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Land Bank of the Philippines vs Court of Appeals

Commercial Law Corporation Law Veil of Corporate Fiction Corporate Name

In 1980, ECO Management Corporation (ECO) obtained loans amounting to about P26 million from Land Bank. ECO
defaulted in its payment but in 1981, ECO submitted a Payment Plan with the hope of restructuring its loan. The
plan was rejected and Land Bank sued ECO. It impleaded Emmanuel C. Oate, the majority stockholder of ECO who
is serving as the Chairman and treasurer of ECO.

The trial court ruled in favor of Land Bank but Oate was absolved from liabilities. The Court of Appeals affirmed
the decision of the trial court.

Land Bank appealed as it wanted Oate to be personally liable on the following grounds (among others): a) ECO
stands for Emmanuel C. Oate, b) Oate is the majority stockholder, c) ECO was formed ostensibly to allow Oate
to acquire loans from Land Bank which he used for his personal advantage, d) Oate holds two positions in the
corporation, and e) ECO never held any board meeting which just shows only Oate was in control of the

ISSUE: Whether or not Oate should be held personally.

HELD: No. Land Bank was not able to produce sufficient evidence to prove its claim. A corporation, upon coming
into existence, is invested by law with a personality separate and distinct from those persons composing it as well
as from any other legal entity to which it may be related. The corporate fiction is only disregarded when the fiction
is used to defeat public convenience, justify wrong, protect fraud, defend crime, confuse legitimate legal or judicial
issues, perpetrate deception or otherwise circumvent the law. This is likewise true where the corporate entity is
being used as an alter ego, adjunct, or business conduit for the sole benefit of the stockholders or of another
corporate entity. None of the foregoing was proved by Land Bank.

The mere fact that Oate owned the majority of the shares of ECO is not a ground to conclude that Oate and ECO
is one and the same. Mere ownership by a single stockholder of all or nearly all of the capital stock of a corporation
is not by itself sufficient reason for disregarding the fiction of separate corporate personalities.

Anent the issue of the corporate name, the fact that Oates initials coincide with the corporate name ECO is not
sufficient to disregard the corporate fiction. Even if ECO does stand for Emmanuel C. Oate, it does not mean
that the said corporation is merely a dummy of Oate. A corporation may assume any name provided it is lawful.
There is nothing illegal in a corporation acquiring the name or as in this case, the initials of one of its shareholders.
Pacific Rehouse Corporation v. Court of Appeals, G.R. No. 199687, March 24, 2014.

Pacific Rehouse Corp v Court of Appeals


A complaint was instituted with the Makati City Regional Trial Court (RTC), Branch 66, against EIB Securities Inc. (E
Securities) for unauthorized sale of 32,180,000 DMCI shares of Pacific Rehouse Corporation, Pacific Concorde
Corporation, Mizpah Holdings, Inc., Forum Holdings Corporation, and East Asia Oil Company, Inc. In its October 18,
2005 Resolution, the RTC rendered judgment on the pleadings, directing the ESecurities to return to the petitioners
32,180,000 DMCI shares, as of judicial demand. On the other hand, petitioners are directed to reimburse the
defendant the amount of [P]10,942,200.00, representing the buy back price of the 60,790,000 KPP shares of stocks
at [P]0.18 per share. The Resolution was ultimately affirmed by the Supreme Court and attained finality.

When the Writ of Execution was returned unsatisfied, petitioners moved for the issuance of an alias writ of
execution to hold Export and Industry Bank, Inc. liable for the judgment obligation as ESecurities is a wholly
owned controlled and dominated subsidiary of Export and Industry Bank, Inc., and is[,] thus[,] a mere alter ego and
business conduit of the latter. ESecurities opposed the motion[,] arguing that it has a corporate personality that is
separate and distinct from the respondent.

The RTC eventually concluded that ESecurities is a mere business conduit or alter ego of petitioner, the dominant
parent corporation, which justifies piercing of the veil of corporate fiction, and issued an alias writ of summons
directing defendant EIB Securities, Inc., and/or Export and Industry Bank, Inc., to fully comply therewith. It
ratiocinated that being one and the same entity in the eyes of the law, the service of summons upon EIB Securities,
Inc. (ESecurities) has bestowed jurisdiction over both the parent and whollyowned subsidiary.

Export and Industry Bank, Inc. (Export Bank) filed before the Court of Appeals a petition for certiorari with prayer
for the issuance of a temporary restraining order (TRO) seeking the nullification of the RTC Order. The Court of
Appeals reversed the RTC Order and explained that the alter ego theory cannot be sustained because ownership of
a subsidiary by the parent company is not enough justification to pierce the veil of corporate fiction. There must be
proof, apart from mere ownership, that Export Bank exploited or misused the corporate fiction of ESecurities. The
existence of interlocking incorporators, directors and officers between the two corporations is not a conclusive
indication that they are one and the same. The records also do not show that Export Bank has complete control
over the business policies, affairs and/or transactions of ESecurities. It was solely ESecurities that contracted the
obligation in furtherance of its legitimate corporate purpose; thus, any fall out must be confined within its limited


Whether or not E-Securities is merely an alter ego of Export Bank so that piercing the veil of corporate fiction is


NO. An alter ego exists where one corporation is so organized and controlled and its affairs are conducted so that it
is, in fact, a mere instrumentality or adjunct of the other. The control necessary to invoke the alter ego doctrine is
not majority or even complete stock control but such domination of finances, policies and practices that the
controlled corporation has, so to speak, no separate mind, will or existence of its own, and is but a conduit for its

The Court has laid down a threepronged control test to establish when the alter ego doctrine should be operative:

Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy
and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had
at the time no separate mind, will or existence of its own;
Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiffs legal right; and
The aforesaid control and breach of duty must [have] proximately caused the injury or unjust loss complained of.
The absence of any one of these elements prevents piercing the corporate veil in applying the instrumentality or
alter ego doctrine, the courts are concerned with reality and not form, with how the corporation operated and the
individual defendants relationship to that operation. Hence, all three elements should concur for the alter ego
doctrine to be applicable.

In this case, the alleged control exercised by Export Bank upon its subsidiary ESecurities, by itself, does not mean
that the controlled corporation is a mere instrumentality or a business conduit of the mother company. Even control
over the financial and operational concerns of a subsidiary company does not by itself call for disregarding its
corporate fiction. There must be a perpetuation of fraud behind the control or at least a fraudulent or illegal
purpose behind the control in order to justify piercing the veil of corporate fiction. Such fraudulent intent is lacking
in this case.

While the courts have been granted the colossal authority to wield the sword which pierces through the veil of
corporate fiction, concomitant to the exercise of this power, is the responsibility to uphold the doctrine of separate
entity, when rightly so; as it has for so long encouraged businessmen to enter into economic endeavors fraught
with risks and where only a few dared to venture.

The decision of the Court of Appeals in favor of Export Bank (reversing the RTC Order) is affirmed.


Lanuza Jr. vs BF Corporation
G.R. No. 174938 October 1, 2014

Facts: In 1993, BF Corporation filed a collection complaint with the Regional Trial Court against Shangri-La and the
members of its board of directors: Alfredo C. Ramos, Rufo B.Colayco, Antonio O. Olbes, Gerardo Lanuza, Jr., Maximo
G. Licauco III, and Benjamin C. Ramos. BF Corporation alleged in its complaint that on December 11, 1989 and May
30, 1991, it entered into agreements with Shangri-La wherein it undertook to construct for Shangri-La a mall and a
multilevel parking structure along EDSA.Shangri-La had been consistent in paying BF Corporation in accordance
with its progress billing statements. However, by October 1991, Shangri-La started defaulting in payment. BF
Corporation alleged that Shangri-La induced BF Corporation to continue with the construction of the buildings using
its own funds and credit despite Shangri-Las default. According to BF Corporation, Shangri-La misrepresented that
it had funds to pay for its obligations with BF Corporation, and the delay in payment was simply a matter of
delayed processing of BF Corporations progress billing statements. BF Corporation eventually completed the
construction of the buildings. Shangri-La allegedly took possession of the buildings while still owing BF Corporation
an outstanding balance. BF Corporation alleged that despite repeated demands, Shangri-La refused to pay the
balance owed to it.It also alleged that the Shangri-Las directors were in bad faith in directing Shangri-Las affairs.
Therefore, they should be held jointly and severally liable with Shangri-La for its obligations as well as for the
damages that BF Corporation incurred as a result of Shangri-Las default. On August 3, 1993, Shangri-La, Alfredo C.
Ramos, Rufo B. Colayco, Maximo G. Licauco III, and Benjamin C. Ramos filed a motion to suspend the proceedings
in view of BF Corporations failure to submit its dispute to arbitration, in accordance with the arbitration clause
provided in its contract. Petitioners filed their comment on Shangri-Las and BF Corporations motions, praying that
they be excluded from the arbitration proceedings for being non-parties to Shangri-Las and BF Corporations

Issue: Whether or not petitioners as directors of Shangri-La is personally liable for the contractual obligations
entered into by the corporation.

Held: No. Because a corporations existence is only by fiction of law, it can only exercise its rights and powers
through its directors, officers, or agents, who are all natural persons. A corporation cannot sue or enter into
contracts without them.

A consequence of a corporations separate personality is that consent by a corporation through its representatives
is not consent of the representative, personally. Its obligations, incurred through official acts of its representatives,
are its own. A stockholder, director, or representative does not become a party to a contract just because a
corporation executed a contract through that stockholder, director or representative.

Hence, a corporations representatives are generally not bound by the terms of the contract executed by the
corporation. They are not personally liable for obligations and liabilities incurred on or in behalf of the corporation.

A submission to arbitration is a contract. As such, the Agreement, containing the stipulation on arbitration, binds
the parties thereto, as well as their assigns and heirs.

When there are allegations of bad faith or malice against corporate directors or representatives, it becomes the
duty of courts or tribunals to determine if these persons and the corporation should be treated as one. Without a
trial, courts and tribunals have no basis for determining whether the veil of corporate fiction should be pierced.
Courts or tribunals do not have such prior knowledge. Thus, the courts or tribunals must first determine whether
circumstances exist towarrant the courts or tribunals to disregard the distinction between the corporation and the
persons representing it. The determination of these circumstances must be made by one tribunal or court in a
proceeding participated in by all parties involved, including current representatives of the corporation, and those
persons whose personalities are impliedly the sameas the corporation. This is because when the court or tribunal
finds that circumstances exist warranting the piercing of the corporate veil, the corporate representatives are
treated as the corporation itself and should be held liable for corporate acts. The corporations distinct personality
is disregarded, and the corporation is seen as a mere aggregation of persons undertaking a business under the
collective name of the corporation.

A corporation is an artificial entity created by fiction of law. This means that while it is not a person, naturally, the
law gives it a distinct personality and treats it as such. A corporation, in the legal sense, is an individual with a
personality that is distinct and separate from other persons including its stockholders, officers, directors,
representatives, and other juridical entities. The law vests in corporations rights,powers, and attributes as if they
were natural persons with physical existence and capabilities to act on their own. For instance, they have the
power to sue and enter into transactions or contracts. Section 36 of the Corporation Code enumerates some of a
corporations powers, thus:

Section 36. Corporate powers and capacity. Every corporation incorporated under this Code has the power and
capacity: 1. To sue and be sued in its corporate name; 2. Of succession by its corporate name for the period of time
stated in the articles of incorporation and the certificate ofincorporation; 3. To adopt and use a corporate seal; 4. To
amend its articles of incorporation in accordance with the provisions of this Code; 5. To adopt by-laws, not contrary
to law, morals, or public policy, and to amend or repeal the same in accordance with this Code; 6. In case of stock
corporations, to issue or sell stocks to subscribers and to sell treasury stocks in accordance with the provisions of
this Code; and to admit members to the corporation if it be a non-stock corporation; 7. To purchase, receive, take or
grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property,
including securities and bonds of other corporations, as the transaction of the lawful business of the corporation
may reasonably and necessarily require, subject to the limitations prescribed by law and the Constitution; 8. To
enter into merger or consolidation with other corporations as provided in this Code; 9. To make reasonable
donations, including those for the public welfare or for hospital, charitable, cultural, scientific, civic, or similar
purposes: Provided, That no corporation, domestic or foreign, shall give donations in aid of any political party or
candidate or for purposes of partisan political activity; 10. To establish pension, retirement, and other plans for the
benefit of its directors, trustees, officers and employees; and 11. To exercise such other powers as may be essential
or necessary to carry out its purpose or purposes as stated in its articles of incorporation.

Traders Royal Bank vs Court of Appeals

269 SCRA 15 Business Organization Corporation Law Piercing the Veil of Corporate Fiction
Filriters Guaranty Assurance Corporation (FGAC) is the owner of several Central Bank Certificates of Indebtedness
(CBCI). These certificates are actually proof that FGAC has the required reserve investment with the Central Bank to
operate as an insurer and to protect third persons from whatever liabilities FGAC may incur. In 1979, FGAC agreed
to assign said CBCI to Philippine Underwriters Finance Corporation (PUFC). Later, PUFC sold said CBCI to Traders
Royal Bank (TRB). Said sale with TRB comes with a right to repurchase on a date certain. However, when the day to
repurchase arrived, PUFC failed to repurchase said CBCI hence TRB requested the Central Bank to have said CBCI
be registered in TRBs name. Central Bank refused as it alleged that the CBCI are not negotiable; that as such, the
transfer from FGAC to PUFC is not valid; that since it was invalid, PUFC acquired no valid title over the CBCI; that
the subsequent transfer from PUFC to TRB is likewise invalid.

TRB then filed a petition for mandamus to compel the Central Bank to register said CBCI in TRBs name. TRB
averred that PUFC is the alter ego of FGAC; that PUFC owns 90% of FGAC; that the two corporations have identical
sets of directors; that payment of said CBCI to PUFC is like a payment to FGAC hence the sale between PUFC and
TRB is valid. In short, TRB avers that that the veil of corporate fiction, between PUFC and FGAC, should be pierced
because the two corporations allegedly used their separate identity to defraud TRD into buying said CBCI.

ISSUE: Whether or not Traders Royal Bank is correct.

HELD: No. Traders Royal Bank failed to show that the corporate fiction is used by the two corporations to defeat
public convenience, justify wrong, protect fraud or defend crime or where a corporation is a mere alter ego or
business conduit of a person. TRB merely showed that PUFC owns 90% of FGAC and that their directors are the
same. The identity of PUFC cant be maintained as that of FGAC because of this mere fact; there is nothing else
which could lead the court under the circumstance to disregard their corporate personalities. Further, TRB cant
argue that it was defrauded into buying those certificates. In the first place, TRB as a banking institution is not
ignorant about these types of transactions. It should know for a fact that a certificate of indebtedness is not
negotiable because the payee therein is inscribed specifically and that the Central Bank is obliged to pay the
named payee only and no one else.


G.R. L-5677, May 25, 1953

Facts: Tan Tong since 1932 has been engaged in the buying and selling gawgaw under the trade name La
Campana Gawgaw Packing. In 1950, Tan Tong and members of his family organized the family corporation. La
Campana Coffee Factory with its principal office located in Gawgaw Packing. Prior to said information, Tan Tong
entered into a CBA with the labor union of La Campana Gawgaw. Later on, his employees formed Kaisahan ng mga
Manggagawa ng La Campana with an authorization from the DOLE to become an affiliate of the larger union.

Kaisahan with 66 members presented a demand for higher wages and more privileges to La Campana Starch and
Coffee Factory. The demand was not granted and the DOLE certified the issue to the CIR. La Campana filed a
motion to dismiss alleging that the action was directed against two different entities with distinct personalities. This
was denied, hence this petition.

Issue: W/N the CIR has jurisdiction over the case.

Held: YES. La Compana Gawgaw and La Campana Factory are operating under one single management or as one
business though with two trade names. The coffee factory is a corporation and by legal fiction, an entity separate
and apart from the persons composing it namely, Tan Tong and his family.

However, the concept of separate corporate personality cannot be extended to a point beyond reason and policy
when invoked in support of an end subversive of this policy and will be disregarded by the courts. A subsidiary
company which is created merely as an agent for the latter may sometimes be regarded as identical with the
parent corporation especially if the stockholders or officers of the two corporations are substantially the same or
their systems of operation unified. The facts showed that they had one management, one payroll prepared by the
same person, laborers were interchangeable, there is only one entity as shown by the signboard ad in trucks,
packages and delivery forms and the same place of business.The attempt to make the two factories appear as two
separate businesses when in reality they are but one, is but a device to defeat the ends of the law and should not
be permitted to prevail.

WHY PIERCE? So that La Campana cannot evade the jurisdiction of CIR since La Campana Gawgaw has only 14
employees and only 5 are members of Kaisahan.

Francisco Motors Corporation vs. Court of Appeals

[GR 100812, 25 June 1999]
Facts: On 23 January 1985, Francisco Motors Corp. filed a complaint against Spouses Gregorio and Librada Manuel
to recover P3,412.06, representing the balance of the jeep body purchased by the Manuels from Francisco Motors;
an additional sum of P20,454.80 representing the unpaid balance on the cost of repair of the vehicle; and
P6,000.00 for cost of suit and attorney's fees. To the original balance on the price of jeep body were added the
costs of repair. In their answer, the Manuel spouses interposed a counterclaim for unpaid legal services by Gregorio
Manuel in the amount of P50,000 which was not paid by the incorporators, directors and officers of Francisco
Motors. The trial court decided the case on 26 June 1985, in favor of Francisco Motors in regard to its claim for
money, but also allowed the counter-claim of the Manuel spouses. Both parties appealed. On 15 April 1991, the
Court of Appeals sustained the trial court's decision. Hence, the present petition for review on certiorari.

Issue: Whether the Francisco Motors Corporation should be liable for the legal services of Gregorio Manuel rendered
in the intestate proceedings over Benita Trinidads estate (of the Francisco family).

Held: Basic in corporation law is the principle that a corporation has a separate personality distinct from its
stockholders and from other corporations to which it may be connected. However, under the doctrine of piercing
the veil of corporate entity, the corporation's separate juridical personality may be disregarded, for example, when
the corporate identity is used to defeat public convenience, justify wrong, protect fraud, or defend crime. Also,
where the corporation is a mere alter ego or business conduit of a person, or where the corporation is so organized
and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct
of another corporation, then its distinct personality may be ignored. In these circumstances, the courts will treat
the corporation as a mere aggrupation of persons and the liability will directly attach to them.

The legal fiction of a separate corporate personality in those cited instances, for reasons of public policy and in the
interest of justice, will be justifiably set aside. Herein, however, given the facts and circumstances of this case, the
doctrine of piercing the corporate veil has no relevant application. The rationale behind piercing a corporation's
identity in a given case is to remove the barrier between the corporation from the persons comprising it to thwart
the fraudulent and illegal schemes of those who use the corporate personality as a shield for undertaking certain
proscribed activities. In the present case, instead of holding certain individuals or persons responsible for an
alleged corporate act, the situation has been reversed. It is the Francisco Motors Corporation (FMC) as a
corporation which is being ordered to answer for the personal liability of certain individual directors, officers and
incorporators concerned. Hence, the doctrine has been turned upside down because of its erroneous invocation. In
fact, the services of Gregorio Manuel were solicited as counsel for members of the Francisco family to represent
them in the intestate proceedings over Benita Trinidad's estate. These estate proceedings did not involve any
business of FMC. Manuel's move to recover unpaid legal fees through a counterclaim against FMC, to offset the
unpaid balance of the purchase and repair of a jeep body could only result from an obvious misapprehension that
FMC's corporate assets could be used to answer for the liabilities of its individual directors, officers, and
incorporators. Such result if permitted could easily prejudice the corporation, its own creditors, and even other
stockholders; hence, clearly inequitous to FMC.

Furthermore, considering the nature of the legal services involved, whatever obligation said incorporators, directors
and officers of the corporation had incurred, it was incurred in their personal capacity. When directors and officers
of a corporation are unable to compensate a party for a personal obligation, it is far-fetched to allege that the
corporation is perpetuating fraud or promoting injustice, and be thereby held liable therefor by piercing its
corporate veil. While there are no hard and fast rules on disregarding separate corporate identity, we must always
be mindful of its function and purpose. A court should be careful in assessing the milieu where the doctrine of
piercing the corporate veil may be applied. Otherwise an injustice, although unintended, may result from its
erroneous application. The personality of the corporation and those of its incorporators, directors and officers in
their personal capacities ought to be kept separate in this case. The claim for legal fees against the concerned
individual incorporators, officers and directors could not be properly directed against the corporation without
violating basic principles governing corporations. Moreover, every action including a counterclaim must be
prosecuted or defended in the name of the real party in interest. It is plainly an error to lay the claim for legal fees
of private respondent Gregorio Manuel at the door of FMC rather than individual members of the Francisco family.

309 SCRA 72 Business Organization Corporation Law Piercing the Veil of Corporate Fiction (Upside Down)

In 1985, Francisco Motors Corporation (FMC) sued Atty. Gregorio Manuel to recover from a him a sum of money in
the amount of P23,000.00+. Said amount was allegedly owed to them by Manuel for the purchase of a jeep body
plus repairs thereto. Manuel filed a counterclaim in the amount of P50,000.00. In his counterclaim, Manuel alleged
that he was the Assistant Legal Officer for FMC; that the Francisco Family, owners of FMC, engaged his services for
the intestate estate proceedings of one Benita Trinidad; that he was not paid for his legal services; that he is filing
the counterclaim against FMC because said corporation was merely a conduit of the Francisco Family. The trial court
as well as the Court of Appeals granted Manuels counterclaim on the ground that the legal fees were owed by the
incorporators of FMC (an application of the doctrine of piercing the veil of corporation fiction in a reversed manner).

ISSUE: Whether or not the doctrine of piercing the veil of corporate fiction was properly used by the Court of
HELD: No. In the first place, the doctrine is to be used in disregarding corporate fiction and making the
incorporators liable in appropriate circumstances. In the case at bar, the doctrine is applied upside down where the
corporation is held liable for the personal obligations of the incorporators such was uncalled for and erroneous. It
must be noted that that Atty. Manuels legal services were secured by the Francisco Family to represent them in the
intestate proceedings over Benita Trinidads estate. The indebtedness was incurred by the Francisco Family in their
separate and personal capacity. These estate proceedings did not involve any business of FMC. The proper remedy
is for Manuel to sue the concerned members of the Francisco Family in their individual capacity.

PNB V. RITRATTO G.R. NO. 142616 362 SCRA 216


PNB-IFL, a subsidiary company of PNB extended credit to Ritratto and secured by the real estate mortgages on four
parcels of land. Since there was default, PNB-IFL thru PNB, foreclosed the property and were subject to public
auction. Ritratto Group filed a complaint for injunction. PNB filed a motion to dismiss on the grounds of failure to
state a cause of action and the absence of any privity between respondents and petitioner.


Is PNB privy to the loan contracts entered into by respondent & PNB-IFL being that PNB-IFL is owned by PNB?


No. The contract questioned is one entered into between Ritratto and PNB-IFL. PNB was admittedly an agent of the
latter who acted as an agent with limited authority and specific duties under a special power of attorney
incorporated in the real estate mortgage.

The mere fact that a corporation owns all of the stocks of another corporation, taken alone is not sufficient to justify
their being treated as one entity. If used to perform legitimate functions, a subsidiarys separate existence may be
respected, and the liability of the parent corporation as well as the subsidiary will be confined to those arising in
their respective business. The courts may, in the exercise of judicial discretion, step in to prevent the abuses of
separate entity privilege and pierce the veil of corporate entity.


1. Petitioner PNB is a domestic corporation organized and existing under the Philippine law. Respondents
Ritratto Group, Inc., Riatto International, Inc. and Dadasan General Merchandise are domestic corporations
organized and existing under Philippine law.
2. May 29, 1996 PNB International Finance Ltd. (PNB-IFL), a subsidiary company of PNB, organized and doing
business in Hongkong, extended a letter of credit in favor of the respondents in the amount of US$300,000 secured
by real estate mortgages constituted over four parcels of land in Makati City. This credit facility was later increased
successively to US$1,290,000 in November 1996; to US$1,425,000 in February 1997; and decreased to
US$1,421,316.18 in April 1998. Respondents made repayments of the loan incurred by remitting those amounts to
their loan account with PNB-IFL in Hongkong. As of April 30,1998, their outstanding obligations stood at
3. PNB-IFL, through its attorney-in-fact PNB, notified the respondents of the foreclosure of all the real estate
mortgages and that the properties subject thereof were to be sold at a public auction.
4. Respondents filed a complaint for injunction with prayer for the issuance of a writ of preliminary injunction
and/or TRO before the RTC of Makati.
5. Petitioner filed a motion to dismiss on the grounds of failure to state a cause of action and the absence of
any privity between the petitioner and respondents.
6. TC issued an order for the issuance of writ of prelim injunction. Motion to Dismiss denied.
7. CA dismissed. Hence, this petition.
Issue: WON PNB is privy to the loan contracts entered into by the respondent. WON PNB is an alter ego of PNB-IFL.

1. The contract is one entered into between respondent and PNB-IFL, not PNB. Respondents admit that
petitioner is a mere attorney-in-fact for the PNB IFL with full power and authority to, inter alia, foreclose on the
properties mortgaged to secure their loan obligations with PNB-IFL. Petitioner is an agent with limited authority and
specific duties under a special power of attorney incorporated in the real estate mortgage. It is not privy to the loan
contracts entered into by respondents and PNB-IFL.
2. The mere fact that a corporation owns all of the stocks of another corporation, taken alone is not sufficient
to justify their being treated as one entity. If used to perform legitimate functions, a subsidiarys separate existence
may be respected, and the liability of the parent corporation as well as the subsidiary will be confined to those
arising in their respective business. The courts may, in the exercise of judicial discretion, step in to prevent the
abuses of separate entity privilege and pierce the veil of corporate entity.
3. Doctrine of Piercing the corporate evil is an equitable doctrine developed to address situations where the
separate corporate personality of a corporation is abused or used for wrongful purposes. It applies when the
corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime, or when it is
made a shield to confuse the legitimate issues, or where a corporation is the mere alter ego or business conduit of
a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it
merely an instrumentality, agency, conduit or adjunct of another corporation.
4. Test in determining the applicability of the doctrine of piercing the veil:
1. Control, not mere majority or complete control, but complete domination, not only of finances but of policy
and business practice.
2. Such control must have been used by the defendant to commit fraud or wrong
3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.
*The absence of any one of these elements prevents piercing the corporate veil. In applying the instrumentality
or alter ego doctrine, the courts are concerned with reality and not form, with how the corporation operated and
the individual defendants relationship to the operation.
Doctrine of piercing the veil based on alter ego or instrumentality finds no application in this case.
PNB-IFL is a wholly owned subsidiary of petitioner PNB.
There is no showing of the indicative factors that the former corporation is a mere instrumentality of the
There is no demonstration that any of the evils sought to be prevented by the doctrine of piercing the
corporate veil exists.

Buenaflor Umali vs Court of Appeals

189 SCRA 529 Business Organization Corporation Law Piercing the Veil of Corporate Fiction

Mauricia Castillo was the administratrix in charge over a parcel of land left be Felipe Castillo. Said land was
mortgaged to the Development Bank of the Philippines and was about to be foreclosed but then Mauricias nephew,
Santiago Rivera, proposed that they convert the land into 4 subdivisions so that they can raise the necessary
money to avoid foreclosure. Mauricia agreed. Rivera sought to develop said land through his company, Slobec
Realty Corporation (SRC), of which he was also the president. SRC then contracted with Bormaheco, Inc. for the
purchase of one tractor. Bormaheco agreed to sell the tractor on an installment basis. At the same time, SRC
mortgaged said tractor to Bormaheco as security just in case SRC will default. As additional security, Mauricia and
other family members executed a surety agreement whereby in case of default in paying said tractor, the
Insurance Corporation of the Philippines (ICP) shall pay the balance. The surety bond agreement between Mauricia
and ICP was secured by Mauricias parcel of land (same land to be developed).

SRC defaulted in paying said tractor. Bormaheco foreclosed the tractor but it wasnt enough hence ICP paid the
deficiency. ICP then foreclosed the property of Mauricia. ICP later sold said property to Philippine Machinery Parts
Manufacturing Corporation (PMPMC). PMPMC then demanded Mauricia et al to vacate the premises of said property.

While all this was going on, Mauricia died. Her successor-administratrix, Buenaflor Umali, questioned the
foreclosure made by ICP. Umali alleged that all the transactions are void and simulated hence they were defrauded;
that through Bormahecos machinations, Mauricia was fooled into entering into a surety agreement with ICP; that
Bormaheco even made the premium payments to ICP for said surety bond; that the president of Bormaheco is a
director of PMPMC; that the counsel who assisted in all the transactions, Atty. Martin De Guzman, was the legal
counsel of ICP, Bormaheco, and PMPMC.

ISSUE: Whether or not the veil of corporate fiction should be pierced.

HELD: No. There is no clear showing of fraud in this case. The mere fact that Bormaheco paid said premium
payments to ICP does not constitute fraud per se. As it turned out, Bormaheco is an agent of ICP. SRC, through
Rivera, agreed that part of the payment of the mortgage shall be paid for the insurance. Naturally, when Rivera
was paying some portions of the mortgage to Bormaheco, Bormaheco is applying some parts thereof for the
payment of the premium and this was agreed upon beforehand.

Further, piercing the veil of corporate fiction is not the proper remedy in order that the foreclosure conducted by
ICP be declared a nullity. The nullity may be attacked directly without disregarding the separate identity of the
corporations involved. Further still, Umali et al are not enforcing a claim against the individual members of the
corporations. They are not claiming said members to be liable. Umali et al are merely questioning the validity of the

The veil of corporate fiction cant be pierced also by the simple reason that the businesses of two or more
corporations are interrelated, absent sufficient showing that the corporate entity was purposely used as a shield to
defraud creditors and third persons of their rights. In this case, there is no justification for disregarding their
separate personalities.
Araneta, Inc. v. Del Paterno (1952)
Tuason, J.

Defendant Paz Tuason de Paterno (Tuason) was the registered owner of several parcels of land in Sta. Mesa,
The lots were subdivided and were occupied by tenants who had lease contracts. It was stipulated that in
the event the owner and lessor should decide to sell the property, the lessees were to be given priority over other
buyers if they should desire to buy their leaseholds, all things being equal.
In 1940 and 1941, Tuason obtained several loans from Jose Vidal (Vidal) amounting to P90,098. The loans
were secured by mortgages executed over the subject property.
In 1943, Tuason obtained additional loans amounting to P50,000 upon the same security. The mortgage
contracts were renewed.
It was alleged that there was another agreement (Agreement), all copies of which were destroyed during
the war. This contained stipulations as to the manner and time of payment, as well as the corresponding penalties.
Tuason later decided to sell her property to plaintiff Gregorio Araneta, Inc. (Araneta, Inc).
o They executed an agreement to buy and sell (Exhibit 1). This contract provided that subject to the
preferred right of the lessees and that of Jose Vidal as mortgagee, Paz Tuason would sell to Gregorio Araneta, Inc.
and the latter would buy for the said amount of P400,000 the entire estate.
o Some of the lessees exercised their right to purchase their respective leaseholds.
o An absolute deed of sale was then executed by the parties over the remaining lots (Exhibit A). The total
amount to be paid was P190k, broken down as follows:
P13,476.62 Paz Tuason;
P3,373.38 City Treasurer of Manila
P30,000 Jose Vidal
P143,150 Jose Vidal
o The deed of sale contained a stipulation that should the vendor lose the checks issued, the vendee shall
not be held liable for such loss.
The day after the consummation of the sale, Tuason tendered payment to Vidal by offering the check drawn
by Araneta, Inc. Vidal refused to accept the payment, alleging that according to the Agreement, payment of the
mortgage was not to be effected totally or partially before the end of four years from April, 1943.
Thus, Tuason, with the help of her attorney Ponce Enrile, commenced an action against Vidal to compel the
latter to accept payment. The checks were deposited with the clerk of court.
The action was never tried and all the records, including the checks, were lost during the war.
After the war, the value of the property increased tremendously. Tuason is now repudiating Exhibits 1 and
Araneta, Inc. filed the present action to compel Tuason to deliver clear title to the lots subject of the sale
free from all liens and encumbrances. It also seeks the cancellation of the mortgage to Vidal. The latter filed a
cross-claim against Tuason to foreclose the mortgage.
TC ruled in favor of defendant; it declared Exhibit A void.


Is Exhibit A (absolute deed of sale) valid? YES.

Trial court based its decision on the alleged variance between the terms of Exhibit 1 (agreement to buy and
sell) and Exhibit A. It is the SCs submission that the lower courts interpretation of Exhibit 1 was wrong.
o One of the conditions in Exhibit 1 is that the deed of sale is to be executed only when Tuason has already
determined which lots she can validly dispose of. After the lessees exercised their right to repurchase, she was
already in a position to sell the remaining lots.
Tuason claims that the sale was effected through fraud as the document was written in English, a language
she did not understand. Had she known how one-sided its provisions were, she would not have affixed her
signature thereto.
o Court finds this hard to believe. She had an able attorney who assisted her throughout the proceedings.
Further, her suit against Vidal was instituted precisely to enforce the provisions of the sale.
o Also, she had a son who was a leading citizen and businessman. He took active part in the negotiations
that led to the execution of the sale.
o Court doubts the defendants veracity. She as probably gambling on the chance that no signed copy of the
document had been saved from the war.
ON THE ISSUE OF AGENCY: It is argued that the sale is invalid because Jose Araneta was both the
defendants agent and the President of Araneta, Inc.
o Trial court simply disposed of the issue by saying that he was not an agent. However, this is contrary to the
clear weight of the evidence.
In Exhibit 1, Jose Araneta was referred to as defendants agent or broker who acts in this transaction,
entitled to a commission of 5%.
o The trial court, hypothetically admitting the agency relationship, pointed out that it was the Corporation
(Araneta, Inc.) and not the person (Jose Araneta) who purchased the property, thus it does not come within the
prohibition of the old Civil Code.
o Tuason would have the SC pierce the veil of corporate fiction in this case. There is, however, no basis for
the application of the rule.
Araneta, Inc. had long been engaged in the real estate business. Clearly, it was not constituted merely to
circumvent the prohibition of the old CC.
The principle invoked by defendant is applicable only as a measure of protection against deceit and not to
open the door to deceit.
o The corporate theory aside, granting that the two entities are in fact identical, the relation between Tuason
and Araneta still did not fall within the prohibition found in Art. 1459 , Old Civil Code.
Citing the commentaries of Scaevola, the Court said that the rationale behind the prohibition rests in the
fact that both the agent and the principal form one juridical person.
In American jurisprudence, commentators are of the opinion that the law does not trust human nature to
resist the temptations likely to arise out of antagonism between the interst of the seller and the buyer.
Par. 2 connotes the idea of trust and confidence; where the relationship does not involve considerations of
good faith and integrity, the prohibition should not apply.
Using the test of trust and confidence, it can be seen that Jose Araneta was nothing more than a
middleman between the defendant and purchaser.
He was not to sell and did not sell the property. He was not authorized to enter into a contract on behalf of
Defendant also claims that there was a conflict of interest as the attorneys who represented her in the sale
negotiations were the Attys. Araneta.
o Not likely. Ponce Enrile was already representing her in the case against Vidal so it would be reasonable to
assume that it was also he who assisted her in negotiating the sale.
o Assuming arguendo that they were in fact lawyers of Tuason, such fact would not bar them from purchasing
her property. What is prohibited is the sale of property under litigation, and in this case the sale was effected even
before the present action.

Should Tuason be held liable for the loss of the certified checks lost in the war? NO.
While Exhibit A is valid, the provision relieving the vendee (Araneta, Inc.) for liability arising from Vidals
failure to collect the checks is VOID.
o Prevailing bank regulations: checks have to be encashed within 90 days otherwise they will be considered
void (EO 49).
o The stipulation in Exhibit A that the defendant or seller shall not hold the vendee responsible for any loss
of these checks was unconscionable, void and unenforceable insofar as the said stipulation would stretch the
defendants liability for these checks beyond 90 days.
o Tuason cannot be held liable for the checks after they expired and became absolutely useless.

Is Vidal entitled to payment in fulfillment of the mortgage obligation? YES.

Tuason offered to pay the loans before they fell due, but Vidal refused to accept payment because he
wanted interest to accrue.
The question then is: Did Tuasons offer to pay before the due date operate to suspend the accrual of
o The Court is of the opinion that it did.
o Two checks were tendered to Vidalone for P143,150 (covering the principal) and P30,000 (penalty).
o Penalty clause embodied in the Agreement: such penalty takes the place of interest in the event the
mortgagor chooses to pay before the due date.
o To say, as Vidal says, that the debtor could not pay the mortgage within four years and, at the same time,
that there would be penalty if she paid after that period, would be a contradiction. Moreover, adequate remedy was
provided for failure to pay on or after the expiration of the mortgage: increased rate of interest, foreclosure of the
mortgage, and attorneys fees.

DISPOSITION: Judgment modified.


211 SCRA 470 (1992)


When Eugenia V. Roxas died, her heirs formed a corporation under the name and style of Heirs of Eugenia V. Roxas,
Inc. using her estate as the capital of the corporation, the private respondent herein. It was primarily engaged in
agriculture business, however it amended its purpose to enable it to engage in resort and restaurant business.
Petitioners are stockholders of the corporation and two of the heirs of Eugenia. By tolerance, they were allowed to
occupy some of the properties of the corporation as their residence. However, the board of directors of the
corporation passed a resolution evicting the petitioners from the property of the corporation because the same will
be needed for expansion.
At the RTC, private respondent presented its evidence averring that the subject premises are owned by the
corporation. Petitioners failed to present their evidence due to alleged negligence of their counsel. RTC handed a
decision in favor of private respondent.
Petitioners appealed to the Court of Appeals but the latter denied the petition and affirmed the ruling of the RTC.
Hence, they appealed to the Supreme Court. In their appeal, petitioners argues that the CA made a mistake in
upholding the decision of the RTC, and that their occupancy of the subject premises should be respected because
they own an aliquot part of the corporation as stockholders, and that the veil of corporate fiction must be pierced
by virtue thereof.

1. Whether petitioners contention were correct as regards the piercing of the corporate veil.
2. Whether petitioners were correct in their contention that they should be respected as regards their occupancy
since they own an aliquot part of the corporation.

1.Petitioners contention to pierce the veil of corporate fiction is untenable. As aptly held by the court: ..The
separate personality of a corporation may ONLY be disregarded when the corporation is used as a cloak or cover for
fraud or illegality, or to work injustice, or when necessary to achieve equity or when necessary for the protection of
2. As regards petitioners contention that they should be respected on their occupancy by virtue of an aliquot part
they own on the corporation as stockholders, it also fails to hold water. The court held that properties owned by a
corporation are owned by it as an entity separate and distinct from its members. While shares of stocks are
personal property, they do not represent property of the corporation. A share of stock only typifies an aliquot part
of the corporations property, or the right to share in its proceeds to that extent when distributed according to law
and equity, but its holder is not the owner of any part of the capital of the corporation. Nor is he entitled to the
possession of any definite portion of its property or assets. The holder is not a co-owner or a tenant in common of
the corporate property.


G.R. 170782
June 22, 2009

This is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the decision of the CA
affirming the decision of the RTC.
On April 10, 1995, petitioner Siain obtained a loan of P37,000,000 from respondent Cupertino covered by a
promissory note signed by both petitioners and respondents respective presidents, Cua Le Leng and Wilfredo Lua.
The promissory note authorizes Cupertino, as the creditor, to place in escrow the loan proceeds of P37M with
Metrobank to pay off petitioners loan obligation with Development Bank of the Philippines. To secure the loan,
petitioner, on the same date, executed a real estate mortgage over two parcels of land and other immovables, such
as equipment and machineries. Two days later, the promissory note was amended to include a 17% interest per
annum on the note. This was again signed by each of the presidents of the parties.
On August 16, 1995, Cua Le Leng, signed a second promissory note as maker, on behalf of petitioner, and
as co-maker, in her personal capacity in favor of Cupertino for P160,000,000. On the same date, the parties
executed an amendment on the real estate mortgage. It now indicated that the total loan to be secured by the
mortgage is P197,000,000.
Curiously, on March 11, 1996, petitioner, through counsel, sent a letter to respondent demanding the
release of the P160,000,000 loan. Petitioner alleges that respondent had yet to release the proceeds of the loan.
Cupertino refuted the accusations and maintained that Siain had long obtained the proceeds. Cupertino
declared petitioners demand as made to "abscond from a just and valid obligation," a mere afterthought, following
Cupertinos letter demanding payment of the P37,000,000 loan covered by the first promissory note which became
overdue on March 5, 1996.
Not surprisingly, Cupertino instituted extrajudicial foreclosure proceedings over the properties subject of the
amended real estate mortgage. The auction sale was scheduled on October 11, 1996 with respondent Notary Public
Edwin R. Catacutan commissioned to conduct the same. This prompted petitioner to file a complaint with a prayer
for a restraining order to enjoin Notary Public Catacutan from proceeding with the public auction on the grounds
that the real estate mortgage was void for lack of consideration.
During the pre-trial conference, the parties failed to arrive at an amicable settlement. Hence, trial on the merits
ensued. RTC upheld the validity of the real estate mortgage. CA affirmed.

ISSUE: Whether the CA erred in affirming the RTCs decision.

NO. The RTC arrived at its decision by applying the doctrine of piercing the veil of corporate fiction. The Court
ruled that the trial court correctly did so. Siain merely denied receiving payment while Cupertino presented
overwhelming evidence of the payments it made by providing proof of the same.
The fact that the checks, debit memos and the pledges of the jewelries, condominium units and trucks were
constituted not exclusively in the name of Siain Enterprises, Inc. but also either in the name of Yuyek Manufacturing
Corporation, Siain Transport, Inc., Cua Le Leng and Alberto Lim is of no moment. Heres why:
1. Siain and Yuyek have a common set of incorporators, stockholders and board of directors;
2. they have the same internal bookkeeper and accountant in the person of Rosemarie Ragodon;
3. they have the same office address at 306 Jose Rizal St., Mandaluyong City;
4. they have the same majority stockholder and president in the person of Cua Le Leng; and
5. in relation to Siain Transport, Cua Le Leng had the unlimited authority by and on herself, without authority
from the Board of Directors, to use the funds of Siain Trucking to pay the obligation incurred by the petitioner
Consequently, these corporations are proven to be the mere alter-ego of their president Cua Le Leng, and
considering that Cua Le Leng and Alberto Lim have been living together as common law spouses with three
children, the Court believes that while Alberto Lim does not appear to be an officer of Siain and Yuyek, nonetheless,
his receipt of certain checks and debit memos from Willie Lua and Victoria Lua was actually for the account of his
common-law wife, Cua Le Leng and her alter ego corporations.


G.R. No. 108734 May 29, 1996

Concept Builders, Inc., a domestic corporation, with principal office at 355 Maysan Road, Valenzuela, Metro Manila,
is engaged in the construction business. Private respondents were employed by said company as laborers,
carpenters and riggers. On November 1981, private respondents were served individual written notices of
termination of employment by petitioner. It was stated in the individual notices that their contracts of employment
had expired and the project in which they were hired had been completed. It was found, however, that at the time
of the termination of private respondent's employment, the project in which they were hired had not yet been
finished and completed. Petitioner had to engage the services of sub-contractors whose workers performed the
functions of private respondents. Aggrieved, private respondents filed a complaint for illegal dismissal, unfair labor
practice and non-payment of their legal holiday pay, overtime pay and thirteenth-month pay against petitioner. On
December 19, 1984, the Labor Arbiter rendered judgment ordering petitioner to reinstate private respondents and
to pay them back wages equivalent to one year or three hundred working days. On Motion for reconsideration, the
same was denied by NLRC on the ground that the said decision had already become final and executory. When the
writ of execution was issued, it was however partially satisfied thru garnishment of sums from petitioners debtor,
Metropolitan Waterworks and Sewerage Authority. On February 1, 1989, an Alias Writ of Execution was issued by
the Labor Arbiter directing the sheriff to collect from herein petitioner the balance due of the judgment award and
to reinstate private respondents to their former positions. When the Alias Writ of Execution was served, it was
found that the petitioner no longer occupied the premises. A second Alias Writ of Execution then was issued upon
motion of private respondents. On November 6, 1989, a certain Dennis Cuyegkeng filed a third-party claim with the
Labor Arbiter alleging that the properties sought to be levied upon by the sheriff were owned by Hydro (Phils.), Inc.
of which he is the Vice-President. On November 23, 1989, private respondents filed a "Motion for Issuance of a
Break-Open Order," alleging that HPPI and petitioner corporation were owned by the same
incorporator/stockholders. They also alleged that petitioner temporarily suspended its business operations in order
to evade its legal obligations to them and that private respondents were willing to post an indemnity bond to
answer for any damages which petitioner and HPPI may suffer because of the issuance of the break-open order.
HPPI filed an Opposition to private respondents' motion for issuance of a break-open order, contending that HPPI is
a corporation which is separate and distinct from petitioner. HPPI also alleged that the two corporations are
engaged in two different kinds of businesses, i.e., HPPI is a manufacturing firm while petitioner was then engaged
in construction. The Labor Arbiter issued an Order which denied private respondents' motion for break-open order.
On appeal to NLRC, applying the doctrine of piercing the corporate veil, it set aside the order of the Labor Arbiter
and issued a break-open order. Motion for reconsideration was denied. Hence this petition.

ISSUE: Whether or not the veil of corporate fiction must be pierced to hold petitioner liable.

The test in determining the applicability of the doctrine of piercing the veil of corporate fiction is as follows:
1. Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy
and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had
at the time no separate mind, will or existence of its own;

2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty or dishonest and unjust act in contravention of plaintiff's legal rights; and

3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.
The absence of any one of these elements prevents "piercing the corporate veil." In applying the "instrumentality"
or "alter ego" doctrine, the courts are concerned with reality and not form, with how the corporation operated and
the individual defendant's relationship to that operation.
Thus the question of whether a corporation is a mere alter ego, a mere sheet or paper Corporation, a sham or a
subterfuge is purely one of fact.

In this case, the NLRC noted that, while petitioner claimed that it ceased its business operations on April 29, 1986,
it filed an Information Sheet with the Securities and Exchange Commission on May 15, 1987, stating that its office
address is at 355 Maysan Road, Valenzuela, Metro Manila. On the other hand, HPPI, the third-party claimant,
submitted on the same day, a similar information sheet stating that its office address is at 355 Maysan Road,
Valenzuela, Metro Manila.

Furthermore, the NLRC stated that:

Both information sheets were filed by the same Virgilio O. Casio as the corporate secretary of both corporations. It
would also not be amiss to note that both corporations had the same president, the same board of directors, the
same corporate officers, and substantially the same subscribers.

From the foregoing, it appears that, among other things, the respondent (herein petitioner) and the third-party
claimant shared the same address and/or premises. Under this circumstances, it cannot be said that the property
levied upon by the sheriff were not of respondents.

Clearly, petitioner ceased its business operations in order to evade the payment to private respondents of back
wages and to bar their reinstatement to their former positions. HPPI is obviously a business conduit of Petitioner
Corporation and its emergence was skilfully orchestrated to avoid the financial liability that already attached to
Petitioner Corporation.


G.R. No. 154975 January 29, 2007

Shortly after its incorporation in 1957 as a finance and investment company, petitioner General Credit Corporation,
then known as Commercial Credit Corporation, established CCC franchise companies in different urban centers of
the country. In furtherance of its business, GCC had, as early as 1974, applied for and was able to secure license
from the then Central Bank of the Philippines and the Securities and Exchange Commission to engage also in quasi-
banking activities. On the other hand, respondent CCC Equity Corporation was organized in November 1994 by GCC
for the purpose of, among other things, taking over the operations and management of the various franchise
companies. At a time material hereto, respondent Alsons Development and Investment Corporation and Conrado,
Nicasio, Editha and Ladislawa, all surnamed Alcantara, and Alfredo de Borja, each owned, just like GCC, shares in
the aforesaid GCC franchise companies, e.g., CCC Davao and CCC Cebu. In December 1980, ALSONS and the
Alcantara family, for a consideration of P2,000,000.00, sold their shareholdings a total of 101,953 shares, more or
less in the CCC franchise companies to EQUITY. On January 2, 1981, EQUITY issued ALSONS et al., a "bearer"
promissory note for P2,000,000.00 with a one-year maturity date, at 18% interest per annum, with provisions for
damages and litigation costs in case of default. Some four years later, the Alcantara family assigned its rights and
interests over the bearer note to ALSONS which thenceforth became the holder thereof. But even before the
execution of the assignment deal aforestated, letters of demand for interest payment were already sent to EQUITY,
through its President, Wilfredo Labayen, who pleaded inability to pay the stipulated interest, EQUITY no longer then
having assets or property to settle its obligation nor being extended financial support by GCC. Having failed to pay
its obligation, ALSONS filed with RTC of Makati a complaint for a sum of money against EQUITY and GCC. When
EQUITY filed an answer, it also filed a cross-claim against GCC claiming, among others, that it is solely dependent
upon GCC for its funding requirements, to settle, among others, equity purchases made by investors on the
franchises; hence, GCC is solely and directly liable to ALSONS, the former having failed to provide EQUITY the
necessary funds to meet its obligations to ALSONS. RTC rendered judgment in favor of ALSONS finding that EQUITY
was but an instrumentality or adjunct of GCC and considering the legal consequences and implications of such
relationship. On appeal, applying the doctrine of piercing the veil of corporate fiction, CA affirmed RTC decision.
Hence this Petition for Review on Certiorari.

ISSUE: Whether or not the veil of corporate fiction must be pierced to hold petitioner liable.

The Court agrees with the disposition of the appellate court on the application of the piercing doctrine to the
transaction subject of this case. Per the Courts count, the trial court enumerated no less than 20 documented
circumstances and transactions, which, taken as a package, indeed strongly supported the conclusion that
respondent EQUITY was but an adjunct, an instrumentality or business conduit of petitioner GCC. This relation, in
turn, provides a justifying ground to pierce petitioners corporate existence as to ALSONS claim in question.
Foremost of what the trial court referred to as "certain circumstances" are the commonality of directors, officers
and stockholders and even sharing of office between petitioner GCC and respondent EQUITY; certain financing and
management arrangements between the two, allowing the petitioner to handle the funds of the latter; the virtual
domination if not control wielded by the petitioner over the finances, business policies and practices of respondent
EQUITY; and the establishment of respondent EQUITY by the petitioner to circumvent CB rules. Verily, indeed, as
the relationships binding herein respondent EQUITY and petitioner GCC have been that of "parent-subsidiary
corporations" the foregoing principles and doctrines find suitable applicability in the case at bar; and, it having
been satisfactorily and indubitably shown that the said relationships had been used to perform certain functions
not characterized with legitimacy, it feels amply justified to "pierce the veil of corporate entity" and disregard the
separate existence of the percent and subsidiary the latter having been so controlled by the parent that its
separate identity is hardly discernible thus becoming a mere instrumentality or alter ego of the former.
Consequently, as the parent corporation, petitioner GCC maybe held responsible for the acts and contracts of its
subsidiary respondent EQUITY - most especially if the latter (who had anyhow acknowledged its liability to
ALSONS) maybe without sufficient property with which to settle its obligations. For after all, GCC was the entity
which initiated and benefited immensely from the fraudulent scheme perpetrated in violation of the law.

Given the foregoing considerations, it behooves the petitioner, as a matter of law and equity, to assume the
legitimate financial obligation of a cash-strapped subsidiary corporation which it virtually controlled to such a
degree that the latter became its instrument or agent. The facts, as found by the courts a quo, and the applicable
law call for this kind of disposition. Or else, the Court would be allowing the wrong use of the fiction of corporate

Lipat vs. Pacific Banking Corporation

[GR 142435, 30 April 2003]
Second Division, Quisumbing (J): 3 concur

The spouses Alfredo Lipat and Estelita Burgos Lipat, owned "Bela's Export Trading" (BET), a single proprietorship
with principal office at No. 814 Aurora Boulevard, Cubao, Quezon City. BET was engaged in the manufacture of
garments for domestic and foreign consumption. The Lipats also owned the "Mystical Fashions" in the United
States, which sells goods imported from the Philippines through BET. Mrs. Lipat designated her daughter, Teresita B.
Lipat, to manage BET in the Philippines while she was managing "Mystical Fashions" in the United States. In order
to facilitate the convenient operation of BET, Estelita Lipat executed on 14 December 1978, a special power of
attorney appointing Teresita Lipat as her attorney-in-fact to obtain loans and other credit accommodations from
Pacific Banking Corporation (Pacific Bank). She likewise authorized Teresita to execute mortgage contracts on
properties owned or co-owned by her as security for the obligations to be extended by Pacific Bank including any
extension or renewal thereof. Sometime in April 1979, Teresita, by virtue of the special power of attorney, was able
to secure for and in behalf of her mother, Mrs. Lipat and BET, a loan from Pacific Bank amounting to P583,854.00 to
buy fabrics to be manufactured by BET and exported to "Mystical Fashions" in the United States. As security
therefor, the Lipat spouses, as represented by Teresita, executed a Real Estate Mortgage over their property
located at No. 814 Aurora Blvd., Cubao, Quezon City. Said property was likewise made to secure other additional or
new loans, etc. On 5 September 1979, BET was incorporated into a family corporation named Bela's Export
Corporation (BEC) in order to facilitate the management of the business. BEC was engaged in the business of
manufacturing and exportation of all kinds of garments of whatever kind and description and utilized the same
machineries and equipment previously used by BET. Its incorporators and directors included the Lipat spouses who
owned a combined 300 shares out of the 420 shares subscribed, Teresita Lipat who owned 20 shares, and other
close relatives and friends of the Lipats. Estelita Lipat was named president of BEC, while Teresita became the vice-
president and general manager. Eventually, the loan was later restructured in the name of BEC and subsequent
loans were obtained by BEC with the corresponding promissory notes duly executed by Teresita on behalf of the
corporation. A letter of credit was also opened by Pacific Bank in favor of A. O. Knitting Manufacturing Co., Inc.,
upon the request of BEC after BEC executed the corresponding trust receipt therefor. Export bills were also
executed in favor of Pacific Bank for additional finances. These transactions were all secured by the real estate
mortgage over the Lipats' property. The promissory notes, export bills, and trust receipt eventually became due
and demandable. Unfortunately, BEC defaulted in its payments. After receipt of Pacific Bank's demand letters,
Estelita Lipat went to the office of the bank's liquidator and asked for additional time to enable her to personally
settle BEC's obligations. The bank acceded to her request but Estelita failed to fulfill her promise. Consequently, the
real estate mortgage was foreclosed and after compliance with the requirements of the law the mortgaged
property was sold at public auction. On 31 January 1989, a certificate of sale was issued to respondent Eugenio D.
Trinidad as the highest bidder. On 28 November 1989, the spouses Lipat filed before the Quezon City RTC a
complaint for annulment of the real estate mortgage, extrajudicial foreclosure and the certificate of sale issued
over the property against Pacific Bank and Eugenio D. Trinidad. The complaint alleged, among others, that the
promissory notes, trust receipt, and export bills were all ultra vires acts of Teresita as they were executed without
the requisite board resolution of the Board of Directors of BEC. The Lipats also averred that assuming said acts
were valid and binding on BEC, the same were the corporation's sole obligation, it having a personality distinct and
separate from spouses Lipat. It was likewise pointed out that Teresita's authority to secure a loan from Pacific Bank
was specifically limited to Mrs. Lipat's sole use and benefit and that the real estate mortgage was executed to
secure the Lipats' and BET's P583,854.00 loan only. In their respective answers, Pacific Bank and Trinidad alleged in
common that petitioners Lipat cannot evade payments of the value of the promissory notes, trust receipt, and
export bills with their property because they and the BEC are one and the same, the latter being a family
corporation. Trinidad further claimed that he was a buyer in good faith and for value and that the Lipat spouses are
estopped from denying BEC's existence after holding themselves out as a corporation. After trial on the merits, the
RTC dismissed the complaint. The Lipats timely appealed the RTC decision to the Court of Appeals in CA-G.R. CV
41536. Said appeal, however, was dismissed by the appellate court for lack of merit. The Lipats then moved for
reconsideration, but this was denied by the appellate court in its Resolution of 23 February 2000. The Lipat spouses
filed the petition for review on certiorari.
ssue: Whether BEC and BET are separate business entities, and thus the Lipt spouses can isolate themselves
behind the corporate personality of BEC.

When the corporation is the mere alter ego or business conduit of a person, the separate personality of the
corporation may be disregarded. This is commonly referred to as the "instrumentality rule" or the alter ego
doctrine, which the courts have applied in disregarding the separate juridical personality of corporations. As held in
one case, where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a
mere instrumentality or adjunct of the other, the fiction of the corporate entity of the 'instrumentality' may be
disregarded. The control necessary to invoke the rule is not majority or even complete stock control but such
domination of finances, policies and practices that the controlled corporation has, so to speak, no separate mind,
will or existence of its own, and is but a conduit for its principal. The evidence on record shows BET and BEC are not
separate business entities. (1) Estelita and Alfredo Lipat are the owners and majority shareholders of BET and BEC,
respectively; (2) both firms were managed by their daughter, Teresita; 19 (3) both firms were engaged in the
garment business, supplying products to "Mystical Fashion," a U.S. firm established by Estelita Lipat; (4) both firms
held office in the same building owned by the Lipats; (5) BEC is a family corporation with the Lipats as its majority
stockholders; (6) the business operations of the BEC were so merged with those of Mrs. Lipat such that they were
practically indistinguishable; (7) the corporate funds were held by Estelita Lipat and the corporation itself had no
visible assets; (8) the board of directors of BEC was composed of the Burgos and Lipat family members; (9) Estelita
had full control over the activities of and decided business matters of the corporation; and that (10) Estelita Lipat
had benefited from the loans secured from Pacific Bank to finance her business abroad and from the export bills
secured by BEC for the account of "Mystical Fashion." It could not have been coincidental that BET and BEC are so
intertwined with each other in terms of ownership, business purpose, and management. Apparently, BET and BEC
are one and the same and the latter is a conduit of and merely succeeded the former. The spouses' attempt to
isolate themselves from and hide behind the corporate personality of BEC so as to evade their liabilities to Pacific
Bank is precisely what the classical doctrine of piercing the veil of corporate entity seeks to prevent and remedy.
BEC is a mere continuation and successor of BET, and the Lipat spouses cannot evade their obligations in the
mortgage contract secured under the name of BEC on the pretext that it was signed for the benefit and under the
name of BET.