G.R. No. 198967, March 07, 2016 - JOSE EMMANUEL P. GUILLERMO, Petitioner, v.

CRISANTO P. USON, Respondent.

THIRD DIVISION
G.R. No. 198967, March 07, 2016
JOSE EMMANUEL P. GUILLERMO, Petitioner, v. CRISANTO P. USON, Respondent.
DECISION
PERALTA, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court
seeking to annul and set aside the Court of Appeals Decision1 dated June 8, 2011 and
Resolution2 dated October 7, 2011 in CA G.R. SP No. 115485, which affirmed in toto the
decision of the National Labor Relations Commission (NLRC).

The facts of the case follow.

On March 11, 1996, respondent Crisanto P. Uson (Uson) began his employment with Royal
Class Venture Phils., Inc. (Royal Class Venture) as an accounting clerk.3 Eventually, he was
promoted to the position of accounting supervisor, with a salary of Php13,000.00 a month,
until he was allegedly dismissed from employment on December 20, 2000.4

On March 2, 2001, Uson filed with the Sub-Regional Arbitration . Branch No. 1, Dagupan
City, of the NLRC a Complaint for Illegal Dismissal, with prayers for backwages,
reinstatement, salaries and 13thmonth pay, moral and exemplary damages and attorney's
fees against Royal Class Venture.5

Royal Class Venture did not make an appearance in the case despite its receipt of
summons.6

On May 15, 2001, Uson filed his Position Paper7 as complainant.

On October 22, 2001, Labor Arbiter Jose G. De Vera rendered a Decision8 in favor of the
complainant Uson and ordering therein respondent Royal Class Venture to reinstate him
to his former position and pay his backwages, 13th month pay as well as moral and
exemplary damages and attorney's fees.

Royal Class Venture, as the losing party, did not file an appeal of the
decision.9 Consequently, upon Uson's motion, a Writ of Execution10 dated February 15,
2002 was issued to implement the Labor Arbiter's decision.
On May 17, 2002, an Alias Writ of Execution11 was issued. But with the judgment still
unsatisfied, a Second Alias Writ of Execution12 was issued on September 11, 2002.

Again, it was reported in the Sheriff's Return that the Second Alias Writ of Execution dated
September 11, 2002 remained "unsatisfied." Thus, on November 14, 2002, Uson filed a
Motion for Alias Writ of Execution and to Hold Directors and Officers of Respondent Liable
for Satisfaction of the Decision.13 The motion quoted from a portion of the Sheriffs Return,
which states:
chanRoblesvirtualLawlibrary
On September 12, 2002, the undersigned proceeded at the stated present business office
address of the respondent which is at Minien East, Sta. Barbara, Pangasinan to serve the
writ of execution. Upon arrival, I found out that the establishment erected thereat is not
[in] the respondent's name but JOEL and SONS CORPORATION, a family corporation
owned by the Guillermos of which, Jose Emmanuel F. Guillermo the General Manager of
the respondent, is one of the stockholders who received the writ using his nickname
"Joey," [and who] concealed his real identity and pretended that he [was] the brother of
Jose, which [was] contrary to the statement of the guard-on-duty that Jose and Joey
[were] one and the same person. The former also informed the undersigned that the
respondent's (sic) corporation has been dissolved.

On the succeeding day, as per [advice] by the [complainant's] counsel that the respondent
has an account at the Bank of Philippine Islands Magsaysay Branch, A.B. Fernandez Ave.,
Dagupan City, the undersigned immediately served a notice of garnishment, thus, the bank
replied on the same day stating that the respondent [does] not have an account with the
branch.14ChanRoblesVirtualawlibrary
On December 26, 2002, Labor Arbiter Irenarco R. Rimando issued an Order15 granting the
motion filed by Uson. The order held that officers of a corporation are jointly and severally
liable for the obligations of the corporation to the employees and there is no denial of due
process in holding them so even if the said officers were not parties to the case when the
judgment in favor of the employees was rendered.16Thus, the Labor Arbiter pierced the
veil of corporate fiction of Royal Class Venture and held herein petitioner Jose Emmanuel
Guillermo (Guillermo), in his personal capacity, jointly and severally liable with the
corporation for the enforcement of the claims of Uson.17

Guillermo filed, by way of special appearance, a Motion for Reconsideration/To Set Aside
the Order of December 26, 2002.18 The same, however, was not granted as, this time, in an
Order dated November 24, 2003, Labor Arbiter Nia Fe S. Lazaga-Rafols sustained the
findings of the labor arbiters before her and even castigated Guillenno for his unexplained
absence in the prior proceedings despite notice, effectively putting responsibility on
Guillermo for the case's outcome against him.19
On January 5, 2004, Guillermo filed a Motion for Reconsideration of the above Order,20 but
the same was promptly denied by the Labor Arbiter in an Order dated January 7, 2004.21

On January 26, 2004, Uson filed a Motion for Alias Writ of Execution,22 to which Guillermo
filed a Comment and Opposition on April 2, 2004.23

On May 18, 2004, the Labor Arbiter issued an Order24 granting Uson's Motion for the
Issuance of an Alias Writ of Execution and rejecting Guillermo's arguments posed in his
Comment and Opposition.

Guillermo elevated the matter to the NLRC by filing a Memorandum of Appeal with Prayer
for a (Writ of) Preliminary Injunction dated June 10, 2004.25cralawred

In a Decision26 dated May 11, 2010, the NLRC dismissed Guillermo's appeal and denied his
prayers for injunction.

On August 20, 2010, Guillermo filed a Petition for Certiorari27 before the Court of Appeals,
assailing the NLRC decision.

On June 8, 2011, the Court of Appeals rendered its assailed Decision28 which denied
Guillermo's petition and upheld all the findings of the NLRC.

The appellate court found that summons was in fact served on Guillermo as President and
General Manager of Royal Class Venture, which was how the Labor Arbiter acquired
jurisdiction over the company.29 But Guillermo subsequently refused to receive all notices
of hearings and conferences as well as the order to file Royal Class Venture's position
paper.30 Then, it was learned during execution that Royal Class Venture had been
dissolved.31 However, the Court of Appeals held that although the judgment had become
final and executory, it may be modified or altered "as when its execution becomes
impossible or unjust."32 It also noted that the motion to hold officers and directors like
Guillermo personally liable, as well as the notices to hear the same, was sent to them by
registered mail, but no pleadings were submitted and no appearances were made by
anyone of them during the said motion's pendency.33 Thus, the court held Guillermo liable,
citing jurisprudence that hold the president of the corporation liable for the latter's
obligation to illegally dismissed employees.34 Finally, the court dismissed Guillermo's
allegation that the case is an intra-corporate controversy, stating that jurisdiction is
determined by the allegations in the complaint and the character of the relief sought.35

From the above decision of the appellate court, Guillermo filed a Motion for
Reconsideration36 but the same was again denied by the said court in the assailed
Resolution37 dated October 7, 2011.

Hence, the instant petition.

Guillermo asserts that he was impleaded in the case only more than a year after its
Decision had become final and executory, an act which he claims to be unsupported in law
and jurisprudence.38 He contends that the decision had become final, immutable and
unalterable and that any amendment thereto is null and void.39 Guillermo assails the so-
called "piercing the veil" of corporate fiction which allegedly discriminated against him
when he alone was belatedly impleaded despite the existence of other directors and
officers in Royal Class Venture.40 He also claims that the Labor Arbiter has no jurisdiction
because the case is one of an intra-corporate controversy, with the complainant Uson also
claiming to be a stockholder and director of Royal Class Venture.41

In his Comment,42 Uson did not introduce any new arguments but merely
cited verbatim the disquisitions of the Court of Appeals to counter Guillermo's assertions
in his petition.

To resolve the case, the Court must confront the issue of whether an officer of a
corporation may be included as judgment obligor in a labor case for the first time only
after the decision of the Labor Arbiter had become final and executory, and whether the
twin doctrines of "piercing the veil of corporate fiction" and personal liability of company
officers in labor cases apply.

The petition is denied.

In the earlier labor cases of Claparols v. Court of Industrial Relations43 and A.C. Ransom
Labor Union-CCLU v. NLRC,44 persons who were not originally impleaded in the case were,
even during execution, held to be solidarity liable with the employer corporation for the
latter's unpaid obligations to complainant-employees. These included a newly-formed
corporation which was considered a mere conduit or alter ego of the originally impleaded
corporation, and/or the officers or stockholders of the latter corporation.45 Liability
attached, especially to the responsible officers, even after final judgment and during
execution, when there was a failure to collect from the employer corporation the
judgment debt awarded to its workers.46 In Naguiat v. NLRC,47 the president of the
corporation was found, for the first time on appeal, to be solidarily liable to the dismissed
employees. Then, in Reynoso v. Court of Appeals,48 the veil of corporate fiction was pierced
at the stage of execution, against a corporation not previously impleaded, when it was
established that such corporation had dominant control of the original party corporation,
which was a smaller company, in such a manner that the latter's closure was done by the
former in order to defraud its creditors, including a former worker.

The rulings of this Court in A.C. Ransom, Naguiat, and Reynoso, however, have since been
tempered, at least in the aspects of the lifting of the corporate veil and the assignment of
personal liability to directors, trustees and officers in labor cases. The subsequent cases
of McLeod v. NLRC,49Spouses Santos v. NLRC50 and Carag v. NLRC,51 have all established,
save for certain exceptions, the primacy of Section 3152 of the Corporation Code in the
matter of assigning such liability for a corporation's debts, including judgment obligations
in labor cases. According to these cases, a corporation is still an artificial being invested by
law with a personality separate and distinct from that of its stockholders and from that of
other corporations to which it may be connected.53 It is not in every instance of inability to
collect from a corporation that the veil of corporate fiction is pierced, and the responsible
officials are made liable. Personal liability attaches only when, as enumerated by the said
Section 31 of the Corporation Code, there is a wilfull and knowing assent to patently
unlawful acts of the corporation, there is gross negligence or bad faith in directing the
affairs of the corporation, or there is a conflict of interest resulting in damages to the
corporation.54 Further, in another labor case, Pantranco Employees Association (PEA-
PTGWO), et al. v. NLRC, et al.,55 the doctrine of piercing the corporate veil is held to apply
only in three (3) basic areas, namely: ( 1) defeat of public convenience as when the
corporate fiction is used as a vehicle for the evasion of an existing obligation; (2) fraud
cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a
crime; or (3) alter ego cases, where a corporation is merely a farce since it 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. In the absence of malice, bad faith, or a specific
provision of law making a corporate officer liable, such corporate officer cannot be made
personally liable for corporate liabilities.56 Indeed, in Reahs Corporation v. NLRC,57 the
conferment of liability on officers for a corporation's obligations to labor is held to be an
exception to the general doctrine of separate personality of a corporation.

It also bears emphasis that in cases where personal liability attaches, not even all officers
are made accountable. Rather, only the "responsible officer," i.e., the person directly
responsible for and who "acted in bad faith" in committing the illegal dismissal or any act
violative of the Labor Code, is held solidarily liable, in cases wherein the corporate veil is
pierced.58 In other instances, such as cases of so-called corporate tort of a close
corporation, it is the person "actively engaged" in the management of the corporation
who is held liable.59 In the absence of a clearly identifiable officer(s) directly responsible
for the legal infraction, the Court considers the president of the corporation as such
officer.60
The common thread running among the aforementioned cases, however, is that the veil of
corporate fiction can be pierced, and responsible corporate directors and officers or even
a separate but related corporation, may be impleaded and held answerable solidarily in a
labor case, even after final judgment and on execution, so long as it is established that
such persons have deliberately used the corporate vehicle to unjustly evade the judgment
obligation, or have resorted to fraud, bad faith or malice in doing so. When the shield of a
separate corporate identity is used to commit wrongdoing and opprobriously elude
responsibility, the courts and the legal authorities in a labor case have not hesitated to
step in and shatter the said shield and deny the usual protections to the offending party,
even after final judgment. The key element is the presence of fraud, malice or bad faith.
Bad faith, in this instance, does not connote bad judgment or negligence but imports a
dishonest purpose or some moral obliquity and conscious doing of wrong; it means breach
of a known duty through some motive or interest or ill will; it partakes of the nature of
fraud.61

As the foregoing implies, there is no hard and fast rule on when corporate fiction may be
disregarded; instead, each case must be evaluated according to its peculiar
circumstances.62 For the case at bar, applying the above criteria, a finding of personal and
solidary liability against a corporate officer like Guillermo must be rooted on a satisfactory
showing of fraud, bad

faith or malice, or the presence of any of the justifications for disregarding the corporate
fiction. As stated in McLeod,63 bad faith is a question of fact and is evidentiary, so that the
records must first bear evidence of malice before a finding of such may be made.

It is our finding that such evidence exists in the record. Like the A. C. Ransom,
and Naguiat cases, the case at bar involves an apparent family corporation. As in those
two cases, the records of the present case bear allegations and evidence that Guillermo,
the officer being held liable, is the person responsible in the actual running of the
company and for the malicious and illegal dismissal of the complainant; he, likewise, was
shown to have a role in dissolving the original obligor company in an obvious "scheme to
avoid liability" which jurisprudence has always looked upon with a suspicious eye in order
to protect the rights of labor.64

Part of the evidence on record is the second page of the verified Position Paper of
complainant (herein respondent) Crisanto P. Uson, where it was clearly alleged that Uson
was "illegally dismissed by the President/General Manager of respondent corporation
(herein petitioner) Jose Emmanuel P. Guillermo when Uson exposed the practice of the
said President/General Manager of dictating and undervaluing the shares of stock of the
corporation."65 The statement is proof that Guillermo was the responsible officer in charge
of running the company as well as the one who dismissed Uson from employment. As this
sworn allegation is uncontroverted - as neither the company nor Guillermo appeared
before the Labor Arbiter despite the service of summons and notices - such stands as a
fact of the case, and now functions as clear evidence of Guillermo's bad faith in his
dismissal of Uson from employment, with the motive apparently being anger at the latter's
reporting of unlawful activities.

Then, it is also clearly reflected in the records that it was Guillermo himself, as President
and General Manager of the company, who received the summons to the case, and who
also subsequently and without justifiable cause refused to receive all notices and orders of
the Labor Arbiter that followed.66This makes Guillermo responsible for his and his
company's failure to participate in the entire proceedings before the said office. The fact is
clearly narrated in the Decision and Orders of the Labor Arbiter, Uson's Motions for the
Issuance of Alias Writs of Execution, as well as in the Decision of the NLRC and the assailed
Decision of the Court of Appeals,67 which Guillermo did not dispute in any of his belated
motions or pleadings, including in his petition for certiorari before the Court of Appeals
and even in the petition currently before this Court.68 Thus, again, the same now stands as
a finding of fact of the said lower tribunals which binds this Court and which it has no
power to alter or revisit.69 Guillermo's knowledge of the case's filing and existence and his
unexplained refusal to participate in it as the responsible official of his company, again is
an indicia of his bad faith and malicious intent to evade the judgment of the labor
tribunals.

Finally, the records likewise bear that Guillermo dissolved Royal Class Venture and helped
incorporate a new firm, located in the same address as the former, wherein he is again a
stockl1older. This is borne by the Sherif11s Return which reported: that at Royal Class
Venture's business address at Minien East, Sta. Barbara, Pangasinan, there is a new
establishment named "Joel and Sons Corporation," a family corporation owned by the
Guillermos in which Jose Emmanuel F. Guillermo is again one of the stockholders; that
Guillermo received the writ of execution but used the nickname "Joey" and denied being
Jose Emmanuel F. Guillermo and, instead, pretended to be Jose's brother; that the guard
on duty confirmed that Jose and Joey are one and the same person; and that the
respondent corporation Royal Class Venture had been dissolved.70 Again, the facts
contained in the Sheriffs Return were not disputed nor controverted by Guillermo, either
in the hearings of Uson's Motions for Issuance of Alias Writs of Execution, in subsequent
motions or pleadings, or even in the petition before this Court. Essentially, then, the facts
form part of the records and now stand as further proof of Guillermo's bad faith and
malicious intent to evade the judgment obligation.
The foregoing clearly indicate a pattern or scheme to avoid the obligations to Uson and
frustrate the execution of the judgment award, which this Court, in the interest of justice,
will not countenance.

As for Guillermo's assertion that the case is an intra-corporate controversy, the Court
sustains the finding of the appellate court that the nature of an action and the jurisdiction
of a tribunal are determined by the allegations of the complaint at the time of its filing,
irrespective of whether or not the plaintiff is entitled to recover upon all or some of the
claims asserted therein.71 Although Uson is also a stockholder and director of Royal Class
Venture, it is settled in jurisprudence that not all conflicts between a stockholder and the
corporation are intra-corporate; an examination of the complaint must be made on
whether the complainant is involved in his capacity as a stockholder or director, or as an
employee.72 If the latter is found and the dispute does not meet the test of what qualities
as an intra-corporate controversy, then the case is a labor case cognizable by the NLRC and
is not within the jurisdiction of any other tribunal.73In the case at bar, Uson's allegation
was that he was maliciously and illegally dismissed as an Accounting Supervisor by
Guillermo, the Company President and General Manager, an allegation that was not even
disputed by the latter nor by Royal Class Venture. It raised no intra-corporate relationship
issues between him and the corporation or Guillermo; neither did it raise any issue
regarding the regulation of the corporation. As correctly found by the appellate court,
Uson's complaint and redress sought were centered alone on his dismissal as an
employee, and not upon any other relationship he had with the company or with
Guillermo. Thus, the matter is clearly a labor dispute cognizable by the labor
tribunals.chanrobleslaw

WHEREFORE, the petition is DENIED. The Court of Appeals Decision dated June 8, 2011
and Resolution dated October 7, 2011 in CA G.R. SP No. 115485 are AFFIRMED.

SO ORDERED.cralawlawlibrary

Velasco, Jr., (Chairperson), Perez, Reyes, and Jardeleza, JJ.,

concur.chanroblesvirtuallawlibrary
Case Digest: Guillermo v. Uson (March 7, 2016)
July 11, 2017
|
Lord Zedrique T. Macatiag

Undisputed Facts and Material Dates

Royal Class Ventures employed Crisanto P. Uson as an accounting clerk since March 11,
1996. He was promoted to the position of accounting supervisor until he was allegedly
dismissed on December 20, 2000.

On March 2, 2001, Uson filed with the Sub-Regional Arbitration Branch No. 1, Dagupan City,
of the NLRC a Complaint for Illegal Dismissal. Guillermo did not appear in the case despite
being summoned by the court.

The LA ruled in favor of Uson and ordered Royal Class to reinstate him with payment of
backwages and 13th month pay. Despite orders of the Court, however, Royal Class never
complied. Thus, Uson filed a Motion to hold directors and officers of Royal Class liable for
the satisfaction of the LAs decision.

Labor Arbiters Ruling

The LA granted Usons motion. The LA held Royal Class president/general manager,
Emmanuel P. Guillermo, liable for the enforcement of the claims of Uson. This order of
holding officers liable for the obligations of the corporation is called piercing the veil of
corporate fiction. Guillermo filed a Motion for Reconsideration, but the LA denied the same
and even castigated Guillermo for his unexplained absence in the prior proceedings.

The NLRCs Ruling on the Appeal and on the MR

Guillermo elevated the matter to the NLRC, but the court denied his appeal.

Court of Appeal's Ruling on the Appeal and on the MR

The CA agreed with the LA and NLRC, which held Guillermo personally liable for the
obligations of Royal Class to Uson.

Guillermos Allegation and Position

Guillermo contends that the so-called piercing the veil of corporate fiction discriminated
against him since he alone was held liable despite the existence of other directors and
officers of Royal Class.
Substantive Law Issue
1. WON the doctrine of piercing of the veil of corporate fiction apply in labor cases -
YES

Factual and Evidentiary Issue

1. May Guillermo be held personally liable for the obligation of Royal Class to Uson - YES

Supreme Court's Ratio Decidendi

Doctrine of piercing the corporate veil apply in labor cases
The Court rules that in labor cases, officers may indeed be ordered to answer for the
companys obligations to employees, but only when there is a presence of fraud, malice or
bad faith on the part of the officers. The Court thus explains:

The common thread running among the aforementioned cases, however, is that the veil of
corporate fiction can be pierced, and responsible corporate directors and officers or even a
separate but related corporation, may be impleaded and held answerable solidarily in a
labor case, even after final judgment and on execution, so long as it is established that such
persons have deliberately used the corporate vehicle to unjustly evade the judgment
obligation, or have resorted to fraud, bad faith or malice in doing so. When the shield of a
separate corporate identity is used to commit wrongdoing and opprobriously elude
responsibility, the courts and the legal authorities in a labor case have not hesitated to step
in and shatter the said shield and deny the usual protections to the offending party, even
after final judgment. The key element is the presence of fraud, malice or bad faith. Bad
faith, in this instance, does not connote bad judgment or negligence but imports a
dishonest purpose or some moral obliquity and conscious doing of wrong; it means breach
of a known duty through some motive or interest or ill will; it partakes of the nature of
fraud. (Emphasis supplied.)

The court adds that there is no hard and fast rule in applying the doctrine, and a case must
be evaluated according to its peculiar circumstances.

Guillermo exhibited bad faith; hence he is personally liable

The Court enumerates three reasons for finding bad faith on the part of Guillermo:

First, Guillermo was personally responsible for the malicious and illegal dismissal of Uson.
This was clearly alleged in Usons position paper, wherein he explained that Guillermo
terminated his employment when Uson exposed Guillermos practice of dictating and
undervaluing the shares of stock of the corporation. Since Guillermo was unjustifiably
absent in lower court proceedings, this allegation by Uson is now treated by the Court as a
fact of the case. It now functions as a clear evidence of bad faith on the part of Guillermo,
that his anger at Usons reporting of unlawful activities motivated Usons dismissal.

Second, he exhibited bad faith in failing to participate in the proceedings. Guillermo himself
received and refused to follow the notices and orders of the Labor Arbiter. His knowledge
of the case and his unexplained non-compliance are an indication of his bad faith to evade
the judgment of the labor tribunals.

Third, Guillermo dissolved Royal Class Venture and helped incorporate a new firm, Joel and
Sons Corporation, in which he is again a stockholder. The Court interpreted this as a
malicious scheme to evade the fulfillment of Royal Class obligation to Uson.

Finally, Guillermo pretended to be another person and introduced himself as Joey when
the Sheriff gave him the order to execute the judgment of the LA.
G.R. No. 182729 September 29, 2010
KUKAN INTERNATIONAL CORPORATION, Petitioner,
vs.
HON. AMOR REYES, in her capacity as Presiding Judge of the Regional Trial Court of
Manila, Branch 21, and ROMEO M. MORALES, doing business under the name and style
"RM Morales Trophies and Plaques,"Respondents.
DECISION
VELASCO, JR., J.:
The Case
This Petition for Review on Certiorari under Rule 45 seeks to nullify and reverse the January
23, 2008 Decision1and the April 16, 2008 Resolution2 rendered by the Court of Appeals (CA)
in CA-G.R. SP No. 100152.
The assailed CA decision affirmed the March 12, 20073 and June 7, 20074 Orders of the
Regional Trial Court (RTC) of Manila, Branch 21, in Civil Case No. 99-93173, entitled Romeo
M. Morales, doing business under the name and style RM Morales Trophies and Plaques v.
Kukan, Inc. In the said orders, the RTC disregarded the separate corporate identities of
Kukan, Inc. and Kukan International Corporation and declared them to be one and the same
entity. Accordingly, the RTC held Kukan International Corporation, albeit not impleaded in
the underlying complaint of Romeo M. Morales, liable for the judgment award decreed in a
Decision dated November 28, 20025 in favor of Morales and against Kukan, Inc.

The Facts

Sometime in March 1998, Kukan, Inc. conducted a bidding for the supply and installation of
signages in a building being constructed in Makati City. Morales tendered the winning bid
and was awarded the PhP 5 million contract. Some of the items in the project award were
later excluded resulting in the corresponding reduction of the contract price to PhP
3,388,502. Despite his compliance with his contractual undertakings, Morales was only paid
the amount of PhP 1,976,371.07, leaving a balance of PhP 1,412,130.93, which Kukan, Inc.
refused to pay despite demands. Shortchanged, Morales filed a Complaint6 with the RTC
against Kukan, Inc. for a sum of money, the case docketed as Civil Case No. 99-93173 and
eventually raffled to Branch 17 of the court.

Following the joinder of issues after Kukan, Inc. filed an answer with counterclaim, trial
ensued. However, starting November 2000, Kukan, Inc. no longer appeared and participated
in the proceedings before the trial court, prompting the RTC to declare Kukan, Inc. in default
and paving the way for Morales to present his evidence ex parte.
On November 28, 2002, the RTC rendered a Decision finding for Morales and against Kukan,
Inc., disposing as follows:
WHEREFORE, consistent with Section 5, Rule 18 of the 1997 Rules of Civil Procedure, and by
preponderance of evidence, judgment is hereby rendered in favor of the plaintiff, ordering
Kukan, Inc.:
1. to pay the sum of ONE MILLION TWO HUNDRED ONE THOUSAND SEVEN HUNDRED
TWENTY FOUR PESOS (P1,201,724.00) with legal interest at 12% per annum from
February 17, 1999 until full payment;
2. to pay the sum of FIFTY THOUSAND PESOS (P50,000.00) as moral damages;
3. to pay the sum of TWENTY THOUSAND PESOS, (P20,000.00) as reasonable attorneys
fees; and
4. to pay the sum of SEVEN THOUSAND NINE HUNDRED SIXTY PESOS and SIX CENTAVOS
(P7,960.06) as litigation expenses.
For lack of factual foundation, the counterclaim is DISMISSED.
IT IS SO ORDERED.7

After the above decision became final and executory, Morales moved for and secured a writ
of execution8 against Kukan, Inc. The sheriff then levied upon various personal properties
found at what was supposed to be Kukan, Inc.s office at Unit 2205, 88 Corporate Center,
Salcedo Village, Makati City. Alleging that it owned the properties thus levied and that it was
a different corporation from Kukan, Inc., Kukan International Corporation (KIC) filed an
Affidavit of Third-Party Claim. Notably, KIC was incorporated in August 2000, or shortly after
Kukan, Inc. had stopped participating in Civil Case No. 99-93173.

In reaction to the third party claim, Morales interposed an Omnibus Motion dated April 30,
2003. In it, Morales prayed, applying the principle of piercing the veil of corporate fiction,
that an order be issued for the satisfaction of the judgment debt of Kukan, Inc. with the
properties under the name or in the possession of KIC, it being alleged that both
corporations are but one and the same entity. KIC opposed Morales motion. By Order of
May 29, 20039as reiterated in a subsequent order, the court denied the omnibus motion.
In a bid to establish the link between KIC and Kukan, Inc., and thus determine the true
relationship between the two, Morales filed a Motion for Examination of Judgment Debtors
dated May 4, 2005. In this motion Morales sought that subponae be issued against the
primary stockholders of Kukan, Inc., among them Michael Chan, a.k.a. Chan Kai Kit. This too
was denied by the trial court in an Order dated May 24, 2005.10
Morales then sought the inhibition of the presiding judge, Eduardo B. Peralta, Jr., who
eventually granted the motion. The case was re-raffled to Branch 21, presided by public
respondent Judge Amor Reyes.

Before the Manila RTC, Branch 21, Morales filed a Motion to Pierce the Veil of Corporate
Fiction to declare KIC as having no existence separate from Kukan, Inc. This time around, the
RTC, by Order dated March 12, 2007, granted the motion, the dispositive portion of which
reads:

WHEREFORE, premises considered, the motion is hereby GRANTED. The Court hereby
declares as follows:
1. defendant Kukan, Inc. and newly created Kukan International Corp. as one and the
same corporation;
2. the levy made on the properties of Kukan International Corp. is hereby valid;
3. Kukan International Corp. and Michael Chan are jointly and severally liable to pay the
amount awarded to plaintiff pursuant to the decision of November [28], 2002 which
has long been final and executory.
SO ORDERED.

From the above order, KIC moved but was denied reconsideration in another Order dated
June 7, 2007.

KIC went to the CA on a petition for certiorari to nullify the aforesaid March 12 and June 7,
2007 RTC Orders.

On January 23, 2008, the CA rendered the assailed decision, the dispositive portion of which
states:

WHEREFORE, premises considered, the petition is hereby DENIED and the assailed Orders
dated March 12, 2007 and June 7, 2007 of the court a quo are both AFFIRMED. No costs.

SO ORDERED.11

The CA later denied KICs motion for reconsideration in the assailed resolution.
Hence, the instant petition for review, with the following issues KIC raises for the Courts
consideration:
1. There is no legal basis for the [CA] to resolve and declare that petitioners
Constitutional Right to Due Process was not violated by the public respondent in
rendering the Orders dated March 12, 2007 and June 7, 2007 and in declaring
petitioner to be liable for the judgment obligations of the corporation "Kukan, Inc."
to private respondent as petitioner is a stranger to the case and was never made a
party in the case before the trial court nor was it ever served a summons and a copy
of the complaint.
2. There is no legal basis for the [CA] to resolve and declare that the Orders dated March
12, 2007 and June 7, 2007 rendered by public respondent declaring the petitioner
liable to the judgment obligations of the corporation "Kukan, Inc." to private
 respondent are valid as said orders of the public respondent modify and/or amend
the trial courts final and executory decision rendered on November 28, 2002.
3. There is no legal basis for the [CA] to resolve and declare that the Orders dated March
12, 2007 and June 7, 2007 rendered by public respondent declaring the petitioner
[KIC] and the corporation "Kukan, Inc." as one and the same, and, therefore, the Veil
of Corporate Fiction between them be pierced as the procedure undertaken by
public respondent which the [CA] upheld is not sanctioned by the Rules of Court
and/or established jurisprudence enunciated by this Honorable Supreme Court.12
In gist, the issues to be resolved boil down to the question of, first, whether the trial
court can, after the judgment against Kukan, Inc. has attained finality, execute it
against the property of KIC; second, whether the trial court acquired jurisdiction over
KIC; and third, whether the trial and appellate courts correctly applied, under the
premises, the principle of piercing the veil of corporate fiction.

The Ruling of the Court

The petition is meritorious.

First Issue: Against Whom Can a Final and

Executory Judgment Be Executed

The preliminary question that must be answered is whether or not the trial court can, after
adjudging Kukan, Inc. liable for a sum of money in a final and executory judgment, execute
such judgment debt against the property of KIC.
The poser must be answered in the negative.

In Carpio v. Doroja,13 the Court ruled that the deciding court has supervisory control over
the execution of its judgment:

A case in which an execution has been issued is regarded as still pending so that all
proceedings on the execution are proceedings in the suit. There is no question that the court
which rendered the judgment has a general supervisory control over its process of
execution, and this power carries with it the right to determine every question of fact and
law which may be involved in the execution.

We reiterated the above holding in Javier v. Court of Appeals14 in this wise: "The said branch
has a general supervisory control over its processes in the execution of its judgment with a
right to determine every question of fact and law which may be involved in the execution."
The courts supervisory control does not, however, extend as to authorize the alteration or
amendment of a final and executory decision, save for certain recognized exceptions,
among which is the correction of clerical errors. Else, the court violates the principle of
finality of judgment and its immutability, concepts which the Court, in Tan v.
Timbal,15 defined:

As we held in Industrial Management International Development Corporation vs. NLRC:

It is an elementary principle of procedure that the resolution of the court in a given issue as
embodied in the dispositive part of a decision or order is the controlling factor as to
settlement of rights of the parties. Once a decision or order becomes final and executory, it
is removed from the power or jurisdiction of the court which rendered it to further alter or
amend it. It thereby becomes immutable and unalterable and any amendment or alteration
which substantially affects a final and executory judgment is null and void for lack of
jurisdiction, including the entire proceedings held for that purpose. An order of execution
which varies the tenor of the judgment or exceeds the terms thereof is a nullity. (Emphasis
supplied.)

Republic v. Tango16 expounded on the same principle and its exceptions:

Deeply ingrained in our jurisprudence is the principle that a decision that has acquired
finality becomes immutable and unalterable. As such, it may no longer be modified in any
respect even if the modification is meant to correct erroneous conclusions of fact or law and
whether it will be made by the court that rendered it or by the highest court of the land. x x
x

The doctrine of finality of judgment is grounded on the fundamental principle of public

policy and sound practice that, at the risk of occasional error, the judgment of courts and
the award of quasi-judicial agencies must become final on some definite date fixed by
law. The only exceptions to the general rule are the correction of clerical errors, the so-
called nunc pro tunc entries which cause no prejudice to any party, void judgments, and
whenever circumstances transpire after the finality of the decision which render its
execution unjust and inequitable. None of the exceptions obtains here to merit the review
sought. (Emphasis added.)

So, did the RTC, in breach of the doctrine of immutability and inalterability of judgment,
order the execution of its final decision in a manner as would amount to its prohibited
alteration or modification?
We repair to the dispositive portion of the final and executory RTC decision. Pertinently, it
provides:
WHEREFORE, consistent with Section 5, Rule 18 of the 1997 Rules of Civil Procedure, and by
preponderance of evidence, judgment is hereby rendered in favor of the plaintiff, ordering
Kukan, Inc.:
1. to pay the sum of ONE MILLION TWO HUNDRED ONE THOUSAND SEVEN HUNDRED
TWENTY FOUR PESOS (P1,201,724.00) with legal interest at 12% per annum from
February 17, 1999 until full payment;
2. to pay the sum of FIFTY THOUSAND PESOS (P50,000.00) as moral damages;
3. to pay the sum of TWENTY THOUSAND PESOS (P20,000.00) as reasonable attorneys
fees; and
4. to pay the sum of SEVEN THOUSAND NINE HUNDRED SIXTY PESOS and SIX CENTAVOS
(P7,960.06) as litigation expenses.

x x x x (Emphasis supplied.)

As may be noted, the above decision, in unequivocal terms, directed Kukan, Inc. to pay the
aforementioned awards to Morales. Thus, making KIC, thru the medium of a writ of
execution, answerable for the above judgment liability is a clear case of altering a decision,
an instance of granting relief not contemplated in the decision sought to be executed. And
the change does not fall under any of the recognized exceptions to the doctrine of finality
and immutability of judgment. It is a settled rule that a writ of execution must conform to
the fallo of the judgment; as an inevitable corollary, a writ beyond the terms of the
judgment is a nullity.17

Thus, on this ground alone, the instant petition can already be granted. Nonetheless, an
examination of the other issues raised by KIC would be proper.

Second Issue: Propriety of the RTC

Assuming Jurisdiction over KIC

The next issue turns on the validity of the execution the trial court authorized against KIC
and its property, given that it was neither made a party nor impleaded in Civil Case No. 99-
93173, let alone served with summons. In other words, did the trial court acquire jurisdiction
over KIC?

In the assailed decision, the appellate court deemed KIC to have voluntarily submitted itself
to the jurisdiction of the trial court owing to its filing of four (4) pleadings adverted to earlier,
namely: (a) the Affidavit of Third-Party Claim;18(b) the Comment and Opposition to Plaintiffs
Omnibus Motion;19 (c) the Motion for Reconsideration of the RTC Order dated March 12,
2007;20 and (d) the Motion for Leave to Admit Reply.21 The CA, citing Section 20, Rule 14 of
the Rules of Court, stated that "the procedural rule on service of summons can be waived
by voluntary submission to the courts jurisdiction through any form of appearance by the
party or its counsel."22

We cannot give imprimatur to the appellate courts appreciation of the thrust of Sec. 20,
Rule 14 of the Rules in concluding that the trial court acquired jurisdiction over KIC.
Orion Security Corporation v. Kalfam Enterprises, Inc.23 explains how courts acquire
jurisdiction over the parties in a civil case:

Courts acquire jurisdiction over the plaintiffs upon the filing of the complaint. On the other
hand, jurisdiction over the defendants in a civil case is acquired either through the service
of summons upon them or through their voluntary appearance in court and their submission
to its authority. (Emphasis supplied.)

In the fairly recent Palma v. Galvez,24 the Court reiterated its holding in Orion Security
Corporation, stating: "[I]n civil cases, the trial court acquires jurisdiction over the person of
the defendant either by the service of summons or by the latters voluntary appearance and
submission to the authority of the former."

The courts jurisdiction over a party-defendant resulting from his voluntary submission to
its authority is provided under Sec. 20, Rule 14 of the Rules, which states:
Section 20. Voluntary appearance. The defendants voluntary appearance in the actions
shall be equivalent to service of summons. The inclusion in a motion to dismiss of other
grounds aside from lack of jurisdiction over the person of the defendant shall not be deemed
a voluntary appearance.

To be sure, the CAs ruling that any form of appearance by the party or its counsel is deemed
as voluntary appearance finds support in the kindred Republic v. Ker & Co., Ltd. 25 and De
Midgely v. Ferandos.26

Republic and De Midgely, however, have already been modified if not altogether
superseded27 by La Naval Drug Corporation v. Court of Appeals,28 wherein the Court
essentially ruled and elucidated on the current view in our jurisdiction, to wit: "[A] special
appearance before the courtchallenging its jurisdiction over the person through a motion
to dismiss even if the movant invokes other groundsis not tantamount to estoppel or a
waiver by the movant of his objection to jurisdiction over his person; and such is not
constitutive of a voluntary submission to the jurisdiction of the court."29
In the instant case, KIC was not made a party-defendant in Civil Case No. 99-93173. Even if
it is conceded that it raised affirmative defenses through its aforementioned pleadings, KIC
never abandoned its challenge, however implicit, to the RTCs jurisdiction over its person.
The challenge was subsumed in KICs primary assertion that it was not the same entity as
Kukan, Inc. Pertinently, in its Comment and Opposition to Plaintiffs Omnibus Motion dated
May 20, 2003, KIC entered its "special but not voluntary appearance" alleging therein that
it was a different entity and has a separate legal personality from Kukan, Inc. And KIC would
consistently reiterate this assertion in all its pleadings, thus effectively resisting all along the
RTCs jurisdiction of its person. It cannot be overemphasized that KIC could not file before
the RTC a motion to dismiss and its attachments in Civil Case No. 99-93173, precisely
because KIC was neither impleaded nor served with summons. Consequently, KIC could only
assert and claim through its affidavits, comments, and motions filed by special appearance
before the RTC that it is separate and distinct from Kukan, Inc.

Following La Naval Drug Corporation,30 KIC cannot be deemed to have waived its objection
to the courts lack of jurisdiction over its person. It would defy logic to say that KIC
unequivocally submitted itself to the jurisdiction of the RTC when it strongly asserted that
it and Kukan, Inc. are different entities. In the scheme of things obtaining, KIC had no other
option but to insist on its separate identity and plead for relief consistent with that position.

Third Issue: Piercing the

Veil of Corporate Fiction
The third and main issue in this case is whether or not the trial and appellate courts correctly
applied the principle of piercing the veil of corporate entitycalled also as disregarding the
fiction of a separate juridical personality of a corporationto support a conclusion that
Kukan, Inc. and KIC are but one and the same corporation with respect to the contract award
referred to at the outset. This principle finds its context on the postulate that a corporation
is an artificial being invested with a personality separate and distinct from those of the
stockholders and from other corporations to which it may be connected or related.31

In Pantranco Employees Association (PEA-PTGWO) v. National Labor Relations

Commission,32 the Court revisited the subject principle of piercing the veil of corporate
fiction and wrote:

Under the doctrine of "piercing the veil of corporate fiction," the court looks at the
corporation as a mere collection of individuals or an aggregation of persons undertaking
business as a group, disregarding the separate juridical personality of the corporation
unifying the group. Another formulation of this doctrine is that when two business
enterprises are owned, conducted and controlled by the same parties, both law and equity
will, when necessary to protect the rights of third parties, disregard the legal fiction that two
corporations are distinct entities and treat them as identical or as one and the same.
Whether the separate personality of the corporation should be pierced hinges on
obtaining facts appropriately pleaded or proved. However, any piercing of the corporate
veil has to be done with caution, albeit the Court will not hesitate to disregard the corporate
veil when it is misused or when necessary in the interest of justice. x x x (Emphasis supplied.)

The same principle was the subject and discussed in Rivera v. United Laboratories, Inc.:
While a corporation may exist for any lawful purpose, the law will regard it as an association
of persons or, in case of two corporations, merge them into one, when its corporate legal
entity is used as a cloak for fraud or illegality. This is the doctrine of piercing the veil of
corporate fiction. The doctrine applies only when such corporate fiction is used to defeat
public convenience, justify wrong, protect fraud, or defend crime, or when it is made as a
shield to confuse the legitimate issues, or where a corporation is the mere alter ego or
business conduit of a person, or where the corporation is so organized and controlled and
its affairs are so conducted as to make it merely an instrumentality, agency, conduit or
adjunct of another corporation.

To disregard the separate juridical personality of a corporation, the wrongdoing must be

established clearly and convincingly. It cannot be presumed.33 (Emphasis supplied.)
Now, as before the appellate court, petitioner KIC maintains that the RTC violated its right
to due process when, in the execution of its November 28, 2002 Decision, the court
authorized the issuance of the writ against KIC for Kukan, Inc.s judgment debt, albeit KIC
has never been a party to the underlying suit. As a counterpoint, Morales argues that KICs
specific concern on due process and on the validity of the writ to execute the RTCs
November 28, 2002 Decision would be mooted if it were established that KIC and Kukan,
Inc. are indeed one and the same corporation.
Morales contention is untenable.

The principle of piercing the veil of corporate fiction, and the resulting treatment of two
related corporations as one and the same juridical person with respect to a given
transaction, is basically applied only to determine established liability;34 it is not available to
confer on the court a jurisdiction it has not acquired, in the first place, over a party not
impleaded in a case. Elsewise put, a corporation not impleaded in a suit cannot be subject
to the courts process of piercing the veil of its corporate fiction. In that situation, the court
has not acquired jurisdiction over the corporation and, hence, any proceedings taken
against that corporation and its property would infringe on its right to due process. Aguedo
Agbayani, a recognized authority on Commercial Law, stated as much:
23. Piercing the veil of corporate entity applies to determination of liability not of
jurisdiction. x x x
This is so because the doctrine of piercing the veil of corporate fiction comes to play
only during the trial of the case after the court has already acquired jurisdiction over the
corporation. Hence, before this doctrine can be applied, based on the evidence presented,
it is imperative that the court must first have jurisdiction over the corporation.35 x x x
(Emphasis supplied.)

The implication of the above comment is twofold: (1) the court must first acquire jurisdiction
over the corporation or corporations involved before its or their separate personalities are
disregarded; and (2) the doctrine of piercing the veil of corporate entity can only be raised
during a full-blown trial over a cause of action duly commenced involving parties duly
brought under the authority of the court by way of service of summons or what passes as
such service.

The issue of jurisdiction or the lack of it over KIC has already been discussed. Anent the
matter of the time and manner of raising the principle in question, it is undisputed that no
full-blown trial involving KIC was had when the RTC disregarded the corporate veil of KIC.
The reason for this actuality is simple and undisputed: KIC was not impleaded in Civil Case
No. 99-93173 and that the RTC did not acquire jurisdiction over it. It was dragged to the case
after it reacted to the improper execution of its properties and veritably hauled to court,
not thru the usual process of service of summons, but by mere motion of a party with whom
it has no privity of contract and after the decision in the main case had already become final
and executory. As to the propriety of a plea for the application of the principle by mere
motion, the following excerpts are instructive:

Generally, a motion is appropriate only in the absence of remedies by regular pleadings, and
is not available to settle important questions of law, or to dispose of the merits of the case.
A motion is usually a proceeding incidental to an action, but it may be a wholly distinct or
independent proceeding. A motion in this sense is not within this discussion even though
the relief demanded is denominated an "order."
A motion generally relates to procedure and is often resorted to in order to correct errors
which have crept in along the line of the principal actions progress. Generally, where there
is a procedural defect in a proceeding and no method under statute or rule of court by which
it may be called to the attention of the court, a motion is an appropriate remedy. In many
jurisdictions, the motion has replaced the common-law pleas testing the sufficiency of the
pleadings, and various common-law writs, such as writ of error coram nobis and audita
querela. In some cases, a motion may be one of several remedies available. For example, in
some jurisdictions, a motion to vacate an order is a remedy alternative to an appeal
therefrom.

Statutes governing motions are given a liberal construction.36 (Emphasis supplied.)

The bottom line issue of whether Morales can proceed against KIC for the judgment debt of
Kukan, Inc.assuming hypothetically that he can, applying the piercing the corporate veil
principleresolves itself into the question of whether a mere motion is the appropriate
vehicle for such purpose.

Verily, Morales espouses the application of the principle of piercing the corporate veil to
hold KIC liable on theory that Kukan, Inc. was out to defraud him through the use of the
separate and distinct personality of another corporation, KIC. In net effect, Morales
adverted motion to pierce the veil of corporate fiction dated January 3, 2007 stated a new
cause of action, i.e., for the liability of judgment debtor Kukan, Inc. to be borne by KIC on
the alleged identity of the two corporations. This new cause of action should be properly
ventilated in another complaint and subsequent trial where the doctrine of piercing the
corporate veil can, if appropriate, be applied, based on the evidence adduced. Establishing
the claim of Morales and the corresponding liability of KIC for Kukan Inc.s indebtedness
could hardly be the subject, under the premises, of a mere motion interposed after the
principal action against Kukan, Inc. alone had peremptorily been terminated. After all, a
complaint is one where the plaintiff alleges causes of action.
In any event, the principle of piercing the veil of corporate fiction finds no application to the
instant case.

As a general rule, courts should be wary of lifting the corporate veil between corporations,
however related. Philippine National Bank v. Andrada Electric Engineering
Company37 explains why:

A corporation is an artificial being created by operation of law. x x x It has a

personality separate and distinct from the persons composing it, as well as from any
other legal entity to which it may be related. This is basic.

Equally well-settled is the principle that the corporate mask may be removed or the
corporate veil pierced when the corporation is just an alter ego of a person or of another
corporation. For reasons of public policy and in the interest of justice, the corporate veil will
justifiably be impaled only when it becomes a shield for fraud, illegality or inequity
committed against third persons.

Hence, any application of the doctrine of piercing the corporate veil should be done with
caution. A court should be mindful of the milieu where it is to be applied. It must be certain
that the corporate fiction was misused to such an extent that injustice, fraud, or crime was
committed against another, in disregard of its rights. The wrongdoing must be clearly and
convincingly established; it cannot be presumed. Otherwise, an injustice that was never
unintended may result from an erroneous application.
This Court has pierced the corporate veil to ward off a judgment credit, to avoid inclusion of
corporate assets as part of the estate of the decedent, to escape liability arising from a debt,
or to perpetuate fraud and/or confuse legitimate issues either to promote or to shield unfair
objectives or to cover up an otherwise blatant violation of the prohibition against forum-
shopping. Only in these and similar instances may the veil be pierced and disregarded.
(Emphasis supplied.)

In fine, to justify the piercing of the veil of corporate fiction, it must be shown by clear and
convincing proof that the separate and distinct personality of the corporation was
purposefully employed to evade a legitimate and binding commitment and perpetuate a
fraud or like wrongdoings. To be sure, the Court has, on numerous occasions,38applied the
principle where a corporation is dissolved and its assets are transferred to another to avoid
a financial liability of the first corporation with the result that the second corporation should
be considered a continuation and successor of the first entity.
In those instances when the Court pierced the veil of corporate fiction of two corporations,
there was a confluence of the following factors:
1. A first corporation is dissolved;
2. The assets of the first corporation is transferred to a second corporation to avoid a
financial liability of the first corporation; and
3. Both corporations are owned and controlled by the same persons such that the
second corporation should be considered as a continuation and successor of the
first corporation.

In the instant case, however, the second and third factors are conspicuously absent. There
is, therefore, no compelling justification for disregarding the fiction of corporate entity
separating Kukan, Inc. from KIC. In applying the principle, both the RTC and the CA miserably
failed to identify the presence of the abovementioned factors. Consider:

The RTC disregarded the separate corporate personalities of Kukan, Inc. and KIC based on
the following premises and arguments:

While it is true that a corporation has a separate and distinct personality from its
stockholder, director and officers, the law expressly provides for an exception. When
Michael Chan, the Managing Director of defendant Kukan, Inc. (majority stockholder of the
newly formed corporation [KIC]) confirmed the award to plaintiff to supply and install
interior signages in the Enterprise Center he (Michael Chan, Managing Director of defendant
Kukan, Inc.) knew that there was no sufficient corporate funds to pay its obligation/account,
thus implying bad faith on his part and fraud in contracting the obligation. Michael Chan
neither returned the interior signages nor tendered payment to the plaintiff. This
circumstance may warrant the piercing of the veil of corporation fiction. Having been guilty
of bad faith in the management of corporate matters the corporate trustee, director or
officer may be held personally liable. x x x

Since fraud is a state of mind, it need not be proved by direct evidence but may be inferred
from the circumstances of the case. x x x [A]nd the circumstances are: the signature of
Michael Chan, Managing Director of Kukan, Inc. appearing in the confirmation of the award
sent to the plaintiff; signature of Chan Kai Kit, a British National appearing in the Articles of
Incorporation and signature of Michael Chan also a British National appearing in the Articles
of Incorporation [of] Kukan International Corp. give the impression that they are one and
the same person, that Michael Chan and Chan Kai Kit are both majority stockholders of
Kukan International Corp. and Kukan, Inc. holding 40% of the stocks; that Kukan
International Corp. is practically doing the same kind of business as that of Kukan,
Inc.39 (Emphasis supplied.)

As is apparent from its disquisition, the RTC brushed aside the separate corporate existence
of Kukan, Inc. and KIC on the main argument that Michael Chan owns 40% of the common
shares of both corporations, obviously oblivious that overlapping stock ownership is a
common business phenomenon. It must be remembered, however, that KICs properties
were the ones seized upon levy on execution and not that of Kukan, Inc. or of Michael Chan
for that matter. Mere ownership by a single stockholder or by another corporation of a
substantial block of shares of a corporation does not, standing alone, provide sufficient
justification for disregarding the separate corporate personality.40 For this ground to hold
sway in this case, there must be proof that Chan had control or complete dominion of Kukan
and KICs finances, policies, and business practices; he used such control to commit fraud;
and the control was the proximate cause of the financial loss complained of by Morales. The
absence of any of the elements prevents the piercing of the corporate veil. 41 And indeed,
the records do not show the presence of these elements.

On the other hand, the CA held:

In the present case, the facts disclose that Kukan, Inc. entered into a contractual obligation
x x x worth more than three million pesos although it had only Php5,000.00 paid-up capital;
[KIC] was incorporated shortly before Kukan, Inc. suddenly ceased to appear and participate
in the trial; [KICs] purpose is related and somewhat akin to that of Kukan, Inc.; and in [KIC]
Michael Chan, a.k.a., Chan Kai Kit, holds forty percent of the outstanding stocks, while he
formerly held the same amount of stocks in Kukan Inc. These would lead to the inescapable
conclusion that Kukan, Inc. committed fraudulent representation by awarding to the private
respondent the contract with full knowledge that it was not in a position to comply with the
obligation it had assumed because of inadequate paid-up capital. It bears stressing that
shareholders should in good faith put at the risk of the business, unencumbered capital
reasonably adequate for its prospective liabilities. The capital should not be illusory or
trifling compared with the business to be done and the risk of loss.

Further, it is clear that [KIC] is a continuation and successor of Kukan, Inc. Michael Chan,
a.k.a. Chan Kai Kit has the largest block of shares in both business enterprises. The
emergence of the former was cleverly timed with the hasty withdrawal of the latter during
the trial to avoid the financial liability that was eventually suffered by the latter. The two
companies have a related business purpose. Considering these circumstances, the obvious
conclusion is that the creation of Kukan International Corporation served as a device to
evade the obligation incurred by Kukan, Inc. and yet profit from the goodwill attained by the
name "Kukan" by continuing to engage in the same line of business with the same list of
clients.42 (Emphasis supplied.)

Evidently, the CA found the meager paid-up capitalization of Kukan, Inc. and the similarity
of the business activities in which both corporations are engaged as a jumping board to its
conclusion that the creation of KIC "served as a device to evade the obligation incurred by
Kukan, Inc." The appellate court, however, left a gaping hole by failing to demonstrate that
Kukan, Inc. and its stockholders defrauded Morales. In fine, there is no showing that the
incorporation, and the separate and distinct personality, of KIC was used to defeat Morales
right to recover from Kukan, Inc. Judging from the records, no serious attempt was made to
levy on the properties of Kukan, Inc. Morales could not, thus, validly argue that Kukan, Inc.
tried to avoid liability or had no property against which to proceed.
Morales further contends that Kukan, Inc.s closure is evidenced by its failure to file its 2001
General Information Sheet (GIS) with the Securities and Exchange Commission. However,
such fact does not necessarily mean that Kukan, Inc. had altogether ceased operations, as
Morales would have this Court believe, for it is stated on the face of the GIS that it is only
upon a failure to file the corporate GIS for five (5) consecutive years that non-operation shall
be presumed.

The fact that Kukan, Inc. entered into a PhP 3.3 million contract when it only had a paid-up
capital of PhP 5,000 is not an indication of the intent on the part of its management to
defraud creditors. Paid-up capital is merely seed money to start a corporation or a business
entity. As in this case, it merely represented the capitalization upon incorporation in 1997
of Kukan, Inc. Paid-up capitalization of PhP 5,000 is not and should not be taken as a
reflection of the firms capacity to meet its recurrent and long-term obligations. It must be
borne in mind that the equity portion cannot be equated to the viability of a business
concern, for the best test is the working capital which consists of the liquid assets of a given
business relating to the nature of the business concern.lawphil
Neither should the level of paid-up capital of Kukan, Inc. upon its incorporation be viewed
as a badge of fraud, for it is in compliance with Sec. 13 of the Corporation Code, 43 which
only requires a minimum paid-up capital of PhP 5,000.1avvphi1

The suggestion that KIC is but a continuation and successor of Kukan, Inc., owned and
controlled as they are by the same stockholders, stands without factual basis. It is true that
Michael Chan, a.k.a. Chan Kai Kit, owns 40% of the outstanding capital stock of both
corporations. But such circumstance, standing alone, is insufficient to establish identity.
There must be at least a substantial identity of stockholders for both corporations in order
to consider this factor to be constitutive of corporate identity.

It would not avail Morales any to rely44 on General Credit Corporation v. Alsons
Development and Investment Corporation.45 General Credit Corporation is factually not on
all fours with the instant case. There, the common stockholders of the corporations
represented 90% of the outstanding capital stock of the companies, unlike here where
Michael Chan merely represents 40% of the outstanding capital stock of both KIC and Kukan,
Inc., not even a majority of it. In that case, moreover, evidence was adduced to support the
finding that the funds of the second corporation came from the first. Finally, there was proof
in General Credit Corporation of complete control, such that one corporation was a mere
dummy or alter ego of the other, which is absent in the instant case.

Evidently, the aforementioned case relied upon by Morales cannot justify the application of
the principle of piercing the veil of corporate fiction to the instant case. As shown by the
records, the name Michael Chan, the similarity of business activities engaged in, and
incidentally the word "Kukan" appearing in the corporate names provide the nexus between
Kukan, Inc. and KIC. As illustrated, these circumstances are insufficient to establish the
identity of KIC as the alter ego or successor of Kukan, Inc.

It bears reiterating that piercing the veil of corporate fiction is frowned upon. Accordingly,
those who seek to pierce the veil must clearly establish that the separate and distinct
personalities of the corporations are set up to justify a wrong, protect fraud, or perpetrate
a deception. In the concrete and on the assumption that the RTC has validly acquired
jurisdiction over the party concerned, Morales ought to have proved by convincing evidence
that Kukan, Inc. was collapsed and thereafter KIC purposely formed and operated to defraud
him. Morales has not to us discharged his burden.

WHEREFORE, the petition is hereby GRANTED. The CAs January 23, 2008 Decision and April
16, 2008 Resolution in CA-G.R. SP No. 100152 are hereby REVERSED and SET ASIDE. The levy
placed upon the personal properties of Kukan International Corporation is hereby ordered
lifted and the personal properties ordered returned to Kukan International Corporation. The
RTC of Manila, Branch 21 is hereby directed to execute the RTC Decision dated November
28, 2002 against Kukan, Inc. with reasonable dispatch.
No costs.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Baguio City
THIRD DIVISION
G.R. No. 195580 April 21, 2014
NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND
DEVELOPMENT, INC., and MCARTHUR MINING, INC., Petitioners,
vs.
REDMONT CONSOLIDATED MINES CORP., Respondent.
DECISION
VELASCO, JR., J.:
Before this Court is a Petition for Review on Certiorari under Rule 45 filed by Narra Nickel
and Mining Development Corp. (Narra), Tesoro Mining and Development, Inc. (Tesoro), and
McArthur Mining Inc. (McArthur), which seeks to reverse the October 1, 2010 Decision1 and
the February 15, 2011 Resolution of the Court of Appeals (CA).

The Facts
Sometime in December 2006, respondent Redmont Consolidated Mines Corp. (Redmont), a
domestic corporation organized and existing under Philippine laws, took interest in mining
and exploring certain areas of the province of Palawan. After inquiring with the Department
of Environment and Natural Resources (DENR), it learned that the areas where it wanted to
undertake exploration and mining activities where already covered by Mineral Production
Sharing Agreement (MPSA) applications of petitioners Narra, Tesoro and McArthur.
Petitioner McArthur, through its predecessor-in-interest Sara Marie Mining, Inc. (SMMI),
filed an application for an MPSA and Exploration Permit (EP) with the Mines and Geo-
Sciences Bureau (MGB), Region IV-B, Office of the Department of Environment and Natural
Resources (DENR).

Subsequently, SMMI was issued MPSA-AMA-IVB-153 covering an area of over 1,782

hectares in Barangay Sumbiling, Municipality of Bataraza, Province of Palawan and EPA-IVB-
44 which includes an area of 3,720 hectares in Barangay Malatagao, Bataraza, Palawan. The
MPSA and EP were then transferred to Madridejos Mining Corporation (MMC) and, on
November 6, 2006, assigned to petitioner McArthur.2

Petitioner Narra acquired its MPSA from Alpha Resources and Development Corporation
and Patricia Louise Mining & Development Corporation (PLMDC) which previously filed an
application for an MPSA with the MGB, Region IV-B, DENR on January 6, 1992. Through the
said application, the DENR issued MPSA-IV-1-12 covering an area of 3.277 hectares in
barangays Calategas and San Isidro, Municipality of Narra, Palawan. Subsequently, PLMDC
conveyed, transferred and/or assigned its rights and interests over the MPSA application in
favor of Narra.
Another MPSA application of SMMI was filed with the DENR Region IV-B, labeled as MPSA-
AMA-IVB-154 (formerly EPA-IVB-47) over 3,402 hectares in Barangays Malinao and Princesa
Urduja, Municipality of Narra, Province of Palawan. SMMI subsequently conveyed,
transferred and assigned its rights and interest over the said MPSA application to Tesoro.
On January 2, 2007, Redmont filed before the Panel of Arbitrators (POA) of the DENR three
(3) separate petitions for the denial of petitioners applications for MPSA designated as
AMA-IVB-153, AMA-IVB-154 and MPSA IV-1-12.

In the petitions, Redmont alleged that at least 60% of the capital stock of McArthur, Tesoro
and Narra are owned and controlled by MBMI Resources, Inc. (MBMI), a 100% Canadian
corporation. Redmont reasoned that since MBMI is a considerable stockholder of
petitioners, it was the driving force behind petitioners filing of the MPSAs over the areas
covered by applications since it knows that it can only participate in mining activities
through corporations which are deemed Filipino citizens. Redmont argued that given that
petitioners capital stocks were mostly owned by MBMI, they were likewise disqualified
from engaging in mining activities through MPSAs, which are reserved only for Filipino
citizens.
In their Answers, petitioners averred that they were qualified persons under Section 3(aq)
of Republic Act No. (RA) 7942 or the Philippine Mining Act of 1995 which provided:
Sec. 3 Definition of Terms. As used in and for purposes of this Act, the following terms,
whether in singular or plural, shall mean:
xxxx
(aq) "Qualified person" means any citizen of the Philippines with capacity to contract, or a
corporation, partnership, association, or cooperative organized or authorized for the
purpose of engaging in mining, with technical and financial capability to undertake mineral
resources development and duly registered in accordance with law at least sixty per cent
(60%) of the capital of which is owned by citizens of the Philippines: Provided, That a legally
organized foreign-owned corporation shall be deemed a qualified person for purposes of
granting an exploration permit, financial or technical assistance agreement or mineral
processing permit.
Additionally, they stated that their nationality as applicants is immaterial because they also
applied for Financial or Technical Assistance Agreements (FTAA) denominated as AFTA-IVB-
09 for McArthur, AFTA-IVB-08 for Tesoro and AFTA-IVB-07 for Narra, which are granted to
foreign-owned corporations. Nevertheless, they claimed that the issue on nationality should
not be raised since McArthur, Tesoro and Narra are in fact Philippine Nationals as 60% of
their capital is owned by citizens of the Philippines. They asserted that though MBMI owns
40% of the shares of PLMC (which owns 5,997 shares of Narra),3 40% of the shares of MMC
(which owns 5,997 shares of McArthur)4 and 40% of the shares of SLMC (which, in turn,
owns 5,997 shares of Tesoro),5 the shares of MBMI will not make it the owner of at least
60% of the capital stock of each of petitioners. They added that the best tool used in
determining the nationality of a corporation is the "control test," embodied in Sec. 3 of RA
7042 or the Foreign Investments Act of 1991. They also claimed that the POA of DENR did
not have jurisdiction over the issues in Redmonts petition since they are not enumerated
in Sec. 77 of RA 7942. Finally, they stressed that Redmont has no personality to sue them
because it has no pending claim or application over the areas applied for by petitioners.
On December 14, 2007, the POA issued a Resolution disqualifying petitioners from gaining
MPSAs. It held:

[I]t is clearly established that respondents are not qualified applicants to engage in mining
activities. On the other hand, [Redmont] having filed its own applications for an EPA over
the areas earlier covered by the MPSA application of respondents may be considered if and
when they are qualified under the law. The violation of the requirements for the issuance
and/or grant of permits over mining areas is clearly established thus, there is reason to
believe that the cancellation and/or revocation of permits already issued under the
premises is in order and open the areas covered to other qualified applicants.
xxxx

WHEREFORE, the Panel of Arbitrators finds the Respondents, McArthur Mining Inc., Tesoro
Mining and Development, Inc., and Narra Nickel Mining and Development Corp. as,
DISQUALIFIED for being considered as Foreign Corporations. Their Mineral Production
Sharing Agreement (MPSA) are hereby x x x DECLARED NULL AND VOID.6
The POA considered petitioners as foreign corporations being "effectively controlled" by
MBMI, a 100% Canadian company and declared their MPSAs null and void. In the same
Resolution, it gave due course to Redmonts EPAs. Thereafter, on February 7, 2008, the POA
issued an Order7 denying the Motion for Reconsideration filed by petitioners.
Aggrieved by the Resolution and Order of the POA, McArthur and Tesoro filed a joint Notice
of Appeal8 and Memorandum of Appeal9 with the Mines Adjudication Board (MAB) while
Narra separately filed its Notice of Appeal10 and Memorandum of Appeal.11
In their respective memorandum, petitioners emphasized that they are qualified persons
under the law. Also, through a letter, they informed the MAB that they had their individual
MPSA applications converted to FTAAs. McArthurs FTAA was denominated as AFTA-IVB-
0912 on May 2007, while Tesoros MPSA application was converted to AFTA-IVB-0813 on May
28, 2007, and Narras FTAA was converted to AFTA-IVB-0714 on March 30, 2006.
Pending the resolution of the appeal filed by petitioners with the MAB, Redmont filed a
Complaint15 with the Securities and Exchange Commission (SEC), seeking the revocation of
the certificates for registration of petitioners on the ground that they are foreign-owned or
controlled corporations engaged in mining in violation of Philippine laws. Thereafter,
Redmont filed on September 1, 2008 a Manifestation and Motion to Suspend Proceeding
before the MAB praying for the suspension of the proceedings on the appeals filed by
McArthur, Tesoro and Narra.
Subsequently, on September 8, 2008, Redmont filed before the Regional Trial Court of
Quezon City, Branch 92 (RTC) a Complaint16 for injunction with application for issuance of a
temporary restraining order (TRO) and/or writ of preliminary injunction, docketed as Civil
Case No. 08-63379. Redmont prayed for the deferral of the MAB proceedings pending the
resolution of the Complaint before the SEC.
But before the RTC can resolve Redmonts Complaint and applications for injunctive reliefs,
the MAB issued an Order on September 10, 2008, finding the appeal meritorious. It held:
WHEREFORE, in view of the foregoing, the Mines Adjudication Board hereby REVERSES and
SETS ASIDE the Resolution dated 14 December 2007 of the Panel of Arbitrators of Region
IV-B (MIMAROPA) in POA-DENR Case Nos. 2001-01, 2007-02 and 2007-03, and its Order
dated 07 February 2008 denying the Motions for Reconsideration of the Appellants. The
Petition filed by Redmont Consolidated Mines Corporation on 02 January 2007 is hereby
ordered DISMISSED.17
Belatedly, on September 16, 2008, the RTC issued an Order18 granting Redmonts
application for a TRO and setting the case for hearing the prayer for the issuance of a writ
of preliminary injunction on September 19, 2008.
Meanwhile, on September 22, 2008, Redmont filed a Motion for Reconsideration19 of the
September 10, 2008 Order of the MAB. Subsequently, it filed a Supplemental Motion for
Reconsideration20 on September 29, 2008.
Before the MAB could resolve Redmonts Motion for Reconsideration and Supplemental
Motion for Reconsideration, Redmont filed before the RTC a Supplemental Complaint21 in
Civil Case No. 08-63379.
On October 6, 2008, the RTC issued an Order22 granting the issuance of a writ of preliminary
injunction enjoining the MAB from finally disposing of the appeals of petitioners and from
resolving Redmonts Motion for Reconsideration and Supplement Motion for
Reconsideration of the MABs September 10, 2008 Resolution.
On July 1, 2009, however, the MAB issued a second Order denying Redmonts Motion for
Reconsideration and Supplemental Motion for Reconsideration and resolving the appeals
filed by petitioners.
Hence, the petition for review filed by Redmont before the CA, assailing the Orders issued
by the MAB. On October 1, 2010, the CA rendered a Decision, the dispositive of which reads:
WHEREFORE, the Petition is PARTIALLY GRANTED. The assailed Orders, dated September 10,
2008 and July 1, 2009 of the Mining Adjudication Board are reversed and set aside. The
findings of the Panel of Arbitrators of the Department of Environment and Natural
Resources that respondents McArthur, Tesoro and Narra are foreign corporations is upheld
and, therefore, the rejection of their applications for Mineral Product Sharing Agreement
should be recommended to the Secretary of the DENR.
With respect to the applications of respondents McArthur, Tesoro and Narra for Financial
or Technical Assistance Agreement (FTAA) or conversion of their MPSA applications to FTAA,
the matter for its rejection or approval is left for determination by the Secretary of the DENR
and the President of the Republic of the Philippines.
SO ORDERED.23
In a Resolution dated February 15, 2011, the CA denied the Motion for Reconsideration filed
by petitioners.
After a careful review of the records, the CA found that there was doubt as to the nationality
of petitioners when it realized that petitioners had a common major investor, MBMI, a
corporation composed of 100% Canadians. Pursuant to the first sentence of paragraph 7 of
Department of Justice (DOJ) Opinion No. 020, Series of 2005, adopting the 1967 SEC Rules
which implemented the requirement of the Constitution and other laws pertaining to the
exploitation of natural resources, the CA used the "grandfather rule" to determine the
nationality of petitioners. It provided:
Shares belonging to corporations or partnerships at least 60% of the capital of which is
owned by Filipino citizens shall be considered as of Philippine nationality, but if the
percentage of Filipino ownership in the corporation or partnership is less than 60%, only the
number of shares corresponding to such percentage shall be counted as of Philippine
nationality. Thus, if 100,000 shares are registered in the name of a corporation or
partnership at least 60% of the capital stock or capital, respectively, of which belong to
Filipino citizens, all of the shares shall be recorded as owned by Filipinos. But if less than
60%, or say, 50% of the capital stock or capital of the corporation or partnership,
respectively, belongs to Filipino citizens, only 50,000 shares shall be recorded as belonging
to aliens.24(emphasis supplied)
In determining the nationality of petitioners, the CA looked into their corporate structures
and their corresponding common shareholders. Using the grandfather rule, the CA
discovered that MBMI in effect owned majority of the common stocks of the petitioners as
well as at least 60% equity interest of other majority shareholders of petitioners through
joint venture agreements. The CA found that through a "web of corporate layering, it is clear
that one common controlling investor in all mining corporations involved x x x is
MBMI."25 Thus, it concluded that petitioners McArthur, Tesoro and Narra are also in
partnership with, or privies-in-interest of, MBMI.
Furthermore, the CA viewed the conversion of the MPSA applications of petitioners into
FTAA applications suspicious in nature and, as a consequence, it recommended the rejection
of petitioners MPSA applications by the Secretary of the DENR.
With regard to the settlement of disputes over rights to mining areas, the CA pointed out
that the POA has jurisdiction over them and that it also has the power to determine the of
nationality of petitioners as a prerequisite of the Constitution prior the conferring of rights
to "co-production, joint venture or production-sharing agreements" of the state to mining
rights. However, it also stated that the POAs jurisdiction is limited only to the resolution of
the dispute and not on the approval or rejection of the MPSAs. It stipulated that only the
Secretary of the DENR is vested with the power to approve or reject applications for MPSA.
Finally, the CA upheld the findings of the POA in its December 14, 2007 Resolution which
considered petitioners McArthur, Tesoro and Narra as foreign corporations. Nevertheless,
the CA determined that the POAs declaration that the MPSAs of McArthur, Tesoro and
Narra are void is highly improper.
While the petition was pending with the CA, Redmont filed with the Office of the President
(OP) a petition dated May 7, 2010 seeking the cancellation of petitioners FTAAs. The OP
rendered a Decision26 on April 6, 2011, wherein it canceled and revoked petitioners FTAAs
for violating and circumventing the "Constitution x x x[,] the Small Scale Mining Law and
Environmental Compliance Certificate as well as Sections 3 and 8 of the Foreign Investment
Act and E.O. 584."27 The OP, in affirming the cancellation of the issued FTAAs, agreed with
Redmont stating that petitioners committed violations against the abovementioned laws
and failed to submit evidence to negate them. The Decision further quoted the December
14, 2007 Order of the POA focusing on the alleged misrepresentation and claims made by
petitioners of being domestic or Filipino corporations and the admitted continued mining
operation of PMDC using their locally secured Small Scale Mining Permit inside the area
earlier applied for an MPSA application which was eventually transferred to Narra. It also
agreed with the POAs estimation that the filing of the FTAA applications by petitioners is a
clear admission that they are "not capable of conducting a large scale mining operation and
that they need the financial and technical assistance of a foreign entity in their operation,
that is why they sought the participation of MBMI Resources, Inc."28 The Decision further
quoted:
The filing of the FTAA application on June 15, 2007, during the pendency of the case only
demonstrate the violations and lack of qualification of the respondent corporations to
engage in mining. The filing of the FTAA application conversion which is allowed foreign
corporation of the earlier MPSA is an admission that indeed the respondent is not Filipino
but rather of foreign nationality who is disqualified under the laws. Corporate documents
of MBMI Resources, Inc. furnished its stockholders in their head office in Canada suggest
that they are conducting operation only through their local counterparts.29
The Motion for Reconsideration of the Decision was further denied by the OP in a
Resolution30 dated July 6, 2011. Petitioners then filed a Petition for Review on Certiorari of
the OPs Decision and Resolution with the CA, docketed as CA-G.R. SP No. 120409. In the CA
Decision dated February 29, 2012, the CA affirmed the Decision and Resolution of the OP.
Thereafter, petitioners appealed the same CA decision to this Court which is now pending
with a different division.
Thus, the instant petition for review against the October 1, 2010 Decision of the CA.
Petitioners put forth the following errors of the CA:
I.
The Court of Appeals erred when it did not dismiss the case for mootness despite the fact
that the subject matter of the controversy, the MPSA Applications, have already been
converted into FTAA applications and that the same have already been granted.
II.The Court of Appeals erred when it did not dismiss the case for lack of jurisdiction
considering that the Panel of Arbitrators has no jurisdiction to determine the
nationality of Narra, Tesoro and McArthur.
III.The Court of Appeals erred when it did not dismiss the case on account of Redmonts
willful forum shopping.
IV.The Court of Appeals ruling that Narra, Tesoro and McArthur are foreign corporations
based on the "Grandfather Rule" is contrary to law, particularly the express mandate
of the Foreign Investments Act of 1991, as amended, and the FIA Rules.
V.The Court of Appeals erred when it applied the exceptions to the res inter alios acta
rule.
VI.The Court of Appeals erred when it concluded that the conversion of the MPSA
Applications into FTAA Applications were of "suspicious nature" as the same is based
on mere conjectures and surmises without any shred of evidence to show the same.31

We find the petition to be without merit.

This case not moot and academic
The claim of petitioners that the CA erred in not rendering the instant case as moot is
without merit.
Basically, a case is said to be moot and/or academic when it "ceases to present a justiciable
controversy by virtue of supervening events, so that a declaration thereon would be of no
practical use or value."32 Thus, the courts "generally decline jurisdiction over the case or
dismiss it on the ground of mootness."33
The "mootness" principle, however, does accept certain exceptions and the mere raising of
an issue of "mootness" will not deter the courts from trying a case when there is a valid
reason to do so. In David v. Macapagal-Arroyo (David), the Court provided four instances
where courts can decide an otherwise moot case, thus:
1.) There is a grave violation of the Constitution;
2.) The exceptional character of the situation and paramount public interest is involved;
3.) When constitutional issue raised requires formulation of controlling principles to guide
the bench, the bar, and the public; and
4.) The case is capable of repetition yet evading review.34
All of the exceptions stated above are present in the instant case. We of this Court note that
a grave violation of the Constitution, specifically Section 2 of Article XII, is being committed
by a foreign corporation right under our countrys nose through a myriad of corporate
layering under different, allegedly, Filipino corporations. The intricate corporate layering
utilized by the Canadian company, MBMI, is of exceptional character and involves
paramount public interest since it undeniably affects the exploitation of our Countrys
natural resources. The corresponding actions of petitioners during the lifetime and
existence of the instant case raise questions as what principle is to be applied to cases with
similar issues. No definite ruling on such principle has been pronounced by the Court; hence,
the disposition of the issues or errors in the instant case will serve as a guide "to the bench,
the bar and the public."35 Finally, the instant case is capable of repetition yet evading review,
since the Canadian company, MBMI, can keep on utilizing dummy Filipino corporations
through various schemes of corporate layering and conversion of applications to skirt the
constitutional prohibition against foreign mining in Philippine soil.
Conversion of MPSA applications to FTAA applications
We shall discuss the first error in conjunction with the sixth error presented by petitioners
since both involve the conversion of MPSA applications to FTAA applications. Petitioners
propound that the CA erred in ruling against them since the questioned MPSA applications
were already converted into FTAA applications; thus, the issue on the prohibition relating
to MPSA applications of foreign mining corporations is academic. Also, petitioners would
want us to correct the CAs finding which deemed the aforementioned conversions of
applications as suspicious in nature, since it is based on mere conjectures and surmises and
not supported with evidence.
We disagree.
The CAs analysis of the actions of petitioners after the case was filed against them by
respondent is on point. The changing of applications by petitioners from one type to another
just because a case was filed against them, in truth, would raise not a few sceptics
eyebrows. What is the reason for such conversion? Did the said conversion not stem from
the case challenging their citizenship and to have the case dismissed against them for being
"moot"? It is quite obvious that it is petitioners strategy to have the case dismissed against
them for being "moot."
Consider the history of this case and how petitioners responded to every action done by the
court or appropriate government agency: on January 2, 2007, Redmont filed three separate
petitions for denial of the MPSA applications of petitioners before the POA. On June 15,
2007, petitioners filed a conversion of their MPSA applications to FTAAs. The POA, in its
December 14, 2007 Resolution, observed this suspect change of applications while the case
was pending before it and held:
The filing of the Financial or Technical Assistance Agreement application is a clear admission
that the respondents are not capable of conducting a large scale mining operation and that
they need the financial and technical assistance of a foreign entity in their operation that is
why they sought the participation of MBMI Resources, Inc. The participation of MBMI in the
corporation only proves the fact that it is the Canadian company that will provide the
finances and the resources to operate the mining areas for the greater benefit and interest
of the same and not the Filipino stockholders who only have a less substantial financial stake
in the corporation.
xxxx
x x x The filing of the FTAA application on June 15, 2007, during the pendency of the case
only demonstrate the violations and lack of qualification of the respondent corporations to
engage in mining. The filing of the FTAA application conversion which is allowed foreign
corporation of the earlier MPSA is an admission that indeed the respondent is not Filipino
but rather of foreign nationality who is disqualified under the laws. Corporate documents
of MBMI Resources, Inc. furnished its stockholders in their head office in Canada suggest
that they are conducting operation only through their local counterparts.36
On October 1, 2010, the CA rendered a Decision which partially granted the petition,
reversing and setting aside the September 10, 2008 and July 1, 2009 Orders of the MAB. In
the said Decision, the CA upheld the findings of the POA of the DENR that the herein
petitioners are in fact foreign corporations thus a recommendation of the rejection of their
MPSA applications were recommended to the Secretary of the DENR. With respect to the
FTAA applications or conversion of the MPSA applications to FTAAs, the CA deferred the
matter for the determination of the Secretary of the DENR and the President of the Republic
of the Philippines.37
In their Motion for Reconsideration dated October 26, 2010, petitioners prayed for the
dismissal of the petition asserting that on April 5, 2010, then President Gloria Macapagal-
Arroyo signed and issued in their favor FTAA No. 05-2010-IVB, which rendered the petition
moot and academic. However, the CA, in a Resolution dated February 15, 2011 denied their
motion for being a mere "rehash of their claims and defenses."38 Standing firm on its
Decision, the CA affirmed the ruling that petitioners are, in fact, foreign corporations. On
April 5, 2011, petitioners elevated the case to us via a Petition for Review on Certiorari under
Rule 45, questioning the Decision of the CA. Interestingly, the OP rendered a Decision dated
April 6, 2011, a day after this petition for review was filed, cancelling and revoking the FTAAs,
quoting the Order of the POA and stating that petitioners are foreign corporations since
they needed the financial strength of MBMI, Inc. in order to conduct large scale mining
operations. The OP Decision also based the cancellation on the misrepresentation of facts
and the violation of the "Small Scale Mining Law and Environmental Compliance Certificate
as well as Sections 3 and 8 of the Foreign Investment Act and E.O. 584." 39 On July 6, 2011,
the OP issued a Resolution, denying the Motion for Reconsideration filed by the petitioners.
Respondent Redmont, in its Comment dated October 10, 2011, made known to the Court
the fact of the OPs Decision and Resolution. In their Reply, petitioners chose to ignore the
OP Decision and continued to reuse their old arguments claiming that they were granted
FTAAs and, thus, the case was moot. Petitioners filed a Manifestation and Submission dated
October 19, 2012,40 wherein they asserted that the present petition is moot since, in a
remarkable turn of events, MBMI was able to sell/assign all its shares/interest in the
"holding companies" to DMCI Mining Corporation (DMCI), a Filipino corporation and, in
effect, making their respective corporations fully-Filipino owned.
Again, it is quite evident that petitioners have been trying to have this case dismissed for
being "moot." Their final act, wherein MBMI was able to allegedly sell/assign all its shares
and interest in the petitioner "holding companies" to DMCI, only proves that they were in
fact not Filipino corporations from the start. The recent divesting of interest by MBMI will
not change the stand of this Court with respect to the nationality of petitioners prior the
suspicious change in their corporate structures. The new documents filed by petitioners are
factual evidence that this Court has no power to verify.
The only thing clear and proved in this Court is the fact that the OP declared that petitioner
corporations have violated several mining laws and made misrepresentations and falsehood
in their applications for FTAA which lead to the revocation of the said FTAAs, demonstrating
that petitioners are not beyond going against or around the law using shifty actions and
strategies. Thus, in this instance, we can say that their claim of mootness is moot in itself
because their defense of conversion of MPSAs to FTAAs has been discredited by the OP
Decision.

Grandfather test
The main issue in this case is centered on the issue of petitioners nationality, whether
Filipino or foreign. In their previous petitions, they had been adamant in insisting that they
were Filipino corporations, until they submitted their Manifestation and Submission dated
October 19, 2012 where they stated the alleged change of corporate ownership to reflect
their Filipino ownership. Thus, there is a need to determine the nationality of petitioner
corporations.

Basically, there are two acknowledged tests in determining the nationality of a corporation:
the control test and the grandfather rule. Paragraph 7 of DOJ Opinion No. 020, Series of
2005, adopting the 1967 SEC Rules which implemented the requirement of the Constitution
and other laws pertaining to the controlling interests in enterprises engaged in the
exploitation of natural resources owned by Filipino citizens, provides:
Shares belonging to corporations or partnerships at least 60% of the capital of which is
owned by Filipino citizens shall be considered as of Philippine nationality, but if the
percentage of Filipino ownership in the corporation or partnership is less than 60%, only the
number of shares corresponding to such percentage shall be counted as of Philippine
nationality. Thus, if 100,000 shares are registered in the name of a corporation or
partnership at least 60% of the capital stock or capital, respectively, of which belong to
Filipino citizens, all of the shares shall be recorded as owned by Filipinos. But if less than
60%, or say, 50% of the capital stock or capital of the corporation or partnership,
respectively, belongs to Filipino citizens, only 50,000 shares shall be counted as owned by
Filipinos and the other 50,000 shall be recorded as belonging to aliens.
The first part of paragraph 7, DOJ Opinion No. 020, stating "shares belonging to corporations
or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be
considered as of Philippine nationality," pertains to the control test or the liberal rule. On
the other hand, the second part of the DOJ Opinion which provides, "if the percentage of
the Filipino ownership in the corporation or partnership is less than 60%, only the number
of shares corresponding to such percentage shall be counted as Philippine nationality,"
pertains to the stricter, more stringent grandfather rule.
Prior to this recent change of events, petitioners were constant in advocating the application
of the "control test" under RA 7042, as amended by RA 8179, otherwise known as the
Foreign Investments Act (FIA), rather than using the stricter grandfather rule. The pertinent
provision under Sec. 3 of the FIA provides:
SECTION 3. Definitions. - As used in this Act:
a.) The term Philippine national shall mean a citizen of the Philippines; or a domestic
partnership or association wholly owned by the citizens of the Philippines; a corporation
organized under the laws of the Philippines of which at least sixty percent (60%) of the
capital stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee of
funds for pension or other employee retirement or separation benefits, where the trustee
is a Philippine national and at least sixty percent (60%) of the fund will accrue to the benefit
of Philippine nationals: Provided, That were a corporation and its non-Filipino stockholders
own stocks in a Securities and Exchange Commission (SEC) registered enterprise, at least
sixty percent (60%) of the capital stock outstanding and entitled to vote of each of both
corporations must be owned and held by citizens of the Philippines and at least sixty percent
(60%) of the members of the Board of Directors, in order that the corporation shall be
considered a Philippine national. (emphasis supplied)
The grandfather rule, petitioners reasoned, has no leg to stand on in the instant case since
the definition of a "Philippine National" under Sec. 3 of the FIA does not provide for it. They
further claim that the grandfather rule "has been abandoned and is no longer the applicable
rule."41 They also opined that the last portion of Sec. 3 of the FIA admits the application of
a "corporate layering" scheme of corporations. Petitioners claim that the clear and
unambiguous wordings of the statute preclude the court from construing it and prevent the
courts use of discretion in applying the law. They said that the plain, literal meaning of the
statute meant the application of the control test is obligatory.
We disagree. "Corporate layering" is admittedly allowed by the FIA; but if it is used to
circumvent the Constitution and pertinent laws, then it becomes illegal. Further, the
pronouncement of petitioners that the grandfather rule has already been abandoned must
be discredited for lack of basis.
Art. XII, Sec. 2 of the Constitution provides:
Sec. 2. All lands of the public domain, waters, minerals, coal, petroleum and other mineral
oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and
other natural resources are owned by the State. With the exception of agricultural lands, all
other natural resources shall not be alienated. The exploration, development, and utilization
of natural resources shall be under the full control and supervision of the State. The State
may directly undertake such activities, or it may enter into co-production, joint venture or
production-sharing agreements with Filipino citizens, or corporations or associations at least
sixty per centum of whose capital is owned by such citizens. Such agreements may be for a
period not exceeding twenty-five years, renewable for not more than twenty-five years, and
under such terms and conditions as may be provided by law.
xxxx
The President may enter into agreements with Foreign-owned corporations involving either
technical or financial assistance for large-scale exploration, development, and utilization of
minerals, petroleum, and other mineral oils according to the general terms and conditions
provided by law, based on real contributions to the economic growth and general welfare
of the country. In such agreements, the State shall promote the development and use of
local scientific and technical resources. (emphasis supplied)
The emphasized portion of Sec. 2 which focuses on the State entering into different types
of agreements for the exploration, development, and utilization of natural resources with
entities who are deemed Filipino due to 60 percent ownership of capital is pertinent to this
case, since the issues are centered on the utilization of our countrys natural resources or
specifically, mining. Thus, there is a need to ascertain the nationality of petitioners since, as
the Constitution so provides, such agreements are only allowed corporations or associations
"at least 60 percent of such capital is owned by such citizens." The deliberations in the
Records of the 1986 Constitutional Commission shed light on how a citizenship of a
corporation will be determined:
Mr. BENNAGEN: Did I hear right that the Chairmans interpretation of an
independent national economy is freedom from undue foreign control?
What is the meaning of undue foreign control?
MR. VILLEGAS: Undue foreign control is foreign control which sacrifices
national sovereignty and the welfare of the Filipino in the economic
sphere.
MR. BENNAGEN: Why does it have to be qualified still with the word
"undue"? Why not simply freedom from foreign control? I think that is the
meaning of independence, because as phrased, it still allows for foreign
control.
MR. VILLEGAS: It will now depend on the interpretation because if, for
example, we retain the 60/40 possibility in the cultivation of natural
resources, 40 percent involves some control; not total control, but some
control.
MR. BENNAGEN: In any case, I think in due time we will propose some
amendments.
MR. VILLEGAS: Yes. But we will be open to improvement of the
phraseology.
Mr. BENNAGEN: Yes.
Thank you, Mr. Vice-President.
 xxxx
MR. NOLLEDO: In Sections 3, 9 and 15, the Committee stated local or
Filipino equity and foreign equity; namely, 60-40 in Section 3, 60-40 in
Section 9, and 2/3-1/3 in Section 15.
MR. VILLEGAS: That is right.
MR. NOLLEDO: In teaching law, we are always faced with the question:
Where do we base the equity requirement, is it on the authorized capital
stock, on the subscribed capital stock, or on the paid-up capital stock of a
corporation? Will the Committee please enlighten me on this?
MR. VILLEGAS: We have just had a long discussion with the members of
the team from the UP Law Center who provided us with a draft. The
phrase that is contained here which we adopted from the UP draft is 60
percent of the voting stock.
MR. NOLLEDO: That must be based on the subscribed capital stock,
because unless declared delinquent, unpaid capital stock shall be entitled
to vote.
MR. VILLEGAS: That is right.
MR. NOLLEDO: Thank you.
With respect to an investment by one corporation in another corporation,
say, a corporation with 60-40 percent equity invests in another
corporation which is permitted by the Corporation Code, does the
Committee adopt the grandfather rule?
MR. VILLEGAS: Yes, that is the understanding of the Committee.
MR. NOLLEDO: Therefore, we need additional Filipino capital?
MR. VILLEGAS: Yes.42 (emphasis supplied)
It is apparent that it is the intention of the framers of the Constitution to apply the
grandfather rule in cases where corporate layering is present.
Elementary in statutory construction is when there is conflict between the Constitution and
a statute, the Constitution will prevail. In this instance, specifically pertaining to the
provisions under Art. XII of the Constitution on National Economy and Patrimony, Sec. 3 of
the FIA will have no place of application. As decreed by the honorable framers of our
Constitution, the grandfather rule prevails and must be applied.
Likewise, paragraph 7, DOJ Opinion No. 020, Series of 2005 provides:
The above-quoted SEC Rules provide for the manner of calculating the Filipino interest in a
corporation for purposes, among others, of determining compliance with nationality
requirements (the Investee Corporation). Such manner of computation is necessary since
the shares in the Investee Corporation may be owned both by individual stockholders
(Investing Individuals) and by corporations and partnerships (Investing Corporation). The
said rules thus provide for the determination of nationality depending on the ownership of
the Investee Corporation and, in certain instances, the Investing Corporation.
Under the above-quoted SEC Rules, there are two cases in determining the nationality of
the Investee Corporation. The first case is the liberal rule, later coined by the SEC as the
Control Test in its 30 May 1990 Opinion, and pertains to the portion in said Paragraph 7 of
the 1967 SEC Rules which states, (s)hares belonging to corporations or partnerships at least
60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine
nationality. Under the liberal Control Test, there is no need to further trace the ownership
of the 60% (or more) Filipino stockholdings of the Investing Corporation since a corporation
which is at least 60% Filipino-owned is considered as Filipino.
The second case is the Strict Rule or the Grandfather Rule Proper and pertains to the portion
in said Paragraph 7 of the 1967 SEC Rules which states, "but if the percentage of Filipino
ownership in the corporation or partnership is less than 60%, only the number of shares
corresponding to such percentage shall be counted as of Philippine nationality." Under the
Strict Rule or Grandfather Rule Proper, the combined totals in the Investing Corporation and
the Investee Corporation must be traced (i.e., "grandfathered") to determine the total
percentage of Filipino ownership.
Moreover, the ultimate Filipino ownership of the shares must first be traced to the level of
the Investing Corporation and added to the shares directly owned in the Investee
Corporation x x x.
xxxx

In other words, based on the said SEC Rule and DOJ Opinion, the Grandfather Rule or the
second part of the SEC Rule applies only when the 60-40 Filipino-foreign equity ownership
is in doubt (i.e., in cases where the joint venture corporation with Filipino and foreign
stockholders with less than 60% Filipino stockholdings [or 59%] invests in other joint venture
corporation which is either 60-40% Filipino-alien or the 59% less Filipino). Stated differently,
where the 60-40 Filipino- foreign equity ownership is not in doubt, the Grandfather Rule will
not apply. (emphasis supplied)

After a scrutiny of the evidence extant on record, the Court finds that this case calls for the
application of the grandfather rule since, as ruled by the POA and affirmed by the OP, doubt
prevails and persists in the corporate ownership of petitioners. Also, as found by the CA,
doubt is present in the 60-40 Filipino equity ownership of petitioners Narra, McArthur and
Tesoro, since their common investor, the 100% Canadian corporationMBMI, funded
them. However, petitioners also claim that there is "doubt" only when the stockholdings of
Filipinos are less than 60%.43

The assertion of petitioners that "doubt" only exists when the stockholdings are less than
60% fails to convince this Court. DOJ Opinion No. 20, which petitioners quoted in their
petition, only made an example of an instance where "doubt" as to the ownership of the
corporation exists. It would be ludicrous to limit the application of the said word only to the
instances where the stockholdings of non-Filipino stockholders are more than 40% of the
total stockholdings in a corporation. The corporations interested in circumventing our laws
would clearly strive to have "60% Filipino Ownership" at face value. It would be senseless
for these applying corporations to state in their respective articles of incorporation that they
have less than 60% Filipino stockholders since the applications will be denied instantly. Thus,
various corporate schemes and layerings are utilized to circumvent the application of the
Constitution.
Obviously, the instant case presents a situation which exhibits a scheme employed by
stockholders to circumvent the law, creating a cloud of doubt in the Courts mind. To
determine, therefore, the actual participation, direct or indirect, of MBMI, the grandfather
rule must be used.
McArthur Mining, Inc.
To establish the actual ownership, interest or participation of MBMI in each of petitioners
corporate structure, they have to be "grandfathered."
As previously discussed, McArthur acquired its MPSA application from MMC, which
acquired its application from SMMI. McArthur has a capital stock of ten million pesos (PhP
10,000,000) divided into 10,000 common shares at one thousand pesos (PhP 1,000) per
share, subscribed to by the following:44
Name Nationality Number Amount Amount Paid
of Shares Subscribed
Madridejos Filipino 5,997 PhP PhP 825,000.00
Mining 5,997,000.00
Corporation
MBMI Canadian 3,998 PhP PhP
Resources, 3,998,000.0 1,878,174.60
Inc.
Lauro L. Filipino 1 PhP 1,000.00 PhP 1,000.00
Salazar
Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00
Esguerra
Manuel A. Filipino 1 PhP 1,000.00 PhP 1,000.00
Agcaoili
Michael T. American 1 PhP 1,000.00 PhP 1,000.00
Mason
Kenneth Canadian 1 PhP 1,000.00 PhP 1,000.00
Cawkell
Total 10,000 PhP PhP
10,000,000.00 2,708,174.60
(emphasis
supplied)
Interestingly, looking at the corporate structure of MMC, we take note that it has a similar
structure and composition as McArthur. In fact, it would seem that MBMI is also a major
investor and "controls"45 MBMI and also, similar nominal shareholders were present, i.e.
Fernando B. Esguerra (Esguerra), Lauro L. Salazar (Salazar), Michael T. Mason (Mason) and
Kenneth Cawkell (Cawkell):
Madridejos Mining Corporation
Name Nationality Number Amount Amount Paid
of Shares Subscribed
Olympic Filipino 6,663 PhP PhP 0
Mines & 6,663,000.00
Development
Corp.
MBMI Canadian 3,331 PhP PhP
Resources, 3,331,000.00 2,803,900.00
Inc.
Amanti Filipino 1 PhP 1,000.00 PhP 1,000.00
Limson
Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00
Esguerra
Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
Emmanuel G. Filipino 1 PhP 1,000.00 PhP 1,000.00
Hernando
Michael T. American 1 PhP 1,000.00 PhP 1,000.00
Mason
Kenneth Canadian 1 PhP 1,000.00 PhP 1,000.00
Cawkell
Total 10,000 PhP PhP
10,000,000.00 2,809,900.00
(emphasis
supplied)
Noticeably, Olympic Mines & Development Corporation (Olympic) did not pay any amount
with respect to the number of shares they subscribed to in the corporation, which is quite
absurd since Olympic is the major stockholder in MMC. MBMIs 2006 Annual Report sheds
light on why Olympic failed to pay any amount with respect to the number of shares it
subscribed to. It states that Olympic entered into joint venture agreements with several
Philippine companies, wherein it holds directly and indirectly a 60% effective equity interest
in the Olympic Properties.46 Quoting the said Annual report:
On September 9, 2004, the Company and Olympic Mines & Development Corporation
("Olympic") entered into a series of agreements including a Property Purchase and
Development Agreement (the Transaction Documents) with respect to three nickel laterite
properties in Palawan, Philippines (the "Olympic Properties"). The Transaction Documents
effectively establish a joint venture between the Company and Olympic for purposes of
developing the Olympic Properties. The Company holds directly and indirectly an initial 60%
interest in the joint venture. Under certain circumstances and upon achieving certain
milestones, the Company may earn up to a 100% interest, subject to a 2.5% net revenue
royalty.47 (emphasis supplied)
Thus, as demonstrated in this first corporation, McArthur, when it is "grandfathered,"
company layering was utilized by MBMI to gain control over McArthur. It is apparent that
MBMI has more than 60% or more equity interest in McArthur, making the latter a foreign
corporation.
Tesoro Mining and Development, Inc.
Tesoro, which acquired its MPSA application from SMMI, has a capital stock of ten million
pesos (PhP 10,000,000) divided into ten thousand (10,000) common shares at PhP 1,000 per
share, as demonstrated below:
[[reference
Name Nationality Number Amount Amount Paid
of Subscribed
Shares
Sara Marie Filipino 5,997 PhP PhP 825,000.00
Mining, Inc. 5,997,000.00
MBMI Canadian 3,998 PhP PhP
Resources, 3,998,000.00 1,878,174.60
Inc.
Lauro L. Filipino 1 PhP 1,000.00 PhP 1,000.00
Salazar
Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00
Esguerra
Manuel A. Filipino 1 PhP 1,000.00 PhP 1,000.00
Agcaoili
Michael T. American 1 PhP 1,000.00 PhP 1,000.00
Mason
Kenneth Canadian 1 PhP 1,000.00 PhP 1,000.00
Cawkell
Total 10,000 PhP PhP
10,000,000.00 2,708,174.60
(emphasis
supplied)
Except for the name "Sara Marie Mining, Inc.," the table above shows exactly the same
figures as the corporate structure of petitioner McArthur, down to the last centavo. All the
other shareholders are the same: MBMI, Salazar, Esguerra, Agcaoili, Mason and Cawkell.
The figures under "Nationality," "Number of Shares," "Amount Subscribed," and "Amount
Paid" are exactly the same. Delving deeper, we scrutinize SMMIs corporate structure:
Sara Marie Mining, Inc.
[[reference
Name Nationality Number Amount Amount Paid
of Subscribed
Shares
Olympic Mines Filipino 6,663 PhP 6,663,000.00 PhP 0
&
Development
Corp.
MBMI Canadian 3,331 PhP 3,331,000.00 PhP
Resources, 2,794,000.00
Inc.
Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00
Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00
Esguerra
Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
Emmanuel G. Filipino 1 PhP 1,000.00 PhP 1,000.00
Hernando
Michael T. American 1 PhP 1,000.00 PhP 1,000.00
Mason
Kenneth Canadian 1 PhP 1,000.00 PhP 1,000.00
Cawkell
Total 10,000 PhP PhP
10,000,000.00 2,809,900.00
(emphasis
supplied)
After subsequently studying SMMIs corporate structure, it is not farfetched for us to spot
the glaring similarity between SMMI and MMCs corporate structure. Again, the presence
of identical stockholders, namely: Olympic, MBMI, Amanti Limson (Limson), Esguerra,
Salazar, Hernando, Mason and Cawkell. The figures under the headings "Nationality,"
"Number of Shares," "Amount Subscribed," and "Amount Paid" are exactly the same except
for the amount paid by MBMI which now reflects the amount of two million seven hundred
ninety four thousand pesos (PhP 2,794,000). Oddly, the total value of the amount paid is
two million eight hundred nine thousand nine hundred pesos (PhP 2,809,900).
Accordingly, after "grandfathering" petitioner Tesoro and factoring in Olympics
participation in SMMIs corporate structure, it is clear that MBMI is in control of Tesoro and
owns 60% or more equity interest in Tesoro. This makes petitioner Tesoro a non-Filipino
corporation and, thus, disqualifies it to participate in the exploitation, utilization and
development of our natural resources.
Narra Nickel Mining and Development Corporation
Moving on to the last petitioner, Narra, which is the transferee and assignee of PLMDCs
MPSA application, whose corporate structures arrangement is similar to that of the first
two petitioners discussed. The capital stock of Narra is ten million pesos (PhP 10,000,000),
which is divided into ten thousand common shares (10,000) at one thousand pesos (PhP
1,000) per share, shown as follows:
[[reference
= http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195
580.pdf]]
Name Nationality Number Amount Amount Paid
of Subscribed
Shares
Patricia Louise Filipino 5,997 PhP PhP
Mining & 5,997,000.00 1,677,000.00
Development
Corp.
MBMI Canadian 3,998 PhP PhP
Resources, Inc. 3,996,000.00 1,116,000.00
Higinio C. Filipino 1 PhP 1,000.00 PhP 1,000.00
Mendoza, Jr.
Henry E. Filipino 1 PhP 1,000.00 PhP 1,000.00
Fernandez
Manuel A. Filipino 1 PhP 1,000.00 PhP 1,000.00
Agcaoili
Ma. Elena A. Filipino 1 PhP 1,000.00 PhP 1,000.00
Bocalan
Bayani H. Filipino 1 PhP 1,000.00 PhP 1,000.00
Agabin
Robert L. American 1 PhP 1,000.00 PhP 1,000.00
McCurdy
Kenneth Canadian 1 PhP 1,000.00 PhP 1,000.00
Cawkell
Total 10,000 PhP PhP
10,000,000.00 2,800,000.00
(emphasis
supplied)
Again, MBMI, along with other nominal stockholders, i.e., Mason, Agcaoili and Esguerra, is
present in this corporate structure.
Patricia Louise Mining & Development Corporation
Using the grandfather method, we further look and examine PLMDCs corporate structure:
Name Nationality Number Amount Amount Paid
of Shares Subscribed
Palawan Alpha Filipino 6,596 PhP PhP 0
South Resources 6,596,000.00
Development
Corporation
MBMI Resources, Canadian 3,396 PhP PhP
Inc. 3,396,000.00 2,796,000.00
Higinio C. Filipino 1 PhP 1,000.00 PhP 1,000.00
Mendoza, Jr.
Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00
Esguerra
Henry E. Fernandez Filipino 1 PhP 1,000.00 PhP 1,000.00
Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
Manuel A. Agcaoili Filipino 1 PhP 1,000.00 PhP 1,000.00
Bayani H. Agabin Filipino 1 PhP 1,000.00 PhP 1,000.00
Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00
Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
Total 10,000 PhP PhP
10,000,000.00 2,708,174.60
(emphasis
supplied)
Yet again, the usual players in petitioners corporate structures are present. Similarly, the
amount of money paid by the 2nd tier majority stock holder, in this case, Palawan Alpha
South Resources and Development Corp. (PASRDC), is zero.
Studying MBMIs Summary of Significant Accounting Policies dated October 31, 2005
explains the reason behind the intricate corporate layering that MBMI immersed itself in:
JOINT VENTURES The Companys ownership interests in various mining ventures engaged in
the acquisition, exploration and development of mineral properties in the Philippines is
described as follows:

(a) Olympic Group

The Philippine companies holding the Olympic Property, and the ownership and interests
therein, are as follows:
Olympic- Philippines (the "Olympic Group")
Sara Marie Mining Properties Ltd. ("Sara Marie") 33.3%
Tesoro Mining & Development, Inc. (Tesoro) 60.0%
Pursuant to the Olympic joint venture agreement the Company holds directly and indirectly
an effective equity interest in the Olympic Property of 60.0%. Pursuant to a shareholders
agreement, the Company exercises joint control over the companies in the Olympic Group.

(b) Alpha Group

The Philippine companies holding the Alpha Property, and the ownership interests therein,
are as follows:
Alpha- Philippines (the "Alpha Group")
Patricia Louise Mining Development Inc. ("Patricia") 34.0%
Narra Nickel Mining & Development Corporation (Narra) 60.4%
Under a joint venture agreement the Company holds directly and indirectly an effective
equity interest in the Alpha Property of 60.4%. Pursuant to a shareholders agreement, the
Company exercises joint control over the companies in the Alpha Group.48 (emphasis
supplied)

Concluding from the above-stated facts, it is quite safe to say that petitioners McArthur,
Tesoro and Narra are not Filipino since MBMI, a 100% Canadian corporation, owns 60% or
more of their equity interests. Such conclusion is derived from grandfathering petitioners
corporate owners, namely: MMI, SMMI and PLMDC. Going further and adding to the
picture, MBMIs Summary of Significant Accounting Policies statement regarding the
"joint venture" agreements that it entered into with the "Olympic" and "Alpha" groups
involves SMMI, Tesoro, PLMDC and Narra. Noticeably, the ownership of the "layered"
corporations boils down to MBMI, Olympic or corporations under the "Alpha" group
wherein MBMI has joint venture agreements with, practically exercising majority control
over the corporations mentioned. In effect, whether looking at the capital structure or the
underlying relationships between and among the corporations, petitioners are NOT Filipino
nationals and must be considered foreign since 60% or more of their capital stocks or equity
interests are owned by MBMI.
Application of the res inter alios acta rule
Petitioners question the CAs use of the exception of the res inter alios acta or the
"admission by co-partner or agent" rule and "admission by privies" under the Rules of Court
in the instant case, by pointing out that statements made by MBMI should not be admitted
in this case since it is not a party to the case and that it is not a "partner" of petitioners.
Secs. 29 and 31, Rule 130 of the Revised Rules of Court provide:
Sec. 29. Admission by co-partner or agent.- The act or declaration of a partner or agent of
the party within the scope of his authority and during the existence of the partnership or
agency, may be given in evidence against such party after the partnership or agency is
shown by evidence other than such act or declaration itself. The same rule applies to the act
or declaration of a joint owner, joint debtor, or other person jointly interested with the
party.
Sec. 31. Admission by privies.- Where one derives title to property from another, the act,
declaration, or omission of the latter, while holding the title, in relation to the property, is
evidence against the former.
Petitioners claim that before the above-mentioned Rule can be applied to a case, "the
partnership relation must be shown, and that proof of the fact must be made by evidence
other than the admission itself."49 Thus, petitioners assert that the CA erred in finding that
a partnership relationship exists between them and MBMI because, in fact, no such
partnership exists.
Partnerships vs. joint venture agreements
Petitioners claim that the CA erred in applying Sec. 29, Rule 130 of the Rules by stating that
"by entering into a joint venture, MBMI have a joint interest" with Narra, Tesoro and
McArthur. They challenged the conclusion of the CA which pertains to the close
characteristics of
"partnerships" and "joint venture agreements." Further, they asserted that before this
particular partnership can be formed, it should have been formally reduced into writing
since the capital involved is more than three thousand pesos (PhP 3,000). Being that there
is no evidence of written agreement to form a partnership between petitioners and MBMI,
no partnership was created.
We disagree.
A partnership is defined as two or more persons who bind themselves to contribute money,
property, or industry to a common fund with the intention of dividing the profits among
themselves.50 On the other hand, joint ventures have been deemed to be "akin" to
partnerships since it is difficult to distinguish between joint ventures and partnerships. Thus:
[T]he relations of the parties to a joint venture and the nature of their association are so
similar and closely akin to a partnership that it is ordinarily held that their rights, duties, and
liabilities are to be tested by rules which are closely analogous to and substantially the same,
if not exactly the same, as those which govern partnership. In fact, it has been said that the
trend in the law has been to blur the distinctions between a partnership and a joint venture,
very little law being found applicable to one that does not apply to the other.51
Though some claim that partnerships and joint ventures are totally different animals, there
are very few rules that differentiate one from the other; thus, joint ventures are deemed
"akin" or similar to a partnership. In fact, in joint venture agreements, rules and legal
incidents governing partnerships are applied.52
Accordingly, culled from the incidents and records of this case, it can be assumed that the
relationships entered between and among petitioners and MBMI are no simple "joint
venture agreements." As a rule, corporations are prohibited from entering into partnership
agreements; consequently, corporations enter into joint venture agreements with other
corporations or partnerships for certain transactions in order to form "pseudo
partnerships."
Obviously, as the intricate web of "ventures" entered into by and among petitioners and
MBMI was executed to circumvent the legal prohibition against corporations entering into
partnerships, then the relationship created should be deemed as "partnerships," and the
laws on partnership should be applied. Thus, a joint venture agreement between and among
corporations may be seen as similar to partnerships since the elements of partnership are
present.
Considering that the relationships found between petitioners and MBMI are considered to
be partnerships, then the CA is justified in applying Sec. 29, Rule 130 of the Rules by stating
that "by entering into a joint venture, MBMI have a joint interest" with Narra, Tesoro and
McArthur.
Panel of Arbitrators jurisdiction
We affirm the ruling of the CA in declaring that the POA has jurisdiction over the instant
case. The POA has jurisdiction to settle disputes over rights to mining areas which definitely
involve the petitions filed by Redmont against petitioners Narra, McArthur and Tesoro.
Redmont, by filing its petition against petitioners, is asserting the right of Filipinos over
mining areas in the Philippines against alleged foreign-owned mining corporations. Such
claim constitutes a "dispute" found in Sec. 77 of RA 7942:
Within thirty (30) days, after the submission of the case by the parties for the decision, the
panel shall have exclusive and original jurisdiction to hear and decide the following:
(a) Disputes involving rights to mining areas
(b) Disputes involving mineral agreements or permits
We held in Celestial Nickel Mining Exploration Corporation v. Macroasia Corp.:53
The phrase "disputes involving rights to mining areas" refers to any adverse claim, protest,
or opposition to an application for mineral agreement. The POA therefore has the
jurisdiction to resolve any adverse claim, protest, or opposition to a pending application for
a mineral agreement filed with the concerned Regional Office of the MGB. This is clear from
Secs. 38 and 41 of the DENR AO 96-40, which provide:
Sec. 38.
xxxx
Within thirty (30) calendar days from the last date of publication/posting/radio
announcements, the authorized officer(s) of the concerned office(s) shall issue a
certification(s) that the publication/posting/radio announcement have been complied with.
Any adverse claim, protest, opposition shall be filed directly, within thirty (30) calendar days
from the last date of publication/posting/radio announcement, with the concerned
Regional Office or through any concerned PENRO or CENRO for filing in the concerned
Regional Office for purposes of its resolution by the Panel of Arbitrators pursuant to the
provisions of this Act and these implementing rules and regulations. Upon final resolution
of any adverse claim, protest or opposition, the Panel of Arbitrators shall likewise issue a
certification to that effect within five (5) working days from the date of finality of resolution
thereof. Where there is no adverse claim, protest or opposition, the Panel of Arbitrators
shall likewise issue a Certification to that effect within five working days therefrom.
xxxx
No Mineral Agreement shall be approved unless the requirements under this Section are
fully complied with and any adverse claim/protest/opposition is finally resolved by the Panel
of Arbitrators.
Sec. 41.
xxxx
Within fifteen (15) working days form the receipt of the Certification issued by the Panel of
Arbitrators as provided in Section 38 hereof, the concerned Regional Director shall initially
evaluate the Mineral Agreement applications in areas outside Mineral reservations. He/She
shall thereafter endorse his/her findings to the Bureau for further evaluation by the Director
within fifteen (15) working days from receipt of forwarded documents. Thereafter, the
Director shall endorse the same to the secretary for consideration/approval within fifteen
working days from receipt of such endorsement.
In case of Mineral Agreement applications in areas with Mineral Reservations, within fifteen
(15) working days from receipt of the Certification issued by the Panel of Arbitrators as
provided for in Section 38 hereof, the same shall be evaluated and endorsed by the Director
to the Secretary for consideration/approval within fifteen days from receipt of such
endorsement. (emphasis supplied)
It has been made clear from the aforecited provisions that the "disputes involving rights to
mining areas" under Sec. 77(a) specifically refer only to those disputes relative to the
applications for a mineral agreement or conferment of mining rights.
The jurisdiction of the POA over adverse claims, protest, or oppositions to a mining right
application is further elucidated by Secs. 219 and 43 of DENR AO 95-936, which read:
Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the provisions of
Sections 28, 43 and 57 above, any adverse claim, protest or opposition specified in said
sections may also be filed directly with the Panel of Arbitrators within the concerned periods
for filing such claim, protest or opposition as specified in said Sections.
Sec. 43. Publication/Posting of Mineral Agreement.-
xxxx
The Regional Director or concerned Regional Director shall also cause the posting of the
application on the bulletin boards of the Bureau, concerned Regional office(s) and in the
concerned province(s) and municipality(ies), copy furnished the barangays where the
proposed contract area is located once a week for two (2) consecutive weeks in a language
generally understood in the locality. After forty-five (45) days from the last date of
publication/posting has been made and no adverse claim, protest or opposition was filed
within the said forty-five (45) days, the concerned offices shall issue a certification that
publication/posting has been made and that no adverse claim, protest or opposition of
whatever nature has been filed. On the other hand, if there be any adverse claim, protest
or opposition, the same shall be filed within forty-five (45) days from the last date of
publication/posting, with the Regional Offices concerned, or through the Departments
Community Environment and Natural Resources Officers (CENRO) or Provincial Environment
and Natural Resources Officers (PENRO), to be filed at the Regional Office for resolution of
the Panel of Arbitrators. However previously published valid and subsisting mining claims
are exempted from posted/posting required under this Section.
No mineral agreement shall be approved unless the requirements under this section are
fully complied with and any opposition/adverse claim is dealt with in writing by the Director
and resolved by the Panel of Arbitrators. (Emphasis supplied.)
It has been made clear from the aforecited provisions that the "disputes involving rights to
mining areas" under Sec. 77(a) specifically refer only to those disputes relative to the
applications for a mineral agreement or conferment of mining rights.
The jurisdiction of the POA over adverse claims, protest, or oppositions to a mining right
application is further elucidated by Secs. 219 and 43 of DENRO AO 95-936, which reads:
Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the provisions of
Sections 28, 43 and 57 above, any adverse claim, protest or opposition specified in said
sections may also be filed directly with the Panel of Arbitrators within the concerned periods
for filing such claim, protest or opposition as specified in said Sections.
Sec. 43. Publication/Posting of Mineral Agreement Application.-
xxxx
The Regional Director or concerned Regional Director shall also cause the posting of the
application on the bulletin boards of the Bureau, concerned Regional office(s) and in the
concerned province(s) and municipality(ies), copy furnished the barangays where the
proposed contract area is located once a week for two (2) consecutive weeks in a language
generally understood in the locality. After forty-five (45) days from the last date of
publication/posting has been made and no adverse claim, protest or opposition was filed
within the said forty-five (45) days, the concerned offices shall issue a certification that
publication/posting has been made and that no adverse claim, protest or opposition of
whatever nature has been filed. On the other hand, if there be any adverse claim, protest
or opposition, the same shall be filed within forty-five (45) days from the last date of
publication/posting, with the Regional offices concerned, or through the Departments
Community Environment and Natural Resources Officers (CENRO) or Provincial Environment
and Natural Resources Officers (PENRO), to be filed at the Regional Office for resolution of
the Panel of Arbitrators. However, previously published valid and subsisting mining claims
are exempted from posted/posting required under this Section.
No mineral agreement shall be approved unless the requirements under this section are
fully complied with and any opposition/adverse claim is dealt with in writing by the Director
and resolved by the Panel of Arbitrators. (Emphasis supplied.)
These provisions lead us to conclude that the power of the POA to resolve any adverse claim,
opposition, or protest relative to mining rights under Sec. 77(a) of RA 7942 is confined only
to adverse claims, conflicts and oppositions relating to applications for the grant of mineral
rights.
POAs jurisdiction is confined only to resolutions of such adverse claims, conflicts and
oppositions and it has no authority to approve or reject said applications. Such power is
vested in the DENR Secretary upon recommendation of the MGB Director. Clearly, POAs
jurisdiction over "disputes involving rights to mining areas" has nothing to do with the
cancellation of existing mineral agreements. (emphasis ours)
Accordingly, as we enunciated in Celestial, the POA unquestionably has jurisdiction to
resolve disputes over MPSA applications subject of Redmonts petitions. However, said
jurisdiction does not include either the approval or rejection of the MPSA applications,
which is vested only upon the Secretary of the DENR. Thus, the finding of the POA, with
respect to the rejection of petitioners MPSA applications being that they are foreign
corporation, is valid.
Justice Marvic Mario Victor F. Leonen, in his Dissent, asserts that it is the regular courts, not
the POA, that has jurisdiction over the MPSA applications of petitioners.
This postulation is incorrect.
It is basic that the jurisdiction of the court is determined by the statute in force at the time
of the commencement of the action.54
Sec. 19, Batas Pambansa Blg. 129 or "The Judiciary Reorganization
Act of 1980" reads:
Sec. 19. Jurisdiction in Civil Cases.Regional Trial Courts shall exercise exclusive original
jurisdiction:
1. In all civil actions in which the subject of the litigation is incapable of pecuniary estimation.
On the other hand, the jurisdiction of POA is unequivocal from Sec. 77 of RA 7942:
Section 77. Panel of Arbitrators.
x x x Within thirty (30) days, after the submission of the case by the parties for the decision,
the panel shall have exclusive and original jurisdiction to hear and decide the following:
(c) Disputes involving rights to mining areas
(d) Disputes involving mineral agreements or permits
It is clear that POA has exclusive and original jurisdiction over any and all disputes involving
rights to mining areas. One such dispute is an MPSA application to which an adverse claim,
protest or opposition is filed by another interested applicant.1wphi1 In the case at bar, the
dispute arose or originated from MPSA applications where petitioners are asserting their
rights to mining areas subject of their respective MPSA applications. Since respondent filed
3 separate petitions for the denial of said applications, then a controversy has developed
between the parties and it is POAs jurisdiction to resolve said disputes.
Moreover, the jurisdiction of the RTC involves civil actions while what petitioners filed with
the DENR Regional Office or any concerned DENRE or CENRO are MPSA applications. Thus
POA has jurisdiction.
Furthermore, the POA has jurisdiction over the MPSA applications under the doctrine of
primary jurisdiction. Euro-med Laboratories v. Province of Batangas55 elucidates:
The doctrine of primary jurisdiction holds that if a case is such that its determination
requires the expertise, specialized training and knowledge of an administrative body, relief
must first be obtained in an administrative proceeding before resort to the courts is had
even if the matter may well be within their proper jurisdiction.
Whatever may be the decision of the POA will eventually reach the court system via a resort
to the CA and to this Court as a last recourse.
Selling of MBMIs shares to DMCI
As stated before, petitioners Manifestation and Submission dated October 19, 2012 would
want us to declare the instant petition moot and academic due to the transfer and
conveyance of all the shareholdings and interests of MBMI to DMCI, a corporation duly
organized and existing under Philippine laws and is at least 60% Philippine-
owned.56 Petitioners reasoned that they now cannot be considered as foreign-owned; the
transfer of their shares supposedly cured the "defect" of their previous nationality. They
claimed that their current FTAA contract with the State should stand since "even wholly-
owned foreign corporations can enter into an FTAA with the State."57Petitioners stress that
there should no longer be any issue left as regards their qualification to enter into FTAA
contracts since they are qualified to engage in mining activities in the Philippines. Thus,
whether the "grandfather rule" or the "control test" is used, the nationalities of petitioners
cannot be doubted since it would pass both tests.
The sale of the MBMI shareholdings to DMCI does not have any bearing in the instant case
and said fact should be disregarded. The manifestation can no longer be considered by us
since it is being tackled in G.R. No. 202877 pending before this Court.1wphi1 Thus, the
question of whether petitioners, allegedly a Philippine-owned corporation due to the sale
of MBMI's shareholdings to DMCI, are allowed to enter into FTAAs with the State is a non-
issue in this case.
In ending, the "control test" is still the prevailing mode of determining whether or not a
corporation is a Filipino corporation, within the ambit of Sec. 2, Art. II of the 1987
Constitution, entitled to undertake the exploration, development and utilization of the
natural resources of the Philippines. When in the mind of the Court there is doubt, based
on the attendant facts and circumstances of the case, in the 60-40 Filipino-equity ownership
in the corporation, then it may apply the "grandfather rule."
WHEREFORE, premises considered, the instant petition is DENIED. The assailed Court of
Appeals Decision dated October 1, 2010 and Resolution dated February 15, 2011 are hereby
AFFIRMED.
SO ORDERED.
Grandfather Rule Rules When the Required 60-40 Filipino-foreign Equity Ownership is In
Doubt (Narra vs Redmont, 2014)

Narra Nickel Mining vs Redmont

Case Digest GR 185590, Apr 21 2014

Facts:

Redmont is a domestic corporation interested in the mining and exploration of some areas
in Palawan. Upon learning that those areas were covered by MPSA applications of other
three (allegedly Filipino) corporations Narra, Tesoro, and MacArthur, it filed a petition
before the Panel of Arbitrators of DENR seeking to deny their permits on the ground that
these corporations are in reality foreign-owned. MBMI, a 100% Canadian corporation, owns
40% of the shares of PLMC (which owns 5,997 shares of Narra), 40% of the shares of MMC
(which owns 5,997 shares of McArthur) and 40% of the shares of SLMC (which, in turn, owns
5,997 shares of Tesoro).

Aside from the MPSA, the three corporations also applied for FTAA with the Office of the
President. In their answer, they countered that (1) the liberal Control Test must be used in
determining the nationality of a corporation as based on Sec 3 of the Foreign Investment
Act which as they claimed admits of corporate layering schemes, and that (2) the
nationality question is no longer material because of their subsequent application for FTAA.

Commercial / Political Law

Issue 1: W/N the Grandfather Rule must be applied in this case

Remedial Law
Issue 2: W/N the case has become moot as a result of the MPSA conversion to FTAA