G.R. No.

159333 July 31, 2006

ARSENIO T. MENDIOLA, petitioner,

vs.
COURT OF APPEALS, NATIONAL LABOR RELATIONS COMMISSION, PACIFIC FOREST
RESOURCES, PHILS., INC. and/or CELLMARK AB, respondents.

DECISION

PUNO, J.:

On appeal are the Decision1 and Resolution2 of the Court of Appeals, dated January 30, 2003 and July 30, 2003,
respectively, in CA-G.R. SP No. 71028, affirming the ruling3 of the National Labor Relations Commission
(NLRC), which in turn set aside the July 30, 2001 Decision4 of the labor arbiter. The labor arbiter declared
illegal the dismissal of petitioner from employment and awarded separation pay, moral and exemplary damages,
and attorney's fees.

The facts are as follows:

Private respondent Pacific Forest Resources, Phils., Inc. (Pacfor) is a corporation organized and existing under
the laws of California, USA. It is a subsidiary of Cellulose Marketing International, a corporation duly
organized under the laws of Sweden, with principal office in Gothenburg, Sweden.

Private respondent Pacfor entered into a "Side Agreement on Representative Office known as Pacific Forest
Resources (Phils.), Inc."5 with petitioner Arsenio T. Mendiola (ATM), effective May 1, 1995, "assuming that
Pacfor-Phils. is already approved by the Securities and Exchange Commission [SEC] on the said date."6 The
Side Agreement outlines the business relationship of the parties with regard to the Philippine operations of
Pacfor. Private respondent will establish a Pacfor representative office in the Philippines, to be known as Pacfor
Phils, and petitioner ATM will be its President. Petitioner's base salary and the overhead expenditures of the
company shall be borne by the representative office and funded by Pacfor/ATM, since Pacfor Phils. is equally
owned on a 50-50 equity by ATM and Pacfor-usa.

On July 14, 1995, the SEC granted the application of private respondent Pacfor for a license to transact business
in the Philippines under the name of Pacfor or Pacfor Phils.7 In its application, private respondent Pacfor
proposed to establish its representative office in the Philippines with the purpose of monitoring and
coordinating the market activities for paper products. It also designated petitioner as its resident agent in the
Philippines, authorized to accept summons and processes in all legal proceedings, and all notices affecting the
corporation.8

In March 1997, the Side Agreement was amended through a "Revised Operating and Profit Sharing Agreement
for the Representative Office Known as Pacific Forest Resources (Philippines),"9 where the salary of petitioner
was increased to $78,000 per annum. Both agreements show that the operational expenses will be borne by the
representative office and funded by all parties "as equal partners," while the profits and commissions will be
shared among them.

In July 2000, petitioner wrote Kevin Daley, Vice President for Asia of Pacfor, seeking confirmation of his 50%
equity of Pacfor Phils.10 Private respondent Pacfor, through William Gleason, its President, replied that
petitioner is not a part-owner of Pacfor Phils. because the latter is merely Pacfor-USA's representative office
and not an entity separate and distinct from Pacfor-USA. "It's simply a 'theoretical company' with the purpose of
dividing the income 50-50."11 Petitioner presumably knew of this arrangement from the start, having been the
one to propose to private respondent Pacfor the setting up of a representative office, and "not a branch office" in
the Philippines to save on taxes.12
Petitioner claimed that he was all along made to believe that he was in a joint venture with them. He alleged he
would have been better off remaining as an independent agent or representative of Pacfor-USA as ATM
Marketing Corp.13 Had he known that no joint venture existed, he would not have allowed Pacfor to take the
profitable business of his own company, ATM Marketing Corp. 14 Petitioner raised other issues, such as the
rentals of office furniture, salary of the employees, company car, as well as commissions allegedly due him.
The issues were not resolved, hence, in October 2000, petitioner wrote Pacfor-USA demanding payment of
unpaid commissions and office furniture and equipment rentals, amounting to more than one million dollars.15

On November 27, 2000, private respondent Pacfor, through counsel, ordered petitioner to turn over to it all
papers, documents, files, records, and other materials in his or ATM Marketing Corporation's possession that
belong to Pacfor or Pacfor Phils. 16 On December 18, 2000, private respondent Pacfor also required petitioner to
remit more than three hundred thousand-peso Christmas giveaway fund for clients of Pacfor Phils. 17 Lastly,
private respondent Pacfor withdrew all its offers of settlement and ordered petitioner to transfer title and turn
over to it possession of the service car. 18

Private respondent Pacfor likewise sent letters to its clients in the Philippines, advising them not to deal with
Pacfor Phils. In its letter to Intercontinental Paper Industries, Inc., dated November 21, 2000, private respondent
Pacfor stated:

Until further notice, please course all inquiries and communications for Pacific Forest Resources
(Philippines) to:

Pacific Forest Resources

200 Tamal Plaza, Suite 200
Corte Madera, CA, USA 94925
(415) 927 1700 phone
(415) 381 4358 fax

Please do not send any communication to Mr. Arsenio "Boy" T. Mendiola or to the offices of ATM
Marketing Corporation at Room 504, Concorde Building, Legaspi Village, Makati City, Philippines. 19

In another letter addressed to Davao Corrugated Carton Corp. (DAVCOR), dated December 2000, private
respondent directed said client "to please communicate directly with us on any further questions associated with
these payments or any future business. Do not communicate with [Pacfor] and/or [ATM]."20

Petitioner construed these directives as a severance of the "unregistered partnership" between him and Pacfor,
and the termination of his employment as resident manager of Pacfor Phils. 21 In a memorandum to the
employees of Pacfor Phils., dated January 29, 2001, he stated:

I received a letter from Pacific Forest Resources, Inc. demanding the turnover of all records to them
effective December 19, 2000. The company records were turned over only on January 26, 2001. This
means our jobs with Pacific Forest were terminated effective December 19, 2000. I am concerned about
your welfare. I would like to help you by offering you to work with ATM Marketing Corporation.

Please let me know if you are interested.22

On the basis of the "Side Agreement," petitioner insisted that he and Pacfor equally own Pacfor Phils. Thus, it
follows that he and Pacfor likewise own, on a 50/50 basis, Pacfor Phils.' office furniture and equipment and the
service car. He also reiterated his demand for unpaid commissions, and proposed to offset these with the
remaining Christmas giveaway fund in his possession. 23 Furthermore, he did not renew the lease contract with
Pulp and Paper, Inc., the lessor of the office premises of Pacfor Phils., wherein he was the signatory to the lease
agreement.24
On February 2, 2001, private respondent Pacfor placed petitioner on preventive suspension and ordered him to
show cause why no disciplinary action should be taken against him. Private respondent Pacfor charged
petitioner with willful disobedience and serious misconduct for his refusal to turn over the service car and the
Christmas giveaway fund which he applied to his alleged unpaid commissions. Private respondent also alleged
loss of confidence and gross neglect of duty on the part of petitioner for allegedly allowing another corporation
owned by petitioner's relatives, High End Products, Inc. (HEPI), to use the same telephone and facsimile
numbers of Pacfor, to possibly steal and divert the sales and business of private respondent for HEPI's principal,
International Forest Products, a competitor of private respondent. 25

Petitioner denied the charges. He reiterated that he considered the import of Pacfor President William Gleason's
letters as a "cessation of his position and of the existence of Pacfor Phils." He likewise informed private
respondent Pacfor that ATM Marketing Corp. now occupies Pacfor Phils.' office premises, 26 and demanded
payment of his separation pay.27 On February 15, 2001, petitioner filed his complaint for illegal dismissal,
recovery of separation pay, and payment of attorney's fees with the NLRC. 28

In the meantime, private respondent Pacfor lodged fresh charges against petitioner. In a memorandum dated
March 5, 2001, private respondent directed petitioner to explain why he should not be disciplined for serious
misconduct and conflict of interest. Private respondent charged petitioner anew with serious misconduct for the
latter's alleged act of fraud and misrepresentation in authorizing the release of an additional peso salary for
himself, besides the dollar salary agreed upon by the parties. Private respondent also accused petitioner of
disloyalty and representation of conflicting interests for having continued using the Pacfor Phils.' office for
operations of HEPI. In addition, petitioner allegedly solicited business for HEPI from a competitor company of
private respondent Pacfor.29

Labor Arbiter Felipe Pati ruled in favor of petitioner, finding there was constructive dismissal. By directing
petitioner to turn over all office records and materials, regardless of whether he may have retained copies,
private respondent Pacfor virtually deprived petitioner of his job by the gradual diminution of his authority as
resident manager. Petitioner's position as resident manager whose duty, among others, was to maintain the
security of its business transactions and communications was rendered meaningless. The dispositive portion of
the decision of the Labor Arbiter reads:

WHEREFORE, premises considered, judgment is hereby rendered ordering herein respondents

Cellmark AB and Pacific Forest Resources, Inc., jointly and severally to compensate complainant
Arsenio T. Mendiola separation pay equivalent to at least one month for every year of service,
whichever is higher (sic), as reinstatement is no longer feasible by reason of the strained relations of the
parties equivalent to five (5) months in the amount of $32,000.00 plus the sum of P250,000.00; pay
complainant the sum of P500,000.00 as moral and exemplary damages and ten percent (10%) of the
amounts awarded as and for attorney's fees.

All other claims are dismissed for lack of basis.

SO ORDERED.30

Private respondent Pacfor appealed to the NLRC which ruled in its favor. On December 20, 2001, the NLRC set
aside the July 30, 2001 decision of the labor arbiter, for lack of jurisdiction and lack of merit. 31 It held there was
no employer-employee relationship between the parties. Based on the two agreements between the parties, it
concluded that petitioner is not an employee of private respondent Pacfor, but a full co-owner (50/50 equity).

The NLRC denied petitioner's Motion for Reconsideration. 32

Petitioner was not successful on his appeal to the Court of Appeals. The appellate court upheld the ruling of the
NLRC.
Petitioner's Motion for Reconsideration33 of the decision of the Court of Appeals was denied.

Hence, this appeal.34

Petitioner assigns the following errors:

A. The Respondent Court of Appeals committed reversible error and abused its discretion in rendering
judgment against petitioner since jurisdiction has been acquired over the subject matter of the case as
there exists employer-employee relationship between the parties.

B. The Respondent Court of Appeals committed reversible error and abused its discretion in ruling that
jurisdiction over the subject matter cannot be waived and may be alleged even for the first time on
appeal or considered by the court motu prop[r]io. 35

The first issue is whether an employer-employee relationship exists between petitioner and private respondent
Pacfor.

Petitioner argues that he is an industrial partner of the partnership he formed with private respondent Pacfor,
and also an employee of the partnership. Petitioner insists that an industrial partner may at the same time be an
employee of the partnership, provided there is such an agreement, which, in this case, is the "Side Agreement"
and the "Revised Operating and Profit Sharing Agreement." The Court of Appeals denied the appeal of
petitioner, holding that "the legal basis of the complaint is not employment but perhaps partnership, co-
ownership, or independent contractorship." Hence, the Labor Code cannot apply.

We hold that petitioner is an employee of private respondent Pacfor and that no partnership or co-ownership
exists between the parties.

In a partnership, the members become co-owners of what is contributed to the firm capital and of all property
that may be acquired thereby and through the efforts of the members. 36 The property or stock of the partnership
forms a community of goods, a common fund, in which each party has a proprietary interest.37 In fact, the New
Civil Code regards a partner as a co-owner of specific partnership property. 38 Each partner possesses a joint
interest in the whole of partnership property. If the relation does not have this feature, it is not one of
partnership.39 This essential element, the community of interest, or co-ownership of, or joint interest in
partnership property is absent in the relations between petitioner and private respondent Pacfor. Petitioner is not
a part-owner of Pacfor Phils. William Gleason, private respondent Pacfor's President established this fact when
he said that Pacfor Phils. is simply a "theoretical company" for the purpose of dividing the income 50-50. He
stressed that petitioner knew of this arrangement from the very start, having been the one to propose to private
respondent Pacfor the setting up of a representative office, and "not a branch office" in the Philippines to save
on taxes. Thus, the parties in this case, merely shared profits. This alone does not make a partnership. 40

Besides, a corporation cannot become a member of a partnership in the absence of express authorization by
statute or charter.41 This doctrine is based on the following considerations: (1) that the mutual agency between
the partners, whereby the corporation would be bound by the acts of persons who are not its duly appointed and
authorized agents and officers, would be inconsistent with the policy of the law that the corporation shall
manage its own affairs separately and exclusively; and, (2) that such an arrangement would improperly allow
corporate property to become subject to risks not contemplated by the stockholders when they originally
invested in the corporation.42 No such authorization has been proved in the case at bar.

Be that as it may, we hold that on the basis of the evidence, an employer-employee relationship is present in the
case at bar. The elements to determine the existence of an employment relationship are: (a) the selection and
engagement of the employee; (b) the payment of wages; (c) the power of dismissal; and (d) the employer's
power to control the employee's conduct. The most important element is the employer's control of the
employee's conduct, not only as to the result of the work to be done, but also as to the means and methods to
accomplish it.43

In the instant case, all the foregoing elements are present. First, it was private respondent Pacfor which selected
and engaged the services of petitioner as its resident agent in the Philippines. Second, as stipulated in their Side
Agreement, private respondent Pacfor pays petitioner his salary amounting to $65,000 per annum which was
later increased to $78,000. Third, private respondent Pacfor holds the power of dismissal, as may be gleaned
through the various memoranda it issued against petitioner, placing the latter on preventive suspension while
charging him with various offenses, including willful disobedience, serious misconduct, and gross neglect of
duty, and ordering him to show cause why no disciplinary action should be taken against him.

Lastly and most important, private respondent Pacfor has the power of control over the means and method of
petitioner in accomplishing his work.

The power of control refers merely to the existence of the power, and not to the actual exercise thereof. The
principal consideration is whether the employer has the right to control the manner of doing the work, and it is
not the actual exercise of the right by interfering with the work, but the right to control, which constitutes the
test of the existence of an employer-employee relationship.44 In the case at bar, private respondent Pacfor, as
employer, clearly possesses such right of control. Petitioner, as private respondent Pacfor's resident agent in the
Philippines, is, exactly so, only an agent of the corporation, a representative of Pacfor, who transacts business,
and accepts service on its behalf.

This right of control was exercised by private respondent Pacfor during the period of November to December
2000, when it directed petitioner to turn over to it all records of Pacfor Phils.; when it ordered petitioner to remit
the Christmas giveaway fund intended for clients of Pacfor Phils.; and, when it withdrew all its offers of
settlement and ordered petitioner to transfer title and turn over to it the possession of the service car. It was also
during this period when private respondent Pacfor sent letters to its clients in the Philippines, particularly
Intercontinental Paper Industries, Inc. and DAVCOR, advising them not to deal with petitioner and/or Pacfor
Phils. In its letter to DAVCOR, private respondent Pacfor replied to the client's request for an invoice payment
extension, and formulated a revised payment program for DAVCOR. This is one unmistakable proof that
private respondent Pacfor exercises control over the petitioner.

Next, we shall determine if petitioner was constructively dismissed from employment.

The evidence shows that when petitioner insisted on his 50% equity in Pacfor Phils., and would not quit
however, private respondent Pacfor began to systematically deprive petitioner of his duties and benefits to make
him feel that his presence in the company was no longer wanted. First, private respondent Pacfor directed
petitioner to turn over to it all records of Pacfor Phils. This would certainly make the work of petitioner very
difficult, if not impossible. Second, private respondent Pacfor ordered petitioner to remit the Christmas
giveaway fund intended for clients of Pacfor Phils. Then it ordered petitioner to transfer title and turn over to it
the possession of the service car. It also advised its clients in the Philippines, particularly Intercontinental Paper
Industries, Inc. and DAVCOR, not to deal with petitioner and/or Pacfor Phils. Lastly, private respondent Pacfor
appointed a new resident agent for Pacfor Phils. 45

Although there is no reduction of the salary of petitioner, constructive dismissal is still present because
continued employment of petitioner is rendered, at the very least, unreasonable. 46 There is an act of clear
discrimination, insensibility or disdain by the employer that continued employment may become so unbearable
on the part of the employee so as to foreclose any choice on his part except to resign from such employment. 47

The harassing acts of the private respondent are unjustified. They were undertaken when petitioner sought
clarification from the private respondent about his supposed 50% equity on Pacfor Phils. Private respondent
Pacfor invokes its rights as an owner. Allegedly, its issuance of the foregoing directives against petitioner was a
valid exercise of management prerogative. We remind private respondent Pacfor that the exercise of
management prerogative is not absolute. "By its very nature, encompassing as it could be, management
prerogative must be exercised in good faith and with due regard to the rights of labor – verily, with the
principles of fair play at heart and justice in mind." The exercise of management prerogative cannot be utilized
as an implement to circumvent our laws and oppress employees. 48

As resident agent of private respondent corporation, petitioner occupied a position involving trust and
confidence. In the light of the strained relations between the parties, the full restoration of an employment
relationship based on trust and confidence is no longer possible. He should be awarded separation pay, in lieu of
reinstatement.

IN VIEW WHEREOF, the petition is GRANTED. The Court of Appeals' January 30, 2003 Decision in CA-
G.R. SP No. 71028 and July 30, 2003 Resolution, affirming the December 20, 2001 Decision of the National
Labor Relations Commission, are ANNULED and SET ASIDE. The July 30, 2001 Decision of the Labor
Arbiter is REINSTATED with the MODIFICATION that the amount of P250,000.00 representing an alleged
increase in petitioner's salary shall be deducted from the grant of separation pay for lack of evidence.

SO ORDERED.

G.R. No. L-4935 May 28, 1954

J. M. TUASON & CO., INC., represented by it Managing PARTNER, GREGORIA ARANETA, INC.,
plaintiff-appellee,
vs.
QUIRINO BOLAÑOS, defendant-appellant.

Araneta and Araneta for appellee.

Jose A. Buendia for appellant.

REYES, J.:

This is an action originally brought in the Court of First Instance of Rizal, Quezon City Branch, to recover
possesion of registered land situated in barrio Tatalon, Quezon City.

Plaintiff's complaint was amended three times with respect to the extent and description of the land sought to be
recovered. The original complaint described the land as a portion of a lot registered in plaintiff's name under
Transfer Certificate of Title No. 37686 of the land record of Rizal Province and as containing an area of 13
hectares more or less. But the complaint was amended by reducing the area of 6 hectares, more or less, after the
defendant had indicated the plaintiff's surveyors the portion of land claimed and occupied by him. The second
amendment became necessary and was allowed following the testimony of plaintiff's surveyors that a portion of
the area was embraced in another certificate of title, which was plaintiff's Transfer Certificate of Title No.
37677. And still later, in the course of trial, after defendant's surveyor and witness, Quirino Feria, had testified
that the area occupied and claimed by defendant was about 13 hectares, as shown in his Exhibit 1, plaintiff
again, with the leave of court, amended its complaint to make its allegations conform to the evidence.

Defendant, in his answer, sets up prescription and title in himself thru "open, continuous, exclusive and public
and notorious possession (of land in dispute) under claim of ownership, adverse to the entire world by defendant
and his predecessor in interest" from "time in-memorial". The answer further alleges that registration of the land
in dispute was obtained by plaintiff or its predecessors in interest thru "fraud or error and without knowledge
(of) or interest either personal or thru publication to defendant and/or predecessors in interest." The answer
therefore prays that the complaint be dismissed with costs and plaintiff required to reconvey the land to
defendant or pay its value.
After trial, the lower court rendered judgment for plaintiff, declaring defendant to be without any right to the
land in question and ordering him to restore possession thereof to plaintiff and to pay the latter a monthly rent of
P132.62 from January, 1940, until he vacates the land, and also to pay the costs.

Appealing directly to this court because of the value of the property involved, defendant makes the following
assignment or errors:

I. The trial court erred in not dismissing the case on the ground that the case was not brought by the real
property in interest.

II. The trial court erred in admitting the third amended complaint.

III. The trial court erred in denying defendant's motion to strike.

IV. The trial court erred in including in its decision land not involved in the litigation.

V. The trial court erred in holding that the land in dispute is covered by transfer certificates of Title Nos.
37686 and 37677.

Vl. The trial court erred in not finding that the defendant is the true and lawful owner of the land.

VII. The trial court erred in finding that the defendant is liable to pay the plaintiff the amount of P132.62
monthly from January, 1940, until he vacates the premises.

VIII. The trial court erred in not ordering the plaintiff to reconvey the land in litigation to the defendant.

As to the first assigned error, there is nothing to the contention that the present action is not brought by the real
party in interest, that is, by J. M. Tuason and Co., Inc. What the Rules of Court require is that an action be
brought in the name of, but not necessarily by, the real party in interest. (Section 2, Rule 2.) In fact the practice
is for an attorney-at-law to bring the action, that is to file the complaint, in the name of the plaintiff. That
practice appears to have been followed in this case, since the complaint is signed by the law firm of Araneta and
Araneta, "counsel for plaintiff" and commences with the statement "comes now plaintiff, through its
undersigned counsel." It is true that the complaint also states that the plaintiff is "represented herein by its
Managing Partner Gregorio Araneta, Inc.", another corporation, but there is nothing against one corporation
being represented by another person, natural or juridical, in a suit in court. The contention that Gregorio
Araneta, Inc. can not act as managing partner for plaintiff on the theory that it is illegal for two corporations to
enter into a partnership is without merit, for the true rule is that "though a corporation has no power to enter into
a partnership, it may nevertheless enter into a joint venture with another where the nature of that venture is in
line with the business authorized by its charter." (Wyoming-Indiana Oil Gas Co. vs. Weston, 80 A. L. R., 1043,
citing 2 Fletcher Cyc. of Corp., 1082.) There is nothing in the record to indicate that the venture in which
plaintiff is represented by Gregorio Araneta, Inc. as "its managing partner" is not in line with the corporate
business of either of them.

Errors II, III, and IV, referring to the admission of the third amended complaint, may be answered by mere
reference to section 4 of Rule 17, Rules of Court, which sanctions such amendment. It reads:

Sec. 4. Amendment to conform to evidence. — When issues not raised by the pleadings are tried by
express or implied consent of the parties, they shall be treated in all respects, as if they had been raised
in the pleadings. Such amendment of the pleadings as may be necessary to cause them to conform to the
evidence and to raise these issues may be made upon motion of any party at my time, even of the trial of
these issues. If evidence is objected to at the trial on the ground that it is not within the issues made by
the pleadings, the court may allow the pleadings to be amended and shall be so freely when the
 presentation of the merits of the action will be subserved thereby and the objecting party fails to satisfy
the court that the admission of such evidence would prejudice him in maintaining his action or defense
upon the merits. The court may grant a continuance to enable the objecting party to meet such evidence.

Under this provision amendment is not even necessary for the purpose of rendering judgment on issues proved
though not alleged. Thus, commenting on the provision, Chief Justice Moran says in this Rules of Court:

Under this section, American courts have, under the New Federal Rules of Civil Procedure, ruled that
where the facts shown entitled plaintiff to relief other than that asked for, no amendment to the
complaint is necessary, especially where defendant has himself raised the point on which recovery is
based, and that the appellate court treat the pleadings as amended to conform to the evidence, although
the pleadings were not actually amended. (I Moran, Rules of Court, 1952 ed., 389-390.)

Our conclusion therefore is that specification of error II, III, and IV are without merit..

Let us now pass on the errors V and VI. Admitting, though his attorney, at the early stage of the trial, that the
land in dispute "is that described or represented in Exhibit A and in Exhibit B enclosed in red pencil with the
name Quirino Bolaños," defendant later changed his lawyer and also his theory and tried to prove that the land
in dispute was not covered by plaintiff's certificate of title. The evidence, however, is against defendant, for it
clearly establishes that plaintiff is the registered owner of lot No. 4-B-3-C, situate in barrio Tatalon, Quezon
City, with an area of 5,297,429.3 square meters, more or less, covered by transfer certificate of title No. 37686
of the land records of Rizal province, and of lot No. 4-B-4, situated in the same barrio, having an area of 74,789
square meters, more or less, covered by transfer certificate of title No. 37677 of the land records of the same
province, both lots having been originally registered on July 8, 1914 under original certificate of title No. 735.
The identity of the lots was established by the testimony of Antonio Manahan and Magno Faustino, witnesses
for plaintiff, and the identity of the portion thereof claimed by defendant was established by the testimony of his
own witness, Quirico Feria. The combined testimony of these three witnesses clearly shows that the portion
claimed by defendant is made up of a part of lot 4-B-3-C and major on portion of lot 4-B-4, and is well within
the area covered by the two transfer certificates of title already mentioned. This fact also appears admitted in
defendant's answer to the third amended complaint.

As the land in dispute is covered by plaintiff's Torrens certificate of title and was registered in 1914, the decree
of registration can no longer be impugned on the ground of fraud, error or lack of notice to defendant, as more
than one year has already elapsed from the issuance and entry of the decree. Neither court the decree be
collaterally attacked by any person claiming title to, or interest in, the land prior to the registration proceedings.
(Soroñgon vs. Makalintal,1 45 Off. Gaz., 3819.) Nor could title to that land in derogation of that of plaintiff, the
registered owner, be acquired by prescription or adverse possession. (Section 46, Act No. 496.) Adverse,
notorious and continuous possession under claim of ownership for the period fixed by law is ineffective against
a Torrens title. (Valiente vs. Judge of CFI of Tarlac,2 etc., 45 Off. Gaz., Supp. 9, p. 43.) And it is likewise
settled that the right to secure possession under a decree of registration does not prescribed. (Francisco vs. Cruz,
43 Off. Gaz., 5105, 5109-5110.) A recent decision of this Court on this point is that rendered in the case of Jose
Alcantara et al., vs. Mariano et al., 92 Phil., 796. This disposes of the alleged errors V and VI.

As to error VII, it is claimed that `there was no evidence to sustain the finding that defendant should be
sentenced to pay plaintiff P132.62 monthly from January, 1940, until he vacates the premises.' But it appears
from the record that that reasonable compensation for the use and occupation of the premises, as stipulated at
the hearing was P10 a month for each hectare and that the area occupied by defendant was 13.2619 hectares.
The total rent to be paid for the area occupied should therefore be P132.62 a month. It is appears from the
testimony of J. A. Araneta and witness Emigdio Tanjuatco that as early as 1939 an action of ejectment had
already been filed against defendant. And it cannot be supposed that defendant has been paying rents, for he has
been asserting all along that the premises in question 'have always been since time immemorial in open,
continuous, exclusive and public and notorious possession and under claim of ownership adverse to the entire
world by defendant and his predecessors in interest.' This assignment of error is thus clearly without merit.

Error No. VIII is but a consequence of the other errors alleged and needs for further consideration.

During the pendency of this case in this Court appellant, thru other counsel, has filed a motion to dismiss
alleging that there is pending before the Court of First Instance of Rizal another action between the same parties
and for the same cause and seeking to sustain that allegation with a copy of the complaint filed in said action.
But an examination of that complaint reveals that appellant's allegation is not correct, for the pretended identity
of parties and cause of action in the two suits does not appear. That other case is one for recovery of ownership,
while the present one is for recovery of possession. And while appellant claims that he is also involved in that
order action because it is a class suit, the complaint does not show that such is really the case. On the contrary,
it appears that the action seeks relief for each individual plaintiff and not relief for and on behalf of others. The
motion for dismissal is clearly without merit.

Wherefore, the judgment appealed from is affirmed, with costs against the plaintiff.

G.R. No. 75875 December 15, 1989

WOLRGANG AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM and CHARLES CHAMSAY,

petitioners,
vs.
SANITARY WARES MANUFACTURING CORPORATOIN, ERNESTO V. LAGDAMEO, ERNESTO
R. LAGDAMEO, JR., ENRIQUE R. LAGDAMEO, GEORGE F. LEE, RAUL A. BONCAN, BALDWIN
YOUNG and AVELINO V. CRUZ, respondents.

G.R. No. 75951 December 15, 1989

SANITARY WARES MANUFACTURING CORPORATION, ERNESTO R. LAGDAMEO, ENRIQUE

B. LAGDAMEO, GEORGE FL .EE RAUL A. BONCAN, BALDWIN YOUNG and AVELINO V.
CRUX, petitioners,
vs.
THE COURT OF APPEALS, WOLFGANG AURBACH, JOHN GRIFFIN, DAVID P.
WHITTINGHAM, CHARLES CHAMSAY and LUCIANO SALAZAR, respondents.

G.R. Nos. 75975-76 December 15, 1989

LUCIANO E. SALAZAR, petitioner,

vs.
SANITARY WARES MANUFACTURING CORPORATION, ERNESTO V. LAGDAMEO, ERNESTO
R. LAGDAMEO, JR., ENRIQUE R. LAGDAMEO, GEORGE F. LEE, RAUL A. BONCAN, BALDWIN
YOUNG, AVELINO V. CRUZ and the COURT OF APPEALS, respondents.

Belo, Abiera & Associates for petitioners in 75875.

Sycip, Salazar, Hernandez & Gatmaitan for Luciano E. Salazar.

GUTIERREZ, JR., J.:

These consolidated petitions seek the review of the amended decision of the Court of Appeals in CA-G.R. SP
Nos. 05604 and 05617 which set aside the earlier decision dated June 5, 1986, of the then Intermediate
Appellate Court and directed that in all subsequent elections for directors of Sanitary Wares Manufacturing
Corporation (Saniwares), American Standard Inc. (ASI) cannot nominate more than three (3) directors; that the
Filipino stockholders shall not interfere in ASI's choice of its three (3) nominees; that, on the other hand, the
Filipino stockholders can nominate only six (6) candidates and in the event they cannot agree on the six (6)
nominees, they shall vote only among themselves to determine who the six (6) nominees will be, with
cumulative voting to be allowed but without interference from ASI.

The antecedent facts can be summarized as follows:

In 1961, Saniwares, a domestic corporation was incorporated for the primary purpose of manufacturing and
marketing sanitary wares. One of the incorporators, Mr. Baldwin Young went abroad to look for foreign
partners, European or American who could help in its expansion plans. On August 15, 1962, ASI, a foreign
corporation domiciled in Delaware, United States entered into an Agreement with Saniwares and some Filipino
investors whereby ASI and the Filipino investors agreed to participate in the ownership of an enterprise which
would engage primarily in the business of manufacturing in the Philippines and selling here and abroad vitreous
china and sanitary wares. The parties agreed that the business operations in the Philippines shall be carried on
by an incorporated enterprise and that the name of the corporation shall initially be "Sanitary Wares
Manufacturing Corporation."

The Agreement has the following provisions relevant to the issues in these cases on the nomination and election
of the directors of the corporation:

3. Articles of Incorporation

(a) The Articles of Incorporation of the Corporation shall be substantially in the form annexed
hereto as Exhibit A and, insofar as permitted under Philippine law, shall specifically provide for

(1) Cumulative voting for directors:

xxx xxx xxx

5. Management

(a) The management of the Corporation shall be vested in a Board of Directors, which shall
consist of nine individuals. As long as American-Standard shall own at least 30% of the
outstanding stock of the Corporation, three of the nine directors shall be designated by
American-Standard, and the other six shall be designated by the other stockholders of the
Corporation. (pp. 51 & 53, Rollo of 75875)

At the request of ASI, the agreement contained provisions designed to protect it as a minority group, including
the grant of veto powers over a number of corporate acts and the right to designate certain officers, such as a
member of the Executive Committee whose vote was required for important corporate transactions.

Later, the 30% capital stock of ASI was increased to 40%. The corporation was also registered with the Board
of Investments for availment of incentives with the condition that at least 60% of the capital stock of the
corporation shall be owned by Philippine nationals.

The joint enterprise thus entered into by the Filipino investors and the American corporation prospered.
Unfortunately, with the business successes, there came a deterioration of the initially harmonious relations
between the two groups. According to the Filipino group, a basic disagreement was due to their desire to expand
the export operations of the company to which ASI objected as it apparently had other subsidiaries of joint joint
venture groups in the countries where Philippine exports were contemplated. On March 8, 1983, the annua l
stockholders' meeting was held. The meeting was presided by Baldwin Young. The minutes were taken by the
Secretary, Avelino Cruz. After disposing of the preliminary items in the agenda, the stockholders then
proceeded to the election of the members of the board of directors. The ASI group nominated three persons
namely; Wolfgang Aurbach, John Griffin and David P. Whittingham. The Philippine investors nominated six,
namely; Ernesto Lagdameo, Sr., Raul A. Boncan, Ernesto R. Lagdameo, Jr., George F. Lee, and Baldwin
Young. Mr. Eduardo R, Ceniza then nominated Mr. Luciano E. Salazar, who in turn nominated Mr. Charles
Chamsay. The chairman, Baldwin Young ruled the last two nominations out of order on the basis of section 5
(a) of the Agreement, the consistent practice of the parties during the past annual stockholders' meetings to
nominate only nine persons as nominees for the nine-member board of directors, and the legal advice of
Saniwares' legal counsel. The following events then, transpired:

... There were protests against the action of the Chairman and heated arguments ensued. An
appeal was made by the ASI representative to the body of stockholders present that a vote be
taken on the ruling of the Chairman. The Chairman, Baldwin Young, declared the appeal out of
order and no vote on the ruling was taken. The Chairman then instructed the Corporate Secretary
to cast all the votes present and represented by proxy equally for the 6 nominees of the
Philippine Investors and the 3 nominees of ASI, thus effectively excluding the 2 additional
persons nominated, namely, Luciano E. Salazar and Charles Chamsay. The ASI representative,
Mr. Jaqua protested the decision of the Chairman and announced that all votes accruing to ASI
shares, a total of 1,329,695 (p. 27, Rollo, AC-G.R. SP No. 05617) were being cumulatively voted
for the three ASI nominees and Charles Chamsay, and instructed the Secretary to so vote.
Luciano E. Salazar and other proxy holders announced that all the votes owned by and or
represented by them 467,197 shares (p. 27, Rollo, AC-G.R. SP No. 05617) were being voted
cumulatively in favor of Luciano E. Salazar. The Chairman, Baldwin Young, nevertheless
instructed the Secretary to cast all votes equally in favor of the three ASI nominees, namely,
Wolfgang Aurbach, John Griffin and David Whittingham and the six originally nominated by
Rogelio Vinluan, namely, Ernesto Lagdameo, Sr., Raul Boncan, Ernesto Lagdameo, Jr., Enrique
Lagdameo, George F. Lee, and Baldwin Young. The Secretary then certified for the election of
the following Wolfgang Aurbach, John Griffin, David Whittingham Ernesto Lagdameo, Sr.,
Ernesto Lagdameo, Jr., Enrique Lagdameo, George F. Lee, Raul A. Boncan, Baldwin Young.
The representative of ASI then moved to recess the meeting which was duly seconded. There
was also a motion to adjourn (p. 28, Rollo, AC-G.R. SP No. 05617). This motion to adjourn was
accepted by the Chairman, Baldwin Young, who announced that the motion was carried and
declared the meeting adjourned. Protests against the adjournment were registered and having
been ignored, Mr. Jaqua the ASI representative, stated that the meeting was not adjourned but
only recessed and that the meeting would be reconvened in the next room. The Chairman then
threatened to have the stockholders who did not agree to the decision of the Chairman on the
casting of votes bodily thrown out. The ASI Group, Luciano E. Salazar and other stockholders,
allegedly representing 53 or 54% of the shares of Saniwares, decided to continue the meeting at
the elevator lobby of the American Standard Building. The continued meeting was presided by
Luciano E. Salazar, while Andres Gatmaitan acted as Secretary. On the basis of the cumulative
votes cast earlier in the meeting, the ASI Group nominated its four nominees; Wolfgang
Aurbach, John Griffin, David Whittingham and Charles Chamsay. Luciano E. Salazar voted for
himself, thus the said five directors were certified as elected directors by the Acting Secretary,
Andres Gatmaitan, with the explanation that there was a tie among the other six (6) nominees for
the four (4) remaining positions of directors and that the body decided not to break the tie. (pp.
37-39, Rollo of 75975-76)

These incidents triggered off the filing of separate petitions by the parties with the Securities and Exchange
Commission (SEC). The first petition filed was for preliminary injunction by Saniwares, Emesto V. Lagdameo,
Baldwin Young, Raul A. Bonean Ernesto R. Lagdameo, Jr., Enrique Lagdameo and George F. Lee against
Luciano Salazar and Charles Chamsay. The case was denominated as SEC Case No. 2417. The second petition
was for quo warranto and application for receivership by Wolfgang Aurbach, John Griffin, David Whittingham,
Luciano E. Salazar and Charles Chamsay against the group of Young and Lagdameo (petitioners in SEC Case
No. 2417) and Avelino F. Cruz. The case was docketed as SEC Case No. 2718. Both sets of parties except for
Avelino Cruz claimed to be the legitimate directors of the corporation.

The two petitions were consolidated and tried jointly by a hearing officer who rendered a decision upholding
the election of the Lagdameo Group and dismissing the quo warranto petition of Salazar and Chamsay. The ASI
Group and Salazar appealed the decision to the SEC en banc which affirmed the hearing officer's decision.

The SEC decision led to the filing of two separate appeals with the Intermediate Appellate Court by Wolfgang
Aurbach, John Griffin, David Whittingham and Charles Chamsay (docketed as AC-G.R. SP No. 05604) and by
Luciano E. Salazar (docketed as AC-G.R. SP No. 05617). The petitions were consolidated and the appellate
court in its decision ordered the remand of the case to the Securities and Exchange Commission with the
directive that a new stockholders' meeting of Saniwares be ordered convoked as soon as possible, under the
supervision of the Commission.

Upon a motion for reconsideration filed by the appellees Lagdameo Group) the appellate court (Court of
Appeals) rendered the questioned amended decision. Petitioners Wolfgang Aurbach, John Griffin, David P.
Whittingham and Charles Chamsay in G.R. No. 75875 assign the following errors:

I. THE COURT OF APPEALS, IN EFFECT, UPHELD THE ALLEGED ELECTION OF

PRIVATE RESPONDENTS AS MEMBERS OF THE BOARD OF DIRECTORS OF
SANIWARES WHEN IN FACT THERE WAS NO ELECTION AT ALL.

II. THE COURT OF APPEALS PROHIBITS THE STOCKHOLDERS FROM EXERCISING

THEIR FULL VOTING RIGHTS REPRESENTED BY THE NUMBER OF SHARES IN
SANIWARES, THUS DEPRIVING PETITIONERS AND THE CORPORATION THEY
REPRESENT OF THEIR PROPERTY RIGHTS WITHOUT DUE PROCESS OF LAW.

III. THE COURT OF APPEALS IMPOSES CONDITIONS AND READS PROVISIONS INTO
THE AGREEMENT OF THE PARTIES WHICH WERE NOT THERE, WHICH ACTION IT
CANNOT LEGALLY DO. (p. 17, Rollo-75875)

Petitioner Luciano E. Salazar in G.R. Nos. 75975-76 assails the amended decision on the following grounds:

11.1. ThatAmendedDecisionwouldsanctiontheCA'sdisregard of binding contractual agreements

entered into by stockholders and the replacement of the conditions of such agreements with
terms never contemplated by the stockholders but merely dictated by the CA .

11.2. The Amended decision would likewise sanction the deprivation of the property rights of
stockholders without due process of law in order that a favored group of stockholders may be
illegally benefitted and guaranteed a continuing monopoly of the control of a corporation. (pp.
14-15, Rollo-75975-76)

On the other hand, the petitioners in G.R. No. 75951 contend that:

THE AMENDED DECISION OF THE RESPONDENT COURT, WHILE RECOGNIZING

THAT THE STOCKHOLDERS OF SANIWARES ARE DIVIDED INTO TWO BLOCKS,
 FAILS TO FULLY ENFORCE THE BASIC INTENT OF THE AGREEMENT AND THE
LAW.

II

THE AMENDED DECISION DOES NOT CATEGORICALLY RULE THAT PRIVATE

PETITIONERS HEREIN WERE THE DULY ELECTED DIRECTORS DURING THE 8
MARCH 1983 ANNUAL STOCKHOLDERS MEETING OF SANTWARES. (P. 24, Rollo-
75951)

The issues raised in the petitions are interrelated, hence, they are discussed jointly.

The main issue hinges on who were the duly elected directors of Saniwares for the year 1983 during its annual
stockholders' meeting held on March 8, 1983. To answer this question the following factors should be
determined: (1) the nature of the business established by the parties whether it was a joint venture or a
corporation and (2) whether or not the ASI Group may vote their additional 10% equity during elections of
Saniwares' board of directors.

The rule is that whether the parties to a particular contract have thereby established among themselves a joint
venture or some other relation depends upon their actual intention which is determined in accordance with the
rules governing the interpretation and construction of contracts. (Terminal Shares, Inc. v. Chicago, B. and Q.R.
Co. (DC MO) 65 F Supp 678; Universal Sales Corp. v. California Press Mfg. Co. 20 Cal. 2nd 751, 128 P 2nd
668)

The ASI Group and petitioner Salazar (G.R. Nos. 75975-76) contend that the actual intention of the parties
should be viewed strictly on the "Agreement" dated August 15,1962 wherein it is clearly stated that the parties'
intention was to form a corporation and not a joint venture.

They specifically mention number 16 under Miscellaneous Provisions which states:

xxx xxx xxx

c) nothing herein contained shall be construed to constitute any of the parties hereto partners or
joint venturers in respect of any transaction hereunder. (At P. 66, Rollo-GR No. 75875)

They object to the admission of other evidence which tends to show that the parties' agreement was to establish
a joint venture presented by the Lagdameo and Young Group on the ground that it contravenes the parol
evidence rule under section 7, Rule 130 of the Revised Rules of Court. According to them, the Lagdameo and
Young Group never pleaded in their pleading that the "Agreement" failed to express the true intent of the
parties.

The parol evidence Rule under Rule 130 provides:

Evidence of written agreements-When the terms of an agreement have been reduced to writing, it
is to be considered as containing all such terms, and therefore, there can be, between the parties
and their successors in interest, no evidence of the terms of the agreement other than the contents
of the writing, except in the following cases:

(a) Where a mistake or imperfection of the writing, or its failure to express the true intent and
agreement of the parties or the validity of the agreement is put in issue by the pleadings.
 (b) When there is an intrinsic ambiguity in the writing.

Contrary to ASI Group's stand, the Lagdameo and Young Group pleaded in their Reply and Answer to
Counterclaim in SEC Case No. 2417 that the Agreement failed to express the true intent of the parties, to wit:

xxx xxx xxx

4. While certain provisions of the Agreement would make it appear that the parties thereto
disclaim being partners or joint venturers such disclaimer is directed at third parties and is not
inconsistent with, and does not preclude, the existence of two distinct groups of stockholders in
Saniwares one of which (the Philippine Investors) shall constitute the majority, and the other ASI
shall constitute the minority stockholder. In any event, the evident intention of the Philippine
Investors and ASI in entering into the Agreement is to enter into ajoint venture enterprise, and if
some words in the Agreement appear to be contrary to the evident intention of the parties, the
latter shall prevail over the former (Art. 1370, New Civil Code). The various stipulations of a
contract shall be interpreted together attributing to the doubtful ones that sense which may result
from all of them taken jointly (Art. 1374, New Civil Code). Moreover, in order to judge the
intention of the contracting parties, their contemporaneous and subsequent acts shall be
principally considered. (Art. 1371, New Civil Code). (Part I, Original Records, SEC Case No.
2417)

It has been ruled:

In an action at law, where there is evidence tending to prove that the parties joined their efforts in
furtherance of an enterprise for their joint profit, the question whether they intended by their
agreement to create a joint adventure, or to assume some other relation is a question of fact for
the jury. (Binder v. Kessler v 200 App. Div. 40,192 N Y S 653; Pyroa v. Brownfield (Tex. Civ.
A.) 238 SW 725; Hoge v. George, 27 Wyo, 423, 200 P 96 33 C.J. p. 871)

In the instant cases, our examination of important provisions of the Agreement as well as the testimonial
evidence presented by the Lagdameo and Young Group shows that the parties agreed to establish a joint venture
and not a corporation. The history of the organization of Saniwares and the unusual arrangements which govern
its policy making body are all consistent with a joint venture and not with an ordinary corporation. As stated by
the SEC:

According to the unrebutted testimony of Mr. Baldwin Young, he negotiated the Agreement with
ASI in behalf of the Philippine nationals. He testified that ASI agreed to accept the role of
minority vis-a-vis the Philippine National group of investors, on the condition that the
Agreement should contain provisions to protect ASI as the minority.

An examination of the Agreement shows that certain provisions were included to protect the
interests of ASI as the minority. For example, the vote of 7 out of 9 directors is required in
certain enumerated corporate acts [Sec. 3 (b) (ii) (a) of the Agreement]. ASI is contractually
entitled to designate a member of the Executive Committee and the vote of this member is
required for certain transactions [Sec. 3 (b) (i)].

The Agreement also requires a 75% super-majority vote for the amendment of the articles and
by-laws of Saniwares [Sec. 3 (a) (iv) and (b) (iii)]. ASI is also given the right to designate the
president and plant manager [Sec. 5 (6)]. The Agreement further provides that the sales policy of
Saniwares shall be that which is normally followed by ASI [Sec. 13 (a)] and that Saniwares
should not export "Standard" products otherwise than through ASI's Export Marketing Services
 [Sec. 13 (6)]. Under the Agreement, ASI agreed to provide technology and know-how to
Saniwares and the latter paid royalties for the same. (At p. 2).

xxx xxx xxx

It is pertinent to note that the provisions of the Agreement requiring a 7 out of 9 votes of the
board of directors for certain actions, in effect gave ASI (which designates 3 directors under the
Agreement) an effective veto power. Furthermore, the grant to ASI of the right to designate
certain officers of the corporation; the super-majority voting requirements for amendments of the
articles and by-laws; and most significantly to the issues of tms case, the provision that ASI shall
designate 3 out of the 9 directors and the other stockholders shall designate the other 6, clearly
indicate that there are two distinct groups in Saniwares, namely ASI, which owns 40% of the
capital stock and the Philippine National stockholders who own the balance of 60%, and that 2)
ASI is given certain protections as the minority stockholder.

Premises considered, we believe that under the Agreement there are two groups of stockholders
who established a corporation with provisions for a special contractual relationship between the
parties, i.e., ASI and the other stockholders. (pp. 4-5)

Section 5 (a) of the agreement uses the word "designated" and not "nominated" or "elected" in the selection of
the nine directors on a six to three ratio. Each group is assured of a fixed number of directors in the board.

Moreover, ASI in its communications referred to the enterprise as joint venture. Baldwin Young also testified
that Section 16(c) of the Agreement that "Nothing herein contained shall be construed to constitute any of the
parties hereto partners or joint venturers in respect of any transaction hereunder" was merely to obviate the
possibility of the enterprise being treated as partnership for tax purposes and liabilities to third parties.

Quite often, Filipino entrepreneurs in their desire to develop the industrial and manufacturing capacities of a
local firm are constrained to seek the technology and marketing assistance of huge multinational corporations of
the developed world. Arrangements are formalized where a foreign group becomes a minority owner of a firm
in exchange for its manufacturing expertise, use of its brand names, and other such assistance. However, there is
always a danger from such arrangements. The foreign group may, from the start, intend to establish its own sole
or monopolistic operations and merely uses the joint venture arrangement to gain a foothold or test the
Philippine waters, so to speak. Or the covetousness may come later. As the Philippine firm enlarges its
operations and becomes profitable, the foreign group undermines the local majority ownership and actively tries
to completely or predominantly take over the entire company. This undermining of joint ventures is not
consistent with fair dealing to say the least. To the extent that such subversive actions can be lawfully
prevented, the courts should extend protection especially in industries where constitutional and legal
requirements reserve controlling ownership to Filipino citizens.

The Lagdameo Group stated in their appellees' brief in the Court of Appeal

In fact, the Philippine Corporation Code itself recognizes the right of stockholders to enter into
agreements regarding the exercise of their voting rights.

Sec. 100. Agreements by stockholders.-

xxx xxx xxx

2. An agreement between two or more stockholders, if in writing and signed by the parties
thereto, may provide that in exercising any voting rights, the shares held by them shall be voted
as therein provided, or as they may agree, or as determined in accordance with a procedure
agreed upon by them.

Appellants contend that the above provision is included in the Corporation Code's chapter on
close corporations and Saniwares cannot be a close corporation because it has 95 stockholders.
Firstly, although Saniwares had 95 stockholders at the time of the disputed stockholders meeting,
these 95 stockholders are not separate from each other but are divisible into groups representing
a single Identifiable interest. For example, ASI, its nominees and lawyers count for 13 of the 95
stockholders. The YoungYutivo family count for another 13 stockholders, the Chamsay family
for 8 stockholders, the Santos family for 9 stockholders, the Dy family for 7 stockholders, etc. If
the members of one family and/or business or interest group are considered as one (which, it is
respectfully submitted, they should be for purposes of determining how closely held Saniwares is
there were as of 8 March 1983, practically only 17 stockholders of Saniwares. (Please refer to
discussion in pp. 5 to 6 of appellees' Rejoinder Memorandum dated 11 December 1984 and
Annex "A" thereof).

Secondly, even assuming that Saniwares is technically not a close corporation because it has
more than 20 stockholders, the undeniable fact is that it is a close-held corporation. Surely,
appellants cannot honestly claim that Saniwares is a public issue or a widely held corporation.

In the United States, many courts have taken a realistic approach to joint venture corporations
and have not rigidly applied principles of corporation law designed primarily for public issue
corporations. These courts have indicated that express arrangements between corporate joint
ventures should be construed with less emphasis on the ordinary rules of law usually applied to
corporate entities and with more consideration given to the nature of the agreement between the
joint venturers (Please see Wabash Ry v. American Refrigerator Transit Co., 7 F 2d 335;
Chicago, M & St. P. Ry v. Des Moines Union Ry; 254 Ass'n. 247 US. 490'; Seaboard Airline Ry
v. Atlantic Coast Line Ry; 240 N.C. 495,.82 S.E. 2d 771; Deboy v. Harris, 207 Md., 212,113 A
2d 903; Hathway v. Porter Royalty Pool, Inc., 296 Mich. 90, 90, 295 N.W. 571; Beardsley v.
Beardsley, 138 U.S. 262; "The Legal Status of Joint Venture Corporations", 11 Vand Law Rev.
p. 680,1958). These American cases dealt with legal questions as to the extent to which the
requirements arising from the corporate form of joint venture corporations should control, and
the courts ruled that substantial justice lay with those litigants who relied on the joint venture
agreement rather than the litigants who relied on the orthodox principles of corporation law.

As correctly held by the SEC Hearing Officer:

It is said that participants in a joint venture, in organizing the joint venture deviate from the
traditional pattern of corporation management. A noted authority has pointed out that just as in
close corporations, shareholders' agreements in joint venture corporations often contain
provisions which do one or more of the following: (1) require greater than majority vote for
shareholder and director action; (2) give certain shareholders or groups of shareholders power to
select a specified number of directors; (3) give to the shareholders control over the selection and
retention of employees; and (4) set up a procedure for the settlement of disputes by arbitration
(See I O' Neal, Close Corporations, 1971 ed., Section 1.06a, pp. 15-16) (Decision of SEC
Hearing Officer, P. 16)

Thirdly paragraph 2 of Sec. 100 of the Corporation Code does not necessarily imply that
agreements regarding the exercise of voting rights are allowed only in close corporations. As
Campos and Lopez-Campos explain:
 Paragraph 2 refers to pooling and voting agreements in particular. Does this provision
necessarily imply that these agreements can be valid only in close corporations as defined by the
Code? Suppose that a corporation has twenty five stockholders, and therefore cannot qualify as a
close corporation under section 96, can some of them enter into an agreement to vote as a unit in
the election of directors? It is submitted that there is no reason for denying stockholders of
corporations other than close ones the right to enter into not voting or pooling agreements to
protect their interests, as long as they do not intend to commit any wrong, or fraud on the other
stockholders not parties to the agreement. Of course, voting or pooling agreements are perhaps
more useful and more often resorted to in close corporations. But they may also be found
necessary even in widely held corporations. Moreover, since the Code limits the legal meaning
of close corporations to those which comply with the requisites laid down by section 96, it is
entirely possible that a corporation which is in fact a close corporation will not come within the
definition. In such case, its stockholders should not be precluded from entering into contracts like
voting agreements if these are otherwise valid. (Campos & Lopez-Campos, op cit, p. 405)

In short, even assuming that sec. 5(a) of the Agreement relating to the designation or nomination
of directors restricts the right of the Agreement's signatories to vote for directors, such
contractual provision, as correctly held by the SEC, is valid and binding upon the signatories
thereto, which include appellants. (Rollo No. 75951, pp. 90-94)

In regard to the question as to whether or not the ASI group may vote their additional equity during elections of
Saniwares' board of directors, the Court of Appeals correctly stated:

As in other joint venture companies, the extent of ASI's participation in the management of the
corporation is spelled out in the Agreement. Section 5(a) hereof says that three of the nine
directors shall be designated by ASI and the remaining six by the other stockholders, i.e., the
Filipino stockholders. This allocation of board seats is obviously in consonance with the minority
position of ASI.

Having entered into a well-defined contractual relationship, it is imperative that the parties
should honor and adhere to their respective rights and obligations thereunder. Appellants seem to
contend that any allocation of board seats, even in joint venture corporations, are null and void to
the extent that such may interfere with the stockholder's rights to cumulative voting as provided
in Section 24 of the Corporation Code. This Court should not be prepared to hold that any
agreement which curtails in any way cumulative voting should be struck down, even if such
agreement has been freely entered into by experienced businessmen and do not prejudice those
who are not parties thereto. It may well be that it would be more cogent to hold, as the Securities
and Exchange Commission has held in the decision appealed from, that cumulative voting rights
may be voluntarily waived by stockholders who enter into special relationships with each other
to pursue and implement specific purposes, as in joint venture relationships between foreign and
local stockholders, so long as such agreements do not adversely affect third parties.

In any event, it is believed that we are not here called upon to make a general rule on this
question. Rather, all that needs to be done is to give life and effect to the particular contractual
rights and obligations which the parties have assumed for themselves.

On the one hand, the clearly established minority position of ASI and the contractual allocation
of board seats Cannot be disregarded. On the other hand, the rights of the stockholders to
cumulative voting should also be protected.

In our decision sought to be reconsidered, we opted to uphold the second over the first. Upon
further reflection, we feel that the proper and just solution to give due consideration to both
 factors suggests itself quite clearly. This Court should recognize and uphold the division of the
stockholders into two groups, and at the same time uphold the right of the stockholders within
each group to cumulative voting in the process of determining who the group's nominees would
be. In practical terms, as suggested by appellant Luciano E. Salazar himself, this means that if
the Filipino stockholders cannot agree who their six nominees will be, a vote would have to be
taken among the Filipino stockholders only. During this voting, each Filipino stockholder can
cumulate his votes. ASI, however, should not be allowed to interfere in the voting within the
Filipino group. Otherwise, ASI would be able to designate more than the three directors it is
allowed to designate under the Agreement, and may even be able to get a majority of the board
seats, a result which is clearly contrary to the contractual intent of the parties.

Such a ruling will give effect to both the allocation of the board seats and the stockholder's right
to cumulative voting. Moreover, this ruling will also give due consideration to the issue raised by
the appellees on possible violation or circumvention of the Anti-Dummy Law (Com. Act No.
108, as amended) and the nationalization requirements of the Constitution and the laws if ASI is
allowed to nominate more than three directors. (Rollo-75875, pp. 38-39)

The ASI Group and petitioner Salazar, now reiterate their theory that the ASI Group has the right to vote their
additional equity pursuant to Section 24 of the Corporation Code which gives the stockholders of a corporation
the right to cumulate their votes in electing directors. Petitioner Salazar adds that this right if granted to the ASI
Group would not necessarily mean a violation of the Anti-Dummy Act (Commonwealth Act 108, as amended).
He cites section 2-a thereof which provides:

And provided finally that the election of aliens as members of the board of directors or governing
body of corporations or associations engaging in partially nationalized activities shall be allowed
in proportion to their allowable participation or share in the capital of such entities. (amendments
introduced by Presidential Decree 715, section 1, promulgated May 28, 1975)

The ASI Group's argument is correct within the context of Section 24 of the Corporation Code. The point of
query, however, is whether or not that provision is applicable to a joint venture with clearly defined agreements:

The legal concept of ajoint venture is of common law origin. It has no precise legal definition but
it has been generally understood to mean an organization formed for some temporary purpose.
(Gates v. Megargel, 266 Fed. 811 [1920]) It is in fact hardly distinguishable from the
partnership, since their elements are similar community of interest in the business, sharing of
profits and losses, and a mutual right of control. Blackner v. Mc Dermott, 176 F. 2d. 498, [1949];
Carboneau v. Peterson, 95 P. 2d., 1043 [1939]; Buckley v. Chadwick, 45 Cal. 2d. 183, 288 P. 2d.
12 289 P. 2d. 242 [1955]). The main distinction cited by most opinions in common law
jurisdictions is that the partnership contemplates a general business with some degree of
continuity, while the joint venture is formed for the execution of a single transaction, and is thus
of a temporary nature. (Tufts v. Mann 116 Cal. App. 170, 2 P. 2d. 500 [1931]; Harmon v.
Martin, 395 111. 595, 71 NE 2d. 74 [1947]; Gates v. Megargel 266 Fed. 811 [1920]). This
observation is not entirely accurate in this jurisdiction, since under the Civil Code, a partnership
may be particular or universal, and a particular partnership may have for its object a specific
undertaking. (Art. 1783, Civil Code). It would seem therefore that under Philippine law, a joint
venture is a form of partnership and should thus be governed by the law of partnerships. The
Supreme Court has however recognized a distinction between these two business forms, and has
held that although a corporation cannot enter into a partnership contract, it may however engage
in a joint venture with others. (At p. 12, Tuazon v. Bolanos, 95 Phil. 906 [1954]) (Campos and
Lopez-Campos Comments, Notes and Selected Cases, Corporation Code 1981)
Moreover, the usual rules as regards the construction and operations of contracts generally apply to a contract of
joint venture. (O' Hara v. Harman 14 App. Dev. (167) 43 NYS 556).

Bearing these principles in mind, the correct view would be that the resolution of the question of whether or not
the ASI Group may vote their additional equity lies in the agreement of the parties.

Necessarily, the appellate court was correct in upholding the agreement of the parties as regards the allocation
of director seats under Section 5 (a) of the "Agreement," and the right of each group of stockholders to
cumulative voting in the process of determining who the group's nominees would be under Section 3 (a) (1) of
the "Agreement." As pointed out by SEC, Section 5 (a) of the Agreement relates to the manner of nominating
the members of the board of directors while Section 3 (a) (1) relates to the manner of voting for these nominees.

This is the proper interpretation of the Agreement of the parties as regards the election of members of the board
of directors.

To allow the ASI Group to vote their additional equity to help elect even a Filipino director who would be
beholden to them would obliterate their minority status as agreed upon by the parties. As aptly stated by the
appellate court:

... ASI, however, should not be allowed to interfere in the voting within the Filipino group.
Otherwise, ASI would be able to designate more than the three directors it is allowed to
designate under the Agreement, and may even be able to get a majority of the board seats, a
result which is clearly contrary to the contractual intent of the parties.

Such a ruling will give effect to both the allocation of the board seats and the stockholder's right
to cumulative voting. Moreover, this ruling will also give due consideration to the issue raised by
the appellees on possible violation or circumvention of the Anti-Dummy Law (Com. Act No.
108, as amended) and the nationalization requirements of the Constitution and the laws if ASI is
allowed to nominate more than three directors. (At p. 39, Rollo, 75875)

Equally important as the consideration of the contractual intent of the parties is the consideration as regards the
possible domination by the foreign investors of the enterprise in violation of the nationalization requirements
enshrined in the Constitution and circumvention of the Anti-Dummy Act. In this regard, petitioner Salazar's
position is that the Anti-Dummy Act allows the ASI group to elect board directors in proportion to their share
in the capital of the entity. It is to be noted, however, that the same law also limits the election of aliens as
members of the board of directors in proportion to their allowance participation of said entity. In the instant
case, the foreign Group ASI was limited to designate three directors. This is the allowable participation of the
ASI Group. Hence, in future dealings, this limitation of six to three board seats should always be maintained as
long as the joint venture agreement exists considering that in limiting 3 board seats in the 9-man board of
directors there are provisions already agreed upon and embodied in the parties' Agreement to protect the
interests arising from the minority status of the foreign investors.

With these findings, we the decisions of the SEC Hearing Officer and SEC which were impliedly affirmed by
the appellate court declaring Messrs. Wolfgang Aurbach, John Griffin, David P Whittingham, Emesto V.
Lagdameo, Baldwin young, Raul A. Boncan, Emesto V. Lagdameo, Jr., Enrique Lagdameo, and George F. Lee
as the duly elected directors of Saniwares at the March 8,1983 annual stockholders' meeting.

On the other hand, the Lagdameo and Young Group (petitioners in G.R. No. 75951) object to a cumulative
voting during the election of the board of directors of the enterprise as ruled by the appellate court and submits
that the six (6) directors allotted the Filipino stockholders should be selected by consensus pursuant to section 5
(a) of the Agreement which uses the word "designate" meaning "nominate, delegate or appoint."
They also stress the possibility that the ASI Group might take control of the enterprise if the Filipino
stockholders are allowed to select their nominees separately and not as a common slot determined by the
majority of their group.

Section 5 (a) of the Agreement which uses the word designates in the allocation of board directors should not be
interpreted in isolation. This should be construed in relation to section 3 (a) (1) of the Agreement. As we stated
earlier, section 3(a) (1) relates to the manner of voting for these nominees which is cumulative voting while
section 5(a) relates to the manner of nominating the members of the board of directors. The petitioners in G.R.
No. 75951 agreed to this procedure, hence, they cannot now impugn its legality.

The insinuation that the ASI Group may be able to control the enterprise under the cumulative voting procedure
cannot, however, be ignored. The validity of the cumulative voting procedure is dependent on the directors thus
elected being genuine members of the Filipino group, not voters whose interest is to increase the ASI share in
the management of Saniwares. The joint venture character of the enterprise must always be taken into account,
so long as the company exists under its original agreement. Cumulative voting may not be used as a device to
enable ASI to achieve stealthily or indirectly what they cannot accomplish openly. There are substantial
safeguards in the Agreement which are intended to preserve the majority status of the Filipino investors as well
as to maintain the minority status of the foreign investors group as earlier discussed. They should be
maintained.

WHEREFORE, the petitions in G.R. Nos. 75975-76 and G.R. No. 75875 are DISMISSED and the petition in
G.R. No. 75951 is partly GRANTED. The amended decision of the Court of Appeals is MODIFIED in that
Messrs. Wolfgang Aurbach John Griffin, David Whittingham Emesto V. Lagdameo, Baldwin Young, Raul A.
Boncan, Ernesto R. Lagdameo, Jr., Enrique Lagdameo, and George F. Lee are declared as the duly elected
directors of Saniwares at the March 8,1983 annual stockholders' meeting. In all other respects, the questioned
decision is AFFIRMED. Costs against the petitioners in G.R. Nos. 75975-76 and G.R. No. 75875.

SO ORDERED.

G.R. No. 108670 September 21, 1994

LBC EXPRESS, INC., petitioner,

vs.
THE COURT OF APPEALS, ADOLFO M. CARLOTO, and RURAL BANK OF LABASON, INC.,
respondents.

Emmanuel D. Agustin for petitioner.

Bernardo P. Concha for private respondents.

PUNO, J.:

In this Petition for Review on Certiorari, petitioner LBC questions the decision 1 of respondent Court of
Appeals affirming the judgment of the Regional Trial Court of Dipolog City, Branch 8, awarding moral and
exemplary damages, reimbursement of P32,000.00, and costs of suit; but deleting the amount of attorney's fees.

Private respondent Adolfo Carloto, incumbent President-Manager of private respondent Rural Bank of Labason,
alleged that on November 12, 1984, he was in Cebu City transacting business with the Central Bank Regional
Office. He was instructed to proceed to Manila on or before November 21, 1984 to follow-up the Rural Bank's
plan of payment of rediscounting obligations with Central Bank's main office in Manila. 2 He then purchased a
round trip plane ticket to Manila. He also phoned his sister Elsie Carloto-Concha to send him ONE
THOUSAND PESOS (P1,000.00) for his pocket money in going to Manila and some rediscounting papers thru
petitioner's LBC Office at Dipolog City. 3

On November 16, 1984, Mrs. Concha thru her clerk, Adelina Antigo consigned thru LBC Dipolog Branch the
pertinent documents and the sum of ONE THOUSAND PESOS (P1,000.00) to respondent Carloto at No. 2
Greyhound Subdivision, Kinasangan, Pardo, Cebu City. This was evidenced by LBC Air Cargo, Inc., Cashpack
Delivery Receipt No. 34805.

On November 17, 1984, the documents arrived without the cashpack. Respondent Carloto made personal
follow-ups on that same day, and also on November 19 and 20, 1984 at LBC's office in Cebu but petitioner
failed to deliver to him the cashpack.

Consequently, respondent Carloto said he was compelled to go to Dipolog City on November 24, 1984 to claim
the money at LBC's office. His effort was once more in vain. On November 27, 1984, he went back to Cebu
City at LBC's office. He was, however, advised that the money has been returned to LBC's office in Dipolog
City upon shipper's request. Again, he demanded for the ONE THOUSAND PESOS (P1,000.00) and refund of
FORTY-NINE PESOS (P49.00) LBC revenue charges. He received the money only on December 15, 1984 less
the revenue charges.

Respondent Carloto claimed that because of the delay in the transmittal of the cashpack, he failed to submit the
rediscounting documents to Central Bank on time. As a consequence, his rural bank was made to pay the
Central Bank THIRTY-TWO THOUSAND PESOS (P32,000.00) as penalty interest. 4 He allegedly suffered
embarrassment and humiliation.

Petitioner LBC, on the other hand, alleged that the cashpack was forwarded via PAL to LBC Cebu City branch
on November 22, 1984. 5 On the same day, it was delivered at respondent Carloto's residence at No. 2
Greyhound Subdivision, Kinasangan, Pardo, Cebu City. However, he was not around to receive it. The delivery
man served instead a claim notice to insure he would personally receive the money. This was annotated on
Cashpack Delivery Receipt No. 342805. Notwithstanding the said notice, respondent Carloto did not claim the
cashpack at LBC Cebu. On November 23, 1984, it was returned to the shipper, Elsie Carloto-Concha at Dipolog
City.

Claiming that petitioner LBC wantonly and recklessly disregarded its obligation, respondent Carloto instituted
an action for Damages Arising from Non-performance of Obligation docketed as Civil Case No. 3679 before
the Regional Trial Court of Dipolog City on January 4, 1985. On June 25, 1988, an amended complaint was
filed where respondent rural bank joined as one of the plaintiffs and prayed for the reimbursement of THIRTY-
TWO THOUSAND PESOS (P32,000.00).

After hearing, the trial court rendered its decision, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered:

1. Ordering the defendant LBC Air Cargo, Inc. to pay unto plaintiff Adolfo M. Carloto and Rural
Bank of Labason, Inc., moral damages in the amount of P10,000.00; exemplary damages in the
amount of P5,000.00; attorney's fees in the amount of P3,000.00 and litigation expenses of
P1,000.00;

2. Sentencing defendant LBC Air Cargo, Inc., to reimburse plaintiff Rural Bank of Labason, Inc.
the sum of P32,000.00 which the latter paid as penalty interest to the Central Bank of the
Philippines as penalty interest for failure to rediscount its due bills on time arising from the
 defendant's failure to deliver the cashpack, with legal interest computed from the date of filing of
this case; and

3. Ordering defendant to pay the costs of these proceedings.

SO ORDERED. 6

On appeal, respondent court modified the judgment by deleting the award of attorney's fees. Petitioner's Motion
for Reconsideration was denied in a Resolution dated January 11, 1993.

Hence, this petition raising the following questions, to wit:

1. Whether or not respondent Rural Bank of Labason Inc., being an artificial person should be awarded moral
damages.

2. Whether or not the award of THIRTY-TWO THOUSAND PESOS (P32,000.00) was made with grave abuse
of discretion.

3. Whether or not the respondent Court of Appeals gravely abused its discretion in affirming the trial court's
decision ordering petitioner LBC to pay moral and exemplary damages despite performance of its obligation.

We find merit in the petition.

The respondent court erred in awarding moral damages to the Rural Bank of Labason, Inc., an artificial person.

Moral damages are granted in recompense for physical suffering, mental anguish, fright, serious anxiety,
besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. 7 A corporation,
being an artificial person and having existence only in legal contemplation, has no feelings, no emotions, no
senses; therefore, it cannot experience physical suffering and mental anguish. 8 Mental suffering can be
experienced only by one having a nervous system and it flows from real ills, sorrows, and griefs of life 9 — all
of which cannot be suffered by respondent bank as an artificial person.

We can neither sustain the award of moral damages in favor of the private respondents. The right to recover
moral damages is based on equity. Moral damages are recoverable only if the case falls under Article 2219 of
the Civil Code in relation to Article 21. 10 Part of conventional wisdom is that he who comes to court to
demand equity, must come with clean hands.

In the case at bench, respondent Carloto is not without fault. He was fully aware that his rural bank's obligation
would mature on November 21, 1984 and his bank has set aside cash for these bills payable. 11 He was all set to
go to Manila to settle this obligation. He has received the documents necessary for the approval of their
rediscounting application with the Central Bank. He has also received the plane ticket to go to Manila.
Nevertheless, he did not immediately proceed to Manila but instead tarried for days allegedly claiming his ONE
THOUSAND PESOS (P1,000.00) pocket money. Due to his delayed trip, he failed to submit the rediscounting
papers to the Central Bank on time and his bank was penalized THIRTY-TWO THOUSAND PESOS
(P32,000.00) for failure to pay its obligation on its due date. The undue importance given by respondent Carloto
to his ONE THOUSAND PESOS (P1,000.00) pocket money is inexplicable for it was not indispensable for him
to follow up his bank's rediscounting application with Central Bank. According to said respondent, he needed
the money to "invite people for a snack or dinner." 12 The attitude of said respondent speaks ill of his ways of
business dealings and cannot be countenanced by this Court. Verily, it will be revolting to our sense of ethics to
use it as basis for awarding damages in favor of private respondent Carloto and the Rural Bank of Labason, Inc.
We also hold that respondents failed to show that petitioner LBC's late delivery of the cashpack was motivated
by personal malice or bad faith, whether intentional or thru gross negligence. In fact, it was proved during the
trial that the cashpack was consigned on November 16, 1984, a Friday. It was sent to Cebu on November 19,
1984, the next business day. Considering this circumstance, petitioner cannot be charged with gross neglect of
duty. Bad faith under the law can not be presumed; it must be established by clearer and convincing evidence.
13 Again, the unbroken jurisprudence is that in breach of contract cases where the defendant is not shown to
have acted fraudulently or in bad faith, liability for damages is limited to the natural and probable consequences
of the branch of the obligation which the parties had foreseen or could reasonable have foreseen. The damages,
however, will not include liability for moral damages. 14

Prescinding from these premises, the award of exemplary damages made by the respondent court would have no
legal leg to support itself. Under Article 2232 of the Civil Code, in a contractual or quasi-contractual
relationship, exemplary damages may be awarded only if the defendant had acted in "a wanton, fraudulent,
reckless, oppressive, or malevolent manner." The established facts of not so warrant the characterization of the
action of petitioner LBC.

IN VIEW WHEREOF, the Decision of the respondent court dated September 30, 1992 is REVERSED and SET
ASIDE; and the Complaint in Civil Case No. 3679 is ordered DISMISSED. No costs.

SO ORDERED.

[G.R. No. 141994. January 17, 2005]

FILIPINAS BROADCASTING NETWORK, INC., petitioner, vs. AGO MEDICAL AND EDUCATIONAL
CENTER-BICOL CHRISTIAN COLLEGE OF MEDICINE, (AMEC-BCCM) and ANGELITA F. AGO,
respondents.

DECISION

CARPIO, J.:

The Case

This petition for review[1] assails the 4 January 1999 Decision[2] and 26 January 2000 Resolution of the Court
of Appeals in CA-G.R. CV No. 40151. The Court of Appeals affirmed with modification the 14 December 1992
Decision[3] of the Regional Trial Court of Legazpi City, Branch 10, in Civil Case No. 8236. The Court of
Appeals held Filipinas Broadcasting Network, Inc. and its broadcasters Hermogenes Alegre and Carmelo Rima
liable for libel and ordered them to solidarily pay Ago Medical and Educational Center-Bicol Christian College
of Medicine moral damages, attorneys fees and costs of suit.

The Antecedents

Expos is a radio documentary[4] program hosted by Carmelo Mel Rima (Rima) and Hermogenes Jun Alegre
(Alegre).[5] Expos is aired every morning over DZRC-AM which is owned by Filipinas Broadcasting Network,
Inc. (FBNI). Expos is heard over Legazpi City, the Albay municipalities and other Bicol areas.[6]

In the morning of 14 and 15 December 1989, Rima and Alegre exposed various alleged complaints from
students, teachers and parents against Ago Medical and Educational Center-Bicol Christian College of Medicine
(AMEC) and its administrators. Claiming that the broadcasts were defamatory, AMEC and Angelita Ago (Ago),
as Dean of AMECs College of Medicine, filed a complaint for damages[7] against FBNI, Rima and Alegre on
27 February 1990. Quoted are portions of the allegedly libelous broadcasts:
JUN ALEGRE:

Let us begin with the less burdensome: if you have children taking medical course at AMEC-BCCM, advise
them to pass all subjects because if they fail in any subject they will repeat their year level, taking up all
subjects including those they have passed already. Several students had approached me stating that they had
consulted with the DECS which told them that there is no such regulation. If [there] is no such regulation why is
AMEC doing the same?

xxx

Second: Earlier AMEC students in Physical Therapy had complained that the course is not recognized by
DECS. xxx

Third: Students are required to take and pay for the subject even if the subject does not have an
instructor - such greed for money on the part of AMECs administration. Take the subject Anatomy:
students would pay for the subject upon enrolment because it is offered by the school. However there would be
no instructor for such subject. Students would be informed that course would be moved to a later date because
the school is still searching for the appropriate instructor.

xxx

It is a public knowledge that the Ago Medical and Educational Center has survived and has been surviving for
the past few years since its inception because of funds support from foreign foundations. If you will take a look
at the AMEC premises youll find out that the names of the buildings there are foreign soundings. There is a
McDonald Hall. Why not Jose Rizal or Bonifacio Hall? That is a very concrete and undeniable evidence that the
support of foreign foundations for AMEC is substantial, isnt it? With the report which is the basis of the expose
in DZRC today, it would be very easy for detractors and enemies of the Ago family to stop the flow of support
of foreign foundations who assist the medical school on the basis of the latters purpose. But if the purpose of the
institution (AMEC) is to deceive students at cross purpose with its reason for being it is possible for these
foreign foundations to lift or suspend their donations temporarily.[8]

xxx

On the other hand, the administrators of AMEC-BCCM, AMEC Science High School and the AMEC-
Institute of Mass Communication in their effort to minimize expenses in terms of salary are absorbing or
continues to accept rejects. For example how many teachers in AMEC are former teachers of Aquinas
University but were removed because of immorality? Does it mean that the present administration of AMEC
have the total definite moral foundation from catholic administrator of Aquinas University. I will prove to you
my friends, that AMEC is a dumping ground, garbage, not merely of moral and physical misfits. Probably
they only qualify in terms of intellect. The Dean of Student Affairs of AMEC is Justita Lola, as the family name
implies. She is too old to work, being an old woman. Is the AMEC administration exploiting the very
[e]nterprising or compromising and undemanding Lola? Could it be that AMEC is just patiently making use of
Dean Justita Lola were if she is very old. As in atmospheric situation zero visibility the plane cannot land,
meaning she is very old, low pay follows. By the way, Dean Justita Lola is also the chairman of the committee
on scholarship in AMEC. She had retired from Bicol University a long time ago but AMEC has patiently made
use of her.

xxx

MEL RIMA:
xxx My friends based on the expose, AMEC is a dumping ground for moral and physically misfit people. What
does this mean? Immoral and physically misfits as teachers.

May I say Im sorry to Dean Justita Lola. But this is the truth. The truth is this, that your are no longer fit to
teach. You are too old. As an aviation, your case is zero visibility. Dont insist.

xxx Why did AMEC still absorb her as a teacher, a dean, and chairman of the scholarship committee at that.
The reason is practical cost saving in salaries, because an old person is not fastidious, so long as she has money
to buy the ingredient of beetle juice. The elderly can get by thats why she (Lola) was taken in as Dean.

xxx

xxx On our end our task is to attend to the interests of students. It is likely that the students would be influenced
by evil. When they become members of society outside of campus will be liabilities rather than assets.
What do you expect from a doctor who while studying at AMEC is so much burdened with unreasonable
imposition? What do you expect from a student who aside from peculiar problems because not all students are
rich in their struggle to improve their social status are even more burdened with false regulations. xxx[9]
(Emphasis supplied)

The complaint further alleged that AMEC is a reputable learning institution. With the supposed exposs, FBNI,
Rima and Alegre transmitted malicious imputations, and as such, destroyed plaintiffs (AMEC and Ago)
reputation. AMEC and Ago included FBNI as defendant for allegedly failing to exercise due diligence in the
selection and supervision of its employees, particularly Rima and Alegre.

On 18 June 1990, FBNI, Rima and Alegre, through Atty. Rozil Lozares, filed an Answer[10] alleging that the
broadcasts against AMEC were fair and true. FBNI, Rima and Alegre claimed that they were plainly impelled
by a sense of public duty to report the goings-on in AMEC, [which is] an institution imbued with public
interest.

Thereafter, trial ensued. During the presentation of the evidence for the defense, Atty. Edmundo Cea,
collaborating counsel of Atty. Lozares, filed a Motion to Dismiss[11] on FBNIs behalf. The trial court denied
the motion to dismiss. Consequently, FBNI filed a separate Answer claiming that it exercised due diligence in
the selection and supervision of Rima and Alegre. FBNI claimed that before hiring a broadcaster, the
broadcaster should (1) file an application; (2) be interviewed; and (3) undergo an apprenticeship and training
program after passing the interview. FBNI likewise claimed that it always reminds its broadcasters to observe
truth, fairness and objectivity in their broadcasts and to refrain from using libelous and indecent language.
Moreover, FBNI requires all broadcasters to pass the Kapisanan ng mga Brodkaster sa Pilipinas (KBP)
accreditation test and to secure a KBP permit.

On 14 December 1992, the trial court rendered a Decision[12] finding FBNI and Alegre liable for libel except
Rima. The trial court held that the broadcasts are libelous per se. The trial court rejected the broadcasters claim
that their utterances were the result of straight reporting because it had no factual basis. The broadcasters did
not even verify their reports before airing them to show good faith. In holding FBNI liable for libel, the trial
court found that FBNI failed to exercise diligence in the selection and supervision of its employees.

In absolving Rima from the charge, the trial court ruled that Rimas only participation was when he agreed with
Alegres expos. The trial court found Rimas statement within the bounds of freedom of speech, expression, and
of the press. The dispositive portion of the decision reads:

WHEREFORE, premises considered, this court finds for the plaintiff. Considering the degree of damages
caused by the controversial utterances, which are not found by this court to be really very serious and
damaging, and there being no showing that indeed the enrollment of plaintiff school dropped, defendants
Hermogenes Jun Alegre, Jr. and Filipinas Broadcasting Network (owner of the radio station DZRC), are hereby
jointly and severally ordered to pay plaintiff Ago Medical and Educational Center-Bicol Christian College of
Medicine (AMEC-BCCM) the amount of P300,000.00 moral damages, plus P30,000.00 reimbursement of
attorneys fees, and to pay the costs of suit.

SO ORDERED. [13] (Emphasis supplied)

Both parties, namely, FBNI, Rima and Alegre, on one hand, and AMEC and Ago, on the other, appealed the
decision to the Court of Appeals. The Court of Appeals affirmed the trial courts judgment with modification.
The appellate court made Rima solidarily liable with FBNI and Alegre. The appellate court denied Agos claim
for damages and attorneys fees because the broadcasts were directed against AMEC, and not against her. The
dispositive portion of the Court of Appeals decision reads:

WHEREFORE, the decision appealed from is hereby AFFIRMED, subject to the modification that
broadcaster Mel Rima is SOLIDARILY ADJUDGED liable with FBN[I] and Hermo[g]enes Alegre.

SO ORDERED.[14]

FBNI, Rima and Alegre filed a motion for reconsideration which the Court of Appeals denied in its 26 January
2000 Resolution.

Hence, FBNI filed this petition.[15]

The Ruling of the Court of Appeals

The Court of Appeals upheld the trial courts ruling that the questioned broadcasts are libelous per se and that
FBNI, Rima and Alegre failed to overcome the legal presumption of malice. The Court of Appeals found Rima
and Alegres claim that they were actuated by their moral and social duty to inform the public of the students
gripes as insufficient to justify the utterance of the defamatory remarks.

Finding no factual basis for the imputations against AMECs administrators, the Court of Appeals ruled that the
broadcasts were made with reckless disregard as to whether they were true or false. The appellate court pointed
out that FBNI, Rima and Alegre failed to present in court any of the students who allegedly complained against
AMEC. Rima and Alegre merely gave a single name when asked to identify the students. According to the
Court of Appeals, these circumstances cast doubt on the veracity of the broadcasters claim that they were
impelled by their moral and social duty to inform the public about the students gripes.

The Court of Appeals found Rima also liable for libel since he remarked that (1) AMEC-BCCM is a dumping
ground for morally and physically misfit teachers; (2) AMEC obtained the services of Dean Justita Lola to
minimize expenses on its employees salaries; and (3) AMEC burdened the students with unreasonable
imposition and false regulations.[16]

The Court of Appeals held that FBNI failed to exercise due diligence in the selection and supervision of its
employees for allowing Rima and Alegre to make the radio broadcasts without the proper KBP accreditation.
The Court of Appeals denied Agos claim for damages and attorneys fees because the libelous remarks were
directed against AMEC, and not against her. The Court of Appeals adjudged FBNI, Rima and Alegre solidarily
liable to pay AMEC moral damages, attorneys fees and costs of suit.

Issues
FBNI raises the following issues for resolution:

I. WHETHER THE BROADCASTS ARE LIBELOUS;

II. WHETHER AMEC IS ENTITLED TO MORAL DAMAGES;

III. WHETHER THE AWARD OF ATTORNEYS FEES IS PROPER; and

IV. WHETHER FBNI IS SOLIDARILY LIABLE WITH RIMA AND ALEGRE FOR PAYMENT OF
MORAL DAMAGES, ATTORNEYS FEES AND COSTS OF SUIT.

The Courts Ruling

We deny the petition.

This is a civil action for damages as a result of the allegedly defamatory remarks of Rima and Alegre against
AMEC.[17] While AMEC did not point out clearly the legal basis for its complaint, a reading of the complaint
reveals that AMECs cause of action is based on Articles 30 and 33 of the Civil Code. Article 30[18] authorizes
a separate civil action to recover civil liability arising from a criminal offense. On the other hand, Article 33[19]
particularly provides that the injured party may bring a separate civil action for damages in cases of defamation,
fraud, and physical injuries. AMEC also invokes Article 19[20] of the Civil Code to justify its claim for
damages. AMEC cites Articles 2176[21] and 2180[22] of the Civil Code to hold FBNI solidarily liable with
Rima and Alegre.

I.
Whether the broadcasts are libelous

A libel[23] is a public and malicious imputation of a crime, or of a vice or defect, real or imaginary, or any act
or omission, condition, status, or circumstance tending to cause the dishonor, discredit, or contempt of a natural
or juridical person, or to blacken the memory of one who is dead.[24]

There is no question that the broadcasts were made public and imputed to AMEC defects or circumstances
tending to cause it dishonor, discredit and contempt. Rima and Alegres remarks such as greed for money on the
part of AMECs administrators; AMEC is a dumping ground, garbage of xxx moral and physical misfits; and
AMEC students who graduate will be liabilities rather than assets of the society are libelous per se. Taken as a
whole, the broadcasts suggest that AMEC is a money-making institution where physically and morally unfit
teachers abound.

However, FBNI contends that the broadcasts are not malicious. FBNI claims that Rima and Alegre were plainly
impelled by their civic duty to air the students gripes. FBNI alleges that there is no evidence that ill will or spite
motivated Rima and Alegre in making the broadcasts. FBNI further points out that Rima and Alegre exerted
efforts to obtain AMECs side and gave Ago the opportunity to defend AMEC and its administrators. FBNI
concludes that since there is no malice, there is no libel.

FBNIs contentions are untenable.

Every defamatory imputation is presumed malicious.[25] Rima and Alegre failed to show adequately their good
intention and justifiable motive in airing the supposed gripes of the students. As hosts of a documentary or
public affairs program, Rima and Alegre should have presented the public issues free from inaccurate and
misleading information.[26] Hearing the students alleged complaints a month before the expos,[27] they had
sufficient time to verify their sources and information. However, Rima and Alegre hardly made a thorough
investigation of the students alleged gripes. Neither did they inquire about nor confirm the purported
irregularities in AMEC from the Department of Education, Culture and Sports. Alegre testified that he merely
went to AMEC to verify his report from an alleged AMEC official who refused to disclose any information.
Alegre simply relied on the words of the students because they were many and not because there is proof that
what they are saying is true.[28] This plainly shows Rima and Alegres reckless disregard of whether their report
was true or not.

Contrary to FBNIs claim, the broadcasts were not the result of straight reporting. Significantly, some courts in
the United States apply the privilege of neutral reportage in libel cases involving matters of public interest or
public figures. Under this privilege, a republisher who accurately and disinterestedly reports certain defamatory
statements made against public figures is shielded from liability, regardless of the republishers subjective
awareness of the truth or falsity of the accusation.[29] Rima and Alegre cannot invoke the privilege of neutral
reportage because unfounded comments abound in the broadcasts. Moreover, there is no existing controversy
involving AMEC when the broadcasts were made. The privilege of neutral reportage applies where the defamed
person is a public figure who is involved in an existing controversy, and a party to that controversy makes the
defamatory statement.[30]

However, FBNI argues vigorously that malice in law does not apply to this case. Citing Borjal v. Court of
Appeals,[31] FBNI contends that the broadcasts fall within the coverage of qualifiedly privileged
communications for being commentaries on matters of public interest. Such being the case, AMEC should
prove malice in fact or actual malice. Since AMEC allegedly failed to prove actual malice, there is no libel.

FBNIs reliance on Borjal is misplaced. In Borjal, the Court elucidated on the doctrine of fair comment, thus:

[F]air commentaries on matters of public interest are privileged and constitute a valid defense in an action for
libel or slander. The doctrine of fair comment means that while in general every discreditable imputation
publicly made is deemed false, because every man is presumed innocent until his guilt is judicially proved, and
every false imputation is deemed malicious, nevertheless, when the discreditable imputation is directed against
a public person in his public capacity, it is not necessarily actionable. In order that such discreditable
imputation to a public official may be actionable, it must either be a false allegation of fact or a comment
based on a false supposition. If the comment is an expression of opinion, based on established facts, then it
is immaterial that the opinion happens to be mistaken, as long as it might reasonably be inferred from the
facts.[32] (Emphasis supplied)

True, AMEC is a private learning institution whose business of educating students is genuinely imbued with
public interest. The welfare of the youth in general and AMECs students in particular is a matter which the
public has the right to know. Thus, similar to the newspaper articles in Borjal, the subject broadcasts dealt with
matters of public interest. However, unlike in Borjal, the questioned broadcasts are not based on established
facts. The record supports the following findings of the trial court:

xxx Although defendants claim that they were motivated by consistent reports of students and parents against
plaintiff, yet, defendants have not presented in court, nor even gave name of a single student who made the
complaint to them, much less present written complaint or petition to that effect. To accept this defense of
defendants is too dangerous because it could easily give license to the media to malign people and
establishments based on flimsy excuses that there were reports to them although they could not satisfactorily
establish it. Such laxity would encourage careless and irresponsible broadcasting which is inimical to public
interests.

Secondly, there is reason to believe that defendant radio broadcasters, contrary to the mandates of their duties,
did not verify and analyze the truth of the reports before they aired it, in order to prove that they are in good
faith.
Alegre contended that plaintiff school had no permit and is not accredited to offer Physical Therapy courses.
Yet, plaintiff produced a certificate coming from DECS that as of Sept. 22, 1987 or more than 2 years before
the controversial broadcast, accreditation to offer Physical Therapy course had already been given the plaintiff,
which certificate is signed by no less than the Secretary of Education and Culture herself, Lourdes R.
Quisumbing (Exh. C-rebuttal). Defendants could have easily known this were they careful enough to verify.
And yet, defendants were very categorical and sounded too positive when they made the erroneous report that
plaintiff had no permit to offer Physical Therapy courses which they were offering.

The allegation that plaintiff was getting tremendous aids from foreign foundations like Mcdonald Foundation
prove not to be true also. The truth is there is no Mcdonald Foundation existing. Although a big building of
plaintiff school was given the name Mcdonald building, that was only in order to honor the first missionary in
Bicol of plaintiffs religion, as explained by Dr. Lita Ago. Contrary to the claim of defendants over the air, not a
single centavo appears to be received by plaintiff school from the aforementioned McDonald Foundation which
does not exist.

Defendants did not even also bother to prove their claim, though denied by Dra. Ago, that when medical
students fail in one subject, they are made to repeat all the other subject[s], even those they have already passed,
nor their claim that the school charges laboratory fees even if there are no laboratories in the school. No
evidence was presented to prove the bases for these claims, at least in order to give semblance of good faith.

As for the allegation that plaintiff is the dumping ground for misfits, and immoral teachers, defendant[s] singled
out Dean Justita Lola who is said to be so old, with zero visibility already. Dean Lola testified in court last Jan.
21, 1991, and was found to be 75 years old. xxx Even older people prove to be effective teachers like Supreme
Court Justices who are still very much in demand as law professors in their late years. Counsel for defendants is
past 75 but is found by this court to be still very sharp and effective. So is plaintiffs counsel.

Dr. Lola was observed by this court not to be physically decrepit yet, nor mentally infirmed, but is still alert and
docile.

The contention that plaintiffs graduates become liabilities rather than assets of our society is a mere conclusion.
Being from the place himself, this court is aware that majority of the medical graduates of plaintiffs pass the
board examination easily and become prosperous and responsible professionals.[33]

Had the comments been an expression of opinion based on established facts, it is immaterial that the opinion
happens to be mistaken, as long as it might reasonably be inferred from the facts.[34] However, the comments
of Rima and Alegre were not backed up by facts. Therefore, the broadcasts are not privileged and remain
libelous per se.

The broadcasts also violate the Radio Code[35] of the Kapisanan ng mga Brodkaster sa Pilipinas, Ink. (Radio
Code). Item I(B) of the Radio Code provides:

B. PUBLIC AFFAIRS, PUBLIC ISSUES AND COMMENTARIES

1. x x x

4. Public affairs program shall present public issues free from personal bias, prejudice and
inaccurate and misleading information. x x x Furthermore, the station shall strive to present
balanced discussion of issues. x x x.

xxx
 7. The station shall be responsible at all times in the supervision of public affairs, public issues and
commentary programs so that they conform to the provisions and standards of this code.

8. It shall be the responsibility of the newscaster, commentator, host and announcer to protect public
interest, general welfare and good order in the presentation of public affairs and public issues.[36]
(Emphasis supplied)

The broadcasts fail to meet the standards prescribed in the Radio Code, which lays down the code of ethical
conduct governing practitioners in the radio broadcast industry. The Radio Code is a voluntary code of conduct
imposed by the radio broadcast industry on its own members. The Radio Code is a public warranty by the radio
broadcast industry that radio broadcast practitioners are subject to a code by which their conduct are measured
for lapses, liability and sanctions.

The public has a right to expect and demand that radio broadcast practitioners live up to the code of conduct of
their profession, just like other professionals. A professional code of conduct provides the standards for
determining whether a person has acted justly, honestly and with good faith in the exercise of his rights and
performance of his duties as required by Article 19[37] of the Civil Code. A professional code of conduct also
provides the standards for determining whether a person who willfully causes loss or injury to another has acted
in a manner contrary to morals or good customs under Article 21[38] of the Civil Code.

II.
Whether AMEC is entitled to moral damages

FBNI contends that AMEC is not entitled to moral damages because it is a corporation.[39]

A juridical person is generally not entitled to moral damages because, unlike a natural person, it cannot
experience physical suffering or such sentiments as wounded feelings, serious anxiety, mental anguish or moral
shock.[40] The Court of Appeals cites Mambulao Lumber Co. v. PNB, et al.[41] to justify the award of moral
damages. However, the Courts statement in Mambulao that a corporation may have a good reputation which, if
besmirched, may also be a ground for the award of moral damages is an obiter dictum.[42]

Nevertheless, AMECs claim for moral damages falls under item 7 of Article 2219[43] of the Civil Code. This
provision expressly authorizes the recovery of moral damages in cases of libel, slander or any other form of
defamation. Article 2219(7) does not qualify whether the plaintiff is a natural or juridical person. Therefore, a
juridical person such as a corporation can validly complain for libel or any other form of defamation and claim
for moral damages.[44]

Moreover, where the broadcast is libelous per se, the law implies damages.[45] In such a case, evidence of an
honest mistake or the want of character or reputation of the party libeled goes only in mitigation of
damages.[46] Neither in such a case is the plaintiff required to introduce evidence of actual damages as a
condition precedent to the recovery of some damages.[47] In this case, the broadcasts are libelous per se. Thus,
AMEC is entitled to moral damages.

However, we find the award of P300,000 moral damages unreasonable. The record shows that even though the
broadcasts were libelous per se, AMEC has not suffered any substantial or material damage to its reputation.
Therefore, we reduce the award of moral damages from P300,000 to P150,000.

III.
Whether the award of attorneys fees is proper

FBNI contends that since AMEC is not entitled to moral damages, there is no basis for the award of attorneys
fees. FBNI adds that the instant case does not fall under the enumeration in Article 2208[48] of the Civil Code.
The award of attorneys fees is not proper because AMEC failed to justify satisfactorily its claim for attorneys
fees. AMEC did not adduce evidence to warrant the award of attorneys fees. Moreover, both the trial and
appellate courts failed to explicitly state in their respective decisions the rationale for the award of attorneys
fees.[49] In Inter-Asia Investment Industries, Inc. v. Court of Appeals,[50] we held that:

[I]t is an accepted doctrine that the award thereof as an item of damages is the exception rather than the rule,
and counsels fees are not to be awarded every time a party wins a suit. The power of the court to award
attorneys fees under Article 2208 of the Civil Code demands factual, legal and equitable justification,
without which the award is a conclusion without a premise, its basis being improperly left to speculation
and conjecture. In all events, the court must explicitly state in the text of the decision, and not only in the
decretal portion thereof, the legal reason for the award of attorneys fees.[51] (Emphasis supplied)

While it mentioned about the award of attorneys fees by stating that it lies within the discretion of the court and
depends upon the circumstances of each case, the Court of Appeals failed to point out any circumstance to
justify the award.

IV.
Whether FBNI is solidarily liable with Rima and Alegre
for moral damages, attorneys fees
and costs of suit

FBNI contends that it is not solidarily liable with Rima and Alegre for the payment of damages and attorneys
fees because it exercised due diligence in the selection and supervision of its employees, particularly Rima and
Alegre. FBNI maintains that its broadcasters, including Rima and Alegre, undergo a very regimented process
before they are allowed to go on air. Those who apply for broadcaster are subjected to interviews, examinations
and an apprenticeship program.

FBNI further argues that Alegres age and lack of training are irrelevant to his competence as a broadcaster.
FBNI points out that the minor deficiencies in the KBP accreditation of Rima and Alegre do not in any way
prove that FBNI did not exercise the diligence of a good father of a family in selecting and supervising them.
Rimas accreditation lapsed due to his non-payment of the KBP annual fees while Alegres accreditation card was
delayed allegedly for reasons attributable to the KBP Manila Office. FBNI claims that membership in the KBP
is merely voluntary and not required by any law or government regulation.

FBNIs arguments do not persuade us.

The basis of the present action is a tort. Joint tort feasors are jointly and severally liable for the tort which they
commit.[52] Joint tort feasors are all the persons who command, instigate, promote, encourage, advise,
countenance, cooperate in, aid or abet the commission of a tort, or who approve of it after it is done, if done for
their benefit.[53] Thus, AMEC correctly anchored its cause of action against FBNI on Articles 2176 and 2180
of the Civil Code.

As operator of DZRC-AM and employer of Rima and Alegre, FBNI is solidarily liable to pay for damages
arising from the libelous broadcasts. As stated by the Court of Appeals, recovery for defamatory statements
published by radio or television may be had from the owner of the station, a licensee, the operator of the
station, or a person who procures, or participates in, the making of the defamatory statements.[54] An employer
and employee are solidarily liable for a defamatory statement by the employee within the course and scope of
his or her employment, at least when the employer authorizes or ratifies the defamation.[55] In this case, Rima
and Alegre were clearly performing their official duties as hosts of FBNIs radio program Expos when they aired
the broadcasts. FBNI neither alleged nor proved that Rima and Alegre went beyond the scope of their work at
that time. There was likewise no showing that FBNI did not authorize and ratify the defamatory broadcasts.
Moreover, there is insufficient evidence on record that FBNI exercised due diligence in the selection and
supervision of its employees, particularly Rima and Alegre. FBNI merely showed that it exercised diligence in
the selection of its broadcasters without introducing any evidence to prove that it observed the same diligence
in the supervision of Rima and Alegre. FBNI did not show how it exercised diligence in supervising its
broadcasters. FBNIs alleged constant reminder to its broadcasters to observe truth, fairness and objectivity and
to refrain from using libelous and indecent language is not enough to prove due diligence in the supervision of
its broadcasters. Adequate training of the broadcasters on the industrys code of conduct, sufficient information
on libel laws, and continuous evaluation of the broadcasters performance are but a few of the many ways of
showing diligence in the supervision of broadcasters.

FBNI claims that it has taken all the precaution in the selection of Rima and Alegre as broadcasters, bearing in
mind their qualifications. However, no clear and convincing evidence shows that Rima and Alegre underwent
FBNIs regimented process of application. Furthermore, FBNI admits that Rima and Alegre had deficiencies in
their KBP accreditation,[56] which is one of FBNIs requirements before it hires a broadcaster. Significantly,
membership in the KBP, while voluntary, indicates the broadcasters strong commitment to observe the
broadcast industrys rules and regulations. Clearly, these circumstances show FBNIs lack of diligence in
selecting and supervising Rima and Alegre. Hence, FBNI is solidarily liable to pay damages together with Rima
and Alegre.

WHEREFORE, we DENY the instant petition. We AFFIRM the Decision of 4 January 1999 and Resolution of
26 January 2000 of the Court of Appeals in CA-G.R. CV No. 40151 with the MODIFICATION that the award
of moral damages is reduced from P300,000 to P150,000 and the award of attorneys fees is deleted. Costs
against petitioner.

SO ORDERED.

G.R. No. L-12719 May 31, 1962

THE COLLECTOR OF INTERNAL REVENUE, petitioner,

vs.
THE CLUB FILIPINO, INC. DE CEBU, respondent.

Office of the Solicitor General for petitioner.

V. Jaime and L. E. Petilla for respondent.

PAREDES, J.:

This is a petition to review the decision of the Court of Tax Appeals, reversing the decision of the Collector of
Internal Revenue, assessing against and demanding from the "Club Filipino, Inc. de Cebu", the sum of
P12,068.84 as fixed and percentage taxes, surcharge and compromise penalty, allegedly due from it as a keeper
of bar and restaurant.

As found by the Court of Tax Appeals, the "Club Filipino, Inc. de Cebu," (Club, for short), is a civic
corporation organized under the laws of the Philippines with an original authorized capital stock of P22,000.00,
which was subsequently increased to P200,000.00, among others, to it "proporcionar, operar, y mantener un
campo de golf, tenis, gimnesio (gymnasiums), juego de bolos (bowling alleys), mesas de billar y pool, y toda
clase de juegos no prohibidos por leyes generales y ordenanzas generales; y desarollar y cultivar deportes de
toda clase y denominacion cualquiera para el recreo y entrenamiento saludable de sus miembros y accionistas"
(sec. 2, Escritura de Incorporacion del Club Filipino, Inc. Exh. A). Neither in the articles or by-laws is there a
provision relative to dividends and their distribution, although it is covenanted that upon its dissolution, the
Club's remaining assets, after paying debts, shall be donated to a charitable Philippine Institution in Cebu (Art.
27, Estatutos del Club, Exh. A-a.).
The Club owns and operates a club house, a bowling alley, a golf course (on a lot leased from the government),
and a bar-restaurant where it sells wines and liquors, soft drinks, meals and short orders to its members and their
guests. The bar-restaurant was a necessary incident to the operation of the club and its golf-course. The club is
operated mainly with funds derived from membership fees and dues. Whatever profits it had, were used to
defray its overhead expenses and to improve its golf-course. In 1951. as a result of a capital surplus, arising
from the re-valuation of its real properties, the value or price of which increased, the Club declared stock
dividends; but no actual cash dividends were distributed to the stockholders. In 1952, a BIR agent discovered
that the Club has never paid percentage tax on the gross receipts of its bar and restaurant, although it secured B-
4, B-9(a) and B-7 licenses. In a letter dated December 22, 1852, the Collector of Internal Revenue assessed
against and demanded from the Club, the following sums: —

As percentage tax on its gross receipts

during the tax years 1946 to 1951 P9,599.07
Surcharge therein 2,399.77
As fixed tax for the years 1946 to 1952 70.00
Compromise penalty 500.00

The Club wrote the Collector, requesting for the cancellation of the assessment. The request having been
denied, the Club filed the instant petition for review.

The dominant issues involved in this case are twofold:

1. Whether the respondent Club is liable for the payment of the sum of 12,068.84, as fixed and percentage taxes
and surcharges prescribed in sections 182, 183 and 191 of the Tax Code, under which the assessment was made,
in connection with the operation of its bar and restaurant, during the periods mentioned above; and

2. Whether it is liable for the payment of the sum of P500.00 as compromise penalty.

Section 182, of the Tax Code states, "Unless otherwise provided, every person engaging in a business on which
the percentage tax is imposed shall pay in full a fixed annual tax of ten pesos for each calendar year or fraction
thereof in which such person shall engage in said business." Section 183 provides in general that "the
percentage taxes on business shall be payable at the end of each calendar quarter in the amount lawfully due on
the business transacted during each quarter; etc." And section 191, same Tax Code, provides "Percentage tax . .
. Keepers of restaurants, refreshment parlors and other eating places shall pay a tax three per centum, and
keepers of bar and cafes where wines or liquors are served five per centum of their gross receipts . . .". It has
been held that the liability for fixed and percentage taxes, as provided by these sections, does not ipso facto
attach by mere reason of the operation of a bar and restaurant. For the liability to attach, the operator thereof
must be engaged in the business as a barkeeper and restaurateur. The plain and ordinary meaning of business is
restricted to activities or affairs where profit is the purpose or livelihood is the motive, and the term business
when used without qualification, should be construed in its plain and ordinary meaning, restricted to activities
for profit or livelihood (The Coll. of Int. Rev. v. Manila Lodge No. 761 of the BPOE [Manila Elks Club] &
Court of Tax Appeals, G.R. No. L-11176, June 29, 1959, giving full definitions of the word "business"; Coll. of
Int. Rev. v. Sweeney, et al. [International Club of Iloilo, Inc.], G.R. No. L-12178, Aug. 21, 1959, the facts of
which are similar to the ones at bar; Manila Polo Club v. B. L. Meer, etc., No. L-10854, Jan. 27, 1960).

Having found as a fact that the Club was organized to develop and cultivate sports of all class and
denomination, for the healthful recreation and entertainment of its stockholders and members; that upon its
dissolution, its remaining assets, after paying debts, shall be donated to a charitable Philippine Institution in
Cebu; that it is operated mainly with funds derived from membership fees and dues; that the Club's bar and
restaurant catered only to its members and their guests; that there was in fact no cash dividend distribution to its
stockholders and that whatever was derived on retail from its bar and restaurant was used to defray its overall
overhead expenses and to improve its golf-course (cost-plus-expenses-basis), it stands to reason that the Club is
not engaged in the business of an operator of bar and restaurant (same authorities, cited above).

It is conceded that the Club derived profit from the operation of its bar and restaurant, but such fact does not
necessarily convert it into a profit-making enterprise. The bar and restaurant are necessary adjuncts of the Club
to foster its purposes and the profits derived therefrom are necessarily incidental to the primary object of
developing and cultivating sports for the healthful recreation and entertainment of the stockholders and
members. That a Club makes some profit, does not make it a profit-making Club. As has been remarked a club
should always strive, whenever possible, to have surplus (Jesus Sacred Heart College v. Collector of Int. Rev.,
G.R. No. L-6807, May 24, 1954; Collector of Int. Rev. v. Sinco Educational Corp., G.R. No. L-9276, Oct. 23,
1956).1äwphï1.ñët

It is claimed that unlike the two cases just cited (supra), which are non-stock, the appellee Club is a stock
corporation. This is unmeritorious. The facts that the capital stock of the respondent Club is divided into shares,
does not detract from the finding of the trial court that it is not engaged in the business of operator of bar and
restaurant. What is determinative of whether or not the Club is engaged in such business is its object or purpose,
as stated in its articles and by-laws. It is a familiar rule that the actual purpose is not controlled by the corporate
form or by the commercial aspect of the business prosecuted, but may be shown by extrinsic evidence,
including the by-laws and the method of operation. From the extrinsic evidence adduced, the Tax Court
concluded that the Club is not engaged in the business as a barkeeper and restaurateur.

Moreover, for a stock corporation to exist, two requisites must be complied with, to wit: (1) a capital stock
divided into shares and (2) an authority to distribute to the holders of such shares, dividends or allotments of the
surplus profits on the basis of the shares held (sec. 3, Act No. 1459). In the case at bar, nowhere in its articles of
incorporation or by-laws could be found an authority for the distribution of its dividends or surplus profits.
Strictly speaking, it cannot, therefore, be considered a stock corporation, within the contemplation of the
corporation law.

A tax is a burden, and, as such, it should not be deemed imposed upon fraternal, civic, non-profit, nonstock
organizations, unless the intent to the contrary is manifest and patent" (Collector v. BPOE Elks Club, et al.,
supra), which is not the case in the present appeal.

Having arrived at the conclusion that respondent Club is not engaged in the business as an operator of a bar and
restaurant, and therefore, not liable for fixed and percentage taxes, it follows that it is not liable for any penalty,
much less of a compromise penalty.

WHEREFORE, the decision appealed from is affirmed without costs.

G.R. No. 79182 September 11, 1991

PNOC-ENERGY DEVELOPMENT CORPORATION, petitioner,

vs.
NATIONAL LABOR RELATIONS COMMISSION (Third Division) and DANILO MERCADO,
respondents.

Bacorro & Associates for petitioner.

Alberto L. Dalmacion for private respondent.

PARAS, J.:

This is a petition for certiorari to set aside the Resolution * dated July 3, 1987 of respondent National Labor
Relations Commission (NLRC for brevity) which affirmed the decision dated April 30, 1986 of Labor Arbiter
Vito J. Minoria of the NLRC, Regional Arbitration Branch No. VII at Cebu City in Case No. RAB-VII-0556-85
entitled "Danilo Mercado, Complainant, vs. Philippine National Oil Company-Energy Development
Corporation, Respondent", ordering the reinstatement of complainant Danilo Mercado and the award of various
monetary claims.

The factual background of this case is as follows:

Private respondent Danilo Mercado was first employed by herein petitioner Philippine National Oil Company-
Energy Development Corporation (PNOC-EDC for brevity) on August 13, 1979. He held various positions
ranging from clerk, general clerk to shipping clerk during his employment at its Cebu office until his transfer to
its establishment at Palimpinon, Dumaguete, Oriental Negros on September 5, 1984. On June 30, 1985, private
respondent Mercado was dismissed. His last salary was P1,585.00 a month basic pay plus P800.00 living
allowance (Labor Arbiter's Decision, Annex "E" of Petition, Rollo, p. 52).

The grounds for the dismissal of Mercado are allegedly serious acts of dishonesty committed as follows:

1. On ApriI 12, 1985, Danilo Mercado was ordered to purchase 1,400 pieces of nipa shingles from Mrs.
Leonardo Nodado of Banilad, Dumaguete City, for the total purchase price of Pl,680.00. Against
company policy, regulations and specific orders, Danilo Mercado withdrew the nipa shingles from the
supplier but paid the amount of P1,000.00 only. Danilo Mercado appropriated the balance of P680.00
for his personal use;

2. In the same transaction stated above, the supplier agreed to give the company a discount of P70.00
which Danilo Mercado did not report to the company;

3. On March 28, 1985, Danilo Mercado was instructed to contract the services of Fred R. Melon of
Dumaguete City, for the fabrication of rubber stamps, for the total amount of P28.66. Danilo Mercado
paid the amount of P20.00 to Fred R. Melon and appropriated for his personal use the balance of P8.66.

In addition, private respondent, Danilo Mercado violated company rules and regulations in the following
instances:

1. On June 5, 1985, Danilo Mercado was absent from work without leave, without proper turn-over of
his work, causing disruption and delay of company work activities;

2. On June 15, 1985, Danilo Mercado went on vacation leave without prior leave, against company
policy, rules and regulations. (Petitioner's Memorandum, Rollo, p. 195).

On September 23, 1985, private respondent Mercado filed a complaint for illegal dismissal, retirement benefits,
separation pay, unpaid wages, etc. against petitioner PNOC-EDC before the NLRC Regional Arbitration Branch
No. VII docketed as Case No. RAB-VII-0556-85.

After private respondent Mercado filed his position paper on December 16, 1985 (Annex "B" of the Petition,
Rollo, pp. 28-40), petitioner PNOC-EDC filed its Position Paper/Motion to Dismiss on January 15, 1986,
praying for the dismissal of the case on the ground that the Labor Arbiter and/or the NLRC had no jurisdiction
over the case (Annex "C" of the Petition, Rollo, pp. 41-45), which was assailed by private respondent Mercado
in his Opposition to the Position Paper/Motion to Dismiss dated March 12, 1986 (Annex "D" of the Petition,
Rollo, pp. 46-50).
The Labor Arbiter ruled in favor of private respondent Mercado. The dispositive onion of said decision reads as
follows:

WHEREFORE, in view of the foregoing, respondents are hereby ordered:

1) To reinstate complainant to his former position with full back wages from the date of his dismissal up
to the time of his actual reinstatement without loss of seniority rights and other privileges;

2) To pay complainant the amount of P10,000.00 representing his personal share of his savings account
with the respondents;

3) To pay complainants the amount of P30,000.00 moral damages; P20,000.00 exemplary damages and
P5,000.00 attorney's fees;

4) To pay complainant the amount of P792.50 as his proportionate 13th month pay for 1985.

Respondents are hereby further ordered to deposit the aforementioned amounts with this Office within
ten days from receipt of a copy of this decision for further disposition.

SO ORDERED.
(Labor Arbiter's Decision, Rollo, p. 56)

The appeal to the NLRC was dismissed for lack of merit on July 3, 1987 and the assailed decision was affirmed.

Hence, this petition.

The issues raised by petitioner in this instant petition are:

1. Whether or not matters of employment affecting the PNOC-EDC, a government-owned and

controlled corporation, are within the jurisdiction of the Labor Arbiter and the NLRC.

2. Assuming the affirmative, whether or not the Labor Arbiter and the NLRC are justified in ordering
the reinstatement of private respondent, payment of his savings, and proportionate 13th month pay and
payment of damages as well as attorney's fee.

Petitioner PNOC-EDC alleges that it is a corporation wholly owned and controlled by the government; that the
Energy Development Corporation is a subsidiary of the Philippine National Oil Company which is a
government entity created under Presidential Decree No. 334, as amended; that being a government-owned and
controlled corporation, it is governed by the Civil Service Law as provided for in Section 1, Article XII-B of the
1973 Constitution, Section 56 of Presidential Decree No. 807 (Civil Service Decree) and Article 277 of
Presidential Decree No. 442, as amended (Labor Code).

The 1973 Constitution provides:

The Civil Service embraces every branch, agency, subdivision and instrumentality of the government
including government-owned or controlled corporations.

Petitioner PNOC-EDC argued that since Labor Arbiter Minoria rendered the decision at the time when the 1973
Constitution was in force, said decision is null and void because under the 1973 Constitution, government-
owned and controlled corporations were governed by the Civil Service Law. Even assuming that PNOC-EDC
has no original or special charter and Section 2(i), Article IX-B of the 1987 Constitution provides that:
 The Civil Service embraces all branches, subdivision, instrumentalities and agencies of the Government,
including government-owned or controlled corporations with original charters.

such circumstances cannot give validity to the decision of the Labor Arbiter (Ibid., pp. 192-193).

This issue has already been laid to rest in the case of PNOC-EDC vs. Leogardo, 175 SCRA 26 (July 5, 1989),
involving the same petitioner and the same issue, where this Court ruled that the doctrine that employees of
government-owned and/or con controlled corporations, whether created by special law or formed as subsidiaries
under the General Corporation law are governed by the Civil Service Law and not by the Labor Code, has been
supplanted by the present Constitution. "Thus, under the present state of the law, the test in determining whether
a government-owned or controlled corporation is subject to the Civil Service Law are the manner of its creation,
such that government corporations created by special charter are subject to its provisions while those
incorporated under the General Corporation Law are not within its coverage."

Specifically, the PNOC-EDC having been incorporated under the General Corporation Law was held to be a
government owned or controlled corporation whose employees are subject to the provisions of the Labor Code
(Ibid.).

The fact that the case arose at the time when the 1973 Constitution was still in effect, does not deprive the
NLRC of jurisdiction on the premise that it is the 1987 Constitution that governs because it is the Constitution
in place at the time of the decision (NASECO v. NLRC, G.R. No. 69870, 168 SCRA 122 [1988]).

In the case at bar, the decision of the NLRC was promulgated on July 3, 1987. Accordingly, this case falls
squarely under the rulings of the aforementioned cases.

As regards the second issue, the record shows that PNOC-EDC's accusations of dishonesty and violations of
company rules are not supported by evidence. Nonetheless, while acknowledging the rule that administrative
bodies are not governed by the strict rules of evidence, petitioner PNOC-EDC alleges that the labor arbiter's
propensity to decide the case through the position papers submitted by the parties is violative of due process
thereby rendering the decision null and void (Ibid., p. 196).

On the other hand, private respondent contends that as can be seen from petitioner's Motion for Reconsideration
and/or Appeal dated July 28, 1986 (Annex "F" of the Petition, Rollo, pp. 57- 64), the latter never questioned the
findings of facts of the Labor Arbiter but simply limited its objection to the lack of legal basis in view of its
stand that the NLRC had no jurisdiction over the case (Private Respondent's Memorandum, Rollo, p. 104).

Petitioner PNOC-EDC filed its Position Paper/Motion to Dismiss dated January 15, 1986 (Annex "C" of the
Petition Rollo, pp. 41-45) before the Regional Arbitration Branch No. VII of Cebu City and its Motion for
Reconsideration and/or Appeal dated July 28, 1986 (Annex "F" of the Petition, Rollo, pp. 57-64) before the
NLRC of Cebu City. Indisputably, the requirements of due process are satisfied when the parties are given an
opportunity to submit position papers. What the fundamental law abhors is not the absence of previous notice
but rather the absolute lack of opportunity to ventilate a party's side. There is no denial of due process where the
party submitted its position paper and flied its motion for reconsideration (Odin Security Agency vs. De la
Serna, 182 SCRA 472 [February 21, 1990]). Petitioner's subsequent Motion for Reconsideration and/or Appeal
has the effect of curing whatever irregularity might have been committed in the proceedings below (T.H.
Valderama and Sons, Inc. vs. Drilon, 181 SCRA 308 [January 22, 1990]).

Furthermore, it has been consistently held that findings of administrative agencies which have acquired
expertise because their jurisdiction is confined to specific matters are accorded not only respect but even finality
(Asian Construction and Development Corporation vs. NLRC, 187 SCRA 784 [July 27, 1990]; Lopez Sugar
Corporation vs. Federation of Free Workers, 189 SCRA 179 [August 30, 1990]). Judicial review by this Court
does not go so far as to evaluate the sufficiency of the evidence but is limited to issues of jurisdiction or grave
abuse of discretion (Filipinas Manufacturers Bank vs. NLRC, 182 SCRA 848 [February 28, 1990]). A careful
study of the records shows no substantive reason to depart from these established principles.

While it is true that loss of trust or breach of confidence is a valid ground for dismissing an employee, such loss
or breach of trust must have some basis (Gubac v. NLRC, 187 SCRA 412 [July 13, 1990]). As found by the
Labor Arbiter, the accusations of petitioner PNOC-EDC against private respondent Mercado have no basis.
Mrs. Leonardo Nodado, from whom the nipa shingles were purchased, sufficiently explained in her affidavit
(Rollo, p. 36) that the total purchase price of P1,680.00 was paid by respondent Mercado as agreed upon. The
alleged discount given by Mrs. Nodado is not supported by evidence as well as the alleged appropriation of
P8.66 from the cost of fabrication of rubber stamps. The Labor Arbiter, likewise, found no evidence to support
the alleged violation of company rules. On the contrary, he found respondent Mercado's explanation in his
affidavit (Rollo, pp. 38-40) as to the alleged violations to be satisfactory. Moreover, these findings were never
contradicted by petitioner petitioner PNOC-EDC.

PREMISES CONSIDERED, the petition is DENIED and the resolution of respondent NLRC dated July 3, 1987
is AFFIRMED with the modification that the moral damages are reduced to Ten Thousand (P10,000.00) Pesos,
and the exemplary damages reduced to Five Thousand (P5,000.00) Pesos.

SO ORDERED.

G.R. No. L-22619 December 2, 1924

NATIONAL COAL COMPANY, plaintiff-appellee,

vs.
THE COLLECTOR OF INTERNAL REVENUE, defendant-appellant.

Attorney-General Villa-Real for appellant.

Perfecto J. Salas Rodriguez for appellee.

JOHNSON, J.:

This action was brought in the Court of First Instance of the City of Manila on the 17th day of July, 1923, for
the purpose of recovering the sum of P12,044.68, alleged to have been paid under protest by the plaintiff
company to the defendant, as specific tax on 24,089.3 tons of coal. Said company is a corporation created by
Act No. 2705 of the Philippine Legislature for the purpose of developing the coal industry in the Philippine
Islands and is actually engaged in coal mining on reserved lands belonging to the Government. It claimed
exemption from taxes under the provision of sections 14 and 15 of Act No. 2719, and prayed for a judgment
ordering the defendant to refund to the plaintiff said sum of P12,044.68, with legal interest from the date of the
presentation of the complaint, and costs against the defendant.

The defendant answered denying generally and specifically all the material allegations of the complaint, except
the legal existence and personality of the plaintiff. As a special defense, the defendant alleged (a) that the sum
of P12,044.68 was paid by the plaintiff without protests, and (b) that said sum was due and owing from the
plaintiff to the Government of the Philippine Islands under the provisions of section 1496 of the Administrative
Code and prayed that the complaint be dismissed, with costs against the plaintiff.

Upon the issue thus presented, the case was brought on for trial. After a consideration of the evidence adduced
by both parties, the Honorable Pedro Conception, judge, held that the words "lands owned by any person, etc.,"
in section 15 of Act No. 2719 should be understood to mean "lands held in lease or usufruct," in harmony with
the other provision of said Act; that the coal lands possessed by the plaintiff, belonging to the Government, fell
within the provisions of section 15 of Act No. 2719; and that a tax of P0.04 per ton of 1,016 kilos on each ton of
coal extracted therefrom, as provided in said section, was the only tax which should be collected from the
plaintiff; and sentenced the defendant to refund to the plaintiff the sum of P11,081.11 which is the difference
between the amount collected under section 1496 of the Administrative Code and the amount which should
have been collected under the provisions of said section 15 of Act No. 2719. From that sentence the defendant
appealed, and now makes the following assignments of error:

I. The court below erred in holding that section 15 of Act No. 2719 does not refer to coal lands owned by
persons and corporations.

II. The court below erred in holding that the plaintiff was not subject to the tax prescribed in section 1496 of the
Administrative Code.

The question confronting us in this appeal is whether the plaintiff is subject to the taxes under section 15 of Act
No. 2719, or to the specific taxes under section 1496 of the Administrative Code.

The plaintiff corporation was created on the 10th day of March, 1917, by Act No. 2705, for the purpose of
developing the coal industry in the Philippine Island, in harmony with the general plan of the Government to
encourage the development of the natural resources of the country, and to provided facilities therefor. By said
Act, the company was granted the general powers of a corporation "and such other powers as may be necessary
to enable it to prosecute the business of developing coal deposits in the Philippine Island and of mining,
extracting, transporting and selling the coal contained in said deposits." (Sec. 2, Act No. 2705.) By the same law
(Act No. 2705) the Government of the Philippine Islands is made the majority stockholder, evidently in order to
insure proper government supervision and control, and thus to place the Government in a position to render all
possible encouragement, assistance and help in the prosecution and furtherance of the company's business.

On May 14, 1917, two months after the passage of Act No. 2705, creating the National Coal Company, the
Philippine Legislature passed Act No. 2719 "to provide for the leasing and development of coal lands in the
Philippine Islands." On October 18, 1917, upon petition of the National Coal Company, the Governor-General,
by Proclamation No. 39, withdrew "from settlement, entry, sale or other disposition, all coal-bearing public
lands within the Province of Zamboanga, Department of Mindanao and Sulu, and the Island of Polillo, Province
of Tayabas." Almost immediately after the issuance of said proclamation the National Coal Company took
possession of the coal lands within the said reservation, with an area of about 400 hectares, without any further
formality, contract or lease. Of the 30,000 shares of stock issued by the company, the Government of the
Philippine Islands is the owner of 29,809 shares, that is, of 99 1/3 per centum of the whole capital stock.

If we understand the theory of the plaintiff-appellee, it is, that it claims to be the owner of the land from which it
has mined the coal in question and is therefore subject to the provisions of section 15 of Act No. 2719 and not
to the provisions of the section 1496 of the Administrative Code. That contention of the plaintiff leads us to an
examination of the evidence upon the question of the ownership of the land from which the coal in question was
mined. Was the plaintiff the owner of the land from which the coal in question was mined? If the evidence
shows the affirmative, then the judgment should be affirmed. If the evidence shows that the land does not
belong to the plaintiff, then the judgment should be reversed, unless the plaintiff's rights fall under section 3 of
said Act.

The only witness presented by the plaintiff upon the question of the ownership of the land in question was Mr.
Dalmacio Costas, who stated that he was a member of the board of directors of the plaintiff corporation; that the
plaintiff corporation took possession of the land in question by virtue of the proclamation of the Governor-
General, known as Proclamation No. 39 of the year 1917; that no document had been issued in favor of the
plaintiff corporation; that said corporation had received no permission from the Secretary of Agriculture and
Natural Resources; that it took possession of said lands covering an area of about 400 hectares, from which the
coal in question was mined, solely, by virtue of said proclamation (Exhibit B, No. 39).
Said proclamation (Exhibit B) was issued by Francis Burton Harrison, then Governor-General, on the 18th day
of October, 1917, and provided: "Pursuant to the provision of section 71 of Act No. 926, I hereby withdraw
from settlement, entry, sale, or other disposition, all coal-bearing public lands within the Province of
Zamboanga, Department of Mindanao and Sulu, and the Island of Polillo, Province of Tayabas." It will be noted
that said proclamation only provided that all coal-bearing public lands within said province and island should be
withdrawn from settlement, entry, sale, or other disposition. There is nothing in said proclamation which
authorizes the plaintiff or any other person to enter upon said reversations and to mine coal, and no provision of
law has been called to our attention, by virtue of which the plaintiff was entitled to enter upon any of the lands
so reserved by said proclamation without first obtaining permission therefor.

The plaintiff is a private corporation. The mere fact that the Government happens to the majority stockholder
does not make it a public corporation. Act No. 2705, as amended by Act No. 2822, makes it subject to all of the
provisions of the Corporation Law, in so far as they are not inconsistent with said Act (No. 2705). No
provisions of Act No. 2705 are found to be inconsistent with the provisions of the Corporation Law. As a
private corporation, it has no greater rights, powers or privileges than any other corporation which might be
organized for the same purpose under the Corporation Law, and certainly it was not the intention of the
Legislature to give it a preference or right or privilege over other legitimate private corporations in the mining
of coal. While it is true that said proclamation No. 39 withdrew "from settlement, entry, sale, or other
disposition of coal-bearing public lands within the Province of Zamboanga . . . and the Island of Polillo," it
made no provision for the occupation and operation by the plaintiff, to the exclusion of other persons or
corporations who might, under proper permission, enter upon the operate coal mines.

On the 14th day of May, 1917, and before the issuance of said proclamation, the Legislature of the Philippine
Island in "an Act for the leasing and development of coal lands in the Philippine Islands" (Act No. 2719), made
liberal provision. Section 1 of said Act provides: "Coal-bearing lands of the public domain in the Philippine
Island shall not be disposed of in any manner except as provided in this Act," thereby giving a clear indication
that no "coal-bearing lands of the public domain" had been disposed of by virtue of said proclamation.

Neither is there any provision in Act No. 2705 creating the National Coal Company, nor in the amendments
thereof found in Act No. 2822, which authorizes the National Coal Company to enter upon any of the reserved
coal lands without first having obtained permission from the Secretary of Agriculture and Natural
Resources.lawphi1.net

The following propositions are fully sustained by the facts and the law:

(1) The National Coal Company is an ordinary private corporation organized under Act No. 2705, and has no
greater powers nor privileges than the ordinary private corporation, except those mentioned, perhaps, in section
10 of Act No. 2719, and they do not change the situation here.

(2) It mined on public lands between the month of July, 1920, and the months of March, 1922, 24,089.3 tons of
coal.

(3) Upon demand of the Collector of Internal Revenue it paid a tax of P0.50 a ton, as taxes under the provisions
of article 1946 of the Administrative Code on the 15th day of December, 1922.

(4) It is admitted that it is neither the owner nor the lessee of the lands upon which said coal was mined.

(5) The proclamation of Francis Burton Harrison, Governor-General, of the 18th day of October, 1917, by
authority of section 1 of Act No. 926, withdrawing from settlement, entry, sale, or other dispositon all coal-
bearing public lands within the Province of Zamboanga and the Island of Polillo, was not a reservation for the
benefit of the National Coal Company, but for any person or corporation of the Philippine Islands or of the
United States.
(6) That the National Coal Company entered upon said land and mined said coal, so far as the record shows,
without any lease or other authority from either the Secretary of Agriculture and Natural Resources or any
person having the power to grant a leave or authority.

From all of the foregoing facts we find that the issue is well defined between the plaintiff and the defendant.
The plaintiff contends that it was liable only to pay the internal revenue and other fees and taxes provided for
under section 15 of Act No. 2719; while the defendant contends, under the facts of record, the plaintiff is
obliged to pay the internal revenue duty provided for in section 1496 of the Administrative Code. That being the
issue, an examination of the provisions of Act No. 2719 becomes necessary.

An examination of said Act (No. 2719) discloses the following facts important for consideration here:

First. All "coal-bearing lands of the public domain in the Philippine Islands shall not be disposed of in any
manner except as provided in this Act." Second. Provisions for leasing by the Secretary of Agriculture and
Natural Resources of "unreserved, unappropriated coal-bearing public lands," and the obligation to the
Government which shall be imposed by said Secretary upon the lessee.lawphi1.net

Third. The internal revenue duty and tax which must be paid upon coal-bearing lands owned by any person,
firm, association or corporation.

To repeat, it will be noted, first, that Act No. 2719 provides an internal revenue duty and tax upon unreserved,
unappropriated coal-bearing public lands which may be leased by the Secretary of Agriculture and Natural
Resources; and, second, that said Act (No. 2719) provides an internal revenue duty and tax imposed upon any
person, firm, association or corporation, who may be the owner of "coal-bearing lands." A reading of said Act
clearly shows that the tax imposed thereby is imposed upon two classes of persons only — lessees and owners.

The lower court had some trouble in determining what was the correct interpretation of section 15 of said Act,
by reason of what he believed to be some difference in the interpretation of the language used in Spanish and
English. While there is some ground for confusion in the use of the language in Spanish and English, we are
persuaded, considering all the provisions of said Act, that said section 15 has reference only to persons, firms,
associations or corporations which had already, prior to the existence of said Act, become the owners of coal
lands. Section 15 cannot certainty refer to "holders or lessees of coal lands' for the reason that practically all of
the other provisions of said Act has reference to lessees or holders. If section 15 means that the persons, firms,
associations, or corporation mentioned therein are holders or lessees of coal lands only, it is difficult to
understand why the internal revenue duty and tax in said section was made different from the obligations
mentioned in section 3 of said Act, imposed upon lessees or holders.

From all of the foregoing, it seems to be made plain that the plaintiff is neither a lessee nor an owner of coal-
bearing lands, and is, therefore, not subject to any other provisions of Act No. 2719. But, is the plaintiff subject
to the provisions of section 1496 of the Administrative Code?

Section 1496 of the Administrative Code provides that "on all coal and coke there shall be collected, per metric
ton, fifty centavos." Said section (1496) is a part of article, 6 which provides for specific taxes. Said article
provides for a specific internal revenue tax upon all things manufactured or produced in the Philippine Islands
for domestic sale or consumption, and upon things imported from the United States or foreign countries. It
having been demonstrated that the plaintiff has produced coal in the Philippine Islands and is not a lessee or
owner of the land from which the coal was produced, we are clearly of the opinion, and so hold, that it is subject
to pay the internal revenue tax under the provisions of section 1496 of the Administrative Code, and is not
subject to the payment of the internal revenue tax under section 15 of Act No. 2719, nor to any other provisions
of said Act.
Therefore, the judgment appealed from is hereby revoked, and the defendant is hereby relieved from all
responsibility under the complaint. And, without any finding as to costs, it is so ordered.

G.R. No. 41570 September 6, 1934

RED LINE TRANSPORTATION CO., petitioner-appellant,

vs.
RURAL TRANSIT CO., LTD., respondent-appellee.

L. D. Lockwood for appellant.

Ohnick and Opisso for appellee.

BUTTE, J.:

This case is before us on a petition for review of an order of the Public Service Commission entered December
21, 1932, granting to the Rural Transit Company, Ltd., a certificate of public convenience to operate a
transportation service between Ilagan in the Province of Isabela and Tuguegarao in the Province of Cagayan,
and additional trips in its existing express service between Manila Tuguegarao.

On June 4, 1932, the Rural Transit Company, Ltd., a Philippine corporation, filed with the Public Company
Service Commission an application in which it is stated in substance that it is the holder of a certificate or public
convenience to operate a passenger bus service between Manila and Tuguegarao; that it is the only operator of
direct service between said points and the present authorized schedule of only one trip daily is not sufficient;
that it will be also to the public convenience to grant the applicant a certificate for a new service between
Tuguegarao and Ilagan.

On July 22, 1932, the appellant, Red Line Transportation Company, filed an opposition to the said application
alleging in substance that as to the service between Tuguegarao and Ilagan, the oppositor already holds a
certificate of public convenience and is rendering adequate and satisfactory service; that the granting of the
application of the Rural Transit Company, Ltd., would not serve public convenience but would constitute a
ruinous competition for the oppositor over said route.

After testimony was taken, the commission, on December 21, 1932, approved the application of the Rural
Transit Company, Ltd., and ordered that the certificate of public convenience applied for be "issued to the
applicant Rural Transit Company, Ltd.," with the condition, among others, that "all the other terms and
conditions of the various certificates of public convenience of the herein applicant and herein incorporated are
made a part hereof."

On January 14, 1933, the oppositor Red Line Transportation Company filed a motion for rehearing and
reconsideration in which it called the commission's attention to the fact that there was pending in the Court of
First Instance of Manila case N. 42343, an application for the voluntary dissolution of the corporation, Rural
Transit Company, Ltd. Said motion for reconsideration was set down for hearing on March 24, 1933. On March
23, 1933, the Rural Transit Company, Ltd., the applicant, filed a motion for postponement. This motion was
verified by M. Olsen who swears "that he was the secretary of the Rural Transit Company, Ltd., in the above
entitled case." Upon the hearing of the motion for reconsideration, the commission admitted without objection
the following documents filed in said case No. 42343 in the Court of First Instance of Manila for the dissolution
of the Rural Transit Company, Ltd. the petition for dissolution dated July 6, 1932, the decision of the said Court
of First Instance of Manila, dated February 28, 1933, decreeing the dissolution of the Rural Transit Company,
Ltd.

At the trial of this case before the Public Service Commission an issue was raised as to who was the real party
in interest making the application, whether the Rural Transit Company, Ltd., as appeared on the face of the
application, or the Bachrach Motor Company, Inc., using name of the Rural Transit Company, Ltd., as a trade
name. The evidence given by the applicant's secretary, Olsen, is certainly very dubious and confusing, as may
be seen from the following:

Q. Will you please answer the question whether it is the Bachrach Motor Company operating
under the trade name of the Rural Transit Company, Limited, or whether it is the Rural Transit
Company, Limited in its own name this application was filed?

A. The Bachrach Motor Company is the principal stockholder.

Q. Please answer the question.

ESPELETA. Objecion porque la pregunta ya ha sido contestada.

JUEZ. Puede contestar.

A. I do not know what the legal construction or relationship existing between the two.

JUDGE. I do not know what is in your mind by not telling the real applicant in this case?

A. It is the Rural Transit Company, Ltd.

JUDGE. As an entity by itself and not by the Bachrach Motor Company?

A. I do not know. I have not given that phase of the matter much thought, as in previous
occassion had not necessitated.

JUDGE. In filing this application, you filed it for the operator on that line? Is it not!

A. Yes, sir.

JUDGE. Who is that operator?

A. The Rural Transit Company, Ltd.

JUDGE. By itself, or as a commercial name of the Bachrach Motor Company?

A. I cannot say.

ESPELETA. The Rural Transit Company, Ltd., is a corporation duly established in accordance with the
laws of the Philippine Islands.

JUDGE. According to the records of this commission the Bachrach Motor Company is the owner of the
certificates and the Rural Transit Company, Ltd., is operating without any certificate.

JUDGE. If you filed this application for the Rural Transit Company, Ltd., and afterwards it is found out
that the Rural Transit Company, Ltd., is not an operator, everything will be turned down.

JUDGE. My question was, when you filed this application you evidently made it for the operator?

A. Yes, sir.
 JUDGE. Who was that operator you had in mind?

A. According to the status of the ownership of the certificates of the former Rural Transit
Company, the operator was the operator authorized in case No. 23217 to whom all of the assets of the
former Rural Transit Company were sold.

JUDGE. Bachrach Motor Company?

A. All actions have been prosecuted in the name of the Rural Transit Company, Ltd.

JUDGE. You mean the Bachrach Motor Company, Inc., doing business under the name of the Rural
Transit Company, Ltd.?

A. Yes, sir.

LOCKWOOD. I move that this case be dismissed, your Honor, on the ground that this application was
made in the name of one party but the real owner is another party.

ESPELETA. We object to that petition.

JUDGE. I will have that in mind when I decide the case. If I agree with you everything would be
finished.

The Bachrach Motor Company, Inc., entered no appearance and ostensibly took no part in the hearing of the
application of the Rural Transit Company, Ltd. It may be a matter of some surprise that the commission did not
on its own motion order the amendment of the application by substituting the Bachrach Motor Company, Inc.,
as the applicant. However, the hearing proceeded on the application as filed and the decision of December 2,
1932, was rendered in favor of the Rural Transit Company, Ltd., and the certificate ordered to be issued in its
name, in the face of the evidence that the said corporation was not the real party in interest. In its said decision,
the commission undertook to meet the objection by referring to its resolution of November 26, 1932, entered in
another case. This resolution in case No. 23217 concludes as follows:

Premises considered we hereby authorize the Bachrach Motor Co., Inc., to continue using the name of
"Rural Transit Co., Ltd.," as its trade name in all the applications, motions or other petitions to be filed
in this commission in connection with said business and that this authority is given retroactive effect as
of the date, of filing of the application in this case, to wit, April 29, 1930.

We know of no law that empowers the Public Service Commission or any court in this jurisdiction to authorize
one corporation to assume the name of another corporation as a trade name. Both the Rural Transit Company,
Ltd., and the Bachrach Motor Co., Inc., are Philippine corporations and the very law of their creation and
continued existence requires each to adopt and certify a distinctive name. The incorporators "constitute a body
politic and corporate under the name stated in the certificate." (Section 11, Act No. 1459, as amended.) A
corporation has the power "of succession by its corporate name." (Section 13, ibid.) The name of a corporation
is therefore essential to its existence. It cannot change its name except in the manner provided by the statute. By
that name alone is it authorized to transact business. The law gives a corporation no express or implied authority
to assume another name that is unappropriated: still less that of another corporation, which is expressly set apart
for it and protected by the law. If any corporation could assume at pleasure as an unregistered trade name the
name of another corporation, this practice would result in confusion and open the door to frauds and evasions
and difficulties of administration and supervision. The policy of the law expressed in our corporation statute and
the Code of Commerce is clearly against such a practice. (Cf. Scarsdale Pub. Co. Colonial Press vs. Carter, 116
New York Supplement, 731; Svenska Nat. F. i. C. vs. Swedish Nat. Assn., 205 Illinois [Appellate Courts], 428,
434.)
The order of the commission of November 26, 1932, authorizing the Bachrach Motor Co., Incorporated, to
assume the name of the Rural Transit Co., Ltd. likewise in corporated, as its trade name being void, and
accepting the order of December 21, 1932, at its face as granting a certificate of public convenience to the
applicant Rural Transit Co., Ltd., the said order last mentioned is set aside and vacated on the ground that the
Rural Transit Company, Ltd., is not the real party in interest and its application was fictitious.

In view of the dissolution of the Rural Transit Company, Ltd. by judicial decree of February 28, 1933, we do
not see how we can assess costs against said respondent, Rural Transit Company, Ltd.

G.R. No. L-28351 July 28, 1977

UNIVERSAL MILLS CORPORATION, petitioner,

vs.
UNIVERSAL TEXTILE MILLS, INC., respondent.

Emigdio G. Tanjuatco for petitioner.

Picazo, Santayana, Reyes, Tayao & Alfonso for respondent.

BARREDO, J.:

Appeal from the order of the Securities and Exchange Commission in S.E.C. Case No. 1079, entitled In the
Matter of the Universal Textile Mills, Inc. vs. Universal Mills Corporation, a petition to have appellant change
its corporate name on the ground that such name is "confusingly and deceptively similar" to that of appellee,
which petition the Commission granted.

According to the order, "the Universal Textile Mills, Inc. was organ on December 29, 1953, as a textile
manufacturing firm for which it was issued a certificate of registration on January 8, 1954. The Universal Mills
Corporation, on the other hand, was registered in this Commission on October 27, 1954, under its original
name, Universal Hosiery Mills Corporation, having as its primary purpose the "manufacture and production of
hosieries and wearing apparel of all kinds." On May 24, 1963, it filed an amendment to its articles of
incorporation changing its name to Universal Mills Corporation, its present name, for which this Commission
issued the certificate of approval on June 10, 1963.

The immediate cause of this present complaint, however, was the occurrence of a fire which gutted respondent's
spinning mills in Pasig, Rizal. Petitioner alleged that as a result of this fire and because of the similarity of
respondent's name to that of herein complainant, the news items appearing in the various metropolitan
newspapers carrying reports on the fire created uncertainty and confusion among its bankers, friends,
stockholders and customers prompting petitioner to make announcements, clarifying the real Identity of the
corporation whose property was burned. Petitioner presented documentary and testimonial evidence in support
of this allegation.

On the other hand, respondent's position is that the names of the two corporations are not similar
and even if there be some similarity, it is not confusing or deceptive; that the only reason that
respondent changed its name was because it expanded its business to include the manufacture of
fabrics of all kinds; and that the word 'textile' in petitioner's name is dominant and prominent
enough to distinguish the two. It further argues that petitioner failed to present evidence of
confusion or deception in the ordinary course of business; that the only supposed confusion
proved by complainant arose out of an extraordinary occurrence — a disastrous fire. (pp. 16-
&17, Record.)
Upon these premises, the Commission held:

From the facts proved and the jurisprudence on the matter, it appears necessary under the
circumstances to enjoin the respondent Universal Mills Corporation from further using its
present corporate name. Judging from what has already happened, confusion is not only
apparent, but possible. It does not matter that the instance of confusion between the two
corporate names was occasioned only by a fire or an extraordinary occurrence. It is precisely the
duty of this Commission to prevent such confusion at all times and under all circumstances not
only for the purpose of protecting the corporations involved but more so for the protection of the
public.

In today's modern business life where people go by tradenames and corporate images, the
corporate name becomes the more important. This Commission cannot close its eyes to the fact
that usually it is the sound of all the other words composing the names of business corporations
that sticks to the mind of those who deal with them. The word "textile" in Universal Textile
Mills, Inc.' can not possibly assure the exclusion of all other entities with similar names from the
mind of the public especially so, if the business they are engaged in are the same, like in the
instant case.

This Commission further takes cognizance of the fact that when respondent filed the amendment
changing its name to Universal Mills Corporation, it correspondingly filed a written undertaking
dated June 5, 1963 and signed by its President, Mr. Mariano Cokiat, promising to change its
name in the event that there is another person, firm or entity who has obtained a prior right to the
use of such name or one similar to it. That promise is still binding upon the corporation and its
responsible officers. (pp. 17-18, Record.)

It is obvious that the matter at issue is within the competence of the Securities and Exchange Commission to
resolve in the first instance in the exercise of the jurisdiction it used to possess under Commonwealth Act 287
as amended by Republic Act 1055 to administer the application and enforcement of all laws affecting domestic
corporations and associations, reserving to the courts only conflicts of judicial nature, and, of course, the
Supreme Court's authority to review the Commissions actuations in appropriate instances involving possible
denial of due process and grave abuse of discretion. Thus, in the case at bar, there being no claim of denial of
any constitutional right, all that We are called upon to determine is whether or not the order of the Commission
enjoining petitioner to its corporate name constitutes, in the light of the circumstances found by the
Commission, a grave abuse of discretion.

We believe it is not. Indeed, it cannot be said that the impugned order is arbitrary and capricious. Clearly, it has
rational basis. The corporate names in question are not Identical, but they are indisputably so similar that even
under the test of "reasonable care and observation as the public generally are capable of using and may be
expected to exercise" invoked by appellant, We are apprehensive confusion will usually arise, considering that
under the second amendment of its articles of incorporation on August 14, 1964, appellant included among its
primary purposes the "manufacturing, dyeing, finishing and selling of fabrics of all kinds" in which respondent
had been engaged for more than a decade ahead of petitioner. Factually, the Commission found existence of
such confusion, and there is evidence to support its conclusion. Since respondent is not claiming damages in
this proceeding, it is, of course, immaterial whether or not appellant has acted in good faith, but We cannot
perceive why of all names, it had to choose a name already being used by another firm engaged in practically
the same business for more than a decade enjoying well earned patronage and goodwill, when there are so many
other appropriate names it could possibly adopt without arousing any suspicion as to its motive and, more
importantly, any degree of confusion in the mind of the public which could mislead even its own customers,
existing or prospective. Premises considered, there is no warrant for our interference.
As this is purely a case of injunction, and considering the time that has elapsed since the facts complained of
took place, this decision should not be deemed as foreclosing any further remedy which appellee may have for
the protection of its interests.

WHEREFORE, with the reservation already mentioned, the appealed decision is affirmed. Costs against
petitioners.

G.R. No. 101897. March 5, 1993.

LYCEUM OF THE PHILIPPINES, INC., petitioner, vs. COURT OF APPEALS, LYCEUM OF APARRI,
LYCEUM OF CABAGAN, LYCEUM OF CAMALANIUGAN, INC., LYCEUM OF LALLO, INC.,
LYCEUM OF TUAO, INC., BUHI LYCEUM, CENTRAL LYCEUM OF CATANDUANES, LYCEUM OF
SOUTHERN PHILIPPINES, LYCEUM OF EASTERN MINDANAO, INC. and WESTERN PANGASINAN
LYCEUM, INC., respondents.

Quisumbing, Torres & Evangelista Law Offices and Ambrosio Padilla for petitioner.

Antonio M. Nuyles and Purungan, Chato, Chato, Tarriela & Tan Law Offices for respondents.

Froilan Siobal for Western Pangasinan Lyceum.

SYLLABUS

1. CORPORATION LAW; CORPORATE NAMES; REGISTRATION OF PROPOSED NAME WHICH IS

IDENTICAL OR CONFUSINGLY SIMILAR TO THAT OF ANY EXISTING CORPORATION,
PROHIBITED; CONFUSION AND DECEPTION EFFECTIVELY PRECLUDED BY THE APPENDING OF
GEOGRAPHIC NAMES TO THE WORD "LYCEUM". — The Articles of Incorporation of a corporation
must, among other things, set out the name of the corporation. Section 18 of the Corporation Code establishes a
restrictive rule insofar as corporate names are concerned: "Section 18. Corporate name. — No corporate name
may be allowed by the Securities an Exchange Commission if the proposed name is identical or deceptively or
confusingly similar to that of any existing corporation or to any other name already protected by law or is
patently deceptive, confusing or contrary to existing laws. When a change in the corporate name is approved,
the Commission shall issue an amended certificate of incorporation under the amended name." The policy
underlying the prohibition in Section 18 against the registration of a corporate name which is "identical or
deceptively or confusingly similar" to that of any existing corporation or which is "patently deceptive" or
"patently confusing" or "contrary to existing laws," is the avoidance of fraud upon the public which would have
occasion to deal with the entity concerned, the evasion of legal obligations and duties, and the reduction of
difficulties of administration and supervision over corporations. We do not consider that the corporate names of
private respondent institutions are "identical with, or deceptively or confusingly similar" to that of the petitioner
institution. True enough, the corporate names of private respondent entities all carry the word "Lyceum" but
confusion and deception are effectively precluded by the appending of geographic names to the word
"Lyceum." Thus, we do not believe that the "Lyceum of Aparri" can be mistaken by the general public for the
Lyceum of the Philippines, or that the "Lyceum of Camalaniugan" would be confused with the Lyceum of the
Philippines.

2. ID.; ID.; DOCTRINE OF SECONDARY MEANING; USE OF WORD "LYCEUM," NOT ATTENDED
WITH EXCLUSIVITY. — It is claimed, however, by petitioner that the word "Lyceum" has acquired a
secondary meaning in relation to petitioner with the result that word, although originally a generic, has become
appropriable by petitioner to the exclusion of other institutions like private respondents herein. The doctrine of
secondary meaning originated in the field of trademark law. Its application has, however, been extended to
corporate names sine the right to use a corporate name to the exclusion of others is based upon the same
principle which underlies the right to use a particular trademark or tradename. In Philippine Nut Industry, Inc.
v. Standard Brands, Inc., the doctrine of secondary meaning was elaborated in the following terms: " . . . a word
or phrase originally incapable of exclusive appropriation with reference to an article on the market, because
geographically or otherwise descriptive, might nevertheless have been used so long and so exclusively by one
producer with reference to his article that, in that trade and to that branch of the purchasing public, the word or
phrase has come to mean that the article was his product." The question which arises, therefore, is whether or
not the use by petitioner of "Lyceum" in its corporate name has been for such length of time and with such
exclusivity as to have become associated or identified with the petitioner institution in the mind of the general
public (or at least that portion of the general public which has to do with schools). The Court of Appeals
recognized this issue and answered it in the negative: "Under the doctrine of secondary meaning, a word or
phrase originally incapable of exclusive appropriation with reference to an article in the market, because
geographical or otherwise descriptive might nevertheless have been used so long and so exclusively by one
producer with reference to this article that, in that trade and to that group of the purchasing public, the word or
phrase has come to mean that the article was his produce (Ana Ang vs. Toribio Teodoro, 74 Phil. 56). This
circumstance has been referred to as the distinctiveness into which the name or phrase has evolved through the
substantial and exclusive use of the same for a considerable period of time. . . . No evidence was ever presented
in the hearing before the Commission which sufficiently proved that the word 'Lyceum' has indeed acquired
secondary meaning in favor of the appellant. If there was any of this kind, the same tend to prove only that the
appellant had been using the disputed word for a long period of time. . . . In other words, while the appellant
may have proved that it had been using the word 'Lyceum' for a long period of time, this fact alone did not
amount to mean that the said word had acquired secondary meaning in its favor because the appellant failed to
prove that it had been using the same word all by itself to the exclusion of others. More so, there was no
evidence presented to prove that confusion will surely arise if the same word were to be used by other
educational institutions. Consequently, the allegations of the appellant in its first two assigned errors must
necessarily fail." We agree with the Court of Appeals. The number alone of the private respondents in the case
at bar suggests strongly that petitioner's use of the word "Lyceum" has not been attended with the exclusivity
essential for applicability of the doctrine of secondary meaning. Petitioner's use of the word "Lyceum" was not
exclusive but was in truth shared with the Western Pangasinan Lyceum and a little later with other private
respondent institutions which registered with the SEC using "Lyceum" as part of their corporation names. There
may well be other schools using Lyceum or Liceo in their names, but not registered with the SEC because they
have not adopted the corporate form of organization.

3. ID.; ID.; MUST BE EVALUATED IN THEIR ENTIRETY TO DETERMINE WHETHER THEY ARE
CONFUSINGLY OR DECEPTIVELY SIMILAR TO ANOTHER CORPORATE ENTITY'S NAME. —
petitioner institution is not entitled to a legally enforceable exclusive right to use the word "Lyceum" in its
corporate name and that other institutions may use "Lyceum" as part of their corporate names. To determine
whether a given corporate name is "identical" or "confusingly or deceptively similar" with another entity's
corporate name, it is not enough to ascertain the presence of "Lyceum" or "Liceo" in both names. One must
evaluate corporate names in their entirety and when the name of petitioner is juxtaposed with the names of
private respondents, they are not reasonably regarded as "identical" or "confusingly or deceptively similar" with
each other.

DECISION

FELICIANO, J p:

Petitioner is an educational institution duly registered with the Securities and Exchange Commission ("SEC").
When it first registered with the SEC on 21 September 1950, it used the corporate name Lyceum of the
Philippines, Inc. and has used that name ever since.

On 24 February 1984, petitioner instituted proceedings before the SEC to compel the private respondents,
which are also educational institutions, to delete the word "Lyceum" from their corporate names and
permanently to enjoin them from using "Lyceum" as part of their respective names.
Some of the private respondents actively participated in the proceedings before the SEC. These are the
following, the dates of their original SEC registration being set out below opposite their respective names:

Western Pangasinan Lyceum — 27 October 1950

Lyceum of Cabagan — 31 October 1962

Lyceum of Lallo, Inc. — 26 March 1972

Lyceum of Aparri — 28 March 1972

Lyceum of Tuao, Inc. — 28 March 1972

Lyceum of Camalaniugan — 28 March 1972

The following private respondents were declared in default for failure to file an answer despite service of
summons:

Buhi Lyceum;

Central Lyceum of Catanduanes;

Lyceum of Eastern Mindanao, Inc.; and

Lyceum of Southern Philippines

Petitioner's original complaint before the SEC had included three (3) other entities:

1. The Lyceum of Malacanay;

2. The Lyceum of Marbel; and

3. The Lyceum of Araullo

The complaint was later withdrawn insofar as concerned the Lyceum of Malacanay and the Lyceum of Marbel,
for failure to serve summons upon these two (2) entities. The case against the Liceum of Araullo was dismissed
when that school motu proprio change its corporate name to "Pamantasan ng Araullo."

The background of the case at bar needs some recounting. Petitioner had sometime before commenced in the
SEC a proceeding (SEC-Case No. 1241) against the Lyceum of Baguio, Inc. to require it to change its corporate
name and to adopt another name not "similar [to] or identical" with that of petitioner. In an Order dated 20 April
1977, Associate Commissioner Julio Sulit held that the corporate name of petitioner and that of the Lyceum of
Baguio, Inc. were substantially identical because of the presence of a "dominant" word, i.e., "Lyceum," the
name of the geographical location of the campus being the only word which distinguished one from the other
corporate name. The SEC also noted that petitioner had registered as a corporation ahead of the Lyceum of
Baguio, Inc. in point of time, 1 and ordered the latter to change its name to another name "not similar or
identical [with]" the names of previously registered entities.

The Lyceum of Baguio, Inc. assailed the Order of the SEC before the Supreme Court in a case docketed as G.R.
No. L-46595. In a Minute Resolution dated 14 September 1977, the Court denied the Petition for Review for
lack of merit. Entry of judgment in that case was made on 21 October 1977. 2
Armed with the Resolution of this Court in G.R. No. L-46595, petitioner then wrote all the educational
institutions it could find using the word "Lyceum" as part of their corporate name, and advised them to
discontinue such use of "Lyceum." When, with the passage of time, it became clear that this recourse had failed,
petitioner instituted before the SEC SEC-Case No. 2579 to enforce what petitioner claims as its proprietary
right to the word "Lyceum." The SEC hearing officer rendered a decision sustaining petitioner's claim to an
exclusive right to use the word "Lyceum." The hearing officer relied upon the SEC ruling in the Lyceum of
Baguio, Inc. case (SEC-Case No. 1241) and held that the word "Lyceum" was capable of appropriation and that
petitioner had acquired an enforceable exclusive right to the use of that word.

On appeal, however, by private respondents to the SEC En Banc, the decision of the hearing officer was
reversed and set aside. The SEC En Banc did not consider the word "Lyceum" to have become so identified
with petitioner as to render use thereof by other institutions as productive of confusion about the identity of the
schools concerned in the mind of the general public. Unlike its hearing officer, the SEC En Banc held that the
attaching of geographical names to the word "Lyceum" served sufficiently to distinguish the schools from one
another, especially in view of the fact that the campuses of petitioner and those of the private respondents were
physically quite remote from each other. 3

Petitioner then went on appeal to the Court of Appeals. In its Decision dated 28 June 1991, however, the Court
of Appeals affirmed the questioned Orders of the SEC En Banc. 4 Petitioner filed a motion for reconsideration,
without success.

Before this Court, petitioner asserts that the Court of Appeals committed the following errors:

1. The Court of Appeals erred in holding that the Resolution of the Supreme Court in G.R. No. L-46595 did not
constitute stare decisis as to apply to this case and in not holding that said Resolution bound subsequent
determinations on the right to exclusive use of the word Lyceum.

2. The Court of Appeals erred in holding that respondent Western Pangasinan Lyceum, Inc. was incorporated
earlier than petitioner.

3. The Court of Appeals erred in holding that the word Lyceum has not acquired a secondary meaning in favor
of petitioner.

4. The Court of Appeals erred in holding that Lyceum as a generic word cannot be appropriated by the
petitioner to the exclusion of others. 5

We will consider all the foregoing ascribed errors, though not necessarily seriatim. We begin by noting that the
Resolution of the Court in G.R. No. L-46595 does not, of course, constitute res adjudicata in respect of the case
at bar, since there is no identity of parties. Neither is stare decisis pertinent, if only because the SEC En Banc
itself has re-examined Associate Commissioner Sulit's ruling in the Lyceum of Baguio case. The Minute
Resolution of the Court in G.R. No. L-46595 was not a reasoned adoption of the Sulit ruling.

The Articles of Incorporation of a corporation must, among other things, set out the name of the corporation. 6
Section 18 of the Corporation Code establishes a restrictive rule insofar as corporate names are concerned:

"SECTION 18. Corporate name. — No corporate name may be allowed by the Securities an Exchange
Commission if the proposed name is identical or deceptively or confusingly similar to that of any existing
corporation or to any other name already protected by law or is patently deceptive, confusing or contrary to
existing laws. When a change in the corporate name is approved, the Commission shall issue an amended
certificate of incorporation under the amended name." (Emphasis supplied)
The policy underlying the prohibition in Section 18 against the registration of a corporate name which is
"identical or deceptively or confusingly similar" to that of any existing corporation or which is "patently
deceptive" or "patently confusing" or "contrary to existing laws," is the avoidance of fraud upon the public
which would have occasion to deal with the entity concerned, the evasion of legal obligations and duties, and
the reduction of difficulties of administration and supervision over corporations. 7

We do not consider that the corporate names of private respondent institutions are "identical with, or
deceptively or confusingly similar" to that of the petitioner institution. True enough, the corporate names of
private respondent entities all carry the word "Lyceum" but confusion and deception are effectively precluded
by the appending of geographic names to the word "Lyceum." Thus, we do not believe that the "Lyceum of
Aparri" can be mistaken by the general public for the Lyceum of the Philippines, or that the "Lyceum of
Camalaniugan" would be confused with the Lyceum of the Philippines.

Etymologically, the word "Lyceum" is the Latin word for the Greek lykeion which in turn referred to a locality
on the river Ilissius in ancient Athens "comprising an enclosure dedicated to Apollo and adorned with fountains
and buildings erected by Pisistratus, Pericles and Lycurgus frequented by the youth for exercise and by the
philosopher Aristotle and his followers for teaching." 8 In time, the word "Lyceum" became associated with
schools and other institutions providing public lectures and concerts and public discussions. Thus today, the
word "Lyceum" generally refers to a school or an institution of learning. While the Latin word "lyceum" has
been incorporated into the English language, the word is also found in Spanish (liceo) and in French (lycee). As
the Court of Appeals noted in its Decision, Roman Catholic schools frequently use the term; e.g., "Liceo de
Manila," "Liceo de Baleno" (in Baleno, Masbate), "Liceo de Masbate," "Liceo de Albay." 9 "Lyceum" is in fact
as generic in character as the word "university." In the name of the petitioner, "Lyceum" appears to be a
substitute for "university;" in other places, however, "Lyceum," or "Liceo" or "Lycee" frequently denotes a
secondary school or a college. It may be (though this is a question of fact which we need not resolve) that the
use of the word "Lyceum" may not yet be as widespread as the use of "university," but it is clear that a not
inconsiderable number of educational institutions have adopted "Lyceum" or "Liceo" as part of their corporate
names. Since "Lyceum" or "Liceo" denotes a school or institution of learning, it is not unnatural to use this
word to designate an entity which is organized and operating as an educational institution.

It is claimed, however, by petitioner that the word "Lyceum" has acquired a secondary meaning in relation to
petitioner with the result that that word, although originally a generic, has become appropriable by petitioner to
the exclusion of other institutions like private respondents herein.

The doctrine of secondary meaning originated in the field of trademark law. Its application has, however, been
extended to corporate names sine the right to use a corporate name to the exclusion of others is based upon the
same principle which underlies the right to use a particular trademark or tradename. 10 In Philippine Nut
Industry, Inc. v. Standard Brands, Inc., 11 the doctrine of secondary meaning was elaborated in the following
terms:

" . . . a word or phrase originally incapable of exclusive appropriation with reference to an article on the market,
because geographically or otherwise descriptive, might nevertheless have been used so long and so exclusively
by one producer with reference to his article that, in that trade and to that branch of the purchasing public, the
word or phrase has come to mean that the article was his product." 12

The question which arises, therefore, is whether or not the use by petitioner of "Lyceum" in its corporate name
has been for such length of time and with such exclusivity as to have become associated or identified with the
petitioner institution in the mind of the general public (or at least that portion of the general public which has to
do with schools). The Court of Appeals recognized this issue and answered it in the negative:

"Under the doctrine of secondary meaning, a word or phrase originally incapable of exclusive appropriation
with reference to an article in the market, because geographical or otherwise descriptive might nevertheless
have been used so long and so exclusively by one producer with reference to this article that, in that trade and to
that group of the purchasing public, the word or phrase has come to mean that the article was his produce (Ana
Ang vs. Toribio Teodoro, 74 Phil. 56). This circumstance has been referred to as the distinctiveness into which
the name or phrase has evolved through the substantial and exclusive use of the same for a considerable period
of time. Consequently, the same doctrine or principle cannot be made to apply where the evidence did not prove
that the business (of the plaintiff) has continued for so long a time that it has become of consequence and
acquired a good will of considerable value such that its articles and produce have acquired a well-known
reputation, and confusion will result by the use of the disputed name (by the defendant) (Ang Si Heng vs.
Wellington Department Store, Inc., 92 Phil. 448).

With the foregoing as a yardstick, [we] believe the appellant failed to satisfy the aforementioned requisites. No
evidence was ever presented in the hearing before the Commission which sufficiently proved that the word
'Lyceum' has indeed acquired secondary meaning in favor of the appellant. If there was any of this kind, the
same tend to prove only that the appellant had been using the disputed word for a long period of time.
Nevertheless, its (appellant) exclusive use of the word (Lyceum) was never established or proven as in fact the
evidence tend to convey that the cross-claimant was already using the word 'Lyceum' seventeen (17) years prior
to the date the appellant started using the same word in its corporate name. Furthermore, educational institutions
of the Roman Catholic Church had been using the same or similar word like 'Liceo de Manila,' 'Liceo de
Baleno' (in Baleno, Masbate), 'Liceo de Masbate,' 'Liceo de Albay' long before appellant started using the word
'Lyceum'. The appellant also failed to prove that the word 'Lyceum' has become so identified with its
educational institution that confusion will surely arise in the minds of the public if the same word were to be
used by other educational institutions.

In other words, while the appellant may have proved that it had been using the word 'Lyceum' for a long period
of time, this fact alone did not amount to mean that the said word had acquired secondary meaning in its favor
because the appellant failed to prove that it had been using the same word all by itself to the exclusion of others.
More so, there was no evidence presented to prove that confusion will surely arise if the same word were to be
used by other educational institutions. Consequently, the allegations of the appellant in its first two assigned
errors must necessarily fail." 13 (Underscoring partly in the original and partly supplied)

We agree with the Court of Appeals. The number alone of the private respondents in the case at bar suggests
strongly that petitioner's use of the word "Lyceum" has not been attended with the exclusivity essential for
applicability of the doctrine of secondary meaning. It may be noted also that at least one of the private
respondents, i.e., the Western Pangasinan Lyceum, Inc., used the term "Lyceum" seventeen (17) years before
the petitioner registered its own corporate name with the SEC and began using the word "Lyceum." It follows
that if any institution had acquired an exclusive right to the word "Lyceum," that institution would have been
the Western Pangasinan Lyceum, Inc. rather than the petitioner institution.

In this connection, petitioner argues that because the Western Pangasinan Lyceum, Inc. failed to reconstruct its
records before the SEC in accordance with the provisions of R.A. No. 62, which records had been destroyed
during World War II, Western Pangasinan Lyceum should be deemed to have lost all rights it may have
acquired by virtue of its past registration. It might be noted that the Western Pangasinan Lyceum, Inc. registered
with the SEC soon after petitioner had filed its own registration on 21 September 1950. Whether or not Western
Pangasinan Lyceum, Inc. must be deemed to have lost its rights under its original 1933 registration, appears to
us to be quite secondary in importance; we refer to this earlier registration simply to underscore the fact that
petitioner's use of the word "Lyceum" was neither the first use of that term in the Philippines nor an exclusive
use thereof. Petitioner's use of the word "Lyceum" was not exclusive but was in truth shared with the Western
Pangasinan Lyceum and a little later with other private respondent institutions which registered with the SEC
using "Lyceum" as part of their corporation names. There may well be other schools using Lyceum or Liceo in
their names, but not registered with the SEC because they have not adopted the corporate form of organization.
We conclude and so hold that petitioner institution is not entitled to a legally enforceable exclusive right to use
the word "Lyceum" in its corporate name and that other institutions may use "Lyceum" as part of their corporate
names. To determine whether a given corporate name is "identical" or "confusingly or deceptively similar" with
another entity's corporate name, it is not enough to ascertain the presence of "Lyceum" or "Liceo" in both
names. One must evaluate corporate names in their entirety and when the name of petitioner is juxtaposed with
the names of private respondents, they are not reasonably regarded as "identical" or "confusingly or deceptively
similar" with each other.

WHEREFORE, the petitioner having failed to show any reversible error on the part of the public respondent
Court of Appeals, the Petition for Review is DENIED for lack of merit, and the Decision of the Court of
Appeals dated 28 June 1991 is hereby AFFIRMED. No pronouncement as to costs.

SO ORDERED.

G.R. No. 96161 February 21, 1992

PHILIPS EXPORT B.V., PHILIPS ELECTRICAL LAMPS, INC. and PHILIPS INDUSTRIAL
DEVELOPMENT, INC., petitioners,
vs.
COURT OF APPEALS, SECURITIES & EXCHANGE COMMISSION and STANDARD PHILIPS
CORPORATION, respondents.

Emeterio V. Soliven & Associates for petitioners.

Narciso A. Manantan for private respondent.

MELENCIO-HERRERA, J.:

Petitioners challenge the Decision of the Court of Appeals, dated 31 July 1990, in CA-GR Sp. No. 20067,
upholding the Order of the Securities and Exchange Commission, dated 2 January 1990, in SEC-AC No. 202,
dismissing petitioners' prayer for the cancellation or removal of the word "PHILIPS" from private respondent's
corporate name.

Petitioner Philips Export B.V. (PEBV), a foreign corporation organized under the laws of the Netherlands,
although not engaged in business here, is the registered owner of the trademarks PHILIPS and PHILIPS
SHIELD EMBLEM under Certificates of Registration Nos. R-1641 and R-1674, respectively issued by the
Philippine Patents Office (presently known as the Bureau of Patents, Trademarks and Technology Transfer).
Petitioners Philips Electrical Lamps, Inc. (Philips Electrical, for brevity) and Philips Industrial Developments,
Inc. (Philips Industrial, for short), authorized users of the trademarks PHILIPS and PHILIPS SHIELD
EMBLEM, were incorporated on 29 August 1956 and 25 May 1956, respectively. All petitioner corporations
belong to the PHILIPS Group of Companies.

Respondent Standard Philips Corporation (Standard Philips), on the other hand, was issued a Certificate of
Registration by respondent Commission on 19 May 1982.

On 24 September 1984, Petitioners filed a letter complaint with the Securities & Exchange Commission (SEC)
asking for the cancellation of the word "PHILIPS" from Private Respondent's corporate name in view of the
prior registration with the Bureau of Patents of the trademark "PHILIPS" and the logo "PHILIPS SHIELD
EMBLEM" in the name of Petitioner, PEBV, and the previous registration of Petitioners Philips Electrical and
Philips Industrial with the SEC.
As a result of Private Respondent's refusal to amend its Articles of Incorporation, Petitioners filed with the SEC,
on 6 February 1985, a Petition (SEC Case No. 2743) praying for the issuance of a Writ of Preliminary
Injunction, alleging, among others, that Private Respondent's use of the word PHILIPS amounts to an
infringement and clear violation of Petitioners' exclusive right to use the same considering that both parties
engage in the same business.

In its Answer, dated 7 March 1985, Private Respondent countered that Petitioner PEBV has no legal capacity to
sue; that its use of its corporate name is not at all similar to Petitioners' trademark PHILIPS when considered in
its entirety; and that its products consisting of chain rollers, belts, bearings and cutting saw are grossly different
from Petitioners' electrical products.

After conducting hearings with respect to the prayer for Injunction; the SEC Hearing Officer, on 27 September
1985, ruled against the issuance of such Writ.

On 30 January 1987, the same Hearing Officer dismissed the Petition for lack of merit. In so ruling, the latter
declared that inasmuch as the SEC found no sufficient ground for the granting of injunctive relief on the basis
of the testimonial and documentary evidence presented, it cannot order the removal or cancellation of the word
"PHILIPS" from Private Respondent's corporate name on the basis of the same evidence adopted in toto during
trial on the merits. Besides, Section 18 of the Corporation Code (infra) is applicable only when the corporate
names in question are identical. Here, there is no confusing similarity between Petitioners' and Private
Respondent's corporate names as those of the Petitioners contain at least two words different from that of the
Respondent. Petitioners' Motion for Reconsideration was likewise denied on 17 June 1987.

On appeal, the SEC en banc affirmed the dismissal declaring that the corporate names of Petitioners and Private
Respondent hardly breed confusion inasmuch as each contains at least two different words and, therefore, rules
out any possibility of confusing one for the other.

On 30 January 1990, Petitioners sought an extension of time to file a Petition for Review on Certiorari before
this Court, which Petition was later referred to the Court of Appeals in a Resolution dated 12 February 1990.

In deciding to dismiss the petition on 31 July 1990, the Court of

Appeals1 swept aside Petitioners' claim that following the ruling in Converse Rubber Corporation v. Universal
Converse Rubber Products, Inc., et al, (G. R. No. L-27906, January 8, 1987, 147 SCRA 154), the word
PHILIPS cannot be used as part of Private Respondent's corporate name as the same constitutes a dominant part
of Petitioners' corporate names. In so holding, the Appellate Court observed that the Converse case is not four-
square with the present case inasmuch as the contending parties in Converse are engaged in a similar business,
that is, the manufacture of rubber shoes. Upholding the SEC, the Appellate Court concluded that "private
respondents' products consisting of chain rollers, belts, bearings and cutting saw are unrelated and non-
competing with petitioners' products i.e. electrical lamps such that consumers would not in any probability
mistake one as the source or origin of the product of the other."

The Appellate Court denied Petitioners' Motion for Reconsideration on 20 November 1990, hence, this Petit ion
which was given due course on 22 April 1991, after which the parties were required to submit their memoranda,
the latest of which was received on 2 July 1991. In December 1991, the SEC was also required to elevate its
records for the perusal of this Court, the same not having been apparently before respondent Court of Appeals.

We find basis for petitioners' plea.

As early as Western Equipment and Supply Co. v. Reyes, 51 Phil. 115 (1927), the Court declared that a
corporation's right to use its corporate and trade name is a property right, a right in rem, which it may assert and
protect against the world in the same manner as it may protect its tangible property, real or personal, against
trespass or conversion. It is regarded, to a certain extent, as a property right and one which cannot be impaired
or defeated by subsequent appropriation by another corporation in the same field (Red Line Transportation Co.
vs. Rural Transit Co., September 8, 1934, 20 Phil 549).

A name is peculiarly important as necessary to the very existence of a corporation (American Steel Foundries
vs. Robertson, 269 US 372, 70 L ed 317, 46 S Ct 160; Lauman vs. Lebanon Valley R. Co., 30 Pa 42; First
National Bank vs. Huntington Distilling Co. 40 W Va 530, 23 SE 792). Its name is one of its attributes, an
element of its existence, and essential to its identity (6 Fletcher [Perm Ed], pp. 3-4). The general rule as to
corporations is that each corporation must have a name by which it is to sue and be sued and do all legal acts.
The name of a corporation in this respect designates the corporation in the same manner as the name of an
individual designates the person (Cincinnati Cooperage Co. vs. Bate. 96 Ky 356, 26 SW 538; Newport
Mechanics Mfg. Co. vs. Starbird. 10 NH 123); and the right to use its corporate name is as much a part of the
corporate franchise as any other privilege granted (Federal Secur. Co. vs. Federal Secur. Corp., 129 Or 375, 276
P 1100, 66 ALR 934; Paulino vs. Portuguese Beneficial Association, 18 RI 165, 26 A 36).

A corporation acquires its name by choice and need not select a name identical with or similar to one already
appropriated by a senior corporation while an individual's name is thrust upon him (See Standard Oil Co. of
New Mexico, Inc. v. Standard Oil Co. of California, 56 F 2d 973, 977). A corporation can no more use a
corporate name in violation of the rights of others than an individual can use his name legally acquired so as to
mislead the public and injure another (Armington vs. Palmer, 21 RI 109. 42 A 308).

Our own Corporation Code, in its Section 18, expressly provides that:

No corporate name may be allowed by the Securities and Exchange Commission if the proposed
name is identical or deceptively or confusingly similar to that of any existing corporation or to
any other name already protected by law or is patently deceptive, confusing or contrary to
existing law. Where a change in a corporate name is approved, the commission shall issue an
amended certificate of incorporation under the amended name. (Emphasis supplied)

The statutory prohibition cannot be any clearer. To come within its scope, two requisites must be proven,
namely:

(1) that the complainant corporation acquired a prior right over the use of such corporate name; and

(2) the proposed name is either:

(a) identical; or

(b) deceptively or confusingly similar

to that of any existing corporation or to any other name already protected by law; or

(c) patently deceptive, confusing or contrary to existing law.

The right to the exclusive use of a corporate name with freedom from infringement by similarity is determined
by priority of adoption (1 Thompson, p. 80 citing Munn v. Americana Co., 82 N. Eq. 63, 88 Atl. 30; San
Francisco Oyster House v. Mihich, 75 Wash. 274, 134 Pac. 921). In this regard, there is no doubt with respect to
Petitioners' prior adoption of' the name ''PHILIPS" as part of its corporate name. Petitioners Philips Electrical
and Philips Industrial were incorporated on 29 August 1956 and 25 May 1956, respectively, while Respondent
Standard Philips was issued a Certificate of Registration on 12 April 1982, twenty-six (26) years later (Rollo, p.
16). Petitioner PEBV has also used the trademark "PHILIPS" on electrical lamps of all types and their
accessories since 30 September 1922, as evidenced by Certificate of Registration No. 1651.
The second requisite no less exists in this case. In determining the existence of confusing similarity in corporate
names, the test is whether the similarity is such as to mislead a person, using ordinary care and discrimination.
In so doing, the Court must look to the record as well as the names themselves (Ohio Nat. Life Ins. Co. v. Ohio
Life Ins. Co., 210 NE 2d 298). While the corporate names of Petitioners and Private Respondent are not
identical, a reading of Petitioner's corporate names, to wit: PHILIPS EXPORT B.V., PHILIPS ELECTRICAL
LAMPS, INC. and PHILIPS INDUSTRIAL DEVELOPMENT, INC., inevitably leads one to conclude that
"PHILIPS" is, indeed, the dominant word in that all the companies affiliated or associated with the principal
corporation, PEBV, are known in the Philippines and abroad as the PHILIPS Group of Companies.

Respondents maintain, however, that Petitioners did not present an iota of proof of actual confusion or
deception of the public much less a single purchaser of their product who has been deceived or confused or
showed any likelihood of confusion. It is settled, however, that proof of actual confusion need not be shown. It
suffices that confusion is probably or likely to occur (6 Fletcher [Perm Ed], pp. 107-108, enumerating a long
line of cases).

It may be that Private Respondent's products also consist of chain rollers, belts, bearing and the like, while
petitioners deal principally with electrical products. It is significant to note, however, that even the Director of
Patents had denied Private Respondent's application for registration of the trademarks "Standard Philips &
Device" for chain, rollers, belts, bearings and cutting saw. That office held that PEBV, "had shipped to its
subsidiaries in the Philippines equipment, machines and their parts which fall under international class where
"chains, rollers, belts, bearings and cutting saw," the goods in connection with which Respondent is seeking to
register 'STANDARD PHILIPS' . . . also belong" ( Inter Partes Case No. 2010, June 17, 1988, SEC Rollo).

Furthermore, the records show that among Private Respondent's primary purposes in its Articles of
Incorporation (Annex D, Petition p. 37, Rollo) are the following:

To buy, sell, barter, trade, manufacture, import, export, or otherwise acquire, dispose of, and
deal in and deal with any kind of goods, wares, and merchandise such as but not limited to
plastics, carbon products, office stationery and supplies, hardware parts, electrical wiring
devices, electrical component parts, and/or complement of industrial, agricultural or commercial
machineries, constructive supplies, electrical supplies and other merchandise which are or may
become articles of commerce except food, drugs and cosmetics and to carry on such business as
manufacturer, distributor, dealer, indentor, factor, manufacturer's representative capacity for
domestic or foreign companies. (emphasis ours)

For its part, Philips Electrical also includes, among its primary purposes, the following:

To develop manufacture and deal in electrical products, including electronic, mechanical and
other similar products . . . (p. 30, Record of SEC Case No. 2743)

Given Private Respondent's aforesaid underlined primary purpose, nothing could prevent it from dealing in the
same line of business of electrical devices, products or supplies which fall under its primary purposes. Besides,
there is showing that Private Respondent not only manufactured and sold ballasts for fluorescent lamps with
their corporate name printed thereon but also advertised the same as, among others, Standard Philips (TSN,
before the SEC, pp. 14, 17, 25, 26, 37-42, June 14, 1985; pp. 16-19, July 25, 1985). As aptly pointed out by
Petitioners, [p]rivate respondent's choice of "PHILIPS" as part of its corporate name [STANDARD PHILIPS
CORPORATION] . . . tends to show said respondent's intention to ride on the popularity and established
goodwill of said petitioner's business throughout the world" (Rollo, p. 137). The subsequent appropriator of the
name or one confusingly similar thereto usually seeks an unfair advantage, a free ride of another's goodwill
(American Gold Star Mothers, Inc. v. National Gold Star Mothers, Inc., et al, 89 App DC 269, 191 F 2d 488).
In allowing Private Respondent the continued use of its corporate name, the SEC maintains that the corporate
names of Petitioners PHILIPS ELECTRICAL LAMPS. INC. and PHILIPS INDUSTRIAL DEVELOPMENT,
INC. contain at least two words different from that of the corporate name of respondent STANDARD PHILIPS
CORPORATION, which words will readily identify Private Respondent from Petitioners and vice-versa.

True, under the Guidelines in the Approval of Corporate and Partnership Names formulated by the SEC, the
proposed name "should not be similar to one already used by another corporation or partnership. If the proposed
name contains a word already used as part of the firm name or style of a registered company; the proposed
name must contain two other words different from the company already registered" (Emphasis ours). It is then
pointed out that Petitioners Philips Electrical and Philips Industrial have two words different from that of
Private Respondent's name.

What is lost sight of, however, is that PHILIPS is a trademark or trade name which was registered as far back as
1922. Petitioners, therefore, have the exclusive right to its use which must be free from any infringement by
similarity. A corporation has an exclusive right to the use of its name, which may be protected by injunction
upon a principle similar to that upon which persons are protected in the use of trademarks and tradenames (18
C.J.S. 574). Such principle proceeds upon the theory that it is a fraud on the corporation which has acquired a
right to that name and perhaps carried on its business thereunder, that another should attempt to use the same
name, or the same name with a slight variation in such a way as to induce persons to deal with it in the belief
that they are dealing with the corporation which has given a reputation to the name (6 Fletcher [Perm Ed], pp.
39-40, citing Borden Ice Cream Co. v. Borden's Condensed Milk Co., 210 F 510). Notably, too, Private
Respondent's name actually contains only a single word, that is, "STANDARD", different from that of
Petitioners inasmuch as the inclusion of the term "Corporation" or "Corp." merely serves the Purpose of
distinguishing the corporation from partnerships and other business organizations.

The fact that there are other companies engaged in other lines of business using the word "PHILIPS" as part of
their corporate names is no defense and does not warrant the use by Private Respondent of such word which
constitutes an essential feature of Petitioners' corporate name previously adopted and registered and-having
acquired the status of a well-known mark in the Philippines and internationally as well (Bureau of Patents
Decision No. 88-35 [TM], June 17, 1988, SEC Records).

In support of its application for the registration of its Articles of Incorporation with the SEC, Private
Respondent had submitted an undertaking "manifesting its willingness to change its corporate name in the event
another person, firm or entity has acquired a prior right to the use of the said firm name or one deceptively or
confusingly similar to it." Private respondent must now be held to its undertaking.

As a general rule, parties organizing a corporation must choose a name at their peril; and the use
of a name similar to one adopted by another corporation, whether a business or a nonbusiness or
non-profit organization if misleading and likely to injure it in the exercise in its corporate
functions, regardless of intent, may be prevented by the corporation having the prior right, by a
suit for injunction against the new corporation to prevent the use of the name (American Gold
Star Mothers, Inc. v. National Gold Star Mothers, Inc., 89 App DC 269, 191 F 2d 488, 27 ALR
2d 948).

WHEREFORE, the Decision of the Court of Appeals dated 31 July 1990, and its Resolution dated 20
November 1990, are SET ASIDE and a new one entered ENJOINING private respondent from using
"PHILIPS" as a feature of its corporate name, and ORDERING the Securities and Exchange Commission to
amend private respondent's Articles of Incorporation by deleting the word PHILIPS from the corporate name of
private respondent.

No costs.
SO ORDERED.

G.R. No. L-22238 February 18, 1967

CLAVECILLIA RADIO SYSTEM, petitioner-appellant,

vs.
HON. AGUSTIN ANTILLON, as City Judge of the Municipal Court of Cagayan de Oro City
and NEW CAGAYAN GROCERY, respondents-appellees.

B. C. Padua for petitioner and appellant.

Pablo S. Reyes for respondents and appellees.

REGALA, J.:

This is an appeal from an order of the Court of First Instance of Misamis Oriental dismissing the petition of the
Clavecilla Radio System to prohibit the City Judge of Cagayan de Oro from taking cognizance of Civil Case
No. 1048 for damages.

It appears that on June 22, 1963, the New Cagayan Grocery filed a complaint against the Clavecilla Radio
System alleging, in effect, that on March 12, 1963, the following message, addressed to the former, was filed at
the latter's Bacolod Branch Office for transmittal thru its branch office at Cagayan de Oro:

NECAGRO CAGAYAN DE ORO (CLAVECILLA)

REURTEL WASHED NOT AVAILABLE REFINED TWENTY FIFTY IF AGREEABLE SHALL

SHIP LATER REPLY POHANG

The Cagayan de Oro branch office having received the said message omitted, in delivering the same to
the New Cagayan Grocery, the word "NOT" between the words "WASHED" and "AVAILABLE," thus
changing entirely the contents and purport of the same and causing the said addressee to suffer damages.
After service of summons, the Clavecilla Radio System filed a motion to dismiss the complaint on the
grounds that it states no cause of action and that the venue is improperly laid. The New Cagayan
Grocery interposed an opposition to which the Clavecilla Radio System filed its rejoinder. Thereafter,
the City Judge, on September 18, 1963, denied the motion to dismiss for lack of merit and set the case
for hearing.1äwphï1.ñët

Hence, the Clavecilla Radio System filed a petition for prohibition with preliminary injunction with the Court of
First Instance praying that the City Judge, Honorable Agustin Antillon, be enjoined from further proceeding
with the case on the ground of improper venue. The respondents filed a motion to dismiss the petition but this
was opposed by the petitioner. Later, the motion was submitted for resolution on the pleadings.

In dismissing the case, the lower court held that the Clavecilla Radio System may be sued either in Manila
where it has its principal office or in Cagayan de Oro City where it may be served, as in fact it was served, with
summons through the Manager of its branch office in said city. In other words, the court upheld the authority of
the city court to take cognizance of the case.1äwphï1.ñët

In appealing, the Clavecilla Radio System contends that the suit against it should be filed in Manila where it
holds its principal office.

It is clear that the case for damages filed with the city court is based upon tort and not upon a written contract.
Section 1 of Rule 4 of the New Rules of Court, governing venue of actions in inferior courts, provides in its
paragraph (b) (3) that when "the action is not upon a written contract, then in the municipality where the
defendant or any of the defendants resides or may be served with summons." (Emphasis supplied)

Settled is the principle in corporation law that the residence of a corporation is the place where its principal
office is established. Since it is not disputed that the Clavecilla Radio System has its principal office in Manila,
it follows that the suit against it may properly be filed in the City of Manila.

The appellee maintain, however, that with the filing of the action in Cagayan de Oro City, venue was properly
laid on the principle that the appellant may also be served with summons in that city where it maintains a branch
office. This Court has already held in the case of Cohen vs. Benguet Commercial Co., Ltd., 34 Phil. 526; that the
term "may be served with summons" does not apply when the defendant resides in the Philippines for, in such
case, he may be sued only in the municipality of his residence, regardless of the place where he may be found
and served with summons. As any other corporation, the Clavecilla Radio System maintains a residence which
is Manila in this case, and a person can have only one residence at a time (See Alcantara vs. Secretary of the
Interior, 61 Phil. 459; Evangelists vs. Santos, 86 Phil. 387). The fact that it maintains branch offices in some
parts of the country does not mean that it can be sued in any of these places. To allow an action to be instituted
in any place where a corporate entity has its branch offices would create confusion and work untold
inconvenience to the corporation.

It is important to remember, as was stated by this Court in Evangelista vs. Santos, et al., supra, that the laying
of the venue of an action is not left to plaintiff's caprice because the matter is regulated by the Rules of Court.
Applying the provision of the Rules of Court, the venue in this case was improperly laid.

The order appealed from is therefore reversed, but without prejudice to the filing of the action in Which the
venue shall be laid properly. With costs against the respondents-appellees.

[G.R. No. L-28398. August 6, 1975.]

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. JOHN L. MANNING, W.D. McDONALD,

E.E. SIMMONS and THE COURT OF TAX APPEALS, Respondents.

Solicitor General Antonio P. Barredo, Solicitor Lolita O. Gal-lang and Special Attorney Virgilio J.
Saldajena for Petitioner.

Manuel O. Chan for Private Respondents.

SYNOPSIS

Under a trust agreement, Julius Reese who owned 24,700 shares of the 25,000 common shares of
MANTRASCO, and the three private respondents who owned the rest, at 100 shares each, deposited all their
shares with the Trustees. The trust agreement provided that upon Reese’s death MANTRASCO shall purchase
Reese’s shares. The trust agreement was executed in view of Reese’s desire that upon his death the Company
would continue under the management of respondents. Upon Reese’s death and partial payment by the company
of Reeses’s share, a new certificate was issued in the name of MANTRASCO, and the certificate indorsed to the
Trustees. Subsequently, the stockholders reverted the 24,700 shares in the Treasury to the capital account of the
company as stock dividends to be distributed to the stockholders. When the entire purchase price of Reese’s
interest in the company was paid in full by the latter, the trust agreement was terminated, and the shares held in
trust were delivered to the company.

The Bureau of Internal Revenue concluded that the distribution of the 24,700 shares of Reese as stock dividends
was in effect a distribution of the "assets or property of the corporation." It therefore assessed respondents for
deficiency income taxes as well as for fraud penalty and interest charges. The Court of Tax Appeals absolved
respondent from any liability for receiving the questioned stock dividends on the ground that their respective
one-third interest in the Company remained the same before and after the declaration of the stock dividends and
only the number of shares held by each of them had changed.

On a petition for review, the Supreme Court held that the newly acquired shares were not treasury shares; their
declaration as treasury stock dividends was a complete nullity and that the assessment by the Commissioner of
fraud penalty and the imposition of interest charges pursuant to the provision of the Tax Code were made in
accordance with law.

Judgment of the Court of Tax Appeals se aside.

SYLLABUS

1. PRIVATE CORPORATIONS; SHARES OF STOCKS; TREASURY; SHARES. — Treasury shares are

stocks issued and fully paid for and re-acquired by the corporation either by purchase, donation, forfeiture or
other means. They are therefore issued shares, but being in the treasury they do not have the status of
outstanding shares. Consequently, although a treasury share, not having been retired by the corporation re-
acquiring it, may be re-issued or sold again, such share, as long as it is held by the corporation as a treasury
share, participates neither in dividends, because dividends cannot be declared by the corporation to itself, nor in
the meetings of the corporations as voting stock, for otherwise equal distribution of voting powers among
stockholders will be effectively lost and the directors will be able to perpetuate their control of the corporation
though it still represent a paid — for interest in the property of the corporation.

2. ID.; ID.; ID.; DECLARATION OF QUESTIONED SHARES AS TREASURY STOCK DIVIDENDS, A

NULLITY. — Where the manifest intention of the parties to the trust agreement was, in sum and substance, to
treat the shares of a deceased stockholder as absolutely outstanding shares of said stockholder’s estate until they
were fully paid. the declaration of said shares as treasury stock dividend was a complete nullity and plainly
violative of public policy.

3. ID.; ID.; STOCK DIVIDEND PAYABLE ONLY FROM RETAINED EARNINGS. — A stock dividend,
being one payable in capital stock, cannot be declared out of outstanding corporate stock, but only from retained
earnings.

4. ID.; ID.; PURCHASE OF HOLDING RESULTING IN DISTRIBUTION OF EARNINGS TAXABLE. —

Where by the use of a trust instrument as a convenient technical device, respondents bestowed unto themselves
the full worth and value of a deceased stockholder’s corporate holding acquired with the very earnings of the
companies, such package device which obviously is not designed to carry out the usual stock dividend purpose
of corporate expansion reinvestment, e.g., the acquisition of additional facilities and other capital budget items,
but exclusively for expanding the capital base of the surviving stockholders in the company, cannot be allowed
to deflect the latter’s responsibilities toward our income tax laws. The conclusion is ineluctable that whenever
the company parted with a portion of its earnings "to buy" the corporate holdings of the deceased stockholders,
it was in ultimate effect and result making a distribution of such earnings to the surviving stockholders. All
these amounts are consequently subject to income tax as being, in truth and in fact, a flow of cash benefits to the
surviving stockholders.

5. ID.; ID.; ID.; COMMISSIONER ASSESSMENT BASED ON THE TOTAL ACQUISITION COST OF THE
ALLEGED TREASURY STOCK DIVIDENDS, ERROR. — Where the surviving stockholders, by resolution,
partitioned among themselves, as treasury stock dividends, the deceased stockholder’s interest, and earnings of
the corporation over a period of years were used to gradually wipe out the holdings therein of said deceased
stockholder, the earnings (which in effect have been distributed to the surviving stockholders when they
appropriated among themselves the deceased stockholder’s interest), should be taxed for each of the
corresponding years when payments were made to the deceased’s estate on account of his shares. In other
words, the Tax Commissioner may not asses the surviving stockholders, for income tax purposes, the total
acquisition cost of the alleged treasury stock dividends in one lump sum. However, with regard to payment
made with the corporation’s earnings before the passage of the resolution declaring as stock dividends the
deceased stockholder’s interest (while indeed those earnings were utilized in those years to gradually pay off the
value of the deceased stockholder’s holdings), the surviving stockholders should be liable (in the absence of
evidence that prior to the passage of the stockholder’s resolution the contributed of each of the surviving
stockholder rose corresponding), for income tax purposes, to the extent of the aggregate amount paid by the
corporation (prior to such resolution) to buy off the deceased stockholder’s shares. The reason is that it was only
by virtue of the authority contained in said resolution that the surviving stockholders actually, albeit illegally,
appropriated and petitioned among themselves the stockholders equity representing the deceased stockholder’s
interest.

6. TAXATION; INCOME TAX; ASSESSMENT OF FRAUD PENALTY AND IMPOSITION OF INTEREST

CHARGES IN ACCORDANCE WITH LAW DESPITE NULLITY OF RESOLUTION AUTHORIZING
DISTRIBUTION OF EARNINGS. — The fact that the resolution authorizing the distribution of earnings is null
and void is of no moment. Under the National Internal Revenue Code, income tax is assessed on income
received from any property, activity or service that produces income. The Tax Code stands as an indifferent,
neutral party on the matter of where the income comes from. The action taken by the Commissioner of
assessing fraud penalty and imposing interest charges pursuant to the provisions of the Tax Code is in
accordance with law.

DECISION

CASTRO, J.:

This is a petition for review of the decision of the Court of Tax Appeals, in CTA case 1626, which set aside the
income tax assessments issued by the Commissioner of Internal Revenue against John L. Manning, W.D.
McDonald and E.E. Simmons (hereinafter referred to as the respondents), for alleged undeclared stock
dividends received in 1958 from the Manila Trading and Supply Co. (hereinafter referred to as the
MANTRASCO) valued at P7,973,660.

In 1952 the MANTRASCO had an authorized capital stock of P2,500,000 divided into 25,000 common shares;
24,700 of these were owned by Julius S. Reese, and the rest, at 100 shares each, by the three respondents.

On February 29, 1952, in view of Reese’s desire that upon his death MANTRASCO and its two subsidiaries,
MANTRASCO (Guam), Inc. and the Port Motors, Inc., would continue under the management of the
respondents, a trust agreement on his and the respondents’ interests in MANTRASCO was executed by and
among Reese (therein referred to as OWNER), MANTRASCO (therein referred to as COMPANY), the law
firm of Ross, Selph, Carrascoso and Janda (therein referred to as TRUSTEES), and the respondents (therein
referred to as MANAGERS).

The trust agreement pertinently provides as follows:jgc:chanrobles.com.ph

"1. Upon the execution of this agreement the OWNER shall deposit with the TRUSTEES, duly endorsed and
ready for transfer Twenty-Four Thousand Seven Hundred (24,700) shares of the capital stock of the
COMPANY, these shares being all shares of the capital stock of the COMPANIES belonging to him . . .
"2. Upon the execution of this Agreement the MANAGERS shall deposit with the TRUSTEES, duly endorsed
and ready for transfer, all shares of the capital stock of the COMPANIES belonging to any of them.

"3. (a) The OWNER and the MANAGERS, and each of them, agree that if any of them shall at any time during
the life of this trust acquire any additional shares of stock of any of the COMPANIES, or of any successor
company, or any shares in substitution, exchange or replacement of the shares subject to this agreement, they
shall forthwith endorse and deposit such shares with the TRUSTEES hereunder and such additional or other
shares shall become subject to this agreement; shares deposited by the OWNER and shares received by the
TRUSTEES as stock dividends on, or in substitution, exchange or replacement of, such shares so deposited
under this agreement being MANAGERS’ SHARES.

"(b) All shares deposited under paragraphs 1, 2 and 3(a) hereof shall, during the life of the OWNER, remain in
the name of and shall be voted by the respective parties making the deposit ...

"4. (a) Upon the death of the OWNER and the receipt by the TRUSTEES of the initial payment from the
company purchasing the OWNER’S SHARES, the TRUSTEES shall cause the OWNER’S SHARES to be
transferred into the name of such company and such company shall thereupon transfer such shares into the
name of the TRUSTEES and the TRUSTEES shall hold such shares until payment for all such shares shall have
been made by the company as provided in this agreement.

x x x

"(c) The TRUSTEES shall vote all stock standing in their name or the name of their nominees at all meetings
and shall be in all respects entitled to all the rights as owners of said shares, subject, however, to the provisions
of this agreement of trust.

"(d) Any and all dividends paid on said shares after the death of the OWNER shall be subject to the provisions
of this agreement.

x x x

"5. (b) It is expressly agreed and understood, however, that the declaration of dividends and amount of earnings
transferred to surplus shall be subject to the approval of the TRUSTEES and the TRUSTEES shall participate to
such extent in the affairs of the COMPANIES as they deem necessary to insure the carrying out of this
agreement and the discharge of the obligations of the COMPANIES and each of them and of the MANAGERS
hereunder.

"(c) The TRUSTEES shall designate one or more directors of each of the COMPANIES as they shall consider
advisable and corresponding shares shall be transferred to such directors to qualify them to act.

x x x

"8. (a) Upon the death of the OWNER, the COMPANIES or any one or more of them shall purchase the
OWNER’S SHARES; it being the intent that any of the COMPANIES shall purchase all or a proportionate part
of the OWNER’S SHARES . . .

"(b) The purchase price of such shares shall be the book value of such share computed in United States dollars .
..
x x x

"(d) All dividends paid on stock that had been OWNER’S SHARES, from the time of the transfer of such
shares by one or more of the COMPANIES to the TRUSTEES as provided in Article 4 until payment in full for
such OWNER’S SHARES shall have been made by each of the COMPANIES which shall have purchased the
same, shall be credited as payments on account of the purchase price of such shares and shall be a prepayment
on account of the next due installment or installments of such purchase price.

x x x

"12. The TRUSTEES may from time to time increase or decrease the unpaid balance of the purchase price of
the shares being purchased by any COMPANY or COMPANIES should they in their exclusive discretion
determine that such increase or decrease would be necessary to carry out the intention of the parties that the
Estate and heirs of the OWNER shall receive the fair value of the shares deposited in Trust as such value
existed at the date of the death of the OWNER. . .

"13. Should the said COMPANIES or any of them be unable or unwilling to comply with their obligations
hereunder when due, the TRUSTEES may terminate this agreement and dispose of all the shares of stock
deposited hereunder, whether or not payment shall have been made for part of such stock, applying the proceeds
of such sale or disposition to the unpaid balance of the purchase price:jgc:chanrobles.com.ph

"(a) If, upon any such sale or disposition of the stock, the TRUSTEES shall receive an amount in excess of the
unpaid balance of the purchase price agreed to be paid by the COMPANIES for the OWNER’S SHARES such
excess, after deducting all expenses, charges and taxes, shall be paid to the then MANAGERS.

x x x

"17. Until the delivery to him of the shares purchased by him, no MANAGER, shall sell, assign, mortgage,
pledge, transfer or in anywise encumber or hypothecate such shares or his interest in this agreement.

x x x

"19. After the death of the OWNER and during the period of this trust the COMPANIES shall pay no dividends
except as may be authorized by the TRUSTEES. Dividends on MANAGER’S SHARES shall, so long as they
shall not be in default under this agreement, be paid over by the TRUSTEES to the MANAGERS. Dividends on
OWNER’S SHARES shall be applied in liquidation of the COMPANIES’ liabilities hereunder as provided in
Article 8(d).

x x x

"26. The TRUSTEES may, after the death of the OWNER and during the life of this trust, vote any and all
shares held in trust, at any general and special meeting of stockholders for all purposes, including but not
limited to wholly or partially liquidating or reducing the capital of any COMPANY or COMPANIES,
authorizing the sale of any or all assets, and election of directors . . .

x x x
"28. The COMPANIES and each of them undertake and agree by proper corporate act to reduce their
capitalization, sell or encumber their assets, amend their articles of incorporation, reorganize, liquidate, dissolve
and do all other things the TRUSTEES in their discretion determine to be necessary to enable them to comply
with their obligations hereunder and the TRUSTEES are hereby irrevocably authorized to vote all shares of the
COMPANIES and each of them at any general or special meeting for the accomplishment of such purposes. . .
."cralaw virtua1aw library

On October 19, 1954 Reese died. The projected transfer of his shares in the name of MANTRASCO could not,
however, be immediately effected for lack of sufficient funds to cover initial payment on the shares.

On February 2, 1955, after MANTRASCO made a partial payment of Reese’s shares, the certificate for the
24,700 shares in Reese’s name was cancelled and a new certificate was issued in the name of MANTRASCO.
On the same date, and in the meantime that Reese’s interest had not been fully paid, the new certificate was
endorsed to the law firm of Ross, Selph, Carrascoso and Janda, as trustees for and in behalf of MANTRASCO.

On December 22, 1958, at a special meeting of MANTRASCO stockholders, the following resolution was
passed:jgc:chanrobles.com.ph

"RESOLVED, that the 24,700 shares in the Treasury be reverted back to the capital account of the company as
a stock dividend to be distributed to shareholders of record at the close of business on December 22, 1958, in
accordance with the action of the Board of Directors at its meeting on December 19, 1958 which action is
hereby approved and confirmed."cralaw virtua1aw library

On November 25, 1963 the entire purchase price of Reese’s interest in MANTRASCO was finally paid in full
by the latter, On May 4, 1964 the trust agreement was terminated and the trustees delivered to MANTRASCO
all the shares which they were holding in trust.

Meanwhile, on September 14, 1962, an examination of MANTRASCO’s books was ordered by the Bureau of
Internal Revenue. The examination disclosed that (a) as of December 31, 1958 the 24,700 shares declared as
dividends had been proportionately distributed to the respondents, representing a total book value or acquisition
cost of P7,973,660; (b) the respondents failed to declare the said stock dividends as part of their taxable income
for the year 1958; and (c) from 1956 to 1961 the following amounts were paid by MANTRASCO to Reese’s
estate by virtue of the trust agreement, to wit:chanrob1es virtual 1aw library

Amounts

Year Liabilities Paid

1956 P5,830,587.86 P 2,143,073.00

1957 5,317,137.86 513,450.00

1958 4,824,059.28 493,078.58

1959 4,319,420.14 504,639.14

1960 3,849,720.14 469,700.00

1961 3,811,387.69 38,332.45

On the basis of their examination, the BIR examiners concluded that the distribution of Reese’s shares as stock
dividends was in effect a distribution of the "asset or property of the corporation as may be gleaned from the
payment of cash for the redemption of said stock and distributing the same as stock dividend." On April 14,
1965 the Commissioner of Internal Revenue issued notices of assessment for deficiency income taxes to the
respondents for the year 1958, as follows:chanrob1es virtual 1aw library

J.L. Manning W.D. McDonald E.E. Simmons

Deficiency Income Tax P1,416,469.00 P1,442,719.00 P1,450,434.00

Add 50% surcharge* 723,234.50 721,359.507 25,217.00

1/2% monthly interest from

6-20-59 to 6-20-62 260,364.42 259,689.42 261,078.12

———— ———— ————

TOTAL AMOUNT DUE

& COLLECTIBLE P2,430,067.92 P2,423,767.92 2,436,729.12

The respondents unsuccessfully challenged the foregoing assessments and, failing to secure a favorable
reconsideration, appealed to the Court of Tax Appeals.

On October 30, 1967 the CTA rendered judgment absolving the respondents from any liability for receiving the
questioned stock dividends on the ground that their respective one-third interest in MANTRASCO remained the
same before and after the declaration of stock dividends and only the number of shares held by each of them
had changed.

Hence, the present recourse.

All the parties rely upon the same provisions of the Tax Code and internal revenue regulations to bolster their
respective positions. These are:chanrob1es virtual 1aw library

A. National Internal Revenue Code

"SEC. 83. Distribution of dividends or assets by corporations — (a) Definition of Dividends — The term
‘dividends’ when used in this Title means any distribution made by a corporation to its shareholders out of its
earnings or profits accrued since March first, nineteen hundred and thirteen, and payable to its shareholders,
whether in money or in other property.

"Where a corporation distributes all of its assets in complete liquidation or dissolution the gain realized or loss
sustained by the stockholder, whether individual or corporate, is a taxable income or deductible loss, as the case
may be.

"(b) Stock dividend. — A stock dividend representing the transfer of surplus to capital account shall not be
subject to tax. However, if a corporation cancels or redeems stock issued as a dividend at such time and in such
manner as to make the distribution and cancellation or redemption, in whole or in part, essentially equivalent to
the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock shall
be considered as taxable income to the extent that it represents a distribution of earnings or profits accumulated
after March first, nineteen hundred and thirteen."cralaw virtua1aw library
B. B.I.R. Regulations

"SEC. 251. Dividends paid in property. — Dividends paid in securities or other property (other than its own
stock), in which the earnings of the corporation have been invested, are income to the recipients to the amount
of the full market value of such property when receivable by individual stockholders . . .

"SEC. 252. Stock dividend. — A stock dividend which represents the transfer of surplus to capital account is
not subject to income tax. However, a dividend in stock may constitute taxable income to the recipients thereof
notwithstanding the fact that the officers or directors of the corporation (as defined in section 84) choose to call
such distribution as a stock dividend. The distinction between a stock dividend which does not, and one which
does, constitute income taxable to the shareholders is the distinction between a stock dividend which works no
change in the corporate entity, the same interest in the same corporation being represented after the distribution
by more shares of precisely the same character, and a stock dividend where there either has been change of
corporate identity or a change in the nature of the shares issued as dividends whereby the proportional interest
of the shareholder after the distribution is essentially different from the former interest. A stock dividend
constitutes income if it gives the shareholder an interest different from that which his former stockholdings
represented. A stock dividend does not constitute income if the new shares confer no different rights or interests
than did the old — the new certificate plus the old representing the same proportionate interest in the net assets
of the corporation as did the old."cralaw virtua1aw library

The parties differ, however, on the taxability of the "treasury" stock dividends received by the respondents.

The respondents anchor their argument on the same basis as the Court of Tax Appeals; whereas the
Commissioner maintains that the full value (P7,973,660) of the shares redeemed from Reese by MANTRASCO
which were subsequently distributed to the respondents as stock dividends in 1958 should be taxed as income of
the respondents for that year, the said distribution being in effect a distribution of cash. The respondents’
interests in MANTRASCO, he further argues, were only .4% prior to the declaration of the stock dividends in
1958, but rose to 33 1/3% each after the said declaration.

In submitting their respective contentions, it is the assumption of both parties that the 24,700 shares declared as
stock dividends were treasury shares. We are however convinced, after a careful study of the trust agreement,
that the said shares were not, on December 22, 1958 or at anytime before or after that date, treasury shares. The
reasons are quite plain.

Although authorities may differ on the exact legal and accounting status of so-called "treasury shares," 1 they
are more or less in agreement that treasury shares are stocks issued and fully paid for and re-acquired by the
corporation either by purchase, donation, forfeiture or other means. 2 Treasury shares are therefore issued
shares, but being in the treasury they do not have the status of outstanding shares. 3 Consequently, although a
treasury share, not having been retired by the corporation re-acquiring it, may be re-issued or sold again, such
share, as long as it is held by the corporation as a treasury share, participates neither in dividends, because
dividends cannot be declared by the corporation to itself, 4 nor in the meetings of the corporation as voting
stock, for otherwise equal distribution of voting powers among stockholders will be effectively lost and the
directors will be able to perpetuate their control of the corporation, 5 though it still represents a paid-for interest
in the property of the corporation. 6 The foregoing essential features of a treasury stock are lacking in the
questioned shares. Thus,

(a) under paragraph 4(c) of the trust agreement, the trustees were authorized to vote all stock standing in their
names at all meetings and to exercise all rights "as owners of said shares" — this authority is reiterated in
paragraphs 26 and 28 of the trust agreement;

(b) under paragraph 4(d), "Any and all dividends paid on said shares after the death of the OWNER shall be
subject to the provisions of this agreement;"

(c) under paragraph 5(b), the amount of retained earnings to be declared as dividends was made subject to the
approval of the trustees of the 24,700 shares;

(d) under paragraph 5(c), the choice of corporate directors was delegated exclusively to the trustees who were
also given the authority to transfer qualifying shares to such directors; and

(e) under paragraph 19, MANTRASCO and its two subsidiaries were expressly prohibited from paying
"dividends except as may be authorized by the TRUSTEES;" in the same paragraph mention was also made of
"dividends on OWNER’S SHARES" which shall be applied to the liquidation of the liabilities of the three
companies for the price of Reese’s shares.

The manifest intention of the parties to the trust agreement was, in sum and substance, to treat the 24,700 shares
of Reese as absolutely outstanding shares of Reese’s estate until they were fully paid. Such being the true nature
of the 24,700 shares, their declaration as treasury stock dividend in 1958 was a complete nullity and plainly
violative of public policy. A stock dividend, being one payable in capital stock, cannot be declared out of
outstanding corporate stock, but only from retained earnings: 7

Of pointed relevance is this useful discussion of the nature of a stock dividend: 8

"‘A stock dividend always involves a transfer of surplus (or profit) to capital stock.’ Graham and Katz,
Accounting in Law Practice, 2d ed. 1938, No. 70. As the court said in United States v. Siegel, 8 Cir., 1931, 52 F
2d 63, 65, 78 ALR 672: ‘A stock dividend is a conversion of surplus or undivided profits into capital stock,
which is distributed to stockholders in lieu of a cash dividend.’ Congress itself has defined the term ‘dividend’
in No. 115(a) of the Act as meaning any distribution made by a corporation to its shareholders, whether in
money or in other property, out of its earnings or profits. In Eisner v. Macomber, 1920, 252 US 189, 40 S Ct
189, 64 L Ed 521, 9 ALR 1570, both the prevailing and the dissenting opinions recognized that within the
meaning of the revenue acts the essence of a stock dividend was the segregation out of surplus account of a
definite portion of the corporate earnings as part of the permanent capital resources of the corporation by the
device of capitalizing the same, and the issuance to the stockholders of additional shares of stock representing
the profits so capitalized."cralaw virtua1aw library

The declaration by the respondents and Reese’s trustees of MANTRASCO’s alleged treasury stock dividends in
favor of the former, brings, however, into clear focus the ultimate purpose which the parties to the trust
instrument aimed to realize: to make the respondents the sole owners of Reese’s interest in MANTRASCO by
utilizing the periodic earnings of that company and its subsidiaries to directly subsidize their purchase of the
said interests, and by making it appear outwardly, through the formal declaration of non-existent stock
dividends in the treasury, that they have not received any income from those firms when, in fact, by that
declaration they secured to themselves the means to turn around as full owners of Reese’s shares. In other
words, the respondents, using the trust instrument as a convenient technical device, bestowed unto themselves
the full worth and value of Reese’s corporate holdings with the use of the very earnings of the companies. Such
package device, obviously not designed to carry out the usual stock dividend purpose of corporate expansion
reinvestment, e.g. the acquisition of additional facilities and other capital budget items, but exclusively for
expanding the capital base of the respondents in MANTRASCO, cannot be allowed to deflect the respondents’
responsibilities toward our income tax laws. The conclusion is thus ineluctable that whenever the companies
involved herein parted with a portion of their earnings "to buy" the corporate holdings of Reese, they were in
ultimate effect and result making a distribution of such earnings to the respondents. All these amounts are
consequently subject to income tax as being, in truth and in fact, a flow of cash benefits to the respondents.

We are of the opinion, however, that the Commissioner erred in assessing the respondents the total acquisition
cost (P7,973,660) of the alleged treasury stock dividends in one lump sum. The record shows that the earnings
of MANTRASCO over a period of years were used to gradually wipe out the holdings therein of Reese.
Consequently, those earnings, which we hold, under the facts disclosed in the case at bar, as in effect having
been distributed to the respondents, should be taxed for each of the corresponding years when payments were
made to Reese’s estate on account of his 24,700 shares. With regard to payments made with MANTRASCO
earnings in 1958 and the years before, while indeed those earnings were utilized in those years to gradually pay
off the value of Reese’s holdings in MANTRASCO, there is no evidence from which it can be inferred that
prior to the passage of the stockholders’ resolution of December 22, 1958 the contributed equity of each of the
respondents rose correspondingly. It was only by virtue of the authority contained in the said resolution that the
respondents actually, albeit illegally, appropriated and partitioned among themselves the stockholders’ equity
representing Reese’s interests in MANTRASCO. As those payments accrued in favor of the respondents in
1958 they are and should be liable, for income tax purposes, to the extent of the aggregate amount paid, from
1955 to 1958, by MANTRASCO to buy off Reese’s shares.

The fact that the resolution authorizing the distribution of the said earnings is null and void is of no moment.
Under the National Internal Revenue Code, income tax is assessed on income received from any property,
activity or service that produces income. 9 The Tax Code stands as an indifferent, neutral party on the matter of
where the income comes from. 10

Subject to the foregoing qualifications, we find the action taken by the Commissioner in all other respects —
that is, the assessment of a fraud penalty and imposition of interest charges pursuant to the provisions of the Tax
Code — to be in accordance with law.

ACCORDINGLY, the judgment of the Court of Tax Appeals absolving the respondents from any deficiency
income tax liability is set aside, and this case is hereby remanded to the Court of Tax Appeals for further
proceedings. More specifically, the Court of Tax Appeals shall recompute the income tax liabilities of the
respondents in accordance with this decision and with the Tax Code, and thereafter pronounce and enter
judgment accordingly. No costs.