1999 and hence,
the two-year contestability period had already lapsed.

ISSUE:

Whether Felipe's reinstated life insurance policy is already incontestable at the time of his death.

RULING:

Yes, the reinstated policy is already incontestable. The insurance policy was reinstated effective
June 22, 1999 whereas Felipe died on September 22, 2001 and therefore, the two year contestability
period had already lapsed.
The Insurance Code pertinently provides that:

Sec. 48. xxxxxxxxxxxxxxxxxxxxxxxxxxx

After a policy of life insurance made payable on the death of the insured shall have been in
force during the lifetime of the insured for a period of two years from the date of its issue
or of its last reinstatement, the insurer cannot prove that the policy is void ab initio or is
rescindible by reason of the fraudulent concealment or misrepresentation of the insured or
his agent.

Thus, it is settled that the reinstatement of an insurance policy should be reckoned from the date
when the same was approved by the insurer.

In this case, the parties differ as to when the reinstatement was actually approved. Insular Life
claims that it approved the reinstatement only on December 27, 1999. On the other hand,

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J. Del Castillo

respondents contend that it was on June 22, 1999 that the reinstatement took effect. The resolution
of this issue hinges on the following documents: 1) Letter of Acceptance; and 2) the Endorsement.

The Letter of Acceptance wherein Felipe affixed his signature was actually drafted and prepared by
Insular Life. This pro-forma document reads as follows:

LETTER OF ACCEPTANCE

Place: Cag. De [O]ro City

The Insular Life Assurance Co., Ltd.
P.O. Box 128, MANILA

Policy No. A000015683

Gentlemen:

Thru your Reinstatement Section, I/WE learned that this policy may be reinstated provided
I/we agree to the following condition/s indicated with a check mark:

[xx] Accept the imposition of an extra/additional extra premium of [P]5.00 a year per
thousand of insurance; effective June 22, 1999

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

After Felipe accomplished this form, Insular Life, through its Regional Administrative Manager
issued an Endorsement dated January 7, 2000. For emphasis, the Endorsement is again quoted as
follows:

ENDORSEMENT
PN-A000015683

This certifies that as agreed to by the Insured, the reinstatement of this policy has been
approved by the Company on the understanding that the following changes are made on
the policy effective June 22, 1999:

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

Respondents argue that the phrase "effective June 22, 1999" found in both the Letter of Acceptance
and in the Endorsement is unclear whether it refers to the subject of the sentence, i.e., the
"reinstatement of this policy" or to the subsequent phrase "changes are made on the policy;" that
granting that there was any obscurity or ambiguity in the insurance policy, the same, should be laid
at the door of Insular Life as it was this insurance company that prepared the necessary documents
that make up the same.

Based on the foregoing, we find that the CA did not commit any error in holding that the subject
insurance policy be considered as reinstated on June 22, 1999. This finding must be upheld not only

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J. Del Castillo

because it accords with the evidence, but also because this is favorable to the insured who was not
responsible for causing the ambiguity or obscurity in the insurance contract. A contract of
insurance, being a contract of adhesion, par excellence, any ambiguity therein should be resolved
against the insurer.

Indeed, more than two years had lapsed from the time the subject insurance policy was reinstated
on June 22, 1999 vis-a-vis Felipe’s death on September 22, 2001. As such, the subject insurance
policy has already become incontestable at the time of Felipe’s death.

MANILA BANKERS LIFE INSURANCE CORPORATION vs. CRESENCIA P. ABAN

G.R. No. 175666. July 29, 2013, J. Del Castillo

The "Incontestability Clause" under Section 48 of the Insurance Code provides that an insurer is given
two years – from the effectivity of a life insurance contract and while the insured is alive – to discover
or prove that the policy is void ab initio or is rescindible by reason of the fraudulent concealment or
misrepresentation of the insured or his agent. After the two-year period lapses, or when the insured
dies within the period, the insurer must make good on the policy, even though the policy was obtained
by fraud, concealment, or misrepresentation.

Facts:

Delia Sotero (Sotero) took out a life insurance policy from Manila Bankers Life Insurance
Corporation (Bankers Life), designating respondent Cresencia P. Aban (Aban), her niece, as
beneficiary. Petitioner issued the policy, with a face value of P100,000.00, in Sotero’s favor after the
requisite medical examination and payment of the insurance premium.

On April 10, 1996, when the insurance policy had been in force for more than two years and seven
months, Sotero died. Respondent filed a claim for the insurance proceeds but petitioner denied
respondent’s claim and refunded the premiums paid on the policy allegedly because the policy is
obtained with of fraud, concealment and/or misrepresentation which renders it voidable. Petitioner
filed a civil case for rescission and/or annulment of the policy.

The RTC rendered a decision in favor of Aban. In dismissing the case, it found out that Sotero, and
not respondent, was the one who procured the insurance. It held further that under Section 48,
petitioner had only two years from the effectivity of the policy to question the same; since the
policy had been in force for more than two years, hence petitioner is now barred from contesting
the same or seeking a rescission or annulment thereof. The petitioner interpose an appeal with the
CA but the appellate court affirmed the RTC decision. Hence the present petition.

Issue:

Whether or not the Court of Appeals erred in sustaining the application of the incontestability
provision in the Insurance Code

Ruling:

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J. Del Castillo

The petition is denied.

With the crucial finding of fact – that it was Sotero who obtained the insurance for herself –
petitioner’s case is severely weakened, if not totally disproved. Allegations of fraud, which are
predicated on respondent’s alleged posing as Sotero and forgery of her signature in the insurance
application, are at once belied by the trial and appellate courts’ finding that Sotero herself took out
the insurance for herself. Fraudulent intent on the part of the insured must be established to entitle
the insurer to rescind the contract. In the absence of proof of such fraudulent intent, no right to
rescind arises.

Section 48 serves a noble purpose, as it regulates the actions of both the insurer and the insured.
Under the provision, an insurer is given two years – from the effectivity of a life insurance contract
and while the insured is alive – to discover or prove that the policy is void ab initio or is rescindible
by reason of the fraudulent concealment or misrepresentation of the insured or his agent. After the
two-year period lapses, or when the insured dies within the period, the insurer must make good on
the policy, even though the policy was obtained by fraud, concealment, or misrepresentation. This
is not to say that insurance fraud must be rewarded, but that insurers who recklessly and
indiscriminately solicit and obtain business must be penalized, for such recklessness and lack of
discrimination ultimately work to the detriment of bona fide takers of insurance and the public in
general.

Further, Section 48 prevents a situation where the insurer knowingly continues to accept annual
premium payments on life insurance, only to later on deny a claim on the policy on specious claims
of fraudulent concealment and misrepresentation, such as what obtains in the instant case. Thus,
instead of conducting at the first instance an investigation into the circumstances surrounding the
issuance of the policy which would have timely exposed the supposed flaws and irregularities
attending it as it now professes, petitioner appears to have turned a blind eye and opted instead to
continue collecting the premiums on the policy. For nearly three years, petitioner collected the
premiums and devoted the same to its own profit. It cannot now deny the claim when it is called
to account. Section 48 must be applied to it with full force and effect.

Petitioner claims that its insurance agent, who solicited the Sotero account, happens to be the
cousin of respondent’s husband, and thus insinuates that both connived to commit insurance fraud.
If this were truly the case, then petitioner would have discovered the scheme earlier if it had in
earnest conducted an investigation into the circumstances surrounding the Sotero policy. But
because it did not and it investigated the Sotero account only after a claim was filed thereon more
than two years later, naturally it was unable to detect the scheme. For its negligence and inaction,
the Court cannot sympathize with its plight.

Finally, insurers may not be allowed to delay the payment of claims by filing frivolous cases in court,
hoping that the inevitable may be put off for years – or even decades – by the pendency of these
unnecessary court cases. In the meantime, they benefit from collecting the interest and/or returns
on both the premiums previously paid by the insured and the insurance proceeds which should
otherwise go to their beneficiaries. The business of insurance is a highly regulated commercial
activity in the country, and is imbued with public interest. An insurance contract is a contract of

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adhesion which must be construed liberally in favor of the insured and strictly against the insurer
in order to safeguard the former’s interest.

Claims Settlement and Subrogation

MANULIFE PHILIPPINES, INC., Petitioner, -versus - HERMENEGILDA YBANEZ,

Respondent.
G.R. No. 204736, SECOND DIVISION, November 28, 2016, DEL CASTILl.O, J.

The fraudulent intent on the part of the insured must be established to entitle the insurer to rescind
the contract. Misrepresentation as a defense of the insurer to avoid liability is an affirmative defense
and the duty to establish such defense by satisfactory and convincing evidence rests upon the insurer.
For failure of Manulife to prove intent to defraud on the part of the insured, it cannot validly sue for
rescission of insurance contracts.

FACTS:

Before the RTC of Makati City, Manulife Philippines, Inc. (Manulife) instituted a Complaint for
Rescission of Insurance Contracts against Hermenegilda Ybanez (Hermenegilda).

It is alleged in the Complaint that 2 subject insurance policies which Manulife issued on October
25, 2002 and on July 25, 2003, respectively, both in favor of Dr. Gumersindo Solidum Ybafiez
(insured), were void due to concealment or misrepresentation of material facts in the latter's
applications for life insurance, particularly the forms entitled Non-Medical Evidence
(NME), Medical Evidence Exam (MEE), and the Declaration of Insurability in the
Application for Life Insurance (DOI); that He1menegilda, wife of the said insured, was revocably
designated as beneficiary in the subject insurance policies; that on November 17, 2003, when one of
the subject insurance policies had been in force for only one year and three months, while the other
for only four months, the insured died; that Hermenegilda, now widow to the said insured, filed a
Claimant's Statement-Death Claim with respect to the subject insurance policies; that the Death
Certificate stated that the insured had "Hepatocellular CA., Crd Stage 4, secondary to Uric Acid
Nephropathy; SAM Nephropathy recurrent malignant pleural effusion; NASCVC"; that Manulife
conducted an investigation into the circumstances leading to the said insured's death, in view of
the aforementioned entries in the said insured's Death Certificate; that Manulife thereafter
concluded that the insured misrepresented or concealed material facts at the time the subject
insurance policies were applied for; and that for this reason Manulife accordingly denied
Hermenegilda's death claims and refunded the premiums that the insured paid on the subject
insurance policies.

The RTC found no merit at all in Manulife's Complaint for rescission of the subject insurance
policies because it utterly failed to prove that the insured had committed the alleged
misrepresentation/s or concealment/s. The RTC stressed that the medical records that might or
could have established the insured's misrepresentation/s or concealment/s were inadmissible for
being hearsay, because Manulife did not present the physician or doctor, or any responsible official

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of the CDH, who could confirm the due execution and authenticity of its medical records. CA
affirmed the decision of RTC.

ISSUE:

Whether the CA committed any reversible error in affirming the RTC Decision dismissing
Manulife's Complaint for rescission of insurance contracts for failure to prove concealment on the
part of the insured.

RULING:

The Court must defer to the findings of fact of the RTC - as affirmed or confirmed by the CA - that
Manulife' s Complaint for rescission of the insurance policies in question was totally bereft of factual
and legal bases because it had utterly failed to prove that the insured had committed the alleged
misrepresentation/s or concealment/s of material facts imputed against him. The RTC correctly
held that the medical records that might have established the insured's purported
misrepresentation/s or concealment/s was inadmissible for being hearsay, given the fact that
Manulife failed to present the physician or any responsible official of the CDH who could confirm
or attest to the due execution and authenticity of the alleged medical records.

Manulife's sole witness gave no evidence at all relative to the particulars of the purported
concealment or misrepresentation allegedly perpetrated by the insured. In fact, Victoriano merely
perfunctorily identified the documentary exhibits adduced by Manulife; she never testified in
regard to the circumstances attending the execution of these documentary exhibits much
less in regard to its contents. Of course, the mere mechanical act of identifying these
documentary exhibits, without the testimonies of the actual participating parties thereto, adds up
to nothing. These documentary exhibits did not automatically validate or explain themselves. The
fraudulent intent on the part of the insured must be established to entitle the insurer to rescind the
contract. Misrepresentation as a defense of the insurer to avoid liability is an affirmative defense
and the duty to establish such defense by satisfactory and convincing evidence rests upon the
insurer. For failure of Manulife to prove intent to defraud on the part of the insured, it cannot
validly sue for rescission of insurance contracts.

ASIAN TERMINALS, INC. v. MALAYAN INSURANCE, CO., INC

G.R. No. 171406, 4 April 2011, FIRST DIVISION (Del Castillo, J.)

Non-presentation of the insurance contract or policy is not fatal in the instant case. The subrogation
receipt, by itself, is sufficient to establish not only the relationship of herein private respondent as
insurer and Caltex, as the assured shipper of the lost cargo of industrial fuel oil, but also the amount
paid to settle the insurance claim. The right of subrogation accrues simply upon payment by the
insurance company of the insurance claim.

FACTS:

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Malayan Insurance, Co., Inc, the insurer of the 60,000 plastic bags of soda ash dense shipped by
Shandong Weifang Soda Ash Plant from China to Manila as subrogee of the consignee, filed before
the Regional Trial Court (RTC) of Manila, Branch 35, a Complaint for damages against Asian
Terminals Inc, a duly registered domestic corporation engaged in providing arrastre and
stevedoring services. Asian contends that Malayan has no cause of action because it failed to present
the insurance contract or policy covering the subject shipment. It further argued that the
Subrogation Receipt presented by Malayan is not sufficient to prove that the subject shipment was
insured and that Malayan was validly subrogated to the rights of the consignee.

ISSUE:

Whether or not a reimbursement to Malayan Insurance is warranted.

RULING:

YES. Non-presentation of the insurance contract or policy is not fatal in the instant case. The
subrogation receipt, by itself, is sufficient to establish not only the relationship of herein private
respondent as insurer and Caltex, as the assured shipper of the lost cargo of industrial fuel oil, but
also the amount paid to settle the insurance claim. The right of subrogation accrues simply upon
payment by the insurance company of the insurance claim. Moreover, since there was no issue
regarding the validity of the insurance contract or policy, or any provision thereof, respondent had
no reason to present the insurance contract or policy as evidence during the trial.

Once the insurer pays the insured, equity demands reimbursement, as no one should benefit at the
expense of the other

Transportation Laws

Vigilance over Goods

MARINA PORT SERVICES, INC. v. AMERICAN HOME ASSURANCE CORPORATION

G.R. No. 201822, 12 August 2015, SECOND DIVISION (Del Castillo, J.)

MPSI, the arrastre operator, cannot be held liable for the missing bags of flour since the consigned
goods were shipped under "Shipper's Load and Count" arrangement. "This means that the shipper was
solely responsible for the loading of the container, while the carrier was oblivious to the contents of
the shipment. Protection against pilferage of the shipment was the consignee's lookout. The arrastre
operator was, like any ordinary depositary, duty-bound to take good care of the goods received from
the vessel and to turn the same over to the party entitled to their possession, subject to such
qualifications as may have validly been imposed in the contract between the parties. The arrastre
operator was not required to verify the contents of the container received and to compare them with
those declared by the shipper because, as earlier stated, the cargo was at the shipper's load and count.
The arrastre operator was expected to deliver to the consignee only the container received from the
carrier."

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FACTS:

Countercorp Trading PTE., Ltd. shipped to the Philippines 10 container vans of soft wheat
flour with seals intact on board the vessel M/V Uni Fortune. The shipment was insured against all
risks by American Home Assurance Corporation (AHAC) and consigned to MSC Distributor (MSC).
Upon arrival at the Manila South Harbor, the shipment was discharged in good condition and with
safety seals in place to the custody of the arrastre operator, Manila Port Services, Inc. (MPSI). After
unloading and prior to hauling, agents of the Bureau of Customs officially broke the seals and
examined the shipment for tax evaluation in the presence of MSC's broker and checker. Thereafter,
the customs inspector closed the container vans and refastened them with safety wire seals while
MSC's broker padlocked the same. MPSI then placed the said container vans in a back-to-back
arrangement at the delivery area of the harbor's container yard where they were watched over by
the security guards of MPSI and of the Philippine Ports Authority.

Subsequently, MSC's representative, AD's Customs Services (ACS), took out five container
vans for delivery to MSC. MPSI issued to ACS the corresponding gate passes for the vans indicating
its turnover of the subject shipment to MSC. However, upon receipt of the container vans at its
warehouse, MSC discovered substantial shortages in the number of bags of flour delivered. Hence,
it filed a formal claim for loss with MPSI. Pursuant to the gate passes issued by MPSI, ACS took out
the remaining five container vans from the container yard and delivered them to MSC. Upon
receipt, MSC once more discovered substantial shortages. Thus, MSC filed another claim with
MPSI.

MPSI denied both claims of MSC. As a result, MSC sought insurance indemnity for the lost
cargoes from AHAC. Upon payment of the claim, MSC issued a subrogation receipt in favor of
AHAC. Thereafter, AHAC filed a Complaint for damages against MPSI before the Regional Trial
Court (RTC), which was dismissed. Aggrieved, AHAC appealed to the Court of Appeals (CA), which
granted the same and held MPSI liable to AHAC for the value of the missing bags of flour. MPSI
moved for reconsideration but the CA denied the same.

ISSUE:

Whether MPSI should be held liable for the loss of the bags of flour.

RULING:

No.

The relationship between an arrastre operator and a consignee is similar to that between a
warehouseman and a depositor, or to that between a common carrier and the consignee and/or the
owner of the shipped goods. Thus, an arrastre operator should adhere to the same degree of
diligence as that legally expected of a warehouseman or a common carrier as set forth in Section
3[b] of the Warehouse Receipts [Act] and Article 1733 of the Civil Code. As custodian of the

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shipment discharged from the vessel, the arrastre operator must take good care of the same and
turn it over to the party entitled to its possession.

In case of claim for loss filed by a consignee or the insurer as subrogee, it is the arrastre
operator that carries the burden of proving compliance with the obligation to deliver the goods to
the appropriate party. It must show that the losses were not due to its negligence or that of its
employees. It must establish that it observed the required diligence in handling the shipment.
Otherwise, it shall be presumed that the loss was due to its fault. In the same manner, an arrastre
operator shall be liable for damages if the seal and lock of the goods deposited and delivered to it
as closed and sealed, be broken through its fault. Such fault on the part of the arrastre operator is
likewise presumed unless there is proof to the contrary.

MPSI was able to prove delivery of the shipment to MSC in good and complete condition and
with locks and seals intact.

As held in International Container Terminal Services, Inc. v. Prudential Guarantee &

Assurance Co., Inc., the signature of the consignee's representative on the gate pass is evidence of
receipt of the shipment in good order and condition.

AHAC justifies the failure of ACS to immediately protest the alleged loss or pilferage upon
initial pick-up of the first batch of container vans. The Court cannot, however, accept such excuse.
Even assuming that stripping of the container vans is indeed not allowed at the pier area, it is hard
to believe that MSC or its representative ACS has no precautionary measures to protect itself from
any eventuality of loss or pilferage. To recall, ACS's representative signed the gate passes without any
qualifications. This is despite the fact that such signature serves as an acknowledgment of ACS's
receipt of the goods in good order and condition. If MSC was keen enough in protecting its interest, it
(through ACS) should have at least qualified the receipt of the goods as subject to inspection, and
thereafter arrange for such an inspection in an area where the same is allowed to be done. However,
no such action or other similar measure was shown to have been undertaken by MSC. What is clear
is that ACS accepted the container vans on its behalf without any qualification.

At any rate, the goods were shipped under "Shipper's Load and Count" arrangement.
Thus, protection against pilferage of the subject shipment was the consignees lookout.

At any rate, MPSI cannot just the same be held liable for the missing bags of flour since the
consigned goods were shipped under "Shipper's Load and Count" arrangement. "This means that
the shipper was solely responsible for the loading of the container, while the carrier was oblivious
to the contents of the shipment. Protection against pilferage of the shipment was the consignee's
lookout. The arrastre operator was, like any ordinary depositary, duty-bound to take good care of
the goods received from the vessel and to turn the same over to the party entitled to their
possession, subject to such qualifications as may have validly been imposed in the contract between
the parties. The arrastre operator was not required to verify the contents of the container received
and to compare them with those declared by the shipper because, as earlier stated, the cargo was
at the shipper's load and count. The arrastre operator was expected to deliver to the consignee only
the container received from the carrier."

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Bill of Lading

MOF Company, Inc. vs. Shin Yang Brokerage Corporation

G.R. No. 172822, December 18, 2009, SECOND DIVISION (Del Castillo, J.)

The bill of lading is oftentimes drawn up by the shipper/consignor and the carrier without the
intervention of the consignee. However, the latter can be bound by the stipulations of the bill of lading
when a) there is a relation of agency between the shipper or consignor and the consignee or b) when
the consignee demands fulfillment of the stipulation of the bill of lading which was drawn up in its
favor. In Keng Hua Paper Products Co., Inc. v. Court of Appeals, 90 Phil. 836 (1952) we held that once
the bill of lading is received by the consignee who does not object to any terms or stipulations
contained therein, it constitutes as an acceptance of the contract and of all of its terms and conditions,
of which the acceptor has actual or constructive notice. x x x In sum, a consignee, although not a
signatory to the contract of carriage between the shipper and the carrier, becomes a party to the
contract by reason of either a) the relationship of agency between the consignee and the shipper/
consignor; b) the unequivocal acceptance of the bill of lading delivered to the consignee, with full
knowledge of its contents or c) availment of the stipulation pour autrui, i.e., when the consignee, a
third person, demands before the carrier the fulfillment of the stipulation made by the
consignor/shipper in the consignee’s favor, specifically the delivery of the goods/cargoes shipped.

Facts:

On October 25, 2001, Halla Trading Co., a company based in Korea, shipped to Manila secondhand
cars and other articles on board the vessel Hanjin Busan 0238W. The bill of lading covering the
shipment, i.e., Bill of Lading No. HJSCPUSI14168303, which was prepared by the carrier Hanjin
Shipping Co., Ltd. (Hanjin), named respondent Shin Yang Brokerage Corp. (Shin Yang) as the
consignee and indicated that payment was on a "Freight Collect" basis, i.e., that the
consignee/receiver of the goods would be the one to pay for the freight and other charges.

The shipment arrived in Manila on October 29, 2001. Thereafter, petitioner MOF Company, Inc.
(MOF), Hanjin's exclusive general agent in the Philippines, repeatedly demanded the payment of
ocean freight, documentation fee and terminal handling charges from Shin Yang. The latter,
however, failed and refused to pay contending that it did not cause the importation of the goods,
that it is only the Consolidator of the said shipment, that the ultimate consignee did not endorse
in its favor the original bill of lading and that the bill of lading was prepared without its consent.

Thus, on March 19, 2003, MOF filed a case for sum of money. Claiming that it is merely a
consolidator/forwarder and that Bill of Lading No. HJSCPUSI14168303 was not endorsed to it by the
ultimate consignee, Shin Yang denied any involvement in shipping the goods or in promising to
shoulder the freightage. It asserted that it never authorized Halla Trading Co. to ship the articles
or to have its name included in the bill of lading. Shin Yang also alleged that MOF failed to present
supporting documents to prove that it was Shin Yang that caused the importation or the one that
assured payment of the shipping charges upon arrival of the goods in Manila.

Issue:

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The issue for resolution is whether a consignee, who is not a signatory to the bill of lading, is bound
by the stipulations thereof. Corollarily, whether respondent who was not an agent of the shipper
and who did not make any demand for the fulfillment of the stipulations of the bill of lading drawn
in its favor is liable to pay the corresponding freight and handling charges.

Ruling:

A consignee, although not a signatory to the contract of carriage between the shipper and the
carrier, becomes a party to the contract by reason of either a) the relationship of agency between
the consignee and the shipper/consignor; b) the unequivocal acceptance of the bill of lading
delivered to the consignee, with full knowledge of its contents or c) availment of the stipulation
pour autrui, i.e., when the consignee, a third person, demands before the carrier the fulfillment of
the stipulation made by the consignor/shipper in the consignee's favor, specifically the delivery of
the goods/cargoes shipped.

In the instant case, Shin Yang consistently denied in all of its pleadings that it authorized Halla
Trading, Co. to ship the goods on its behalf; or that it got hold of the bill of lading covering the
shipment or that it demanded the release of the cargo. Basic is the rule in evidence that the burden
of proof lies upon him who asserts it, not upon him who denies, since, by the nature of things, he
who denies a fact cannot produce any proof of it. Thus, MOF has the burden to controvert all these
denials, it being insistent that Shin Yang asserted itself as the consignee and the one that caused
the shipment of the goods to the Philippines.

In civil cases, the party having the burden of proof must establish his case by preponderance of
evidence, which means evidence which is of greater weight, or more convincing than that which is
offered in opposition to it. Here, MOF failed to meet the required quantum of proof. Other than
presenting the bill of lading, which, at most, proves that the carrier acknowledged receipt of the
subject cargo from the shipper and that the consignee named is to shoulder the freightage, MOF
has not adduced any other credible evidence to strengthen its cause of action. It did not even
present any witness in support of its allegation that it was Shin Yang which furnished all the details
indicated in the bill of lading and that Shin Yang consented to shoulder the shipment costs. There
is also nothing in the records which would indicate that Shin Yang was an agent of Halla Trading
Co. or that it exercised any act that would bind it as a named consignee. Thus, the CA correctly
dismissed the suit for failure of petitioner to establish its cause against respondent.

Financial Rehabilitation and Insolvency Act of 2010

ROBINSON'S BANK CORPORATION vs. HON. SAMUEL H. GAERLAN, et al.

G.R. No. 195289, September 24, 2014, J. Del Castillo

Under Rule 3, Section 5 of the Rules of Procedure on Corporate Rehabilitation, the review of
any order or decision of the rehabilitation court or on appeal therefrom shall be in accordance with
the Rules of Court, unless otherwise provided. In the case at bar, TIDCORP’s Petition for Review

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sought to nullify the pari passu sharing scheme directed by the trial court and to grant preferential
and special treatment to TIDCORP over other WGC creditors, such as RBC. This being the case, there
is no visible objection to RBC’s participation in said case, as it stands to be injured or benefited by the
outcome of TIDCORP’s Petition for Review – being both a secured and unsecured creditor of WGC.

Facts:

Nation Granary, Inc. (now World Granary Corporation, or WGC) filed a Petition for
Rehabilitation with Prayer for Suspension of Payments, Actions and Proceedings before the RTC.

WGC is engaged in the business of mechanized bulk handling, transport and storage,
warehousing, drying, and milling of grains. It incurred loans amounting to P2.66 billion from RBC
and other banks and entities such as Trade and Investment Development Corporation of the
Philippines (TIDCORP). It appears that RBC is both a secured and unsecured creditor, while
TIDCORP is a secured creditor.

The RTC issued a Stay Order staying the enforcement of creditors’ claims and prohibiting
WGC from disposing its properties and paying its outstanding liabilities. The RTC gave due course
to the Petition for Rehabilitation. Accordingly, the receiver submitted his Report with a proposal of
a pari passu– or equal – sharing between the secured and unsecured creditors of the proceeds from
WGC’s cash flow made available for debt servicing.

In its Comment, TIDCORP among others took exception to the proposed pari passu sharing,
insisting that as a secured creditor, it should enjoy preference over unsecured creditors, citing law
and jurisprudence to the effect that the law on preference of credits shall be observed in resolving
claims against corporations under rehabilitation. It likewise claimed that WGC violated its
Indemnity Agreement with TIDCORP – which required that while the agreement subsisted, WGC
shall not incur new debts without TIDCORP’s approval – by obtaining additional loans without the
knowledge and consent of the latter.

RBC filed an Opposition to TIDCORP’s Comment, arguing that giving preference to

TIDCORP would violate the Stay Order and impair the powers of the receiver; and that any change
in the contractual relations between TIDCORP and WGC relative to their Indemnity Agreement
comes as a necessary consequence of rehabilitation, which TIDCORP may not be heard to
complain.

The RTC approved WGC’s rehabilitation plan. TIDCORP filed a Petition for review before
the CA praying that the order directing that all WGC obligations be settled on a pari passu basis be
reversed and set aside. RBC filed an Urgent Motion for Intervention with attached Comment in
Intervention, which is anchored on its original claim and objection to TIDCORP’s position.

In its Opposition, TIDCORP maintained that intervention is not allowed in rehabilitation

proceedings, citing Rule 3, Section 1 of the Interim Rules of Procedure on Corporate Rehabilitation.
It argued that a final determination of the appeal does not depend on RBC’s participation since
rehabilitation proceedings are in remand binding on all interested and affected parties even if they
did not participate in the proceedings.

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Issues:

1. Whether or not RBC should be allowed to participate in the petition for review;
2. Whether or not a petition for review is the proper remedy for RBC

Ruling:

1. Yes. Under Rule 3, Section 5 of the Rules of Procedure on Corporate Rehabilitation, the
review of any order or decision of the rehabilitation court or on appeal therefrom shall be in
accordance with the Rules of Court, unless otherwise provided. This being the case, there is no
visible objection to RBC’s participation in CA-G.R. SP No. 104141 as it stands to be injured or
benefited by the outcome of TIDCORP’s Petition for Review – being both a secured and unsecured
creditor of WGC.

To recall, TIDCORP’s Petition for Review in CA-G.R. SP No. 104141 sought to 1) nullify the
pari passu sharing scheme directed by the trial court; 2) declare RBC and the other creditor banks–
which granted additional loans to WGC after the latter executed its Indemnity Agreement with
TIDCORP – guilty of violating TIDCORP’s rights; and 3) grant preferential and special treatment to
TIDCORP over other WGC creditors. These remedies would undoubtedly affect not merely the
rights of RBC, but of all the other WGC creditors as well, as their standing or status as creditors
would be somewhat downgraded, and the manner of recovery of their respective credits will be
altered if TIDCORP’s prayer is granted. Thus, the nature of TIDCORP’s Petition in CA-G.R. SP No.
104141 is such that the other creditors like RBC must be allowed to participate in the proceedings.
They have an interest in the controversy where a final decree would necessarily affect their rights.

To disallow the participation of RBC constitutes an evasion of the appellate court’s positive
duty to observe due process, a gross and patent error that can be considered as grave abuse of
discretion. Likewise, when an adverse effect on the substantial rights of a litigant results from the
exercise of the court’s discretion, certiorari may issue. If not, this Court possesses the prerogative
and initiative to take corrective action when necessary to prevent a substantial wrong or to do
substantial justice.

2. No. While TIDCORP is correct in arguing that intervention is not the proper mode for
RBC coming to the CA since it is already a party to the rehabilitation proceedings, this merely
highlights the former’s error in not allowing the latter to participate in the proceedings in CA-G.R.
SP No. 104141 just as it underscores the appellate court’s blunder in not ordering that RBC be
allowed to comment or participate in the case so that they may be given the opportunity to be heard
on TIDCORP’s allegations and accusations. And while RBC chose the wrong mode for interposing
its comments and objections in CA-G.R. SP No. 104141, this does not necessarily warrant the outright
denial of its chosen remedy; the Court is not so rigid as to be precluded from adopting measures to
insure that justice would be administered fairly to all parties concerned. If TIDCORP must pursue
its Petition for Review, then RBC should be allowed to comment and participate in the proceedings.
There is no other solution to the impasse.

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Finally, the CA committed another patent error in declaring that RBC’s proper remedy was not to
move for intervention, but to file a Petition for Review of the trial court’s June 6, 2008 Order. It
failed to perceive the obvious fact that there is nothing about the trial court’s order that RBC
questioned; quite the contrary, it sought to affirm the said order in toto and simply prayed for the
dismissal of TIDCORP’s Petition for Review. There is thus no legal and logical basis for its
conclusion that RBC should have resorted to a Petition for Review just the same.

LEONARDO S. UMALE, [deceased] represented by CLARISSA VICTORIA, JOHN LEO,

GEORGE LEONARD, KRISTINE, MARGUERITA ISABEL, and MICHELLE ANGELIQUE, ALL
SURNAMED UMALE v. ASB Realty Corp.
G.R. No. 181126, 15 June 2011, FIRST DIVISION (Del Castillo, J.)

Being placed under corporate rehabilitation and having a receiver appointed to carry out the
rehabilitation plan do not ipso facto deprive a corporation and its corporate officers of the power to
recover its unlawfully detained property.

FACTS:

Amethyst Pearl Corp., owned by ASB Realty Corp., had a parcel of land in Pasig City which it
transferred in favor of ASB through a Deed of Assignment in Liquidation in 1996. Meanwhile, ASB
entered into a lease contract with Leonardo Umale over the same parcel of land for the period of
1999-2000. However, despite the expiration of the contract, Umale continued to possess the
property and pay rentals until 2003. ASB sent him a notice to terminate the contract, vacate the
premises, and demand to pay accrued rentals amounting to ₱1.2 M. When Umale failed to comply,
ASB filed an action for unlawful detainer against Umale before the Metropolitan Trial Court
(MeTC).

Umale claims that the lease over the land was through a verbal agreement with Amethyst, not ASB.
He also challenged ASB Realty’s personality to recover the subject premises considering that ASB
Realty had been placed under receivership by the Securities and Exchange Commission (SEC) and
a rehabilitation receiver had been duly appointed. Under Section 14(s), Rule 4 of the Administrative
Memorandum No. 00-8-10SC, or the Interim Rules of Procedure on Corporate Rehabilitation
(Interim Rules), it is the rehabilitation receiver that has the power to take possession, control and
custody of the debtors assets. Since ASB Realty claims that it owns the subject premises, it is its
duly-appointed receiver that should sue to recover possession of the same.

ASB presented a written contract showing that it is indeed the lessor, not Amethyst.

The MeTC dismissed ASB’s complaint without prejudice, stating that ASB had no personality
because Amethyst was the real lessor since the signatories to the written lease contract were under
the name of Amethyst. The Regional Trial Court (RTC) reversed the decision and declared ASB as
the real lessor and that it did not lose its corporate personality, which included the power to sue,
even if it was under receivership. The Court of Appeals (CA) affirmed it in toto.

ISSUES:

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Whether or not a corporate officer of ASB Realty (duly authorized by the Board of Directors) can
file suit to recover an unlawfully detained corporate property despite the fact that the corporation
had already been placed under rehabilitation.

RULING:

YES. Corporations, such as ASB Realty, are juridical entities that exist by operation of law. As a
creature of law, the powers and attributes of a corporation are those set out, expressly or impliedly,
in the law. Among the general powers granted by law to a corporation is the power to sue in its own
name. This power is granted to a duly-organized corporation, unless specifically revoked by another
law. The question becomes: Do the laws on corporate rehabilitation particularly PD 902-A, as
amended, and its corresponding rules of procedure forfeit the power to sue from the corporate
officers and Board of Directors?

Corporate rehabilitation is defined as the restoration of the debtor to a position of successful

operation and solvency, if it is shown that its continuance of operation is economically feasible and
its creditors can recover by way of the present value of payments projected in the plan more if the
corporation continues as a going concern than if it is immediately liquidated. It was first introduced
in the Philippine legal system through PD 902-A, as amended. The intention of the law is to effect
a feasible and viable rehabilitation by preserving a floundering business as a going concern, because
the assets of a business are often more valuable when so maintained than they would be when
liquidated. This concept of preserving the corporations business as a going concern while it is
undergoing rehabilitation is called debtor-in-possession or debtor-in-place. This means that the
debtor corporation (the corporation undergoing rehabilitation), through its Board of Directors and
corporate officers, remains in control of its business and properties, subject only to the monitoring
of the appointed rehabilitation receiver. The concept of debtor-in-possession, is carried out more
particularly in the SEC Rules, the rule that is relevant to the instant case. It states therein that the
interim rehabilitation receiver of the debtor corporation does not take over the control and
management of the debtor corporation. Likewise, the rehabilitation receiver that will replace the
interim receiver is tasked only to monitor the successful implementation of the rehabilitation plan.
There is nothing in the concept of corporate rehabilitation that would ipso facto deprive the Board
of Directors and corporate officers of a debtor corporation, such as ASB Realty, of control such that
it can no longer enforce its right to recover its property from an errant lessee.

To be sure, corporate rehabilitation imposes several restrictions on the debtor corporation. The
rules enumerate the prohibited corporate actions and transactions (most of which involve some
kind of disposition or encumbrance of the corporations assets) during the pendency of the
rehabilitation proceedings but none of which touch on the debtor corporations right to sue. The
implication therefore is that our concept of rehabilitation does not restrict this particular power,
save for the caveat that all its actions are monitored closely by the receiver, who can seek an
annulment of any prohibited or anomalous transaction or agreement entered into by the officers of
the debtor corporation.

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