G.R. No.

171591 25 June 2012

ACE NAVIGATION CO., INC., petitioner,

vs.
FGU INSURANCE CORPORATION and PIONEER INSURANCE AND SURETY
CORPORATION, Respondents.

DECISION

PERLAS-BERNABE, J.:

This is an appeal under Rule 45 of the Rules of Court seeking to reverse the June 22, 2004
Decision1 and February 17, 2006 Resolution2 of the Court of Appeals (CA) ordering petitioner
Ace Navigation Co., Inc., jointly and severally with Cardia Limited, to pay respondents FGU
Insurance Corp. and Pioneer Insurance and Surety Corp. the sum of P213,518.20 plus interest at
the rate of six percentum (6%) from the filing of the complaint until paid.

The Facts

On July 19, 1990, Cardia Limited (CARDIA) shipped on board the vessel M/V Pakarti Tiga at
Shanghai Port China, 8,260 metric tons or 165,200 bags of Grey Portland Cement to be discharged
at the Port of Manila and delivered to its consignee, Heindrich Trading Corp. (HEINDRICH). The
subject shipment was insured with respondents, FGU Insurance Corp. (FGU) and Pioneer
Insurance and Surety Corp. (PIONEER), against all risks under Marine Open Policy No.
062890275 for the amount of P18,048,421.00. 3

The subject vessel is owned by P.T. Pakarti Tata (PAKARTI) which it chartered to Shinwa Kaiun
Kaisha Ltd. (SHINWA). 4 Representing itself as owner of the vessel, SHINWA entered into a
charter party contract with Sky International, Inc. (SKY), an agent of Kee Yeh Maritime Co. (KEE
YEH), 5 which further chartered it to Regency Express Lines S.A. (REGENCY). Thus, it was
REGENCY that directly dealt with consignee HEINDRICH, and accordingly, issued Clean Bill of
Lading No. SM-1. 6

On July 23, 1990, the vessel arrived at the Port of Manila and the shipment was discharged.
However, upon inspection of HEINDRICH and petitioner Ace Navigation Co., Inc. (ACENAV),
agent of CARDIA, it was found that out of the 165,200 bags of cement, 43,905 bags were in bad
order and condition. Unable to collect the sustained damages in the amount of P1,423,454.60 from
the shipper, CARDIA, and the charterer, REGENCY, the respondents, as co-insurers of the cargo,
each paid the consignee, HEINDRICH, the amounts of P427,036.40 and P284,690.94,
respectively, 7 and consequently became subrogated to all the rights and causes of action accruing
to HEINDRICH.

Thus, on August 8, 1991, respondents filed a complaint for damages against the following
defendants: "REGENCY EXPRESS LINES, S.A./ UNKNOWN CHARTERER OF THE VESSEL
'PAKARTI TIGA'/ UNKNOWN OWNER and/or DEMIFE (sic) CHARTERER OF THE
VESSEL 'PAKARTI TIGA', SKY INTERNATIONAL, INC. and/or ACE NAVIGATION
COMPANY, INC." 8 which was docketed as Civil Case No. 90-2016.

In their answer with counterclaim and cross-claim, PAKARTI and SHINWA alleged that the suits
against them cannot prosper because they were not named as parties in the bill of lading. 9

Similarly, ACENAV claimed that, not being privy to the bill of lading, it was not a real party-in-
interest from whom the respondents can demand compensation. It further denied being the local
ship agent of the vessel or REGENCY and claimed to be the agent of the shipper, CARDIA. 10

For its part, SKY denied having acted as agent of the charterer, KEE YEH, which chartered the
vessel from SHINWA, which originally chartered the vessel from PAKARTI. SKY also averred
that it cannot be sued as an agent without impleading its alleged principal, KEE YEH. 11

On September 30, 1991, HEINDRICH filed a similar complaint against the same parties and
Commercial Union Assurance Co. (COMMERCIAL), docketed as Civil Case No. 91-2415, which
was later consolidated with Civil Case No. 91-2016. However, the suit against COMMERCIAL
was subsequently dismissed on joint motion by the respondents and COMMERCIAL. 12

Proceedings Before the RTC and the CA

In its November 26, 2001 Decision, 13 the RTC dismissed the complaint, the fallo of which reads:

WHEREFORE, premises considered, plaintiffs’ complaint is DISMISSED. Defendants’ counter-

claim against the plaintiffs are likewise dismissed, it appearing that plaintiff[s] did not act in
evident bad faith in filing the present complaint against them.

Defendant Pakarti and Shinwa’s cross-claims against their co-defendants are likewise dismissed
for lack of sufficient evidence.

No costs.

SO ORDERED.

Dissatisfied, the respondents appealed to the CA which, in its assailed June 22, 2004 Decision, 14
found PAKARTI, SHINWA, KEE YEH and its agent, SKY, solidarily liable for 70% of the
respondents' claim, with the remaining 30% to be shouldered solidarily by CARDIA and its agent,
ACENAV, thus:

WHEREFORE, premises considered, the Decision dated November 26, 2001 is hereby
MODIFIED in the sense that:

a) defendant-appellees P.T. Pakarti Tata, Shinwa Kaiun Kaisha, Ltd., Kee Yeh Maritime
Co., Ltd. and the latter’s agent Sky International, Inc. are hereby declared jointly and
severally liable, and are DIRECTED to pay FGU Insurance Corporation the amount of
Two Hundred Ninety Eight Thousand Nine Hundred Twenty Five and 45/100
 (P298,925.45) Pesos and Pioneer Insurance and Surety Corp. the sum of One Hundred
Ninety Nine Thousand Two Hundred Eighty Three and 66/100 (P199,283.66) Pesos
representing Seventy (70%) percentum of their respective claims as actual damages plus
interest at the rate of six (6%) percentum from the date of the filing of the complaint; and

b) defendant Cardia Ltd. and defendant-appellee Ace Navigation Co., Inc. are DECLARED
jointly and severally liable and are hereby DIRECTED to pay FGU Insurance Corporation
One Hundred Twenty Eight Thousand One Hundred Ten and 92/100 (P128,110.92) Pesos
and Pioneer Insurance and Surety Corp. Eighty Five Thousand Four Hundred Seven and
28/100 (P85,407.28) Pesos representing thirty (30%) percentum of their respective claims
as actual damages, plus interest at the rate of six (6%) percentum from the date of the filing
of the complaint.

SO ORDERED.

Finding that the parties entered into a time charter party, not a demise or bareboat charter where
the owner completely and exclusively relinquishes possession, command and navigation to the
charterer, the CA held PAKARTI, SHINWA, KEE YEH and its agent, SKY, solidarily liable for
70% of the damages sustained by the cargo. This solidarity liability was borne by their failure to
prove that they exercised extraordinary diligence in the vigilance over the bags of cement entrusted
to them for transport. On the other hand, the CA passed on the remaining 30% of the amount
claimed to the shipper, CARDIA, and its agent, ACENAV, upon a finding that the damage was
partly due to the cargo's inferior packing.

With respect to REGENCY, the CA affirmed the findings of the RTC that it did not acquire
jurisdiction over its person for defective service of summons.

PAKARTI's, SHINWA's, SKY's and ACENAV's respective motions for reconsideration were
subsequently denied in the CA's assailed February 17, 2006 Resolution.

Issues Before the Court

PAKARTI, SHINWA, SKY and ACENAV filed separate petitions for review on certiorari before
the Court, docketed as G.R. Nos. 171591, 171614, and 171663, which were ordered consolidated
in the Court’s Resolution dated July 31, 2006. 15

On April 21, 2006, SKY manifested 16 that it will no longer pursue its petition in G.R. No. 171614
and has preferred to await the resolution in G.R. No. 171663 filed by PAKARTI and SHINWA.
Accordingly, an entry of judgment 17 against it was made on August 18, 2006. Likewise, on
November 29, 2007, PAKARTI and SHINWA moved 18 for the withdrawal of their petitions for
lack of interest, which the Court granted in its January 21, 2008 Resolution. 19 The corresponding
entry of judgment 20 against them was made on March 17, 2008.

Thus, only the petition of ACENAV remained for the Court's resolution, with the lone issue of
whether or not it may be held liable to the respondents for 30% of their claim.
Maintaining that it was not a party to the bill of lading, ACENAV asserts that it cannot be held
liable for the damages sought to be collected by the respondents. It also alleged that since its
principal, CARDIA, was not impleaded as a party-defendant/respondent in the instant suit, no
liability can therefore attach to it as a mere agent. Moreover, there is dearth of evidence showing
that it was responsible for the supposed defective packing of the goods upon which the award was
based.

The Court's Ruling

A bill of lading is defined as "an instrument in writing, signed by a carrier or his agent, describing
the freight so as to identify it, stating the name of the consignor, the terms of the contract for
carriage, and agreeing or directing that the freight to be delivered to the order or assigns of a
specified person at a specified place." 21

It operates both as a receipt and as a contract. As a receipt, it recites the date and place of shipment,
describes the goods as to quantity, weight, dimensions, identification marks and condition, quality,
and value. As a contract, it names the contracting parties, which include the consignee, fixes the
route, destination, and freight rates or charges, and stipulates the rights and obligations assumed
by the parties. 22 As such, it shall only be binding upon the parties who make them, their assigns
and heirs. 23

In this case, the original parties to the bill of lading are: (a) the shipper CARDIA; (b) the carrier
PAKARTI; and (c) the consignee HEINDRICH. However, by virtue of their relationship with
PAKARTI under separate charter arrangements, SHINWA, KEE YEH and its agent SKY likewise
became parties to the bill of lading. In the same vein, ACENAV, as admitted agent of CARDIA,
also became a party to the said contract of carriage.

The respondents, however, maintain 24 that ACENAV is a ship agent and not a mere agent of
CARDIA, as found by both the CA 25 and the RTC. 26

The Court disagrees.

Article 586 of the Code of Commerce provides:

ART. 586. The shipowner and the ship agent shall be civilly liable for the acts of the captain and
for the obligations contracted by the latter to repair, equip, and provision the vessel, provided the
creditor proves that the amount claimed was invested therein.

By ship agent is understood the person entrusted with the provisioning of a vessel, or who
represents her in the port in which she may be found. (Emphasis supplied)

Records show that the obligation of ACENAV was limited to informing the consignee
HEINDRICH of the arrival of the vessel in order for the latter to immediately take possession of
the goods. No evidence was offered to establish that ACENAV had a hand in the provisioning of
the vessel or that it represented the carrier, its charterers, or the vessel at any time during the
unloading of the goods. Clearly, ACENAV's participation was simply to assume responsibility
over the cargo when they were unloaded from the vessel. Hence, no reversible error was committed
by the courts a quo in holding that ACENAV was not a ship agent within the meaning and context
of Article 586 of the Code of Commerce, but a mere agent of CARDIA, the shipper.

On this score, Article 1868 of the Civil Code states:

ART. 1868. By the contract of agency, a person binds himself to render some service or to do
something in representation or on behalf of another, with the consent or authority of the latter.

Corollarily, Article 1897 of the same Code provides that an agent is not personally liable to the
party with whom he contracts, unless he expressly binds himself or exceeds the limits of his
authority without giving such party sufficient notice of his powers.

Both exceptions do not obtain in this case. Records are bereft of any showing that ACENAV
exceeded its authority in the discharge of its duties as a mere agent of CARDIA. Neither was it
alleged, much less proved, that ACENAV's limited obligation as agent of the shipper, CARDIA,
was not known to HEINDRICH.

Furthermore, since CARDIA was not impleaded as a party in the instant suit, the liability attributed
upon it by the CA 27 on the basis of its finding that the damage sustained by the cargo was due to
improper packing cannot be borne by ACENAV. As mere agent, ACENAV cannot be made
responsible or held accountable for the damage supposedly caused by its principal. 28

Accordingly, the Court finds that theCA erred in ordering ACENAV jointly and severally liable
with CARDIA to pay 30o/o of the respondents' claim.

WHEREFORE, the assailed Decision and Resolution of the Court of Appeals are hereby
REVERSED.1awp++i1 The complaint against petitioner Ace Navigation Co., Inc. is hereby
DISMISSED.

SO ORDERED.

G.R. No. 192294 November 21, 2012

GREAT WHITE SHARK ENTERPRISES, INC., Petitioner,

vs.
DANILO M. CARALDE, JR., Respondent.

DECISION

PERLAS-BERNABE, J.:

Assailed in this Petition for Review on Certiorari under Rule 45 of the Rules of Court is the
December 14, 2009 Decision1 of the Court of Appeals (CA) in CA-G.R. SP No. 105787, which
reversed and set aside the October 6, 2008 Decision2 of the Director General of the Intellectual
Property Office (IPO), and directed him to grant the application for the mark "SHARK & LOGO"
filed by respondent Danilo M. Caralde, Jr. (Caralde).

The Factual Antecedents

On July 31, 2002, Caralde filed before the Bureau of Legal Affairs (BLA), IPO a trademark
application seeking to register the mark "SHARK & LOGO" for his manufactured goods under
Class 25, such as slippers, shoes and sandals. Petitioner Great White Shark Enterprises, Inc. (Great
White Shark), a foreign corporation domiciled in Florida, USA, opposed3 the application claiming
to be the owner of the mark consisting of a representation of a shark in color, known as "GREG
NORMAN LOGO" (associated with apparel worn and promoted by Australian golfer Greg
Norman). It alleged that, being a world famous mark which is pending registration before the BLA
since February 19, 2002,4 the confusing similarity between the two (2) marks is likely to deceive
or confuse the purchasing public into believing that Caralde's goods are produced by or originated
from it, or are under its sponsorship, to its damage and prejudice.

In his Answer,5 Caralde explained that the subject marks are distinctively different from one
another and easily distinguishable. When compared, the only similarity in the marks is in the word
"shark" alone, differing in other factors such as appearance, style, shape, size, format, color, ideas
counted by marks, and even in the goods carried by the parties.

Pending the inter partes proceedings, Great White Shark’s trademark application was granted and
it was issued Certificate of Registration No. 4-2002-001478 on October 23, 2006 for clothing,
headgear and footwear, including socks, shoes and its components.6

The Ruling of the BLA Director

On June 14, 2007, the BLA Director rendered a Decision7 rejecting Caralde's application,
ratiocinating, as follows:

Prominent in both competing marks is the illustration of a shark.1âwphi1 The dominant feature in
opposer's mark is the illustration of a shark drawn plainly. On the other hand, the dominant feature
in respondent's mark is a depiction of shark shaded darkly, with its body designed in a way to
contain the letters "A" and "R" with the tail suggestive of the letter "K." Admittedly, there are
some differences between the competing marks. Respondent's mark contains additional features
which are absent in opposer's mark. Their dominant features, i.e., that of an illustration of a shark,
however, are of such degree that the overall impression it create [sic] is that the two competing
marks are at least strikingly similar to each another [sic], hence, the likelihood of confusion of
goods is likely to occur. x x x x

Moreover, the goods of the competing marks falls [sic] under the same Class 25. Opposer's mark
GREG NORMAN LOGO, which was applied for registration on February 19, 2002, pertains to
clothing apparel particularly hats, shirts and pants. Respondent, on the other hand, later applied for
the registration of the mark SHARK & LOGO on July 3, 2002 (should be July 31, 2002) for
footwear products particularly slippers, shoes, sandals. Clearly, the goods to which the parties use
their marks belong to the same class and are related to each other."8 (Italics ours)
The BLA Director, however, found no merit in Great White Shark's claim that its mark was famous
and well-known for insufficiency of evidence.

The Ruling of the IPO Director General

On appeal, the IPO Director General affirmed9 the final rejection of Caralde's application, ruling
that the competing marks are indeed confusingly similar. Great White Shark's mark is used in
clothing and footwear, among others, while Caralde's mark is used on similar goods like shoes and
slippers. Moreover, Great White Shark was first in applying for registration of the mark on
February 19, 2002, followed by Caralde on July 31, 2002. Furthermore, Great White Shark’s mark
consisted of an illustration of a shark while Caralde's mark had a composite figure forming a
silhouette of a shark. Thus, as to content, word, sound and meaning, both marks are similar, barring
the registration of Caralde's mark under Section 123.1(d) of Republic Act No. 8293, otherwise
known as the Intellectual Property Code (IP Code). Nonetheless, while Great White Shark
submitted evidence of the registration of its mark in several other countries, the IPO Director
General considered its mark as not well-known for failing to meet the other criteria laid down
under Rule 10210 of the Rules and Regulations on Trademarks, Service Marks, Trade Names and
Marked or Stamped Containers.

The Ruling of the Court of Appeals

However, on petition for review, the CA reversed and set aside the foregoing Decision and directed
the IPO to grant Caralde's application for registration of the mark "SHARK & LOGO." The CA
found no confusing similarity between the subject marks notwithstanding that both contained the
shape of a shark as their dominant feature. It observed that Caralde's mark is more fanciful and
colorful, and contains several elements which are easily distinguishable from that of the Great
White Shark. It further opined that considering their price disparity, there is no likelihood of
confusion as they travel in different channels of trade.11

Issues Before The Court

THE COURT OF APPEALS ERRED IN RULING THAT THE RESPONDENT'S MARK

SUBJECT OF THE APPLICATION BEING OPPOSED BY THE PETITIONER IS NOT
CONFUSINGLY SIMILAR TO PETITIONER'S REGISTERED MARK THE COURT OF
APPEALS ERRED IN RULING THAT THE COST OF GOODS COULD NEGATE
LIKELIHOOD OF CONFUSION THE COURT OF APPEALS ERRED IN REVERSING THE
PREVIOUS RESOLUTIONS OF THE DIRECTOR GENERAL AND THE BLA12

The Court's Ruling

In the instant petition for review on certiorari, Great White Shark maintains that the two (2)
competing marks are confusingly similar in appearance, shape and color scheme because of the
dominant feature of a shark which is likely to deceive or cause confusion to the purchasing public,
suggesting an intention on Caralde's part to pass-off his goods as that of Great White Shark and to
ride on its goodwill. This, notwithstanding the price difference, targets market and channels of
trade between the competing products. Hence, the CA erred in reversing the rulings of the IPO
Director General and the BLA Director who are the experts in the implementation of the IP Code.

The petition lacks merit.

A trademark device is susceptible to registration if it is crafted fancifully or arbitrarily and is

capable of identifying and distinguishing the goods of one manufacturer or seller from those of
another. Apart from its commercial utility, the benchmark of trademark registrability is
distinctiveness.13 Thus, a generic figure, as that of a shark in this case, if employed and designed
in a distinctive manner, can be a registrable trademark device, subject to the provisions of the IP
Code.

Corollarily, Section 123.1(d) of the IP Code provides that a mark cannot be registered if it is
identical with a registered mark belonging to a different proprietor with an earlier filing or priority
date, with respect to the same or closely related goods or services, or has a near resemblance to
such mark as to likely deceive or cause confusion.

In determining similarity and likelihood of confusion, case law has developed the Dominancy Test
and the Holistic or Totality Test. The Dominancy Test focuses on the similarity of the dominant
features of the competing trademarks that might cause confusion, mistake, and deception in the
mind of the ordinary purchaser, and gives more consideration to the aural and visual impressions
created by the marks on the buyers of goods, giving little weight to factors like prices, quality,
sales outlets, and market segments. In contrast, the Holistic or Totality Test considers the entirety
of the marks as applied to the products, including the labels and packaging, and focuses not only
on the predominant words but also on the other features appearing on both labels to determine
whether one is confusingly similar to the other14 as to mislead the ordinary purchaser. The
"ordinary purchaser" refers to one "accustomed to buy, and therefore to some extent familiar with,
the goods in question."15

Irrespective of both tests, the Court finds no confusing similarity between the subject marks. While
both marks use the shape of a shark, the Court noted distinct visual and aural differences between
them. In Great White Shark's "GREG NORMAN LOGO," there is an outline of a shark formed
with the use of green, yellow, blue and red16 lines/strokes, to wit:

In contrast, the shark in Caralde's "SHARK & LOGO" mark17 is illustrated in l et t er s outlined
in the form of a shark with the letter "S" forming the head, the letter "H" forming the fins, the
letters "A" and "R" forming the body, and the letter "K" forming the tail. In addition, the latter
mark includes several more elements such as the word "SHARK" in a different font underneath
the shark outline, layers of waves, and a tree on the right side, and liberally used the color blue
with some parts in red, yellow, green and white.18 The whole design is enclosed in an elliptical
shape with two linings, thus:

As may be gleaned from the foregoing, the visual dissimilarities between the two (2) marks are
evident and significant, negating the possibility of confusion in the minds of the ordinary
purchaser, especially considering the distinct aural difference between the marks.

Finally, there being no confusing similarity between the subject marks, the matter of whether Great
White Shark’s mark has gained recognition and acquired becomes unnecessary.19 Besides, both
the BLA Director and the IPO Director General have ruled that Great White Shark failed to meet
the criteria under Rule 102 of the Rules and Regulations on Trademarks, Service Marks, Trade
Names and Marked or Stamped Containers to establish that its mark is well-known, and the latter
failed to show otherwise.

WHEREFORE, the Court resolves to DENY the instant petition and AFFIRM the assailed
December 14, 2009 Decision of the Court of Appeals (CA) for failure to show that the CA
committed reversible error in setting aside the Decision of the IPO Director General and allowing
the registration of the mark "SHARK & LOGO" by respondent Danilo M. Caralde, Jr.

SO ORDERED.

G.R. No. 190144 August 1, 2012

BANK OF THE PHILIPPINE ISLANDS, Petitioner,

vs.
CARLITO LEE, Respondent.

DECISION

PERLAS-BERNABE, J.:
In this Petition for Review on Certiorari1 under Rule 45 of the Rules of Court, petitioner Bank of
the Philippine Islands (BPI) seeks to reverse and set aside the February 11, 2009 Decision2 and
October 29, 2009 Resolution3 of the Court of Appeals (CA) in CA-G.R. No. 87911 which annulled
the March 1, 20043 and September 16, 20044 Orders of the Regional Trial Court (RTC) of Makati
City, Branch 61 and instead, entered a new one directing the RTC to issue a writ of execution
and/or enforce garnishment against the bank deposit of Trendline Resources & Commodities
Exponent, Inc. (Trendline) and Leonarda Buelva (Buelva) with the defunct Citytrust Banking
Corporation (Citytrust), now merged with BPI.

The Facts

On April 26, 1988, respondent Carlito Lee (Lee) filed a complaint for sum of money with damages
and application for the issuance of a writ of attachment against Trendline and Buelva (collectively
called "defendants") before the RTC, docketed as Civil Case No. 88-702, seeking to recover his
total investment in the amount of P5.8 million. Lee alleged that he was enticed to invest his money
with Trendline upon Buelva’s misrepresentation that she was its duly licensed investment
consultant or commodity saleswoman. His investments, however, were lost without any
explanation from the defendants.

On May 4, 1988, the RTC issued a writ of preliminary attachment whereby the Check-O-Matic
Savings Accounts of Trendline with Citytrust Banking Corporation, Ayala Branch, in the total
amount of P700,962.10 were garnished. Subsequently, the RTC rendered a decision on August 8,
1989 finding defendants jointly and severally liable to Lee for the full amount of his investment
plus legal interest, attorney’s fees and costs of suit. The defendants appealed the RTC decision to
the CA, docketed as CA-G.R. CV No. 23166.

Meanwhile, on April 13, 1994, Citytrust filed before the RTC an Urgent Motion and
Manifestation5 seeking a ruling on defendants' request to release the amount of P591,748.99 out
of the garnished amount for the purpose of paying Trendline’s tax obligations. Having been denied
for lack of jurisdiction, Trendline filed a similar motion6 with the CA which the latter denied for
failure to prove that defendants had no other assets to answer for its tax obligations.

On October 4, 1996, Citytrust and BPI merged, with the latter as the surviving corporation. The
Articles of Merger provide, among others, that "all liabilities and obligations of Citytrust shall be
transferred to and become the liabilities and obligations of BPI in the same manner as if the BPI
had itself incurred such liabilities or obligations."7

On December 22, 1998, the CA denied the appeal in CA-G.R. CV No. 23166 and affirmed in toto
the decision of the RTC, which had become final and executory on January 24, 1999.

Hence, Lee filed a Motion for Execution8 before the RTC on July 29, 1999, which was granted.
Upon issuance of the corresponding writ, he sought the release of the garnished deposits of
Trendline. When the writ was implemented, however, BPI Manager Samuel Mendoza, Jr. denied
having possession, control and custody of any deposits or properties belonging to defendants,
prompting Lee to seek the production of their records of accounts with BPI. However, on the
manifestation of BPI that it cannot locate the defendants' bank records with Citytrust, the RTC
denied the motion on September 6, 2002.

On December 16, 2002, Lee filed a Motion for Execution and/or Enforcement of Garnishment9
before the RTC seeking to enforce against BPI the garnishment of Trendline’s deposit in the
amount of P700,962.10 and other deposits it may have had with Citytrust. The RTC denied the
motion for dearth of evidence showing that BPI took over the subject accounts from Citytrust and
the fact that BPI was not a party to the case. Lee’s motion for reconsideration was likewise
denied.10

Lee elevated the matter to the CA on a petition for certiorari. In its February 11, 2009 Decision,
the CA annulled the questioned orders, finding grave abuse of discretion on the part of the RTC in
denying Lee’s motion to enforce the garnishment against Trendline’s attached bank deposits with
Citytrust, which have been transferred to BPI by virtue of their merger. It found BPI liable to
deliver to the RTC the garnished bank deposit of Trendline in the amount of P700,962.10, which
Citytrust withheld pursuant to the RTC's previously-issued writ of attachment.

The CA refused to give credence to BPI’s defense that it can no longer locate Trendline’s bank
records with the defunct Citytrust, as its existence was supported by evidence and by the latter's
admission. Neither did it consider BPI a stranger to the case, holding it to have become a party in-
interest upon the approval by the Securities and Exchange Commission (SEC) of the parties’
Articles of Merger. BPI’s Motion for Reconsideration11 was denied in the CA's October 29, 2009
Resolution.

The Issues

In this petition, BPI ascribes the following errors to the CA:

A.

THE HONORABLE COURT OF APPEALS ERRED IN NOT DISMISSING CA-G.R. SP

No. 87911, THE PETITION FOR CERTIORARI UNDER RULE 65 OF THE REVISED
RULES OF COURT, FILED BY RESPONDENT CARLITO LEE BEING AN
IMPROPER REMEDY.

B.

THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT PETITIONER

BPI BECAME PARTY-IN-INTEREST IN THE CASE FILED BY RESPONDENT
CARLITO LEE UPON THE APPROVAL BY THE SECURITIES AND EXCHANGE
COMMISSION OF ITS MERGER WITH CITYTRUST BANKING CORPORATION.

C.

THE HONORABLE COURT OF APPEALS ERRED IN NOT RULING THAT THE

MOTION FOR EXECUTION AND/OR ENFORCEMENT OF GARNISHMENT IS NOT
 THE APPROPRIATE REMEDY IN THE EVENT THERE IS A THIRD PARTY
INVOLVED DURING THE EXECUTION PROCESS OF A FINAL AND EXECUTORY
JUDGMENT.

D.

THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT PETITIONER

BPI SHOULD BE HELD ACCOUNTABLE FOR THE AMOUNT OF PHP700,962.10.12

The Ruling of the Court

Section 1, Rule 41 of the Revised Rules of Court provides:

SECTION 1. Subject of appeal. - x x x

No appeal may be taken from:

xxx

(b) An interlocutory order;

xxx

In any of the foregoing circumstances, the aggrieved party may file an appropriate special
civil action as provided in Rule 65.13

A punctilious examination of the records will reveal that Lee had previously sought the execution
of the final and executory decision of the RTC dated August 8, 1989 which was granted and had
resulted in the issuance of the corresponding writ of execution. However, having garnished the
deposits of Trendline with Citytrust in the amount of ₱ 700,962.10 by virtue of a writ of
preliminary attachment, Lee filed anew a Motion for Execution and/or Enforcement of
Garnishment before the RTC on December 16, 2002. While the RTC denied the motion in its
March 1, 2004 Order, the denial was clearly with respect only to the enforcement of the
garnishment, to wit:

Acting on the Motion for Execution and/or Enforcement of Garnishment filed by plaintiff Carlito
Lee, and there being no evidence shown that the accounts subject of the motion were taken over
by the Bank of the Philippine Islands from Citytrust Bank and considering further that Bank of
Philippine Islands is not a party to this case, the instant Motion is DENIED for lack of merit.

SO ORDERED.14

Consequently, the foregoing Order merely involved the implementation of a writ of execution,
hence, interlocutory in nature. An interlocutory order is one that does not finally dispose of the
case, and does not end the court's task of adjudicating the parties’ contentions and determining
their rights and liabilities as regards each other, but obviously indicates that other things remain to
be done.15

Conformably with the provisions of Section 1, Rule 41 of the Revised Rules of Court above-
quoted, the remedy from such interlocutory order is certiorari under Rule 65. Thus, contrary to the
contention of BPI, the CA did not err in assuming jurisdiction over the petition for certiorari.

BPI likewise insists that the CA erred in considering it a party to the case by virtue of its merger
with Citytrust, the garnishee of defendants' deposits.

The Court is not convinced.

Section 5, Rule 65 of the Revised Rules of Court requires that persons interested in sustaining the
proceedings in court must be impleaded as private respondents. Upon the merger of Citytrust and
BPI, with the latter as the surviving corporation, and with all the liabilities and obligations of
Citytrust transferred to BPI as if it had incurred the same, BPI undoubtedly became a party
interested in sustaining the proceedings, as it stands to be prejudiced by the outcome of the case.

It is a settled rule that upon service of the writ of garnishment, the garnishee becomes a "virtual
party" or "forced intervenor" to the case and the trial court thereby acquires jurisdiction to bind the
garnishee to comply with its orders and processes. In Perla Compania de Seguros, Inc. v.
Ramolete,16 the Court ruled:

In order that the trial court may validly acquire jurisdiction to bind the person of the garnishee, it
is not necessary that summons be served upon him. The garnishee need not be impleaded as a party
to the case. All that is necessary for the trial court lawfully to bind the person of the garnishee or
any person who has in his possession credits belonging to the judgment debtor is service upon him
of the writ of garnishment.

The Rules of Court themselves do not require that the garnishee be served with summons or
impleaded in the case in order to make him liable.

xxxx

Through the service of the writ of garnishment, the garnishee becomes a "virtual party" to, or a
"forced intervenor" in, the case and the trial court thereby acquires jurisdiction to bind him to
compliance with all orders and processes of the trial court with a view to the complete satisfaction
of the judgment of the court.17

Citytrust, therefore, upon service of the notice of garnishment and its acknowledgment that it was
in possession of defendants' deposit accounts in its letter-reply dated June 28, 1988, became a
"virtual party" to or a "forced intervenor" in the civil case. As such, it became bound by the orders
and processes issued by the trial court despite not having been properly impleaded therein.
Consequently, by virtue of its merger with BPI on October 4, 1996, BPI, as the surviving
corporation, effectively became the garnishee, thus the "virtual party" to the civil case.
Corollarily, it should be emphasized that a merger of two corporations produces, among others,
the following effects:

1. The constituent corporations shall become a single corporation which, in case of merger, shall
be the surviving corporation designated in the plan of merger; and in case of consolidation, shall
be the consolidated corporation designated in the plan of consolidation;

2. The separate existence of the constituent corporation shall cease, except that of the surviving or
the consolidated corporation;

3. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities
and powers and shall be subject to all the duties and liabilities of a corporation organized under
this Code;

4. The surviving or the consolidated corporation shall thereupon and thereafter possess all the
rights, privileges, immunities and franchises of each of the constituent corporations; and all
property, real or personal, and all receivables due on whatever account, including subscriptions to
shares and other choses in action, and all and every other interest of, or belonging to, or due to
each constituent corporation, shall be deemed transferred to and vested in such surviving or
consolidated corporation without further act or deed; and

5. The surviving or consolidated corporation shall be responsible and liable for all the liabilities
and obligations of each of the constituent corporations in the same manner as if such surviving or
consolidated corporation had itself incurred such liabilities or obligations; and any pending claim,
action or proceeding brought by or against any of such constituent corporations may be prosecuted
by or against the surviving or consolidated corporation. The rights of creditors or liens upon the
property of any of such constituent corporations shall not be impaired by such merger or
consolidation.18 (Underscoring supplied)

In sum, although Citytrust was dissolved, no winding up of its affairs or liquidation of its assets,
privileges, powers and liabilities took place. As the surviving corporation, BPI simply continued
the combined businesses of the two banks and absorbed all the rights, privileges, assets, liabilities
and obligations of Citytrust, including the latter’s obligation over the garnished deposits of the
defendants.

Adopting another tack, BPI claims that Lee should have instead availed himself of the remedy
provided under Section 43, Rule 39 of the Revised Rules of Court because he is a third party to
the case who denies possession of the property.

The argument is specious.

Section 43, Rule 39 of the Revised Rules of Court states:

SECTION 43. Proceedings when indebtedness denied or another person claims the
property. – If it appears that a person or corporation, alleged to have property of the
judgment obligor or to be indebted to him, claims an interest in the property adverse to him
 or denies the debt, the court may authorize, by an order made to that effect, the judgment
oblige to institute an action against such person or corporation for the recovery of such
interest or debt, forbid a transfer or other disposition of such interest or debt within one
hundred twenty (120) days from notice of the order, and may punish disobedience of such
order as for contempt. Such order may be modified or vacated at any time by the court
which issued it, or by the court in which the action is brought, upon such terms as may be
just. (Underscoring supplied).

The institution of a separate action against a garnishee contemplates a situation where the garnishee
(third person) "claims an interest in the property adverse to him (judgment debtor) or denies the
debt."19 Neither of these situations exists in this case. The garnishee does not claim any interest
in the deposit accounts of the defendants, nor does it deny the existence of the deposit accounts.
In fact, Citytrust admitted in its letter dated June 28, 1988 that it is in possession of the deposit
accounts.

Considering the foregoing disquisitions, BPI's liability for the garnished deposits of defendants
has been clearly established.

Garnishment has been defined as a specie of attachment for reaching credits belonging to the
judgment debtor and owing to him from a stranger to the litigation.20 A writ of attachment is
substantially a writ of execution except that it emanates at the beginning, instead of at the
termination, of a suit. It places the attached properties in custodia legis, obtaining pendente lite a
lien until the judgment of the proper tribunal on the plaintiff’s claim is established, when the lien
becomes effective as of the date of the levy.21

By virtue of the writ of garnishment, the deposits of the defendants with Citytrust were placed in
custodia legis of the court. From that time onwards, their deposits were under the sole control of
the RTC and Citytrust holds them subject to its orders until such time that the attachment or
garnishment is discharged, or the judgment in favor of Lee is satisfied or the credit or deposit is
delivered to the proper officer of the court.22 Thus, Citytrust, and thereafter BPI, which
automatically assumed the former’s liabilities and obligations upon the approval of their Articles
of Merger, is obliged to keep the deposit intact and to deliver the same to the proper officer upon
order of the court.

However, the RTC is not permitted to dissolve or discharge a preliminary attachment or

garnishment except on grounds specifically provided23 in the Revised Rules of Court, namely,24
(a) the debtor has posted a counter-bond or has made the requisite cash deposit;25 (b) the
attachment was improperly or irregularly issued26 as where there is no ground for attachment, or
the affidavit and/or bond filed therefor are defective or insufficient; (c) the attachment is excessive,
but the discharge shall be limited to the excess;27 (d) the property attachment is exempt from
preliminary attachment;28 or (e) the judgment is rendered against the attaching creditor.29

Evidently, the loss of bank records of a garnished deposit is not a ground for the dissolution of
garnishment. Consequently, the obligation to satisfy the writ stands.
Moreover, BPI cannot avoid the obligation attached to the writ of garnishment by claiming that
the fund was not transferred to it, in light of the Articles of Merger which provides that "all
liabilities and obligations of Citytrust shall be transferred to and become the liabilities and
obligations of BPI in the same manner as if the BPI had itself incurred such liabilities or
obligations, and in order that the rights and interest of creditors of Citytrust or liens upon the
property of Citytrust shall not be impaired by merger."30

Indubitably, BPI IS liable to deliver the fund subject of the writ of garnishment.

With regard to the amount of the garnished fund, the Court concurs with the finding of the CA that
the total amount of garnished deposit of Trendline as of January 27, 1994 is P700,962.10,31 extant
in its motion for partial lifting of the writ of preliminary attachment32 and which amount, as
correctly observed by the CA, remains undisputed33 throughout the proceedings relative to this
case.

WHEREFORE, the instant petition is DENIED and the assailed February 11, 2009 Decision and
October 29, 2009 Resolution of the Court of Appeals are AFFIRMED.

SO ORDERED.

G.R. No. 199481 December 3, 2012

ILDEFONSO S. CRISOLOGO, Petitioner,

vs.
PEOPLE OF THE PHILIPPINES and CHINA BANKING CORPORATION, Respondents.

DECISION

PERLAS-BERNABE, J.:

This Petition for Review on Certiorari1 under Rule 45 of the Rules of Court assails the November
23, 2011 Decision2 of the Court of Appeals (CA) in CA-G.R. CV No. 80350, which affirmed the
December 4, 2002 Decision3 of the Regional Trial Courtt (RTC); Manila, Branch 21. The RTC
Decision acquitted petitioner Ildefonso S. Crisologo (petitioner) of the charges for violation of
Presidential Decree (P.D.) No. 115 (Trust Receipts Law) in relation to Article 315 1(b) of the
Revised Penal Code (RPC), but adjudged him civilly liable under the subject letters of credit.

The Factual Antecedents

Sometime in January and February 1989, petitioner, as President of Novachemical Industries, Inc.
(Novachem), applied for commercial letters of credit from private respondent China Banking
Corporation (Chinabank) to finance the purchase of 1,6004 kgs. of amoxicillin trihydrate
micronized from Hyundai Chemical Company based in Seoul, South Korea and glass containers
from San Miguel Corporation (SMC). Subsequently, Chinabank issued Letters of Credit Nos.
89/03015 and DOM-330416 in the respective amounts of US$114,400.007 (originally
US$135,850.00)8 with a peso equivalent of P2,139,119.809 and P1,712,289.90. After petitioner
received the goods, he executed for and in behalf of Novachem the corresponding trust receipt
agreements dated May 24, 1989 and August 31, 1989 in favor of Chinabank.

On January 28, 2004, Chinabank, through its Staff Assistant, Ms. Maria Rosario De Mesa (Ms. De
Mesa), filed before the City Prosecutor's Office of Manila a Complaint-Affidavit10 charging
petitioner for violation of P.D. No. 115 in relation to Article 315 1(b) of the RPC for his purported
failure to turn-over the goods or the proceeds from the sale thereof, despite repeated demands. It
averred that the latter, with intent to defraud, and with unfaithfulness and abuse of confidence,
misapplied, misappropriated and converted the goods subject of the trust agreements, to its damage
and prejudice.

In his defense, petitioner claimed that as a regular client of Chinabank, Novachem was granted a
credit line and letters of credit (L/Cs) secured by trust receipt agreements. The subject L/Cs were
included in the special term-payment arrangement mutually agreed upon by the parties, and
payable in installments. In the payment of its obligations, Novachem would normally give
instructions to Chinabank as to what particular L/C or trust receipt obligation its payments would
be applied. However, the latter deviated from the special arrangement and misapplied payments
intended for the subject L/Cs and exacted unconscionably high interests and penalty charges.

The City Prosecutor found probable cause to indict petitioner as charged and filed the
corresponding informations before the RTC of Manila, docketed as Criminal Case Nos. 94-139613
and 94-139614.

The RTC Ruling

After due proceedings, the RTC rendered a Decision11 dated December 4, 2002 acquitting
petitioner of the criminal charges for failure of the prosecution to prove his guilt beyond reasonable
doubt. It, however, adjudged him civilly liable to Chinabank, without need for a separate civil
action, for the amounts of P1,843,567.90 and P879,166.81 under L/C Nos. 89/0301 and DOM-
33041, respectively, less the payment of P500,000.00 made during the preliminary investigation,
with legal interest from the filing of the informations on October 27, 1994 until full payment, and
for the costs.

The CA Ruling

On appeal of the civil aspect, the CA affirmed12 the RTC Decision holding petitioner civilly liable.
It noted that petitioner signed the "Guarantee Clause" of the trust receipt agreements in his personal
capacity and even waived the benefit of excussion against Novachem. As such, he is personally
and solidarily liable with Novachem.

The Petition

In the instant petition, petitioner contends that the CA erred in declaring him civilly liable under
the subject L/Cs which are corporate obligations of Novachem, and that the adjudged amounts
were without factual basis because the obligations had already been settled. He also questions the
unilaterally-imposed interest rates applied by Chinabank and, accordingly, prays for the
application of the stipulated interest rate of 18% per annum (p.a.) on the corporation’s obligations.
He further assails the authority of Ms. De Mesa to prosecute the case against him sans authority
from Chinabank's Board of Directors.

The Court's Ruling

The petition is partly meritorious.

Section 13 of the Trust Receipts Law explicitly provides that if the violation or offense is
committed by a corporation, as in this case, the penalty provided for under the law shall be imposed
upon the directors, officers, employees or other officials or person responsible for the offense,
without prejudice to the civil liabilities arising from the criminal offense.

In this case, petitioner was acquitted of the charge for violation of the Trust Receipts Law in
relation to Article 315 1(b)13 of the RPC. As such, he is relieved of the corporate criminal liability
as well as the corresponding civil liability arising therefrom. However, as correctly found by the
RTC and the CA, he may still be held liable for the trust receipts and L/C transactions he had
entered into in behalf of Novachem.

Settled is the rule that debts incurred by directors, officers, and employees acting as corporate
agents are not their direct liability but of the corporation they represent, except if they contractually
agree/stipulate or assume to be personally liable for the corporation’s debts,14 as in this case.

The RTC and the CA adjudged petitioner personally and solidarily liable with Novachem for the
obligations secured by the subject trust receipts based on the finding that he signed the guarantee
clauses therein in his personal capacity and even waived the benefit of excussion. However, a
review of the records shows that petitioner signed only the guarantee clauses of the Trust Receipt
dated May 24, 198915 and the corresponding Application and Agreement for Commercial Letter
of Credit No. L/C No. 89/0301.16 With respect to the Trust Receipt17 dated August 31, 1989 and
Irrevocable Letter of Credit18 No. L/C No. DOM-33041 issued to SMC for the glass containers,
the second pages of these documents that would have reflected the guarantee clauses were missing
and did not form part of the prosecution's formal offer of evidence. In relation thereto, Chinabank
stipulated19 before the CA that the second page of the August 31, 1989 Trust Receipt attached to
the complaint before the court a quo would serve as the missing page. A perusal of the said page,
however, reveals that the same does not bear the signature of the petitioner in the guarantee clause.
Hence, it was error for the CA to hold petitioner likewise liable for the obligation secured by the
said trust receipt (L/C No. DOM-33041). Neither was sufficient evidence presented to prove that
petitioner acted in bad faith or with gross negligence as regards the transaction that would have
held him civilly liable for his actions in his capacity as President of Novachem.1âwphi1

On the matter of interest, while petitioner assailed the unilateral imposition of interest at rates
above the stipulated 18% p.a., he failed to submit a summary of the pertinent dates when excessive
interests were imposed and the purported over-payments that should be refunded. Having failed to
prove his affirmative defense, the Court finds no reason to disturb the amount awarded to
Chinabank. Settled is the rule that in civil cases, the party who asserts the affirmative of an issue
has the onus to prove his assertion in order to obtain a favorable judgment. Thus, the burden rests
on the debtor to prove payment rather than on the creditor to prove non-payment.20

Lastly, the Court affirms Ms. De Mesa's capacity to sue on behalf of Chinabank despite the lack
of proof of authority to represent the latter. The Court noted that as Staff Assistant of Chinabank,
Ms. De Mesa was tasked, among others, to review applications for L/Cs, verify the documents of
title and possession of goods covered by L/Cs, as well as pertinent documents under trust receipts
(TRs); prepare/send/cause the preparation of statements of accounts reflecting the outstanding
balance under the said L/Cs and/or TRs, and accept the corresponding payments; refer unpaid
obligations to Chinabank's lawyers and follow-up results thereon. As such, she was in a position
to verify the truthfulness and correctness of the allegations in the Complaint-Affidavit. Besides,
petitioner voluntarily submitted21 to the jurisdiction of the court a quo and did not question Ms.
De Mesa's authority to represent Chinabank in the instant case until an adverse decision was
rendered against him.

WHEREFORE, the assailed November 23, 2011 Decision of the Court of Appeals in CA-G.R. CV
No. 80350 is AFFIRMED with the modification absolving petitioner lldefonso S. Crisologo from
any civil liability to private respondent China Banking Corporation with respect to the Trust
Receipt dated August 31, 1989 and L/C No. DOM-33041. The rest of the Decision stands.

SO ORDERED.

G.R. No. 192951 November 14, 2012

ALDERSGATE COLLEGE, INC., ARSENIO L. MENDOZA, IGNACIO A. GALINDEZ,

WILSON E. SAGADRACA, and FILIPINAS MENZEN, Petitioners,
vs.
JUNIFEN F. GAUUAN, ARTEMIO M. VILLALUZ, SR., TERESITA ARREOLA,
FORTUNATA ANDAYA, SALVADOR C. AQUINO, ROBERTO M. TUGAWIN JOSE O.
RUPAC, Respondents,

-and-

ALDERSGATE COLLEGE, INC., DR. WILLIE A. DAMASCO, REV. ELMER V. LUNA,

JEMZ R. LUDAN, SAMUEL V. FULGENCIO, REV. ISMAEL A. DAMASCO, VICENTE
V. RAMEL, SALVADOR C. AQUINO, CAMILO V. GALLARDO, NORMALITA C.
ORDONEZ, and ARSENIO L. SOLIMEN, Respondents-Intervenors.

RESOLUTION

PERLAS-BERNABE, J.:

This petition for review assails the March 30, 2010 Resolution1 and June 29, 2010 Order2 of the
Regional Trial Court (RTC), Branch 28, Nueva Vizcaya in SEC Case No. 3972 which granted the
Motion to Withdraw and/or to Dismiss Case filed by the respondents-intervenors composed of the
incumbent members of the Board of Trustees of petitioner Aldersgate College, Inc.
The Factual Antecedents

Sometime in March 1991, petitioners Aldersgate College, Inc., Arsenio L. Mendoza, Ignacio A.
Galindez, Wilson E. Sagadraca, and Filipinas Menzen, together with now deceased Justino R.
Vigilia, Castulo Villanueva, Samuel F. Erana and Socorro Cabanilla, filed a case against the
respondents before the Securities and Exchange Commission (SEC).3 When the SEC was
reorganized pursuant to Republic Act 8799,4 the case was transferred to the RTC of Nueva
Vizcaya for further proceedings.5 Pre-trial thereafter ensued and a Pre-Trial Order was issued
enumerating the following issues:

[a] which of the contending trustees and officers are legally elected in accordance with the
1970 By-Laws;

[b] whether the withdrawals and disbursements are in accordance with the By-Laws;

[c] whether there was a complete, audited report and accounting of all the corporate funds;

[d] whether respondents Gauuan, Villaluz, Arreola and the banks, are jointly and severally
liable to indemnify the school for all sums of money withdrawn, disbursed, paid, diverted
and unaccounted for without the approval and counter-signature of the chairman;

[e] whether there was a demand of a right of inspection and a refusal to allow inspection,
and

[f] whether respondents are liable for damages.6

In a motion7 dated August 10, 2003, respondents sought the dismissal of the complaint or the
issuance of a summary judgment dismissing the case. On February 16, 2004, the RTC denied8 the
motion on the ground that "there are several issues raised which would still need the presentation
of evidence to determine the rights of the parties." A few years later, respondents-intervenors also
sought the dismissal of the complaint in their Answer-in-Intervention with Motion to Dismiss9
dated February 27, 2008 raising the lack of capacity, personality or authority to sue the individual
petitioners in behalf of Aldersgate College, Inc. The RTC, in its February 6, 2009 Order, once
more brushed aside the attempt to have the case dismissed.10 Unfazed, the respondents-
intervenors again filed in February 2010 a Motion to Withdraw and/or to Dismiss Case,11 alleging
that the case was instituted without any board resolution authorizing its filing and that the
incumbent members of the Board of Trustees of petitioner Aldersgate College, Inc. had recently
passed a resolution which sought the dismissal and/or withdrawal of the case.

The RTC’s Ruling

On March 30, 2010, the RTC granted12 the motion despite the opposition of the petitioners, and
dismissed the case on the basis of the Resolution passed by the members of the Board of Trustees
of petitioner Aldersgate College dated December 14, 2009 recommending the dismissal of the
case.
Petitioners' motion for reconsideration was denied in the RTC's June 29, 2010 Order.13

Hence the instant petition.

Issue Before The Court

Petitioners raise the issue of whether or not the RTC erred in dismissing the case.

The Court's Ruling

The petition is meritorious.

In an ordinary civil action, a motion to dismiss must generally be filed "within the time for but
before filing the answer to the complaint"14 and on the grounds enumerated in Section 1, Rule 16
of the Rules of Court, to wit:

(a) That the court has no jurisdiction over the person of the defending party;

(b) That the court has no jurisdiction over the subject matter of the claim;

(c) That venue is improperly laid;

(d) That the plaintiff has no legal capacity to sue;

(e) That there is another action pending between the same parties for the same cause;

(f) That the cause of action is barred by a prior judgment or by the statute of limitations;

(g) That the pleading asserting the claim states no cause of action;

(h) That the claim or demand set forth in the plaintiff’s pleading has been paid, waived,
abandoned, or otherwise extinguished;

(i) That the claim on which the action is founded is unenforceable under the provisions of
the statute of frauds; and

(j) That a condition precedent for filing the claim has not been complied with.15

The rule is, however, different with respect to intra-corporate controversies.1âwphi1 Under
Section 8, Rule 1 of the Interim Rules of Procedure for Intra-Corporate Controversies,16 a motion
to dismiss is a prohibited pleading.

As this case involves an intra-corporate dispute, the motion to dismiss is undeniably a prohibited
pleading. Moreover, the Court finds no justification for the dismissal of the case based on the mere
issuance of a board resolution by the incumbent members of the Board of Trustees of petitioner
corporation recommending its dismissal, especially considering the various issues raised by the
parties before the court a quo. Hence, the RTC should not have entertained, let alone have granted
the subject motion to dismiss.

WHEREFORE, the petition is GRANTED. The assailed March 30, 2010 Resolution and June 29,
2010 Order of the Regional Trial Court, Branch 28, Nueva Vizcaya in SEC Case No. 3972 are
REVERSED and SET ASIDE. The RTC is DIRECTED to proceed with the trial and to decide the
case with dispatch.

SO ORDERED.

G.R. No. 194307 November 20, 2013

BIRKENSTOCK ORTHOPAEDIE GMBH AND CO. KG (formerly BIRKENSTOCK

ORTHOPAEDIE GMBH), Petitioner,
vs.
PHILIPPINE SHOE EXPO MARKETING CORPORATION, Respondent.

DECISION

PERLAS-BERNABE, J.:

Assailed in this Petition for Review on Certiorari1 are the Court of Appeals (CA) Decision2 dated
June 25, 2010 and Resolution3 dated October 27, 2010 in CA-G.R. SP No. 112278 which reversed
and set aside the Intellectual Property Office (IPO) Director General’s Decision4 dated December
22, 2009 that allowed the registration of various trademarks in favor of petitioner Birkenstock
Orthopaedie GmbH & Co. KG.

The Facts

Petitioner, a corporation duly organized and existing under the laws of Germany, applied for
various trademark registrations before the IPO, namely: (a) "BIRKENSTOCK" under Trademark
Application Serial No. (TASN) 4-1994-091508 for goods falling under Class 25 of the
International Classification of Goods and Services (Nice Classification) with filing date of March
11, 1994; (b) "BIRKENSTOCK BAD HONNEF -RHEIN & DEVICE COMPRISING OF
ROUND COMPANY SEAL AND REPRESENTATION OF A FOOT, CROSS AND SUNBEA
M" under TASN 4-1994-091509 for goods falling under Class 25 of the Nice Classification with
filing date of March 11, 1994; and (c) "BIRKENSTOCK BAD HONNEF-RHEIN & DEVICE
COMPRISING OF ROUND COMPANY SEAL AND REPRESENTATION OF A FOOT,
CROSS AND SUNBEAM" under TASN 4-1994-095043 for goods falling under Class 10 of the
Nice Classification with filing date of September 5, 1994 (subject applications).5

However, registration proceedings of the subject applications were suspended in view of an

existing registration of the mark "BIRKENSTOCK AND DEVICE" under Registration No. 56334
dated October 21, 1993 (Registration No. 56334) in the name of Shoe Town International and
Industrial Corporation, the predecessor-in-interest of respondent Philippine Shoe Expo Marketing
Corporation.6 In this regard, on May 27, 1997 petitioner filed a petition for cancellation of
Registration No. 56334 on the ground that it is the lawful and rightful owner of the Birkenstock
marks (Cancellation Case).7 During its pendency, however, respondent and/or its predecessor-in-
interest failed to file the required 10th Year Declaration of Actual Use (10th Year DAU) for
Registration No. 56334 on or before October 21, 2004,8 thereby resulting in the cancellation of
such mark.9 Accordingly, the cancellation case was dismissed for being moot and academic.10

The aforesaid cancellation of Registration No. 56334 paved the way for the publication of the
subject applications in the IPO e-Gazette on February 2, 2007.11 In response, respondent filed
three (3) separate verified notices of oppositions to the subject applications docketed as Inter Partes
Case Nos. 14-2007-00108, 14-2007-00115, and 14-2007-00116,12 claiming, inter alia, that: (a) it,
together with its predecessor-in-interest, has been using Birkenstock marks in the Philippines for
more than 16 years through the mark "BIRKENSTOCK AND DEVICE"; (b) the marks covered
by the subject applications are identical to the one covered by Registration No. 56334 and thus,
petitioner has no right to the registration of such marks; (c) on November 15, 1991, respondent’s
predecessor-in-interest likewise obtained a Certificate of Copyright Registration No. 0-11193 for
the word "BIRKENSTOCK" ; (d) while respondent and its predecessor-in-interest failed to file the
10th Yea r DAU, it continued the use of "BIRKENSTOCK AND DEVICE" in lawful commerce;
and (e) to record its continued ownership and exclusive right to use the "BIRKENSTOCK" marks,
it has filed TASN 4-2006-010273 as a " re-application " of its old registration, Registration No.
56334.13 On November 13, 2007, the Bureau of Legal Affairs (BLA) of the IPO issued Order No.
2007-2051 consolidating the aforesaid inter partes cases (Consolidated Opposition Cases).14

The Ruling of the BLA

In its Decision15 dated May 28, 2008, the BLA of the IPO sustained respondent’s opposition, thus,
ordering the rejection of the subject applications. It ruled that the competing marks of the parties
are confusingly similar since they contained the word "BIRKENSTOCK" and are used on the same
and related goods. It found respondent and its predecessor-in-interest as the prior user and adopter
of "BIRKENSTOCK" in the Philippines, while on the other hand, petitioner failed to present
evidence of actual use in the trade and business in this country. It opined that while Registration
No. 56334 was cancelled, it does not follow that prior right over the mark was lost, as proof of
continuous and uninterrupted use in trade and business in the Philippines was presented. The BLA
likewise opined that petitioner’s marks are not well -known in the Philippines and internationally
and that the various certificates of registration submitted by petitioners were all photocopies and,
therefore, not admissible as evidence.16

Aggrieved, petitioner appealed to the IPO Director General.

The Ruling of the IPO Director General

In his Decision17 dated December 22, 2009, the IPO Director General reversed and set aside the
ruling of the BLA, thus allowing the registration of the subject applications. He held that with the
cancellation of Registration No. 56334 for respondent’s failure to file the 10th Year DAU, there is
no more reason to reject the subject applications on the ground of prior registration by another
proprietor.18 More importantly, he found that the evidence presented proved that petitioner is the
true and lawful owner and prior user of "BIRKENSTOCK" marks and thus, entitled to the
registration of the marks covered by the subject applications.19 The IPO Director General further
held that respondent’s copyright for the word "BIRKENSTOCK" is of no moment since copyright
and trademark are different forms of intellectual property that cannot be interchanged.20

Finding the IPO Director General’s reversal of the BLA unacceptable, respondent filed a petition
for review with the CA.

Ruling of the CA

In its Decision21 dated June 25, 2010, the CA reversed and set aside the ruling of the IPO Director
General and reinstated that of the BLA. It disallowed the registration of the subject applications
on the ground that the marks covered by such applications "are confusingly similar, if not outright
identical" with respondent’s mark.22 It equally held that respondent’s failure to file the 10th Year
DAU for Registration No. 56334 "did not deprive petitioner of its ownership of the
‘BIRKENSTOCK’ mark since it has submitted substantial evidence showing its continued use,
promotion and advertisement thereof up to the present."23 It opined that when respondent’s
predecessor-in-interest adopted and started its actual use of "BIRKENSTOCK," there is neither an
existing registration nor a pending application for the same and thus, it cannot be said that it acted
in bad faith in adopting and starting the use of such mark.24 Finally, the CA agreed with
respondent that petitioner’s documentary evidence, being mere photocopies, were submitted in
violation of Section 8.1 of Office Order No. 79, Series of 2005 (Rules on Inter Partes Proceedings).

Dissatisfied, petitioner filed a Motion for Reconsideration25 dated July 20, 2010, which was,
however, denied in a Resolution26 dated October 27, 2010. Hence, this petition.27

Issues Before the Court

The primordial issue raised for the Court’s resolution is whether or not the subject marks should
be allowed registration in the name of petitioner.

The Court’s Ruling

The petition is meritorious.

A. Admissibility of Petitioner’s Documentary Evidence.

In its Comment28 dated April 29, 2011, respondent asserts that the documentary evidence
submitted by petitioner in the Consolidated Opposition Cases, which are mere photocopies, are
violative of Section 8.1 of the Rules on Inter Partes Proceedings, which requires certified true
copies of documents and evidence presented by parties in lieu of originals.29 As such, they should
be deemed inadmissible.

The Court is not convinced.

It is well-settled that "the rules of procedure are mere tools aimed at facilitating the attainment of
justice, rather than its frustration. A strict and rigid application of the rules must always be
eschewed when it would subvert the primary objective of the rules, that is, to enhance fair trials
and expedite justice. Technicalities should never be used to defeat the substantive rights of the
other party. Every party-litigant must be afforded the amplest opportunity for the proper and just
determination of his cause, free from the constraints of technicalities."30 "Indeed, the primordial
policy is a faithful observance of [procedural rules], and their relaxation or suspension should only
be for persuasive reasons and only in meritorious cases, to relieve a litigant of an injustice not
commensurate with the degree of his thoughtlessness in not complying with the procedure
prescribed."31 This is especially true with quasi-judicial and administrative bodies, such as the
IPO, which are not bound by technical rules of procedure.32 On this score, Section 5 of the Rules
on Inter Partes Proceedings provides:

Sec. 5. Rules of Procedure to be followed in the conduct of hearing of Inter Partes cases. – The
rules of procedure herein contained primarily apply in the conduct of hearing of Inter Partes cases.
The Rules of Court may be applied suppletorily. The Bureau shall not be bound by strict technical
rules of procedure and evidence but may adopt, in the absence of any applicable rule herein, such
mode of proceedings which is consistent with the requirements of fair play and conducive to the
just, speedy and inexpensive disposition of cases, and which will give the Bureau the greatest
possibility to focus on the contentious issues before it. (Emphasis and underscoring supplied)

In the case at bar, while petitioner submitted mere photocopies as documentary evidence in the
Consolidated Opposition Cases, it should be noted that the IPO had already obtained the originals
of such documentary evidence in the related Cancellation Case earlier filed before it. Under this
circumstance and the merits of the instant case as will be subsequently discussed, the Court holds
that the IPO Director General’s relaxation of procedure was a valid exercise of his discretion in
the interest of substantial justice.33

Having settled the foregoing procedural matter, the Court now proceeds to resolve the substantive
issues.

B. Registration and ownership of "BIRKENSTOCK."

Republic Act No. (RA) 166,34 the governing law for Registration No. 56334, requires the filing
of a DAU on specified periods,35 to wit:

Section 12. Duration. – Each certificate of registration shall remain in force for twenty years:
Provided, That registrations under the provisions of this Act shall be cancelled by the Director,
unless within one year following the fifth, tenth and fifteenth anniversaries of the date of issue of
the certificate of registration, the registrant shall file in the Patent Office an affidavit showing that
the mark or trade-name is still in use or showing that its non-use is due to special circumstance
which excuse such non-use and is not due to any intention to abandon the same, and pay the
required fee.

The Director shall notify the registrant who files the above- prescribed affidavits of his acceptance
or refusal thereof and, if a refusal, the reasons therefor. (Emphasis and underscoring supplied)
The aforementioned provision clearly reveals that failure to file the DAU within the requisite
period results in the automatic cancellation of registration of a trademark. In turn, such failure is
tantamount to the abandonment or withdrawal of any right or interest the registrant has over his
trademark.36

In this case, respondent admitted that it failed to file the 10th Year DAU for Registration No.
56334 within the requisite period, or on or before October 21, 2004. As a consequence, it was
deemed to have abandoned or withdrawn any right or interest over the mark "BIRKENSTOCK."
Neither can it invoke Section 23637 of the IP Code which pertains to intellectual property rights
obtained under previous intellectual property laws, e.g., RA 166, precisely because it already lost
any right or interest over the said mark.

Besides, petitioner has duly established its true and lawful ownership of the mark
"BIRKENSTOCK."

Under Section 238 of RA 166, which is also the law governing the subject applications, in order
to register a trademark, one must be the owner thereof and must have actually used the mark in
commerce in the Philippines for two (2) months prior to the application for registration. Section
2-A39 of the same law sets out to define how one goes about acquiring ownership thereof. Under
the same section, it is clear that actual use in commerce is also the test of ownership but the
provision went further by saying that the mark must not have been so appropriated by another.
Significantly, to be an owner, Section 2-A does not require that the actual use of a trademark must
be within the Philippines. Thus, under RA 166, one may be an owner of a mark due to its actual
use but may not yet have the right to register such ownership here due to the owner’s failure to use
the same in the Philippines for two (2) months prior to registration.40

It must be emphasized that registration of a trademark, by itself, is not a mode of acquiring

ownership.1âwphi1 If the applicant is not the owner of the trademark, he has no right to apply for
its registration. Registration merely creates a prima facie presumption of the validity of the
registration, of the registrant’s ownership of the trademark, and of the exclusive right to the use
thereof. Such presumption, just like the presumptive regularity in the performance of official
functions, is rebuttable and must give way to evidence to the contrary.41

Clearly, it is not the application or registration of a trademark that vests ownership thereof, but it
is the ownership of a trademark that confers the right to register the same. A trademark is an
industrial property over which its owner is entitled to property rights which cannot be appropriated
by unscrupulous entities that, in one way or another, happen to register such trademark ahead of
its true and lawful owner. The presumption of ownership accorded to a registrant must then
necessarily yield to superior evidence of actual and real ownership of a trademark.

The Court’s pronouncement in Berris Agricultural Co., Inc. v. Abyadang42 is instructive on this
point:

The ownership of a trademark is acquired by its registration and its actual use by the manufacturer
or distributor of the goods made available to the purchasing public. x x x A certificate of
registration of a mark, once issued, constitutes prima facie evidence of the validity of the
registration, of the registrant’s ownership of the mark, and of the registrant’s exclusive right to use
the same in connection with the goods or services and those that are related thereto specified in
the certificate. x x x In other words, the prima facie presumption brought about by the registration
of a mark may be challenged and overcome in an appropriate action, x x x by evidence of prior
use by another person, i.e. , it will controvert a claim of legal appropriation or of ownership based
on registration by a subsequent user. This is because a trademark is a creation of use and belongs
to one who first used it in trade or commerce.43 (Emphasis and underscoring supplied)

In the instant case, petitioner was able to establish that it is the owner of the mark
"BIRKENSTOCK." It submitted evidence relating to the origin and history of "BIRKENSTOCK"
and its use in commerce long before respondent was able to register the same here in the
Philippines. It has sufficiently proven that "BIRKENSTOCK" was first adopted in Europe in 1774
by its inventor, Johann Birkenstock, a shoemaker, on his line of quality footwear and thereafter,
numerous generations of his kin continuously engaged in the manufacture and sale of shoes and
sandals bearing the mark "BIRKENSTOCK" until it became the entity now known as the
petitioner. Petitioner also submitted various certificates of registration of the mark
"BIRKENSTOCK" in various countries and that it has used such mark in different countries
worldwide, including the Philippines.44

On the other hand, aside from Registration No. 56334 which had been cancelled, respondent only
presented copies of sales invoices and advertisements, which are not conclusive evidence of its
claim of ownership of the mark "BIRKENSTOCK" as these merely show the transactions made
by respondent involving the same.45

In view of the foregoing circumstances, the Court finds the petitioner to be the true and lawful
owner of the mark "BIRKENSTOCK" and entitled to its registration, and that respondent was in
bad faith in having it registered in its name. In this regard, the Court quotes with approval the
words of the IPO Director General, viz.:

The facts and evidence fail to show that [respondent] was in good faith in using and in registering
the mark BIRKENSTOCK. BIRKENSTOCK, obviously of German origin, is a highly distinct and
arbitrary mark. It is very remote that two persons did coin the same or identical marks. To come
up with a highly distinct and uncommon mark previously appropriated by another, for use in the
same line of business, and without any plausible explanation, is incredible. The field from which
a person may select a trademark is practically unlimited. As in all other cases of colorable
imitations, the unanswered riddle is why, of the millions of terms and combinations of letters and
designs available, [respondent] had to come up with a mark identical or so closely similar to the
[petitioner’s] if there was no intent to take advantage of the goodwill generated by the [petitioner’s]
mark. Being on the same line of business, it is highly probable that the [respondent] knew of the
existence of BIRKENSTOCK and its use by the [petitioner], before [respondent] appropriated the
same mark and had it registered in its name.46

WHEREFORE, the petition is GRANTED. The Decision dated June 25, 2010 and Resolution
dated October 27, 2010 of the Court of Appeals in CA-G.R. SP No. 112278 are REVERSED and
SET ASIDE. Accordingly, the Decision dated December 22, 2009 of the IPO Director General is
hereby REINSTATED.
SO ORDERED.

G.R. No. 194872 June 9, 2014

SAHAR INTERNATIONAL TRADING, INC., Petitioner,

vs.
WARNER LAMBERT LLC and PFIZER, (Philippines), CO., INC. Respondents.

RESOLUTION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari1 are the Decision2 dated April 22, 2010 and the
Resolution3 dated December 21, 2010 of the Court of Appeals (CA) in CA-G.R. SP No. 106455
which annulled and set aside the Orders4 dated August 5, 2008 and September 25, 2008 of the
Regional Trial Court of Makati City, Branch 149 (RTC), thereby directing the said court to issue
a writ of preliminary injunction enjoining petitioner Sahar International Trading, Inc. (Sahar), its
agents, representatives, and assigns, during the pendency of Civil Case No. 08-424, from making,
using or offering for sale, or distributing Atorvastatin or Atorvastatin Calcium products to various
hospitals, drugstores, or to any other individual or entity in the Philippines, or from otherwise
infringing the patents of respondent Warner Lambert Co., LLC (Warner Lambert)' over the
foregoing drugs.

The Facts

Warner Lambert, a foreign corporation, is the registered owner of three (3) Philippine patents,
namely: (a) Letters Patent (LP) No. 26330 for the pharmaceutical substance Atorvastatin valid
until April 29, 2009; (b) LP No. 29149 for the pharmaceutical substance Atorvastatin Calcium
valid until September 26, 2012;5 and (c) LP No. 1-1996-53719 for the pharmaceutical substance
Atorvastatin Calcium in crystalline form valid until October 23, 2019 (subject patents).6 In
general, Atorvastatin blocks the production of cholesterol in the body and is used to reduce the
amounts of LDL (bad cholesterol), total cholesterol, triglycerides (another type of fat), and
apolipoprotein B (a protein needed to make cholesterol) in a person’s blood.7 Atorvastatin is also
used to increase the level of HDL (good cholesterol) in one’s blood. These actions are important
in reducing the risk of hardening of the arteries, which can lead to heart attacks, strokes, and
peripheral vascular diseases.8 Warner Lambert and its worldwide affiliates sell products covered
by the subject patents under the brand name Lipitor.9

On the other hand, respondent Pfizer, Inc. (Pfizer) is the exclusive licensee of Warner Lambert to
import, market, distribute, and sell products covered by the subject patents in the Philippines. To
this end, Pfizer applied for and was issued various Certificates of Product Registration (CPR) from
the Bureau of Food and Drugs (now, Food and Drug Administration [FDA]) in order to validly
sell and promote such products in the Philippine market.10

Sometime in 2005, Pfizer discovered that Sahar also applied for and was issued a CPR by the FDA
for Atorvastatin Calcium under the brand name Atopitar.11 It also found out that Sahar has been
selling and distributing Atopitar in the provinces of Bicol, Zamboanga, Cebu, Ilocos Norte, as well
as in Tarlac; and thatSahar’s marketing ads showed that Atopitar is neither manufactured by
Warner Lambert nor any Pfizer company, but by Geofman12 Pharmaceuticals of Pakistan. Upon
further investigation and laboratory testing, Pfizer learned that the Atorvastatin Calcium that is
used in Atopitar is also in its crystalline form.13

Pfizer immediately sent numerous letters to Sahar informing the latter of Warner Lambert’s patents
over Atorvastatin Calcium and demanding it to cease and desist from selling and distributing said
pharmaceutical substance under the brand name Atopitar. However, Sahar did not heed such
demands and replied that the patent over Atorvastatin Calcium had already expired in Pakistan
and, therefore, it believed the same can already be freely distributed and marketed in the
Philippines by any entity.14 Thus, Warner Lambert and Pfizer (respondents) filed a Complaint15
for Patent Infringement, Damages, and Injunction, with applications for the issuance of Temporary
Restraining Orders and/or Writs of Preliminary Injunction against Sahar before the RTC, docketed
as Civil Case No. 08-424.16 In support of its prayer for injunctive relief, respondents alleged that
Sahar’s acts of importing, selling, and offering for sale Atorvastatin and Atorvastatin Calcium
products under the brand name Atopitar constitute acts of patent infringement as defined in Section
7617 of Republic Act No. (RA) 8293,18 otherwise known as the "Intellectual Property Code of
the Philippines,"19 and that unless Sahar is enjoined from doing said acts, they will suffer
irreparable damage and render any judgment ineffectual.20

In opposition to the prayer for injunctive relief, Sahar assailed the validity of Warner Lambert’s
patents, maintaining that: (a) the ingredients and the process in the making of the Atorvastatin
Calcium found in Atopitar is substantially different from that found in Lipitor; (b) the FDA’s
issuance of a CPR in its favor should be deemed prima facie evidence that it is authorized to sell
and distribute Atopitar in the Philippines; and (c) there is no urgent need to enjoin the sale and
distribution of Atopitar in the Philippine market, considering that Warner and Pfizer themselves
took more than two (2) years to file their complaint.21

The RTC Ruling

In an Order22 dated August 5, 2008, the RTC denied respondents’ application for the issuance of
a writ of preliminary injunction against the alleged patent infringement of Sahar. The RTC deemed
it proper not to grant such prayer, considering that the instant case is principally for injunction and
damages, and, as such, the issuance of an injunctive writ "would in effect result in [the] premature
disposition of the main case and would defeat the purpose of preliminary injunctive relief."23

Respondents filed a Motion for Reconsideration24 dated August 20, 2008, which was, however,
denied by the RTC in an Order25 dated September 25, 2008. Aggrieved, respondents filed a
petition for certiorari26 before the CA.

The CA Ruling

In a Decision27 dated April 22, 2010, the CA annulled and set aside the assailed orders of the RTC
and issued a writ of preliminary injunction enjoining Sahar, its agents, representatives, and assigns,
during the pendency of Civil Case No. 08-424, from making, using or offering for sale, or
distributing Atopitar in the Philippine market.28

The CA held that from the evidence presented, respondents have established their right to
preliminary injunctive relief against Sahar’s acts of selling and distributing Atorvastatin Calcium
under the brand name Atopitar, considering that: (a) Warner Lambert is the registered owner of
the subject patents which are still existing and effective; (b) Sahar does not deny that it has been
selling and distributing products using Atorvastatin and Atorvastatin Calcium in crystalline form;
and (c) respondents’ witnesses testified that the presence of Atopitaris causing confusion among
medical practitioners as to the availability of Lipitor and validity of the subject patents registered
under the name of Warner Lambert.29

Further, contrary to the RTC’s findings, the CA held that the issuance of a writ of preliminary
injunction in respondents’ favor would not result in the prejudgment of the instant case because
other issues, such as whether or not Sahar is indeed guilty of patent infringement and thus, liable
for damages, still need to be resolved through full-blown trial.30

Dissatisfied, Sahar moved for reconsideration,31 which was, however, denied by the CA in a
Resolution32 dated December 21, 2010.1âwphi1 Hence, this petition.

The Issue Before the Court

The sole issue for the Court’s resolution is whether or not the CA was correct in issuing a writ of
preliminary injunction enjoining Sahar, its agents, representatives, and assigns, during the
pendency of Civil Case No. 08-424 from making, using or offering for sale, or distributing Atopitar
in the Philippine market.

At this point, it must be noted that on March 11, 2011 and during the pendency of the instant
petition, the RTC issued a Judgment33 dismissing Civil Case No. 08-424 on the ground of lack of
cause of action. Thereafter, respondents filed an appeal before the CA, docketed as CA-G.R. CV
No. 97495.34 In a Decision35 dated November 5, 2013, the CA reversed and set aside the RTC
ruling and found Sahar liable for patent infringement, and thus, ordered that: (a) Sahar pay
respondents ₱300,000.00 as temperate or moderate damages, ₱50,000.00 as exemplary damages,
and ₱50,000.00 as attorney’s fees and litigation expenses; (b) the writ of preliminary injunction
that it issued in its April 22, 2010 Decision in CA-G.R. SP No. 106455 be made permanent; and
(c) Sahar’s Atopitar, wherever they may be found in the Philippines, including materials and
implements used in the commission of patent infringement, be condemned, seized, and forfeited.36

The Court's Ruling

The petition is dismissed on the ground of mootness.

A case or issue is considered moot and academic when it ceases to present a justiciable controversy
by virtue of supervening events, so that an adjudication of the case or a declaration on the issue
would be of no practical value or use. In such instance, there is no actual substantial relief which
a petitioner would be entitled to, and which would be negated by the dismissal of the petition.
Courts generally decline jurisdiction over such case or dismiss it on the ground of mootness. This
is because the judgment will not serve any useful purpose or have any practical legal effect
because, in the nature of things, it cannot be enforced.37

Applying the foregoing, the Court finds that the CA's supervening promulgation of its Decision
dated November 5, 2013 in CA-G.R. CV No. 97495 - which reversed the RTC's Judgment dated
March 11, 2011 in Civil Case No. 08-424 and thereby made the writ of preliminary injunction
permanent - rendered the present case moot and academic. This is because the primordial issue
raised in the instant petition is precisely the propriety of the aforesaid issuance. Since the writ of
preliminary injunction is but an incident of the patent infringement case which had already been
resolved by the CA, ruling on its propriety would be merely an academic exercise carrying no
practical effect. Accordingly, the Court is constrained to dismiss the instant petition. In this
relation, it is relevant to point out that it would be premature for the Court to tackle the merits of
the CA's recent decision for the reason that it is not the matter herein appealed.

WHEREFORE, the petition is DISMISSED for being moot and academic.

SO ORDERED.

G.R. No. 190706 July 21, 2014

SHANG PROPERTIES REALTY CORPORATION (formerly THE SHANG GRAND

TOWER CORPORATION) and SHANG PROPERTIES, INC. (formerly EDSA
PROPERTIES HOLDINGS, INC.), Petitioners,
vs.
ST. FRANCIS DEVELOPMENT CORPORATION, Respondent.

DECISION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari1 is the Decision2 dated December 18, 2009 of the
Court of Appeals (CA) in CA-G.R. SP No. 105425 which affirmed with modification the
Decision3 dated September 3, 2008 of the Intellectual Property Office (IPO) Director-General.
The CA: (a) affirmed the denial of the application for registration of the mark "ST. FRANCIS
TOWERS" filed by petitioners Shang Properties Realty Corporation and Shang Properties, Inc.
(petitioners); ( b) found petitioners to have committed unfair competition for using the marks "THE
ST. FRANCIS TOWERS" and "THE ST. FRANCIS SHANGRI-LA PLACE"; (c) ordered
petitioners to cease and desist from using "ST. FRANCIS" singly or as part of a composite mark;
and (d) ordered petitioners to jointly and severally pay respondent St. Francis Square Development
Corporation (respondent) a fine in the amount of ₱200,000.00.

The Facts

Respondent – a domestic corporation engaged in the real estate business and the developer of the
St. Francis Square Commercial Center, built sometime in 1992, located at Ortigas Center,
Mandaluyong City, Metro Manila (Ortigas Center)4 – filed separate complaints against petitioners
before the IPO - Bureau of Legal Affairs (BLA), namely: (a) an intellectual property violation case
for unfair competition, false or fraudulent declaration, and damages arising from petitioners’ use
and filing of applications for the registration of the marks "THE ST. FRANCIS TOWERS" and
"THE ST. FRANCIS SHANGRI-LA PLACE," docketed as IPV Case No. 10-2005-00030 (IPV
Case); and (b) an inter partes case opposing the petitioners’ application for registration of the mark
"THE ST. FRANCIS TOWERS" for use relative to the latter’s business, particularly the
construction of permanent buildings or structures for residential and office purposes, docketed as
Inter PartesCase No. 14-2006-00098 (St. Francis Towers IP Case); and (c) an inter partes case
opposing the petitioners’ application for registration of the mark "THE ST. FRANCIS SHANGRI-
LA PLACE," docketed as IPC No. 14-2007-00218 (St. Francis Shangri-La IP Case).5

In its complaints, respondent alleged that it has used the mark "ST. FRANCIS" to identify its
numerous property development projects located at Ortigas Center, such as the aforementioned St.
Francis Square Commercial Center, a shopping mall called the "St. Francis Square," and a mixed-
use realty project plan thatincludes the St. Francis Towers. Respondent added that as a result of its
continuous use of the mark "ST. FRANCIS" in its real estate business,it has gained substantial
goodwill with the public that consumers and traders closely identify the said mark with its property
development projects. Accordingly, respondent claimed that petitioners could not have the mark
"THE ST. FRANCIS TOWERS" registered in their names, and that petitioners’ use of the marks
"THE ST. FRANCIS TOWERS" and "THE ST. FRANCIS SHANGRI-LA PLACE" in their own
real estate development projects constitutes unfair competition as well as false or fraudulent
declaration.6

Petitioners denied committing unfair competition and false or fraudulent declaration, maintaining
that they could register the mark "THE ST. FRANCIS TOWERS" and "THE ST. FRANCIS
SHANGRI-LA PLACE" under their names. They contended that respondent is barred from
claiming ownership and exclusive use ofthe mark "ST. FRANCIS" because the same is
geographically descriptive ofthe goods or services for which it is intended to be used.7 This is
because respondent’s as well as petitioners’ real estate development projects are locatedalong the
streets bearing the name "St. Francis," particularly, St. FrancisAvenue and St. Francis Street (now
known as Bank Drive),8 both within the vicinity of the Ortigas Center.

The BLA Rulings

On December 19, 2006, the BLA rendered a Decision9 in the IPV Case, and found that petitioners
committed acts of unfair competition against respondent by its use of the mark "THE ST.
FRANCIS TOWERS" but not with its use of the mark "THE ST. FRANCIS SHANGRI-LA
PLACE." It, however, refused to award damages in the latter’s favor, considering that there was
no evidence presented to substantiate the amount of damages it suffered due to the former’s acts.
The BLA found that "ST. FRANCIS," being a name of a Catholic saint, may be considered as an
arbitrary mark capable of registration when used in real estate development projects as the name
has no direct connection or significance when used in association with real estate. The BLA neither
deemed "ST. FRANCIS" as a geographically descriptive mark, opiningthat there is no specific
lifestyle, aura, quality or characteristic that the real estate projects possess except for the fact that
they are located along St. Francis Avenueand St. Francis Street (now known as Bank Drive),
Ortigas Center. In this light, the BLA found that while respondent’s use of the mark "ST.
FRANCIS" has not attained exclusivity considering that there are other real estate development
projects bearing the name "St. Francis" in other areas,10 it must nevertheless be pointed out that
respondent has been known to be the only real estate firm to transact business using such name
within the Ortigas Center vicinity. Accordingly, the BLA considered respondent to have gained
goodwill and reputation for its mark, which therefore entitles it to protection against the use by
other persons, at least, to those doing business within the Ortigas Center.11

Meanwhile, on March 28, 2007, the BLA rendered a Decision12 in the St. Francis Towers IP Case,
denying petitioners’ application for registration of the mark "THE ST. FRANCIS TOWERS."
Excluding the word "TOWERS" in view of petitioners’ disclaimer thereof, the BLA ruled that
petitioners cannot register the mark "THE ST. FRANCIS" since it is confusingly similar to
respondent’s"ST. FRANCIS" marks which are registered with the Department of Trade and
Industry(DTI). It held that respondent had a better right over the use of the mark "ST. FRANCIS"
because of the latter’s appropriation and continuous usage thereof for a long period of time.13 A
little over a year after, or on March 31, 2008, the BLA then rendered a Decision14 in the St. Francis
Shangri-La IP Case, allowing petitioners’ application for registration of the mark "THE ST.
FRANCIS SHANGRI-LA PLACE." It found that respondent cannot preclude petitioners from
using the mark "ST. FRANCIS" as the records show that the former’s use thereof had not been
attended with exclusivity. More importantly, it found that petitioners had adequately appended the
word "Shangri-La" to its composite mark to distinguish it from that of respondent, in which case,
the former had removed any likelihood of confusion that may arise from the contemporaneous use
by both parties of the mark "ST. FRANCIS."

Both parties appealed the decision in the IPV Case, while petitioners appealed the decision in the
St. Francis Towers IP Case. Due to the identity of the parties and issues involved, the IPO Director-
General ordered the consolidation of the separate appeals.15 Records are, however, bereft of any
showing that the decision in the St. Francis Shangri-La IP Casewas appealed by either party and,
thus, is deemed to have lapsed into finality.

The IPO Director-General Ruling

In a Decision16 dated September 3, 2008, then IPO Director-General Adrian S. Cristobal, Jr.
affirmedthe rulings of the BLA that: (a) petitioners cannot register the mark "THEST. FRANCIS
TOWERS"; and (b) petitioners are not guilty of unfair competition in its use of the mark "THE
ST. FRANCIS SHANGRI-LA PLACE." However, the IPO DirectorGeneral reversed the BLA’s
findingthat petitioners committed unfair competition through their use of the mark "THE ST.
FRANCIS TOWERS," thus dismissing such charge. He foundthat respondent could not be entitled
to the exclusive use of the mark "ST. FRANCIS," even at least to the locality where it conducts its
business, because it is a geographically descriptive mark, considering that it was petitioners’ as
well as respondent’s intention to use the mark "ST. FRANCIS"in order to identify, or at least
associate, their real estate development projects/businesses with the place or location where they
are situated/conducted, particularly, St. Francis Avenue and St. Francis Street (now known as Bank
Drive), Ortigas Center. He further opined that respondent’s registration of the name "ST.
FRANCIS" with the DTI is irrelevant since what should be controlling are the trademark
registrations with the IPO itself.17 Also, the IPO Director-General held that since the parties are
both engaged in the real estate business, it would be "hard to imagine that a prospective buyer will
be enticed to buy, rent or purchase [petitioners’] goods or servicesbelieving that this is owned by
[respondent] simply because of the name ‘ST. FRANCIS.’ The prospective buyer would
necessarily discuss things with the representatives of [petitioners] and would readily know that
this does not belong to [respondent]."18

Disagreeing solely with the IPO Director-General’s ruling on the issue of unfair competition (the
bone of contention in the IPV Case), respondent elevated the sameto the CA.

In contrast, records do not show that either party appealed the IPO Director-General’s ruling on
the issue ofthe registrability of the mark "THE ST. FRANCIS TOWERS" (the bone of contention
in the St. Francis Towers IP Case). As such, said pronouncement isalso deemed to have lapsed
into finality.

The CA Ruling

In a Decision19 dated December 18, 2009, the CA found petitioners guilty of unfair competition
not only withrespect to their use of the mark "THE ST. FRANCIS TOWERS" but alsoof the mark
"THE ST. FRANCIS SHANGRI-LA PLACE." Accordingly, itordered petitioners to cease and
desist from using "ST. FRANCIS" singly or as part of a composite mark, as well as to jointly and
severally pay respondent a fine in the amount of ₱200,000.00.

The CA did not adhere to the IPO Director-General’s finding that the mark "ST. FRANCIS" is
geographically descriptive, and ruled that respondent – which has exclusively and continuously
used the mark "ST. FRANCIS" for more than a decade, and,hence, gained substantial goodwill
and reputation thereby – is very muchentitled to be protected against the indiscriminate usage by
other companies of the trademark/name it has so painstakingly tried to establish and maintain.
Further, the CA stated that even on the assumption that "ST. FRANCIS" was indeed a
geographically descriptive mark, adequateprotection must still begiven to respondent pursuant to
the Doctrine of Secondary Meaning.20

Dissatisfied, petitioners filed the present petition.

The Issue Before the Court

With the decisions in both Inter PartesCases having lapsed into finality, the sole issue thus left for
the Court’s resolution is whether or not petitioners are guilty of unfair competition in using the
marks "THE ST. FRANCIS TOWERS" and "THE ST. FRANCIS SHANGRI-LA PLACE."

The Court’s Ruling

The petition is meritorious.

Section 168 of Republic Act No. 8293,21 otherwise known as the "Intellectual Property Code of
the Philippines" (IP Code), provides for the rules and regulations on unfair competition.
To begin, Section 168.1 qualifies who is entitled to protection against unfair competition. It states
that "[a]person who has identified in the mind of the public the goods he manufacturesor deals in,
his business or services from those of others, whether or not a registered mark is employed, has a
property right in the goodwill of the said goods, business or services so identified, which will be
protected inthe same manner as other property rights."

Section 168.2proceeds to the core of the provision, describing forthwith who may be found guilty
of and subject to an action of unfair competition – that is, "[a]ny person who shall employ
deception or any other means contrary to good faith by which he shall pass off the goods
manufactured by him or in which he deals, or his business, or services for those of the one having
established such goodwill, or who shall commit any acts calculated to produce said result x x x."

Without limiting its generality, Section 168.3goes on to specify examples of acts which are
considered as constitutive of unfair competition, viz.:

168.3. In particular, and without in any way limiting the scope of protection against unfair
competition, the following shall be deemed guilty of unfair competition:

(a) Any person who is selling his goods and gives them the general appearance of goods
of another manufacturer or dealer, either as to the goods themselves or in the wrapping of
the packages in which they are contained, or the devices or words thereon, or in any other
feature of their appearance, which would be likely to influence purchasers to believe that
the goods offered are those of a manufacturer or dealer, other than the actual manufacturer
or dealer, or who otherwise clothes the goods with such appearance as shall deceive the
public and defraud another of his legitimate trade, or any subsequent vendor ofsuch goods
or any agent of any vendor engaged in selling such goods with a like purpose;

(b) Any person who by any artifice, or device, or who employs any other means calculated
to induce the false belief that such person is offering the service of another who has
identified such services in the mind of the public; or

(c) Any person who shall make any false statement in the course of trade or who shall
commit any other act contrary to good faith of a nature calculated to discredit the goods,
business or services of another.

Finally, Section 168.4 dwells on a matter of procedure by stating that the "[t]he remedies provided
by Sections 156,22 157,23 and 16124 shall apply mutatis mutandis."

The statutory attribution of the unfair competition concept is wellsupplemented by jurisprudential

pronouncements. In the recent case of Republic Gas Corporation v. Petron Corporation,25 the
Court has echoed the classic definition of the term which is "‘the passing off (or palming off) or
attempting to pass off upon the public of the goods or business of one person as the goods or
business of another with the end and probable effect of deceiving the public.’ Passing off (or
palming off) takes place where the defendant, by imitative devices on the general appearance of
the goods, misleads prospective purchasers into buying his merchandise under the impression that
they are buying that of his competitors. [In other words], the defendant gives his goods the general
appearance of the goods of his competitor with the intention of deceiving the publicthat the goods
are those of his competitor."26 The "true test" of unfair competition has thus been "whether the
acts of the defendant have the intent of deceiving or are calculated to deceive the ordinary buyer
making his purchases under the ordinary conditions of theparticular trade to which the controversy
relates." Based on the foregoing, it is therefore essential to prove the existence of fraud, or the
intent to deceive, actual or probable,27 determined through a judicious scrutiny of the factual
circumstances attendant to a particular case.28

Here, the Court finds the element of fraud to be wanting; hence, there can be no unfair competition.
The CA’scontrary conclusion was faultily premised on its impression that respondenthad the right
to the exclusive use of the mark "ST. FRANCIS," for which the latter had purportedly established
considerable goodwill. What the CA appears to have disregarded or been mistaken in its
disquisition, however, is the geographicallydescriptive nature of the mark "ST. FRANCIS" which
thus bars its exclusive appropriability, unless a secondary meaning is acquired. As deftly explained
in the U.S. case of Great Southern Bank v. First Southern Bank:29 "[d]escriptive geographical
terms are inthe ‘public domain’ in the sense that every seller should have the right to inform
customers of the geographical origin of his goods. A ‘geographically descriptive term’ is any noun
or adjective that designates geographical location and would tend to be regarded by buyers as
descriptive of the geographic location of origin of the goods or services. A geographically
descriptive term can indicate any geographic location on earth, such as continents, nations, regions,
states, cities, streets and addresses, areas of cities, rivers, and any other location referred to by a
recognized name. In order to determine whether or not the geographic term in question is
descriptively used, the following question is relevant: (1) Is the mark the name of the place or
region from which the goods actually come? If the answer is yes, then the geographic term is
probably used in a descriptive sense, and secondary meaning is required for protection."30

In Burke-Parsons-Bowlby Corporation v. Appalachian Log Homes, Inc.,31 it was held that

secondary meaningis established when a descriptive mark no longer causes the public to associate
the goods with a particular place, but to associate the goods with a particular source.In other words,
it is not enough that a geographically-descriptive mark partakes of the name of a place known
generally to the public to be denied registration as it is also necessary to show that the public would
make a goods/place association – that is, to believe that the goods for which the mark is sought to
be registered originatein that place.1âwphi1 To hold sucha belief, it is necessary, of course, that
the purchasers perceive the mark as a place name, from which the question of obscurity or
remoteness then comes to the fore.32 The more a geographical area is obscure and remote, it
becomes less likely that the public shall have a goods/place association with such area and thus,
the mark may not be deemed as geographically descriptive. However, where there is no genuine
issue that the geographical significance of a term is its primary significanceand where the
geographical place is neither obscure nor remote, a public association of the goods with the place
may ordinarily be presumed from the fact that the applicant’s own goods come from the
geographical place named in the mark.33

Under Section 123.234 of the IP Code, specific requirements have to be met in order to conclude
that a geographically-descriptive mark has acquired secondary meaning, to wit: (a) the secondary
meaning must have arisen as a result of substantial commercial use of a mark in the Philippines;
(b) such use must result in the distinctiveness of the mark insofar as the goods or theproducts are
concerned; and (c) proof of substantially exclusive and continuous commercial use in the
Philippines for five (5) years beforethe date on which the claim of distinctiveness is made. Unless
secondary meaning has been established, a geographically-descriptive mark, dueto its general
public domain classification, is perceptibly disqualified from trademark registration. Section
123.1(j) of the IP Code states this rule as follows:

SEC. 123. Registrability. –

123.1 A mark cannot be registered if it:

xxxx

(j) Consists exclusively of signs orof indications that may serve in trade to designate the kind,
quality, quantity, intended purpose, value, geographical origin, time or production of the goods or
rendering of the services, or other characteristics of the goods or services; (Emphasis supplied) x
xxx

Cognizant of the foregoing, the Court disagrees with the CA that petitioners committed unfair
competition due to the mistaken notion that petitioner had established goodwill for the mark "ST.
FRANCIS" precisely because said circumstance, by and of itself, does not equateto fraud under
the parameters of Section 168 of the IP Code as above-cited. In fact, the records are bereft of any
showing thatpetitioners gave their goods/services the general appearance that it was respondent
which was offering the same to the public. Neither did petitioners employ any means to induce the
public towards a false belief that it was offering respondent’s goods/services. Nor did petitioners
make any false statement or commit acts tending to discredit the goods/services offered by
respondent. Accordingly, the element of fraud which is the core of unfair competition had not been
established.

Besides, respondent was not able toprove its compliance with the requirements stated in Section
123.2 of the IP Code to be able to conclude that it acquired a secondary meaning – and, thereby,
an exclusive right – to the "ST. FRANCIS" mark, which is, as the IPO Director-General correctly
pointed out, geographically-descriptive of the location in which its realty developments have been
built, i.e., St. Francis Avenue and St. Francis Street (now known as "Bank Drive"). Verily, records
would reveal that while it is true that respondent had been using the mark "ST. FRANCIS" since
1992, its use thereof has been merely confined to its realty projects within the Ortigas Center, as
specifically mentioned.As its use of the mark is clearly limited to a certain locality, it cannot be
said thatthere was substantial commercial use of the same recognizedall throughout the country.
Neither is there any showing of a mental recognition in buyers’ and potential buyers’ minds that
products connected with the mark "ST. FRANCIS" are associated with the same source35 – that
is, the enterprise of respondent. Thus, absent any showing that there exists a clear goods/service-
association between the realty projects located in the aforesaid area and herein respondent as the
developer thereof, the latter cannot besaid to have acquired a secondary meaning as to its use of
the "ST. FRANCIS" mark.

In fact, even on the assumption that secondary meaning had been acquired, said finding only
accords respondents protectional qualification under Section 168.1 of the IP Code as above quoted.
Again, this does not automatically trigger the concurrence of the fraud element required under
Section 168.2 of the IP Code, as exemplified by the acts mentioned in Section 168.3 of the same.
Ultimately, as earlier stated, there can be no unfair competition without this element. In this
respect, considering too the notoriety of the Shangri-La brand in the real estate industry which
dilutes petitioners' propensity to merely ride on respondent's goodwill, the more reasonable
conclusion is that the former's use of the marks "THE ST. FRANCIS TOWERS" and "THE ST.
FRANCIS SHANGRI-LA PLACE" was meant only to identify, or at least associate, their real
estate project/s with its geographical location. As aptly observed by the IPO DirectorGeneral:36

In the case at hand, the parties are business competitors engaged in real estate or property
development, providing goods and services directly connected thereto. The "goods" or "products"
or "services" are real estate and the goods and the services attached to it or directly related to it,
like sale or lease of condominium units, offices, and commercial spaces, such as restaurants, and
other businesses. For these kinds of goods or services there can be no description of its
geographical origin as precise and accurate as that of the name of the place where they are situated.
(Emphasis and underscoring supplied)

Hence, for all the reasons above-discussed, the Court hereby grants the instant petition, and, thus,
exonerates petitioners from the charge of unfair competition in the IPV Case. As the decisions in
the Inter Partes Cases were not appealed, the registrability issues resolved therein are hereby
deemed to have attained finality and, therefore, are now executory.

WHEREFORE, the petition is GRANTED. The Decision dated December 18, 2009 of the Court
of Appeals in CA-G.R. SP No. 105425 is hereby REVERSED and SET ASIDE. Accordingly, the
Decision dated September 3, 2008 of the Intellectual Property Office-Director General is
REINSTATED.

SO ORDERED.

G.R. No. 184000 September 17, 2014

PUERTO AZUL LAND, INC., Petitioner,

vs.
PACIFIC WIDE REALTY DEVELOPMENT CORPORATION,* Respondent.

DECISION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari1 are the Decision2 dated February 21, 2008 and
the Resolution3 dated July 22, 2008 of the Court of Appeals (CA) in CA-G.R. SP No. 92691 which
set aside the Decision4 dated December 13, 2005 of the Regional Trial Court of Manila, Branch
24 (RTC) in Civil Case No. 04-110914, thereby dismissing the revised rehabilitation plan of
petitioner Puerto Azul Land, Inc. (PALI).

The Facts
PALI is a domestic corporation engaged in the business of developing the Puerto Azul Complex
located in Ternate, Cavite into a "satellite city," described as a "self-sufficient and integrated tourist
destination community with residential areas, resort/tourism,and retail commercial centers with
recreation areas like golf courses, jungle trails, and white sand lagoons."5 To finance the full
operation of its business, PALI obtained loans in the total principal amount of 640,225,324.00
from several creditors, among which were East Asia Capital,Export and Industry Bank (EIB),
Philippine National Bank, and Equitable PCI Bank (EPCIB), secured by real estate owned by PALI
and by accommodation mortgagors under a Mortgage Trust Indenture.6

Foreseeing the impossibility of meeting its debts and obligations to its creditors as they fall due,
PALI, on September 14, 2004, filed a Petition for Suspension of Payments and Rehabilitation7
before the RTC, docketed as Civil Case No. 04-110914, attributing its financial difficulties to: (a)
the denial by the Philippine Stock Exchangeof its application for the public listing of its shares of
stock which resulted in the loss of potential investors and real estate buyers; (b) the 1997 Asian
financial crisis; and (c) the real estate bubble burst.8 Attached to PALI’s petition was its proposed
Rehabilitation Plan.9

On September 17, 2004, the RTC, finding PALI’s petition to be sufficient in form and substance,
issued a Stay Order10 pursuant to Section 6, Rule 4 of the Interim Rules on Corporate
Rehabilitation11 (Interim Rules), among others, (a) staying the enforcement of all claims against
the debtor, its guarantors, and sureties not solidarily liable with the debtor, (b) prohibiting PALI
from making any payment of its liabilities outstanding as of the date of filing of the petition, (c)
prohibiting PALI from selling, encumbering, transferring, or disposing any of its properties except
in the ordinary course ofbusiness, and (d) appointing Mr. Patrick V. Caoile as Rehabilitation
Receiver, conditioned upon his posting of a bond in the amount of ₱1,000,000.00. During the
initial hearing, PALI adduced evidence showing compliance with the jurisdictional requirements.
Thereafter, the RTC heard the comments and opposition of the creditors to the petition and the
Rehabilitation Plan.12 Later, creditor EPCIB was substituted by Cameron Granville Asset
Management(SPV-AMC), Inc. (CGAM).13

On April 20, 2005, the Rehabilitation Receiver filed his Rehabilitation Report and
Recommendation,14 recommending PALI’s rehabilitation over its dissolution and liquidation,
followed by a Revised Rehabilitation Plan on June 9, 2005.15

The RTC Ruling

In a Decision16 dated December 13, 2005,the RTC approved PALI’s Revised Rehabilitation Plan
under the following terms and conditions:

1. The creditors shall have, as first option, the right to be paid with real estate properties
being offered by the petitioner in dacion en pago, which shall be implemented under the
following terms and conditions:

a) The properties offered by the petitioner shall be appraised by three appraisers,

one to be chosen by the petitioner, a second to be chosen by the bank creditors and
the third to be chosen by the Receiver. The average of the appraisals of the three
 (3) chosen appraisers shall be the value to be applied in arriving at the dacionvalue
of the properties. In case the dacionamount is less than the total of the secured
creditor’s principal obligation, the balance shall be restructured in accordance with
the schedule of payments under option 2, paragraph (a). In case of excess, the same
shall [be] applied in full or partial payment of the accrued interest on the
obligations. The balance of the accrued interest, if any, togetherwith the penalties
shall [be] condoned.

2. Creditors who will not opt for dacion, shall be paid in accordance with the restructuring
of the obligations as recommended by the Receiver as follows:

a) The obligations to secured creditors will be subject to a 50% haircut of the

principal, and repayment shall be semi-annually over a period of 10 years, with 3-
year grace period. Accrued interests and penalties shall be condoned. Interest shall
be paid at the rate of 2% p.a. for the first 5 years, and 5% p.a. thereafter until the
obligations are fully paid. The petitioner shall allot 50% of its cash flow available
for debt service for secured creditors. Upon completion of payments to government
and employee accounts, the petitioner’s cash flow available for debt service shall
be used until the obligations are fully paid.

b) One half (1/2) of the principal of the petitioner’s unsecured loan obligations to
other creditors shall be settled through non-cash offsetting arrangements, with the
balance payable semi-annually over a period of 10 years, with 3-year grace period,
with interest at the rate of 2% p.a. for the first 5 years and 5% p.a. from the 6th year
onwards until the obligations are settled in full. Accrued interest and penalties shall
be condoned.

c) Similarly, one half (1/2) of the petitioner’s obligations to trade creditorsshall be

settled through noncash offsetting arrangements. The cash payments shall be made
semi-annually over a period of 10 years on a pari passu basiswith the bank creditors,
without interest, penalties and other charges of similar kind.17

Dissatisfied, CGAM filed a petition for review before the CA, docketed as CA-G.R. SP No. 92691,
objecting to the approval of PALI’s Revised Rehabilitation Plan on the following grounds: (a)
insufficiency in the substance of the petition; (b) the Revised Rehabilitation Plan was not approved
within 180 days from the date of the initial hearing; (c) the 50% "haircut" reduction on the principal
obligation and the condonation of penalties and interests violated the constitutional guarantee
against nonimpairment of contracts; and (d) the Revised Rehabilitation Plan does not give due
regard to the interests of the secured creditors.18

CGAM was later substituted by its assignee, herein respondent Pacific Wide Realty Development
Corporation (PWRDC),19 in the proceedings before the CA.

The CA Ruling
In a Decision20 dated February 21, 2008,the CA granted PWRDC’s petition for review and
reversed the December 13, 2005 RTC Decision, thereby dismissing PALI’s petition for
rehabilitation.

It held that the causes of PALI’s inability to pay its debts were not alleged in the petition with
sufficient particularity as to have allowed the RTC to properly evaluate whether ornot to issue a
Stay Order and eventually approve its rehabilitation.21 It further ruled that when the RTC
approved PALI’s Revised Rehabilitation Plan on December 13, 2005, the mandatory 180-day
period allowed under the rules for the approval or disapproval of the same had already lapsed,
warranting the dismissal of the petition for rehabilitation.22 It also found the 50% "haircut"
reduction on the principal loan and the condonation of penalties and interests to be an impairment
of the parties’ loan agreements.23

PALI moved for reconsideration which the CA denied in a Resolution24 dated July 22, 2008,
prompting the filing of the instant petition.

PALI invokes a liberal construction of the provisions of the Interim Rules, and cites Sections 5(d),
6(c), and 6(d) of Presidential Decree No. 902-A whose objectives are to effect a feasible and viable
rehabilitation and to give enough breathing space for the management committee orrehabilitation
receiver to make the business viable anew.25 It also posits that the CA erred in construing the 180-
day period under Section 11, Rule 4 of the Interim Rules to be mandatory, stating that the purpose
and intent of the rules should have been considered.26 Finally, it asserts that the approved Revised
Rehabilitation Plan is neither unreasonable nor prejudicial to the interests of its creditors, adding
that PALI’s rehabilitation is the best way to protect the interests of all parties concerned and its
continued operation remains the only viable and feasible solution to meet the desired objectives.27

Significantly, another PALI creditor,EIB, filed a petition for review before the CA, docketed as
CA-G.R. SP No. 92695,28 contesting the same December 13, 2005 RTC Decision. The CA,
however, dismissed the petition and affirmed the aforesaid RTC Decision. Consequently, EIB’s
assignee, PWRDC, elevated the matter to the Court, docketed as G.R. No. 180893, and was
consolidated with G.R. No. 178768, a related case also commenced by PWRDC essentially
involving the coverage of the RTC’s Stay Order over the security posted by an accommodation
mortgagor.29

The Court resolved both cases in a Decision30 dated November 25, 2009, ruling: (a) in G.R. No.
180893, that there was nothing unreasonable or onerous in PALI’s Revised Rehabilitation Plan
nor was there a violation of the non-impairment clause, in effectupholding the RTC’s approval of
PALI’s rehabilitation;31 and (b) in G.R. No. 178768, that the RTC committed no reversible error
when it removed TCT No. 133164 from the coverage of the Stay Order since the Interim Rules
only covers the suspension of the enforcement of all claims against the debtor, its guarantors, and
sureties not solidarily liable with the mortgagor, and is silent on the enforcement of claims against
accommodation mortgagors.32

The Issue Before the Court

The core issue for resolution is whether or not the CA erred in reversing the December 13, 2005
RTC Decision, thereby dismissing PALI’s Revised Rehabilitation Plan.

The Court’s Ruling

The Court finds in favor of PALI.

As adverted to earlier, the validity of PALI’s rehabilitation was already raised as an issue by
PWRDC and resolved with finality by the Court in its November 25, 2009 Decision in G.R. No.
180893 (consolidated with G.R. No. 178768). The Court sustained therein the CA’s affirmation of
PALI’s Revised Rehabilitation Plan, including those terms which its creditors had found
objectionable, namely, the 50% "haircut" reduction of the principal obligations and the
condonation of accrued interests and penalty charges. The relevant portion of the Court’s ruling
reads:

In G.R. No. 180893, the rehabilitation plan is contested on the ground that the same is unreasonable
and results in the impairment of the obligations of contract. PWRDC contests the following
stipulations in PALI’s rehabilitation plan: fifty percent (50%) reduction of the principal obligation;
condonation of the accrued and substantial interests and penalty charges; repayment over a period
of ten years, with minimal interest of two percent (2%) for the first five years and five percent
(5%) for the next five years until fully paid, and only upon availability of cash flow for debt service.

We find nothing onerous in the terms of PALI’s rehabilitation plan. The Interim Rules on
Corporate Rehabilitation provides for means of execution of the rehabilitation plan, which may
include, among others, the conversion of the debts orany portion thereof to equity, restructuring of
the debts, dacion en pago, or sale of assets or ofthe controlling interest.

The restructuring of the debts of PALI is part and parcel of its rehabilitation.1âwphi1 Moreover,
per findings offact of the RTC and as affirmed by the CA, the restructuring of the debts of PALI
would not be prejudicial to the interest of PWRDC as a secured creditor. Enlightening is the
observation of the CA in this regard, viz.:

There is nothing unreasonable or onerous about the 50% reduction of the principal amount when,
as found by the courta quo, a Special Purpose Vehicle (SPV) acquired the credits of PALI from its
creditors at deep discounts of as much as 85%. Meaning, PALI’s creditors accepted only 15% of
their credit’s value. Stated otherwise, if PALI’s creditors are in a position to accept 15% of their
credit’s value, with more reason that they should be able to accept 50% thereof as full settlement
by their debtor. x x x.33

Since the issue on the validity, as well as regularity of the December 13, 2005 RTC Decision
approving PALI’s Revised Rehabilitation Plan had already been resolved, the Court, in line with
the res judicataprinciple, is constrained to grant the present petition and, consequently, reverse the
assailed CA decision.

Res judicata (meaning, a "matter adjudged") is a fundamental principle of law which precludes
parties from re-litigating issues actually litigated and determined by a prior and final judgment.34
It means that "a final judgment or decree on the merits by a court of competent jurisdiction is
conclusive of the rights of the parties ortheir privies in all later suits on all points and matters
determined in the former suit."35

Res judicatahas two (2) concepts. The first is "bar by prior judgment" in which the judgment or
decree of the court of competent jurisdiction on the merits concludes the litigation between the
parties, aswell as their privies, and constitutes a bar to a new action or suit involving the same
cause of action before the same or other tribunal. The second is "conclusiveness of judgment" in
which any right, fact or matter in issue directly adjudicated or necessarily involved in the
determination of an action before a competent court in which judgment is rendered on the merits
is conclusively settled by the judgment therein and cannot again be litigated between the parties
and their privies whether or not the claim, demand, purpose, or subject matter of the two actions
is the same.36

There is a bar by prior judgment where there is identity of parties, subject matter, and causes of
actionbetween the first case where the judgment was rendered and the second case that is sought
to be barred.37 There is conclusiveness of judgment, on the other hand, where there is identity of
parties in the first and second cases, but no identity of causes of action.38

As may be gleaned from the foregoing antecedents, the present case and G.R. No. 180893 involve
the same parties, i.e., PWRDC and PALI, the same subject matter, i.e., PALI’s rehabilitation, and
the same causes of action, i.e., the alleged violation of PWRDC’s rights as creditor by virtue of
the RTC’s approval of PALI’s Revised Rehabilitation Plan. Thus, with the identity of all three (3)
elements present in the previously decided case and this one, it is then clearthat the principle of res
judicatashould heretofore apply. Accordingly, the Court’s November 25, 2009 Decision in G.R.
No. 180893 (consolidated with G.R. No. 178768) bars the re-litigation of the issue of the validity
and regularity of the approved Revised Rehabilitation Plan between PWRDC and PALI. As the
plan's validity had already been upheld, PWRDC is now bound by such adverse ruling which had
long attained finality. As a result, the CA Decision opposite to the aforestated Court Decision
should be set aside, and the petition herein be granted. WHEREFORE, the petition is GRANTED.
The Decision dated February 21, 2008 and the Resolution dated July 22, 2008 of the Court of
Appeals in CA-G.R. SP No. 92691 are hereby SET ASIDE.

SO ORDERED.

G.R. No. 212705 September 10, 2014

ROBERTO CO, Petitioner,

vs.
KENG HUAN JERRY YEUNG and EMMA YEUNG, Respondents.

RESOLUTION

PERLAS-BERNABE, J.:
Before the Court is a petition for review on certiorari1 assailing the Decision2 dated September
16, 2013 and the Resolution3 dated May 29, 2014 of the Court of Appeals (CA) in CA-G.R. CV
No. 93679 which affirmed the Decision4 dated October 27, 2008 of the Regional Trial Court of
Quezon City, Branch 90 (RTC), finding petitioner Roberto Co (Co), among others, guilty of unfair
competition and, thus, liable for damages to respondents Keng Huan Jerry Yeung and Emma
Yeung (Sps. Yeung).

The Facts

At the core of the controversy isthe product Greenstone Medicated Oil Item No. 16 (Greenstone)
which is manufactured by Greenstone Pharmaceutical, a traditional Chinese medicine
manufacturing firm based in Hong Kong and owned by Keng HuanJerry Yeung (Yeung), and is
exclusively imported and distributed in the Philippines by Taka Trading owned by Yeung’s wife,
Emma Yeung (Emma).5

On July 27, 2000, Sps. Yeung filed a civil complaint for trademark infringement and unfair
competition before the RTC against Ling Na Lau, her sister Pinky Lau (the Laus), and Cofor
allegedly conspiring in the sale of counterfeit Greenstone products tothe public. In the complaint,
Sps. Yeung averred that on April 24, 2000, Emma’s brother, Jose Ruivivar III (Ruivivar), bought
a bottle of Greenstone from Royal Chinese Drug Store (Royal) in Binondo, Manila, owned by Ling
Na Lau.However, when he used the product, Ruivivar doubted its authenticity considering that it
had a different smell, and the heat it producedwas not as strong as the original Greenstone he
frequently used. Having been informed by Ruivivar of the same, Yeung, together with his son,
John Philip, went to Royal on May 4, 2000 to investigate the matter, and, there, found seven (7)
bottles of counterfeit Greenstone on display for sale. He was then told by Pinky Lau (Pinky) – the
store’s proprietor – thatthe items came from Co of Kiao An Chinese Drug Store. According to
Pinky, Co offered the products on April 28, 2000 as "Tienchi Fong Sap Oil Greenstone" (Tienchi)
which she eventually availed from him. Upon Yeung’s prodding, Pinky wrote a note stating these
events.6

In defense, Co denied having supplied counterfeit items to Royal and maintained that the stocks
of Greenstone came only from Taka Trading. Meanwhile, the Laus denied selling Greenstone and
claimed that the seven (7) items of Tienchi were left by an unidentified male person at the counter
of their drug store and that when Yeung came and threatened to report the matter to the authorities,
the items were surrendered to him. As to Pinky’s note, it was claimed that she was merely forced
by Yeung to sign the same.7

The RTC Ruling

In a Decision8 dated October 27, 2008, the RTC ruled in favor of Sps. Yeung, and accordingly
ordered Co and the Laus to pay Sps. Yeung: (a) ₱300,000.00 as temperate damages; (b)
₱200,000.00 as moral damages; (c) ₱100,000.00 as exemplary damages; (d) ₱100,000.00 as
attorney’s fees; and (e) costs of suit.9

It found that the Sps. Yeung had proven by preponderance of evidence that the Laus and Co
committed unfair competition through their conspiracy to sell counterfeit Greenstone products that
resulted in confusion and deception not only to the ordinary purchaser, like Ruivivar, but also to
the public.10 It, however, did not find the Laus and Co liable for trademark infringement as there
was no showing that the trademark "Greenstone" was registered at the time the acts complained of
occurred, i.e., in May 2000.11 Dissatisfied, the Laus and Co appealed to the CA. The CA Ruling

In a Decision12 dated September 16, 2013, the CA affirmed the RTC Decision, pointing out that
in the matter of credibility of witnesses, the findings of the trial court are given great weight and
the highest degree of respect.13 Accordingly, it sustained the RTC’s finding of unfair competition,
considering that Sps. Yeung’s evidence preponderated over that of the Laus and Co which was
observed to be shiftyand contradictory. Resultantly, all awards of damages in favor of Sps. Yeung
were upheld.14

The Laus and Co respectively moved for reconsideration but were, however, denied in a
Resolution15 dated May 29, 2014, hence, Co filed the instant petition. On the other hand, records
are bereft of any showing that the Laus instituted any appeal before this Court.

The Issue Before the Court

The sole issue for the Court’s resolution is whether or not the CA correctly upheld Co’s liability
for unfair competition.

The Court’s Ruling

The petition is without merit.

The Court’s review of the present case is via a petition for review under Rule 45 of the Rules of
Court,which generally bars any question pertaining to the factual issues raised. The well-settled
rule is that questions of fact are not reviewable in petitionsfor review under Rule 45, subject only
to certain exceptions, among them, the lack of sufficient support in evidence of the trial court’s
judgment or the appellate court’s misapprehension of the adduced facts.16

Co, who mainly interposes a denialof the acts imputed against him, fails to convince the Court that
any of the exceptions exists so as to warrant a review of the findings of facts in this case. Factual
findings of the RTC, when affirmed by the CA, are entitled to great weight and respect by the
Court and are deemed final and conclusive when supported by the evidence on record.17 The Court
finds that both the RTC and the CA fully considered the evidence presented by the parties, and
have adequately explained the legal and evidentiary reasons in concluding that Co committed acts
of unfair competition.

Unfair competition is defined as the passing off (or palming off) or attempting to pass off upon the
public of the goods or business of one person as the goods or business of another with the end and
probable effect of deceiving the public. This takes place where the defendant gives his goods the
general appearance ofthe goods of his competitor with the intention of deceiving the public that
the goods are those of his competitor.18
Here, it has been established that Coconspired with the Laus in the sale/distribution of counterfeit
Greenstone products to the public, which were even packaged in bottles identical to that of the
original, thereby giving rise to the presumption of fraudulent intent.19 In light of the foregoing
definition, it is thus clear that Co, together with the Laus, committed unfair competition, and
should, consequently, beheld liable therefor. To this end, the Court finds the award of ₱300,000.00
as temperate damages to be appropriate in recognition of the pecuniary loss suffered by Sps.
Yeung, albeit its actual amount cannot, from the nature of the case, as it involves damage to
goodwill, be proved with certainty.20 The awards of moral and exemplary damages, attorney's
fees, and costs of suit are equally sustained for the reasons already fully-explained by the courts a
quo in their decisions.

Although liable for unfair competition, the Court deems it apt to clarify that Co was properly
exculpated from the charge of trademark infringement considering that the registration of the
trademark "Greenstone" – essential as it is in a trademark infringement case – was not proven to
have existed during the time the acts complained of were committed, i.e., in May 2000. In this
relation, the distinctions between suits for trademark infringement and unfair competition prove
useful: (a) the former is the unauthorized use of a trademark, whereas the latter is the passing off
of one's goods as those of another; (b) fraudulent intent is unnecessary in the former, while it is
essential in the latter; and (c) in the former, prior registration of the trademark is a pre-requisite to
the action, while it is not necessary in the latter.21

WHEREFORE, the petition is DENIED. The Decision dated September 16, 2013 and the
Resolution dated May 29, 2014 of the Court of Appeals in CA-G.R. CV No. 93679 are hereby
AFFIRMED.

SO ORDERED.

G.R. No. 199028 November 12, 2014

COSMOS BOTTLING CORPORATION, Petitioner,

vs.
COMMISSION EN BANC of the SECURITIES AND EXCHANGE COMMISSION (SEC)
and JUSTINA F. CALLANGAN, in her capacity as Director of the Corporation Finance
Department of the SEC, Respondents.

DECISION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari1 are the Decision2 dated April 25, 2011 and the
Resolution3 dated October 17, 2011 of the Court of Appeals (CA) in CA-G.R. SP. No. 110714
affirming the Decision4 dated September 10, 2009 of respondent the Securities and Exchange
Commission (SEC) En Banc in SEC En Banc Case No. 04-08-129 which dismissed petitioner
Cosmos Bottling Corporation's (Cosmos) appeal on the ground that it was treated as a prohibited
motion for reconsideration. Thus, the Order of Revocation5 (Revocation Order) dated March 19,
2008 of the SEC-Corporation Finance Department (SEC-CFD) revoking Cosmos’s Registration
of Securities/Permit to Sell Securities to the Public (Subject Registration/Permit) was deemed to
have lapsed into finality.

The Facts

The instant case stemmed from Cosmos’s failure to submit its 2005 Annual Report to the SEC
within the prescribed period. In connection therewith, it requested an extension of time within
which to file the same.6 In response, the SEC-CFD, through respondent Director Justina F.
Callangan (Director Callangan), sent Cosmos a letter7 dated May 18, 2006 denying the latter’s
request and directing it to submit its 2005 Annual Report. The same letter also ordered Cosmos
toshow cause why the Subject Registration/Permit should not be revoked for violating Section
17.1 (a)8 of Republic Act No. 8799, otherwise known as "The Securities Regulation Code"
(SRC).9

On May 31, 2006, Cosmossent a reply-letter10 to the SEC-CFD, explaining that its failure to file
its 2005 Annual Report was due to the noncompletion by its external auditors of their audit
procedures. For this reason, Cosmos implored the SEC-CFD to reconsider its previous denial of
Cosmos’s request for additional time to file its 2005 Annual Report.11 Thereafter, hearings for the
suspension of the Subject Registration/Permit commenced, with Cosmos advancing the same
reasons for the non submission of its 2005 Annual Report in its May 31, 2006 letter to the
SECCFD.12

The SEC-CFD Proceedings

In an Order13 dated May 8, 2007, the SEC-CFD ordered the suspension of the Subject
Registration/Permit (suspension order) for a period of 60 days from receipt of the same, or until
Cosmos files its 2005 Annual Report, whichever is earlier. The SEC-CFD also stated that
Cosmos’s failure to submit its 2005 Annual Report within the 60-day period shall constrain the
SEC to initiate proceedings for revocation of the Subject Registration/Permit.14

After the lapse of the aforesaid period, Cosmos still failed to comply with the SEC’s directives.
Thus, the revocation proceedings commenced on August 22, 2007.15 On August 24, 2007,
Cosmos submitted its formal explanation,16 reiterating that the delay in submitting its 2005
Annual Report, as well as its 2006 Annual Report, is occasioned by the following factors: (a) non-
completion of its 2005 Audited Financial Statements by its external auditor; (b) the adoption of
new accounting standards which gave rise to additional disclosures in the financial reports; and (c)
the sale of Coca-Cola Bottlers Philippines, Inc., which is the parent company of Cosmos, to Coca-
Cola South Asia Holdings, Inc.17 These notwithstanding, Cosmos undertook to submit its 2005
and 2006 Annual Reports not later than October 31, 2007, or as soon as they are duly
accomplished, and to pay all the corresponding penalties. Lastly, Cosmos also requested the SEC-
CFD to abandon the pending revocation proceedings.18

On October 31, 2007, Cosmos finally submitted its 2005 and 2006 Annual Reports to the SEC.19
In connection therewith,Cosmos sent a letter20 dated January 24, 2008 to the SEC-CFD,
requesting that the latter lift the suspension order and abandon the revocation proceedings against
the former.21 The SEC-CFD referred the matter to the SEC En Banc for its consideration in its
March 13, 2008 meeting.22 After the said meeting, the SEC En Banc issued Resolution No. 87,
series of (s.) 200823 wherein they resolved to: (a) deny Cosmos’s request for the lifting of the
suspension order; and (b) revoke the Subject Registration/Permit.24 On the basis thereof, the SEC-
CFD issued a Revocation Order echoing the pronouncements indicated in the aforesaid resolution.

Dissatisfied, Cosmos appealed to the SEC En Banc.25

The SEC En BancRuling

In a Decision26 dated September 10, 2009, the SEC En Banc dismissed Cosmos’s appeal.27 It
held that the Revocation Order was a mere articulation of the SEC En Banc’s Resolution No. 87,
s. 2008, and thus, should be considered an issuance of the SEC En Banc itself. The SEC En Banc
thus deemed Cosmos’s appeal asa motion for reconsideration, a prohibited pleading under Section
3-6, Rule III of the 2006 SEC Rules of Procedure,28 and was accordingly expunged from the
records of the case.29

Aggrieved, Cosmos filed a petition for review before the CA.30

The CA Ruling

In a Decision31 dated April 25, 2011, the CA affirmed the SEC En Banc Ruling. It held that the
SEC-CFD merely acted as an arm of the SEC En Banc when it issued the Revocation Order against
Cosmos, considering that it was simply a reiteration of Resolution No. 87, s. 2008 which emanated
from the SEC En Banc itself. As such, Cosmos’s appeal before the SEC En Banc assailing the
Revocation Order was properly deemed as a motion for reconsideration, since it is tantamount to
a request for the SEC En Banc to review or reconsider its own judgment.32 Hence, the SEC En
Banc correctly dismissed Cosmos’s appeal.

Further, the CA held that Cosmos’s appeal, which was treated as a prohibited motion for
reconsideration under the 2006 SEC Rules of Procedure, did not toll the reglementary period for
filing an appeal before it. As such, the SEC En Banc’s Ruling, as well as the Revocation Order,
had already lapsed into finality and could no longer be disturbed.33

Cosmos moved for reconsideration,34 which was, however, denied in a Resolution35 dated
October 17, 2011, hence, this petition.

The Issue Before the Court

The primordial issue for the Court’s resolution is whether or not the CA correctly treated Cosmos’s
appeal before the SEC En Banc as a motion for reconsideration, and consequently, affirmed its
dismissal for being a prohibited pleading under the 2006 SEC Rules of Procedure.

The Court's Ruling

The petition is meritorious.

As an administrative agency with both regulatory and adjudicatory functions,36 the SEC was given
the authority to delegate some of its functions to, inter alia, its various operating departments, such
as the SECCFD, the Enforcement and Investor Protection Department, and the Company
Registration and Monitoring Department, pursuant to Section 4.6 of the SRC, to wit: SEC. 4.
Administrative Agency.

xxxx

4.6. The Commission may, for purposes of efficiency, delegate any of its functions to any
department or office of the Commission, an individual Commissioner or staff member of the
Commission except its review or appellate authority and its powerto adopt, alter and supplement
any rule or regulation.1âwphi1

The Commission may review upon its own initiative or upon the petition of any interested party
any action of any department or office, individual Commissioner, or staff member or the
Commission. (Emphasis and underscoring supplied)

Naturally, the aforesaid provision also gives the SEC the power to review the acts performed by
its operating departments in the exercise of the former’s delegated functions. This power of review
is squarely addressed by Section 11-1, Rule XI of the 2006 SEC Rules of Procedure, which
provides that "[a]n appeal to the Commission En Banc may be taken from a decision, order, or
resolution issued by an Operating Department if there are questions of fact, of law, or mixed
questions of fact and law."

In this case, the Court disagrees with the findings of both the SEC En Bancand the CA that the
Revocation Order emanated from the SEC En Banc. Rather, such Order was merely issued by the
SEC-CFD as one of the SEC’s operating departments, as evidenced by the following: (a) it was
printed and issued on the letterheadof the SEC-CFD, and not the SEC En Banc; (b) it was docketed
as a case under the SEC-CFD as an operating department of the SEC, since it bore the serial
number "SEC-CFD Order No. 027, [s.] 2008;" and (c) it was signed solely by Director Callangan
as director of the SEC-CFD, and notby the commissioners of the SEC En Banc. Further, both the
SEC En Banc and the CA erred in holding that the Revocation Order merely reflected Resolution
No. 87, s. 2008, and thus, should already be considered as the ruling of the SEC En Banc in this
case. As admitted by respondents, the SEC-CFD’s referral of the case to the SEC En Banc for its
consideration in its March 13, 2008 meeting, which eventually resulted in the issuance of
Resolution No. 87, s.2008, was merely an internal procedure inherent in the exercise by the SEC
of its administrative and regulatory functions.37 Moreover, Cosmos never knew of the existence
of Resolution No. 87, s. 2008, as it was not furnished a copy thereof; nor did the Revocation Order
make any specific reference to the same. Essentially, Cosmos was only apprised of the existence
of Resolution No. 87, s. 2008 when it was finally cited by the SEC En Banc in its September 10,
2009 Decision.38 Accordingly, when Cosmos received the Revocation Order, it had every reason
to believe that it was issued by the SEC-CFD as an Operating Department ofthe SEC, and thus,
appealable to the SEC En Banc. Therefore, the outright dismissal of Cosmos’s appeal by the SEC
En Banc effectively denied it of its right to appeal, as provided for under the SRC and the 2006
SEC Rules ofProcedure, and therefore could not be countenanced.
In sum, the Revocation Order is properly deemed as a decision issued by the SEC-CFD as one of
the Operating Departments of the SEC, and accordingly, may be appealed to the SEC En Banc, as
what Cosmos properly did in this case. Perforce, the SEC En Banc and the CA erred in deeming
Cosmos’s appeal as a motion for reconsideration and ordering its dismissal on such ground. In
view thereof, the Court deems it prudent to reinstate and remand the case to the SEC En Banc for
its resolution on the merits.

WHEREFORE, the petition is GRANTED. Accordingly, the Decision dated April 25, 2011 and
the Resolution dated October 17, 2011 of he Court of Appeals in CA-G.R. SP. No. 110714 are
hereby SET ASIDE. The instant case is REMANDED to the Securities and Exchange Commission
En Banc for resolution of Cosmos Bottling Corporation's appeal on the merits.

SO ORDERED.

G.R. No. 189358 October 8, 2014

CENTENNIAL GUARANTEE ASSURANCE CORPORATION, Petitioner,

vs.
UNIVERSAL MOTORS CORPORATION, RODRIGO T. JANEO, JR., GERARDO
GELLE, NISSAN CAGAYAN DE ORO DISTRIBUTORS, INC., JEFFERSON U.
ROLIDA, and PETER YAP, Respondents.

DECISION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari1 are the Decision2 dated February 25, 2009 and
the Resolution3 dated August 14, 2009 of the Court of Appeals (CA) in CA-G.R. SP No. 02459-
MIN which affirmed, in part, the Order4 dated May 13, 2008 of the Regional Trial Court of
Cagayan de Oro City, Branch 39 (RTC) allowing the execution pending appeal of the Decision5
dated October 31, 2007 (October 31, 2007 Decision) of the RTC in Civil Case No. 2002-058, but
limiting the amount of petitioner Centennial Guarantee Assurance Corporation's (CGAC) liability
to only Pl ,000,000.00.

The Facts

The instant petition originated from a Complaint for Breach of Contract with Damages and Prayer
for Preliminary Injunction and Temporary Restraning Order filed by Nissan Specialist Sales
Corporation (NSSC) and its President and General Manager, Reynaldo A. Orimaco (Orimaco),
against herein respondents Universal Motors Corporation (UMC), Rodrigo T. Janeo, Jr. (Janeo,
Jr.), Gerardo Gelle (Gelle), Nissan Cagayan de Oro Distributors, Inc. (NCOD), Jefferson U. Rolida
(Rolida), and Peter Yap (Yap). The case was raffled to the RTC and docketed as Civil Case No.
2002-058.6

The temporary restraining order (TRO) prayed for was eventually issued by the RTC upon the
posting by NSSC and Orimaco of a _1,000,000.00 injunction bond7 issued by their surety, CGAC.
The TRO enjoined respondents UMC, Rolida, Gelle, Janeo, Jr., NCOD, and Yap (respondents)
from selling, dealing, and marketing all models of motor vehicles and spare parts of Nissan, and
from terminating the dealer agreement between UMC and NSSC. It likewise restrained UMC from
supplying and doing trading transactions with NCOD, which, in turn, was enjoined from entering
and doing business on Nissan Products within the dealership territory of NSSC as defined in the
Dealer Agreement. The TRO was converted to a writ of preliminary injunction on April 2, 2002.8

Respondents filed a petition for certiorari and prohibition before the CA, docketed as CA-G.R. SP
No. 70236, to assail the issuance of the aforesaid injunctive writ. On July 24, 2002, the CA
rendered a Decision holding that the RTC committed grave abuse of discretion in issuing the writ
absent a clear legal right thereto on the part of NSSC and Orimaco. Consequently, the April 2,
2002 Writ of Preliminary Injunction issued by the RTC was ordered dissolved.9

On May 27, 2004, respondents filed an application for damages against the injunction bond issued
by CGAC in the amount of _1,000,000.00.10

The RTC Ruling

On October 31, 2007, the RTC rendered a Decision11 dismissing the complaint for breach of
contract with damages for lack of merit.12

It further ruled that respondents were entitled to recover damages against the injunction bond
following the CA’s pronouncement in CA-G.R. SP No. 70236, i.e., that NSSC and Orimaco had
no clear legal right to justify the issuance of the April 2, 2002 Writ of Preliminary Injunction,
warranting its dissolution.13

Accordingly, the RTC ordered NSSC, Orimaco, and CGAC to jointly and severally pay
respondents the following amounts: actual damages and lost opportunities suffered by UMC in the
amounts of _928,913.68 and _14,271,266.00, respectively; _50,000.00 as attorney’s fees and
_500,000.00 as lost income in favor of NCOD, Rolida, and Yap; and exemplary damages of
_300,000.00 for each of the respondents.14

Upon respondents’ motion,15 the RTC granted Execution Pending Appeal of its October 31, 2007
Decision through an Order16 dated January 16, 2008. It ruled that there exists good reasons to
justify the immediate execution of the Decision, namely: (a) that NSSC is in imminent danger of
insolvency being admittedly in a state of rehabilitation under the supervision of the Regional Trial
Court of Misamis Oriental, Branch 40 through Special Proceeding No. 2002-095; (b) that it has
ceased its business operation as the authorized dealer of Nissan Motor Philippines, Inc.; (c) that
Orimaco, NSSC’s President and General Manager, has migrated abroad with his family; and (d)
that NSSC failed to file the necessary supersedeas bond to forestall the immediate execution of the
Decision pending appeal.17 The RTC thereupon issued the corresponding writ.18

CGAC assailed the RTC’s January 16, 2008 Order before the CA through a petition for certiorari,
docketed as CA-G.R. SP No. 02459-MIN, questioning the existence of good reasons to warrant
the grant of execution pending appeal and the propriety of enforcing it against one which is not
the losing party in the case but a mere bondsman whose liability is limited to the surety bond it
issued.

The CA Ruling

In a Decision19 dated February 25, 2009, the CA affirmed in part the assailed order by allowing
the execution pending appeal of the RTC’s October 31, 2007 Decision but limiting the amount of
CGAC’s liability to only _1,000,000.00.20

It upheld the trial court’s findings that there are good reasons warranting the execution of the
latter’s Decision pending appeal, not only against NSSC and Orimaco, but also against CGAC
whose liability, however, was declared to be limited only to the extent of the amount of the bond
it issued in favor of its principals, NSSC and Orimaco.21

Aggrieved, CGAC filed a motion for reconsideration22 which was, however, denied in a
Resolution23 dated August 14, 2009, hence, this petition.

The Issues Before the Court

The central issues in this case are: (a) whether or not good reasons exist to justify execution
pending appeal against CGAC which is a mere surety; and (b) whether or not CGAC’s liability on
the bond should be limited to _500,000.00.

The Court’s Ruling

The petition is unmeritorious.

The execution of a judgment pending appeal is an exception to the general rule that only a final
judgment may be executed; hence, under Section 2, Rule 39 of the Rules of Court (Rules), the
existence of "good reasons" for the immediate execution of a judgment is an indispensable
requirement as this is what confers discretionary power on a court to issue a writ of execution
pending appeal.24 Good reasons consist of compelling circumstances justifying immediate
execution, lest judgment becomes illusory,25 that is, the prevailing party’s chances for recovery
on execution from the judgment debtor are altogether nullified. The "good reason" yardstick
imports a superior circumstance demanding urgency that will outweigh injury or damage to the
adverse party26 and one such "good reason" that has been held to justify discretionary execution
is the imminent danger of insolvency of the defeated party.27

The factual findings that NSSC is under a state of rehabilitation and had ceased business
operations, taken together with the information that NSSC President and General Manager
Orimaco had permanently left the country with his family, constitute such superior circumstances
that demand urgency in the execution of the October 31, 2007 Decision because respondents now
run the risk of its non-satisfaction by the time the appeal is decided with finality. Notably, as early
as April 22, 2008, the rehabilitation receiver had manifested before the rehabilitation court the
futility of rehabilitating NSSC because of the latter’s insincerity in the implementation of the
rehabilitation process.28 Clearly, respondents’ diminishing chances of recovery from the favorable
Decision is a good reason to justify immediate execution; hence, it would be improper to set aside
the order granting execution pending appeal.

That CGAC’s financial standing differs from that of NSSC does not negate the order of execution
pending appeal.1âwphi1 As the latter’s surety, CGAC is considered by law as being the same party
as the debtor in relation to whatever is adjudged touching the obligation of the latter, and their
liabilities are interwoven as to be inseparable.29 Verily, in a contract of suretyship, one lends his
credit by joining in the principal debtor’s obligation so as to render himself directly and primarily
responsible with him, and without reference to the solvency of the principal.30 Thus, execution
pending appeal against NSSC means that the same course of action is warranted against its surety,
CGAC. The same reason stands for CGAC’s other principal, Orimaco, who was determined to
have permanently left the country with his family to evade execution of any judgment against him.

Now, going to the second issue as above-stated, the Court resolves that CGAC’s liability should –
as the CA correctly ruled – be confined to the amount of _1,000,000.00, and not _500,000.00 as
the latter purports.

Section 4(b), Rule 58 of the Rules provides that the injunction bond is answerable for all damages
that may be occasioned by the improper issuance of a writ of preliminary injunction.31 The Court
has held in Paramount Insurance Corp. v. CA32 that:

The bond insures with all practicable certainty that the defendant may sustain no ultimate loss in
the event that the injunction could finally be dissolved. Consequently, the bond may obligate the
bondsmen to account to the defendant in the injunction suit for all: (1) such damages; (2) costs and
damages; (3) costs, damages and reasonable attorney's fees as shall be incurred or sustained by the
person enjoined in case it is determined that the injunction was wrongfully issued. 33

In this case, the R TC, in view of the improvident issuance of the April 2, 2002 Writ of Preliminary
Injunction, adjudged CGAC's principals, NSSC and Orimaco, liable not only for damages as
against NCOD, Rolida, and Yap but also as against UMC. As may be gleaned from the dispositive
portion of the RTC Decision, the amount adjudged to the former group was ₱500,000.00,34 while
it was found - this time, contained in the body of the same decision - that damages in the amount
₱4,199,355.00 due to loss of sales was incurred by UMC in the year 2002,35 or the year in which
the latter was prevented from selling their products pursuant to the April 2, 2002 Writ of
Preliminary Injunction. Since CGAC is answerable jointly and severally with NSSC and Orimaco
for their liabilities to the above-mentioned parties for all damages caused by the improvident
issuance of the said injunctive writ, and considering that the total amount of damages as above-
stated evidently exhausts the full Pl ,000,000.00 amount of the injunction bond, there is perforce
no reason to reverse the assailed CA Decision even on this score.

WHEREFORE, the petition is DENIED. The Decision dated February 25, 2009 and the Resolution
dated August 14, 2009 of the Court of Appeals in CA-G.R. SP No. 02459-MIN are hereby
AFFIRMED.

SO ORDERED.
G.R. No. 201892, July 22, 2015

NORLINDA S. MARILAG, Petitioner, v. MARCELINO B. MARTINEZ, Respondent.

DECISION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari1 are the Decision2 dated November 4, 2011 and
the Resolution3 dated May 14, 2012 of the Court of Appeals (CA) in CA-G.R. CV No. 81258
which recalled and set aside the Orders dated November 3, 20034 and January 14, 20045 of the
Regional Trial Court (RTC) of Las Piñas City, Branch 202 (court a quo) in Civil Case No. 98-
0156, and reinstated the Decision6 dated August 28, 2003 directing petitioner Norlinda S. Marilag
(petitioner) to return to respondent Marcelino B. Martinez (respondent) the latter's excess payment,
plus interest, and to pay attorney's fees and the costs of suit.

The Facts

On July 30, 1992, Rafael Martinez (Rafael), respondent's father, obtained from petitioner a loan in
the amount of P160,000.00, with a stipulated monthly interest of five percent (5%), payable within
a period of six (6) months. The loan was secured by a real estate mortgage over a parcel of land
covered by Transfer Certificate of Title (TCT) No. T-208400. Rafael failed to settle his obligation
upon maturity and despite repeated demands, prompting petitioner to file a Complaint for Judicial
Foreclosure of Real Estate Mortgage before the RTC of Imus, Cavite, Branch 907 (RTC-Imus) on
November 10, 1995,8 docketed as Civil Case No. 1208-95 Gudicial foreclosure case).

Rafael failed to file his answer and, upon petitioner's motion, was declared in default. After an ex
parte presentation of petitioner's evidence, the RTC-Imus issued a Decision9 dated January 30,
1998, (January 30, 1998 Decision) in the foreclosure case, declaring the stipulated 5% monthly
interest to be usurious and reducing the same to 12% per annum (p.a.). Accordingly, it ordered
Rafael to pay petitioner the amount of P229,200.00, consisting of the principal of P160,000.00 and
accrued interest of P59,200.00 from July 30, 1992 to September 30, 1995.10 Records do not show
that this Decision had already attained finality.

Meanwhile, prior to Rafael's notice of the above decision, respondent agreed to pay Rafael's
obligation to petitioner which was pegged at P689,000.00. After making a total payment of
P400,000.00,11 he executed a promissory note12 dated February 20, 1998 (subject PN), binding
himself to pay on or before March 31, 1998 the amount of P289,000.00, "representing the balance
of the agreed financial obligation of [his] father to [petitioner]."13 After learning of the January 30,
1998 Decision, respondent refused to pay the amount covered by the subject PN despite demands,
prompting petitioner to file a complaint14 for sum of money and damages before the court a quo
on July 2, 1998, docketed as Civil Case No. 98-0156 (collection case).

Respondent filed his answer,15 contending that petitioner has no cause of action against him. He
averred that he has fully settled Rafael's obligation and that he committed a mistake in paying more
than the amount due under the loan, i.e., the amount of P229,200.00 as adjudged by the RTC-Imus
in the judicial foreclosure case which, thus, warranted the return of the excess payment. He
therefore prayed for the dismissal of the complaint, and interposed a compulsory counterclaim for
the release of the mortgage, the return of the excess payment, and the payment of moral and
exemplary damages, attorney's fees and litigation expenses.16 redarclaw

The Court A Quo's Ruling

In a Decision17 dated August 28, 2003 (August 28, 2003 Decision), the court a quo denied recovery
on the subject PN. It found that the consideration for its execution was Rafael's indebtedness to
petitioner, the extinguishment of which necessarily results in the consequent extinguishment of the
cause therefor. Considering that the RTC-Imus had adjudged Rafael liable to petitioner only for
the amount of P229,200.00, for which a total of P400,000.00 had already been paid, the court a
quo found no valid or compelling reason to allow petitioner to recover further on the subject PN.
There being an excess payment of P171,000.00, it declared that a quasi-contract (in the concept of
solutio indebiti) exists between the parties and, accordingly, directed petitioner to return the said
amount to respondent, plus 6% interest p.a.18 reckoned from the date of judicial demand19 on
August 6, 1998 until fully paid, and to pay attorney's fees and the costs of suit. 20 redarclaw

In an Order21 dated November 3, 2003 (November 3, 2003 Order), however, the court a quo
granted petitioner's motion for reconsideration, and recalled and set aside its August 28, 2003
Decision. It declared that the causes of action in the collection and foreclosure cases are distinct,
and respondent's failure to comply with his obligation under the subject PN justifies petitioner to
seek judicial relief. It further opined that the stipulated 5% monthly interest is no longer usurious
and is binding on respondent considering the suspension of the Usury Law pursuant to Central
Bank Circular 905, series of 1982. Accordingly, it directed respondent to pay the amount of
P289,000.00 due under the subject PN, plus interest at the legal rate reckoned from the last extra-
judicial demand on May 15, 1998, until fully paid, as well as attorney's fees and the costs of suit.22
redarclaw

Aggrieved, respondent filed a motion for reconsideration23 which was denied in an Order24 dated
January 14, 2004, prompting him to elevate the matter to the CA.25 redarclaw

The CA Ruling

In a Decision26 dated November 4, 2011, the CA recalled and set aside the court a quo's November
3, 2003 and January 14, 2004 Orders, and reinstated the August 28, 2003 Decision. It held that the
doctrine of res judicata finds application in the instant case,27 considering that both the judicial
foreclosure and collection cases were filed as a consequence of the non-payment ofRafael's loan,
which was the principal obligation secured by the real estate mortgage and the primary
consideration for the execution of the subject PN. Since res judicata only requires substantial, not
actual, identity of causes of action and/or identity of issue,28 it ruled that the judgment in the
judicial foreclosure case relating to Rafael's obligation to petitioner is final and conclusive on the
collection case.

Petitioner's motion for reconsideration was denied in a Resolution29 dated May 14, 2012; hence,
this petition.

The Issue Before the Court

The essential issue for the Court's resolution is whether or not the CA committed reversible error
in upholding the dismissal of the collection case.

The Court's Ruling

The petition lacks merit.

A case is barred by prior judgment or res judicata when the following elements concur: (a) the
judgment sought to bar the new action must be final; (b) the decision must have been rendered by
a court having jurisdiction over the subject matter and the parties; (c) the disposition of the case
must be a judgment on the merits; and (d) there must be as between the first and second action,
identity of parties, subject matter, and causes of action.30 redarclaw

After a punctilious review of the records, the Court finds the principle of res judicata to be
inapplicable to the present case. This is because the records are bereft of any indication that the
August 28, 2003 Decision in the judicial foreclosure case had already attained finality, evidenced,
for instance, by a copy of the entry of judgment in the said case. Accordingly, with the very first
element of res judicata missing, said principle cannot be made to obtain.

This notwithstanding, the Court holds that petitioner's prosecution of the collection case was
barred, instead, by the principle of litis pendentia in view of the substantial identity of parties and
singularity of the causes of action in the foreclosure and collection cases, such that the prior
foreclosure case barred petitioner's recourse to the subsequent collection case.

To lay down the basics, litis pendentia, as a ground for the dismissal of a civil action, refers to
that situation wherein another action is pending between the same parties for the same cause
of action, such that the second action becomes unnecessary and vexatious. For the bar of litis
pendentia to be invoked, the following requisites must concur: (a) identity of parties, or at least
such parties as represent the same interests in both actions; (b) identity of rights asserted and relief
prayed for, the relief being founded on the same facts; and (c) the identity of the two preceding
particulars is such that any judgment rendered in the pending case, regardless of which party is
successful would amount to res judicata in the other.31 The underlying principle of litis pendentia
is the theory that a party is not allowed to vex another more than once regarding the same subject
matter and for the same cause of action. This theory is founded on the public policy that the same
subject matter should not be the subject of controversy in courts more than once, in order that
possible conflicting judgments may be avoided for the sake of the stability of the rights and status
of persons, and also to avoid the costs and expenses incident to numerous suits.32 Consequently, a
party will not be permitted to split up a single cause of action and make it a basis for several suits
as the whole cause must be determined in one action.33To be sure, splitting a cause of action is
a mode of forum shopping by filing multiple cases based on the same cause of action, but
with different prayers, where the round of dismissal is litis pendentia for res judicata, as the
case may be).34redarclaw

In this relation, it must be noted that the question of whether a cause of action is single and entire
or separate is not always easy to determine and the same must often be resolved, not by the general
rules, but by reference to the facts and circumstances of the particular case. The true rule, therefore,
is whether the entire amount arises from one and the same act or contract which must, thus,
be sued for in one action, or the several parts arise from distinct and different acts or
contracts, for which a party may maintain separate suits.35 redarclaw

In loan contracts secured by a real estate mortgage, the rule is that the creditor-mortgagee has a
single cause of action against the debtor mortgagor, i.e., to recover the debt, through the filing
of a personal action for collection of sum of money or the institution of a real action to
foreclose on the mortgage security. The two remedies are alternative,36 not cumulative or
successive,37 and each remedy is complete by itself. Thus, if the creditor-mortgagee opts to
foreclose the real estate mortgage, he waives the action for the collection of the unpaid
debt,38except only for the recovery of whatever deficiency may remain in the outstanding
obligation of the debtor-mortgagor after deducting the bid price in the public auction sale of
the mortgaged properties.39 Accordingly, a deficiency judgment shall only issue after it is
established that the mortgaged property was sold at public auction for an amount less than the
outstanding obligation.

In the present case, records show that petitioner, as creditor mortgagee, instituted an action for
judicial foreclosure pursuant to the provisions of Rule 68 of the Rules of Court in order to recover
on Rafael's debt. In light of the foregoing discussion, the availment of such remedy thus bars
recourse to the subsequent filing of a personal action for collection of the same debt, in this case,
under the principle of litis pendentia, considering that the foreclosure case only remains pending
as it was not shown to have attained finality.

While the ensuing collection case was anchored on the promissory note executed by respondent
who was not the original debtor, the same does not constitute a separate and distinct contract of
loan which would have given rise to a separate cause of action upon breach. Notably, records are
bereft of any indication that respondent's agreement to pay Rafael's loan obligation and the
execution of the subject PN extinguished by novation40 the contract of loan between Rafael and
petitioner, in the absence of express agreement or any act of equal import. Well-settled is the rule
that novation is never presumed, but must be clearly and unequivocally shown. Thus, in order for
a new agreement to supersede the old one, the parties to a contract must expressly agree that they
are abrogating their old contract in favor of a new one,41 which was not shown here.

On the contrary, it is significant to point out that: (a) the consideration for the subject PN was the
same consideration that supported the original loan obligation of Rafael; (b) respondent merely
assumed to pay Rafael's remaining unpaid balance in the latter's behalf, i.e., as Rafael's agent or
representative;42 and (c) the subject PN was executed after respondent had assumed to pay Rafael's
obligation and made several payments thereon. Case law states that the fact that the creditor accepts
payments from a third person, who has assumed the obligation, will result merely in the addition
of debtors, not novation, and the creditor may enforce the obligation against both debtors.43 For
ready reference,
ChanRob lesVirtualawlibrary
the subject PN reads in full:
February 20, 1998

PROMISSORY NOTE

P289,000.00
I, MARCELINO B. MARTINEZ, son of Mr. RAFAEL MARTINEZ, of legal age, Filipino,
married and a resident of No. 091 Anabu I-A, Imus, Cavite, by these presents do hereby
specifically and categorically PROMISE, UNDERTAKE and bind myself in behalf of my father,
to pay to Miss NORLINDA S. MARILAG, Mortgagee-Creditor of my said father, the sum of
TWO HUNDRED EIGHTY NINE THOUSAND PESOS (P289,000.00), Philippine Currency, on
or before MARCH 31, 1998, representing the balance of the agreed financial obligation of my
said father to her. (Emphases supplied)

Executed at Pamplona I, Las Piñas City, Metro Manila, this 20th day of February, 1998.

Sgd.
MARCELINO B. MARTINEZ
Promissor44
Petitioner's contention that the judicial foreclosure and collection cases enforce independent
rights45 must, therefore, fail because the Deed of Real Estate Mortgage46 and the subject PN both
refer to one and the same obligation, i.e., Rafael's loan obligation. As such, there exists only one
cause of action for a single breach of that obligation. Petitioner cannot split her cause of action on
Rafael's unpaid loan obligation by filing a petition for the judicial foreclosure of the real estate
mortgage covering the said loan, and, thereafter, a personal action for the collection of the unpaid
balance of said obligation not comprising a deficiency arising from foreclosure, without violating
the proscription against splitting a single cause of action, where the ground for dismissal is either
res judicata or litis pendentia, as in this case.

As elucidated by this Court in the landmark case of Bachrach Motor Co., Inc. v. Icarangal.47
ChanRob lesVirtualawlibrary

For non-payment of a note secured by mortgage, the creditor has a single cause of action
against the debtor. This single cause of action consists in the recovery of the credit with execution
of the security. In other words, the creditor in his action may make two demands, the payment of
the debt and the foreclosure of his mortgage. But both demands arise from the same cause, the
non-payment of the debt, and, for that reason, they constitute a single cause of action. Though the
debt and the mortgage constitute separate agreements, the latter is subsidiary to the former,
and both refer to one and the same obligation. Consequently, there exists only one cause of
action for a single breach of that obligation. Plaintiff, then, by applying the rule above stated,
cannot split up his single cause of action by filing a complaint for payment of the debt, and
thereafter another complaint for foreclosure of the mortgage. If he does so, the filing of the first
complaint will bar the subsequent complaint. By allowing the creditor to file two separate
complaints simultaneously or successively, one to recover his credit and another to foreclose his
mortgage, we will, in effect, be authorizing him plural redress for a single breach of contract at so
much cost to the courts and with so much vexation and oppression to the debtor. (Emphases and
underscoring supplied)
Further on the point, the fact that no foreclosure sale appears to have been conducted is of no
moment because the remedy of foreclosure of mortgage is deemed chosen upon the filing of the
complaint therefor.48 In Suico Rattan & Buri Interiors, Inc. v. CA,49 it was explained:
ChanRob lesVirtualawlibrary
Lawlibrary ofCRAlaw

x x x x In sustaining the rule that prohibits mortgage creditors from pursuing both the remedies of
a personal action for debt or a real action to foreclose the mortgage, the Court held in the case of
Bachrach Motor Co., Inc. v. Esteban Icarangal, et al. that a rule which would authorize the
plaintiff to bring a personal action against the debtor and simultaneously or successively another
action against the mortgaged property, would result not only in multiplicity of suits so offensive
to justice and obnoxious to law and equity, but also in subjecting the defendant to the vexation of
being sued in the place of his residence or of the residence of the plaintiff, and then again in the
place where the property lies. Hence, a remedy is deemed chosen upon the filing of the suit for
collection or upon the filing of the complaint in an action for foreclosure of mortgage,
pursuant to the provisions of Rule 68 of the Rules of Court. As to extrajudicial foreclosure,
such remedy is deemed elected by the mortgage creditor upon filing of the petition not with any
court of justice but with the office of the sheriff of the province where the sale is to be made, in
accordance with the provisions of Act No. 3135, as amended by Act No. 4118. (Emphases
supplied)
As petitioner had already instituted judicial foreclosure proceedings over the mortgaged
property, she is now barred from availing herself of an ordinary action for collection, regardless
of whether or not the decision in the foreclosure case had attained finality. In fine, the dismissal of
the collection case is in order. Considering, however, that respondent's claim for return of excess
payment partakes of the nature of a compulsory counterclaim and, thus, survives the dismissal of
petitioner's collection suit, the same should be resolved based on its own merits and evidentiary
support.50 redarclaw

Records show that other than the matter of interest, the principal loan obligation and the payments
made were not disputed by the parties. Nonetheless, the Court finds the stipulated 5% monthly
interest to be excessive and unconscionable. In a plethora of cases, the Court has affirmed that
stipulated interest rates of three percent (3%) per month and higher are excessive,
iniquitous, unconscionable, and exorbitant,51hence, illegal52and void for being contrary to
morals.53 In Agner v. BPI Family Savings Bank, Inc.,54 the Court had the occasion to rule:
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Lawlibrary ofCRAlaw

Settled is the principle which this Court has affirmed in a number of cases that stipulated interest
rates of three percent (3%) per month and higher are excessive, iniquitous, unconscionable, and
exorbitant. While Central Bank Circular No. 905-82, which took effect on January 1, 1983,
effectively removed the ceiling on interest rates for both secured and unsecured loans, regardless
of maturity, nothing in the said circular could possibly be read as granting carte blanche authority
to lenders to raise interest rates to levels which would either enslave their borrowers or lead to a
hemorrhaging of their assets. Since the stipulation on the interest rate is void for being
contrary to morals, if not against the law, it is as if there was no express contract on said
interest rate; thus, the interest rate may be reduced as reason and equity demand. (Emphases
supplied)
As such, the stipulated 5% monthly interest should be equitably reduced to 1% per month or 12%
p.a. reckoned from the execution of the real estate mortgage on July 30, 1992. In order to determine
whether there was any overpayment as claimed by respondent, we first compute the interest until
January 30, 199855 when he made a payment in the amount of P300,000.00 on Rafael's loan
obligation. Accordingly, the amount due on the loan as of the latter date is hereby computed as
follows:
ChanRob lesVirtualawlibrary
Lawlibrary ofCRAlaw

Principal P160,000.00
Interest from
Add:07/30/1992 to
01/30/1998
(P160,000.00 X
105,600.00
12% X 5.5 yrs.)
Amount due on the loan P265,600.00
Less: Payment made on
( 300,000.00)
01/30/98
Overpayment as of(P
01/30/98 34,400.00)56
Thus, as of January 30, 1998, only the amount of P265,600.00 was due under the loan contract,
and the receipt of an amount more than that renders petitioner liable for the return of the excess.
Respondent, however, made further payment in the amount of P100,000.0057 on the belief that the
subject loan obligation had not yet been satisfied. Such payments were, therefore, clearly made by
mistake, giving rise to the quasi-contractual obligation of solutio indebiti under Article 215458 in
relation to Article 216359 of the Civil Code. Not being a loan or forbearance of money, an interest
of 6% p.a. should be imposed on the amount to be refunded and on the damages and attorney's
fees awarded, if any, computed from the time of demand60 until its satisfaction.61 Consequently,
petitioner must return to respondent the excess payments in the total amount of P134,400.00, with
legal interest at the rate of 6% p.a. from the filing of the Answer on August 6, 199862 interposing
a counterclaim for such overpayment, until fully settled.

However, inasmuch as the court a quo failed to state in the body of its decision the factual or legal
basis for the award of attorney's fees to the respondent, as required under Article 220863 of the
New Civil Code, the Court resolves to delete the same. The rule is well-settled that the trial court
must clearly state the reasons for awarding attorney's fees in the body of its decision, not merely
in its dispositive portion, as the appellate courts are precluded from supplementing the bases for
such award.64 redarclaw

Finally, in the absence of showing that the court a quo's award of the costs of suit in favor of
respondent was patently capricious,65 the Court finds no reason to disturb the same.

WHEREFORE, the petition is DENIED. The Decision dated November 4, 2011 and the
Resolution dated May 14, 2012 of the Court of Appeals in CA-G.R. CV No. 81258 reinstating the
court a quo's Decision dated August 28, 2003 in Civil Case No. 98-0156 are hereby AFFIRMED
with the MODIFICATIONS: (a) directing petitioner Norlinda S. Marilag to return to respondent
Marcelino B. Martinez the latter's excess payments in the total amount of P134,400.00, plus legal
interest at the rate of 6% p.a. from the filing of the Answer on August 6, 1998 until full satisfaction;
and (b) deleting the award of attorney's fees.

SO ORDERED. cralawlawlibrary

G.R. No. 205705, August 05, 2015

DOMINADOR M. APIQUE, Petitioner, v. EVANGELINE APIQUE FAHNENSTICH,

Respondent.

DECISION

PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari1 are the Decision2 dated July 31, 2012 and the
Resolution3 dated January 17, 2013 of the Court of Appeals, Cagayan de Oro City (CA) in CA-
G.R. CV No. 00740-MIN, which set aside the Decision4 dated January 25, 2006 of the Regional
Trial Court of Davao City, Branch 16 (RTC) dismissing Civil Case No. 29,122-02 and, instead,
ordered petitioner Dominador M. Apique (Dominador) to return to respondent Evangeline Apique
Fahnenstich (Evangeline) the amount of P980,000.00, plus six percent (6%) interest per annum
(p.a.) reckoned from the filing of the complaint up to the finality of the decision and, thereafter,
twelve percent (12%) interest p.a. on the total amount demanded until its full satisfaction.chanrobleslaw

The Facts

Dominador and Evangeline are siblings who used to live with their parents at Babak, Island Garden
City of Samal, Davao, until Evangeline left for Germany to work sometime in 1979.5 On August
2, 1995, Evangeline executed General6 and Special Powers of Attorney7 constituting Dominador
as her attorney-in-fact to purchase real property for her, and to manage or supervise her business
affairs in the Philippines.8

As Evangeline was always in Germany, she opened a joint savings account on January 18, 1999
with Dominador at the Claveria Branch of the Philippine Commercial International Bank (PCI
Bank) in Davao City, which later became Equitable PCI Bank (EPCIB), and now Banco de Oro,
under Savings Account No. 1189-02819-5 (subject account).9

On February 11, 2002, Dominador withdrew the amount of P980,000.00 from the subject account
and, thereafter, deposited the money to his own savings account with the same bank, under Savings
Account No. 1189-00781-3. It was only on February 23, 2003 that Evangeline learned of such
withdrawal from the manager of EPCIB. Evangeline then had the passbook updated, which
reflected the said withdrawal. She likewise discovered that Dominador had deposited the amount
withdrawn to his own account with the same bank and that he had withdrawn various amounts
from the said account.10

Evangeline demanded the return of the amount withdrawn from the joint account, but to no avail.
Hence, she filed a complaint11 for sum of money, damages, and attorney's fees, with prayer for
preliminary mandatory and prohibitory injunction and temporary restraining order (TRO) against
Dominador before the RTC, docketed as Civil Case No. 29,122-02, impleading EPCIB as a party
defendant.

In her complaint,12 Evangeline claimed to be the sole owner of the money deposited in the subject
account, and that Dominador has no authority to withdraw the same. On the other hand, she alleged
that EPCIB violated its banking rules when it allowed the withdrawal without the presentation of
the passbook. She also prayed for a TRO to enjoin EPCIB from allowing any withdrawal from the
subject account, which was granted by the Executive Judge on May 7, 2002.13

In his answer,14 Dominador asserted, among others, that he was authorized to withdraw funds from
the subject account to answer for the expenses of Evangeline's projects, considering: (a) that it was
a joint account, and (b) the general and special powers of attorney executed by Evangeline in his
favor. By way of counterclaim, he sought payment of moral and exemplary damages, attorney's
fees, litigation expenses, and costs of suit. EPCIB, for its part, denied having violated its own
banking rules and regulations, contending that the account in question was an "OR" account such
that any of the account holders may transact without the signature of the other. It also pointed out
that "no passbook" transactions were allowed if the following could be verified, namely: (a)
technicalities of documents, (b) identity of payee, (c) authenticity of signature/s, and (d)
sufficiency of funds.15 In the course of the proceedings, Evangeline and EPCIB filed a joint motion
to drop the latter as party defendant, which the RTC granted in an Order16 dated April 5, 2004.17

During the trial, Dominador claimed that the money withdrawn from the subject account belonged
to him, explaining that he had contributed an initial deposit of P100,000.0018 and that Evangeline's
common-law husband, Holgar Schwarzfeller (Holgar), had also deposited a total amount of
P900,000.0019 pursuant to the latter's verbal promise to compensate him for his services as
administrator/manager of the couple's business and properties in the amount of P1,000,000.00,20
which his sister, Marietta Apique (Marietta), corroborated.21

The RTC Ruling

In a Decision22 dated January 25, 2006, the RTC ruled in favor of Dominador and dismissed the
complaint. It held that Dominador may validly withdraw money from the subject account even
without Evangeline's consent, considering that: (a) it was a joint "OR" account, and (b) the reason
for the withdrawal, i.e., as compensation for his services as administrator of the business affairs of
Evangeline. As such, it declared the February 11, 2002 withdrawal in the amount of P980,000.00
to be a valid transaction. However, it dismissed Dominador's counterclaims for failure to show
that Evangeline acted with bad faith in filing the complaint.

Aggrieved, Evangeline filed an appeal before the CA.23

The CA Ruling

In a Decision24 dated July 31, 2012, the CA reversed and set aside the RTC's ruling and, instead,
ordered Dominador to return to Evangeline the amount of P980,000.00, plus interest at six percent
(6%) p.a. reckoned from the filing of the complaint up to the finality of the decision and, thereafter,
an additional twelve percent (12%) p.a. interest on the total amount demanded until its full
satisfaction.

The CA found that Evangeline was able to establish her case by preponderance of evidence.25 In
so ruling, it held that since the subject account is a joint "OR" account, and as such, Dominador is
not required to present any authorization from his co-depositor every time he transacts with the
bank, nonetheless, the nature of the said account did not give him unbridled license to withdraw
any amount any time he wants, noting that his authority to withdraw was still subject to
Evangeline's prior approval considering the purpose for which the account was opened.26 It
rejected Dominador's claim that the money in the subject account, or at least half of it, belonged
to Holgar, and that the amount withdrawn was part of the compensation promised by the latter, for
being bare, self-serving, and unsubstantiated allegations.27

Dominador moved for reconsideration28 but the same was denied in a Resolution29 dated January
17, 2013; hence, this petition.chanrobleslaw
The Issue Before the Court

The essential issue for the Court's resolution is whether or not Evangeline is entitled to the return
of the amount of P980,000.00 Dominador withdrew from their joint savings account with EPCIB,
plus legal interest thereon.
chanrobleslaw

The Court's Ruling

The petition is partly meritorious.

At the outset, the Court notes that the arguments raised herein necessarily require a reevaluation
of the parties' submissions and the CA's factual findings, which is generally proscribed in a petition
for review on certiorari because: (a) a Rule 45 petition resolves only questions of law, not
questions of fact; and (b) factual findings of the CA are generally conclusive on the parties and
are, therefore, not reviewable by this Court. By way of exception, however, the Court resolves
factual issues when the findings of the RTC differ from those of the CA,30 as in this case.

A joint account is one that is held jointly by two or more natural persons, or by two or more
juridical persons or entities.31 Under such setup, the depositors are joint owners or co-owners of
the said account,32 and their share in the deposits shall be presumed equal, unless the contrary is
proved, pursuant to Article 485 of the Civil Code, which provides: chanRob lesvirtualLawlibrary

Art. 485. The share of the co-owners, in the benefits as well as in the charges, shall be proportional
to their respective interests. Any stipulation in a contract to the contrary shall be void.

The portions belonging to the co-owners in the co-ownership shall be presumed equal, unless
the contrary is proved. (Emphasis supplied) Chan RoblesV irtualawlibrary

The common banking practice is that regardless of who puts the money into the account, each of
the named account holder has an undivided right to the entire balance,33 and any of them may
deposit and/or withdraw, partially or wholly, the funds without the need or consent of the other,34
during their lifetime.35 Nevertheless, as between the account holders, their right against each other
may depend on what they have agreed upon, and the purpose for which the account was opened
and how it will be operated.36

In this case, there is no dispute that the account opened by Evangeline and Dominador under
Savings Account No. 1189-02819-5 with EPCIB was a joint "OR" account. It is also admitted that:
(a) the account was opened for a specific purpose, i.e., to facilitate the transfer of needed funds for
Evangeline's business projects;37 and (b) Dominador may withdraw funds therefrom "if"38 there is
a need to meet Evangeline's financial obligations arising from said projects.39 Hence, while
Dominador is a co-owner of the subject account as far as the bank is concerned — and may, thus,
validly deposit and/or withdraw funds without the consent of his co-depositor, Evangeline — as
between him and Evangeline, his authority to withdraw, as well as the amount to be
withdrawn, is circumscribed by the purpose for which the subject account was opened.

Under the foregoing circumstances, Dominador's right to obtain funds from the subject account
was, thus, conditioned on the necessity of funds for Evangeline's projects. Admittedly, at the time
he withdrew the amount of P980,000.00 from the subject account, there was no project being
undertaken for Evangeline.40 Moreover, his claim that the said amount belonged to him, as part of
the compensation promised by Holgar for his services as administrator of the business affairs of
Evangeline, was correctly rejected by the CA,41 considering the dearth of competent evidence
showing that Holgar: (a) undertook to pay Dominador the amount of P1,000,000.00 for his services
as administrator of Evangeline's various projects; and (b) remitted such amount to the subject
account for the benefit of Dominador. Having failed to justify his right over the amount withdrawn,
Dominador is liable for its return, as correctly adjudged by the CA.

In civil cases, the party having the burden of proof must establish his case by a preponderance of
evidence, or evidence which is more convincing to the court as worthy of belief than that which is
offered in opposition thereto. Thus, the party who asserts the affirmative of an issue has the onus
to prove his assertion in order to obtain a favorable judgment. For the plaintiff, the burden to prove
its positive assertions never parts. For the defendant, an affirmative defense is one which is not a
denial of an essential ingredient in the plaintiffs cause of action, but one which, if established, will
be a Rood defense, i.e. an avoidance of the claim.42 Dominador miserably failed in this respect.

Corollarily, the Court cannot subscribe to Dominador's claim for payment of compensation as
administrator of the business affairs of Evangeline based on the principle of quantum meruit,43
which was not raised as an affirmative defense or counterclaim in his answer to the complaint.
Settled is the rule that defenses which are not raised in the answer are deemed waived,44 and
counterclaims not set up in the answer shall be barred.45

Nonetheless, the Court deems it proper to modify the amount to be returned to Evangeline,
considering: (a) the unrefuted claim that Dominador contributed the amount of P100,000.00 to the
joint account at the time it was opened; and (b) the absence of controverting proof showing that
the same had been withdrawn prior to February 11, 2002, when the contested withdrawal was
made. Consequently, Dominador is entitled to the said amount which should be, therefore,
deducted from amount to be returned.

Finally, the Court finds a need to partially modify the interest accruing from the finality of the
Decision, which should be imposed at the lower rate of 6% p.a., and not 12% p.a. as imposed by
the CA, in line with the amendment introduced by the Bangko Sentral ng Pilipinas Monetary Board
in BSP-MB Circular No. 799,46 series of 2013, and the ruling in Nacar v. Gallery Frames.47

WHEREFORE, the petition is DENIED. The Decision dated July 31, 2012 and the Resolution
dated January 17, 2013 of the Court of Appeals, Cagayan de Oro City in CA-G.R. CV No. 00740-
MIN are hereby AFFIRMED with MODIFICATION directing petitioner Dominador M. Apique
to return to respondent Evangeline Apique Fahnenstich the amount of P880,000.00, plus legal
interest at six percent (6%) per annum, reckoned from the filing of the complaint on May 7, 2002,
until full payment.

SO ORDERED. chanroblesvirtuallawlibrary

G.R. No. 208844, November 10, 2015

F & S VELASCO COMPANY, INC., IRWIN J. SEVA, ROSINA B. VELASCO-SCRIBNER,
MERCEDEZ SUNICO, AND JOSE SATURNINO O. VELASCO*, Petitioners, v. DR.
ROMMEL L. MADRID, PETER PAUL L. DANAO, MANUEL L. ARIMADO, AND
MAUREEN R. LABALAN, Respondents.

DECISION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari1 are the Decision2 dated March 1, 2013 and the
Resolution3 dated August 7, 2013 of the Court of Appeals (CA) in CA-G.R. SP No. 113279, which
modified the Decision4 dated March 3, 2010 of the Regional Trial Court of Legazpi City, Branch
5 (RTC) in SR-09-007: (a) declaring the Special Stockholders' and Re-Organizational Meeting of
petitioner F & S Velasco Company, Inc. (FSVCI) held on November 18, 2009 legal and valid; and
(b) remanding the case to the court a quo and directing it to appoint or constitute a. Management
Committee to take over the corporate and business affairs of FSVCI.

The Facts

On June 8, 1987, FSVCI was duly organized and registered as a corporation with Francisco O.
Velasco (Francisco), Simona J. Velasco (Simona), Angela V. Madrid (Angela), herein respondent
Dr. Rommel L. Madrid (Madrid), and petitioner Saturnino O. Velasco (Saturnino) as its
incorporators. When Simona and Francisco died on June 12, 1998 and June 22, 1999, respectively,
their daughter, Angela, inherited their shares, thereby giving her control of 70.82% of FSVCI's
total shares of stock. As of May 11, 2009, the distribution of FSVCI's 24,000 total shares of stock
is as follows: (a) Angela with 16,998 shares; (b) Madrid with 1,000 shares; (c) petitioner Rosina
B. Velasco-Scribner (Scribner) with 6,000 shares; and (d) petitioners Irwin J. Seva (Seva) and
Mercedez Sunico (Sunico) with one (1) share each.5

On September 20, 2009 and during her tenure as Chairman of the Board of Directors of FSVCI
(the other members of the Board of Directors being Madrid, Scribner, Seva, and Sunico), Angela
died intestate and without issue. On October 8, 2009, Madrid, as Angela's spouse, executed an
Affidavit of Self-Adjudication covering the latter's estate which includes her 70.82% ownership
of FSVCI's shares of stock. Believing that he is already the controlling stockholder of FSVCI by
virtue of such self-adjudication, Madrid called for a Special Stockholders' and Re-Organizational
Meeting to be held on November 18, 2009. On November 10, 2009 and in preparation for said
meeting, Madrid executed separate deeds of assignment transferring one share each to Vitaliano
B. Ricafort and to respondents Peter Paul L. Danao (Danao), Maureen R. Labalan (Labalan), and
Manuel L. Arimado (Arimado; collectively, Madrid Group).6

Meanwhile, as Madrid was performing the aforesaid acts, Seva, in his then-capacity as FSVCI
corporate secretary, sent a Notice of an Emergency Meeting to FSVCI's remaining stockholders
for the purpose of electing a new president and vice-president, as well as the opening of a bank
account. Such meeting was held on November 6, 2009 which was attended by Saturnino, Seva,
and Sunico (November 6, 2009 Meeting), during which, Saturnino was recognized as a member
of the FSVCI Board of Directors and thereafter, as FSVCI President, while Scribner was elected
FSVCI Vice-President (Saturnino Group).7
Despite the election conducted by the Saturnino Group, the Madrid Group proceeded with the
Special Stockholders' and Re-Organizational Meeting on November 18, 2009, wherein: (a) the
current members of FSVCI Board of Directors (save for Madrid) were ousted and replaced by the
members of the Madrid Group; and (b) Madrid, Danao, Arimado, and Labalan were elected
President, Vice-President, Corporate Secretary, and Treaurer, respectively, of FSVCI (November
18, 2009 Meeting).8

In view of the November 18, 2009 Meeting, the Saturnino Group filed a petition for Declaration
of Nullity of Corporate Election with Preliminary Injunction and Temporary Restraining Order 9
(TRO) against the Madrid Group before the RTC, which was acting as a Special Commercial
Court.10

After the RTC denied the Saturnino Groups' prayer for TRO, the Madrid Group filed its Answer
(with Compulsory Counterclaims)11 which prayed for, among others, the declaration of nullity of
the November 6, 2009 Meeting conducted by the Saturnino Group. The Madrid Group likewise
applied for the Appointment of a Management Committee for FSVCI, which was denied by the
RTC in an Order12 dated January 12, 2010.13

The RTC Ruling

In a Decision14 dated March 3, 2010, the RTC declared both the November 6, 2009 and November
18, 2009 Meetings null and void.15 It found the November 6, 2009 Meeting invalid because: (a) it
was conducted without a quorum as only two (2) FSVCI Board Members (i.e., Seva and Sunico)
attended the same, and that Scribner cannot attend by proxy as the Corporation Code expressly
prohibits proxy attendance in Board meetings; and (b) merely recognizing Saturnino as an
additional member of the FSVCI Board of Directors - and not electing him to take the position
vacated by Angela upon her death - had the effect of increasing FSVCI's number of Directors to
six (6), thus, exceeding the number of Directors explicitly stated in the FSVCI Articles of
Incorporation.16

On the other hand, in ruling on the invalidity of the November 18, 2009 Meeting, the RTC held
that until a probate court conducting the settlement proceedings of Angela's estate determines the
rightful owner of Angela's properties, Madrid only has an equitable right over Angela's 70.82%
ownership of FSVCI's shares of stock. As such, Madrid cannot exercise the rights accorded to such
ownership, hence, making his call for a meeting, as well as the actual conduct of the November
18, 2009 Meeting, invalid.17

Aggrieved, the Madrid Group appealed18 before the CA contesting the RTC's declaration of
invalidity of the November 18, 2009 Meeting, as well as the denial of the appointment of a
Management Committee for FSVCI.19 Meanwhile, records do not show that the Saturnino Group
appealed the declaration of invalidity of the November 6, 2009 Meeting to the CA.

The CA Ruling

In a Decision20 dated March 1, 2013, the CA modified the RTC ruling: (a) declaring the November
18, 2009 Meeting conducted by the Madrid Group valid; and (b) remanding the case to the court
a quo and directing it to appoint or constitute a Management Committee to take over the corporate
and business affairs of FSVCI.21

Contrary to the RTC findings, the CA held that Madrid's execution of the Affidavit of Self-
Adjudication already conferred upon him the ownership of Angela's 70.82% ownership of FSVCI's
shares of stock, resulting in total ownership of 74.98% shares of stock inclusive of his original
4.16% ownership.22 In this relation, the CA found that Madrid had already complied with the
registration requirement of such transfer in the books of the corporation through the November 18,
2009 General Information Sheet (GIS) of the corporation duly filed with the Securities and
Exchange Commission (SEC). As such, he validly made the call for the November 18, 2009
Meeting, and accordingly, the matters resolved therein - such as the reorganization of the FSVCI
Board of Directors and the election of corporate officers — should bind the corporation.23

Further, the CA ruled that the creation of a Management Committee is appropriate in view of the
persisting conflict between the Saturnino and Madrid Groups, the allegations of embezzlement of
corporate funds among the parties, and the uncertainty in the leadership and direction of the
corporation which had created an imminent danger of dissipation, loss, and wastage of FSVCI's
assets and the paralyzation of its business operations which may be prejudicial to the minority
stockholders, parties-litigants, or the general public.24

Dissatisfied, the Saturnino Group moved for reconsideration25 which was, however, denied in a
Resolution26 dated August 7, 2013; hence, the instant petition.

The Issues Before the Court

The core issues for the Court's resolution are whether or not the CA correctly ruled that: (a) the
November 18, 2009 Meeting organized by Madrid is legal and valid; and (b) a Management
Committee should be appointed or constituted to take over the corporate and business affairs of
FSVCI.

The Court's Ruling

The petition is partly meritorious.

At the outset, the Court notes that after Madrid executed his Affidavit of Self-Adjudication, he
then filed a petition for letters of administration regarding Angela's estate, docketed as S.P. No.
M-7025, before the Regional Trial Court of Makati City, Branch 5927 (RTC-Makati Br. 59).
Through Orders dated December 29, 201028 and March 29, 2011,29 the RTC-Makati Br. 59 already
recognized Madrid as Angela's sole heir to the exclusion of others - i.e., Angela's purported
biological sister, Lourdita J. Estevez (Estevez) - and, thus, appointed him as Special Administrator
of Angela's estate.30 Estevez then belatedly challenged such Orders of the RTC-Makati Br. 59 via
a petition for annulment of judgment before the CA, docketed as CA-G.R. SP No. 128979, which
was dismissed through Resolutions dated April 3, 201331 and November 4, 2013.32 Undaunted,
Estevez made a further appeal33 to the Court, which was denied in the Minute Resolutions dated
February 26, 201434 and June 16, 2014.35 Such ruling of the Court had already attained finality as
evidenced by an Entry of Judgment36 dated June 16, 2014. In view of the foregoing, the Court is
constrained to view that Madrid is indeed Angela's sole heir and her death caused the immediate
transfer of her properties, including her 70.82% ownership of FSVCI's shares of stock, to Madrid.37
As such, Madrid may compel the issuance of certificates of stock in his favor, as well as the
registration of Angela's stocks in his name in FSVCI's Stock and Transfer Book.

Be that as it may, it must be clarified that Madrid's inheritance of Angela's shares of stock does
not ipso facto afford him the rights accorded to such majority ownership of FSVCI's shares of
stock. Section 63 of the Corporation Code governs the rule on transfers of shares of stock. It reads:
SEC. 63. Certificate of stock and transfer of shares. - The capital stock of stock corporations shall
be divided into shares for which certificates signed by the president or vice president,
countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation
shall be issued in accordance with the by-laws. Shares of stock so issued are personal property and
may be transferred by delivery of the certificate or certificates indorsed by the owner or his
attorney-in-fact or other person legally authorized to make the transfer. No transfer, however,
shall be valid, except as between the parties, until the transfer is recorded in the books of the
corporation showing the names of the parties to the transaction, the date of the transfer, the
number of the certificate or certificates and the number of shares transferred.

No shares of stock against which the corporation holds any unpaid claim shall be transferable in
the books of the corporation. (Emphasis and underscoring supplied)
Verily, all transfers of shares of stock must be registered in the corporate books in order to be
binding on the corporation. Specifically, this refers to the Stock and Transfer Book, which is
described in Section 74 of the same Code as follows:
SEC. 74. Books to be kept; stock transfer agent. - x x x.

x x x x

Stock corporations must also keep a book to be known as the "stock and transfer book", in which
must be kept a record of all stocks in the names of the stockholders alphabetically arranged; the
installments paid and unpaid on all stock for which subscription has been made, and the date of
payment of any installment; a statement of every alienation, sale or transfer of stock made, the date
thereof, and by and to whom made; and such other entries as the by-laws may prescribe. The stock
and transfer book shall be kept in the principal office of the corporation or in the office of its stock
transfer agent and shall be open for inspection by any director or stockholder of the corporation at
reasonable hours on business days.

xxxx
In this regard, the case of Batangas Laguna Tayabas Bus Co., Inc. v. Bitanga38 instructs that an
owner of shares of stock cannot be accorded the rights pertaining to a stockholder - such as the
right to call for a meeting and the right to vote, or be voted for - if his ownership of such shares is
not recorded in the Stock and Transfer Book, viz.:
Indeed, until registration is accomplished, the transfer, though valid between the parties, cannot be
effective as against the corporation. Thus, the unrecorded transferee, the Bitanga group in this case,
cannot vote nor be voted for. The purpose of registration, therefore, is two-fold: to enable the
transferee to exercise all the rights of a stockholder, including the right to vote and to be
voted for, and to inform the corporation of any change in share ownership so that it can
ascertain the persons entitled to the rights and subject to the liabilities of a stockholder. Until
challenged in a proper proceeding, a stockholder of record has a right to participate in any meeting;
his vote can be properly counted to determine whether a stockholders' resolution was approved,
despite the claim of the alleged transferee. On the other hand, a person who has purchased stock,
and who desires to be recognized as a stockholder for the purpose of voting, must secure such
a standing by having the transfer recorded on the corporate books. Until the transfer is
registered, the transferee is not a stockholder but an outsider.39 (Emphases and underscoring
supplied)
In the case at bar, records reveal that at the time Madrid called for the November 18, 2009 Meeting,
as well as the actual conduct thereof, he was already the owner of 74.98% shares of stock of FSVCI
as a result of his inheritance of Angela's 70.82% ownership thereof. However, records are bereft
of any showing that the transfer of Angela's shares of stock to Madrid had been registered in
FSVCFs Stock and Transfer Book when he made such call and when the November 18, 2009
Meeting was held. Thus, the CA erred in holding that Madrid complied with the required
registration of transfers of shares of stock through mere reliance on FSVCI's GIS dated November
18, 2009.

In this relation, it is noteworthy to point out that the submission of a GIS of a corporation before
the SEC is pursuant to the objective sought by Section 2640 of the Corporation Code which is to
give the public information, under sanction of oath of responsible officers, of the nature of
business, financial condition, and operational status of the company, as well as its key officers or
managers, so that those dealing and who intend to do business with it may know or have the means
of knowing facts concerning the corporation's financial resources and business responsibility.41
The contents of the GIS, however, should not be deemed conclusive as to the identities of the
registered stockholders of the corporation, as well as their respective ownership of shares of stock,
as the controlling document should be the corporate books, specifically the Stock and Transfer
Book. Jurisprudence in Lao v. Lao42 is instructive on this matter, to wit:
The mere inclusion as shareholder of petitioners in the General Information Sheet of PFSC
is insufficient proof that they are shareholders of the company.

Petitioners bank heavily on the General Information Sheet submitted by PFSC to the SEC in which
they were named as shareholders of PFSC. They claim that respondent is now estopped from
contesting the General Information Sheet.

While it may be true that petitioners were named as shareholders in the General Information
Sheet submitted to the SEC, that document alone does not conclusively prove that they are
shareholders of PFSC. The information in the document will still have to be correlated with
the corporate books of PFSC. As between the General Information Sheet and the corporate
books, it is the latter that is controlling. As correctly ruled by the CA:
We agree with the trial court that mere inclusion in the General Information Sheets as
stockholders and officers does not make one a stockholder of a corporation, for this may
have come to pass by mistake, expediency or negligence. As professed by respondent-
appellee, this was done merely to comply with the reportorial requirements with the SEC.
This maybe against the law but "practice, no matter how long continued, cannot give rise to any
vested right."

If a transferee of shares of stock who failed to register such transfer in the Stock and Transfer Book
of the Corporation could not exercise the rights granted unto him by law as stockholder, with more
reason that such rights be denied to a person who is not a stockholder of a corporation. Petitioners-
appellants never secured such a standing as stockholders of PFSC and consequently, their petition
should be denied.43 (Emphases and underscoring supplied)
In light of the foregoing, Madrid could not have made a valid call of the November 18, 2009
Meeting as his stock ownership of FSVCI as registered in the Stock and Transfer Book is only
4.16% in view of the nonregistration of Angela's shares of stock in the FSVCI Stock and Transfer
Book in his favor. As there was no showing that he was able to remedy the situation by the time
the meeting was held, the conduct of such meeting, as well as the matters resolved therein,
including the reorganization of the FSVCI Board of Directors and the election of new corporate
officers, should all be declared null and void.

Thus, in view of the nullity of the November 6, 2009 Meeting conducted by the Saturnino Group
which ruling of the RTC had already attained finality, as well as the November 18, 2009 Meeting
conducted by the Madrid Group - both of which attempted to wrest control of FSVCI by
reorganizing the Board of Directors and electing a new set of corporate officers - the FSVCI Board
of Directors at the time of Angela's death (i.e. Madrid, Seva, Scribner, and Sunico) should be
reconstituted, and thereafter, fill the vacant seat left by Angela in accordance with Section 2944 of
the Corporation Code. Such Board of Directors shall only act in a hold-over capacity until their
successors are elected and qualified, pursuant to Section 2345 of the Corporation Code.

Finally, on the issue of the propriety of appointing/constituting a Management Committee to

manage FSVCI's affairs, the Court recognizes that a corporation may be placed under the care of
a Management Committee specifically created by a court and, thus, under the latter's control and
supervision, for the purpose of preserving properties involved in a suit and protecting the rights of
the parties.46 However, case law is quick to point out that "the creation and appointment of a
management committee x x x is an extraordinary and drastic remedy to be exercised with care and
caution; and only when the requirements under the Interim Rules [of Procedure Governing Intra-
Corporate Controversies] are shown. It is a drastic course for the benefit of the minority
stockholders, the parties-litigants or the general public [and is] allowed only under pressing
circumstances and when there is inadequacy, ineffectual or exhaustion of legal or other remedies.
x x x The power of the court to continue a business of a corporation x x x must be exercised with
the greatest care and caution. There should be a full consideration of all the attendant facts,
including the interest of all the parties concerned.47 In view of the extraordinary nature of such a
remedy, Section 1, Rule 9 of the Interim Rules of Procedure Governing Intra-Corporate
Controversies48 provides the elements needed for the creation of a Management Committee:
SEC. 1. Creation of a management committee. - As an incident to any of the cases filed under these
Rules or the Interim Rules on Corporate Rehabilitation, a party may apply for the appointment of
a management committee for the corporation, partnership or association, when there is imminent
danger of:chanRoblesvir tualLawlibrary

(1) Dissipation, loss, wastage or destruction of assets or other properties; and

(2) Paralyzation of its business operations which may be prejudicial to the interest of the minority
stockholders, parties-litigants or the general public.
Thus, applicants for the appointment of a management committee need to establish the confluence
of these two (2) requisites. This is because appointed management committees will immediately
take over the management of the corporation and exercise the management powers specified in the
law. This may have a negative effect on the operations and affairs of the corporation with third
parties, as persons who are more familiar with its operations are necessarily dislodged from their
positions in favor of appointees who are strangers to the corporation's operations and affairs. 49

In the case at bar, the CA merely based its directive of creating a Management Committee for
FSVCI on its finding of "the persisting conflict between [the Saturn ino and Madrid Groups], the
allegations of embezzlement of corporate funds among the parties, and the uncertainty in the
leadership and direction of the corporation had created an imminent danger of dissipation, loss[,]
and wastage of FSVCI's assets and the paralyzation of its business operations which may be
prejudicial to the minority stockholders, parties-litigants or the general public."50 However, absent
any actual evidence from the records showing such imminent danger, the CA's findings have no
legal or factual basis to support the appointment/constitution of a Management Committee for
FSVCI. Accordingly, the CA erred in ordering the creation of a Management Committee in this
case. Hence, in the event a Management Committee had already been constituted pursuant to the
CA ruling, as what herein respondents point out,51 then it should be immediately dissolved for the
reasons aforestated.

WHEREFORE, the petition is PARTLY GRANTED. The Decision dated March 1, 2013 and
the Resolution dated August 7, 2013 of the Court of Appeals (CA) in CA-G.R. SP No. 113279 are
hereby REVERSED and SET ASIDE. The Special Stockholders' and Re-Organizational Meeting
of petitioner F & S Velasco Company, Inc. called by respondent Rommel L. Madrid and held on
November 18, 2009 is declared NULL and VOID and the Management Committee constituted
pursuant to the aforementioned CA Decision and Resolution is hereby DISSOLVED.

Accordingly, the Board of Directors of petitioner F & S Velasco Company, Inc. prior to the death
of Angela V. Madrid - consisting of the remaining members petitioners Rosina B. Velasco-
Scribner, Irwin J. Seva, and Mercedez Sunico and respondent Dr. Rommel L. Madrid - is hereby
ORDERED reconstituted. The Board of Directors is ORDERED to fill the vacant seat left by
Angela V. Madrid and, thereafter, act in a hold-over capacity until their successors are elected and
qualified, in accordance with prevailing laws, rules, and jurisprudence.

SO ORDERED. chanroble

G.R. No. 202664, November 20, 2015

MANUEL LUIS C. GONZALES AND FRANCIS MARTIN D. GONZALES, Petitioners, v.

GJH LAND, INC. (FORMERLY KNOWN AS S.J. LAND, INC.), CHANG HWAN JANG
A.K.A. STEVE JANG, SANG RAK KIM, MARIECHU N. YAP, AND ATTY. ROBERTO
P. MALLARI II, Respondent.

DECISION
PERLAS-BERNABE, J.:

This is a direct recourse to the Court, via a petition for review on certiorari,1 from the Orders dated
April 17, 20122 and July 9, 20123 of the Regional Trial Court (RTC) of Muntinlupa City, Branch
276 (Branch 276) dismissing Civil Case No. 11-077 for lack of jurisdiction.

The Facts

On August 4, 2011, petitioners Manuel Luis C. Gonzales4 and Francis Martin D. Gonzales
(petitioners) filed a Complaint5 for "Injunction with prayer for Issuance of Status Quo Order, Three
(3) and Twenty (20)-Day Temporary Restraining Orders, and Writ of Preliminary Injunction with
Damages" against respondents GJH Land, Inc. (formerly known as S.J. Land, Inc.), Chang Hwan
Jang, Sang Rak Kim, Mariechu N. Yap, and Atty. Roberto P. Mallari II6 (respondents) before the
RTC of Muntinlupa City seeking to enjoin the sale of S.J. Land, Inc.'s shares which they
purportedly bought from S.J. Global, Inc. on February 1, 2010. Essentially, petitioners alleged that
the subscriptions for the said shares were already paid by them in full in the books of S.J. Land,
Inc.,7 but were nonetheless offered for sale on July 29, 2011 to the corporation's stockholders,8
hence, their plea for injunction.

The case was docketed as Civil Case No. 11-077 and raffled to Branch 276, which is not a Special
Commercial Court. On August 9, 2011, said branch issued a temporary restraining order,9 and
later, in an Order10 dated August 24, 2011, granted the application for a writ of preliminary
injunction.

After filing their respective answers11 to the complaint, respondents filed a motion to dismiss12 on
the ground of lack of jurisdiction over the subject matter, pointing out that the case involves an
intra-corporate dispute and should, thus, be heard by the designated Special Commercial Court of
Muntinlupa City.13

The RTC Ruling

In an Order14 dated April 17, 2012, Branch 276 granted the motion to dismiss filed by respondents.
It found that the case involves an intra-corporate dispute that is within the original and exclusive
jurisdiction of the RTCs designated as Special Commercial Courts. It pointed out that the RTC of
Muntinlupa City, Branch 256 (Branch 256) was specifically designated by the Court as the Special
Commercial Court, hence, Branch 276 had no jurisdiction over the case and cannot lawfully
exercise jurisdiction on the matter, including the issuance of a Writ of Preliminary Injunction. 15
Accordingly, it dismissed the case.

Dissatisfied, petitioners filed a motion for reconsideration,16 arguing that they filed the case with
the Office of the Clerk of Court of the RTC of Muntinlupa City which assigned the same to Branch
276 by raffle.17 As the raffle was beyond their control, they should not be made to suffer the
consequences of the wrong assignment of the case, especially after paying the filing fees in the
amount of P235,825.00 that would be for naught if the dismissal is upheld.18 They further
maintained that the RTC has jurisdiction over intra-corporate disputes under Republic Act No.
(RA) 8799,19 but since the Court selected specific branches to hear and decide such suits, the case
must, at most, be transferred or raffled off to the proper branch.20
In an Order21 dated July 9, 2012, Branch 276 denied the motion for reconsideration, holding that
it has no authority or power to order the transfer of the case to the proper Special Commercial
Court, citing Calleja v. Panday22 (Calleja); hence, the present petition.

The Issue Before the Court

The essential issue for the Court's resolution is whether or not Branch 276 of the RTC of
Muntinlupa City erred in dismissing the case for lack of jurisdiction over the subject matter.

The Court's Ruling

The petition is meritorious.

At the outset, the Court finds Branch 276 to have correctly categorized Civil Case No. 11-077 as
a commercial case, more particularly, an intra-corporate dispute,23 considering that it relates to
petitioners' averred rights over the shares of stock offered for sale to other stockholders, having
paid the same in full. Applying the relationship test and the nature of the controversy test, the suit
between the parties is clearly rooted in the existence of an intra-corporate relationship and pertains
to the enforcement of their correlative rights and obligations under the Corporation Code and the
internal and intra-corporate regulatory rules of the corporation,24 hence, intra-corporate, which
should be heard by the designated Special Commercial Court as provided under A.M. No. 03-03-
03-SC25 dated June 17, 2003 in relation to Item 5.2, Section 5 of RA 8799.

The present controversy lies, however, in the procedure to be followed when a commercial case
- such as the instant intra-corporate dispute -has been properly filed in the official station of
the designated Special Commercial Court but is, however, later wrongly assigned by raffle
to a regular branch of that station.

As a basic premise, let it be emphasized that a court's acquisition of jurisdiction over a particular
case's subject matter is different from incidents pertaining to the exercise of its jurisdiction.
Jurisdiction over the subject matter of a case is conferred by law, whereas a court's exercise of
jurisdiction, unless provided by the law itself, is governed by the Rules of Court or by the orders
issued from time to time by the Court.26 In Lozada v. Bracewell,27 it was recently held that the
matter of whether the RTC resolves an issue in the exercise of its general jurisdiction or of
its limited jurisdiction as a special court is only a matter of procedure and has nothing to do
with the question of jurisdiction.

Pertinent to this case is RA 8799 which took effect on August 8, 2000. By virtue of said law,
jurisdiction over cases enumerated in Section 528 of Presidential Decree No. 902-A29 was
transferred from the Securities and Exchange Commission (SEC) to the RTCs, being courts of
general jurisdiction. Item 5.2, Section 5 of RA 8799 provides: chanRoblesv irtualLawlibrary

SEC. 5. Powers and Functionsof the Commission. - x x x

x x x x
5.2 The Commission's jurisdiction over all cases enumerated under Section 5 of Presidential
Decree No. 902-A is hereby transferred to the Courts of general jurisdiction or the
appropriate Regional Trial Court: Provided, that the Supreme Court in the exercise of its
authority may designate the Regional Trial Court branches that shall exercise jurisdiction
over the cases. The Commission shall retain jurisdiction over pending cases involving intra-
corporate disputes submitted for final resolution which should be resolved within one (1) year from
the enactment of this Code. The Commission shall retain jurisdiction over pending suspension of
payments/rehabilitation cases filed as of 30 June 2000 until finally disposed. (Emphasis supplied) cralawlawlibrary

The legal attribution of Regional Trial Courts as courts of general jurisdiction stems from
Section 19 (6), Chapter II of Batas Pambansa Bilang (BP) 129,30 known as "The Judiciary
Reorganization Act of 1980": chanRob lesvirtualLawlibrary

Section 19. Jurisdiction in civil cases.- Regional Trial Courts shall exercise exclusive original
jurisdiction: chanRoblesvirtualLawlibrary

x x x x

(6) In all cases not within the exclusive jurisdiction of any court, tribunal, person or body
exercising jurisdiction or any court, tribunal, person or body exercising judicial or quasi-judicial
functions;
cralawlawlibrary
x x x x

As enunciated in Durisol Philippines, Inc. v. CA:31 chanroblesvirtuallawlibrary

The regional trial court, formerly the court of first instance, is a court of general jurisdiction. All
cases, the jurisdiction over which is not specifically provided for by law to be within the
jurisdiction of any other court, fall under the jurisdiction of the regional trial court.32
cralawlawlibrary
ChanRoblesVirtualawlibrary

To clarify, the word "or" in Item 5.2, Section 5 of RA 8799 was intentionally used by the legislature
to particularize the fact that the phrase "the Courts of general jurisdiction" is equivalent to the
phrase "the appropriate Regional Trial Court." In other words, the jurisdiction of the SEC over the
cases enumerated under Section 5 of PD 902-A was transferred to the courts of general jurisdiction,
that is to say (or, otherwise known as), the proper Regional Trial Courts. This interpretation is
supported by San Miguel Corp. v. Municipal Council,33 wherein the Court held that: chanRoblesvirtualLawlibrary

[T]he word "or" may be used as the equivalent of "that is to say" and gives that which precedes it
the same significance as that which follows it. It is not always disjunctive and is sometimes
interpretative or expository of the preceding word.34 cralawlawlibrary

Further, as may be gleaned from the following excerpt of the Congressional deliberations: chanRobles virtualLawlibrary

Senator [Raul S.] Roco: x x x.

x x x x
x x x. The first major departure is as regards the Securities and Exchange Commission. The
Securities and Exchange Commission has been authorized under this proposal to reorganize itself.
As an administrative agency, we strengthened it and at the same time we take away the quasi-
judicial functions. The quasi-judicial functions are now given back to the courts of general
jurisdiction - the Regional Trial Court, except for two categories of cases.

In the case of corporate disputes, only those that are now submitted for final determination of the
SEC will remain with the SEC. So, all those cases, both memos of the plaintiff and the defendant,
that have been submitted for resolution will continue. At the same time, cases involving
rehabilitation, bankruptcy, suspension of payments and receiverships that were filed before June
30, 2000 will continue with the SEC. in other words, we are avoiding the possibility, upon approval
of this bill, of people filing cases with the SEC, in manner of speaking, to select their court.35

x x x x (Emphasis supplied) cralawlawlibrary

Therefore, one must be disabused of the notion that the transfer of jurisdiction was made only in
favor of particular RTC branches, and not the RTCs in general.

Consistent with the foregoing, history depicts that when the transfer of SEC cases to the RTCs was
first implemented, they were transmitted to the Executive Judges of the RTCs for raffle between
or among its different branches, unless a specific branch has been designated as a Special
Commercial Court, in which instance, the cases were transmitted to said branch.36 It was only
on November 21, 2000 that the Court designated certain RTC branches to try and decide said SEC
cases37 without, however, providing for the transfer of the cases already distributed to or filed with
the regular branches thereof. Thus, on January 23, 2001, the Court issued SC Administrative
Circular No. 08-200138 directing the transfer of said cases to the designated courts (commercial
SEC courts). Later, or on June 17, 2003, the Court issued A.M. No. 03-03-03-SC consolidating
the commercial SEC courts and the intellectual property courts39 in one RTC branch in a
particular locality, i.e., the Special Commercial Court, to streamline the court structure and to
promote expediency.40 Accordingly, the RTC branch so designated was mandated to try and
decide SEC cases, as well as those involving violations of intellectual property rights, which were,
thereupon, required to be filed in the Office of the Clerk of Court in the official station of the
designated Special Commercial Courts, to wit: chanRoblesvirtualLawlibrary

1. The Regional Courts previously designated as SEC Courts through the: (a) Resolutions of this
Court dated 21 November 2000, 4 July 2001, 12 November 2002, and 9 July 2002 all issued in
A.M. No. 00-11-03-SC; (b) Resolution dated 27 August 2001 in A.M. No. 01-5-298-RTC; and (c)
Resolution dated 8 July 2002 in A.M. No. 01-12-656-RTC are hereby DESIGNATED and shall
be CALLED as Special Commercial Courts to try and decide cases involving violations of
Intellectual Property Rights which fall within their jurisdiction and those cases formerly
cognizable by the Securities and Exchange Commission: chanRoblesv irtualLawlibrary

x x x x

4. The Special Commercial Courts shall have jurisdiction over cases arising within their respective
territorial jurisdiction with respect to the National Capital Judicial Region and within the respective
provinces with respect to the First to Twelfth Judicial Regions. Thus, cases shall be filed in the
Office of the Clerk of Court in the official station of the designated Special Commercial Court;41

x x x x (Underscoring supplied) cralawlawlibrary

It is important to mention that the Court's designation of Special Commercial Courts was made in
line with its constitutional authority to supervise the administration of all courts as provided under
Section 6, Article VIII of the 1987 Constitution: chanRoblesvirtualLawlibrary

Section 6. The Supreme Court shall have administrative supervision over all courts and the
personnel thereof. cralawlawlibrary

The objective behind the designation of such specialized courts is to promote expediency and
efficiency in the exercise of the RTCs' jurisdiction over the cases enumerated under Section 5
of PD 902-A. Such designation has nothing to do with the statutory conferment of jurisdiction to
all RTCs under RA 8799 since in the first place, the Court cannot enlarge, diminish, or dictate
when jurisdiction shall be removed, given that the power to define, prescribe, and apportion
jurisdiction is, as a general rule, a matter of legislative prerogative.42 Section 2, Article VIII
of the 1987 Constitution provides: chanRoblesv irtualLawlibrary

Section 2. The Congress shall have the power to define, prescribe, and apportion the jurisdiction
of the various courts but may not deprive the Supreme Court of its jurisdiction over cases
enumerated in Section 5 hereof.

x
cralawlawlibrary
x x x

Here, petitioners filed a commercial case, i.e., an intra-corporate dispute, with the Office of the
Clerk of Court in the RTC of Muntinlupa City, which is the official station of the designated
Special Commercial Court, in accordance with A.M. No. 03-03-03-SC. It is, therefore, from the
time of such filing that the RTC of Muntinlupa City acquired jurisdiction over the subject
matter or the nature of the action.43 Unfortunately, the commercial case was wrongly raffled
to a regular branch, e.g., Branch 276, instead of being assigned44to the sole Special
Commercial Court in the RTC of Muntinlupa City, which is Branch 256. This error may have
been caused by a reliance on the complaint's caption, i.e., "Civil Case for Injunction with prayer
for Status Quo Order, TRO and Damages,"45 which, however, contradicts and more importantly,
cannot prevail over its actual allegations that clearly make out an intra-corporate dispute: chanRobles virtualLawlibrary

16. To the surprise of MLCG and FMDG, however, in two identical letters both dated 13 May
2011, under the letterhead of GJH Land, Inc., Yap, now acting as its President, Jang and Kim
demanded payment of supposed unpaid subscriptions of MLCG and FMDG amounting to
P10,899,854.30 and P2,625,249.41, respectively.
16.1 Copies of the letters dated 13 May 2011 are attached hereto and made integral parts hereof as
Annexes "J" and "K", repectively.
17. On 29 July 2011, MLCG and FMDG received an Offer Letter addressed to stockholders of
GJH Land, Inc. from Yap informing all stockholders that GJH Land, Inc. is now offering for sale
the unpaid shares of stock of MLCG and FMDG. The same letter states that the offers to purchase
these shares will be opened on 10 August 2011 with payments to be arranged by deposit to the
depository bank of GJH Land, Inc.
17.1 A copy of the undated Offer Letter is attached hereto and made and made an integral part
hereof as Annex "L".
18. The letter of GJH Land, Inc. through Yap, is totally without legal and factual basis because as
evidenced by the Deeds of Assignment signed and certified by Yap herself, all the S.J. Land, Inc.
shares acquired by MLCG and FMDG have been fully paid in the books of S.J. Land, Inc.

19. With the impending sale of the alleged unpaid subscriptions on 10 August 2011, there is now
a clear danger that MLCG and FMDG would be deprived of these shares without legal and
factual basis.

20. Furthermore, if they are deprived of these shares through the scheduled sale, both MLCG and
FMDG would suffer grave and irreparable damage incapable of pecuniary estimation.

21. For this reason, plaintiffs now come to the Honorable Court for injunctive relief so that after
trial on the merits, a permanent injunction should be issued against the defendants preventing them
from selling the shares of the plaintiffs, there being no basis for such sale.46
cralawlawlibrary

According to jurisprudence, "it is not the caption but the allegations in the complaint or other
initiatory pleading which give meaning to the pleading and on the basis of which such pleading
may be legally characterized."47 However, so as to avert any future confusion, the Court requires
henceforth, that all initiatory pleadings state the action's nature both in its caption and the body,
which parameters are defined in the dispositive portion of this Decision.

Going back to the case at bar, the Court nonetheless deems that the erroneous raffling to a regular
branch instead of to a Special Commercial Court is only a matter of procedure - that is, an incident
related to the exercise of jurisdiction - and, thus, should not negate the jurisdiction which the RTC
of Muntinlupa City had already acquired. In such a scenario, the proper course of action was not
for the commercial case to be dismissed; instead, Branch 276 should have first referred the case
to the Executive Judge for re-docketing as a commercial case; thereafter, the Executive
Judge should then assign said case to the only designated Special Commercial Court in the
station, i.e., Branch 256.

Note that the procedure would be different where the RTC acquiring jurisdiction over the case has
multiple special commercial court branches; in such a scenario, the Executive Judge, after re-
docketing the same as a commercial case, should proceed to order its re-raffling among the said
special branches.

Meanwhile, if the RTC acquiring jurisdiction has no branch designated as a Special

Commercial Court, then it should refer the case to the nearest RTC with a designated Special
Commercial Court branch within the judicial region.48 Upon referral, the RTC to which the case
was referred to should re-docket the case as a commercial case, and then: (a) if the said RTC has
only one branch designated as a Special Commercial Court, assign the case to the sole special
branch; or (b) if the said RTC has multiple branches designated as Special Commercial Courts,
raffle off the case among those special branches.

In all the above-mentioned scenarios, any difference regarding the applicable docket fees should
be duly accounted for. On the other hand, all docket fees already paid shall be duly credited, and
any excess, refunded.

At this juncture, the Court finds it fitting to clarify that the RTC mistakenly relied on the Calleja
case to support its ruling. In Calleja, an intra-corporate dispute49 among officers of a private
corporation with principal address at Goa, Camarines Sur, was filed with the RTC of San Jose,
Camarines Sur, Branch 58 instead of the RTC of Naga City, which is the official station of the
designated Special Commercial Court for Camarines Sur. Consequently, the Court set aside the
RTC of San Jose, Camarines Sur's order to transfer the case to the RTC of Naga City and dismissed
the complaint considering that it was filed before a court which, having no internal branch
designated as a Special Commercial Court, had no jurisdiction over those kinds of actions, i.e.,
intra-corporate disputes. Calleja involved two different RTCs, i.e., the RTC of San Jose,
Camarines Sur and the RTC of Naga City, whereas the instant case only involves one RTC, i.e.,
the RTC of Muntinlupa City, albeit involving two different branches of the same court, i.e.,
Branches 256 and 276. Hence, owing to the variance in the facts attending, it was then improper
for the RTC to rely on the Calleja ruling.

Besides, the Court observes that the fine line that distinguishes subject matter jurisdiction and
exercise of jurisdiction had been clearly blurred in Calleja. Harkening back to the statute that had
conferred subject matter jurisdiction, two things are apparently clear: (a) that the SEC's subject
matter jurisdiction over intra-corporate cases under Section 5 of Presidential Decree No. 902-A
was transferred to the Courts of general jurisdiction, i.e., the appropriate Regional Trial Courts;
and (b) the designated branches of the Regional Trial Court, as per the rules promulgated by the
Supreme Court, shall exercise jurisdiction over such cases. Item 5.2, Section 5 of RA 8799
provides:chanRoblesv irtualLawlibrary

SEC. 5. Powers and Functions of the Commission. - x x x

x x x x

5.2 The Commission's jurisdiction over all cases enumerated under Section 5 of Presidential
Decree No. 902-A is hereby transferred to the Courts of general jurisdiction or the
appropriate Regional Trial Court: Provided, that the Supreme Court in the exercise of its
authority may designate the Regional Trial Court branches that shall exercise jurisdiction
over the cases, x x x. cralawlawlibrary

In contrast, the appropriate jurisprudential reference to this case would be Tan v. Bausch & Lomb,
Inc.,50 which involves a criminal complaint for violation of intellectual property rights filed before
the RTC of Cebu City but was raffled to a regular branch thereof (Branch 21), and not to a Special
Commercial Court. As it turned out, the regular branch subsequently denied the private
complainant's motion to transfer the case to the designated special court of the same RTC, on the
ground of lack of jurisdiction. The CA reversed the regular branch and, consequently, ordered the
transfer of the case to the designated special court at that time (Branch 9). The Court, affirming
the CA, declared that the RTC had acquired jurisdiction over the subject matter. In view, however,
of the designation of another court as the Special Commercial Court in the interim (Branch 11 of
the same Cebu City RTC), the Court accordingly ordered the transfer of the case and the transmittal
of the records to said Special Commercial Court instead.51Similarly, the transfer of the present
intra-corporate dispute from Branch 276 to Branch 256 of the same RTC of Muntinlupa
City, subject to the parameters above-discussed is proper and will further the purposes
stated in A.M. No. 03-03-03-SC of attaining a speedy and efficient administration of justice.

For further guidance, the Court finds it apt to point out that the same principles apply to the
inverse situation of ordinary civil cases filed before the proper RTCs but wrongly raffled to
its branches designated as Special Commercial Courts. In such a scenario, the ordinary civil
case should then be referred to the Executive Judge for re-docketing as an ordinary civil
case; thereafter, the Executive Judge should then order the raffling of the case to all branches
of the same RTC, subject to limitations under existing internal rules, and the payment of the
correct docket fees in case of any difference. Unlike the limited assignment/raffling of a
commercial case only to branches designated as Special Commercial Courts in the scenarios stated
above, the re-raffling of an ordinary civil case in this instance to all courts is permissible due to
the fact that a particular branch which has been designated as a Special Commercial Court does
not shed the RTC's general jurisdiction over ordinary civil cases under the imprimatur of statutory
law, i.e., Batas Pambansa Bilang (BP) 129.52 To restate, the designation of Special Commercial
Courts was merely intended as a procedural tool to expedite the resolution of commercial cases in
line with the court's exercise of jurisdiction. This designation was not made by statute but only
by an internal Supreme Court rule under its authority to promulgate rules governing matters of
procedure and its constitutional mandate to supervise the administration of all courts and the
personnel thereof.53 Certainly, an internal rule promulgated by the Court cannot go beyond the
commanding statute. But as a more fundamental reason, the designation of Special Commercial
Courts is, to stress, merely an incident related to the court's exercise of jurisdiction, which, as first
discussed, is distinct from the concept of jurisdiction over the subject matter. The RTC's general
jurisdiction over ordinary civil cases is therefore not abdicated by an internal rule streamlining
court procedure.

In fine, Branch 276's dismissal of Civil Case No. 11-077 is set aside and the transfer of said case
to Branch 256, the designated Special Commercial Court of the same RTC of Muntinlupa City,
under the parameters above-explained, is hereby ordered.

WHEREFORE, the petition is GRANTED. The Orders dated April 17, 2012 and July 9, 2012 of
the Regional Trial Court (RTC) of Muntinlupa City, Branch 276 in Civil Case No. 11-077 are
hereby REVERSED and SET ASIDE. Civil Case No. 11-077 is REFERRED to the Executive
Judge of the RTC of Muntinlupa City for re-docketing as a commercial case. Thereafter, the
Executive Judge shall ASSIGN said case to Branch 256, the sole designated Special Commercial
Court in the RTC of Muntinlupa City, which is ORDERED to resolve the case with reasonable
dispatch. In this regard, the Clerk of Court of said RTC shall DETERMINE the appropriate
amount of docket fees and, in so doing, ORDER the payment of any difference or, on the other
hand, refund any excess.
Furthermore, the Court hereby RESOLVES that henceforth, the following guidelines shall be
observed:
1. If a commercial case filed before the proper RTC is wrongly raffled to its regular branch, the
proper courses of action are as follows:
1.1 If the RTC has only one branch designated as a Special Commercial Court, then the case shall
be referred to the Executive Judge for re-docketing as a commercial case, and thereafter, assigned
to the sole special branch;

1.2 If the RTC has multiple branches designated as Special Commercial Courts, then the case shall
be referred to the Executive Judge for re-docketing as a commercial case, and thereafter, raffled
off among those special branches; and

1.3 If the RTC has no internal branch designated as a Special Commercial Court, then the case
shall be referred to the nearest RTC with a designated Special Commercial Court branch within
the judicial region. Upon referral, the RTC to which the case was referred to should re- docket the
case as a commercial case, and then: (a) if the said RTC has only one branch designated as a
Special Commercial Court, assign the case to the sole special branch; or (b) if the said RTC has
multiple branches designated as Special Commercial Courts, raffle off the case among those
special branches.
2. If an ordinary civil case filed before the proper RTC is wrongly raffled to its branch designated
as a Special Commercial Court, then the case shall be referred to the Executive Judge for re-
docketing as an ordinary civil case. Thereafter, it shall be raffled off to all courts of the same RTC
(including its designated special branches which, by statute, are equally capable of exercising
general jurisdiction same as regular branches), as provided for under existing rules.

3. All transfer/raffle of cases is subject to the payment of the appropriate docket fees in case of any
difference. On the other hand, all docket fees already paid shall be duly credited, and any excess,
refunded.

4. Finally, to avert any future confusion, the Court requires that all initiatory pleadings state the
action's nature both in its caption and body. Otherwise, the initiatory pleading may, upon motion
or by order of the court motu proprio, be dismissed without prejudice to its re-filing after due
rectification. This last procedural rule is prospective in application.

5. All existing rules inconsistent with the foregoing are deemed superseded. cralawlawlibrary

SO ORDERED.

G.R. No. 215764 July 6, 2015

RICHARD K. TOM, Petitioner,

vs.
SAMUEL N. RODRIGUEZ, Respondent.
DECISION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari1 are the Resolutions of the Court of Appeals (CA)
dated May 16, 20142 and November 5, 2014,3 in CA-G.R. SP No. 06075, which denied the prayer
for issuance of a temporary restraining order (TRO) and/or writ of preliminary injunction sought
for by petitioner Richard K. Tom (Tom) in his petition for certiorari filed before the CA.

The Facts

Golden Dragon International Terminals, Inc. (GDITI) is the exclusive Shore Reception Facility
(SRF) Service Provider of the Philippine Ports Authority (PPA) tasked to collect, treat, and dispose
of all ship-generated oil wastes in all bases and private ports under the PPA’s jurisdiction.4

Records show that sometime in December 2008, Fidel Cu (Cu) sold viaDeed of Conditional Sale
his 17,237 shares of stock in GDITI to Virgilio S. Ramos (Ramos) and Cirilo C. Basalo, Jr.
(Basalo).5 When the latter failed to pay the purchase price, Cu sold 15,233 of the same shares
through a Deed of Sale in favor of Edgar D. Lim (Lim), Eddie C. Ong (Ong), and Arnold Gunnacao
(Gunnacao), who also did not pay the consideration therefor.6

On September 11, 2009, the following were elected as officers of GDITI: Lim as President and
Chairman of the Board, Basalo as Vice President for Visayas and Mindanao, Ong as Treasurer and
Vice President for Luzon, and Gunnacao as Director, among others.7 However, a group8 led by
Ramos composed of individuals who were not elected as officers of GDITI – which included Tom
– forcibly took over the GDITI offices and performed the functions of its officers. This prompted
GDITI, through its duly-elected Chairman and President, Lim, to file an action for injunction and
damages against Ramos, et al., before the Regional Trial Court of Manila, Branch 46 (RTC-
Manila), docketed as Civil Case No. 09-122149 (injunction case).9 Pending the injunction case,
Cu resold his shares of stock in GDITI to Basalo for a consideration of 60,000,000.00, as evidenced
by an Agreement10 dated April 30, 2010 (April 30,2010 Agreement). Under the said agreement,
Cu sold not only his remaining 1,997 shares of stock in GDITI, but also the shares of stock subject
of the previously-executed Deed of Conditional Sale in favor of Ramos, as well as the Deed of
Sale in favor of Lim, Ong, and Gunnacao, where the respective considerations were not paid.11
As such, Cu intervened in the injunction case claiming that, as an unpaid seller, he was still the
legal owner of the shares of stock subject of the previous contracts he entered into with Ramos,
Lim, Ong, and Gunnacao.12 In an Order13 dated October 11, 2010, the RTC-Manila granted Cu’s
application for Preliminary Mandatory and Preliminary Prohibitory Injunctions, and thereafter
issued corresponding writs therefor on October 20, 2010,14 which, inter alia, directed the original
parties (plaintiff Lim and those acting under his authority, and defendants Ramos, et al.) to cease
and desist from performing or causing the performance of any and all acts of management and
control over GDITI, and to give Cu, as intervenor, the authority to put in order GDITI’s business
operations.15

In view of his successful intervention in the injunction case, Cu executed a Special Power of
Attorney16 (SPA) dated October 18, 2010 in favor of Cezar O. Mancao II (Mancao) constituting
the latter as his duly authorized representative to exercise the powers granted to him in the October
11, 2010 Order, and to perform all acts of management and control over GDITI. Thereafter, Cu
and Basalo entered into an Addendum to Agreement17 (Addendum) setting forth the terms of
payment of the sale of the shares of stock subject of the April 30, 2010 Agreement.

However, in a letter18 dated September 5, 2011 addressed to Mancao, Basalo, and the Board of
Directors of GDITI filed before the RTC-Manila, Cu expressly revoked the authority that he had
previously granted to Mancao and Basalo under the SPA and other related documents, effectively
reinstating the power to control and manage the affairs of GDITI unto himself.19 Thus, Mancao
and Basalo filed the present Complaint for Specific Performance with Prayer for the Issuance of a
Temporary Restraining Order (TRO) and a Writ of Preliminary Injunction20 against Cu, Tom, and
several John and Jane Does before the Regional Trial Court of Nabunturan, Compostela Valley,
Branch 3 (RTC-Nabunturan), docketed as Civil Case No. 1043 (specific performance case). The
complaint impleaded Tom on the allegation that Cu had authorized him to exercise control and
management over GDITI and, on the strength thereof, had made representations before the PPA
that enabled him to enter the ports in a certain region, to the exclusion of the other agents of
GDITI.21 Thus, the complaint prayed that: (a) a TRO be issued ex parte enjoining Cu, Tom and
all persons acting for and under Cu’s authority from exercising control and management over
GDITI and/or interfering with Mancao and Basalo’s affairs; (b) after hearing, a writ of preliminary
injunction be issued; and (c) judgment be rendered ordering Cu to faithfully comply with his
obligations under the agreements he executed with them.22

Thereafter, herein respondent Samuel N. Rodriguez (Rodriguez) filed a Complaint-in-

Intervention,23 alleging that in a Memorandum of Agreement24 (MOA) dated May 2, 2012,
Basalo authorized him to take over, manage, and control the operations of GDITI in the Luzon
area, and, in such regard, effectively revoked whatever powers Basalo had previously given to
Mancao. In the said MOA, Basalo and Rodriguez agreed to divide between them the monthly net
profit of GDITI equally. However, as Basalo purportedly refused to honor the terms and conditions
of the MOA despite demand,25 Rodriguez sought to intervene in the specific performance case to
compel Basalo to faithfully comply with his undertaking. Likewise, Rodriquez prayed for the
issuance of a writ of preliminary injunction directing Basalo, his agents, deputies, and successors,
and all other persons acting for and on his behalf, to honor his obligations under the MOA by: (a)
giving the management and control of GDITI in the Luzon area to Rodriguez; (b) allocating the
power to administer and manage the Visayas and Mindanao regions of GDITI to Rodriguez in the
concept of a partner; (c) granting to Rodriguez the right to provide the manpower services for the
operations of GDITI; and (d) giving to Rodriguez his share in the net proceeds of GDITI. Finally,
he prayed that after trial, such injunction be made permanent.26

Basalo failed to present any evidence to contradict Rodriguez’s allegations, despite having been
given the opportunity to do so.27

The RTC-Nabunturan Ruling

In an Order28 dated November 13, 2013, the RTC-Nabunturan granted Rodriguez’s application
for the issuance of a writ of preliminary mandatory injunction, conditioned on the filing of a bond
in the amount of 1,000,000.00. It found credence in the MOA executed between him and Basalo
which remained uncontroverted.29 Accordingly, the RTC-Nabunturan ordered Basalo to: (a) place
the management and control of GDITI in Luzon to Rodriguez as representative of Basalo;
(b)allocate the power to administer and manage the Visayas and Mindanao regions of GDITI to
Rodriguez in the concept of a partner of Basalo; (c) allow Rodriguez to provide the manpower
services for the operations of GDITI; and (d) give to Rodriguez his share in the monthly net
proceeds from GDITI’s operations, subject to the rules of the corporation on fees relative to the
management contracts.30

The original parties, plaintiffs Basalo and Mancao, and defendant Tom, separately filed motions
for reconsideration thereof, which were denied in an Order31 dated December 11, 2013.
Aggrieved, Tom elevated the matter before the CA via petition for certiorari with prayer for the
issuance of a TRO and/or writ of preliminary injunction,32 docketed as CA-G.R. SP No. 06075,
seeking to nullify the November 13, 2013 and December 11, 2013 Orders of the RTC-Nabunturan
in the specific performance case.33

The CA Ruling

In a Resolution34 dated May 16, 2014, the CA, without touching upon the merits of the case,
denied Tom’s prayer for the issuance of a TRO and/or writ of preliminary injunction, finding no
extreme urgency on the matter raised by Tom, and that no clear and irreparable injury would be
suffered if the injunctive writ was not granted.35

Dissatisfied, Tom filed a motion for reconsideration,36 but was denied in a Resolution37 dated
November 5, 2014; hence, this petition.

The Issue Before the Court

The issue for the Court’s resolution is whether or not the CA committed grave abuse of discretion
in denying Tom’s prayer for the issuance of a TRO and/or writ of preliminary injunction.

The Court's Ruling

The petition is meritorious.

At the outset, it is observed that Tom has erroneously invoked the Court’s appellate jurisdiction
under Rule 45 of the Rules of Court in assailing the CA’s Resolutions denying his prayer for
injunctive relief. Considering that the assailed CA Resolutions merely disposed of Tom’s prayer
for the issuance of a TRO and/or writ of preliminary injunction – hence, interlocutory orders – the
proper remedy should have been to file a petition for certiorari, not a petition for review,38 before
this Court. On this score, therefore, the instant petition would have been dismissible outright.

However, in accordance with the liberal spirit pervading the Rules of Court and in the interest of
substantial justice, as justified by the merits of the petition, which was filed39 within the 60-day
reglementary period under Rule 65 of the Rules of Court, and alleged that the CA "departed from
the accepted and usual course of judicial proceedings,"40 the Court deems it proper to treat Tom’s
petition for review on certiorari as a petition for certiorari41 and, thus, proceeds to determine
whether the CA gravely abused its discretion in denying Tom’s prayer for the issuance of a TRO
and/or writ of preliminary injunction.

As traditionally described, grave abuse of discretion refers to capricious or whimsical exercise of

judgment as is equivalent to lack of jurisdiction.1âwphi1 In Yu v. Reyes-Carpio,42 the Court
explained that:

The term "grave abuse of discretion" has a specific meaning. An act of a court or tribunal can only
be considered as with grave abuse of discretion when such act is done in a "capricious or whimsical
exercise of judgment as is equivalent to lack of jurisdiction." The abuse of discretion must be so
patent and gross as to amount to an "evasion of a positive duty or to a virtual refusal to perform a
duty enjoined by law, or to act at all in contemplation of law, as where the power is exercised in
an arbitrary and despotic manner by reason of passion and hostility." Furthermore, the use of a
petition for certiorari is restricted only to "truly extraordinary cases wherein the act of the lower
court or quasi-judicial body is wholly void."43

As the existence of grave abuse of discretion in this case relates to the propriety of issuing a TRO
and/or writ of preliminary injunction, which, by nature, are injunctive reliefs and preservative
remedies for the protection of substantive rights and interests, it is important to lay down the
issuance’s requisites, namely: (1) there exists a clear and unmistakable right to be protected; (2)
this right is directly threatened by an act sought to be enjoined; (3) the invasion of the right is
material and substantial; and (4) there is an urgent and paramount necessity for the writ to prevent
serious and irreparable damage.44 Case law holds that the issuance of an injunctive writ rests upon
the sound discretion of the court that took cognizance of the case; as such, the exercise of judicial
discretion by a court in injunctive matters must not be interfered with, except when there is grave
abuse of discretion.45

Keeping the foregoing in mind, the Court finds that the CA committed grave abuse of discretion
amounting to lack or excess of jurisdiction in denying Tom’s prayer for the issuance ofa TRO
and/or writ of preliminary injunction. The issuance of an injunctive writ is warranted to enjoin the
RTC-Nabunturan from implementing its November 13, 2013 and December 11, 2013 Orders in
the specific performance case placing the management and control of GDITI to Rodriguez, among
other directives. This pronouncement follows the well-entrenched rule that a corporation exercises
its powers through its board of directors and/or its duly authorized officers and agents, except in
instances where the Corporation Code requires stockholders’ approval for certain specific acts.46
As statutorily provided for in Section 23 of Batas Pambansa Bilang 68,47 otherwise known as
"The Corporation Code of the Philippines":

SEC. 23. The board of directors or trustees. – Unless otherwise provided in this Code, the corporate
powers of all corporations formed under this Code shall be exercised, all business conducted and
all property of such corporations controlled and held by the board of directors or trustees to be
elected from among the holders of stocks, or where there is no stock, from among the members of
the corporation, who shall hold office for one (1) year until their successors are elected and
qualified.
Every director must own at least one (1) share of the capital stock of the corporation of which he
is a director, which share shall stand in his name on the books of the corporation. Any director
who ceases to be the owner of at least one (1) share of the capital stock of the corporation of which
he is a director shall thereby cease to be a director. Trustees of non-stock corporations must be
members thereof. A majority of the directors or trustees of all corporations organized under this
Code must be residents of the Philippines. (Emphasis and underscoring supplied) Accordingly, it
cannot be doubted that the management and control of GDITI, being a stock corporation, are vested
in its duly elected Board of Directors, the body that: (1) exercises all powers provided for under
the Corporation Code; (2) conducts all business of the corporation; and (3) controls and holds all
property of the corporation. Its members have been characterized as trustees or directors clothed
with a fiduciary character.48

Thus, by denying Tom's prayer for the issuance of a TRO and/or writ of preliminary injunction,
the CA effectively affirmed the RTC's Order placing the management and control of GDITI to
Rodriguez, a mere intervenor, on the basis of a MOA between the latter and Basalo, in violation
of the foregoing provision of the Corporation Code. In so doing, the CA committed grave abuse
of discretion amounting to lack or excess of jurisdiction, which is correctible by certiorari.

As a final point, it is apt to clarify that Tom has legal standing to seek the issuance of an injunctive
writ, considering that he is the original party-defendant in the specific performance case pending
before the RTC-Nabunturan from which this petition arose, and in which Rodriguez merely
intervened. It likewise appears from the records49 that pending these proceedings, Tom has been
elected as a member of the current Board of Directors of GDITI, hence, the injunctive writ must
issue in line with the above-disquisition, without prejudice to the resolution on the merits of the
specific performance case pending before the RTC-Nabunturan of which the the instant petition is
but a mere incident.

WHEREFORE, the petition is GRANTED. The Resolutions dated May 16, 2014 and November
5, 2014 of the Court of Appeals in CA-G.R. SP No. 06075 are hereby NULLIFIED and SET
ASIDE. Accordingly, let a Writ of Preliminary Injunction be ISSUED against respondent Samuel
N. Rodriguez, his agents, and all persons acting under his authority to refrain and desist from
further exercising any powers of management and control over Golden Dragon International
Terminals, Inc.

SO ORDERED.

G.R. No. 214866

APEX BANCRIGHTS HOLDINGS, INC., LEAD BANCFUND HOLDINGS, INC., ASIA

WIDE REFRESHMENTS CORPORATION, MEDCO ASIA INVESTMENT
CORPORATION, ZEST-O CORPORATION, HARMONY BANCSHARES HOLDINGS,
INC., EXCALIBUR HOLDINGS, INC., and ALFREDO M. YAO, Petitioners
vs.
BANGKO SENTRAL NG PILIPINAS DEPOSIT CORPORATION, and PHILIPPINE
INSURANCE, Respondents
DECISION

PERLAS-BERNABE, J.:

Before the Court is a petition for review on certiorari 1 filed by petitioners Apex Bancrights
Holdings, Inc., Lead Bancfund Holdings, Inc, Asia Wide Refreshments Corporation, Medco Asia
Investment Corporation, Zest-O Corporation, Harmony Bancshares Holdings, Inc., Excalibur
Holdings, Inc., and Alfredo M. Yao (petitioners) assailing the Decision2 dated January 21, 2014
and the Resolution3 dated October 10, 2014 of the Court of Appeals in CA-G.R. SP No. 129674,
which affirmed Resolution No. 571 dated April 4, 2013 of the Monetary Board of respondent
Bangko Sentral ng Pilipinas (BSP) ordering the liquidation of the Export and Industry Bank (EIB).

The Facts

Sometime in July 2001, EIB entered into a three-way merger with Urban Bank, Inc. (UBI) and
Urbancorp Investments, Inc. (UII) in an attempt to rehabilitate UBI which was then under
receivership.4 In September 2001, following the said merger, EIB itself encountered financial
difficulties which prompted respondent the Philippine Deposit Insurance Corporation (PDIC) to
extend financial assistance to it. However, EIB still failed to overcome its financial problems,
thereby causing PDIC to release in May 2005 additional financial assistance to it, conditioned
upon the infusion by EIB stockholders of additional capital whenever EIB' s adjusted Risk Based
Capital Adequacy Ratio falls below 12.5%. Despite this, EIB failed to comply with the BSP's
capital requirements, causing EIB's stockholders to commence the process of selling the bank.5

Initially, Banco de Oro (BDO) expressed interest in acquiring EIB. However, certain issues
derailed the acquisition, including BDO's unwillingness to assume certain liabilities of EIB,
particularly the claim of the Pacific Rehouse Group against it. In the end, BDO's acquisition of
EIB did not proceed and the latter's financial condition worsened. Thus, in a letter6 dated April
26, 2012, EIB 's president and chairman voluntarily turned-over the full control of EIB to BSP,
and informed the latter that the former will declare a bank holiday on April 27, 2012.7

On April 26, 2012, the BSP, through the Monetary Board, issued Resolution No. 6868 prohibiting
EIB from doing business in the Philippines and placing it under the receivership of PDIC, in
accordance with Section 30 of Republic Act No. (RA) 7653, otherwise known as "The New Central
Bank Act."9 Accordingly, PDIC took over EIB.10

In due course, PDIC submitted its initial receivership report to the Monetary Board which
contained its finding that EIB can be rehabilitated or permitted to resume business; provided, that
a bidding for its rehabilitation would be conducted, and that the following conditions would be
met: (a) there are qualified interested banks that will comply with the parameters for rehabilitation
of a closed bank, capital strengthening, liquidity, sustainability and viability of operations, and
strengthening of bank governance; and (b) all parties (including creditors and stockholders) agree
to the rehabilitation and the revised payment terms and conditions of outstanding liabilities.11
Accordingly, the Monetary Board issued Resolution No. 1317 on August 9, 2012 noting PDIC's
initial report, and its request to extend the period within which to submit the final determination
of whether or not EIB can be rehabilitated. Pursuant to the rehabilitation efforts, a public bidding
was scheduled by PDIC on October 18, 2012, but the same failed as no bid was submitted. A re-
bidding was then set on March 20, 2013 which also did not materialize as no bids were
submitted.12

On April 1, 2013, PDIC informed BSP that EIB can hardly be rehabilitated.13 Based on PDIC's
report that EIB was insolvent, the Monetary Board passed Resolution No. 571 on April 4, 2013
directing PDIC to proceed with the liquidation of EIB.14

On April 29, 2013, petitioners, who are stockholders representing the majority stock of EIB,15
filed a petition for certiorari 16 before the CA challenging Resolution No. 571. In essence,
petitioners blame PDIC for the failure to rehabilitate EIB, contending that PDIC: (a) imposed
unreasonable and oppressive conditions which delayed or frustrated the transaction between BDO
and EIB; (b) frustrated EIB's efforts to increase its liquidity when PDIC disapproved EIB's
proposal to sell its MRT bonds to a private third party and, instead, required EIB to sell the same
to government entities; (c) imposed impossible and unnecessary bidding requirements; and (d)
delayed the public bidding which dampened investors' interest.17

In defense, PDIC countered18 that petitioners were already estopped from assailing the placement
of EIB under receivership and its eventual liquidation since they had already surrendered full
control of the bank to the BSP as early as April 26, 2012.19 For its part, BSP maintained20 that it
had ample factual and legal bases to order EIB's liquidation.21

The CA Ruling

In a Decision22 dated January 21, 2014, the CA dismissed the petition for lack of merit. It ruled
that the Monetary Board did not gravely abuse its discretion in ordering the liquidation of EIB
pursuant to the PDIC's findings that the rehabilitation of the bank is no longer feasible. In this
regard, the CA held that there is nothing in Section 30 of RA 7653 that requires the Monetary
Board to make its own independent factual determination on the bank's viability before ordering
its liquidation. According to the CA, the law only provides that the Monetary Board "shall notify
in writing the board of directors of its findings and direct the receiver to proceed with the
liquidation of the institution,"23 which it did in this case.

Undaunted, petitioners moved for reconsideration24 which was, however, denied by the CA in its
Resolution25 dated October 10, 2014; hence, this petition.

The Issue Before the Court

The sole issue before the Court is whether or not the CA correctly ruled that the Monetary Board
did not gravely abuse its discretion in issuing Resolution No. 571 which directed the PDIC to
proceed with the liquidation of EIB.

The Court's Ruling

The petition is without merit. Section 30 of RA 7653 provides for the proceedings in the
receivership and liquidation of banks and quasi-banks, the pertinent portions of which read:
Section 30. Proceedings in Receivership and Liquidation. - Whenever, upon report of the head of
the supervising or examining department, the Monetary Board finds that a bank or quasi-bank:

(a) is unable to pay its liabilities as they become due in the ordinary course of business:
Provided, That this shall not include inability to pay caused by extraordinary demands
induced by financial panic in the banking community;

(b) has insufficient realizable assets, as determined by the Bangko Sentral, to meet its
liabilities; or

(c) cannot continue in business without involving probable losses to its depositors or
creditors; or

(d) has willfully violated a cease and desist order under Section 37 that has become final,
involving acts or transactions which amount to fraud or a dissipation of the assets of the
institution; in which cases, the Monetary Board may summarily and without need for prior
hearing forbid the institution from doing business in the Philippines and designate the
Philippine Deposit Insurance Corporation as receiver of the banking institution.

xxxx

The receiver shall immediately gather and take charge of all the assets and liabilities of the
institution, administer the same for the benefit of its creditors, and exercise the general powers of
a receiver under the Revised Rules of Court x x x[.]

If the receiver determines that the institution cannot be rehabilitated or permitted to resume
business in accordance with the next preceding paragraph, the Monetary Board shall notify in
writing the board of directors of its findings and direct the receiver to proceed with the liquidation
of the institution. The receiver shall:

xxxx

The actions of the Monetary Board taken under this section or under Section 29 of this Act shall
be final and executory, and may not be restrained or set aside by the court except on petition for
certiorari on the ground that the action taken was in excess of jurisdiction or with such grave abuse
of discretion as to amount to lack or excess of jurisdiction. The petition for certiorari may only be
filed by the stockholders of record representing the majority of the capital stock within ten (10)
days from receipt by the board of directors of the institution of the order directing receivership,
liquidation or conservatorship.

The designation of a conservator under Section 29 of this Act or the appointment of a receiver
under this section shall be vested exclusively with the Monetary Board.1âwphi1 Furthermore, the
designation of a conservator is not a precondition to the designation of a receiver. (Emphases and
underscoring supplied)
It is settled that "[t]he power and authority of the Monetary Board to close banks and liquidate
them thereafter when public interest so requires is an exercise of the police power of the State.
Police power, however, is subject to judicial inquiry. It may not be exercised arbitrarily or
unreasonably and could be set aside if it is either capricious, discriminatory, whimsical, arbitrary,
unjust, or is tantamount to a denial of due process and equal protection clauses of the
Constitution."26 Otherwise stated and as culled from the above provision, the actions of the
Monetary Board shall be final and executory and may not be restrained or set aside by the court
except on petition for certiorari on the ground that the action taken was in excess of jurisdiction
or with such grave abuse of discretion as to amount to lack or excess of jurisdiction. "There is
grave abuse of discretion when there is an evasion of a positive duty or a virtual refusal to perform
a duty enjoined by law or to act in contemplation of law as when the judgment rendered is not
based on law and evidence but on caprice, whim and despotism."27

In line with the foregoing considerations, the Court agrees with the CA that the Monetary Board
did not gravely abuse its discretion in ordering the liquidation of EIB through its Resolution No.
571.

To recount, after the Monetary Board issued Resolution No. 686 which placed EIB under the
receivership of PDIC, the latter submitted its initial findings to the Monetary Board, stating that
EIB can be rehabilitated or permitted to resume business; provided, that a bidding for its
rehabilitation would be conducted, and that the following conditions would be met: (a) there are
qualified interested banks that will comply with the parameters for rehabilitation of a closed bank,
capital strengthening, liquidity, sustainability and viability of operations, and strengthening of
bank governance; and (b) all parties (including creditors and stockholders) agree to the
rehabilitation and the revised payment terms and conditions of outstanding liabilities.28 However,
the foregoing conditions for EIB 's rehabilitation "were not met because the bidding and re-bidding
for the bank's rehabilitation were aborted since none of the pre-qualified Strategic Third Party
Investors (STPI) submitted a letter of interest to participate in the bidding,"29 thereby resulting in
the PDIC's finding that EIB is already insolvent and must already be liquidated - a finding which
eventually resulted in the Monetary Board's issuance of Resolution No. 571.

In an attempt to forestall EIB's liquidation, petitioners insist that the Monetary Board must first
make its own independent finding that the bank could no longer be rehabilitated - instead of merely
relying on the findings of the PDIC - before ordering the liquidation of a bank.30

Such position is untenable.

As correctly held by the CA, nothing in Section 30 of RA 7653 requires the BSP, through the
Monetary Board, to make an· independent determination of whether a bank may still be
rehabilitated or not. As expressly stated in the afore-cited provision, once the receiver determines
that rehabilitation is no longer feasible, the Monetary Board is simply obligated to: (a) notify in
writing the bank's board of directors of the same; and (b) direct the PDIC to proceed with
liquidation, viz.:

If the receiver determines that the institution cannot be rehabilitated or permitted to resume
business in accordance with the next preceding paragraph, the Monetary Board shall notify in
writing the board of directors of its findings and direct the receiver to proceed with the liquidation
of the institution. x x x.

x x x x31

Suffice it to say that if the law had indeed intended that the Monetary Board make a separate and
distinct factual determination before it can order the liquidation of a bank or quasi-bank, then there
should have been a provision to that effect. There being none, it can safely be concluded that the
Monetary Board is not so required when the PDIC has already made such determination. It must
be stressed that the BSP (the umbrella agency of the Monetary Board), in its capacity as
government regulator of banks, and the PDIC, as statutory receiver of banks under RA 7653, are
the principal agencies mandated by law to determine the financial viability of banks and quasi-
banks, and facilitate the receivership and liquidation of closed financial institutions, upon a factual
determination of the latter's insolvency.32 Thus, following the maxim verba legis non est
recedendum - which means "from the words of a statute there should be no departure" - a statute
that is clear, plain, and free from ambiguity must be given its literal meaning and applied without
any attempted interpretation,33 as in this case.

In sum, the Monetary Board's issuance of Resolution No. 571 ordering the liquidation of EIB
cannot be considered to be tainted with grave abuse of discretion as it was amply supported by the
factual circumstances at hand and made in accordance with prevailing law and jurisprudence. To
note, the "actions of the Monetary Board in proceedings on insolvency are explicitly declared by
law to be 'final and executory.' They may not be set aside, or restrained, or enjoined by the courts,
except upon 'convincing proof that the action is plainly arbitrary and made in bad faith,"[['34]]
which is absent in this case.

WHEREFORE, the petition is hereby DENIED. The Decision dated January 21, 2014 and the
Resolution dated October 10, 2014 of the Court of Appeals in CA-G.R. SP No. 129674 are hereby
AFFIRMED.

SO ORDERED.

G.R. No. 222366, December 04, 2017

W LAND HOLDINGS, INC., Petitioner, v. STARWOOD HOTELS AND RESORTS

WORLDWIDE, INC., Respondent.

DECISION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari1 are the Decision2 dated June 22, 2015 and the
Resolution3 dated January 7, 2016 of the Court of Appeals (CA) in CA-G.R. SP No. 133825
affirming the Decision4 dated January 10, 2014 of the Intellectual Property Office (IPO) - Director
General (IPO DG), which, in turn, reversed the Decision5 dated May 11, 2012 of the IPO Bureau
of Legal Affairs (BLA) in Inter Partes Case No. 14-2009-00143, and accordingly, dismissed
petitioner W Land Holdings, Inc.'s (W Land) petition for cancellation of the trademark "W"
registered in the name of respondent Starwood Hotels and Resorts, Worldwide, Inc. (Starwood).

The Facts

On December 2, 2005, Starwood filed before the IPO an application for registration of the
trademark "W" for Classes 436 and 447 of the International Classification of Goods and Services
for the Purposes of the Registration of Marks8 (Nice Classification).9 On February 26, 2007,
Starwood's application was granted and thus, the "W" mark was registered in its name.10 However,
on April 20, 2006, W Land applied11 for the registration of its own "W" mark for Class 36,12 which
thereby prompted Starwood to oppose the same.13 In a Decision14 dated April 23, 2008, the BLA
found merit in Starwood's opposition, and ruled that W Land's "W" mark is confusingly similar
with Starwood's mark,15 which had an earlier filing date. W Land filed a motion for
reconsideration16 on June 11, 2008, which was denied by the BLA in a Resolution17 dated July 23,
2010.

On May 29, 2009, W Land filed a Petition for Cancellation18 of Starwood's mark for non-use under
Section 151.119 of Republic Act No. 8293 or the "Intellectual Property Code of the Philippines"
(IP Code),20 claiming that Starwood has failed to use its mark in the Philippines because it has no
hotel or establishment in the Philippines rendering the services covered by its registration; and that
Starwood's "W" mark application and registration barred its own "'W" mark application and
registration for use on real estate.21

In its defense,22 Starwood denied having abandoned the subject mark on the ground of non-use,
asserting that it filed with the Director of Trademarks a notarized Declaration of Actual Use23
(DAU)24 with evidence of use on December 2, 2008,25 which was not rejected. In this relation,
Starwood argued that it conducts hotel and leisure business both directly and indirectly through
subsidiaries and franchisees, and operates interactive websites for its W Hotels in order to
accommodate its potential clients worldwide.26 According to Starwood, apart from viewing agents,
discounts, promotions, and other marketing fields being offered by it, these interactive websites
allow Philippine residents to make reservations and bookings, which presuppose clear and
convincing use of the "W'' mark in the Philippines.27

The BLA Ruling

In a Decision28 dated May 11, 2012, the BLA ruled in W Land's favor, and accordingly ordered
the cancellation of Starwood's registration for the "W" mark. The BLA found that the DAU and
the attachments thereto submitted by Starwood did not prove actual use of the "W" mark in the
Philippines, considering that the "evidences of use" attached to the DAU refer to hotel or
establishments that are located abroad.29 In this regard, the BLA opined that "the use of a trademark
as a business tool and as contemplated under [Section 151.1 (c) of RA 8293] refers to the actual
attachment thereof to goods and services that are sold or availed of and located in the
Philippines."30

Dissatisfied, Starwood appealed31 to the IPO DG.

The IPO DG Ruling

In a Decision32 dated January 10, 2014, the IPO DG granted Starwood's appeal,33 thereby
dismissing W Land's Petition for Cancellation. Contrary to the BLA's findings, the IPO DG found
that Starwood's submission of its DAU and attachments, coupled by the acceptance thereof by the
IPO Bureau of Trademarks, shows that the "W" mark still bears a "registered" status. Therefore,
there is a presumption that Starwood sufficiently complied with the registration requirements for
its mark.34 The IPO DG likewise held that the absence of any hotel or establishment owned by
Starwood in the Philippines bearing the "W" mark should not be equated to the absence of its use
in the country, opining that Starwood's pieces of evidence, particularly its interactive website,
indicate actual use in the Philippines,35 citing Rule 20536 of the Trademark Regulations, as
amended by IPO Office Order No. 056-13.37 Finally, the IPO DG stressed that since Starwood is
the undisputed owner of the "W" mark for use in hotel and hotel-related services, any perceived
damage on the part of W Land in this case should be subordinated to the essence of protecting
Starwood's intellectual property rights. To rule otherwise is to undermine the intellectual property
system.38

Aggrieved, W Land filed a petition for review39 under Rule 43 of the Rules of Court before the
CA.

The CA Ruling

In a Decision40 dated June 22, 2015, the CA affirmed the IPO DG ruling. At the onset, the CA
observed that the hotel business is peculiar in nature in that the offer, as well as the acceptance of
room reservations or bookings wherever in the world is an indispensable element. As such, the
actual existence or presence of a hotel in one place is not necessary before it can be considered as
doing business therein.41 In this regard, the CA recognized that the internet has become a powerful
tool in allowing businesses to reach out to consumers in a given market without being physically
present thereat; thus, the IPO DG correctly held that Starwood's interactive websites already
indicate its actual use in the Philippines of the "W" mark.42 Finally, the CA echoed the IPO DG's
finding that since Starwood is the true owner of the "W" mark - as shown by the fact that Starwood
had already applied for the registration of this mark even before W Land was incorporated - its
registration over the same should remain valid, absent any showing that it has abandoned the use
thereof.43

Unperturbed, W Land moved for reconsideration,44 but was denied in a Resolution45 dated January
7, 2016; hence, this petition.

The Issue Before the Court

The essential issue for the Court's resolution is whether or not the CA correctly affirmed the IPO
DG's dismissal of W Land's Petition for Cancellation of Starwood's "W'' mark.

The Court's Ruling

The petition is without merit.

The IP Code defines a "mark" as "any visible sign capable of distinguishing the goods (trademark)
or services (service mark) of an enterprise."46 Case law explains that "[t]rademarks deal with the
psychological function of symbols and the effect of these symbols on the public at large."47 It is a
merchandising short-cut, and, "[w]hatever the means employed, the aim is the same to convey
through the mark, in the minds of potential customers, the desirability of the commodity upon
which it appears."48 Thus, the protection of trademarks as intellectual property is intended not only
to preserve the goodwill and reputation of the business established on the goods or services bearing
the mark through actual use over a period of time, but also to safeguard the public as consumers
against confusion on these goods or services.49 As viewed by modern authorities on trademark
law, trademarks perform three (3) distinct functions: (1) they indicate origin or ownership of the
articles to which they are attached; (2) they guarantee that those articles come up to a certain
standard of quality; and (3) they advertise the articles they symbolize.50

In Berris Agricultural Co., Inc. v. Abyadang,51 this Court explained that "[t]he ownership of a
trademark is acquired by its registration and its actual use by the manufacturer or distributor of the
goods made available to the purchasing public. x x x. A certificate of registration of a mark, once
issued, constitutes prima facie evidence of the validity of the registration, of the registrant's
ownership of the mark, and of the registrant's exclusive right to use the same in connection with
the goods or services and those that are related thereto specified in the certificate."52 However,
"the prima facie presumption brought about by the registration of a mark may be challenged and
overcome, in an appropriate action, by proof of[, among others,] non-use of the mark, except
when excused."53

The actual use of the mark representing the goods or services introduced and transacted in
commerce over a period of time creates that goodwill which the law seeks to protect. For this
reason, the IP Code, under Section 124.2,54 requires the registrant or owner of a registered mark
to declare "actual use of the mark" (DAU) and present evidence of such use within the prescribed
period. Failing in which, the IPO DG may cause the motu propio removal from the register of the
mark's registration.55 Also, any person, believing that "he or she will be damaged by the
registration of a mark," which has not been used within the Philippines, may file a petition for
cancellation.56 Following the basic rule that he who alleges must prove his case,57 the burden lies
on the petitioner to show damage and non-use.

The IP Code and the Trademark Regulations have not specifically defined "use." However, it is
understood that the "use" which the law requires to maintain the registration of a mark must
be genuine, and not merely token. Based on foreign authorities,58 genuine use may be
characterized as a bona fide use which results or tends to result, in one way or another, into a
commercial interaction or transaction "in the ordinary course of trade."59

What specific act or acts would constitute use of the mark sufficient to keep its registration in force
may be gleaned from the Trademark Regulations, Rule 205 of which reads:

RULE 205. Contents of the Declaration and Evidence of Actual Use. — The declaration shall be
under oath, must refer to only one application or registration, must contain the name and address
of the applicant or registrant declaring that the mark is in actual use in the Philippines, list of
goods where the mark is attached; list the name or names and the exact location or locations of
the outlet or outlets where the products are being sold or where the services are being rendered,
recite sufficient facts to show that the mark described in the application or registration is
being actually used in the Philippines and, specifying the nature of such use. The declarant
shall attach five labels as actually used on the goods or the picture of the stamped or marked
container visibly and legibly showing the mark as well as proof of payment of the prescribed fee.
[As amended by Office Order No. 08 (2000)] (Emphases supplied)

The Trademark Regulations was amended by Office Order No. 056-13. Particularly, Rule 205 now
mentions certain items which "shall be accepted as proof of actual use of the mark:"

RULE 205. Contents of the Declaration and Evidence of Actual Use.—

(a) The declaration shall be under oath and filed by the applicant or registrant (or the authorized
officer in case of a juridical entity) or the attorney or authorized representative of the applicant or
registrant. The declaration must refer to only one application or registration, shall contain the name
and address of the applicant or registrant declaring that the mark is in actual use in the Philippines,
the list of goods or services where the mark is used, the name/s of the establishment and address
where the products are being sold or where the services are being rendered. If the goods or services
are available only by online purchase, the website must be indicated on the form in lieu of name
or address of the establishment or outlet. The applicant or registrant may include other facts to
show that the mark described in the application or registration is actually being used in the
Philippines. The date of first use shall not be required.

(b) Actual use for some of the goods and services in the same class shall constitute use for the
entire class of goods and services. Actual use for one class shall be considered use for related
classes. In the event that some classes are not covered in the declaration, a subsequent declaration
of actual use may be filed for the other classes of goods or services not included in the first
declaration, provided that the subsequent declaration is filed within the three year period or the
extension period, in case an extension of time to file the declaration was timely made. In the event
that no subsequent declaration of actual use for the other classes of goods and services is filed
within the prescribed period, the classes shall be automatically dropped from the application or
registration without need of notice to the applicant or registrant.

(c) The following shall be accepted as proof of actual use of the mark: (1) labels of the mark
as these are used; (2) downloaded pages from the website of the applicant or registrant clearly
showing that the goods are being sold or the services are being rendered in the Philippines;
(3) photographs (including digital photographs printed on ordinary paper) of goods bearing the
marks as these are actually used or of the stamped or marked container of goods and of the
establishment/s where the services are being rendered; (4) brochures or advertising materials
showing the actual use of the mark on the goods being sold or services being rendered in the
Philippines; (5) for online sale, receipts of sale of the goods or services rendered or other
similar evidence of use, showing that the goods are placed on the market or the services are
available in the Philippines or that the transaction took place in the Philippines; (6) copies of
contracts for services showing the use of the mark. Computer printouts of the drawing or
reproduction of marks will not be accepted as evidence of use.
(d) The Director may, from time to time, issue a list of acceptable evidence of use and those
that will not be accepted by the Office. (Emphases and underscoring supplied)

Office Order No. 056-13 was issued by the IPO DG on April 5, 2013, pursuant to his delegated
rule-making authority under Section 7 of the IP Code.60 The rationale for this issuance, per its
whereas clauses, is to further "the policy of the [IPO] to streamline administrative procedures in
registering trademarks" and in so doing, address the need "to clarify what will be accepted as proof
of use." In this regard, the parameters and list of evidence introduced under the amended
Trademark Regulations are thus mere administrative guidelines which are only meant to flesh out
the types of acceptable evidence necessary to prove what the law already provides, i.e., the
requirement of actual use. As such, contrary to W Land's postulation,61 the same does not diminish
or modify any substantive right and hence, may be properly applied to "all pending and registered
marks,"62 as in Starwood's "W" mark for hotel / hotel reservation services being rendered or, at the
very least, made available in the Philippines.

Based on the amended Trademark Regulations, it is apparent that the IPO has now given due regard
to the advent of commerce on the internet. Specifically, it now recognizes, among others,
"downloaded pages from the website of the applicant or registrant clearly showing that the goods
are being sold or the services are being rendered in the Philippines," as well as "for online sale,
receipts of sale of the goods or services rendered or other similar evidence of use, showing that the
goods are placed on the market or the services are available in the Philippines or that the transaction
took place in the Philippines,"63 as acceptable proof of actual use. Truly, the Court discerns that
these amendments are but an inevitable reflection of the realities of the times. In Mirpuri v. CA,64
this Court noted that "[a]dvertising on the Net and cybershopping are turning the Internet into a
commercial marketplace:"65

The Internet is a decentralized computer network linked together through routers and
communications protocols that enable anyone connected to it to communicate with others likewise
connected, regardless of physical location. Users of the Internet have a wide variety of
communication methods available to them and a tremendous wealth of information that they may
access. The growing popularity of the Net has been driven in large part by the World Wide Web,
i.e., a system that facilitates use of the Net by sorting through the great mass of information
available on it. Advertising on the Net and cybershopping are turning the Internet into a
commercial marketplace.66 (Emphasis and underscoring supplied)

Thus, as modes of advertising and acquisition have now permeated into virtual zones over
cyberspace, the concept of commercial goodwill has indeed evolved:

In the last half century, the unparalleled growth of industry and the rapid development of
communications technology have enabled trademarks, tradenames and other distinctive signs of a
product to penetrate regions where the owner does not actually manufacture or sell the product
itself. Goodwill is no longer confined to the territory of actual market penetration; it extends
to zones where the marked article has been fixed in the public mind through advertising.
Whether in the print, broadcast or electronic communications medium, particularly on the
Internet, advertising has paved the way for growth and expansion of the product by creating
and earning a reputation that crosses over borders, virtually turning the whole world into
one vast marketplace.67 (Emphasis and underscoring supplied)

Cognizant of this current state of affairs, the Court therefore agrees with the IPO DG, as affirmed
by the CA, that the use of a registered mark representing the owner's goods or services by means
of an interactive website may constitute proof of actual use that is sufficient to maintain the
registration of the same. Since the internet has turned the world into one vast marketplace, the
owner of a registered mark is clearly entitled to generate and further strengthen his commercial
goodwill by actively marketing and commercially transacting his wares or services throughout
multiple platforms on the internet. The facilities and avenues present in the internet are, in fact,
more prominent nowadays as they conveniently cater to the modern-day consumer who desires to
procure goods or services at any place and at any time, through the simple click of a mouse, or the
tap of a screen. Multitudinous commercial transactions are accessed, brokered, and consummated
everyday over websites. These websites carry the mark which represents the goods or services
sought to be transacted. For the owner, he intentionally exhibits his mark to attract the customers'
interest in his goods or services. The mark displayed over the website no less serves its functions
of indicating the goods or services' origin and symbolizing the owner's goodwill than a mark
displayed in the physical market. Therefore, there is no less premium to recognize actual use of
marks through websites than their actual use through traditional means. Indeed, as our world
evolves, so too should our appreciation of the law. Legal interpretation - as it largely affects the
lives of people in the here and now - never happens in a vacuum. As such, it should not be stagnant
but dynamic; it should not be ensnared in the obsolete but rather, sensitive to surrounding social
realities.

It must be emphasized, however, that the mere exhibition of goods or services over the internet,
without more, is not enough to constitute actual use. To reiterate, the "use" contemplated by law
is genuine use - that is, a bona fide kind of use tending towards a commercial transaction in the
ordinary course of trade. Since the internet creates a borderless marketplace, it must be shown
that the owner has actually transacted, or at the very least, intentionally targeted customers
of a particular jurisdiction in order to be considered as having used the trade mark in the
ordinary course of his trade in that country. A showing of an actual commercial link to the
country is therefore imperative. Otherwise, an unscrupulous registrant would be able to maintain
his mark by the mere expedient of setting up a website, or by posting his goods or services on
another's site, although no commercial activity is intended to be pursued in the Philippines. This
type of token use renders inutile the commercial purpose of the mark, and hence, negates the reason
to keep its registration active. As the IP Code expressly requires, the use of the mark must be
"within the Philippines." This is embedded in Section 151 of the IP Code on cancellation, which
reads:

SECTION 151. Cancellation. — 151.1. A petition to cancel a registration of a mark under this Act
may be filed with the Bureau of Legal Affairs by any person who believes that he is or will be
damaged by the registration of a mark under this Act as follows:

(a) Within five (5) years from the date of the registration of the mark under this Act.
 (b) At any time, if the registered mark becomes the generic name for the goods or services, or
a portion thereof, for which it is registered, or has been abandoned, or its registration was
obtained fraudulently or contrary to the provisions of this Act, or if the registered mark is
being used by, or with the permission of, the registrant so as to misrepresent the source of
the goods or services on or in connection with which the mark is used. If the registered
mark becomes the generic name for less than all of the goods or services for which it is
registered, a petition to cancel the registration for only those goods or services may be filed.
A registered mark shall not be deemed to be the generic name of goods or services solely
because such mark is also used as a name of or to identify a unique product or service. The
primary significance of the registered mark to the relevant public rather than purchaser
motivation shall be the test for determining whether the registered mark has become the
generic name of goods or services on or in connection with which it has been used.
(c) At any time, if the registered owner of the mark without legitimate reason fails to use
the mark within the Philippines, or to cause it to be used in the Philippines by virtue
of a license during an uninterrupted period of three (3) years or longer. (Emphasis and
underscoring supplied)

The hotel industry is no stranger to the developments and advances in technology. Like most
businesses nowadays, hotels are utilizing the internet to drive almost every aspect of their
operations, most especially the offering and accepting of room reservations or bookings, regardless
of the client or customer base. The CA explained this booking process in that the "business
transactions commence with the placing of room reservations, usually by or through a travel agent
who acts for or in behalf of his principal, the hotel establishment. [The] reservation is first
communicated to the reservations and booking assistant tasked to handle the transaction. After the
reservation is made, the specific room reserved for the guest will be blocked and will not be offered
to another guest. As such, on the specified date of arrival, the room reserved will be available to
the guest."68

In this accord, a hotel's website has now become an integral element of a hotel business. Especially
with the uptrend of international travel and tourism, the hotel's website is now recognized as an
efficient and necessary tool in advertising and promoting its brand in almost every part of the
world. More so, interactive websites that allow customers or clients to instantaneously book and
pay for, in advance, accommodations and other services of a hotel anywhere in the world,
regardless of the hotel's actual location, dispense with the need for travel agents or hotel employees
to transact the reservations for them. In effect, the hotel's website acts as a bridge or portal through
which the hotel reaches out and provides its services to the client/customer anywhere in the world,
with the booking transaction completed at the client/customer's own convenience. It is in this sense
that the CA noted that the "actual existence or presence of a hotel in one place is not necessary
before it can be considered as doing business therein."69

As earlier intimated, mere use of a mark on a website which can be accessed anywhere in the world
will not automatically mean that the mark has been used in the ordinary course of trade of a
particular country. Thus, the use of mark on the internet must be shown to result into a within-
State sale, or at the very least, discernibly intended to target customers that reside in that country.
This being so, the use of the mark on an interactive website, for instance, may be said to target
local customers when they contain specific details regarding or pertaining to the target State,
sufficiently showing an intent towards realizing a within-State commercial activity or
interaction. These details may constitute a local contact phone number, specific reference being
available to local customers, a specific local webpage, whether domestic language and currency is
used on the website, and/or whether domestic payment methods are accepted.70 Notably, this
paradigm of ascertaining local details to evince within-state commercial intent is subscribed to by
a number of jurisdictions, namely, the European Union, Hong Kong, Singapore, Malaysia, Japan,
Australia, Germany, France, Russia, and the United Kingdom.71 As for the U.S. - where most of
our intellectual property laws have been patterned72 - there have been no decisions to date coming
from its Trademark Trial and Appeal Board involving cases challenging the validity of mark
registrations through a cancellation action based on the mark's internet use. However, in
International Bancorp LLC v. Societe des Bains de Mer et du Cercle des Etrangers a Monaco,73 it
was ruled that mere advertising in the U.S. combined with rendering of services to American
customers in a foreign country constituted "use" for the purpose of establishing trademark rights
in the U.S.

In this case, Starwood has proven that it owns Philippine registered domain names,74 i.e.,
www.whotels.ph, www.wreservations.ph, www.whotel.ph, www.wreservation.ph, for its website
that showcase its mark. The website is readily accessible to Philippine citizens and residents, where
they can avail and book amenities and other services in any of Starwood's W Hotels worldwide.
Its website also readily provides a phone number75 for Philippine consumers to call for information
or other concerns. The website further uses the English language76 - considered as an official
language in this country77 - which the relevant market in the Philippines understands and often
uses in the daily conduct of affairs. In addition, the prices for its hotel accommodations and/or
services can be converted into the local currency or the Philippine Peso.78 Amidst all of these
features, Starwood's "W" mark is prominently displayed in the website through which consumers
in the Philippines can instantaneously book and pay for their accommodations, with immediate
confirmation, in any of its W Hotels. Furthermore, it has presented data showing a considerably
growing number of internet users in the Philippines visiting its website since 2003, which is
enough to conclude that Starwood has established commercially-motivated relationships with
Philippine consumers.79

Taken together, these facts and circumstances show that Starwood's use of its "W" mark through
its interactive website is intended to produce a discernable commercial effect or activity within the
Philippines, or at the very least, seeks to establish commercial interaction with local consumers.
Accordingly, Starwood's use of the "W" mark in its reservation services through its website
constitutes use of the mark sufficient to keep its registration in force.

To be sure, Starwood's "W" mark is registered for Classes 43, i.e., for hotel, motel, resort and
motor inn services, hotel reservation services, restaurant, bar and catering services, food and
beverage preparation services, cafe and cafeteria services, provision of conference, meeting and
social function facilities, under the Nice Classification.80 Under Section 152.3 of the IP Code,
"[t]he use of a mark in connection with one or more of the goods or services belonging to the class
in respect of which the mark is registered shall prevent its cancellation or removal in respect of all
other goods or services of the same class." Thus, Starwood's use of the "W" mark for reservation
services through its website constitutes use of the mark which is already sufficient to protect its
registration under the entire subject classification from non-use cancellation. This, notwithstanding
the absence of a Starwood hotel or establishment in the Philippines.

Finally, it deserves pointing out that Starwood submitted in 2008 its DAU with evidence of use
which the IPO, through its Director of Trademarks and later by the IPO DG in the January 10,
2014 Decision, had accepted and recognized as valid. The Court finds no reason to disturb this
recognition. According to jurisprudence, administrative agencies, such as the IPO, by means of
their special knowledge and expertise over matters falling within their jurisdiction are in a better
position to pass judgment on this issue.81 Thus, their findings are generally accorded respect and
finality, as long as they are supported by substantial evidence. In this case, there is no compelling
basis to reverse the IPO DG's findings - to keep Starwood's registration for the "W" mark in force
- as they are well supported by the facts and the law and thus, deserve respect from this Court.

WHEREFORE, the petition is DENIED. The Decision dated June 22, 2015 and the Resolution
dated January 7, 2016 of the Court of Appeals in CA-G.R. SP No. 133825 are hereby
AFFIRMED.

SO ORDERED.

G.R. No. 191667 April 17, 2013

LAND BANK OF THE PHILIPPINES, Petitioner,

vs.
EDUARDO M. CACAYURAN, Respondent.

DECISION

PERLAS-BERNABE, J.:

Assailed in this Petition for Review on Certiorari1 is the March 26, 2010 Decision2 of the Court of
Appeals (CA) in CA-G.R. CV. No. 89732 which affirmed with modification the April 10, 2007
Decision3 of the Regional Trial Court (RTC) of Agoo, La Union, Branch 31, declaring inter alia
the nullity of the loan agreements entered into by petitioner Land Bank of the Philippines (Land
Bank) and the Municipality of Agoo, La Union (Municipality).

The Facts

From 2005 to 2006, the Municipality’s Sangguniang Bayan (SB) passed certain resolutions to
implement a multi-phased plan (Redevelopment Plan) to redevelop the Agoo Public Plaza (Agoo
Plaza) where the Imelda Garden and Jose Rizal Monument were situated.

To finance phase 1 of the said plan, the SB initially passed Resolution No. 68-20054 on April 19,
2005, authorizing then Mayor Eufranio Eriguel (Mayor Eriguel) to obtain a loan from Land Bank
and incidental thereto, mortgage a 2,323.75 square meter lot situated at the southeastern portion of
the Agoo Plaza (Plaza Lot) as collateral. To serve as additional security, it further authorized the
assignment of a portion of its internal revenue allotment (IRA) and the monthly income from the
proposed project in favor of Land Bank.5 The foregoing terms were confirmed, approved and
ratified on October 4, 2005 through Resolution No. 139-2005.6 Consequently, on November 21,
2005, Land Bank extended a ₱4,000,000.00 loan in favor of the Municipality (First Loan),7 the
proceeds of which were used to construct ten (10) kiosks at the northern and southern portions of
the Imelda Garden. After completion, these kiosks were rented out.8

On March 7, 2006, the SB passed Resolution No. 58-2006,9 approving the construction of a
commercial center on the Plaza Lot as part of phase II of the Redevelopment Plan. To finance the
project, Mayor Eriguel was again authorized to obtain a loan from Land Bank, posting as well the
same securities as that of the First Loan. All previous representations and warranties of Mayor
Eriguel related to the negotiation and obtention of the new loan10 were ratified on September 5,
2006 through Resolution No. 128-2006.11 In consequence, Land Bank granted a second loan in
favor of the Municipality on October 20, 2006 in the principal amount of ₱28,000,000.00 (Second
Loan).12

Unlike phase 1 of the Redevelopment Plan, the construction of the commercial center at the Agoo
Plaza was vehemently objected to by some residents of the Municipality. Led by respondent
Eduardo Cacayuran (Cacayuran), these residents claimed that the conversion of the Agoo Plaza
into a commercial center, as funded by the proceeds from the First and Second Loans (Subject
Loans), were "highly irregular, violative of the law, and detrimental to public interests, and will
result to wanton desecration of the said historical and public park."13 The foregoing was embodied
in a Manifesto,14 launched through a signature campaign conducted by the residents and
Cacayuran.

In addition, Cacayuran wrote a letter15 dated December 8, 2006 addressed to Mayor Eriguel, Vice
Mayor Antonio Eslao (Vice Mayor Eslao), and the members of the SB namely, Violeta Laroya-
Balbin, Jaime Boado, Jr., Rogelio De Vera, James Dy, Crisogono Colubong, Ricardo Fronda,
Josephus Komiya, Erwina Eriguel, Felizardo Villanueva, and Gerard Mamuyac (Implicated
Officers), expressing the growing public clamor against the conversion of the Agoo Plaza into a
commercial center. He then requested the foregoing officers to furnish him certified copies of
various documents related to the aforementioned conversion including, among others, the
resolutions approving the Redevelopment Plan as well as the loan agreements for the sake of public
information and transparency.

Unable to get any response, Cacayuran, invoking his right as a taxpayer, filed a Complaint16 against
the Implicated Officers and Land Bank, assailing, among others, the validity of the Subject Loans
on the ground that the Plaza Lot used as collateral thereof is property of public dominion and
therefore, beyond the commerce of man.17

Upon denial of the Motion to Dismiss dated December 27, 2006,18 the Implicated Officers and
Land Bank filed their respective Answers.

For its part, Land Bank claimed that it is not privy to the Implicated Officers’ acts of destroying
the Agoo Plaza. It further asserted that Cacayuran did not have a cause of action against it since
he was not privy to any of the Subject Loans.19
During the pendency of the proceedings, the construction of the commercial center was completed
and the said structure later became known as the Agoo’s People Center (APC).

On May 8, 2007, the SB passed Municipal Ordinance No. 02-2007,20 declaring the area where the
APC stood as patrimonial property of the Municipality.

The Ruling of the RTC

In its Decision dated April 10, 2007,21 the RTC ruled in favor of Cacayuran, declaring the nullity
of the Subject Loans.22 It found that the resolutions approving the said loans were passed in a
highly irregular manner and thus, ultra vires; as such, the Municipality is not bound by the same.23
Moreover, it found that the Plaza Lot is proscribed from collateralization given its nature as
property for public use.24

Aggrieved, Land Bank filed its Notice of Appeal on April 23, 2007.25 On the other hand, the
Implicated Officers’ appeal was deemed abandoned and dismissed for their failure to file an
appellants’ brief despite due notice.26 In this regard, only Land Bank’s appeal was given due course
by the CA.

Ruling of the CA

In its Decision dated March 26, 2010,27 the CA affirmed with modification the RTC’s ruling,
excluding Vice Mayor Eslao from any personal liability arising from the Subject Loans.28

It held, among others, that: (1) Cacayuran had locus standi to file his complaint, considering that
(a) he was born, raised and a bona fide resident of the Municipality; and (b) the issue at hand
involved public interest of transcendental importance;29 (2) Resolution Nos. 68-2005, 139-2005,
58-2006, 128-2006 and all other related resolutions (Subject Resolutions) were invalidly passed
due to the SB’s non-compliance with certain sections of Republic Act No. 7160, otherwise known
as the "Local Government Code of 1991" (LGC); (3) the Plaza Lot, which served as collateral for
the Subject Loans, is property of public dominion and thus, cannot be appropriated either by the
State or by private persons;30 and (4) the Subject Loans are ultra vires because they were transacted
without proper authority and their collateralization constituted improper disbursement of public
funds.

Dissatisfied, Land Bank filed the instant petition.

Issues Before the Court

The following issues have been raised for the Court’s resolution: (1) whether Cacayuran has
standing to sue; (2) whether the Subject Resolutions were validly passed; and (3) whether the
Subject Loans are ultra vires.

The Court’s Ruling

The petition lacks merit.

A. Cacayuran’s standing to sue

Land Bank claims that Cacayuran did not have any standing to contest the construction of the APC
as it was funded through the proceeds coming from the Subject Loans and not from public funds.
Besides, Cacayuran was not even a party to any of the Subject Loans and is thus, precluded from
questioning the same.

The argument is untenable.

It is hornbook principle that a taxpayer is allowed to sue where there is a claim that public funds
are illegally disbursed, or that public money is being deflected to any improper purpose, or that
there is wastage of public funds through the enforcement of an invalid or unconstitutional law. A
person suing as a taxpayer, however, must show that the act complained of directly involves the
illegal disbursement of public funds derived from taxation. In other words, for a taxpayer’s suit to
prosper, two requisites must be met namely, (1) public funds derived from taxation are disbursed
by a political subdivision or instrumentality and in doing so, a law is violated or some irregularity
is committed; and (2) the petitioner is directly affected by the alleged act.31

Records reveal that the foregoing requisites are present in the instant case.

First, although the construction of the APC would be primarily sourced from the proceeds of the
Subject Loans, which Land Bank insists are not taxpayer’s money, there is no denying that public
funds derived from taxation are bound to be expended as the Municipality assigned a portion of
its IRA as a security for the foregoing loans. Needless to state, the Municipality’s IRA, which
serves as the local government unit’s just share in the national taxes,32 is in the nature of public
funds derived from taxation. The Court believes, however, that although these funds may be posted
as a security, its collateralization should only be deemed effective during the incumbency of the
public officers who approved the same, else those who succeed them be effectively deprived of its
use.

In any event, it is observed that the proceeds from the Subject Loans had already been converted
into public funds by the Municipality’s receipt thereof. Funds coming from private sources become
impressed with the characteristics of public funds when they are under official custody.33

Accordingly, the first requisite has been clearly met.

Second, as a resident-taxpayer of the Municipality, Cacayuran is directly affected by the

conversion of the Agoo Plaza which was funded by the proceeds of the Subject Loans. It is well-
settled that public plazas are properties for public use34 and therefore, belongs to the public
dominion.35 As such, it can be used by anybody and no one can exercise over it the rights of a
private owner.36 In this light, Cacayuran had a direct interest in ensuring that the Agoo Plaza would
not be exploited for commercial purposes through the APC’s construction. Moreover, Cacayuran
need not be privy to the Subject Loans in order to proffer his objections thereto. In Mamba v. Lara,
it has been held that a taxpayer need not be a party to the contract to challenge its validity; as long
as taxes are involved, people have a right to question contracts entered into by the government.37
Therefore, as the above-stated requisites obtain in this case, Cacayuran has standing to file the
instant suit.

B. Validity of the Subject Resolutions

Land Bank avers that the Subject Resolutions provided ample authority for Mayor Eriguel to
contract the Subject Loans. It posits that Section 444(b)(1)(vi) of the LGC merely requires that the
municipal mayor be authorized by the SB concerned and that such authorization need not be
embodied in an ordinance.38

A careful perusal of Section 444(b)(1)(vi) of the LGC shows that while the authorization of the
municipal mayor need not be in the form of an ordinance, the obligation which the said local
executive is authorized to enter into must be made pursuant to a law or ordinance, viz:

Sec. 444. The Chief Executive: Powers, Duties, Functions and Compensation. -

xxxx

(b) For efficient, effective and economical governance the purpose of which is the general welfare
of the municipality and its inhabitants pursuant to Section 16 of this Code, the municipal mayor
shall:

xxxx

(vi) Upon authorization by the sangguniang bayan, represent the municipality in all its business
transactions and sign on its behalf all bonds, contracts, and obligations, and such other documents
made pursuant to law or ordinance; (Emphasis and underscoring supplied)

In the present case, while Mayor Eriguel’s authorization to contract the Subject Loans was not
contained – as it need not be contained – in the form of an ordinance, the said loans and even the
Redevelopment Plan itself were not approved pursuant to any law or ordinance but through mere
resolutions. The distinction between ordinances and resolutions is well-perceived. While
ordinances are laws and possess a general and permanent character, resolutions are merely
declarations of the sentiment or opinion of a lawmaking body on a specific matter and are
temporary in nature.39 As opposed to ordinances, "no rights can be conferred by and be inferred
from a resolution."40 In this accord, it cannot be denied that the SB violated Section 444(b)(1)(vi)
of the LGC altogether.

Noticeably, the passage of the Subject Resolutions was also tainted with other irregularities, such
as (1) the SB’s failure to submit the Subject Resolutions to the Sangguniang Panlalawigan of La
Union for its review contrary to Section 56 of the LGC;41 and (2) the lack of publication and
posting in contravention of Section 59 of the LGC.42

In fine, Land Bank cannot rely on the Subject Resolutions as basis to validate the Subject Loans.

C. Ultra vires nature of the Subject

Loans

Neither can Land Bank claim that the Subject Loans do not constitute ultra vires acts of the officers
who approved the same.

Generally, an ultra vires act is one committed outside the object for which a corporation is created
as defined by the law of its organization and therefore beyond the powers conferred upon it by
law.43 There are two (2) types of ultra vires acts. As held in Middletown Policemen's Benevolent
Association v. Township of Middletown:44

There is a distinction between an act utterly beyond the jurisdiction of a municipal corporation and
the irregular exercise of a basic power under the legislative grant in matters not in themselves
jurisdictional. The former are ultra vires in the primary sense and void; the latter, ultra vires only
in a secondary sense which does not preclude ratification or the application of the doctrine of
estoppel in the interest of equity and essential justice. (Emphasis and underscoring supplied)

In other words, an act which is outside of the municipality’s jurisdiction is considered as a void
ultra vires act, while an act attended only by an irregularity but remains within the municipality’s
power is considered as an ultra vires act subject to ratification and/or validation. To the former
belongs municipal contracts which (a) are entered into beyond the express, implied or inherent
powers of the local government unit; and (b) do not comply with the substantive requirements of
law e.g., when expenditure of public funds is to be made, there must be an actual appropriation
and certificate of availability of funds; while to the latter belongs those which (a) are entered into
by the improper department, board, officer of agent; and (b)do not comply with the formal
requirements of a written contract e.g., the Statute of Frauds.45

Applying these principles to the case at bar, it is clear that the Subject Loans belong to the first
class of ultra vires acts deemed as void.

Records disclose that the said loans were executed by the Municipality for the purpose of funding
the conversion of the Agoo Plaza into a commercial center pursuant to the Redevelopment Plan.
However, the conversion of the said plaza is beyond the Municipality’s jurisdiction considering
the property’s nature as one for public use and thereby, forming part of the public dominion.
Accordingly, it cannot be the object of appropriation either by the State or by private persons. 46
Nor can it be the subject of lease or any other contractual undertaking.47 In Villanueva v.
Castañeda, Jr.,48 citing Espiritu v. Municipal Council of Pozorrubio,49 the Court pronounced that:

x x x Town plazas are properties of public dominion, to be devoted to public use and to be made
available to the public in general. They are outside the commerce of man and cannot be disposed
of or even leased by the municipality to private parties.1âwphi1

In this relation, Article 1409(1) of the Civil Code provides that a contract whose purpose is
contrary to law, morals, good customs, public order or public policy is considered void 50 and as
such, creates no rights or obligations or any juridical relations.51 Consequently, given the unlawful
purpose behind the Subject Loans which is to fund the commercialization of the Agoo Plaza
pursuant to the Redevelopment Plan, they are considered as ultra vires in the primary sense thus,
rendering them void and in effect, non-binding on the Municipality.

At this juncture, it is equally observed that the land on which the Agoo Plaza is situated cannot be
converted into patrimonial property – as the SB tried to when it passed Municipal Ordinance No.
02-200752 – absent any express grant by the national government.53 As public land used for public
use, the foregoing lot rightfully belongs to and is subject to the administration and control of the
Republic of the Philippines.54 Hence, without the said grant, the Municipality has no right to claim
it as patrimonial property.

Nevertheless, while the Subject Loans cannot bind the Municipality for being ultra vires, the
officers who authorized the passage of the Subject Resolutions are personally liable. Case law
states that public officials can be held personally accountable for acts claimed to have been
performed in connection with official duties where they have acted ultra vires,55 as in this case.

WHEREFORE, the petition is DENIED. Accordingly, the March 26, 2010 Decision of the Court
of Appeals in CA-G.R. CV. No. 89732 is hereby AFFIRMED.

SO ORDERED.

G.R. No. 185830 June 5, 2013

ECOLE DE CUISINE MANILLE (CORDON BLEU OF THE PHILIPPINES), INC.,

Petitioner,
vs.
RENAUD COINTREAU & CIE and LE CORDON BLEU INT'L., B.V., Respondents.

DECISION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari1 is the December 23, 2008 Decision2 of the Court
of Appeals (CA) in CA-G.R. SP No. 104672 which affirmed in toto the Intellectual Property Office
(IPO) Director General’s April 21, 2008 Decision3 that declared respondent Renaud Cointreau &
Cie (Cointreau) as the true and lawful owner of the mark "LE CORDON BLEU & DEVICE" and
thus, is entitled to register the same under its name.

The Facts

On June 21, 1990, Cointreau, a partnership registered under the laws of France, filed before the
(now defunct) Bureau of Patents, Trademarks, and Technology Transfer (BPTTT) of the
Department of Trade and Industry a trademark application for the mark "LE CORDON BLEU &
DEVICE" for goods falling under classes 8, 9, 16, 21, 24, 25, 29, and 30 of the International
Classification of Goods and Services for the Purposes of Registrations of Marks ("Nice
Classification") (subject mark). The application was filed pursuant to Section 37 of Republic Act
No. 166, as amended (R.A. No. 166), on the basis of Home Registration No. 1,390,912, issued on
November 25, 1986 in France. Bearing Serial No. 72264, such application was published for
opposition in the March-April 1993 issue of the BPTTT Gazette and released for circulation on
May 31, 1993.4

On July 23, 1993, petitioner Ecole De Cuisine Manille, Inc. (Ecole) filed an opposition to the
subject application, averring that: (a) it is the owner of the mark "LE CORDON BLEU, ECOLE
DE CUISINE MANILLE," which it has been using since 1948 in cooking and other culinary
activities, including in its restaurant business; and (b) it has earned immense and invaluable
goodwill such that Cointreau’s use of the subject mark will actually create confusion, mistake, and
deception to the buying public as to the origin and sponsorship of the goods, and cause great and
irreparable injury and damage to Ecole’s business reputation and goodwill as a senior user of the
same.5

On October 7, 1993, Cointreau filed its answer claiming to be the true and lawful owner of the
subject mark. It averred that: (a) it has filed applications for the subject mark’s registration in
various jurisdictions, including the Philippines; (b) Le Cordon Bleu is a culinary school of
worldwide acclaim which was established in Paris, France in 1895; (c) Le Cordon Bleu was the
first cooking school to have set the standard for the teaching of classical French cuisine and pastry
making; and (d) it has trained students from more than eighty (80) nationalities, including Ecole’s
directress, Ms. Lourdes L. Dayrit. Thus, Cointreau concluded that Ecole’s claim of being the
exclusive owner of the subject mark is a fraudulent misrepresentation.6

During the pendency of the proceedings, Cointreau was issued Certificates of Registration Nos.
60631 and 54352 for the marks "CORDON BLEU & DEVICE" and "LE CORDON BLEU PARIS
1895 & DEVICE" for goods and services under classes 21 and 41 of the Nice Classification,
respectively.7

The Ruling of the Bureau of Legal Affairs

In its Decision8 dated July 31, 2006, the Bureau of Legal Affairs (BLA) of the IPO sustained
Ecole’s opposition to the subject mark, necessarily resulting in the rejection of Cointreau’s
application.9 While noting the certificates of registration obtained from other countries and other
pertinent materials showing the use of the subject mark outside the Philippines, the BLA did not
find such evidence sufficient to establishCointreau’s claim of prior use of the same in the
Philippines. It emphasized that the adoption and use of trademark must be in commerce in the
Philippines and not abroad. It then concluded that Cointreau has not established any proprietary
right entitled to protection in the Philippine jurisdiction because the law on trademarks rests upon
the doctrine of nationality or territoriality.10

On the other hand, the BLA found that the subject mark, which was the predecessor of the mark
"LE CORDON BLEU MANILLE" has been known and used in the Philippines since 1948 and
registered under the name "ECOLE DE CUISINE MANILLE (THE CORDON BLEU OF THE
PHILIPPINES), INC." on May 9, 1980.11

Aggrieved, Cointreau filed an appeal with the IPO Director General.

The Ruling of the IPO Director General

In his Decision dated April 21, 2008, the IPO Director General reversed and set aside the BLA’s
decision, thus, granting Cointreau’s appeal and allowing the registration of the subject mark.12 He
held that while Section 2 of R.A. No. 166 requires actual use of the subject mark in commerce in
the Philippines for at least two (2) months before the filing date of the application, only the owner
thereof has the right to register the same, explaining that the user of a mark in the Philippines is
not ipso facto its owner. Moreover, Section 2-A of the same law does not require actual use in the
Philippines to be able to acquire ownership of a mark.13

In resolving the issue of ownership and right to register the subject mark in favor of Cointreau, he
considered Cointreau’s undisputed use of such mark since 1895 for its culinary school in Paris,
France (in which petitioner’s own directress, Ms. Lourdes L. Dayrit, had trained in 1977).
Contrarily, he found that while Ecole may have prior use of the subject mark in the Philippines
since 1948, it failed to explain how it came up with such name and mark. The IPO Director General
therefore concluded that Ecole has unjustly appropriated the subject mark, rendering it beyond the
mantle of protection of Section 4(d)14 of R.A. No. 166.15

Finding the IPO Director General’s reversal of the BLA’s Decision unacceptable, Ecole filed a
Petition for Review16 dated June 7, 2008 with the CA.

Ruling of the CA

In its Decision dated December 23, 2008, the CA affirmed the IPO Director General’s Decision in
toto.17 It declared Cointreau as the true and actual owner of the subject mark with a right to register
the same in the Philippines under Section 37 of R.A. No. 166, having registered such mark in its
country of origin on November 25, 1986.18

The CA likewise held that Cointreau’s right to register the subject mark cannot be barred by
Ecole’s prior use thereof as early as 1948 for its culinary school "LE CORDON BLEU MANILLE"
in the Philippines because its appropriation of the mark was done in bad faith. Further, Ecole had
no certificate of registration that would put Cointreau on notice that the former had appropriated
or has been using the subject mark. In fact, its application for trademark registration for the same
which was just filed on February 24, 1992 is still pending with the IPO.19

Hence, this petition.

Issues Before the Court

The sole issue raised for the Court’s resolution is whether the CA was correct in upholding the
IPO Director General’s ruling that Cointreau is the true and lawful owner of the subject mark and
thus, entitled to have the same registered under its name.

At this point, it should be noted that the instant case shall be resolved under the provisions of the
old Trademark Law, R.A. No. 166, which was the law in force at the time of Cointreau’s
application for registration of the subject mark.
The Court’s Ruling

The petition is without merit.

In the petition, Ecole argues that it is the rightful owner of the subject mark, considering that it
was the first entity that used the same in the Philippines. Hence, it is the one entitled to its
registration and not Cointreau.

Petitioner’s argument is untenable.

Under Section 220 of R.A. No. 166, in order to register a trademark, one must be the owner thereof
and must have actually used the mark in commerce in the Philippines for two (2) months prior to
the application for registration. Section 2-A21 of the same law sets out to define how one goes
about acquiring ownership thereof. Under Section 2-A, it is clear that actual use in commerce is
also the test of ownership but the provision went further by saying that the mark must not have
been so appropriated by another. Additionally, it is significant to note that Section 2-A does not
require that the actual use of a trademark must be within the Philippines. Thus, as correctly
mentioned by the CA, under R.A. No. 166, one may be an owner of a mark due to its actual use
but may not yet have the right to register such ownership here due to the owner’s failure to use the
same in the Philippines for two (2) months prior to registration.22

Nevertheless, foreign marks which are not registered are still accorded protection against
infringement and/or unfair competition. At this point, it is worthy to emphasize that the Philippines
and France, Cointreau’s country of origin, are both signatories to the Paris Convention for the
Protection of Industrial Property (Paris Convention).23 Articles 6bis and 8 of the Paris Convention
state:

ARTICLE 6bis

(1) The countries of the Union undertake, ex officio if their legislation so permits, or at the request
of an interested party, to refuse or to cancel the registration, and to prohibit the use, of a trademark
which constitutes a reproduction, an imitation, or a translation, liable to create confusion, of a mark
considered by the competent authority of the country of registration or use to be well known in
that country as being already the mark of a person entitled to the benefits of this Convention and
used for identical or similar goods.1âwphi1 These provisions shall also apply when the essential
part of the mark constitutes a reproduction of any such well-known mark or an imitation liable to
create confusion therewith.

ARTICLE 8

A trade name shall be protected in all the countries of the Union without the obligation of filing or
registration, whether or not it forms part of a trademark. (Emphasis and underscoring supplied)

In this regard, Section 37 of R.A. No. 166 incorporated Article 8 of the Paris Convention, to wit:
Section 37. Rights of foreign registrants. - Persons who are nationals of, domiciled in, or have a
bona fide or effective business or commercial establishment in any foreign country, which is a
party to any international convention or treaty relating to marks or trade-names, or the repression
of unfair competition to which the Philippines may be a party, shall be entitled to the benefits and
subject to the provisions of this Act to the extent and under the conditions essential to give effect
to any such convention and treaties so long as the Philippines shall continue to be a party thereto,
except as provided in the following paragraphs of this section.

xxxx

Trade-names of persons described in the first paragraph of this section shall be protected without
the obligation of filing or registration whether or not they form parts of marks.

xxxx

In view of the foregoing obligations under the Paris Convention, the Philippines is obligated to
assure nationals of the signatory-countries that they are afforded an effective protection against
violation of their intellectual property rights in the Philippines in the same way that their own
countries are obligated to accord similar protection to Philippine nationals.24 "Thus, under
Philippine law, a trade name of a national of a State that is a party to the Paris Convention, whether
or not the trade name forms part of a trademark, is protected "without the obligation of filing or
registration.’"25

In the instant case, it is undisputed that Cointreau has been using the subject mark in France since
1895, prior to Ecole’s averred first use of the same in the Philippines in 1948, of which the latter
was fully aware thereof. In fact, Ecole’s present directress, Ms. Lourdes L. Dayrit (and even its
foundress, Pat Limjuco Dayrit), had trained in Cointreau’s Le Cordon Bleu culinary school in
Paris, France. Cointreau was likewise the first registrant of the said mark under various classes,
both abroad and in the Philippines, having secured Home Registration No. 1,390,912 dated
November 25, 1986 from its country of origin, as well as several trademark registrations in the
Philippines.26

On the other hand, Ecole has no certificate of registration over the subject mark but only a pending
application covering services limited to Class 41 of the Nice Classification, referring to the
operation of a culinary school. Its application was filed only on February 24, 1992, or after
Cointreau filed its trademark application for goods and services falling under different classes in
1990. Under the foregoing circumstances, even if Ecole was the first to use the mark in the
Philippines, it cannot be said to have validly appropriated the same.

It is thus clear that at the time Ecole started using the subject mark, the same was already being
used by Cointreau, albeit abroad, of which Ecole’s directress was fully aware, being an alumna of
the latter’s culinary school in Paris, France. Hence, Ecole cannot claim any tinge of ownership
whatsoever over the subject mark as Cointreau is the true and lawful owner thereof. As such, the
IPO Director General and the CA were correct in declaring Cointreau as the true and lawful owner
of the subject mark and as such, is entitled to have the same registered under its name.
In any case, the present law on trademarks, Republic Act No. 8293, otherwise known as the
Intellectual Property Code of the Philippines, as amended, has already dispensed with the
requirement of prior actual use at the time of registration.27 Thus, there is more reason to allow the
registration of the subject mark under the name of Cointreau as its true and lawful owner.

As a final note, "the function of a trademark is to point out distinctly the origin or ownership of
the goods (or services) to which it is affixed; to secure to him, who has been instrumental in
bringing into the market a superior article of merchandise, the fruit of his industry and skill; to
assure the public that they are procuring the genuine article; to prevent fraud and imposition; and
to protect the manufacturer against substitution and sale of an inferior and different article as his
product."28 As such, courts will protect trade names or marks, although not registered or properly
selected as trademarks, on the broad ground of enforcing justice and protecting one in the fruits of
his toil.29

WHEREFORE, the petition is DENIED. Accordingly, the December 23, 2008 Decision of the
Court of Appeals in CA-G.R. SP No. 104672 is hereby AFFIRMED in toto.

SO ORDERED.

G.R. No. 175844 July 29, 2013

BANK OF THE PHILIPPINE ISLANDS, Petitioner,

vs.
SARABIA MANOR HOTEL CORPORATION, Respondent.

DECISION

PERLAS-BERNABE, J.:

Before the Court is a petition for review on certiorari1 assailing the Decision2 dated April 24, 2006
and Resolution3 dated December 6, 2006 of the Court of Appeals, Cebu City (CA) in CA-G.R.
CV. No. 81596 which affirmed with modification the rehabilitation plan of respondent Sarabia
Manor Hotel Corporation (Sarabia) as approved by the Regional Trial Court of Iloilo City, Branch
39 (RTC) through its Order4 dated August 7, 2003.

The Facts

Sarabia is a corporation duly organized and existing under Philippine laws, with principal place of
business at 101 General Luna Street, Iloilo City.5 It was incorporated on February 22, 1982, with
an authorized capital stock of ₱10,000,000.00, fully subscribed and paid-up, for the primary
purpose of owning, leasing, managing and/or operating hotels, restaurants, barber shops, beauty
parlors, sauna and steam baths, massage parlors and such other businesses incident to or necessary
in the management or operation of hotels.6

In 1997, Sarabia obtained a ₱150,000,000.00 special loan package from Far East Bank and Trust
Company (FEBTC) in order to finance the construction of a five-storey hotel building (New
Building) for the purpose of expanding its hotel business. An additional ₱20,000,000.00 stand-by
credit line was approved by FEBTC in the same year.7

The foregoing debts were secured by real estate mortgages over several parcels of land8 owned by
Sarabia and a comprehensive surety agreement dated September 1, 1997 signed by its
stockholders.9 By virtue of a merger, Bank of the Philippine Islands (BPI) assumed all of FEBTC’s
rights against Sarabia.10

Sarabia started to pay interests on its loans as soon as the funds were released in October 1997.
However, largely because of the delayed completion of the New Building, Sarabia incurred various
cash flow problems. Thus, despite the fact that it had more assets than liabilities at that time,11 it,
nevertheless, filed, on July 26, 2002, a Petition12 for corporate rehabilitation (rehabilitation
petition) with prayer for the issuance of a stay order before the RTC as it foresaw the impossibility
to meet its maturing obligations to its creditors when they fall due.

In the said petition, Sarabia claimed that its cash position suffered when it was forced to take-over
the construction of the New Building due to the recurring default of its contractor, Santa Ana – AJ
Construction Corporation (contractor),13 and its subsequent abandonment of the said project.14
Accordingly, the New Building was completed only in the latter part of 2000, or two years past
the original target date of August 1998, thereby skewing Sarabia’s projected revenues. In addition,
it was compelled to divert some of its funds in order to cover cost overruns. The situation became
even more difficult when the grace period for the payment of the principal loan amounts ended in
2000 which resulted in higher amortizations. Moreover, external events adversely affecting the
hotel industry, i.e., the September 11, 2001 terrorist attacks and the Abu Sayyaf issue, also
contributed to Sarabia’s financial difficulties.15 Owing to these circumstances, Sarabia failed to
generate enough cash flow to service its maturing obligations to its creditors, namely: (a) BPI (in
the amount of ₱191,476,421.42); (b) Rural Bank of Pavia (in the amount of ₱2,500,000.00); (c)
Vic Imperial Appliance Corp. (Imperial Appliance) (in the amount of ₱5,000,000.00); (d) its
various suppliers (in the amount of ₱7,690,668.04); (e) the government (for minimum corporate
income tax in the amount of ₱547,161.18); and (f) its stockholders (in the amount of
₱18,748,306.35).16

In its proposed rehabilitation plan,17 Sarabia sought for the restructuring of all its outstanding
loans, submitting that the interest payments on the same be pegged at a uniform escalating rate of:
(a) 7% per annum (p.a.) for the years 2002 to 2005; (b) 8% p.a. for the years 2006 to 2010; (c)
10% p.a. for the years 2011 to 2013; (d) 12% p.a. for the years 2014 to 2015; and (e) 14% p.a. for
the year 2018. Likewise, Sarabia sought to make annual payments on the principal loans starting
in 2004, also in escalating amounts depending on cash flow. Further, it proposed that it should pay
off its outstanding obligations to the government and its suppliers on their respective due dates,
for the sake of its day to day operations.

Finding Sarabia’s rehabilitation petition sufficient in form and substance, the RTC issued a Stay
Order18 on August 2, 2002. It also appointed Liberty B. Valderrama as Sarabia’s rehabilitation
receiver (Receiver). Thereafter, BPI filed its Opposition.19
After several hearings, the RTC gave due course to the rehabilitation petition and referred
Sarabia’s proposed rehabilitation plan to the Receiver for evaluation.20

In a Recommendation21 dated July 10, 2003 (Receiver’s Report), the Receiver found that Sarabia
may be rehabilitated and thus, made the following recommendations:

(1) Restructure the loans with Sarabia’s creditors, namely, BPI, Imperial Appliance, Rural
Bank of Pavia, and Barcelo Gestion Hotelera, S.L. (Barcelo), under the following terms
and conditions: (a) the total outstanding balance as of December 31, 2002 shall be
recomputed, with the interest for the years 2001 and 2002 capitalized and treated as part of
the principal; (b) waive all penalties; (c) extend the payment period to seventeen (17) years,
i.e., from 2003 to 2019, with a two-year grace period in principal payment; (d) fix the
interest rate at 6.75% p.a. plus 10% value added tax on interest for the entire term of the
restructured loans;22 (e) the interest and principal based on the amortization schedule shall
be payable annually at the last banking day of each year; and (f) any deficiency shall be
paid personally by Sarabia’s stockholders in the event it fails to generate enough cash flow;
on the other hand, any excess funds generated at the end of the year shall be paid to the
creditors to accelerate the debt servicing;23

(2) Pay Sarabia’s outstanding payables with its suppliers and the government so as not to
disrupt hotel operations;24

(3) Convert the Advances from stockholders amounting to ₱18,748,306.00 to stockholder’s

equity and other advances amounting to ₱42,688,734.00 as of the December 31, 2002
tentative financial statements to Deferred Credits; the said conversion should increase
stockholders’ equity to ₱268,545,731.00 and bring the debt to equity ratio to 0.85:1;25

(4) Require Sarabia’s stockholders to pay its payables to the hotel recorded as Accounts
Receivable – Trade, amounting to ₱285,612.17 as of December 31, 2001, and its remaining
receivables after such date;26

(5) No compensation or cash dividends shall be paid to the stockholders during the
rehabilitation period, except those who are directly employed by the hotel as a full time
officer, employee or consultant covered by a valid contract and for a reasonable fee;27

(6) All capital expenditures which are over and above what is provided in the case flow of
the rehabilitation plan which will materially affect Sarabia’s cash position but which are
deemed necessary in order to maintain the hotel’s competitiveness in the industry shall be
subject to the RTC’s approval prior to its implementation;28

(7) Terminate the management contract with Barcelo, thereby saving an estimated
₱25,830,997.00 in management fees, over and above the salaries and benefits of certain
managerial employees;29
 (8) Appoint a new management team which would be required to submit a comprehensive
business plan to support the generation of the target revenue as reported in the rehabilitation
plan;30

(9) Open a debt servicing account and transfer all excess funds thereto, which in no case
should be less than ₱500,000.00 at the end of the month; the funds will be drawn payable
to the creditors only based on the amortization schedule;31 and

(10) Release the surety obligations of Sarabia’s stockholders, considering the adequate
collaterals and securities covered by the rehabilitation plan and the continuing mortgages
over Sarabia’s properties.32

The RTC Ruling

In an Order33 dated August 7, 2003, the RTC approved Sarabia’s rehabilitation plan as
recommended by the Receiver, finding the same to be feasible. In this accord, it observed that the
rehabilitation plan was realistic since, based on Sarabia’s financial history, it was shown that it has
the inherent capacity to generate funds to pay its loan obligations given the proper perspective.34
The recommended rehabilitation plan was also practical in terms of the interest rate pegged at
6.75% p.a. since it is based on Sarabia’s ability to pay and the creditors’ perceived cost of money.35
It was likewise found to be viable since, based on the extrapolations made by the Receiver,
Sarabia’s revenue projections, albeit projected to slow down, remained to have a positive
business/profit outlook altogether.36

The RTC further noted that while it may be true that Sarabia has been unable to comply with its
existing terms with BPI, it has nonetheless complied with its obligations to its employees and
suppliers and pay its taxes to both local and national government without disrupting the day-to-
day operations of its business as an on-going concern.37

More significantly, the RTC did not give credence to BPI’s opposition to the Receiver’s
recommended rehabilitation plan as neither BPI nor the Receiver was able to substantiate the claim
that BPI’s cost of funds was at the 10% p.a. threshold. In this regard, the RTC gave more credence
to the Receiver’s determination of fixing the interest rate at 6.75% p.a., taking into consideration
not only Sarabia’s ability to pay based on its proposed interest rates, i.e., 7% to 14% p.a., but also
BPI’s perceived cost of money based on its own published interest rates for deposits, i.e., 1% to
4.75% p.a., as well as the rates for treasury bills, i.e., 5.498% p.a. and CB overnight borrowings,
i.e., 7.094%. p.a.38

The CA Ruling

In a Decision39 dated April 24, 2006, the CA affirmed the RTC’s ruling with the modification of
reinstating the surety obligations of Sarabia’s stockholders to BPI as an additional safeguard for
the effective implementation of the approved rehabilitation plan.40 It held that the RTC’s
conclusions as to the feasibility of Sarabia’s rehabilitation was well-supported by the company’s
financial statements, both internal and independent, which were properly analyzed and examined
by the Receiver.41 It also upheld the 6.75%. p.a. interest rate on Sarabia’s loans, finding the said
rate to be reasonable given that BPI’s interests as a creditor were properly accounted for. As
published, BPI’s time deposit rate for an amount of ₱5,000,000.00 (with a term of 360-364 days)
is at 5.5% p.a.; while the benchmark ninety one-day commercial paper, which banks used to price
their loan averages to 6.4% p.a. in 2005, has a three-year average rate of 6.57% p.a.42 As such, the
6.75% p.a. interest rate would be higher than the current market interest rates for time deposits and
benchmark commercial papers. Moreover, the CA pointed out that should the prevailing market
interest rates change as feared by BPI, the latter may still move for the modification of the approved
rehabilitation plan.43

Aggrieved, BPI moved for reconsideration which was, however, denied in a Resolution44 dated
December 6, 2006.

Hence, this petition.

The Issue Before the Court

The primordial issue raised for the Court’s resolution is whether or not the CA correctly affirmed
Sarabia’s rehabilitation plan as approved by the RTC, with the modification on the reinstatement
of the surety obligations of Sarabia’s stockholders.

BPI mainly argues that the approved rehabilitation plan did not give due regard to its interests as
a secured creditor in view of the imposition of a fixed interest rate of 6.75% p.a. and the extended
loan repayment period.45 It likewise avers that Sarabia’s misrepresentations in its rehabilitation
petition remain unresolved.46

On the contrary, Sarabia essentially maintains that: (a) the present petition improperly raises
questions of fact;47 (b) the approved rehabilitation plan takes into consideration all the interests of
the parties and the terms and conditions stated therein are more reasonable than what BPI
proposes;48 and (c) BPI’s allegations of misrepresentation are mere desperation moves to convince
the Court to overturn the rulings of the courts a quo.49

The Court’s Ruling

The petition has no merit.

A. Propriety of BPI’s petition;

procedural considerations.

It is fundamental that a petition for review on certiorari filed under Rule 45 of the Rules of Court
covers only questions of law. In this relation, questions of fact are not reviewable and cannot be
passed upon by the Court unless, the following exceptions are found to exist: (a) when the findings
are grounded entirely on speculations, surmises, or conjectures; (b) when the inference made is
manifestly mistaken, absurd, or impossible; (c) when there is a grave abuse of discretion; (d) when
the judgment is based on misappreciation of facts; (e) when the findings of fact are conflicting; (f)
when in making its findings, the same are contrary to the admissions of both parties; (g) when the
findings are contrary to those of the trial court; (h) when the findings are conclusions without
citation of specific evidence on which they are based; (i) when the facts set forth in the petition as
well as in the petitioner’s main and reply briefs are not disputed by the respondent; and (j) when
the findings of fact are premised on the supposed absence of evidence and contradicted by the
evidence on record.50

The distinction between questions of law and questions of fact is well-defined. A question of law
exists when the doubt or difference centers on what the law is on a certain state of facts. A question
of fact, on the other hand, exists if the doubt centers on the truth or falsity of the alleged facts. This
being so, the findings of fact of the CA are final and conclusive and the Court will not review them
on appeal.51

In view of the foregoing, the Court finds BPI’s petition to be improper – and hence, dismissible52
– as the issues raised therein involve questions of fact which are beyond the ambit of a Rule 45
petition for review.

To elucidate, the determination of whether or not due regard was given to the interests of BPI as a
secured creditor in the approved rehabilitation plan partakes of a question of fact since it will
require a review of the sufficiency and weight of evidence presented by the parties – among others,
the various financial documents and data showing Sarabia’s capacity to pay and BPI’s perceived
cost of money – and not merely an application of law. Therefore, given the complexion of the
issues which BPI presents, and finding none of the above-mentioned exceptions to exist, the Court
is constrained to dismiss its petition, and prudently uphold the factual findings of the courts a quo
which are entitled to great weight and respect, and even accorded with finality. This especially
obtains in corporate rehabilitation proceedings wherein certain commercial courts have been
designated on account of their expertise and specialized knowledge on the subject matter, as in
this case.

In any event, even discounting the above-discussed procedural considerations, the Courts still finds
BPI’s petition lacking in merit.

B. Approval of Sarabia’s
rehabilitation plan; substantive
considerations.

Records show that Sarabia has been in the hotel business for over thirty years, tracing its operations
back to 1972. Its hotel building has been even considered a landmark in Iloilo, being one of its
kind in the province and having helped bring progress to the community.23 Since then, its
expansion was continuous which led to its decision to commence with the construction of a new
hotel building. Unfortunately, its contractor defaulted which impelled Sarabia to take-over the
same. This significantly skewed its projected revenues and led to various cash flow difficulties,
resulting in its incapacity to meet its maturing obligations.

Recognizing the volatile nature of every business, the rules on corporate rehabilitation have been
crafted in order to give companies sufficient leeway to deal with debilitating financial
predicaments in the hope of restoring or reaching a sustainable operating form if only to best
accommodate the various interests of all its stakeholders, may it be the corporation’s stockholders,
its creditors and even the general public. In this light, case law has defined corporate rehabilitation
as an attempt to conserve and administer the assets of an insolvent corporation in the hope of its
eventual return from financial stress to solvency. It contemplates the continuance of corporate life
and activities in an effort to restore and reinstate the corporation to its former position of successful
operation and liquidity. Verily, the purpose of rehabilitation proceedings is to enable the company
to gain a new lease on life and thereby allow creditors to be paid their claims from its earnings. 54
Thus, rehabilitation shall be undertaken when it is shown that the continued operation of the
corporation is economically more feasible and its creditors can recover, by way of the present
value of payments projected in the plan, more, if the corporation continues as a going concern than
if it is immediately liquidated.55

Among other rules that foster the foregoing policies, Section 23, Rule 4 of the Interim Rules of
Procedure on Corporate Rehabilitation56 (Interim Rules) states that a rehabilitation plan may be
approved even over the opposition of the creditors holding a majority of the corporation’s total
liabilities if there is a showing that rehabilitation is feasible and the opposition of the creditors is
manifestly unreasonable. Also known as the "cram-down" clause, this provision, which is currently
incorporated in the FRIA,57 is necessary to curb the majority creditors’ natural tendency to dictate
their own terms and conditions to the rehabilitation, absent due regard to the greater long-term
benefit of all stakeholders. Otherwise stated, it forces the creditors to accept the terms and
conditions of the rehabilitation plan, preferring long-term viability over immediate but incomplete
recovery.

It is within the parameters of the aforesaid provision that the Court examines the approval of
Sarabia’s rehabilitation.

i. Feasibility of Sarabia’s rehabilitation.

In order to determine the feasibility of a proposed rehabilitation plan, it is imperative that a

thorough examination and analysis of the distressed corporation’s financial data must be
conducted. If the results of such examination and analysis show that there is a real opportunity to
rehabilitate the corporation in view of the assumptions made and financial goals stated in the
proposed rehabilitation plan, then it may be said that a rehabilitation is feasible. In this accord, the
rehabilitation court should not hesitate to allow the corporation to operate as an on-going concern,
albeit under the terms and conditions stated in the approved rehabilitation plan. On the other hand,
if the results of the financial examination and analysis clearly indicate that there lies no reasonable
probability that the distressed corporation could be revived and that liquidation would, in fact,
better subserve the interests of its stakeholders, then it may be said that a rehabilitation would not
be feasible. In such case, the rehabilitation court may convert the proceedings into one for
liquidation.58 As further guidance on the matter, the Court’s pronouncement in Wonder Book
Corporation v. Philippine Bank of Communications59 proves instructive:

Rehabilitation is x x x available to a corporation [which], while illiquid, has assets that can generate
more cash if used in its daily operations than sold. Its liquidity issues can be addressed by a
practicable business plan that will generate enough cash to sustain daily operations, has a definite
source of financing for its proper and full implementation, and anchored on realistic assumptions
and goals. This remedy should be denied to corporations whose insolvency appears to be
irreversible and whose sole purpose is to delay the enforcement of any of the rights of the creditors,
which is rendered obvious by the following: (a) the absence of a sound and workable business
plan; (b) baseless and unexplained assumptions, targets and goals; (c) speculative capital infusion
or complete lack thereof for the execution of the business plan; (d) cash flow cannot sustain daily
operations; and (e) negative net worth and the assets are near full depreciation or fully
depreciated.60 (Emphasis and underscoring supplied)

Keeping with these principles, the Court thus observes that:

First, Sarabia has the financial capability to undergo rehabilitation.

Based on the Receiver’s Report, Sarabia’s financial history shows that it has the inherent capacity
to generate funds to repay its loan obligations if applied through the proper financial framework.
The Receiver’s examination and analysis of Sarabia’s financial data reveals that the latter’s
business is not only an on-going but also a growing concern. Despite its financial constraints,
Sarabia likewise continues to be profitable with its hotelier business as its operations have not been
disrupted.61 Hence, given its current fiscal position, the prospect of substantial and continuous
revenue generation is a realistic goal.

Second, Sarabia has the ability to have sustainable profits over a long period of time.

As concluded by the Receiver, Sarabia’s projected revenues shall have a steady year-on-year
growth from the time that it applied for rehabilitation until the end of its rehabilitation plan in
2018, albeit with decreasing growth rates (growth rate is at 26% in 2003, 5% in 2004-2007, 3% in
2008-2018).62 Should such projections come through, Sarabia would have the ability not just to
pay off its existing debts but also to carry on with its intended expansion. The projected
sustainability of its business, as mapped out in the approved rehabilitation plan, makes Sarabia’s
rehabilitation a more viable option to satisfy the interests of its stakeholders in the long run as
compared to its immediate liquidation.

Third, the interests of Sarabia’s creditors are well-protected.

As correctly perceived by the CA, adequate safeguards are found under the approved rehabilitation
plan, namely: (a) any deficiency in the required minimum payments to creditors based on the
presented amortization schedule shall be paid personally by Sarabia’s stockholders;

(b) the conversion of the advances from stockholders amounting to ₱18,748,306.00 and deferred
credits amounting to ₱42,688,734 as of the December 31, 2002 tentative audited financial
statements to stockholder’s equity was granted;64 (c) all capital expenditures which are over and
above what is provided in the cash flow of the approved rehabilitation plan which will materially
affect the cash position of the hotel but which are deemed necessary in order to maintain the hotel’s
competitiveness in the industry shall be subject to the approval by the Court prior to
implementation;65 (d) the formation of Sarabia’s new management team and the requirement that
the latter shall be required to submit a comprehensive business plan to support the generation of
revenues as reported in the Rehabilitation Plan, both short term and long term;66 (e) the
maintenance of all Sarabia’s existing real estate mortgages over hotel properties as collaterals and
securities in favor of BPI until the former’s full and final liquidation of its outstanding loan
obligations with the latter;67 and (f) the reinstatement of the comprehensive surety agreement of
Sarabia’s stockholders regarding the former’s debt to BPI.68 With these terms and conditions69 in
place, the subsisting obligations of Sarabia to its creditors would, more likely than not, be satisfied.

Therefore, based on the above-stated reasons, the Court finds Sarabia’s rehabilitation to be
feasible.

ii. Manifest unreasonableness of BPI’s opposition.

Although undefined in the Interim Rules, it may be said that the opposition of a distressed
corporation’s majority creditor is manifestly unreasonable if it counter-proposes unrealistic
payment terms and conditions which would, more likely than not, impede rather than aid its
rehabilitation. The unreasonableness becomes further manifest if the rehabilitation plan, in fact,
provides for adequate safeguards to fulfill the majority creditor’s claims, and yet the latter persists
on speculative or unfounded assumptions that his credit would remain unfulfilled.

While Section 23, Rule 4 of the Interim Rules states that the rehabilitation court shall consider
certain incidents in determining whether the opposition is manifestly unreasonable,70 BPI neither
proposes Sarabia’s liquidation over its rehabilitation nor questions the controlling interest of
Sarabia’s shareholders or owners. It only takes exception to: (a) the imposition of the fixed interest
rate of 6.75% p.a. as recommended by the Receiver and as approved by the courts a quo, proposing
that the original escalating interest rates of 7%, 8%, 10%, 12%, and 14%, over seventeen years be
applied instead;71 and (b) the fact that Sarabia’s misrepresentations in the rehabilitation petition,
i.e., that it physically acquired additional property whereas in fact the increase was mainly due to
the recognition of Revaluation Increment and because of capital expenditures, were not taken into
consideration by the courts a quo.72

Anent the first matter, it must be pointed out that oppositions which push for high interests rates
are generally frowned upon in rehabilitation proceedings given that the inherent purpose of a
rehabilitation is to find ways and means to minimize the expenses of the distressed corporation
during the rehabilitation period. It is the objective of a rehabilitation proceeding to provide the best
possible framework for the corporation to gradually regain or achieve a sustainable operating form.
Hence, if a creditor, whose interests remain well-preserved under the existing rehabilitation plan,
still declines to accept interests pegged at reasonable rates during the period of rehabilitation, and,
in turn, proposes rates which are largely counter-productive to the rehabilitation, then it may be
said that the creditor’s opposition is manifestly unreasonable.

In this case, the Court finds BPI’s opposition on the approved interest rate to be manifestly
unreasonable considering that: (a) the 6.75% p.a. interest rate already constitutes a reasonable rate
of interest which is concordant with Sarabia’s projected rehabilitation; and (b) on the contrary,
BPI’s proposed escalating interest rates remain hinged on the theoretical assumption of future
fluctuations in the market, this notwithstanding the fact that its interests as a secured creditor
remain well-preserved.
The following observations impel the foregoing conclusion: first, the 6.75% p.a. interest rate is
actually higher than BPI’s perceived cost of money as evidenced by its published time deposit rate
(for an amount of ₱5,000,000.00, with a term of 360-364 days) which is only set at 5.5% p.a.;
second, the 6.75% p.a. is also higher than the benchmark ninety one-day commercial paper, which
is used by banks to price their loan averages to 6.4% p.a. in 2005, and has a three-year average
rate of 6.57% p.a.; and third, BPI’s interests as a secured creditor are adequately protected by the
maintenance of all Sarabia’s existing real estate mortgages over its hotel properties as collateral as
well as by the reinstatement of the comprehensive surety agreement of Sarabia’s stockholders,
among other terms in the approved rehabilitation plan.

As to the matter of Sarabia’s alleged misrepresentations, records disclose that Sarabia already
clarified its initial statements in its rehabilitation petition by submitting, on its own accord, a
supplemental affidavit dated October 24, 200273 that explains that the increase in its properties and
assets was indeed by recognition of revaluation increment.74 Proceeding from this fact, the CA
observed that BPI actually failed to establish its claimed defects in light of Sarabia’s assertive and
forceful explanation that the alleged inaccuracies do not warrant the dismissal of its petition. 75
Thus, absent any compelling reason to disturb the CA's finding on this score, the Court deems it
proper to dismiss BPI's allegations of misrepresentation against Sarabia.

As a final point, BPI claims that Sarabia's projections were "too optimistic," its management was
"extremely incompetent"76 and that it was even forced to pay a pre-termination penalty due to its
previous loan with the Landbank of the Philippines.77 Suffice it to state that bare allegations of fact
should not be entet1ained as they are bereft of any probative value.78 In any event, even if it is
assumed that the said allegations are substantiated by clear and convincing evidence, the Court,
absent any cogent basis to proceed otherwise, remains steadfast in its preclusion to thresh out
matters of fact on a Rule 45 petition, as in this case.

All told, Sarabia's rehabilitation plan, as approved and modified by the CA, is hereby sustained. In
view of the foregoing pronouncements, the Court finds it unnecessary to delve on the other
ancillary issues as herein raised.

WHEREFORE, the petition is DENIED. Accordingly, the Decision dated April 24, 2006 and
Resolution dated December 6, 2006 of the Court of Appeals, Cebu City in CA-G.R. CV. No. 81596
are hereby AFFIRMED.

SO ORDERED.

G.R. No. 180064 September 16, 2013

JOSE U. PUA and BENJAMIN HANBEN U. PUA, Petitioners,

vs.
CITIBANK, N. A., Respondent.

DECISION

PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari1 are the Decision2 dated May 21, 2007 and
Resolution3 dated October 16, 2007 of the Court of Appeals (CA) in CA-G.R. SP No. 79297,
which reversed and set aside the Orders dated May 14, 20034 and July 16, 20035 of the Regional
Trial Court of Cauayan City, Isabela, Branch 19 (RTC), dismissing petitioners Jose(Jose) and
Benjamin Hanben U. Pua's (petitioners) complaint against respondent Citibank, N. A.
(respondent).

The Facts

On December 2, 2002, petitioners filed before the RTC a Complaint6 for declaration of nullity of
contract and sums of money with damages against respondent,7 docketed as Civil Case No. 19-
1159.8 In their complaint, petitioners alleged that they had been depositors of Citibank Binondo
Branch (Citibank Binondo) since 1996. Sometime in 1999, Guada Ang, Citibank Binondo’s
Branch Manager, invited Jose to a dinner party at the Manila Hotel where he was introduced to
several officers and employees of Citibank Hongkong Branch (Citibank Hongkong).9 A few
months after, Chingyee Yau (Yau), Vice-President of Citibank Hongkong, came to the Philippines
to sell securities to Jose. They averred that Yau required Jose to open an account with Citibank
Hongkong as it is one of the conditions for the sale of the aforementioned securities.10 After
opening such account, Yau offered and sold to petitioners numerous securities11 issued by various
public limited companies established in Jersey, Channel I sands. The offer, sale, and signing of the
subscription agreements of said securities were all made and perfected at Citibank Binondo in the
presence of its officers and employees.12 Later on, petitioners discovered that the securities sold to
them were not registered with the Securities and Exchange Commission (SEC)and that the terms
and conditions covering the subscription were not likewise submitted to the SEC for evaluation,
approval, and registration.13 Asserting that respondent’s actions are in violation of Republic Act
No.8799, entitled the "Securities Regulation Code" (SRC), they assailed the validity of the
subscription agreements and the terms and conditions thereof for being contrary to law and/or
public policy.14

For its part, respondent filed a motion to dismiss15 alleging, inter alia, that petitioners’ complaint
should be dismissed outright for violation of the doctrine of primary jurisdiction. It pointed out
that the merits of the case would largely depend on the issue of whether or not there was a violation
of the SRC, in particular, whether or not there was a sale of unregistered securities. In this regard,
respondent contended that the SRC conferred upon the SEC jurisdiction to investigate compliance
with its provisions and thus, petitioners’ complaint should be first filed with the SEC and not
directly before the RTC.16

Petitioners opposed17 respondent’s motion to dismiss, maintaining that the RTC has jurisdiction
over their complaint. They asserted that Section 63of the SRC expressly provides that the RTC has
exclusive jurisdiction to hear and decide all suits to recover damages pursuant to Sections 56 to 61
of the same law.18

The RTC Ruling

In an Order19 dated May 14, 2003, the RTC denied respondent’s motion to dismiss. It noted that
petitioners’ complaint is for declaration of nullity of contract and sums of money with damages
and, as such, it has jurisdiction to hear and decide upon the case even if it involves the alleged sale
of securities. It ratiocinated that the legal questions or issues arising from petitioners’ causes of
action against respondent are more appropriate for the judiciary than for an administrative agency
to resolve.20

Respondent filed an omnibus motion21 praying, among others, for there consideration of the
aforesaid ruling, which petitioners, in turn, opposed.22 In an Order23 dated July 16, 2003, the RTC
denied respondent’s omnibus motion with respect to its prayer for reconsideration. Dissatisfied,
respondent filed a petition for certiorari before the CA.24

The CA Ruling

In a Decision25 dated May 21, 2007, the CA reversed and set aside the RTC’s Orders and dismissed
petitioners’ complaint for violation of the doctrine of primary jurisdiction. The CA agreed with
respondent’s contention that since the case would largely depend on the issue of whether or not
the latter violated the provisions of the SRC, the matter is within the special competence or
knowledge of the SEC. Citing the case of Baviera v. Paglinawan26 (Baviera), the CA opined that
all complaints involving violations of the SRC should be first filed before the SEC.27

Aggrieved, petitioners moved for reconsideration,28 which was, however, denied by the CA in a
Resolution29 dated October 16, 2007.Hence, this petition.

The Issue Before the Court

The essential issue in this case is whether or not petitioners’ action falls within the primary
jurisdiction of the SEC.

Petitioners reiterate their original position that the SRC itself provides that civil cases for damages
arising from violations of the same law fall within the exclusive jurisdiction of the regional trial
courts.30

On the contrary, respondent maintains that since petitioners’ complaint would necessarily touch
on the issue of whether or not the former violated certain provisions of the SRC, then the said
complaint should have been first filed with the SEC which has the technical competence to resolve
such dispute.31

The Court’s Ruling

The petition is meritorious.

At the outset, the Court observes that respondent erroneously relied on the Baviera ruling to
support its position that all complaints involving purported violations of the SRC should be first
referred to the SEC. A careful reading of the Baviera case would reveal that the same involves a
criminal prosecution of a purported violator of the SRC, and not a civil suit such as the case at bar.
The pertinent portions of the Baviera ruling thus read:
A criminal charge for violation of the Securities Regulation Code is a specialized dispute. Hence,
it must first be referred to an administrative agency of special competence, i.e., the SEC. Under
the doctrine of primary jurisdiction, courts will not determine a controversy involving a question
within the jurisdiction of the administrative tribunal, where the question demands the exercise of
sound administrative discretion requiring the specialized knowledge and expertise of said
administrative tribunal to determine technical and intricate matters of fact. The Securities
Regulation Code is a special law. Its enforcement is particularly vested in the SEC.

Hence, all complaints for any violation of the Code and its implementing rules and regulations
should be filed with the SEC. Where the complaint is criminal in nature, the SEC shall indorse the
complaint to the DOJ for preliminary investigation and prosecution as provided in Section 53.1
earlier quoted.

We thus agree with the Court of Appeals that petitioner committed a fatal procedural lapse when
he filed his criminal complaint directly with the DOJ. Verily, no grave abuse of discretion can be
ascribed to the DOJ in dismissing petitioner’s complaint.32 (Emphases and underscoring supplied)

Records show that petitioners’ complaint constitutes a civil suit for declaration of nullity of
contract and sums of money with damages, which stemmed from respondent’s alleged sale of
unregistered securities, in violation of the various provisions of the SRC and not a criminal case
such as that involved in Baviera.

In this light, when the Court ruled in Baviera that "all complaints for any violation of the [SRC] x
x x should be filed with the SEC,"33 it should be construed as to apply only to criminal and not to
civil suits such as petitioners’ complaint.

Moreover, it is a fundamental rule in procedural law that jurisdiction is conferred by law; 34 it

cannot be inferred but must be explicitly stated therein. Thus, when Congress confers exclusive
jurisdiction to a judicial or quasi-judicial entity over certain matters by law, this, absent any other
indication to the contrary, evinces its intent to exclude other bodies from exercising the same.

It is apparent that the SRC provisions governing criminal suits are separate and distinct from those
which pertain to civil suits. On the one hand, Section 53 of the SRC governs criminal suits
involving violations of the said law, viz.:

SEC. 53. Investigations, Injunctions and Prosecution of Offenses. –

53.1. The Commission may, in its discretion, make such investigations as it deems necessary to
determine whether any person has violated or is about to violate any provision of this Code, any
rule, regulation or order thereunder, or any rule of an Exchange, registered securities association,
clearing agency, other self-regulatory organization, and may require or permit any person to file
with it a statement in writing, under oath or otherwise, as the Commission shall determine, as to
all facts and circumstances concerning the matter to be investigated. The Commission may publish
information concerning any such violations, and to investigate any fact, condition, practice or
matter which it may deem necessary or proper to aid in the enforcement of the provisions of this
Code, in the prescribing of rules and regulations thereunder, or in securing information to serve as
a basis for recommending further legislation concerning the matters to which this Code relates:
Provided, however, That any person requested or subpoenaed to produce documents or testify in
any investigation shall simultaneously be notified in writing of the purpose of such investigation:
Provided, further, That all criminal complaints for violations of this Code, and the implementing
rules and regulations enforced or administered by the Commission shall be referred to the
Department of Justice for preliminary investigation and prosecution before the proper court:

Provided, furthermore, That in instances where the law allows independent civil or criminal
proceedings of violations arising from the same act, the Commission shall take appropriate action
to implement the same: Provided, finally, That the investigation, prosecution, and trial of such
cases shall be given priority.

On the other hand, Sections 56, 57, 58, 59, 60, 61, 62, and 63 of the SRC pertain to civil suits
involving violations of the same law. Among these, the applicable provisions to this case are
Sections 57.1 and 63.1 of the SRC which provide:

SEC. 57. Civil Liabilities Arising in Connection With Prospectus, Communications and Reports.

– 57.1. Any person who:

(a) Offers to sell or sells a security in violation of Chapter III;

or

(b) Offers to sell or sells a security, whether or not exempted by the provisions of this Code,
by the use of any means or instruments of transportation or communication, by means of a
prospectus or other written or oral communication, which includes an untrue statement of
a material fact or omits to state a material fact necessary in order to make the statements,
in the light of the circumstances under which they were made, not misleading (the
purchaser not knowing of such untruth or omission), and who shall fail in the burden of
proof that he did not know, and in the exercise of reasonable care could not have known,
of such untruth or omission, shall be liable to the person purchasing such security from
him, who may sue to recover the consideration paid for such security with interest thereon,
less the amount of any income received thereon, upon the tender of such security, or for
damages if he no longer owns the security.

xxxx

SEC. 63. Amount of Damages to be Awarded. – 63.1. All suits to recover damages pursuant to
Sections 56, 57, 58, 59, 60 and 61 shall be brought before the Regional Trial Court which shall
have exclusive jurisdiction to hear and decide such suits. The Court is hereby authorized to award
damages in an amount not exceeding triple the amount of the transaction plus actual damages.

x x x x (Emphases and underscoring supplied)

Based on the foregoing, it is clear that cases falling under Section 57of the SRC, which pertain to
civil liabilities arising from violations of the requirements for offers to sell or the sale of securities,
as well as other civil suits under Sections 56, 58, 59, 60, and 61 of the SRC shall be exclusively
brought before the regional trial courts. It is a well-settled rule in statutory construction that the
term "shall" is a word of command, and one which has always or which must be given a
compulsory meaning, and it is generally imperative or mandatory.35 Likewise, it is equally
revelatory that no SRC provision of similar import is found in its sections governing criminal suits;
quite the contrary, the SRC states that criminal cases arising from violations of its provisions
should be first referred to the SEC.1âwphi1

Therefore, based on these considerations, it stands to reason that civil suits falling under the SRC
are under the exclusive original jurisdiction of the regional trial courts and hence, need not be first
filed before the SEC, unlike criminal cases wherein the latter body exercises primary jurisdiction.

All told, petitioners' filing of a civil suit against respondent for purported violations of the SRC
was properly filed directly before the RTC.

WHEREFORE, the petition is GRANTED. Accordingly, the Court of Appeals' Decision dated
May 21, 2007 and Resolution dated October 16,2007 in CA-G.R. SP No. 79297 are hereby
REVERSED and SET ASIDE. Let Civil Case No. 19-1159 be REINSTATED and REMANDED
to the Regional Trial Court of Cauayan City, Isabela, Branch 19 for further proceedings.

SO ORDERED.

G.R. No. 205839

LAND BANK OF THE PHILIPPINES, Petitioner

vs.
NARCISO L. KHO, Respondent

x-----------------------x

G.R. No. 205840

MA.LORENA FLORES and ALEXANDER CRUZ, Petitioners,

vs.
NARCISO L. KHO, Respondent.

DECISION

BRION, J.:

These are consolidated petitions for review on certiorari assailing the Court of Appeals' (CA)
August 30, 2012 decision and February 14, 2013 Resolution in CA-G.R. CV No. 93881.1The CA
set aside the Regional Trial Court’s (RTC) dismissal of Civil Case No. Q-06-571542and remanded
the case for further proceedings.
Antecedents

The respondent Narciso Kho is the sole proprietor of United Oil Petroleum, a business engaged in
trading diesel fuel. Sometime in December 2006, he entered into a verbal agreement to purchase
lubricants from Red Orange International Trading (Red Orange), represented by one Rudy Medel.
Red Orange insisted that it would only accept a Land Bank manager’s check as payment.

On December 28, 2005, Kho, accompanied by Rudy Medel, opened Savings Account No. 0681-
0681-80 at the Araneta Branch of petitioner Land Bank of the Philippines (Land Bank).3His initial
₱25,993,537.37 deposit4 consisted of the following manager’s checks:

1 UCPB Del Monte Branch PHP 15,000,000

Check No. 19107

2 E-PCI Banawe Branch PHP 2,900,000

Check No. 26200720

3 I.E. Bank Retiro Branch PHP 8,093,537.37

Check No. 1466

These checks were scheduled for clearance on January 2, 2006.

Kho also purchased Land Bank Manager’s Check No. 07410 leveraged by his newly opened
savings account. Recem Macarandan, the Acting Operations Supervisor of the Araneta branch,
and Leida Benitez, the Document Examiner, prepared and signed the check.5

The check was postdated to January 2, 2006, and scheduled for actual delivery on the same date
after the three checks were expected to have been cleared. It was valued at ₱25,000,000.00 and
made payable to Red Orange.6

Kho requested a photocopy of the manager’s check to provide Red Orange with proof that he had
available funds for the transaction.1âwphi1 The branch manager, petitioner Ma. Lorena Flores,
accommodated his request. Kho gave the photocopy of the check to Rudy Medel.7

On January 2, 2006, Kho returned to the bank and picked up check No. 07410. Accordingly,
₱25,000,000.00 was debited from his savings account.

Unfortunately, his deal with Red Orange did not push through.

On January 3, 2006, an employee of the Bank of the Philippine Islands (BPI) called Land Bank,
Araneta Branch, to inform them that Red Orange had deposited check No. 07410 for payment.
Flores confirmed with BPI that Land Bank had issued the check to Kho.8
On January 4, 2006, the Central Clearing Department (CCD) of the Land Bank Head Office faxed
a copy of the deposited check to the Araneta branch for payment. The officers of the Araneta
branch examined the fax copy and thought that the details matched the check purchased by Kho.
Thus, Land Bank confirmed the deposited check.9

On January 5, 2006, Flores informed Kho by phone that Check No. 07410 was cleared and paid
by the BPI, Kamuning branch.10

Shocked, Kho informed Flores that he never negotiated the check because the deal did not
materialize. More importantly, the actual check was still in his possession.11

Kho immediately went to Land Bank with the check No. 07410. They discovered that what was
deposited and encashed with BPI was a spurious manager’s check.12 Kho demanded the
cancellation of his manager’s check and the release of the remaining money in his account (then
₱995,207.27).13 However, Flores refused his request because she had no authority to do so at the
time.

Kho returned to the Land Bank, Araneta branch on January 12, 2006, with the same demands. He
was received by petitioner Alexander Cruz who was on his second day as the Officer in Charge
(OIC) of the Araneta branch.14 Cruz informed him that there was a standing freeze order on his
account because of the (then) ongoing investigation on the fraudulent withdrawal of the manager’s
check.15

On January 16, 2006, Kho sent Land Bank a final demand letter for the return of his
₱25,000,000.00 and the release of the ₱995,207.27 from his account but the bank did not comply.

Hence, on January 23, 2006, Kho filed a Complaint for Specific Performance and Damages against
Land Bank, represented by its Araneta Avenue Branch Manager Flores and its OIC Cruz. He also
impleaded Flores and Cruz in their personal capacities. The complaint was docketed as Civil Case
No. Q-06-57154.

Kho asserted that the manager’s check No. 07410 was still in his possession and that he had no
obligation to inform Land Bank whether or not he had already negotiated the check.16

On the other hand, Land Bank argued that Kho was negligent because he handed Medel a
photocopy of the manager’s check and that this was the proximate cause of his loss.17

On April 30, 2009, the RTC dismissed the complaint.18

Citing Associated Bank v. Court of Appeals, the RTC reasoned that the failure of the
purchaser/drawer to exercise ordinary care that substantially contributed to the making of the
forged check precludes him from asserting the forgery.19 It held that (1) Kho’s act of giving Medel
a photocopy of the check and (2) his failure to inform the bank that the transaction with Red Orange
did not push through were the proximate causes of his loss.20
The RTC also found that Flores and Cruz acted in good faith in performing their duties as officers
of Land Bank when they refused to cancel the manager’s check and disallowed Kho from
withdrawing from his account.21

Kho appealed to the CA where the case was docketed as CA-G.R. CV No. 93881.

On August 30, 2012, the CA set aside the RTC’s decision and remanded the case for further
proceedings.

The CA pointed out that Land Bank was conducting an investigation to determine whether there
was a fraudulent negotiation of the manager’s check No. 07410. It held that the outcome of the
investigation – which was not yet available during the trial – is crucial to the resolution of the case.
It noted that the RTC’s ruling on Kho’s negligence in dealing with Medel preempted the outcome
of Land Bank’s investigation.22 Thus, it remanded the case to the RTC with the directive to
consider the outcome of the investigation.

Dissatisfied, Land Bank, Flores, and Cruz, filed separately petitions for review on certiorari before
this Court.

The Arguments

Land Bank asserts that neither party denied the spurious nature of the manager’s check that was
deposited with BPI. Therefore, the conclusion of its investigation as to the fraudulent negotiation
of check No. 07410 is immaterial to the resolution of the case.23

Land Bank adopts the RTC’s conclusion that Kho is precluded from asserting the forgery of check
No. 07410 because his negligence substantially contributed to his loss.24

The bank highlights the following instances of Kho’s negligence:

(1) Kho transacted with Rudy Medel, a person he barely knew, without verifying Medel’s actual
relationship with Red Orange. In fact, Kho even mistook him as "Rudy Rodel" in his complaint;

(2) Kho accorded Medel an unusual degree of trust. He brought Medel with him to the bank and
carelessly gave the latter a photocopy of the manager’s check; and

(3) When he picked up check No. 07410 on January 2, 2006, Kho did not even bother to inform
Land Bank that his transaction with Red Orange did not push through. He could have prevented
or detected the duplication of the check if he had simply notified the bank.25

Flores and Cruz maintain that they did not incur any personal liability to Kho because they were
only performing their official duties in good faith. They insist that their alleged wrongdoing, if
there was any, were corporate acts performed within the scope of their official authority; therefore,
only Land Bank should be made liable for the consequences.26

For his part, Kho adopts the CA’s arguments and reasoning in CA-G. R. CV No. 93881.27
Our Ruling

At the outset, we agree with Land Bank’s contention that the result of its investigation is not
indispensable to resolving this case. After all, it was not conducted by an independent party but by
a party-litigant. We cannot expect the report to yield a completely impartial result. At best, the
investigation report will be of doubtful probative value.

More importantly, all the facts necessary to decide the case are already available. Although they
have reached different legal conclusions, both the RTC and the CA agree that:

On December 28, 2005, Kho opened an account with Land Bank in order to leverage a business
deal with Red Orange;

He purchased Land Bank Manager’s check No. 07410 worth ₱25,000,000.00 payable to Red
Orange and dated January 2, 2006;

He also gave Rudy Medel a photocopy of the check that the bank had given him;

After his visit to the Bank, the deal with Medel and Red Orange did not push through;

He picked up check No. 07410 from the bank on January 2, 2006, without informing the bank that
the deal did not materialize;

Afterwards, Red Orange presented a spurious copy of check No. 07410 to BPI, Kamuning for
payment;

Land Bank cleared the check;

However, Kho never negotiated the actual check. It was in his possession the whole time.

This case can already be resolved based on these undisputed facts. Therefore, the CA erred when it
remanded the case for further proceedings.

That said, we cannot agree that the proximate causes of the loss were Kho’s act of giving Medel a
photocopy of check No. 07410 and his failure to inform Land Bank that his deal with Red Orange did
not push through.

Proximate cause – which is determined by a mixed consideration of logic, common sense, policy, and
precedent – is "that cause which, in natural and continuous sequence, unbroken by any efficient
intervening cause, produces the injury, and without which the result would not have occurred ."28
We cannot understand how both the RTC and the CA overlooked the fact that Land Bank’s officers
cleared the counterfeit check. We stress that the signatories of the genuine check No. 07410 were
Land Bank’s officers themselves.

The business of banking is imbued with public interest; it is an industry where the general public’s
trust and confidence in the system is of paramount importance.29 Consequently, banks are expected
to exert the highest degree of, if not the utmost, diligence. They are obligated to treat their
depositors’ accounts with meticulous care, always keeping in mind the fiduciary nature of their
relationship.30

Banks hold themselves out to the public as experts in determining the genuineness of checks and
corresponding signatures thereon.31 Stemming from their primordial duty of diligence, one of a
bank’s prime duties is to ascertain the genuineness of the drawer’s signature on check being
encashed.32 This holds especially true for manager’s checks.

A manager’s check is a bill of exchange drawn by a bank upon itself, and is accepted by its issuance.
It is an order of the bank to pay, drawn upon itself, committing in effect its total resources, integrity,
and honor behind its issuance. The check is signed by the manager (or some other authorized officer)
for the bank. In this case, the signatories were Macarandan and Benitez.

The genuine check No. 07410 remained in Kho’s possession the entire time and Land Bank admits
that the check it cleared was a fake. When Land Bank’s CCD forwarded the deposited check to its
Araneta branch for inspection, its officers had every opportunity to recognize the forgery of their
signatures or the falsity of the check. Whether by error or neglect, the bank failed to do so, which led
to the withdrawal and eventual loss of the ₱25,000,000.00.

This is the proximate cause of the loss. Land Bank breached its duty of diligence and assumed the risk
of incurring a loss on account of a forged or counterfeit check. Hence, it should suffer the resulting
damage.

We cannot agree with the Land Bank and the RTC’s positions that Kho is precluded from invoking
the forgery. A drawer or a depositor of the bank is precluded from asserting the forgery if the drawee
bank can prove his failure to exercise ordinary care and if this negligence substantially contributed to
the forgery or the perpetration of the fraud.

In Gempesaw v. Court of Appeals,33 Natividad Gempesaw, a businesswoman, completely placed her

trust in her bookkeeper. Gempesaw allowed her bookkeeper to prepare the checks payable to her
suppliers. She signed the checks without verifying their amounts and their corresponding invoices.
Despite receiving her banks statements, Gempesaw never verified the correctness of the returned
checks nor confirmed if the payees actually received payment. This went on for over two years,
allowing her bookkeeper to forge the indorsements of over 82 checks.

Gempesaw failed to examine her records with reasonable diligence before signing the checks and
after receiving her bank statements. Her gross negligence allowed her bookkeeper to benefit from
the subsequent forgeries for over two years.

Gempesaw’s negligence precluded her from asserting the forgery. Nevertheless, we adjudged the
drawee Bank liable to share evenly in her loss for its failure to exercise utmost diligence, which
amounted to a breach of its contractual obligations to the depositor.34

In Associated Bank v. Court of Appeals,35 the province of Tarlac (the depositor) released 30 checks
payable to the order of a government hospital to a retired administrative officer/cashier of the
hospital. The retired officer forged the hospital’s indorsement and deposited the checks into his
personal account. This took place for over three years resulting in the accumulated loss of ₱
203,300.00. We found the province of Tarlac grossly negligent, to the point of substantially
contributing to its loss.36

Nevertheless, we apportioned the loss evenly between the province of Tarlac and the drawee bank
because of the bank’s failure to pay according to the terms of the check. It violated its duty to charge
the customer’s account only for properly payable items.37

Kho’s negligence does not even come close to approximating those of Gempesaw or of the province
of Tarlac. While his act of giving Medel a photocopy of the check may have allowed the latter to create
a duplicate, this cannot possibly excuse Land Bank’s failure to recognize that the check itself –not
just the signatures – is a fake instrument. More importantly, Land Bank itself furnished Kho the
photocopy without objecting to the latter’s intention of giving it to Medel.

Kho' s failure to inform Land Bank that the deal did not push through as of January 2, 2006, does not
justify Land Bank's confirmation and clearing of a fake check bearing the forged signatures of its own
officers. Whether or not the deal pushed through, the check remained in Kho's possession. He was
entitled to a reasonable expectation that the bank would not release any funds corresponding to the
check.

Lastly, we agree with the RTC's finding that neither Flores nor Cruz is liable to Kho in their private
capacities. Their refusal to honor Kho' s demands was made in good faith pursuant to the directives
of the Land Bank's management.
As a pillar of economic development, the banking industry is impressed with public interest. The
general public relies on banks' sworn duty to serve with utmost diligence. Public trust and confidence
in banks is critical to a healthy, stable, and well-functioning economy. Let this serve as a reminder for
banks to always act with the highest degree of diligence and the most meticulous attention to detail.

WHEREFORE, we PARTLY GRANT the petitions. The Court of Appeals' August 30, 2012 decision and
February 14, 2013 resolution in CA-G.R. CV No. 93881 are SET ASIDE. The Regional Trial Court's April
30, 2009 decision in Civil Case No. Q-06-57154 is REVERSED.

Petitioner Land Bank of the Philippines is ORDERED:

(1) to PAY Narciso Kho the sum of TWENTY FIVE MILLION PESOS (₱25,000,000.00), plus interest at the
legal rate reckoned from the filing of the complaint; and

(2) to ALLOW Narciso Kho to withdraw his remaining funds from Savings Account No. 0681-0681-
80.

SO ORDERED.

G.R. No. 219037, October 19, 2016

RCBC SAVINGS BANK, Petitioner, v. NOEL M. ODRADA, Respondent.

DECISION

CARPIO, J.:

The Case

Before the Court is a petition for review on certiorari1 assailing the 26 March 2014 Decision2 and
the 18 June 2015 Resolution3 of the Court of Appeals in CA-G.R. CV No. 94890.

The Facts

In April 2002, respondent Noel M. Odrada (Odrada) sold a secondhand Mitsubishi Montero
(Montero) to Teodoro L. Lim (Lim) for One Million Five Hundred Ten Thousand Pesos
(P1,510,000). Of the total consideration, Six Hundred Ten Thousand Pesos (P610,000) was
initially paid by Lim and the balance of Nine Hundred Thousand Pesos (P900,000) was financed
by petitioner RCBC Savings Bank (RCBC) through a car loan obtained by Lim.4 As a requisite for
the approval of the loan, RCBC required Lim to submit the original copies of the Certificate of
Registration (CR) and Official Receipt (OR) in his name. Unable to produce the Montero's OR
and CR, Lim requested RCBC to execute a letter addressed to Odrada informing the latter that his
application for a car loan had been approved.
On 5 April 2002, RCBC issued a letter that the balance of the loan would be delivered to Odrada
upon submission of the OR and CR. Following the letter and initial down payment, Odrada
executed a Deed of Absolute Sale on 9 April 2002 in favor of Lim and the latter took possession
of the Montero.5 chanrobleslaw

When RCBC received the documents, RCBC issued two manager's checks dated 12 April 2002
payable to Odrada for Nine Hundred Thousand Pesos (P900,000) and Thirteen Thousand Five
Hundred Pesos (P13,500).6 After the issuance of the manager's checks and their turnover to Odrada
but prior to the checks' presentation, Lim notified Odrada in a letter dated 15 April 2002 that there
was an issue regarding the roadworthiness of the Montero. The letter states:
chanRoblesvirtualLawlibrary

April 15, 2002

Mr. Noel M. Odrada

C/o Kotse Pilipinas
Fronting Ultra, Pasig City

Thru: Shan Mendez;.

Dear Mr. Odrada,

Please be inform[ed] that I am going to cancel or exchange the (1) one unit Montero that you sold
to me thru Mr. Shan Mendez because it did not match your representations the way Mr. Shan
Mendez explained to me like: ChanRob lesVirtualawlibrary

1. You told me that the said vehicle has not experience [d] collision. However, it is hidden, when
you open its engine cover there is a trace of a head-on collision. The condenser is smashed,; the
fender support is not align[ed], both bumper supports] connecting [the] chassis were crippled and
welded, the hood support was repaired, etc.

2. The 4-wheel drive shift is not functioning. When Mr. Mendez was asked about it, he said it
would not function until you can reach the speed of 30 miles.

3. During Mr. Mendez['s] representation, he said the odometer has still an original mileage data
but found tampered.

4. You represented the vehicle as model 1998 however; it is indicated in the front left A-pillar
inscribed at the identification plate [as] model 1997.
Therefore, please show your sincerity by personally inspecting the said vehicle at RCBC, Pacific
Bldg. Pearl Drive, Ortigas Center, Pasig City. Let us meet at the said bank at 10:00 A.M., April
17, 2002.

Meanwhile, kindly hold or do not encash the manager's check[s] issued to you by RCBC until you
have clarified and satisfied my complaints.

Sincerely yours,
Teodoro L. Lim

Cc: Dario E. Santiago, RCBC loan

Legal7
Odrada did not go to the slated meeting and instead deposited the manager's checks with
International Exchange Bank (Ibank) on 16 April 2002 and redeposited them on 19 April 2002 but
the checks were dishonored both times apparently upon Lim's instruction to RCBC.8
Consequently, Odrada filed a collection suit9 against Lim and RCBC in the Regional Trial Court
of Makati.10 chanrobleslaw

In his Answer,11 Lim alleged that the cancellation of the loan was at his instance, upon discovery
of the misrepresentations by Odrada about the Montero's roadworthiness. Lim claimed that the
cancellation was not done ex parte but through a letter12 dated 15 April 2002.13 He further alleged
that the letter was delivered to Odrada prior to the presentation of the manager's checks to
RCBC.14 chanrobleslaw

On the other hand, RCBC contended that the manager's checks were dishonored because Lim had
cancelled the loan. RCBC claimed that the cancellation of the loan was prior to the presentation of
the manager's checks. Moreover, RCBC alleged that despite notice of the defective condition of
the Montero, which constituted a failure of consideration, Odrada still proceeded with presenting
the manager's checks.

It was later disclosed during trial that RCBC also sent a formal notice of cancellation of the loan
on 18 April 2002 to both Odrada and Lim.15 chanrobleslaw

The Regional Trial Court's Ruling

In its Decision16 dated 1 October 2009, the trial court ruled in favor of Odrada. The trial court held
that Odrada was the proper party to ask for rescission.17 The lower court reasoned that the right of
rescission is implied in reciprocal obligations where one party fails to perform what is incumbent
upon him when the other is willing and ready to comply. The trial court ruled that it was not proper
for Lim to exercise the right of rescission since Odrada had already complied with the contract of
sale by delivering the Montero while Lim remained delinquent in payment.18 Since Lim was not
ready, willing, and able to comply with the contract of sale, he was not the proper party entitled to
rescind the contract.

The trial court ruled that the defective condition of the Montero was not a supervening event that
would justify the dishonor of the manager's checks. The trial court reasoned that a manager's check
is equivalent to cash and is really the bank's own check. It may be treated as a promissory note
with the bank as maker. Hence, the check becomes the primary obligation of the bank which issued
it and constitutes a written promise to pay on demand.19 Being the party primarily liable, the trial
court ruled that RCBC was liable to Odrada for the value of the manager's checks.

Finally, the trial court found that Odrada suffered sleepless nights, humiliation, and was
constrained to hire the services of a lawyer meriting the award of damages. 20 chanrobleslaw
The dispositive portion of the Decision reads:
chanRoblesvirtualLawlibrary

WHEREFORE, premises considered, judgment is hereby rendered: Chan RoblesV irtualawlibrary

(a) Directing defendant RCBC to pay plaintiff the amount of Php 913,500.00 representing the cash
equivalent of the two (2) manager's checks, plus 12% interest from the date of filing of the case
until fully paid;

(b) Directing defendants to solidarity pay moral damages in the amount of Php 500,000.00 and
exemplary damages in the amount of Php 500,000.00;

(c) Directing defendants to solidarity pay attorney's fees in the amount of Php 300,000.00.
Finally, granting the cross-claim of defendant RCBC, Teodoro L. Lim is hereby directed to
indemnify RCBC Savings Bank for the amount adjudged for it to pay plaintiff.

SO ORDERED.21

RCBC and Lim appealed from the trial court's decision.

The Court of Appeals' Ruling

In its assailed 26 March 2014 Decision, the Court of Appeals dismissed the appeal and affirmed
the trial court's 1 October 2009 Decision.

The Court of Appeals ruled that the two manager's checks, which were complete and regular,
reached the hands of Lim who deposited the same in his bank account with Ibank. RCBC knew
that the amount reflected on the manager's checks represented Lim's payment for the remaining
balance of the Montero's purchase price. The appellate court held that when RCBC issued the
manager's checks in favor of Odrada, RCBC admitted the existence of the payee and his then
capacity to endorse, and undertook that on due presentment the checks which were negotiable
instruments would be accepted or paid, or both according to its tenor.22 The appellate court held
that the effective delivery of the checks to Odrada made RCBC liable for the checks. 23 chanrobleslaw

On RCBC's defense of want of consideration, the Court of Appeals affirmed the finding of the trial
court that Odrada was a holder in due course. The appellate court ruled that the defense of want of
consideration is not available against a holder in due course.24 chanrobleslaw

Lastly, the Court of Appeals found that the award of moral and exemplary damages and attorney's
fees was excessive. Hence, modification was proper.

The dispositive portion of the Decision reads:

chanRoblesvirtualLawlibrary

WHEREFORE, the impugned Decision of the court a quo in Civil Case No. 02-453 is hereby
AFFIRMED with MODIFICATION insofar as the reduction of awards for moral, exemplary
damages and attorney's fees to P50,000.00, P20,000.00, and P20,000.00 respectively.
SO ORDERED.25 cralawred

RCBC and Lim filed a motion for reconsideration26 on 28 April 2014. In its 18 June 2015
Resolution, the Court of Appeals denied the motion for lack of merit.27 chanrobleslaw

RCBC alone28 filed this petition before the Court. Thus, the decision of the Court of Appeals
became final and executory as to Lim.

The Issues

RCBC presented the following, issues in this petition:

chanRoblesvirtualLawlibrary

A. The court a quo gravely erred in finding that as between Odrada as seller and Lim as buyer of
the vehicle, only the former has the right to rescind the contract of sale finding failure to perform
an obligation under the contract of sale on the part of the latter only despite the contested
roadworthiness of the vehicle, subject matter of the sale.
1. Whether or not the court a quo erred in holding that Lim cannot cancel the auto loan despite the
failure in consideration due to the contested roadworthiness of the vehicle delivered by Odrada to
him.29
B. The court a quo gravely erred when it found that Odrada is a holder in due course of the
manager's checks in question despite being informed of the cancellation of the auto loan by the
borrower, Lim.
1. Whether or not Lim can validly countermand the manager's checks in the hands of a holder who
does not hold the same in due course.30

Odrada failed to file a comment31 within the period prescribed by this Court.32 chanrobleslaw

The Ruling of this Court

We grant the petition.

Under the law on sales, a contract of sale is perfected the moment there is a meeting of the minds
upon the thing which is the object of the contract and upon the price which is the consideration.
From that moment, the parties may reciprocally demand performance.33 Performance may be done
through delivery, actual or constructive. Through delivery, ownership is transferred to the
vendee.34 However, the obligations between the parties do not cease upon delivery of the subject
matter. The vendor and vendee remain concurrently bound by specific obligations. The vendor, in
particular, is responsible for an implied warranty against hidden defects.

Article 1547 of the Civil Code states: "In a contract of sale, unless a contrary intention appears,
there is an implied warranty that the thing shall be free from any hidden faults or defects."35 Article
1566 of the Civil Code provides that "the vendor is responsible to the vendee for any hidden faults
or defects in the thing sold, even though he was not aware thereof."36 As a consequence, the law
fixes the liability of the vendor for hidden defects whether known or unknown to him at the time
of the sale.
The law defines a hidden defect as one which would render the thing sold unfit for the use for
which it is intended, or would diminish its fitness for such use to such an extent that, had the
vendee been aware thereof, he would not have acquired it or would have given a lower price for
it.37
chanrobleslaw

In this case, Odrada and Lim entered into a contract of sale of the Montero. Following the initial
downpayment and execution of the deed of sale, the Montero was delivered by Odrada to Lim and
the latter took possession of the Montero. Notably, under the law, Odrada's warranties against
hidden defects continued even after the Montero's delivery. Consequently, a misrepresentation as
to the Montero's roadworthiness constitutes a breach of warranty against hidden defects.

In Supercars Management & Development Corporation v. Flores,38 we held that a breach of

warranty against hidden defects occurred when the vehicle, after it was delivered to respondent,
malfunctioned despite repairs by petitioner.39 In the present case, when Lim acquired possession,
he discovered that the Montero was not roadworthy. The engine was misaligned, the automatic
transmission was malfunctioning, and the brake rotor disks needed refacing.40 However, during
the proceedings in the trial court, Lim's testimony was stricken off the record because he failed to
appear during cross-examination.41 In effect, Lim was not able to present clear preponderant
evidence of the Montero's defective condition.

RCBC May Refuse to Pay Manager's Checks

We address the legal question of whether or not the drawee bank of a manager's check has the
option of refusing payment by interposing a personal defense of the purchaser of the manager's
check who delivered the check to a third party.

In resolving this legal question, this Court will examine the nature of a manager's check and its
relation to personal defenses under the Negotiable Instruments Law.42 chanrobleslaw

Jurisprudence defines a manager's check as a check drawn by the bank's manager upon the bank
itself and accepted in advance by the bank by the act of its issuance.43 It is really the bank's own
check and may be treated as a promissory note with the bank as its maker.44 Consequently, upon
its purchase, the check becomes the primary obligation of the bank and constitutes its written
promise to pay the holder upon demand.45 It is similar to a cashier's check46 both as to effect and
use in that the bank represents that the check is drawn against sufficient funds.47 chanrobleslaw

As a general rule, the drawee bank is not liable until it accepts.48 Prior to a bill's acceptance, no
contractual relation exists between the holder49 and the drawee. Acceptance, therefore, creates a
privity of contract between the holder and the drawee so much so that the latter, once it accepts,
becomes the party primarily liable on the instrument.50 Accordingly, acceptance is the act which
triggers the operation of the liabilities of the drawee (acceptor) under Section 6251of the Negotiable
Instruments Law. Thus, once he accepts, the drawee admits the following: (a) existence of the
drawer; (b) genuineness of the drawer's signature; (c) capacity and authority of the drawer to draw
the instrument; and (d) existence of the payee and his then capacity to endorse.

As can be gleaned in a long line of cases decided by this Court, a manager's check is accepted by
the bank upon its issuance. As compared to an ordinary bill of exchange where acceptance occurs
after the bill is presented to the drawee, the distinct feature of a manager's check is that it is
accepted in advance. Notably, the mere issuance of a manager's check creates a privity of contract
between the holder and the drawee bank, the latter primarily binding itself to pay according to the
tenor of its acceptance.

The drawee bank, as a result, has the unconditional obligation to pay a manager's check to a holder
in due course irrespective of any available personal defenses. However, while this Court has
consistently held that a manager's check is automatically accepted, a holder other than a holder
in due course is still subject to defenses. In International Corporate Bank v. Spouses Gueco,52
which involves a delivered manager's check, the Court still considered whether the check had
become stale:
chanRoblesvirtualLawlibrary

It has been held that, if the check had become stale, it becomes imperative that the circumstances
that caused its non-presentment be determined. In the case at bar, there is no doubt that the
petitioner bank held on the check and refused to encash the same because of the controversy
surrounding the signing of the joint motion to dismiss. We see no bad faith or negligence in this
position taken by the bank.53

In International Corporate Bank, this Court considered whether the holder presented the manager's
check within a reasonable time after its issuance - a circumstance required for holding the
instrument in due course.54 chanrobleslaw

Similarly, in Rizal Commercial Banking Corporation v. Hi-Tri Development Corporation,55 the

Court observed that the mere issuance of a manager's check does not ipso facto work as an
automatic transfer of funds to the account of the payee.56 In order for the holder to acquire title to
the instrument, there still must have been effective delivery. Accordingly, the Court, taking
exception to the manager's check automatic transfer of funds to the payee, declared that: "the
doctrine that the deposit represented by a manager's check automatically passes to the payee is
inapplicable, because the instrument - although accepted in advance remains undelivered."57 This
Court ruled that the holder did not acquire the instrument in due course since title had not passed
for lack of delivery.58 chanrobleslaw

We now address the main legal question: if the holder of a manager's check is not a holder in due
course, can the drawee bank interpose a personal defense of the purchaser?

Our rulings in Mesina v. Intermediate Appellate Court59 and United Coconut Planters Bank v.
Intermediate Appellate Court60 shed light on the matter.

In Mesina, Jose Go purchased a manager's check from Associated Bank. As he left the bank, Go
inadvertently left the check on top of the desk of the bank manager. The bank manager entrusted
the check for safekeeping to another bank official who at the time was attending to a customer
named Alexander Lim.61 After the bank official answered the telephone and returned from the
men's room, the manager's check could no longer be found. After learning that his manager's check
was missing, Go immediately returned to the bank to give a stop payment order on the check. A
third party named Marcelo Mesina deposited the manager's check with Prudential Bank but the
drawee bank sent back the manager's check to the collecting bank with the words "payment
stopped." When asked how he obtained the manager's check, Mesina claimed it was paid to him
by Lim in a "certain transaction."62 chanrobleslaw

While this Court acknowledged the general causes and effects of a manager's check, it noted that
other factors were needed to be considered, namely the manner by which Mesina acquired the
instrument. This Court declared:
chanRoblesvirtualLawlibrary

Petitioner's allegations hold no water. Theories and examples advanced by petitioner on causes
and effects of a cashier's check such as (1) it cannot be countermanded in the hands of a holder in
due course and (2) a cashier's check is a bill of exchange drawn by the bank against itself - are
general principles which cannot be aptly applied to the case at bar, without considering other
things. Petitioner failed to substantiate his claim that he is a holder in due course and for
consideration or value as shown by the established facts of the case. Admittedly, petitioner became
the holder of the cashier's check as endorsed by Alexander Lim who stole the check. He refused
to say how and why it was passed to him. He had therefore notice of the defect of his title over the
check from the start.63

Ultimately, the notice of defect affected Mesina's claim as a holder of the manager's check. This
Court ruled that the issuing bank could validly refuse payment because Mesina was not a
holder in due course. Unequivocally, the Court declared: "the holder of a cashier's check who
is not a holder in due course cannot enforce such check against the issuing bank which
dishonors the same."64 chanrobleslaw

In the same manner, in United Coconut Planters Bank (UCPB),65 this Court ruled that the drawee
bank was legally justified in refusing to pay the holder of a manager's check who did not hold the
check in due course. In UCPB, Altiura Investors, Inc. purchased a manager's check from UCPB,
which then issued a manager's check in the amount of Four Hundred Ninety Four Thousand Pesos
(P494,000) to Makati Bel-Air Developers, Inc. The manager's check represented the payment of
Altiura Investors, Inc. for a condominium unit it purchased from Makati Bel-Air Developers, Inc.
Subsequently, Altiura Investors, Inc. instructed UCPB to hold payment due to material
misrepresentations by Makati Bel-Air Developers, Inc. regarding the condominium unit.66 Pending
negotiations; and while the stop payment order was in effect, Makati Bel-Air Developers, Inc.
insisted that UCPB pay the value of the manager's check. UCPB refused to pay and filed an
interpleader to allow Altiura Investors, Inc. and Makati Bel-Air Developers, Inc. to litigate their
respective claims. Makati Bel-Air Developers, Inc. also filed a counterclaim against UCPB in the
amount of Five Million Pesos (P5,000,000) based on UCPB's violation of its warranty on its
manager's check.67 chanrobleslaw

In upholding UCPB's refusal to pay the value of the manager's check, this Court reasoned that
Makati Bel-Air Developers, Inc.'s title to the instrument became defective when there arose a
partial failure of consideration.68 We held that UCPB could validly invoke a personal defense of
the purchaser against Makati Bel-Air Developers, Inc. because the latter was not a holder in due
course of the manager's check:
chanRoblesvirtualLawlibrary
There are other considerations supporting the conclusion reached by this Court that respondent
appellate court had committed reversible error. Makati Bel-Air was a party to the contract of sale
of an office condominium unit to Altiura, for the payment of which the manager's check was
issued. Accordingly, Makati Bel-Air was fully aware, at the time it had received the manager's
check, that there was, or had arisen, at least partial failure of consideration since it was unable to
comply with its obligation to deliver office space amounting to 165 square meters to Altiura.
Makati Bel-Air was also aware that petitioner Bank had been informed by Altiura of the claimed
defect in Makati Bel-Air's title to the manager's check or its right to the proceeds thereof. Vis-a-
vis both Altiura and petitioner Bank, Makati Bel-Air was not a holder in due course of the
manager's check.69

The foregoing rulings clearly establish that the drawee bank of a manager's check may interpose
personal defenses of the purchaser of the manager's check if the holder is not a holder in due
course. In short, the purchaser of a manager's check may validly countermand payment to a holder
who is not a holder in due course. Accordingly, the drawee bank may refuse to pay the manager's
check by interposing a personal defense of the purchaser. Hence, the resolution of the present case
requires a determination of the status of Odrada as holder of the manager's checks.

In this case, the Court of Appeals gravely erred when it considered Odrada as a holder in due
course. Section 52 of the Negotiable Instruments Law defines a holder in due course as one who
has taken the instrument under the following conditions:
chanRoblesvirtualLawlibrary

(a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, and without notice that it has been
previously dishonored, if such was the fact;

(c) That he took it in good faith and for value;

(d) That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or
defect in the title of the person negotiating it. (Emphasis supplied)

To be a holder in due course, the law requires that a party must have acquired the instrument in
good faith and for value.

Good faith means that the person taking the instrument has acted with due honesty with regard to
the rights of the parties liable on the instrument and that at the time he,took the instrument, the
holder has no knowledge of any defect or infirmity of the instrument.70 To constitute notice of an
infirmity in the instrument or defect in the title of the person negotiating the same, the person to
whom it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of
such facts that his action in taking the instrument would amount to bad faith.71 chanrobleslaw

Value, on the other hand, is defined as any consideration sufficient to support a simple contract.72 chanrobleslaw

In the present case, Odrada attempted to deposit the manager's checks on 16 April 2002, a day
after Lim had informed him that there was a serious problem with the Montero. Instead of
addressing the issue, Odrada decided to deposit the manager's checks. Odrada's actions do not
amount to good faith. Clearly, Odrada failed to make an inquiry even when the circumstances
strongly indicated that there arose, at the very least, a partial failure of consideration due to the
hidden defects of the Montero. Odrada's action in depositing the manager's checks despite
knowledge of the Montero's defects amounted to bad faith. Moreover, when Odrada redeposited
the manager's checks on 19 April 2002, he was already formally notified by RCBC the previous
day of the cancellation of Lim's auto loan transaction. Following UCPB,73 RCBC may refuse
payment by interposing a personal defense of Lim - that the title of Odrada had become defective
when there arose a partial failure or lack of consideration.74
chanrobleslaw

RCBC acted in good faith in following the instructions of Lim. The records show that Lim notified
RCBC of the defective condition of the Montero before Odrada presented the manager's checks.75
Lim informed RCBC of the hidden defects of the Montero including a misaligned engine, smashed
condenser, crippled bumper support, and defective transmission. RCBC also received a formal
notice of cancellation of the auto loan from Lim and this prompted RCBC to cancel the manager's
checks since the auto loan was the consideration for issuing the manager's checks. RCBC acted in
good faith in stopping the payment of the manager's checks.

Section 58 of the Negotiable Instruments Law provides: "In the hands of any holder other than a
holder in due course, a negotiable instrument is subject to the same defenses as if it were non-
negotiable, x x x." Since Odrada was not a holder in due course, the instrument becomes subject
to personal defenses under the Negotiable Instruments Law. Hence, RCBC may legally act on a
countermand by Lim, the purchaser of the manager's checks.

Lastly, since Lim's testimony involving the Montero's hidden defects was stricken off the record
by the trial court, Lim failed to prove the existence of the hidden defects and thus Lim remains
liable to Odrada for the purchase price of the Montero. Lim's failure to file an appeal from the
decision of the Court of Appeals made the decision of the appellate court final and executory as to
Lim. RCBC cannot be made liable because it acted in good faith in carrying out the stop payment
order of Lim who presented to RCBC the complaint letter to Odrada when Lim issued the stop
payment order.

WHEREFORE, we GRANT the petition. We REVERSE and SET ASIDE the 26 March 2014
Decision and the 18 June 2015 Resolution of the Court of Appeals in CA-G.R. CV No. 94890 only
insofar as RCBC Savings Bank is concerned.

SO ORDERED. chanRoblesvirtualLawlibrary

G.R. No. 227005

BDO UNIBANK, INC., Petitioner

vs.
ENGR. SELWYN LAO, doing business under the name and style "SELWYN F. LAO
CONSTRUCTION" AND "WING AN CONSTRUCTION AND DEVELOPMENT
CORPORATION" and INTERNATIONAL EXCHANGE BANK (now UNION BANK OF
THE PHILIPPINES),, Respondents

DECISION

MENDOZA, J.:

This is a petition for review on certiorari seeking to reverse and set aside the October 14, 2015
Decision1 and the September 5, 2016 Resolution2 of the Court of Appeals (CA) in CA-G.R. CV
No. 100351, which affirmed, with modification, the July 9, 2012 Decision3 of the Regional Trial
Court, Branch 55, Manila (RTC) in Civil Case No. 99-93068, a case for collection of sum of
money.

The Antecedents

On March 9, 1999, respondent Engineer Selwyn S. Lao (Lao) filed before the RTC a complaint
for collection of sum of money against Equitable Banking Corporation, now petitioner Banco de
Oro Unibank (BDO), Everlink Pacific Ventures, Inc. (Ever/ink), and Wu Hsieh a.k.a.George Wu
(Wu).

In his complaint, Lao alleged that he was doing business under the name and style of "Selwyn Lao
Construction"; that he was a majority stockholder of Wing An Construction and Development
Corporation (WingAn); that he entered into a transaction with Ever link, through its
authorizedrepresentative Wu, under which, Everlink would supply him with "HCG sanitary
wares"; and that for the down payment, he issued two (2) Equitable crossed checks payable to
Everlink: Check No. 0127-2422494 and Check No. 0127-242250,5 in the amounts of ₱273,300.00
and ₱336,500.00, respectively.

Lao further averred that when the checks were encashed, he contacted Everlink for the immediate
delivery of the sanitary wares, but the latter failed to perform its obligation. Later, Lao learned that
the checks were deposited in two different bank accounts at respondent International Exchange
Bank, now respondent Union Bank of the Philippines (UnionBank). He was later informed that the
two bank accounts belonged to Wuand a company named New Wave Plastic (New Wave),
represented by a certain Willy Antiporda (Antiporda). Consequently, Lao was prompted to file a
complaint against Everlink and Wu for their failure to comply with their obligation and against
BDO for allowing the encashment of the two (2) checks. He later withdrew his complaint against
Everlink as the corporation had ceased existing.

In its answer, BDO asserted that it had no obligation to ascertain the owner of the account/s to
which the checks were deposited because the instruction to deposit the said checks to the payee's
account only was directed to the payee and the collecting bank, which in this case was Union Bank;
that as the drawee bank, its obligations consist in examining the genuineness of the signatures
appearing on the checks, and paying the same if there were sufficient funds in the account under
which the checks were drawn; and that the subject checks were properly negotiated and paid in
accordance with the instruction of Lao in crossing them as they were deposited to the account of
the payee Ever link with Union Bank, which then presented them for payment with BDO.
On August 24, 2001, Lao filed an Amended Complaint, wherein he impleaded Union Bank as
additional defendant for allowing the deposit of the crossed checks in two bank accounts other
than the payee's, in violation of its obligation to deposit the same only to the payee's account.

In its answer, Union Bank argued that Check No. 0127-242249 was deposited in the account of
Everlink; that Check No. 0127-242250 was validly negotiated by Everlink to New Wave; that
Check No. 0127-242250 was presented for payment to BDO, and the proceeds thereof were
credited to New Wave's account; that it was under no obligation to deposit the checks only in the
account of Everlink because there was nothing on the checks which would indicate such
restriction; and that a crossed check continues to be negotiable, the only limitation being that it
should be presented for payment by a bank.

During trial, BDO presented as its witnesses Elizabeth P. Tinimbang (Tinimbang) and Atty. Carlos
Buenaventura (Atty. Buenaventura).

Tinimbang testified that Everlink was the payee of the two (2) crossed checks issued by their client,
Wing An; that the checks were deposited with Union Bank, which presented them to BDO for
payment. She further narrated that after the checks were cleared and that the drawer's signatures
on the checks were determined to be genuine, that there was sufficient fund to cover the amounts
of the checks, and that there was no order to stop payment, the checks were paid by BDO.
Tinimbang continued that sometime in July 1998, BDO received a letter from Wing An stating
that the amounts of the checks were not credited to Everlink's account. This prompted BDO to
write a letter to Union Bank demanding the latter to refund the amounts of the checks. In a letter-
reply, Union Bank claimed that the checks were deposited in the account of Everlink.

Atty. Buenaventura claimed that BDO gave credence to Union Bank's representation that the
checks were indeed credited to the account of Everlink. He stated that BDO's only obligations
under the circumstances were to ascertain the genuineness of the checks, to determine if the
account was sufficiently funded and to credit the proceeds to the collecting bank. On cross-
examination, Atty. Buenaventura clarified that Union Bank endorsed the crossed checks as could
be seen on the dorsal portion of the subject checks. According to him, such endorsement meant
that the lack of prior endorsement was guaranteed by Union Bank.

For its part, Union Bank presented as its witness Jojina Lourdes C. Vega (Vega), its Branch
Business Manager. Vega testified that the transaction history of Everlink's account with Union
Bank and the notation at the back of the check indicating Everlink's Account No. (005030000925)
revealed that the proceeds of Check No. 0127-242249 were duly credited to Everlink's account on
September 22, 1997. As regards Check No. 0127-242250, Vega clarified that the proceeds of the
same were credited to New Wave's account. She explained that New Wave was a valued client of
Union Bank. As a form of accommodation extended to valued clients, Union Bank would request
the signing of a second endorsement agreement because the payee was not the same as the account
holder. In this case, Antiporda executed a Deed of Undertaking (Second Endorsed Checks)
wherein he assumed the responsibilities for the correctness, genuineness, and validity of the subject
checks.

The RTC Ruling

In its Decision, dated July 9, 2012, the RTC absolved BDO from any liability, but ordered Union
Bank to pay Lao the amount of ₱336,500.00, representing the value of Check No. 0127-242250;
₱50,000.00 as moral damages; ₱l00,000.00 as exemplary damages; and ₱50,000.00 as attorney's
fees.

The RTC observed that there was nothing irregular with the transaction of Check No. 0127-242249
because the same was deposited in Everlink's account with Union Bank. It, however, found that
Check No. 0127-242250 was irregularly deposited and encashed because it was not issued for the
account of Everlink, the payee, but for the account of New Wave. The trial court noted further that
Check No. 0127-242250 was not even endorsed by Everlink to New Wave. Thus, it opined that
Union Bank was negligent in allowing the deposit and encashment of the said check without proper
endorsement. The R TC wrote that considering that the subject check was a crossed check, Union
Bank failed to take reasonable steps in order to determine the validity of the representations made
by Antiporda. In the end, it adjudged that BDO could not be held liable because of Union Bank's
warranty when it stamped on the check that "all prior endorsement and/or lack of endorsement
guaranteed." The dispositive portion of the decision reads:

WHEREFORE, premises considered, judgment is herebyrendered in FAVOR of the plaintiff

Engr. Selwyn F. Lao and AGAINST the defendant International Exchange Bank (now Union
Bank) ordering the latter to pay the former the following:

1. The amount of Three Hundred Thirty Six Thousand Five Hundred Pesos (₱336,500.oo)
representing the Equitable Bank Check No. 0127-242250;

2. The amount of Fifty Thousand Pesos (₱50,ooo.oo) representing moral damages;

3. The amount of One Hundred Thousand Pesos (₱100,ooo.oo) representing exemplary

damages; and,

4. The amount of Fifty Thousand Pesos (₱50,ooo.oo) as attorney's fees.

The Complaints against defendants Equitable Banking Corporation (now Banco de Oro) and Wu
Shu Chien a.k.a. George Wu are hereby ordered DISMISSED.

Costs against the defendant International and Exchange Bank (now Union Bank).

SO ORDERED. 6

Aggrieved, Union Bank elevated an appeal to the CA. 7

The CA Ruling

In its assailed Decision, dated October 14, 2015, the CA affirmed, with modification, the ruling of
the R TC. It ordered BDO to pay Lao the amount of ₱336,500.00, with legal interest from the time
of filing of the complaint until its full satisfaction. The appellate court further directed Union Bank
to reimburse BDO the aforementioned amount. It concurred with the RTC that Union Bank was
liable because of its negligence and its guarantee on the validity of all prior endorsements or lack
of it.

With regard to BDO's liability, the CA explained that it violated its duty to charge to the drawer's
account only those authorized by the latter when it paid the value of Check No. 0127-242250.
Thus, it held that BDO was liable for the amount charged to the drawer's account. The fallo reads:

FOR THESE REASONS, the appeal is PARTLY GRANTED. The July 9, 2012 Decision of the
Regional Trial Court of Manila, Branch 55 is AFFIRMED with MODIFICATIONS that Equitable
Bank is ordered to pay Selwyn Lao the amount corresponding to Check No. 0127-242250, i.e.,
₱336,500.oo, with legal interest from the time of filing of the complaint until the amount is fully
paid. International Exchange Bank (now Union Bank of the Philippines) is ordered to reimburse
Equitable Bank the abovementioned amount. The award of damages and attorney's fees is
DELETED. The rest of the Decision stands.

SO ORDERED.8

On November 5, 2012, BDO filed its Motion for Partial Reconsideration. It argued that neither
Lao nor Union Bank appealed the dismissal of the complaint against it, thus, the RTC decision had
already attained finality as far as it was concerned. It also prayed that Lao should be allowed to
recover directly from Union Bank.

In its assailed Resolution, dated September 6, 2016, the CA denied BDO's Motion for Partial
Reconsideration. It ratiocinated that in Bank ofAmerica, NT & SA v. Associated Citizens Bank, 9
(Bank of America) thedrawee bank was adjudged liable for the amount charged to the drawer's
account, while the collecting bank was ordered to reimburse the drawee bank whatever amount the
latter was made to pay.

Hence, this petition anchored on the following:

GROUNDS

I.

ISSUES NOT RAISED BY THE PARTIES ON APPEAL CANNOT BE REVIEWED NOR

RULED UPON BY THE APPELLATE COURT.

II.

A COLLECTING BANK ASSUMES RESPONSIBILITY FOR A CROSSED CHECK AS A

GENERAL ENDORSER IN ACCORDANCE WITH SECTION 66 OF THE NEGOTIABLE
INSTRUMENTS LAW.

III.
THE PARTY WHICH DID NOT EXERCISE THE REQUIRED DILIGENCE IS THE CAUSE
OF THE LOSS AND BEARS THE DAMAGES. 10

BDO argued that the CA's order for it to pay Lao was erroneous as the RTC had already adjudged
with finality that it was not liable. It posited that the appellate court could not resolve issues not
raised on appeal by both parties thereto. BDO pointed out that it was not a party in the appeal
before the CA. It further stressed that neither Lao nor Union Bank assailed the R TC decision with
respect to the dismissal of the complaint against it during the appeal before the CA, and even on
motion for reconsideration before the R TC. Thus, for failure to appeal therefrom, the R TC
decision had already attained finality as to BDO.

BDO further averred that Union Bank, as the collecting bank and last endorser, must suffer the
loss because it had the duty to ascertain the genuineness of all prior endorsement. It asserted that
as the drawee bank, it could not be held liable because it merely relied on Union Bank's express
guarantee. It added that the proximate cause of the loss suffered by Lao was the negligence of
Union Bank when it allowed the deposit of the crossed check intended for Everlink to New Wave's
account.

In his Comment, 11 dated January 26,2017, Lao asserted that the CA did not commit any error
when it resolved the issue on the liability of BDO even if it was not raised on appeal. He was of
the view that the said issue was inextricably intertwined with the principal issue. Lao stated that
the CA correctly adjudged BDO liable, without prejudice to its right to seek reimbursement from
Union Bank, as it was the correct sequence in the enforcement of payment in cases where the
collecting bank allowed a crossed check to be deposited in the account of a person other than the
payee.

Union Bank did not file any comment on BDO's petition.

The Court's Ruling

The petition is meritorious.

Ordinarily, this Court would have concurred with the CA as regards the applicability of Bank of
America. There is, however, a peculiar circumstance which would prevent the application of Bank
of America in the present case.

Sequence of Recovery in cases of unauthorized payment of checks

The Court agrees with the appellate court that in cases of unauthorized payment of checks to a
person other than the payee named therein, the drawee bank may be held liable to the drawer. The
drawee bank, in turn, may seek reimbursement from the collecting bank for the amount of the
check. This rule on the sequence of recovery in case of unauthorized check transactions had already
been deeply embedded in jurisprudence. 12

The liability of the drawee bank is based on its contract with the drawer and its duty to charge to
the latter's accounts only those payables authorized by him. A drawee bank is under strict liability
to pay the check only to the payee or to the payee's order. When the drawee bank pays a person
other than the payee named in the check, it does not comply with the terms of the check and violates
its duty to charge the drawer's account only for properly payable items. 13

On the other hand, the liability of the collecting bank is anchored on its guarantees as the last
endorser of the check. Under Section 66 of the Negotiable Instruments Law, an endorser warrants
"that the instrument is genuine and in all respects what it purports to be; that he has good title to
it; that all prior parties had capacity to contract; and that the instrument is at the time of his
endorsement valid and subsisting."

It has been repeatedly held that in check transactions, the collecting bank generally suffers the loss
because it has the duty to ascertain the genuineness of all prior endorsements considering that the
act of presenting the check for payment to the drawee is an assertion that the party making the
presentment has done its duty to ascertain the genuineness of the endorsements. If any of the
warranties made by the collecting bank turns out to be false, then the drawee bank may recover
from it up to the amount of the check. 14

In the present case, BDO paid the value of Check No. 0127-242250 to Union Bank, which, in turn,
credited the amount to New Wave's account. The payment by BDO was in violation of Lao's
instruction because the same was not issued in favor of Everlink, the payee named in the check. It
must be pointed out that the subject check was not even endorsed by Everlink to New Wave.
Clearly, BDO violated its duty to charge to Lao's account only those payables authorized by him.

Nevertheless, even with such clear violation by BDO of its duty, the loss would have ultimately
pertained to Union Bank. By stamping at the back of the subject check the phrase "all prior
endorsements and/or lack of it guaranteed," Union Bank had, for all intents and purposes treated
the check as a negotiable instrument and, accordingly, assumed the warranty of an endorser.
Without such warranty, BDO would not have paid the proceeds of the check. Thus, Union Bank
cannot now deny liability after the aforesaid warranty turned out to be false. 15

Union Bank was clearly negligent when it allowed the check to be presented by, and deposited in
the account of New Wave, despite knowledge that it was not the payee named therein. Further, it
could not have escaped its attention that the subject checks were crossed checks.

A crossed check is one where two parallel lines are drawn across its face or across the comer
thereof. A check may be crossed generally or specially. A check is crossed especially when the
name of a particular banker or company is written between the parallel lines drawn. It is crossed
generally when only the words "and company" are written at all between the parallel lines. 16

Jurisprudence dictates that the effects of crossing a check are: (1) that the check may not be
encashed but only deposited in the bank; (2) that the check may be negotiated only once - to one
who has an account with a bank; and (3) that the act of crossing the check serves as a warning to
the holder that the check has been issued for a definite purpose so that he must inquire if he has
received the check pursuant to that purpose. 17 The effects of crossing a check, thus, relate to the
mode of payment, meaning that the drawer had intended the check for deposit only by the rightful
person, i.e., the payee named therein. 18
It is undisputed that Check No. 0127-242250 had been crossed generally as nothing was written
between the parallel lines appearing on the face of the instrument. This indicated that Lao, the
drawer, had intended the same for deposit only to the account of Everlink, the payee named therein.
Despite this clear intention, however, Union Bank negligently allowed the deposit of the proceeds
of the said check in the account of New Wave.

Generally, BDO must be ordered to pay Lao the value of the subject check; whereas, Union Bank
would be ordered to reimburse BDO the amount of the check. The aforesaid sequence of recovery,
however, is not applicable in the present case due to the presence of certain factual peculiarities.

Simplification of the proceedings for Recovery

Although the rule on the sequence of recovery has been deeply engrained in jurisprudence, there
may be exceptional circumstances which would justify its simplification.1âwphi1 Stated
differently, the aggrieved party may be allowed to recover directly from the person which caused
the loss when circumstances warrant. In Associated Bank v. Court of Appeals (AssociatedBank),
19 the person who suffered the loss as a result of the unauthorizedencashment of crossed checks
was allowed to recover the loss directly from the negligent bank despite the latter's contention of
lack of privity of contract. The Court said:

There being no evidence that the crossed checks were actually received by the private respondent,
she would have a right of action against the drawer companies, which in turn could go against their
respective drawee banks, which in turn could sue the herein petitioner as collecting bank. In a
similar situation, it was held that, to simplify proceedings, the payee of the illegally encashed
checks should be allowed to recover directly from the bank responsible for such encashment
regardless of whether or not the checks were actually delivered to the payee. We approve such
direct action in the case at bar.20

A peculiar circumstance in Associated Bank is the fact that the drawer companies, which should
have been directly liable to the aggrieved payee, were not impleaded as parties in the suit. In this
regard, it is a fundamental principle in this jurisdiction that a person cannot be prejudiced by a
ruling rendered in an action or proceeding in which he has not been made a party. This principle
conforms to the constitutional guarantee of due process of law.21 To the mind of the Court, this
principle was a foremost underlying consideration for allowing the direct recovery by the payee
from the negligent collecting bank.

Finality of the RTC decisionwith respecttoBDOjustifiesthe simplification of the proceedings for

recovery.

BDO argues that the appellate court erred in ordering it to pay the amount of the subject check to
Lao because it was no longer a party in the case, not being impleaded in the appeal, and that the
issue as regards its had liability already been settled with finality by the R TC.

The Court agrees.

It has been held that it is not the caption of the pleading, but the allegations therein that are
controlling. The non-inclusion of a party in the title of the pleading is not fatal to the case, provided
there is a statement in the body indicating that such non-included person is a party to the case.22

BDO was not impleaded as a party in Union Bank's appeal before the CA. This is evident from the
title of the case before the CA, and the respective briefs of Union Bank and Lao, which mentioned
only Lao and Union Bank as parties thereto. Moreover, in their respective briefs before the
appellate court, neither Lao23 nor Union Bank24 made any statement or raised any issue on BDO's
liability and its inclusion as a party in the appeal.

Consequently, because of Lao and Union Bank's failure to appeal the July 9, 2012 Decision of the
RTC with respect to BDO's lack of liability, said decision became final as to the latter.

The finality of the July 9, 2012 RTC Decision as to BDO, which absolved it from any liability,
necessarily means that it could not be prejudiced or adversely affected by the decision rendered in
the appeal. It is elementary in this jurisdiction that a person cannot be bound by a decision wherein
it was not a party.25 A contrary finding would violate BDO's constitutional right to due· process.
Needless to state, the appellate court erred in ordering BDO to pay the amount of the subject check
because the latter was not made a party in the appeal, and the issue as to its liability or lack thereof,
was not raised on appeal.

From the foregoing, the Court is of the considered view that the pronouncements made in
Associated Bank as regards the simplification of the recovery proceedings are applicable in the
present case. The factual milieu of this case are substantially similar with that of Associated Bank,
i.e., a crossed check was presented and deposited, without authority, in the account of a person
other than the payee named therein; the collecting bank endorsed the crossed check and warrant
the validity of all prior endorsements and/or lack of it; the warranty turned out to be false; and, a
party to the check transaction, which would otherwise be held liable to the party aggrieved, was
not made a party in the proceedings in court.

To summarize, Lao, the drawer of the subject check, has a right of action against BDO for its
failure to comply with its duty as the drawee bank. BDO, in turn, would have a right of action
against Union Bank because of the falsity of its warranties as the collecting bank. Considering,
however, that BDO was not made a party in the appeal, it could no longer be held liable to Lao.
Thus, following Associated Bank, the proceedings for recovery must be simplified and Lao should
be allowed to recover directly from Union Bank.

WHEREFORE, the petition is GRANTED. The October 14, 2015 Decision and the September 5,
2016 Resolution of the Court of Appeals in CA-G.R. CV No. 100351 are hereby REVERSED and
SET ASIDE insofar as it ordered petitioner BDO Unibank, Inc. to pay Selwyn Lao the amount of
Check No. 0127-242250. The rest of the decision is AFFIRMED.

The amount shall earn interest at the rate of twelve percent (12%) perannum from August 24,
2001, the date of judicial demand, to June 30, 2013.From July 1, 2013, the rate shall be six percent
(6%) per annum until full satisfaction.
SO ORDERED.

G.R. No. 204736

MANULIFE PHILIPPINES, INC.1, Petitioner

vs.
HERMENEGILDA YBAÑEZ, Respondent

DECISION

DEL CASTILLO, J.:

Assailed in this Petition for Review on Certiorari2 are the April 26, 2012 Decision3 of the Court
of Appeals (CA) in CA-G.R. CV No. 95561 and its December 10, 2012 Resolution4 which
affirmed the April 22, 2008 Decision5 and the June 15, 2009 Order6 of the Regional Trial Court
(RTC), Branch 57, Makati City in Civil Case No. 04-1119.

Factual Antecedents

Before the RTC of Makati City, Manulife Philippines, Inc. (Manulife) instituted a Complaint7 for
Rescission of Insurance Contracts against Hermenegilda Ybañez (Hermenegilda) and the BPI
Family Savings Bank (BPI Family). This was docketed as Civil Case No. 04-1119.

It is alleged in the Complaint that Insurance Policy Nos. 6066517-18 and 6300532-69 (subject
insurance policies) which Manulife issued on October 25, 2002 and on July 25, 2003, respectively,
both in favor of Dr. Gumersindo Solidum Ybañez (insured), were void due to concealment or
misrepresentation of material facts in the latter's applications for life insurance, particularly the
forms entitled Non-Medical Evidence dated August 28, 2002 (NME),10 Medical Evidence Exam
dated September 10, 2002 (MEE),11 and the Declaration of Insurability in the Application for Life
Insurance (DOI) dated July 9, 2003;12 that He1menegilda, wife of the said insured, was revocably
designated as beneficiary in the subject insurance policies; that on November 17, 2003, when one
of the subject insurance policies had been in force for only one year and three months, while the
other for only four months, the insured died; that on December 10, 2003, Hermenegilda, now
widow to the said insured, filed a Claimant's Statement-Death Claim13 with respect to the subject
insurance policies; that the Death Certificate dated November 17, 200314 stated that the insured
had "Hepatocellular CA., Crd Stage 4, secondary to Uric Acid Nephropathy; SAM Nephropathy
recurrent malignant pleural effusion; NASCVC"; that Manulife conducted an investigation into
the circumstances leading to the said insured's death, in view of the aforementioned entries in the
said insured's Death Certificate; that Manulife thereafter concluded that the insured misrepresented
or concealed material facts at the time the subject insurance policies were applied for; and that for
this reason Manulife accordingly denied Hermenegilda's death claims and refunded the premiums
that the insured paid on the subject insurance policies.15

Manulife also set forth in said Complaint the details of the insured's supposed misrepresentation/s
or concealment/s, to wit:
2.6. On the basis of the authority granted by [Hermenegilda] in her Claimant's

Statement (Annex "H"), [Manulife] conducted an investigation [into] the Insured's medical records
and history, and discovered that the Insured concealed material facts which the law, good faith,
and fair dealing required him to reveal when he answered the [NME] (Annex ''C"), [the MEE]
(Annex "D"), and [the DOI] (Annex "E"), as follows:

(1) Insured's confinement at the Cebu Doctors' Hospital [CDH] from 27 December 2000 to 3l
December 2000, wherein he underwent total parotidectomy on 28 December 2000 due to the
swelling of his right parotid gland and the presence of a tumor, and was found to have had a history
of being hypertensive, and his kidneys have become atretic or shrunken. A copy of each of the
Admission and Discharge Record and PGIS' Interns' Progress Notes and Operative Record of the
[CDH] is attached hereto and made an integral part hereof as Annex "K", "K-1", and "K-2'',
respectively.

(2) Insured's confinement at the CDH from 9 May 2002 to 14 May 2002, wherein he was diagnosed
to have acute pancreatitis, in addition to being hypertensive. A copy [of] each of the Insured's
Admission and Discharge Record and Doctor's History/Progress Notes is attached hereto and made
an integral part hereof as Annex "L" and "L-1", respectively.

(3) Insured's diagnosis for leptospirosis in 2000. A copy [of] each of the Insured's Admission and
Discharge Record and History Sheet is attached hereto and made an integral part hereof as Annex
"M" and "M-1",respectively.

x x xx

2.8. Due to the Insured's concealment of material facts at the time the subject insurance policies
were applied for and issued, [Manulife] exercised its right to rescind the subject insurance contracts
and denied the claims on those policies.

xxxx16

Manulife thus prayed that judgment be rendered finding its act of rescinding the subject insurance
policies proper; declaring these subject insurance policies null and void; and discharging it from
any obligation whatsoever under these policies.17

In her Answer, Hermenegilda countered that:

6. [Manulife's own insurance agent, Ms. Elvira Monteclaros herself] assured [the insured,] that
there would be no problem regarding the application for the insurance policy. In fact, it was
Monteclaros who filled up everything in the questionnaire (Annex "C" of the [C]omplaint), so that
[all that the insured needed to do was sign it,] and it's done. [It was also Ms. Monteclaros who
herself] checked in advance all the boxes in Annex "C," [that the insured himself was required to
answer or check].

xxxx
10. The four grounds for denial as enumerated in Annex "N" of the complaint are refuted as
follows:

1) [The insured's] hospital confinement on 27 December 2000 at [the CDH was] due to right
parotid swelling secondary to tumor [for which he] underwent Parotidectomy on 28 December
2000. (- There is an obvious scar and disfigurement in the right side of [the insured's] face, in front,
and below his ear. This [ought to] have been easily noticed by [Manulife's company] physician,
Dr. [Winifredo] Lumapas.

2) [The insured's] history of Hypertension [has been] noted 03 years prior to [the insured's]
admission on 27 December 2000. (This is not something serious or fatal)

3) [The insured's] history of Leptospirosis in 2000. (This is not confirmed)

4) [The insured's] hospital confinement [at the CDH] on 09 May 2002 with findings of Acute
Pancreatitis (This is related to the gallstones of [the insured]. When the gallbladder is diseased,
distention is impossible and its pressure-regulating function is lost - a fact that may explain high
incidence of pancreatitis in patient with cholecystic disease. [The insured] had cholecystitis, so his
acute pancreatitis is related to the cholecystitis and chol[e]lithiasis (gallstones).

x x xx

11. [Manulife] accepted [the insured's] application, and now that a claim for the benefits [is] made,
[Manulife now] says that [the insured] misrepresented and concealed his past illnesses[!] In the
form filled up by [Dr. Winifredo F. Lumapas,] Manulife's [company] physician, dated 9/10/02,
[the insured] checked the column which says ''yes" [to] the following questions:

• Have you had electrocardiograms, when, why, result? ([Manulife's company physician] wrote
the answer which stated that result was normal.) ' .

• Have you seen a doctor, or had treatment operation on hospital case during the last five years?

12. x x x It is rather strange that [the insured's] parotidectomy was not included in the report when
the scar of that operation can not be concealed because it caused a disfigurement in the right side.
of his face in front and below his ear. This is just too obvious to be overlooked by [Manulife's
company physician] who examined and interviewed [the insured] before accepting the policy. x x
x

13. x x x [Undoubtedly, Manulife] had the option to inquire further [into the insured's physical
condition, because the insured had given it authority to do so] based on the authority given by [the
insured. And how come that Manulife] was able to gather all [these] information now and not
before [the insured] was ensured? x x x

xxxx
16. Moreover, in the comments of [the said] Dr. Lumapas, (Annex "D" of the Complaint), he said
the physical condition of [the] then prospective insurance policy holder, [the insured, was] "below
average". x x x [Estoppel now bars Manulife from claiming the contrary.]

17. [Especially] worth noting are the [following] comments of [the said Dr. Lumapas, on the
insured's answer to the questionnaires] - (Annex "D" of the Complaint ). [to wit:]

"4.d. Have you had any electrocardiograms, when, why, result. "Yes"

- on June 2002 at CDH, Cebu City

= Cardiac clearance for surgery

= Result normal

16. Have you seen a doctor, or had treatment, operation or hospital care during the last 5 years?
"Yes" admitted at [CDH,] Cebu City by Dr. Lamberto Garcia and Dr. Jorge Ang for Chronic
Calculous Chol[e]cystitis

=Cholecystectomy done [J]une 7[,] 2002 by Dr. Ang

=Biopsy: Gallbladder Chronic Calculous Cholestitis

=CBC, Hepatitis Panel done – all negative results except hepatitis antigen(+)

18. Do you consume alcohol beverages? If so, how much? Yes, consumes 1-2 shots of whisky
during socials.

25. The abdomen - Abnormality of any viscus, genitalia or evidence of hemia or operation - post
cholecystectomy scar.

26. The head and neck - vision, optic, fundi, hearing, speech, thyroid etc. Yes wears eyeglasses for
reading. (This is where [Manulife's company physician] should have written the scar of [the
insured's] parotidectomy as shown in the picture).

32. From your knowledge of this person would you consider his/ her health to be Average [] Below
average[/] Poor []

(Underscoring ours)

18. It is interesting to note that the answers in the insurance agent's form for [the insured] (Annex
"C" of the Complaint) did not jibe with the answers [made by] Dr. Lumapas in Annex "D" of the
Complaint. This only boosts Hermenegilda's claim that x x x indeed, it was the Manulife's agent
herself, (Ms. Montesclaros) who checked all the items in the said form to speed up the insurance
application and its approval, [so she could] get her commission as soon as possible.
19. In fine, at the time when both insurance policies in question were submitted for approval to
[Manulife, the latter had had all the forewarnings that should have put it on guard or on notice that
things were not what it wanted them to be, reason enough to bestir it into exercising greater
prudence and caution to further inquire into] the health or medical history of [the insured]. In
particular, Manulife ought to have noted the fact that the insured was at that time already 65 years
old, x x x that he had a previous operation, and x x x that his health was "below average. x x x18

On November 25, 2005, BPI Family filed a Manifestation19 praying that either it be dropped from
the case or that the case be dismissed with respect to it (BPI Family), because it no longer had any
interest in the subject insurance policies as asssignee because the insured’s obligation with it (BPI
Family) had already been settled or paid. Since no objection was interposed to this prayer by either
Manulife or Hermenegilda, the RTC granted this prayer in its Order of

November 25, 2005.20

Then in the Second Order dated November 25, 2005,21 the RTC considered the pre-trial as
te1minated. Trial then ensued.

Manulife presented its sole witness in the person of Ms. Jessiebelle Victoriano (Victoriano ), the
Senior Manager of its Claims and Settlements Department.22 The oral testimony of this witness
chiefly involved identifying herself as the Senior Manager of Manulife's Claims and Settlements
Department and also identifying the following pieces of evidence;23 the subject insurance policies;
NME, MEE, DOI; the Assignment of Policy No. 6066517-1 to BPI Family as collateral, dated July
9, 2003; its Letter dated July 10, 2003 re: assignment of said Policy; death claim filed by
Hermenegilda on December 10, 2003; the insured's Death Certificate; the Marriage Contract
between the insured and Hermenegilda; copies of CDH's Admission and Discharge Records of the
insured for December 2000 re: parotidectomy; copies of CDH's PGIS' Interns' Notes and CDH
Operative Record dated December 28, 2000 re: hypertension; copies of CDH's Admission and
Discharge Record of the insured for May 2002, and the Doctor's History/Progress Notes re: acute
pancreatitis and hypertension; copies of CDH's Admission and Discharge Record of the insured
for October 2003 re: leptospirosis; letters dated March 24, 2004 to Hermenegilda and BPI Family;
and BPI Checks deposited on April 10, 2004 and May 14, 2004 to the bank accounts of BPI Family
and Hermenegilda, respectively, representing the premium refund.

In its Order of October 2, 2006, 24 the RTC admitted all these exhibits.

Like Manulife, Hermenegilda, in amplication of her case, also called only one witness to the
witness stand: her counsel of record, Atty. Edgardo Mayol (Atty. Mayol), whose testimony focused
on his professional engagement with Hermenegilda and the monetary expenses he incurred in
attending to the hearings in this case.25 Hermenegilda thereafter filed her Formal Offer of
Evidence26 wherein she proffered the following: NME, MEE, DOI, the insured's driver's license,
her letter dated May 8, 2004 protesting the denial by Manulife of her insurance claim, the contract
of services between her and Atty. Mayol, the official receipts for plane tickets, terminal fees, and
boarding passes, attesting to Atty. Mayol's plane travels to and from Cebu City to attend to this
case. These were all admitted by the RTC.27
Ruling of the Regional Trial Court

After due proceedings, the RTC dismissed Manulife's Complaint, thus:

WHEREFORE, premises duly considered, judgment is hereby rendered DISMISSING the instant
case for insufficiency of evidence.

[Manulife] is hereby ordered to pay [Hermenegilda] actual expenses in the sum of ₱40,050.00 and
attorney's fees in the sum of ₱l00,000.1âwphi1 [Hermenegilda's] claim for moral and exemplary
damages is denied for lack of evidence.

SO .ORDERED.28

The RTC found no merit at all in Manulife's Complaint for rescission of the subject insurance
policies because it utterly failed to prove that the insured had committed the alleged
misrepresentation/s or concealment/s. In fact, Victoriano, the one and only witness that Manulife
called to the witness stand, gave no first-hand, direct evidence at all relative to the particulars of
the alleged misrepresentation/s or concealment/s that the insured allegedly practiced or committed
against it. This witness did not testify at all in respect to the circumstances under which these
documentary exhibits were executed, nor yet about what these documentary exhibits purported to
embody. The RTC stressed that the CDH medical records that might or could have established the
insured's misrepresentation/s or concealment/s were inadmissible for being hearsay, because
Manulife did not present the physician or doctor, or any responsible official of the CDH, who
could confirm the due execution and authenticity of its medical records; that if anything, Manulife
itself admitted in its Reply29 that its very own company physician, Dr. Winifredo Lumapas, had
duly noted the insured's scar, even as the same company physician also categorized in the MEE
the insured's health as "below average"; and that in short, it is evident that Manulife thus had had
ample opportunity to verify and to inquire further into the insured' s medical history commencing
from the date of the MEE but opted not to do so; and that if things did not come up to its standards
or expectations, it was totally at liberty to reject the insured's applications altogether, or it could
have demanded a higher premium for the insurance coverage.

The RTC further ruled that Hermenegilda was entitled to attorney's fees in the sum of ₱l00,000.00
and actual expenses in the amount of ₱40,050.00, because she was compelled to litigate to defend
her interest against Manulife' s patently unjustified act in rejecting her clearly valid and lawful
claim. The RTC also found merit in Hermenegilda’s claims relative to the expenses she paid her
Cebu-based counsel.

In its Order of June 15, 2009,30 the RTC denied for lack of merit Manulife's motion for
reconsideration31 and Hermenegilda's motion for partial reconsideration.32

From the RTC's Decision, Manulife filed a Notice of Appeal33 which was given due course by
the RTC in its Order of June 11, 2010.34

Ruling of the Court of Appeals

In its appellate review, the CA virtually adopted en toto the findings of facts made by, and the
conclusions of law arrived at, by the RTC. Thus, the CA decreed:

WHEREFORE, the instant appeal is DENIED. The assailed Decision dated April 22, 2008 and
Order dated June 15, 2009 of the Regional Trial Court of Makati, Branch 57, are hereby
AFFIRMED.

SO ORDERED.35

The CA, like the RTC, found Manulife's Complaint bereft of legal and factual bases. The CA ruled
that it is settled that misrepresentation or concealment in insurance is an affirmative defense, which
the insurer must establish by convincing evidence if it is to avoid liability; and that in this case the
one and only witness presented by Manulife utterly failed to prove the basic elements of the alleged
misrepresentation/s or concealment/s of material facts imputed by Manulife against the now
deceased insured. The CA held that there is no basis for Manulife's claim that it is exempted from
the duty of proving the insured's supposed misrepresentation/s or concealment/s, as these had
allegedly been admitted already in Hermenegilda's Answer; that in the absence of authentication
by a competent witness, the purported CDH medical records of the insured are deemed hearsay
hence, inadmissible, and devoid of probative value; and that the medical certificate, even if
admitted in evidence as an exception to the hearsay rule, was still without probative value because
the physician or doctor or the hospital's official who issued it, was not called to the witness stand
to validate it or to attest to it.

Manulife moved for reconsideration36 of the CA's Decision, but this was denied by the CA in its
Resolution of December 10, 2012;37 hence, the present recourse.

Issue

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

Our Ruling

The present recourse essentially challenges anew the findings of fact by both the RTC and the CA
that the Complaint for rescission of the insurance policies in question will not prosper because
Manulife failed to prove concealment on the part of the insured. This is not allowed. It is horn-
book law that in appeal by certiorari to this Court under Rule 45 of the Revised Rules of Court,
the findings of fact by the CA, especially where such findings of fact are affirmatory or
confirmatory of the findings of fact of the RTC, as in this case, are conclusive upon this Court.
The reason is simple: this Court not being a trial court, it does not embark upon the task of
dissecting, analyzing, evaluating, calibrating or weighing all over again the evidence, testimonial
or documentary, that the parties adduced during trial. Of course, there are exceptions to this rule,
such as (1) when the conclusion is grounded upon speculations, surmises or conjectures; (2) when
the inference is manifestly mistaken, absurd or impossible; (3) when there is a grave abuse of
discretion; (4) when the judgment is based on a misapprehension of facts; (5) when the findings
of fact are conflicting; (6) when there is no citation of specific evidence on which the factual
findings are based; (7) when the findings of absence of facts is contradicted by the presence of
evidence on record; (8) when the findings of the CA are contrary to the findings of the RTC; (9)
when the CA manifestly overlooked certain relevant and undisputed facts that, if properly
considered, would justify a different conclusion; (10) when the findings of the CA are beyond the
issues of the case; and (11) when the CA’s findings are contrary to the admission of both parties.38
We are satisfied that none of these exceptions obtains in the Petition at bench. Thus, this Court
must defer to the findings of fact of the RTC – as affirmed or confirmed by the CA – that
Manulife’s Complaint for rescission of the insurance policies in question was totally bereft of
factual and legal bases because it had utterly failed to prove that the insured had committed the
alleged misrepresentation/s or concealment/s of material facts imputed against him. The RTC
correctly held that the CDH’s medical records that might have established the insured’s purported
misrepresentation/s or concealment/s was inadmissible for being hearsay, given the fact that
Manulife failed to present the physician or any responsible official of the CDH who could confirm
or attest to the due execution and authenticity of the alleged medical records. Manulife had utterly
failed to prove by convincing evidence that it had been beguiled, inveigled, or cajoled into selling
the insurance to the insured who purportedly with malice and deceit passed himself off as
thoroughly sound and healthy, and thus a fit and proper applicant for life insurance. Manulife's
sole witness gave no evidence at all relative to the particulars of the purported concealment or
misrepresentation allegedly perpetrated by the insured. In fact, Victoriano merely perfunctorily
identified the documentary exhibits adduced by Manulife; she never testified in regard to the
circumstances attending the execution of these documentary exhibits much less in regard to its
contents. Of course, the mere mechanical act of identifying these documentary exhibits, without
the testimonies of the actual participating parties thereto, adds up to nothing. These documentary
exhibits did not automatically validate or explain themselves. "The fraudulent intent on the part of
the insured must be established to entitle the insurer to rescind the contract. Misrepresentation as
a defense of the insurer to avoid liability is an affirmative defense and the duty to establish such
defense by satisfactory and convincing evidence rests upon the insurer."39 For failure of Manulife
to prove intent to defraud on the part of the insured, it cannot validly sue for rescission of insurance
contracts.

WHEREFORE, the Petition is DENIED. The assailed Decision of the Court of Appeals dated
April 26, 2012 in CA-G.R. CV No. 95561 and its December 10, 2012 Resolution, are
AFFIRMED.

SO ORDERED.

G.R. No. 192159

COMMUNICATION AND INFORMATION SYSTEMS CORPORATION, Petitioner,

vs.
MARK SENSING AUSTRALIA PTY. LTD., MARK SENSING PHILIPPINES, INC. and
OFELIA B. CAJIGAL, Respondents.

DECISION
JARDELEZA, J.:

This is a petition for review on certiorari1seeking to set aside the Decision2 dated November 25,
2009 and Resolution3 dated April 23, 2010 of the Court of Appeals (CA) in CA-G.R. SP No.
110511. The question is whether courts may approve an attachment bond which has been reinsured
as to the excess of the issuer's statutory retention limit.

Petitioner Communication and Information Systems Corporation (CISC) and respondent Mark
Sensing Australia Pty. Ltd. (MSAPL) entered into a Memorandum of Agreement4 (MOA) dated
March 1, 2002 whereby MSAPL appointed CISC as "the exclusive AGENT of [MS APL] to PCSO
during the [lifetime] of the recently concluded Memorandum of Agreement entered into between
[MSAPL], PCSO and other parties." The recent agreement referred to in the MOA is the thermal
paper and bet slip supply contract (the Supply Contract) between the Philippine Charity
Sweepstakes Office (PCSO), MSAPL, and three other suppliers, namely Lamco Paper Products
Company, Inc. (Lamco Paper), Consolidated Paper Products, Inc. (Consolidated Paper) and Trojan
Computer Forms Manufacturing Corporation (Trojan Computer Forms). 5 As consideration for
CISC's services, MSAPL agreed to pay CISC a commission of 24.5% of future gross sales to
PCSO, exclusive of duties and taxes, for six years.6

After initially complying with its obligation under the MOA, MSAPL stopped remitting
commissions to CISC during the second quarter of 2004. MSAPL justified its action by claiming
that Carolina de Jesus, President of CISC, violated her authority when she negotiated the Supply
Contract with PCSO and three of MSAPL's competitors. According to MSAPL, it lost almost one-
half of its business with PCSO because the Supply Contract provided that MSAPL's business with
PCSO shall be limited to the latter's Luzon operations, with MSAPL supplying 70% of thermal
rolls and 50% of bet slips. MSAPL pointed out that it used to have a Build Operate Transfer (BOT)
Agreement with PCSO where it undertook to build a thermal paper and bet slip manufacturing
facility to supply all requirements of PCSO. However, PCSO unilaterally cancelled the BOT
Agreement and granted supply contracts to Lamco Paper, Consolidated Paper and Trojan
Computer Forms, which ultimately resulted in litigation between the parties.7 The suit was
eventually settled when PCSO, MSAPL, and the three other suppliers entered into the Supply
Contract, which was submitted and approved by the Regional Trial Court (RTC), Branch 224 of
Quezon City, as a compromise agreement.8 MSAPL felt shortchanged by CISC's efforts and thus
decided to withhold payment of commissions.

As a result of MSAPL's refusal to pay, CISC filed a complaint before the RTC in Quezon City for
specific performance against MS APL, Mark Sensing Philippines, Inc. (MSPI), Atty. Ofelia
Cajigal, and PCS0.9 CISC prayed that private respondents be ordered to comply with its
obligations under the MOA. It also asked the RTC to issue a writ of preliminary mandatory
injunction and/or writ of attachment. 10 The RTC denied CISC's prayer for mandatory injunctive
relief but ordered the PCSO to hold the amount being contested until the final determination of the
case. 11 It later reversed itself, holding that its jurisdiction is limited to the amount stated in the
complaint and therefore had no jurisdiction to order PCSO to withhold payments in excess of such
amount. 12 This order of reversal became the subject of a separate petition for certiorari filed by
CISC before the CA, docketed as CA-G.R. SP No. 96620. 13 The CA later reversed the RTC and
ordered that the additional docket fees shall constitute a lien on the judgment. 14

On September 10, 2007, the RTC granted CISC's application for issuance of a writ of preliminary
attachment, stating that "the non-payment of the agreed commission constitutes fraud on the part
of the defendant MSAPL in their performance of their obligation to the plaintiff." 15 The RTC
found that MSAPL is a foreign corporation based in Australia, and its Philippine subsidiary, MSPI,
has no other asset except for its collectibles from PCSO. Thus, the RTC concluded that CISC may
be left without any security if ever MSAPL is found liable. 16 But the RTC limited the attachment
to ₱4,861,312.00, which is the amount stated in .the complaint, instead of the amount sought to be
attached by CISC, i.e., ?113,197,309.10. 17 The RTC explained that it "will have to await the
Supreme Court judgment over the issue of whether [it] has jurisdiction on the amounts in the excess
of the amount prayed for by the plaintiff in their complaint" since MSAPL appealed the adverse
judgment in CA-G.R. SP No. 96620 to us. 18 We later denied MSAPL's petition for review
assailing the CA Decision in CA-G.R. SP No. 96620 (subsequently docketed as G.R. No. 179073)
in a Resolution dated November 12, 2007. 19 It became final and executory on March 25, 2008.20

In view of this development, CISC moved to amend the order of attachment to include unpaid
commissions in excess of the amount stated in the complaint.1âwphi1 On December 22, 2008, the
RTC granted CISC's motion and issued a new writ of preliminary attachment.21 On April 13,
2009, the RTC, acting on the partial motions for reconsideration by both CISC and MSAPL,
modified the amount covered by the writ to reflect the correct amount prayed for by CISC in its
previous motion to amend the attachment order conditioned upon the latter's payment of additional
docket fees. It also denied MSAPL' s opposition to the attachment order for lack of merit. 22 On
July 2, 2009, the RTC modified its order insofar as it allowed CISC to pay docket fees within a
reasonable time. 23

On July 8, 2009, CJSC posted a bond in the amount of ₱113,197,309.10 through Plaridel Surety
and Insurance Company (Plaridel)

in favor of MSAPL, which the RTC approved on the same date.24 Two days later, MSAPL filed
a motion to determine the sufficiency of the bond because of questions regarding the financial
capacity of Plaridel.25 But before the RTC could act on this motion, MSAPL, apparently 'getting
hold of Plaridel' s latest financial statements, moved to recall and set aside the approval of the
attachment bond on the ground that Plaridel had no capacity to underwrite the bond pursuant to
Section 215 of the old Insurance Code26 because its net worth was only P214,820,566.00 and
could therefore only underwrite up to P42,964, 113.20.27 On September 4, 2009, the RTC denied
MSAPL's motion, finding that although Plaridel cannot underwrite the bond by itself, the amount
covered by the attachment bond "was likewise re-insured to sixteen other insurance companies."28
However, "for the best interest of both parties," the RTC ordered Plaridel to submit proof that the
amount of ₱95,8 l 9,770.91 was reinsured. Plaridel submitted its compliance on September 11,
2009, attaching therein the reinsurance contracts. 29

On September 18, 2009, MSAPL, MSPI and Atty. Ofelia Cajigal 30 filed a petition for certiorari
before the CA, docketed as CA-G.R. SP No. 11051 l, assailing the Orders of the RTC dated April
13, 2009, July 2, 2009, July 8, 2009, and September 4, 2009. In its now-assailed Decision dated
November 25, 2009, the CA granted the petition.31 It concluded that the petition for certiorari
was filed on time because MSAPL did not abandon their right to impugn the evidence submitted
in the application for the writ of preliminary attachment, because they filed a motion to determine
the sufficiency of the bond. On the merits, it held that the RTC exceeded its authority when it
"ordered the issuance of the writ [of preliminary attachment] despite a dearth of evidence to clearly
establish [CISC's] entitlement thereto, let alone the latter's failure to comply with all requirements
therefor."32 Noting that the posting of the attachment bond is a jurisdictional requirement, the CA
concluded that since Plaridel's capacity for single risk coverage is limited to 20% of its net worth,
or ₱57,866,599.80, the RTC "should have set aside the second writ outright for non-compliance
with Sections 3 and 4 of Rule 57."33

After the CA perfunctorily denied CISC's motion for reconsideration on April 23, 2010,34 it filed
this petition for review on certiorari.

II

CISC argues that the CA erred in giving due course to the petition insofar as it challenged the
Orders elated April 13, 2009, July 2, 2009, and July 8, 2009 because the reglementary period to
challenge these Orders already lapsed by the time private respondents filed their petition for
certiorari below.35 In response, MSAPL contends that since they continued to assail the additional
attachment from the time it was first issued, the 60-day period should be counted from the final
denial of their challenge to the additional attachment, which was on September 4, 2009.36

MSAPL' s theory is similar to that proffered by one of the parties in the case of San Juan, Jr. v.
Cruz.37The petitioner therein filed second and third motions for reconsideration from an
interlocutory order by the trial court. When he filed the petition for certiorari with the CA, he
counted the 60-day reglementary period from the notice of denial of his third motion for
reconsideration. He argued that since there is no rule prohibiting the filing of a second or third
motion for reconsideration of an interlocutory order, the 60-day period should be counted from the
notice of denial of the last motion for reconsideration. In resolving the question of when the
reglementary period for filing a petition for certiorari shall be counted, we held that the "60-day
period shall be reckoned from the trial court's denial of his first motion for reconsideration,
otherwise indefinite delays will ensue."38

Applying the rule in San Juan, MSAPL's challenge to the order dated April 13, 2009 was clearly
time-barred. The 60-day reglementary period for challenging the RTC's issuance of the amended
writ of attachment should be counted from April 27, 2009,39 the date when MSAPL received a
copy of the April 13, 2009 Order denying MSAPL's motion for reconsideration of the December
22, 2008 Order which granted CISC's motion to amend the writ of preliminary attachment. The
CA, however, considered MSAPL's act of filing a motion to determine the sufficiency of the bond
as a definitive indication that private respondents have not "abandoned their right to impugn the
evidence submitted in the application for the second writ."40 This is erroneous for two reasons:
first, MSAPL's motion never impugned the propriety and factual bases of the RTC's issuance of
the amended writ of attachment; and second, even if it did, the motion would be considered as a
second motion for reconsideration, which could not have stayed the reglementary period within
which to file a petition for certiorari assailing an interlocutory order. We emphasize that the
provisions on reglementary periods are strictly applied, indispensable as they are to the prevention
of needless delays, and are necessary to the orderly and speedy discharge of judicial business. The
timeliness of filing a petition for certiorari is mandatory and jurisdictional, and should not be
trifled with.41

Meanwhile, the Orders dated July 2, 2009 and July 8, 2009 resolved incidental issues with respect
to the issuance of the amended writ of attachment, namely: (1) when the additional docket fees
should be paid; and (2) the approval of the attachment bond. As regards the first incidental issue,
the RTC allowed CISC to pay the additional docket fees "within a reasonable time but in no case
beyond its applicable prescriptive or reglementary period. "42 MS APL, instead of filing a motion
for reconsideration of the July 2, 2009 Order, elected to file a motion to compel CISC to pay the
required docket fees on August 14, 2009.43 Evidently, MS APL already recognized the validity
of the July 2, 2009 Order and sought CISC's compliance with the Order. Notably, the motion
remained pending before the RTC when MSAPL filed its petition for certiorari with the CA. We
find that the petition for certiorari, insofar as it questions the alleged non-payment of docket fees,
was prematurely filed because the RTC has yet to rule on this issue. A petition for certiorari may
be resorted to only when there is no plain, speedy, and adequate remedy in the ordinary course of
law. 44 It is not up to parties to preempt the trial court's action on their motions. Absent any
showing of unreasonable delay on the part of the RTC-and there is none here, considering the short
period between the filing of the motion and the petition for certiorari, as well as the various
incidents pending a quo-MSAPL's recourse to the CA was premature. The more appropriate
remedy for MSAPL would have been to move for the RTC to resolve its pending motion instead
of precipitately raising this matter in its petition for certiorari.45

This leaves the July 8, 2009 Order which approved the attachment bond Plaridel submitted. It was
directly challenged by MSAPL when the latter filed a motion to determine the sufficiency of the
bond because of questions regarding Plaridel's financial capacity. Before the RTC could act on the
motion, however, MSAPL filed an urgent motion to recall and set aside the approval of the
attachment bond, dated July 21, 2009,46 on the ground that the attachment bond underwritten by
Plaridel exceeded its retention limit under the Insurance Code. The RTC resolved these two
motions jointly in its September 4, 2009 Order, holding that Section 215 allows insurance
companies to insure a single risk in excess of retention limits provided that the excess amount is
ceded to reinsurers, and consequently affirming its approval of the attachment bond. In turn, the
September 4, 2009 Order became the anchor of MSAPL's petition for certiorari. Although not
captioned as "motions for reconsideration," the twin motions filed by MSAPL directly challenged
the approval of the attachment bond, and the September 4, 2009 Order was the second time the
RTC passed upon the issue concerning the sufficiency of the bond. Therefore, the petition for
certiorari filed by MSAPL on September 18, 2009, insofar as it assailed both the July 8, 2009 and
September 4, 2009 Orders, was timely filed.

III

We now resolve the sole substantive issue before us: whether the RTC committed grave abuse of
discretion when it approved the attachment bond whose face amount exceeded the retention limit
of the surety.
Section 215 of the old Insurance Code,47 the law in force at the time Plaridel issued the attachment
bond, limits the amount of risk that insurance companies can retain to a maximum of 20% of its
net worth. However, in computing the retention limit, risks that have been ceded to authorized
reinsurers are ipso jure deducted.48 In mathematical terms, the amount of retained risk is
computed by deducting ceded/reinsured risk from insurable risk.49 If the resulting amount is
below 20% of the insurer's net worth, then the retention limit is not breached. In this case, both the
RTC and CA determined that, based on Plaridel's financial statement that was attached to its
certificate of authority issued by the Insurance Commission, its net worth is ₱289,332,999.00. 50
Plaridel's retention limit is therefore ₱57,866,599.80, which is below the ₱113,197,309.10 face
value of the attachment bond. However, it only retained an insurable risk of ₱l7,377,938.19
because the remaining amount of ₱98,819,770.91 was ceded to 16 other insurance companies. 51
Thus, the risk retained by Plaridel is actually ₱40 Million below its maximum retention limit.
Therefore, the approval of the attachment bond by the RTC was in order. Contrary to MSAPL's
contention that the RTC acted with grave abuse of discretion, we find that the RTC not only
correctly applied the law but also acted judiciously when it required Plaridel to submit proof of its
reinsurance contracts after MSAPL questioned Plaridel's capacity to underwrite the attachment
bond. Apparently, MSAPL failed to appreciate that by dividing the risk through reinsurance,
Plaridel's attachment bond actually became more reliable-as it is no longer dependent on the
financial stability of one company-and, therefore, more beneficial to MSAPL.

In cancelling Plaridel's insurance bond, the CA also found that because the reinsurance contracts
were issued in favor of Plaridel, and not MSAPL, these failed to comply with the requirement of
Section 4, Rule 57 of the Rules of Court requiring the bond to be executed to the adverse party.52
This led the CA to conclude that "the bond has been improperly and insufficiently posted."53 We
reverse the CA and so hold that the reinsurance contracts were correctly issued in favor of Plaridel.
A contract of reinsurance is one by which an insurer (the "direct insurer" or "cedant") procures a
third person (the "reinsurer") to insure him against loss or liability by reason of such original
insurance. 54 It is a separate and distinct arrangement from the original contract of insurance,
whose contracted risk is insured in the reinsurance agreement.55 The reinsurer's contractual
relationship is with the direct insurer, not the original insured, and the latter has no interest in and
is generally not privy to the contract of reinsurance. 56 Put simply, reinsurance is the "insurance
of an insurance."57

By its nature, reinsurance contracts are issued in favor of the direct insurer because the subject of
such contracts is the direct insurer's risk-in this case, Plaridel's contingent liability to MSAPL-and
not the risk assumed under the original policy.58 The requirement under Section 4, Rule 57 of the
Rules of Court that the applicant's bond be executed to the adverse party necessarily pertains only
to the attachment bond itself and not to any underlying reinsurance contract. With or without
reinsurance, the obligation of the surety to the party against whom the writ of attachment is issued
remains the same.

WHEREFORE, the petition is GRANTED. The Decision dated November 25, 2009 and
Resolution dated April 23, 2010 of the Court of Appeals in CA-G.R. SP No. 110511 are SET
ASIDE.

SO ORDERED.
G.R. No. 190702

JAIME T. GAISANO, Petitioner

vs.
DEVELOPMENT INSURANCE AND SURETY CORPORATION, Respondent

DECISION

JARDELEZA, J.:

This is a petition for review on certiorari1 seeking to nullify the Court of Appeals' (CA) September
11, 2009 Decision2 and November 24, 2009 Resolution3 in CA-G.R. CV No. 81225. The CA
reversed the September 24, 2003 Decision4 of the Regional Trial Court (RTC) in Civil Case No.
97-85464. The RTC granted Jaime T. Gaisano's (petitioner) claim on the proceeds of the
comprehensive commercial vehicle policy issued by Development Insurance and Surety
Corporation (respondent), viz.:

IN VIEW OF THE FOREGOING, the decision appealed from is reversed, and the defendant-
appellant ordered to pay the plaintiff-appellee the sum of ₱55,620.60 with interest at 6 percent per
annum from the date of the denial of the claim on October 9, 1996 until payment.

SO ORDERED.5

The facts are undisputed. Petitioner was the registered owner of a 1992 Mitsubishi Montero with
plate number GTJ-777 (vehicle), while respondent is a domestic corporation engaged in the
insurance business.6 On September 27, 1996, respondent issued a comprehensive commercial
vehicle policy7 to petitioner in the amount of ₱1,500,000.00 over the vehicle for a period of one
year commencing on September 27, 1996 up to September 27, 1997.8 Respondent also issued two
other commercial vehicle policies to petitioner covering two other motor vehicles for the same
period.9

To collect the premiums and other charges on the policies, respondent's agent, Trans-Pacific
Underwriters Agency (Trans-Pacific), issued a statement of account to petitioner's company,
Noah's Ark Merchandising (Noah's Ark).10 Noah's Ark immediately processed the payments and
issued a Far East Bank check dated September 27, 1996 payable to Trans-Pacific on the same
day.11 The check bearing the amount of ₱140,893.50 represents payment for the three insurance
policies, with ₱55,620.60 for the premium and other charges over the vehicle.12 However, nobody
from Trans-Pacific picked up the check that day (September 27) because its president and general
manager, Rolando Herradura, was celebrating his birthday. Trans-Pacific informed Noah's Ark
that its messenger would get the check the next day, September 28.13

In the evening of September 27, 1996, while under the official custody of Noah's Ark marketing
manager Achilles Pacquing (Pacquing) as a service company vehicle, the vehicle was stolen in the
vicinity of SM Megamall at Ortigas, Mandaluyong City. Pacquing reported the loss to the
Philippine National Police Traffic Management Command at Camp Crame in Quezon City.14
Despite search and retrieval efforts, the vehicle was not recovered.15

Oblivious of the incident, Trans-Pacific picked up the check the next day, September 28. It issued
an official receipt numbered 124713 dated September 28, 1996, acknowledging the receipt of
₱55,620.60 for the premium and other charges over the vehicle.16 The check issued to Trans-
Pacific for ₱140,893.50 was deposited with Metrobank for encashment on October 1, 1996.17

On October 1, 1996, Pacquing informed petitioner of the vehicle's loss. Thereafter, petitioner
reported the loss and filed a claim with respondent for the insurance proceeds of ₱1,500,000.00.18
After investigation, respondent denied petitioner's claim on the ground that there was no insurance
contract.19 Petitioner, through counsel, sent a final demand on July 7, 1997.20 Respondent,
however, refused to pay the insurance proceeds or return the premium paid on the vehicle.

On October 9, 1997, petitioner filed a complaint for collection of sum of money and damages21
with the RTC where it sought . to collect the insurance proceeds from respondent. In its Answer,22
respondent asserted that the non-payment of the premium rendered the policy ineffective. The
premium was received by the respondent only on October 2, 1996, and there was no known loss
covered by the policy to which the payment could be applied.23

In its Decision24 dated September 24, 2003, the RTC ruled in favor of petitioner. It considered the
premium paid as of September 27, even if the check was received only on September 28 because
(1) respondent's agent, Trans-Pacific, acknowledged payment of the premium on that date,
September 27, and (2) the check that petitioner issued was honored by respondent in
acknowledgment of the authority of the agent to receive it.25 Instead of returning the premium,
respondent sent a checklist of requirements to petitioner and assigned an underwriter to investigate
the claim.26 The RTC ruled that it would be unjust and inequitable not to allow a recovery on the
policy while allowing respondent to retain the premium paid.27 Thus, petitioner was awarded an
indemnity of ₱l,500,000.00 and attorney's fees of ₱50,000.00.28

After respondent's motion for reconsideration was denied,29 it filed a Notice of Appeal.30 Records
were forwarded to the CA.31

The CA granted respondent's appeal.32 The CA upheld respondent's position that an insurance
contract becomes valid and binding only after the premium is paid pursuant to Section 77 of the
Insurance Code (Presidential Decree No. 612, as amended by Republic Act No. 10607).33 It found
that the premium was not yet paid at the time of the loss on September 27, but only a day after or
on September 28, 1996, when the check was picked up by Trans-Pacific.34 It also found that none
of the exceptions to Section 77 obtains in this case.35 Nevertheless, the CA ordered respondent to
return the premium it received in the amount of ₱55,620.60, with interest at the rate of 6% per
annum from the date of the denial of the claim on October 9, 1996 until payment.36

Hence petitioner filed this petition. He argues that there was a valid and binding insurance contract
between him and respondent.37 He submits that it comes within the exceptions to the rule in
Section 77 of the Insurance Code that no contract of insurance becomes binding unless and until
the premium thereof has been paid. The prohibitive tenor of Section 77 does not apply because the
parties stipulated for the payment of premiums.38 The parties intended the contract of insurance
to be immediately effective upon issuance, despite non-payment of the premium, because
respondent trusted petitioner.39 He adds that respondent waived its right to a pre-payment in full
of the terms of the policy, and is in estoppel.40

Petitioner also argues that assuming he is not entitled to recover insurance proceeds, but only to
the return of the premiums paid, then he should be able to recover the full amount of ₱140,893.50,
and not merely ₱55,620.60.41 The insurance policy covered three vehicles yet respondent's
intention was merely to disregard the contract for only the lost vehicle.42 According to petitioner,
the principle of mutuality of contracts is violated, at his expense, if respondent is allowed to be
excused from performance on the insurance contract only for one vehicle, but not as to the two
others, just because no loss is suffered as to the two. To allow this "would be to place exclusively
in the hands of one of the contracting parties the right to decide whether the contract should stand
or not x x x. "43

For failure of respondent to file its comment to the petition, we declared respondent to have waived
its right to file a comment in our June 15, 2011 Resolution.44

The lone issue here is whether there is a binding insurance contract between petitioner and
respondent.

II

We deny the petition.

Insurance is a contract whereby one undertakes for a consideration to indemnify another against
loss, damage or liability arising from an unknown or contingent event.45 Just like any other
contract, it requires a cause or consideration. The consideration is the premium, which must be
paid at the time and in the way and manner specified in the policy.46 If not so paid, the policy will
lapse and be forfeited by its own terms.47

The law, however, limits the parties' autonomy as to when payment of premium may be made for
the contract to take effect. The general rule in insurance laws is that unless the premium is paid,
the insurance policy is not valid and binding.48 Section 77 of the Insurance Code, applicable at
the time of the issuance of the policy, provides:

Sec. 77. An insurer is entitled to payment of the premium as soon as the thing insured is exposed
to the peril insured against. Notwithstanding any agreement to the contrary, no policy or contract
of insurance issued by an insurance company is valid and binding unless and until the premium
thereof has been paid, except in the case of a life or an industrial life policy whenever the grace
period provision applies.

In Tibay v. Court of Appeals,49 we emphasized the importance of this rule. We explained that in
an insurance contract, both the insured and insurer undertake risks. On one hand, there is the
insured, a member of a group exposed to a particular peril, who contributes premiums under the
risk of receiving nothing in return in case the contingency does not happen; on the other, there is
the insurer, who undertakes to pay the entire sum agreed upon in case the contingency happens.
This risk-distributing mechanism operates under a system where, by prompt payment of the
premiums, the insurer is able to meet its legal obligation to maintain a legal reserve fund needed
to meet its contingent obligations to the public. The premium, therefore, is the elixir vitae or source
of life of the insurance business:

In the desire to safeguard the interest of the assured, it must not be ignored that the contract of
insurance is primarily a risk-distributing device, a mechanism by which all members of a group
exposed to a particular risk contribute premiums to an insurer. From these contributory funds are
paid whatever losses occur due to exposure to the peril insured against. Each party therefore takes
a risk: the insurer, that of being compelled upon the happening of the contingency to pay the entire
sum agreed upon, and the insured, that of parting with the amount required as premium. without
receiving anything therefor in case the contingency does not happen. To ensure payment for these
losses, the law mandates all insurance companies to maintain a legal reserve fund in favor of those
claiming under their policies. It should be understood that the integrity of this fund cannot be
secured and maintained if by judicial fiat partial offerings of premiums were to be construed as a
legal nexus between the applicant and the insurer despite an express agreement to the contrary. For
what could prevent the insurance applicant from deliberately or willfully holding back full
premium payment and wait for the risk insured against to transpire and then conveniently pass on
the balance of the premium to be deducted from the proceeds of the insurance? x x x

xxx

And so it must be. For it cannot be disputed that premium is the elixir vitae of the insurance
business because by law the insurer must maintain a legal reserve fund to meet its contingent
obligations to the public, hence, the imperative need for its prompt payment and full satisfaction.
It must be emphasized here that all actuarial calculations and various tabulations of probabilities
of losses under the risks insured against are based on the sound hypothesis of prompt payment of
premiums. Upon this bedrock insurance firms are enabled to offer the assurance of security to the
public at favorable rates. x x x50 (Citations omitted.)

Here, there is no dispute that the check was delivered to and was accepted by respondent's agent,
Trans-Pacific, only on September 28, 1996. No payment of premium had thus been made at the
time of the loss of the vehicle on September 27, 1996. While petitioner claims that Trans-Pacific
was informed that the check was ready for pick-up on September 27, 1996, the notice of the
availability of the check, by itself, does not produce the effect of payment of the premium. Trans-
Pacific could not be considered in delay in accepting the check because when it informed petitioner
that it will only be able to pick-up the check the next day, petitioner did not protest to this, but
instead allowed Trans-Pacific to do so. Thus, at the time of loss, there was no payment of premium
yet to make the insurance policy effective.

There are, of course, exceptions to the rule that no insurance contract takes effect unless premium
is paid. In UCPB General Insurance Co., Inc. v. Masagana Telamart, Inc.,51 we said:

It can be seen at once that Section 77 does not restate the portion of Section 72 expressly permitting
an agreement to extend the period to pay the premium. But are there exceptions to Section 77?
The answer is in the affirmative.

The first exception is provided by Section 77 itself, and that is, in case of a life or industrial life
policy whenever the grace period provision applies.

The second is that covered by Section 78 of the Insurance Code, which provides:

SEC. 78. Any acknowledgment in a policy or contract of insurance of the receipt of premium is
conclusive evidence of its payment, so far as to make the policy binding, notwithstanding any
stipulation therein that it shall not be binding until premium is actually paid.

A third exception was laid down in Makati Tuscany Condominium Corporation vs. Court of
Appeals, wherein we ruled that Section 77 may not apply if the parties have agreed to the payment
in installments of the premium and partial payment has been made at the time of loss. We said
therein, thus:

We hold that the subject policies are valid even if the premiums were paid on installments. The
records clearly show that the petitioners and private respondent intended subject insurance policies
to be binding and effective notwithstanding the staggered payment of the premiums. The initial
insurance contract entered into in 1982 was renewed in 1983, then in 1984. In those three years,
the insurer accepted all the installment payments. Such acceptance of payments speaks loudly of
the insurer's intention to honor the policies it issued to petitioner. Certainly, basic principles of
equity and fairness would not allow the insurer to continue collecting and accepting the premiums,
although paid on installments, and later deny liability on the lame excuse that the premiums were
not prepaid in full.

Not only that. In Tuscany, we also quoted with approval the following pronouncement of the Court
of Appeals in its Resolution denying the motion for reconsideration of its decision:

While the import of Section 77 is that prepayment of premiums is strictly required as a condition
to the validity of the contract, We are not prepared to rule that the request to make installment
payments duly approved by the insurer would prevent the entire contract of insurance from going
into effect despite payment and acceptance of the initial premium or first installment. Section 78
of the Insurance Code in effect allows waiver by the insurer of the condition of prepayment by
making an acknowledgment in the insurance policy of receipt of premium as conclusive evidence
of payment so far as to make the policy binding despite the fact that premium is actually unpaid.
Section 77 merely precludes the parties from stipulating that the policy is valid even if premiums
are not paid, but does not expressly prohibit an agreement granting credit extension, and such an
agreement is not contrary to morals, good customs, public order or public policy (De Leon, The
Insurance Code, p. 175). So is an understanding to allow insured to pay premiums in installments
not so prescribed. At the very least, both parties should be deemed in estoppel to question the
arrangement they have voluntarily accepted.

By the approval of the aforequoted findings and conclusion of the Court of Appeals, Tuscany has
provided a fourth exception to Section 77, namely, that the insurer may grant credit extension for
the payment of the premium. This simply means that if the insurer has granted the insured a credit
term for the payment of the premium and loss occurs before the expiration of the tem1, recovery
on the policy should be allowed even though the premium is paid after the loss but within the credit
term.

xxx

Finally in the instant case, it would be unjust and inequitable if recovery on the policy would not
be permitted against Petitioner, which had consistently granted a 60- to 90-day credit term for the
payment of premiums despite its full awareness of Section 77. Estoppel bars it from taking refuge
under said Section, since Respondent relied in good faith on such practice. Estoppel then is the
fifth exception to Section 77.52 (Citations omitted.)

In UCPB General Insurance Co., Inc., we summarized the exceptions as follows: (1) in case of
life or industrial life policy, whenever the grace period provision applies, as expressly provided by
Section 77 itself; (2) where the insurer acknowledged in the policy or contract of insurance itself
the receipt of premium, even if premium has not been actually paid, as expressly provided by
Section 78 itself; (3) where the parties agreed that premium payment shall be in installments and
partial payment has been made at the time of loss, as held in Makati Tuscany Condominium Corp.
v. Court of Appeals;53(4) where the insurer granted the insured a credit term for the payment of
the premium, and loss occurs before the expiration of the term, as held in Makati Tuscany
Condominium Corp.; and (5) where the insurer is in estoppel as when it has consistently granted
a 60 to 90-day credit term for the payment of premiums.

The insurance policy in question does not fall under the first to third exceptions laid out in UCPB
General Insurance Co., Inc.: (1) the policy is not a life or industrial life policy; (2) the policy does
not contain an acknowledgment of the receipt of premium but merely a statement of account on
its face;54 and (3) no payment of an installment was made at the time of loss on September 27.

Petitioner argues that his case falls under the fourth and fifth exceptions because the parties
intended the contract of insurance to be immediately effective upon issuance, despite non-payment
of the premium. This waiver to a pre-payment in full of the premium places respondent in estoppel.

We do not agree with petitioner.

The fourth and fifth exceptions to Section 77 operate under the facts obtaining in Makati Tuscany
Condominium Corp. and UCPB General Insurance Co., Inc. Both contemplate situations where
the insurers have consistently granted the insured a credit extension or term for the payment of the
premium. Here, however, petitioner failed to establish the fact of a grant by respondent of a credit
term in his favor, or that the grant has been consistent. While there was mention of a credit
agreement between Trans-Pacific and respondent, such arrangement was not proven and was
internal between agent and principal.55 Under the principle of relativity of contracts, contracts
bind the parties who entered into it. It cannot favor or prejudice a third person, even if he is aware
of the contract and has acted with knowledge.56

We cannot sustain petitioner's claim that the parties agreed that the insurance contract is
immediately effective upon issuance despite nonpayment of the premiums.1âwphi1 Even if there
is a waiver of pre-payment of premiums, that in itself does not become an exception to Section 77,
unless the insured clearly gave a credit term or extension. This is the clear import of the fourth
exception in the UCPB General Insurance Co., Inc. To rule otherwise would render nugatory the
requirement in Section 77 that "[n]otwithstanding any agreement to the contrary, no policy or
contract of insurance issued by an insurance company is valid and binding unless and until the
premium thereof has been paid, x x x." Moreover, the policy itself states:

WHEREAS THE INSURED, by his corresponding proposal and declaration, and which shall be
the basis of this Contract and deemed incorporated herein, has applied to the company for the
insurance hereinafter contained, subject to the payment of the Premium as consideration for such
insurance.57 (Emphasis supplied.)

The policy states that the insured's application for the insurance is subject to the payment of the
premium.1âwphi1 There is no waiver of pre-payment, in full or in installment, of the premiums
under the policy. Consequently, respondent cannot be placed in estoppel.

Thus, we find that petitioner is not entitled to the insurance proceeds because no insurance policy
became effective for lack of premium payment.

The consequence of this declaration is that petitioner is entitled to a return of the premium paid for
the vehicle in the amount of ₱55,620.60 under the principle of unjust enrichment. There is unjust
enrichment when a person unjustly retains a benefit to the loss of another, or when a person retains
money or property of another against the fundamental principles of justice, equity and good
conscience.58 Petitioner cannot claim the full amount of ₱140,893.50, which includes the payment
of premiums for the two other vehicles. These two policies are not affected by our ruling on the
policy subject of this case because they were issued as separate and independent contracts of
insurance.59 We, however, find that the award shall earn legal interest of 6% from the time of
extra judicial demand on July 7, 1997.60

WHEREFORE, the petition is DENIED. The assailed Decision of the CA dated September 11,
2009 and the Resolution dated November 24, 2009 are AFFIRMED with the MODIFICATION
that respondent should return the amount of P55,620.60 with the legal interest computed at the rate
of 6% per annum reckoned from July 7, 1997 until finality of this judgment. Thereafter, the total
amount shall earn interest at the rate of 6% per annum from the finality of this judgment until its
full satisfaction.

SO ORDERED.

G.R. No. 185565 November 26, 2014

LOADSTAR SHIPPING COMPANY, INCORPORATED and LOADSTAR

INTERNATIONAL SHIPPING COMPANY, INCORPORATED, Petitioners,
vs.
MALAYAN INSURANCE COMPANY, INCORPORATED, Respondent.

DECISION
REYES, J.:

This is a Petition for Review on Certiorari1 filed by Loadstai Shipping Company, Incorporated
and Loadstar International Shipping Company, Incorporated (petitioners) against Malayan
Insurance Company, Incorporated (Malayan) seeking to set aside the Decision2 dated April 14,
2008 and Resolution3 dated December 11, 2008 of the Court of Appeals (CA) in CA-G.R. CV No.
82758, which reversed and set aside the Decision4 dated March 31, 2004 of the Regional Trial
Court of Manila, Branch 34, in Civil Case No. 01-101885.

The facts as found by the CA, are as follows:

Loadstar International Shipping, Inc.(Loadstar Shipping) and Philippine Associated Smelting and
Refining Corporation (PASAR) entered into a Contract of Affreightment for domestic bulk
transport of the latter’s copper concentrates for a period of one year from November 1, 1998 to
October 31, 1999. The contract was extended up to the end of October 2000.

On September 10, 2000, 5,065.47 wet metric tons (WMT) of copper concentrates were loaded in
Cargo Hold Nos. 1 and 2 of MV "Bobcat", a marine vessel owned by Loadstar International
Shipping Co., Inc. (Loadstar International) and operated by Loadstar Shipping under a charter
party agreement. The shipper and consignee under the Bill of Lading are Philex Mining
Corporation (Philex) and PASAR, respectively. The cargo was insured with Malayan Insurance
Company, Inc. (Malayan) under Open Policy No. M/OP/2000/001-582. P & I Association is the
third party liability insurer of Loadstar Shipping.

On said date (September 10, 2000), MV "Bobcat" sailed from Poro Point, San Fernando, La Union
bound for Isabel, Leyte. On September 12, 2000, while in the vicinity of Cresta de Gallo, the
vessel’s chief officer on routine inspection found a crack on starboard sideof the main deck which
caused seawater to enter and wet the cargo inside Cargo Hold No. 2 forward/aft. The cracks at the
top deck starboard side of Cargo Hold No. 2, measuring 1.21 meters long x 0.39 meters wide, and
at top deck aft section starboard side on other point, measuring 0.82 meters long x 0.32 meters
wide, were welded.

Immediately after the vessel arrived at Isabel, Leyte anchorage area, on September 13, 2000,
PASAR and Philex’s representatives boarded and inspected the vessel and undertook sampling of
the copper concentrates. In its preliminary report dated September 15, 2000, the Elite Adjusters
and Surveyor, Inc. (Elite Surveyor) confirmed that samples of copper concentrates from Cargo
Hold No. 2 were contaminated by seawater. Consequently, PASAR rejected 750 MT of the 2,300
MT cargo discharged from Cargo Hold No. 2.

On November 6, 2000, PASAR sent a formal notice of claim in the amount of [P]37,477,361.31
to Loadstar Shipping. In its final report dated November 16, 2000, Elite Surveyor recommended
payment to the assured the amount of [P]32,351,102.32 as adjusted. On the basis of such
recommendation, Malayan paid PASAR the amount of [P]32,351,102.32.

Meanwhile, on November 24, 2000, Malayan wrote Loadstar Shipping informing the latter of a
prospective buyer for the damaged copper concentrates and the opportunity to nominate/refer other
salvage buyers to PASAR. On November 29, 2000, Malayan wrote Loadstar Shipping informing
the latter of the acceptance of PASAR’s proposal to take the damaged copper concentrates at a
residual value of US$90,000.00. On December 9, 2000, Loadstar Shipping wrote Malayan
requesting for the reversal of its decision to accept PASAR’s proposal and the conduct of a public
bidding to allow Loadstar Shipping to match or top PASAR’s bid by 10%.

On January 23, 2001, PASAR signed a subrogation receipt in favor of Malayan. To recover the
amount paid and in the exercise of its right of subrogation, Malayan demanded reimbursement
from Loadstar Shipping, which refused to comply. Consequently, on September 19, 2001, Malayan
instituted with the RTC a complaint for damages. The complaint was later amended to include
Loadstar International as party defendant.

In its amended complaint, Malayan mainly alleged that as a direct and natural consequence of the
unseaworthiness of the vessel, PASAR suffered loss of the cargo. It prayed for the amount of
[P]33,934,948.75, representing actual damages plus legal interest fromdate of filing of the
complaint until fully paid, and attorney’s fees in the amount of not less than [P]500,000.00. It also
sought to declare the bill of lading as void since it violates the provisions of Articles 1734 and
1745 of the Civil Code.

On October 30, 2002, Loadstar Shipping and Loadstar International filed their answer with
counterclaim, denying plaintiff appellant’s allegations and averring as follows: that they are not
engaged in the business as common carriers but as private carriers; that the vessel was seaworthy
and defendants-appellees exercised the required diligence under the law; that the entry of water
into Cargo Hold No. 2 must have been caused by force majeureor heavy weather; that due to the
inherent nature of the cargo and the use of water in its production process, the same cannot be
considered damaged or contaminated; that defendants-appellees were denied reasonable
opportunity to participate in the salvage sale; that the claim had prescribed in accordance with the
bill of lading provisions and the Code of Commerce; that plaintiff-appellant’s claim is excessive,
grossly overstated, unreasonable and unsubstantiated; that their liability, if any, should not exceed
the CIFvalue of the lost/damaged cargo as set forth in the bill of lading, charter party or customary
rules of trade; and that the arbitration clause in the contract of affreightment should be followed.

After trial, and considering that the billof lading, which was marked as Exhibit "B", is unreadable,
the RTC issued on February 17, 2004 an order directing the counsel for Malayan to furnish it with
a clearer copy of the same within three (3) days from receipt of the order. On February 23, 2004,
Malayan filed a compliance attaching thereto copy of the bill of lading.

On March 31, 2004, the RTC rendered a judgment dismissing the complaint as well as the
counterclaim. The RTC was convinced that the vessel was seaworthy at the time of loading and
that the damage was attributable to the perils of the sea (natural disaster) and not due to the fault
or negligence of Loadstar Shipping.

The RTC found that although contaminated by seawater, the copper concentrates can still be used.
Itgave credence to the testimony of Francisco Esguerra, defendants-appellees’ expert witness, that
despite high chlorine content, the copper concentrates remain intact and will not lose their value.
The gold and silver remain with the grains/concentrates even if soaked with seawater and does not
melt. The RTC observed that the purchase agreement between PASAR and Philex contains a
penalty clause and has no rejection clause. Despite this agreement, the parties failed to sit down
and assess the penalty.

The RTC also found that defendants-appellees were not afforded the opportunity to object or
participate or nominate a participant in the sale of the contaminated copper concentrates to lessen
the damages to be paid. No record was presented to show that a public bidding was conducted.
Malayan sold the contaminated copper concentrates to PASAR at a low price then paid PASAR
the total value of the damaged concentrate without deducting anything from the claim.

Finally, the RTC denied the prayer to declare the Bill of Lading null and void for lack of basis
because what was attached to Malayan’s compliance was still an unreadable machine copy
thereof.5 (Citations omitted)

Ruling of the CA

On April 14, 2008, the CA rendered its Decision,6 the dispositive portion of which reads:
WHEREFORE, the appeal is GRANTED. The Decision dated March 31, 2004 of the RTC, Branch
34, Manila in Civil Case No. 01-101885, is REVERSED and SET ASIDE. In lieu thereof, a new
judgment is entered, ORDERING defendants-appellees to pay plaintiff-appellant ₱33,934,948.75
as actual damages, plus legal interest at 6% annually from the date of the trial court’s decision.
Upon the finality of the decision, the total amount of the judgment shall earn annual interest at
12% until full payment.

SO ORDERED.7

On December 11, 2008, the CA modified the above decision through a Resolution,8 the fallo
thereof states:

WHEREFORE, the Motion for Reconsiderationis PARTLY GRANTED. The decision of this
Court dated April 14, 2008 is PARTIALLY RECONSIDERED and MODIFIED. Defendants-
appellees are ORDERED to pay to plaintiff-appellant ₱33,934,948.74 as actual damages, less
US$90,000.00, computed at the exchange rate prevailing on November 29, 2000, plus legal interest
at 6% annually from the date of the trial court’s decision. Upon the finality of the decision, the
total amount of the judgment shall earn annual interest at 12% until full payment.

SO ORDERED.9

The CA discussed that the amount of US$90,000.00 should have been deducted from Malayan’s
claim against the petitioners in order to prevent undue enrichment on the part of Malayan.
Otherwise, Malayan would recover from the petitioners not merely the entire amount of
33,934,948.74 as actual damages, but would also end up unjustly enriching itself in the amount of
US$90,000.00 – the residual value of the subject copper concentrates it sold to Philippine
Associated Smelting and Refining Corporation (PASAR) on November 29, 2000.10 Issues

In sum, the grounds presented by the petitioners for the Court’s consideration are the following:
I.

THE [CA] HAS NO BASIS IN REVERSING THE DECISION OF THE TRIAL COURT.
THERE IS NOTHING IN THE DECISION OF THE HONORABLE COURT THAT
REVERSED THE FACTUAL FINDINGS AND CONCLUSIONS OF THE TRIAL COURT,
THAT THERE WAS NO ACTUAL LOSS OR DAMAGE TO THE CARGO OF COPPER
CONCENTRATES WHICH WOULD MAKE LOADSTAR AS THE SHIPOWNER LIABLE
FOR A CARGO CLAIM. CONSEQUENTLY, THERE IS NO BASIS FOR THE COURT TO
ORDER LOADSTAR TO PAY ACTUAL DAMAGES IN THE AMOUNT OF PH₱33
MILLION.11

II.

M/V BOBCAT IS A PRIVATE CARRIER, THE HONORABLE COURT HAD NO BASIS IN

RULING THAT IT IS A COMMON CARRIER. THE DECISION OF THE TRIAL COURT IS
BEREFT OF ANY CATEGORICAL FINDING THAT M/V BOBCAT IS A COMMON
CARRIER.12

III.

THE HONORABLE COURT OFAPPEALS COMMITTED A REVERSIBLE ERROR IN

RULING THAT RESPONDENT’S PAYMENT TO PASAR, ON THE BASIS OF THE
LATTER’S FRAUDULENT CLAIM, ENTITLED RESPONDENT AUTOMATIC RIGHT OF
RECOVERY BY VIRTUE OF SUBROGATION.13

Ruling of the Court

I. Proof of actual damages

It is not disputed that the copper concentrates carried by M/V Bobcat from Poro Point, La Union
to Isabel, Leyte were indeed contaminated with seawater. The issue lies on whether such
contamination resulted to damage, and the costs thereof, if any,incurred by the insured PASAR.

The petitioners argued that the copper concentrates, despite being dampened with seawater, is
neither subject to penalty nor rejection. Under the Philex Mining Corporation (Philex)-PASAR
Purchase Contract Agreement, there is no rejection clause. Instead, there is a pre-agreed formula
for the imposition of penalty in case other elements exceeding the provided minimum level would
be found on the concentrates.14 Since the chlorine content on the copper concentrates is still below
the minimum level provided under the Philex-PASAR purchase contract, no penalty may be
imposed against the petitioners.15

Malayan opposed the petitioners’ invocation of the Philex-PASAR purchase agreement, stating
that the contract involved in this case is a contract of affreightment between the petitioners and
PASAR, not the agreement between Philex and PASAR, which was a contract for the sale of
copper concentrates.16
On this score, the Court agrees withMalayan that contrary to the trial court’s disquisition, the
petitioners cannot validly invoke the penalty clause under the Philex-PASAR purchase agreement,
where penalties are to be imposed by the buyer PASAR against the seller Philex if some elements
exceeding the agreed limitations are found on the copper concentrates upon delivery. The
petitioners are not privy tothe contract of sale of the copper concentrates. The contract between
PASAR and the petitioners is a contract of carriage of goods and not a contract of sale. Therefore,
the petitioners and PASAR are bound by the laws on transportation of goods and their contract of
affreightment. Since the Contract of Affreightment17 between the petitioners and PASAR is silent
as regards the computation of damages, whereas the bill of lading presented before the trial court
is undecipherable, the New Civil Code and the Code ofCommerce shall govern the contract
between the parties.

Malayan paid PASAR the amount of 32,351,102.32 covering the latter’s claim of damage to the
cargo.18 This is based on the recommendation of Elite Adjustors and Surveyors, Inc. (Elite) which
both Malayan and PASAR agreed to. The computation of Elite is presented as follows:

Computation of Loss Payable.We computed for the insured value of the loss and loss payable,
based on the following pertinent data:

1) Total quantity shipped - 5,065.47 wet metric tons and at risk or (Risk Note and B/L)
4,568.907 dry metric tons

2) Total sum insured - [P]212,032,203.77 (Risk Note and Endorsement)

3) Quantity damaged: 777.290 wet metric tons or (Pasar Laboratory Cert. & 696.336 dry
metric tons discharge & sampling Cert.dated September 21, 2000)

Computation:

Total sum insured x Qty. damaged= Insured value of damage

Total Qty. in DMT (DMT) (DMT)

[P] 212,032,203.77 x 696.336 DMT = [P]32,315,312.32

4,568.907 DMT

Insured value of damage = [P] 32,315,312.3219

Based on the preceding computation, the sum of ₱32,315,312.32 represents damages for the total
loss ofthat portion of the cargo which were contaminated with seawater and not merely the
depreciation in its value. Strangely though, after claiming damages for the total loss of that portion,
PASAR bought back the contaminated copper concentrates from Malayan at the price of
US$90,000.00. The fact of repurchase is enough to conclude that the contamination of the copper
concentrates cannot be considered as total loss on the part of PASAR.
The following provisions of the Code of Commerce state how damages on goods delivered by the
carrier should be appraised:

Article 361. The merchandise shall be transported at the risk and venture of the shipper, if the
contrary has not been expressly stipulated. As a consequence, all the losses and deteriorations
which the goods may suffer during the transportation by reason of fortuitous event, force majeure,
or the inherent nature and defect of the goods, shall be for the account and risk of the shipper.
Proof of these accidents is incumbent upon the carrier.

Article 362. Nevertheless, the carrier shall be liable for the losses and damages resulting from the
causes mentioned in the preceding article if it is proved, as against him, that they arose through his
negligence or by reason of his having failed to take the precautions which usage has established
among careful persons, unless the shipper has committed fraud in the bill of lading, representing
the goods to be of a kind or quality different from what they really were.

If, notwithstanding the precautions referred to in this article, the goods transported run the risk of
being lost, on account of their nature or by reason of unavoidable accident, there being no time for
their owners to dispose of them, the carrier may proceed to sell them, placing them for this purpose
at the disposal of the judicial authority or of the officials designated by special provisions.

xxxx

Article 364. If the effect of the damage referred to in Article 361 is merely a diminution in the
value of the goods, the obligation of the carrier shall be reduced to the payment of the amount
which, in the judgment of experts, constitutes such difference in value.

Article 365. If, in consequence of the damage, the goods are rendered useless for sale and
consumption for the purposes for which they are properly destined, the consignee shall not be
bound to receive them, and he may have them in the hands of the carrier, demanding of the latter
their value at the current price on that day.

If among the damaged goods there should be some pieces in good condition and without any
defect, the foregoing provision shall be applicable with respect to those damaged and the consignee
shall receive those which are sound, this segregation to be made by distinct and separate pieces
and without dividing a single object, unless the consignee proves the impossibility of conveniently
making use of them in this form.

The same rule shall be applied to merchandise in bales or packages, separating those parcels which
appear sound.

From the above-cited provisions, if the goods are delivered but arrived at the destination in
damaged condition, the remedies to be pursued by the consignee depend on the extent of damage
on the goods.

If the goods are rendered useless for sale, consumption or for the intended purpose, the consignee
may reject the goods and demand the payment of such goods at their marketprice on that day
pursuant to Article 365. In case the damaged portion of the goods can be segregated from those
delivered in good condition, the consignee may reject those in damaged condition and accept
merely those which are in good condition. But if the consignee is able to prove that it is impossible
to use those goods which were delivered in good condition without the others, then the entire
shipment may be rejected. To reiterate, under Article 365, the nature of damage must be such that
the goods are rendered useless for sale, consumption or intended purpose for the consignee to be
able to validly reject them.

If the effect of damage on the goods consisted merely of diminution in value, the carrier is bound
to pay only the difference between its price on that day and its depreciated value as provided under
Article 364.

Malayan, as the insurer of PASAR, neither stated nor proved that the goods are rendered useless
or unfit for the purpose intended by PASAR due to contamination with seawater. Hence, there is
no basis for the goods’ rejection under Article 365 of the Code of Commerce. Clearly, it is
erroneous for Malayan to reimburse PASAR as though the latter suffered from total loss of goods
in the absence of proof that PASAR sustained such kind of loss. Otherwise, there will be no
difference inthe indemnification of goods which were not delivered at all; or delivered but rendered
useless, compared against those which were delivered albeit, there is diminution in value.

Malayan also failed to establish the legal basis of its decision to sell back the rejected copper
concentrates to PASAR. It cannot be ascertained how and when Malayan deemed itself asthe
owner of the rejected copper concentrates to have these validly disposed of. If the goods were
rejected, it only means there was no acceptance on the part of PASAR from the carrier.
Furthermore, PASAR and Malayan simply agreed on the purchase price of US$90,000.00 without
any allegation or proof that the said price was the depreciated value based on the appraisal of
experts as provided under Article 364 of the Code of Commerce.

II. Subrogation of Malayan to the rights of PASAR

Malayan’s claim against the petitioners is based on subrogation to the rights possessed by PASAR
as consignee of the allegedly damaged goods. The right of subrogation stems from Article 2207
of the New Civil Code which states:

Art. 2207. If the plaintiff’s property has been insured, and he has received indemnity from the
insurance company for the injury or loss arising out of the wrong or breach of contract complained
of, the insurance company shall be subrogated to the rights of the insured against the wrong doer
or the person who has violated the contract. If the amount paid by the insurance company does not
fully cover the injury or loss, the aggrieved party shall be entitled to recover the deficiency from
the person causing the loss or injury.

"The right of subrogation is not dependent upon, nor does it grow out of, any privity of contract or
upon written assignment of claim. It accrues simply upon payment of the insurance claim by the
insurer."20 The right of subrogation is however, not absolute. "There are a few recognized
exceptions to this rule. For instance, if the assured by his own act releases the wrongdoer or third
party liable for the loss or damage, from liability, the insurer’s right of subrogation is defeated. x
x x Similarly, where the insurer pays the assured the value of the lostgoods without notifying the
carrier who has in good faith settled the assured’s claim for loss, the settlement is binding on both
the assured and the insurer, and the latter cannot bring an action against the carrier on his right of
subrogation. x x x And where the insurer pays the assured for a loss which is not a risk covered by
the policy, thereby effecting ‘voluntary payment,’ the former has no right of subrogation against
the third party liable for the loss x x x."21

The rights of a subrogee cannot be superior to the rights possessed by a subrogor. "Subrogation is
the substitution of one person in the place of another with reference to a lawful claim or right, so
that he who is substituted succeeds to the rights of the other in relation to a debt or claim, including
its remedies or securities. The rights to which the subrogee succeeds are the same as, but not
greaterthan, those of the person for whom he is substituted, that is, he cannot acquire any claim,
security or remedy the subrogor did not have. In other words, a subrogee cannot succeed to a right
not possessed by the subrogor. A subrogee in effect steps into the shoes of the insured and can
recover only ifthe insured likewise could have recovered."22 Consequently, an insurer indemnifies
the insured based on the loss or injury the latter actually suffered from. If there is no loss or injury,
then there is no obligation on the part of the insurer to indemnify the insured. Should the insurer
pay the insured and it turns out that indemnification is not due, or if due, the amount paid is
excessive, the insurer takes the risk of not being able to seek recompense from the alleged
wrongdoer. This is because the supposed subrogor did not possessthe right to be indemnified and
therefore, no right to collect is passed on to the subrogee. As regards the determination of actual
damages, "[i]t is axiomatic that actual damages must be proved with reasonable degree of certainty
and a party is entitled only to such compensation for the pecuniary loss that was duly proven."23
Article 2199 of the New Civil Code speaks of how actual damages are awarded:

Art. 2199. Except as provided by law or by stipulation, one is entitled to an adequate compensation
only for such pecuniary loss suffered by him as he has duly proved. Such compensation is referred
to as actual or compensatory damages.

Whereas the CA modified its Decision dated April 14, 2008 by deducting the amount of
US$90,000.00 fromthe award, the same is still iniquitous for the petitioners because PASAR and
Malayan never proved the actual damages sustained by PASAR. It is a flawed notion to merely
accept that the salvage value of the goods is US$90,000.00, since the price was arbitrarily fixed
between PASAR and Malayan. Actual damages to PASAR, for example, could include the
diminution in value as appraised by experts or the expenses which PASAR incurred for the
restoration of the copper concentrates to its former condition, ifthere is damage and rectification
is still possible.

It is also note worthy that when the expert witness for the petitioners, Engineer Francisco Esguerra
(Esguerra), testified as regards the lack of any adverse effect of seawater on copper concentrates,
Malayan never presented evidence of its own in refutation to Esguerra’s testimony. And, even if
the Court will disregard the entirety of his testimony, the effect on Malayan’s cause of action is
nil. As Malayan is claiming for actual damages, it bears the burden of proof to substantiate its
claim.
"The burden of proof is on the party who would be defeated if no evidence would be presented on
either side. The burden is to establish one’s case by a preponderance of evidence which means that
the evidence, as a whole, adduced by one side, is superior tothat of the other. Actual damages are
not presumed. The claimant must prove the actual amount of loss with a reasonable degree of
certainty premised upon competent proof and on the best evidence obtainable. Specific facts that
could afford a basis for measuring whatever compensatory or actual damages are borne must be
pointed out. Actual damages cannot be anchored on mere surmises, speculations or conjectures."24

Having ruled that Malayan did not adduce proof of pecuniary loss to PASAR for which the latter
was questionably indemnified, there is no necessity to expound further on the other issues raised
by the petitioners and Malayan in this case.

WHEREFORE, the petition is GRANTED. The Decision dated April 14, 2008 and Resolution
dated December 11, 2008 of the Court of Appeals in CA-G.R. CV No. 82758 are hereby
REVERSED and SET ASIDE. The Decision dated March 31, 2004 of the Regional Trial Comi of
Manila, Branch 34 in Civil Case No·. 01-101885 is REINSTATED.

SO ORDERED.

G.R. No. 194121

TORRES-MADRID BROKERAGE, INC., Petitioner

vs.
FEB MITSUI MARINE INSURANCE CO., INC. and BENJAMIN P. MANALAST AS,
doing business under the name of BMT TRUCKING SERVICES, Respondents

DECISION

BRION, J.:

We resolve the petition for review on certiorari challenging the Court of Appeals' (CA) October
14, 2010 decision in CA-G.R. CV No. 91829.1

The CA affirmed the Regional Trial Court's (RTC) decision in Civil Case No. 01-1596, and found
petitioner Torres-Madrid Brokerage, Inc. (TMBI) and respondent Benjamin P. Manalastas jointly
and solidarily liable to respondent FEB Mitsui Marine Insurance Co., Inc. (Mitsui) for damages
from the loss of transported cargo.

Antecedents

On October 7, 2000, a shipment of various electronic goods from Thailand and Malaysia arrived
at the Port of Manila for Sony Philippines, Inc. (Sony). Previous to the arrival, Sony had engaged
the services of TMBI to facilitate, process, withdraw, and deliver the shipment from the port to its
warehouse in Biñan, Laguna.2
TMBI – who did not own any delivery trucks – subcontracted the services of Benjamin
Manalastas’ company, BMT Trucking Services (BMT), to transport the shipment from the port to
the Biñan warehouse.3 Incidentally, TMBI notified Sony who had no objections to the
arrangement.4

Four BMT trucks picked up the shipment from the port at about 11:00 a.m. of October 7, 2000.
However, BMT could not immediately undertake the delivery because of the truck ban and because
the following day was a Sunday. Thus, BMT scheduled the delivery on October 9, 2000.

In the early morning of October 9, 2000, the four trucks left BMT’s garage for Laguna.5 However,
only three trucks arrived at Sony’s Biñan warehouse.

At around 12:00 noon, the truck driven by Rufo Reynaldo Lapesura (NSF-391) was found
abandoned along the Diversion Road in Filinvest, Alabang, Muntinlupa City.6 Both the driver and
the shipment were missing.

Later that evening, BMT’s Operations Manager Melchor Manalastas informed Victor Torres,
TMBI’s General Manager, of the development.7 They went to Muntinlupa together to inspect the
truck and to report the matter to the police.8

Victor Torres also filed a complaint with the National Bureau of Investigation (NBI) against
Lapesura for "hijacking."9 The complaint resulted in a recommendation by the NBI to the Manila
City Prosecutor’s Office to prosecute Lapesura for qualified theft.10

TMBI notified Sony of the loss through a letter dated October 10, 2000.11 It also sent BMT a letter
dated March 29, 2001, demanding payment for the lost shipment. BMT refused to pay, insisting
that the goods were "hijacked."

In the meantime, Sony filed an insurance claim with the Mitsui, the insurer of the goods. After
evaluating the merits of the claim, Mitsui paid Sony PHP7,293,386.23 corresponding to the value
of the lost goods.12

After being subrogated to Sony’s rights, Mitsui sent TMBI a demand letter dated August 30, 2001
for payment of the lost goods. TMBI refused to pay Mitsui’s claim. As a result, Mitsui filed a
complaint against TMBI on November 6, 2001,

TMBI, in turn, impleaded Benjamin Manalastas, the proprietor of BMT, as a third-party defendant.
TMBI alleged that BMT’s driver, Lapesura, was responsible for the theft/hijacking of the lost
cargo and claimed BMT’s negligence as the proximate cause of the loss. TMBI prayed that in the
event it is held liable to Mitsui for the loss, it should be reimbursed by BMT.

At the trial, it was revealed that BMT and TMBI have been doing business with each other since
the early 80’s. It also came out that there had been a previous hijacking incident involving Sony’s
cargo in 1997, but neither Sony nor its insurer filed a complaint against BMT or TMBI.13
On August 5, 2008, the RTC found TMBI and Benjamin Manalastas jointly and solidarily liable
to pay Mitsui PHP 7,293,386.23 as actual damages, attorney’s fees equivalent to 25% of the
amount claimed, and the costs of the suit.14 The RTC held that TMBI and Manalastas were
common carriers and had acted negligently.

Both TMBI and BMT appealed the RTC’s verdict.

TMBI denied that it was a common carrier required to exercise extraordinary diligence. It
maintains that it exercised the diligence of a good father of a family and should be absolved of
liability because the truck was "hijacked" and this was a fortuitous event.

BMT claimed that it had exercised extraordinary diligence over the lost shipment, and argued as
well that the loss resulted from a fortuitous event.

On October 14, 2010, the CA affirmed the RTC’s decision but reduced the award of attorney’s
fees to PHP 200,000.

The CA held: (1) that "hijacking" is not necessarily a fortuitous event because the term refers to
the general stealing of cargo during transit;15 (2) that TMBI is a common carrier engaged in the
business of transporting goods for the general public for a fee;16 (3) even if the "hijacking" were
a fortuitous event, TMBI’s failure to observe extraordinary diligence in overseeing the cargo and
adopting security measures rendered it liable for the loss;17 and (4) even if TMBI had not been
negligent in the handling, transport and the delivery of the shipment, TMBI still breached its
contractual obligation to Sony when it failed to deliver the shipment.18

TMBI disagreed with the CA’s ruling and filed the present petition on December 3, 2010.

The Arguments

TMBI’s Petition

TMBI insists that the hijacking of the truck was a fortuitous event. It contests the CA’s finding
that neither force nor intimidation was used in the taking of the cargo. Considering Lapesura was
never found, the Court should not discount the possibility that he was a victim rather than a
perpetrator.19

TMBI denies being a common carrier because it does not own a single truck to transport its
shipment and it does not offer transport services to the public for compensation.20 It emphasizes
that Sony knew TMBI did not have its own vehicles and would subcontract the delivery to a third-
party.

Further, TMBI now insists that the service it offered was limited to the processing of paperwork
attendant to the entry of Sony’s goods. It denies that delivery of the shipment was a part of its
obligation.21
TMBI solely blames BMT as it had full control and custody of the cargo when it was lost.22 BMT,
as a common carrier, is presumed negligent and should be responsible for the loss.

BMT’s Comment

BMT insists that it observed the required standard of care.23 Like the petitioner, BMT maintains
that the hijacking was a fortuitous event – a force majeure – that exonerates it from liability.24 It
points out that Lapesura has never been seen again and his fate remains a mystery. BMT likewise
argues that the loss of the cargo necessarily showed that the taking was with the use of force or
intimidation.25

If there was any attendant negligence, BMT points the finger on TMBI who failed to send a
representative to accompany the shipment.26 BMT further blamed TMBI for the latter’s failure to
adopt security measures to protect Sony’s cargo.27

Mitsui’s Comment

Mitsui counters that neither TMBI nor BMT alleged or proved during the trial that the taking of
the cargo was accompanied with grave or irresistible threat, violence, or force.28 Hence, the
incident cannot be considered "force majeure" and TMBI remains liable for breach of contract.

Mitsui emphasizes that TMBI’s theory – that force or intimidation must have been used because
Lapesura was never found – was only raised for the first time before this Court.29 It also discredits
the theory as a mere conjecture for lack of supporting evidence.

Mitsui adopts the CA’s reasons to conclude that TMBI is a common carrier. It also points out
Victor Torres’ admission during the trial that TMBI’s brokerage service includes the eventual
delivery of the cargo to the consignee.30

Mitsui invokes as well the legal presumption of negligence against TMBI, pointing out that TMBI
simply entrusted the cargo to BMT without adopting any security measures despite: (1) a previous
hijacking incident when TMBI lost Sony’s cargo; and (2) TMBI’s knowledge that the cargo was
worth more than 10 million pesos.31

Mitsui affirms that TMBI breached the contract of carriage through its negligent handling of the
cargo, resulting in its loss.

The Court’s Ruling

A brokerage may be considered a

common carrier if it also undertakes to
deliver the goods for its customers

Common carriers are persons, corporations, firms or associations engaged in the business of
transporting passengers or goods or both, by land, water, or air, for compensation, offering their
services to the public.32 By the nature of their business and for reasons of public policy, they are
bound to observe extraordinary diligence in the vigilance over the goods and in the safety of their
passengers.33

In A.F. Sanchez Brokerage Inc. v. Court of Appeals,34we held that a customs broker – whose
principal business is the preparation of the correct customs declaration and the proper shipping
documents – is still considered a common carrier if it also undertakes to deliver the goods for its
customers. The law does not distinguish between one whose principal business activity is the
carrying of goods and one who undertakes this task only as an ancillary activity.35 This ruling has
been reiterated in Schmitz Transport & Brokerage Corp. v. Transport Venture, Inc.,36
Loadmasters Customs Services, Inc. v. Glodel Brokerage Corporation,37and Westwind Shipping
Corporation v. UCPB General Insurance Co., Inc.38

Despite TMBI’s present denials, we find that the delivery of the goods is an integral, albeit
ancillary, part of its brokerage services. TMBI admitted that it was contracted to facilitate, process,
and clear the shipments from the customs authorities, withdraw them from the pier, then transport
and deliver them to Sony’s warehouse in Laguna.39

Further, TMBI’s General Manager Victor Torres described the nature of its services as follows:

ATTY. VIRTUDAZO: Could you please tell the court what is the nature of the business of
[TMBI]?

Witness MR. Victor Torres of Torres Madrid: We are engaged in customs brokerage business.
We acquire the release documents from the Bureau of Customs and eventually deliver the
cargoes to the consignee’s warehouse and we are engaged in that kind of business, sir.40

That TMBI does not own trucks and has to subcontract the delivery of its clients’ goods, is
immaterial. As long as an entity holds itself to the public for the transport of goods as a business,
it is considered a common carrier regardless of whether it owns the vehicle used or has to actually
hire one.41

Lastly, TMBI’s customs brokerage services – including the transport/delivery of the cargo – are
available to anyone willing to pay its fees. Given these circumstances, we find it undeniable that
TMBI is a common carrier.

Consequently, TMBI should be held responsible for the loss, destruction, or deterioration of the
goods it transports unless it results from:

(1) Flood, storm, earthquake, lightning, or other natural disaster or calamity;

(2) Act of the public enemy in war, whether international or civil;

(3) Act of omission of the shipper or owner of the goods;

(4) The character of the goods or defects in the packing or in the containers;
(5) Order or act of competent public authority.42

For all other cases - such as theft or robbery – a common carrier is presumed to have been at fault
or to have acted negligently, unless it can prove that it observed extraordinary diligence.43

Simply put, the theft or the robbery of the goods is not considered a fortuitous event or a force
majeure. Nevertheless, a common carrier may absolve itself of liability for a resulting loss: (1) if
it proves that it exercised extraordinary diligence in transporting and safekeeping the goods;44 or
(2) if it stipulated with the shipper/owner of the goods to limit its liability for the loss, destruction,
or deterioration of the goods to a degree less than extraordinary diligence.45

However, a stipulation diminishing or dispensing with the common carrier’s liability for acts
committed by thieves or robbers who do not act with grave or irresistible threat, violence, or force
is void under Article 1745 of the Civil Code for being contrary to public policy.46 Jurisprudence,
too, has expanded Article 1734’s five exemptions. De Guzman v. Court of Appeals47 interpreted
Article 1745 to mean that a robbery attended by "grave or irresistible threat, violence or force" is
a fortuitous event that absolves the common carrier from liability.

In the present case, the shipper, Sony, engaged the services of TMBI, a common carrier, to
facilitate the release of its shipment and deliver the goods to its warehouse. In turn, TMBI
subcontracted a portion of its obligation – the delivery of the cargo – to another common carrier,
BMT.

Despite the subcontract, TMBI remained responsible for the cargo. Under Article 1736, a common
carrier’s extraordinary responsibility over the shipper’s goods lasts from the time these goods are
unconditionally placed in the possession of, and received by, the carrier for transportation, until
they are delivered, actually or constructively, by the carrier to the consignee.48

That the cargo disappeared during transit while under the custody of BMT – TMBI’s subcontractor
– did not diminish nor terminate TMBI’s responsibility over the cargo. Article 1735 of the Civil
Code presumes that it was at fault.

Instead of showing that it had acted with extraordinary diligence, TMBI simply argued that it was
not a common carrier bound to observe extraordinary diligence. Its failure to successfully establish
this premise carries with it the presumption of fault or negligence, thus rendering it liable to
Sony/Mitsui for breach of contract.

Specifically, TMBI’s current theory – that the hijacking was attended by force or intimidation – is
untenable.

First, TMBI alleged in its Third Party Complaint against BMT that Lapesura was responsible for
hijacking the shipment.49 Further, Victor Torres filed a criminal complaint against Lapesura with
the NBI.50 These actions constitute direct and binding admissions that Lapesura stole the cargo.
Justice and fair play dictate that TMBI should not be allowed to change its legal theory on appeal.
Second, neither TMBI nor BMT succeeded in substantiating this theory through evidence. Thus,
the theory remained an unsupported allegation no better than speculations and conjectures. The
CA therefore correctly disregarded the defense of force majeure.

TMBI and BMT are not solidarily liable

to Mitsui

We disagree with the lower courts’ ruling that TMBI and BMT are solidarily liable to Mitsui for
the loss as joint tortfeasors. The ruling was based on Article 2194 of the Civil Code:

Art. 2194. The responsibility of two or more persons who are liable for quasi-delict is solidary.

Notably, TMBI’s liability to Mitsui does not stem from a quasi-delict (culpa aquiliana) but from
its breach of contract (culpa contractual). The tie that binds TMBI with Mitsui is contractual, albeit
one that passed on to Mitsui as a result of TMBI’s contract of carriage with Sony to which Mitsui
had been subrogated as an insurer who had paid Sony’s insurance claim. The legal reality that
results from this contractual tie precludes the application of quasi-delict based Article 2194.

A third party may recover from a

common carrier for quasi-delict but must
prove actual negligence

We likewise disagree with the finding that BMT is directly liable to Sony/Mitsui for the loss of
the cargo. While it is undisputed that the cargo was lost under the actual custody of BMT (whose
employee is the primary suspect in the hijacking or robbery of the shipment), no direct contractual
relationship existed between Sony/Mitsui and BMT. If at all, Sony/Mitsui’s cause of action against
BMT could only arise from quasi-delict, as a third party suffering damage from the action of
another due to the latter’s fault or negligence, pursuant to Article 2176 of the Civil Code.51

We have repeatedly distinguished between an action for breach of contract (culpa contractual) and
an action for quasi-delict (culpa aquiliana).

In culpa contractual, the plaintiff only needs to establish the existence of the contract and the
obligor’s failure to perform his obligation. It is not necessary for the plaintiff to prove or even
allege that the obligor’s non-compliance was due to fault or negligence because Article 1735
already presumes that the common carrier is negligent. The common carrier can only free itself
from liability by proving that it observed extraordinary diligence. It cannot discharge this liability
by shifting the blame on its agents or servants.52

On the other hand, the plaintiff in culpa aquiliana must clearly establish the defendant’s fault or
negligence because this is the very basis of the action.53 Moreover, if the injury to the plaintiff
resulted from the act or omission of the defendant’s employee or servant, the defendant may
absolve himself by proving that he observed the diligence of a good father of a family to prevent
the damage.54
In the present case, Mitsui’s action is solely premised on TMBI’s breach of contract. Mitsui did
not even sue BMT, much less prove any negligence on its part. If BMT has entered the picture at
all, it is because TMBI sued it for reimbursement for the liability that TMBI might incur from its
contract of carriage with Sony/Mitsui. Accordingly, there is no basis to directly hold BMT liable
to Mitsui for quasi-delict.

BMT is liable to TMBI for breach of their

contract of carriage

We do not hereby say that TMBI must absorb the loss. By subcontracting the cargo delivery to
BMT, TMBI entered into its own contract of carriage with a fellow common carrier.

The cargo was lost after its transfer to BMT' s custody based on its contract of carriage with TMBI.
Following Article 1735, BMT is presumed to be at fault. Since BMT failed to prove that it observed
extraordinary diligence in the performance of its obligation to TMBI, it is liable to TMBI for
breach of their contract of carriage.

In these lights, TMBI is liable to Sony (subrogated by Mitsui) for breaching the contract of
carriage. In tum, TMBI is entitled to reimbursement from BMT due to the latter's own breach of
its contract of carriage with TMBI. The proverbial buck stops with BMT who may either: (a)
absorb the loss, or (b) proceed after its missing driver, the suspected culprit, pursuant to Article
2181.55

WHEREFORE, the Court hereby ORDERS petitioner TorresMadrid Brokerage, Inc. to pay the
respondent FEB Mitsui Marine Insurance Co", Inc. the following:

a. Actual damages in the amount of PHP 7,293,386.23 plus legal interest from the time the
complaint was filed until it is fully paid;

b. Attorney's foes in the amount of PHP 200,000.00; and

c. Costs of suit.

Respondent Benjamin P. Manalastas is in turn ORDERED to REIMBURSE Torres-Madrid

Brokerage, Inc. of the above-mentioned amounts.

SO ORDERED.

G.R. No. 181375

PHIL-NIPPON KYOEI, CORP., Petitioner,

vs.
ROSALIA T. GUDELOSAO, on her behalf and in behalf of minor children CHRISTY MAE
T. GUDELOSAO and ROSE ELDEN T. GUDELOSAO, CARMEN TANCONTIAN, on her
behalf and in behalf of the children CAMELA B. TANCONTIAN, BEVERLY B.
TANCONTIAN, and ACE B. TANCONTIAN, Respondents.
DECISION

JARDELEZA, J.:

This is a petition for review on certiorari1under Rule 45 of the Revised Rules of Court filed by
Phil-Nippon Kyoei, Corp. (Petitioner) from the Decision2 of the Court of Appeals (CA) dated
October 4, 2007 (CA Decision) and its Resolution3 dated January 11, 2008 in CA-G.R. SP No.
95456. The CA reinstated the Labor Arbiter's Decision4 dated August 5, 2004 (LA Decision) with
the modification, among others, that petitioner is liable to respondents under the insurance cover
it procured from South Sea Surety & Insurance Co., Inc. (SSSICI). The CA ruled that petitioner's
liability would be extinguished only upon payment by SSSICI of the insurance proceeds to
respondents.5

Facts

Petitioner, a domestic shipping corporation, purchased a "Ro-Ro" passenger/cargo vessel "MV

Mahlia" in Japan in February 2003.6 For the vessel's one month conduction voyage from Japan to
the Philippines, petitioner, as local principal, and Top Ever Marine Management Maritime Co.,
Ltd. (TMCL), as foreign principal, hired Edwin C. Gudelosao, Virgilio A. Tancontian, and six
other crewmembers. They were hired through the local manning agency of TMCL, Top Ever
Marine Management Philippine Corporation (TEMMPC). TEMMPC, through their president and
general manager, Capt. Oscar Orbeta (Capt. Orbeta), and the eight crewmembers signed separate
contracts of employment. Petitioner secured a Marine Insurance Policy (Maritime Policy No.
00001) from SSSICI over the vessel for P10,800,000.00 against loss, damage, and third party
liability or expense, arising from the occurrence of the perils of the sea for the voyage of the vessel
from Onomichi, Japan to Batangas, Philippines. This Marine Insurance Policy included Personal
Accident Policies for the eight crewmembers for P3,240,000.00 each in case of accidental death
or injury.7

On February 24, 2003, while still within Japanese waters, the vessel sank due to extreme bad
weather condition. Only Chief Engineer Nilo Macasling survived the incident while the rest of the
crewmembers, including Gudelosao and Tancontian, perished.8

Respondents, as heirs and beneficiaries of Gudelosao and Tancontian, filed separate complaints
for death benefits and other damages against petitioner, TEMMPC, Capt. Orbeta, TMCL, and
SSSICI, with the Arbitration Branch of the National Labor Relations Commission (NLRC).9

On August 5, 2004, Labor Arbiter (LA) Pablo S. Magat rendered a Decision10 finding solidary
liability among petitioner, TEMMPC, TMCL and Capt. Orbeta. The LA also found SSSICI liable
to the respondents for the proceeds of the Personal Accident Policies and attorney's fees. The LA,
however, ruled that the liability of petitioner shall be deemed extinguished only upon SSSICI's
payment of the insurance proceeds. The dispositive portion of the LA Decision reads:

WHEREFORE, premises considered, CAPT. OSCAR ORBETA, [TEMMPC], [TMCL], and

PHIL-NIPPON KYOEI CORPORATION are hereby directed to pay solidarily the
complainants as follows:
 Death Benefits Burial Expenses 10% atty's [fees]
1. ROSALIA T. GUDELOSAO: US$50,000 US$1,000 US$5,100
2. CARMEN B. TANCONTIAN: US$50,000 US$1,000 US$5,100
3. CARMELA B. TANCONTIAN: US$7,000 US$700
4. BEVERLY B. TANCONTIAN: US$7,000 US$700
5. ACE B. TANCONTIAN: US$7,000 US$700

Further, respondent SOUTH SEA SURETY & INSURANCE CO., INC. is hereby directed
to pay as beneficiaries complainants ROSALIA T. GUDELOSAO and CARMEN B.
TANCONTIAN [P]3,240,000.00 each for the proceeds of the Personal Accident Policy Cover it
issued for each of the deceased seafarers EDWIN C. GUDELOSAO and VIRGILIO A. T
ANCONTIAN plus 10% attorney's fees thereof at [P]324,000.00 each thereof or a total of
[P]648,000.00.

Nevertheless, upon payment of said proceeds to said widows by respondent SOUTH SEA
SURETY & INSURANCE CO., INC., respondent PHIL-NIPPON CORPORATION's liability
to all the complainants is deemed extinguished.

Any other claim is hereby dismissed for lack of merit.

SO ORDERED.11

On appeal, the NLRC modified the LA Decision in a Resolution12 dated February 28, 2006, the
dispositive portion of which reads:

WHEREFORE, premises considered, the Appeals of Complainants and PNKC are GRANTED but
only partially in the case of Complainants' Appeal, and the Appeal of [SSSICI] is DISMISSED for
lack of merit. Accordingly, the Decision is SUSTAINED subject to the modification that [SSSICI]
is DIRECTED to pay Complainants in addition to their awarded claims, in the appealed decision,
additional death benefits of US$7,000 each to the minor children of Complainant Gudelosao,
namely, Christy Mae T. Gudelosao and Rose Elden T. Gudelosao.

As regards the other issues, the appealed Decision is SUSTAINED.

SO ORDERED.13

The NLRC absolved petitioner, TEMMPC and TMCL and Capt. Orbeta from any liability based
on the limited liability rule.14 It, however, affirmed SSSICI's liability after finding that the
Personal Accident Policies answer for the death benefit claims under the Philippine Overseas
Employment Administration Standard Employment Contract (POEASEC).15 Respondents filed a
Partial Motion for Reconsideration which the NLRC denied in a Resolution dated May 5, 2006.16
Respondents filed a petition for certiorari17before the CA where they argued that the NLRC
gravely abused its discretion in ruling that TEMMPC, TMCL, and Capt. Orbeta are absolved from
the terms and conditions of the POEA-SEC by virtue of the limited liability rule. Respondents also
argued that the NLRC gravely abused its discretion in ruling that the obligation to pay the surviving
heirs rests solely on SSSICI. The CA granted the petition, the dispositive portion thereof reads:

WHEREFORE for being impressed with merit the petition is hereby GRANTED. Accordingly,
the Resolution dated February 28, 2006, and Resolution, dated May 5, 2006, of the public
respondent NLRC are hereby SET ASIDE. The Decision of the Labor Arbiter dated [August 5,
2004] is REINSTATED, subject to the following modifications:

(1) [R]espondents CAPT. OSCAR ORBETA, [TEMMPC] and [TMCL] (the manning agency),
are hereby directed to pay solidarily the complainants as follows:

Death Benefits Burial Expenses 10% atty's fees

ROSALIA T. GUDELOSAO: US$50,000 US$1,000 US$5,1OO
CARMEN B. TANCONTIAN: US$50,000 US$1,000 US$5,1OO
CARMELA B. TANCONTIAN: US$7,000 US$700
BEVERLY B. TANCONTIAN: US$7,000 US$700
ACE B. TANCONTIAN: US$7,000 US$700

Further, [respondents] CAPT. OSCAR ORBETA, [TEMMPC] and [TMCL] (the manning agency)
are hereby directed to pay solidarily the complainants in addition to their awarded claims,
additional death benefits of US$7,000 each to the minor children of petitioner Rosalia T.
Gudelosao, namely, Christy Mae T. Gudelosao and Rose Elden T. Gudelosao.

Respondent SOUTH SEA SURETY & INSURANCE CO., INC. is hereby directed to pay as
beneficiaries complainants ROSALIA T. GUDELOSAO and CARMEN B. TANCONTIAN
[P]3,240,000.00 each for the proceeds of the Personal Accident Policy Cover it issued for each of
the deceased seafarers EDWIN C. GUDELOSAO and VIRGILIO A. TANCONTIAN plus 10%
attorney's fees thereof at [P]324,000.00 each thereof or a total of [P]648,000.00.

Nevertheless, upon payment of said proceeds to said widows by respondent SOUTH SEA
SURETY & INSURANCE CO., INC., respondent PHIL-NIPPON CORPORATION's liability to
all the complainants is deemed extinguished.

SO ORDERED.18

The CA found that the NLRC erred when it ruled that the obligation of petitioner, TEMMPC and
TMCL for the payment of death benefits under the POEA-SEC was ipso facto transferred to
SSSICI upon the death of the seafarers. TEMMPC and TMCL cannot raise the defense of the total
loss of the ship because its liability under POEA-SEC is separate and distinct from the liability of
the shipowner.19 To disregard the contract, which has the force of law between the parties, would
defeat the purpose of the Labor Code and the rules and regulations issued by the Department of
Labor and Employment (DOLE) in setting the minimum terms and conditions of employment for
the protection of Filipino seamen.20 The CA noted that the benefits being claimed are not
dependent upon whether there is total loss of the vessel, because the liability attaches even if the
vessel did not sink.21 Thus, it was error for the NLRC to absolve TEMMPC and TMCL on the
basis of the limited liability rule.

Significantly though, the CA ruled that petitioner is not liable under the POEA-SEC, but by virtue
of its being a shipowner.22 Thus, petitioner is liable for the injuries to passengers even without a
determination of its fault or negligence.1âwphi1 It is for this reason that petitioner obtained
insurance from SSSICI - to protect itself against the consequences of a total loss of the vessel
caused by the perils of the sea. Consequently, SSSICI's liability as petitioner's insurer directly
arose from the contract of insurance against liability (i.e., Personal Accident Policy).23 The CA
then ordered that petitioner's liability will only be extinguished upon payment by SSSICI of the
insurance proceeds.24

Petitioner filed a Motion for Reconsideration25 dated November 5, 2007 but this was denied by
the CA in its Resolution26 dated January 11, 2008. On the other hand, since SSSICI did not file a
motion for reconsideration of the CA Decision, the CA issued a Partial Entry of Judgment27 stating
that the decision became final and executory as to SSSICI on October 27, 2007.

Hence, this petition where petitioner claims that the CA erred in ignoring the fundamental rule in
Maritime Law that the shipowner may exempt itself from liability by abandoning the vessel and
freight it may have earned during the voyage, and the proceeds of the insurance if any. Since the
liability of the shipowner is limited to the value of the vessel unless there is insurance, any claim
against petitioner is limited to the proceeds arising from the insurance policies procured from
SSSICI. Thus, there is no reason in making petitioner's exoneration from liability conditional on
SSSICI's payment of the insurance proceeds.

On December 8, 2008, TEMMPC filed its Manifestation28 informing us of TEMMPC and

TMCL's Joint Motion to Dismiss the Petition and the CA's Resolution29 dated January 11, 2008
granting it. The dismissal is based on the execution of the Release of All Rights and Full
Satisfaction Claim30 (Release and Quitclaim) on December 14, 2007 between respondents and
TEMMPC, TMCL, and Capt. Orbeta. In a Resolution31 dated January 28, 2009, we noted that
TEMMPC, TMCL, and Capt. Orbeta will no longer comment on the Petition.

On the other hand, SSSICI filed its Comment32 to the petition dated September 3, 2010. It alleged
that the NLRC has no jurisdiction over the insurance claim because claims on the Personal
Accident Policies did not arise from employer-employee relations. It also alleged that petitioner
filed a complaint for sum of money33 in the Regional Trial Court (RTC) of Manila, Branch 46,
where it prays for the payment of the insurance proceeds on the individual Marine Insurance Policy
with a Personal Accident Policy covering the crewmembers of MV Mahlia. This case was
eventually dismissed and is now subject of an appeal34 before the CA. SSSICI prays that this
matter be considered in resolving the present case.35

Issues
I. Whether the doctrine of real and hypothecary nature of maritime law (also known as the limited
liability rule) applies in favor of petitioner.

II. Whether the CA erred in ruling that the liability of petitioner is extinguished only upon SSSICI's
payment of insurance proceeds.

Discussion

I. Liability under the POEA

Standard Employment Contract.

At the outset, the CA erred in absolving petitioner from the liabilities under the POEA-SEC.
Petitioner was the local principal of the deceased seafarers for the conduction trip of MV Mahlia.
Petitioner hired them through TMCL, which also acted through its agent, TEMMPC. Petitioner
admitted its role as a principal of its agents TMCL, TEMMPC and Capt. Orbeta in their Joint
Partial Appeal36 before the NLRC.37 As such, it is solidarily liable with TEMMPC and TMCL
for the benefits under the POEA-SEC.

Doctrine of limited liability is not

applicable to claims under POEA-SEC.

In this jurisdiction, the limited liability rule is embodied in Articles 587, 590 and 837 under Book
III of the Code of Commerce, viz:

Art. 587. The ship agent shall also be civilly liable for the indemnities in favor of third persons
which arise from the conduct of the captain in the care of the goods which the vessel carried; but
he may exempt himself therefrom by abandoning the vessel with all her equipment and the
freightage he may have earned during the voyage.

Art. 590. The co-owners of a vessel shall be civilly liable, in the proportion of their contribution
to the common fund, for the results of the acts of the captain, referred to in Art. 587.

Each part-owner may exempt himself from this liability by the abandonment before a notary of
the part of the vessel belonging to him.

Art. 837. The civil liability incurred by the shipowners in the cases prescribed in this section, shall
be understood as limited to the value of the vessel with all its appurtenances and freightage earned
during the voyage.

Article 83 7 applies the limited liability rule in cases of collision. Meanwhile, Articles 587 and 590
embody the universal principle of limited liability in all cases wherein the shipowner or agent may
be properly held liable for the negligent or illicit acts of the captain.38 These articles precisely
intend to limit the liability of the shipowner or agent to the value of the vessel, its appurtenances
and freightage earned in the voyage, provided that the owner or agent abandons the vessel.39 When
the vessel is totally lost, in which case abandonment is not required because there is no vessel to
abandon, the liability of the shipowner or agent for damages is extinguished.40 Nonetheless, the
limited liability rule is not absolute and is without exceptions. It does not apply in cases: (1) where
the injury or death to a passenger is due either to the fault of the shipowner, or to the concurring
negligence of the shipowner and the captain; (2) where the vessel is insured; and (3) in workmen's
compensation claims.41

In Abueg v. San Diego,42 we ruled that the limited liability rule found in the Code of Commerce
is inapplicable in a liability created by statute to compensate employees and laborers, or the heirs
and dependents, in cases of injury received by or inflicted upon them while engaged in the
performance of their work or employment, to wit:

The real and hypothecary nature of the liability of the shipowner or agent embodied in the
provisions of the Maritime Law, Book III, Code of Commerce, had its origin in the prevailing
conditions of the maritime trade and sea voyages during the medieval ages, attended by
innumerable hazards and perils. To offset against these adverse conditions and to encourage
shipbuilding and maritime commerce, it was deemed necessary to confine the liability of the owner
or agent arising from the operation of a ship to the vessel, equipment, and freight, or insurance, if
any, so that if the shipowner or agent abandoned the ship, equipment, and freight, his liability was
extinguished.

But the provisions of the Code of Commerce invoked by appellant have no room in the application
of the Workmen's Compensation Act which seeks to improve, and aims at the amelioration of, the
condition of laborers and employees. It is not the liability for the damage or loss of the cargo or
injury to, or death of, a passenger by or through the misconduct of the captain or master of the
ship; nor the liability for the loss of the ship as a result of collision; nor the responsibility for wages
of the crew, but a liability created by a statute to compensate employees and laborers in cases of
injury received by or inflicted upon them, while engaged in the performance of their work or
employment, or the heirs and dependents of such laborers and employees in the event of death
caused by their employment. Such compensation has nothing to do with the provisions of the Code
of Commerce regarding maritime commerce. It is an item in the cost of production which must be
included in the budget of any well-managed industry.43 (Underscoring supplied.)

We see no reason why the above doctrine should not apply here.

Act No. 3428, otherwise known as The Workmen's Compensation Act44 is the first law on
workmen's compensation in the Philippines for work-related injury, illness, or death. This was
repealed on November 1, 1974 by the Labor Code,45 and was further amended on December 27,
1974 by Presidential Decree No. 626.46 The pertinent provisions are now found in Title II, Book
IV of the Labor Code on Employees Compensation and State Insurance Fund.

The death benefits granted under Title II, Book IV of the Labor Code are similar to the death
benefits granted under the POEA-SEC.47 Specifically, its Section 20(A)(l) and (4)(c) provides
that:

1. In case of work-related death of the seafarer, during the term of his contract the employer shall
pay his beneficiaries the Philippine Currency equivalent to the amount of Fifty Thousand US
dollars (US$50,000) and an additional amount of Seven Thousand US dollars (US$7,000) to each
child under the age of twenty-one (21) but not exceeding four (4) children, at the exchange rate
prevailing during the time of payment.

xxx

4. The other liabilities of the employer when the seafarer dies as a result of work-related injury or
illness during the term of employment are as follows:

xxx

c. The employer shall pay the beneficiaries of the seafarer the [Philippine] currency equivalent to
the amount of One Thousand US dollars (US$1,000) for burial expenses at the exchange rate
prevailing during the time of payment.

Akin to the death benefits under the Labor Code, these benefits under the POEA-SEC are given
when the employee dies due to a work-related cause during the term of his contract.48 The liability
of the shipowner or agent under the POEA-SEC has likewise nothing to do with the provisions of
the Code of Commerce regarding maritime commerce. The death benefits granted under the
POEA-SEC is not due to the death of a passenger by or through the misconduct of the captain or
master of the ship; nor is it the liability for the loss of the ship as result of collision; nor the liability
for wages of the crew. It is a liability created by contract between the seafarers and their employers,
but secured through the State's intervention as a matter of constitutional and statutory duty to
protect Filipino overseas workers and to secure for them the best terms and conditions possible, in
order to compensate the seafarers' heirs and dependents in the event of death while engaged in the
performance of their work or employment. The POEA-SEC prescribes the set of standard
provisions established and implemented by the POEA containing the minimum requirements
prescribed by the government for the employment of Filipino seafarers. While it is contractual in
nature, the POEA-SEC is designed primarily for the protection and benefit of Filipino seamen in
the pursuit of their employment on board ocean-going vessels.49 As such, it is deemed
incorporated in every Filipino seafarers' contract of employment.50 It is established pursuant to
POEA's power "to secure the best terms and conditions of employment of Filipino contract workers
and ensure compliance therewith" and "to protect the well-being of Filipino workers overseas"51
pursuant to Article 17 of the Labor Code as amended by Executive Order (EO) Nos. 79752 and
247.53

But while the nature of death benefits under the Labor Code and the POEA-SEC are similar, the
death benefits under the POEA-SEC are intended to be separate and distinct from, and in addition
to, whatever benefits the seafarer is entitled to under Philippine laws, including those benefits
which may be claimed from the State Insurance Fund.54

Thus, the claim for death benefits under the POEA-SEC is the same species as the workmen's
compensation claims under the Labor Code – both of which belong to a different realm from that
of Maritime Law. Therefore, the limited liability rule does not apply to petitioner's liability under
the POEA-SEC.

Nevertheless, the Release and Quitclaim benefit petitioner as a solidary debtor.

All the same, the Release and Quitclaim executed between TEMMPC, TMCL and Capt. Oscar
Orbeta, and respondents redounded to the benefit of petitioner as a solidary debtor.

Petitioner is solidarily liable with TEMMPC and TMCL for the death benefits under the POEA-
SEC. The basis of the solidary liability of the principal with the local manning agent is found in
the second paragraph of Section 10 of the Migrant Workers and Overseas Filipino Act of 1995,55
which, in part, provides: "[t]he liability of the principal/employer and the recruitment/placement
agency for any and all claims under this section shall be joint and several." This provision, is in
tum, implemented by Section 1 (e)(8), Rule 2, Part II of the POEA Rules and Regulations
Governing the Recruitment and Employment of Seafarers, which requires the undertaking of the
manning agency to "[a]ssume joint and solidary liability with the employer for all claims and
liabilities which may arise in connection with the implementation of the employment contract [and
POEA-SEC]."

We have consistently applied the Civil Code provisions on solidary obligations, specifically
Articles 121756 and 1222,57 to labor cases.58 We explained in Varorient Shipping Co., Inc. v.
NLRC59the nature of the solidary liability in labor cases, to wit:

x x x The POEA Rules holds her, as a corporate officer, solidarily liable with the local licensed
manning agency. Her liability is inseparable from those of Varorient and Lagoa. If anyone of them
is held liable then all of them would be liable for the same obligation. Each of the solidary
debtors, insofar as the creditor/s is/are concerned, is the debtor of the entire amount; it is
only with respect to his co-debtors that he/she is liable to the extent of his/her share in the
obligation. Such being the case, the Civil Code allows each solidary debtor, in actions filed
by the creditor/s, to avail himself of all defenses which are derived from the nature of the
obligation and of those which are personal to him, or pertaining to his share. He may also
avail of those defenses personally belonging to his co-debtors, but only to the extent of their share
in the debt. Thus, Varorient may set up all the defenses pertaining to Colarina and Lagoa; whereas
Colarina and Lagoa are liable only to the extent to which Varorient may be found liable by the
court. The complaint against Varorient, Lagoa and Colarina is founded on a common cause of
action; hence, the defense or the appeal by anyone of these solidary debtors would redound to the
benefit of the others.

xxx

x x x If Varorient were to be found liable and made to pay pursuant thereto, the entire obligation
would already be extinguished even if no attempt was made to enforce the judgment against
Colarina. Because there existed a common cause of action against the three solidary obligors,
as the acts and omissions imputed against them are one and the same, an ultimate finding
that Varorient was not liable would, under these circumstances, logically imply a similar
exoneration from liability for Colarina and Lagoa, whether or not they interposed any
defense.60 (Emphasis supplied.)

Thus, the rule is that the release of one solidary debtor redounds to the benefit of the others.61
Considering that petitioner is solidarily liable with TEMMPC and TMCL, we hold that the Release
and Quitclaim executed by respondents in favor of TEMMPC and TMCL redounded to petitioner's
benefit. Accordingly, the liabilities of petitioner under Section 20(A)(l) and (4)(c) of the POEA-
SEC to respondents are now deemed extinguished. We emphasize, however, that this
pronouncement does not foreclose the right of reimbursement of the solidary debtors who paid
(i.e., TEMMPC and TMCL) from petitioner as their co-debtor.

II. Liability under the Personal

Accident Policies.

The NLRC has jurisdiction over the

claim on the Personal Accident
Policies.

We find that the CA correctly upheld the NLRC's jurisdiction to order SSSICI to pay respondents
the value of the proceeds of the Personal Accident Policies.

The Migrant Workers and Overseas Filipinos Act of 1995 gives the Labor Arbiters of the NLRC
the original and exclusive jurisdiction over claims arising out of an employer-employee
relationship or by virtue of any law or contract involving Filipino workers for overseas
deployment, including claims for actual, moral, exemplary and other forms of damage. It further
creates a joint and several liability among the principal or employer, and the recruitment/placement
agency, for any and all claims involving Filipino workers, viz:

SEC. 10. Money Claims. - Notwithstanding any provision of law to the contrary, the Labor
Arbiters of the National Labor Relations Commission (NLRC) shall have the original and
exclusive jurisdiction to hear and decide, within ninety (90) calendar days after the filing of the
complaint, the claims arising out of an employer-employee relationship or by virtue of any law
or contract involving Filipino workers for overseas deployment including claims for actual,
moral, exemplary and other forms of damages. Consistent with this mandate, the NLRC shall
endeavor to update and keep abreast with the developments in the global services industry.

The liability of the principal/employer and the recruitment/placement agency for any and all claims
under this section shall be joint and several. This provision shall be incorporated in the contract
for overseas employment and shall be a condition precedent for its approval. The performance
bond to be filed by the recruitment/placement agency, as provided by law, shall be answerable for
all money claims or damages that may be awarded to the workers. If the recruitment/placement
agency is a juridical being, the corporate officers and directors and partners as the case may be,
shall themselves be jointly and solidarily liable with the corporation or partnership for the aforesaid
claims and damages. x x x (Emphasis supplied.)

In Finman General Assurance Corp. v. Inocencio,62 we upheld the jurisdiction of the POEA to
determine a surety's liability under its bond. We ruled that the adjudicatory power to do so is not
vested with the Insurance Commission exclusively. The POEA (now the NLRC) is vested with
quasi-judicial powers over all cases, including money claims, involving employer-employee
relations arising out of or by virtue of any law or contract involving Filipino workers for overseas
employment.63 Here, the award of the insurance proceeds arose out of the personal accident
insurance procured by petitioner as the local principal over the deceased seafarers who were
Filipino overseas workers. The premiums paid by petitioner were, in actuality, part of the total
compensation paid for the services of the crewmembers.64 Put differently, the labor of the
employees is the true source of the benefits which are a form of additional compensation to them.
Undeniably, such claim on the personal accident cover is a claim under an insurance contract
involving Filipino workers for overseas deployment within the jurisdiction of the NLRC.

It must also be noted that the amendment under Section 37-A of the Migrant Workers and Overseas
Filipinos Act of 1995 on Compulsory Insurance Coverage does not apply.1âwphi1 The amendment
requires the claimant to bring any question or dispute in the enforcement of any insurance policy
before the Insurance Commission for mediation or adjudication. The amendment, however, took
effect on May 8, 2010 long after the Personal Accident Policies in this case were procured in 2003.
Accordingly, the NLRC has jurisdiction over the claim for proceeds under the Personal Accident
Policies.

In any event, SSSICI can no longer assail its liability under the Personal Accident Policies. SSSICI
failed to file a motion for reconsideration on the CA Decision. In a Resolution dated April 24,
2008, the CA certified in a Partial Entry of Judgment that the CA Decision with respect to SSSICI
has become final and executory and is recorded in the Book of Entries of Judgments.65 A decision
that has acquired finality becomes immutable and unalterable. This quality of immutability
precludes the modification of a final judgment, even if the modification is meant to correct
erroneous conclusions of fact and law. This holds true whether the modification is made by the
court that rendered it or by the highest court in the land. Thus, SSSICI's liability on the Personal
Accident Policies can no longer be disturbed in this petition.

SSSICI 's liability as insurer under the

Personal Accident Policies is direct.

We, however, find that the CA erred in ruling that "upon payment of [the insurance] proceeds to
said widows by respondent SOUTH SEA SURETY & INSURANCE CO., INC., respondent
PHIL-NIPPON CORPORATION's liability to all the complainants is deemed extinguished."66

This ruling makes petitioner's liability conditional upon SSSICI's payment of the insurance
proceeds. In doing so, the CA determined that the Personal Accident Policies are casualty
insurance, specifically one of liability insurance. The CA determined that petitioner, as insured,
procured from SSSICI the Personal Accident Policies in order to protect itself from the
consequences of the total loss of the vessel caused by the perils of the sea. The CA found that the
liabilities insured against are all monetary claims, excluding the benefits under the POEA-SEC, of
respondents in connection with the sinking of the vessel.

We rule that while the Personal Accident Policies are casualty insurance, they do not answer for
petitioner's liabilities arising from the sinking of the vessel. It is an indemnity insurance procured
by petitioner for the benefit of the seafarers. As a result, petitioner is not directly liable to pay
under the policies because it is merely the policyholder of the Personal Accident Policies.

Section 176 (formerly Sec. 174) of The Insurance Code67 defines casualty insurance as follows:
SEC. 174. Casualty insurance is insurance covering loss or liability arising from accident or
mishap, excluding certain types of loss which by law or custom are considered as falling
exclusively within the scope of other types of insurance such as fire or marine. It includes,
but is not limited to, employer's liability insurance, motor vehicle liability insurance, plate glass
insurance, burglary and theft insurance, personal accident and health insurance as written by
non-life insurance companies, and other substantially similar kinds of

insurance. (Emphasis supplied.)

Based on Section 176, casualty insurance may cover liability or loss arising from accident or
mishap.1âwphi1 In a liability insurance, the insurer assumes the obligation to pay third party in
whose favor the liability of the insured arises.68 On the other hand, personal accident insurance
refers to insurance against death or injury by accident or accidental means.69 In an accidental
death policy, the accident causing the death is the thing insured against.70

Notably, the parties did not submit the Personal Accident Policies with the NLRC or the CA.
However, based on the pleadings submitted by the parties, SSSICI admitted that the crewmembers
of MV Mahlia are insured for the amount of P3,240,000.00, payable upon the accidental death of
the crewmembers.71 It further admitted that the insured risk is the loss of life or bodily injury
brought about by the violent external event or accidental means.72 Based on the foregoing, the
insurer itself admits that what is being insured against is not the liability of the shipowner for death
or injuries to passengers but the death of the seafarers arising from accident.

The liability of SSSICI to the beneficiaries is direct under the insurance contract.73 Under the
contract, petitioner is the policyholder, with SSSICI as the insurer, the crewmembers as the cestui
que vie or the person whose life is being insured with another as beneficiary of the proceeds,74
and the latter's heirs as beneficiaries of the policies. Upon petitioner's payment of the premiums
intended as additional compensation to the crewmembers, SSSICI as insurer undertook to
indemnify the crewmembers' beneficiaries from an unknown or contingent event.75 Thus, when
the CA conditioned the extinguishment of petitioner's liability on SSSICI's payment of the
Personal Accident Policies' proceeds, it made a finding that petitioner is subsidiarily liable for the
face value of the policies. To reiterate, however, there is no basis for such finding; there is no
obligation on the part of petitioner to pay the insurance proceeds because petitioner is, in fact, the
obligee or policyholder in the Personal Accident Policies. Since petitioner is not the party liable
for the value of the insurance proceeds, it follows that the limited liability rule does not apply as
well.

One final note. Petitioner's claim that the limited liability rule and its corresponding exception (i.e.,
where the vessel is insured) apply here is irrelevant because petitioner was not found liable under
tort or quasi-delict. Moreover, the insurance proceeds contemplated under the exception in the
case of a lost vessel are the insurance over the vessel and pending freightage for the particular
voyage.76 It is not the insurance in favor of the seafarers, the proceeds of which are intended for
their beneficiaries. Thus, if ever petitioner is liable for the value of the insurance proceeds under
tort or quasi-delict, it would be from the Marine Insurance Policy over the vessel and not from the
Personal Accident Policies over the seafarers.
WHEREFORE, the petition is PARTLY GRANTED. The CA Decision dated October 4, 2007
and the Resolution dated January 11, 2008 of the Court of Appeals are AFFIRMED WITH THE
FOLLOWING MODIFICATIONS:

(1) The death benefits are limited to the amount granted under the Release of All Rights and Full
Satisfaction of Claim dated December 14, 2007 executed between respondents and Top Ever
Marine Management Company Ltd., Top Ever Marine Management Philippine Corporation, and
Captain Oscar Or beta;

(2) As a solidary co-debtor, petitioner's liability to respondents under the POEA-SEC is also
extinguished by virtue of the Release of All Rights and Full Satisfaction of Claim dated December
14, 2007; and

(3) The last paragraph of the dispositive portion of the CA Decision dated October 4, 2007 stating:
"Nevertheless, upon payment of said proceeds to said widows by respondent SOUTH SEA
SURETY & INSURANCE CO., INC., respondent PHIL-NIPPON CORPORATION's liability to
all the complainants is deemed extinguished ... " is DELETED.

SO ORDERED.

G.R. No. 172682

SULPICIO LINES, INC., Petitioner

vs.
NAPOLEON SESANTE, NOW SUBSTITUTED BY MARIBEL ATILANO, KRISTEN
MARIE, CHRISTIAN IONE, KENNETH KERRN AND KARISNA KATE, ALL
SURNAMED SESANTE, Respondents

DECISION

BERSAMIN, J.:

Moral damages are meant to enable the injured party to obtain the means, diversions or
amusements in order to alleviate the moral suffering. Exemplary damages are designed to permit
the courts to reshape behavior that is socially deleterious in its consequence by creating negative
incentives or deterrents against such behavior.

The Case

This appeal seeks to undo and reverse the adverse decision promulgated on June 27, 2005,1
whereby the Court of Appeals (CA) affirmed with modification the judgment of the Regional Trial
Court (RTC), Branch 91, in Quezon City holding the petitioner liable to pay temperate and moral
damages due to breach of contract of carriage.2

Antecedents
On September 18, 1998, at around 12:55 p.m., the M/V Princess of the Orient, a passenger vessel
owned and operated by the petitioner, sank near Fortune Island in Batangas. Of the 388 recorded
passengers, 150 were lost.3 Napoleon Sesante, then a member of the Philippine National Police
(PNP) and a lawyer, was one of the passengers who survived the sinking. He sued the petitioner
for breach of contract and damages.4

Sesante alleged in his complaint that the M/V Princess of the Orient left the Port of Manila while
Metro Manila was experiencing stormy weather; that at around 11:00 p.m., he had noticed the
vessel listing starboard, so he had gone to the uppermost deck where he witnessed the strong winds
and big waves pounding the vessel; that at the same time, he had seen how the passengers had been
panicking, crying for help and frantically scrambling for life jackets in the absence of the vessel's
officers and crew; that sensing danger, he had called a certain Veney Ceballos through his
cellphone to request him to inform the proper authorities of the situation; that thereafter, big waves
had rocked the vessel, tossing him to the floor where he was pinned by a long steel bar; that he had
freed himself only after another wave had hit the vessel;5 that he had managed to stay afloat after
the vessel had sunk, and had been carried by the waves to the coastline of Cavite and Batangas
until he had been rescued; that he had suffered tremendous hunger, thirst, pain, fear, shock, serious
anxiety and mental anguish; that he had sustained injuries,6 and had lost money, jewelry, important
documents, police uniforms and the .45 caliber pistol issued to him by the PNP; and that because
it had committed bad faith in allowing the vessel to sail despite the storm signal, the petitioner
should pay him actual and moral damages of ₱500,000.00 and ₱l,000,000.00, respectively.7

In its defense, the petitioner insisted on the seaworthiness of the M/V Princess of the Orient due
to its having been cleared to sail from the Port of Manila by the proper authorities; that the sinking
had been due to force majeure; that it had not been negligent; and that its officers and crew had
also not been negligent because they had made preparations to abandon the "'vessel because they
had launched life rafts and had provided the passengers assistance in that regard.8

Decision of the RTC

On October 12, 2001, the RTC rendered its judgment in favor of the respondent,9 holding as
follows:

WHEREFORE, judgment is hereby rendered in favor of plaintiff Napoleon Sesante and against
defendant Sulpicio Lines, Inc., ordering said defendant to pay plaintiff:

1. Temperate damages in the amount of ₱400,000.00;

2. Moral damages in the amount of One Million Pesos (₱l ,000,000.00);

3. Costs of suit.

SO ORDERED.10

The RTC observed that the petitioner, being negligent, was liable to Sesante pursuant to Articles
1739 and 1759 of the Civil Code; that the petitioner had not established its due diligence in the
selection and supervision of the vessel crew; that the ship officers had failed to inspect the stowage
of cargoes despite being aware of the storm signal; that the officers and crew of the vessel had not
immediately sent a distress signal to the Philippine Coast Guard; that the ship captain had not
called for then "abandon ship" protocol; and that based on the report of the Board of Marine Inquiry
(BMI), the erroneous maneuvering of the vessel by the captain during the extreme weather
condition had been the immediate and proximate cause of the sinking.

The petitioner sought reconsideration, but the RTC only partly granted its motion by reducing the
temperate damages from ₱500,000.00 to ₱300,000.00.11

Dissatisfied, the petitioner appealed.12 It was pending the appeal in the CA when Sesante passed
away. He was substituted by his heirs.13

Judgment of the CA

On June 27, 2005, the CA promulgated its assailed decision. It lowered the temperate damages to
₱120,000.00, which approximated the cost of Sesante's lost personal belongings; and held that
despite the seaworthiness of the vessel, the petitioner remained civilly liable because its officers
and crew had been negligent in performing their duties.14

Sttill aggrieved, Sulpicio Lines moved for reconsideration, but the CA denied the motion.15

Hence, this appeal.

Issues

The petitioner attributes the following errors to the CA, to wit:

THE ASSAILED DECISION ERRED IN SUSTAINING THE AWARD OF MORAL

DAMAGES, AS THE INSTANT CASE IS FOR ALLEGED PERSONAL INJURIES
PREDICATED ON BREACH OF CONTRACT OF CARRIAGE, AND THERE BEING NO
PROOF OF BAD FAITH ON THE PART OF SULPICIO

II

THE ASSAILED DECISION ERRED IN SUSTAINING THE AMOUNT OF MORAL

DAMAGES AWARDED, THE SAME BEING UNREASONABLE, EXCESSIVE AND
UNCONSCIONABLE, AND TRANSLATES TO UNJUST ENRICHMENT AGAINST
SULPICIO

III
THE ASSAILED DECISION ERRED IN SUSTAINING THE AWARD OF TEMPERATE
DAMAGES AS THE SAME CANNOT SUBSTITUTE FOR A FAILED CLAIM FOR ACTUAL
DAMAGES, THERE BEING NO COMPETENT PROOF TO WARRANT SAID AWARD

IV

THE AWARD OF TEMPERATE DAMAGES IS UNTENABLE AS THE REQUISITE NOTICE

UNDER THE LAW WAS NOT GIVEN TO SULPICIO IN ORDER TO HOLD IT LIABLE FOR
THE ALLEGED LOSS OF SESANTE'S PERSONAL BELONGINGS

THE ASSAILED DECISION ERRED IN SUBSTITUTING THE HEIRS OF RESPONDENT

SESANTE IN THE INST ANT CASE, THE SAME BEING A PERSONAL ACTION WHICH
DOES NOT SURVIVE

VI

THE ASSAILED DECISION ERRED IN APPLYING ARTICLE 1759 OF THE NEW CIVIL
CODE AGAINST SULPICIO SANS A CLEAR-CUT FINDING OF SULPICIO'S BAD FAITH
IN THE INCIDENT16

In other words, to be resolved are the following, namely: (1) Is the complaint for breach of contract
and damages a personal action that does not survive the death of the plaintiff?; (2) Is the petitioner
liable for damages under Article 1759 of the Civil Code?; and (3) Is there sufficient basis for
awarding moral and temperate damages?

Ruling of the Court

The appeal lacks merit.

An action for breach of contract of carriage

survives the death of the plaintiff

The petitioner urges that Sesante's complaint for damages was purely personal and cannot be
transferred to his heirs upon his death. Hence, the complaint should be dismissed because the death
of the plaintiff abates a personal action.

The petitioner's urging is unwarranted.

Section 16, Rule 3 of the Rules of Court lays down the proper procedure in the event of the death
of a litigant, viz.:
Section 16. Death of party; duty of counsel. - Whenever a party to a pending action dies, and
the claim is not thereby extinguished, it shall be the duty of his counsel to inform the court within
thirty (30) days after such death of the fact thereof, and to give the name and address of his legal
representative or representatives. Failure of counsel to comply with his duty shall be a ground for
disciplinary action.

The heirs of the deceased may be allowed to be substituted for the deceased, without requiring
the appointment of an executor or administrator and the court may appoint a guardian ad litem for
the minor heirs.

xxxx

Substitution by the heirs is not a matter of jurisdiction, but a requirement of due process.17 It
protects the right of due process belonging to any party, that in the event of death the deceased
litigant continues to be protected and properly represented in the suit through the duly appointed
legal representative of his estate.18

The application of the rule on substitution depends on whether or not the action survives the death
of the litigant. Section 1, Rule 87 of the Rules of Court enumerates the following actions that
survive the death of a party, namely: (1) recovery of real or personal property, or an interest from
the estate; (2) enforcement of liens on the estate; and (3) recovery of damages for an injury to
person or property. On the one hand, Section 5, Rule 86 of the Rules of Court lists the actions
abated by death as including: (1) claims for funeral expenses and those for the last sickness of the
decedent; (2) judgments for money; and (3) all claims for money against the deceased, arising from
contract, express or implied.

A contract of carriage generates a relation attended with public duty, neglect or malfeasance of the
carrier's employees and gives ground for an action for damages.19 Sesante's claim against the
petitioner involved his personal injury caused by the breach of the contract of carriage. Pursuant
to the aforecited rules, the complaint survived his death, and could be continued by his heirs
following the rule on substitution.

II

The petitioner is liable for

breach of contract of carriage

The petitioner submits that an action for damages based on breach of contract of carriage under
Article 1759 of the Civil Code should be read in conjunction with Article 2201 of the same code;
that although Article 1759 only provides for a presumption of negligence, it does not envision
automatic liability; and that it was not guilty of bad faith considering that the sinking of M/V
Princess of the Orient had been due to a fortuitous event, an exempting circumstance under Article
1174 of the Civil Code.

The submission has no substance.

Article 1759 of the Civil Code does not establish a presumption of negligence because it explicitly
makes the common carrier liable in the event of death or injury to passengers due to the negligence
or fault of the common carrier's employees. It reads:

Article 1759. Common carriers are liable for the death or injuries to passengers through the
negligence or willful acts of the former's employees, although such employees may have acted
beyond the scope of their authority or in violation of the orders of the common earners.

This liability of the common carriers does not cease upon proof that they exercised all the diligence
of a good father of a family in the selection and supervision of their employees.

The liability of common carriers under Article 1759 is demanded by the duty of extraordinary
diligence required of common carriers in safely carrying their passengers.20

On the other hand, Article 1756 of the Civil Code lays down the presumption of negligence against
the common carrier in the event of death or injury of its passenger, viz.:

Article 1756. In case of death of or injuries to passengers, common carriers are presumed to have
been at fault or to have acted negligently, unless they prove that they observed extraordinary
diligence as prescribed in Articles 1733 and 1755.

Clearly, the trial court is not required to make an express finding of the common carrier's fault or
negligence.21 Even the mere proof of injury relieves the passengers from establishing the fault or
negligence of the carrier or its employees.22 The presumption of negligence applies so long as
there is evidence showing that: (a) a contract exists between the passenger and the common carrier;
and (b) the injury or death took place during the existence of such contract.23 In such event, the
burden shifts to the common carrier to prove its observance of extraordinary diligence, and that an
unforeseen event or force majeure had caused the injury.24

Sesante sustained injuries due to the buffeting by the waves and consequent sinking of M/V
Princess of the Orient where he was a passenger. To exculpate itself from liability, the common
carrier vouched for the seaworthiness of M/V Princess of the Orient, and referred to the BMI report
to the effect that the severe weather condition - a force majeure – had brought about the sinking
of the vessel.

The petitioner was directly liable to Sesante and his heirs.

A common carrier may be relieved of any liability arising from a fortuitous event pursuant to
Article 117425 of the Civil Code. But while it may free a common carrier from liability, the
provision still requires exclusion of human agency from the cause of injury or loss.26 Else stated,
for a common carrier to be absolved from liability in case of force majeure, it is not enough that
the accident was caused by a fortuitous event. The common carrier must still prove that it did not
contribute to the occurrence of the incident due to its own or its employees' negligence.27 We
explained in Schmitz Transport & Brokerage Corporation v. Transport Venture, Inc.,28 as
follows:
In order to be considered a fortuitous event, however, (1) the cause of the unforeseen and
unexpected occurrence, or the failure of the debtor to comply with his obligation, must be
independent of human will; (2) it must be impossible to foresee the event which constitute the caso
fortuito, or if it can be foreseen it must be impossible to avoid; (3) the occurrence must be such as
to render it impossible for the debtor to fulfill his obligation in any manner; and (4) the obligor
must be free from any participation in the aggravation of the injury resulting to the creditor.

[T]he principle embodied in the act of God doctrine strictly requires that the act must be
occasioned solely by the violence of nature. Human intervention is to be excluded from
creating or entering into the cause of the mischief. When the effect is found to be in part the
result of the participation of man, whether due to his active intervention or neglect or failure
to act, the whole occurrence is then humanized and removed from the rules applicable to the
acts of God.29 (bold underscoring supplied for emphasis)

The petitioner has attributed the sinking of the vessel to the storm notwithstanding its position on
the seaworthiness of M/V Princess of the Orient.1âwphi1 Yet, the findings of the BMI directly
contradicted the petitioner's attribution, as follows:

7. The Immediate and the Proximate Cause of the Sinking

The Captain's erroneous maneuvers of the MIV Princess of the Orient minutes before she sunk
[sic] had caused the accident. It should be noted that during the first two hours when the ship left
North Harbor, she was navigating smoothly towards Limbones Point. During the same period, the
ship was only subjected to the normal weather stress prevailing at the time. She was then inside
Manila Bar. The waves were observed to be relatively small to endanger the safety of the ship. It
was only when the MV Princess of the Orient had cleared Limbones Pt. while navigating towards
the direction of the Fortune Island when this agonizing misfortune struck the ship.

Initially, a list of three degrees was observed. The listing of the ship to her portside had
continuously increased. It was at this point that the captain had misjudged the situation. While the
ship continuously listed to her portside and was battered by big waves, strong southwesterly winds,
prudent judgement [sic] would dictate that the Captain should have considerably reduced the ship's
speed. He could have immediately ordered the Chief Engineer to slacken down the speed.
Meanwhile, the winds and waves continuously hit the ship on her starboard side. The waves were
at least seven to eight meters in height and the wind velocity was a[t] 25 knots. The MV Princess
of the Orient being a close-type ship (seven decks, wide and high superstructure) was vulnerable
and exposed to the howling winds and ravaging seas. Because of the excessive movement, the
solid and liquid cargo below the decks must have shifted its weight to port, which could have
contributed to the tilted position of the ship.

Minutes later, the Captain finally ordered to reduce the speed of the ship to 14 knots. At the same
time, he ordered to put ballast water to the starboard-heeling tank to arrest the continuous listing
of the ship. This was an exercise in futility because the ship was already listing between 15 to 20
degrees to her portside. The ship had almost reached the maximum angle of her loll. At this stage,
she was about to lose her stability.
Despite this critical situation, the Captain executed several starboard maneuvers. Steering the
course of the Princess to starboard had greatly added to her tilting. In the open seas, with a fast
speed of 14 knots, advance maneuvers such as this would tend to bring the body of the ship in the
opposite side. In navigational terms, this movement is described as the centripetal force. This force
is produced by the water acting on the side of the ship away from the center of the turn. The force
is considered to act at the center of lateral resistance which, in this case, is the centroid of the
underwater area of the ship's side away from the center of the turn. In the case of the Princess,
when the Captain maneuvered her to starboard, her body shifted its weight to port. Being already
inclined to an angle of 15 degrees, coupled with the instantaneous movement of the ship, the
cargoes below deck could have completely shifted its position and weight towards portside. By
this time, the ship being ravaged simultaneously by ravaging waves and howling winds on her
starboard side, finally lost her grip.30

Even assuming the seaworthiness of the M/VPrincess of the Orient, the petitioner could not escape
liability considering that, as borne out by the aforequoted findings of the BMI, the immediate and
proximate cause of the sinking of the vessel had been the gross negligence of its captain in
maneuvering the vessel.

The Court also notes that Metro Manila was experiencing Storm Signal No. 1 during the time of
the sinking.31 The BMI observed that a vessel like the M/V Princess of the Orient, which had a
volume of 13.734 gross tons, should have been capable of withstanding a Storm Signal No. I
considering that the responding fishing boats of less than 500 gross tons had been able to weather
through the same waves and winds to go to the succor of the sinking vessel and had actually
rescued several of the latter's distressed passengers.32

III

The award of moral damages and

temperate damages is proper

The petitioner argues that moral damages could be meted against a common carrier only in the
following instances, to wit: (1) in the situations enumerated by Article 2201 of the Civil Code; (2)
in cases of the death of a passenger; or (3)where there was bad faith on the part of the common
carrier. It contends that none of these instances obtained herein; hence, the award should be
deleted.

We agree with the petitioner that moral damages may be recovered in an action upon breach of
contract of carriage only when: (a) death of a passenger results, or (b) it is proved that the carrier
was guilty of fraud and bad faith, even if death does not result.33 However, moral damages may
be awarded if the contractual breach is found to be wanton and deliberately injurious, or if the one
responsible acted fraudulently or with malice or bad faith.34

The CA enumerated the negligent acts committed by the officers and crew of M/V Princess of the
Orient, viz.:
x x x. [W]hile this Court yields to the findings of the said investigation report, yet it should be
observed that what was complied with by Sulpicio Lines were only the basic and minimal safety
standards which would qualify the vessel as seaworthy. In the same report however it also revealed
that the immediate and proximate cause of the sinking of the M/V Princess of the Orient was
brought by the following: erroneous maneuvering command of Captain Esrum Mahilum and due
to the weather condition prevailing at the time of the tragedy. There is no doubt that under the
circumstances the crew of the vessel were negligent in manning it. In fact this was clearly
established by the investigation of the Board of Marine Inquiry where it was found that:

The Chief Mate, when interviewed under oath, had attested that he was not able to make stability
calculation of the ship vis-à-vis her cargo. He did not even know the metacentric height (GM) of
the ship whether it be positive or negative.

As cargo officer of the ship, he failed to prepare a detailed report of the ship's cargo stowage plan.

He likewise failed to conduct the soundings (measurement) of the ballast tanks before the ship
departed from port. He readily presumed that the ship was full of ballast since the ship was fully
ballasted when she left Cebu for Manila on 16 September 1998 and had never discharge[d] its
contents since that time.

Being the officer-in-charge for emergency situation (sic) like this, he failed to execute and
supervise the actual abandonship (sic) procedure. There was no announcement at the public
address system of abandonship (sic), no orderly distribution of life jackets and no orderly
launching of life rafts. The witnesses have confirmed this finding on their sworn statements.

There was miscalculation in judgment on the part of the Captain when he erroneously navigated
the ship at her last crucial moment.x x x

To aggravate his case, the Captain, having full command and responsibility of the MV Princess of
the Orient, had failed to ensure the proper execution of the actual abandoning of the ship.

The deck and engine officers (Second Mate, Third Mate, Chief Engineers, Second Engineer, Third
Engineer and Fourth Engineer), being in charge of their respective abandonship (sic) post, failed
to supervise the crew and passengers in the proper execution of abandonship (sic) procedure.

The Radio Officer (spark) failed to send the SOS message in the internationally accepted
communication network (VHF Channel 16). Instead, he used the Single Side Band (SSB) radio in
informing the company about the emergency situation. x x x x35

The aforestated negligent acts of the officers and crew of M/V Princess of the Orient could not be
ignored in view of the extraordinary duty of the common carrier to ensure the safety of the
passengers. The totality of the negligence by the officers and crew of M/V Princess of the Orient,
coupled with the seeming indifference of the petitioner to render assistance to Sesante,36
warranted the award of moral damages.
While there is no hard-and-fast rule in determining what is a fair and reasonable amount of moral
damages, the discretion to make the determination is lodged in the trial court with the limitation
that the amount should not be palpably and scandalously excessive. The trial court then bears in
mind that moral damages are not intended to impose a penalty on the wrongdoer, or to enrich the
plaintiff at the expense of the defendant.37 The amount of the moral damages must always
reasonably approximate the extent of injury and be proportional to the wrong committed.38

The Court recognizes the mental anguish, agony and pain suffered by Sesante who fought to
survive in the midst of the raging waves of the sea while facing the immediate prospect of losing
his life. His claim for moral and economic vindication is a bitter remnant of that most infamous
tragedy that left hundreds of families broken in its wake. The anguish and moral sufferings he
sustained after surviving the tragedy would always include the memory of facing the prospect of
his death from drowning, or dehydration, or being preyed upon by sharks. Based on the established
circumstances, his survival could only have been a miracle wrought by God's grace, by which he
was guided in his desperate swim for the safety of the shore. But even with the glory of survival,
he still had to grapple with not just the memory of having come face to face with almost certain
death, but also with having to answer to the instinctive guilt for the rest of his days of being chosen
to live among the many who perished in the tragedy.39

While the anguish, anxiety, pain and stress experienced by Sesante during and after the sinking
cannot be quantified, the moral damages to be awarded should at least approximate the reparation
of all the consequences of the petitioner's negligence. With moral damages being meant to enable
the injured party to obtain the means, diversions or amusements in order to alleviate his moral and
physical sufferings,40 the Court is called upon to ensure that proper recompense be allowed to
him, through his heirs. For this purpose, the amount of ₱l,000,000.00, as granted by the RTC and
affirmed by the CA, is maintained.

The petitioner contends that its liability for the loss of Sesante' s personal belongings should
conform with A1iicle 1754, in relation to Articles 1998, 2000 to 2003 of the Civil Code, which
provide:

Article 1754. The provisions of Articles 1733 to 1753 shall apply to the passenger's baggage which
is not in his personal custody or in that of his employees. As to other baggage, the rules in Articles
1998 and 2000 to 2003 concerning the responsibility of hotel-keepers shall be applicable.

xxxx

Article 1998. The deposit of effects made by travellers in hotels or inns shall also be regarded as
necessary. The keepers of hotels or inns shall be responsible for them as depositaries, provided
that notice was given to them, or to their employees, of the effects brought by the guests and that,
on the part of the latter, they take the precautions which said hotel-keepers or their substitutes
advised relative to the care and vigilance of their effects.

xxxx
Article 2000. The responsibility referred to in the two preceding articles shall include the loss of,
or injury to the personal property of the guests caused by the servants or employees of the keepers
of hotels or inns as well as by strangers; but not that which may proceed from any force majeure.
The fact that travellers are constrained to rely on the vigilance of the keeper of the hotel or inn
shall be considered in determining the degree of care required of him.

Article 2001. The act of a thief or robber, who has entered the hotel is not deemed force majeure,
unless it is done with the use of arms or through an irresistible force.

Article 2002. The hotel-keeper is not liable for compensation if the loss is due to the acts of the
guest, his family, servants or visitors, or if the loss arises from the character of the things brought
into the hotel.

Article 2003. The hotel-keeper cannot free himself from responsibility by posting notices to the
effect that he is not liable for the articles brought by the guest. Any stipulation to the contrary
between the hotel-keeper and the guest whereby the responsibility of the former as set forth in
Articles 1998 to 2001 is suppressed or diminished shall be void.

The petitioner denies liability because Sesante' s belongings had remained in his custody all
throughout the voyage until the sinking, and he had not notified the petitioner or its employees
about such belongings. Hence, absent such notice, liability did not attach to the petitioner.

Is notification required before the common carrier becomes liable for lost belongings that remained
in the custody of the passenger?

We answer in the negative.

The rule that the common carrier is always responsible for the passenger's baggage during the
voyage needs to be emphasized. Article 1754 of the Civil Code does not exempt the common
carrier from liability in case of loss, but only highlights the degree of care required of it depending
on who has the custody of the belongings. Hence, the law requires the common carrier to observe
the same diligence as the hotel keepers in case the baggage remains with the passenger; otherwise,
extraordinary diligence must be exercised.41 Furthermore, the liability of the common carrier
attaches even if the loss or damage to the belongings resulted from the acts of the common carrier's
employees, the only exception being where such loss or damages is due to force majeure.42

In YHT Realty Corporation v. Court of Appeals,43we declared the actual delivery of the goods to
the innkeepers or their employees as unnecessary before liability could attach to the hotelkeepers
in the event of loss of personal belongings of their guests considering that the personal effects were
inside the hotel or inn because the hotelkeeper shall remain accountable.44 Accordingly, actual
notification was not necessary to render the petitioner as the common carrier liable for the lost
personal belongings of Sesante. By allowing him to board the vessel with his belongings without
any protest, the petitioner became sufficiently notified of such belongings. So long as the
belongings were brought inside the premises of the vessel, the petitioner was thereby effectively
notified and consequently duty-bound to observe the required diligence in ensuring the safety of
the belongings during the voyage. Applying Article 2000 of the Civil Code, the petitioner assumed
the liability for loss of the belongings caused by the negligence of its officers or crew. In view of
our finding that the negligence of the officers and crew of the petitioner was the immediate and
proximate cause of the sinking of the M/V Princess of the Orient, its liability for Sesante' s lost
personal belongings was beyond question.

The petitioner claims that temperate damages were erroneously awarded because Sesante had not
proved pecuniary loss; and that the CA merely relied on his self-serving testimony.

The award of temperate damages was proper.

Temperate damages may be recovered when some pecuniary loss has been suffered but the amount
cannot, from the nature of the case, be proven with certainty.45 Article 222446 of the Civil Code
expressly authorizes the courts to award temperate damages despite the lack of certain proof of
actual damages.47

Indubitably, Sesante suffered some pecuniary loss from the sinking of the vessel, but the value of
the loss could not be established with certainty. The CA, which can try facts and appreciate
evidence, pegged the value of the lost belongings as itemized in the police report at P120,000.00.
The valuation approximated the costs of the lost belongings. In that context, the valuation of
₱120,000.00 is correct, but to be regarded as temperate damages.

In fine, the petitioner, as a common carrier, was required to observe extraordinary diligence in
ensuring the safety of its passengers and their personal belongings. It being found herein short of
the required diligence rendered it liable for the resulting injuries and damages sustained by Sesante
as one of its passengers.

Should the petitioner be further held liable for exemplary damages?

In contracts and quasi-contracts, the Court has the discretion to award exemplary damages if the
defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.48 Indeed,
exemplary damages cannot be recovered as a matter of right, and it is left to the court to decide
whether or not to award them.49 In consideration of these legal premises for the exercise of the
judicial discretion to grant or deny exemplary damages in contracts and quasi-contracts against a
defendant who acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner, the
Court hereby awards exemplary damages to Sesante.

First of all, exemplary damages did not have to be specifically pleaded or proved, because the
courts had the discretion to award them for as long as the evidence so warranted. In Marchan v.
Mendoza,50 the Court has relevantly discoursed:

x x x. It is argued that this Court is without jurisdiction to adjudicate this exemplary damages
since there was no allegation nor prayer, nor proof, nor counterclaim of error for the same
by the appellees. It is to be observed however, that in the complaint, plaintiffs "prayed for
such other and further relief as this Court may deem just and equitable." Now, since the
body of the complaint sought to recover damages against the defendant-carrier wherein
plaintiffs prayed for indemnification for the damages they suffered as a result of the
negligence of said Silverio Marchan who is appellant's employee; and since exemplary
damages is intimately connected with general damages, plaintiffs may not be expected to
single out by express term the kind of damages they arc trying to recover against the
defendant's carrier. Suffice it to state that when plaintiffs prayed in their complaint for such
other relief and remedies that may be availed of under the premises, in effect, therefore, the
court is called upon to exercise and use its discretion whether the imposition of punitive or
exemplary damages even though not expressly prayed or pleaded in the plaintiffs'
complaint."

x x x It further appears that the amount of exemplary damages need not be proved, because
its determination depends upon the amount of compensatory damages that may be awarded
to the claimant. If the amount of exemplary damages need not be proved, it need not also be
alleged, and the reason is obvious because it is merely incidental or dependent upon what the
court may award as compensatory damages. Unless and until this premise is determined and
established, what may be claimed as exemplary damages would amount to a mere surmise
or speculation. It follows as a necessary consequence that the amount of exemplary damages
need not be pleaded in the complaint because the same cannot be predetermined. One can
merely ask that it be determined by the court if in the use of its discretion the same is
warranted by the evidence, and this is just what appellee has done. (Bold underscoring
supplied for emphasis)

And, secondly, exemplary damages are designed by our civil law to "permit the courts to reshape
behavior that is socially deleterious in its consequence by creating negative incentives or deterrents
against such behavior. "51 The nature and purpose for this kind of damages have been well-stated
in People v. Dalisay,52to wit:

Also known as 'punitive' or 'vindictive' damages, exemplary or corrective damages are intended
to serve as a deterrent to serious wrong doings, and as a vindication of undue sufferings and
wanton invasion of the rights of an injured or a punishment for those guilty of outrageous
conduct. These terms are generally, but not always, used interchangeably. In common law, there
is preference in the use of exemplary damages when the award is to account for injury to feelings
and for the sense of indignity and humiliation suffered by a person as a result of an injury that has
been maliciously and wantonly inflicted, the theory being that there should be compensation for
the hurt caused by the highly reprehensible conduct of the defendant - associated with such
circumstances as willfulness, wantonness, malice, gross negligence or recklessness, oppression,
insult or fraud or gross fraud - that intensifies the injury. The terms punitive or vindictive damages
are often used to refer to those species of damages that may be awarded against a person to punish
him for his outrageous conduct. In either case, these damages arc intended in good measure to
deter the wrongdoer and others like him from similar conduct in the future. (Bold
underscoring supplied for emphasis)

The BMI found that the "erroneous maneuvers" during the ill-fated voyage by the captain of the
petitioner's vessel had caused the sinking. After the vessel had cleared Limbones Point while
navigating towards the direction of Fortune Island, the captain already noticed the listing of the
vessel by three degrees to the portside of the vessel, but, according to the BMI, he did not exercise
prudence as required by the situation in which his vessel was suffering the battering on the
starboard side by big waves of seven to eight meters high and strong southwesterly winds of 25
knots. The BMI pointed out that he should have considerably reduced the speed of the vessel based
on his experience about the vessel - a close-type ship of seven decks, and of a wide and high
superstructure - being vulnerable if exposed to strong winds and high waves. He ought to have
also known that maintaining a high speed under such circumstances would have shifted the solid
and liquid cargo of the vessel to port, worsening the tilted position of the vessel. It was only after
a few minutes thereafter that he finally ordered the speed to go down to 14 knots, and to put ballast
water to the starboard-heeling tank to arrest the continuous listing at portside. By then, his moves
became an exercise in futility because, according to the BMI, the vessel was already listing to her
portside between 15 to 20 degrees, which was almost the maximum angle of the vessel's loll. It
then became inevitable for the vessel to lose her stability.

The BMI concluded that the captain had executed several starboard maneuvers despite the critical
situation of the vessel, and that the maneuvers had greatly added to the tilting of the vessel. It
observed:

x x x In the open seas, with a fast speed of 14 knots, advance maneuvers such as this would
tend to bring the body of the ship in the opposite side. In navigational terms, this movement
is described as the centripetal force. This force is produced by the water acting on the side
of the ship away from the center of the turn. The force is considered to act at the center of
lateral resistance which, in this case, is the centroid of the underwater area of the ship's side
away from the center of the turn. In the case of the Princess, when the Captain maneuvered
her to starboard, her body shifted its weight to port. Being already inclined to an angle of 15
degrees, coupled with the instantaneous movement of the ship, the cargoes below deck could
have completely shifted its position and weight towards portside. By this time, the ship being
ravaged simultaneously by ravaging waves and howling winds on her starboard side, finally
lost her grip.53

Clearly, the petitioner and its agents on the scene acted wantonly and recklessly. Wanton and
reckless are virtually synonymous in meaning as respects liability for conduct towards others.54
Wanton means characterized by extreme recklessness and utter disregard for the rights of others;
or marked by or manifesting arrogant recklessness of justice or of rights or feelings of others.55
Conduct is reckless when it is an extreme departure from ordinary care, in a situation in which a
high degree of danger is apparent. It must be more than any mere mistake resulting from
inexperience, excitement, or confusion, and more than mere thoughtlessness or inadvertence, or
simple inattention.56

The actuations of the petitioner and its agents during the incident attending the unfortunate sinking
of the M/V Princess of the Orient were far below the standard of care and circumspection that the
law on common carriers demanded. Accordingly, we hereby fix the sum of ₱l ,000,000.00 in order
to serve fully the objective of exemplarity among those engaged in the business of transporting
passengers and cargo by sea. The amount would not be excessive, but proper. As the Court put it
in Pereria v. Zarate:57

Anent the ₱1,000,000.00 allowed as exemplary damages, we should not reduce the amount if only
to render effective the desired example for the public good. As a common carrier, the Pereñas
needed to be vigorously reminded to observe their duty to exercise extraordinary diligence to
prevent a similarly senseless accident from happening again. Only by an award of exemplary
damages in that amount would suffice to instill in them and others similarly situated like them the
ever-present need for greater and constant vigilance in the conduct of a business imbued with
public interest.58 (Bold underscoring supplied for emphasis)

WHEREFORE, the Court AFFIRMS the decision promulgated on June 27, 2005 with the
MODIFICATIONS that: (a) the amount of moral damages is fixed at ₱l,000,000.00; (b) the
amount of ₱l,000,000.00 is granted as exemplary damages; and (c) the sum of ₱l20,000.00 is
allowed as temperate damages, all to be paid to the heirs of the late Napoleon Sesante. In addition,
all the amounts hereby awarded shall earn interest of 6% per annum from the finality of this
decision until fully paid. Costs of suit to be paid by the petitioner.

SO ORDERED.

G.R. No. 190271, September 14, 2016

TRANSIMEX CO., Petitioner, v. MAFRE ASIAN INSURANCE CORP., Respondent.

DECISION

SERENO, C.J.:

This case involves a money claim filed by an insurance company against the ship agent of a
common carrier. The dispute stemmed from an alleged shortage in a shipment of fertilizer
delivered by the carrier to a consignee. Before this Court, the ship agent insists that the shortage
was caused by bad weather, which must be considered either a storm under Article 1734 of the
Civil Code or a peril of the sea under the Carriage of Goods by Sea Act (COGSA). 1 chanrobleslaw

In the Decision2 and the Resolution3 assailed in this Petition for Review on Certiorari,4 the Court
of Appeals (CA) affirmed the Decision5 of the Regional Trial Court (RTC). The RTC ordered
petitioner Transimex Co. (Transimex) to pay respondent Mafre Asian Insurance Corp.6 the amount
of P1,617,527.37 in addition to attorney's fees and costs. Petitioner is the local ship agent of the
vessel, while respondent is the subrogee of Fertiphil Corporation (Fertiphil),7 the consignee of a
shipment of Prilled Urea Fertilizer transported by M/V Meryem Ana.

FACTUAL ANTECEDENTS

On 21 May 1996, M/V Meryem Ana received a shipment consisting of 21,857 metric tons of Prilled
Urea Fertilizer from Helm Duengemittel GMBH at Odessa, Ukraine.8 The shipment was covered
by two separate bills of lading and consigned to Fertiphil for delivery to two ports - one in Poro
Point, San Fernando, La Union; and the other in Tabaco, Albay.9 Fertiphil insured the cargo against
all risks under Marine Risk Note Nos. MN-MAR-HO-0001341 and MN-MAR-HO-0001347
issued by respondent.10 chanrobleslaw

On 20 June 1996, M/V Meryem Ana arrived at Poro Point, La Union, and discharged 14,339.507
metric tons of fertilizer under the first bill of lading.11 The ship sailed on to Tabaco, Albay, to
unload the remainder of the cargo. The fertilizer unloaded at Albay appeared to have a gross weight
of 7,700 metric tons.12 The present controversy involves only this second delivery.

As soon as the vessel docked at the Tabaco port, the fertilizer was bagged and stored inside a
warehouse by employees of the consignee.13 When the cargo was subsequently weighed, it was
discovered that only 7,350.35 metric tons of fertilizer had been delivered.14 Because of the alleged
shortage of 349.65 metric tons, Fertiphil filed a claim with respondent for P1,617,527.37,15 which
was found compensable.16 chanrobleslaw

After paying the claim of Fertiphil, respondent demanded reimbursement from petitioner on the
basis of the right of subrogation. The claim was denied, prompting respondent to file a Complaint
with the RTC for recovery of sum of money.17 In support of its claim, respondent presented a
Report of Survey18 and a Certification19 from David Cargo Survey Services to prove the shortage.
In addition, respondent submitted an Adjustment Report20 prepared by Adjustment Standards
Corporation (ASC) to establish the outturn quantity and condition of the fertilizer discharged from
the vessel at the Tabaco port.21 In the report, the adjuster also stated that the shortage was
attributable to the melting of the fertilizer while inside the hatches, when the vessel took on water
because of the bad weather experienced at sea.22 Two witnesses were then presented by respondent
to buttress its documentary evidence.23
chanrobleslaw

Petitioner, on the other hand, denied that there was loss or damage to the cargo. 24 It submitted
survey certificates and presented the testimony of a marine surveyor to prove that there was, in
fact, an excess of 3.340 metric tons of fertilizer delivered to the consignee.25 Petitioner also
cralawred

alleged that defendants had exercised extraordinary diligence in the transport and handling of the
cargo.26chanrobleslaw

THE RTC RULING

The RTC ruled in favor of respondent and ordered petitioner to pay the claim of P1,617,527.37.
In its Decision,27 the trial court found that there was indeed a shortage in the cargo delivered, for
which the common carrier must be held responsible under Article 1734 of the Civil Code. The
RTC also refused to give credence to petitioner's claim of overage and noted that the presumption
of fault and/or negligence on the part of the carrier remained unrebutted. The trial court
explained: ChanRoblesV irtualawlibrary

The defendants' defense is that there was no loss/damage to the cargo because instead of a shortage
there was an overage of 3.340, invoking the findings of Raul Pelagio, a marine surveyor connected
with Survey Specialists, Inc. whose services were engaged by the defendants. However, the Court
notes that what was loaded in the vessel M/V Meryem Ana at Odessa, Ukraine on May 21, 1996
was 21,857 metric tons of prilled urea fertilizer (Draft Survey Report, Exhibit F). How the quantity
loaded had increased to 21,860.34 has not been explained by the defendants. Thus, the Court finds
incredible the testimony of Raul Pelagio that he found an overage of 3.340 metric tons. The Court
is inclined to give credence to the testimonies of witness Jaime David, the cargo surveyor engaged
by consignee Fertiphil Corporation, and witness Fabian Bon, a cargo surveyor of Adjustment
Standards Corporation, whose services were engaged by plaintiff Mafre Asian Insurance
Corporation, there being no reason for the Court to disregard their findings which jibe with one
another.
Thus, it appears crystal clear that on the vessel M/V Meryem Ana was loaded in bulk on May 21,
1996 at Odessa, Ukraine a cargo consisting of 21,857 metric tons of prilled urea fertilizer bound
for delivery at Poro Point, San Fernando, La Union and at Tabaco, Albay; that the cargo unloaded
at said ports of destination had a shortage of 349.65 metric tons.

x x x x

As to the defense that defendants had supposedly exercised extraordinary care and diligence in the
transport and handling of the cargo, the Court finds that the evidence presented by the defendants
is absolutely and completely bereft of anything to support their claim of having exercised
extraordinary care and diligence.

Hence, the presumption of fault and/or negligence as provided in Art. 1735 of the Civil Code on
the part of the defendants stands unrebutted as against the latter.28chanroblesvirtuallawlibrary

THE CA RULING

The CA affirmed the ruling of the RTC and denied petitioner's appeal.29 After evaluating the
evidence presented during trial, the appellate court found no reason to disturb the trial court's
conclusion that there was indeed a shortage in the shipment.30 chanrobleslaw

The CA also rejected the assertion that petitioner was not a common carrier.31 Because the latter
offered services to the public for the transport of goods in exchange for compensation, it was
considered a common carrier in accordance with Article 1732 of the Civil Code. The CA further
noted that petitioner had already admitted this fact in the Answer32 and even raised the defenses
usually invoked by common carriers during trial and on appeal, i.e., the exercise of extraordinary
care and diligence, and fortuitous event.33 These defenses were, however, found unmeritorious: Chan RoblesVir tualawlibrary

Defendants-appellants claim that the loss was due to a fortuitous event as the Survey Report of
Jaime David stated that during its voyage, the vessel encountered bad weather. But to excuse a
common carrier fully of any liability, Article 1739 of the Civil Code requires that the fortuitous
event must have been the proximate and only cause of the loss. Moreover, it should have exercised
due diligence to prevent or minimize the loss before, during and after the occurrence of the
fortuitous event.

x x x x

In the present case, defendants-appellants did not present proof that the "bad weather" they
encountered was a "storm" as contemplated by Article 1734(1). String winds are the ordinary
vicissitudes of a sea voyage. Even if the weather encountered by the ship was to be deemed a
natural disaster under Article 1739 of the Civil Code, defendants-appellants failed to show that
such natural disaster or calamity was the proximate and only cause of the loss. The shortage must
not have been caused or worsened by human participation. The defense of fortuitous event or
natural disaster cannot be successfully made when the injury could have been avoided by human
precaution.34chanroblesvirtuallawlibrary
Petitioner moved for reconsideration of the CA Decision, but the motion was denied.35 Not only
did the Motion for Reconsideration lack meit according to the appellate court; it was also filed out
of time.36 chanrobleslaw

PROCEEDINGS BEFORE THIS COURT

On 3 December 2009, Transimex filed a Petition for Review on Certiorari37 before this Court
praying for the reversal of the CA Decision and Resolution.38 Petitioner asserts that the lower
courts erred in holding it liable for the alleged shortage in the shipment of fertilizer. While it no
longer questions the existence of the shortage, it claims that the loss or damage was caused by bad
weather.39 It then insists that the dispute is governed by Section 4 of COGSA, which exempts the
carrier from liability for any loss or damage arising from "perils, dangers and accidents of the
sea.40chanrobleslaw

In its Comment,41 respondent maintains that petitioner was correctly held liable for the shortage
of the cargo in accordance with the Civil Code provisions on common carriers.42 It insists that the
factual findings of the lower courts must be respected43 particularly in this case, since petitioner
failed to timely appeal the Decision of the CA.44 chanrobleslaw

Petitioner, in its Reply,45 takes a position different from its initial stance as to the law applicable
to the dispute. It concedes that the Civil Code primarily governs its liability as a carrier, with
COGSA as a suppletory source.46 Under both laws, petitioner contends that it is exempt from
liability, because damage to the cargo was caused by the bad weather encountered by the vessel
while at sea. This kind of weather supposedly qualifies as a violent storm under the Civil Code; or
as a peril, danger or accident of the sea under COGSA.47 chanrobleslaw

ISSUES

The following issues are presented for resolution by this Court:

1. Whether the CA Decision has become final and executory

2. Whether the transaction is governed by the provisions of the Civil Code on common
carriers or by the provisions of COGSA

3. Whether petitioner is liable for the loss or damage sustained by the cargo because of bad
weather

OUR RULING

We DENY the Petition.

This Court finds that the CA Decision has become final because of the failure of petitioner to
timely file a motion for reconsideration. Furthermore, contrary to the argument raised by the latter,
there is insufficient evidence to establish that the loss or damage to the cargo was caused by a
storm or a peril of the sea.
The CA Decision has become final and executory.

In the assailed Resolution, in which the CA ruled that petitioner's Motion for Reconsideration was
filed late, it explained: ChanRob lesVirtualawlibrary

Defendants-appellants' motion for reconsideration of the Court's Decision dated August 7, 2009
was filed out of time, as based on the reply letter dated October 13, 2009 of the Chief,
Administrative Unit, Office of the Postmaster, Makati City, copy of said Decision was received
by defendants-appellants' counsel on September 4, 2009, not September 14, 2009 as alleged in the
motion for reconsideration. Consequently, the subject Decision dated August 27, 2009 had become
final and executory considering that the motion for reconsideration was filed only on September
29, 2009, beyond the fifteen (15)-day reglementary period which lasted until September 19,
2009.48chanroblesvirtuallawlibrary

The Court agrees. The Certification issued by the Office of the Postmaster of Makati, which states
that the Decision was received by respondent's counsel on 4 September 2009, is entitled to full
faith and credence. In the absence of contradictory evidence, the presumption is that the postmaster
has regularly performed his duty.49 In this case, there is no reason to doubt his statement as to the
date respondent received the CA Decision.

Significantly, Transimex failed to address this matter in its Petition. While it continued to allege
that it received the CA Decision on 14 September 2009, it did not refute the finding of the appellate
court that the former's Motion for Reconsideration had been filed late. It was only after respondent
again asserted the finality of the CA Decision in its Comment did petitioner attempt to explain the
discrepancy: Chan RoblesVir tualawlibrary

x x x Apparently, the said Decision dated 27 August 2009 was delivered by the postman to the
guard on duty at the ground floor of the building where undersigned counsel's office is located. It
was the guard on duty who received the said decision on 4 September 2009 but it was only on 14
September 2009 that undersigned counsel actually received the said decision. Hence, the date of
receipt of the decision should be reckoned from the date of receipt by the counsel of the decision
and not from the date of receipt of the guard who is not an employee of the law office of the
undersigned counsel.
This Court notes that the foregoing account remains unsupported by evidence. The guard on duty
or any employee of the law firm could have easily substantiated the explanation offered by counsel
for petitioner, but no statement from any of them was ever submitted. Since petitioner was
challenging the official statement of the Office of the Postmaster of Makati on the matter, the
former had the burden of proving its assertions and presenting countervailing evidence. Unfounded
allegations would not suffice.

In any event, this Court has decided to review the merits of this case in the interest of justice. After
a judicious evaluation of the arguments interposed by the parties, we find no reason to reverse the
CA Decision and Resolution.

The provisions of the Civil Code on common carriers are applicable.

As previously discussed, petitioner initially argued that the CA erred in applying the provisions of
the Civil Code to this case. It insisted that the contract of carriage between the parties was governed
by COGSA,50 the law applicable to "all contracts for the carriage of goods by sea to and from
Philippine ports in foreign trade."51 This assertion is bereft of merit.

This Court upholds the ruling of the CA with respect to the applicable law. As expressly provided
in Article 1753 of the Civil Code, "[t]he law of the country to which the goods are to be transported
shall govern the liability of the common carrier for their loss, destruction or deterioration." Since
the cargo in this case was transported from Odessa, Ukraine, to Tabaco, Albay, the liability of
petitioner for the alleged shortage must be determined in accordance with the provisions of the
Civil Code on common carriers. In Eastern Shipping Lines, Inc. v. BPI/MS Insurance Corp., the
Court declared: ChanRoblesVirtualawlibrary

According to the New Civil Code, the law of the country to which the goods are to be transported
shall govern the liability of the common carrier for their loss, destruction or deterioration. The
Code takes precedence as the primary law over the rights and obligations of common carriers with
the Code of Commerce and COGSA applying suppletorily.52 chanroblesvirtuallawlibrary

Besides, petitioner itself later conceded in its Reply that the Civil Code provisions on common
carriers are primarily applicable to the present dispute, while COGSA only applies in a suppletory
manner.53 chanrobleslaw

Petitioner is liable for the shortage incurred by the shipment.

Having settled the foregoing preliminary issues, the only argument left for this Court to resolve is
petitioner's assertion that it is exempt from liability for the loss or damage to the cargo. As grounds
for this exemption, petitioner cites both the Civil Code and COGSA, particularly the provisions
absolving a carrier from loss or damage sustained as the result of a "storm" or a "peril of the sea."

In its Petition, Transimex summarizes the testimony of one witness for respondent supposedly
proving that the shortage in the shipment was caused by inclement weather encountered by the
vessel at sea. Petitioner claims that this testimony proves that damage to the cargo was the result
of the melting of the fertilizer after seawater entered Hatch No. 1 of the vessel as a result of the
bad weather conditions at sea: ChanRoblesVirtualawlibrary

The evidence for the respondent clearly proves that the loss/damage/shortage [suffered by] the
cargo was caused by the bad weather encountered by the vessel during the voyage from Odessa,
Ukraine to Poro Point, San Fernando, La Union, wherein due to bad weather[,] sea water found its
way inside Hatch No. 1 resulting in the wetting, melting and discoloration of the prilled urea
fertilizer. The fact that sea water found its way inside Hatch No. 1 was clearly testified to by the
witness for the respondent. Jaime R. Davis testified that: ChanRo blesVirtualaw library

"He was present during the discharging operation, that he saw the hatches opened whereupon
he noticed the presence of water thereat; accordingly, he informed the master of the vessel
of the presence of water at the hatches to which the master of the vessel replied that on the
way they encountered bad weather."54 (Emphasis in the original)
Petitioner also cites a portion of the Adjustment Report submitted by respondent during trial as
proof that damage to the cargo was caused by a storm: ChanRob lesVirtualawlibrary

How the sea water found its way inside Hatch No. 1 was clearly explained by another witness for
the respondent by the name of Fabian Bon who stated in his Adjustment as follows: ChanRob lesVirtualawlibrary

Our inquiries disclosed that the master of the vessel interviewed by the consignee's surveyor
(David Cargo Survey Services) that during sailing from Odessa (Ukraine) bound to Poro Point,
San Fernando, La Union, Philippines, the vessel encountered bad weather on June 3, 1996 and
was rolling from starboard to portside top of the 1, 2, 3, 4, 5, 6 & 7 hatch covers and sea
water were washing over all main deck.

On the following day, June 4, 1996, wind reading up to 40 knots and very high swells were
coming from south west direction. The vessel was rolling and pitching heavily. Heavy sea
water were washing all main deck and were jumping from main deck to top of the seven (7)
hatch covers. As a result, the master filed a Marine Note of Protest on June 19, 1996 at the
Port of Poro Point, San Fernando, La Union, Philippines.55 (Emphases in the original)
The question before this Court therefore comes down to whether there is sufficient proof that the
loss or damage incurred by the cargo was caused by a "storm" or a "peril of the sea."

We rule in the negative. As will be discussed, petitioner failed to prove the existence of a storm or
a peril of the sea within the context of Article 1734(1) of the Civil Code or Section 4(2)(c) of
COGSA. Furthermore, there was no sufficient proof that the damage to the shipment was solely
and proximately caused by bad weather.

The presence of a "storm" or a "peril of the sea" was not established.

It must be emphasized that not all instances of bad weather may be categorized as "storms" or
"perils of the sea" within the meaning of the provisions of the Civil Code and COGSA on common
carriers. To be considered absolutory causes under either statute, bad weather conditions must
reach a certain threshold of severity.

With respect to storms, this Court has explained the difference between a storm and ordinary
weather conditions in Central Shipping Co. Inc. v. Insurance Company of North America:56
Nonetheless, to our mind it would not be sufficient to categorize the weather condition at the time
as a "storm" within the absolutory causes enumerated in the law. Significantly, no typhoon was
observed within the Philippine area of responsibility during that period.

According to PAGASA, a storm has a wind force of 48 to 55 knots, equivalent to 55 to 63 miles

per hour or 10 to 11 in the Beaufort Scale. The second mate of the vessel stated that the wind
was blowing around force 7 to 8 on the Beaufort Scale. Consequently, the strong winds
accompanying the southwestern monsoon could not be classified as a "storm." Such winds
are the ordinary vicissitudes of a sea voyage.57 (Emphases supplied; citations omitted)
The phrase "perils of the sea" carries the same connotation. Although the term has not been
definitively defined in Philippine jurisprudence, courts in the United States of America generally
limit the application of the phrase to weather that is "so unusual, unexpected and catastrophic as
to be beyond reasonable expectation."58 Accordingly, strong winds and waves are not
automatically deemed perils of the sea, if these conditions are not unusual for that particular sea
area at that specific time, or if they could have been reasonably anticipated or foreseen. 59 While
cases decided by U.S. courts are not binding precedents in this jurisdiction, the Court considers
these pronouncements persuasive60 in light of the fact that COGSA was originally an American
statute61 that was merely adopted by the Philippine Legislature in 1936.62 chanrobleslaw

In this case, the documentary and testimonial evidence cited by petitioner indicate that M/V
Meryem Ana faced winds of only up to 40 knots while at sea. This wind force clearly fell short of
the 48 to 55 knots required for "storms" under Article 1734(1) of the Civil Code based on the
threshold established by PAGASA.63 Petitioner also failed to prove that the inclement weather
encountered by the vessel was unusual, unexpected, or catastrophic. In particular, the strong winds
and waves, which allegedly assaulted the ship, were not shown to be worse than what should have
been expected in that particular location during that time of the year. Consequently, this Court
cannot consider these weather conditions as "perils of the sea" that would absolve the carrier from
liability.

As a side note, we observe that there are no definite statutory standards for determining the
existence of a "storm" or "peril of the sea" that would exempt a common carrier from liability.
Hence, in marine insurance cases, courts are constrained to rely upon their own understanding of
these terms of art, or upon imprecise accounts of the speed of the winds encountered and the
strength of the waves experienced by a vessel. To obviate uncertainty, it may be time for Congress
to lay down specific rules to distinguish "storms" and other "perils of the sea" from the ordinary
action of the wind and waves. While uniform measures of severity may prove difficult to establish,
the legislature may consider providing more detailed standards to be used by the judiciary in
resolving maritime cases. These may include wind velocity, violence of the seas, the height of the
waves, or even the expected weather conditions in the area involved at the time of the incident.

Petitioner failed to prove the other requisites for exemption from liability under Article 1734 of
the Civil Code.

Even assuming that the inclement weather encountered by the vessel amounted to a "storm" under
Article 1734(1) of the Civil Code, there are two other reasons why this Court cannot absolve
petitioner from liability for loss or damage to the cargo under the Civil Code. First, there is no
proof that the bad weather encountered by M/V Meryem Ana was the proximate and only cause of
damage to the shipment. Second, petitioner failed to establish that it had exercised the diligence
required from common carriers to prevent loss or damage to the cargo.

We emphasize that common carriers are automatically presumed to have been at fault or to have
acted negligently if the goods they were transporting were lost, destroyed or damaged while in
transit.64 This presumption can only be rebutted by proof that the carrier exercised extraordinary
diligence and caution to ensure the protection of the shipment in the event of foul weather.65 As
this Court explained in Fortune Sea Carrier, Inc. v. BPI/MS Insurance Corp.: ChanRob lesVirtualawlibrary

While the records of this case clearly establish that M/V Sea Merchant was damaged as result of
extreme weather conditions, petitioner cannot be absolved from liability. As pointed out by this
Court in Lea Mer Industries, Inc. v. Malayan Insurance, Inc., a common carrier is not liable for
loss only when (1) the fortuitous event was the only and proximate cause of the loss and (2) it
exercised due diligence to prevent or minimize the loss. The second element is absent here. As a
common carrier, petitioner should have been more vigilant in monitoring weather disturbances
within the country and their (possible) effect on its routes and destination. More specifically, it
should have been more alert on the possible attenuating and dysfunctional effects of bad weather
on the parts of the ship. It should have foreseen the likely prejudicial effects of the strong waves
and winds on the ship brought about by inclement weather and should have taken the necessary
precautionary measures through extraordinary diligence to prevent the weakening or dysfunction
of the parts of the ship to avoid or prune down the loss to cargo.66 (citations omitted)
In the instant case, there is absolutely no evidence that petitioner satisfied the two requisites.
Before the trial court, petitioner limited itself to the defense of denial. The latter refused to admit
that the shipment sustained any loss or damage and even alleged overage of the cargo delivered.67
As a result, the evidence it submitted was severely limited, i.e., the testimony of a witness that
supposedly confirmed the alleged excess in the quantity of the fertilizer delivered to the consignee
in Albay.68 No other evidence was presented to demonstrate either the proximate and exclusive
cause of the loss or the extraordinary diligence of the carrier.

Under these circumstances, the Court cannot absolve petitioner from liability for the shortage
incurred by the shipment.

WHEREFORE, the Petition is DENIED. The Court of Appeals Decision and Resolution dated
27 August 2009 and 10 November 2009, respectively, are hereby AFFIRMED.

SO ORDERED. chanRoblesvirtualLawlibrary

G.R. No. 213418, September 21, 2016

ALFREDO S.RAMOS, CONCHITA S. RAMOS, BENJAMIN B. RAMOS, NELSON T.

RAMOS AND ROBINSON T. RAMOS, Petitioners, v. CHINA SOUTHERN AIRLINES CO.
LTD., Respondent.

DECISION

PEREZ, J.:

For resolution of the Court is this Petition for Review on Certiorari1 filed by petitioners Alfredo
S. Ramos, Conchita S. Ramos, Benjamin B. Ramos, Nelson T. Ramos and Robinson T. Ramos,
seeking to reverse and set aside the Decision2 dated 19 March 2013 and Resolution3 dated 9 July
2014 of the Court of Appeals (CA) in CA-G.R. CV. No. 94561. The assailed decision and
resolution affirmed with modification the 23 March 2009 Decision4 of the Regional Trial Court
(RTC) of Manila, Branch 36, which ordered respondent China Southern Airlines to pay petitioners
the amount of P692,000.00, representing the amount of damages and attorney's fees. On appeal,
the appellate court affirmed the award of actual damages but deleted the order for payment of
moral and exemplary damages in the amount of P600,000.00.5 chanrobleslaw

The Facts

On 7 August 2003, petitioners purchased five China Southern Airlines roundtrip plane tickets from
Active Travel Agency for $985.00.6 It is provided in their itineraries that petitioners will be leaving
Manila on 8 August 2003 at 0900H and will be leaving Xiamen on 12 August 2003 at 1920H.7
Nothing eventful happened during petitioners' flight going to Xiamen as they were able to
successfully board the plane which carried them to Xiamen International Airport. On their way
back to the Manila, however, petitioners were prevented from taking their designated flight despite
the fact that earlier that day an agent from Active Tours informed them that their bookings for
China Southern Airlines 1920H flight are confirmed.8 The refusal came after petitioners already
checked in all their baggages and were given the corresponding claim stubs and after they had paid
the terminal fees. According to the airlines' agent with whom they spoke at the airport, petitioners
were merely chance passengers but they may be allowed to join the flight if they are willing to pay
an additional 500 Renminbi (RMB) per person. When petitioners refused to defray the additional
cost, their baggages were offloaded from the plane and China Southern Airlines 1920H flight then
left Xiamen International Airport without them.9 Because they have business commitments
waiting for them in Manila, petitioners were constrained to rent a car that took them to Chuan Chio
Station where they boarded the train to Hongkong.10 Upon reaching Hong Kong, petitioners
purchased new plane tickets from Philippine Airlines (PAL) that flew them back to Manila.11 chanrobleslaw

Upon arrival in Manila, petitioners went to Active Travel to inform them of their unfortunate fate
with China Southern Airlines. In their effort to avoid lawsuit, Active Travel offered to refund the
price of the plane tickets but petitioners refused to accept the offer. Petitioners then went to China
Southern Airlines to demand for the reimbursement of their airfare and travel expenses in the
amount of P87,375.00. When the airline refused to accede to their demand, petitioners initiated an
action for damages before the RTC of Manila against China Southern Airlines and Active Travel.
In their Complaint docketed as Civil Case No. 04-109574, petitioners sought for the payment of
the amount of P87,375.00 as actual damages, P500,000.00 as moral damages, P500,000.00 as
exemplary damages and cost of the suit.12 chanrobleslaw

In their Answer,13 China Southern Airlines denied liability by alleging that petitioners were not
confirmed passengers of the airlines but were merely chance passengers. According to the airlines,
it was specifically provided in the issued tickets that petitioners are required to re-confirm all their
bookings at least 72 hours before their scheduled time of departures but they failed to do so which
resulted in the automatic cancellation of their bookings.

The RTC then proceeded with the reception of evidence after the pre-trial conference.

On 23 March 2009, the RTC rendered a Decision14 in favor of the petitioners and ordered Chkia
Southern Airlines to pay damages in the amount of P692,000.00, broken down as follows: ChanRoblesVir tualawlibrary

"WHEREFORE, judgment is hereby rendered ordering the defendant [China Southern Airlines]
to pay [petitioners]:

chanRoblesvirtualLawlibrary 1. The sum of [P]62,000.00 as actual damages;

2. The sum of [P]300,000.00 as moral damages;

3. The sum of [P]300,000.00 as exemplary damages; and cralawlawlibrary

4. The sum of [P]30,000.00 for attorney's fees.

The defendants' counterclaim against plaintiffs are [hereby] dismissed for insufficiency of
evidence [enough] to sustain the damages claimed."15 chanroblesvirtuallawlibrary

On appeal, however, the CA modified the RTC Decision by deleting the award for moral and
exemplary damages. According to the appellate court, petitioners failed to prove that China
Southern Airlines' breach of contractual obligation was attended with bad faith.16 The disquisition
of the CA reads: ChanRoblesVirtualawlibrary

"xxx. Where in breaching the contract, the defendant is not shown to have acted fraudulently or in
bad faith, liability for damages is limited to the natural and probable consequences of the breach
of the obligation and which the parties had foreseen or could reasonably have foreseen; and in that
case, such liability would not include liability for moral and exemplary damages.

In this case, We are not persuaded that [China Southern Airlines] breach of contractual obligation
had been attended by bad faith or malice or gross negligence amounting to bad faith. On the
contrary, it appears that despite [petitioner's] failure to "re-confirm" their bookings, [China
Southern Airlines] exerted diligent efforts to comply with its obligation to [petitioners]. If at the
outset, [China Southern Airlines] simply did not intend to comply with its promise to transport
[petitioners] back to Manila, it would not have taken the trouble of proposing that the latter could
still board the plane as "chance passengers" provided [that] they will pay the necessary pay and
penalties.

Thus, We believe and so hold that the damages recoverable by [petitioners] are limited to the peso
value of the PAL ticket they had purchased for their return flight from Xiamen, plus attorney's
fees, in the amount of [P]30,000.00, considering that [petitioners] were ultimately compelled to
litigate their claim[s] against [China Southern Airlines]."17 chanroblesvirtuallawlibrary

Since China Southern, Airlines' refusal to let petitioners board the plane was not attended by bad
faith, the appellate court decided not to award petitioners moral and exemplary damages. The CA
disposed in this wise: ChanRoblesVir tualawlibrary

"WHEREFORE, premises considered, the instant appeal is hereby AFFIRMED with

MODIFICATION in that the award of moral and exemplary damages are hereby
DELETED."18 chanroblesvirtuallawlibrary

Dissatisfied, petitioners timely interposed a Motion for Partial Reconsideration which was partially
granted by the CA in a Resolution19 dated 9 July 2014, to wit: ChanRoblesVir tualawlibrary

"ACCORDINGLY, the instant Motion is PARTIALLY GRANTED. The Decision dated 19

March 2013 rendered by this Court in CA-G.R. CV No. 94561 is hereby MODIFIED in that
[China Southern Airlines] is ORDERED to pay [petitioners] interest of 6% per annum on the
P62,000.00 as actual damages from the finality of this Court's Decision until the same is fully
satisfied."20
chanroblesvirtuallawlibrary

Unflinching, petitioners elevated the matter before the Court by filing the instant Petition for
Review on Certiorari assailing the CA Decision and Resolution on the following grounds: ChanRo blesVirtualawlibrary

The Issues

I.

THE COURT OF APPEALS COMMITTED GRAVE AND SERIOUS ERROR WHEN IT

DELETED THE AWARDS OF MORAL AND EXEMPLARY DAMAGES, A DEPARTURE
FROM ESTABLISHED DOCTRINES THAT PASSENGERS WHO ARE BUMPED-OFF ARE
ENTITLED TO MORAL AND EXEMPLARY DAMAGES;

I.
THE COURT OF APPEALS COMMITTED GRAVE AND SERIOUS ERROR WHEN IT
DECLARED THAT BUMPING OFF OF THE PETITIONERS WAS NOT ATTENDED BY
BAD FAITH AND MALICE CONTRARY TO THE FINDINGS OF THE LOWER COURT;

III.

THE COURT OF APPEALS COMMITTED GRAVE AND SERIOUS ERROR WHEN IT HELD
THAT THE LEGAL INTEREST COMMENCE ONLY FROM THE FINALITY OF THE
DECISION INSTEAD OF FROM THE DATE OF EXTRA-JUDICIAL DEMAND ON 18
AUGUST 2003.21 chanroblesvirtuallawlibrary

The Court's Ruling

We resolve to grant the petition.

A contract of carriage, in this case, air transport, is intended to serve the traveling public and thus,
imbued with public interest.22 The law governing common carriers consequently imposes an
exacting standard of conduct,23viz: ChanRoblesVirtualawlibrary

"1755 of the New Civil Code. A common carrier is bound to carry passengers safely as far as
human care and foresight can provide, using the utmost diligence of very cautious persons, with
due regard for all the circumstances."
When an airline issues a ticket to a passenger confirmed on a particular flight, on a certain date, a
contract of carriage arises, and the passenger has every right to expect that he would fly on that
flight and on that date. If that does not happen, then the carrier opens itself to a suit for breach of
contract of carriage.24 In an action based on a breach of contract of carriage, the aggrieved party
does not have to prove that the common carrier was at fault or was negligent.25 All he has to prove
cralawred

is the existence of the contract and the fact of its non-performance by the carrier, through the latter's
failure to carry the passenger to its destination.26 chanrobleslaw

It is beyond question in the case at bar that petitioners had an existing contract of air carriage with
China Southern Airlines as evidenced by the airline tickets issued by Active Travel. When they
showed up at the airport and after they went through the routine security check including the
checking in of their luggage and the payment of the corresponding terminal fees, petitioners were
not allowed by China Southern Airlines to board on the plane. The airlines' claim that petitioners
do not have confirmed reservations cannot be given credence by the Court. The petitioners were
issued two-way tickets with itineraries indicating the date and time of their return flight to Manila.
These are binding contracts of carriage.27 China Southern Airlines allowed petitioners to check in
their luggage and issued the necessary claim stubs showing that they were part of the flight. It was
only after petitioners went through all the required check-in procedures that they were informed
by the airlines that they were merely chance passengers. Airlines companies do not, as a practice,
accept pieces of luggage from passengers without confirmed reservations. Quite tellingly, all the
foregoing circumstances lead us to the inevitable conclusion that petitioners indeed were bumped
off from the flight. We cannot from the records of this case deduce the true reason why the airlines
refused to board petitioners back to Manila. What we can be sure of is the unacceptability of the
proffered reason that rightfully gives rise to the claim for damages.
The prologue shapes the body of the petitioners' rights, that is, that they are entitled to damages,
actual, moral and exemplary.

There is no doubt that petitioners are entitled to actual or compensatory damages. Both the RTC
and the CA uniformly held that there was a breach of contract committed by China Southern
Airlines when it failed to deliver petitioners to their intended destination, a factual finding that we
do not intend to depart from in the absence of showing that it is unsupported by evidence. As the
aggrieved parties, petitioners had satisfactorily proven the existence of the contract and the fact of
its non-performance by China Southern Airlines; the concurrence of these elements called for the
imposition of actual or compensatory damages.

With respect to moral damages, the following provision of the New Civil Code is instructive: ChanRob lesVirtualawlibrary

Article 2220. Willful injury to property may be a legal ground for awarding moral damages if the
court should find that, under the circumstances, such damages are justly due. The same rule applies
to breaches of contract where the defendant acted fraudulently or in bad faith.
Bad faith does not simply connote bad judgment or negligence. It imports dishonest purpose or
some moral obliquity and conscious doing of a wrong. It means breach of a known duty through
some motive, interest or ill will that partakes the nature of fraud. Bad faith is in essence a question
of intention.28 chanrobleslaw

In Japan Airlines v. Simangan,29 the Court took the occasion to expound on the meaning of bad
faith in a breach of contract of carriage that merits the award of moral damages: Chan RoblesV irtualawlibrary

"Clearly, JAL is liable for moral damages. It is firmly settled that moral damages are recoverable
in suits predicated on breach of a contract of carriage where it is proved that the carrier was guilty
of fraud or bad faith, as in this case. Inattention to and lack of care for the interests of its passengers
who are entitled to its utmost consideration, particularly as to their convenience, amount to bad
faith which entitles the passenger to an award of moral damages. What the law considers as bad
faith which may furnish the ground for an award of moral damages would be bad faith in securing
the contract and in the execution thereof, as well as in the enforcement of its terms, or any other
kind of deceit."
Applying the foregoing yardstick in the case at bar, We find that the airline company acted in bad
faith in insolently bumping petitioners off the flight after they have completed all the pre-departure
routine. Bad faith is evident when the ground personnel of the airline company unjustly and
unreasonably refused to board petitioners to the plane which compelled them to rent a car and take
the train to the nearest airport where they bought new sets of plane tickets from another airline that
could fly them home. Petitioners have every reason to expect that they would be transported to
their intended destination after they had checked in their luggage and had gone through all the
security checks. Instead, China Southern Airlines offered to allow them to join the flight if they
are willing to pay additional cost; this amount is on top of the purchase price of the plane tickets.
The requirement to pay an additional fare was insult upon injury. It is an aggravation of the breach
of contract. Undoubtedly, petitioners are entitled to the award of moral damages. The purpose of
awarding moral damages is to enable the injured party to obtain means, diversion or amusement
that will serve to alleviate the moral suffering [that] he has undergone by reason of defendant['s]
culpable action.30 chanrobleslaw

China Southern Airlines is also liable for exemplary damages as it acted in a wantonly oppressive
manner as succinctly discussed above against the petitioners. Exemplary damages which are
awarded by way of example or correction for the public good, may be recovered in contractual
obligations, as in this case, if defendant acted in wanton, fraudulent, reckless, oppressive or
malevolent manner.31 chanrobleslaw

Article 2216 of the Civil Code provides that assessment of damages is left to the discretion of the
court according to the circumstances of each case. This discretion is limited by the principle that
the amount awarded should not be palpably excessive as to indicate that it was the result of
prejudice or corruption on the part of the trial court. Simply put, the amount of damages must be
fair, reasonable and proportionate to the injury suffered.32 With fairness as the benchmark, We
find adequate the amount of P300,000.00 each for moral and exemplary damages imposed by the
trial court.

The last issue is the reckoning point of the 6% interest on the money judgment. Following this
Court's ruling in Nacar v. Gallery Frames,33 we agree with the petitioners that the 6% rate of
interest per annum shall be reckoned from the date of their extrajudicial demand on 18 August
2003 until the date of finality of this judgment. The total amount shall thereafter earn interest at
the rate of six percent (6%) per annum from such finality of judgment until its satisfaction.

WHEREFORE, premises considered, the petition is GRANTED. The Court hereby AWARDS
petitioners the following amounts: ChanRoblesV irtualawlibrary

(a) P62,000.00 as actual damages, with 6% interest per annum from date of extrajudicial
demand on 18 August 2003 until finality of this judgment, and the total amount to thereafter
earn interest at 6% per annum from finality of judgment until full satisfaction;

(b) P300,000.00 as moral damages; and

(c) P300,000.00 as exemplary damages.

SO ORDERED. chanRoblesvirtualLawlibrary

G.R. No. 213088

LAND TRANSPORTATION FRANCHISING AND REGULATORY BOARD (LTFRB),

Petitioner
vs.
G.V. FLORIDA TRANSPORT, INC., Respondent

DECISION

PERALTA, J.:
Before the Court is a petition for review on certiorari seeking the reversal and setting aside of the
Decision 1 of the Court of Appeals (CA), dated June 26, 2014 in CA-G.R. SP No. 134772.

The pertinent factual and procedural antecedents of the case are as follows:

Around 7:20 in the morning of February 7, 2014, a vehicular accident occurred at Sitio Paggang,
Barangay Talubin, Bontoc, Mountain Province involving a public utility bus coming from
Sampaloc, Manila, bound for Poblacion Bontoc and bearing a "G.V. Florida" body mark with
License Plate No. TXT-872. The mishap claimed the lives of fifteen (15) passengers and injured
thirty-two (32) others.

An initial investigation report, which came from the Department of Transportation and
Communications of the Cordillera Administrative Region (DOTC-CAR), showed that based on the
records of the Land Transportation Office (LTO) and herein petitioner, License Plate No. TXT-
872 actually belongs to a different bus owned by and registered under the name of a certain
Norberto Cue, Sr. (Cue) under Certificate of Public Convenience (CPC) Case No. 2007-0407 and
bears engine and chassis numbers LX004564 and KN2EAM12PK004452, respectively; and that
the bus involved in the accident is not duly authorized to operate as a public transportation.

Thus, on the same day of the accident, herein petitioner, pursuant to its regulatory powers,
immediately issued an Order2 preventively suspending, for a period not exceeding thirty (30) days,
the operations of ten (10) buses of Cue under its CPC Case No. 2007-0407, as well as respondent's
entire fleet of buses, consisting of two hundred and twenty-eight (228) units, under its twenty-eight
(28) CPCs. In the same Order, respondent and Cue were likewise directed to comply with the
following:

1. Inspection and determination of road worthiness of the authorized PUB unit of respondents-
operators bringing the said buses to the Motor Vehicle Inspection Service (MVIS) of the Land
Transportation Office, together with the authorized representatives of the Board;

2. Undergo Road Safety Seminar of respondents-operators' drivers and conductors to be conducted

or scheduled by the Board and/or its authorized seminar provider;

3. Compulsory Drug Testing of the respondents-operators' drivers and conductors to be conducted

by authorized/accredited agency of the Department of Health and the Land Transportation Office;

4. Submit the Certificates of Registration and latest LTO Official Receipts of the units, including
the names of the respective drivers and conductors; and

5. Submit the video clippings of roadworthiness inspection, Road Safety Seminar and Drug
Testing. 3

Furthermore, respondent and Cue were ordered to show cause why their respective CPCs should
not be suspended, canceled or revoked due to the said accident.
Thereafter, in its Incident Report dated February 12, 2014, the DOTC-CAR stated, among others:
that the License Plate Number attached to the ill-fated bus was indeed TXT-872, which belongs to
a different unit owned by Cue; that the wrecked bus had actual engine and chassis numbers DE12T-
601104BD and KTP1011611C,4 respectively; that, per registration records, the subject bus was
registered as "private" on April 4, 2013 with issued License Plate No. UDO 762; and that the
registered owner is Dagupan Bus Co., Inc. (Dagupan Bus) while the previous owner is herein
respondent bus company.

As a result, Dagupan Bus was also ordered to submit an Answer on the DOTC-CAR Incident
Report, particularly, to explain why the bus involved in the above accident, which is registered in
its name, was sporting the name "G.V. Florida" at the time of the accident.

Subsequently, Dagupan Bus filed its Answer claiming that: it is not the owner of the bus which
was involved in the accident; the owner is G.V. Florida; Dagupan Bus entered into a Memorandum
of Agreement with G.V. Florida, which, among others, facilitated the exchange of its CPC
covering the Cagayan route for the CPC of Florida covering the Bataan route; and the subsequent
registration of the subject bus in the name of Dagupan Bus is a mere preparatory act on the part of
G.V. Florida to substitute the old authorized units of Dagupan Bus plying the Cagayan route which
are being operated under the abovementioned CPC which has been exchanged with G. V. Florida.

On the other hand, Cue filed his Position Paper contending that: License Plate No. TXT-872 was
issued by the LTO to one among ten public utility buses under CPC No. 2007-040i issued to him
as operator of the Mountain Province Cable Tours; the application for the extension of the validity
of the said CPC is pending with petitioner; the subject CPC, together with all authorized units, had
been sold to G.V. Florida in September 2013; and thereafter, Cue completely ceded the operation
and maintenance of the subject buses in favor of G.R. Florida.

In its Position Paper, herein respondent alleged that: it, indeed, bought Cue's CPC and the ten
public utility buses operating under the said CPC, including the one which bears License Plate No.
TXT-872; since Cue's buses were already old and dilapidated, and not wanting to stop its
operations to the detriment of the riding public, it replaced these buses with new units using the
License Plates attached to the old buses, pending approval by petitioner of the sale and transfer of
Cue's CPC in its favor; and it exercised utmost good faith in deciding to dispatch the ill-fated bus
notwithstanding the absence of prior adequate compliance with the requirements that will
constitute its operation legal.

On March 14, 2014, herein petitioner rendered its Decision canceling Cue's CPC No. 2007-0407
and suspending the operation of respondent's 186 buses under 28 of its CPCs for a period of six
(6) months. Pertinent portions of the dispositive portion of the said Decision read as follows:

WHEREFORE, premises considered and by virtue of Commonwealth Act 146 (otherwise known
as "The Public Service Law"), as amended, and Executive Order No. 202, the Board hereby
ORDERS that:

a. The Certificate of Public Convenience of respondentoperator NORBERTO M. CUE, SR. under

Case No. 2007- 0407, now under the beneficial ownership of respondentoperator G.V. FLORIDA
TRANSPORT, INC., be CANCELLED and REVERTED to the State. Therefore, upon receipt of
this Decision, respondent-operator G.V. FLORIDA TRANSPORT, INC. is hereby directed to
CEASE and DESIST from operating the Certificate of Public Convenience under Case No. 2007-
0407 involving ten (10) authorized units, to wit:

xxxx

b. Upon finality of this Decision, the above-mentioned for hire plates of respondent-operator
NORBERTO M. CUE, SR. are hereby ordered DESTRUCTED (sic) and DESTROYED prior to
their turn over to the Land Transportation Office (LTO).

xxxx

c. All existing Certificates of Public Convenience of respondent-operator G.V. FLORIDA

TRANSPORT, INC. under case numbers listed under case numbers listed below are hereby
SUSPENDED for a period of SIX (6) MONTHS commencing from March 11, 2014, which is the
lapse of the 30-day preventive suspension order issued by this Board, to wit:

xxxx

[d.] During the period of suspension of its CPCs and as a condition for the lifting thereof,
respondent-operator G.V. FLORIDA TRANSPORT, INC. must comply with the following:

1. All its authorized drivers must secure the National Competency III issued by the Technical
Education and Skills Development Authority (TESDA)

2. All its conductors must secure Conductor's License from the Land Transportation Office (LTO);

3. Submit all its authorized units that have not undergone inspection and determination of
roadworthiness to the Motor Vehicle Inspection Service of the LTO, together with the authorized
representatives of the Board; and

4. Compulsory Drug Testing of all its authorized drivers and conductors to be conducted by the
authorized accredited agency of the Department of Health and the Land Transportation Office at
least thirty (30) days before the expiration of its suspension.

[e.] The Show Cause Order issued against respondent-operator DAGUPAN BUS CO., INC. is
hereby SET ASIDE.

The Information Systems Management Division (ISMD) is also directed to make proper recording
of this Decision for future reference against subject vehicles and respondents-operators. During
the period of suspension of its CPCs, respondent-operator G.V. FLORIDA TRANSPORT, INC.
is allowed to confirm its authorized units subject to submission of all requirements for
confirmation.
The Law Enforcement Unit of this Board, the Land Transportation Office (LTO), the Metro
Manila Development Authority (MMDA), the Philippine National Police-Highway Patrol
Group (PNP-HPG), and other authorized traffic enforcement agencies are hereby ordered to
APPREHEND and IMPOUND the said vehicles, if found operating.

SO ORDERED.6

Respondent then filed with the CA a petition for certiorari under Rule 65 of the Rules of Court,
with prayer for the issuance of a preliminary mandatory injunction, assailing petitioner's above
Decision.

On June 26, 2014, the CA promulgated its questioned Decision, disposing as follows:

WHEREFORE, the instant petition is PARTIALLY GRANTED. The Decision dated March 14,
2014 of the Land Transportation Franchising and Regulatory Board is MODIFIED as follows:

1. The Order canceling and reverting to the State of the Certificate of Public Convenience of
operator Cue under Case No. 2007-0407, under the beneficial ownership of petitioner G.V. Florida
Transport, Inc. is AFFIRMED;

2. The penalty of suspension for a period of six (6) months against all existing 28 Certificates of
Public Convenience of petitioner G.V. Florida, Transport, Inc., is REVERSED and SET ASIDE;

3. The condition set forth in the Decision for the lifting of the penalty of suspension is DELETED;
and

4. The order to apprehend and impound petitioner G.V. Florida Transport, Inc.'s 186 authorized
bus units under the 28 CPCs if found operating is RECALLED

Accordingly, petitioner G.V. Florida Transport, Inc. prayer for mandatory injunctive relief is
hereby GRANTED. The Land Transportation and Franchising Regulatory Board is hereby ordered
to immediately LIFT the order of suspension and RETURN or CAUSE the RETURN of the
confiscated license plates of petitioner G.V. Florida Transport, Inc.'s 186 authorized bus units
under its 28 Certificates of Public Convenience without need of further order from this Court. Said
Office is further DIRECTED to submit its Compliance within five (5) days from receipt thereof.

SO ORDERED.7

Hence, the present petition grounded on a lone issue, to wit:

DOES THE LTFRB HAVE THE POWER TO SUSPEND THE FLEET OF A PUBLIC UTILITY
THAT VIOLATES THE LAW, TO THE DAMAGE OF THE PUBLIC?8

The main issue brought before this Court is whether or not petitioner is justified in suspending
respondent's 28 CPCs for a period of six (6) months. In other words, is the suspension within the
powers of the LTFRB to impose and is it reasonable?
Petitioner contends that it is vested by law with jurisdiction to regulate the operation of public
utilities; that under Section 5(b) of Executive Order No. 202 (E. 0. 202),9 it is authorized "[t]o
issue, amend, revise, suspend or cancel Certificates of Public Convenience or permits authorizing
the operation of public land transportation services provided by motorized vehicles, and to
prescribe the appropriate terms and conditions therefor;" and that petitioner's authority to impose
the penalty of suspension of CPCs of bus companies found to have committed violations of the
law is broad and is consistent with its mandate and regulatory capability.

On the other hand, respondent, in its Comment to the present Petition, contends that the suspension
of its 28 CPCs is tantamount to an outright confiscation of private property without due process of
law; and that petitioner cannot simply ignore respondent's property rights on the pretext of
promoting public safety. Respondent insists that the penalty imposed by petitioner is not
commensurate to the infraction it had committed.

The Court rules in favor of petitioner.

Section 16(n) of Commonwealth Act. No. 146, otherwise known as the Public Service Act,
provides:

Section 16. Proceedings of the Commission, upon notice and hearing. - The Commission shall
have power, upon proper notice and hearing in accordance with the rules and provisions of this
Act, subject to the limitations and exceptions mentioned and saving provisions to the contrary:

xxxx

(n) To suspend or revoke any certificate issued under the provisions of this Act whenever the
holder thereof has violated or willfully and contumaciously refused to comply with any order rule
or regulation of the Commission or any provision of this Act: Provided, That the Commission, for
good cause, may prior to the hearing suspend for a period not to exceed thirty days any certificate
or the exercise of any right or authority issued or granted under this Act by order of the
Commission, whenever such step shall in the judgment of the Commission be necessary to avoid
serious and irreparable damage or inconvenience to the public or to private interests.

xxxx

Also, Section 5(b) of E.O. 202 states:

Sec. 5. Powers and Functions of the Land Transportation Franchising and Regulatory Board. The
Board shall have the following powers and functions:

Also, Section 5(b) of E.O. 202 states:

Sec. 5. Powers and Functions of the Land Transportation Franchising and Regulatory Board. The
Board shall have the following powers and functions:

xxxx
b. To issue, amend, revise, suspend or cancel Certificates of Public Convenience or permits
authorizing the operation of public land transportation services provided by motorized vehicles,
and to prescribe the appropriate terms and conditions therefor;

xxxx

In the present case, respondent is guilty of several violations of the law, to wit: lack of petitioner's
approval of the sale and transfer of the CPC which respondent bought from Cue; operating the ill-
fated bus under its name when the same is registered under the name of Dagupan Bus Co., Inc.;
attaching a vehicle license plate to the ill-fated bus when such plate belongs to a different bus
owned by Cue; and operating the subject bus under the authority of a different CPC. What makes
matters worse is that respondent knowingly and blatantly committed these violations. How then
can respondent claim good faith under these circumstances?

Respondent, nonetheless, insists that it is unreasonable for petitioner to suspend the operation of
186 buses covered by its 28 CPCs, considering that only one bus unit, covered by a single CPC,
was involved in the subject accident.

The Court is not persuaded. It bears to note that the suspension of respondent's 28 CPCs is not
only because of the findings of petitioner that the ill-fated bus was not roadworthy. 10 Rather, and
more importantly, the suspension of the 28 CPCs was also brought about by respondent's wanton
disregard and obstinate defiance of the regulations issued by petitioner, which is tantamount to a
willful and contumacious refusal to comply with the requirements of law or of the orders, rules or
regulations issued by petitioner and which is punishable, under the law, by suspension or
revocation of any of its CPCs.

The Court agrees with petitioner that its power to suspend the CPCs issued to public utility vehicles
depends on its assessment of the gravity of the violation, the potential and actual harm to the public,
and the policy impact of its own actions. In this regard, the Court gives due deference to petitioner's
exercise of its sound administrative discretion in applying its special knowledge, experience and
expertise to resolve respondent's case.

Indeed, the law gives to the LTFRB (previously known, among others, as Public Service
Commission or Board of Transportation) ample power and discretion to decree or refuse the
cancellation of a certificate of public convenience issued to an operator as long as there is evidence
to support its action. 11 As held by this Court in a long line of cases, 12 it was even intimated that,
in matters of this nature so long as the action is justified, this Court will not substitute its discretion
for that of the regulatory agency which, in this case, is the LTFRB.

Moreover, the Court finds the ruling in Rizal Light & Ice Co., Inc. v. The Municipality of Morang,
Rizal and The Public Service Commission, 13 instructive, to wit:

xxxx

It should be observed that Section 16(n) of Commonwealth Act No. 146, as amended, confers upon
the Commission ample power and discretion to order the cancellation and revocation of any
certificate of public convenience issued to an operator who has violated, or has willfully and
contumaciously refused to comply with, any order, rule or regulation of the Commission or any
provision of law. What matters is that there is evidence to support the action of the Commission.
In the instant case, as shown by the evidence, the contumacious refusal of the petitioner since 1954
to comply with the directives, rules and regulations of the Commission, its violation of the
conditions of its certificate and its incapability to comply with its commitment as shown by its
inadequate service, were the circumstances that warranted the action of the Commission in not
merely imposing a fine but in revoking altogether petitioner's certificate. To allow petitioner to
continue its operation would be to sacrifice public interest and convenience in favor of private
interest.

A grant of a certificate of public convenience confers no property rights but is a mere license or
privilege, and such privilege is forfeited when the grantee fails to comply with his commitments
behind which lies the paramount interest of the public, for public necessity cannot be made to wait,
nor sacrificed for private convenience. (Collector of Internal Revenue v. Estate of F. P. Buan, et
al., L-11438 and Santiago Sambrano, et al. v. PSC, et al., L-11439 & L- 11542-46, July 31, 1958)

(T)he Public Service Commission, . . . has the power to specify and define the terms and conditions
upon which the public utility shall be operated, and to make reasonable rules and regulations for
its operation and the compensation which the utility shall receive for its services to the public, and
for any failure to comply with such rules and regulations or the violation of any of the terms and
conditions for which the license was granted, the Commission has ample power to enforce the
provisions of the license or even to revoke it, for any failure or neglect to comply with any of its
terms and provisions. x xx x x x14

Respondent likewise contends that, in suspending its 28 CPCs, the LTFRB acted in reckless
disregard of the property rights of respondent as a franchise holder, considering that it has put in
substantial investments amounting to hundreds of millions in running its operations. In this regard,
the Court's ruling in the case of Luque v. Villegas 15 is apropos:

xxxx

Contending that they possess valid and subsisting certificates of public convenience, the
petitioning public services aver that they acquired a vested right to operate their public utility
vehicles to and from Manila as appearing in their said respective certificates of public convenience.

Petitioner's argument pales on the face of the fact that the very nature of a certificate of public
convenience is at cross purposes with the concept of vested rights. To this day, the accepted view,
at least insofar as the State is concerned, is that "a certificate of public convenience constitutes
neither a franchise nor a contract, confers no property right, and is a mere license or privilege."
The holder of such certificate does not acquire a property right in the route covered thereby. Nor
does it confer upon the holder any proprietary right or interest of franchise in the public highways.
Revocation of this certificate deprives him of no vested right. Little reflection is necessary to show
that the certificate of public convenience is granted with so many strings attached. New and
additional burdens, alteration of the certificate, and even revocation or annulment thereof is
reserved to the State.
We need but add that the Public Service Commission, a government agency vested by law with
"jurisdiction, supervision, and control over all public services and their franchises, equipment, and
other properties" is empowered, upon proper notice and hearing, amongst others: (1) "[t]o amend,
modify or revoke at any time a certificate issued under the provisions of this Act [Commonwealth
Act 146, as amended], whenever the facts and circumstances on the strength of which said
certificate was issued have been misrepresented or materially changed"; and (2) "[t]o suspend or
revoke any certificate issued under the provisions of this Act whenever the holder thereof has
violated or wilfully and contumaciously refused to comply with any order, rule or regulation of
the Commission or any provision of this Act: Provided, That the Commission, for good cause,
may prior to the hearing suspend for a period not to exceed thirty days any certificate or the
exercise of any right or authority issued or granted under this Act by order of the Commission,
whenever such step shall in the judgment of the Commission be necessary to avoid serious and
irreparable damage or inconvenience to the public or to private interests."

Jurisprudence echoes the rule that the Commission is authorized to make reasonable rules and
regulations for the operation of public services and to enforce them. In reality, all certificates of
public convenience issued are subject to the condition that all public services "shall observe and
comply [with] ... all the rules and regulations of the Commission relative to" the service. To further
emphasize the control imposed on public services, before any public service can "adopt, maintain,
or apply practices or measures, rules, or regulations to which the public shall be subject in its
relation with the public service," the Commission's approval must first be had.

And more. Public services must also reckon with provincial resolutions and municipal ordinances
relating to the operation of public utilities within the province or municipality concerned. The
Commission can require compliance with these provincial resolutions or municipal ordinances.

Illustrative of the lack of "absolute, complete, and unconditional" right on the part of public
services to operate because of the delimitations and restrictions which circumscribe the privilege
afforded a certificate of public convenience is the following from the early (March 31, 1915)
decision of this Court in Fisher vs. Yangco Steamship Company, 31 Phil. 1, 18-19:

Common carriers exercise a sort of public office, and have duties to perform in which the public
is interested. Their business is, therefore, affected with a public interest, and is subject of public
regulation. (New Jersey Steam Nav. Co. vs. Merchants Banks, 6 How. 344, 382; Munn vs. Illinois,
94 U.S. 113, 130.) Indeed, this right of regulation is so far beyond question that it is well settled
that the power of the state to exercise legislative control over railroad companies and other carriers
'in all respects necessary to protect the public against danger, injustice and oppression' may be
exercised through boards of commissioners. (New York, etc. R. Co. vs. Bristol, 151 U.S. 556, 571;
Connecticut, etc. R. Co. vs. Woodruff, 153 U.S. 689.).

xxxx

.... The right to enter the public employment as a common carrier and to offer one's services to the
public for hire does not carry with it the right to conduct that business as one pleases, without
regard to the interests of the public and free from such reasonable and just regulations as may be
prescribed for the protection of the public from the reckless or careless indifference of the carrier
as to the public welfare and for the prevention of unjust and unreasonable discrimination of any
kind whatsoever in the performance of the carrier's duties as a servant of the public.

Business of certain kinds, including the business of a common carrier, holds such a peculiar
relation to the public interest that there is superinduced upon it the right of public regulation. (Budd
vs. New York, 143 U.S. 517, 533.) When private property is "affected with a public interest it
ceases to be Juris privati only." Property becomes clothed with a public interest when used in a
manner to make it of public consequence and affect the community at large. "When, therefore, one
devotes his property to a use in which the public has an interest, he, in effect, grants to the public
an interest in that use, and must submit to be controlled by the public for the common good, to the
extent of the interest he has thus created. He may withdraw his grant by discontinuing the use, but
so long as he maintains the use he must submit to control." (Munn vs. Illinois, 94 U.S. 113; Georgia
R. & Bkg. Co. vs. Smith, 128 U.S. 174; Budd vs. New York, 143 U.S. 517; Louisville, etc. Ry.
Co. vs. Kentucky, 161 U.S. 677, 695.).

The foregoing, without more, rejects the vested rights theory espoused by petitioning bus
operators.

x x x16

Neither is the Court convinced by respondent's contention that the authority given to petitioner,
under the abovequoted Section 16(n) of the Public Service Act does not mean that petitioner is
given the power to suspend the entire operations of a transport company. Respondent must be
reminded that, as quoted above, the law clearly states that petitioner has the power "[t]o suspend
or revoke any certificate issued under the provisions of [the Public Service Act] whenever the
holder thereof has violated or willfully and contumaciously refused to comply with any order
rule or regulation of the Commission or any provision of this Act x x x" This Court has held
that when the context so indicates, the word "any" may be construed to mean, and indeed it has
been frequently used in its enlarged and Plural sense as meaning "all " "all or every" "each " "each
one of all " ' ' ' ' ' "every" without limitation; indefinite number or quantity, an indeterminate unit
or number of units out of many or all, one or more as the case may be, several, some. 17 Thus, in
the same vein, the Merriam-Webster Dictionary defines the word "any" as "one, some, or all
indiscriminately of whatever quantity"; "used to indicate a maximum or whole"; "unmeasured or
unlimited in amount, number, or extent." 18 Hence, under the above definitions, petitioner
undoubtedly wields authority, under the law, to suspend not only one but all of respondent's CPCs
if warranted, which is proven to be the case here.

As to whether or not the penalty imposed by petitioner is reasonable, respondent appears to

trivialize the effects of its deliberate and shameless violations of the law. Contrary to its contention,
this is not simply a case of one erring bus unit. Instead, the series or combination of violations it
has committed with respect to the ill-fated bus is indicative of its design and intent to blatantly and
maliciously defy the law and disregard, with impunity, the regulations imposed by petitioner upon
all holders of CPCs. Thus, the Court finds nothing irregular in petitioner's imposition of the penalty
of sixmonths suspension of the operations of respondent's 28 CPCs. In other words, petitioner did
not commit grave abuse of discretion in imposing the questioned penalty.
Lastly, the suspension of respondent's CPCs finds relevance in light of the series of accidents met
by different bus units owned by different operators in recent events. This serves as a reminder to
all operators of public utility vehicles that their franchises and CPCs are mere privileges granted
by the government. As such, they are sternly warned that they should always keep in mind that, as
common carriers, they bear the responsibility of exercising extraordinary diligence in the
transportation of their passengers. Moreover, they should conscientiously comply with the
requirements of the law in the conduct of their operations, failing which they shall suffer the
consequences of their own actions or inaction.

WHEREFORE, the instant petition is GRANTED. The Decision of the Court of Appeals, dated
June 26, 2014 in CA-GR. SP No. 134772, is REVERSED and SET ASIDE. The March 14, 2014
Decision of the Land Transportation Franchising and Regulatory Board is REINSTATED.

SO ORDERED.

G.R. No. 206649, July 20, 2016

FOREST HELLS GOLF AND COUNTRY CLUB, INC., REPRESENTED BY RAINIER L.

MADRID, IN A DERIVATIVE CAPACITY AS SHAREHOLDER AND CLUB MEMBER,
Petitioner, v. FIL-ESTATE PROPERTIES, INC., AND FIL-ESTATE GOLF
DEVELOPMENT, INC., Respondents.

DECISION

DEL CASTILLO, J.:

"A derivative action is a suit by a shareholder to enforce a corporate cause of action x x x on behalf
of the corporation in order to protect or vindicate [its] rights [when its] officials refuse to sue, or
are the ones to be sued, or hold control of [it]."1 Upon the enactment of Republic Act (RA) No.
8799, otherwise known as "The Securities Regulation Code," jurisdiction over such action now
lies with the special commercial courts designated by this Court pursuant to A.M. No. 00- 11-03-
SC promulgated on November 21, 2000.2chanrobleslaw

This Petition for Review on Certiorari3 under Rule 45 of the Rules of Court assails the Orders
dated May 14, 20124 and February 1, 20135 of the Regional Trial Court (RTC), Branch 74,
Antipolo City, in Civil Case No. 10-9042.

Factual Antecedents

On March 31, 1993, Kingsville Construction and Development Corporation (Kingsville) and
Kings Properties Corporation (KPC) entered into a project agreement with respondent Fil-Estate
Properties, Inc. (FEPI), whereby the latter agreed to finance and cause the development of several
parcels of land owned by Kingsville in Antipolo, Rizal, into Forest Hills Residential Estates and
Golf and Country Club, a first-class residential area/golf-course/commercial center.6 Under the
agreement, respondent FEPI was tasked to incorporate petitioner Forest Hills Golf and Country
Club, Inc. (FHGCCI) with an authorized stock of 3,600 shares; and to perform the development
and construction work and other undertakings as full payment of its subscription to the authorized
capital stock of the club.7 As to the remaining shares of the club, they agreed that these should be
retained by Kingsville in exchange for the parcels of land used for the golf course development.
8
chanrobleslaw

On July 10, 1995, respondent FEPI assigned its rights and obligations over the project to a related
corporation, respondent Fil-Estate Golf Development, Inc. (FEGDI).9 chanroblesla w

On July 19, 1996, Rainier L. Madrid (Madrid) purchased two Class "A" shares at the secondary
price of P3 80,000.00 each, and applied for a membership to the club for P25,000.00. 10 chanrobleslaw

Due to the delayed construction of the second 18-Hole Golf Course, Madrid wrote two demand
letters dated October 29, 2009 and March 15, 2010 to the Board of Directors of petitioner FHGCCI
asking them to initiate the appropriate legal action against respondents FEPI and FEGDI.11 The
Board of Directors, however, failed and/or refused to act on the demand letters.12 chanrobleslaw

Thus, on April 21, 2010, Madrid, in a derivative capacity on behalf of petitioner FHGCCI, filed
with the RTC of Antipolo City a Complaint for Specific Performance with Damages, 13 docketed
as Civil Case No. 10-9042, against respondents FEPI and FEGDI.14 chanrobleslaw

In their Answer with Compulsory Counterclaim,15 respondents FEPI and FEGDI argued that there
is no cause of action against them as petitioner FHGCCI failed to state the contractual and/or legal
bases of their alleged obligation; that no prior demand was made to them; that the action is not a
proper derivative suit as petitioner FHGCCI failed to exhaust all remedies available under the
articles of incorporation and by-laws; and that petitioner FHGCCI failed to implead its Board of
Directors as indispensable parties.

Petitioner FHGCCI, in turn, filed a Reply16 arguing that the case does not involve an intra-
corporate controversy and that the exhaustion of intra-corporate remedies was futile and useless
as the Board of Directors of petitioner FHGCCI also own respondent FEGDI.

Respondents FEPI and FEGDI filed a Rejoinder17 followed by a Motion18 to set their affirmative
defenses for preliminary hearing.

Petitioner FHGCCI filed a Motion19 for leave to amend its Complaint to implead KPC and
Kingsville as additional defendants and to include Madrid as additional plaintiff in his personal
capacity. Respondents FEPI and FEGDI opposed the Motion.20 chanrobleslaw

Ruling of the Regional Trial Court

On May 14, 2012, applying the relationship and nature of controversy tests in Reyes v. Hon. RTC
of Makati, Br. 14221 and taking into account the fact that petitioner FHGCCI denominated the
Complaint as a derivative suit, the RTC issued an Order22 dismissing the case for lack of
jurisdiction, without prejudice to the re-filing of the same with the proper special commercial court
sitting at Binangonan, Rizal. Consequently, the motion for leave to amend the Complaint was
mooted.
Feeling aggrieved, petitioner FHGCCI moved for reconsideration23 but the RTC denied the same
in its Order24 dated February 1, 2013.

Issue

Hence, petitioner FHGCCI directly filed before this Court the instant Petition for Review on
Certiorari25 under Rule 45 of the Rules of Court on a pure question of law, raising the sole issue
cralawred

of:
chanRoblesvirtualLawlibrary

WHETHER OR NOT PETITIONER [FHGCCI'S] ORDINARY CIVIL SUIT FOR SPECIFIC

PERFORMANCE WITH DAMAGES AGAINST RESPONDENTS [FEPI AND FEGDI] VIS-A-
VIS THE LATTER'S OBLIGATION UNDER THE PROJECT AGREEMENT TO FULLY
COMPLETE AND DEVELOP THE FOREST HELLS RESIDENTIAL ESTATES AND GOLF
COURSE AND COUNTRY CLUB IS COGNIZABLE BY THE LOWER COURT AS A
REGULAR COURT OR BY THE RTC-BINANGONAN, BRANCH 70, AS A SPECIAL
COMMERCIAL COURT FOR INTRA-CORPORATE CONTROVERSIES.26

Petitioner FHGCCVs Arguments

Petitioner FHGCCI admits that it filed a derivative suit.27 However, it contends that not all
derivative suits involve intra-corporate controversies.28 In this case, it filed a derivative suit for
specific performance in order to enforce the project agreement between KPC, Kingsville, and
respondents FEPI and FEGDI.29 And although respondent FEGDI is a stockholder of petitioner
FHGCCI, it argues that this does not make the instant case an intra-corporate controversy as the
case was filed against respondents FEPI and FEGDI as developers, and not as stockholders of
petitioner FHGCCI.30 In fact, the causes of action stated in the Complaint do not involve intra-
corporate controversies, nor do these involve the intra-corporate relations between and among the
stockholders and the corporation's officials.31 Thus, the RTC seriously erred in applying the case
of Reyes32 without clearly explaining why the instant case involves an intra-corporate
controversy.33 chanrobleslaw

Respondents' Arguments

Respondents FEPI and FEGDI, on the other hand, reiterate the arguments raised in their Answer
before the RTC, to wit: that petitioner FHGCCI has no cause of action as it failed to present any
contract upon which it can base its claim; that the filing of the case is premature as no prior demand
was made to respondents FEPI and FEGDI; that the Complaint is not a proper derivative suit as
petitioner FHGCCI failed to exhaust all remedies available under the articles of incorporation and
by-laws; and that petitioner FHGCCI failed to implead its Board of Directors as indispensable
parties.34 They also maintain that the instant case is an intra-corporate controversy as the
allegations in the Complaint clearly show that petitioner FHGCCI is suing respondents FEPI and
FEGDI not only as developers but also as stockholders of petitioner FHGCCI.35 And since the
instant case involves an intra-corporate controversy, the RTC correctly dismissed the Complaint
for lack of jurisdiction, as the RTC is not a special commercial court.36 chanrobleslaw
Our Ruling

The Petition lacks merit.

The Complaint, denominated as a

derivative suit for specific performance,
falls under the jurisdiction of special
commercial courts.

Petitioner FHGCCFs main contention is that its Complaint, although denominated as a derivative
suit, does not fall under the jurisdiction of special commercial courts, as it does not involve an
intra-corporate controversy.

We do not agree.

It is a fundamental principle that jurisdiction is conferred by law and is determined by the material
allegations of the complaint, containing the concise statement of ultimate facts of a plaintifFs cause
of action.37 chanrobleslaw

In this case, petitioner FHGCCI alleged in its Complaint that:

chanRoblesvirtualLawlibrary

PREFATORY

This is a derivative suit filed by Shareholder and Club Member Rainier Madrid on behalf of
[petitioner FHGCCI] to compel [respondents FEPI and FEGDI], to finish the construction and
complete development of Club's Arnold Palmer 2nd Nine-Holes Golf Course and the adjunct
Country Club Premises.

Despite repeated demands on FHGCCI, which appears controlled and managed by interlocking
directors of [respondents FEPI and FEGDI] as an "OLD BOYS CLUB," and therefore guilty
of grave conflict of interest to initiate legal actions against developer [respondent] FEGDI
vis-a-vis the completion of the Club's Arnold Palmer 2nd Nine-Holes Golf Course and the promised
Country Club Facilities, FHGCCI has failed, shirked, and refused to sue the [respondents
FEPI and FEGDI].

This BAD FAITH inaction and refusal to sue [respondents FEPI and FEGDI] by the
FHGCCI Board of Directors is definitely prejudicial to FHGCCI and its members as they
have been long deprived the maximum use of the promised Full 36-Hole Golf Course and Country
Club Amenities, thereby rendering them in fundamental and material breach of their SEC
Disclosure Statements, Marketing and Sales Contracts.

The FHGCCI Board of Directors [are] guilty of grave conflict of interest as Founder
Shareholders Noel M. Carifio, Robert John L. Sobrepefia, Ferdinand T. Santos and Enrique
Sobrepena, Jr. are also the majority Board of Directors of [respondent] FEPI and later
[respondent] FEGDI, who for more than ten (10) years NOW has failed and refused to
complete the Project for which they should have sued [respondents] FEPI [and] FEGDI as
early as 2000.

Indeed, the control, exclusive management and operations of FHGCCI, which should have been
turned-over to the General Membership, has been illegally withheld, retained and continued to be
enjoyed by FHGCCI Board of Directors via their abusive, void and illegal Founder's Shares,
subject now of a separate suit to compel turnover of the FHGCCI to its General Membership.

The patent interlocking directorship of FHGCCI and [respondents] FEPI /FEGDI

sufficiently shows the abuse, high handed and condescending strong arm posture of
FHGCCI Board of Directors in failing or refraining from suing [respondents] FEPI [and]
FEGDI as the developer for the full and total completion of [the] 36-Hole Golf Course and
adjunct Country Club facilities.

HENCE, THIS DERIVATIVE SUIT.

x x x x

ALLEGATIONS COMMON TO ALL CAUSES OF ACTION

x x x x

4. On June 29, 1995, [respondent] FEPI incorporated the Golf and Country Club Company -
[FHGCCf] x x x.

Per FHGCCI's Articles of Incorporation, fifty (50%) percent of its authorized member shares
appears to have been distributed as follows:

chanRoblesvirtualLawlibrary

SUBSCRIBERS NUMBER AND KIND OF

SHARES
1. Noel M. Cariño 1 Founder's Share
2. Robert John L. Sobrepeña 1 Founder's Share
3. Ferdinand T. Santos 1 Founder's Share
4. Sabrina T.Santos 1 Founder's Share
5. Enrique Sobrepeña, Jr. 1 Founder's Share
6. Johnson Ong 1 Founder's Share
7. Romeo G. Carlos 1 Founder's Share
8. Manuel Yu 1 Founder's Share
 9. FEGDI 537 Class "A", 190 Class "B",
292 Class "C", 146 Class "D";
total = 1165
10. Kings Properties Corp. 290 Class "A", 102 Class "B",
292 Class "C", 146 Class "D";
total = 627

x x x x

10. Worse, with manifest intention of giving undue benefit, gain and/or advantage to
[respondents] FEPI/FEGDI and to retain control of FHGCCI via the Founders' Shares, the
FHGCCI Board of Directors appear to have deliberately failed, shirked and refused to sue,
act and demand that [respondents] FEPI/FEGDI complete and finish the construction
and/or turn-over of the second golf course, specifically the Arnold Palmer 2 nd Nine-Holes and
the additional "Country Club" premises and adjunct country club facilities, to enable them, as
"Founder Shareholders," to hold on to, continue their control and exclusive management of the
Club, as an "OLD BOYS CLUB," to the damage and prejudice of FHGCCI, and its members
whose corporate rights remain IN LIMBO to date.

x x x x

13. To date, however, the FHGCCI Board of Directors intentionally and deliberately failed
and/or refused to heed Shareholder and Club Member Rainier L. Madrid and numerous
undisclosed members of FHGCCPs above valid and just demand, to the damage and
prejudice of [petitioner] FHGCCI and its Members.

x x x x

2.2 As shown, for more than ten (10) years now from the stipulated full completion of the 2nd 18-
Holes Arnold Palmer Golf Course, and the country club facilities in September 2000, the
FHGCCI Board of Directors, being guilty of apparent conflict of interest prescinding from
their interlocking directorships, have deliberately and purposely failed, shirked and/or
refused to demand and sue [respondents] developer FEPI/FEGDI to fully complete the
Project, especially the 36-Hole Golf Course, and adjunct Country Club and commercial complex
amenities, to the grave damage and prejudice of [petitioner] FHGCCI and its Members. It is pure
and simple, SYNDICATED ESTAFA.

2.3. Consequently, [respondents FEPI and FEGDI], jointly and severally, should be compelled,
ordered and directed to fully perform, finish, complete and turn-over the whole 36-Hole Golf
Course and Country Club Amenities soonest.

xxxx

3.2. Additionally, [respondents] FEPI and FEGDI must be ordered to render an accounting of ALL
work done, EXISTING work-in-progress, if any, and differential backlog in connection with their
performance and delivery of the Project, including the contracted 36-Hole Golf Course and
Country Club Amenities.38 (Emphasis supplied)

Based on the foregoing allegations, it is clear that Madrid filed a derivative suit on behalf of
petitioner FHGCCI to compel respondents FEPI and FEGDI to complete the golf course and
country club project and to render an accounting of all works done, existing work-in-progress and,
if any, differential backlog. The fact that petitioner FHGCCI denominated the Complaint as a
derivative suit for specific performance is sufficient reason for the RTC to dismiss it for lack of
jurisdiction, as the RTC where the Complaint was raffled is not a special commercial court. Upon
the enactment of RA No. 8799, jurisdiction over intra- corporate disputes, including derivatives
suits, is now vested in the RTCs designated as special commercial courts by this Court pursuant to
A.M. No. 00- 11-03-SC promulgated on November 21, 2000.39 chanrobleslaw

Petitioner FHGCCI's contention that the instant case does not involve an intra-corporate
controversy as it was filed against respondents FEPI and FEGDI as developers, and not as
shareholders of the corporation holds no water. Apparent in the Complaint are allegations of the
interlocking directorships of the Board of Directors of petitioner FHGCCI and respondents FEPI
and FEGDI, the conflict of interest of the Board of Directors of petitioner FHGCCI, and their bad
faith in carrying out their duties. Likewise alleged is that respondent FEPI and, later, respondent
FEGDI are shareholders of petitioner FHGCCI which under the project agreement, respondent
FEPI was tasked to perform the development and construction work and other obligations and
undertakings of the project as full payment of its subscription to the authorized capital stock of
petitioner FHGCCI, which it later assigned to respondent FEGDI. Considering these allegations,
we find that, contrary to the claim of petitioner FHGCCI, there are unavoidably intra- corporate
controversies intertwined in the specific performance case.

Moreover, a derivative suit is a remedy designed by equity as a principal defense of the minority
shareholders against the abuses of the majority.40 Under the Corporation Code, the corporation's
power to sue is lodged with its board of directors or trustees.41 However, when its officials refuse
to sue, or are the ones to be sued, or hold control of the corporation, an individual stockholder may
be permitted to institute a derivative suit to enforce a corporate cause of action on behalf of a
corporation in order to protect or vindicate its rights.42 In such actions, the corporation is the real
party in interest, while the stockholder suing on behalf of the corporation is only a nominal party.43
Considering its purpose, a derivative suit, therefore, would necessarily touch upon the internal
affairs of a corporation.

It is for this reason that a derivative suit is among the cases covered by the Interim Rules of
Procedure Governing Intra-Corporate Controversies, A.M. No. 01-2-04- SC, March 13, 2001.
Section l(a), Rule 1 of the said Interim Rules states that:
chanRoblesvirtualLawlibrary

RULE 1
General Provisions

SECTION 1. (a) Cases Covered— These Rules shall govern the procedure to be observed in civil
cases involving the following:
 (1) Devices or schemes employed by, or any act of, the board of directors, business associates,
chanRoblesvirtualLawlibrary

officers or partners, amounting to fraud or misrepresentation which may be detrimental to the

interest of the public and/or of the stockholders, partners, or members of any corporation,
partnership, or association;

(2) Controversies arising out of intra-corporate, partnership, or association relations, between and
among stockholders, members, or associates; and between, any or all of them and the corporation,
partnership, or association of which they are stockholders, members, or associates, respectively;

(3) Controversies in the election or appointment of directors, trustees, officers, or managers of

corporations, partnerships, or associations;

(4) Derivative suits; and

(5) Inspection of corporate books.

In view of the foregoing, we agree with the RTC that the instant derivative suit for specific
performance against respondents FEPI and FEGDI falls under the jurisdiction of special
commercial courts.

In Gonzales v. GJH Land, Inc.,44 we laid down the guidelines to be observed if a commercial case
filed before the proper RTC is wrongly raffled to its regular branch. In that case, we said that if
the RTC has no internal branch designated as a Special Commercial Court, the proper recourse is
to refer the case to the nearest RTC with a designated Special Commercial Court branch within
the judicial region. Upon referral, the RTC to which the case was referred to should redocket the
case as a commercial case. And if the said RTC has only one branch designated as a Special
Commercial Court, it should assign the case to the sole special branch.

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

In this case, however, to refer the case to a special commercial court would be a waste of time
since it is apparent on the face of the Complaint, as pointed out by respondents FEPI and FEGDI
in their Answer, that petitioner FHGCCI failed to comply with the requisites for a valid derivative
suit.

Rule 8, Section 1 of the Interim Rules of Procedure Governing Intra- Corporate Controversies
provides:
chanRoblesvirtualLawlibrary

SECTION 1. Derivative action. — A stockholder or member may bring an action in the name of
a corporation or association, as the case may be, provided, that: (1) He was a stockholder or
member at the time the acts or transactions subject of the action occurred and at the time the action
was filed;
(2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to
exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing
the corporation or partnership to obtain the relief he desires;
(3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit. In case of nuisance or harassment suit, the court
shall forthwith dismiss the case.

Corollarily, "[f]or a derivative suit to prosper, it is required that the minority stockholder suing for
and on behalf of the corporation must allege in his complaint that he is suing on a derivative cause
of action on behalf of the corporation and all other stockholders similarly situated who may wish
to join him in the suit."45 It is also required that the stockholder "should have exerted all reasonable
efforts to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules
governing the corporation or partnership to obtain the relief he desires [and that such fact is
alleged] with particularity in the complaint."46 The purpose for this rule is "to make the derivative
suit the final recourse of the stockholder, after all other remedies to obtain the relief sought had
failed."47 Finally, the stockholder is also required "to allege, explicitly or otherwise, the fact that
there were no appraisal rights available for the acts complained of, as well as a categorical
statement that the suit is not a nuisance or a harassment suit."48 chanrobleslaw

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

Thus, for failing to meet the requirements set forth in Section 1, Rule 8 of the Interim Rules of
Procedure Governing Intra-Corporate Controversies, the Complaint, denominated as a derivative
suit for specific performance, must be dismissed.

WHEREFORE, the Petition is hereby DENIED. The assailed Orders dated May 14,2012 and
February 1, 2013 of the Regional Trial Court, Branch 74, Antipolo City, in Civil Case No. 10-
9042 are hereby AFFIRMED.

SO ORDERED. cralaw lawlibrary

G.R. No. 188769, August 03, 2016

JOSEPH OMAR O. ANDAY A, Petitioner, v. RURAL BANK OF CABADBARAN, INC.,

DEMOSTHENES P. ORAIZ and RICARDO D. GONZALEZ, Respondents.

RESOLUTION
SERENO, C.J.:

This case concerns the dismissal1 of an action for mandamus that sought to compel respondents
Rural Bank of Cabadbaran, Inc., Demosthenes P. Oraiz, and Ricardo D. Gonzalez to register the
transfer of shares of stock and issue the corresponding stock certificates in favor of petitioner
Joseph Omar O. Andaya. The Cabadbaran City Regional Trial Court (RTC) ifuled that petitioner
Andaya was not entitled to the remedy of mandamus, s|ince the transfer of the subject shares of
stock had not yet been recorded in the corporation's stock and transfer book, and the registered
owner, Conception O. Chute, had not given him a special power of attorney to makq the transfer.
Andaya has filed a Rule 45 petition directly before this Court, insisting that he has a cause of action
to institute the suit.

FACTS

Andaya bought from Chute 2,200 shares of stock in the Rural Bank of Cabadbaran for
P220,000.2 The transaction was evidenced by a notarized document denominated as Sale of
Shares of Stocks.3 Chute duly endorsed and delivered the certificates of stock to Andaya and,
subsequently, requested the bank to register the transfer and issue new stock certificates in favor
of the latter.4 Andaya also separately communicated5 with the bank's corporate secretary,
respondent Oraiz, reiterating Chute's request for the issuance of new stock certificates in
petitioner's favor.

A few days later, the bank's corporate secretary wrote6 Chute to inform her that he could not
register the transfer. He explained that under a previous stockholders' Resolution, existing
stockholders were given priority to buy the shares of others in the event that the latter offered those
shares for sale (i.e., a right of first refusal). He then asked Chute if she, instead, wished to have her
shares offered to existing stockholders. He told her that if no other stockholder would buy them,
she could then proceed to sell her shares to outsiders.

Meanwhile, the bank's legal counsel, respondent Gonzalez, informed7 Andaya that the latter's
request had been referred to the bank's board of directors for evaluation. Gonzalez also furnished
him a copy of the bank's previous reply to Chute concerning a similar request from her. Andaya
responded8 by reiterating his earlier request for the registration of the transfer and the issuance of
new certificates of stock in his favor. Citing Section 98 of the Corporation Code, he claimed that
the purported restriction on the transfer of shares of stock agreed upon during the 2001
stockholders' meeting could not deprive him of his right as a transferee. He pointed out that the
restriction did not appear in the bank's articles of incorporation, bylaws, or certificates of stock.

The bank eventually denied the request of Andaya.9 It reasoned that he had a conflict of interest,
as he was then president and chief executive officer of the Green Bank of Caraga, a competitor
bank. Respondent bank concluded that the purchase of shares was not in good faith, and that the
purchase "could be the beginning of a hostile bid to take-over control of the [Rural Bank of
Cabadbaran]."10 Citing Gokongwei v. Securities and Exchange Commission,11 respondent insisted
that it may refuse to accept a competitor as one of its stockholders. It also maintained that Chute
should have first offered her shares to the other stockholders, as agreed upon during the 2001
stockholders' meeting.
Consequently, Andaya instituted an action for mandamus and damages12 against the Rural Bank
of Cabadbaran; its corporate secretary, Oraiz; and its legal counsel, Gonzalez. Petitioner sought to
compel them to record the transfer in the bank's stock and transfer book and to issue new
certificates of stock in his name.

The RTC issued a Decision dismissing the complaint. Citing Porice v. Alsons Cement
Corporation13 the trial court ruled that Andaya had no standing to compel the bank to register the
transfer and issue stock certificates in his name.14 It explained that he had failed "[to show] that
the transfer of subject shares of stock [was] recorded in the stock and transfer book of [the] bank
or that [he was] authorized by [Chute] to make the transfer."15 According to the trial court, Ponce
requires that a person seeking to transfer shares must appear to have an express instruction and a
specific authority from the registered stockholder, such as a special power of attorney, to cause the
disposition of stocks registered in the stockholder's name. It ruled that "[w]ithout the sale first
registered or an authority from the transferor, it [was] therefore unmistakably clear that [Andaya
had] no cause of action for mandamus against [the] bank."

Consequently, Andaya directly filed with this Court a Rule 45 petition for review on certiorari
assailing the RTC Decision on pure questions of law.

ISSUES

The Court culls the issues raised by petitioner as follows:

1. Whether Andaya, as a transferee of shares of stock, may initiate

an action for mandamus compelling the Rural Bank of Cabadbaran to record the
transfer of shares in its stock and transfer book, as well as issue new stock certificates in
his name

2. Whether a writ of mandamus should issue in favor of petitioner

OUR RULING

The petition is partly meritorious.

It is already settled jurisprudence16 that the registration of a transfer of shares of stock is a

ministerial duty on the part of the corporation. Aggrieved parties may then resort to the remedy of
mandamus to compel corporations that wrongfully or unjustifiably refuse to record the transfer or
to issue new certificates of stock. This remedy is available even upon the instance of a bona fide
transferee17 who is able to establish a clear legal right to the registration of the transfer.18 This legal
right inherently flows from the transferee's established ownership of the stocks, a right that has
been recognized by this Court as early as in Price v. Martin:19
A person who has purchased stock, and who desires to be recognized as a stockholder, for the
purpose of voting, must secure a standing by having the transfer recorded upon the books. If the
transfer is not duly made upon request, he has, as his remedy, to compel it to be made.20 (Emphases
supplied)
Thus, in Pacific Basin Securities Co., Inc., v. Oriental Petroleum and Minerals Corp.,21this Court
stressed that the registration of a transfer of shares is ministerial on the part of the corporation:ChanRoblesVirtualawlibrary

Clearly, the right of a transferee/assignee to have stocks transferred to his name is an inherent
right flowing from his ownership of the stocks. The Court had ruled in Rural Bank of Salinas,
Inc. v. Court of Appeals that the corporation's obligation to register is ministerial, citing
Fletcher, to wit: ChanRo blesVirtualaw library

In transferring stock, the secretary of a corporation acts in purely ministerial capacity, and does
not try to decide the question of ownership.

The duty of the corporation to transfer is a ministerial one and if it refuses to make such transaction
without good cause, it may be compelled to do so by mandamus.
The Court further held in Rural Bank of Salinas that the only limitation imposed by Section 63
of the Corporation Code is when the corporation holds any unpaid claim against the shares
intended to be transferred.22 (Emphasis supplied; citations omitted)
Consequently, transferees of shares of stock are real parties in interest having a cause of action for
mandamus to compel the registration of the transfer and the corresponding issuance of stock
certificates.

We also rule that Andaya has been able to establish that he is a bona fide transferee of the shares
of stock of Chute. In proving this fact, he presented to the RTC the following documents
evidencing the sale: (1) a notarized Sale of Shares of Stocks23 showing Chute's sale of 2,200 shares
of stock to petitioner; (2) a Documentary Stamp Tax Declaration/Return24 (3) Capital Gains Tax
Return;25 and (4) stock certificates26 covering the subject shares duly endorsed
cralawred

by Chute. The existence, genuineness, and due execution of these documents have been
admitted27 and remain undisputed. There is no doubt that Andaya had the standing to initiate an
action for mandamus to compel the Rural Bank of Cabadbaran to record the transfer of shares in
its stock and transfer book and to issue new stock certificates in his name. As the transferee of the
shares, petitioner stands to be benefited or injured by the judgment in the instant petition, a
judgment that will either order the bank to recognize the legitimacy of the transfer and petitioner's
status as stockholder or to deny the legitimacy thereof.

This Court further finds that the reliance of the RTC on Ponce in finding that petitioner had no
cause of action for mandamus against the defendant bank was misplaced. In Ponce, the issue
resolved by this Court was whether the petitioner therein had a cause of action for mandamus to
compel the issuance of stock certificates, not the registration of the transfer. Ruling in the negative,
the Court said in that case that without any record of the transfer of shares in the stock and transfer
book of the corporation, there would be no clear basis to compel that corporation to issue a stock
certificate. By the import of Section 63 of the Corporation Code, the stock and transfer book would
be the main reference book in ascertaining a person's entitlement to the rights of a stockholder.
Consequently, without the registration of the transfer, the alleged transferee could not yet be
recognized as a stockholder who is entitled to be given a stock certificate.

In contrast, at the crux of this petition are the registration of the transfer and the issuance of the
corresponding stock certificates. Requiring petitioner to register the transaction before he could
institute a mandamus suit in supposed abidance by the ruling in Ponce was a palpable error. It led
to an absurd, circuitous situation in which Andaya was prevented from causing the registration of
the transfer, ironically because the shares had not been registered. With the logic resorted to by the
RTC, transferees of shares of stock would never be able to compel the registration of the transfer
and the issuance of new stock certificates in their favor. They would first be required to show the
registration of the transfer in their names — the ministerial act that is the subject of the mandamus
suit in the first place. The trial court confuses the application of the dicta in Ponce, which is
pertinent only to the issuance of new stock certificates, and not to the registration of a transfer of
shares. As Ponce itself provides, these two are entirely different events. The RTC's anomalous
reasoning cannot be given legal imprimatur by this Court.

With regard to the requisite authorization from the transferor, the Court stresses that the concern
in Ponce was rooted in whether or not the alleged right of the petitioner therein to compel the
issuance of new stock certificates was clearly established. Reiterating the ruling in Rivera v.
FIorendo28 and Eager v. Bryan,29 the Court therein maintained that a mere endorsement of stock
certificates by the supposed owners of the stock could not be the basis of an action for mandamus
in the absence of express instructions from them. According to the Court, the reason behind this
ruling was that the corporation's duty and legal obligation therein were not so clear and
indisputable as to justify the issuance of the writ. The ambiguity of the alleged transferee's deed of
undertaking with endorsement led the Court in Ponce to rule that mandamus would have issued
had the registered owner himself requested the registration of the transfer, or had the person
requesting the registration secured a special power of attorney from the registered owner.

In the instant case, however, the submitted documents did not merely consist of an endorsement.
Rather, petitioner presented several undisputed documents,30 among which was respondent Oraiz's
letter to Chute denying her request to transfer the stock standing in her name in favor of Andaya.
This letter clearly indicated that the registered owner herself had requested the registration of the
transfer of shares of stock. There was therefore no sensible reason for the RTC to perfunctorily
extract the pronouncement in Ponce and then disregard it in the face of admitted facts in addition
to the duly endorsed stock certificates.

On whether the writ of mandamus should issue, Section 3, Rule 65 of the Rules of Court, provides
for the rules governing a petition for mandamus, viz:
SECTION 3. Petition for mandamus. — When any tribunal, corporation, board, officer or person
unlawfully neglects the performance of an act which the law specifically enjoins as a duty resulting
from an office, trust, or station, or unlawfully excludes another from the use and enjoyment of
a right or office to which such other is entitled, and there is no other plain, speedy and adequate
remedy in the ordinary course of law, the person aggrieved thereby may file a verified petition in
the proper court, alleging the facts with certainty and praying that judgment be rendered
commanding the respondent, immediately or at some other time to be specified by the court, to do
the act required to be done to protect the rights of the petitioner, and to pay the damages sustained
by the petitioner by reason of the wrongful acts of the respondent.

The petition shall also contain a sworn certification of non-forum shopping as provided in the third
paragraph of Section 3, Rule 46. (Emphases supplied)
Accordingly, a writ of mandamus to enforce a ministerial act may issue only when petitioner is
able to establish the presence of the following: (1) right clearly founded in law and is not doubtful;
(2) a legal duty to perform the act; (3) unlawful neglect in performing the duty enjoined by law;
(4) the ministerial nature of the act to be performed; and (5) the absence of other plain, speedy,
and adequate remedy in the ordinary course of law.31 chanrobleslaw

Respondents primarily challenge the mandamus suit on the grounds that the transfer violated the
bank stockholders' right of first refusal and that petitioner was a buyer in bad faith. Both parties
refer to Section 98 of the Corporation Code to support their arguments, which reads as follows: ChanRoblesVirtualawlibrary

SECTION 98. Validity of restrictions on transfer of shares. — Restrictions on the right to

transfer shares must appear in the articles of incorporation and in the by-laws as well as in
the certificate of stock; otherwise, the same shall not be binding on any purchaser thereof
in good faith. Said restrictions shall not be more than onerous than granting the existing
stockholders or the corporation the option to purchase the shares of the transferring stockholder
with such reasonable terms, conditions or period stated therein. If upon the expiration of said
period, the existing stockholders or the corporation fails to exercise the option to purchase, the
transferring stockholder may sell his shares to any third person. (Emphases supplied)
It must be noted that Section 98 applies only to close corporations. Hence, before the Court can
allow the operation of this section in the case at bar, there must first be a factual determination that
respondent Rural Bank of Cabadbaran is indeed a close corporation. There needs to be a
presentation of evidence on the relevant restrictions in the articles of incorporation j and bylaws
of the said bank. From the records or the RTC Decision, there is apparently no such determination
or even allegation that would assist this Court in ruling on these two major factual matters. With
the foregoing, the validity of the transfer cannot yet be tested using that provision. These are the
factual matters that the parties must first thresh out before the RTC.

After finding that petitioner has legal standing to initiate an action for mandamus, the Court now
reinstates the action he filed and remands the case to the RTC to resolve the propriety of issuing a
writ of mandamus. The resolution of the case must include the determination of all relevant factual
matters in connection with the issues at bar. The RTC must also resolve petitioner's prayer for the
payment of attorney's fees, litigation expenses, moral damages, and exemplary damages.

WHEREFORE, premises considered, the instant petition I is GRANTED. The Decision dated
17 April 2009 and the Order dated 15 July 2009 of the Regional Trial Court, Branch 34,
Cabadbaran City, which dismissed petitioner's action for mandamus, are SET ASIDE. The action
is hereby REINSTATED and the case REMANDED to the court of origin for further
proceedings. The trial court is further enjoined to proceed with [the resolution of this case with
dispatch.

SO ORDERED.

G.R. No. 184008, August 03, 2016

INDIAN CHAMBER OF COMMERCE PHILS., INC., Petitioner, v. FILIPINO INDIAN

CHAMBER OF COMMERCE IN THE PHILIPPINES, INC., Respondent.

DECISION
JARDELEZA, J.:

This is a Petition for Review on Certiorari1 assailing the Decision and Resolution of the Court of
Appeals (CA) dated May 15, 20082 and August 4, 2008,3 respectively, in CA-G.R. SP No. 97320.
The Decision and Resolution affirmed the Securities and Exchange Commission En Banc (SEC
En Banc) Decision dated November 30, 20064 directing petitioner Indian Chamber of Commerce
Phils., Inc. to modify its corporate name.

The Facts

Filipino-Indian Chamber of Commerce of the Philippines, Inc. (defunct FICCPI) was originally
registered with the SEC as Indian Chamber of Commerce of Manila, Inc. on November 24, 1951,
with SEC Registration Number 64655 On October 7, 1959, it amended its corporate name into
Indian Chamber of Commerce of the Philippines, Inc., and further amended it into Filipino-Indian
Chamber of Commerce of the Philippines, Inc. on

March 4, 1977,.6 Pursuant to its Articles of Incorporation, and without applying for an extension
of its corporate term, the defunct FICCPI's term of existence expired on November 24, 2001. 7 chanrobleslaw

SEC Case No. 05-008

On January 20, 2005, Mr. Naresh Mansukhani (Mansukhani) reserved

the corporate name "Filipino Indian Chamber of Commerce in the Philippines, Inc."
(FICCPI), for the period from January 20, 2005 to April 20, 2005, with the Company Registration
and Monitoring Department (CRMD) of the SEC.8 In an opposition letter dated April 1, 2005,
Ram Sitaldas (Sitaldas), claiming to be a representative of the defunct FICCPI, alleged that the
corporate name has been used by the defunct FICCPI since 1951, and that the reservation by
another person who is not its member or representative is illegal.9 chanrobleslaw

The CRMD called the parties for a conference and required them to submit their position papers.
Subsequently, on May 27, 2005, the CRMD rendered a decision granting Mansukhani's
reservation, holding that he possesses the better right over the corporate name.11 The CRMD ruled
that the defunct FICCPI has no legal personality to oppose the reservation of the corporate name
by Mansukhani. After the expiration of the defunct FICCPFs corporate existence, without any act
on its part to extend its term, its right over the name ended. Thus, the name "Filipino Indian
Chamber of Commerce in the Philippines, Inc." is free for appropriation by any party. 12 chanrobleslaw

Sitaldas appealed the decision of the CRMD to the SEC En Bane, which appeal was docketed as
SEC Case No. 05-008. On December 7, 2005, the SEC En Bane denied the appeal,13 thus: ChanRoblesVirtualaw library

WHEREFORE, premises considered, the instant appeal is HEREBY DISMISSED for lack
of merit. Let a copy of this decision be furnished the Company Registration and Monitoring
Department of this Commission for its appropriate action.14 (Emphasis in the original.)
Sitaldas appealed the SEC En Banc decision to the CA, docketed as CA-G.R. SP No. 92740. On
September 27, 2006, the CA affirmed the decision of the SEC En Banc15. It ruled that Mansukhani,
reserving the name 'Filipino Indian Chamber of Commerce in the Philippines, Inc.," has the of the
better right over the corporate name. It ruled that with the expiration corporate life of the defunct
FICCPI, without an extension having been filed and granted, it lost its legal personality as a
corporation.16 Thus, the CA affirmed the SEC En Banc ruling that after the expiration of its term,
the defunct FICCPI's rights over the name also ended.17 The CA also cited SEC Memorandum
Circular No. 14-200018 which gives protection to corporate names for a period of three years after
the approval of the dissolution of the corporation.19 It noted that the reservation for the use of the
corporate name "Filipino Indian Chamber of Commerce in the Philippines, Inc.," and the
opposition were filed only in January 2005, way beyond this three-year period.20 chanrobleslaw

On March 14, 2006, pending resolution by the CA, the SEC issued the Certificate of Incorporation
of respondent FICCPI, pursuant to its ruling in SEC Case No. 05-008.

SEC Case No. 06-014

Meanwhile, on December 8, 2005,22 Mr. Pracash Dayacanl, who allegedly represented the defunct
FICCPI, filed an application with the CRMD for the reservation of the corporate name "Indian
Chamber of Commerce Phils., Inc." (ICCPI).23 Upon knowledge, Mansukhani, in a letter dated
February 14, 2006,24 formally opposed the application. Mansukhani cited the SEC En Banc
decision in SEC Case No. 05-008 recognizing him as the one possessing the better right over the
corporate name "Filipino Chamber of Commerce in the Philippines, Inc.25 cralawredchanrobleslaw

In a letter dated April 5, 200626 the CRMD denied Mansukhani's opposition. It stated that the name
"Indian Chamber of Commerce Phils., Inc." is not deceptively or confusingly similar to "Filipino
Indian Chamber of Commerce in the Philippines, Inc." On the same date, the CRMD approved
and issued the Certificate of Incorporation27 of petitioner ICCPI.

Thus, respondent FICCPI, through Mansukhani, appealed the CRMD's decision to the SEC En
Banc.28 The appeal was docketed as SEC Case No. 06-014. On November 30, 2006, the SEC En
Bane granted the appeal filed by FICCPI,29 and reversed the CRMD's decision. Citing Section 18
of the Corporation Code,30 the SEC En Bane made a finding that "both from the standpoint of their
[ICCPI and FICCPI] corporate names and the purposes for which they were established, there
exist[s] a similarity that could inevitably lead to confusion."31 It also ruled that "oppositor
[FICCPI] has the prior right to use its corporate name to the exclusion of the others. It was
registered with the Commission on March 14, 2006 while respondent [ICCPI] was registered on
April 05, 2006. By virtue of oppositor's [FICCPI] prior appropriation and use of its name, it is
entitled to protection against the use of identical or similar name of another corporation."32
Thus, the SEC En Banc ruled, to wit:
WHEREFORE, the appeal is hereby granted and the assailed Order dated April 05, 2006 is hereby
REVERSED and SET ASIDE and respondent is directed to change or modify its corporate name
within thirty (30) days from the date of actual receipt hereof.

SO ORDERED.33 (Emphasis in the original.)

ICCPI appealed the SEC En Banc decision in SEC Case No. 06-014 to the CA.34 The appeal,
docketed as CA-G.R. SP No. 97320, raised
the following issues:
 A. The Honorable SEC En Banc committed serious error when it held that petitioner's
corporate name (ICCPI) could inevitably lead to confusion;

B. Respondent's corporate name (FICCPI) did not acquire secondary meaning; and cralawlawlibrary

C. The Honorable SEC En Bane violated the rule of equal protection when it denied petitioner
(ICCPI) the use of the descriptive generic words. 35

In a decision dated May 15, 2008,36 the CA affirmed the decision of the SEC En Banc. It held that
by simply looking at the corporate names of ICCPI and FICCPI, one may readily notice the striking
similarity between the two. Thus, an ordinary person using ordinary care and discrimination may
be led to believe that the corporate names of ICCPI and FICCPI refer to one and the same
corporation.37 The CA further ruled that ICCPI's corporate name did not comply with the
requirements of SEC Memorandum Circular No. 14-2000. It noted that under the facts of this case,
it is the registered corporate name, FICCPI, which contains the word (Filipino) making it different
from the proposed
corporate name. SEC Memorandum Circular No. 14-2000 requires, however, that it should be the
proposed corporate name which should contain one distinctive word different from the name of
the corporation already registered, and not the other way around, as In this case.39 Finally, the CA
held that the SEC En Bane did not violate ICCPFs right to equal protection when it ordered ICCPI
to change its corporate name. The SEC En Bane merely compelled ICCPI to comply with its
undertaking to change its corporate name in case another person or firm has acquired a prior right
to the use of the said name or the same is deceptively or confusingly similar to one already
registered with the SEC.40
The dispositive portion of the CA decision reads:
WHEREFORE, premises considered, the petition filed in this case is hereby DENIED and the
assailed Decision of the Securities and Exchange Commission en banc in SEC EN BANC Case
No. 06-014 is hereby AFFIRMED.

SO ORDERED.41 (Emphasis in the original.)

In its Resolution dated August 4, 2008,42 the CA denied the Motion for Reconsideration filed by
ICCPI.

The Petition43

ICCPI now appeals the CA decision before this Court raisin; following arguments:

A. The Honorable Court of Appeals committed serious error when it upheld the findings of
the SEC En Banc;

B. The Honorable Court of Appeals committed serious error when it held that there is
similarity between the petitioner and the respondent (sic) corporate name that would
inevitably lead to confusion; and cralawlawlibrary

C. Respondent's corporate name did not acquire secondarymeaning.44

The Court's Ruling

We uphold the decision of the CA.

Section 18 of the Coiporation Code expressly prohibits the use of a corporate name which is
identical or deceptively or confusingly similar to that of any existing corporation: ChanRo blesVirtualawlibrary

No corporate name may be allowed by the Securities and Exchange Commission if the proposed
name is identical or deceptively or confusingly similar to that of any existing corporation or to any
other name already protected by law or is patently deceptive, confusing or contrary to existing
laws. When a change in the corporate name is approved, the Commission shall issue an amended
certificate of
incorporation under the amended name. (Underscoring supplied.)
In Philips Export B. V. v. Court of Appeals,45 this Court ruled that to fall within the prohibition,
two requisites must be proven, to wit:

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

2. the proposed name is either:

(a)
chanRoblesvirtualLawlibrary identical; or
(b) deceptively or confusingly similar to that of any existing corporation or to any other
name already protected by law; or
(c) patently deceptive, confusing or contrary to existing law.46

These two requisites are present in this case.

FICCPI acquired a prior right over

the use of the corporate name

In Industrial Refractories Corporation of the Philippines v. Court of Appeals, 47 the Court applied
the priority of adoption rule to determine prior right, taking into consideration the dates when the
parties used their respective corporate names. It ruled that "Refractories Corporation of the
Philippines" (RCP), as opposed to "Industrial Refractories Corporation of the Philippines" (IRCP),
has acquired the right to use the word "Refractories" as part of its corporate name, being its prior
registrant on October 13, 1976. The Court noted that IRCP only started using its corporate name
when it amended its Articles of Incorporation on August 23, 1985.48 chanrobleslaw

In this case, FICCPI was incorporated on March 14, 2006. On the other hand, ICCPI was
incorporated only on April 5, 2006, or a month after FICCPI registered its corporate name. Thus,
applying the principle in the Refractories case, we hold that FICCPI, which was incorporated
earlier, acquired a prior right over the use of the corporate name.

ICCPI cannot argue that it first incorporated and held the "Filipino Indian Chamber of Commerce,"
in 1977; and that it established the name's goodwill until it failed to renew its name due to
oversight.49 It is settled that a corporation is ipso facto dissolved as soon as its term of existence
expires.50 SEC Memorandum Circular No. 14-2000 likewise provides for the use of corporate
names of dissolved corporations: ChanRob lesVirtualawlibrary

14. The name of a dissolved firm shall not be allowed to be used by other firms within three (3)
years after the approval of the dissolution of the corporation by the Commission, unless allowed
by the last stockholders representing at least majority of the outstanding capital stock of the
dissolved firm.
When the term of existence of the defunct FICCPI expired on November 24, 2001, its corporate
name cannot be used by other corporations within three years from that date, until November 24,
2004. FICCPI reserved the name "Filipino Indian Chamber of Commerce in the Philippines, Inc."
on January 20, 2005, or beyond the three-year period. Thus, the SEC was correct when it allowed
FICCPI to use the reserved corporate name.

ICCPI's name is identical and

deceptively or confusingly similar to
that of FICCPI

The second requisite in the Philips Export case likewise obtains in two respects: the proposed
name is (a) identical or (b) deceptively or confusingly similar to that of any existing corporation
or to any other name already protected by law.

On the first point, ICCPI's name is identical to that of FICCPI. ICCPFs and FICCPFs corporate
names both contain the same words "Indian Chamber of Commerce." ICCPI argues that the word
"Filipino" in FICCPFs corporate name makes it easily distinguishable from ICCPI. 51 It adds that
confusion and deception are effectively precluded by appending the word "Filipino" to the phrase
"Indian Chamber of Commerce."52 Further, ICCPI claims that the corporate name of FICCPI uses
the words "in the Philippines" while ICCPI uses only "Phils, Inc."53 chanrobleslaw

ICCPFs arguments are without merit. These words do not effectively distinguish the corporate
names. On the one hand, the word "Filipino" is merely a description, referring to a Filipino citizen
or one living in the Philippines, to describe the corporation's members. On the other, the words "in
the Philippines" and "Phils., Inc." are simply geographical locations of the corporations which,
even if appended to both the corporate names, will not make one distinct from the other. Under
the facts of this case, these words cannot be separated from each other such that each word can be
considered to add distinction to the corporate names. Taken together, the words in the phrase "in
the Philippines" and in the phrase "Phils. Inc." are synonymous—they both mean the location of
the corporation.

The same principle was adopted by this Court in Ang mga Kaanib sa Iglesia ng Dios Kay Kristo
Hesus, H.S.K. sa Bansang Pilipinas, Inc. v. Iglesia ng Dios Kay Cristo Jesus, Haligi at Suhay ng
Katotohanan:54
Significantly, the only difference between the corporate names of petitioner and respondent are
the words SALIGAN and SUHAY. These words are synonymous-both mean ground, foundation or
support. Hence, this case is on all fours with Universal Mills Corporation v. Universal Textile
Mills, Inc., where the Court ruled that the corporate names Universal Mills Corporation and
Universal Textile Mills, Inc., are undisputably so similar that even under the test of "reasonable
care and observation" confusion may arise.55 (Italics in the original.)
Thus, the CA is correct when it ruled, "[a]s correctly found by the SEC en bane, the word 'Filipino'
in the corporate name of the respondent [FICCPI] is merely descriptive and can hardly serve as an
effective differentiating medium necessary to avoid confusion. The other two words alluded to by
petitioner [ICCPI] that allegedly distinguishes its corporate name from that of the respondent are
the words 'in' and 'the' in the respondent's corporate name. To our mind, the presence of the
words 'in' and 'the' in respondent's corporate name does not, in any way, make an effective
distinction to that of petitioner."56 chanrobleslaw

Petitioner cannot argue that the combination of words in respondent's corporate name is merely
descriptive and generic, and consequently cannot be appropriated as a corporate name to the
exclusion of the others.57 Save for the words "Filipino," "in the," and "Inc.," the corporate names
of petitioner and respondent are identical in all other respects. This issue was also discussed in the
Iglesia case where this Court held,

Furthermore, the wholesale appropriation by petitioner of respondent's corporate name cannot find
justification under the generic word rule. We agree with the Court of Appeals' conclusion that a
contrary ruling would encourage other corporations to adopt verbatim and register an
existing and protected corporate name, to the detriment of the public.58 chanrobleslaw

On the second point, ICCPI's corporate name is deceptively or confusingly similar to that of
FICCPI. It is settled that to determire the existence of confusing similarity in corporate names, the
test is whether the similarity is such as to mislead a person, using ordinary care and discrimination.
In so doing, the court must examine the record as well as the names themselves.59 Proof of actual
confusion need not be shown. It suffices that confusion is probably or likely to occur.60 chanrobleslaw

In this case, the overriding consideration in determining wheiher a person, using ordinary care and
discrimination, might be misled is the circumstance that both ICCPI and FICCPI have a common
primary purpose, that is, the promotion of Filipino-Indian business in the Philippines.

The primary purposes of ICCPI as provided in its Articles of Incorporation are:

a. Develop a stronger sense of brotherhood;

b. Enhance the prestige of the Filipino-Indian business community in the Philippines;

c. Promote cordial business relations with Filipinos and other business communities in
the Philippines, and other overseas Indian business organizations;

d. Respond fully to the needs of a progressive economy and the Filipino-Indian Business
community;

e. Promote and foster relations between the people and Governments of the Republics of the
Philippines and

India in areas of Industry, Trade, and Culture.61 chanroblesvirtuallawlibrary

Likewise, the primary purpose of FICCPI is "[t]o actively promote and enhance the Filipino-Indian
business relationship especially in view of [current] local and global business trends."62 chanrobleslaw
Considering these corporate purposes, the SEC En Banc made a finding that "[i]t is apparent that
both from the standpoint of their corporate names and the purposes for which they were
established, there exist a I similarity that could inevitably lead to confusion."63 This finding of the
SEC En Bane was fully concurred with and adopted by the CA.64 chanrobleslaw

Findings of fact of quasi-judicial agencies, like the SEC, are generally accorded respect and even
finality by this Court, if supported by substantial evidence, in recognition of their expertise on the
specific matters under their consideration, and more so if the same has been upheld by the appellate
court,65 as in this case.

Petitioner cannot argue that the CA erred when it upheld the SEC En Banc's decision to cancel
ICCPFs corporate name.66 By express mandate of law, the SEC has absolute jurisdiction,
supervision and control over all corporations.67 It is the SEC's duty to prevent confusion in the use
of corporate names not only for the protection of the corporation involved, but more so for the
protection of the public. It has the authority to de-register at all times, and under all circumstances
corporate names which in its estimation are likely to generate confusion.68 chanrobleslaw

Pursuant to its mandate, the SEC En Banc correctly applied Section 18 of the Corporation Code,
and Section 15 of SEC Memorandum Circular No. 14-2000: ChanRo blesVirtualaw library

In implementing Section 18 of the Corporation Code of the Philippines (BP 68), the following
revised guidelines in the approval of corporate and partnership names are hereby
adopted for the information and guidelines of all concerned:
chanRoblesvirtualLawlibrary

xxx

15. Registrant corporations or partnership shall submit a letter undertaking to change their
corporate or partnership name in case another person or firm has acquired a prior right to the use
of said firm name or the same is deceptively or confusingly similar to one already registered unless
this undertaking is already included as one of the provisions of the articles of incorporation or
partnership of the registrant.
Finding merit in respondent's claims, the SEC En Bane merely compelled petitioner to comply
with its undertaking.69 chanrobleslaw

WHEREFORE, the petition is DENIED. The Decision of the CA dated May 15, 2008 in CA-
G.R. SP No. 97320 is hereby AFFIRMED.

SO ORDERED. chanRoblesvirtualLawlibrary

G.R. No. 168134, October 05, 2016

FERRO CHEMICALS, INC., Petitioner, v. ANTONIO M. GARCIA, ROLANDO

NAVARRO, JAIME Y. GONZALES AND CHEMICAL INDUSTRIES OF THE
PHILIPPINES, INC., Respondents.
G.R. NO. 168183

JAIME Y. GONZALES, Petitioner, v. HON. COURT OF APPEALS AND FERRO

CHEMICALS, INC., Respondents.

G.R. NO. 168196

ANTONIO M. GARCIA, Petitioner, v. FERRO CHEMICALS, INC., Respondent.

DECISION

PEREZ, J.:

Before us are three consolidated Petitions for Review on Certiorari assailing the 3 March 2004
Decision1 and the 17 May 2005 Resolution2 of the Court of Appeals (CA) in CA-G.R. CV No.
69970, which affirmed with modification the 4 September 2000 Decision3 of the Regional Trial
Court (RTC) of Makati City, Branch 61. The RTC found Antonio M. Garcia, Jaime Y. Gonzales,
Rolando Navarro and Chemical Industries of the Philippines, Inc. solidarily liable for the amount
of P256,255,537.41, representing the value of the shares of stocks here in question. In its assailed
Decision and Resolution, the CA absolved Rolando Navarro and Chemical Industries of the
Philippines, Inc. from liability, reduced the amount of attorney's fees from P1,000,000.00 to
P500,000.00, and deleted the additional 10% of the value of the shares to the amount of attorney's
fees that was awarded. The dispositive portion of theCA Decision reads:
chanRoblesvirtualLawlibrary

"WHEREFORE, the appeal is hereby PARTIALLY GRANTED. The appealed Decision, dated 04
September 2000, rendered by Hon. Judge Fernando V. Gorospe, Jr., of the Regional Trial Court
of Makati, Branch 61, is MODIFIED, in that:

1. [CHEMICAL INDUSTRIES OF THE PHILIPPINES] and ROLANDO

NAVARRO are hereby EXONERATED from any liability in this case.

2. ANTONIO M. GARCIA and JAIME GONZALES are hereby ORDERED,

jointly and severally, to pay FERRO CHEMICALS, INC., the following: Chan Ro blesVirtualawlibrary

a.) P256,255,537.41, which is the value of the lost shares minus the balance
of the purchase price;
b.) P100,000.00, as exemplary damages.
c.) P500,000.00 as attorney's fees; and
d.) Costs of the suit.

3. The award of P12,000,000.00, which is the cost of suit and expenses of litigation
in the case against the Consortium is hereby DELETED for lack of factual basis.

SO ORDERED."4 chanroblesvirtuallawlibrary
The Facts

Ferro Chemicals Incorporated (Ferro Chemicals), is a domestic corporation duly authorized by

existing law to engage in business in the Philippines. It is represented in this action by its President,
Ramon M. Garcia.

Chemical Industries of the Philippines Inc. (Chemical Industries), on the other hand, is also a
domestic corporation duly organized and existing by virtue of Philippine laws. Antonio Garcia,
one of the parties in the instant case, is the Chairman of the Board of Directors (BOD) of Chemical
Industries and a brother of Ferro Chemical's President, Ramon Garcia. Rolando Navarro is the
Corporate Secretary of Chemical Industries while Jaime Gonzales is a close financial advisor of
Antonio Garcia.

The Deed of Absolute Sale and Purchase of Shares of Stock

On 15 July 1988, Antonio Garcia and Ferro Chemicals entered into a Deed of Absolute Sale and
Purchase of Shares of Stock5 over 1,717,678 shares of capital stock of Chemical Industries
registered under the name of Antonio Garcia for a consideration of P-79,207,331.28 (subject
shares). Included as subjects of the sale were Antonio Garcia's 371,697 shares of stocks in Vision
Insurance Consultants, Inc., (VIC) and his proprietary membership in Alabang Country Club and
Manila Polo Club. Under the sale agreement, Antonio Garcia warranted the following:
chanRoblesvirtualLawlibrary

(1) That the subject shares are free from the liens and encumbrances except the ones under the
Security Bank and Trust Company (Security Bank) and the Insular Bank of Asia and America
(Insular Bank);

(2) That the seller undertakes to defend the sale contract and defray the litigation cost should its
validity be assailed, and, to reimburse Ferro Chemicals the amount of the purchase price

(3) That in the event that the sale is invalidated, the seller will reimburse the buyer the amount of
the purchase price.

The parties also stipulated in the agreement that Ferro Chemicals will deliver a part of the purchase
price to Security Bank in satisfaction of Antonio Garcia's obligation as judgment obligor with
Security Bank.

Pursuant to the sale contract, Ferro Chemicals remitted the amount of P-35,462,869.92 to Security
Bank and Trust Co. (SBTC) in the form of a check drawn against its account with Bank of America.
On the ground that the amount tendered was insufficient to satisfy Antonio Garcia's obligation, the
payment was not accepted by Security Bank, leaving the obligor with no recourse but to consign
the check to the court which adjudicated his liability. (Security Bank Case) On 19 June 1990, the
CA approved the consignation effected by Antonio Garcia and held that the amount tendered is
sufficient to discharge his liability. In a Resolution dated 21 November 1990 the Court affirmed
the final settlement of Antonio Garcia's liability with the bank. This settled the Security Bank Case
with finality.
The Compromise Agreement

On 17 January 1989, Antonio Garcia entered into a Compromise Agreement6 with Philippine
Investments System Organization (PISO), Bank of the Philippine Islands (BPI), Philippine
Commercial International Bank (PCIB), Rizal Commercial Banking Corporation (RCBC) and
Land Bank of the Philippines (LBP) (collectively known as Consortium Banks). The settlement
was entered in connection with the Surety Agreements previously contracted by Antonio Garcia
and Dynetics Corporation with the onsortium Banks.

The First Consortium Case

The 17 January 1989 Compromise Agreement sprang from Civil Case No. 8527, filed by Antonio
Garcia and Dynetics,. Inc. before the RTC of Makati City, seeking to enjoin the Consortium Banks
from collecting the amount of P117,800,000.00, excluding interests, penalties and attorney's fees,
purportedly representing their liability under surety contracts.

The RTC, upon application therefor by the Consortium Banks, issued a Notice of Garnishment7
dated 19 July 1985 over the 1,717,678 shares of stocks of Antonio Garcia in Chemical Industries
to secure any contingent claims that may be awarded in favor of the banks. On the ground that
only absolute transfers of shares are required to be on the corporation's stock and transfer books,
the Corporate Secretary did not annotate the banks' claims on Chemical Industries' books.

Subsequently, the RTC issued Orders dated 25 March 1988 and 20 May 1988 dismissing Civil
Case No. 8527. In effect, the causes of action of the plaintiffs and the counterclaims of the
defendants were all denied. Insisting on their right to enforce the surety contracts, the Consortium
Banks assailed the dismissal of Civil Case No. 8527 before the appellate court. During the
pendency of the appeal docketed as CA-G.R. No. 20467, the parties agreed to amicably settle the
case, and thus, the creditors accepted the offer of the debtors to immediately pay the obligation in
exchange for the waiver of interests, penalties and attorney's fees. The compromise agreement,
which required Antonio Garcia and Dynetics to pay the Consortium Banks the amount of
P145,000,000.00, was consequently approved by the CA in a Judgment dated 22 May 1989.

The Deed of Right to Repurchase

After the parties in the First Consortium Case forged a Compromise Agreement, Antonio Garcia
and Ferro Chemicals entered into a Deed of Right to Repurchase8 dated 3 March 1989. Under the
repurchase contract, Ferro Chemicals stipulated to sell back the subject shares to Antonio Garcia
within 180 days from its execution or until 30 August 1989 subject to the foregoing terms:
chanRoblesvirtualLawlibrary

(1) That the consideration for the repurchase shall either be equivalent to the amount actually paid
by the buyer for the sale or the sum of P79,207,331.28, whichever is lesser, plus interest charges,
bank charges, broker's commission, transfer taxes and documentary stamp tax;

(2) Should the tender of the repurchase price be effected 90 days after 3 March 1989, the seller,
shall, in addition to the payment of the above stated amount, shall pay a surcharge equivalent to
5% over and above the actual cost of the buyer in holding the shares.
Desirous to reacquire the ownership of the subject shares, Antonio Garcia, on 12 July 1989,
notified Ferro Chemicals of his intention to exercise his right, under the repurchase deed. On 31
July 1989, Antonio Garcia reiterated his intent to reacquire the subject shares by sending another
notice to Ferro Chemicals and tendering the amount of the agreed repurchase price. On the ground
that the taxes and the interests due were not included in the consideration for repurchase price
tendered by Antonio Garcia, Ferro Chemicals refused to sell back the shares to him. Instead, Ferro
Chemicals opted to cede its rights over the subject shares to Chemphil Export and Import
Corporation (Chemphil Export) by virtue of an Agreement9 dated 26 June 1989.

First and Second Repurchase Cases

The assignment. effected by Ferro Chemicals to a third party did not deter Antonio Garcia's efforts
to recover the subject shares. On 21 August 1989, he initiated an action for Specific Performance
before the RTC of Makati City. The case, which was raffled to Branch 145 and docketed as Civil
Case No. 89-4837, sought for the enforcement of the seller's right under the repurchase agreement
and prayed that the buyer be ordered to reconvey the subject shares to him. Finding that the issues
raised involved an intra-corporate dispute cognizable by the Securities and Exchange Commission
(SEC), the RTC dismissed Civil Case No. 89-4837.

Undeterred, Antonio Garcia filed a Second Repurchase Case before the SEC which was docketed
as SEC Case No. 04303. In his Complaint, the seller cited the unjustified refusal of the buyer to
comply with the terms of the agreement and reiterated his prayer in the First Repurchase Case that
the buyer be enjoined to observe its obligation under the repurchase agreement.

Enforcement o[the First Consortium Case

With Antonio Garcia and Dynetics' failure to comply with the compromise agreement, the
Consortium Banks, on 18 July 1989, filed a Motion for Execution.10 Thus, the RTC, issued a Writ
of Execution11 on 11 August 1989, to enforce the court-approved compromise against Antonio
Garcia and Dynetics.

Pursuant to the writ of execution, the sheriff levied the 1,717,678 shares of capital stocks in
Chemical Industries that were previously attached on the strength of the 19 July 1985 RTC Order12
in the First Consortium Case. After the notice and the publication requirements were complied
with, a public auction was conducted whereby the Consortium Banks were declared as the highest
bidders as shown in the Certificate of Sale.13 chanrobleslaw

The RTC, upon application of the Consortium Banks, issued an Order14 dated 4 September 1989,
directing the Corporate Secretary of Chemical Industries to enter the sheriffs certificate of sale in
the company's stock and transfer books. In effect, the corporate secretary was enjoined to cancel
the certificates of shares of stocks under the name of Antonio Garcia and all those claiming rights
under him and issue new ones in favor of the Consortium Banks.

The Second Consortium Case

Before the corporate secretary could carry out the foregoing directive, Chemphil Export filed an
Urgent Motion15 opposing the 4 September 1989 RTC Order. Tracing back its ownership to Ferro
Chemicals, which in tum, came into ownership of the disputed shares as early as 15 July 1988, the
intervenor propounded that it has superior right as against the Consortium Banks.

On 27 September 1989, the RTC issued an Order,16 allowing the intervention. On the belief that
there is a necessity of resolving first the question of which between Chemphil Export on the one
hand, and the Consortium Banks on the other, is rightfully entitled to the ownership of the disputed
shares, the RTC recalled its 4 September 1989 Order. For Chemphil Export, the garnishment
effected by the Sheriff on 19 July 1985 is not binding on third persons because it was not recorded
on the stock and transfer book of the corporation.

The Second Consortium Case was litigated all the way up to this Court in G.R. Nos. 112438-39
and 113394. In a Decision dated 12 December 1995, the Court ruled in favor of the Consortium
Banks and declared that the attachment lien they previously acquired is valid and effective even
though it was not annotated in the corporation's stock and transfer books. The chief purpose of the
remedy of attachment is to secure a contingent lien on the defendant's property until plaintiff can,
by appropriate proceedings, obtain a judgment and have such property applied to its satisfaction.17
For this reason, the Court adjudged the Consortium Banks as the rightful owners of the disputed
shares. This decision settled with finality the Second Consortium Case.18 chanrobleslaw

The Ferro Chemicals Case

After losing the disputed shares to the Consortium Banks, Chemphil Export proceeded to demand
from Ferro Chemicals the value of the lost shares in the amount of P100,000,000.00. In payment
thereof, Ferro Chemicals ceded its fights over its chrome plant in Misamis Oriental m favor of the
former.19chanrobleslaw

In the interregnum, Consortium Banks also assigned their rights over the disputed shares to Jaime
Gonzales by executing a Deed of Assignment of Credit Without Recourse20 on 7 July 1993.

On the belief that it is aggrieved by the tum of events, Ferro Chemicals initiated several civil and
criminal cases against Chemical Industries, Antonio Garcia, Rolando Navarro, Jaime Gonzales
and a certain Atty. Virgilio Gesmundo before different courts and judicial bodies.

On 3 December 1996, Ferro Chemicals filed an action for damages before the RTC of Makati,
seeking for the recovery of the amount of the shares that was lost by Chemphil Export to the
Consortium Banks in the Second Consortium Case.

In its Complaint21 docketed as Civil Case No. 96-1964, Ferro Chemicals claimed that defendants
conspired and abetted to fraudulently induce the buyer to purchase Antonio Garcia's shares by
falsely warranting that these shares are free from liens and encumbrances. These representations
were made despite their knowledge that the subject shares were previously garnished by
Consortium Banks. Relying on defendants' warranty, Ferro Chemicals parted with the amount of
P35,462,868.69 as payment for those shares only to lose the said shares to prior lienholders after
a protracted legal battle which reached all the way up to this Court. It was alleged that the
fraudulent scheme was perpetuated by Antonio Garcia, together with his co-defendants, Jaime
Gonzales and Rolando Navarro, who conspired with him in enticing Ferro Chemicals to purchase
the subject shares.

In refuting liability, defendants Chemical Industries and Antonio Garcia averred that there is no
truth to the claim of Ferro Chemicals that it was not made aware of the prior attachment of the
Consortium Banks. They insisted that, all the outstanding claims against the subject shares, were
fully disclosed to Ferro Chemicals' President, Ramon Garcia, during the negotiation of the sale
which took almost a year before the parties finally decided to sign the transfer deed. While the
subject lien was not mentioned in the purchase agreement, Ramon Garcia, however, was wholly
apprised of the status of the encumbrance who went to the extent of inserting the "reimbursement
clause" and "the obligation to defend the sale clause" in the agreement in order to protect Ferro
Chemicals' rights in the event that prior lienholders will exercise their right over the subject
properties. The reason why the said lien was not expressly stated, defendants argued, was because
at the time the contract was perfected, the First Consortium Case was ordered dismissed by the
RTC.22 chanrobleslaw

To expose the frailty of the case, defendants Chemical Industries and Antonio Garcia punctuated
Ferro Chemical's unjustified refusal to sell back the shares to Antonio Garcia and the latter's
unrelenting efforts to reacquire the shares at the price stipulated in the Deed of Right to
Repurchase. It was postulated that had it been the intention of the defendants to deprive plaintiff
of the subject shares, an offer to repurchase made in good faith, coupled with the tender of the
agreed consideration, would not have been made.23 chanrobleslaw

By its obstinate refusal to divest its ownership over the shares, it was argued that plaintiff obviously
chose to profit from the shares even at the risk of losing it to third person·s. After it was finally
divested of its right to receive dividends, defendants pointed out, Ferro Chemicals turned to
Antonio Garcia for the value of the lost shares trumpeting all sorts of specious claims against him
and other defendants.24chanrobleslaw

For his part, defendant Jaime Gonzales claimed that he is not a party to the agreement which was
merely between the brothers Ramon Garcia and Antonio Garcia and their respective corporations,
Ferro Chemicals and Chemical Industries.25 Contrary to the claim of Ferro Chemicals, Jaime
cralawred

Gonzales maintained that Ramon Garcia was well aware of the levy of Consortium Banks against
the shares of Antonio Garcia as this issue was fully discussed to him in the presence of Jaime
Gonzales during the negotiation of the agreement. He invited the attention of the trial court to the
peculiar provisions in the transfer deed which stipulates "the seller undertook to defend the validity
of the sale and defray the cost of litigation and reimburse the buyer of the payments made should
the sale be invalidated' that were inserted for the precise reason that the parties wanted to protect
the interest of Ferro Chemicals from the claims of the Consortium Banks. In any case, Jaime
Gonzales claimed that there is no proof that he conspired with his co-defendants to carry out the
sinister design alleged by the plaintiff.26 chanrobleslaw

Defendant Rolando Navarro also denied liability by pointing out that he was neither a party nor a
privy to the contract in question and his participation in the transaction was limited to his signing
of the deed as an instrumental witness thereof. It was Atty. Virgilio Gesmundo who was consulted
by Antonio Garcia during the negotiation of the agreement and was the one who also prepared the
draft of the contract in accordance with the terms agreed upon by parties. Not being a party nor a
privy, Rolando Navarro posited that he was not in a position to make any representation or
warranty with respect to the subject shares.

After the Pre-Trial Conference, trial on the merits ensued. During the trial, parties adduced their
respective testimonial and documentary evidence to support their case.

The RTC Decision

On 4 September 2000, the RTC rendered a Decision27 in favor of Ferro Chemicals and found
Chemical Industries, Antonio Garcia, Jaime Gonzales and Rolando Navarro solidarily liable for
the total amount of P269,355,537.41, representing the value ofthe lost shares, costs of litigation,
attorney's fees and exemplary damages.

In finding Antonio Garcia liable, the RTC harbored the belief that no reasonable businessman
would assume the risk of buying the shares for P-79,207,331.28 and then end up answering
liabilities to its prior lienholders in the amount of P145,000,000.00. To find flawed Antonio
Garcia's defense, the court a quo went on to declare that it would be an unwise business decision
for Ferro Chemicals to purchase shares of stocks that were already attached to answer for
contingent claims, viz:
chanRoblesvirtualLawlibrary

"Verily, Antonio Garcia has more reason not to disclose the lien/claim of the consortium since the
consummation of the sale is more to his benefit. Ramon Garcia's testimony that Antonio Garcia's
[Chemical Industries] shares which have been garnished by [Security Bank] have been the subject
of attempts by the latter to ell the same at public auction which will result in its disposal at much
lower price as is always the case in such sales, and acquisition thereof by the bank itself, an adverse
party is undisputed. xxx.

xxxx

In fine, Antonio Garcia entered into an agreement with [Ferro Chemicals] for the sale and purchase
of his [Chemical Industries] shares, among others, covered by Deed of Absolute Sale and Purchase
of Shares of Stock. He falsely represented and warranted that the same is free from all liens and
encumbrances except that of [Security Bank] and [Insular Bank], despite his knowledge of the lien
of the consortium. He, therefore, concealed [the] said lien from [Ferro Chemicals]. The [Chemical
Industries] shares were subsequently lost when said shares were executed and sold at public
auction to satisfy Antonio Garcia's liability with the consortium, the ownership of the latter having
been declared by the Supreme Court."28

After having found that Antonio Garcia violated the terms of the purchase agreement by falsely
representing to Ferro Chemicals that the subject shares were free from liens and encumbrances
other than the ones mentioned in the agreement, the trial court found him liable under Article 1170
of the New Civil Code which states that "those who in the performance of their obligations are
guilty of fraud, negligence or delay, and those who in any manner contravene the tenor thereof,
are liable for damages."

With respect to acts imputed against Jaime Gonzales and Rolando Navarro, the RTC found that
their conduct prior to, during and subsequent to the execution of the contract reflected a common
design to aide Antonio Garcia to evade his contractual obligations with Ferro Chemicals. In effect,
the lower court found Jaime Gonzales and Rolando Navarro liable for tortious interference for
having perpetrated acts which are akin to the scenario wherein third persons induce a party to
renege on or violate his undertaking under the contract warranting relief therefrom. The RTC
decreed that these acts of Jaime Gonzales and Rolando Navarro are indicative of their scheme to
aide Antonio Garcia unjustly deprive Ferro Chemicals of its purchased shares, to wit:
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"Defendant Navarro is now estopped from disclaiming his active participation in the transaction
involving the sale of Antonio Garcia's shares to [Ferro Chemicals]. The Court believes that he
showed the stock and transfer book of [Chemical Industries] to Ramon Garcia confident that the
garnishment of the corporation will not be revealed because as corporate secretary who had the
duty to annotate the garnishment he did not respond to the call obviously because he was protecting
the interest of Antonio Garcia whom he had been assisting regarding the former's shares and/or
disposition thereof. Worse, defendant Navarro even cancelled the certificate of shares in the name
of Antonio Garcia and issued new ones to [Ferro Chemicals]. This was followed by the issuance
of new certificates of shares to [Chemphil Export]. What cannot be explained is the fact that he
continuously did not record the consortium's garnishment despite being aware that the interests of
Antonio Garcia over his [Chemical Industries] shares was already being transferred to third parties,
whose interests are definitely affected.

Likewise, defendant Gonzales is also estopped from denying his participation in the transaction
involving the sale of Antonio Garcia's [Chemical Industries] shares to [Ferro Chemicals] after
previously admitting unconditionally his participation in his Affidavit of 30 May 1990. His
subsequent qualification of such participation is unavailing. In fact, defendant Gonzales' interest
being intertwined with that of Antonio Garcia personally, in business and in matters regarding the
subject [Chemical Industries] shares of the latter is an understatement- he is a financial officer and
[a] business associate of Antonio Garcia; he was also [an] attorney-in-fact of Antonio Garcia in
negotiating and entering into a compromise agreement with the consortium; and the subject
[Chemical Industries] shares of Antonio Garcia were ultimately assigned [']to his name['] by the
said consortium."29

As to defendant Chemical Industries, the RTC made the corporation accountable for the acts of its
Corporate Secretary, Rolando Navarro, which were carried out to the damage and prejudice of
Ferro Chemicals.

Having laid the individual participation of each defendant to defraud the plaintiff, the RTC then
found them jointly and severally liable for the purchase price of the subject shares, cost of
litigation, attorney's fees and exemplary damages, viz:
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"WHEREFORE, premises above considered, and [Ferro Chemicals] having duly established its
claim, judgement is hereby rendered in favor of [Ferro Chemicals] and as against [Chemical
Industries, Antonio Garcia, Jaime Gonzales and Rolando Navarro], who are hereby ordered to pay
[Ferro Chemicals], jointly and severally, as follows:
chanRoblesvirtualLawlibrary
(1) P256,255,537.41, which is the value of the lost shares minus the balance of the purchase price;

(2) P12,000,000.00, which is the cost of suit and expenses of litigation in the case against the
consortium and the instant case;

(3) P100,000.000 as exemplary damages[;]

(4) P1,000,000.00 plus additional 10% of the value of the shares as attorney's fees.
SO ORDERED."30 chanroblesvirtuallawlibrary

The Court of Appeals Decision

On 3 March 2004, the CA rendered a Decision affirming with modification the RTC Decision.
Finding no sufficient evidence on record that Rolando Navarro actively participated in the fraud
perpetrated by Antonio Garcia against Ferro Chemicals, the CA discharged him from liability.
Underlying the ruling was the finding that Rolando Navarro's participation was limited to his
failure to disclose the existence of lien in favor of Consortium Banks without any showing that he
subsequently "abetted, actively participated or connived" with Antonio Garcia in breaching the
latter's obligation under the agreement. Being a corporation with a personality separate and distinct
from its officers and members, the CA held that Chemical Industries could not be held liable for
the acts of the latter. Finally, the CA struck down the grant of "attorney's fees in the sum of
P1,000,000.00 plus 10% of the value of the shares" for being reasonable and excessive and deleted
the grant for reimbursement of litigation expenses for lack of proof.

In a Resolution dated 17 May 2005, the CA denied the Motions for Partial Reconsideration
separately filed by Ferro Chemicals, Antonio Garcia and Jaime Gonzales for lack of merit.

The Petitions Before This Court

From the foregoing CA Decision and Resolution arose three separate Petitions for Review n
Certiorari: (1) G.R. No. 168134. Ferro Chemicals, Inc., v. Antonio M. Garcia, Rolando P.
Navarro, Jaime Y. Gonzales and Chemical Industries of the Philippines, Inc.; (2) G.R. No. 168183,
Jaime Y. Gonzales v. Hon. Court of Appeals and Ferro Chemicals, Inc.; and (3) G.R. No. 168196,
Antonio M. Garcia v. Ferro Chemicals, Inc. For identity of the parties and similarity of the issues
involved, the Court directed the consolidation of G.R. Nos. 168196, 168134 and 168183.

G.R. No. 168134

This is a petition filed by Ferro Chemicals assailing the CA ruling which discharged Rolando
Navarro and Chemical Industries from liability. Ferro Chemicals likewise questioned in this
petition the deletion of the reimbursement for the. litigation costs expended by Chemphil Export
in the Second Consortium Case in the amount of P12,000,000.00, and, the attorney's fees in the
sum of P1,000,000.00 with the additional 10% of the value of the shares which were previously
awarded by the RTC.

G.R. No. 168183

In G.R. No. 168183, Jaime Gonzales controverts the CA's finding which adjudged him liable for
tortious interference under Article 1314 of the New Civil Code on account of participation in the
negotiation of sale of the shares and his eventual acquisition of the same shares from the
Consortium Banks.

G.R. No. 168196

For his part, Antonio Garcia initiated G.R. No. 168196 seeking the nullity of the CA Decision and
Resolution finding him guilty of fraud in the performance of his obligations and in failing to
comply with his obligation to defend the sale. He questions the failure of the CA to deduct the
dividends earned by the subject shares in its computation of the value of the shares lost including
the value of Alabang Country Club, Inc. and Manila Polo Club, Inc. shares which were both
transferred by Antonio Garcia to Ferro Chemicals thereby allowing Ferro Chemicals to unjustly
enrich itself at his expense.

The Issues

I.

THE HONORABLE COURT OF APPEALS GRAVELY AND PALPABLY ERRED IN

EXONERATING RESPONDENT ROLANDO NAVARRO FROM LIABILITY DESPITE HIS
PARtiCIPATION IN THE SINISTER PLAN TO DECEIVE [FERRO CHEMICALS]. HIS
FAILURE TO COMPLY WITH HIS DUTIES AS CORPORATE SECRETARY AND
INTERFERING AND OBSTRUCTING THE FAITHFUL FULFILLMENT OF [ANTONIO
GARCIA'S] OBLIGATION UNDER THE CONTRACT BETWEEN [FERRO CHEMICALS]
AND [ANTONIO GARCIA];

II.

THE HONORABLE COURT OF APPEALS GRAVELY AND PALPABLY ERRED IN

EXONERATING [CHEMICAL INDUSTRIES] FROM LIABILITY DESPITE THE TORTIOUS
ACTS OF ITS RESPONSIBLE OFFICERS;

III.

THE HONORABLE COURT OF APPEALS GRAVELY AND PALPABLY ERRED IN

RULING THAT THERE IS NO EVIDENCE THAT [FERRO CHEMICALS] ASSUMED THE
EXPENSES OF LITIGATION IN A CASE AGAINST THE CONSORTIUM BANKS IN THE
AMOUNT OF P12,000,000.00;

IV.

THE HONORABLE COURT OF APPEALS GRAVELY AND PALPABLY ERRED IN

DISREGARDING THE UNCONTROVERTED EVIDENCE AND LEGAL JUSTIFICATION
FOR THE AWARD OF P1,000,000.00 PLUS THE ADDITIONAL 10% OF THE VALUE OF
THE SHARES AS ATTORNEY'S FEES IN FAVOR OF THE PETITIONERS.
V.

THE HONORABLE COURT OF APPEALS GRAVELY AND PALPABLY ERRED IN

FINDING JAIME GONZALES LIABLE FOR TORTIOUS INTERFERENCE FOR HIS
PARTICIPATION IN THE NEGOTIATION OF THE PURCHASE AGREEMENT AND IN
EVENTUALLY ACQUIRING THE SUBJECT SHARES FROM THE CONSORTIUM BANKS;

VI.

THE HONORABLE COURT OF APPEALS GRAVELY AND PALPABLY ERRED IN

FINDING ANTONIO GARCIA GUILTY OF FRAUD IN THE PERFORMANCE OF HIS
OBLIGATION UNDER THE PURCHASE AGREEMENT IN FAILING TO COMPLY WITH
HIS OBLIGATION TO DEFEND THE SALE UNDER THE SAID CONTRACT;

VII.

THE HONORABLE COURT OF APPEALS GRAVELY AND PALPABLY ERRED IN

FAILING TO DEDUCT THE DIVIDENDS EARNED BY THE SUBJECT SHARES
INCLUDING THE VALUE OF THE ALABANG GOLF CLUB AND MANILA POLO CLUB
SHARES IN ITS COMPUTATION OF THE VALUE OF FERRO CHEMICAL'S LOSS.

The Court's Ruling

On the liability of
Antonio Garcia for fraud and
breach of obligation

Resonating the RTC, the CA arrived at the conclusion that Antonio Garcia is guilty of fraud in the
performance of his obligation, but the CA made its independent judgment pinning Antonio Garcia
on the basis of the following assumptions:
chanRoblesvirtualLawlibrary

1. That Ferro Chemicals would not have entered into the sale had it known that the
subject shares were subject of the Consortium Banks' lien as to do so would be
tantamount to "committing financial suicide;"

2. That if it were true that Ferro Chemicals was apprised of the pendency of the claims
in question, that fact would have been embodied in the provisions of the contract.
Under the Best Evidence Rule, defendants cannot be permitted to present evidence
aliunde;

3. That defendants cannot impute negligence to Ramon Garcia for failing to uncover
the subject attachment prior to the execution of the sale as it is the obligation of
Antonio Garcia to fully disclose in good faith all existing claims against the
disputed shares.
The CA endeavored to tie all the loose ends by declaring that Antonio Garcia's liability was hinged
primarily not on his misrepresentations with respect to the sale contract, but on alleged fraudulent
acts he perpetrated in connection with the First Consortium Case. For the CA, his acts subsequent
to the consummation of the sale were not at arm's length and jeopardized the position of Ferro
Chemicals in relation to Chemical Industries' shares. All these circumstances, taken together, led
the CA to its conclusion that Antonio Garcia breached his obligation under the circumstances, to
wit:
chanRoblesvirtualLawlibrary

1. By recognizing his liability with the banks in the Compromise Agreement, Antonio
Garcia placed the subject shares within the reach of his obligors knowing that these
shares were previously attached to answer his obligation with them;

2. By failing to move for the lifting of the attachment effected by the Consortium
Banks over the subject shares and to offer his other properties as substitutes after
he sold these shares to Ferro Chemicals;

3. By allowing the execution on sale to proceed without opposition on his part and by
refusing to reimburse Ferro Chemicals of the amount of litigation expenses it
incurred in its effort to defend its ownership of the subject shares;

The appellate court, in other words, saw that Antonio Garcia, all throughout the First Consortium
Case, maintained a lackadaisical stance which paved the way for the Consortium Banks'
enforcement of garnishment and the consequent sale of the attached shares at the public auction to
the damage and prejudice of Ferro Chemicals.

We are not convinced.

TheCA's lament, in every tum, that Antonio Garcia was guilty of bad faith from the inception of
the sale contract until his compromise with the Consortium Banks is inexorably rebuked by the
following chronology of factual incidents that governs the relationship of Antonio Garcia and
Ferro Chemicals:
chanRoblesvirtualLawlibrary

(1) On 15 July 1988, Antonio Garcia and Ferro Chemicals entered into a Deed of Absolute Sale
and Purchase of Shares of Stock;31 chanrobleslaw

(2) On 17 January 1989, Antonio Garcia and Consortium Banks entered into a Compromise
Agreement32 with respect to the First Consortium Case;

(3) On 3 March 1989, Antonio Garcia and Ferro Chemicals entered into a Deed of Right to
Repurchase;33 chanrobleslaw

(4) On 12 July 1989, Antonio Garcia notified Ferro Chemicals of his intention to exercise his
right to buy back the sold shares under the repurchase deed;
(5) On 31 July 1989, Antonio Garcia reiterated his intent to reacquire the subject shares by
sending another notice to Ferro Chemicals coupled with the tender of the amount of the
agreed repurchase price;

(6) On 11 August 1989, the RTC of Makati, Branch 145, issued a Writ of Execution34 to enforce
the Judgment by Compromise in the First Consortium Case;

(7) On 22 August 1989, the Consortium Banks were declared as the highest bidders of the levied
shares at the public auction;35 chanrobleslaw

(8) On 26 September 1989, Ferro Chemicals (thru Chemphil Export) successor-in-interest,

opposed the consolidation of ownership of the subject shares in the names of the Consortium
Banks;36 chanrobleslaw

(9) From 26 September 1989 up to 12 December 1995, the Second Consortium Case was under
litigation;

(10) On 1 April 1996, Ferro Chemicals lost the Second Consortium Case with finality;37 chanrobleslaw

(11) On 3 December 1996, Ferro Chemicals initiated the Ferro Chemicals Case for the payment of
damages based on fraud.38 (Emphasis supplied)

While the factual milieu of this case is seemingly mazy because of the number of cases and legal
issues that stemmed from a simple transfer of shares contract, there are two clearly crucial
evidentiary matters that were without warrant overlooked by the lower tribunals: (I) the execution
by Ferro Chemicals and Antonio Garcia of the Deed of Right to Repurchase on 3 March 1989;
and (2) that on two separate occasions, Antonio Garcia conveyed in writing his intent to buy
back the shares in accordance with the terms of the repurchase deed. These pieces of evidence, if
appreciated in light of the allegation of fraud, would overthrow the very foundation upon which
the Ferro Chemicals rested its case.

Notably, Antonio Garcia's right to repurchase the subject shares, his attempts to exercise that right
and Ferro Chemicals' refusal to honor it, as well as the legal actions taken by Antonio Garcia
against Ferro Chemicals, were duly pleaded as affirmative allegations in Antonio Garcia's
Answer,39 in Civil Case No. 96-1964 to wit:
chanRoblesvirtualLawlibrary

"3.7 On 3 March 1989, [Antonio Garcia] and [Ferro Chemicals] entered into a Deed of Right to
Repurchase (the "Repurchase Deed", hereafter) covering the shares subject matter of the Deed of
Sale, including the CIP Shares, confirming earlier verbal agreement between the brothers, Ramon
M. Garcia and [Antonio Garcia], that the latter could repurchase the said shares from [Ferro
Chemicals]. Under the Repurchase Deed, defendant Garcia had until 30 August 1989 to exercise
his right to repurchase the shares.
3.7.1 On July 1989, or long before the expiration of his right to repurchase the shares, Antonio
Garcia informed [Ferro Chemicals] that it was going to exercise said right. This notice was
reiterated on 31 July 1989 with a tender of the repurchase price as stipulated in the Repurchase
Deed;
3.7.2 [Ferro Chemicals] refused to honor [Antonio Garcia's] right under the Repurchase Deed
alleging that the amount tendered was insufficient in that interest for one day and the broker's
commission were not included in said amount. [Antonio Garcia] offered to pay the interest for one
day but refused to pay the broker's commission because the sale of the shares was not coursed
through the stock exchange. [Ferro Chemicals] still refused to honor [Antonio Garcia's] right under
the Repurchase Agreement. Worse, [Ferro Chemicals] assigned its rights over the [Chemical
Industries] Shares to [Chemphil Export] supposedly on 26 June 1989;

3.7.3 Accordingly, on 21 August 1989; Antonio Garcia filed a complaint for specific performance
and annulment of transfer of shares against [Ferro Chemicals] and [Chemphil Export] entitled
[']Antonio M. Garcia v. Ferro Chemicals,,Inc., et al.,['] docketed as Civil Case No. 89-4837, with
the Regional Trial Court of Makati, which was raffled to Branch 145 (the "First Repurchase Case",
hereafter). [Antonio Garcia] sought, among other reliefs, the reconveyance of the shares, including
the [Chemical Industries] Shares from [Ferro Chemicals] and [Chemphil Export]. This case was,
however, ordered dismissed by the Court of Appeals based on its finding that the Repurchase Case
involved an intra-corporate dispute over which the Securities and Exchange Commission ("SEC")
has exclusive jurisdiction;

3.7.4 Pursuant to the Court of Appeals decision, [Antonio Garcia], on 26 August 1992, filed with
the SEC a complaint for specific performance and/or rescission, with damages against Ramon M.
Garcia, [Chemphil Export] and [Ferro Chemicals]', docketed as SEC Case No. 04303 (the "Second
Repurchase Case", hereafter). In the Second Repurchase Case, [Antonio Garcia] again sought,
among other relief, the reconveyance of the [Chemical Industries] shares. As in the First
Reconveyance Case, Ramon M. Garcia, [Chemphil Export] and [Ferro Chemicals] again
vigorously opposed [Antonio Garcia's] action to recover the shares subject matter of the Deed of
Sale, including the [Chemical Industries] Shares. The Second Repurchase Case is still pending
with the SEC."40

Antonio Garcia attached a copy of the Deed of Right to Repurchase as Annex 1 of his Answer and
argued, as one of his affirmative defenses, that Ferro Chemicals does not have a cause of action
against him because:
chanRoblesvirtualLawlibrary

"4.1.3 Despite its full knowledge of the Bank Consortium's claim on the [Chemical Industries]
shares, Ferro Chemicals refused and opposed all offers and efforts of Antonio Garcia to repurchase
the [Chemical Industries] shares."41

Harping on the infallibility of the lower tribunals' factual findings, Ferro Chemicals impresses
upon this Court that Antonio Garcia, driven by the desire to profit from the disposal of his shares
and to satisfy his obligations with his creditors at the same time, employed deceptive schemes to
lure Ramon Garcia to purchase the subject shares by concealing the lien of the Consortium Banks.
The non-disclosure of the subject lien, Ferro Chemicals claimed and the RTC and CA believed, is
constitutive of an actionable fraud warranting the award of damages. In no uncertain terms both
tribunals pronounced that the non-mention of the lien in the transfer contract was intentionally and
deceptively done by Antonio Garcia in bad faith and with intent to defraud. For the lower courts,
the testimonial evidence sought to be introduced by Antonio Garcia, which modifies the express
terms of the purchase agreement to suggest that the subject lien was purportedly contemplated by
the parties in the contract, is not permissible under the Parole Evidence Rule.

We do not agree.

Fraud, in its general sense, is deemed to comprise anything calculated to deceive, including all
acts, omissions, and concealment involving a breach of legal or equitable duty, trust or confidence
justly reposed, resulting in the damage to another, or by which an undue and unconscionable
advantage is taken of another. It is a question of fact and the circumstances constituting it must be
alleged and proved in the court below.42chanrobleslaw

In the case of Tankeh v. DBP, et al.,43 this Court reviewed the doctrines of fraud in relation to
contractual relations and the quantum of proof necessary to prove fraud and establish liability
therefor:
chanRoblesvirtualLawlibrary

"Fraud is defined in Article 1338 of the Civil Code as: Chan RoblesV irtualawlibrary

x x x fraud when, through insidious words or machinations of one of the contracting parties, the
other is induced to enter into contract which, without them, he would not have agreed to.
This is followed by the articles which provide legal examples and illustrations of fraud.

Art. 1339. Failure to disclose facts, when there is a duty to reveal them, as when the parties are
bound by confidential relations, constitutes fraud. (n)

Art. 1340. The usual exaggerations in trade, when the other party had an opportunity to know the
facts, are not in themselves fraudulent. (n)

Art. 1341. . A mere expression of an opm10n does not signify fraud, unless made by an expert and
the other party has relied on the former's special knowledge. (n)

Art. 1342. Misrepresentation by a third person does not vitiate consent, unless such
misrepresentation has created substantial mistake and the same is mutual. '(n)

Art. 1343. Misrepresentation made in good faith 1s not fraudulent but may constitute error. (n)

"The distinction between fraud as a ground for rendering a contract voidable or as basis for an
award of damages is provided in Article 1344:
chanRoblesvirtualLawlibrary

In order that fraud may make a contract voidable, it should be serious and should not have been
employed by both contracting parties.

Incidental fraud only obliges the person employing it to pay damages. (1270)

"There are two types of fraud contemplated in the performance of contracts: dolo incidente or
incidental fraud and dolo causante or fraud serious enough to render a contract voidable.
In Geraldez v. Court of Appeals, this Court held that: ChanRob lesVirtualawlibrary

This fraud or dolo which is present or employed at the time of birth or perfection of a contract may
either be dolo causante or dolo incidente. The first, or causal fraud referred to in Article 1338, are
those deceptions or misrepresentations of a serious character employed by one party and without
which the other party would not have entered into the contract. Dolo incidente, or incidental fraud
which is referred to in Article 1344, are those which are not serious in character and without which
the other party would still have entered into the contract. Dolo causante determines or is the
essential cause of the consent, while dolo incidente refers only to some particular or accident of
the obligation. The effects of dolo causante are the nullity of the contract and the indemnification
of damages, and dolo incidente also obliges the person employing it to pay damages..

"In Solidbank Corporation v. Mindanao Ferroalloy Corporation, et al., this Court elaborated on
the distinction between dolo causante and dolo incidente:
chanRoblesvirtualLawlibrary

Fraud refers to all kinds of deception -- whether through insidious machination, manipulation,
concealment or misrepresentation -- that would lead an ordinarily prudent person into error after
taking the circumstances into account. In contracts, a fraud known as dolo causante or causal fraud
is basically a deception used by one party prior to or simultaneous with the contract, in order to
secure the consent of the other. Needless to say, the deceit employed must be serious. In
contradistinction, only some particular or accident of the obligation is referred to by incidental
fraud or dolo incidente, or that which is not serious in character and without which the other party
would have entered into the contract anyway.

"Under Article 1344, the fraud must be serious to annul or avoid a contract and render it voidable.
This fraud or deception must be so material that had it not been present, the defrauded party would
not have entered into the contract. In the recent case of Spouses Carmen S. Tongson and Jose C.
Tongson, et al., v. Emergency Pawnshop Bula, Inc., this Court provided some examples of what
constituted dolo causante or causal fraud:
chanRoblesvirtualLawlibrary

Some of the instances where this Court found the existence of causal fraud include: (1) when the
seller, who had no intention to part with her property, was "tricked into believing" that what she
signed were papers pertinent to her application for the reconstitution of her burned certificate of
title, not a deed of sale; (2) when the signature of the authorized corporate officer was forged; or
(3) when the seller was seriously ill, and died a week after signing the deed of sale raising doubts
on whether the seller could have read, or fully understood, the contents of the documents he signed
or of the consequences of his act. (Citations omitted)

"However, Article 1344 also provides that if fraud is incidental, it follows that this type of fraud is
not serious enough so as to render the original contract voidable.

"A classic example of dolo incidente is Woodhouse v. Halili. In this case, the plaintiff Charles
Woodhouse entered into a written agreement with the defendant Fortunato Halili to organize a
partnership for the bottling and distribution of soft drinks. However, the partnership did not come
into fruition, and the plaintiff filed a Complaint in order to execute the partnership. The defendant
filed a Counterclaim, alleging that the plaintiff had defrauded him because the latter was not
actually the owner of the franchise of a soft drink bottling operation. Thus, defendant sought the
nullification of the contract to enter into the partnership. This Court concluded that:
chanRoblesvirtualLawlibrary

x x x from all the foregoing x x x plaintiff did actually represent to defendant that he was the holder
of the exclusive franchise. The defendant was made to believe, and he actually believed, that
plaintiff had the exclusive franchise. x x x The record abounds with circumstances indicative that
the fact that the principal consideration, the main cause that induced defendant to enter into the
partnership. agreement with plaintiff, was the ability of plaintiff to get the exclusive franchise to
bottle and distribute for the defendant or for the partnership. x x x The defendant was, therefore,
led to the belief that plaintiff had the exclusive franchise, but that the same was to be secured for
or transferred to the partnership. The plaintiff no longer had the exclusive franchise, or the option
thereto, at the time the contract was perfected. But while he had already lost his option thereto
(when the contract was entered into), the principal obligation that he assumed or undertook was to
secure said franchise for the partnership, as the bottler and distributor for the Mission Dry
Corporation. We declare, therefore, that if he was guilty of a false representation, this was not the
causal consideration, or the principal inducement, that led plaintiff to enter into the partnership
agreement.

But, on the other hand, this supposed ownership of an exclusive franchise was actually the
consideration or price plaintiff gave in exchange for the share of 30 percent granted him in the net
profits of the partnership business. Defendant agreed to give plaintiff 30 per cent share in the net
profits because he was transferring his exclusive franchise to the partnership. x x x.

Plaintiff had never been a bottler or a chemist; he never had experience in the production or
distribution of beverages. As a matter of fact, when the bottling plant being built, all that he
suggested was about the toilet facilities for the laborers.

We conclude from the above that while the representation that plaintiff had the exclusive franchise'
did not vitiate defendant's consent to the contract, it was used by plaintiff to get from defendant a
share of 30 per cent of the net profits; in other words, by pretending that he had the exclusive
franchise and promising to transfer it to defendant, he obtained the consent of the latter to give him
(plaintiff) a big slice in the net profits. This is the dolo incidente defined in article 1270 of the
Spanish Civil Code, because it was used to get the other party's consent to a big share in the profits,
an incidental matter in the agreement.

"Thus, this Court held that the original agreement may not be declared null and void. This Court
also said that the plaintiff had been entitled to damages because of the refusal of the defendant to
enter into the partnership. However, the plaintiff was also held liable for damages to the defendant
for the misrepresentation that the former had the exclusive franchise to soft drink bottling
operations.

To summarize, if there is fraud in the performance of the contract, then this fraud will give rise to
damages. If the fraud did not compel the imputing party to give his or her consent, it may not serve
as the basis to annul the contract; which exhibits dolo causante. However, the party alleging the
existence of fraud may prove the existence of dolo incidente. This may make the party against
whom fraud is alleged liable for damages."44

Applying the foregoing precepts in this case, we find it hard to believe that Antonio Garcia, in
view of his impassioned efforts to buy back the disputed shares way before the Second Consortium
Case commenced and even after the shares were assigned already to Chemphil Export, could be
motivated by his fraudulent desire to extract money and then ease out Ferro Chemicals from its
ownership of the subject shares. The flagrancy of the Deed of the Right to Repurchase ought to
have caused the lower courts to delve into the repurchase issue since this could have very well
dispelled the fraud alleged to have attended the acts of Antonio Garcia. By disregarding the
repurchase contract and Antonio Garcia's intent in good faith to buy back the shares, the lower
tribunals fell prey into the skewed representations of Ferro Chemicals of the factual incidents of
this case. Indeed, both the contractual agreement on Antonio Garcia's right to repurchase and
Antonio Garcia's actual earnest attempts at repurchase were central to the cause of Antonio Garcia
in the proceedings below.

Though it fashioned itself as the vulnerable party, who was lured into buying shares of stocks that
later turned out to be overburdened by liens, the fact is that Ramon· Garcia is the President of
Ferro Chemicals and the brother of Antonio Garcia of Chemical Industries which, like Ferro
Chemicals, is into initiated business ventures. The transactions that Ramon and Antonio Garcia
had with each other were between brothers about their businesses. Ramon Garcia, both in buying
the subject shares from Antonio Garcia, and later on, in refusing to sell back the shares to Antonio
Garcia did so in furtherance of his interests. It would be rash judgment to say it was not so and
hold that business dealings in multimillions were done without conducting due diligence on the
subject of the contract.

Indeed, the allegation that Antonio Garcia employed fraudulent machinations to hide the subject
lien to facilitate the disposal of his shares and to lure Ferro Chemicals to part with its money is
diametrically opposed to Antonio Garcia's subsequent offers to repurchase the shares and tender
of the repurchase price. On the other hand, Ferro Chemicals' explanation that the reason why it did
not agree to the reacquisition was because the repurchase price tendered did not include the amount
of taxes and interest due,45 is flimsy and unacceptable under the circumstances. It must be pointed
out that no negotiation in good faith between. the parties as to the correct amount of taxes and
interests should be paid took place since Ferro Chemicals at the outset flatly refused the offer to
buy. As a matter of fact, Antonio Garcia was constrained to initiate two repurchase cases in his
effort to reacquire the property.

The succession of events shows that Ferro Chemical's refusal to sell back the shares to Antonio
Garcia was a calculated move by Ramon Garcia who measured the risk of losing the subject shares
to the Consortium Banks against the visible returns on the shares during the pendency of the
Consortium Bank Case. Between the time of the initial offer of Antonio Garcia to buy back the
shares on 31 July 1989' up to the finality of the Court's decision in the Second Consortium Case
on 12 December 1995, Ferro Chemicals thru Chemphil Export, profited from the Chemical
Industries' shares. It was only after it had lost the shares to the Consortium Banks by the decision
of the Court that Ferro Chemicals went back to Antonio Garcia and his co-defendants for the
enforcement of the sale contract asking for the reimbursement of the amount of the shares that was
lost. The buying and selling of stocks and the subsequent agreement on reversed activities were in
the exercise of business judgment.

Fraud has been defined to include an inducement through insidious machination. Insidious
machination refers to a deceitful scheme or plot with an evil or devious purpose. Deceit exists
where the party, with intent to deceive, conceals or omits to state material facts and, by reason of
such omission or concealment, the other party was induced to give consent that would not
otherwise have been given. These are allegations of fact that demand clear and convincing proof.
They are serious accusations that can be so conveniently and casually invoked, and that is why
they are never presumed.46 Applying the doctrines to the case at bar, a judgment on fraud requires
allegation and proof of facts and circumstances by which undue and unconscionable advantage is
taken by Antonio Garcia. Ramon Garcia failed in this regard. In contrast, the succession of
transaction between Antonio and Ramon Garcia indicated that Ramon Garcia wanted to have a
way out of his failed business decision of holding on to his shares instead of selling it back to
Antonio Garcia when he had the opportunity to do so. He saw that it was better to hold on to the
shares he bought from Antonio Garcia. The Court cannot save him from the fall that came from
his own choice.

On the liability of Rolando Navarro

and Jaime Gonzales for tortious
interference

In imputing liability to Rolando Navarro, Ferro Chemicals harps on the following acts found by
the trial court to be demonstrative of his malicious intention to interfere with the contract between
Antonio Garcia and Ferro Chemicals:
chanRoblesvirtualLawlibrary

(1) He facilitated in the execution of the Deed by showing the Stock and Transfer Book of
[Chemical Industries] to [Ferro Chemicals] thru [Ramon Garcia] to assure the latter that the
disputed shares had no lien other than those in the Stock and Transfer Book and in order to conceal
the [Consortium Bank's] lien;

(2) He, together with Atty. Virgilio Gesmundo, also drafted in the boardroom of the [Chemical
Industries] the Deed which embodied the basic terms and conditions of the sale as agreed upon by
the parties;

(3) He also signed as instrumental witness in the Deed;

(4) Upon examination of the Deed and despite knowledge of the irregularity of the sale, he, acting
as corporate secretary of [Chemical Industries], transferred the disputed shares in the name of
[Ferro Chemicals] and issued the corresponding certificates of stock;

(5) He drafted the Deed of Right to Repurchase under which [Antonio Garcia] was given the right
to redeem the shares sold to [Ferro Chemicals] within 180 days from signing of the said deed and
subject to other conditions stated therein;

(6) He, as the corporate secretary of [Chemical Industries], again made the transfer of the said
shares in the Stock and Transfer Book of [Chemical Industries] this time with respect to the
4,119,614 shares (which included the disputed shares) assigned by [Ferro Chemicals] to [Chemphil
Export].

In essence, Ferro Chemicals contends that while Rolando Navaro is not privy to the contract, his
individual acts form part of the bigger scheme to defraud the corporation.

In his Comment,47 Rolando Navarro denies liability by arguing that not being a party to the
contract, he cannot be held liable for breach thereof under Article 1311 of the New Civil Code. He
underscores that Ferro Chemical's complaint was for ·breach of contract, i.e. for failure to deliver
the clean title of the subject shares, which obligation befalls on the buyer alone. As an instrumental
witness to the deed, it is absurd to hold him liable for failure of the buyer to make good his warranty
under the agreement. Invoking that only absolute transfers of shares of stocks are required to be
recorded in the corporation's stock and transfer book, Rolando Navarro insists that he cannot be
held liable for failing to record the claim of the Consortium Banks since it is merely an attachment.
Finally, he asserts that none of the conduct imputed against him constitute tortious interference
under Article 1314 of the New Civil Code because these acts, i.e., transfer the certificate of title of
the said shares and preparing a draft of contracts, were mainly part of his primary duty as the
Corporate Secretary of the Chemical Industries.

We affirm the ruling of the Court of Appeals in favor of Rolando Navarro.

The basic principle of relativity of contracts is that contracts can only bind the parties who entered
into it, and cannot favor or prejudice a third person, even if he is aware of such contract and has
acted with knowledge thereof.48 Where there is no privity of contract, there is likewise no
obligation or liability to speak about.49 Article 1311 of the New Civil Code provides:
chanRoblesvirtualLawlibrary

Art. 1311. Contracts take effect only between the parties, their assigns and heirs, except in case
where the rights and obligations arising from the contract are not transmissible by their nature, or
by stipulation or by provision of law. The heir is not liable beyond the value of the property he
received from the decedent.

The obligation of contracts is limited to the parties making them and, ordinarily, only those who
are parties to contracts are liable for their breach. Parties to a contract cannot thereby impose any
liability on one who, under its terms, is a stranger to the contract, and, in any event, in order to
bind a third person contractually, an expression of assent by such person is necessary.50 chanrobleslaw

Under Article 1314 of the New Civil Code, however, any third person who induces another to
violate .his contract shall be liable for damages to the other contracting party. The tort recognized
in that provision is known as interference with contractual relations. The interference is penalized
because it violates the property right of a party in a contract to reap the benefits that should result
therefrom.51 chanrobleslaw

The Court, in the case of So Ping Bun v. Court of Appeals, et al.,52 laid down the elements of
tortious interference with contractual relations: (1) existence of a valid contract; (2) knowledge on
the part of the third person of the existence of the contract and (3) interference on the part of the
third person without legal justification or excuse.53
chanrobleslaw

A duty which the law of torts is concerned with is respect for property of others, and cause of
action ex delicto may be predicated by an unlawful interference by any person of the enjoyment of
the other of his private property. This may pertain to a situation where a third person induces a
person to renege on or violate his undertaking under a contract.54 chanrobleslaw

A perusal of the. allegations proffered against Rolando Navarro would show that none of his
conduct prior or even subsequent to the execution of the subject deed, which was primarily done
in furtherance of his duties as corporate secretary, constitutes tortious interference. To imply that
by preparing a draft of a contract, signing as instrumental witness of the deed and recording of
transfer of shares on the corporate books, Rolando Navarro can now be held liable for tortious
interference, is incredulous. Nothing from his acts as found by the trial court, which were clearly
carried out within the bounds of his office devoid of malice and bad faith, would suggest
involvement in the sinister design to deprive Ferro Chemicals of its property right over the disputed
shares. As the Corporate Secretary of Chemical Industries, Rolando Navarro is under obligation
to record in the stock and transfer book any and all alienation involving the shares of stocks of the
corporation as mandated by Section 74 of the Corporation Code which states:
chanRoblesvirtualLawlibrary

Sec. 74. Books to he kept; stock transfer agent. x x x

x x x x

Stock corporations must also keep a book to be known as the "stock and transfer book," in which
must be kept a record of all stocks in the names of the stockholders alphabetically arranged; the
installments paid and unpaid on all stock for which subscription has been made, and the date of
payment of any installment; a statement of every alienation, sale or transfer of stock made the date
thereof, and by and to whom made; and such other entries as the by-laws may prescribe. The stock
and transfer book shall be kept in the principal office of the corporation or in the office of its stock
transfer agent and shall be open for inspection by any director or stockholder of the corporation at
reasonable hours on business days.

Clearly, the transfer of the certificates of stocks covering the subject shares in favor of Ferro
Chemicals effected on the strength of a valid deed of sale cannot be taken as an actionable tortious
conduct, whether such action is viewed in isolation or in connection with conduct of his co-
defendants. The Court, in So Ping Bun v. Court of Appeals, et al.,55 defined what constitutes an
unlawful interference with contract:
chanRoblesvirtualLawlibrary

"The foregoing issues involve, essentially, the correct interpretation of the applicable law on
tortuous conduct, particularly unlawful interference with contract. We have to begin, obviously,
with certain fundamental principles on torts and damages.

Damage is the loss, hurt, or harm which results from injury, and damages are the recompense or
compensation awarded for the damage suffered. One becomes liable in an action for damages for
a nontrespassory invasion of another's interest in the private use and enjoyment of asset if (a) the
other has property rights and privileges with respect to the use or enjoyment interfered with, (b)
the invasion is substantial, (c) the defendant's conduct is a legal cause of the invasion, and (d) the
invasion is either intentional and unreasonable or unintentional and actionable under general
negligence rules."

For sure, Rolando Navarro has transgressed no right of Ferro Chemicals while performing his
obligation as an officer of Chemical Industries. There is absolutely no proof other than the weak
indicia which, the plaintiff contends, show the existence thereof.. Even if we lend credence to the
graver allegation that Rolando Navarro showed the stock and transfer books of the corporation to
Ramon Garcia which bore no record of the Consortium Banks' lien, still he could not be faulted in
the absence of showing that he acted in bad faith with the intention to lure the buyer to believe that
the subject shares were lien-free. As the Corporate Secretary of Chemical Industries, he is under
no obligation to record the attachment of the Consortium Banks, not being a transfer of ownership
but merely a burden on the title of the owner. Only absolute transfers of shares of stock are
required to be recorded in the corporation's stock and transfer book in order to have "force
and effect as a ainst third persons."56 In Chemphil Export and Import Corporation v. Court of
Appeals, et al.,57 the Court enunciated the rule that attachments of shares are not considered
"transfer" and need not be recorded in the corporations' stock and transfer book, viz:
chanRoblesvirtualLawlibrary

"'Are attachments of shares of stock included in the term "transfer" as provided in Sec. 63
of the Corporation Code? We rule in the negative. As succinctly declared in the case of
Monserrat v. Ceron, chattel mortgage over shares of stock need not be registered in the
corporation's stock and transfer book inasmuch as chattel mortgage over shares of stock does not
involve a "transfer of shares," and that only absolute transfers of shares of stock are required to be
recorded in the corporation's stock and transfer book in order to have "force and effect as against
third persons."

xxxx

"A 'transfer' is the act by which the owner of a thing delivers it to another with the intent of passing
the rights which he has in it to the latter, and a chattel mortgage is not within the meaning of such
term.

xxxx

Although the Monserrat case refers to a chattel mortgage over shares of stock, the same may
be applied to the attachment of the disputed shares of stock in the present controversy since
an attachment does not constitute an absolute conveyance of property but is primarily used
as a means "to seize the debtor's property in order to secure the debt or claim of the creditor
in the event that a judgment is rendered."

Known commentators on the Corporation Code expound, thus:

chanRoblesvirtualLawlibrary xxxx

Shares of stock being personal property, may be the subject matter of pledge and chattel mortgage.
Such collateral transfers are however not covered by the registration requirement of Section 63,
since our Supreme Court has held that such provision applies only to absolute transfers thus, the
registration in the corporate books of pledges and chattel mortgages of share cannot have any legal
effect.

xxxx

The requirement that the transfer shall be recorded in the books of the corporation to be
valid as against third persons has reference only to absolute transfers or absolute conveyance
of the ownership or title to a share."58 [Emphasis supplied]

Veritably, the facts, statutes and jurisprudence do not support Ferro Chemical's imputation of fraud
to Rolando Navarro. The accusations of fraud directed to him upon which Ferro Chemicals rests
its case are unsubstantiated, no direct evidence of it exists; it was clutching at straws pointing out
to a remote participation of the defendant who carried out the imputed acts within the bounds of
his office. Fraud cannot be presumed but must be proved by clear and convincing evidence.59
Whoever alleges fraud affecting a transaction must substantiate his allegation, because a person is
always presumed to take ordinary care of his concerns, and private transactions are similarly
presumed to have been fair and regular.60 To be remembered is that mere allegation is definitely
not evidence; hence, it must be proved by sufficient evidence.61chanrobleslaw

Be that as it may, undisputed is the fact that Rolando Navarro derived no financial gains from the
breach of Antonio Garcias obligation to Ferro Chemicals watering down the allusion that his acts
were impelled by economic motive.

Even if Jaime ,Gonzales, on other hand, eventually became the assignee of the subject shares, he
cannot, for that reason alone, be held liable for tortious interference as the elements of this act are
clearly wanting in this case. Jaime Gonzales did nothing more than act as instrumental witness of
the deed of sale and give Antonio Garcia financial advice on the matter. None of these acts is
actionable tort.

In any case, the allegations against Rolando Navarro and Jaime Gonzales have no more leg to
stand on as we have ruled that fraud never attended the transaction and that Ferro Chen1icals
entered the contract subject of this case with the full knowledge and discretion of the existence of
any and all liens.

On the liability of Chemical Industries

for the acts of its responsible officers

On the premise that Chemical Industries afforded plenary powers to its officers to make certain
representations to third persons, Ferro Chemicals faults the ruling of the appellate court absolving
Chemical Industries from liability by arguing that the corporation is liable for the tortious and
wrongful acts of its corporate officers, Antonio Garcia and Rolando Navarro, under the principle
of agency.

Chemical Industries, however, argues otherwise. It submits that Ferro Chemical's reliance on the
doctrine of apparent authority is misplaced. Citing the findings of the appellate court, it posits that
the sale of Antonio Garcia's shares was a purely personal transaction between him and Ferro
Chemicals which requires no "express direction or authority" from Chemical Industries.

Having settled that Rolando Navarro committed no tortious acts generative of liability, we now
limit our discussion on whether Chemical Industries can be held liable supposedly for the fraud
and breach of contract perpetrated by Antonio Garcia.

We rule in the negative.

A corporation, upon coming to existence, is invested by law with a personality separate and distinct
from those of the persons composing it. Ownership by a single or a small group of stockholders of
nearly all of the capital stock of the corporation is not, without more, sufficient to disregard the
fiction of separate corporate personality. Thus, obligations incurred by corporate officers, acting
as corporate agents, are not theirs, but direct accountabilities of the corporation they represent.
Solidary liability on the part of corporate officers may at times attach, but only under exceptional
circumstances, such as when they act with malice or in bad faith. Also, in appropriate cases, the
veil of corporate fiction shall be disregarded when the separate juridical personality of a
corporation is abused or used to commit fraud and perpetrate a social injustice, or used as a vehicle
to evade obligations.62 chanrobleslaw

It must be stressed at the onset that the sale contract was entered by Antonio Garcia in his personal
capacity and not as the President of Chemical Industries. As aptly found by the CA:
chanRoblesvirtualLawlibrary

"xxx. As can be gleaned from the Deed of Sale, [Antonio Garcia] sold the disputed shares in his
private capacity as owner thereof and not as responsible officer or representative of [Chemical
Industries]. Moreover, the disputed shares constitute merely 20% of [Chemical Industries']
outstanding capital stocks. As such, the corporation's consent in the disposition is not required.
Neither does its conveyance require any action on the part of the corporation, except the ministerial
duty of recording the same in its stock and transfer book.

Considering the nature of the transaction involved, whatever obligation [Antonio Garcia] incurred,
it was incurred in his personal capacity. xxx"63

Even if Antonio Garcia was selling his shares of stocks in the Chemical Industries, the corporation
was neither made a party to the contract nor did the sale redound to its benefit. As a matter of fact,
the subject of the purchase agreement was not limited to Antonio Garcia's shares in Chemical
Industries, but likewise included his shares in Vision Insurance Consultants, Inc., Alabang Country
Club, Inc. and Manila Polo Club, Inc.64 His shares of capital stocks with Chemical Industries
became the subject of controversy because of the allegation that he intentionally withheld the
information from Ferro Chemicals that these shares were subject of the Consortium Banks' claim.
Notably, the purported misrepresentation was: not alleged to have been authorized or abetted by
the corporation. It was a purely personal act of the seller desirous to dispose conveniently his
shares in the corporation. It bears underscoring that a corporation has a personality separate and
distinct from that of each stockholder. It has the right ,of continuity or perpetual succession,65 that
is, its existence is not extinguished by the transfer of ownership of its shares of capital stock from
one shareholder to another.
Needless to say, the imputation of liability Chemical Industries for the acts of its corporate officer
and the consequent shedding of corporate shroud cannot rest on flimsy grounds. The application
of the doctrine of piercing the veil of corporate fiction is frowned upon.66 It can only be done if it
has been clearly established that the separate and distinct personality of the corporation is used to
justify a wrong, protect fraud, or perpetrate a deception.67 As explained by the Court in Philippine
National Bank v. Andrada Electric & Engineering Company:68 chanrobleslaw

"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."

In the case at bar, Ferro Chemicals failed to adduce satisfactory evidence to prove that Chemical
Industries' separate corporate personality was being used by Antonio Garcia to protect fraud or
perpetrate deception warranting the shedding of its veil and the consequent imposition of solidary
liability upon it.

On Ferro Chemical's claim for

reimbursement of litigation expenses
in the amount of P12,000,000.00, as
payment of attorney's fees

The award of litigation expenses in the amount of P12,000,000.00 is not proper because Ferro
Chemicals failed to justify satisfactorily its claim, and the trial court failed to state explicitly in its
decision the rationale for the award. Likewise, We agree with the CA's finding that the award of
attorney's fees in the sum of P1,000,000.00 plus additional 10% ofthe value of the shares is
unreasonable and excessive. Article 2208 of the New Civil Code enumerates the instances where
such may be awarded and, in any event, it must be reasonable, just and equitable.69 Attorney's fees
as part of damages are not meant to enrich the winning party at the expense of the losing litigant.70
They are not awarded every time a party prevails in a suit because of the policy that no premium
should be placed on the right to litigate. The award of attorney's fees is the exception rather than
the rule.71chanrobleslaw

As such, it is necessary for the court to make findings of fact and law that would bring the -case
within the exception and justifY the grant of such award.72 chanrobleslaw

For lack of factual basis, we cannot likewise lend credence to Antonio Garcia's claim that the
dividends earned from Alabang Country Club, Inc. and Manila Polo Club, Inc. shares should be
deducted from the cost of the lost shares.

WHEREFORE, premises considered, the petition of Ferro Chemicals, Inc. in G.R. No. 168134
is hereby DENIED while the petitions of Jaime Y. Gonzales in G.R. No. 168183 and Antonio M.
Garcia in G.R. No. 168196 are hereby GRANTED. Consequently, the Decision of the Court of
Appeals is modified to read:

1) Chemical Industries of the Philippines, Inc. and Rolando Navarro are hereby exonerated from
chanRoblesvirtualLawlibrary

liabilities;

2) Antonio M. Garcia and Jaime Y. Gonzales are likewise discharged from liabilities;

3) The award of P12,000,000.00, representing the cost of the suit and expenses of litigation in the
Consortium Case is deleted.

SO ORDERED. chanRoblesvirtualLawl ibrary

G.R. No. 172948, October 05, 2016

PHILIPPINE ASSOCIATED SMELTING AND REFINING CORPORATION, Petitioner,

v. PABLITO O. LIM, MANUEL A. AGCAOILI, AND CONSUELO M. PADILLA,
Respondents.

DECISION

LEONEN, J.:

An action for injunction filed by a corporation generally does not lie to prevent the enforcement
by a stockholder of his or her right to inspection.1

Philippine Associated Smelting and Refining Corporation filed a Petition for Review on Certiorari2
to assail the Court of Appeals Decision3 dated January 243 2006 and Resolution4 dated May 18,
2006, The Court of Appeals lifted and cancelled the writ of preliminary injunction issued by the
Regional Trial Court,5 which enjoined respondents Pablito O. Lim (Lim), Manuel A. Agcaoili
(Agcaoili), and Consuelo M. Padilla (Padilla), or their representatives, from gaining access to the
records of Philippine Associated Smelting and Refining Corporation.: The records were then
classified as either confidential or inexistent until further orders from the court.6

As summarized by the Court of Appeals, the facts are as follows: chanRoblesv irtualLawlibrary

Philippine Associated Smelting and Refining Corporation (hereafter PASAR) is a corporation duly
organized and existing under the laws of the Philippines and is engaged in copper smelting and
refining.

On the other hand, Pablito Lim, Manuel Agcaoili and Consuelo Padilla (collectively referred to as
petitioners) were former senior officers and presently shareholders of PASAR holding 500 shares
each.

An Amended Petition for Injunction and Damages with prayer for Preliminary Injunction and/or
Temporary Restraining Order, dated February 4, 2004 was filed by PASAR seeking to restrain
petitioners from demanding inspection of its confidential and inexistent records.

On February 23, 2004, petitioners moved for the dismissal of the petition on the following grounds:
1) the petition states no cause of action; 2) the petition should be dismissed on account of litis
pendentia; 3) the petition is a nuisance or harassment suit; and 4) the petition should be dismissed
on account of improper venue.

On April 14, 2004, the RTC issued an Order granting PASAR's prayer for a writ of preliminary
injunction. The RTC held that the right to inspect book should not be denied to the stockholders,
however, the same may be restricted. The right to inspect should be limited to the ordinary records
as identified and classified by PASAR. Thus, pending the determination of which records are
confidential or inexistent, the petitioners should be enjoined from inspecting the books. The
dispositive portion of said Order states:chanRoblesv irtualLawlibrary

"WHEREFORE, let a writ of preliminary injunction be issued enjoining respondents Pablito Lim,
Manuel A. Agcaoili and Consuelo N. Padilla or their representatives from gaining access to records
of Philippine Associated Smelting and Refining Corporation which are presently classified as
either confidential or inexistent, until further orders from this Court.

Petitioner is required to execute a bond in the amount of FIVE HUNDRED THOUSAND PESOS
(P500,000.00) in favor of herein respondents to answer for all damages which the latter may
sustain by reason of the injunction should this Court, finally decide that petitioner is not entitled
thereto.

SO ORDERED."
chanrobleslaw

On May 26, 2004, petitioners filed a Motion for Dissolution of the Writ of Preliminary Injunction
on the ground that the petition is insufficient. Petitioners claim that the enforcement of the right to
inspect book should be on the stockholders and not on PASAR. Petitioners further claim that no
irreparable injury is caused to PASAR which justifies the issuance of the writ of preliminary
injunction.

On January 10, 2005, the RTC issued the assailed Order, denying the Motion to Dismiss filed by
petitioners on the ground that it is a prohibited pleading under Section 8, Rule 1 of the Interim
Rules on Intra-Corporate Controversies under the Securities Regulation Code (RA 8799). The
Motion for Dissolution of the Writ of Preliminary Injunction was likewise denied on the ground
that the writ does not completely result in unjust denial of petitioners' right to inspect the books of
the corporation. The RTC further stated that if no preliminary injunction is issued, petitioners may,
before final judgment, do the act which PASAR is seeking the Court to restrain which will make
ineffectual the final judgment that it may afterward render.7 (Emphasis in the original)
chanrobleslaw

Aggrieved, Lim, Agcaoili, and Padilla filed before the Court of Appeals a Petition for Certiorari8
questioning the propriety of the writ of preliminary injunction. The Court of Appeals held that
there was no basis to issue an injunctive writ, thus: chanRoblesv irtualLawlibrary

We agree. The act of PASAR in filing a petition for injunction with prayer for writ of preliminary
injunction is uncalled for. The petition is a pre-emptive action unjustly intended to impede and
restrain the stockholders' rights. If a stockholder demands the inspection of corporate books, the
corporation could refuse to heed to such demand. When the corporation, through its officers, denies
the stockholders of such right, the latter could then go to court and enforce their rights. It is then
that the corporation could set up its defenses and the reasons for the denial of such right. Thus, the
proper remedy available for the enforcement of the right of inspection is undoubtedly the writ of
mandamus to be filed by the stockholders and not a petition for injunction filed by the corporation.

The Order of the RTC shows that indeed there is no basis for the issuance not only of the temporary
but also of the permanent injunctive writ. The Order dated April 14, 2004 states: chanRoblesv irtualLawlibrary

"In the present case, PASAR failed to present sufficient evidence to show that respondents'
(petitioners') demand to inspect the corporate records was not made in good faith nor for a lawful
purpose. . . . PASAR is reminded that it is its burden to prove that respondents' action in seeking
examination of the corporate records was moved by unlawful or ill-motivated designs which could
appropriately call for a judicial protection against the exercise of such right[.]"9
chanrobleslaw

Hence, Philippine Associated Smelting and Refining Corporation filed this Petition praying that
this Court render judgment: chanRoblesvirtualLawlibrary

(a) reversing and setting aside the Decision dated 24 January 2006 and Resolution dated 18 May
2006 rendered by the Court of Appeals; ChanRo blesVirtualawlibrary

(b) reinstating the writ of preliminary injunction granted by the RTC in its Order dated 14 April
2004, and consequently ordering respondents to desist from further harassing, vexing, or annoying
petitioner with threats of filing criminal complaints against its President, Bruce Anderson, and
other appropriate parties, as embodied in the letters dated 25 and 27 February 2006 and 31 March
2006; ChanRob lesVirtualawlibrary

(c) reinstating the main action for injunction and ordering the RTC to continue hearing SEC Case
No. 04-33; ChanRo blesVirtualawlibrary

(d) meanwhile, it is respectfully prayed that a temporary restraining order or status quo order be
issued by this Honorable Court to urgently restrain respondents from further committing acts
which are bases for the application of the writ of preliminary injunction.10
chanrobleslaw

In the Resolution11 dated July 19, 2006, this Court denied petitioner's prayer for the issuance of a
temporary restraining order and required respondents Lim, Agcaoili, and Padilla to comment on
the Petition.

Respondents filed their Comment12 on October 16, 2006 through counsel Cayetano Sebastian Ata
Dado & Cruz. On October 20, 2006, they filed a second Comment13 through counsel Siguion
Reyna Montecillo & Ongsiako. Petitioner filed a Motion for Leave to Admit Attached Reply,14
together with its Reply,15 on December 12, 2006.

In the Resolution16 dated January 24, 2007, this Court noted respondents' separate Comments and
petitioner's Reply. The parties were also directed to submit their respective memoranda within 30
days from notice.17 Respondents filed their Memorandum18 on March 26, 2007, and petitioner filed
its Memorandum19 on April 2, 2007.

Petitioner argues that the right of a stockholder to inspect corporate books and records is limited
in that any demand must be made in good faith or for a legitimate purpose.20 Respondents,
however, have no legitimate purpose in this case.21 If respondents gain access to petitioner's
confidential records, petitioner's trade secrets and other confidential information will be used by
its former officers to give undue commercial advantage to third parties.22 Petitioner insists that to
hold that objections to the right of inspection can only be raised in an action for mandamus brought
by the stockholder, would leave a corporation helpless and without an adequate legal remedy.23
To leave the corporation helpless negates the doctrine that where there is a right, there is a remedy
for its violation.24

Petitioner argues that it has the right to protect itself against all forms of embarrassment or
harassment against its officers, including the filing of criminal cases against them.25 Moreover,
respondents' request for inspection of confidential corporate records and documents violates and
breaches petitioner's right to peaceful and continuous possession of its confidential records and
documents.26

Petitioner further argues that respondents' Motion for Dissolution before the Court of Appeals did
not comply with Rule 58, Section 6 of the Rules of Court. Therefore, the Motion should not have
been granted.27 Likewise, respondents' Motion to Dismiss is a prohibited pleading under Rule 1,
Section 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies28 and should
not have been granted.29 In any case, the Court of Appeals should have remanded the case to the
trial court for further disposition.30

We are asked to resolve whether injunction properly lies to prevent respondents from invoking
their right to inspect.

We deny the Petition.

The Petition asks this Court to enjoin acts beyond what was enjoined by the Regional Trial Court
in its April 14, 2004 Order.31 The Regional Trial Court Order did not specify the particular acts it
enjoined respondents from doing: chanRoblesv irtualLawlibrary

The question as to what records should be deemed confidential and inexistent, however, cannot be
passed upon at this time, since neither were admissions made nor sufficient evidence presented to
categorically determine which corporate records are to be considered confidential and inexistent.
In the meantime, then, and in order to prevent grave and irreparable injury on the part of PASAR
should otherwise be allowed [sic], respondents' right to inspect is limited to the ordinary records
as identified and classified by PASAR. Subsequent hearings shall be set to determine which among
the corporate records demanded to be inspected by the respondents are indeed confidential or
inexistent, and to further determine whether or not the issuance of a writ of final injunction is in
order.

WHEREFORE, let a writ of preliminary injunction be issued enjoining respondents Pablito Lim,
Manuel A. Agcaoili and Consuelo N. Padilla or their representatives from gaining access to
records of Philippine Associated Smelting & Refining Corporation which are presently classified
as either confidential or inexistent, until further orders from this Court.32 (Emphasis supplied)
chanrobleslaw

What precisely is contemplated by the phrase "gaming access to records" is not clear.

Taking advantage of this ambiguity, petitioner prays that the injunction be reinstated and that this
Court enjoin respondents from "harassing, vexing, or annoying petitioner with threats of filing
criminal complaints" and from "further committing acts which are bases for the application of the
writ of preliminary injunction": chanRob lesvirtualLawlibrary

(b) reinstating the writ of preliminary injunction granted by the RTC in its Order dated 14 April
2004, and consequently ordering respondents to desist from further harassing, vexing, or annoying
petitioner with threats of filing criminal complaints against its President, Bruce Anderson, and
other appropriate parties, as embodied in the letters dated 25 and 27 February 2006 and 31 March
2006; ChanRob lesVirtualawlibrary

.....

(d) meanwhile, it is respectfully prayed that a temporary restraining order or status quo order be
issued by this Honorable Court to urgently restrain respondents from further committing acts
which are bases for the application of the writ of preliminary injunction.33
chanrobleslaw

Petitioner claims that respondents are materially and substantially invading its right to protect itself
by demanding to inspect petitioner's purportedly confidential records. Respondents wrote
petitioner and demanded to inspect its corporate books and records.34 They reiterated this demand
in a subsequent letter.35

On at least two (2) occasions, respondents went to petitioner's office to again demand that they be
allowed to inspect.36 On one of these occasions, respondents brought members of the press, caused
work disruption, and harassed petitioner's representatives who met with them.37 When asked the
purpose of the inspection of certain records not ordinarily inspected by stockholders, respondents
answered they wished to ensure that petitioner's business transactions were "above board" and
"entered into for the best interest of the company."38

During negotiations on the terms of confidentiality agreements to be executed before respondents

are allowed to inspect certain confidential records, respondents wrote petitioner stating that they
would proceed to inspect the corporate books and records. They warned petitioner that should
petitioner fail to allow inspection, they would initiate legal proceedings against it.39 They refused
to accept the final terms and conditions of the confidentiality agreement and wrote another letter,
reiterating their demand to inspect confidential records.40

After petitioner filed before the Regional Trial Court of Pasig City a Petition for Declaratory
Relief41 seeking a declaration of the rights and duties of the parties in relation to the inspection of
the records, respondent Lim filed a criminal Complaint42 against some of petitioner's officers for
infringing on their right to inspect petitioner's corporate books and records.43 As a result, a criminal
case was filed against Javier Herrero, petitioner's Former President, and Jocelyn Sanchez-Salazar,
its Former Corporate Secretary.44 Respondents caused news reports to be published on the arrest
warrants issued in relation to these Informations.45

Respondents wrote another letter dated January 30, 2004 demanding again that they be allowed to
inspect, among others, the confidential records.46 On March 31, 2006, respondents wrote another
letter threatening to file criminal charges if they were not allowed to inspect the confidential
records. They stated that they wanted to ensure that petitioner complied with environmental laws
in the operations of its plant in Leyte.47
On April 7, 2006, petitioner advised respondents that it would furnish them with records kept by
the Department of Environment and Natural Resources. These records supposedly showed that all
environmental laws were complied with.48 On June 28, 2006 and July 4, 2006, respondents Lim
and Padilla wrote to demand that they be allowed to inspect the audited financial statements for
2004 and 2005; the interim statements for the end of May 2006; and more detailed records on
finance, production, marketing, and purchasing.49

In September 2006, after a stockholders' meeting, respondents again demanded access to certain
information and documents.50 In a letter dated September 8, 2006, respondents again asked about
balance sheet accounts, advances to suppliers, trade and other receivables, inventory, investments,
current assets, trade and other payables, related party transactions, cost of goods manufactured and
sold, selling and administrative expenses, other operating expenses, metal hedging, and staff costs,
among others.51

For an action for injunction to prosper, the applicant must show the existence of a right, as well as
the actual or threatened violation of this right.52

Specifically, for a writ of preliminary injunction to be issued, Rule 58 of the Rules of Court
provides: chanRoblesv irtualLawlibrary

RULE 58
PRELIMINARY INJUNCTION

....

SEC. 3. Grounds for issuance of preliminary injunction. — A preliminary injunction may be

granted when it is established: chanRoblesvir tualLawlibrary

(a) That the applicant is entitled to the relief demanded, and the whole or part of such relief consists
in restraining the commission or continuance of the act or acts complained of, or in requiring the
performance of an act or acts either for a limited period or perpetually; ChanRob lesVirtualawlibrary

(b) That the commission, continuance or non- performance of the act or acts complained of during
the litigation would probably work injustice to the applicant; or

(c) That a party, court, agency or a person is doing, threatening, or is attempting to do, or is
procuring or suffering to be done some act or acts probably in violation of the rights of the applicant
respecting the subject of the action or proceeding, and tending to render the judgment ineffectual.
chanrobleslaw

In Duvaz Corp. v. Export and Industry Bank:53 chanroblesvirtuallawlibrary

Anent the first issue, the requisites for preliminary injunctive relief are: (a) the invasion of the right
sought to be protected is material and substantial; (b) the right of the plaintiff is clear and
unmistakable; and (c) there is an urgent and paramount necessity for the writ to prevent serious
damage. As such, a writ of preliminary injunction may be issued only upon clear showing of an
actual existing right to be protected during the pendency of the principal action. The twin
requirements of a valid injunction are the existence of a right and its actual or threatened violation.
Thus, to be entitled to an injunctive writ, the right to be protected and the violation against that
right must be shown.
In Almeida v. Court of Appeals, the Court stressed how important it is for the applicant for an
injunctive writ to establish his right thereto by competent evidence: chan Roblesv irtualLawlibrary

Thus, the petitioner, as plaintiff, was burdened to adduce testimonial and/or documentary evidence
to establish her right to the injunctive writs. It must be stressed that injunction is not designed to
protect contingent or future rights, and, as such, the possibility of irreparable damage without proof
of actual existing right is no ground for an injunction. A clear and positive right especially calling
for judicial protection must be established. Injunction is not a remedy to protect or enforce
contingent, abstract, or future rights; it will not issue to protect a right not in esse and which may
never arise, or to restrain an action which did not give rise to a cause of action. There must be an
existence of an actual right. Hence, where the plaintiffs right or title is doubtful or disputed,
injunction is not proper.

. . . .

An injunctive remedy may only be resorted to when there is a pressing necessity to avoid injurious
consequences which cannot be remedied under any standard compensation. The possibility of
irreparable damage without proof of an. actual existing right would not justify injunctive relief in
his favor.

. . . .

In the absence of a clear legal right, the issuance of the injunctive writ constitutes grave abuse of
discretion. As the Court had the occasion to state in Olalia v. Hizon . . . : chanRoblesvirtualLawlibrary

It has been consistently held that there is no power the exercise of which is more delicate, which
requires greater caution, deliberation and sound discretion, or more dangerous in a doubtful case,
than the issuance of an injunction. It is the strong arm of equity that should never be extended
unless to cases of great injury, where courts of law cannot afford an adequate or commensurate
remedy in damages.

Every court should remember that an injunction is a limitation upon the freedom of action of the
defendant and should not be granted lightly or precipitately. It should be granted only when the
court is fully satisfied that the law permits it and the emergency demands it.54 (Emphasis supplied,
citations omitted)
chanrobleslaw

Thus, an injunction must fail where there is no clear showing of both an actual right to be protected
and its threatened violation, which calls for the issuance of an injunction.

The Corporation Code provides that a stockholder has the right to inspect the records of all business
transactions of the corporation and the minutes of any meeting at reasonable hours on business
days. The stockholder may demand in writing for a copy of excerpts from these records or minutes,
at his or her expense:chanRob lesvirtualLawlibrary

Title VIII
Corporate Books and Records

SECTION 74. Books to be Kept; Stock Transfer Agent. — Every corporation shall, at its principal
office, keep and carefully preserve a record of all business transactions, and minutes of all meetings
of stockholders or members, or of the board of directors or trustees, in which shall be set forth in
detail the time and place of holding the meeting, how authorized, the notice given, whether the
meeting was regular or special, if special its object, those present and absent, and every act done
or ordered done at the meeting. Upon the demand of any director, trustee, stockholder or member,
the time when any director, trustee, stockholder or member entered or left the meeting must be
noted in the minutes; and on a similar demand, the yeas and nays must be taken on any motion or
proposition, and a record thereof carefully made. The protest of any director, trustee, stockholder
or member on any action or proposed action must be recorded in full on his demand.

The records of all business transactions of the corporation and the minutes of any meetings shall
be open to the inspection of any director, trustee, stockholder or member of the corporation at
reasonable hours on business days and he may demand, in writing, for a copy of excerpts from
said records or minutes, at his expense.

Any officer or agent of the corporation who shall refuse to allow any director, trustee, stockholder
or member of the corporation to examine and copy excerpts from its records or minutes, in
accordance with the provisions of this Code, shall be liable to such director, trustee, stockholder
or member for damages, and in addition, shall be guilty of an offense which shall be punishable
under Section 144 of this Code: Provided, That if such refusal is pursuant to a resolution or order
of the Board of Directors or Trustees, the liability under this section for such action shall be
imposed upon the directors or trustees who voted for such refusal: and Provided, further, That it
shall be a defense to any action under this section that the person demanding to examine and
copy excerpts from the corporation's records and minutes has improperly used any information
secured through any prior examination of the records or minutes of such corporation or of any
other corporation, or was not acting in good faith or for a legitimate purpose in making his
demand. (Emphasis supplied)
chanrobleslaw

The right to inspect under Section 74 of the Corporation Code is subject to certain limitations.
However, these limitations are expressly provided as defenses in actions filed under Section 74.
Thus, this Court has held that a corporation's objections to the right to inspect must be raised as a
defense:
2) the person demanding to examine and copy excerpts from the corporation's records and minutes
has not improperly used any information secured through any previous examination of the records
of such corporation; and 3) the demand is made in good faith or for a legitimate purpose. The latter
two limitations, however, must be set up as a defense by the corporation if it is to merit judicial
cognizance. As such, and in the absence of evidence, the PCGG cannot unilaterally deny a
stockholder from exercising his statutory right of inspection based on an unsupported and naked
assertion that private respondent's motive is improper or merely for curiosity or on the ground that
the stockholder is not in friendly terms with the corporation's officers.55
chanrobleslaw

Gokongwei, Jr. v. Securities and Exchange Commission56 stresses that "impropriety of purpose
. . . must be set up the [sic] corporation defensively":chan Roblesv irtualLawlibrary

The stockholder's right of inspection of the corporation's books and records is based upon their
ownership of the assets and property of the corporation. It is, therefore, an incident of ownership
of the corporate property, whether this ownership or interest be termed an equitable ownership, a
beneficial ownership, or a quasi-ownership. This right is predicated upon the necessity of self-
protection. It is generally held by majority of the courts that where the right is granted by statute
to the stockholder, it is given to him as such and must be exercised by him with respect to his
interest as a stockholder and for some purpose germane thereto or in the interest of the corporation.
In other words, the inspection has to be germane to the petitioner's interest as a stockholder, and
has to be proper and lawful in character and not inimical to the interest of the corporation. In Grey
v. Insular Lumber, this Court held that "the right to examine the books of the corporation must be
exercised in good faith, for specific and honest purpose, and not to gratify curiosity, or for
speculative or vexatious purposes." The weight of judicial opinion appears to be, that on
application for mandamus to enforce the right, it is proper for the court to inquire into and consider
the stockholder's good faith and his purpose and motives hi seeking inspection. Thus, it was held
that "the right given by statute is not absolute and may be refused when the information is not
sought in good faith or is used to the detriment of the corporation." But the "impropriety of purpose
such as will defeat enforcement must be set up the corporation defensively if the Court is to take
cognizance of it as a qualification. In other words, the specific provisions take from the
stockholder the burden of showing propriety of purpose and place upon the corporation the burden
of showing impropriety of purpose or motive." It appears to be the "general rule that stockholders
are entitled to full information as to the management of the corporation and the manner of
expenditure of its funds, and to inspection to obtain such information, especially where it appears
that the company is being mismanaged or that it is being managed for the personal benefit of
officers or directors or certain of the stockholders to the exclusion of others."57 (Emphasis supplied,
citations omitted)
chanrobleslaw

Terelay Investment and Development Corp. v. Yulo58 has held that although the corporation may
deny a stockholder's request to inspect corporate records, the corporation must show that the
purpose of the shareholder is improper by way of defense: chanRoblesv irtualLawlibrary

The right of the shareholder to inspect the books and records of the petitioner should not be made
subject to the condition of a showing of any particular dispute or of proving any mismanagement
or other occasion rendering an examination proper, but if the right is to be denied, the burden of
proof is upon the corporation to show that the purpose of the shareholder is improper, by way of
defense. According to a recognized commentator: chanRob lesvirtualLawlibrary

By early English decisions it was formerly held that there must be something more than bare
suspicion of mismanagement or fraud. There must be some particular controversy or question in
which the party applying was interested, and inspection would be granted only so far as necessary
for that particular occasion. By the general rule in the United States, however, shareholders have
a right to inspect the books and papers of the corporation without first showing any particular
dispute or proving any mismanagement or other occasion rendering an examination proper. The
privilege, however, is not absolute and the corporation may show in defense that the applicant is
acting from wrongful motives.

In Guthrie v. Harkness, there was involved the right of a shareholder hi a national bank to inspect
its books for the purpose of ascertaining whether the business affairs of the bank' had been
conducted according to law, and whether, as suspected, the bank was guilty of irregularities. The
court said: "The decisive weight of American authority recognizes the right of the shareholder, for
proper purposes and under reasonable regulations as to place and time, to inspect the books of the
corporation of which he is a member. . . . In issuing the writ of mandamus the court will exercise
a sound discretion and grant the right under proper safeguards to protect the interest of all
concerned. The writ should not be granted for speculative purposes or to gratify idle curiosity or
to aid a blackmailer, but it may not be denied to the stockholder who seeks the information for
legitimate purposes."

Among the purposes held to justify a demand for inspection are the following: (1) To ascertain the
financial condition of the company or the propriety of dividends; (2) the value of the shares of
stock for sale or investment; (3) whether there has been mismanagement; (4) in anticipation of
shareholders' meetings to obtain a mailing list of shareholders to solicit proxies or influence voting;
(5) to obtain information in aid of litigation with the corporation or its officers as to corporate
transactions. Among the improper purposes which may justify denial of the right of inspection are:
(1) Obtaining of information as to business secrets or to aid a competitor; (2) to secure business
"prospects" or investment or advertising lists; (3) to find technical defects in corporate transactions
in order to bring "strike suits" for purposes of blackmail or extortion.

In general, however, officers and directors have no legal authority to close the office doors against
shareholders for whom they are only agents, and withhold from them the right to inspect the books
which furnishes the most effective method of gaining information which the law has provided, on
mere doubt or suspicion as to the motives of the shareholder. While there is some conflict of
authority, when an inspection by a shareholder is contested, the burden is usually held to be upon
the corporation to establish a probability that the applicant is attempting to gain inspection for a
purpose not connected with his interests as a shareholder, or that his purpose is otherwise improper.
The burden is not upon the petitioner to show the propriety of his examination or that the refusal
by the officers or directors was wrongful, except under statutory provisions.59 (Citations omitted)
chanrobleslaw

Among the actions that may be filed is an action for specific performance, damages, petition for
mandamus, or for violation of Section 74, in relation to Section 144 of the Corporation Code,
which provides: chanRob lesvirtualLawlibrary

SECTION 144. Violations of the Code. — Violations of any of the provisions of this Code or its
amendments not otherwise specifically penalized therein shall be punished by a fine of not less
than one thousand (P1,000.00) pesos but not more than ten thousand (P10,000.00) pesos or by
imprisonment for not less than thirty (30) days but not more than five (5) years, or both, in the
discretion of the court. If the violation is committed by a corporation, the same may, after notice
and hearing, be dissolved in appropriate proceedings before the Securities and Exchange
Commission: Provided, That such dissolution shall not preclude the institution of appropriate
action against the director, trustee or officer of the corporation responsible for said violation:
Provided, further, That nothing in this section shall be construed to repeal the other causes for
dissolution of a corporation provided in this Code.
chanrobleslaw

In this case, petitioner invokes its right to raise the limitations provided under Section 74 of the
Corporation Code. However, petitioner provides scant legal basis to claim this right because it
does not raise the limitations as a matter of defense. As properly appreciated by the Court of
Appeals: chanRobles virtualLawlibrary

We agree. The act of PASAR in filing a petition for injunction with prayer for writ of preliminary
injunction is uncalled for. The petition is a pre-emptive action unjustly intended to impede and
restrain the stockholders' rights. If a stockholder demands the inspection of corporate books, the
corporation could refuse to heed to such demand. When the corporation, through its officers, denies
the stockholders of such right, the latter could then go to court and enforce their rights. It is then
that the corporation could set up its defenses and the reasons for the denial of such right. Thus, the
proper remedy available for the enforcement of the right of inspection is undoubtedly the writ of
mandamus to be filed by the stockholders and not a petition for injunction filed by the
corporation.60
chanrobleslaw

Petitioner insists that the Court of Appeals erred in relying on Section 74 of the Corporation Code.
It claims that jurisprudence allows the corporation to prevent a stockholder from inspecting records
containing confidential information.61 Petitioner cites W.G Philpotts v. Philippine Manufacturing
Company:62 chanroblesvirtuallawlibrary

In order that the rule above stated may not be taken in too sweeping a sense, we deem it advisable
to say that there are some things which a corporation may undoubtedly keep secret,
notwithstanding the right of inspection given by law to the stockholder; as, for instance, where a
corporation engaged in the business of manufacture, has acquired a formula or process, not
generally known, which has proved of utility to it in the manufacture of its products. It is not our
intention to declare that the authorities of the corporation, and more particularly the Board of
Directors, might not adopt measures for the protection of such process from publicity.63
chanrobleslaw

However, W.G Philpotts cannot support petitioner's contention since it involved a petition for
mandamus where the stockholder prayed to be allowed to exercise its right to inspect, and the
respondent's objections were raised as a defense. Nothing in W.G. Philpotts grants a corporation a
cause of action to enjoin the exercise of the right of inspection by a stockholder.

The clear provision in Section 74 of the Corporation Code is sufficient authority to conclude that
an action for injunction and, consequently, a writ of preliminary injunction filed by a corporation
is generally unavailable to prevent stockholders from exercising their right to inspection.
Specifically, stockholders cannot be prevented from gaining access to the (a) records of all
business transactions of the corporation; and (b) minutes of any meeting of stockholders or the
board of directors, including their various committees and subcommittees.

The grant of legal personality to a corporation is conditioned on its compliance with certain
obligations. Among these are its fiduciary responsibilities to its stockholders. Providing
stockholders with access to information is a fundamental basis for their intelligent participation in
the governance of the corporation as a business organization that they partially own. The law is
agnostic with respect to the amount of shares required. Generally, each individual stockholder
should be given reasonable access so that he or she can assess or share his or her assessment of the
management of the corporation with other stockholders. The separate legal personality of a
corporation is not so absolutely separate that it divorces itself from its responsibility to its
constituent owners.

The law takes into consideration the potential disparity in the financial legal resources between the
corporation and an ordinary stockholder. The phraseology of the text of the law provides that
access to the information mentioned in Section 74 of the Corporation Code is mandatory. The
presumption is that the corporation should provide access. If it has basis for denial, then the
corporation shoulders the risks of being sued and of successfully raising the proper defenses. The
corporation cannot immediately deploy its resources—part of which is owned by the requesting
stockholder—to put the owner on the defensive.

Specifically, corporations may raise their objections to the right of inspection through affirmative
defense in an ordinary civil action for specific performance or damages, or through a comment (if
one is required) in a petition for mandamus.64 The corporation or defendant or respondent still
carries the burden of proving (a) that the stockholder has improperly used information before; (b)
lack of good faith; or (c) lack of legitimate purpose.65

Good faith and a legitimate purpose are presumed. It is the duty of the corporation to allege and
prove with sufficient evidence the facts that give rise to a claim of bad faith as to the existence of
an illegitimate purpose.

The confidentiality of business transactions is not a magical incantation that will defeat the request
of a stockholder to inspect the records. Although it is true that the business is entitled to the
protection of its trade secrets and other intellectual property rights, facts must be pleaded to
convince the court that a specific stockholder's request for inspection, under certain conditions,
would violate the corporation's own legal right.

Furthermore, the discomfort caused to the management of a corporation when a request for
inspection is claimed is part of the regular matters that a business wanting to ensure good
governance must endure. The range between discomfort and vexation is a broad one, which may
tend to be located in the personalities of those involved.

Certainly, by themselves, these are not sufficient factual basis to conclude bad faith on the part of
the requesting stockholder. Courts must be convinced that the scope or manner of the request and
the conditions under which it was made are so frivolous that the huge cost to the business will, in
equity, be unfair to the other stockholders. There is no iota of evidence that this happened here. chanroblesvirtuallawlibrary

II

The Court of Appeals did not commit an error of law in disregarding the procedure on dissolution
of injunctive writs. It lifted and cancelled the injunction via a petition for certiorari under Rule 65
of the Rules of Court based on the grave abuse of discretion on the part of the Regional Trial Court
in issuing the writ of preliminary injunction.

Petitioner invokes Rule 58, Section 6 of the Rules of Court, which provides: chanRoblesvirtualLawlibrary

SEC. 6. Grounds for Objection to, or for Motion of Dissolution of, Injunction or Restraining
Order. — The application for injunction or restraining order may be denied, upon a showing of its
insufficiency. The injunction or restraining order may also be denied, or, if granted, may be
dissolved, on other grounds upon affidavits of the party or person enjoined, which may be opposed
by the applicant also by affidavits. It may further be denied, or, if granted, may be dissolved, if it
appears after hearing that although the applicant is entitled to the injunction or restraining order,
the issuance or continuance thereof, as the case may be, would cause irreparable damage to the
party or person enjoined while the applicant can be fully compensated for such damages as he may
suffer, and the former files a bond in an amount fixed by the court conditioned that he will pay all
damages which the applicant may suffer by the denial or the dissolution of the injunction or
restraining order. If it appears that the extent of the preliminary injunction or restraining order
granted is too great, it may be modified.
chanrobleslaw

Petitioner assails respondents' failure to submit any affidavit or counter-bond pertaining to

irreparable damage and compensation of damages that may be suffered if the injunction is
dissolved.66

However, the injunction was lifted and cancelled via a petition for certiorari under Rule 65 of the
Rules of Court,67 not based on a motion for dissolution of the injunction. Thus, the Court of
Appeals evaluated the basis for the injunction granted by the Regional Trial Court rather than
whether the injunction would cause irreparable damage to respondents.

WHEREFORE, the Petition is DENIED.

SO ORDERED. ChanRoblesV irtualawlibrary

G.R. No. 196134, October 12, 2016

VALENTIN S. LOZADA, Petitioner, v. MAGTANGGOL MENDOZA, Respondent.

DECISION

BERSAMIN, J.:

This appeal seeks the reversal of the decision promulgated on September 28, 2010, 1 whereby the
Court Appeals (CA), in CA-G.R. SP No. 111722, set aside the decision of the National Labor
Relations Commission (NLRC) upon finding that the NLRC had gravely abused its discretion
amounting to lack or excess of jurisdiction in reversing the ruling of the Labor Arbiter dated
February 24, 2009,2 and reinstated such ruling in favor of the respondent holding the petitioner
liable for the satisfaction of the money judgment in favor of the respondent.

Antecedents

The factual and procedural antecedents are as follows: ChanRob lesVirtualawlibrary

On October 13, 1997, the petitioner Magtanggol Mendoza was employed as a technician by VSL
Service Center, a single proprietorship owned and managed by Valentin Lozada.

Sometime in August 2003, the VSL Service Center was incorporated and changed its business
name to LB&C Services Corporation. Subsequently, the petitioner was asked by respondent
Lozada to sign a new employment contract. The petitioner did not accede because the respondent
company did not consider the number of years of service that he had rendered to VSL Service
Center. From then on, the petitioner's work schedule was reduced to one to three days a week.

In December 2003, the petitioner was given his regular working schedule by the respondent
company. However, on January 12, 2004, the petitioner was advised by the respondent company's
Executive Officer, Angeline Aguilar, not to report for work and just wait for a cal1 from the
respondent company regarding his work schedule.

The petitioner patiently waited for the respondent company's call regarding his work schedule.
However, he did not receive any call from it. Considering that his family depends on him for
support, he asked his wife to call the respondent company and inquire on when he would report
back to work. Still, the petitioner was not given any work schedule by the respondent company.

Aggrieved, the petitioner filed a complaint against the respondent company on January 21, 2004
for illegal dismissal with a prayer for the payment of his 13th month pay, service incentive leave
pay, holiday pay and separation pay and with a claim for moral and exemplary damages, and
attorney's fees. The case was docketed as NLRC NCR Case No. 00-01-00968-2004.

A mandatory conciliation conference was conducted, but to no avail, thus, they were ordered by
the Labor Arbiter to submit their respective position papers.

In his Position paper dated March 2, 2004, the petitioner alleged that he was constructively
dismissed as he was not given any work assignment for his refusal to sign a new contract of
employment. He was dismissed from his work without any valid authorized cause. He was not
given any separation pay for the services that he rendered for almost six (6) years that he worked
with VSL Service Center. He thus claimed that his termination from employment was effected
illegally, hastily, arbitrarily and capriciously.

In its Position paper, dated March 9, 2004, the respondent company vehemently denied the
allegation of the petitioner that he was dismissed from employment. The petitioner was still
reporting for work with the respondent company even after he filed a complaint with the arbitration
board of the NLRC up to February 10, 2004. It also denied that the petitioner was its employee
since 1997. The truth of the matter, according to the respondent company, was that it employed
the petitioner only on August 1, 2003 because the respondent company started its corporate
existence only on August 27, 2002 and started its business operation on August 1, 2003. It further
averred that respondent Valentin Lozada was not an officer or employee of the respondent
company nor (sic) its authorized representative. The respondent company finally claimed that it
was the petitioner who severed his relationship with it.3 chanroblesvirtuallawlibrary

On February 23, 2005, the Labor Arbiter declared the dismissal of the petitioner from employment
as illegal, disposing thusly: ChanRob lesVirtualawlibrary

WHEREFORE, premises considered, judgment is rendered declaring the dismissal of complainant

as illegal and ordering his reinstatement with full backwages plus payment of his 13th month pay
(less P500.00 pesos) and service incentive leave pay all computed three years backward, as
follows:

chanRoblesvirtualLawlibrary x x x x

SO ORDERED.4 chanroblesvirtuallawlibrary

LB&C Services Corporation appealed, but the NLRC dismissed the appeal for non-perfection
thereof due to failure to deposit the required cash or surety bond. Thus, the Labor Arbiter's decision
attained finality on August 4, 2006, and the entry of judgment was issued by the NLRC on August
16, 2006.

The respondent moved for the issuance of the writ of execution, which the Labor Arbiter granted
on November 21, 2006.
The petitioner and LB&C Services Corporation filed a motion to quash the writ of execution, 5
alleging that there was no employer-employee relationship between the petitioner and the
respondent; and that LB&C Services Corporation "has been closed and no longer in operation due
to irreversible financiallosses."6 chanrobleslaw

The Labor Arbiter denied the motion to quash the writ of execution on April 16, 2007.7 In due
course, the sheriff garnished P5,767.77 in the petitioner's deposit under the account of Valor
Appliances Services at the Las Piñas Branch of the First Macro Bank.

On November 19, 2007, the Labor Arbiter directed the sheriff to proceed with further execution
of the properties of the petitioner for the satisfaction of the monetary award in favor of the
respondent.8chanrobleslaw

On December 19, 2007, the sheriff issued to the petitioner a notice of levy upon realty. The sheriff
notified the Registry of Deeds of Las Piñas City on the levy made on the petitioner's real property
with an area of 31.30 square meters covered by Transfer Certificate of Title No. T-43336 of that
office.

LB&C Services Corporation moved for the lifting of the levy because the real property levied upon
had been constituted by the petitioner as the family home;9 and that the decision of the Labor
Arbiter did not adjudge the petitioner as jointly and solidarily liable for the obligation in favor of
the respondent.

After the Labor Arbiter denied its motion for the lifting of the levy on February 24, 2009,10 LB&C
Services Corporation appealed the denial to the NLRC, which, on May 29, 2009, reversed the
Labor Arbiter, as follows: ChanRob lesVirtualawlibrary

WHEREFORE, premises considered, respondents' appeal is hereby GRANTED. Accordingly, the

order of the labor arbiter is hereby REVERSED and SET ASIDE.

As prayed for by the respondents, the levy constituted over such Las Piñas property which is
covered by Transfer Certificate of Title No. (sic) is hereby LIFTED.

SO ORDERED.11 chanroblesvirtuallawlibrary

The respondent assailed the reversal by motion for reconsideration, which the NLRC thereafter
denied.

Thence, a petition for certiorari was filed in the CA to assail the ruling of the NLRC on the ground
of grave abuse of discretion amounting to lack or excess of jurisdiction.

As stated, the CA promulgated the assailed decision on September 28, 2010 granting the petition
for certiorari, and reinstating the Labor Arbiter's decision. It opined that the petitioner was still
liable despite the fact that the Labor Arbiter's decision had not specified his being jointly and
severally liable for the monetary awards in favor of the respondent; that LB&C Services
Corporation, being an artificial being, must have an officer who could be presumed to be the
employer, being the person acting in the interest of the corporate employer;12 that with LB&C
Services Corporation having already ceased its operation, the respondent could no longer recover
the monetary benefits awarded to him, thereby rendering the entire procedure and the award
nugatory; and that the petitioner was the corporate officer liable by virtue of his having acted on
behalf of the corporation.

Hence, this appeal by the petitioner.

Issue

Was the petitioner liable for the monetary awards granted to the respondent despite the absence of
a pronouncement of his being solidarity liable with LB&C Services Corporation?

Ruling of the Court

The appeal is meritorious.

A corporation, as a juridical entity, may act only through its directors, officers and employees.
Obligations incurred as a result of the acts .of the directors and officers as the corporate agents are
not their personal liability but the direct responsibility of the corporation they represent. 13 As a
general rule, corporate officers are not held solidarily liable with the corporation for separation
pay because the corporation is invested by law with a personality separate and distinct from those
of the persons composing it as well as from that of any other legal entity to which it may be related.
Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital
stock of a corporation is not of itself sufficient ground for disregarding the separate corporate
personality.14chanrobleslaw

To hold a director or officer personally liable for corporate obligations, two requisites must concur,
to wit: (1) the complaint must allege that the director or officer assented to the patently unlawful
acts of the corporation, or that the director or officer was guilty of gross negligence or bad faith;
and (2) there must be proof that the director or officer acted in bad faith.15 chanrobleslaw

A perusal of the respondent's position paper and other submissions indicates that he neither
ascribed gross negligence or bad faith to the petitioner nor alleged that the petitioner had assented
to patently unlawful acts of the corporation. The respondent only maintained that the petitioner
had asked him to sign a new employment contract, but that he had refused to do the petitioner's
bidding. The respondent did not thereby clearly and convincingly prove that the petitioner had
acted in bad faith. Indeed, there was no evidence whatsoever to corroborate the petitioner's
participation in the respondent's illegal dismissal. Accordingly, the twin requisites of allegation
and proof of bad faith necessary to hold the petitioner personally liable for the monetary awards
in favor of the respondent were lacking.

The CA reinstated the Labor Arbiter's decision by relying on the pronouncement in Restaurante
Las Conchas v. Llego,16 where the Court held that when the employer corporation was no longer
existing and the judgment rendered in favor of the employees could not be satisfied, the officers
of the corporation should be held liable for acting on behalf of the corporation.17 chanrobleslaw

A close scrutiny of Restaurante Las Conchas shows that the pronouncement applied the exception
instead of the general rule. The Court opined therein that, as a rule, the officers and members of
the corporation were not personally liable for acts done in the performance of their duties;18 but
that the exception instead of the general rule should apply because of the peculiar circumstances
of the case. The Court observed that if the general rule were to be applied, the employees would
end up with an empty victory inasmuch as the restaurant had been closed for lack of venue, and
there would be no one to pay its liability because the respondents thereat claimed that the restaurant
had been owned by a different entity that had not been made a party in the case.19 chanrobleslaw

It is notable that the Court has subsequently opted not to adhere to Restaurante Las Conchas in
the cases of Mandaue Dinghow Dimsum House, Co., Inc. v. National Labor Relations
Commission-Fourth Division20 and Pantranco Employees Association (PEA-PTGWO) v. National
Labor Relations Commission.21 chanrobleslaw

In Mandaue Dinghow Dimsum House, Co., Inc., the Court declined to follow Restaurante Las
Conchas because there was showing that the respondent therein, Henry Uytengsu, had acted in
bad faith or in excess of his authority. It stressed that every corporation was invested by law with
a personality separate and distinct from those of the persons composing it as well as from that of
any other legal entity to which it might be related; and that the doctrine of piercing the veil of
corporate fiction must be resorted to with caution.22 The Court noted that corporate directors and
officers were solidarily liable with the corporation for the termination of employees done with
malice or bad faith; and declared that bad faith did not connote bad judgment or negligence, but a
dishonest purpose or some moral obliquity and conscious doing of wrong, or meant a breach of a
known duty through some motive or interest or ill will, or partook of the nature of fraud.

In Pantranco Employees Association, the Court rejected the invocation of Restaurante Las
Conchas and refused to pierce the veil of corporate fiction, explaining: Chan RoblesVir tualawlibrary

As between PNB and PNEI, petitioners want us to disregard their separate personalities, and insist
that because the company, PNEI, has already ceased operations and there is no other way by which
the judgment in favor of the employees can be satisfied, corporate officers can be held jointly and
severally liable with the company. Petitioners rely on the pronouncement of this Court in A.C.
Ransom Labor Union-CCLU v. NLRC and subsequent cases.

This reliance fails to persuade. We find the aforesaid decisions inapplicable to the instant case.

For one, in the said cases, the persons made liable after the company's cessation of operations were
the officers and agents of the corporation. The rationale is that, since the corporation is an artificial
person, it must have an officer who can be presumed to be the employer, being the person acting
in the interest of the employer. The corporation, only in the technical sense, is the employer. In the
instant case, what is being made liable is another corporation (PNB) which acquired the debtor
corporation (PNEI).

Moreover, in the recent cases Carag v. National Labor Relations Commission and McLeod v.
National Labor Relations Commission, the Court explained the doctrine laid down in AC Ransom
relative to the personal liability of the officers and agents of the employer for the debts of the latter.
In AC Ransom, the Court imputed liability to the officers of the corporation on the strength of the
definition of an employer in Article 212(c) (now Article 212[e]) of the Labor Code. Under the said
provision, employer includes any person acting in the interest of an employer, directly or
indirectly, but does not include any labor organization or any of its officers or agents except when
acting as employer. It was clarified in Carag and McLeod that Article 212(e) of the Labor Code,
by itself, does not make a corporate officer personally liable for the debts of the corporation. It
added that the governing law on personal liability of directors or officers for debts of the
corporation is still Section 31 of the Corporation Code.

More importantly, as aptly observed by this Court in AC Ransom, it appears that Ransom,
foreseeing the possibility or probability of payment of backwages to its employees, organized
Rosario to replace Ransom, with the latter to be eventually phased out if the strikers win their case.
The execution could not be implemented against Ransom because of the disposition posthaste of
its leviable assets evidently in order to evade its just and due obligations. Hence, the Court
sustained the piercing of the corporate veil and made the officers of Ransom personally liable for
the debts of the latter.

Clearly, what can be inferred from the earlier cases is that the doctrine of piercing the corporate
veil applies 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. 23 [Bold
Emphasis supplied]
The records of this case do not warrant the application of the exception. The rule, which requires
malice or bad faith on the part of the directors or officers of the corporation, must still prevail. The
petitioner might have acted in behalf of LB&C Services Corporation but the corporation's failure
to operate could not be hastily equated to bad faith on his part. Verily, the closure of a business
can be caused by a host of reasons, including mismanagement, bankruptcy, lack of demand,
negligence, or lack of business foresight. Unless the closure is clearly demonstrated to be
deliberate, malicious and in bad faith, the general rule that a corporation has, by law, a personality
separate and distinct from that of its owners should hold sway. In view of the dearth of evidence
indicating that the petitioner had acted deliberately, maliciously or in bad faith in handling the
affairs of LB&C Services Corporation, and such acts had eventually resulted in the closure of its
business, he could not be validly held to be jointly and solidarily liable with LB&C Services
Corporation.

The CA imputed bad faith to LB&C Services Corporation in respect of the cessation of its
operations because it still filed an appeal tot he NLRC,24 which the CA construed as evincing its
intent to evade liability. For that reason, the CA deemed it mandatory to pierce the corporate fiction
and then identified the petitioner as the person responsible for the payment of the respondent's
money claims. However, the CA pointed out nothing else in the records that showed the petitioner
as being responsible for the acts complained of. At the very least, we consider it to be highly
improbable that LB&C Services Corporation deliberately ceased its operations if only to evade the
payment of the monetary awards adjudged in favor of a single employee like the respondent.
In reinstating the decision of the Labor Arbiter, the CA, although conceding that the petitioner was
not among those who should be liable for the monetary award, still went on to pierce the veil of
corporate fiction and to declare as follows: Chan Rob lesVirtualawlibrary

Undoubtedly, respondent Lozada cannot be absolved from his liability as corporate officer.
Although, as a rule, the officers and members of a corporation are not personally liable for the acts
done in the performance of their duties, this rule admits of exceptions one of which is when the
employer corporation is no longer existing and is unable to satisfy the judgment in favor of the
employee. The corporate officer in such case should be held for acting on behalf of the corporation.
Here, the respondent company already ceased its business operation.

x x x x

x x x The petitioner's claim that respondent Lozada was the real owner of the LB & C Corporation
is thus correct and tenable. The conclusion is bolstered by the fact that the respondent company
never revealed who were the officers of the LB & C Corporation if only to pinpoint responsibility
in the closure of the company that resulted in the dismissal of the petitioner from employment.
Respondent Lozada is, therefore, personally liable for the payment of the monetary benefits due
to the petitioner, its former employee.25 cralawredchanroblesvirtuallawlibrary

The Labor Arbiter did not render any findings about the petitioner perpetrating the wrongful act
against the respondent, or about the petitioner being personally liable along with LB&C Services
Corporation for the monetary award. The lack of such findings was not assailed by the respondent.
On its part, the NLRC did not discuss the matter at all in its decision of May 31, 2006, which
ultimately attained finality. To hold the petitioner liable after the decision had become final and
executory would surely alter the tenor of the decision in a manner that would exceed its terms.

Moreover, by declaring that the petitioner's liability as solidary, the Labor Arbiter modified the
already final and executory February 23, 2005 decision. The modification was impermissible
because the decision had already become immutable, even if the modification was intended to
correct erroneous conclusions of fact and law. The only recognized exceptions to the immutability
of the decision are the corrections of clerical errors, the making of so-called nunc pro tunc entries
that cause no prejudice to any party, and where the judgment is void.26 None of such exceptions
applied herein.

It is fully warranted, therefore, that we quash and lift the alias writ of execution as a patent nullity
by virtue of its not conforming to, or of its being different from and going beyond or varying the
tenor of the judgment that gave it life. To insist on its validity would be defying the constitutional
guarantee against depriving any person of his property without due process of law.

In sum, there was no justification for holding the petitioner jointly and solidarily liable with LB&C
Services Corporation to pay to the respondent the adjudged monetary award. To start with, the
respondent had not alleged the petitioner's act of bad faith, whether in his complaint or in his
position paper, or anywhere else in his other submissions before the Labor Arbiter, that would
have justified the piercing of the veil of corporate identity. Hence, we reverse the CA.

WHEREFORE, the Court GRANTS the petition for review on certiorari; REVERSES and
SETS ASIDE the decision promulgated by the Court of Appeals on September 28, 2010;
ANNULS and SETS ASIDE the order issued on April 16, 2007 by Labor Arbiter Antonio R.
Macam; QUASHES and LIFTS the alias writ of execution; and DIRECTS the National Labor
Relations Commission Labor Arbiter to implement with utmost dispatch the final and executory
decision rendered on May 31, 2006 against the assets of LB&C Service Corporation only.

No pronouncement on costs of suit.

SO ORDERED. chanRoblesvirtualLawlibrary

G.R. Nos. 188642 & 189425, October 17, 2016

AGDAO RESIDENTS INC., THE DIRECTORS LANDLESS LANDLESS ASSOCIATION,

BOARD OF OF AGDAO ASSOCIATION, INC., IN THEIR PERSONAL CAPACITY
NAMELY: ARMANDO JAVONILLO, MA. ACELITA ARMENTANO, ALEX JOSOL,
ANTONIA AMORADA, JULIUS ALINSUB, POMPENIANO ESPINOSA, JR., SALCEDO
DE LA CRUZ, CLAUDIO LAO, CONSORCIO DELGADO, ROMEO CABILLO,
RICARDO BACONG, RODOLFO GALENZOGA, BENJAMIN LAMIGO, AND
ASUNCION A. ALCANTARA, Petitioners, v. ROLANDO MARAMION, LEONIDAS
JAMISOLA, VIRGINIA CANOY, ELIZABETH GONZALES, CRISPINIANO QUIRE-
QUIRE, ERNESTINO DUNLAO, ELLA DEMANDANTE, ELLA RIA DEMANDANTE,
ELGIN DEMANDANTE, SATURNINA WITARA, VIRGILIO DAYONDON, MELENCIA
MARAMION, ANGELICA PENKIAN, PRESENTACION TAN, HERNANI GREGORY,
RUDY GIMARINO, VALENTIN CAMEROS, RODEL CAMEROS, ZOLLO JABONETE,
LUISITO TAN, JOSEPH QUIRE-QUIRE, ERNESTO DUNLAO, JR., FRED DUNLAO,
LIZA MARAMION, CLARITA ROBILLA, RENATO DUNLAO AND PRUDENCIO
JUARIZA, JR., Respondents.

G.R. NOS. 188888-89

ROLANDO MARAMION, LEONIDAS JAMISOLA, VIRGINIA CANOY, ERNESTINO

DUNLAO, ELLA DEMANDANTE, ELLA RIA DEMANDANTE, ELGIN DEMANDANTE,
SATURNINA WITARA, MELENCIA MARAMION, LIZA MARAMION, ANGELICA
PENKIAN, PRESENTACION TAN, AS SUBSTITUTED BY HIS LEGAL HEIRS:
HERNANI GREGORY, RUDY GIMARINO, RODEL CAMEROS, VALENTIN
CAMEROS, VIRGILIO DAYONDON, PRUDENCIO JUARIZA, JR., ZOILO
JABONETE, LUISITO TAN, ERNESTINO DUNLAO, JR., FRED DUNLAO, CLARITA
ROBILLA, AND RENATO DUNLAO, Petitioners, v. AGDAO LANDLESS RESIDENTS
ASSOCIATION, INC., THE DIRECTORS LANDLESS BOARD OF OF AGDAO
RESIDENTS ASSOCIATION, INC., IN THEIR PERSONAL CAPACITY, NAMELY:
ARMANDO JAVONILLO, MA. ACELITA ARMENTANO, ALEX JOSOL, ANTONIA
AMORADA, JULIUS ALINSUB, POMPENIANO ESPINOSA, JR. JACINTO BO-OC,
HERMENIGILDO DUMAPIAS, SALCEDO DE LA CRUZ, CLAUDIO LAO,
CONSORCIO DELGADO, ROMEO CABILLO, RICARDO BACONG, RODOLFO
GALENZOGA, BENJAMIN LAMIGO, ROMEO DE LA CRUZ, ASUNCION
ALCANTARA AND LILY LOY, Respondents.
DECISION

JARDELEZA, J.:

These are consolidated petitions for review on certiorari assailing the Court of Appeals' (CA)
Decision1 and Resolution2 dated November 24, 2008 and June 19, 2009, respectively, in CA-G.R.
SP No. 01858-MIN and CA-G.R. SP No. 01861-MIN. The CA affirmed with modification the
Decision3 of the Regional Trial Court (court a quo) dated July 11, 2007 which ruled in favor of
respondents.

The Parties

Petitioners are Agdao Landless Residents Association, Inc. (ALRAI), a non-stock, non-profit
corporation duly organized and existing under and by virtue of the laws of the Republic of the
Philippines,4 and its board of directors,5 namely, Armando Javonillo (Javonillo), Ma. Acelita
Armentano (Armentano), Alex Josol, Salcedo de la Cruz, Jr., Claudio Lao, Antonia Amorada,
Julius Alinsub, Pompeniano Espinosa, Consorcio Delgado, Romeo Cabillo, Benjamin Lamigo,
Ricardo Bacong, Rodolfo Galenzoga, and Asuncion Alcantara (Alcantara).6 Respondents are
allegedly ousted members of ALRAI, namely, Rolando Maramion, Leonidas Jamisola, Virginia
Canoy (Canoy), Elizabeth Gonzales, Crispiniano Quire-Quire, Emestino Dunlao, Ella
Demandante, Ella Ria Demandante, Elgin Demandante, Satumina Witara (Witara), Virgilio
Dayondon (Dayondon), Melencia Maramion, Angelica Penkian (Penkian), Presentacion Tan,
Hemani Gregory (Gregory), Rudy Gimarino (Gimarino), Valentin Cameros, Radel Cameros
(Cameros), Zoilo Jabonete, Luisito Tan (Tan), Joseph Quire Quire, Emestino Dunlao, Jr., Fred
Dunlao, Liza Maramion, Clarita Robilla (Robilla), Renata Dunlao and Prudencio Juariza, Jr.
(Juariza).7
chanrobleslaw

The Antecedents

Dakudao & Sons, Inc. (Dakudao) executed six Deeds of Donation8 in favor of ALRAI covering
46 titled lots (donated lots).9 One Deed of Donation10 prohibits ALRAI, as donee, from partitioning
or distributing individual certificates of title of the donated lots to its members, within a period of
five years from execution, unless a written authority is secured from Dakudao.11 A violation of the
prohibition will render the donation void, and title to and possession of the donated lot will revert
to Dakudao.12 The other five Deeds of Donation do not provide for the five-year restriction.

In the board of directors and stockholders meetings held on January 5, 2000 and January 9, 2000,
respectively, members of ALRAI resolved to directly transfer 10 of the donated lots to individual
members and non members of ALRAI.13 Transfer Certificate of Title (TCT) Nos. T-62124 (now
T-322968), T-297811 (now TCT No. T-322966), T-297813 (now TCT No. T-322967) and T-
62126 (now TCT No. T-322969) were transferred to Romeo Dela Cruz (Dela Cruz). TCT Nos. T-
41374 (now TCT No. T-322963) and T-41361 (now TCT No. T-322962) were transferred to
petitioner Javonillo, the president of ALRAI. TCT Nos. T-41365 (now TCT No. T-322964) and
T-41370 (now TCT No. T-322964) were transferred to petitioner Armentano, the secretary of
ALRAI. TCT Nos. T-41367 (now TCT No. T-322971) and T-41366 were transferred to petitioner
Alcantara, the widow of the fanner legal counsel of ALRAI. The donated lot covered by TCT No.
T-41366 (replaced by TCT No. T-322970) was sold to Lily Loy (Loy) and now covered by TCT
No. T-338403.14 chanrobleslaw

Respondents filed a Complaint15 against petitioners. Respondents alleged that petitioners expelled
them as members of ALRAI, and that petitioners are abusing their powers as officers. 16
Respondents further alleged that petitioners were engaged in the following anomalous and illegal
acts: (1) requiring ALRAI's members to pay exorbitant arrear fees when ALRAI's By-Laws only
set membership dues at P1.00 per month;17 (2) partially distributing the lands donated by Dakudao
to some officers of ALRAI and to some non-members in violation of the Deeds of Donation;18 (3)
illegally expelling them as members of ALRAI without due process;19 and (4) being unable to
show the books of accounts of ALRAI.20 They also alleged that Loy (who bought one of the
donated lots from Alcantara) was a buyer in bad faith, having been aware of the status of the land
when she bought it.21 chanrobleslaw

Thus, respondents prayed for: (1) the restoration of their membership to ALRAI; (2) petitioners to
stop selling the donated lands and to annul the titles transferred to Javonillo, Armentano, Dela
Cruz, Alcantara and Loy; (3) the production of the accounting books of ALRAI and receipts of
payments from ALRAI's members; (4) the accounting of the fees paid by ALRAI's members; and
(5) damages.22 chanrobleslaw

In their Answer,23 petitioners alleged that ALRAI transferred lots to Alcantara as attorney's fees
ALRAI owed to her late husband, who was the legal counsel of ALRAI. 24 On the other hand,
Javonillo and Armentano, as president and secretary of ALRAI, respectively, made a lot of
sacrifices for ALRAI, while Dela Cruz provided financial assistance to ALRAI.25 cralawredchanrobleslaw

Petitioners also alleged that respondents who are non-members of ALRAI have no personality to
sue. They also claimed that the members who were removed were legally ousted due to their
absences in meetings.26 chanrobleslaw

The Ruling of the RTC

On July 11, 2007, the court a quo promulgated its Decision,27 the decretal portion of which reads:
chanRoblesvirtualLawlibrary

After weighing the documentary and testimonial evidence presented, as well as the arguments
propounded by the counsels, this Court tilts the scale of justice in favor of complainants and hereby
grants the following: ChanRoblesVirtualawlibrary

1. Defendants are enjoined from disposing or selling further the donated lands
to the detriment of the beneficiary-members of the Association;

2. The Complainants and/or the ousted members are hereby restored to their
membership with ALRAI, and a complete list of all bona fide members
should be made and submitted before this Court;

3. The Register of Deeds of the City of Davao is directed to annul the Land
Titles transferred to Armando Javonillo, Ma. Acelita Armentano, Romeo
dela Cruz, Asuncion Alcantara and Lily Loy with TCT Nos. T-322962, T-
 322963, T-322964, T-322965, T-322966, T-322967, T-322968, T-322969,
T-322971 and T-338403 (formerly T-322970), respectively; and to register
said titles to the appropriate donee provided in the Deeds of Donation; and
cralawlawlibrary

4. Defendants are further directed to produce all the Accounting Books of the
Association, receipts of the payments made by all the members, and for an
accounting of the fees paid by the members from the time of its
incorporation up to the present;

5. Moral, exemplary and attorney's fees being unsubstantiated, the same

cannot be given due course; and cralawlawlibrary

6. Defendants are ordered to shoulder the costs of suit.

SO ORDERED.28

The court a quo treated the case as an intra-corporate dispute.29 It found respondents to be bona
fide members of ALRAI.30 Being bona fide members, they are entitled to notices of meetings held
for the purpose of suspending or expelling them from ALRAI.31 The court a quo however found
that respondents were expelled without due process.32 It also annulled all transfers of the donated
lots because these violated the five-year prohibition under the Deeds of Donation.33 It also found
Loy a purchaser in bad faith.34 chanrobleslaw

Both Loy and petitioners filed separate appeals with the CA. Loy's appeal was docketed as CA-
G.R. SP No. 01858;35 while petitioners' appeal was docketed as CA-G.R. SP No. 1861.36 In its
Resolution37 dated October 19, 2007, the CA ordered the consolidation of the appeals.

The Ruling of the Court of Appeals

The CA affirmed with modification the court a quo's Decision. The decretal portion of the CA
Decision38 dated November 24, 2008 reads:
chanRoblesvirtualLawlibrary

WHEREFORE, the consolidated petitions are PARTLY GRANTED. The assailed Decision
dated July 11,2007 of the Regional Trial Court (RTC), Eleventh (11th)Judicial Region, Branch No.
10 of Davao City in Civil Case No. 29,047-02 is hereby AFFIRMED with MODIFICATION.

The following Transfer Certificates of Title are declared VALID:

1. TCT Nos. T-322966, T-322967, T-322968 and T-322969 in the name of petitioner
Romeo C. DelaCruz; and
2. TCT No. T-338403 in the name of petitioner Lily Loy.

The following Transfer Certificates of Title are declared VOID:

1. TCT Nos. T-322963 and T-322962 in the name of Petitioner Armando Javonillo;
 2. TCT Nos. T-322964 and T-322965 in the name of petitioner Ma. Acelita
Armentano; and
3. TCT No. T-322971 in the name of petitioner Asuncion A. Alcantara.

Petitioners who are members of ALRAI may inspect all the records and books of accounts of
ALRAI and demand accounting of its funds in accordance with Section 1, Article VII and Section
6, Article V of ALRAI's Constitution and By-Laws.

SO ORDERED.39

Under Section 2, Article III of ALRAI's Amended Constitution and By-Laws (ALRAI
Constitution), the corporate secretary should give written notice of all meetings to all members at
least three days before the date of the meeting.40 The CA found that respondents were not given
notices of the meetings held for the purpose of their termination from ALRAI at least three days
before the date of the meeting.41 Being existing members of ALRAI, respondents are entitled to
inspect corporate books and demand accounting of corporate funds in accordance with Section 1,
Article VII and Section 6, Article V ofthe ALRAI Constitution.42
chanrobleslaw

The CA also noted that among the donated lots transferred, only one [under TCT No. T-41367
(now TCT No. 322971) and transferred to Alcantara] was covered by the five-year prohibition.43
Although petitioners attached to their Memorandum44 dated November 19, 2007 a Secretary's
Certificate45 of Dakudao resolving to remove the restriction from the land covered by TCT No. T-
41367, the CA did not take this certificate into consideration because petitioners never mentioned
its existence in any of their pleadings before the court a quo. Thus, without the required written
authority from the donor, the CA held that the disposition of the land covered by TCT No. T-41367
is prohibited and the land's subsequent registration under TCT No. T-322971 is void.46 chanrobleslaw

However, the CA nullified the transfers made to Javonillo and Armentano because these transfers
violated Section 6 of Article IV of the ALRAI Constitution. Section 6 prohibits directors from
receiving any compensation, except for per diems, for their services to ALRAI. 47 The CA upheld
the validity of the transfers to Dela Cruz and Alcantara48 because the ALRAI Constitution does
not prohibit the same. The CA held that as a consequence, the subsequent transfer of the lot covered
by TCT No. T-41366 to Loy from Alcantara was also valid.49
chanrobleslaw

Both parties filed separate motions for reconsideration with the CA but these were denied in a
Resolution50 dated June 19, 2009.

Thus, the parties filed separate petitions for review on certiorari under Rule 45 of the Rules of
Court with this Court. In a Resolution51 dated September 30, 2009, we resolved to consolidate the
petitions considering they assail the same CA Decision and Resolution dated November 24, 2008
and June 19, 2009, respectively. The petitions also involve the same parties and raise interrelated
issues.

The Issues

Petitioners raise the following issues for resolution of the Court, to wit:
chanRoblesvirtualLawlibrary

1. Whether respondents should be reinstated as members of ALRAI; and

2. Whether the transfers of the donated lots are valid.

Our Ruling

We find the petition partly meritorious.

I. Legality of respondents' termination

Petitioners argue that respondents were validly dismissed for violation of the ALRAI Constitution
particularly for non-payment of membership dues and absences in the meetings.52 chanrobleslaw

Petitioners' argument is without merit. We agree with the CA's finding that respondents were
illegally dismissed from ALRAI.

We stress that only questions of law may be raised in a petition for review on certiorari under Rule
45 of the Rules of Court, since "the Supreme Court is not a trier of facts."53 It is not our function
to review, examine and evaluate or weigh the probative value of the evidence presented.

When supported by substantial evidence, the findings of fact of the CA are conclusive and binding
on the parties and are not reviewable by this Court, unless the case falls under any of the recognized
exceptions in Jurisprudence.54 chanrobleslaw

The court a quo held that respondents are bona fide members of ALRAL55 This finding was not
disturbed by the CA because it was not raised as an issue before it and thus, is binding and
conclusive on the parties and upon this Court.56 In addition, both the court a quo and the CA found
that respondents were illegally removed as members of ALRAI. Both courts found that in
terminating respondents from ALRAI, petitioners deprived them of due process.57 chanrobleslaw

Section 9158 of the Corporation Code of the Philippines (Corporation Code)59 provides that
membership in a non-stock, non-profit corporation (as in petitioner ALRAI in this case) shall be
terminated in the manner and for the cases provided in its articles of incorporation or the by-laws.

In tum, Section 5, Article II of the ALRAI Constitution60 states:

chanRoblesvirtualLawlibrary

Sec. 5. - Termination of Membership - Membership may be lost in any of the following: a)

Delinquent in the payment of monthly dues; b) failure to [attend] any annual or special
meeting of the association for three consecutive times without justifiable cause, and c)
expulsion may be exacted by majority vote of the entire members, on causes which herein
enumerated: 1) Act and utterances which are derogatory and harmful to the best interest of the
association; 2) Failure to attend any annual or special meeting of the association for six (6)
consecutive months, which shall be construed as lack of interest to continue his membership, and
3) any act to conduct which are contrary to the objectives, purpose and aims of the association as
embodied in the charter[.]61

Petitioners allege that the membership of respondents in ALRAI was terminated due to (a) non-
payment of membership dues and (b) failure to consecutively attend meetings.62 However,
petitioners failed to substantiate these allegations. In fact, the court a quo found that respondents
submitted several receipts showing their compliance with the payment of monthly dues.63
Petitioners likewise failed to prove that respondents' absences from meetings were without any
justifiable grounds to result in the loss of their membership in ALRAI.

Even assuming that petitioners were able to prove these allegations, the automatic termination of
respondents' membership in ALRAI is still not warranted. As shown above, Section 5 of the
ALRAI Constitution does not state that the grounds relied upon by petitioners will cause the
automatic termination of respondents' membership. Neither can petitioners argue that respondents'
memberships in ALRAI were terminated under letter (c) of Section 5, to wit:
chanRoblesvirtualLawlibrary

x x x c) expulsion may be exacted by majority vote of the entire members, on causes which herein
enumerated: 1) Act and utterances which are derogatory and harmful to the best interest of the
association; 2) Failure to attend any annual or special meeting of the association for six (6)
consecutive months, which shall be construed as lack of interest to continue his membership, and
3) any act to conduct which are contrary to the objectives, purpose and aims of the association as
embodied in the charter; x x x64 chanroblesvirtuallawlibrary

Although termination of membership from ALRAI may be made by a majority of the members,
the court a quo found that the "guideline (referring to Section 2, Article III of the ALRAI
Constitution) was not followed, hence, complainants' ouster from the association was illegally
done."65 The court a quo cited Section 2, Article III of the ALRAI Constitution which provides,
thus:
chanRoblesvirtualLawlibrary

Sec. 2. -Notice- The Secretary shall give or cause to be given written notice of all meetings, regular
or special to all members of the association at least three (3) days before the date of each meetings
either by mail or personally. Notice for special meetings shall specify the time and the purposes or
purpose for which it was called; x x x 66

The CA concurred with the finding of the court a quo.67 The CA noted that the evidence presented
revealed that the General Meeting for the termination of membership was to be held on July 29,
2001, at 2 o'clock in the afternoon; but the Notice to all officers and members of ALRAI informing
them about the General Meeting appeared to have been signed by ALRAI's President only on July
27, 2001.68 Thus, the CA held that the "notice for the July 29, [2001] meeting where the general
membership of ALRAI approved the expulsion of some of the respondents was short of the three
(3)-day notice requirement. More importantly, the petitioners have failed to adduce evidence
showing that the expelled members were indeed notified of any meeting or investigation
proceeding where they are given the opportunity to be heard prior to the termination of their
membership."69 chanrobleslaw
The requirement of due notice becomes more essential especially so since the ALRAI Constitution
provides for the penalties to be imposed in cases where any member is found to be in arrears in
payment of contributions, or is found to be absent from any meeting without any justifiable cause.
Section 3, Article II and Section 3, Article III of the ALRAI Constitution provide, to wit:
chanRoblesvirtualLawlibrary

Article II

xxx

Sec. 3. - Suspension of members Any member who shall be six (6) months in arrears in the payment
of monthly dues or additional contributions or assessments shall be automatically suspended and
may be reinstated only upon payment of the corresponding dues in arrears or additional
contributions and after approval of the board of Directors.70 chanrobleslaw

x x x

Article III
xxx

Sec. 3. - Any member who shall be absent from any meeting without justifiable causes shall be
liable to a fine of Two Pesos (P 2.00);71

Clearly, members proved to be in arrears in the payment of monthly dues, contributions, or

assessments shall only be automatically suspended; while members who shall be absent from any
meeting without any justifiable cause shall only be liable for a fine. Nowhere in the ALRAI
Constitution does it say that the foregoing actions shall cause the automatic termination of
membership. Thus, the CA correctly ruled that "respondents' expulsion constitutes an infringement
of their constitutional right to due process of law and is not in accord with the principles established
in Article 19 of the Civil Code, x x x."72 chanrobleslaw

There being no valid termination of respondents' membership m ALRAI, respondents remain as

its existing members.73 It follows that as members, respondents are entitled to inspect the records
and books of accounts of ALRAI subject to Section 1, Article VII74 of ALRAI's Constitution, and
they can demand the accounting of its funds in accordance with Section 6, Article V of the ALRAI
Constitution.75 In addition, Sections 7476 and 7577 of the Corporation Code also sanction the right
of respondents to inspect the records and books of accounts of ALRAI and demand the accounting
of its funds.

II. On the validity of the donated lots

We modify the decision of the CA.

At the onset, we find that the cause of action and the reliefs sought in the complaint pertaining to
the donated lands (ALRAI's corporate property) strictly call for the filing of a derivative suit, and
not an individual suit which respondents filed.
Individual suits are filed when the cause of action belongs to the stockholder personally, and not
to the stockholders as a group, or to the corporation, e.g. denial of right to inspection and denial of
dividends to a stockholder. If the cause of action belongs to a group of stockholders, such as when
the rights violated belong to preferred stockholders, a class or representative suit may be filed to
protect the stockholders in the group.78chanrobleslaw

A derivative suit, on the other hand, is one which is instituted by a shareholder or a member of a
corporation, for and in behalf of the corporation for its protection from acts committed by directors,
trustees, corporate officers, and even third persons.79 The whole purpose of the law authorizing a
derivative suit is to allow the stockholders/members to enforce rights which are derivative
(secondary) in nature, i.e., to enforce a corporate cause of action.80 chanrobleslaw

The nature of the action, as well as which court or body has jurisdiction over it, is determined
based on the allegations contained in the complaint of the plaintiff, irrespective of whether or not
the plaintiff is entitled to recover upon all or some of the claims asserted therein.81 chanrobleslaw

In this case, the complaint alleged, thus:

chanRoblesvirtualLawlibrary

FIRST CAUSE OF ACTION

9. Sometime in 2001, Complainants accidentally discovered that portions of the aforementioned

donated lands were partially distributed by the Officers of said association, AMONG
THEMSELVES, without knowledge of its members.

xxx

11. Then there was illegal partial distribution of the donated lands. Not only the President and
Secretary of the Association, but also some personalities who are not members of the association
and who themselves own big tracts of land, are the recipients of the donated lands, which acts are
contrary to the clear intents as indicated in the deed of donation. x x x82

In the same complaint, respondents prayed .for the following reliefs, among others, to wit:
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a) An Order for a writ of PRELIMINARY PROHIBITORY MANDATORY INJUNCTION to

stop the Defendants from disposing the donated lands to the detriment of the beneficiary-members
of the Association[.]

xxx

c) To cease and desist from selling donated lands subject of this case and to annul the titles
transferred x x x.

d) To annul the Land Titles fraudulently and directly transferred from the Dacudao in the names
of Defendants Javonillo, Armentano, Romeo de la Cruz and Alcantara, and subsequently to
defendant Lily Loy in the name of Agdao Landless Associatidn.83
In a strict sense, the first cause of action, and:the reliefs sought, should have been brought through
a derivative suit. The first cause of action pertains to the corporate right of ALRAI involving its
corporate properties which it owned by virtue of the Deeds of Donation. In derivative suits, the
real party-in-interest is the corporation, and the suing stockholder is a mere nominal party.84 A
derivative suit, therefore, concerns "a wrong to the corporation itself."85 chanrobleslaw

However, we liberally treat this case (in relation to the cause of action pertaining to ALRAI's
corporate properties) as one pursued by the corporation itself, for the following reasons.

First, the court a quo has jurisdiction to hear and decide this controversy. Republic Act No. 8799,86
in relation to Section 5 of Presidential Decree No. 902-A,87 vests the court a quo with original and
exclusive jurisdiction to hear and decide cases involving:
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Sec. 5. x x x

(a) Devices or schemes employed by or any acts, of the board of directors, business associates, its
officers or partnership, amounting to fraud and misrepresentation which may be detrimental to the
interest of the public and/or of the stockholders, partners, members of associations or organizations
registered with the Commission.

Second, we note that petitioners did not object to the institution of the case (on the ground that a
derivative suit should have been lodged instead of an individual suit) in any of the proceedings
before the court a quo or before the CA.88 chanrobleslaw

Third, a reading of the complaint (in relation to the cause of action pertaining to ALRAI's corporate
properties) shows that respondents do not pray for reliefs for their personal benefit; but in fact, for
the benefit of the ALRAI, to wit:
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c) To cease and desist from selling donated lands subject of this case and to annul the titles
transferred to Armando Javonillo, Ma. Acelita Armentano, Romeo de Ia Cruz, Asuncion Alcantara
and Lily Loy x x x.

d) To annul the Land Titles fraudulently and directly transferred from the (sic) Dacudao in the
names of Defendants Javonillo, Armentano, Romeo de la Cruz and Alcantara, and subsequently
to Defendant Lily Loy in the name of Agdao Landless Assiociation.89

The reliefs sought show that the complaint was filed ultimately to curb the alleged mismanagement
of ALRAI's corporate properties. We note that the danger sought to be avoided in Evangelista v.
Santos90 does not exist in this case. In Santos, plaintiff stockholders sought damages against the
principal officer of the corporation, alleging that the officer's mismanagement of the affairs and
assets of the corporation brought about the loss of the value of its stocks. In ruling against the
plaintiff-stockholders, this Court held that "[t]he stockholders may not directly claim those
damages for themselves for that would result in the appropriation by, and the distribution among
them of part of the corporate assets before the dissolution of the corporation x x x."91 More, in
Santos, if only the case was brought before the proper venue, this Court added, "we note that the
action stated in their complaint is susceptible of being converted into a derivative suit for the
benefit of the corporation by a mere change in the prayer."92 chanrobleslaw

In this case, the reliefs sought do not entail the premature distribution of corporate assets. On the
contrary, the reliefs seek to preserve them for the corporate interest of ALRAI. Clearly then, any
benefit that may be recovered is accounted for, not in favor of respondents, but for the corporation,
who is the real party-in-interest Therefore, the occasion for the strict application of the rule that a
derivative suit should be brought in order to protect and vindicate the interest of the corporation
does not obtain under the circumstances of this case.

Commart (Phils.), Inc. v. Securities and Exchange Commission (SEC)93 upholds the same
principle. In that case, the chairman and board of directors of Commart were sued for diverting
into their private accounts amounts due to Commart as commissions. Respondents argued that the
Hearing Panel of the SEC should dismiss the case·on the ground that it has no jurisdiction over
the matter because the case is not a derivative suit The Hearing Panel denied the motion, and was
affirmed by the SEC. Upon appeal, this Court affirmed the decision of the SEC, to wit:
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The complaint in SEC Case No. 2673, particularly paragraphs 2 to 9 under First Cause of Action,
readily shows that it avers the diversion of corporate income into the private bank accounts of
petitioner x x x and his wife. Likewise, the principal relief prayed for in the complaint is the
recovery of a sum of money in favor of the corporation. This being the case, the complaint is
definitely a derivative suit. xxx

xxx

In any case, the suit is for the benefit of Commart itself, for a judgment in favor of the complainants
will necessarily mean recovery by the corporation of the US$2.5 million alleged to have been
diverted from its coffers to the private bank accounts of its top managers and directors. Thus, the
prayer in the Amended Complaint is for judgment ordering respondents x x x, "to account for and
to, turn over or deliver to the Corporation" the aforesaid sum, with legal interest, and "ordering all
the respondents, as members of the Board of Directors to take such remedial steps as would protect
the corporation from further depredation of the funds and property."94

Fourth, based on the records, we find that there is substantial compliance with the requirements of
a derivative suit, to wit:
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a) [T]he party bringing suit should be a shareholder as of the time of the act or transaction
complained of, the number of his shares not being material;

b) [H]e has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of
directors for the appropriate relief but the latter has failed or refused to heed his plea; and cralawlawlibrary

c) [T]he cause of action actually devolves on the corporation, the wrongdoing or harm having
been, or being caused to the corporation and not to the particular stockholder bringing the suit.95

Here, the court a quo found that respondents are bona fide members of ALRAI.96 As for the second
requisite, respondents also have tried to demand appropriate relief within the corporation, but the
demand was unheeded. In their Memorandum before the CA, respondents alleged, thus:
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4.18 The occurrence of the series of distressing revelation prompted Respondents to confront
Defendant Armentano on the accounting of all payments made including the justification for the
illegal distribution of the Donated Land to four persons mentioned in preceding paragraph (4.12)
of this memorandum. Unfortunately, Petitioner Armentano merely reasoned their (referring to the
four persons) right to claim ownership of the land as compensation for their service and attorney's
fees;

4.19 Anxious of the plan of action taken by the Respondents against the Petitioners, the latter
started harassing the unschooled Respondents by unduly threatening them. Respondents simply
wanted the land due them, an accounting of the finances of the Association and justification of the
illegal disposition of the Donated Land which was donated for the landless members of the
Association;

4.20 As a consequence, Petitioners on their own, with grave abuse of power and in violation of the
Constitution and By-Laws of the Association maliciously expelled the Respondents particularly
those persistently inquisitive about Petitioners' moves and acts which only emphasized their
practice of upholding the MOB RULE by presenting solicited signatures of alleged members and
non-members written on a scrap of paper signifying confirmation of the ouster (sic) members. x x
x97

We note that respondents' demand on Armentano substantially complies with the second
requirement. While it is true that the complaining stockholder must show that he has exhausted all
the means within his reach to attain within the corporation the redress for his grievances, demand
is unnecessary if the exercise will result in futility.98 Here, after respondents demanded Armentano
to justify the transfer of ALRAI's properties to the individual petitioners, respondents were
expelled from the corporation, which termination we have already ruled as invalid. To our mind,
the threat of expulsion against respondents is sufficient to forestall any expectation of further
demand for relief from petitioners. Ultimately, to make an effort to demand redress within the
corporation will only result in futility, rendering the exhaustion of other remedies unnecessary.

Finally, the third requirement for the institution of a derivative suit is clearly complied with. As
discussed in the previous paragraphs, the cause of action and the reliefs sought ultimately redound
to the benefit of ALRAI. In this case, and as in a proper derivative suit, ALRAI is the party-in-
interest and respondents are merely nominal parties.

In view of the foregoing, and considering further the interest of justice, and the length of time that
this case has been pending, we liberally treat this case as one pursued by the corporation to protect
its corporate rights. As the court a quo noted, this case "commenced [on] April 2, 2002, blossomed
in a full-blown trial and ballooned into seven (7) voluminous rollos."99 chanrobleslaw

We now proceed to resolve the issue of the validity of the transfers of the donated lots to Javonillo,
Armentano, DelaCruz, Alcantara and Loy. We agree with the CA in ruling that the TCTs issued
in the names of Javonillo, Armentano and Alcantara are void.100 We modify the ruling of the CA
insofar as we rule that the TCTs issued in the names of Dela Cruz and Loy are also void. 101 chanrobleslaw

One of the primary purposes of ALRAI is the giving of assistance in uplifting and promoting better
living conditions to all members in particular and the public in general.102 One of its objectives
includes "to uplift and promote better living condition, education, health and general welfare of all
members in particular and the public in general by providing its members humble shelter and
decent housing."103 Respondents maintain that it is pursuant to this purpose and objective that the
properties subject of this case were donated to ALRAI.104 chanrobleslaw

Section 36, paragraphs 7 and 11 of the Corporation Code provide:

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Sec. 36. Corporate powers and capacity. - Every corporation incorporated under this Code has the
power and capacity: ChanRoblesVirtualawlibrary

xxx

7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise
deal with such real and personal property, including securities and bonds of other corporations, as
the transaction of the lawful business of the corporation may reasonably and necessarily require,
subject to the limitations prescribed by law and the Constitution.

xxx

11. To exercise such other powers as may be essential or necessary to carry out its purpose or
purposes as stated in the articles of incorporation.105 chanroblesvirtuallawlibrary

The Corporation Code therefore tells us that the power of a corporation to validly grant or convey
any of its real or personal properties is circumscribed by its primary purpose. It is therefore
important to determine whether the grant or conveyance is pursuant to a legitimate corporate
purpose, or is at least reasonable and necessary to further its purpose.

Based on the records of this case, we find that the transfers of the corporate properties to Javonillo,
Armentano, Dela Cruz, Alcantara and Loy are bereft of any legitimate corporate purpose, nor were
they shown to be reasonably necessary to further ALRAI's purposes. This is principally because,
as respondents argue, petitioners "personally benefitted themselves by allocating among
themselves vast track of lands at the dire expense of the landless general membership of the
Association."106 chanrobleslaw

We take first the cases of Dela Cruz, Alcantara and Loy.

We disagree with theCA in ruling that the TCTs issued in the name of Dela Cruz are valid. The
transfer of property to him does not further the corporate purpose of ALRAI. To justify the transfer
to Dela Cruz, petitioners merely allege that, "[o]n the other hand, the lots given by ALRAI to
Romeo de la Cruz were compensation for the financial assistance he had been extending to
ALRAI."107 Records of this case do not bear any evidence to show how much Dela Cruz has
extended to ALRAI as financial assistance. The want of evidence to support this allegation cannot
allow a determination whether the amount of the financial help that Dela Cruz extended to ALRAI
is commensurate to the amount of the property transferred to him. The lack of evidence on this
point is prejudicial to ALRAI because ALRAI had parted with its property without any means by
which to determine whether the transfer is fair and reasonable under the circumstances.

The same is true with the transfer of properties to Alcantara. Petitioners allege that Alcantara's
husband, Atty. Pedro Alcantara, "handled all the legal work both before the Regional Trial Court
in Davao City (Civil Case No. 16192) and the Court of Appeals in Manila (CA GR No. 13744).
He agreed to render his services although he was being paid intermittently, with just small
amounts, in the hope that he will be compensated when ALRAI triumphs in the litigation."108
Petitioners thus claim that "[b]ecause of the legal services of her husband, who is now deceased,
petitioner Alcantara was given by ALRAI two (2) lots x x x."109 chanrobleslaw

Petitioners admit that Atty. Pedro Alcantara represented ALRAI as counsel on part contingency
basis.110 In their Memorandum before the court a quo, respondents alleged that, "[i]n fact,
Complainants have duly paid Atty. Alcantara's legal fees as evidence (sic) by corresponding
receipts issued by the receiving Officer of the Association."111 The aforementioned receipts112
show that Atty. Pedro Alcantara had already been paid the total amount of P16,845.00.

In Rayos v. Hernandez,113 we held that a contingent fee arrangement is valid in this jurisdiction. It
is generally recognized as valid and binding, but must be laid down in an express contract. In the
same case, we have identified the circumstances to be considered in determining the
reasonableness of a claim for attorney's fees as follows: (1) the amount and character of the service
rendered; (2) labor, time, and trouble involved; (3) the nature and importance of the litigation or
business in which the services were rendered; (4) the responsibility imposed; (5) the amount of
money or the value of the property affected by the controversy or involved in the employment; (6)
the skill and experience called for in the performance of the services; (7) the professional character
and social standing of the attorney; (8) the results secured; (9) whether the fee is absolute or
contingent, it being recognized that an attorney may properly charge a much larger fee when it is
contingent than when it is not; and (10) the financial capacity and economic status of the client
have to be taken into account in fixing the reasonableness of the fee.114 chanrobleslaw

In this case however, petitioners did not substantiate the extent of the services that Atty. Pedro
Alcantara rendered for ALRAL In fact, no engagement or retainer contract was ever presented to
prove the terms of their agreement. Petitioners did not also present evidence as to the value of the
ALRAI properties at the time of transfer to Alcantara. There is therefore no proof that the amount
of the properties transferred to Alcantara, in addition to the legal fees he received, is commensurate
(as compensation) to the reasonable value of his legal services. Using the guidelines set forth in
Rayos, absent proof, there is no basis to determine whether the transfer of the property to Alcantara
is reasonable under the circumstances.115
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The importance of this doctrine in Rayos is emphasized in the Canons of Professional Ethics116
and the Rules of Court.117 In both, the overriding consideration is the reasonableness of the terms
of the contingent fee agreement, so much so that the grant of the contingent fee is subject to the
supervision of the court.118 chanrobleslaw

Spouses Cadavedo v. Lacaya119 further illustrates this principle. In that case, this Court was
confronted with the issue of whether the contingent attorney's fees consisting of one-half of the
property that was subject of litigation was valid and reasonable. This Court ruled that the attorney's
fee is excessive and unconscionable, and is therefore void. The Court said that as "matters then
stood, [there] was not a sufficient reason to justify a large fee in the absence of any showing that
special skills and additional work had been involved."120 The Court also noted that Spouses
Cadavedo and Atty. Lacaya already made arrangements for the cost and expenses for the cases
handled.121chanrobleslaw

Similarly in this case, there is no proof that special skills and additional work have been put in by
Atty. Pedro Alcantara. Further, as adverted to in previous paragraphs, receipts show that
intermittent payments as legal fees have already been paid to him. We also note that in this case,
not only one-half of a property was transferred to Alcantara as compensation; but two whole
parcels of land - one with more or less 400 square meters (TCT No. 41366), and the other with
more or less 395 square meters (TCT No. 41367). 122 The amount of fee contracted for, standing
alone and unexplained would be sufficient to show that an unfair advantage had been taken of the
client, or that a legal fraud had been perpetrated on him.123chanrobleslaw

Consequently, we also find that Alcantara's subsequent sale to Loy is not valid. Alcantara cannot
sell the property, over which she did not have the right to own, in the first place. More, based on
the records, the court a quo had already made a finding that Loy is guilty of bad faith as to render
124
her purchase of the property from Alcantara void. chanrobleslaw

We likewise find that there is failure to show any legitimate corporate purpose in the transfer of
ALRAI's corporate properties to Javonillo and Armentano.

The Board Resolution125 confirming the transfer of ALRAI's corporate properties to Javonillo and
Armentano merely read, "[t]hat the herein irrevocable confirmation is made in recognition of, and
gratitude for the outstanding services rendered by x x x Mr. Armando Javonillo, our tireless
President and Mrs. Acelita Armentano, our tactful, courageous, and equally tireless Secretary,
without whose efforts and sacrifices to acquire a portion of the realty of Dacudao & Sons, Inc.,
would not have been attained."126 In their Memorandum, petitioners also alleged that "[t]he most
difficult part of their (Javonillo and Armentano) job was to raise money to meet expenses. x x x It
was very difficult for petitioners Javonillo and Armentano when they needed to pay P300,000.00
for realty tax on the land donated by Dakudao and Sons, Inc. to ALRAI. It became more difficult
when the Bureau of Internal Revenue was demanding P6,874,000.00 as donor's tax on the donated
lands. Luckily, they were able to make representation with the BIR to waive the tax."127 chanrobleslaw

These reasons cannot suffice to prove any legitimate corporate purpose in the transfer of the
properties to Javonillo and Armentano. For one, petitioners cannot argue that the properties
transferred to them will serve as reimbursements of the amounts they advanced for ALRAL There
is no evidence to show that they indeed paid the realty tax on the donated lands. Neither did
petitioners present any proof of actual disbursements they incurred whenever Javonillo and
Armentano allegedly helped Atty. Pedro Alcantara in handling the cases involving ALRAI.128 Like
in the cases of Dela Cruz and Alcantara, absent proof, there was no basis by which it could have
been determined whether the transfer of properties to Javonillo and Armentano was reasonable
under the circumstances at that time. Second, petitioners cannot argue that the properties are
transferred as compensatioh for Javonillo. It is well settled that directors of corporations
presumptively serve without compensation; so that while the directors, in assigning themselves
additional duties, act within their power, they nonetheless act in excess of their authority by voting
for themselves compensation for such additional duties.129 Even then, aside from the claim of
petitioners, there is no showing that Javonillo rendered extraordinary or unusual services to
ALRAI.

The lack of legitimate corporate purpose is even more emphasized when Javonillo and Armentano,
as a director and an officer of ALRAI, respectively, violated the fiduciary nature130 of their
positions in the corporation.

Section 32 of the Corporation Code provides, thus:

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Sec. 32. Dealings of directors, trustees or officers with the corporation. —A contract of the
corporation with one or more of its directors or trustees or officers is voidable, at the option of
such corporation, unless all of the following conditions are present:

1. That the presence of such director or trustee in the board meeting in which the contract was
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approved was not necessary to constitute a quorum for such meeting;

2. That the vote of such director or trustee was not necessary for the approval of the contract;
3. That the contract is fair and reasonable under the circumstances; and
4. That in case of an officer, the contract has been previously authorized by the board of directors.

Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of
a contract with a director or trustee, such contract may be ratified by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock or of at least two thirds (2/3)
of the members in a meeting called for the purpose: Provided, That full disclosure of the adverse
interest of the directors or trustees involved is made at such meeting: Provided, however, That the
contract is fair and reasonable under the circumstances.

Being the corporation's agents and therefore, entrusted with the management of its affairs, the
directors or trustees and other officers of a corporation occupy a fiduciary relation towards it, and
cannot be allowed to contract with the corporation, directly or indirectly, or to sell property to it,
or purchase property from it, where they act both for the corporation and for themselves.131 One
situation where a director may gain undue advantage over his corporation is when he enters into a
132
contract with the latter. chanrobleslaw

Here, we note that Javonillo, as a director, signed the Board Resolutions133 confirming the transfer
of the corporate properties to himself, and to Armentano. Petitioners cannot argue that the transfer
of the corporate properties to them is valid by virtue of the Resolution134 by the general
membership of ALRAI confirming the transfer for three reasons.

First, as cited, Section 32 requires that the contract should be ratified by a vote representing at least
two-thirds of the members in a meeting called for the purpose. Records of this case do not show
whether the Resolution was indeed voted by the required percentage of membership. In fact,
respondents take exception to the credibility of the signatures of the persons who voted in the
Resolution. They argue that, "from the alleged 134 signatures, 24 of which are non-members, 4 of
which were signed twice under different numbers, and 27 of which are apparently proxies
unequipped with the proper authorization. Obviously, on such alleged general membership
meeting the majority of the entire membership was not attained."135 chanrobleslaw

Second, there is also no showing that there was full disclosure of the adverse interest of the
directors involved when the Resolution was approved. Full disclosure is required under the
aforecited Section 32 of the Corporation Code.136 chanrobleslaw

Third, Section 32 requires that the contract be fair and reasonable under the circumstances. As
previously discussed, we find that the transfer of the corporate properties to the individual
petitioners is not fair and reasonable for (1) want of legitimate corporate purpose, and for (2) the
breach of the fiduciary nature of the positions held by Javonillo and Armentano. Lacking any of
these (full disclosure and a showing that the contract is fair and reasonable), ratification by the
two-thirds vote would be of no avail.137 chanrobleslaw

In view of the foregoing, we rule that the transfers of ALRAI's corporate properties to Javonillo,
Armentano, Dela Cruz, Alcantara and Loy are void. We affirm the finding of the court a quo when
it ruled that "[n]o proof was shown to justify the transfer of the titles, hence, said transfer should
be annulled."138
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WHEREFORE, in view of the foregoing, the petitions for review on certiorari in G.R. Nos.
188642 & 189425 and in G.R. Nos. 188888-89 are PARTIALLY GRANTED. The Decision of
the CA dated November 24, 2008 and its Resolution dated June 19, 2009 ruling that respondents
are reinstated as members of ALRAI are hereby AFFIRMED. The Decision of theCA dated
November 24, 2008 and its Resolution dated June 19, 2009 are MODIFIED as follows:

The following Transfer Certificates of Title are VOID:

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(1) TCT Nos. T-322962 and T-322963 in the name of Armando Javonillo;
(2) TCT Nos. T-322964 and T-322965 in the name of Ma. Acelita Armentano;
(3) TCT Nos. T-322966, T-322967, T-322968, and T-322969 in the name of Romeo Dela Cruz;
(4) TCT No. T-338403 in the name of Lily Loy; and
(5) TCT No. T-322971 in the name of Asuncion Alcantara.

SO ORDERED. chanRoblesvirtualLawlibrary

G.R. No. 207246

JOSE M. ROY III, Petitioner

vs.
CHAIRPERSON TERESITA HERBOSA, THE SECURITIES AND EXCHANGE
COMMISSION, and PHILIPPINE LONG DISTANCE TELEPHONE COMP ANY,,
Respondents

x-----------------------x
WILSON C. GAMBOA, JR., DANIEL V. CARTAGENA, JOHN WARREN P. GABINETE,
ANTONIO V. PESINA, JR., MODESTO MARTINY. MAMON III, and GERARDO C.
EREBAREN, Petitioners-in-Intervention,

x-----------------------x

PHILIPPINE STOCK EXCHANGE, INC. Respondent-in-Intervention,

x-----------------------x

SHAREHOLDERS' ASSOCIATION OF THE PHILIPPINES, INC., Respondent-in-

Intervention.

RESOLUTION

CAGUIOA, J.:

Before the Court is the Motion for Reconsideration dated January 19, 20171 (the Motion) filed by
petitioner Jose M. Roy III (movant) seeking the reversal and setting aside of the Decision dated
November 22, 20162 (the Decision) which denied the movant's petition, and declared that the
Securities and Exchange Commission (SEC) did not commit grave abuse of discretion in issuing
Memorandum Circular No. 8, Series of 2013 (SEC-MC No. 8) as the same was in compliance
with, and in fealty to, the decision of the Court in Gamboa v. Finance Secretary Teves,3 (Gamboa
Decision) and the resolution4 denying the Motion for Reconsideration therein (Gamboa
Resolution).

The Motion presents no compelling and new arguments to justify the reconsideration of the
Decision.

The grounds raised by movant are: (1) He has the requisite standing because this case is one of
transcendental importance; (2) The Court has the constitutional duty to exercise judicial review
over any grave abuse of discretion by any instrumentality of government; (3) He did not rely on
an obiter dictum; and (4) The Court should have treated the petition as the appropriate device to
explain the Gamboa Decision.

The Decision has already exhaustively discussed and directly passed upon these grounds. Movant's
petition was dismissed based on both procedural and substantive grounds.

Regarding the procedural grounds, the Court ruled that petitioners (movant and petitioners-in-
intervention) failed to sufficiently allege and establish the existence of a case or controversy and
locus standi on their part to warrant the Court's exercise of judicial review; the rule on the hierarchy
of courts was violated; and petitioners failed to implead indispensable parties such as the
Philippine Stock Exchange, Inc. and Shareholders' Association of the Philippines, Inc. 5

In connection with the failure to implead indispensable parties, the Court's Decision held:
Under Section 3, Rule 7 of the Rules of Court, an indispensable party is a party-in-interest without
whom there can be no final determination of an action. Indispensable parties are those with such a
material and direct interest in the controversy that a final decree would necessarily affect their
rights, so that the court cannot proceed without their presence. The interests of such indispensable
parties in the subject matter of the suit and the relief are so bound with those of the other parties
that their legal presence as parties to the proceeding is an absolute necessity and a complete and
efficient determination of the equities and rights of the parties is not possible if they are not joined.

Other than PLDT, the petitions failed to join or implead other public utility corporations subject
to the same restriction imposed by Section 11, Article XII of the Constitution. These corporations
are in danger of losing their franchise and property if they are found not compliant with the
restrictive interpretation of the constitutional provision under review which is being espoused by
petitioners. They should be afforded due notice and opportunity to be heard, lest they be deprived
of their property without due process.

Not only are public utility corporations other than PLDT directly and materially affected by the
outcome of the petitions, their shareholders also stand to suffer in case they will be forced to divest
their shareholdings to ensure compliance with the said restrictive interpretation of the term
"capital". As explained by SHAREPHIL, in five corporations alone, more than Php158 Billion
worth of shares must be divested by foreign shareholders and absorbed by Filipino investors if
petitioners' position is upheld.

Petitioners' disregard of the rights of these other corporations and numerous shareholders
constitutes another fatal procedural flaw, justifying the dismissal of their petitions. Without giving
all of them their day in court, they will definitely be deprived of their property without due
process of law. 6

This is highlighted to clear any misimpression that the Gamboa Decision and Gamboa Resolution
made a categorical ruling on the meaning of the word "capital" under Section 11, Article XII of
the Constitution only in respect of, or only confined to, respondent Philippine Long Distance
Telephone Company (PLDT). Nothing is further from the truth. Indeed, a fair reading of the
Gamboa Decision and Gamboa Resolution shows that the Court's pronouncements therein would
affect all public utilities, and not just respondent PLDT.

On the substantive grounds, the Court disposed of the issue on whether the SEC gravely abused
its discretion in ruling that respondent PLDT is compliant with the limitation on foreign ownership
under the Constitution and other relevant laws as without merit. The Court reasoned that "in the
absence of a definitive ruling by the SEC on PLDT's compliance with the capital requirement
pursuant to the Gamboa Decision and Resolution, any question relative to the inexistent ruling is
premature."7

In resolving the other substantive issue raised by petitioners, the Court held that:

[E]ven if the resolution of the procedural issues were conceded in favor of petitioners, the petitions,
being anchored on Rule 65, must nonetheless fail because the SEC did not commit grave abuse of
discretion amounting to lack or excess of jurisdiction when it issued SEC-MC No. 8. To the
contrary, the Court finds SEC-MC No. 8 to have been issued in fealty to the Gamboa Decision
and Resolution.8

To belabor the point, movant's petition is not a continuation of the Gamboa case as the Gamboa
Decision attained finality on October 18, 2012, and thereafter Entry of Judgment was issued on
December 11, 2012.9

As regards movant's repeated invocation of the transcendental importance of the Gamboa case,
this does not ipso facto accord locus standi to movant. Being a new petition, movant had the burden
to justify his locus standi in his own petition. The Court, however, was not persuaded by his
justification.

Pursuant to the Court's constitutional duty to exercise judicial review, the Court has conclusively
found no grave abuse of discretion on the part of SEC in issuing SEC-MC No. 8.

The Decision has painstakingly explained why it considered as obiter dictum that pronouncement
in the Gamboa Resolution that the constitutional requirement on Filipino ownership should "apply
uniformly and across the board to all classes of shares, regardless of nomenclature and category,
comprising the capital of a corporation."[[9-a]] The Court stated that:

[T]he fallo or decretal/dispositive portions of both the Gamboa Decision and Resolution are
definite, clear and unequivocal. While there is a passage in the body of the Gamboa Resolution
that might have appeared contrary to the fallo of the Gamboa Decision x x x the definiteness and
clarity of the fallo of the Gamboa Decision must control over the obiter dictum in the Gamboa
Resolution regarding the application of the 60-40 Filipino-foreign ownership requirement to "each
class of shares, regardless of differences in voting rights, privileges and restrictions." 10

To the Court's mind and, as exhaustively demonstrated in the Decision, the dispositive portion of
the Gamboa Decision was in no way modified by the Gamboa Resolution.

The heart of the controversy is the interpretation of Section 11, Article XII of the Constitution,
which provides: "No franchise, certificate, or any other form of authorization for the operation of
a public utility shall be granted except to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines at least sixty per centum of whose capital
is owned by such citizens x x x."

The Gamboa Decision already held, in no uncertain terms, that what the Constitution requires is
"[fJull [and legal] beneficial ownership of 60 percent of the outstanding capital stock, coupled with
60 percent of the voting rights x x x must rest in the hands of Filipino nationals x x x." 11 And,
precisely that is what SEC-MC No. 8 provides, viz.: "x x x For purposes of determining
compliance [with the constitutional or statutory ownership], the required percentage of Filipino
ownership shall be applied to BOTH (a) the total number of outstanding shares of stock entitled to
vote in the election of directors; AND (b) the total number of outstanding shares of stock, whether
or not entitled to vote x x x." 12
In construing "full beneficial ownership," the Implementing Rules and Regulations of the Foreign
Investments Act of 1991 (FIA-IRR) provides:

For stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal
title is not enough to meet the required Filipino equity. Full beneficial ownership of the stocks,
coupled with appropriate voting rights is essential. Thus, stocks, the voting rights of which have
been assigned or transferred to aliens cannot be considered held by Philippine citizens or
Philippine nationals. 13

In turn, "beneficial owner" or "beneficial ownership" is defined in the Implementing Rules and
Regulations of the Securities Regulation Code (SRC-IRR) as:

[A]ny person who, directly or indirectly, through any contract, arrangement, understanding,
relationship or otherwise, has or shares voting power (which includes the power to vote or direct
the voting of such security) and/or investment returns or power (which includes the power to
dispose of, or direct the disposition of such security) x x x. 14

Thus, the definition of "beneficial owner or beneficial ownership" in the SRC-IRR, which is in
consonance with the concept of "full beneficial ownership" in the FIA-IRR, is, as stressed in the
Decision, relevant in resolving only the question of who is the beneficial owner or has beneficial
ownership of each "specific stock" of the public utility company whose stocks are under review.
If the Filipino has the voting power of the "specific stock", i.e., he can vote the stock or direct
another to vote for him, or the Filipino has the investment power over the "specific stock", i.e.,
he can dispose of the stock or direct another to dispose of it for him, or both, i.e., he can vote and
dispose of that "specific stock" or direct another to vote or dispose it for him, then such Filipino
is the "beneficial owner" of that "specific stock." Being considered Filipino, that "specific stock"
is then to be counted as part of the 60% Filipino ownership requirement under the Constitution.
The right to the dividends, jus fruendi - a right emanating from ownership of that "specific stock"
necessarily accrues to its Filipino "beneficial owner."

Once more, this is emphasized anew to disabuse any notion that the dividends accruing to any
particular stock are determinative of that stock's "beneficial ownership." Dividend declaration is
dictated by the corporation's unrestricted retained earnings. On the other hand, the corporation's
need of capital for expansion programs and special reserve for probable contingencies may limit
retained earnings available for dividend declaration. 15 It bears repeating here that the Court in the
Gamboa Decision adopted the foregoing definition of the term "capital" in Section 11, Article XII
of the 1987 Constitution in express recognition of the sensitive and vital position of public utilities
both in the national economy and for national security, so that the evident purpose of the
citizenship requirement is to prevent aliens from assuming control of public utilities, which may
be inimical to the national interest. 16 This purpose prescinds from the "benefits"/dividends that
are derived from or accorded to the particular stocks held by Filipinos vis-a-vis the stocks held by
aliens. So long as Filipinos have controlling interest of a public utility corporation, their decision
to declare more dividends for a particular stock over other kinds of stock is their sole prerogative
- an act of ownership that would presumably be for the benefit of the public utility corporation
itself. Thus, as explained in the Decision:
In this regard, it would be apropos to state that since Filipinos own at least 60% of the outstanding
shares of stock entitled to vote directors, which is what the Constitution precisely requires, then
the Filipino stockholders control the corporation, i.e., they dictate corporate actions and decisions,
and they have all the rights of ownership including, but not limited to, offering certain preferred
shares that may have greater economic interest to foreign investors - as the need for capital for
corporate pursuits (such as expansion), may be good for the corporation that they own. Surely,
these "true owners" will not allow any dilution of their ownership and control if such move will
not be beneficial to them. 17

Finally, as to how the SEC will classify or treat certain stocks with voting rights held by a trust
fund that is created by the public entity whose compliance with the limitation on foreign ownership
under the Constitution is under scrutiny, and how the SEC will determine if such public utility
does, in fact, control how the said stocks will be voted, and whether, resultantly, the trust fund
would be considered as Philippine national or not - lengthily discussed in the dissenting opinion
of Justice Carpio - is speculative at this juncture. The Court cannot engage in guesswork. Thus,
there is need of an actual case or controversy before the Court may exercise its power of judicial
review. The movant's petition is not that actual case or controversy.

Thus, the discussion of Justice Carpio' s dissenting opinion as to the voting preferred shares created
by respondent PLDT, their acquisition by BTF Holdings, Inc., which appears to be a wholly-owned
company of the PLDT Beneficial Trust Fund (BTF), and whether or not it is respondent PLDT's
management that controls BTF and BTF Holdings, Inc. - all these are factual matters that are
outside the ambit of this Court's review which, as stated in the beginning, is confined to
determining whether or not the SEC committed grave abuse of discretion in issuing SEC-MC No.
8; that is, whether or not SEC-MC No. 8 violated the ruling of the Court in Gamboa v. Finance
Secretary Teves, 18 and the resolution in Heirs of Wilson P. Gamboa v. Finance Sec.
Teves19denying the Motion for Reconsideration therein as to the proper understanding of
"capital".

To be sure, it would be more prudent and advisable for the Court to await the SEC's prior
determination of the citizenship of specific shares of stock held in trust - based on proven facts -
before the Court proceeds to pass upon the legality of such determination.

As to whether respondent PLDT is currently in compliance with the Constitutional provision

regarding public utility entities, the Court must likewise await the SEC's determination thereof
applying SEC-MC No. 8. After all, as stated in the Decision, it is the SEC which is the government
agency with the competent expertise and the mandate of law to make such determination.

In conclusion, the basic issues raised in the Motion having been duly considered and passed upon
by the Court in the Decision and no substantial argument having been adduced to warrant the
reconsideration sought, the Court resolves to DENY the Motion with FINALITY.

WHEREFORE, the subject Motion for Reconsideration is hereby DENIED WITH FINALITY.
No further pleadings or motions shall be entertained in this case. Let entry of final judgment be
issued immediately.
SO ORDERED.

G.R. No. 210316, November 28, 2016

THE SECURITIES AND EXCHANGE COMMISSION (SEC) CHAIRPERSON

TERESITA J. HERBOSA, COMMISSIONER MA. JUANITA E. CUETO,
COMMISIONER RAUL J. PALABRICA, COMMISSIONER MANUEL HUBERTO B.
GAITE, COMMISIONER ELADIO M. JALA, AND THE SEC ENFORCEMENT AND
PROSECUTION DEPARTMENT, Petitioners, v. CJH DEVELOPMENT CORPORATION
AND CJH SUITES CORPORATION, HEREIN REPRESENTED BY ITS EXECUTIVE
VICE-PRESIDENT AND CHIEF OPERATING OFFICER, ALFREDO R. YÑIGUEZ III,
Respondents.

DECISION

PERALTA, J.:

Before the Court is a petition for review on certiorari seeking to annul and set aside the Decision1
and Resolution2 of the Court of Appeals (CA), dated June 7, 2013 and November 28, 2013,
respectively, in CA-G.R. SP No. 125482. The assailed CA Decision annulled and set aside the
Cease and Desist Order (CDO) issued by the Securities and Exchange Commission (SEC) En Banc
on June 7, 2012, and dismissed SEC-CDO Case No. 05-12-006, while the CA Resolution denied
petitioners' Motion for Reconsideration.

The facts of the case are as follows: cralawlawlibrary

Herein respondent CJH Development Corporation (CJHDC) is a duly organized domestic

corporation which is engaged in the acquisition, development, sale, lease and management of real
estate and any improvements thereon or any interest and right therein.3 Respondent CJH Suites
Corporation (CJHSC), on the other hand, is a wholly-owned subsidiary of CJHDC which was
formed primarily for the purpose of acquiring, maintaining, operating and managing hotels, inns,
lodging houses, restaurants and other allied businesses.4

On October 19, 1996, CJHDC entered into a Lease Agreement (Agreement) with the Bases
Conversion and Development Authority (BCDA) for the development into a public tourism
complex, multiple-use forest watershed and human resource development center, of a 247-hectare
property within the John Hay Special Economic Zone in Baguio City. The fixed annual rental for
the property for the first five years was pegged at P425,001,378.00 or five percent of Gross
Revenues, whichever is higher. Thereafter, for the duration of the lease period, the fixed annual
rental shall not be more than P150,000,000.00 or five percent of Gross Revenues, whichever is
higher. Among other provisions, the Agreement authorized CJHDC to sub-lease, develop and
manage the abovementioned property for a period of fifty (50) years, or until 2046. It was also
provided that, upon expiration of the Agreement, the leased property shall revert back to the BCDA
and all the improvements thereon shall become its property.

Subsequently, CJHDC came up with a development plan and put it into effect. Part of such
development plan was the construction of two (2) condominium-hotels (condotels) which it named
as "The Manor" and "The Suites". Subject to CJHDC's leasehold rights under the Agreement, the
residential units in these condotels were then offered for sale to the general public by means of
two schemes. The first is a straight purchase and sale contract where the buyer pays the purchase
price for the unit bought, either in lump sum or on installment basis and, thereafter, enjoys the
benefits of full ownership, subject to payment of maintenance dues and utility fees. The second
scheme involved the sale of the unit with an added option to avail of a "leaseback" or a "money-
back" arrangement. Under this added option, the buyer pays for the unit bought and, subsequently,
surrenders its possession to the management of CJHDC or CJHSC. These corporations would then
create a pool of these units and, in tum, will offer them for billeting under the management of the
hotel operated by the Camp John Hay Leisure, Inc. (CJHLI). This arrangement lasts for a period
of fifteen (15) years with a renewal option for the same period until 2046. The buyers who opt for
the "leaseback" arrangement will receive either a proportionate share in seventy percent (70%) of
the annual income derived from the hotel operation of the pooled rooms or a guaranteed eight
percent (8%) return on their investment. On the other hand, those who choose to avail of the
"money-back" arrangement are entitled to a return of the purchase price they paid for the units by
expiration of the Lease Agreement in 2046. The buyers are given the right to use their units for
thirty (30) days within a year and they are exempted from paying the monthly dues and utility fees.

Sometime in May 2010, the BCDA and the CJHDC entered into an agreement for the restructuring
of the latter's rental payments and other financial obligations to the former. Thus, pursuant to this
agreement, CJHDC transferred ownership of, among others, sixteen (16) units from "The Manor"
and ten (10) units from "The Suites" to the BCDA via dacion en pago. These units were covered
by Limited Warranty Deeds and were subject to a "leaseback" arrangement.

Subsequently, the BCDA acquired information regarding CJHDC and CJHSC's scheme of selling
"The Manor" and "The Suites" units through "leaseback" or "money-back" terms. Hence, in a letter
dated November 18, 2011, the BCDA requested the SEC to conduct an investigation into the
operations of CJHDC and CJHSC on the belief that the "leaseback" or "money-back" arrangements
they are offering to the public is, in essence, investment contracts which are considered as
securities under Republic Act No. 8799, otherwise known as the Securities Regulation Code
(SRC).

Acting on such a request, the Enforcement and Prosecution Department (EPD) of the SEC
conducted its own investigation of the operations of CJHDC and CJHSC with respect to the sale
of the subject condotel units and, thereafter, submitted a Field Investigation Report, 5 dated
February 1, 2012, to the Chairperson of the SEC, providing details of their findings during such
investigation. The EPD was also able to confer with several buyers of the condotel units who gave
information with respect to the terms of the contracts they entered into with respondents.

Subsequently, on April 23, 2012, the SEC's Corporation Finance Department (CFD) issued a
Memorandum6 indicating its opinion that the "leaseback" arrangements offered by respondents to
the public are investment contracts.

On May 16, 2012, the EPD filed a Motion for Issuance of Cease and Desist Order7 with the SEC
En Banc praying that CJHDC and CJHSC, their respective officers, directors, representatives,
salesmen, agents, and any and all persons claiming and acting for and in their behalf be directed
to immediately cease and desist "from further engaging in activities of selling and/or offering for
sale investment contracts covering the condotel units on "leaseback" and/or "money-back"
arrangements until the requisite registration statement is duly filed with and approved by the
Commission and the corresponding permit to offer/sell securities is issued."8 The case was
docketed as SEC-CDO Case No. 05-12-006.

On June 7, 2012, the SEC En Banc issued an Order,9 disposing as follows: chanRoblesv irtualLawlibrary

WHEREFORE, premises considered, there being a prima facie evidence that respondents CJH
DEVELOPMENT CORPORATION and its wholly-owned subsidiary CJH SUITES
CORPORATION, are engaged in the business of selling securities without the proper registration
issued by this Commission in violation [of] Section 8 of the SRC, the respondents, their respective
officers, directors, representatives, salesmen, agents and any and all persons claiming and acting
for and in their behalf, are hereby ordered to immediately CEASE and DESIST from further
engaging in the business of selling securities until they have complied with the requirements of
law and its implementing rules and regulations.

x x x x

SO ORDERED.10
CJHDC and CJHSC then filed a Petition for Review11 with prayer for the issuance of a temporary
restraining order and/or writ of preliminary injunction before the CA questioning the above CDO
and praying that the same be reversed and set aside.

On September 25, 2012, the CA issued a temporary restraining order which enjoins the SEC from
enforcing its questioned CDO for a period of sixty (60) days.12 Thereafter, on November 8, 2012,
the CA issued a writ of preliminary injunction which was made effective pending the decision of
the petition on the merits.13

In its presently assailed Decision, the CA ruled in favor of CJHDC and CJHSC and disposed as
follows:chanRoblesvirtualLawlibrary

WHEREFORE, the instant petition is GRANTED. The Cease and Desist Order dated June 7, 2012
issued by the SEC En Banc is [ANNULLED] and SET ASIDE, and SEC-CDO Case No. 05-12-
006 is DISMISSED. The writ of preliminary injunction per Resolution dated November 8, 2012,
enjoining respondents from enforcing the June 7, 2012 Cease and Desist Order, is MADE
PERMANENT.

SO ORDERED.14
CJHDC and CJHSC filed a Motion for Reconsideration, but the CA denied it in its Resolution15
dated November 28, 2013.

Hence, the instant petition for review on certiorari based on the following grounds: chanRo blesvirtualLawlibrary

THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN NOT OUTRIGHTLY

DISMISSING THE APPEAL FILED BY RESPONDENTS AGAINST AN INTERLOCUTORY
OR PROVISIONAL ORDER OF THE SEC. chanroblesvirtuallawlibrary

II

THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR AND ACTED WITH

GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION IN FAILING TO DISMISS THE PETITION FOR REVIEW CONSIDERING
THAT THE SEC HAS THE PRIMARY JURISDICTION OVER THE CASE AND
RESPONDENTS FAILED TO EXHAUST ALL THE ADMINISTRATIVE REMEDIES UNDER
THE LAW TO CHALLENGE THE PROVISIONAL ORDER. chanroblesvirtuallawlibrary

III

THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR AND ACTED WITH

GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION IN NULLIFYING THE CDO AND DISMISSING SEC-CDO CASE NO. 05-
12-006.16
The petition is meritorious.

First, the Court agrees with petitioners that the challenged CDO is an interlocutory order. The word
interlocutory refers to something intervening between the commencement and the end of the suit
which decides some point or matter but is not a final decision of the whole controversy.17 An
interlocutory order merely resolves incidental matters and leaves something more to be done to
resolve the merits of the case.18 Stated differently, an interlocutory order is one which leaves
substantial proceedings yet to be had in connection with the controversy.19 It does not end the task
of the court in adjudicating the parties' contentions and determining their rights and liabilities as
against each other.20 In this sense, it is basically provisional in its application.21

It is a settled rule in this jurisdiction that an appeal may only be taken from a judgment or final
order that completely disposes of the case and that an interlocutory order is not appealable until
after the rendition of the judgment on the merits for a contrary rule would delay the administration
of justice and unduly burden the courts.22

In the present case, it is clear from the dispositive portion of the CDO that its issuance is based on
the findings of the SEC that there exists prima facie evidence that respondents are engaged in the
business of selling securities without the proper registration issued by the Commission. Prima
facie means a fact presumed to be true unless disproved by some evidence to the contrary. 23
Applied to the instant case, it means that the findings of the SEC, as contained in the assailed CDO,
can still be refuted and disproved by contrary evidence. This only means that the CDO is not final,
is just provisional, and that the prohibition thereunder is merely temporary, subject to the
determination of the parties' respective evidence in a subsequent hearing. It is, therefore, clear that
the subject CDO, being interlocutory, may not be the subject of an appeal.

In fact, the non-appealability of a CDO issued by the SEC is provided for under the 2006 Rules of
Procedure of the Commission. Thus, Section 10-8 of the Rules provides: chanRobles virtualLawlibrary
SEC. 10-8. Prohibitions. - No pleading, motion or submission in any form that may prevent the
resolution of an application for a CDO by the Commission shall be entertained except under Rule
XII herein. A CDO when issued, shall not be the subject of an appeal and no appeal from it
will be entertained; Provided, however, that an order by the Director of the Operating Department
denying the motion to lift a CDO may be appealed to the Commission En Banc through the O[ffice
of the] G[eneral] C[ounsel]. (Emphasis supplied)
In addition, the temporary character, thus interlocutory nature, of a CDO is recognized under
Section 10-5 of the same Rules, as it provides for the procedure on how a CDO can be made
permanent, to wit: chanRoblesv irtualLawlibrary

SEC. 10-5. Failure to File Motion to Lift. - (a) If the respondent fails to file a motion to lift CDO
within the prescribed period, the Director of the C[ompliance and] E[nforcement] D[epartment]
may file with the Commission a motion to make the CDO permanent. The Order shall contain the
following: cralawlawlibrary

i. a brief and procedural history of the case;

ii. a statement declaring the CDO as permanent;
iii. a statement ordering the respondent to appear before the Commission within fifteen (15) days
to file its Comment and to show cause why the stated penalty should not be imposed.

(b) The Commission may conduct hearing within fifteen (15) business days from the filing of the
motion to make the CDO permanent. After the termination of the hearing, the Commission shall
resolve the motion within ten (10) business days.
Thus, pursuant to the above provision, the EPD of the SEC filed a Motion for Issuance of
Permanent Cease and Desist Order on July 9, 201224 which, however, was subsequently overtaken
by the CA's issuance of a temporary restraining order and preliminary injunction enjoining the
SEC from enforcing its assailed CDO.

Nonetheless, contrary to respondents' contention in their petition filed with the CA, they are not
left without recourse in the administrative level. Section 64.3 of the SRC provides, thus: chanRoblesvirtualLawlibrary

64.3 Any person against whom a cease and desist order was issued may, within five (5) days from
receipt of the order, file a formal request for a lifting thereof. Said request shall be set for hearing
by the Commission not later than fifteen (15) days from its filing and the resolution thereof shall
be made not later than ten (10) days from the termination of the hearing. If the Commission fails
to resolve the request within the time herein prescribed, the cease and desist order shall
automatically be lifted.
In the same manner Section 10-3 of the 2006 Rules of Procedure of the SEC states: cralawlawlibrary

SEC. 10-3. Lifting of CDO. - A party against whom a CDO was issued may, within a non-
extendible period of five (5) business days from receipt of the order, file a formal request or motion
for the lifting thereof with the OGC. Said motion or request shall be set for hearing by the OGC
not later than fifteen (15) days from its filing and the resolution thereof not later than ten (10) days
from the termination of the hearing.

Hence, as cited above, instead of filing an appeal with the CA, respondents should have filed a
motion to lift the assailed CDO. Since the law and the SEC Rules require that this motion be heard
by the SEC, it is during this hearing that respondents could have presented evidence in support of
their contentions. However, they chose not to file the said motion.

Thus, the second reason for the denial of the instant petition is respondents' failure to exhaust all
administrative remedies available to them. Settled is the rule that: chanRoblesvir tualLawlibrary

Under the doctrine of exhaustion of administrative remedies, before a party is allowed to seek the
intervention of the court, he or she should have availed himself or herself of all the means of
administrative processes afforded him or her. Hence, if resort to a remedy within the administrative
machinery can still be made by giving the administrative officer concerned every opportunity to
decide on a matter that comes within his or her jurisdiction, then such remedy should be exhausted
first before the court's judicial power can be sought. The premature invocation of the intervention
of the court is fatal to one's cause of action. The doctrine of exhaustion of administrative remedies
is based on practical and legal reasons. The availment of administrative remedy entails lesser
expenses and provides for a speedier disposition of controversies. Furthermore, the courts of
justice, for reasons of comity and convenience, will shy away from a dispute until the system of
administrative redress has been completed and complied with, so as to give the administrative
agency concerned every opportunity to correct its error and dispose of the case.25
It is true that there are exceptions to the above doctrine, to wit:
chanRoblesvirtualLawlibrary

(1) when there is a violation of due process; (2) when the issue involved is purely a legal question;
(3) when the administrative action is patently illegal amounting to lack or excess of jurisdiction;
(4) when there is estoppel on the part of the administrative agency concerned; (5) when there is
irreparable injury; (6) when the respondent is a department secretary who acts as an alter ego of
the President bears the implied and assumed approval of the latter; (7) when to require exhaustion
of administrative remedies would be unreasonable; (8) when it would amount to a nullification of
a claim; (9) when the subject matter is a private land in land case proceedings; (10) when the rule
does not provide a plain, speedy and adequate remedy, (11) when there are circumstances
indicating the urgency of judicial intervention, and unreasonable delay would greatly prejudice the
complainant; (12) where no administrative review is provided by law; (13) where the rule of
qualified political agency applies and (14) where the issue of non-exhaustion of administrative
remedies has been rendered moot.26
However, the Court does not agree with the CA in its ruling that the present case falls under the
first and second exceptions for reasons to be discussed hereunder.

Corollary to the principle of exhaustion of administrative remedies is the third reason for denying
the instant petition. The main issue, as to whether or not the sale of "The Manor" or "The Suites"
units to the general public under the "leaseback" or "money-back" scheme is a form of investment
contract or sale of securities, is not a pure question of law. On the contrary, it involves a question
of fact that falls under the primary jurisdiction of the SEC. Under the doctrine of primary
administrative jurisdiction, courts will not determine a controversy where the issues for resolution
demand the exercise of sound administrative discretion requiring the special knowledge,
experience, and services of the administrative tribunal to determine technical and intricate matters
of fact, which under a regulatory scheme have been placed within the special competence of such
tribunal or agency.27

In other words, 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 court is had even if the matter may well be within the latter's proper
jurisdiction.28 The objective of the doctrine of primary jurisdiction is to guide the court in
determining whether it should refrain from exercising its jurisdiction until after an administrative
agency has determined some question or some aspect of some question arising in the proceeding
before the court.29

In the instant case, the resolution of the issue as to whether respondents' scheme of selling the
subject condotel units is tantamount to an investment contract and/or sale of securities, as defined
under the SRC, requires the expertise and technical knowledge of the SEC being the government
agency which is tasked to enforce and implement the provisions of the said Code as well as its
implementing rules and regulations. In fact, after the issuance of the CDO, the SEC is yet to hear
from respondents and receive evidence from them regarding this issue. Nonetheless, respondents
prematurely filed an appeal with the CA, which erroneously gave due course to it in disregard of
the doctrines of exhaustion of administrative remedies and primary jurisdiction.

Furthermore, the present case does not fall under the exceptions to the doctrine of exhaustion of
administrative remedies as there is no violation of respondents' right to due process. The Court
does not agree with the CA in sustaining petitioners' contention that the investigation conducted
by the EPD necessitated the participation of petitioners and that they should have been given
opportunity to explain their side prior to the issuance of the questioned CDO. In this regard,
Sections 64.1 and 64.2 of the SRC provide as follows: chanRoblesvirtualLawlibrary

64.1. The Commission, after proper investigation or verification, motu proprio, or upon verified
complaint by any aggrieved party, may issue a cease and desist order without the necessity of a
prior hearing if in its judgment the act or practice, unless restrained, will operate as a fraud on
investors or is otherwise likely to cause grave or irreparable injury or prejudice to the investing
public.

64.2. Until the Commission issues a cease and desist order, the fact that an investigation has been
initiated or that a complaint has been filed, including the contents of the complaint, shall be
confidential. Upon issuance of a cease and desist order, the Commission shall make public such
order and a copy thereof shall immediately be furnished to each person subject to the order.

64.3. Any person against whom a cease and desist order was issued may, within five (5) days from
receipt of the order, file a formal request for lifting thereof. Said request shall be set for hearing by
the Commission not later than fifteen (15) days from its filing and the resolution thereof shall be
made not later than ten (10) days from the termination of the hearing. If the Commission fails to
resolve the request within the time herein prescribed, the cease and desist order shall automatically
be lifted.
Explaining the import of these provisions, this Court, in the case of Primanila Plans, Inc. v.
Securities and Exchange Commission,30 held, thus: chanRoblesvirtualLawlibrary

The law is clear on the point that a cease and desist order may be issued by the SEC motu
proprio, it being unnecessary that it results from a verified complaint from an aggrieved
party. A prior hearing is also not required whenever the Commission finds it appropriate to
issue a cease and desist order that aims to curtail fraud or grave or irreparable injury to
investors. There is good reason for this provision, as any delay in the restraint of acts that yield
such results can only generate further injury to the public that the SEC is obliged to protect.
To equally protect individuals and corporations from baseless and improvident issuances, the
authority of the SEC under this rule is nonetheless with defined limits. A cease and desist order
may only be issued by the Commission after proper investigation or verification, and upon showing
that the acts sought to be restrained could result in injury or fraud to the investing public. Without
doubt, these requisites were duly satisfied by the SEC prior to its issuance of the subject cease and
desist order.

Records indicate the prior conduct of a proper investigation on Primanila's activities by the
Commission's CED. Investigators of the CED personally conducted an ocular inspection of
Primanila's declared office, only to confirm reports that it had closed even without the prior
approval of the SEC. Members of CED also visited the company website of Primanila, and
discovered the company's offer for sale thereon of the pension plan product called Primasa Plan,
with instructions on how interested applicants and planholders could pay their premium payments
for the plan. One of the payment options was through bank deposit to Primanila's given Metrobank
account which, following an actual deposit made by the CED was confirmed to be active.

As part of their investigation, the SEC also looked into records relevant to Primanila's business.
Records with the SEC's Non-Traditional Securities and Instruments Department (NTD) disclosed
Primanila's failure to renew its dealer's license for 2008, or to apply for a secondary license as
dealer or general agent for pre-need pension plans for the same year. SEC records also confirmed
Primanila's failure to file a registration statement for Primasa Plan, to fully remit premium
collections from plan holders, and to declare truthfully its premium collections from January to
September 2007.

The SEC was not mandated to allow Primanila to participate in the investigation conducted
by the Commission prior to the cease and desist order's issuance. Given the circumstances, it
was sufficient for the satisfaction of the demands of due process that the company was amply
apprised of the results of the SEC investigation, and then given the reasonable opportunity to
present its defense. Primanila was able to do this via its motion to reconsider and lift the cease and
desist order. After the CED filed its comment on the motion, Primanila was further given the
chance to explain its side to the SEC through the filing of its reply. "Trite to state, a formal trial or
hearing is not necessary to comply with the requirements of due process. Its essence is simply the
opportunity to explain one's position." x x x31
In the present case, as mentioned above, the SEC through its EPD, conducted an investigation
upon request of the BCDA. The EPD dispatched a team of SEC employees, who posed as
representatives of interested buyers, to the John Hay Special Economic Zone in Baguio City.
There, the team members were able to talk to CJHDC's Director of Sales, who, not only explained
to them the straight and leaseback agreements, but also gave the team copies of marketing material,
as well as sample contracts, indicating that respondents are indeed selling the subject units either
on a straight purchase or leaseback agreement.

Subsequently, on three different occasions, the EPD invited several buyers of the subject condotels
and met with them in separate conferences wherein these buyers shed light on the transactions they
entered into with respondents and informed the EPD that they bought condotel units on a leaseback
arrangement. These buyers provided the EPD copies of document relating to their purchase of
condotel units on such terms.

Upon issuance of the CDO, nothing prevented respondents from filing a motion to lift the said
Order wherein they could have amply explained their position. However, they chose not to avail
of this remedy and, instead, went directly, albeit erroneously, to the CA via a petition for review.

Lastly, the Court neither agrees with the ruling of the CA that there is nothing in the assailed CDO
which shows that the acts sought to be restrained therein operate as a fraud on investors. The SEC
arrived at a preliminary finding that respondents are engaged in the business of selling securities
without the proper registration issued by the Commission. Based on this initial finding,
respondents' act of selling unregistered securities would necessarily operate as a fraud on investors
as it deceives the investing public by making it appear that respondents have authority to deal on
such securities. As correctly cited by the SEC, Section 8.1 of the SRC clearly states that securities
shall not be sold or offered for sale or distribution within the Philippines without a registration
statement duly filed with and approved by the SEC and that prior to such sale, information on the
securities, in such form and with such substance as the SEC may prescribe, shall be made available
to each prospective buyer. The Court agrees with the SEC that the purpose of this provision is to
afford the public protection from investing in worthless securities.

WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals, dated June 7,
2013, and its Resolution dated November 28, 2013, in CA-G.R. SP No. 125482 are REVERSED
and SET ASIDE. The Writ of Preliminary Injunction, per CA Resolution dated November 8, 2012,
which was made permanent by its June 7, 2013 Decision, is hereby LIFTED. SEC-CDO Case No.
05-12-006 and the June 7, 2012 Cease and Desist Order of the Securities and Exchange
Commission are REINSTATED.

SO ORDERED. ChanRoblesV irtualawlibrary

G.R. No. 212774

WESLEYAN UNIVERSITY-PHILIPPINES, Petitioner

vs.
GUILLERMO T. MAGLAYA, SR., Respondent

DECISION

PERALTA, J.:

For this Court's resolution is a petition for review on certiorari filed by petitioner Wesleyan
University-Philippines (WUP) assailing the Resolution1 dated January 20, 2014 of the Court of
Appeals (CA) which denied its petition for certiorari.

The facts are as follows:

WUP is a non-stock, non-profit, non-sectarian educational corporation duly organized and existing
under the Philippine laws on April 28, 1948.2

Respondent Atty. Guillermo T. Maglaya, Sr. (Maglaya) was appointed as a corporate member on
January 1, 2004, and was elected as a member of the Board of Trustees (Board) on January 9, 2004
- both for a period of five (5) years. On May 25, 2005, he was elected as President of the University
for a five-year term. He was re-elected as a trustee on May 25, 2007. 3

In a Memorandum dated November 28, 2008, the incumbent Bishops of the United Methodist
Church (Bishops) apprised all the corporate members of the expiration of their tenns on December
31, 2008, unless renewed by the former. 4 The said members, including Maglaya, sought the
renewal of their membership in the WUP's Board, and signified their willingness to serve the
corporation. 5

On January 10, 2009, Dr. Dominador Cabasal, Chairman of the Board, informed the Bishops of
the cessation of corporate terms of some of the members and/or trustees since the by-laws provided
that the vacancy shall only be filled by the Bishops upon the recommendation of the Board. 6

On March 25, 2009, Maglaya learned that the Bishops created an Ad Hoc Committee to plan the
efficient and orderly turnover of the administration of the WUP in view of the alleged "gentleman's
agreement" reached in December 2008, and that the Bishops have appointed the incoming
corporate members and trustees. 7 He clarified that there was no agreement and any discussion of
the turnover because the corporate members still have valid and existing corporate terms.8

On April 24, 2009, the Bishops, through a formal notice to all the officers, deans, staff, and
employees of WUP, introduced the new corporate members, trustees, and officers. In the said
notice, it was indicated that the new Board met, organized, and elected the new set of officers on
April 20, 2009.9 Manuel Palomo (Palomo), the new Chairman of the Board, informed Maglaya of
the termination of his services and authority as the President of the University on April 27, 2009.
10

Thereafter, Maglaya and other fonner members of the Board (Plaintiffs) filed a Complaint for
Injunction and Damages before the Regional Trial Court (RTC) of Cabanatuan City, Branch 28.
11 In a Resolution12 dated August 19, 2009, the RTC dismissed the case declaring the same as a
nuisance or harassment suit prohibited under Section l(b), 13 Rule 1 of the Interim Rules for Intra-
Corporate Controversies. 14 The RTC observed that it is clear from the by-laws of WUP that
insofar as membership in the corporation is concerned, which can only be given by the College of
Bishops of the United Methodist Church, it is a precondition to a seat in the WUP Board. 15
Consequently, the expiration of the terms of the plaintiffs, including Maglaya, as corporate
members carried with it their termination as members of the Board. 16 Moreover, their continued
stay in their office beyond their terms was only in hold-over capacities, which ceased when the
Bishops appointed new members of the corporation and the Board. 17

The CA, in a Decision18 dated .March 15, 2011, affirmed the decision of the RTC, and dismissed
the petition for certiorari filed by the plaintiffs for being the improper remedy. The CA held that
their status as corporate members of WUP which expired on December 31, 2008 was undisputed.
The CA agreed with the RTC that the plaintiffs had no legal standing to question the Bishops'
alleged irregular appointment of the new members in their Complaint on May 18, 2009 as the
termination of their membership in the corporation necessarily resulted in the conclusion of their
positions as members of the Board pursuant to the WUP by-laws. 19

Thereafter, Maglaya filed on March 22, 2011 the present illegal dismissal case against WUP,
Palomo, Bishop Lito C. Tangonan (Tangonan), and Bishop Leo A. Soriano (Soriano ).20 Maglaya
claimed that he was unceremoniously dismissed in a wanton, reckless, oppressive and malevolent
manner on the eve of April 27, 2009.21 Tangonan and Soriano acted in evident bad faith when
they disregarded his five-year term of office and delegated their protege Palomo as the new
university president.22 Maglaya alleged that he faithfully discharged his necessary and desirable
functions as President, and received ₱75,000.00 as basic salary, Pl0,000.00 as cost of living
allowance, and ₱10,000.00 as representation allowance. He was also entitled to other benefits such
as: the use of university vehicles; the use of a post paid mobile cellular phone in his official
transactions; the residence in the University Executive House located at Inday Street, Magsaysay
Sur, Cabanatuan City, with free water, electricity, and services of a household helper; and receipt
of 13th month pay, vacation leave pay, retirement pay, and shares in related learning experience.23
On May 31, 2006, his basic salary was increased to P95,000.00 due to his additional duty in
overseeing the operations of the WUP Cardiovascular and Medical Center.

Maglaya presented the following pieces of evidence: copies of his appointment as President, his
Identification Card, the WUP Administration and Personnel Policy Manual which specified the
retirement of the university president, and the check disbursement in his favor evidencing his
salary, to substantiate his claim that he was a mere employee.24

WUP, on the other hand, asseverated that the dismissal or removal of Maglaya, being a corporate
officer and not a regular employee, is a corporate act or intra-corporate controversy under the
jurisdiction of the RTC. 25 WUP also maintained that since Maglaya's appointment was not
renewed, he ceased to be a member of the corporation and of the Board; thus, his term for
presidency has also been tenninated. 26

Meanwhile, this Court, in a Resolution dated June 13, 2011, denied the petition for review on
certiorari filed by Maglaya and the other former members of the Board for failure to show any
reversible error in the decision of the CA. The same became final and executory on August 24,
2011.27

In a Decision28 dated September 20, 2011, the Labor Arbiter (LA) ruled in favor of WUP. The
LA held that the action between employers and employees where the employer-employee
relationship is merely incidental is within the exclusive and original jurisdiction of the regular
courts.29 Since he was appointed as President of the University by the Board, Maglaya was a
corporate officer and not a mere employee. The instant case involves intra-corporate dispute which
was definitely beyond the jurisdiction of the labor tribunal.30 The dispositive portion of the
decision reads:

WHEREFORE, premises considered, the instant complaint is hereby dismissed for lack of
jurisdiction.
SO ORDERED.31

In a Decision32 dated April 25, 2012, the National Labor Relations Commission (NLRC) in·
NLRC-LAC No. 01-000470-12, reversed and set aside the Decision of the LA ruling that the illegal
dismissal case falls within the jurisdiction of the labor tribunals. Since the reasons for his
termination cited by WUP were not among the just causes provided under Article 28233 (now
Article 297) of the Labor Code, Maglaya was illegally dismissed. The NLRC observed that the
Board did not elect Maglaya, but merely appointed him. Maglaya was appointed for a fixed period
of five (5) years from May 7, 2005 to May 6, 2010, while the period of his appointment as member
of the corporation was five (5) years from January 2004.34 The decretal portion of the decision
reads:

WHEREFORE, premises considered, the appealed decision is hereby REVERSED and SET
ASIDE, declaring:

(a) jurisdiction over this case by virtue of the employer-employee relation of the parties

(b) the illegality of the dismissal of [respondent] by [petitioner] [Petitioner] therefore [is] hereby
ordered to pay [respondent]:

1. separation pay - ₱375,000.00

2. full backwages - 1,252,462.50

3. retirement pay - 500,000.00

4. moral damages - 100,000.00

5. exemplary damages - 50,000.00

6. 10% of the above as attorney's fees - 227,746.25

TOTAL AWARDS - [₱]2,505,208.75

Based on the attached computation of this Commission’s Computation Unit.

SO ORDERED.35

Ruling in favor of Maglaya, the NLRC explicated that although the position of the President of the
University is a corporate office, the manner of Maglaya' s appointment, and his duties, salaries,
and allowances point to his being an employee and subordinate. 36 The control test is the most
important indicator of the presence of employer-employee relationship. Such was present in the
instant case as Maglaya had the duty to report to the Board, and it was the Board which terminated
or dismissed him even before his term ends.37
Thereafter, the NLRC denied the motion for reconsideration filed by WUP in a Resolution38 dated
February 11, 2013.

In a Resolution, the CA dismissed the petition for certiorari filed by WUP. The CA noted that the
decision and resolution of the NLRC became final and executory on March 16, 2013.39 WUP's
attempt to resurrect its lost remedy through filing the petition would not prosper since final and
executory judgment becomes unalterable and may no longer be modified in any respect.40 Thus:

WHEREFORE, the petition is DENIED for lack of merit.

SO ORDERED.41

Upon denial of his Motion for Reconsideration, WUP elevated the case before this Court raising
the issue:

The Court of Appeals committed an error of law when it summarily dismissed the special civil
action for certiorari raising lack of jurisdiction of the NLRC filed by [WUP] where it was very
clear that the NLRC had no jurisdiction over the case involving a corporate officer and where the
nature of the controversy is an intra-corporate dispute.

We find the instant petition impressed with merit.

WUP alleges that while the NLRC decision became final and executory on March 16, 2013, it did
not mean that the said decision had become immutable and unalterable as the CA ruled. WUP
maintains that the remedy of the aggrieved party against a final and executory decision of the
NLRC is the filing of the petition for certiorari under Rule 65 of the Rules of Court. As such, it
was able to meet the conditions set forth in filing the said remedy before the CA.

Settled is the rule that while the decision of the NLRC becomes final and executory after the lapse
of ten calendar days from receipt thereof by the parties under Article 22342 (now Article 229) of
the Labor Code, the adverse party is not precluded from assailing it via Petition for Certiorari
under Rule 65 before the CA and then to this Court via a Petition for Review under Rule 45.43

This Court has explained and clarified the power of the CA to review NLRC decisions, viz. :

The power of the Court of Appeals to review NLRC decisions via Rule 65 or Petition for Certiorari
has been settled as early as in our decision in St. Martin Funeral Home v. National Labor Relations
Commission. This Court held that the proper vehicle for such review was a Special Civil Action
for Certiorari under Rule 65 of the Rules of Court, and that this action should be filed in the Court
of Appeals in strict observance of the doctrine of the hierarchy of courts. Moreover, it is already
settled that under Section 9 of Batas Pambansa Blg. 129, as amended by Republic Act No.
7902[10] (An Act Expanding the Jurisdiction of the Court of Appeals, amending for the purpose
of Section Nine of Batas Pambansa Blg. 129 as amended, known as the Judiciary Reorganization
Act of 1980), the Court of Appeals - pursuant to the exercise of its original jurisdiction over
Petitions for Certiorari – is specifically given the power to pass upon the evidence, if and hwen
necessary, to resolve factual issues.44
Consequently, the remedy of the aggrieved party is to timely file a motion for reconsideration
as a precondition for any further or subsequent remedy, and then seasonably avail of the
special civil action of certiorari under Rule 65, for a period of sixty (60) days from notice of the
decision.45

Records reveal that WUP received the decision of the NLRC on May 12, 2012, and filed its motion
for reconsideration on May 24, 2012.46 WUP received the Resolution dated February 11, 2013
denying its motion on March 12, 2013.47 Thereafter, it filed its petition for certiorari before the
CA on March 26, 2013.48

We find that the application of the doctrine of immutability of judgment in the case at bar is
misplaced.1âwphi1 To reiterate, although the 10-day period for finality of the decision of the
NLRC may already have lapsed as contemplated in the Labor Code, this Court may still take
cognizance of the petition for certiorari on jurisdictional and due process considerations if filed
within the reglementary period under Rule 65.49 From the abovementioned, WUP was able to
discharge the necessary conditions in availing its remedy against the final and executory decision
of the NLRC.

There is an underlying power of the courts to scrutinize the acts of such agencies on questions of
law and jurisdiction even though no right of review is given by statute.50 Furthermore, the purpose
of judicial review is to keep the administrative agency within its jurisdiction and protect the
substantial rights of the parties.51

Now on the issue of whether or not the NLRC has jurisdiction over the illegal dismissal case filed
by Maglaya.

The said issue revolves around the question on whether Maglaya is a corporate officer or a mere
employee. For purposes of identifying an intracorporate controversy, We have defined corporate
officers, thus:

"Corporate officers" in the context of Presidential Decree No. 902- A are those officers of the
corporation who are given that character by the Corporation Code or by the corporation's by-
laws. There are three specific officers whom a corporation must have under Section 25 of the
Corporation Code. These are the president, secretary and the treasurer. The number of officers is
not limited to these three. A corporation may have such other officers as may be provided for by
its by-laws like, but not limited to, the vice-president, cashier, auditor or general manager. The
number of corporate officers is thus limited by law and by the corporation's by-laws.52

The president, vice-president, secretary and treasurer are commonly regarded as the principal or
executive officers of a corporation, and they are usually designated as the officers of the
corporation. However, other officers are sometimes created by the charter or by-laws of a
corporation, or the board of directors may be empowered under the by-laws of a corporation to
create additional offices as may be necessary. This Court expounded that an "office" is created by
the charter of the corporation and the officer is elected by the directors or stockholders, while an
"employee" usually occupies no office and generally is employed not by action of the directors or
stockholders but by the managing officer of the corporation who also determines the compensation
to be paid to such employee. 53

From the foregoing, that the creation of the position is under the corporation's charter or by-laws,
and that the election of the officer is by the directors or stockholders must concur in order for an
individual to be considered a corporate officer, as against an ordinary employee or officer. It is
only when the officer claiming to have been illegally dismissed is classified as such corporate
officer that the issue is deemed an intracorporate dispute which falls within the jurisdiction of the
trial courts. 54 In its position paper before the LA, WUP presented its amended ByLaws55 dated
November 28, 1988 submitted to the SEC to prove that Maglaya, as the University President, was
a corporate officer whose rights do not fall within the jurisdiction of the labor tribunal. It also
presented the Resolution dated. August 19, 2009 of the RTC, and the Decision dated March 15,
2011 of the CA to show that the earlier case was filed by Maglaya and others, as members of the
Board, questioning the Bishops' appointment of the new members without their recommendation.

The relevant portions of the amended By-Laws provide:

ARTICLE VI. BOARD OF TRUSTEES

xxxx

Section 2. Membership - (a) The Board of Trustees shall be composed of Ten (10) members of the
corporation from among themselves provided, that six (6) shall come from the Ministry and Laity
of the United Methodist [C]hurch in the Philippines, tlu·ee (3) shall be non-Methodist, friends and
sympathizers of the Wesleyan UniversityPhilippines and of the United Methodist Church, and one
(1) representative of the Wesleyan Alumni Association, as provided in section 1 (c), Aiiicle IV
hereof, and (b) provided further that the incumbent area bishop and the President of the Wesleyan
University-Philippines shall be honorary members of the Board.

x x x x56

ARTICLE VIII. OFFICERS

Section 1. Officers -The officers of the Board of Trustees shall be:

(a) Chairman

(b) Vice-Chairman

(c) Secretary

(d) Treasurer

xxxx
Section 6. The President of Wesleyan University-Philippines -The President of the University,
who must be an active member of the United Methodist Church in the Philippines at the time of
his election shall be incharge of and be responsible for the administration of the University and
other institutions of learning that [ m]ay hereafter be established by the corporation, and

(a) May, with the Board of Trustees;

(1) Organize and/or reorganize the administrative set up of the Wesleyan University-Philippines
to effect efficiency and upgrade institutional administration and supervision;

(2) Employ, suspend, dismiss, transfer or replace personnel and prescribe and enforce rules and
regulations for their proper conduct in the discharge of their duties;

(3) Shall make reports during the different ammal conference of the United Methodist Church and
to such agencies as may be deemed necessary on the operations of the university and related
matters;

(4) Shall prescribe and enforce rules and regulations for the promotion and maintenance of
discipline in the proper conduct and discharge of the functions and duties of subordinate
administrative officers, professors, teachers, employees and students and other personnel.

(b) Shall make reports and recommendations to the Board of Trustees or to the Chairman of the
Board of Trustees on matters pertaining to the institution as he may find necessary;

(c) Shall countersign all checks drawn by the Treasurer from the depository of the University, and

(d) Shall exercise, perform and discharge all such other powers, functions and duties as are interest
in the office of the President.

x x x57

It is apparent from the By-laws of WUP that the president was one of the officers of the
corporation, and was an honorary member of the Board. He was appointed by the Board and not
by a managing officer of the corporation. We held that one who is included in the by-laws of a
corporation in its roster of corporate officers is an officer of said corporation and not a mere
employee58

The alleged "appointment" of Maglaya instead of "election" as provided by the by-laws neither
convert the president of university as a mere employee, nor amend its nature as a corporate officer.
With the office specifically mentioned in the by-laws, the NLRC erred in taking cognizance of the
case, and in concluding that Maglaya was a mere employee and subordinate official because of the
manner of his appointment, his duties and responsibilities, salaries and allowances, and
considering the Identification Card, the Administration and Personnel Policy Manual which
specified the retirement of the university president, and the check disbursement as pieces of
evidence supporting such finding.
A corporate officer's dismissal is always a corporate act, or an intracorporate controversy which
arises between a stockholder and a corporation, and the nature is not altered by the reason or
wisdom with which the Board of Directors may have in taking such action.59 The issue of the
alleged termination involving a corporate officer, not a mere employee, is not a simple labor
problem but a matter that comes within the area of corporate affairs and management and is a
corporate controversy in contemplation of the Corporation Code.60

The long-established rule is that the jurisdiction over a subject matter is conferred by law.61
Perforce, Section 5 (c) of PD 902-A, as amended by Subsection 5.2, Section 5 of Republic Act
No. 8799, which provides that the regional trial courts exercise exclusive jurisdiction over all
controversies in the election or appointment of directors, trustees, officers or managers of
corporations, partnerships or associations, applies in the case at bar.62

To emphasize, the determination of the rights of a corporate officer dismissed from his
employment, as well as the corresponding liability of a corporation, if any, is an intra-corporate
dispute subject to the jurisdiction of the regular courts.63

As held in Leonor v. Court of Appeals,64 a void judgment for want of jurisdiction is no judgment
at all. It cannot be the source of any right nor the creator of any obligation. All acts perfonned
pursuant to it and all claims emanating from it have no legal effect. Hence, it can never become
final and any writ of execution based on it is void. 65

Since this Court is now reversing the challenged decision of the CA and affirming the decision of
the LA in dismissing the case for want of jurisdiction, Maglaya is not entitled to collect the amount
of ₱2,505,208.75 awarded from the time the NLRC decision became final and executory up to the
time the CA dismissed WUP's petition for certiorari.

In sum, this Court finds that the NLRC eITed in assuming jurisdiction over, and thereafter in failing
to dismiss, Maglaya's complaint for illegal dismissal against WUP, since the subject matter of the
instant case is an intra-corporate controversy which the NLRC has no jurisdiction.

WHEREFORE, the petition for review on certiorari filed by petitioner Wesleyan University-
Philippines is hereby GRANTED. The assailed Resolution dated January 20, 2014 of the Court
of Appeals in CAG.R. SP No. 129196 is hereby REVERSED and SET ASIDE. Respondent Atty.
Guillermo T. Maglaya, Sr. is hereby ORDERED to REIMBURSE the petitioner the amount of
₱2,505,208.75 awarded by the National Labor Relations Commission.

SO ORDERED.

G.R. No. 206038

MARY E. LIM, represented by her Attorney-in-fact, REYNALDO V. LIM, Petitioner,

vs.
MOLDEX LAND, INC., 1322 ROXAS BOULEVARD CONDOMINIUM CORPORATION,
and JEFFREY JAMINOLA, EDGARDO MACALINTAL, JOJI MILANES, and
CLOTHILDA ANNE ROMAN, in their capacity as purported MENDOZA, and
LEONEN,JJ. members of the Board of Directors of 1322 Golden Empire Corporation,,
Respondents.

DECISION

MENDOZA, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court assailing
the March 4, 2013 Decision 1 of the Regional Trial Court of Manila, Branch 24, (RTC) in Civil
Case No. 12-128478, which dismissed the complaint against the respondents for 1] annulment of
the July 21, 2012 general membership meeting of 1322 Roxas Boulevard Condominium
Corporation (Condocor); 2] annulment of election of Jeffrey Jaminola (Jaminola), Edgardo
Macalintal (Macalintal), Joji Milanes (Milanes), and Clothilda Anne Roman (Roman) (collectively
referred to as "individual respondents") as members of the Board of Directors; and 3] accounting.

The primordial issue presented before the R TC, acting as a special commercial court, was the
validity, legality and effectivity of the July 21, 2012 Annual General Membership Meeting and
Organizational Meeting of Condocor's Board of Directors.2

Initially, the Court, in its Resolution3 dated April 1, 2013, denied the petition for having availed
of the wrong mode of appeal because Lim raised mixed questions of fact and law, which should
have been filed before the Court of Appeals (CA).4Upon motion for reconsideration, however, the
Court granted it. Thereafter, the respondents filed their Comment5 and Lim filed a Reply6 thereto.

The Antecedents

Lim is a registered unit owner of 1322 Golden Empire Tower (Golden Empire Tower), a
condominium project of Moldex Land, Inc. (Moldex), a real estate company engaged in the
construction and development of high-end condominium projects and in the marketing and sale of
the units thereof to the general public. Condocor, a non-stock, non-profit corporation, is the
registered condominium corporation for the Golden Empire Tower. Lim, as a unit owner of Golden
Empire Tower, is a member of Condocor.

Lim claimed that the individual respondents are non-unit buyers, but all are members of the Board
of Directors of Condocor, having been elected during its organizational meeting in 2008. They
were again elected during the July 21, 2012 general membership meeting.7

Moldex became a member of Condocor on the basis of its ownership of the 220 unsold units in the
Golden Empire Tower. The individual respondents acted: as its representatives.

On July 21, 2012, Condocor held its annual general membership meeting. Its corporate secretary
certified, and Jaminola, as Chairman, declared the existence of a quorum even though only 29 of
the 1088 unit buyers were present. The declaration of quorum was based on the presence of the
majority of the voting rights, including those pertaining to the 220 unsold units held by Moldex
through its representatives. Lim, through her attorney-in-fact, objected to the validity of the
meeting. The objection was denied. Thus, Lim and all the other unit owners present, except for
one, walked out and left the meeting.

Despite the walkout, the individual respondents and the other unit owner proceeded with the annual
general membership meeting and elected the new members of the Board of Directors for 2012-
2013. All four (4) individual respondents were voted as members of the board, together with three
(3) others whose election was conditioned on their subsequent confirmation.9 Thereafter, the
newly elected members of the board conducted an organizational meeting and proceeded with the
election of its officers. The individual respondents were elected as follows:

1. Atty. Jeffrey Jaminola - Chairman of the Board and President

2. Ms. Joji Milanes - Vice-President

3. Ms. Clothilda Ann Roman - Treasurer

4. Mr. Edgardo Macalintal - Corporate Secretary

5. Atty. Ma. Rosario Bernardo - Asst. Corporate Secretary

6. Atty. Mary Rose Pascual - Asst. Corporate Secretary

7. Atty. Jasmin Cuizon - Asst. Corporate Secretary10

Consequently, Lim filed an election protest before the RTC. Said court, however, dismissed the
complaint holding that there was a quorum during the July 21, 2012 annual membership meeting;
that Moldex is a member of Condocor, being the registered owner of the unsold/unused
condominium units, parking lots and storage areas; and that the individual respondents, as
Moldex's representatives, were entitled to exercise all membership rights, including the right to
vote and to be voted. 11 In so ruling, the trial court explained that the presence or absence of a
quorum in the subject meeting was determined on the basis of the voting rights of all the units
owned by the members in good standing. 12 The total voting rights of unit owners in good standing
was 73,376 and, as certified by the corporate secretary, 83.33% of the voting rights in good
standing were present in the said meeting, inclusive of the 5 8,504 voting rights of Moldex. 13

Not in conformity, Lim filed the subject petition raising the following

ISSUES

A. THE LOWER COURT GRAVELY ERRED IN RULING THAT IN DETERMINING

THE PRESENCE OR ABSENCE OF QUORUM AT GENERAL OR ANNUAL
MEMBERSHIP MEETINGS OF RESPONDENT CONDOCOR, EVEN NONUNIT
BUYERS SHOULD BE INCLUDED DESPITE THE EXPRESS PROVISION OF ITS BY-
LAWS, THE LAW AND SETTLED JURISPRUDENCE;
B. THE LOWER COURT ERRED IN RULING THAT RESPONDENT MOLDEX IS A
MEMBER OF RESPONDENT CONDOCOR AND THAT IT MAY APPOINT
INDIVIDUAL RESPONDENTS TO REPRESENT IT THEREIN;

C. EVEN ASSUMING THAT RESPONDENT MOLDEX MAY BE A MEMBER OF

RESPONDENT CONDOCOR, THERE IS STILL NO BASIS FOR IT TO BE ELECTED
TO THE BOARD OF DIRECTORS OF RESPONDENT CONDOCOR BECAUSE IT IS A
JURIDICAL PERSON;

D. ASSUMING FURTHER THAT DESPITE BEING A JURIDICAL PERSON, IT MAY

BE ELECTED TO THE BOARD OF DIRECTORS OF RESPONDENT CONDOCOR,
THERE IS NO LEGAL BASIS FOR THE LOWER COURT TO HOLD THAT
RESPONDENT MOLDEX HAS AUTOMATICALLY RESERVED FOUR SEATS
THEREIN; AND,

E. THE LOWER COURT GRAVELY ERRED IN RULING TO RECOGNIZE

RESPONDENT MOLDEX AS OWNERDEVELOPER HAVING FOUR RESERVED
SEATS IN RESPONDENT CONDOCOR BOARD, AS SUCH RULING EFFECTIVELY
ALLOWED THE VERY EVIL THAT PD 957 SOUGHT TO PREVENT FROM
DOMINATING THE CONTROL AND MANAGEMENT OF RESPONDENT
CONDOCOR TO THE GRAVE AND IRREPARABLE DAMAGE AND INJURY OF
PETITIONER AND THE OTHER UNIT BUYERS, WHO ARE THE BONA FIDE
MEMBERS OF RESPONDENT CONDOCOR.

In sum, the primordial issues to be resolved are: 1) whether the July 21, 2012 membership meeting
was valid; 2) whether Moldex can be deemed a member of Condocor; and 3) whether a non-unit
owner can be elected as a member of the Board of Directors of Condocor.

Procedural Issues

The issues raised being purely legal, the Court may properly entertain the subject petition.

The subject case was initially denied because it appeared that Lim raised mixed questions of fact
and law which should have been filed before the CA. After judicious perusal of Lim's arguments,
however, the Court ascertained that a reconsideration of its April 1, 2013 Resolution14 was in
order.

It has been consistently held that only pure questions of law can be entertained in a petition for
review under Rule 45 of the Rules of Court. In Century Iron Works, Inc. v. Banas,15the Court
held:

A petition for review on certiorari under Rule 45 is an appeal from a ruling of a lower tribunal on
pure questions of law. It is only in exceptional circumstances that we admit and review questions
of fact.
A question of law arises when there is doubt as to what the law is on a certain state of facts, while
there is a question of fact when the doubt arises as to the truth or falsity of the alleged facts. For a
question to be one of law, the question must not involve an examination of the probative value of
the evidence presented by the litigants or any of them. The resolution of the issue must rest solely
on what the law provides on the given set of circumstances. Once it is clear that the issue invites a
review of the evidence presented, the question posed is one of fact.

Thus, the test of whether a question is one of law or of fact is not the appellation given to such
question by the party raising the same; rather, it is whether the appellate court can
determine the issue raised without reviewing or evaluating the evidence, in which case, it is
a question of law; otherwise it is a question of fact. 16 [Emphasis supplied]

Respondents argued that the initial denial of the petition was correct because Lim availed of the
wrong mode of appeal. As the assailed judgment involved an intra-corporate dispute cognizable
by the RTC, the appeal should have been filed before the CA, and not before this Court.

Doubtless, this case involves intra-corporate controversies and, thus, jurisdiction lies with the R
TC, acting as a special commercial court. Section 5.2 of Republic Act No. 8799 (R.A. No.
8799)17effectively transferred to the appropriate RTCs jurisdiction over all cases enumerated
under Section 5 of Presidential Decree No. 902-A (P.D. No. 902-A), to wit:

a) Devices or schemes employed by or any acts, of the board of directors, business associates, its
officers or partnership, amounting to fraud and misrepresentation which may be detrimental to the
interest of the public and/ or of the stockholder, partners, members of associations or organizations
registered with the Commission;

b) Controversies arising out of intra-corporate or partnership relations, between and among

stockholders, members, or associates; between any or all of them and the corporation,
partnership or association of which they are stockholders, members or associates, respectively;
and between such corporation, partnership or association and the state insofar as it concerns their
individual franchise or right to exist as such entity; and

c) Controversies in the election or appointments of directors, trustees, officers or managers

of such corporations, partnerships or associations. [Emphases supplied]

Pursuant to A.M. No. 04-9-07-SC, all decisions and final orders in cases falling under the Interim
Rules of Corporate Rehabilitation and the Interim Rules of Procedure Governing Intra-Corporate
Controversies shall be appealable to the CA through a petition for review under Rule 43 of the
Rules of Court. Such petition shall be taken within fifteen (15) days from notice of the decision or
final order of the RTC.18

In turn, Rule 43 governs the procedure for appeals from judgments or final orders of quasi-judicial
agencies to the CA, whether it involves questions of fact, of law, or mixed questions of fact and
law. Nevertheless, a party may directly file a petition for review on certiorari before the Court to
question the judgment of a lower court, especially when the issue raised is purely of law and is one
of novelty.
Substantive Issues

Lim is still a member of Condocor

Respondents argued that Lim had no cause of action to file the subject action because she was no
longer the owner of a condominium unit by virtue of a Deed of Assignment19 she executed in
favor of Reynaldo Valera Lim and Dianna Mendoza Lim, her nephew and niece.

Section 90 of the Corporation Code states that membership in a non-stock corporation and all
rights arising therefrom are personal and non-transferable, unless the articles of incorporation or
the by-laws otherwise provide. A perusal of Condocor's By-Laws as regards membership and
transfer of rights or ownership over the unit reveal that:

Membership in the CORPORATION is a mere appurtenance of the ownership of any unit in the
CONDOMINIUM and may not therefore be sold, transferred or otherwise encumbered separately
from the said unit. Any member who sells or transfer his/her/its unit/s in the
CONDOMINIUM shall automatically cease to be a member of the CORPORATION, the
membership being automatically assumed by the buyer or transferee upon registration of
the sale or transfer and ownership of the latter over the unit with the Register of Deeds for
the City of Manila.20 [Emphasis supplied.]

Likewise, the Master Deed of Condocor provides:

Section 11 : MORTGAGES, LIENS, LEASES, TRANSFERS OF RIGHTS AND SALE OF

UNITS: All transactions involving the transfer of the ownership or occupancy of any UNIT, such
as sale, transfer of rights or leases, as well as encumbrances involving said UNIT, such as
mortgages, liens and the like, shall be reported to the CORPORATION within five (5) days
after the effectivity of said transactions.21

Nothing in the records showed that the alleged transfer made by Lim was registered with the
Register of Deeds of the City of Manila or was reported to the corporation. Logically, until and
unless the registration is effected, Lim remains to be the registered owner of the condominium unit
and thus, continues to be a member of Condocor.

Moreover, even assuming that there was a transfer by virtue of the Deed of Assignment, the
Confirmatory Special Power of Attorney22 executed later by Lim, wherein she reiterated her
membership in Condocor and constituted Reynaldo V. Lim as her true and lawful Attorney-in-
Fact, strengthened the fact that she still owns the condominium unit and that there has been no
transfer of ownership over the said property to her nephew, but only a mere assignment of rights
to the latter. As held by the Court in Casabuena v. CA,23 at most, an assignee can only acquire
rights duplicating those which his assignor is entitled by law to exercise. 24 Had it been otherwise,
Reynaldo V. Lim himself would have questioned and objected to the granting of the special power
of attorney, and would have insisted that he was really the owner of the condominium unit.
In non-stock corporations, quorum
is determined by the majority
of its actual members

In corporate parlance, the term "meeting" applies to every duly convened assembly either of
stockholders, members, directors, trustees, or managers for any legal purpose, or the transaction
of business of a common interest.25 Under Philippine corporate laws, meetings may either be
regular or special. A stockholders' or members' meeting must comply with the following requisites
to be valid:

1. The meeting must be held on the date fixed in the By-Laws or in accordance with law;26

2. Prior written notice of such meeting must be sent to all stockholders/members of record;27

3. It must be called by the proper party;28

4. It must be held at the proper place;29 and

5. Quorum and voting requirements must be met. 30

Of these five (5) requirements, the existence of a quorum is crucial. Any act or transaction made
during a meeting without quorum is rendered of no force and effect, thus, not binding on the
corporation or parties concerned.

In relation thereto, Section 52 of the Corporation Code of the Philippines (Corporation Code)
provides:

Section 52. Quorum in meetings. - Unless otherwise provided for in this Code or in the by-laws, a
quorum shall consist of the stockholders representing a majority of the outstanding capital stock
or a majority of the members in the case of non-stock corporations.

Thus, for stock corporations, the quorum is based on the number of outstanding voting stocks while
for non-stock corporations, only those who are actual, living members with voting rights shall be
counted in determining the existence of a quorum. 31

To be clear, the basis in determining the presence of quorum in non-stock corporations is the
numerical equivalent of all members who are entitled to vote, unless some other basis is provided
by the By-Laws of the corporation. The qualification "with voting rights" simply recognizes the
power of a non-stock corporation to limit or deny the right to vote of any of its members.32 To
include these members without voting rights in the total number of members for purposes of
quorum would be superfluous for although they may attend a particular meeting, they cannot cast
their vote on any matter discussed therein.

Similarly, Section 6 of Condocor's By-Laws reads: "The attendance of a simple majority of the
members who are in good standing shall constitute a quorum ... x x x." The phrase, "members in
good standing," is a mere qualification as to which members will be counted for purposes of
quorum. As can be gleaned from Condocor's By-Laws, there are two (2) kinds of members: 1)
members in good standing; and 2) delinquent members. Section 6 merely stresses that delinquent
members are not to be taken into consideration in determining quorum. In relation thereto, Section
733 of the By-Laws, referring to voting rights, also qualified that only those members in good
standing are entitled to vote. Delinquent members are stripped off their right to vote. Clearly,
contrary to the ruling of the RTC, Sections 6 and 7 of Condocor's By-Laws do not provide that
majority of the total voting rights, without qualification, will constitute a quorum.

It must be emphasized that insofar as Condocor is concerned, quorum is different from voting
rights. Applying the law and Condocor's By-Laws, if there are 100 members in a non-stock
corporation, 60 of which are members in good standing, then the presence of 50% plus 1 of those
members in good standing will constitute a quorum. Thus, 31 members in good standing will
suffice in order to consider a meeting valid as regards the presence of quorum. The 31 members
will naturally have to exercise their voting rights. It is in this instance when the number of voting
rights each member is entitled to becomes significant. If 29 out of the 31 members are entitled to
1 vote each, another member (known as A) is entitled to 20 votes and the remaining member
(known as B) is entitled to 15 votes, then the total number of voting rights of all 31 members is
64. Thus, majority of the 64 total voting rights, which is 33 (50% plus 1), is necessary to pass a
valid act. Assuming that only A and B concurred in approving a specific undertaking, then their
35 combined votes are more than sufficient to authorize such act.

The By-Laws of Condocor has no rule different from that provided in the Corporation Code with
respect the determination of the existence of a quorum. The quorum during the July 21, 2012
meeting should have been majority of Condocor's members in good standing. Accordingly, there
was no quorum during the July 21, 2012 meeting considering that only 29 of the 108 unit buyers
were present.

As there was no quorum, any resolution passed during the July 21, 2012 annual membership
meeting was null and void and, therefore, not binding upon the corporation or its members. The
meeting being null and void, the resolution and disposition of other legal issues emanating from
the null and void July 21, 2012 membership meeting has been rendered unnecessary.

To serve as a guide for the bench and the bar, however, the Court opts to discuss and resolve the
same.

Moldex is a member
Of Condocor

Matters involving a condominium are governed by Republic Act No. 4726 (Condominium Act).
Said law sanctions the creation of a condominium corporation which is especially formed for the
purpose of holding title to the common areas, including the land, or the appurtenant interests in
such areas, in which the holders of separate interest shall automatically be members or
shareholders, to the exclusion of others, in proportion to the appurtenant interest of their respective
units in the common areas. 34 In relation thereto, Section 10 of the same law clearly provides that
the condominium corporation shall constitute the management body of the project.
Membership in a condominium corporation is limited only to the unit owners of the condominium
project. This is provided in Section 10 of the Condominium Act which reads:

Membership in a condominium corporation, regardless of whether it is a stock or non-stock

corporation, shall not be transferable separately from the condominium unit of which it is an
appurtenance. When a member or stockholder ceases to own a unit in the project in which the
condominium corporation owns or holds the common areas, he shall automatically cease to be a
member or stockholder of the condominium corporation.35 [Emphases supplied]

Although the Condominium Act provides for the minimum requirement for membership in a
condominium corporation, a corporation's articles of incorporation or by-laws may provide for
other terms of membership, so long as they are not inconsistent with the provisions of the law, the
enabling or master deed, or the declaration of restrictions of the condominium project.

In this case, Lim argued that Moldex cannot be a member of Condocor. She insisted that a
condominium corporation is an association of homeowners for the purpose of managing the
condominium project, among others. Thus, it must be composed of actual unit buyers or residents
of the condominium project.36 Lim further averred that the ownership contemplated by law must
result from a sale transaction between the owner-developer and the purchaser. She advanced the
view that the ownership of Moldex was only in the nature of an owner-developer and only for the
sole purpose of selling the units.37 In justifying her arguments, Lim cited Section 30 of
Presidential Decreee No. 957, known as The Subdivision and Condominium Buyers' Protective
Decree (P.D. No. 957), to wit:

Section 30. Organization of Homeowners Association. The owner or developer of a subdivision

project or condominium project shall initiate the organization of a homeowners association among
the buyers and residents of the projects for the purpose of promoting and protecting their mutual
interest and assist in their community development. [Emphasis in the original.]

Furthermore, in distinguishing between a unit buyer and an owner-developer of a project, Lim

cited Section 25 of P.D. No. 957, which provides:

Section 25. Issuance of Title. The owner or developer shall deliver the title of the lot or unit to the
buyer upon full payment of the lot or unit. xxx

Likewise, Lim relied on Sunset View Condominium Corp. v. Hon. Campos, Jr., 38 where the Court
wrote:

The share of stock appurtenant to the unit will be transferred accordingly to the purchaser of
the unit only upon full payment of the purchase price at which time he will also become the
owner of the unit. Consequently, even under the contract, it is only the owner of a unit who is a
shareholder of the Condominium Corporation.

Inasmuch as owners is conveyed only upon full payment of the purchase price, it necessarily
follows that a purchaser of a unit who has not paid the full purchase price thereof is not the
owner of the unit and consequently is not a shareholder of the Condominium Corporation.
[Emphasis in the original]

On these grounds, Lim asserted that only unit buyers are entitled to become members of Condocor.
39

The Court finds itself unable to agree.

Lim's reliance of P.D. No. 957 is misplaced. There is no provision in P.D. No. 957 which states
that an owner-developer of a condominium project cannot be a member of a condominium
corporation. Section 30 of P.D. No. 957 determines the purposes of a homeowners association - to
promote and protect the mutual interest of the buyers and residents, and to assist in their
community development. A condominium corporation, however, is not just a management body
of the condominium project. It also holds title to the common areas, including the land, or the
appurtenant interests in such areas. Hence, it is especially governed by the Condominium Act.
Clearly, a homeowners association is different from a condominium corporation. P.D. No. 957
does not regulate condominium corporations and, thus, cannot be applied in this case.

Sunset View merely delineated the difference between a "purchaser" and an "owner," whereby the
former could be considered an owner only upon full payment of the purchase price. The case
merely clarified that not every purchaser of a condominium unit could be a shareholder of the
condominium corporation.

Respondents, for their part, countered that a registered owner of a unit in a condominium project
or the holders of duly issued condominium certificate of title (CCT),40automatically becomes a
member of the condominium corporation,41 relying on Sections 2 and 10 of the Condominium
Act, the Master Deed and Declaration of Restrictions, as well as the By-Laws of Condocor. For
said reason, respondents averred that as Moldex is the owner of 220 unsold units and the parking
slots and storage areas attached thereto, it automatically became a member of Condocor upon the
latter's creation.42

On this point, respondents are correct.

Section 2 of the Condominium Act states:

Sec. 2. A condominium is an interest in real property consisting of separate interest in a unit in a

residential, industrial or commercial building and an undivided interest in common, directly or
indirectly, in the land on which it is located and in other common areas of the building. A
condominium may include, in addition, a separate interest in other portions of such real property.
Title to the common areas, including the land, or the appurtenant interests in such areas,
may be held by a corporation specially formed for the purpose (hereinafter known as the
"condominium corporation") in which the holders of separate interest shall automatically be
members or shareholders, to the exclusion of others, in proportion to the appurtenant interest
of their respective units in the common areas. [Emphasis supplied]
In Sunset View,43the Court elucidated on what constitutes "separate interest," in relation to
membership, as mentioned in the Condominium Act, to wit:

By necessary implication, the "separate interest" in a condominium, which entitles the

holder to become automatically a shareholder in the condominium corporation, as provided
in Section 2 of the Condominium Act, can be no other than ownership of a unit. This is so
because nobody can be a shareholder unless he is the owner of a unit and when he ceases to be the
owner, he also ceases automatically to be a shareholder.44 [Emphasis supplied.]

Thus, law and jurisprudence dictate that ownership of a unit entitles one to become a member of
a condominium corporation.1âwphi1 The Condominium Act does not provide a specific mode of
acquiring ownership. Thus, whether one becomes an owner of a condominium unit by virtue of
sale or donation is of no moment.

It is erroneous to argue that the ownership must result from a sale transaction between the owner-
developer and the purchaser. Such interpretation would mean that persons who inherited a unit, or
have been donated one, and properly transferred title in their names cannot become members of a
condominium corporation.

The next issue is - may Moldex appoint duly authorized representatives who will exercise its
membership rights, specifically the right to be voted as corporate directors/officers?

Moldex may appoint a

duly authorized representative

A corporation can act only through natural persons duly authorized for the purpose or by a specific
act of its board of directors.45 Thus, in order for Moldex to exercise its membership rights and
privileges, it necessarily has to appoint its representatives.

Section 58 of the Corporation Code mandates:

Section 58. Proxies. - Stockholders and members may vote in person or by proxy in all meetings
of stockholders or members. Proxies shall in writing, signed by the stockholder or member and
filed before the scheduled meeting with the corporate secretary. Unless otherwise provided in the
proxy, it shall be valid only for the meeting for which it is intended. No proxy shall be valid and
effective for a period longer than five (5) years at any one time. [Emphasis supplied]

Relative to the above provision is Section 1, Article II of Condocor's By-Laws, 46 which grants
registered owners the right to designate any person or entity to represent them in Condocor, subject
to the submission of a written notification to the Secretary of such designation. Further, the owner's
representative is entitled to enjoy and avail himself of all the rights and privileges, and perform all
the duties and responsibilities of a member of the corporation. The law and Condocor's By-Laws
evidently allow proxies in members' meeting.

Prescinding therefrom, Moldex had the right to send duly authorized representatives to represent
it during the questioned general membership meeting. Records showed that, pursuant to a Board
Resolution, as certified47 by Sandy T. Uy, corporate secretary of Moldex, the individual
respondents were instituted as Moldex's representatives. This was attested to by Mary Rose V.
Pascual, Assistant Corporate Secretary of Condocor, in a sworn statement48 she executed on
August 31, 2012.

Next question is - can the individual respondents be elected as directors of Condocor?

Individual respondents who

are non-members cannot be
elected as directors and officers
of the condominium corporation

The governance and management of corporate affairs in a corporation lies with its board of
directors in case of stock corporations, or board of trustees in case of non-stock corporations. As
the board exercises all corporate powers and authority expressly vested upon it by law and by the
corporations' by-laws, there are minimum requirements set in order to be a director or trustee, one
of which is ownership of a share in one's name or membership in a non-stock corporation. Section
23 of the Corporation Code provides:

Section 23. The Board of Directors or Trustees. - Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and held by the board of directors or
trustees to be elected from among the holders of stocks, or where there is no stock, from among
the members of the corporation, who shall hold office for one (1) year until their successors are
elected and qualified.

Every director must own at least one (1) share of the capital stock of the corporation of which he
is a director, which share shall stand in his name on the books of the corporation. Any director
who ceases to be the owner of at least one (1) share of the capital stock of the corporation of which
he is a director shall thereby cease to be a director. Trustees of non-stock corporations must be
members thereof. A majority of the directors or trustees of all corporations organized under this
Code must be residents of the Philippines. [Emphases supplied]

This rule was reiterated in Section 92 of the Corporation Code, which states:

Section 92. Election and term of trustees. – x x x No person shall be elected as trustee unless he is
a member of the corporation. x x x

While Moldex may rightfully designate proxies or representatives, the latter, however, cannot be
elected as directors or trustees of Condocor. First, the Corporation Code clearly provides that a
director or trustee must be a member of record of the corporation. Further, the power of the proxy
is merely to vote. If said proxy is not a member in his own right, he cannot be elected as a director
or proxy.

Respondents cannot rely on the Securities and Exchange Commission (SEC) Opinions they cited
to justify the individual respondents' election as directors. In Heirs of Gamboa v. Teves,49 the
Court En Banc held that opinions issued by SEC legal officers do not have the force and effect of
SEC rules and regulations because only the SEC en banc can adopt rules and regulations.

Following Section 25 of the Corporation Code, the election of individual respondents, as corporate
officers, was likewise invalid.

Section 25 of the Corporation Code mandates that the President shall be a director. As previously
discussed, Jaminola could not be elected as a director. Consequently, Jaminola's election as
President was null and void.

The same provision allows the election of such other officers as may be provided for in the by-
laws. Condocor's By-Laws, however, require that the Vice-President shall be elected by the Board
from among its member-directors in good standing, and the Secretary may be appointed by the
Board under the same circumstance. Like Jaminola, Milanes and Macalintal were not directors
and, thus, could not be elected and appointed as Vice-President and Secretary, respectively.

Insofar as Roman's election as Treasurer is concerned, the same would have been valid, as a
corporate treasurer may or may not be a director of the corporation's board. The general
membership meeting of Condocor, however, was null and void. As a consequence, Roman's
election had no legal force and effect.

In fine, the July 21, 2012 annual general membership meeting of Condocor being null and void,
all acts and resolutions emanating therefrom are likewise null and void.

WHEREFORE, the petition is GRANTED. The March 4, 2013 Decision of the Regional Trial
Court, Branch 24, Manila, in Civil Case No. 12-128478 is hereby REVERSED and SET ASIDE.
The Court declares that:

a) The July 21, 2012 Annual General Membership Meeting of Condocor is null and void;

b) The election of members of the Board of Directors in the annual general membership meeting
is likewise null and void; and

c) The succeeding Organizational Meeting of Condocor's Board of Directors as well as the election
of its corporate officers are of no force and effect.

Costs against respondents.

SO ORDERED.

G.R. No. 184317

METROPOLITAN BANK AND TRUST COMPANY, Petitioner,

vs.
LIBERTY CORRUGATED BOXES MANUFACTURING CORPORATION, Respondent.
DECISION

LEONEN, J.:

A corporation with debts that have already matured may still file a petition for rehabilitation under
the Interim Rules of Procedure on Corporation Rehabilitation.

This resolves a Petition for Review1 on certiorari assailing the Court of Appeals' June 13, 2008
Decision2 and August 20, 2008 Resolution.3 The Court of Appeals affirmed the Regional Trial
Court's December 21, 2007 Order 4 approving Liberty Corrugated Boxes Manufacturing Corp.'s
rehabilitation plan.

Respondent Liberty Corrugated Boxes Manufacturing Corp. (Liberty) is a domestic corporation

that produces corrugated packaging boxes. 5 It obtained various credit accommodations and loan
facilities from petitioner Metropolitan Bank and Trust Company (Metrobank) amounting to
₱19,940,000.00. To secure its loans, Liberty mortgaged to Metrobank 12 lots in Valenzuela City.
6

Liberty defaulted on the loans. 7

On June 21, 2007, Liberty filed a Petition8 for corporate rehabilitation before Branch 74 of the
Regional Trial Court of Malabon City. Liberty claimed that it could not meet its obligations to
Metrobank because of the Asian Financial Crisis, which resulted in a drastic decline in demand for
its goods, and the serious sickness of its Founder and President, Ki Kiao Koc.9

Liberty's rehabilitation plan consisted of: (a) a debt moratorium; (b) renewal of marketing efforts;
(c) resumption of operations; and (d) entry into condominium development, a new business.10

On June 27, 2007, the Regional Trial Court, finding the Petition sufficient in form and substance,
issued a Stay Order11 and set an initial hearing for the Petition. On August 6, 2007, Metro bank
filed its Comment/Opposition. It argued that Liberty was not qualified for corporate rehabilitation;
that Liberty's Petition for rehabilitation and rehabilitation plan were defective; and that
rehabilitation was not feasible. It also claimed that Liberty filed the Petition solely to avoid its
obligations to the bank.

In its September 20, 2007 Order, 12 the Regional Trial Court gave due course to the Petition and
referred the rehabilitation plan to the Rehabilitation Receiver.

Rehabilitation Receiver Rafael Chris F. Teston recommended the approval of the plan, provided
that Liberty would initiate construction on the property in Valenzuela within 12 months from
approval. 13

In its December 21, 2007 Order, 14 the Regional Trial Court approved the rehabilitation plan. The
trial court found that Liberty was capable of being rehabilitated and that the rehabilitation plan was
feasible and viable. 15
Metrobank appealed to the Court of Appeals. On June 13, 2008, the Court of Appeals issued the
Decision16 denying the Petition and affirming the Regional Trial Court's December 21, 2007
Order.

The Court of Appeals affirmed the Regional Trial Court's finding that debtor corporations could
still avail themselves of the remedy of rehabilitation under the Interim Rules of Procedure on
Corporate Rehabilitation (Interim Rules) even if they were already in default. 17 It held that even
insolvent corporations could still file a petition for rehabilitation.18

The Court of Appeals also found that the trial court correctly approved the rehabilitation plan over
Metrobank's Opposition upon the recommendation of the Rehabilitation Receiver, who had
carefully considered and addressed Metrobank's criticism on the plan's viability. 19

The Court of Appeals stressed that the purpose of rehabilitation proceedings is to enable the
distressed company to gain a new lease on life and to allow the creditors to be paid their claims. It
held that the approval of the Regional Trial Court was precisely "'to effect a feasible and viable
rehabilitation' of ailing corporations[,]"20 as required by Presidential Decree No. 902-A.

Metrobank moved for reconsideration, but the Motion was denied21 on August 20, 2008.

Hence, this Petition was filed.

This Court required respondent Liberty Corrugated Boxes Manufacturing Corp. to file its comment
on the Petition within 10 days from notice.22 On March 23, 2009, respondent filed its Comments
to the Petition,23 noted by this Court in its April 20, 2009 Resolution.24 Petitioner Metropolitan
Bank and Trust Company filed its Reply25 dated May 26, 2009, which this Court noted in its July
20, 2009 Resolution. 26 This Court also gave due course to the Petition and required the parties to
submit their respective memoranda within 30 days from notice.

The parties filed their Memoranda on September 24, 200927 and November 3, 2009.28

Petitioner argues that respondent can no longer file a petition for corporate rehabilitation. It claims
that Rule 4, Section 1 of the Interim Rules restricts the kind of debtor who can file petitions for
corporate rehabilitation. 29 Petitioner insists that the phrase "who fore sees the impossibility of
meeting its debts when they respectively fall due" must be construed plainly to mean that an
element of foresight is required.30 Because foresight is required, the debts of the corporation
should not have matured. 31

Petitioner also argues that the Regional Trial Court's approval of the rehabilitation plan is contrary
to Rule 4, Section 23 of the Interim Rules.32 Under the provision, the court may approve the
rehabilitation plan over the opposition of the creditors only when two (2) elements concur: (a)
when the court finds that the rehabilitation of the debtor is feasible; and (b) when the opposition
of the creditors is "manifestly unreasonable."33 Petitioner claims that the Regional Trial Court did
not declare the manifest unreasonableness of petitioner's opposition.34
Petitioner likewise argues that respondent's Petition for rehabilitation and the attached inventory
of accounts receivable failed to disclose the maturity dates of the accounts.35 This failure renders
the Petition defective under Rule 4, Section 2(d) of the Interim Rules.36

Petitioner further claims that the rehabilitation plan lacked material financial commitments
required under Rule 4, Section 5 of the Interim Rules.37 The rehabilitation plan did not claim that
new money would be invested in the corporation.38

On the other hand, respondent insists on its qualification to seek rehabilitation.39 It argues that
petitioner's reading of Rule 4, Section 1 of the Interim Rules is restrictive, merely indicating the
minimum conditions for a debtor to be able to file a petition for rehabilitation.40

In support of its claim that the remedy of corporate rehabilitation covers defaulting debtors,
respondent cites Rule 4, Sections 441 and 642 of the Interim Rules.43 Under Section 6, a stay
order, which may assume that cases have been filed to collect on matured debts, may be granted.

Respondent argues that the Court of Appeals' finding that the rehabilitation plan is feasible is well-
grounded and in keeping with Rule 4, Section 23 of the Interim Rules.44 The Rehabilitation
Receiver deemed the rehabilitation plan viable.45 The Petition also listed the receivables, clearly
due for collection, in its annexes.46

Respondent further contends that contrary to petitioner's arguments, the rehabilitation plan
contains material financial commitments.47 When the Interim Rules speak of "material financial
commitments to support the rehabilitation plan,"48 it does not mean that the commitment must
come from outside sources. The corporation's showing that the rehabilitation plan can find
sufficient funding should be sufficient.49

The issues for resolution are:

First, whether respondent, as a debtor in default, is qualified to file a petition for rehabilitation
under Presidential Decree No. 902-A and Rule 4, Section 1 of the Interim Rules; and

Second, whether respondent's Petition for rehabilitation is sufficient in form and substance and
respondent's rehabilitation plan, feasible.

I.A

A corporation that may seek corporate rehabilitation is characterized not by its debt but by its
capacity to pay this debt.

Rule 4, Section 1 of the Interim Rules provides:

RULE4

Debtor-Initiated Rehabilitation
SECTION 1. Who May Petition. - Any debtor who foresees the impossibility of meeting its debts
when they respectively fall due, or any creditor or creditors holding at least twenty-five percent
(25%) of the debtor's total liabilities, may petition the proper Regional Trial Court to have the
debtor placed under rehabilitation.

Petitioner insists that the words of the Interim Rules are clear and must be given their plain and
literal meaning. A better interpretation requires scrutiny of the purpose behind the enactment of
the Interim Rules and its provisions.

Philippine Bank of Communications v. Basic Polyprinters and Packaging Corporation50reiterates

the purpose of rehabilitation, which is to provide meritorious corporations an opportunity for
recovery:

Under the Interim Rules, rehabilitation is the process of restoring "the debtor to a position of
successful operation and solvency, if it is shown that its continuance of operation is economically
feasible and its creditors can recover by way of the present value of payments projected in the plan
more if the corporation continues as a going concern that if it is immediately liquidated." It
contemplates a continuance of corporate life and activities in an effort to restore and reinstate the
corporation to its former position of successful operation and solvency. 51 (Citations omitted)

As stated by the Court of Appeals in Philippine Bank of Communications, rehabilitation is in line

with the State's objective to promote a wider and more meaningful equitable distribution of wealth.
52

In line with this objective, the Interim Rules provide for a liberal construction of its provisions:

RULE2

Definition of Terms and Construction

....

SECTION 2. Construction. - These Rules shall be liberally construed to carry out the objectives
of Sections 5(d), 6(c) and 6(d) of Presidential Decree No. 902-A, as amended, and to assist the
parties in obtaining a just, expeditious, and inexpensive determination of cases. Where applicable,
the Rules of Court shall apply suppletorily to proceedings under these Rules.

To adopt petitioner's interpretation would undermine the purpose of the Interim Rules. There is no
reason why corporations with debts that may have already matured should not be given the
opportunity to recover and pay their debtors in an orderly fashion. The opportunity to rehabilitate
the affairs of an economic entity, regardless of the status of its debts, redounds to the benefit of its
creditors, owners, and to the economy in general. Rehabilitation, rather than collection of debts
from a company already near bankruptcy, is a better use of judicial rewards.

A.M. No. 08-8-1 O-SC53 further describes the remedy initiated by a petition for rehabilitation:
[A] petition for rehabilitation, the procedure for which is provided in the Interim Rules of
Procedure on Corporate Recovery, should be considered as a special proceeding. It is one that
seeks to establish the status of a party or a particular fact. As provided in section 1, Rule 4 of the
Interim Rules on Corporate Recovery, the status or fact sought to be established is the inability of
the corporate debtor to pay its debts when they fall due so that a rehabilitation plan, containing
the formula for the successful recovery of the corporation, may be approved in the end. It does not
seek a relief from an injury caused by another party. (Emphasis supplied)

Thus, the condition that triggers rehabilitation proceedings is not the maturation of a corporation's
debts but the inability of the debtor to pay these.

I.B

Where the law does not distinguish, neither should this Court. 54 Because the definition under the
Interim Rules is encompassing, 55 there should be no distinction whether a claim has matured or
otherwise.

Petitioner's proposed interpretation contradicts provisions of the Interim Rules, which contemplate
situations where a debtor corporation may already be in default. As correctly pointed out by
respondent, a creditor may possibly petition for the debtor's rehabilitation for default on debts
already owed.56

Rule 4, Section 1 of the Interim Rules does not specify what kind of debtor may seek rehabilitation.
The provision allows creditors holding 25% of the debtor corporation's total liabilities to petition
for the corporation's rehabilitation.

Further, Rule 4, Section 6 of the Interim Rules provides for a stay order "staying enforcement of
all claims, whether for money or otherwise and whether such enforcement is by court action or
otherwise."57 A stay order, however, only applies to the suspension of the enforcement of claims.
Hence, claims, if proper, can still be instituted in other proceedings. There may already be pending
claims against a debtor corporation for debts already matured.

In Spouses Sobrejuanite v. ASB Development, 58 the purpose of the stay order is to preserve the
rights of both the debtor corporation and its creditors:

The purpose for the suspension of the proceedings is to prevent a creditor from obtaining an
advantage or preference over another and to protect and preserve the rights of party litigants as
well as the interest of the investing public or creditors. Such suspension is intended to give enough
breathing space for the management committee or rehabilitation receiver to make the business
viable again, without having to divert attention and resources to litigations in various fora. 59
(Emphasis supplied, citations omitted)

The stay order prevents preference or advantage of creditors over others, including the advantage
that a creditor with matured money claims may have over one whose claims are not in yet in
default.
Rule 2, Section 1 of the Interim Rules defines the term "claim":

RULE 2
Definition of Terms and Construction

....

"Claim" shall include all claims or demands of whatever nature or character against a debtor or its
property, whether for money or otherwise.

The term "claim," which includes "all claims or demands of whatever nature or character," is not
limited to claims which have not yet defaulted.

This does not mean that those with secured claims against corporations undergoing rehabilitation
are deprived of the preference given them by law. Negros Navigation Co., Inc. v. Court of
Appeals60enumerated the guidelines in the treatment of claims against corporations undergoing
rehabilitation:

1. All claims against corporations, partnerships, or associations that are pending before any court,
tribunal, or board, without distinction as to whether or not a creditor is secured or unsecured, shall
be suspended effective upon the appointment of a management committee, rehabilitation receiver,
board, or body in accordance with the provisions of Presidential Decree No. 902-A.

2. Secured creditors retain their preference over unsecured creditors, but enforcement of such
preference is equally suspended upon the appointment of a management committee, rehabilitation
receiver, board, or body. In the event that the assets of the corporation, partnership, or association
are finally liquidated, however, secured and preferred credits under the applicable provisions of
the Civil Code will definitely have preference over unsecured ones.61

While the corporation is undergoing rehabilitation, all claims, regardless of nature, are suspended
from enforcement. However, once the corporation has successfully rehabilitated or finally
liquidated, the enforcement of these secured claims takes precedence.

In Negros Navigation Co., Tsuneishi Heavy Industries (Tsuneishi) filed a collection case against
Negros Navigation Co, Inc. (Negros Navigation) for repairman's lien, or the unpaid services for
the repair of its vessels. 62 The Regional Trial Court of Cebu issued a writ of preliminary
attachment against Negros Navigation's properties and held that Tsuneishi's repairman's lien
constituted a superior maritime lien.63 Negros Navigation then filed before the Regional Trial
Court of Manila a petition for corporate rehabilitation with prayer for suspension of payments,
which the trial court, in issuing a stay order, granted.64 On appeal, Tsuneishi argued before this
Court that its maritime liens were not covered by the stay order.65

This Court held that the admiralty proceeding was appropriately suspended under Rule 4, Section
6 of the Interim Rules, there being no exemptions or distinctions in the law on what kinds of claims
are covered by suspension:
The justification for the suspension of actions or claims, without distinction, pending rehabilitation
proceedings is to enable the management committee or rehabilitation receiver to effectively
exercise its/his powers free from any judicial or extra-judicial interference that might unduly
hinder or prevent the "rescue" of the debtor company. To allow such other actions to continue
would only add to the burden of the management committee or rehabilitation receiver, whose time,
effort and resources would be wasted in defending claims against the corporation instead of being
directed toward its restructuring and rehabilitation.66 (Citations omitted)

Likewise, in Abrera v. Hon. Barza,67College Assurance Plan Philippines, Inc. (CAP) sold pre-
need educational plans, which guaranteed the payment of tuition and other standard school fees.68
CAP suffered financial difficulties and failed to meet its obligations under the plans.69 The CAP
planholders then filed an action for specific performance and/or annulment of contract against
CAP, its directors, and its officers. 70

CAP filed a petition for rehabilitation, which the trial court deemed sufficient in form and
substance. 71 The trial court also issued a stay order. 72

Questioning the stay order and the petition for rehabilitation, the CAP planholders argued that
CAP was a pre-need corporation and that a trust relationship existed between the corporation and
the planholders. 73 They argued that because they did not have a debtor-creditor relationship with
CAP, CAP could not apply for rehabilitation, and the stay order could not apply to the action for
specific performance. 74

This Court held that CAP, a pre-need corporation already in default of its obligations to the
planholders, could file for rehabilitation:

Under the Interim rules, "debtor" shall mean "any corporation, partnership, or association,
whether supervised or regulated by the Securities and Exchange Commission or other
government agencies, on whose behalf a petition for rehabilitation has been filed under these
Rules."

The Interim Rules does not distinguish whether a pre-need corporation like CAP cannot file a
petition for rehabilitation before the RTC. Courts are not authorized to distinguish where the
Interim Rules makes no distinction.

Moreover, under the Interim Rules, "claim" shall include "all claims or demands of whatever
nature or character against a debtor or its property, whether for money or otherwise." "Creditor"
shall mean "any holder of a claim."

Hence, the claim of petitioners for payment of tuition fees from CAP is included in the definition
of "claims" under the Interim Rules. 75 (Emphasis in the original, citations omitted)

In Express Investments III Private Ltd. and Export Development Canada v. Bayan
Telecommunications, Inc., 76 Bayan Telecommunications, Inc. (Bayantel) defaulted on its
obligations to its creditors and reached a total of ₱35.928 billion in unpaid principal and interest.77
One of its bank creditors filed a petition for rehabilitation.78 The trial court gave due course to the
petition.79

This Court allowed Bayantel to undergo rehabilitation proceedings despite Bayantel's status as a
debtor corporation already in default.80

The definition of "claim" and the nature of stay orders contemplate situations where debtor
corporations already in default may be under rehabilitation. Rule 4, Section 1 does not limit who
may file a petition for rehabilitation.

I.C

The plain meaning doctrine cannot apply to Rule 4, Section 1 of the Interim Rules. In Social
Weather Stations, Inc. and Pulse Asia v. Commission on Elections:81

First, verba legis or the so-called plain-meaning rule applies only when the law is completely clear,
such that there is absolutely no room for interpretation. Its application is premised on a situation
where the words of the legislature are clear that its intention, insofar as the facts of a case demand
from the point of view of a contemporary interpretative community, is neither vague nor
ambiguous. This is a matter of judicial appreciation. It cannot apply merely on a party's contention
of supposed clarity and lack of room for interpretation.

....

Second, statutory construction cannot lend itself to pedantic rigor that foments absurdity. The
dangers of inordinate insistence on literal interpretation are commonsensical and need not be
belabored. These dangers are by no means endemic to legal interpretation. Even in everyday
conversations, misplaced literal interpretations are fodder for humor. A fixation on technical rules
of grammar is no less innocuous. A pompously doctrinaire approach to text can stifle, rather than
facilitate, the legislative wisdom that unbridled textualism purports to bolster.

Third, the assumption that there is, in all cases, a universal plain language is erroneous. In reality,
universality and uniformity of meaning is a rarity. A contrary belief wrongly assumes that language
is static. 82 (Citations omitted)

The context of the words of the statute should be considered to clarify inherent ambiguities. Thus,
in Chavez v. Judicial and Bar Council:83

Under the maxim noscitur a sociis, where a particular word or phrase is ambiguous in itself or is
equally susceptible of various meanings, its correct construction may be made clear and specific
by considering the company of words in which it is founded or which it is associated. This is
because a word or phrase in a statute is always used in association with other words or phrases,
and its meaning may, thus, be modified or restricted by the latter. The particular words, clauses
and phrases should not be studied as detached and isolated expressions, but the whole and every
part of the statute must be considered in fixing the meaning of any of its parts and in order to
produce a harmonious whole. A statute must be so construed as to harmonize and give effect to
all its provisions whenever possible. In short, every meaning to be given to each word or phrase
must be ascertained from the context of the body of the statute since a word or phrase in a statute
is always used in association with other words or phrases and its meaning may be modified or
restricted by the latter. 84 (Emphasis supplied, citations omitted)

Where a literal meaning would lead to absurdity, 85 contradiction, or injustice,86 or otherwise

defeat the clear purpose of the lawmakers,87 the spirit and reason of the statute may be examined
to determine the true intention of the provision. 88

In this case, the phrase "any debtor who foresees the impossibility of meeting its debts when they
respectively fall due" in Rule 4, Section 1 of the Interim Rules need not refer to a specific period
or point in time when the debts mature. It may refer to the debtor corporation's general realization
that it will not be able to fulfill its obligations-a realization that may come before default.

Construing the phrase "when they respectively fall due" to mean that the debtor must already be
in default defeats the clear purpose of the lawmakers. It unjustly limits rehabilitation to
corporations with matured obligations.

II

This Court is not a trier of facts. 89 The factual findings of the lower courts are accorded great
weight and respect.90 This is especially so in corporate rehabilitation proceedings, to which
commercial courts are designated on account of their expertise and specialized knowledge.91

The Court of Appeals affirmed the Regional Trial Court's findings that the Petition for
rehabilitation was sufficient and that the rehabilitation plan was reasonable. Petitioner seeks to
overturn these findings. It argues that the Petition was insufficient for its failure to include maturity
dates in the attached inventory; that the Regional Trial Court failed to determine whether
petitioner's opposition was manifestly unreasonable; and that the rehabilitation plan was not
feasible as it lacked materially significant financial commitments.92

These are questions of fact. The resolution of these issues entails a review of the sufficiency and
weight of the evidence presented by the parties, including the inventory attached to the Petition,
as well as the other financial documents for the rehabilitation.

Pascual v. Burgos93reiterates that only questions of law should be raised in petitions for certiorari
under Rule 45:

The Rules of Court require that only questions of law should be raised in petitions filed under Rule
45. This court is not a trier of facts. It will not entertain questions of fact as the factual findings of
the appellate courts are "final, binding[,] or conclusive on the parties and upon this [c]ourt" when
supported by substantial evidence. Factual findings of the appellate courts will not be reviewed
nor disturbed on appeal to this court.
However, these rules do admit exceptions. Over time, the exceptions to these rules have expanded.
At present, there are 10 recognized exceptions that were first listed in Medina v. Mayor Asistio,
Jr.:

(1) When the conclusion is a finding grounded entirely on speculation, surmises or conjectures;
(2) When the inference made is manifestly mistaken, absurd or impossible; (3) Where there is a
grave abuse of discretion; (4) When the judgment is based on a misapprehension of facts; (5) When
the findings of fact are conflicting; (6) When the Court of Appeals, in making its findings, went
beyond the issues of the case and the same is contrary to the admissions of both appellant and
appellee; (7) The findings of the Court of Appeals are contrary to those of the trial court; (8) When
the findings of fact are conclusions without citation of specific evidence on which they are based;
(9) When the facts set forth in the petition as well as in the petitioner's main and reply briefs are
not disputed by the respondents; and (10) The finding of fact of the Court of Appeals is premised
on the supposed absence of evidence and is contradicted by the evidence on record.

These exceptions similarly apply in petitions for review filed before this court involving civil,
labor, tax, or criminal cases.

A question of fact requires this court to review the truthfulness or falsity of the allegations of the
parties. This review includes assessment of the "probative value of the evidence presented." There
is also a question of fact when the issue presented before this court is the correctness of the lower
courts' appreciation of the evidence presented by the parties.94 (Citations omitted)

Absent any of the exceptions enumerated in Pascual, this Court will neither review nor disturb the
lower courts' findings of fact on appeal.

Petitioner contends that the Court of Appeals' findings are misapprehensions of the facts of the
case, and that these findings are conclusions without citations of their specific factual bases. It
claims that the Court of Appeals ignored respondent's failure to attach the maturity dates95 and
merely relied on respondent's self-serving assertions.96 It also argues that the Court of Appeals
failed to refute petitioner's observations on the defects of respondent's rehabilitation plan.97

Petitioner fails to convince. The Court of Appeals had legal and factual bases for approving the
Petition for rehabilitation.

The Interim Rules does not specify that courts must make a written declaration that a creditor's
opposition is manifestly unreasonable. The Regional Trial Court Orders gave petitioner every
opportunity to make its opposition and stance clear. In issuing the December 21, 2007 Order and
approving the rehabilitation plan, the Regional Trial Court found the opposition unreasonable.

Rule 4, Section 5 of the Interim Rules outlines the requisites of a rehabilitation plan:

RULE4

Debtor-Initiated Rehabilitation
....

SECTION 5. Rehabilitation Plan - The rehabilitation plan shall include (a) the desired business
targets or goals and the duration and coverage of the rehabilitation; (b) the terms and conditions of
such rehabilitation which shall include the manner of its implementation, giving due regard to the
interests of secured creditors; (c) the material financial commitments to support the rehabilitation
plan; (d) the means for the execution of the rehabilitation plan, which may include conversion of
the debts or any portion thereof to equity, restructuring of the debts, dacion en pago, or sale of
assets or of the controlling interest; (e) a liquidation analysis that estimates the proportion of the
claims that the creditors and shareholders would receive if the debtor's properties were liquidated;
and (f) such other relevant information to enable a reasonable investor to make an informed
decision on the feasibility of the rehabilitation plan.

The Regional Trial Court, as affirmed by the Court of Appeals, deemed the Petition for
rehabilitation sufficient. In its June 27, 2007 Order, it found that all the documents required under
Rule 4, Section 2 of the Interim Rules were attached to the Petition.98

The Court of Appeals did not disregard the maturity dates. The Petition annexed a table of accounts
receivable showing obligations that had already matured.1âwphi1 Respondent likewise admitted
in the Petition99 that it could not comply with its obligations to petitioner.

Petitioner argues that the Regional Trial Court failed to rule on its Opposition and declare it
manifestly unreasonable. It claims that this failure renders respondent's Petition for rehabilitation
insufficient. This argument lacks credence.

Both the Court of Appeals and the Regional Trial Court found that the Rehabilitation Receiver
carefully considered the feasibility of the rehabilitation plan, and that no serious objection and
counter proposal were presented by petitioner.100

Philippine Bank of Communications illustrates what may be deemed as insufficient financial

commitments:

The commitment to add ₱10,000,000.00 working capital appeared to be doubtful considering that
the insurance claim from which said working capital would be sourced had already been written
off by Basic Polyprinters's affiliate, Wonder Book Corporation. A claim that has been written off
is considered a bad debt or a worthless asset, and cannot be deemed a material financial
commitment for purposes of rehabilitation . . .

We also declared in Wonder Book Corporation v. Philippine Bank of Communications (Wonder

Book) that the conversion of all deposits for future subscriptions to common stock and the
treatment of all payables to officers and stockholders as trade payables was hardly constituting
material financial commitments. Such "conversion" of cash advances to trade payables was, in
fact, a mere re-classification of the liability entry and had no effect on the shareholders' deficit. . .
.

....
We observe, too, that Basic Polyprinters's proposal to enter into the dacion en pago to create a
source of ''fresh capital" was not feasible because the object thereof would not be its own property
but one belonging to its affiliate, TOL Realty and Development Corporation, a corporation also
undergoing rehabilitation. Moreover, the negotiations (for the return of books and magazines from
Basic Polyprinters's trade creditors) did not partake of a voluntary undertaking because no actual
financial commitments had been made thereon.

....

Due to the rehabilitation plan being an indispensable requirement in the corporate rehabilitation
proceedings, Basic Polyprinters was expected to exert a conscious effort in formulating the same,
for such plan would spell the future not only for itself but also for its creditors and the public in
general. The contents and execution of the rehabilitation plan could not be taken lightly.101
(Emphasis supplied, citations omitted)

Petitioner's contention hinges on the sufficiency of respondent's material financial commitments,

which becomes significant in determining its resolve, earnestness, and good faith. 102

Respondent intends to source its funds from internal operations. That the funds are internally
generated does not render the funds insufficient. This arrangement is still a material, voluntary,
and significant financial commitment, in line with respondent's rehabilitation plan.

Both the Court of Appeals and the Regional Trial Court found the Rehabilitation Receiver's
assurance that the cashflow from respondent's committed sources to be sufficient, thus:

From the foregoing, the undersigned deems the expected sources of cashflow to support the
proposed Rehabilitation Plan of the Petitioner as realistic. The funds requirement to jumpstart the
Rehabilitation Plan is minimal and easily obtained by the Petitioner's management; while the
income to be realized from the development of a condominium project is also feasible. Finally, the
present management of the Petitioner appears to be capable of revitalizing and operating the
Company and to generate the expected cashflow to support its repayment program. 103

Based on his assessment, the Rehabilitation Receiver noted that the funds required to finance the
first year of the rehabilitation plan would be much less than that the amount stated in the Petition.
104 Respondent put forth in detail its financial commitments.

Respondent, as a debtor corporation, may file for rehabilitation despite having defaulted on its
obligations to petitioner. As its Petition for rehabilitation was sufficient and its rehabilitation plan
was feasible, respondent's rehabilitation should proceed.

WHEREFORE, the Petition is DENIED. The June 13, 2008 Decision and August 20, 2008
Resolution of the Court of Appeals in CA-G.R. SP No. 102147 are AFFIRMED.

SO ORDERED.

G.R. No. 206617

PHILIPPINE NUMISMATIC AD ANTIQUARIAN SOCIETY, Petitioner
vs.
GENESIS AQUINO, ANGELO BERNARDO, JR., EDUARDO M. CHUA, FERNANDO
FRANCISCO, JR., FERMIN S. CARINO, PERCIVAL M. MANUEL, FERNANDO M.
GAITE, JR., JOSE CHOA, TOMAS DE GUZMAN, JR., LI VI JU, CATALINO M.
SILANGIL, RAMUNDO SANTOS, PETER SY, and WILSON YULOQUE, Respondents

DECISION

PERALTA, J.:

Before us is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court which seeks
the reversal of the Decision2 dated September 6, 2012, and Resolution3 dated March 19, 2013 of
the Court of Appeals (CA) in CA-G.R. SP No. 113864, which affirmed the dismissal of Civil Case
No. 09- 122709 entitled Philippine Numismatic and Antiquarian Society. Inc. v. Genesis Aquino,
et al. by the Regional Trial Court (RTC), Branch 24, Manila.

The factual antecedents are as follows:

Petitioner Philippine Numismatic and Antiquarian Society, Inc. (PNAS) is a non-stock, non-profit
domestic corporation duly organized in accordance with Philippine Laws. 4 On October 29, 2009,
petitioner filed a complaint with the RTC, Branch 24, Manila docketed as Civil Case No. 09-
122388 5 praying for the issuance of a writ of a preliminary injunction against respondent Angelo
Bernardo, Jr. The complaint was verified by respondents Eduardo M. Chua, Catalino M. Silangil
and Percival M. Manuel who claimed to be the attorneys-in-fact of petitioner as per Secretary's
Certificate attached to the complaint. Petitioner was represented by Atty. Faustino S. Tugade as
counsel. 6

On December 22, 2009, another complaint 7 was filed by petitioner against respondents Genesis
Aquino, Angelo Bernardo, Jr., Eduardo M. Chua, Fernando Francisco, Jr., Fermin S. Carino,
Percival M. Manuel, Fernando M. Gaite, Jr., Jose Choa, Tomas De Guzman, Jr., Li Vi Ju, Catalino
M. Silangil, Raymundo Santos, Peter Sy, and Wilson Yuloque docketed as Civil Case No. 09-
122709 praying that the Membership Meeting conducted by defendants on November 25, 2008 be
declared null and void. It is, likewise prayed that a temporary restraining order or a writ of
preliminary injunction be issued for the defendants to desist from acting as the true members,
officers and directors of petitioner. The verification was signed by Atty. William L. Villareal. 8
The petitioner was represented by Siguion Reyna Montecillo and Ongsiako Law Office. 9

On January 26, 2010, considering that there were two different paiiies claiming to be the
representative of petitioner, the RTC issued a Joint Order directing the parties to submit within
fifteen (15) days from notice the appropriate pleadings as to who are the true officers of PNAS and
to submit all the documentary exhibits in support of their respective positions. 10

Only respondents Eduardo M. Chua, Tomas De Guzman, Jr., Catalino M. Silangil, Peter Sy,
Fernando Francisco, Jr., and Percival M. Manuel in Civil Case No. 09-122709 complied with the
aforesaid Joint Order. In their Memorandum, they alleged that Atty. William F. Villareal who
signed the verification in the complaint was not authorized by the Board of Directors of PNAS to
institute the complaint in behalf of petitioner corporation, and that his action in filing the complaint
is an ultra vires act and was in violation of Section 23 of the Corporation Code. 11 The aforesaid
respondents also filed their Answer dated January 29, 2010.

On the part of respondents Genesis Aquino, Angelo Bernardo, Jr., Li Vi Ju, and Raymundo Santos,
they filed a Special Entry of Appearance to Question the Issue of Improper Service of Summons
and Notices and Motion to Defer the Proceedings Until All the Said Issues Have Been Resolved.
Petitioner then filed a Motion to Declare Defendants in Default and for Judgment Based on the
Complaint dated February 10, 2010. Petitioner likewise filed a Request for Admission 12 dated
February 17, 2010.

Subsequently, on March 15, 2010, the RTC issued a Joint Order 13 dismissing the complaint, thus:

The failure of plaintiff represented by Atty. William F. Villareal who alleged in the complaint that
he is the President of Philippine Numismatic and Antiquarian Society, Inc. and its duly-authorized
representative to file the appropriate pleadings and submit documentary exhibits relative to his
authority to file the instant complaint for and in behalf of plaintiff Philippine Numismatic and
Antiquarian Society, Inc. as mandated by the order of this Court during the hearing on January 26,
2010 lends credence to the assertion of defendants that he has no authority to represent plaintiff
and to file the complaint in Civil Case No. 09- 122709. Consequently, the court has no other
recourse but to order the dismissal of Civil Case No. 09-122709

Accordingly, Civil Case No. 09-122709 entitled Philippine Numismatic and Antiquarian Society,
Inc. versus Genesis Aquino, Angelo Bernardo, Jr., Eduardo M. Chua, Fernando Francisco, Jr.,
Fermin S. Carino, Percival M. Manuel, Fernando M. Gaite, Jr., Jose Choa, Tomas De Guzman,
Jr., Li Vi Ju, Catalino M. Silangil, Raymundo Santos, Peter Sy, and Wilson Yuloque is hereby
ordered DISMISSED.

This Order likewise renders moot and academic the Motion to Declare Defendants in Default and
For Judgment Based on the Complaint filed by plaintiff in Civil Case No. 09-122709.

SO ORDERED. 14

Petitioner then filed a Petition for Review15 dated May 12, 2010 with the CA under Rule 43 of
the Rules of Court, in relation to A.M. No. 04-09- 07 dated September 14, 2004. In a Decision
dated September 6, 2012, the CA dismissed the petition.

Petitioner filed a motion for reconsideration, 16 but the same was denied by the CA on March 19,
2013.

Hence, this petition, raising the following issues:

I
THE COURT OF APPEALS COMMITTED A GRAVE ERROR WHEN IT UPHELD THE
DISMISSAL OF THE INTRA-CORPORATE CASE FOR PURPORTEDLY BEING A
NUISANCE SUIT;

II

THE COURT OF APPEALS COMMITTED A GRAVE ERROR WHEN IT REFUSED TO

CONSIDER, CONTRARY TO ESTABLISHED JURISPRUDENCE, A BOARD
RESOLUTION/SECRETARY'S CERTIFICATE AS PROOF OF AUTHORITY TO FILE
INITIATORY PLEADINGS FOR AND ON A COMPANY'S BEHALF;

III

THE COURT OF APPEALS DEPARTED FROM THE USUAL COURSE OF PROCEDURE

WHEN IT DISMISSED THE CASE ON PROCEDURAL GROUNDS RATHER THAN ON THE
MERITS AND THUS PRECLUDING PETITIONER FROM A JUST AND PROPER
DETERMINATION OF ITS CASE. 17

We deny the petition.

There is no question that a litigation should be disallowed immediately if it involves a person

without any interest at stake, for it would be futile and meaningless to still proceed and render a
judgment where there is no actual controversy to be thereby determined. Courts of law in our
judicial system are not allowed to delve on academic issues or to render advisory opinions. They
only resolve actual controversies involving rights that are legally demandable and enforceable.18

The Rules of Court, specifically Section 2 of Rule 3 thereof, requires that unless otherwise
authorized by law or the Rules of Court, every action must be prosecuted or defended in the name
of the name of the real party-in-interest, thus:

Sec. 2. Parties-in-interest. - A real party-in-interest is the party who stands to be benefited or

injured by the judgment in the suit, or the party entitled to the avails of the suit. Unless otherwise
authorized by law or these Rules, every action must be prosecuted or defended in the name of the
real party-in-interest.

This provision has two requirements: (1) to institute an action, the plaintiff must be the real party-
in-interest; and (2) the action must be prosecuted in the name of the real party-in-interest. Interest
within the meaning of the Rules of Court means material interest or an interest in issue to be
affected by the decree or judgment of the case, as distinguished from mere curiosity about the
question involved. One having no material interest to protect cannot invoke the jurisdiction of the
court as the plaintiff in an action.19 The Interim Rules of Procedure for Intra-Corporate
Controversies under Republic Act No. 8799 in A.M. No. 01-2-04-SC, effective on April 1, 2001
considers the suppletory application of the Rules of Court under Section 2, Rule 1, thus:
Section 2. Suppletory application of the Rules of Court. - The Rules of Court, in so far as they may
be applicable and are not inconsistent with these Rules, are hereby adopted to form an integral part
of these Rules.

Moreover, We consider the summary nature of the proceedings governed by the Interim Rules
which is premised on one objective which is the expeditious disposition of cases.20

The purposes of the requirement for the real party in interest prosecuting or defending an action at
law are: (a) to prevent the prosecution of actions by persons without any right, title or interest in
the case; (b) to require that the actual party entitled to legal relief be the one to prosecute the action;
(c) to avoid a multiplicity of suits; and (d) to discourage litigation and keep it within certain bounds,
pursuant to sound public policy. 21

The rule on real party-in-interest ensures, therefore, that the party with the legal right to sue brings
the action, and this interest ends when a judgment involving the nominal plaintiff will protect the
defendant from a subsequent identical action. Such a rule is intended to bring before the court the
party rightfully interested in the litigation so that only real controversies will be presented and the
judgment, when entered, will be binding and conclusive and the defendant will be saved from
further harassment and vexation at the hands of other claimants to the same demand. 22

In the case at bar, PNAS, as a corporation, is the real party-in-interest because its personality is
distinct and separate from the personalities of its stockholders.1âwphi1 A corporation has no
power, except those expressly conferred on it by the Corporation Code and those that are implied
or incidental to its existence. In tum, a corporation exercises said powers through its board of
directors and/or its duly-authorized officers and agents. Thus, it has been observed that the power
of a corporation to sue and be sued in any court is lodged with the board of directors that exercises
its corporate powers. In tum, physical acts of the corporation, like the signing of documents, can
be performed only by natural persons duly authorized for the purpose by corporate by-laws or by
a specific act of the board of directors. 23 It necessarily follows that "an individual corporate
officer cannot solely exercise any corporate power pertaining to the corporation without authority
from the board of directors".24

Section 23, in relation to Sec. 25 of the Corporation Code, clearly enunciates that all corporate
powers are exercised, all business conducted, and all properties controlled by the board of
directors. A corporation has a separate and distinct personality from its directors and officers and
can only exercise its corporate powers through the board of directors. Thus, it is clear that an
individual corporate officer cannot solely exercise any corporate power pertaining to the
corporation without authority from the board of directors.25 Absent the said board resolution, a
petition may not be given due course. The application of the rules must be the general rule, and
the suspension or even mere relaxation of its application, is the exception. This Court may go
beyond the strict application of the rules only on exceptional cases when there is truly substantial
compliance with the rule.26

Hence, since petitioner is a corporation, the certification attached to its complaint filed with the
RTC must be executed by an officer or member of the board of directors or by one who is duly
authorized by a resolution of the board of directors; otherwise, the complaint will have to be
dismissed. 27 Courts are not, after all, expected to take judicial notice of corporate board
resolutions or a corporate officers' authority to represent a corporation.28 Petitioner's failure to
submit proof that Atty. William L. Villareal has been authorized by PNAS to file the complaint is
a sufficient ground for the dismissal thereof.

In Tamondong v. Court of Appeals,29 we held that if a complaint is filed for and in behalf of the
plaintiff who is not authorized to do so, the complaint is not deemed filed. An unauthorized
complaint does not produce any legal effect. Hence, the court should dismiss the complaint on the
ground that it has no jurisdiction over the complaint and the plaintiff. 30

In the present case, the real issue is whether Atty. William L. Villareal who claimed to be the
President of PNAS in 2009, was indeed authorized through a Board Resolution to represent PNAS
in filing Civil Case No. 09- 122709.

Respondents Genesis Aquino, Angelo Bernardo, Jr., Li Vi Ju, and Raymundo Santos aver that
Atty. Villareal was President in 2007 and was never reelected from then on. They presented the
notarized Certificate of Elections dated November 25, 2008 which shows that respondent Angelo
Bernardo, Jr. was the one elected as President, while respondent Francisco Fernando, Jr. was
elected as Secretary for the year 2009 during the election 31 . held on November 25, 2008. Though
the election of officers on November 25, 2008 was the subject of the complaint that was dismissed,
Atty. Villareal did not present any proof that indeed he was President in 2009 when he filed the
complaint.

As correctly ruled by the CA, Atty. Villareal was given the opportunity to prove his authority to
institute the complaint considering that there were two different parties representing the petitioner
in two cases filed before the RTC, Branch 24, Manila. If indeed Atty. Villareal was authorized to
file the complaint, he could have simply presented a Board Resolution to prove that he was
authorized. Neither did he file the appropriate pleadings and submit documentary exhibits relative
to his authority to file the complaint for and in behalf of petitioner as mandated by the Joint Order
of the RTC during its hearing on January 26, 2010. As correctly stated by the RTC, such failure
on the part of Atty. Villareal gave credence to the assertion of respondents herein that he has no
authority to represent petitioner and to file the complaint in Civil Case No. 09-122709.

Moreover, the records would show that Atty. Villareal ceased to be a director in 2009, not in 2008
as erroneously found by the CA. But what is material is that he was not anymore a director in 2009
at the time he filed the complaint. This is evidenced by the notarized Certificate of Elections32
dated November 23, 2008 which shows that he was not among the eleven(11) Directors elected
for 2009. The Board of Directors elected were respondents Fernando Gaite, Angelo Bernardo, Jr.,
Fermin S. Carifio, Eduardo M. Chua, Catalino M. Silangil, Peter Sy, Fernando Francisco, Jr.,
Tomas De Guzman, Jr., Li Vi Ju, Jose Choa and Percival M. Manuel. Also the General Information
Sheet (GJS) 33 filed on November 27, 2008 shows that respondent Angelo Bernardo, Jr. 34 was
the one elected as President for the year 2009, while respondent Francisco Fernando, Jr. was
elected as Secretary.

Assuming the officers for 2009 were illegally elected as claimed by Atty. Villareal, We note that
Atty. Villareal could not even be President in a hold-over capacity because he was not the one
elected as President in 2008. From his own evidence attached to the petition as Annex "A", the
GIS filed on July 10, 200835 shows that it was respondent Tomas Z. De Guzman who was elected
as President and respondent Eduardo M. Chua as Secretary for the year 2008.

The said fact was also stated by the respondents Eduardo M. Chua, Fernando Francisco, Jr., Fermin
S. Carifio, Percival M. Manuel, Tomas De Guzman, Jr., Catalino M. Silangil and Peter Sy in their
comment to the instant petition. They aven-ed that Atty. William Villareal was 2007 President of
PNAS. In the year 2008, he was still elected as one of the eleven (11) members of the Board of
Directors during the election on November 25, 2007 held at the Manila Yacht Club at Roxas
Boulevard, Manila. But, he was not anymore elected president. It was respondent Tomas Z. De
Guzman who was elected by a vote of six directors36 as against five votes for Atty. William
Villareal.37 The other officers elected were respondents Catalino M. Silangil (Vice President),
Eduardo M. Chua (Secretary), Genesis Aquino (Treasurer) and Angelo Bernardo, Jr. (Auditor).

The aforesaid respondents further averred that Atty. William Villareal and his minority group of
directors, namely, Antonio Carinan, Edward Nocom, Rufino Fermin and Albert Dealino, refused
to honor the new set of officers.38 Also, Atty. William Villareal allegedly refused to tum-over and
submit an accounting of all the records. Thus, respondents Catalino M. Silangil, Eduardo M. Chua,
Angelo Bernardo, Jr. and Fernando M. Gaite, Jr. filed a Complaint for Annulment of Corporate
Acts, Accounting, Inventory, Recovery of Corporate Items, Funds and Properties and for Damages
with Prayer for TRO and Preliminary Injunction before RTC, Branch 46, Manila docketed as Civil
Case No. 08-120341.39

Furthermore, it was alleged in the instant petition that Atty. Villareal is a member of the Board of
Directors since 2001 to present. The General Information Sheet (GIS) for the years 2008 to 201140
were attached to the petition to prove the allegation. We wonder, however, why these documents
were not presented in the RTC nor attached to the petition filed with the CA. We also observe that
there were no elected officers for the year 2008 as appearing on the GIS which was accomplished
and filed only in May 18, 2011.41 Likewise, the GIS for the years 2009 to 2011 where it was stated
that Atty. Villaruel was the President appears no indication that it was filed with the SEC. As stated
in the instructions on the GIS, a GIS Form is required to be filed within thirty (30) days following
the date of the annual or a special meeting, and must be certified and sworn to by the corporate
secretary, or by the president, or any duly authorized officer of the corporation. 42

Indeed, there was no proof submitted that Atty. Villareal was duly authorized by petitioner to file
the complaint and sign the verification and certification against forum shopping 43 dated
December 21, 2009. Where the plaintiff is not the real party-in-interest, the ground for the motion
to dismiss is lack of cause of action. The reason for this is that the courts ought not to pass upon
questions not derived from any actual controversy. Truly, a person having no material interest to
protect cannot invoke the jurisdiction of the court as the plaintiff in an action. Nor does a court
acquire jurisdiction over a case where the real party- in- interest is not present or imp leaded. 44

Under our procedural rules, "a case is dismissible for lack of personality to sue upon proof that the
plaintiff is not the real party-ininterest, hence, grounded on failure to state a cause of action." 45
Indeed, considering that all civil actions must be based on a cause of action, definedas the act or
omission by which a party violates the right of another, the former as the defendant must be
allowed to insist upon being opposed by the real party-in-interest so that he is protected from
further suits regarding the same claim. Under this rationale, the requirement benefits the defendant
because "the defendant can insist upon a plaintiff who will afford him a setup providing good res
judicata protection if the struggle is carried through on the merits to the end.46

Procedural rules are not to be disdained as mere technicalities that may be ignored at will to suit
the convenience of a party. Adjective law is important in ensuring the effective enforcement of
substantive rights through the orderly and speedy administration of justice. These rules are not
intended to hamper litigants or complicate litigation but, indeed to provide for a system under
which a suitor may be heard in the correct form and manner and at the prescribed time in a peaceful
confrontation before a judge whose authority they acknowledge. 47

WHEREFORE, the petition is DENIED. The Decision of Court Appeals dated September 6,
2012, and its Resolution dated March19, 2013 in CA-G.R. SP No. 113864 are hereby
AFFIRMED.

SO ORDERED.

G.R. No. 207246

JOSE M. ROY III, Petitioner

vs.
CHAIRPERSON TERESITA HERBOSA, THE SECURITIES AND EXCHANGE
COMMISSION, and PHILIPPINE LONG DISTANCE TELEPHONE COMP ANY,,
Respondents

x-----------------------x

WILSON C. GAMBOA, JR., DANIEL V. CARTAGENA, JOHN WARREN P. GABINETE,

ANTONIO V. PESINA, JR., MODESTO MARTINY. MAMON III, and GERARDO C.
EREBAREN, Petitioners-in-Intervention,

x-----------------------x

PHILIPPINE STOCK EXCHANGE, INC. Respondent-in-Intervention,

x-----------------------x

SHAREHOLDERS' ASSOCIATION OF THE PHILIPPINES, INC., Respondent-in-

Intervention.

RESOLUTION

CAGUIOA, J.:
Before the Court is the Motion for Reconsideration dated January 19, 20171 (the Motion) filed by
petitioner Jose M. Roy III (movant) seeking the reversal and setting aside of the Decision dated
November 22, 20162 (the Decision) which denied the movant's petition, and declared that the
Securities and Exchange Commission (SEC) did not commit grave abuse of discretion in issuing
Memorandum Circular No. 8, Series of 2013 (SEC-MC No. 8) as the same was in compliance
with, and in fealty to, the decision of the Court in Gamboa v. Finance Secretary Teves,3 (Gamboa
Decision) and the resolution4 denying the Motion for Reconsideration therein (Gamboa
Resolution).

The Motion presents no compelling and new arguments to justify the reconsideration of the
Decision.

The grounds raised by movant are: (1) He has the requisite standing because this case is one of
transcendental importance; (2) The Court has the constitutional duty to exercise judicial review
over any grave abuse of discretion by any instrumentality of government; (3) He did not rely on
an obiter dictum; and (4) The Court should have treated the petition as the appropriate device to
explain the Gamboa Decision.

The Decision has already exhaustively discussed and directly passed upon these grounds. Movant's
petition was dismissed based on both procedural and substantive grounds.

Regarding the procedural grounds, the Court ruled that petitioners (movant and petitioners-in-
intervention) failed to sufficiently allege and establish the existence of a case or controversy and
locus standi on their part to warrant the Court's exercise of judicial review; the rule on the hierarchy
of courts was violated; and petitioners failed to implead indispensable parties such as the
Philippine Stock Exchange, Inc. and Shareholders' Association of the Philippines, Inc. 5

In connection with the failure to implead indispensable parties, the Court's Decision held:

Under Section 3, Rule 7 of the Rules of Court, an indispensable party is a party-in-interest without
whom there can be no final determination of an action. Indispensable parties are those with such a
material and direct interest in the controversy that a final decree would necessarily affect their
rights, so that the court cannot proceed without their presence. The interests of such indispensable
parties in the subject matter of the suit and the relief are so bound with those of the other parties
that their legal presence as parties to the proceeding is an absolute necessity and a complete and
efficient determination of the equities and rights of the parties is not possible if they are not joined.

Other than PLDT, the petitions failed to join or implead other public utility corporations subject
to the same restriction imposed by Section 11, Article XII of the Constitution. These corporations
are in danger of losing their franchise and property if they are found not compliant with the
restrictive interpretation of the constitutional provision under review which is being espoused by
petitioners. They should be afforded due notice and opportunity to be heard, lest they be deprived
of their property without due process.

Not only are public utility corporations other than PLDT directly and materially affected by the
outcome of the petitions, their shareholders also stand to suffer in case they will be forced to divest
their shareholdings to ensure compliance with the said restrictive interpretation of the term
"capital". As explained by SHAREPHIL, in five corporations alone, more than Php158 Billion
worth of shares must be divested by foreign shareholders and absorbed by Filipino investors if
petitioners' position is upheld.

Petitioners' disregard of the rights of these other corporations and numerous shareholders
constitutes another fatal procedural flaw, justifying the dismissal of their petitions. Without giving
all of them their day in court, they will definitely be deprived of their property without due
process of law. 6

This is highlighted to clear any misimpression that the Gamboa Decision and Gamboa Resolution
made a categorical ruling on the meaning of the word "capital" under Section 11, Article XII of
the Constitution only in respect of, or only confined to, respondent Philippine Long Distance
Telephone Company (PLDT). Nothing is further from the truth. Indeed, a fair reading of the
Gamboa Decision and Gamboa Resolution shows that the Court's pronouncements therein would
affect all public utilities, and not just respondent PLDT.

On the substantive grounds, the Court disposed of the issue on whether the SEC gravely abused
its discretion in ruling that respondent PLDT is compliant with the limitation on foreign ownership
under the Constitution and other relevant laws as without merit. The Court reasoned that "in the
absence of a definitive ruling by the SEC on PLDT's compliance with the capital requirement
pursuant to the Gamboa Decision and Resolution, any question relative to the inexistent ruling is
premature."7

In resolving the other substantive issue raised by petitioners, the Court held that:

[E]ven if the resolution of the procedural issues were conceded in favor of petitioners, the petitions,
being anchored on Rule 65, must nonetheless fail because the SEC did not commit grave abuse of
discretion amounting to lack or excess of jurisdiction when it issued SEC-MC No. 8. To the
contrary, the Court finds SEC-MC No. 8 to have been issued in fealty to the Gamboa Decision
and Resolution.8

To belabor the point, movant's petition is not a continuation of the Gamboa case as the Gamboa
Decision attained finality on October 18, 2012, and thereafter Entry of Judgment was issued on
December 11, 2012.9

As regards movant's repeated invocation of the transcendental importance of the Gamboa case,
this does not ipso facto accord locus standi to movant. Being a new petition, movant had the burden
to justify his locus standi in his own petition. The Court, however, was not persuaded by his
justification.

Pursuant to the Court's constitutional duty to exercise judicial review, the Court has conclusively
found no grave abuse of discretion on the part of SEC in issuing SEC-MC No. 8.

The Decision has painstakingly explained why it considered as obiter dictum that pronouncement
in the Gamboa Resolution that the constitutional requirement on Filipino ownership should "apply
uniformly and across the board to all classes of shares, regardless of nomenclature and category,
comprising the capital of a corporation."[[9-a]] The Court stated that:

[T]he fallo or decretal/dispositive portions of both the Gamboa Decision and Resolution are
definite, clear and unequivocal. While there is a passage in the body of the Gamboa Resolution
that might have appeared contrary to the fallo of the Gamboa Decision x x x the definiteness and
clarity of the fallo of the Gamboa Decision must control over the obiter dictum in the Gamboa
Resolution regarding the application of the 60-40 Filipino-foreign ownership requirement to "each
class of shares, regardless of differences in voting rights, privileges and restrictions." 10

To the Court's mind and, as exhaustively demonstrated in the Decision, the dispositive portion of
the Gamboa Decision was in no way modified by the Gamboa Resolution.

The heart of the controversy is the interpretation of Section 11, Article XII of the Constitution,
which provides: "No franchise, certificate, or any other form of authorization for the operation of
a public utility shall be granted except to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines at least sixty per centum of whose capital
is owned by such citizens x x x."

The Gamboa Decision already held, in no uncertain terms, that what the Constitution requires is
"[fJull [and legal] beneficial ownership of 60 percent of the outstanding capital stock, coupled with
60 percent of the voting rights x x x must rest in the hands of Filipino nationals x x x." 11 And,
precisely that is what SEC-MC No. 8 provides, viz.: "x x x For purposes of determining
compliance [with the constitutional or statutory ownership], the required percentage of Filipino
ownership shall be applied to BOTH (a) the total number of outstanding shares of stock entitled to
vote in the election of directors; AND (b) the total number of outstanding shares of stock, whether
or not entitled to vote x x x." 12

In construing "full beneficial ownership," the Implementing Rules and Regulations of the Foreign
Investments Act of 1991 (FIA-IRR) provides:

For stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal
title is not enough to meet the required Filipino equity. Full beneficial ownership of the stocks,
coupled with appropriate voting rights is essential. Thus, stocks, the voting rights of which have
been assigned or transferred to aliens cannot be considered held by Philippine citizens or
Philippine nationals. 13

In turn, "beneficial owner" or "beneficial ownership" is defined in the Implementing Rules and
Regulations of the Securities Regulation Code (SRC-IRR) as:

[A]ny person who, directly or indirectly, through any contract, arrangement, understanding,
relationship or otherwise, has or shares voting power (which includes the power to vote or direct
the voting of such security) and/or investment returns or power (which includes the power to
dispose of, or direct the disposition of such security) x x x. 14
Thus, the definition of "beneficial owner or beneficial ownership" in the SRC-IRR, which is in
consonance with the concept of "full beneficial ownership" in the FIA-IRR, is, as stressed in the
Decision, relevant in resolving only the question of who is the beneficial owner or has beneficial
ownership of each "specific stock" of the public utility company whose stocks are under review.
If the Filipino has the voting power of the "specific stock", i.e., he can vote the stock or direct
another to vote for him, or the Filipino has the investment power over the "specific stock", i.e.,
he can dispose of the stock or direct another to dispose of it for him, or both, i.e., he can vote and
dispose of that "specific stock" or direct another to vote or dispose it for him, then such Filipino
is the "beneficial owner" of that "specific stock." Being considered Filipino, that "specific stock"
is then to be counted as part of the 60% Filipino ownership requirement under the Constitution.
The right to the dividends, jus fruendi - a right emanating from ownership of that "specific stock"
necessarily accrues to its Filipino "beneficial owner."

Once more, this is emphasized anew to disabuse any notion that the dividends accruing to any
particular stock are determinative of that stock's "beneficial ownership." Dividend declaration is
dictated by the corporation's unrestricted retained earnings. On the other hand, the corporation's
need of capital for expansion programs and special reserve for probable contingencies may limit
retained earnings available for dividend declaration. 15 It bears repeating here that the Court in the
Gamboa Decision adopted the foregoing definition of the term "capital" in Section 11, Article XII
of the 1987 Constitution in express recognition of the sensitive and vital position of public utilities
both in the national economy and for national security, so that the evident purpose of the
citizenship requirement is to prevent aliens from assuming control of public utilities, which may
be inimical to the national interest. 16 This purpose prescinds from the "benefits"/dividends that
are derived from or accorded to the particular stocks held by Filipinos vis-a-vis the stocks held by
aliens. So long as Filipinos have controlling interest of a public utility corporation, their decision
to declare more dividends for a particular stock over other kinds of stock is their sole prerogative
- an act of ownership that would presumably be for the benefit of the public utility corporation
itself. Thus, as explained in the Decision:

In this regard, it would be apropos to state that since Filipinos own at least 60% of the outstanding
shares of stock entitled to vote directors, which is what the Constitution precisely requires, then
the Filipino stockholders control the corporation, i.e., they dictate corporate actions and decisions,
and they have all the rights of ownership including, but not limited to, offering certain preferred
shares that may have greater economic interest to foreign investors - as the need for capital for
corporate pursuits (such as expansion), may be good for the corporation that they own. Surely,
these "true owners" will not allow any dilution of their ownership and control if such move will
not be beneficial to them. 17

Finally, as to how the SEC will classify or treat certain stocks with voting rights held by a trust
fund that is created by the public entity whose compliance with the limitation on foreign ownership
under the Constitution is under scrutiny, and how the SEC will determine if such public utility
does, in fact, control how the said stocks will be voted, and whether, resultantly, the trust fund
would be considered as Philippine national or not - lengthily discussed in the dissenting opinion
of Justice Carpio - is speculative at this juncture. The Court cannot engage in guesswork. Thus,
there is need of an actual case or controversy before the Court may exercise its power of judicial
review. The movant's petition is not that actual case or controversy.
Thus, the discussion of Justice Carpio' s dissenting opinion as to the voting preferred shares created
by respondent PLDT, their acquisition by BTF Holdings, Inc., which appears to be a wholly-owned
company of the PLDT Beneficial Trust Fund (BTF), and whether or not it is respondent PLDT's
management that controls BTF and BTF Holdings, Inc. - all these are factual matters that are
outside the ambit of this Court's review which, as stated in the beginning, is confined to
determining whether or not the SEC committed grave abuse of discretion in issuing SEC-MC No.
8; that is, whether or not SEC-MC No. 8 violated the ruling of the Court in Gamboa v. Finance
Secretary Teves, 18 and the resolution in Heirs of Wilson P. Gamboa v. Finance Sec.
Teves19denying the Motion for Reconsideration therein as to the proper understanding of
"capital".

To be sure, it would be more prudent and advisable for the Court to await the SEC's prior
determination of the citizenship of specific shares of stock held in trust - based on proven facts -
before the Court proceeds to pass upon the legality of such determination.

As to whether respondent PLDT is currently in compliance with the Constitutional provision

regarding public utility entities, the Court must likewise await the SEC's determination thereof
applying SEC-MC No. 8. After all, as stated in the Decision, it is the SEC which is the government
agency with the competent expertise and the mandate of law to make such determination.

In conclusion, the basic issues raised in the Motion having been duly considered and passed upon
by the Court in the Decision and no substantial argument having been adduced to warrant the
reconsideration sought, the Court resolves to DENY the Motion with FINALITY.

WHEREFORE, the subject Motion for Reconsideration is hereby DENIED WITH FINALITY.
No further pleadings or motions shall be entertained in this case. Let entry of final judgment be
issued immediately.

SO ORDERED.

G.R. No. 185024

JOSELITO HERNAND M. BUSTOS, Petitioners

vs.
MILLIANS SHOE, INC., SPOUSES FERNANDO AND AMELIA CRUZ, and the
REGISTER OF DEEDS OF MARIKINA CITY, Respondents

DECISION

SERENO, J.:

Before this Court is a Rule 45 Petition 1 assailing the Decision and the Resolution2 of the Court
of Appeals (CA). The CA did not find any grave abuse of discretion on the part of the Regional
Trial Court, Imus, Cavite, Branch 21 (RTC). The RTC had issued Orders3 refusing to exclude the
subject property in the Stay Order pertaining to assets under rehabilitation of respondent Millians
Shoe, Inc. (MSI).
FACTS OF THE CASE

Spouses Fernando and Amelia Cruz owned a 464-square-meter lot covered by Transfer Certificate
of Title (TCT) No. N-126668.4 On 6 January 2004, the City Government of Marikina levied the
prope1iy for nonpayment of real estate taxes. The Notice of Levy was annotated on the title on 8
January 2004. On 14 October 2004, the City Treasurer of Marikina auctioned off the property,
with petitioner Joselito Hernand M. Bustos emerging 'as the winning bidder.

Petitioner then applied for the cancellation of TCT No. N-126668. On 13 July 2006, the Regional
Trial Court, Marikina City, Branch 273, rendered a final and executory Decision ordering the
cancellation of the previous title and the issuance of a new one under the name of petitioner. 5

Meanwhile, notices of lis pendens were annotated on TCT No. N-126668 on 9 February 2005.6
These markings indicated that SEC Corp. Case No. 036-04, which was filed before the RTC and
involved the rehabilitation proceedings for MSI, covered the subject property and included it in
the Stay Order issued by the RTC dated 25 October 2004.7

On 26 September 2006, petitioner moved for the exclusion of the subject property from the Stay
Order.8 He claimed that the lot belonged to Spouses Cruz who were mere stockholders and officers
of MSL He further argued that since he had won the bidding of the property on 14 October 2004,
or before the annotation of the title on 9 February 2005, the auctioned property could no longer be
part of the Stay Order.

The RTC denied the entreaty of petitioner. It ruled that because the period of redemption up to 15
October 2005 had not yet lapsed at the time of the issuance of the Stay Order on 25 October 2004,
the ownership thereof had not yet been transferred to petitioner.9

Petitioner moved for reconsideration, 10 but to no avail. 11 He then filed an action for certiorari
before the CA. He asserted that the Stay Order undermined the taxing powers of the local
government unit. He also reiterated his arguments that Spouses Cruz owned the property, and that
the lot had already been auctioned to him.

In the assailed Decision dated 12 June 2008, the CA brushed aside the claim that the suspension
orders undermined the power to tax. As regards petitioner's main contention, the CA ruled as
follows:

In the case at bar, the delinquent tax payers were the Cruz Spouses who were the registered owners
of the said parcel of land at the time of the delinquency sale. The sale was held on October 14,
2004 and the Cruz

Spouses had until October 15, 2005 within which to redeem the parcel of land. The stay order was
issued on October 25, 2004 and inscribed at the back of the title on February 9, 2005, which is
within the redemption period. The Cruz Spouses were still the owners of the land at the time of
the issuance of the stay order. The said parcel of land which secured several mortgage liens for the
account of MSI remains to be an asset of the Cruz Spouses, who are the stockholders and/or
officers of MSI, a close corporation. Incidentally, as an exception to the general rule, in a close
corporation, the stockholders and/or officers usually manage the business of the corporation and
are subject to all liabilities of directors, i.e. personally liable for corporate debts and obligations.
Thus, the Cruz Spouses being stockholders of MSI are personally liable for the latter's debt and
obligations.

Petitioner unsuccessfully moved for reconsideration. The CA maintained its ruling and even held
that his prayer to exclude the property was time-barred by the 10-day reglementary period to
oppose rehabilitation petitions under Rule 4, Section 6 of the Interim Rules of Procedure on
Corporate Rehabilitation

Before this Court, petitioner maintains three points: (1) the Spouses Cruz are not liable for the
debts of MSI; (2) the Stay Order undermines the taxing power of Marikina City; and (3) the time
bar rule does not apply to him, because he is not a creditor of MSI. 12

In their Comment, 13 respondents do not contest that Spouses Cruz own the subject property.
Rather, respondents assert that as stockholders and officers of a close corporation, they are
personally liable for its debts and obligations. Furthermore, they argue that since the Rehabilitation
Plan of MSI has been approved, petitioner can no longer assail the same.

ISSUE OF THE CASE

The controlling issue in this case is whether the CA correctly considered the properties of Spouses
Cruz answerable for the obligations of MSI.

If the answer is in the affirmative, then the courts a quo correctly ruled that the Stay Order
involving the assets of MSI included the property covered by TCT No. N-126668. Petitioner would
also be considered a creditor of MSI who must timely file an opposition to the proposed
rehabilitation plan of the corporation.

RULING OF THE COURT

We set aside rulings of the CA for lack of basis.

In finding the subject property answerable for the obligations of MSI, the CA characterized
respondent spouses as stockholders of a close corporation who, as such, are liable for its debts.
This conclusion is baseless.

To be considered a close corporation, an entity must abide by the requirements laid out in Section
96 of the Corporation Code, which reads:

Sec. 96. Definition and applicability of Title. - A close corporation, within the meaning of this
Code, is one whose articles of incorporation provide that: (1) All the corporation's issued stock
of all classes, exclusive of treasury shares, shall be held of record by not more than a specified
number of persons, not exceeding twenty (20); (2) all the issued stock of all classes shall be subject
to one or more specified restrictions on transfer permitted by this Title; and (3) The corporation
shall not list in any stock exchange or make any public offering of any of its stock of any class.
Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least
two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation
which is not a close corporation within the meaning of this Code.x x x. (Emphasis supplied)

In San Juan Structural and Steel Fabricators. Inc. v. Court ol Appeals,14 this Court held that a
narrow distribution of ownership does not, by itself, make a close corporation. Courts must look
into the articles of incorporation to find provisions expressly stating that (l) the number of
stockholders shall not exceed 20; or (2) a preemption of shares is restricted in favor of any
stockholder or of the corporation; or (3) the listing of the corporate stocks in any stock exchange
or making a public offering of those stocks is prohibited.

Here, neither the CA nor the R TC showed its basis for finding that MSI is a close corporation.
The courts a quo did not at all refer to the Articles of Incorporation of MSI. The Petition submitted
by respondent in the rehabilitation proceedings before the RTC did not even include those Articles
of Incorporation among its attachments. 15

In effect, the CA and the RTC deemed MSI a close corporation based on the allegation of Spouses
Cruz that it was so. However, mere allegation is not evidence and is not equivalent to proof. 16
For this reason alone, the CA rulings should be set aside.

Furthermore, we find that the CA seriously erred in portraying the import of Section 97 of the
Corporation Code. Citing that provision, the CA concluded that "in a close corporation, the
stockholders and/or officers usually manage the business of the corporation and are subject to all
liabilities of directors, i.e. personally liable for corporate debts and obligations." 17

However, Section 97 of the Corporation Code only specifies that "the stockholders of the
corporation shall be subject to all liabilities of directors." Nowhere in that provision do we find
any inference that stockholders of a close corporation are automatically liable for corporate debts
and obligations.

Parenthetically, only Section 100, paragraph 5, of the Corporation Code explicitly provides for
personal liability of stockholders of close corporation, viz:

Sec. 100. Agreements by stockholders. -

xxxx

5. To the extent that the stockholders are actively engaged in the management or operation of the
business and affairs of a close corporation, the stockholders shall be held to strict fiduciary duties
to each other and among themselves. Said stockholders shall be personally liable for corporate
torts unless the corporation has obtained reasonably adequate liability insurance. (Emphasis
supplied)
As can be read in that provision, several requisites must be present for its applicability. None of
these were alleged in the case of Spouses Cruz. Neither did the RTC or the CA explain the factual
circumstances for this Court to discuss the personally liability of respondents to their creditors
because of corporate torts." 18

We thus apply the general doctrine of separate juridical personality, which provides that a
corporation has a legal personality separate and distinct from that of people comprising it. 19 By
virtue of that doctrine, stockholders of a corporation enjoy the principle of limited liability: the
corporate debt is not the debt of the stockholder.20 Thus, being an officer or a stockholder of a
corporation does not make one's property the property also of the corporation.21

Situs Development Corp. v. Asiatrust Bank22 is analogous to the case at bar.1âwphi1 We held
therein that the parcels of land mortgaged to creditor banks were owned not by the corporation,
but by the spouses who were its stockholders. Applying the doctrine of separate juridical
personality, we ruled that the parcels of land of the spouses could not be considered part of the
corporate assets that could be subjected to rehabilitation proceedings.

In rehabilitation proceedings, claims of creditors are limited to demands of whatever nature or

character against a debtor or its property, whether for money or otherwise.23 In several cases,24
we have already held that stay orders should only cover those claims directed against corporations
or their properties, against their guarantors, or their sureties who are not solidarily liable with them,
to the exclusion of accommodation mortgagors.25 To repeat, properties merely owned by
stockholders cannot be included in the inventory of assets of a corporation under rehabilitation.

Given that the true owner the subject property is not the corporation, petitioner cannot be
considered a creditor of MSI but a holder of a claim against respondent spouses.26

Rule 4, Section 6 of the Interim Rules of Procedure on Corporate Rehabilitation, directs creditors
of the debtor to file an opposition to petitions for rehabilitation within 10 days before the initial
hearing of rehabilitation proceedings. Since petitioner does not hold any claim over the properties
owned by MSI, the time-bar rule does not apply to him.

WHEREFORE, the Petition for review on certiorari filed by petitioner Joselito Hernand M.
Bustos is GRANTED. The Decision dated 12 June 2008 and Resolution dated 27 October 2008
of the Court of Appeals in C.A.-G.R. SP. No. 100298 are REVERSED and SET ASIDE.

SO ORDERED.

G.R. No. 202454

CALIFORNIA MANUFACTURING COMPANY, INC., Petitioner,

vs.
ADVANCED TECHNOLOGY SYSTEM, INC., Respondent.

DECISION
SERENO, J.:

Before us is a Petition for Review on Certiorari assailing the Decision 1 of the Court of Appeals
(CA) in CA-G.R. CV No. 94409, which denied the appeal filed by California Manufacturing
Company, Inc. (CMCI) from the Decision2 of Regional Trial Court (RTC) of Pasig City, Branch
268, in the Complaint for Sum of Money3 filed by Advanced Technology Systems, Inc. (ATSI)
against the former.

The RTC ordered CMCI to pay ATSI the amount of ₱443,729.39 for the unpaid rentals for a
Prodopak machine, plus legal interest from the date of extra-judicial demand until full payment;
30% of the judgment award as attorney's fees; and the costs of litigation. The CA affirmed the trial
court's decision, but it deleted the award of attorney's fees for lack of factual and legal basis and
ordered CMCI to pay the costs of litigation.

THE ANTECEDENT FACTS

Petitioner CMCI is a domestic corporation engaged in the food and beverage manufacturing
business. Respondent ATSI is also a domestic corporation that fabricates and distributes food
processing machinery and equipment, spare parts, and its allied products.4

In August 200 I, CMCI leased from ATSI a Prodopak machine which was used to pack products
in 20-ml. pouches.5 The parties agreed to a monthly rental of ₱98,000 exclusive of tax. Upon
receipt of an open purchase order on 6 August 2001, ATSI delivered the machine to CMCI's plant
at Gateway Industrial Park, General Trias, Cavite on 8 August 2001.

In November 2003, ATSI filed a Complaint for Sum of Money against CMCI to collect unpaid
rentals for the months of June, July, August, and September 2003. ATSI alleged that CMCI was
consistently paying the rents until June 2003 when the latter defaulted on its obligation without
just cause. ATSI also claimed that CMCI ignored all the billing statements and its demand letter.
Hence, in addition to the unpaid rents A TSI sought payment for the contingent attorney's fee
equivalent to 30% of the judgment award.

CMCI moved for the dismissal of the complaint on the ground of extinguishment of obligation
through legal compensation. The RTC, however, ruled that the conflicting claims of the parties
required trial on the merits. It therefore dismissed the motion to dismiss and directed CMCI to file
an Answer.7

In its Answer,8 CMCI averred that ATSI was one and the same with Processing Partners and
Packaging Corporation (PPPC), which was a toll packer of CMCI products. To support its
allegation, CMCI submitted copies of the Articles of Incorporation and General Information Sheets
(GIS)9 of the two corporations. CMCI pointed out that ATSI was even a stockholder of PPPC as
shown in the latter's GIS. 10

CMCI alleged that in 2000, PPPC agreed to transfer the processing of CMCI's product line from
its factory in Meycauayan to Malolos, Bulacan. Upon the request of PPPC, through its Executive
Vice President Felicisima Celones, CMCI advanced ₱4 million as mobilization fund. PPPC
President and Chief Executive Officer Francis Celones allegedly committed to pay the amount in
12 equal instalments deductible from PPPC's monthly invoice to CMCI beginning in October
2000. 11 CMCI likewise claims that in a letter dated 30 July 2001, 12 Felicisima proposed to set
off PPPC's obligation to pay the mobilization fund with the rentals for the Prodopak machine.

CMCI argued that the proposal was binding on both PPPC and A TSI because Felicisima was an
officer and a majority stockholder of the two corporations. Moreover, in a letter dated 16
September 2003, 13 she allegedly represented to the new management of CMCI that she was
authorized to request the offsetting of PPPC's obligation with ATSI's receivable from CMCI. When
ATSI filed suit in November 2003, PPPC's debt arising from the mobilization fund allegedly
amounted to ₱10,766.272.24.

Based on the above, CMCl argued that legal compensation had set in and that ATSI was even
liable for the balance of PPPC's unpaid obligation after deducting the rentals for the Prodopak
machine.

After trial, the RTC rendered a Decision in favor of ATSI with the following dispositive portion:

WHEREFORE, foregoing premises considered, judgment is hereby rendered in favor of plaintiff

and against the defendant, ordering the latter to pay the former, the following sums:

1. Php443,729.39 representing the unpaid rental for the prodopak machine plus legal
interest from the date of extra judicial demand (October 13, 2003 - Exh. "E") until
satisfaction of this judgment;

2. 30% of the judgment award as and by way of attorney's fees; and

3. Cost of litigation.14

The trial court ruled that legal compensation did not apply because PPPC had a separate legal
personality from its individual stockholders, the Spouses Celones, and ATSI. Moreover, there was
no board resolution or any other proof showing that Felicisima's proposal to set-off the unpaid
mobilization fund with CMCI 's rentals to A TSI for the Prodopak Machine had been authorized
by the two corporations. Consequently, the RTC ruled that CMCI's financial obligation to pay the
rentals for the Prodopak machine stood and that its claim against PPPC could be properly
ventilated in the proper proceeding upon payment of the required docket fees. 15

On appeal by CMCI, the CA affirmed the trial court's ruling that legal compensation had not set
in because the element of mutuality of parties was lacking. Likewise, the appellate court sustained
the trial court's refusal to pierce the corporate veil. It ruled that there must be clear and convincing
proof that the Spouses Celones had used the separate personalities of ATSI or PPPC as a shield to
commit fraud or any wrong against CMCI, which was not existing in this case. 16

Aside from the absence of a board resolution issued by ATSI, the CA observed that the letter dated
30 July 2001 clearly showed that Felicisima's proposal to effect the offsetting of debts was limited
to the obligation of PPPC. 17 The appellate court thus sustained the trial court's finding that ATSI
was not bound by Felicisima's conduct.

Moreover, the CA rejected CMCI's argument that ATSI is barred by estoppel as it found no
indication that ATSI had created any appearance of false fact. 18 CA also held that estoppel did
not apply to PPPC because the latter was not even a party to this case.

The CA, however, deleted the trial court's award of attorney's fees and costs of litigation in favor
of ATSI as it found no discussion in the body of the decision of the factual and legal justification
for the award.

CMCI filed a Motion for Reconsideration of the CA Decision, but the appellate court denied the
motion for lack of merit. 19 Hence, this petition.20

THE ISSUE

The assignment of errors raised by CMCI all boil down to the question of whether the CA erred in
affirming the ruling of the RTC that legal compensation between ATSI's claim against CMCI on
the one hand, and the latter's claim against PPPC on the other hand, has not set in.

OUR RULING

We affirm the CA Decision in toto.

CMCI argues that both the RTC and the CA overlooked the circumstances that it has proven to
justify the piercing of corporate veil in this case, i.e., (1) the interlocking board of directors,
incorporators, and majority stockholder of PPPC and ATSI; (2) control of the two corporations by
the Spouses Celones; and (3) the two corporations were mere alter egos or business conduits of
each other. CMCI now asks us to disregard the separate corporate personalities of A TSI and PPPC
based on those circumstances and to enter judgment in favor of the application of legal
compensation.

Whether one corporation is merely an alter ego of another, a sham or subterfuge, and whether the
requisite quantum of evidence has been adduced to warrant the puncturing of the corporate veil
are questions of fact. 21 Relevant to this point is the settled rule that in a petition for review on
certiorari like this case, this Court's jurisdiction is limited to reviewing errors of law in the absence
of any showing that the factual findings complained of are devoid of support in the records or are
glaringly erroneous. 22 This rule alone wan-ants the denial of the petition, which essentially asks
us to reevaluate the evidence adduced by the pm1ies and the credibility of the witnesses presented.

We have reviewed the evidence on record and have found no cogent reason to disturb the findings
of the co mis a quo that A TSI is distinct and separate from PPPC, or from the Spouses Celones.

Any piercing of the corporate veil must be done with caution.23 As the CA had correctly observed,
it must be ce11ain that the corporate fiction was misused to such an extent that injustice, fraud, or
crime was committed against another, in disregard of rights. Moreover, the wrongdoing must be
clearly and convincingly established. Sarona v. NLRC24 instructs, thus:

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. After all, the concept of corporate entity was not meant to
promote unfair objectives.

The doctrine of piercing the corporate veil applies 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.25

CMCI 's alter ego theory rests on the alleged interlocking boards of directors and stock ownership
of the two corporations. The CA, however, rejected this theory based on the settled rule that mere
ownership by a single stockholder of even all or nearly all of the capital stocks of a corporation,
by itself, is not sufficient ground to disregard the corporate veil. We can only sustain the CA's
ruling. The instrumentality or control test of the alter ego doctrine requires not mere majority or
complete stock control, but complete domination of finances, policy and business practice with
respect to the transaction in question. The corporate entity must be shown to have no separate
mind, will, or existence of its own at the time of the transaction.26

Without question, the Spouses Celones are incorporators, directors, and majority stockholders of
the ATSI and PPPC. But that is all that CMCI has proven. There is no proof that PPPC controlled
the financial policies and business practices of ATSI either in July 2001 when Felicisima proposed
to set off the unpaid ₱3.2 million mobilization fund with CMCI's rental of Prodopak machines; or
in August 2001 when the lease agreement between CMCI and ATSI commenced. Assuming
arguendo that Felicisima was sufficiently clothed with authority to propose the offsetting of
obligations, her proposal cannot bind ATSI because at that time the latter had no transaction yet
with CMCI. Besides, CMCI had leased only one Prodopak machine. Felicisima's reference to the
Prodopak machines in its letter in July 2001 could only mean that those were different from the
Prodopak machine that CMCI had leased from A TSI.

Contrary to the claim of CMCI, none of the letters from the Spouses Celones tend to show that
ATSI was even remotely involved in the proposed offsetting of the outstanding debts of CMCI
and PPPC. Even Felicisima's letter to the new management of CMCI in 2003 contains nothing to
support CMCI's argument that Felicisima represented herself to be clothed with authority to
propose the offsetting. For clarity, we quote below the relevant portions of her letter:

Gentlemen:
I apologize for writing this letter. But kindly spare me your time and allow to ventilate my
grievances against California Manufacturing Corporation x x x. I had formally lodged my
grievances with the management of CMC, but until now, no action has been done yet. It is on this
spirit and time tested principle of diplomacy that I write this letter.

I am the Executive Vice President of Processing Partners & Packaging Corporation (PPPC),
a duly organized domestic corporation, engaged in the toll packing business.

Sometime in November of 1996, CMC availed of the toll packing services of PPPC. At the
outset, business relationship between the two was going smoothly. In due time, PPPC proved its
name to CMC in delivering quality toll packing services. As a matter of fact, after the expiration
of the toll packing contract, CMC still retained the services of PPPC. Thus, sometime in the year
2000, CMC executed another toll packing contract with PPC.

However, the business relationship unexpectedly turned sour when CMC changed its Management
in the latter part of 2002. Since then CMC's new management has been committing unsound
business practices prejudicial to the interests of PPPC.

xxxx

Failure of CMC to honor its

agreement with PPC anent
the pickling machinery

xxxx

Leapfrog Plant/Jasmine al)d

Rose Plant

xxxx

Pre-termination of toll
[p]acking [a]greement for
KLS Spaghetti Sauce without
just cause

xxxx

Unpaid rentals for the lease

of machinery from Advanced
Technology Systems, Inc.

CMC has been leasing a machinery of Advanced Technology Systems, Inc. (Advanced Tech), a
domestic corporation of which I am also the majority stockholder. CMC owes Advanced Tech.
unpaid rentals in
the amount of P443,729.37, but despite various demands, CMC refused to pay Advanced
Tech.

We have already formally lodged our grievances concerning the foregoing with the management
of CMC. However, until now, no action has been done. We believe that before we take coercive
actions available under the law, it is wise to bring said grievances first to your attention to exhaust
available venues for amicable settlement.

Though PPPC's grievances are ripe for judicial action, we still hope that we can settle [the] same
amicably. However, if we run out of choices, we will [be] constrained to invoke the aid of the
appropriate court. (Emphases supplied)27

Nothing in the narration above supports CMCI's claim that it had been led to believe that ATSI
and PPPC were one and the same; or, that ATSI's collectible was intertwined with the business
transaction of PPPC with CMCI.

In all its pleadings, CMCI averred that the P4 million mobilization fund was in furtherance of its
agreement with PPPC in 2000.1awp++i1 Prior thereto, PPPC had been a toll packer of its products
as early as 1996. Clearly, CMCI had been dealing with PPPC as a distinct juridical person acting
through its own corporate officers from 1996 to 2003.

CMCI's dealing with ATSI began only in August 2001. It appears, however, that CMCI now wants
the Court to gloss over the separate corporate existence ATSI and PPPC notwithstanding the dearth
of evidence showing that either PPPC or ATSI had used their corporate cover to commit fraud or
evade their respective obligations to CMCI. It even appears that CMCI faithfully discharged its
obligation to ATSI for a good two years without raising any concern about its relationship to PPPC.

The fraud test, which is the second of the three-prong test to determine the application of the alter
ego doctrine, requires that the parent corporation's conduct in using the subsidiary corporation be
unjust, fraudulent or wrongful. Under the third prong, or the harm test, a causal connection between
the fraudulent conduct committed through the instrumentality of the subsidiary and the injury
suffered or the damage incurred by the plaintiff has to be established.28 None of these elements
have been demonstrated in this case. Hence, we can only agree with the CA and RTC in ruling out
mutuality of parties to justify the application of legal compensation in this case.

Article 1279 of the Civil Code provides:

ARTICLE 1279. In order that compensation may be proper, it is necessary:

(1) That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;
 (2) That both debts consist in a sum of money, or if the things due are consumable, they be
of the same kind, and also of the same quality if the latter has been stated;

(3) That the two debts be due;

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor.

The law, therefore, requires that the debts be liquidated and demandable. Liquidated debts are
those whose exact amounts have already been determined. 29

CMCI has not presented any credible proof, or even just an exact computation, of the supposed
debt of PPPC. It claims that the mobilization fund that it had advanced to PPPC was in the amount
of ₱4 million. Yet, Felicisima's proposal to conduct offsetting in her letter dated 30 July 2001
pertained to a ₱3.2 million debt of PPPC to CMCI. Meanwhile, in its Answer to ATSI's complaint,
CMCI sought to set off its unpaid rentals against the alleged ₱10 million debt of PPPC. The
uncertainty in the supposed debt of PPPC to CMCI negates the latter's invocation of legal
compensation as justification for its non-payment of the rentals for the subject Prodopak machine.

WHEREFORE, the Decision dated 25 August 2011 and Resolution dated 21 June 2012 issued
by the Court of Appeals in CA-G.R. CV No. 94409 are AFFIRMED. The instant Petition is
DENIED for lack of merit.

SO ORDERED.

G.R. No. 210032, April 25, 2017

DUTCH MOVERS, INC. CESAR LEE AND YOLANDA LEE, Petitioners, v. EDILBERTO1
LEQUIN, CHRISTOPHER R. SALVADOR, REYNALDO2 L. SINGSING, AND RAFFY B.
MASCARDO, Respondents.

DECISION

DEL CASTILLO, J.:

Before the Court is a Petition for Review on Certiorari assailing the July 1, 2013 Decision3 of the
Court of Appeals in CA-G.R. SP No. 113774. The CA reversed and set aside the October 29, 20094
and January 29, 20105 Resolutions of the National Labor Relations Commission (NLRC), which
in turn reversed and set aside the Order6 dated September 4, 2009 of Labor Arbiter Lilia S. Savari
(LA Savari).

Also challenged is the November 13, 2013 CA Resolution.7 which denied the Motion for
Reconsideration on the assailed Decision.
Factual Antecedents

This case is an offshoot of the illegal dismissal Complaint8 filed by Edilberto Lequin (Lequin),
Christopher Salvador, Reynaldo Singsing, and Raffy Mascardo (respondents) against Dutch
Movers, Inc. (DMI), and/or spouses Cesar Lee and Yolanda Lee (petitioners), its alleged
President/Owner, and Manager respectively.

In their Amended Complaint and Position Paper,9 respondents stated that DMI, a domestic
corporation engaged in hauling liquefied petroleum gas, employed Lequin as truck driver and the
rest of respondents as helpers; on December 28, 2004, Cesar Lee, through the Supervisor Nazario
Furio, informed them that DMI would cease its hauling operation for no reason; as such, they
requested DMI to issue a formal notice regarding the matter but to no avail. Later, upon
respondents' request, the DOLE NCR10 issued a certification11 revealing that DMI did not file any
notice of business closure. Thus, respondents argued that they were illegally dismissed as their
termination was without cause and only on the pretext of closure.

On October 28, 2005, LA Aliman D. Mangandog dismissed12 the case for lack of cause of action.

On November 23, 2007, the NLRC reversed and set aside the LA Decision. It ruled that
respondents were illegally dismissed because DMI simply placed them on standby, and no longer
provide them with work. The dispositive portion of the NLRC Decision13 reads:

WHEREFORE, the Decision dated October 28, 2005 is hereby REVERSED and SET ASIDE and
a new judgment is hereby rendered ordering respondent Dutch Movers, Inc. to reinstate
complainants to their former positions without loss of seniority rights and other privileges.
Respondent corporation is also hereby ordered to pay complainants their full backwages from the
time they were illegally dismissed up to the date of their actual reinstatement and ten (10%) percent
of the monetary award as for attorney's fees.

SO ORDERED.14
The NLRC Decision became final and executory on December 30, 2007.15 And, on February 14,
2008, the NLRC issued an Entry of Judgment16 on the case.

Consequently, respondents filed a Motion for Writ of Execution.17 Later, they submitted a
Reiterating Motion for Writ of Execution with Updated Computation of Full Backwages. 18
Pending resolution of these motions, respondents filed a Manifestation and Motion to Implead19
stating that upon investigation, they discovered that DMI no longer operates. They, nonetheless,
insisted that petitioners - who managed and operated DMI, and consistently represented to
respondents that they were the owners of DMI - continue to work at Toyota Alabang, which they
(petitioners) also own and operate. They further averred that the Articles of Incorporation (AOI)
of DMI ironically did not include petitioners as its directors or officers; and those named directors
and officers were persons unknown to them. They likewise claimed that per inquiry with the SEC20
and the DOLE, they learned that DMI did not tile any notice of business closure; and the creation
and operation of DMI was attended with fraud making it convenient for petitioners to evade their
legal obligations to them.
Given these developments, respondents prayed that petitioners, and the officers named in DMI's
AOI, which included Edgar N. Smith and Millicent C. Smith (spouses Smith), be impleaded, and
be held solidarity liable with DMI in paying the judgment awards.

In their Opposition to Motion to Implead,21 spouses Smith alleged that as part of their services as
lawyers, they lent their names to petitioners to assist them in incorporating DMI. Allegedly, after
such undertaking, spouses Smith promptly transferred their supposed rights in DMI in favor of
petitioners.

Spouses Smith stressed that they never participated in the management and operations of DMI,
and they were not its stockholders, directors, officers or managers at the time respondents were
terminated. They further insisted that they were not afforded due process as they were not
impleaded from the inception of the illegal dismissal case; and hence, thy cannot be held liable for
the liabilities of DMI.

On April 1, 2009, LA Savari issued an Order22 holding petitioners liable for the judgment awards.
LA Savari decreed that petitioners represented themselves to respondents as the owners of DMI;
and were the ones who managed the same. She further noted that petitioners were afforded due
process as they were impleaded from the beginning of this case.

Later, respondents filed anew a Reiterating Motion for Writ of Execution and Approve[d) Updated
Computation of Full Backwages.23

On July 31, 2009, LA Savari issued a Writ of Execution, the pertinent portion of which reads: chanRobles virtualLawlibrary

NOW THEREFORE, you [Deputy Sheriff] are commanded to proceed to respondents DUTCH
MOVERS and/or CESAR LEE and YOLANDA LEE with address at c/o Toyota Alabang,
Alabang Zapote Road, Las Piñas City or wherever they may be found within the jurisdiction of
the Republic of the Philippines and collect from said respondents the amount of THREE MILLION
EIGHT HUNDRED EIGHTEEN THOUSAND ONE HUNDRED EIGHTY SIX PESOS &
66/100 (Php3,818,186.66) representing Complainants' awards plus 10%, Attorney's fees in the
amount of THREE HUNDRED EIGHTY ONE THOUSAND EIGHT HUNDRED EIGHTEEN
PESOS & 66/100 (Php381,818.66) and execution fee in the amount of FORTY THOUSAND
FIVE HUNDRED PESOS (Php40,500.00) or a total of FOUR MILLION TWO HUNDRED
FORTY THOUSAND FIVE HUNDRED FIVE PESOS & 32/100 (Php4,240,505.32) x x x24
Petitioners moved25 to quash the Writ of Execution contending that the April 1, 2009 LA Order
was void because the LA has no jurisdiction to modify the final and executory NLRC Decision
and the same cannot anymore be altered or modified since there was no finding of bad faith against
them.

Ruling of the Labor Arbiter

On September 4, 2009, LA Savari denied petitioners' Motion to Quash because it did not contain
any ground that must be set forth in such motion.

Thus, petitioners appealed to the NLRC.

Ruling of the National Labor Relations Commission

On October 29, 2009, the NLRC quashed the Writ of Execution insofar as it held petitioners liable
to pay the judgment awards. The decretal portion of the NLRC Resolution reads: chanRob lesvirtualLawlibrary

WHEREFORE, in view of the foregoing, the assailed Order dated September 4, 2009 denying
respondents' Motion to Quash Writ is hereby REVERSED and SET ASIDE. The Writ of Execution
dated July 13,26 2009 is hereby QUASHED insofar as it holds individual respondents Cesar Lee
and Yolanda Lee liable for the judgment award against the complainants.

Let the entire record of the case be forwarded to the Labor Arbiter of origin for appropriate
proceedings.

SO ORDERED.27
The NLRC ruled that the Writ of Execution should only pertain to DMI since petitioners were not
held liable to pay the awards under the final and executory NLRC Decision. It added that
petitioners could not be sued personally for the acts of DMI because the latter had a separate and
distinct personality from the persons comprising it; and, there was no showing that petitioners were
stockholders or officers of DMI; or even granting that they were, they were not shown to have
acted in bad faith against respondents.

On January 29, 2010, the NLRC denied respondents' Motion for Reconsideration.

Undaunted, respondents filed a Petition for Certiorari with the CA ascribing grave abuse of
discretion against the NLRC in quashing the Writ of Execution insofar as it held petitioners liable
to pay the judgment awards.

Ruling of the Court of Appeals

On July 1, 2013, the CA reversed and set aside the NLRC Resolutions, and accordingly affirmed
the Writ of Execution impleading petitioners as party-respondents liable to answer for the
judgment awards.

The CA ratiocinated that as a rule, once a judgment becomes final and executory, it cannot
anymore be altered or modified; however, an exception to this rule is when there is a supervening
event, which renders the execution of judgment unjust or impossible. It added that petitioners were
afforded due process as they were impleaded from the beginning of the case; and, respondents
identified petitioners as the persons who hired them, and were the ones behind DMI. It also noted
that such participation of petitioners was confirmed by DIVII's two incorporators who attested that
they lent their names to petitioners to assist the latter in incorporating DMI; and, after their
undertaking, these individuals relinquished their purported interests in DMI in favor of petitioners.

On November 13, 2013, the CA denied the Motion for Reconsideration on the assailed Decision.

Thus, petitioners filed this Petition raising the following grounds: chanRoblesvir tualLawlibrary
THE HONORABLE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN
RULING THAT RESPONDENTS SHOULD BE LIABLE FOR THE JUDGMENT AWARD TO
RESPONDENTS BASED ON THE FOLLOWING:

THE VALDERAMA VS. NLRC AND DAVID VS. CA ARE NOT APPLICABLE IN THE
INSTANT CASE.

II

THERE IS NO LEGAL BASIS TO PIERCE THE VEIL OF CORPORATE FICTION OF DUTCH

MOVERS, INC.28
Petitioners argue that the circumstances in Valderrama v. National Labor Relations Commission29
differ with those of the instant case. They explain that in Valderrama, the LA therein granted a
motion for clarification. In this case, however, the LA made petitioners liable through a mere
manifestation and motion to implead filed by respondents. They further stated that in Valderrama,
the body of the decision pointed out the liability of the individual respondents therein while here,
there was no mention in the November 23, 2007 NLRC Decision regarding petitioners' liability.
As such they posit that they cannot be held liable under said NLRC Decision.

In addition, petitioners claim that there is no basis to pierce the veil of corporate fiction because
DMI had a separate and distinct personality from the officers comprising it. They also insist that
there was no showing that the termination of respondents was attended by bad faith.

In fine, petitioners argue that despite the allegation that they operated and managed the affairs of
DMI, they cannot be held accountable for its liability in the absence of any showing of bad faith
on their part.

Respondents, on their end, counter that petitioners were identified as the ones who owned and
managed DMI and therefore, they should be held liable to pay the judgment awards. They also
stress that petitioners were consistently impleaded since the filing of the complaint and thus, they
were given the opportunity to be heard.

Issue

Whether petitioners are personally liable to pay the judgment awards in favor of respondents

Our Ruling

The Court denies the Petition.

To begin with, the Court is not a trier of facts and only questions of law may be raised in a petition
under Rule 45 of the Rules of Court. This rule, nevertheless, allows certain exceptions, which
include such instance where the factual findings of the CA are contrary to those of the lower court
or tribunal. Considering the divergent factual findings of the CA and the NLRC in this case, the
Court deems it necessary to examine, review and evaluate anew the evidence on record.30

Moreover, after a thorough review of the records, the Court finds that contrary to petitioners' claim,
Valderrama v. National Labor Relations Commission,31 and David v. Court of Appeals32 are
applicable here. In said cases, the Court held that the principle of immutability of judgment, or the
rule that once a judgment has become final and executory, the same can no longer be altered or
modified and the court's duty is only to order its execution, is not absolute. One of its exceptions
is when there is a supervening event occurring after the judgment becomes final and executory,
which renders the decision unenforceable.33

To note, a supervening event refers to facts that transpired after a judgment has become final and
executory, or to new situation that developed after the same attained finality. Supervening events
include matters that the parties were unaware of before or during trial as they were not yet existing
during that time.34

In Valderrama, the supervening event was the closure of Commodex, the company therein, after
the decision became final and executory, and without any showing that it filed any proceeding for
bankruptcy. The Court held that therein petitioner, the owner of Commodex, was personally liable
for the judgment awards because she controlled the company.

Similarly, supervening events transpired in this case after the NLRC Decision became final and
executory, which rendered its execution impossible and unjust. Like in Valderrama, during the
execution stage, DMI ceased its operation, and the same did not file any formal notice regarding
it. Added to this, in their Opposition to the Motion to Implead, spouses Smith revealed that they
only lent their names to petitioners, and they were included as incorporators just to assist the latter
in forming DMI; after such undertaking, spouses Smith immediately transferred their rights in
DMI to petitioners, which proved that petitioners were the ones in control of DMI, and used the
same in furthering their business interests.

In considering the foregoing events, the Court is not unmindful of the basic tenet that a corporation
has a separate and distinct personality from its stockholders, and from other corporations it may
be connected with. However, such personality may be disregarded, or the veil of corporate fiction
may be pierced attaching personal liability against responsible person if the corporation's
personality "is used to defeat public convenience, justify wrong, protect fraud or defend crime, or
is used as a device to defeat the labor laws x x x."35 By responsible person, we refer to an individual
or entity responsible for, and who acted in bad faith in committing illegal dismissal or in violation
of the Labor Code; or one who actively participated in the management of the corporation. Also,
piercing the veil of corporate fiction is allowed where a corporation is a mere alter ego or a conduit
of a person, or another corporation.36

Here, the veil of corporate fiction must be pierced and accordingly, petitioners should be held
personally liable for judgment awards because the peculiarity of the situation shows that they
controlled DMI; they actively participated in its operation such that DMI existed not as a separate
entity but only as business conduit of petitioners. As will be shown be shown below, petitioners
controlled DMI by making it appear to have no mind of its own,37 and used DMI as shield in
evading legal liabilities, including payment of the judgment awards in favor of respondents.38
First, petitioners and DMI jointly filed their Position Paper,39 Reply,40 and Rejoinder41 in
contesting respondents' illegal dismissal. Perplexingly, petitioners argued that they were not part
of DMI and were not privy to its dealings;42 yet, petitioners, along with DMI, collectively raised
arguments on the illegal dismissal case against them.

Stated differently, petitioners denied having any participation in the management and operation of
DMI; however, they were aware of and disclosed the circumstances surrounding respondents'
employment, and propounded arguments refuting that respondents were illegally dismissed.

To note, petitioners revealed the annual compensation of respondents and their length of service;
they also set up the defense that respondents were merely project employees, and were not
terminated but that DMI's contract with its client was discontinued resulting in the absence of
hauling projects for respondents.

If only to prove that they were not part of DMI, petitioners could have revealed who operated it,
and from whom they derived the information embodied in their pleadings. Such failure to reveal
thus gives the Court reasons to give credence to respondents' firm stand that petitioners are no
strangers to DMI, and that they were the ones who managed and operated it.

Second, the declarations made by spouses Smith further bolster that petitioners and no other
controlled DMI, to wit:chanRoblesv irtualLawlibrary

Complainants [herein respondents] in their own motion admit that they never saw [spouses Smith]
at the office of [DMI], and do not know them at all. This is because [spouses Smith's] services as
lawyers had long been dispensed by the Spouses Lee and had no hand whatsoever in the
management of the company. The Smiths, as counsel of the spouses at [that] time, [lent] their
names as incorporators to facilitate the [incorporation of DMI.] Respondent Edgard Smith was
then counsel of Toyota Alabang and acts as its corporate secretary and as favor to his former client
and employer, Respondent Cesar Lee, agreed to help incorporate [DMI] and even asked his wife
Respondent, Millicent Smith, to act as incorporator also [to] complete the required 5 man
incorporators. After the incorporation they assigned and transferred all their purported
participation in the company to the Respondents Spouses Cesar and Yolanda Lee, who acted as
managers and are the real owners of the corporation. Even at the time complainant[s were] fired
from [their] employment respondents Spouses Smith had already given up their shares. The failure
to an1end the Articles of Incorporation of [DMI], and to apply for closure is the fault of the new
board, if any was constituted subsequently, and not of Respondents Smiths. Whatever fraud
committed was not committed by the Respondents Smiths, hence they could not be made solidarily
liable with Respondent Corporation or with the spouses Lee. If bad faith or fraud did attend the
termination of complainant[s], respondents Smiths would know nothing of it because they had
ceased any connection with [DMI] even prior to such time. And they had at the inception of the
corporation never exercised management prerogatives in the selection, hiring, and firing of
employees of [DMI].43
Spouses Smith categorically identified petitioners as the owners and managers of DMI. In their
Motion to Quash, however, petitioners neither denied the allegation of spouses Smith nor adduced
evidence to establish that they were not the owners and managers of DMI. They simply insisted
that they could not be held personally liable because of the immutability of the final and executory
NLRC Decision, and of the separate and distinct personality of DMI.

Furthermore, the assailed CA Decision heavily relied on the declarations of spouses Smith but still
petitioners did not address the matters raised by spouses Smith in the instant Petition with the
Court.

Indeed, despite sufficient opportunity to clarify matters and/or to refute them, petitioners simply
brushed aside the allegations of spouses Smith that petitioners owned and managed DMI.
Petitioners just maintain that they did not act in bad faith; that the NLRC Decision is final and
executory; and that DMI has a distinct and separate personality. Hence, for failure to address,
clarify, or deny the declarations of spouses Smith, the Court finds respondents' position that
petitioners owned, and operated DMI with merit.

Third, piercing the veil of corporate fiction is allowed, and responsible persons may be impleaded,
and be held solidarily liable even after final judgment and on execution, provided that such persons
deliberately used the corporate vehicle to unjustly evade the judgment obligation, or resorted to
fraud, bad faith, or malice in evading their obligation.44

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

While it is true that one's control does not by itself result in the disregard of corporate fiction;
however, considering the irregularity in the incorporation of DMI, then there is sufficient basis to
hold that such corporation was used for an illegal purpose, including evasion of legal duties to its
employees, and as such, the piercing of the corporate veil is warranted. The act of hiding behind
the cloak of corporate fiction will not be allowed in such situation where it is used to evade one's
obligations, which "equitable piercing doctrine was formulated to address and prevent."45

Clearly, petitioners should be held liable for the judgment awards as they resorted to such scheme
to countermand labor laws by causing the incorporation of DMI but without any indication that
they were part thereof. While such device to defeat labor laws may be deemed ingenious and
imaginative, the Court will not hesitate to draw the line, and protect the right of workers to security
of tenure, including ensuring that they will receive the benefits they deserve when they fall victims
of illegal dismissal.46

Finally, it appearing that respondents' reinstatement is no longer feasible by reason of the closure
of DMI, then separation pay should be awarded to respondents instead.47

WHEREFORE, the Petition is DENIED. The July 1, 2013 Decision and November 13, 2013
Resolution of the Court of Appeals in CA-G.R. SP 113774 are AFFIRMED with
MODIFICATION that instead of reinstatement, Dutch Movers, Inc. and spouses Cesar Lee and
Yolanda Lee are solidarily liable to pay respondents' separation pay for every year of service.

SO ORDERED.
G.R. No. 211108

ALEJANDRO D.C. ROQUE, Petitioner

vs.
PEOPLE OF THE PHILIPPINES, Respondent

DECISION

TIJAM, J.:

Before Us is a Petition for Review on Certiorari under Rule 45 filed by petitioner Alejandro Roque
(Roque).

Roque assails the Decision 1 dated August 31, 2012 and the Resolution 2 dated January 22, 2014
of the Court of Appeals 3 (CA), which set aside and annulled the Order 4 dated November 12,
2008 of the Regional Trial Court (RTC) 5 , Third Judicial Region, Branch 11, Malolos City,
Bulacan in Criminal Case No. 1011-M- 2005. Said Order granted the motion for leave of court to
file demurrer to evidence filed by Rosalyn Singson (Singson), herein petitioner's co-accused.

On November 17, 1993, Barangay Mulawin Tricycle Operators and Drivers Association, Inc.
(BMTODA) became a corporation duly registered with the Securities and Exchange Commission
(SEC).

Sometime in August 2003, Oscar Ongjoco (Ongjoco), a member of BMTODA, learned that
BMTODA's funds were missing. In a letter, Ongjoco requested copies of the Association's
documents pursuant to his right to examine records under Section 74 of the Corporation Code of
the Philippines (Corporation Code). However, Singson, the Secretary of BMTODA, denied his
request.

Ongjoco also learned that the incumbent officers were holding office for three years already, in
violation of the one-year period provided for in BMTODA's by-laws. He then requested from
Roque, the President of BMTODA, a copy of the list of its members with the corresponding
franchise numbers of their respective tricycle fees and the franchise fees paid by each member, but
Roque denied Ongjoco's request.

Ongjoco filed an Affidavit-Complaint against Roque and Singson for violation of Section 7 4 in
relation to Section 144 of the Corporation Code because of their refusal to furnish him copies of
records pertaining to BMTODA.

The Office of the City Prosecutor of San Jose Del Monte, Bulacan found probable cause to indict
Roque and Singson. Hence, an Information was filed against them, which reads:

That sometime in December 2004, in San Jose Del Monte City, [P]rovince of Bulacan,
Ph,ilippines, and within the jurisdiction of this Honorable· Court, the said accused, Alejandro D.C.
Roque and Rosalyn G. Singson, being the President and Secretary, respectively, of Barangay
Mulawin Tricycle Operators and Drivers Association, Inc. (BMTODA), conspiring, confederating,
and mutually helping each other, did then and there willfully, unlawfully, and feloniously fail and
neglect to keep in their official record of all business transactions, minutes of all meetings or
stockholders or members·, or of the board of directors or trustees and refused to allow
stockholders, members, directors or trustees to examine and copy excerpt from the records or
minutes of the association after demand in writing. 6

After the prosecution rested its case, Roque and Singson filed a Motion for Leave of Court to File
Demurrer to Evidence with Motion to Dismiss by way of Demurrer to Evidence.1âwphi1 The
prosecution failed to file any comment thereon.

In an Order 7 dated November 12, 2008, the RTC granted the motion and gave due course to Roque
and Singson's demurrer to evidence. The RTC ruled that said association failed to prove its
existence as a corporation.

Hence, a violation under the Corporation Code cannot be made applicable against its officers. The
fallo thereof reads:

Accordingly, this demurrer is GIVEN DUE COURSE and the instant case is hereby DISMISSED.

SO ORDERED. 8

On appeal, the CA reversed and set aside the Order dated November 12, 2008 of the RTC. The
CA ruled that BMTODA is a duly registered corporation. The CA stated that a Petition to Lift
Order of Revocation and the SEC Order Lifting the Revocation were presented in evidence; and
that logic dictates that such documentary evidence presupposes a duly registered and existing
entity. The dispositive portion thereof reads:

WHEREFORE, premises considered, the instant Petition for Certiorari is hereby GRANTED.

Accordingly, the court a quo's Order dated 12 November 2008 is hereby ANNULLED and SET
ASIDE.

This case is hereby remanded to the court a quo for the presentation of defense evidence. SO
ORDERED. 9

Hence, Roque, thru his counsel, filed the present Petition.

Petitioner contends that there is want of evidence to prove that BMTODA is a corporation duly
established and organized under the Corporation Code; thus, he cannot be prosecuted under the
penal provisions of the said code.

The appeal lacks merit.

Section 7410 of the Corporation Code provides for the liability for damages of any officer or agent
of the corporation for refusing to allow any director, trustee, stockholder or member of the
corporation to examine and copy excerpts from its records or minutes. Section 144 of the same
Code further provides for other applicable penalties in case of violation of any provision of the
Corporation Code.

Hence, to prove any violation under the aforementioned provisions, it is necessary that: (1) a
director, trustee, stockholder or member has made a prior demand in writing for a copy of excerpts
from the corporations records or minutes; (2) any officer or agent of the concerned corporation
shall refuse to allow the said director, trustee, stockholder or member of the corporation to examine
and copy said excerpts; (3) if such refusal is made pursuant to a resolution or order of the board of
directors or trustees, the liability under this section for such action spall be imposed upon the
directors or trustees who voted for such refusal;· and (4) where the officer or agent of the
corporation sets up the defense that the person demanding to examine and copy excerpts from the
corporation's records and minutes has improperly used any information secured through any prior
examination of the records or minutes of such corporation or of any other corporation, or was not
acting in good faith or for a legitimate purpose in making his demand, the contrary must be shown
or proved. 11

Clearly, Ongjoco, as a member of BMTODA, had a right to examine documents and records
pertaining to said association. To recall, Ongjoco made a prior demand in writing for copy of
pertinent records of BMTODA from Roque and Singson. Ongjoco sent his letters dated December
13, 2003 12 and August 29, 2004 13 to Roque and Singson, respectively. However, both of them
refused to furnish Ongjoco copies of such pertinent records.

Roque argues that when the letters were received by him and Singson, BMTODA's registration
was·.already revoked. Hence, BMTODA ceased to exist as a corporation.

We are not persuaded.

While it appears that the registration of BMTODA as a corporation with the SEC was revoked on
September 30, 2003, the letter-request of Ongjoco to Singson, which was dated while BMTODA's
registration was revoked, was actually received by Singson after the revocation was lifted. In a
Letter dated October 11, 2004, the General Counsel of the SEC made it clear that the SEC lifted
the revocation of BMTODA's registration on August 30, 2004. As the CA correctly observed, the
letter-request was received by Singson on September 23, 2004 when BMTODA had regained its
active status. 14

In any case, the revocation of a corporation's Certificate of Registration does not automatically
warrant the extinction of the corporation itself such that its rights and liabilities are likewise
altogether extinguished. In the case of Clemente v. Court of Appeals 15 , the Court explained that
the termination of the life of a juridical entity does not, by itself, cause the extinction or diminution
of the rights and liabilities of such entity nor those of its owners and creditors.

Thus, the revocation of BMTODA's registration does not automatically strip off Ongjoco of his
right to examine pertinent documents and records relating to such association.
Also, since Roque .admitted the revocation of BMTODA's Registration 16 , he cannot come
'forward and disclaim BMTODA's registration with the SEC as a corporation. It is logical to
presume that a registration precedes the revocation thereof; as any registration cannot be revoked
without its valid existence.

Moreover, Roque also tries to exculpate himself from liability by claiming Singson's denial of the
request of Ongjoco as Singson's personal act.

We do not agree.

A reading of this present Petition reveals that Roque admitted 17 his denial of Ongjoco's request,
i.e., to furnish him a copy of BMTODA's list of its members with the corresponding franchise
body numbers of their respective tricycles and franchise fees paid by each member. Also, what
was requested from Singson pertains to an entirely different document. Thus, Singson' s denial is
immateriai, and does not detract from Roque' s denial of Ongjoco's request to access the above-
mentioned document. For his individual and separate act, Roque should be held accountable.
Hence, Roque's denial is unquestionably considered as a violation under the Corporation Code.

WHEREFORE, the instant petition is DENIED. The Decision dated August 31, 2012 and
Resolution dated January 22, 2014 of the Court of Appeals are AFFIRMED in toto.

SO ORDERED.

G.R. No. 213241, August 01, 2016

PHILIPPINE NATIONAL BANK, Petitioner, v. JUAN F. VILA, Respondent.

DECISION

PEREZ, J.:

For resolution of the Court is the instant Petition for Review on Certiorari1 filed by petitioner
Philippine National Bank (PNB), seeking to reverse and set aside the Decision2 dated 18 December
2013 and Resolution3 dated 13 June 2014 of the Court of Appeals (CA) in CA-G.R. CV No. 97612.
The assailed decision and resolution affirmed the 22 June 2011 Decision4 of the Regional Trial-
Court (RTC) of Villasis, Pangasinan, Branch 50 which found that petitioner PNB is not a
mortgagee in good faith.

The Facts

Petitioner PNB is a universal banking corporation duly authorized by Bangko Sentral ng Pilipinas
(BSP) to engage in banking business.

Sometime in 1986, Spouses Reynaldo Cormsta and Erlinda Gamboa Cornista (Spouses Cornista)
obtained a loan from Traders Royal Bank (Traders Bank).5 To secure the said obligation, the
Spouses Cornista mortgaged to the bank a parcel of land with an area of 451 square meters
designated as Lot 555-A-2 and registered under Transfer Certificate of Title (TCT) No. 131498 in
their names by the Register of Deeds of Pangasinan.

For failure of the Spouses Cornista to make good of their loan obligation after it has become due,
Traders Bank foreclosed the mortgage constituted on the security of the loan. After the notice and
publication requirements were complied with, the subject property was sold at the public auction
on 23 December 1987. During the public sale, respondent Juan F. Vila (Vila) was declared as the
highest bidder after he offered to buy the subject property for P50,000.00. The Certificate of Sale
dated 13 January 1988 was duly recorded in TCT No. 131498 under Entry No. 623599.6 chanrobleslaw

To exercise his right of ownership, Vila immediately took possession of the subject property and
paid the real estate taxes corresponding thereon.

On 11 February 1989, a Certificate of Final Sale was issued to Vila after the one-year redemption
period had passed without the Spouses Cornista exercising their statutory right to redeem the
subject property. He was, however, prevented from consolidating the ownership of the property
under his name because the owner's copy of the certificate of title was not turned over to him by
the Sheriff.

Despite the lapse of the redemption period and the fact of issuance of a Certificate of Final Sale to
Vila, the Spouses Cormsta were nonetheless allowed to buy back the subject property by tendering
the amount of P50,000.00. A Certificate of Redemption7 dated 14 March 1989 was issued for this
purpose and was duly annotated in the title under Entry No. 708261.

Claiming that the Spouses Cornista already lost their right to redeem the subject property, Vila
filed an action for nullification of redemption, transfer of title and damages against the Spouses
Cornista and Alfredo Vega in his capacity as the Register of Deeds of Pangasinan. The case was
docketed as Civil Case No. V-0242 on 10 January 1992 and was raffled to Branch 50. A Notice of
Lis Pendens was issued for this purpose and was duly recorded in the certificate of title of the
property on 19 October 1992 under Entry No. 759302.8 chanrobleslaw

On 3 February 1995, the RTC rendered a Decision9 in Civil Case No. V-0242 in favor of Vila
thereby ordering the Register of Deeds to cancel the registration of the certificate of redemption
and the annotation thereof on TCT No. 131498. The said decision was affirmed by the CA on 19
October 1997 in CA-G.R. CV No. 49463.10 The decision of the appellate court became final and
executory on 19 November 1997.

In order to enforce the favorable decision, Vila filed before the RTC a Motion for the Issuance of
Writ of Execution which was granted by the court. Accordingly, a Writ of Execution11 was issued
by the RTC on 14 December 1997.

By unfortunate turn of events, the Sheriff could not successfully enforce the decision because the
certificate of title covering the subject property was no longer registered under the names of the
Spouses Cornista. Hence, the judgment was returned unsatisfied as shown in Sheriffs Return12
dated 13 July 1999.
Upon investigation it was found out that during the interregnum the Spouses Cornista were able
to secure a loan from the PNB in the amount of P532,000.00 using the same property subject of
litigation as security. The Real Estate Mortgage (REM) was recorded on 28 September 1992 under
Entry No. 75817113 or month before the Notice of Lis Pendens was annotated.

Eventually, the Spouses Cornista defaulted in the payment of their loan obligation with the PNB
prompting the latter to foreclose the property offered as security. The bank emerged as the highest
bidder during the public sale as shown at the Certificate of Sale issued by the Sheriff. As with the
prior mortgage, the Spouses Cornista once again failed to exercise their right of redemption within
the required period allowing PNB to consolidate its ownership over the subject property.
Accordingly, TCT No. 13149814 in the name of the Spouses Cornista was cancelled and a new one
under TCT No. 21677115 under the name of the PNB was issued.

The foregoing turn of events left Vila with no other choice but to commence another round of
litigation against the Spouses Cornista and PNB before the RTC of Viliasis, Pangasinan, Branch
50. In his Complaint docketed as Civil Case No. V-0567, Vila sought for the nullification of TCT
No. 216771 issued under the name of PNB and for the payment of damages.

To refute the allegations of Vila, PNB pounded that it was a mortgagee in good faith pointing the
fact that at the time the subject property was mortgaged to it, the same was still free from any liens
and encumbrances and the Notice of Lis Pendens was registered only a month after the REM was
annotated on the title. PNB meant to say that at the time of the transaction, the Spouses Cornista
were still the absolute owners of the property possessing all the rights to mortgage the same to
third persons. PNB also harped on the fact that a close examination of title was conducted and
nowhere was it shown that there was any cloud in the title of the Spouses Cornista, the latter having
redeemed the property after they have lost it in a foreclosure sale.16 chanrobleslaw

After the Pre-Trial Conference, trial on the merits ensued. The court a quo then proceeded to
receive documentary and testimonial evidence from the opposing parties. Thereafter, the parties
submitted their respective memorandum and the case was submitted for decision.

On 22 June 2011, the RTC rendered a Decision17 in favor of Vila and ruled that PNB is not a
mortgagee in good faith. As a financial institution, the trial court held that PNB is expected to
observe a higher degree of diligence. In hastily granting the loan, the trial court declared that PNB
failed in this regard. Had the bank exercised due diligence, it could have easily discovered that the
Spouses Cornista were not the possessors of the subject property which could lead it to the fact
that at the time the subject property was mortgaged to it, a litigation involving the same was already
commenced before the court. It was further ratiocinated by the RTC that "[a] mortgagee cannot
close his eyes to facts which should put a reasonable man upon his guard" in ascertaining the status
of a mortgaged property. The dispositive portion of the decision reads: Chan RoblesV irtualawlibrary

"WHEREFORE, judgment is hereby rendered:

1. Declaring the Real Estate Mortgage dated September 28, 1992, executed by the
Spouses Reynaldo Cornista and Erlinda Gamboa in favor of the Philippine National
Bank, Tayug, Pangasinan Branch, over the parcel of land covered by TCT No.
131498 null and void;
 2. Declaring the Deed of Sale dated September 27, 1996, in favor of the PNB null and
void;

3. Ordering the nullification and cancellation of Transfer Certificate of Title No.

216771 in the name of PNB;

4. Ordering the Register of Deeds of Pangasinan to issue a new certificate of title

covering the property subject matter of this case in the name-of Juan F. Vila; and cralawlawlibrary

5. Ordering [the] defendant PNB to pay the plaintiff P50,000.00 moral damages,
P50,000.00 exemplary damages and P100,000.00 attorney's fees and litigation
expenses.

Costs against defendant Philippine National Bank.

SO ORDERED."18 chanroblesvirtuallawlibrary

19
In a Resolution dated 13 June 2014, the RTC refused to reconsider its earlier decision and thereby
denied the Motion for Reconsideration interposed by PNB.

On appeal, the CA Decision20 dated 18 December 2013 affirmed the RTC ruling. In failing to
exercise greater care and diligence in approving the loan of the Spouses Cornista without first
ascertaining if there were any defects in their title, the appellate court held that PNB could not be
afforded the status of a mortgagee in good faith. It went further by declaring that [a] bank whose
business is impressed with public interest is expected to exercise more care and prudence in its
dealings than a private individual, even in cases involving registered lands. A bank cannot assume
that, simply because the title offered as security is on its face free of any encumbrances of lien, it
is relieved of the responsibility of taking further steps to verify the title and inspect the properties
to be mortgaged.21 The CA thus disposed: ChanRob lesVirtualawlibrary

"WHEREFORE, the instant appeal is DENIED. The assailed Decision dated June 22, 2011 and
the Resolution dated August 11, 2011 of the Regional Trial Court of Villasis, Pangasinan, Branch
50, in Civil Case No, V-0567 are hereby AFFIRMED."22 chanroblesvirtuallawlibrary

23
On 13 June 2014, the CA issued a Resolution denying the Motion for Reconsideration of the
PNB prompting the bank to seek recourse before the Court via instant Petition for Review on
Certiorari. For Our resolution are the following issues: ChanRo blesVirtualawlibrary

The Issues

I.

WHETHER OR NOT PNB IS A MORTGAGEE IN GOOD FAITH;

II

WHETHER OR NOT PNB IS LIABLE FOR DAMAGES.24 chanroblesvirtuallawlibrary

The Court's Ruling

We resolve to deny the petition.

In general, the issue of whether a mortgagee is in good faith cannot be entertained in a Rule 45
petition. This is because the ascertainment of good faith or the lack thereof, and the determination
of negligence are factual matters which lay outside the scope of a petition for review on certiorari.
Good faith, or the lack of it, is a question of intention. In ascertaining intention, courts are
necessarily controlled by the evidence as to the conduct and outward facts by which alone the
inward motive may, with safety, be determined.25 A recognized, exception to the rule is when
cralawred

there are conflicting findings of fact by the CA and the RTC.26 In the case at bar, RTC and the CA
agreed on their findings.

The RTC, which possessed the first hand opportunity to observe the demeanor of the witnesses
and admit the documentary evidence, found that PNB accepted outright the collateral offered by
the Spouses Cornista without making farther inquiry as to the real status of the subject property.
Had the bank been prudent and diligent enough in ascertaining the condition of the property, it
could have discovered that the same was in the possession of Vila who, at that time, possessed a
colorable title thereon being a holder of a Final Certificate of Sale. The RTC further exposed the
frailty of PNB's claim by pointing to the fact that it was Vila who was paying the realty tax on the
property, a crucial information that the bank could have easily discovered had it exercised due
diligence.

Resonating the findings of the RTC, the CA also declared that PNB fell short in exercising the
degree of diligence expected from bank and financial Institutions. We hereby quote with approval
the disquisition of the appellate court:
ChanRob lesVirtualawlibrary

Thus, before approving a loan application, it is a standard operating practice for these institutions
to conduct an ocular inspection of the property offered for mortgage and to verify the genuineness
of the title to determine the real owner thereof. The apparent purpose of an ocular inspection is to
protect the "true owner" of the property as well as innocent third parties with a right, interest or
claim thereon from a usurper who may have acquired a fraudulent certificate of title thereto. Here,
[the] PNB has failed to exercise the requisite due diligence in ascertaining the status and condition
of the property being offered to it as security for the loan before it approved the same. xxx.27
chanroblesvirtuallawlibrary

Clearly, the PNB failed to observe the exacting standards required of banking institutions which
are behooved by statutes and jurisprudence to exercise greater care and prudence before entering
into a mortgage contract.

No credible proof on the records could substantiate the claim of PNB that a physical inspection of
the property was conducted. We agree with, bbth the RTC and CA that if in fact it were true that
ocular inspection was conducted, a suspicion could have been raised as to the real status of
property. By failing to uncover a crucial fact that the mortgagors were not the possessors of the
subject property. We could not lend credence to claim of the bank that an ocular inspection of the
property was conducted. What further tramples upon PNB's claim is the fact that, as shown on the
records, it was Vila who was religiously paying the real property tax due on the property from
1989 to 1996, another significant fact that could have raised a red flag as to the real ownership of
the property. The failure of the mortgagee to take precautionary steps would mean negligence on
his part and would thereby preclude it from invoking that it is a mortgagee in good faith.

Before approving a loan application, it is standard operating procedure for banks and financial
institutions to conduct an ocular inspection of the property offered for mortgage and to determine
the real owner(s) thereof The apparent purpose of an ocular inspection is to protect the "true owner"
of the property as well as innocent third parties with a right, interest or claim thereon from a usurper
who may have acquired a fraudulent certificate of title thereto.28
chanrobleslaw

In this case, it was adjudged by the courts of competent jurisdiction in a final and executory
decision that the Spouses Cornista's reacquisition of the property after the lapse of the redemption
period is fraudulent and the property used by the mortgagors as collateral rightfully belongs to
Vila, an innocent third party with a right, could have been protected if PNB only observed the
degree diligence expected from it.

In Land Bank of the Philippines v. Belle Corporation,29 the Court exhorted banks to exercise the
highest degree of diligence in its dealing with properties offered as securities for the loan
obligation: ChanRoblesVir tualawlibrary

When the purchaser or the mortgagee is a bank, the rule on innocent purchasers or mortgagees for
value is applied more strictly. Being in the business of extending loans secured by real estate
mortgage, banks are presumed to be familiar with the rules on land registration. Since the banking
business-is impressed with public interest, they are expected to be more cautious, to exercise a
higher degree of diligence, care and prudence, than private individuals in their dealings, even those
involving registered lands. Banks may not simply rely on the face of the certificate of title. Hence,
they cannot assume that, xxx the title offered as security is on its face free of any encumbrances
or lien, they are relieved of the responsibility of taking further steps to verify the title and inspect
the properties to be mortgaged. As expected, the ascertainment of the status or condition of a
property offered to it as security for a loan must be a standard and indispensable part of the bank's
operations. xxx. (Citations omitted)
We never fail to stress the remarkable significance of a banking institution to commercial
transactions, in particular, and to the country's economy in general.30 The banking system is an
indispensable institution in the modern world and plays a vital role in the economic life of every
civilized nation.31 Whether as mere passive entities for the safekeeping and saving of money or as
active instruments of business and commerce, banks have become an ubiquitous presence among
the people, who have come to regard them with respect and even gratitude and, most of all,
confidence.32 Consequently, the highest degree of diligence is expected, and high standards of
integrity and performance are even required, of it.33 chanrobleslaw

PNB clearly failed to observe the required degree of caution in readily approving the loan and
accepting the collateral offered by the Spouses Cornista without first ascertaining the real
ownership of the property. It should not have simply relied on the face of title but went furthef to
physically ascertain the actual condition of the property. That the propprty offered as security was
in the possession of the person other than the lone applying for the loan and the taxes were declared
not in their names could have raised a suspicion. A person who deliberately ignores a significant
fact that could create suspicion in an otherwise reasonable person is not an innocent purchaser for
value.34chanrobleslaw

Having laid down that the PNB is not in good faith, We are led to affirm the award of moral
damages, exemplary damages, attorney's fees and costs of litigation in favor of Vila. Moral
damages are not awardecl to penalize the defendant but to compensate the plaintiff for the injuries
he may have suffered.35 Willful injury to property may be a legal ground for awarding moral
damages if the court should find that, under the circumstances, such damages are justly due.36 In
the instant case, we find that the award of moral damages is proper.37 As for the award of
exemplary damages, we deem that the same is proper for the PNB was remiss in its obligation to
inquire the real status of the subject property, causing damage to Vila.38 Finally, we rule that the
award of attorney's fees and litigation expenses is valid since Vila was compelled to litigate and
thus incur expenses in order to protect its rights over the subject property.39 chanrobleslaw

WHEREFORE, premises considered, the petition is DENIED. The assailed Decision and
Resolution of the Court of Appeals are hereby AFFIRMED. Accordingly, the decision of the RTC
dated 22 June 2011 STANDS as the final resolution of this case.

SO ORDERED. chanRoblesvirtualLawlibrary

G.R. No. 222407

WHITE MARKETING DEVELOPMENT CORPORATION, Petitioner

vs.
GRANDWOOD FURNITURE & WOODWORK, INC., Respondent

DECISION

MENDOZA, J.:

This Petition for Review on Certiorari seeks to reverse and set aside the June 22, 2015 Decision1
and the December 28, 2015 Resolution2 of the Court of Appeals (CA) in CA-G.R. CV No. 103488,
which reversed and set aside the July 21, 2014 Decision3 of the Regional Trial Court, Branch 166,
Pasig City (RTC), in a case involving the issue on the applicable redemption period.

On May 26, 1995, respondent Grandwood Furniture & Woodwork, Inc. (Grandwood) obtained a
loan in the amount of ₱40,000,000.00 from Metropolitan Bank and Trust Company (Metrobank).
The loan was secured by a real estate mortgage over a parcel of land covered by Transfer
Certificate of Title (TCT) No. 63678. Metrobank eventually sold its rights and interests over the
loan and mortgage contract to Asia Recovery Corporation (ARC). The latter then assigned the same
rights and interests to Cameron Granville 3 Asset Management, Inc. (CGAM3).4

On July 24, 2013, after Grandwood failed to pay the loan which already amounted to
₱68,941,239.46, CGAM3 initiated extrajudicial foreclosure proceedings of the real estate
mortgage. During the September 17, 2013 Auction Sale, petitioner White Marketing Development
Corporation (White Marketing) was declared the highest bidder and a certificate of sale was issued
in its favor.5

On September 30, 2013, the certificate of sale was registered and annotated on TCT No. 63678.
On November 21, 2013, White Marketing received a letter from the sheriff informing it that
Grandwood intended to redeem the foreclosed property. In response, White Marketing sent a letter
informing the sheriff that Grandwood no longer had the right to redeem.6

Insisting on its right to redeem the property, Grandwood sent a letter, dated December 3, 2013, to
the Office of the Clerk of Court of the RTC (OCC-RTC) insisting that it was the latter's ministerial
duty to recognize its right of redemption, to accept the tender of payment and to issue a certificate
of redemption. The OCC-RTC, however, refused to accept the tender of payment on the ground
that it was confronted with the conflicting applicable laws on the matter of the redemption period.
Thus, Grandwood was prompted to file its Petition for Consignation, Mandamus and Damages
before the RTC. It reiterated its right to redeem the property subject of the foreclosure sale under
Act No. 3135 in relation to Republic Act (R.A.) No. 337 and Sections 27 and 28 of Rule 39 of the
Rules of Court.7

The RTC Decision

In its July 21, 2014 Decision, the RTC dismissed the petition for mandamus. The trial court ruled
that the redemption period applicable in the mortgage between Metro bank and Grandwood was
Section 478 of R.A. No. 8791 or the "General Banking Law of 2000. "The RTC wrote that by
virtue of the said law, Grandwood should have redeemed the property before the registration of
the certificate of sale on September 30, 2013, which was an earlier date than December 17, 2013,
or three months after the foreclosure on September 17, 2013. It further stressed that White
Marketing acquired all the rights of Metrobank in the mortgage contract, which was eventually
assigned to CGAM3. The dispositive portion of the RTC decision reads:

WHEREFORE, premises considered, the petition for consignation and mandamus is hereby
DISMISSED, for lack of merit. Petitioner's claim is DENIED, for lack of legal basis.

Private Respondent's counterclaims are likewise DENIED, for lack of sufficient basis.

No pronouncement as to costs.

SO ORDERED.9

Aggrieved, Grandwood moved for reconsideration but its motion was denied by the RTC in the
Order,10 dated September 11, 2014. Hence, it appealed before the CA.

The CA Decision

In its June 22, 2015 Decision, the CA reversed the RTC ruling and remanded the case to the latter
for the determination of the amount of the redemption price. It ordered the OCC-RTC to accept
the consigned amount and to issue the corresponding certificate of redemption in Grandwood's
favor. It emphasized that Section 47 of R.A. No. 8791 applied only in cases of foreclosure of real
estate by a mortgagee bank in order to provide sufficient legal remedies to banks in case of unpaid
debts or loans. As White Marketing was not privy to the contract of loan and the accessory contract
of mortgage, it considered the limitation on the right of redemption on juridical persons as
inapplicable. It was of the view that in case of doubt on the issue of the right of redemption, it
should be resolved in favor of the mortgagor. Thus, the CA disposed:

WHEREFORE, premises considered, the instant appeal is GRANTED. Accordingly, the Decision
dated July 21, 2014 of the Regional Trial Court of Pasig City, Branch 166, in SCA No. 3915, is
hereby REVERSED AND SET ASIDE and a new one is rendered by allowing petitioner-appellant
Grandwood Furniture & Woodwork, Inc. to consign to the court a quo the amount corresponding
to the redemption of its foreclosed property covered by TCT No. 63678 of the Register of Deeds
of Pasig. Furthermore, the Court hereby directs the following:

(a) remand this case to the court a quo and the latter is ordered to reinstate SCA Case No. 3915
into its docket;

(b) for the court a quo to determine the entire amount of redemption price together with interest
and other legal fees;

(c) for the Office of the Clerk of Court and Ex-Officio Sheriff of RTC Pasig City to forthwith
accept the consigned amounts and issue the corresponding Certificate of Redemption in favor
petitioner-appellant.

SO ORDERED.11

White Marketing moved for reconsideration but the CA denied its motion in the assailed December
28, 2015 Resolution.

Hence, this petition.

SOLE ISSUE

WHETHER OR NOT THE COURT OF APPEALS ERRED IN REVERSING THE

DECISION OF THE COURT A QUO WHEN IT DECLARED THAT SEC. 47 of R.A. NO.
8791 OR THE GENERAL BANKING LAW IS NOT APPLICABLE IN THE CASE AT
BAR.12

Petitioner White Marketing insisted that Grandwood's right of redemption had lapsed because,
under the mortgage contract, the parties agreed that the same would be governed by R.A. No. 8791.
It argued that because the parties voluntarily stipulated on the governing law, the same was binding
on them. White Marketing asserted that when Metrobank assigned its rights, its assignees acquired
whatever rights the former had under the Real Estate Mortgage.

It reiterated that Section 47 of R.A. No. 8791 was the applicable law with regard to the period of
redemption. For said reason, Grandwood should have redeemed the foreclosed property before the
registration of the certificate of sale on September 30, 2013.
In its March 14, 2016 Resolution,13 the Court resolved to deny the petition.1âwphi1 White
Marketing moved for reconsideration. In its June 15, 2016 Resolution,14 the Court granted the
motion, reinstated the petition, and required respondent Grandwood to file its comment.

In its Comment,15 dated July 22, 2016, Grandwood argued that the provisions of the real estate
mortgage were pro forma as the original mortgagee, Metrobank, was a banking institution; and so,
the contract would necessarily contain a provision indicating that the mortgagor would be bound
by R.A. No. 8791.

Grandwood, however, explained that White Marketing could not enjoy the provision of R.A. No.
8791 on the redemption period because it was not a banking institution. It asserted that its exercise
of redemption rights was not against Metrobank in accordance with the real estate mortgage, but
against White Marketing as the highest bidder in the foreclosure sale.

Grandwood further reiterated that pursuant to the spirit and intent of R.A No. 8791, the shorter
redemption period applied in favor of banking institutions only. In its view, R.A. No. 8791 would
apply only when the mortgagee bank itself would foreclose the property and not when the same
had already assigned or conveyed its mortgage rights for a consideration.

In its Reply,16 dated August 10, 2016, White Marketing countered that Grandwood was bound by
the provisions of the real estate mortgage. It added that the fact that Metrobank assigned its rights
to CGAM3 neither modified the terms of the mortgage contract nor excluded Grandwood from the
provisions thereof. Thus, it insisted that Grandwood was bound by the redemption period under
R.A. No. 8791 and should suffer the consequences for its failure to redeem the mortgaged property
within the allotted time.

The Court's Ruling

The Court finds merit in the petition.

In the case at bench, it is undisputed that Metrobank assigned its rights in the mortgage to ARC,
which later assigned the same to CGAM3. After Grandwood defaulted in its loan obligation,
CGAM3 foreclosed the mortgaged property. As earlier stated, White Marketing emerged as the
winning bidder in the foreclosure sale. Thus, White Marketing, stepped into the shoes of Metro
bank.

In Fort Bonifacio v. Fong,17 the Court explained the effects of assignment of credit, to wit:

The reason that a contracting party's assignees, although seemingly a third party to the transaction,
remain bound by the original party's transaction under the relativity principle further lies in the
concept of subrogation, which inheres in assignment.

Case law states that when a person assigns his credit to another person, the latter is deemed
subrogated to the rights as well as to the obligations of the former. By virtue of the Deed of
Assignment, the assignee is deemed subrogated to the rights and obligations of the assignor
and is bound by exactly the same conditions as those which bound the assignor. Accordingly,
an assignee cannot acquire greater rights than those pertaining to the assignor. The general rule is
that an assignee of a non-negotiable chose in action acquires no greater right than what was
possessed by his assignor and simply stands into the shoes of the latter. [Emphasis and underlining
supplied]

In an assignment of credit, the assignee is subrogated to the rights of the original creditor, such
that he acquires the power to enforce it, to the same extent as the assignor could have enforced it
against the debtor.18 Through the assignment of credit, the new creditor is entitled to the rights
and remedies available to the previous creditor, and includes accessory rights such as
mortgage or pledge.19 Consequently, ARC acquired all the rights, benefits and obligations of
Metrobank under its mortgage contract with Grandwood. The same could be said for subsequent
assignees or successors-in-interest after ARC like White Marketing.

The mortgage between Grandwood and Metrobank, as the original mortgagee, was subject to the
provisions of Section 47 of R.A. No. 8791. Section 47 provides that when a property of a juridical
person is sold pursuant to an extrajudicial foreclosure, it "shall have the right to redeem the
property in accordance with this provision until, but not after, the registration of the Certificate of
foreclosure sale with the applicable Register of Deeds which in no case shall be more than three
(3) months after foreclosure, whichever is earlier."

Applied in the present case, Grandwood had three months from the foreclosure or before the
certificate of foreclosure sale was registered to redeem the foreclosed property. This holds true
even when Metrobank ceased to be the mortgagee in view of its assignment to ARC of its credit,
because the latter acquired all the rights of the former under the mortgage contract-including the
shorter redemption period. The shorter redemption period should also redound to the benefit of
White Marketing as the highest bidder in the foreclosure sale as it stepped into the shoes of the
assignee-mortgagee.

Measured by the foregoing parameters, the Court finds that Grandwood's redemption was made
out of time as it was done after the certificate of sale was registered on September 30, 2013.
Pursuant to Section 47 of R.A. No. 8791, it only had three (3) months from foreclosure or before
the registration of the certificate of foreclosure sale, whichever came first, to redeem the property
sole in the extrajudicial sale.

Such interpretation is in harmony with the avowed purpose of R.A. No. 8791 in providing for a
shorter redemption period for juridical persons. In Goldenway Merchandising Corporation v.
Equitable PCI Bank,20 the Court explained that the shortened period under Section 47 of R.A. No.
8791 served as additional security for banks to maintain their solvency and liquidity, to wit:

The difference in the treatment of juridical persons and natural persons was based on the nature of
the properties foreclosed - whether these are used as residence, for which the more liberal one-
year redemption period is retained, or used for industrial or commercial purposes, in which case a
shorter term is deemed necessary to reduce the period of uncertainty in the ownership of
property and enable mortgagee-banks to dispose sooner of these acquired assets. It must be
underscored that the General Banking Law of 2000, crafted in the aftermath of the 1997
Southeast Asian financial crisis, sought to reform the General Banking Act of 1949 by
fashioning a legal framework for maintaining a safe and sound banking system. In this
context, the amendment introduced by Section 47 embodied one of such safe and sound
practices aimed at ensuring the solvency and liquidity of our banks. It cannot therefore be
disputed that the said provision amending the redemption period in Act 3135 was based on a
reasonable classification and germane to the purpose of the law. [Emphasis supplied]

To adopt Grandwood's position that Section 47 of R.A. No. 8791 no longer applies would defeat
its very purpose to provide additional security to mortgagee-banks.1âwphi1 The shorter
redemption period is an incentive which mortgagee-banks may use to encourage prospective
assignees to accept the assignment of credit for a consideration. If the redemption period under
R.A. No. 8791 would be extended upon the assignment by the bank of its rights under a mortgage
contract, then it would be tedious for banks to find willing parties to be subrogated in its place.
Thus, it would adversely limit the bank's opportunities to quickly dispose of its hard assets, and
maintain its solvency and liquidity.

Although it is true that, generally, redemption is liberally construed in favor of the mortgagor, the
rule cannot be applied in the present case. In City of Davao v. The Intestate Estate of Amado S.
Dalisay,21 the Court eruditely explained that the liberal construction of the redemption period is
not a panacea readily invoked by mortgagors whose right to redeem had been justifiably defeated,
viz:

The Court need not belabor the existence of this rule in jurisprudence. In a long line of cases, the
Court has indeed been copious in its stance to allow the redemption of property where in doing so,
the ends of justice are better realized. xxx

Nonetheless, the Court's agreement with the CA decision ends here. The above rulings now beget
a more important question for the resolution of this case: Does a simplistic application of the liberal
construction of redemption laws provide a just resolution of this case? The Court answers this
question in the negative.

While it is a given that redemption by property owners is looked upon with favor, it is equally
true that the right to redeem properties remains to be a statutory privilege. Redemption is by
force of law, and the purchaser at public auction is bound to accept it. Further, the right to redeem
property sold as security for the satisfaction of an unpaid obligation does not exist preternaturally.
Neither is it predicated on proprietary right, which, after the sale of the property on execution,
leaves the judgment debtor and vests in the purchaser. Instead, it is a bare statutory privilege to be
exercised only by the persons named in the statute.

In other words, a valid redemption of property must appropriately be based on the law which
is the very source of this substantive right. It is, therefore, necessary that compliance with
the rules set forth by law and jurisprudence should be shown in order to render validity to
the exercise of this right. Hence, when the Court is beckoned to rule on this validity, a hasty resort
to elementary rules on construction proves inadequate. Especially so, when there are deeper
underpinnings involved, not only as to the right of the owner to take back his property, but equally
important, as to the right of the purchaser to acquire the property after deficient compliance with
statutory requirements, including the exercise of the right within the period prescribed by law.
The Court cannot close its eyes and automatically rule in favor of the redemptioner at all
times. The right acquired by the purchaser at an execution sale is inchoate and does not become
absolute until after the expiration of the redemption period without the right of redemption having
been exercised. "But inchoate though it be, it is, like any other right, entitled to protection and must
be respected until extinguished by redemption." Suffice it to say, the liberal application of
redemption laws in favor of the property owner is not an austere solution to a controversy,
where there are remarkable factors that lead to a more sound and reasonable interpretation
of the law. Here, the proper focus of the CA should have been the just and fair interpretation of
the law, instead of an automatic and constricted view on its liberal application. [Emphases
supplied]

To reiterate, the shortened period of redemption provided in Section 47 of R.A. No. 8791 serves
as additional security and protection to mortgagee-banks in order for them to maintain a solvent
and liquid financial status. The period is not extended by the mere fact that the bank assigned its
interest to the mortgage to a non-banking institution because the assignee merely steps into the
shoes of the mortgagee bank and acquires all its rights, interests and benefits under the mortgage-
including the shortened redemption period. Moreover, to extend the redemption period would
prejudice the ability of the banks to quickly dispose of its hard assets to maintain solvency and
liquidity.

WHEREFORE, the June 22, 2015 Decision of the Court of Appeals and its December 28, 2015
Resolution, in CA-G.R. CV No. 103488 are REVERSED and SET ASIDE. The July 21, 2014
Decision of the Regional Trial Court, Branch 166, Pasig City is REINSTATED.

SO ORDERED.

G.R. No. 204605

INTELLECTUAL PROPERTY ASSOCIATION OF THE PHILIPPINES, Petitioner,

vs.
HON. PAQUITO OCHOA, IN HIS CAPACITY AS EXECUTIVE SECRETARY, HON.
ALBERT DEL ROSARIO, IN HIS CAPACITY AS SECRETARY OF THE
DEPARTMENT OF FOREIGN AFFAIRS, AND HON. RICARDO BLANCAFLOR, IN HIS
CAPACITY AS THE DIRECTOR GENERAL OF THE INTELLECTUAL PROPERTY
OFFICE OF THE PHILIPPINES, Respondents.

DECISION

BERSAMIN, J.:

In this special civil action for certiorari and prohibition, the Intellectual Property Association of
the Philippines (IPAP) seeks to declare the accession of the Philippines to the Protocol Relating
to the Madrid Agreement Concerning the International Registration of Marks (Madrid Protocol)
unconstitutional on the ground of the lack of concurrence by the Senate, and in the alternative, to
declare the implementation thereof as unconstitutional because it conflicts with Republic Act No.
8293, otherwise known as the Intellectual Property Code of the Philippines (IP Code).1
We find and declare that the President's ratification is valid and constitutional because the Madrid
Protocol, being an executive agreement as determined by the Department of Foreign Affairs, does
not require the concurrence of the Senate.

Antecedents

The Madrid System for the International Registration of Marks (Madrid System), which is the
centralized system providing a one-stop solution for registering and managing marks worldwide,
allows the trademark owner to file one application in one language, and to pay one set of fees to
protect his mark in the territories of up to 97 member-states.2 The Madrid System is governed by
the Madrid Agreement, concluded in 1891, and the Madrid Protocol, concluded in 1989.3

The Madrid Protocol, which was adopted in order to remove the challenges deterring some
countries from acceding to the Madrid Agreement, has two objectives, namely: (1) to facilitate
securing protection for marks; and (2) to make the management of the registered marks easier in
different countries.4

In 2004; the Intellectual Property Office of the Philippines (IPOPHL), the government agency
mandated to administer the intellectual property system of the country and to implement the state
policies on intellectual property; began considering the country's accession to the Madrid Protocol.
However, based on its assessment in 2005, the IPOPHL needed to first improve its own operations
before making the recommendation in favor of accession. The IPOPHL thus implemented reforms
to eliminate trademark backlogs and to reduce the turnaround time for the registration of marks.5

In the meanwhile, the IPOPHL mounted a campaign for information dissemination to raise
awareness of the Madrid Protocol. It launched a series of consultations with stakeholders and
various business groups regarding the Philippines' accession to the Madrid Protocol. It ultimately
arrived at the conclusion that accession would benefit the country and help raise the level of
competitiveness for Filipino brands. Hence, it recommended in September 2011 to the Department
of Foreign Affairs (DFA) that the Philippines should accede to the Madrid Protocol.6

After its own review, the DFA endorsed to the President the country's accession to the Madrid
Protocol. Conformably with its express authority under Section 9 of Executive Order No. 459
(Providing for the Guidelines in the Negotiation of International Agreements and its Ratification)
dated November 25, 1997, the DFA determined that the Madrid Protocol was an executive
agreement.1âwphi1 The IPOPHL, the Department of Science and Technology, and the Department
of Trade and Industry concurred in the recommendation of the DFA.7

On March 27, 2012, President Benigno C. Aquino III ratified the Madrid Protocol through an
instrument of accession, The instrument of accession was deposited with the Director General of
the World Intellectual Property Organization (WIPO) on April 25, 2012.8 The Madrid Protocol
entered into force in the Philippines on July 25, 2012.9

Petitioner IP AP, an association of more than 100 law firms and individual practitioners in
Intellectual Property Law whose main objective is to promote and protect intellectual property
rights in the Philippines through constant assistance and involvement in the legislation of
intellectual property law,10 has commenced this special civil action for certiorari and
prohibition11 to challenge the validity of the President's accession to the Madrid Protocol without
the concurrence of the Senate. Citing Pimentel, Jr. v. Office of the Executive Secretary, the IPAP
has averred:

Nonetheless, while the President has the sole authority to negotiate and enter into treaties, the
Constitution provides a limitation to his power by requiring the concurrence of 2/3 of all the
members of the Senate for the validity of the treaty entered into by him. Section 21, Article VII of
the 1987 Constitution provides that "no treaty or international agreement shall be valid and
effective unless concurred in by at least two-thirds of all the Members of the Senate." The 1935
and the 1973 Constitution also required the concurrence by the legislature to the treaties entered
into by the executive.12

According to the IPAP, the Madrid Protocol is a treaty, not an executive agreement; hence,
respondent DFA Secretary Albert Del Rosario acted with grave abuse of discretion in determining
the Madrid Protocol as an executive agreement.13

The IPAP has argued that the implementation of the Madrid Protocol in the Philippines;
specifically the processing of foreign trademark applications, conflicts with the IP Code,14 whose
Section 125 states:

Sec. 125. Representation; Address for Service. - If the applicant is not domiciled or has no real
and effective commercial establishment in the Philippines; he shall designate by a written
document filed in the office, the name and address of a Philippine resident who may be served
notices or process in proceedings affecting the mark. Such notices or services may be served upon
the person so designated by leaving a copy thereof at the address specified in the last designation
filed. If the person so designated cannot be found at the address given in the last designation, such
notice or process may be served upon the Director. (Sec. 3; R.A. No. 166 a)

It has posited that Article 2 of the Madrid Protocol provides in contrast:

Article 2

Securing Protection through International Registration

(1) Where an application for the registration of a mark has been filed with the Office of a
Contracting Party, or where a mark has been registered in the register of the Office of a Contracting
Party, the person in whose name that application (hereinafter referred to as "the basic application;')
or that registration (hereinafter referred to as "the basic registration") stands may, subject to the
provisions of this Protocol secure protection for his mark in the territory of the Contracting Parties,
by obtaining the registration of that mark in the register of the International Bureau of the World
Intellectual Property Organization (hereinafter referred to as "the international registration," "the
International Register," "the International Bureau" and "the Organization'', respectively), provided
that,
(i) where the basic application has been filed with the Office of a Contracting State or where the
basic registration has been made by such an Office, the person in whose name that application or
registration stands is a national of that Contracting State, or is domiciled, or has a real and effective
industrial or commercial establishment, in the said Contracting State,

(ii) where the basic application has been filed with the Office of a Contracting Organization or
where the basic registration has been made by such an Office, the person in whose name that
application or registration stands is a national of a State member of that Contracting Organization,
or is domiciled, or has a real and effective industrial or commercial establishment, in the territory
of the said Contracting Organization.

(2) The application for international registration (hereinafter referred to as "the international
application") shall be filed with the International Bureau through the intermediary of the Office
with which the basic application was filed or by which the basic registration was made (hereinafter
referred to as "the Office of origin"), as the case may be.

(3) Any reference in this Protocol to an "Office" or an "Office of a Contracting Party" shall be
construed as a reference to the office that is in charge, on behalf of a Contracting Party, of the
registration of marks, and any reference in this Protocol to "marks" shall be construed as a
reference to trademarks and service marks.

(4) For the purposes of this Protocol, "territory of a Contracting Party" means, where the
Contracting Party is a State, the territory of that State and, where the Contracting Party is an
intergovernmental organization, the territory in which the constituting treaty of that
intergovernmental organization applied.

The IPAP has insisted that Article 2 of the Madrid Protocol means that foreign trademark
applicants may file their applications through the International Bureau or the WIPO, and their
applications will be automatically granted trademark protection without the need for designating
their resident agents in the country.15

Moreover, the IPAP has submitted that the procedure outlined in the Guide to the International
Registration of Marks relating to representation before the International Bureau is the following,
to wit:

Rule 3(1)(a) 09.02 References in the Regulations, Administrative Instructions or in this Guide to
representation relate only to representation before the International Bureau. The questions of the
need for a representative before the Office of origin or the Office of a designated Contracting Party
(for example, in the event of a refusal of protection issued by such an Office), who may act as a
representative in such cases and the method of appointment, are outside the scope of the
Agreement, Protocol and Regulations and are governed by the law and practice of the Contracting
Party concerned.

which procedure is in conflict with that under Section 125 of the IP Code, and constitutes in effect
an amendment of the local law by the Executive Department.16
The IPAP has prayed that the implementation of the Madrid Protocol in the Philippines be
restrained in order to prevent future wrongs considering that the IP AP and its constituency have
a clear and unmistakable right not to be deprived of the rights granted them by the IP Code and
existing local laws.17

In its comment in behalf of the respondents, the Office of the Solicitor General (OSG) has stated
that the IPAP does not have the locus standi to challenge the accession to the Madrid Protocol;
that the IPAP cannot invoke the Court's original jurisdiction absent a showing of any grave abuse
of discretion on the part of the respondents; that the President's ratification of the Madrid Protocol
as an executive agreement is valid because the Madrid Protocol is only procedural, does not create
substantive rights, and does not require the amendment of the IP Code; that the IPAP is not entitled
to the restraining order or injunction because it suffers no damage from the ratification by the
President, and there is also no urgency for such relief; and the IPAP has no clear unmistakable
right to the relief sought.18

Issues

The following issues are to be resolved, namely:

I. Whether or not the IP AP has locus standi to challenge the President's ratification of the Madrid
Protocol;

II. Whether or not the President's ratification of the Madrid Protocol is valid and constitutional;
and

III. Whether or not the Madrid Protocol is in conflict with the IP Code.

Ruling of the Court

The petition for certiorari and prohibition is without merit.

A.

The issue of legal standing to sue, or locus standi

The IPAP argues in its reply19 that it has the locus standi to file the present case by virtue of its
being an association whose members stand to be injured as a result of the enforcement of the
Madrid Protocol in the Philippines; that the injury pertains to the acceptance and approval of
applications submitted through the Madrid Protocol without local representation as required by
Section 125 of the IP Code;20 and that such will diminish the rights granted by the IP Code to
Intellectual Property Law practitioners like the members of the IPAP.21

The argument of the IPAP is untenable.

Legal standing refers to "a right of appearance in a court of justice on a given question."22
According to Agan, Jr. v. Philippine International Air Terminals Co., Inc.,23standing is "a peculiar
concept in constitutional law because in some cases, suits are not brought by parties who have
been personally injured by the operation of a law or any other government act but by concerned
citizens, taxpayers or voters who actually sue in the public interest."

The Court has frequently felt the need to dwell on the issue of standing in public or constitutional
litigations to sift the worthy from the unworthy public law litigants seeking redress or relief. The
following elucidation in De Castro v. Judicial and Bar Council24offers the general understanding
of the context of legal standing, or locus standi for that purpose, viz. :

In public or constitutional litigations, the Court is often burdened with the determination of the
locus standi of the petitioners due to the ever-present need to regulate the invocation of the
intervention of the Court to correct any official action or policy in order to avoid obstructing the
efficient functioning of public officials and offices involved in public service. It is required,
therefore, that the petitioner must have a personal stake in the outcome of the controversy, for, as
indicated in Agan, Jr. v. Philippine International Air Terminals Co., Inc.:

The question on legal standing is whether such parties have "'alleged such a personal stake
in the outcome of the controversy as to assure that concrete adverseness which sharpens the
presentation of issues upon which the court so largely depends for illumination of difficult
constitutional questions," Accordingly, it has been held that the interest of a person assailing
the constitutionality of a statute must be direct and personal. He must be able to show, not
only that the law or any government act is invalid, but also that he sustained or is in imminent
danger of sustaining some direct injury as a result of its enforcement, and not merely that he
suffers thereby in some indefinite way. It must appear that the person complaining has been
or is about to be denied some right or privilege to which he is lawfully entitled or that he is
about to be subjected to some burdens or penalties by reason of the statute or act complained
of.

It is true that as early as in 1937, in People v. Vera, the Court adopted the direct injury test for
determining whether a petitioner in a public action had locus standi. There, the Court held that the
person who would assail the validity of a statute must have "a personal and substantial interest in
the case such that he has sustained, or will sustain direct injury as a result." Vera was followed in
Custodio v. President of the Senate, Manila Race Horse Trainers' Association v. De la Fuente,
Anti-Chinese League of the Philippines v. Felix, and Pascual v. Secretary of Public Works.

Yet, the Court has also held that the requirement of locus standi, being a mere procedural
technicality, can be waived by the Court in the exercise of its discretion. For instance, in 1949, in
Araneta v. Dinglasan, the Court liberalized the approach when the cases had "transcendental
importance." Some notable controversies whose petitioners did not pass the direct injury test were
allowed to be treated in the same way as in Araneta v. Dinglasan.

In the 1975 decision in Aquino v. Commission on Elections, this Court decided to resolve the issues
raised by the petition due to their "farreaching implications,'; even if the petitioner had no
personality to file the suit. The liberal approach of Aquino v. Commission on Elections has been
adopted in several notable cases, permitting ordinary citizens, legislators, and civic organizations
to bring their suits involving the constitutionality or validity of laws, regulations, and rulings.
However, the assertion of a public right as a predicate for challenging a supposedly illegal or
unconstitutional executive or legislative action rests on the theory that the petitioner represents the
public in general. Although such petitioner may not be as adversely affected by the action
complained against as are others, it is enough that he sufficiently demonstrates in his petition that
he is entitled to protection or relief from the Court in the vindication ofa public right.25

The injury that the IPAP will allegedly suffer from the implementation of the Madrid Protocol is
imaginary, incidental and speculative as opposed to a direct and material injury required by the
foregoing tenets on locus standi. Additionally, as the OSG points out in the comment,26 the IPAP
has misinterpreted Section 125 of the IP Code on the issue of representation. The provision only
states that a foreign trademark applicant "shall designate by a written document filed in the office,
the name and address of a Philippine resident who may be served notices or process in proceedings
affecting the mark;" it does not grant anyone in particular the right to represent the foreign
trademark applicant. Hence, the IPAP cannot justly claim that it will suffer irreparable injury or
diminution of rights granted to it by Section 125 of the IP Code from the implementation of the
Madrid Protocol.

Nonetheless, the IPAP also emphasizes that the paramount public interest involved has
transcendental importance because its petition asserts that the Executive Department has
overstepped the bounds of its authority by thereby cutting into another branch's functions and
responsibilities.27 The assertion of the IPAP may be valid on this score. There is little question
that the issues raised herein against the implementation of the Madrid Protocol are of
transcendental importance. Accordingly, we recognize IPAP's locus standi to bring the present
challenge. Indeed, the Court has adopted a liberal attitude towards locus standi whenever the issue
presented for consideration has transcendental significance to the people, or whenever the issues
raised are of paramount importance to the public.28

B.

Accession to the

Madrid Protocol was constitutional

The IP AP submits that respondents Executive Secretary and DFA Secretary Del Rosario gravely
abused their discretion in determining that there was no need for the Philippine Senate's
concurrence with the Madrid Protocol; that the Madrid Protocol involves changes of national
policy, and its being of a permanent character requires the Senate's concurrence,29 pursuant to
Section 21, Article VII of the Constitution, which states that "no treaty or international agreement
shall be valid and effective unless concurred in by at least two-thirds of all the Members of the
Senate."

Before going further, we have to distinguish between treaties and international agreements, which
require the Senate's concurrence, on one hand, and executive agreements, which may be validly
entered into without the Senate's concurrence. Executive Order No. 459, Series of 1997,30 notes
the following definitions, to wit:
Sec. 2. Definition of Terms.

a. International agreement - shall refer to a contract or understanding, regardless of nomenclature,

entered into between the Philippines and another government in written form and governed by
international law, whether embodied in a single instrument or in two or more related instruments.

b. Treaties - international agreements entered into by the Philippines which require legislative
concurrence after executive ratification. This term may include compacts like conventions,
declarations, covenants and acts.

c. Executive Agreements - similar to treaties except that they do not require legislative
concurrence.

The Court has highlighted the difference between treaties and executive agreements in
Commissioner of Customs v. Eastern Sea Trading,31 thusly:

International agreements involving political issues or changes of national policy and those
involving international arrangements of a permanent character usually take the form of treaties.
But international agreements embodying adjustments of detail carrying out well-established
national policies and traditions and those involving arrangements of a more or less temporary
nature usually take the form of executive agreements.

In the Philippines, the DFA, by virtue of Section 9, Executive Order No. 459,32 is initially given
the power to determine whether an agreement is to be treated as a treaty or as an executive
agreement. To determine the issue of whether DFA Secretary Del Rosario gravely abused his
discretion in making his determination relative to the Madrid Protocol, we review the
jurisprudence on the nature of executive agreements, as well as the subject matters to be covered
by executive agreements.

The pronouncement in Commissioner of Customs v. Eastern Sea Trading33is instructive, to wit:

x x x The concurrence of said House of Congress is required by our fundamental law in the making
of "treaties" (Constitution of the Philippines; Article VII, Section 10[7]), which are, however,
distinct and different from "executive agreements," which may be validly entered into without
such concurrence.

"Treaties are formal documents which require ratification with the approval of two thirds of the
Senate. Executive agreements become binding through executive action without the need of a vote
by the Senate or by Congress.

xxxx

"x x x the right of the Executive to enter into binding agreements without the necessity of
subsequent Congressional approval has been confirmed by long usage. From the earliest days of
our history we have entered into executive agreements covering such subjects as commercial and
consular relations, most-favored-nation rights, patent rights, trademark and copyright
protection, postal and navigation arrangements and the settlement of claims. The validity of these
has never been seriously questioned by our courts.

xxxx

Agreements with respect to the registration of trademarks have been concluded by the
Executive with various countries under the Act of Congress of March 3, 1881 (21 Stat. 502), x x
x

xxxx

In this connection, Francis B. Sayre, former U.S. High Commissioner to the Philippines, said in
his work on "The Constitutionality of Trade Agreement Acts":

Agreements concluded by the President which fall short of treaties are commonly referred to as
executive agreements and are no less common in our scheme of government than are the more
formal instruments - treaties and conventions. They sometimes take the form of exchanges of notes
and at other times that or more formal documents denominated 'agreements' or 'protocols'. The
point where ordinary correspondence between this and other governments ends and agreements -
whether denominated executive agreements or exchanges of notes or otherwise - begin, may
sometimes be difficult of ready ascertainment. It would be useless to undertake to discuss here the
large variety of executive agreements as such, concluded from time to time. Hundreds of executive
agreements, other than those entered into under the trade-agreements act, have been negotiated
with foreign governments. x x x It would seem to be sufficient, in order to show that the trade
agreements under the act of 1934 are not anomalous in character, that they are not treaties, and
that they have abundant precedent in our history, to refer to certain classes of agreements
heretofore entered into by the Executive without the approval of the Senate. They cover such
subjects as the inspection of vessels, navigation dues, income tax on shipping profits, the
admission of civil aircraft, customs matters, and commercial relations generally,
international claims, postal matters, the registration of trademarks and copyrights, etcetera.
Some of them were concluded not by specific congressional authorization but in conformity
with policies declared in acts of Congress with respect to the general subject matter, such as
tariff acts; while still others, particularly those with respect of the settlement of claims against
foreign governments, were concluded independently of any legislation. (Emphasis ours)

As the foregoing pronouncement indicates, the registration of trademarks and copyrights have been
the subject of executive agreements entered into without the concurrence of the Senate. Some
executive agreements have been concluded in conformity with the policies declared in the acts of
Congress with respect to the general subject matter.

It then becomes relevant to examine our state policy on intellectual property in general, as reflected
in Section 2 of our IP Code, to wit:

Section 2. Declaration of State Policy. - The State recognizes that an effective intellectual and
industrial property system is vital to the development of domestic and creative activity,
facilitates transfer of technology, attracts foreign investments, and ensures market access for
our products. It shall protect and secure the exclusive rights of scientists, inventors, artists
and other gifted citizens to their intellectual property and creations, particularly when
beneficial to the people, for such periods as provided in this Act.

The use of intellectual property bears a social function. To this end, the State shall promote the
diffusion of knowledge and information for the promotion of national development and progress
and the common good.

It is also the policy of the State to streamline administrative procedures of registering

patents, trademarks and copyright, to liberalize the registration on the transfer of technology;
and to enhance the enforcement of intellectual property rights in the Philippines.

In view of the expression of state policy having been made by the Congress itself, the IPAP is
plainly mistaken in asserting that "there was no Congressional act that authorized the accession of
the Philippines to the Madrid Protocol."34

Accordingly, DFA Secretary Del Rosario’s determination and treatment of the Madrid Protocol
as an executive agreement; being in apparent contemplation of the express state policies on
intellectual property as well as within his power under Executive Order No. 459, are upheld. We
observe at this point that there are no hard and fast rules on the propriety of entering into a treaty
or an executive agreement on a given subject as an instrument of international relations. The
primary consideration in the choice of the form of agreement is the parties' intent and desire to
craft their international agreement in the form they so wish to further their respective interests. The
matter of form takes a back seat when it comes to effectiveness and binding effect of the
enforcement of a treaty or an executive agreement; inasmuch as all the parties; regardless of the
form, become obliged to comply conformably with the time-honored principle of pacta sunt
servanda.35The principle binds the parties to perform in good faith their parts in the agreements.36

c.

There is no conflict between the

Madrid Protocol and the IP Code.

The IPAP also rests its challenge on the supposed conflict between the Madrid Protocol and the
IP Code, contending that the Madrid Protocol does away with the requirement of a resident agent
under Section 125 of the IP Code; and that the Madrid Protocol is unconstitutional for being in
conflict with the local law, which it cannot modify.

The IPAP's contentions stand on a faulty premise. The method of registration through the IPOPHL,
as laid down by the IP Code, is distinct and separate from the method of registration through the
WIPO, as set in the Madrid Protocol. Comparing the two methods of registration despite their
being governed by two separate systems of registration is thus misplaced.

In arguing that the Madrid Protocol conflicts with Section 125 of the IP Code, the IP AP highlights
the importance of the requirement for the designation of a resident agent. It underscores that the
requirement is intended to ensure that non-resident entities seeking protection or privileges under
Philippine Intellectual Property Laws will be subjected to the country's jurisdiction. It submits that
without such resident agent, there will be a need to resort to costly, time consuming and
cumbersome extraterritorial service of writs and processes.37

The IPAP misapprehends the procedure for examination under the Madrid Protocol, The
difficulty, which the IPAP illustrates, is minimal, if not altogether inexistent. The IPOPHL actually
requires the designation of the resident agent when it refuses the registration of a mark. Local
representation is further required in the submission of the Declaration of Actual Use, as well as in
the submission of the license contract.38 The Madrid Protocol accords with the intent and spirit
of the IP Code, particularly on the subject of the registration of trademarks. The Madrid Protocol
does not amend or modify the IP Code on the acquisition of trademark rights considering that the
applications under the Madrid Protocol are still examined according to the relevant national law,
In that regard, the IPOPHL will only grant protection to a mark that meets the local registration
requirements.

WHEREFORE, this Court DISMISSES the petition for certiorari and prohibition for lack of
merit; and ORDERS the petitioner to pay the costs of suit.

SO ORDERED.

G.R. No. 174379

E.I DUPONT DE NEMOURS AND CO., (assignee of inventors Carino, Duncia and Wong),
Petitioner
vs.
DIRECTOR EMMA C. FRANCISCO (in ger capacity as DIRECTOR GENERAL OF THE
INTELLECTUAL PROPERTY OFFICE), DIRECTOR EPIFANIO M. VELASCO (in his
capacity as the DIRECTOR OF THE BUREAU OF PATENTS, and THERAPHARMA,
INC., Respondents

DECISION

LEONEN, J.:

A patent is granted to provide rights and protection to the inventor after an invention is disclosed
to the public. It also seeks to restrain and prevent unauthorized persons from unjustly profiting
from a protected invention. However, ideas not covered by a patent are free for the public to use
and exploit. Thus, there are procedural rules on the application and grant of patents established to
protect against any infringement. To balance the public interests involved, failure to comply with
strict procedural rules will result in the failure to obtain a patent.

This resolves a Petition for Review on Certiorari 1 assailing the Court of Appeals Amended
Decision2 dated August 30, 2006, which denied the revival of Philippine Patent Application No.
35526, and the Court of Appeals Resolution3 dated January 31, 2006, which granted the
intervention of Therapharma, Inc. in the revival proceedings.
E.I. Dupont Nemours and Company (E.I. Dupont Nemours) is an American corporation organized
under the laws of the State of Delaware. 4 It is the assignee of inv~ntors David John Carini, John
Jonas Vytautas Duncia, and Pancras Chor Bun Wong, all citizens of the United States of America.5

On July 10, 1987, E.I. Dupont Nemours filed Philippine Patent Application No. 35526 before the
Bureau of Patents, Trademarks, and Technology Transfer.6 The application was for Angiotensin
II Receptor Blocking Imidazole (losartan), an invention related to the treatment of hypertension
and congestive heart failure.7 The product was produced and marketed by Merck, Sharpe, and
Dohme Corporation (Merck), E.I. Dupont Nemours' licensee, under the brand names Cozaar and
Hyzaar.8

The patent application was handled by Atty. Nicanor D. Mapili (Atty. Mapili), a local resident
agent who handled a majority of E.I. Dupont Nemours' patent applications in the Philippines from
1972 to 1996.9

On December 19, 2000, E.I. Dupont Nemours' new counsel, Ortega, Del Castillo, Bacorro, Odulio,
Calma, and Carbonell,10 sent the Intellectual Property Office11 a letter requesting that an office
action be issued on Philippine Patent Application No. 35526. 12

In response, Patent Examiner Precila O. Bulihan of Intellectual Property Office sent an office
action marked Paper No. 2 on January 30, 2002,13 which stated:

The appointed attorney on record was the late Atty. Nicanor D. Mapili. The reconstituted
documents provided no documents that will show that the authority to prosecute the instant
application is now transferred to the present counsel. No official revocation on record is available.

Therefore, an official revocation of the Power of Attorney of the former counsel and the
appointment of the present by the applicant is therefore required before further action can be
undertaken.

....

1. Contrary to what was alleged, the Chemical Examining Division's (CED) record will show that
as far as the said division is concern[ ed], it did not fail to issue the proper and timely action on the
instant application. CED record shows that the subject application was assigned to the examiner
on June 7, 1988. A month after that was July 19, 1988, the first Office Action was mailed but was
declared abandoned as of September 20, 1988 for applicant's failure to respond within the period
as prescribed under Rule 112. Since then, no other official transactions were recorded. Tlris record
is complemented by the Examiner-in-charge's own record ....

....

2. It was noted that it took thirteen (13) long years for the applicant to request for such Office
Action. This is not expected of the applicant since it is an acceptable fact that almost all inventors/
applicants wish for the early disposition for their applications.14
On May 29, 2002, E.I. Dupont Nemours replied to the office action by submitting a Power of
Attorney executed by Miriam Meconnahey, authorizing Ortega, Castillo, Del Castillo, Bacorro,
Odulio, Calma, and Carbonell to prosecute and handle its patent applications. 15 On the same day,
it also filed a Petition for Revival with Cost of Philippine Patent Application No. 35526. 16

In its Petition for Revival, E.I. Dupont Nemours argued that its former counsel, Atty. Mapili, did
not inform it about the abandonment of the application, and it was not aware that Atty. Mapili had
already died. 17 It argued that it discovered Atty. Mapili's death when its senior-level patent
attorney visited the Philippines in 1996. 18 It argued that it only had actual notice of the
abandonment on January 30, 2002, the date of Paper No. 2. 19 Thus, it argued that its Petition for
Revival was properly filed under Section 113 of the 1962 Revised Rules of Practice before the
Philippines Patent Office in Patent Cases (1962 Revised Rules of Practice).20

On April 18, 2002, the Director of Patents denied the Petition for Revival for having been filed out
of time.21 The Resolution22 stated:

Propriety dictates that the well-settled rule on agency should be applied to this case to maintain
the objectivity and discipline of the Office. Therefore, for cases such as the instant case, let the
Office maintain its position that mistakes of the counsel bind the client,' regardless of the degree
of negligence committed by the former counsel. Although it appears that the former counsel, Atty.
Nicanor Mapili was remiss in his obligations as counsel for the applicants, the Office cannot revive
the abandoned application because of the limitations provided in Rule 115. Clearly, the Petition
for Revival was filed beyond the reglementary period. Since the law and rules do not give the
Director of Patents the discretion to stretch the period for revival, the Office is constrained to apply
Rule 115 to the instant case.

In view of the foregoing considerations, applicants' petition to revive the subject application is
hereby denied.

SO ORDERED.23

E.I. Dupont Nemours appealed the denial to the Director-General of the Intellectual Property
Office on August 26, 2002.24 In the Decision25 dated October 22, 2003, Director-General Emma
C. Francisco denied the appeal and affirmed the Resolution of the Director of Patents.

On November 21, 2003, petitioner filed before the Court of Appeals a Petition for Review seeking
to set aside the Intellectual Property Office's Decision dated October 22, 2003. 26

On August 31, 2004, the Court of Appeals granted the Petition for Review. 27 In allowing the
Petition for Revival, the Court of Appeals stated:

After an exhaustive examination of the records of this case, this Court believes that there is
sufficient justification to relax the application of the above-cited doctrine in this case, and to afford
petitioner some relief from the gross negligence committed by its former lawyer, Atty. Nicanor D.
Mapili[.]28
The Office of the Solicitor General, on behalf of the Intellectual Property Office, moved for
reconsideration of this Decision on September 22, 2004. 29

In the interim, Therapharma, Inc. moved for leave to intervene and admit the Attached Motion for
Reconsideration dated October 11, 200430 and argued that the Court of Appeals' August 31, 2004
Decision directly affects its "vested" rights to sell its own product. 31

Therapharma, Inc. alleged that on January 4, 2003, it filed before the Bureau of Food and Drugs
its own application for a losartan product "Lifezar," a medication for hypertension, which the
Bureau granted.32 It argued that it made a search of existing patent applications for similar
products before its application, and that no existing patent registration was found since E.I. Dupont
Nemours' application for its losartan product was considered abandoned by the Bureau of Patents,
Trademarks, and Technology Transfer.33 It alleged that sometime in 2003 to 2004, there was an
exchange of correspondence between Therapharma, Inc. and Merck. In this exchange, Merck
informed Therapharma, Inc. that it was pursuing a patent on the losartan products in the Philippines
and that it would pursue any legal action necessary to protect its product.34

On January 31, 2006, the Court of Appeals issued the Resolution35 granting the Motion· for Leave
to Intervene. According to the Court of Appeals, Therapharma, Inc. had an interest in the revival
of E.I. Dupont Nemours' patent application since it was the local competitor for the losartan
product. 36 It stated hat even if the Petition for Review was premised on the revival of the patent
application, Therapharma, Inc.' s intervention was not premature since E.I. Dupont Nemours,
through Merck, already threatened Therapharma, Inc. with legal action if it continued to market
its losartan product.37

E.I. Dupont Nemours moved for reconsideration on February 22, 2006, assailing the Court of
Appeals' January 31, 2006 Resolution.38

On August 30,. 2006, the Court of Appeals resolved both Motions for Reconsideration and
rendered the Amended Decision39 reversing its August 31, 2004 Decision.

The Court of Appeals ruled that the public interest would be prejudiced by the revival of E.I.
Dupont Nemours' application.40 It found that losartan was used to treat hypertension, "a chronic
ailment afflicting an estimated 12.6 million Filipinos,"41 and noted that the presence of
competition lowered the price for losartan products. 42 It also found that the revival of the
application prejudiced Therapharma, Inc.' s interest, in that it had already invested more than
P20,000,000.00 to develop its own losartan product and that it acted in good faith when it marketed
its product.43

The Court of Appeals likewise found that it erroneously based its August 31, 2004 Decision on E.I
Dupont Nemours' allegation that it took seven (7) to 13 years for the Intellectual Property Office
to act on a patent application. 44 It stated that while it might have taken that long to issue the
patent, it did not take that long for the Intellectual Property Office to act on application.45 Citing
Schuartz v. Court of Appeals,46 it found that both E.I. Dupont Nemours and Atty. Mapili were
inexcusably negligent in
prosecuting the patent application.47

On October 19, 2006, petitioner E.I. Dupont Nemours filed before this Court this Petition for
Review on Certiorari.48 Both respondents Intellectual Property Office and Therapharma, Inc.
were directed to comment on the comment on the Petition.49 Upon submission of their respective
Comments,50 petitioner was directed to file its Consolidated Reply. 51 Thereafter, the parties were
directed to file their respective memoranda. 52

The arguments of the parties present several issues for this Court's resolution, as follows:

First, whether the Petition for Review on Certiorari complied with Rule 45, Section 4 of the Rules
of Court when petitioner failed to attach certain documents to support the allegations in the
complaint;

Second, whether petitioner should have filed a petition for certiorari under Rule 65 of the Rules
of Court;

Third, whether the Petition for Review on Certiorari raises questions of fact;

Fourth, whether the Court of Appeals erred in allowing the intervention of respondent
Therapharma, Inc. in petitioner's appeal;

Fifth, whether the Court of Appeals erred in denying petitioner's appeal for the revival of its patent
application on the grounds that (a) petitioner committed inexcusable negligence in the prosecution
of its patent application; and (b) third-party rights and the public interest would be prejudiced by
the appeal;

Sixth, whether Schuartz applies to this case in that the negligence of a patent applicant's counsel
binds the applicant; and

Lastly, whether the invention has already become part of public domain.

The question of whether the Court of Appeals may resolve a motion for intervention is a question
that assails an interlocutory order and requests a review of a lower court's exercise of discretion.
Generally, a petition for certiorari under Rule 65 of the Rules of Court will lie to raise this issue
in a limited manner. There must be a clear showing of grave abuse of discretion for writ of
certiorari to be issued.

However, when the Court of Appeals has already resolved the question of intervention and the
merits of the case, an appeal through a petition for review on certiorari under Rule 45 of the Rules
of Court is the proper remedy.

Respondent Therapharma, Inc. argues that the Petition should be dismissed outright for being the
wrong mode of appeal.53 It argues that petitioner should have filed a petition for certiorari under
Rule 65 since petitioner was assailing an act done by the Court of Appeals in the exercise of its
discretion. 54 It argues that petitions under Rule 45 are limited to questions of law, and petitioner
raised findings of fact that have already been affirmed by the Court of Appeals. 55 Petitioner, on
the other hand, argues that Rule 65 is only available when there is no appeal or any plain, speedy
remedy in the ordinary course of law. Since a petition for review under Rule 45 was still available
to it, it argues that it correctly availed itself of this remedy. 56 Petitioner also argues that there are
exceptions to the general rule on the conclusiveness of the Court of Appeals' findings of fact. 57
It argues that it was necessary for it to discuss relevant facts in order for it to show that the Court
of Appeals made a misapprehension of facts. 58

The special civil action of certiorari under Rule 65 is intended to correct errors of jurisdiction. 59
Courts lose competence in relation to an order if it acts in grave abuse of discretion amounting to
lack or excess of jurisdiction.60 A petition for review under Rule 45, on the other hand, is a mode
of appeal intended to correct errors of judgment.61 Errors of judgment are errors committed by a
court within its jurisdiction.62 This includes a review of the conclusions of law63 of the lower
court and, in appropriate cases, evaluation of the admissibility, weight, and inference from the
evidence presented.

Intervention results in an interlocutory order ancillary to a principal action.64 Its grant or denial is
subject to the sound discretion of the court.65 Interlocutory orders, or orders that do not make a
final disposition of the merits of the main controversy or cause of action,66 are generally not
reviewable.67 The only exception is a limited one, in that when there is no plain, speedy, and
adequate remedy, and where it can be shown that the court acted without, in excess, or with such
grave abuse of discretion that such action ousts it of jurisdiction.

Judicial economy, or the goal to have cases prosecuted with the least cost to the parties,68 requires
that unnecessary or frivolous reviews of orders by the trial court, which facilitate the resolution of
the main merits of the case, be reviewed together with the main merits of the case. After all, it
would be more efficient for an appellate court to review a case in its entire context when the case
is finally disposed.

The question of whether intervention is proper is a question of law. Settled is the distinction
between a question of law and a question of fact. A question of fact arises when there is doubt as
to the truth or falsity of certain facts.69 A question of law, on the other hand, arises when "the
appeal raises doubt as to the applicable law on a certain set of facts." 70 The test often used by this
Court to determine whether there is a question of fact or a question of law "is not the appellation
given to such question by the party raising the same; rather, it is whether the appellate court can
determine the issue raised without reviewing or evaluating the evidence, in which case, it is a
question of law; otherwise it is a question of fact."71

Petitioner raises the question of whether Republic Act No. 165 allows the Court of Appeals to
grant a motion for intervention. This necessarily requires a determination of whether Rule 19 of
the Rules of Court 72 applies in appeals of cases filed under Republic Act No. 165. The
determination of this question does not require a review of re-evaluation of the evidence. It requires
a determination of the applicable law.
II

If a petition fails to attach material portions of the record, it may still be given due course if it falls
under certain exceptions. Although Rule 45, Section 4 of the Rules of Court requires that the
petition "be accompanied by ... such material portions of the record as would support the petition,"
the failure to do so will not necessarily warrant the outright dismissal of the complaint. 73

Respondent Therapharma, Inc. argues that the Petition should have been outright dismissed since
it failed to attach certain documents to support its factual allegations and legal arguments,
particularly: the annexes of the Petition for Review it had filed before the Court of Appeals and
the annexes in the Motion for Leave to Intervene it had filed. 74 It argues that petitioner's failure
to attach the documents violates Rule 45, Section 4, which requires the submission of material
portions of the record. 75

On the other hand, petitioner argues that it was able to attach the Court of Appeals Decision dated
August 31, 2004, the Resolution dated January 31, 2006, and the Amended Decision dated August
30, 2006, all of which were sufficient for this Court to give due course to its Petition. 76

In Magsino v. De Ocampo, 77 this Court applied the procedural guideposts in Galvez v. Court of
Appeals 78 in determining whether the Court of Appeals correctly dismissed a petition for review
under Rule 42 for failure to attach relevant portions of the record. Thus:

In Galvez v. Court of Appeals, a case that involved the dismissal of a petition for certiorari to
assail an unfavorable ruling brought about by the failure to attach copies of all pleadings submitted
and other material portions of the record in the trial court (like the complaint, answer and position
paper) as would support the allegations of the petition, the Court recognized three guideposts for
the CA to consider in determining whether or not the rules of procedures should be relaxed, as
follows:

First, not all pleadings and parts of case records are required to be attached to the petition. Only
those which are relevant and pertinent must accompany it. The test of relevancy is whether the
document in question will support the material allegations in the petition, whether said document
will make out a prima facie case of grave abuse of discretion as to convince the court to give due
course to the petition.

Second, even if a document is relevant and pertinent to the petition, it need not be appended if it
is shown that the contents thereof can also [sic] found in another document already attached to the
petition. Thus, if the material allegations in a position paper are summarized in a questioned
judgment, it will suffice that only a certified true copy of the judgment is attached.

Third, a petition lacking an essential pleading or part of the case record may still be given due
course or reinstated (if earlier dismissed) upon showing that petitioner later submitted the
documents required, or that it will serve the higher interest of justice that the case be decided on
the merits.79
Although Magsino referred to a petition for review under Rule 42 before the Court of Appeals, the
procedural guideposts cited in Mafilsino may apply to this case since the contents of a pleading
under Rule 4280 are substantially the same as the contents of a pleading under Rule 45,81 in that
both procedural rules require the submission of "material portions of the record as would support
the allegations of the petition."82

In support of its Petition for Review on Certiorari, petitioner attached the Court of Appeals
Decision dated August 31, 2004, 83 the Resolution dated January 31, 2006,84 and the Amended
Decision dated August 30, 2006.85 The Court of Appeals Resolution and Amended Decision
quoted extensive portions of its rollo in support of its rulings. 86 These conclusions were sufficient
to convince this Court not to outright dismiss the Petition but to require respondents to first
comment on the Petition, in satisfaction of the first and second procedural guideposts in Magsino.

Upon filing of its Consolidated Reply,87 petitioner was able to attach the following additional
documents:

(1) Petition for Review filed before the Court of Appeals;88

(2) Letters dated July 18, 1995, December 12, 1995, and December 29, 1995;89

(3) Declaration of Ms. Miriam Meconnahey dated June 25, 2002;90

(4) Spreadsheet of petitioner's patent applications handled by Atty. Mapili;91

(5) Power of Attorney and Appointment of Resident Agent dated September 26, 1996;92

(6) Letter dated December 19, 2000 requesting an Office Action on Patent Application No.
35526;93

(7) Paper No. 2 dated January 30, 2002;94

(8) Petition for Revival dated January 30, 2002 with attached Power of Attorney and
Appointment of Resident Agent;95

(9) Resolution dated July 24, 2002 by Director of the Bureau of Patents;96 and

(10) Notice of and Memorandum on Appeal before the DirectorGeneral of the Intellectual
Property Office.97

The third procedural guidepost in Magsino was complied with upon the submission of these
documents. Petitioner, therefore, has substantially complied with Rule 45, Section 4 of the Rules
of Court.

III
Appeal is not a right but a mere privilege granted by statute.98 It may only be exercised in
accordance with the law that grants it.

Accordingly, the Court of Appeals is not bound by the rules of procedure in administrative
agencies. The procedural rules of an administrative agency only govern proceedings within the
agency. Once the Court of Appeals has given due course to an appeal from a ruling of an
administrative agency, the proceedings before it are governed by the Rules of Court.

However, petitioner argues that intervention should not have been allowed on appeal99 since the
revival of a patent application is ex parte and is "strictly a contest between the examiner and the
applicant"100 under Sections 78101 and 79102 of the 1962 Revised Rules of Practice. 103 It
argues that the disallowance of any intervention is to ensure the confidentiality of the proceedings
under Sections 13 and 14 of the 1962 Revised Rules of Practice. 104

Respondents argue that the 1962 Revised Rules of Practice is only applicable before the
Intellectual Property Office. 105 In particular, respondent Therapharma, Inc. argues that the issue
before the Court of Appeals was beyond the realm of patent examination proceedings since it did
not involve the patentability of petitioner's invention. 106 It further argues that its intervention did
not violate the confidentiality of the patent application proceedings since petitioner was not
required to divulge confidential information regarding its patent application. 107

In the 1962 Revised Rules of Practice, final decisions of the Director of Patents are appealed to
this Court and governed by Republic Act No. 165. In particular:

PARTX
PETITION AND APPEALS

....

CHAPTER IV
APPEALS TO THE SUPREME COURT FROM FINAL ORDERS OR
DECISIONS OF THE DIRECTOR OF PATENTS IN EX PARTE AND
INTER PARTES PROCEEDINGS

265. Appeals to the Supreme Court in ex parte and inter partes proceedings.-Any person who is
dissatisfied with the final decision of the Director of Patents, (affirming that of a Principal
Examiner) denying him a patent for an invention, industrial design or utility model; any person
who is dissatisfied with any final decision of the Director of Patents (affirming that of the
Executive Examiner) in any proceeding; and any party who is dissatisfied with any final decision
of the Director of Patents in an inter partes proceeding, may appeal such final decision to the
Supreme Court within thirty days from the date he receives a copy of such decision. (Republic Act
No. 165, section 16, as amended by section 3, Republic Act No. 864.)

266. Procedure on appeal to the Supreme Court.-For the procedure on appeal to the Supreme Court,
from the final decisions of the Director of Patents, see sections 63 to 73, inclusive, of Republic
Act No. 165 (patent law).
Particularly instructive is Section 73 of Republic Act No. 165, which provides:

Section 73. Rules of Court applicable. - In all other matters not herein provided, the applicable
provisions of the Rules of Court shall govern.

Republic Act No. 165 has since been amended by Republic Act No. 8293, otherwise known as the
Intellectual Property Code of the Philippines (Intellectual Property Code), in 1997. This is the
applicable law with regard to the revival of petitioner's patent application. Section 7 (7.1 )(a) of
the Intellectual Property Code states:

SECTION 7. The Director General and Deputies Director General. -

7 .1. Functions. - The Director General shall exercise the following powers and functions:

....

b. Exercise exclusive appellate jurisdiction over all decisions rendered by the Director of Legal
Affairs, the Director of Patents, the Director of Trademarks, and the Director of the
Documentation, Information and Technology Transfer Bureau. The decisions of the Director
General in the exercise of his appellate jurisdiction in respect of the decisions of the Director of
Patents, and the Director of Trademarks shall be appealable to the Court of Appeals in accordance
with the Rules of Court; and those in respect of the decisions of the Director of Documentation,
Information and Technology Transfer Bureau shall be appealable to the Secretary of Trade and
Industry[.] (Emphasis supplied)

Thus, it is the Rules of Court, not the 1962 Revised Rules of Practice, which governs the Court of
Appeals' proceedings in appeals from the decisions of the Director-General of the Intellectual
Property Office regarding the revival of patent applications.

Rule 19 of the Rules of Court provides that a court has the discretion to determine whether to give
due course to an intervention. Rule 19, Section 1 states:

RULE 19
INTERVENTION

SECTION 1. Who may intervene. -A person who has a legal interest in the matter in litigation, or
in the success of either of the parties, or an interest against both, or is so situated as to be adversely
affected by a distribution or other disposition of property in the custody of the court or of an officer
thereof may, with leave of court, be allowed to intervene in the action. The court shall consider
whether or not the intervention will unduly delay or prejudice the adjudication of the rights of the
original parties, and whether or not the intervenor's rights may be fully protected in a separate
proceeding.

The only questions the court need to consider in a motion to intervene are whether the intervenor
has standing to intervene, whether the motion will / unduly delay the proceedings or prejudice
rights already established, and whether the intervenor's rights may be protected in a separate
action.108

If an administrative agency's procedural rules expressly prohibit an intervention by third parties,

the prohibition is limited only to the proceedings before the administrative agency. Once the matter
is brought before the Court of Appeals in a petition for review, any prior prohibition on
intervention does not apply since the only question to be determined is whether the intervenor has
established a right to intervene under the Rules of Court.

In this case, respondent Therapharma, Inc. filed its Motion for Leave to Intervene 109 before the
Court of Appeals, not before the Intellectual Property Office. In assessing whether to grant the
intervention, the Court of Appeals considered respondent Therapharma, Inc.' s legal interest in the
case and its other options for the protection of its interests. 110 This was within the discretion of
the Court of Appeals under the Rules of Court.

Respondent Therapharma, Inc. was able to show that it had legal interest to intervene in the appeal
of petitioner's revival of its patent application. While its intervention may have been premature as
no patent has been granted yet, petitioner's own actions gave rise to respondent Therapharma, Inc.'
s right to protect its losartan product.

Respondent Therapharma, Inc. filed an application for product registration before the Bureau of
Food and Drugs on June 4, 2003 and was granted a Certificate of Product Registration on January
27, 2004. 111 It conducted patent searches from October 15, 1995 and found that no patent
application for losartan had been filed either before the Bureau of Patents, Trademarks, and
Technology Transfer or before the Intellectual Property Office.112

As early as December 11, 2003, petitioner through Merck was already sending communications
threatening legal action if respondent Therapharma, Inc. continued to develop and market losartan
in the Philippines. The letter stated:

Merck is strongly committed to the protection of its valuable intellectual property rights, including
the subject losartan patents. While fair competition by sale of pharmaceutical products which are
domestically produced legally is always welcomed by Merck and MSD Philippines, Merck will
vigorously pursue all available legal remedies against any unauthorized manufacturer, distributor
or supplier of losartan in countries where its patents are in force and where such activity is
prohibited by law. Thus, Merck is committed to preventing the distribution of losartan in the
Philippines if it originates from, or travels through, a country in which Merck holds patent rights.
113 (Emphasis supplied)

This letter was presented before the Court of Appeals, which eventually granted the revival of the
patent application in its August 31, 2004 Decision. Petitioner had no pending patent application
for its losartan product when it threatened respondent Therapharma, Inc. with legal action.114

Respondent Therapharma, Inc. expressed its willingness to enter into a Non-Use and
Confidentiality Contract if there was a pending patent application. 115 After several negotiations
on the clauses of the contract, 116 the parties were unable to come to an agreement. In its letter
dated May 24, 2004, 117 respondent Therapharma, Inc. expressed its frustration on petitioner's
refusal to give a clear answer on whether it had a pending patent application:

For easy reference, we have reproduced below paragraph 5 of the Confidentiality and Non-Use
Agreement ("Confidentiality Agreement"), underscoring your proposed amendment:

"THERAPHARMA agrees that upon receipt of Specifications and Claims of Application No.
35526 or at any time thereafter, before it becomes part of the public domain, through no fault of
THERAPHARMA, it will not, either directly or indirectly, alone, or through, on behalf of, or in
conjunction with any other person or entity, make use of any information contained therein,
particularly the product covered by its claims and the equivalents thereof, in any manner
whatsoever."

We find your proposed insertion odd. What may be confidential, and which we agree you have
every right to protect by way of the Confidentiality Agreement, are the Specifications and Claims
in the patent application, not the product per se. The product has been in the market for years.
Hence, how can it be confidential? Or is the ambiguity intended to create a legal handle because
you have no cause of action against us should we launch our own version of the losartan product?

....

Finally, the questions we posed in our previous letters are plain and simple - Is the Philippine
Patent Application No. 35526 still pending before the IPO, i.e., it has neither been withdrawn
by your licensor nor denied registration by the IPO for any reason whatsoever? When did
your licensor file said application with the IPO? These questions are easy to answer, unless
there is an intention to mislead. You are also

aware that the IPO is the only government agency that can grant letters patent. This is why we find
disturbing your statement that the pendency of the patent application before the IPO is "not
relevant". Hence, unless we receive unequivocal answers to the questions above, we regret that we
cannot agree to execute the Confidentiality Agreement; otherwise, we may be acknowledging by
contract a right that you do not have, and never will have, by law. 118 (Emphasis and underscoring
in the original)

The threat of legal action against respondent Therapharma, Inc. was real and imminent. If
respondent Therapharma, Inc. waited until petitioner was granted a patent application so it could
file a petition for compulsory licensing and petition for cancellation of patent under Section
240119 and Section 247 120 of the 1962 Revised Rules of Practice, 121 its continued marketing
of Lifezar would be considered as an infringement of petitioner's patent.

Even assuming that the Intellectual Property Office granted the revival of Philippine Patent
Application No. 35526 back in 2000, petitioner's claim of absolute confidentiality in patent
proceedings is inaccurate.

In the 1962 Revised Rules of Practice, the Bureau of Patents, Trademarks, and Technology
Transfer previously required secrecy in pending patent applications. Section 13 states:
13. Pending applications are preserved in secrecy.-No information will be given to anyone
respecting the filing by any particular person of any application for a patent, the pendency of any
particular case before the Office, or the subject matter of any particular application, unless the
same is authorized by the applicant in writing, and unless it shall be necessary, in the opinion of
the Director of Patents for the proper conduct of business before the Office.

The Intellectual Property Code, however, changed numerous aspects of the old patent law. The
Intellectual Property Code was enacted not only to amend certain provisions of existing laws on
trademark, patent, and copyright, but also to honor the country's commitments under the World
Trade Organization - Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS
Agreement), a treaty that entered force in the Philippines on January 1, 1995.122

The mandatory disclosure requirement in the TRIPS Agreement123 precipitated the shift from a
first-to-invent system to a first-to-file system. The first-to-file system required citizens of foreign
countries to register their patents in the Philippines before they can sue for infringement. 124

Lawmakers, however, expressed their concern over the extension of the period of protection for
registered patents. 125 Under Section 21 126 of Republic Act No. 165, a patent had a term of 17
years. The Intellectual Property Code extended the period to 20 years. 127

During the interpellations before the House of Representatives, then Representative Neptali
Gonzales II (Gonzales) explained that under the Intellectual Property Code, the period of
protection would have been shortened because of the publication requirement:

MR. TANADA. Under the proposed measure, Your Honor, what is the period of protection that is
given to the holder of the patent registered?

MR. GONZALES. Seventeen years from grant of patent, Mr. Speaker. Unlike before ...

MR. TANADA. Under the present law, Mr. Speaker.

MR. GONZALES. I mean 17 years from filing, Mr. Speaker, unlike before which is 20 years from
grant. Okay.

I am sorry, Mr. Speaker. Seventeen years from filing under the existing law, 20 years from grant
under the proposed measure. It would appear, Mr. Speaker, that the proposed measure seeks to
extend the grant of the patent.

MR. TA.NADA. But you have made the period of protection longer, Mr. Speaker.

MR. GONZALES. On the contrary, Mr. Speaker, when a similar question was previously
propounded before, actually Mr. Speaker, it may decrease in fact the period of protection, Mr.
Speaker. Because unlike before 17 years from grant, Mr. Speaker, now 20 years from application
or from filing but actually, Mr. Speaker, it normally takes three to four years before a patent is
actually granted even under the proposed measure. Because as you can see[,] publication in the
BPTTT Gazette would even taken place after 18 months from filing. In other words, the procedure
itself is such a manner that normally takes a period of about three years to finally grant the patent.
So even if 20 years is given from the time of filing actually in essence it will be the same, Mr.
Speaker, because under the existing law 17 years from grant. But even under our existing law from
the time that a patent application is filed it also takes about three to four years, Mr. Speaker, to
grant the same.

Now, why from filing, Mr. Speaker? Because the patent holder applicant is now required to publish
in a manner easily understood by a person trained or with the same skill as that of a patent holder.
And from that time this is published, this process covered by the patent is already made available.
In fact, from the time that it is published, any interested person may even examine and go over the
records as filed with the BPTTT and, therefore, this new technology or new invention is now made
available to persons equipped or possessed with the same skills as that of the patent holder. And
that is the reason why the patent is - the time of the patent is now tacked from the time it is filed
because as a compromise it is now mandatory to publish the said patent together with its
description - the description of the process and even would, at times demand the deposit of sample
of the industrial design, Mr. Speaker. 128

Gonzales further clarified that the publication requirements of the Intellectual Property Code
would necessarily shorten the period for confidentiality of patent applications:

MR. MONFORT. Now, another question is, (another is) you know, the time from the filing of the
date up to publication which is the period of pendency or confidentiality, may I know how many
years will it take, that confidentiality period, variability.

MR. GONZALES. Eighteen months, Mr. Speaker.

MR. MONFORT. How many?

MR. GONZALES. Eighteen months.

MR. MONFORT. I do not think it is 18 months.

MR. GONZALES. It is provided for in the law, Mr. Speaker, because prior to the publication,
naturally, the records become confidential because the essence of a patent, trademark, or copyright
is to give the author or the inventor exclusive right to work on his own invention. And that is his
invention, and naturally, it is but right that he should have the exclusive right over his invention.

On the other hand, the law requires that after 18 months, it should now be published. When it is
now published, naturally, it ceases to be confidential in character because it is now ready for
examination. It is now ready for possible copying of any interested person because the application,
as we have repeatedly said on the floor, would require the filing of a description of the invention
that can be carried out by a Eerson similarly trained in the arts and sciences as that of the patent
holder.129

Thus, the absolute secrecy required by the 1962 Revised Rules of Practice would not be applicable
to a patent application before the Intellectual Property Office. Section 13 of the 1962 Revised
Rules of Practice does not appear in the Intellectual Property Code, 130 in the Rules and
Regulations on Inventions, 131 or in the Revised Implementing Rules and Regulations for Patents,
Utility Models and Industrial Design. 132 The Intellectual Property Code now states that all patent
applications must be published in the Intellectual Property Office Gazette and that any interested
party may inspect all documents submitted to the Intellectual Property Office. The patent
application is only confidential before its publication. Sections 44 and 45 of the Intellectual
Property Code provide:

SECTION 44. Publication of Patent Application. -

44.1. The patent application shall be published in the IPO Gazette together with a search document
established by or on behalf of the Office citing any documents that reflect prior art, after the
expiration of eighteen (18) months from the filing date or priority date.

44.2. After publication of a patent application, any interested party may inspect the application
documents filed with the Office.

44.3. The Director General, subject to the approval of the Secretary of Trade and Industry, may
prohibit or restrict the publication of an application, if in his opinion, to do so would be prejudicial
to the national security and interests of the Republic of the Philippines. (n)

SECTION 45. Confidentiality Before Publication. -A patent application, which has not yet been
published, and all related documents, shall not be made available for inspection without the
consent of the applicant.

It was inaccurate, therefore, for petitioner to argue that secrecy in patent applications prevents any
intervention from interested parties. The confidentiality in patent applications under the
Intellectual Property Code is not absolute since a party may already intervene after the publication
of application.

IV

An abandoned patent application may only be revived within four (4) months from the date of
abandonment. No extension of this period is provided by the 1962 Revised Rules of Practice.
Section 113 states:

113. Revival of abandoned application.-An application abandoned for failure to prosecute may be
revived as a pending application if it is shown to the satisfaction of the Director that the delay was
unavoidable. An abandoned application may be revived as a pending application within four
months from the date of abandonment upon good cause shown and upon the payment of the
required fee of ₱25. An application not revived within the specified period shall be deemed
forfeited.

Petitioner argues that it was not negligent in the prosecution of its patent application133 since it
was Atty. Mapili or his heirs who failed to inform it of crucial developments with regard to its
patent application. 134 It argues that as a client in a foreign country, it does not have immediate
supervision over its local counsel so it should not be bound by its counsel's negligence. 135 In any
case, it complied with all the requirements for the revival of an abandoned application under Rule
113 of the 1962 Revised Rules of Practice. 136

Respondents, on the other hand, argue that petitioner was inexcusably and grossly negligent in the
prosecution of its patent application since it allowed eight (8) years to pass before asking for a
status update on its application. 137 Respondent Intellectual Property Office argues that
petitioner's inaction for eight (8) years constitutes actual abandonment. 138 It also points out that
from the time petitioner submitted its new Special Power of Attorney on September 29, 1996, it
took them another four (4) years to request a status update on its application. 139

Under Chapter VII, Section 1 ll(a) of the 1962 Revised Rules of Practice, a patent application is
deemed abandoned if the applicant fails to prosecute the application within four months from the
date of the mailing of J the notice of the last action by the Bureau of Patents, Trademarks, and
Technology Transfer, and not from applicant's actual notice. Section 11 l(a)

states:

Chapter VII

TIME FOR RESPONSE BY APPLICANT; ABANDONMENT OF APPLICATION

111. Abandonment for failure to respond within the time limit.-

(a) If an applicant fails to prosecute his application within four months after the date when the last
official notice of action by the Office was mailed to him, or within such time as may be fixed (rule
112), the application will become abandoned.

According to the records of the Bureau of Patents, Trademarks, and Technology Transfer Chemical
Examining Division, petitioner filed Philippine Patent Application No. 35526 on July 10, 1987. It
was assigned to an examiner on June 7, 1988. An Office Action was mailed to petitioner's agent,
Atty. Mapili, on July 19, 1988. Because petitioner failed to respond within the allowable period,
the application was deemed abandoned on September 20, 1988.140 Under Section 113, petitioner
had until January 20, 1989 to file for a revival of the patent application. Its Petition for Revival,
however, was filed on May 30, 2002, 141 13 years after the date of abandonment.

Section 113 has since been superseded by Section 133.4 of the Intellectual Property Code, Rule
930 of the Rules and Regulations on Inventions, and Rule 929 of the Revised Implementing Rules
and Regulations for Patents, Utility Models and Industrial Design. The period of four (4) months
from the date of abandonment, however, remains unchanged. The Intellectual Property Code even
provides for a shorter period of three (3) months within which to file for revival:

SECTION 133. Examination and Publication. –

....
133.4. An abandoned application may be revived as a pending application within three (3) months
from the date of abandonment, upon good cause shown and the payment of the required fee.

Rule 930 of the Rules and Regulations on Inventions provides:

Rule 930. Revival of application. - An application deemed withdrawn for failure to prosecute may
be revived as a pending application within a

period of four (4) months from the mailing date of the notice of withdrawal if it is shown to the
satisfaction of the Director that the failure was due to fraud, accident, mistake or excusable
negligence.

A petition to revive an application deemed withdrawn must be accompanied by (1) a showing of

the cause of the failure to prosecute, (2) a complete proposed response, and (3) the required fee.

An application not revived in accordance with this rule shall be deemed forfeited.

Rule 929 of the Revised Implementing Rules and Regulations for Patents, Utility Models and
Industrial Design provides:

Rule 929. Revival of Application. - An application deemed withdrawn for failure to prosecute may
be revived as a pending application within a period of four (4) months from the mailing date of the
notice of withdrawal if it is shown to the satisfaction of the Director that the failure was due to
fraud, accident, mistake, or excusable negligence. A petition to revive an application deemed
withdrawn shall be accompanied by:

(a) A showing of a justifiable reason for the failure to prosecute;

(b) A complete proposed response; and

(c) Full payment of the required fee.

No revival shall be granted to an application that has been previously revived with cost.

An application not revived in accordance with this Rule shall be deemed forfeited.

Even if the delay was unavoidable, or the failure to prosecute was due to fraud, accident, mistake,
or excusable negligence, or the Petition was accompanied by a complete proposed response, or all
fees were paid, the Petition would still be denied since these regulations only provide a four (4 )-
month period within which to file for the revival of the application. The rules do not provide any
exception that could extend this four (4)-month period to 13 years.

Petitioner’s patent application, therefore, should not be revived since it was filed beyond the
allowable period.

V
Even assuming that the four (4)-month period could be extended, petitioner was inexcussably
negligent in the prosecution of its patent application.

Negligence is inexcusable if its commission could have been avoided through ordinary diligence
and prudence. 142 It is also settled that negligence of counsel binds the client as this "ensures
against the resulting uncertainty and tentativeness of proceedings if clients were allowed to merely
disown. 143 their counsels' conduct."

Petitioner's resident agent, Atty. Mapili, was undoubtedly negligent in failing to respond to the
Office Action sent by the Bureau of Patents, Trademarks, and Technology Transfer on June 19,
1988. Because of his negligence, petitioner's patent application was declared abandoned. He was
again negligent when he failed to revive the abandoned application within four (4) months from
the date of abandonment.

Petitioner tries to disown Atty. Mapili 's conduct by arguing that it was not informed of the
abandonment of its patent application or of Atty. Mapili's death. By its own evidence, however,
petitioner requested a status update from Atty. Mapili only on July 18, 1995, eight (8) years after
the filing of its application. 144 It alleged that it only found out about Atty. Mapili 's death
sometime in March 1996, as a result of its senior patent attorney's visit to the Philippines. 145
Although it was in petitioner's discretion as a foreign client to put its complete trust and confidence
on its local resident agent, there was a correlative duty on its part to be diligent in keeping itself
updated on the progress of its patent applications. Its failure to be informed of the abandonment of
its patent application was caused by its own lack of prudence.

In Bernardo v. Court of Appeals, 146 "[n]o prudent party will leave the fate of his case entirely to
his lawyer .... It is the duty of a party-litigant to be in contact with his counsel from time to time in
order to be informed of the progress of his case." 147

Even if Atty. Mapili's death prevented petitioner from submitting a petition for revival on time, it
was clearly negligent when it subsequently failed to immediately apprise itself of the status of its
patent application.

Upon learning of Atty. Mapili’s death, petitioner issued a Power of Attorney and Appointment of
Resident Agent in favor of Bito, Lozada, Ortega & Castillo on March 25, 1996. 148 Despite the
immediate action in the substitution of its resident agent, it only requested a status update of
Philippine Patent Application No. 35526 from the Intellectual Property Office on December 14,
2000, 149 or four (4) years after it learned of Atty. Mapili' s death.

Petitioner attempts to explain that it took them four (4) years to request a status update because the
Bureau of Patents, Trademarks, and Technology Transfer failed to take any action when it
submitted its Power of Attorney and Appointment of Resident Agent in favor of Bito, Lozada,
Ortega & Castillo.150 The Power of Attorney, however, shows that it was only to inform the
Bureau that all notices relating to its pending patent applications should be sent to it. Philippine
Patent Application No. 35526 was declared abandoned on September 20, 1988. As far as the
Bureau was concerned, it was a forfeited application that had already been archived. It was not the
Bureau's duty to resurrect previous notices of forfeited and abandoned applications to be sent to
new resident agents unless a specific status update was requested. Considering that petitioner only
requested a status update on December 14, 2000, it was only then that the Intellectual Property
Office would start sending notices to it.

Contrary to the posturing of petitioner, Schuartz is applicable.

In Schuartz, several foreign inventors seeking to file patent applications in the Philippines hired
the law firm Siguion Reyna, Montecillo and Ongsiako to process their applications. 151 The
Bureau of Patents, Trademarks, and Technology Transfer mailed the law firm several notices of
abandonment on its patent applications from June 1987 to September 1987. The law firm only
found out about this in December 1987, after it dismissed two (2) of its employees in charge of
handling correspondences from the Bureau. 152 The law firm filed petitions for revival of its patent
applications from March 1988, all of which were denied by the Director of the Bureau of Patents
for being filed out of time. 153 An appeal was subsequently filed before the Court of Appeals but
was dismissed for being filed beyond the reglementary period. 154

This Court found that although the Court of Appeals may have erred in counting the period for
appeal, it could not grant the Petition. This Court stated:

[P]etitioners lost sight of the fact that the petition could not be granted because of laches. Prior to
the filing of the petition for revival of the patent application with the Bureau of Patents, an
unreasonable period of time had lapsed due to the negligence of petitioners' counsel. By such
inaction, petitioners were deemed to have forfeited their right to revive their applications for
patent.

Facts show that the patent attorneys appointed to follow up the applications for patent registration
had been negligent in complying with the rules of practice prescribed by the Bureau of
Patents.1âwphi1 The firm had been notified about the abandonment as early as June 1987, but it
was only after December 7, 1987, when their employees Bangkas and Rosas had been dismissed,
that they came to know about it. This clearly showed that petitioners' counsel had been remiss in
the handling of their clients' applications.

"A lawyer's fidelity to the cause of his client requires him to be ever mindful of the responsibilities
that should be expected of him. A lawyer shall not neglect a legal matter entrusted to him." In the
instant case, petitioners' patent attorneys not only failed to take notice of the notices of
abandonment, but they failed to revive the application within the four-month period, as provided
in the rules of practice in patent cases. These applications are deemed forfeited upon the lapse of
such period. 155 (Emphasis supplied)

Petitioner attempts to distinguish itself from Schuartz by arguing that the petitioners in Schuartz
had actual notice of abandonment while petitioner here was only able to have actual notice when
it received Paper No. 2.

The four (4 )-month period in Section 111 156of the 1962 Revised Rules of Practice, however, is
not counted from actual notice of abandonment but from mailing of the notice. Since it appears
from the Intellectual Property Office's records that a notice of abandonment was mailed to
petitioner's resident agent on July 19, 1988,157 the time for taking action is counted from this
period. Petitioner's patent application cannot be revived simply because the period for revival has
already lapsed and no extension of this period is provided for by the 1962 Revised Rules of
Practice.

VI

The right of priority given to a patent applicant is only relevant when there are two or more
conflicting patent applications on the same invention. Because a right of priority does not
automatically grant letters patent to an applicant, possession of a right of priority does not confer
any property rights on the applicant in the absence of an actual patent.

Petitioner argues that its patent application was filed on July 10, 1987, within 12 months from the
prior filing of a U.S. patent application on July 11, 1986.158 It argues that it is protected from
becoming part of the public domain because of convention priority under the Paris Convention for
the Protection of Industrial Property and Section 9 of Republic Act No. 165. 159

Respondent Therapharma, Inc., on the other hand, argues that a mere patent application does not
vest any right in the applicant before the issuance of the patent.160 It argues that the "priority date"
argued by petitioner is only relevant in determining who has a better right to the patent among the
other applicants who subsequently apply for the same invention. 161

Under Section 31 of the Intellectual Property Code, a right of priority is given to any patent
applicant who has previously applied for a patent in a country that grants the same privilege to
Filipinos. Section 31 states:

SECTION 31. Right of Priority. - An application for patent filed by any person who has previously
applied for the same invention in another country which by treaty, convention, or law affords
similar privileges to Filipino citizens, shall be considered as filed as of the date of filing the foreign
application: Provided, That:

a. the local application expressly claims priority;

b. it is filed within twelve (12) months from the date the earliest foreign application was filed; and

c. a certified copy of the foreign application together with an English translation is filed within six
(6) months from the date of filing in the Philippines.

A patent applicant with the right of priority is given preference in the grant of a patent when there
are two or more applicants for the same invention. Section 29 of the Intellectual Property Code
provides:

SECTION 29. First to File Rule. - If two (2) or more persons have made the invention separately
and independently of each other, the right to the patent shall belong to the person who filed an
application for such invention, or where two or more applications are filed for the same invention,
to the applicant who has the earliest filing date or, the earliest priority date.
Since both the United States162 and the Philippines163 are signatories to the Paris Convention for
the Protection of Industrial Property, an applicant who has filed a patent application in the United
States may have a right of priority over the same invention in a patent application in the
Philippines.164 However, this right of priority does not immediately entitle a patent applicant the
grant of a patent. A right of priority is not equivalent to a patent. Otherwise, a patent holder of any
member-state of the Paris Convention need not apply for patents in other countries where it wishes
to exercise its patent.

It was, therefore, inaccurate for petitioner to argue that its prior patent application in the United
States removed the invention from the public domain in the Philippines. This argument is only
relevant if respondent Therapharma, Inc. had a conflicting patent application with the Intellectual
Property Office. A right of priority has no bearing in a case for revival of an abandoned patent
application.

VII

The grant of a patent is to provide protection to any inventor from any patent infringement. 165
Once an invention is disclosed to the public, only the patent holder has the exclusive right to
manufacture, utilize, and market the invention.166 In Creser Precision Systems v. Court of
Appeals:167

Under American jurisprudence, an inventor has no common-law right to a monopoly of his

invention. He has the right to make, use and vend his own invention, but if he voluntarily discloses
it, such as by offering it for sale, the world is free to copy and use it with impunity. A patent,
however, gives the inventor the right to exclude all others. As a patentee, he has the exclusive right
of making, using or selling the invention. 168

Under the Intellectual Property Code, a patent holder has the right to "to restrain, prohibit and
prevent" 169 any unauthorized person or entity from manufacturing, selling, or importing any
product derived from the patent. However, after a patent is granted and published in the Intellectual
Property Office Gazette, 170 any interested third party "may inspect the complete description,
claims, and drawings of the patent." 171

The grant of a patent provides protection to the patent holder from the indiscriminate use of the
invention. However, its mandatory publication also has the correlative effect of bringing new ideas
into the public consciousness. After the publication of the patent, any person may examine the
invention and develop it into something further than what the original patent holder may have
envisioned. After the lapse of 20 years, 172 the invention becomes part of the public domain and
is free for the public to use. In Pearl and Dean v. Shoemart, Inc.: 173

To be able to effectively and legally preclude others from copying and profiting from the invention,
a patent is a primordial requirement. No patent, no protection. The ultimate goal of a patent system
is to bring new designs and technologies into the public domain through disclosure. Ideas, once
disclosed to the public without the protection of a valid patent, are subject to appropriation without
significant restraint.
On one side of the coin is the public which will benefit from new ideas; on the other are the
inventors who must be protected. As held in Bauer & Cie vs. O'Donnell, "The act secured to the
inventor the exclusive right to make use, and vend the thing patented, and consequently to prevent
others from exercising like privileges without the consent of the patentee. It was passed for the
purpose of encouraging useful invention and promoting new and useful inventions by the
protection and stimulation new and useful inventions by the protection and stimulation given to
inventive genius, and was intended to secure to the public, after the lapse of the exclusive privileges
granted the benefit of such inventions and improvements."

The law attempts to strike an ideal balance between the interests:

"(The p)atent system thus embodies a carefully varafted bargain for encouraging the creation and
disclosure of new useful and non-obvious advances in technology and design, in return for the
exclusive right to practice the invention for a number of years. The inventor may keep his invention
secret and reap its fruits indefinitely. In consideration of its disclosure and the consequent benefit
to the community, the patent is granted. An exclusive enjoyment is guaranteed him for 17 years,
but upon the expiration of that period, the knowledge of the invention inures to the people, who
are thus enabled to practice it and profit by its use."

The patent law has a three-fold purpose: "first, patent law seeks to foster and reward invention;
second, it promotes disclosures of inventions to stimulate further innovation and to permit the
public to practice the invention once the patent expires; third, the stringent requirements for patent
protection. seek to ensure that ideas in the public domain remain there for the free use of the
public."

It is only after an exhaustive examination by the patent office that a patent is issued. Such an in-
depth investigation is required because "in rewarding a useful invention, the rights and welfare of
the community must be fairly dealt with and effectively guarded. To that end, the prerequisites to
obtaining a patent are strictly observed and when a patent is issued, the limitations on its exercise
are equally strictly enforced. To begin with, a genuine invention or discovery must be
demonstrated lest in the constant demand for new appliances, the heavy hand of tribute be laid on
each slight technological advance in art."174 (Emphasis supplied)

In addition, a patent holder of inventions relating to food or medicine does not enjoy absolute
monopoly over the patent. Both Republic Act No. 165 and the Intellectual Property Code provide
for compulsory licensing. Compulsory licensing is defined in the Intellectual Property Code as the
"grant a license to exploit a patented invention, even without the agreement of the patent owner."
175

Under Republic Act No. 165, a compulsory license may be granted to any applicant three (3) years
after the grant of a patent if the invention relates to food or medicine necessary for public health
or safety. 176 In Smith Kline & French Laboratories, Ltd. vs. Court of Appeals: 177

Section 34 of R.A. No. 165, even if the Act was enacted prior to the Philippines' adhesion to the
[Paris] Convention, fits well within the aforequoted provisions of Article 5 of the Paris
Convention. In the explanatory note of Bill No. 1156 which eventually became R.A. No. 165, the
legislative intent in the grant of a compulsory license was not only to afford others an opportunity
to provide the public with the quantity of the patented product, but also to prevent the growth of
monopolies. Certainly, the growth of monopolies was among the abuses which Section A, Article
5 of the Convention foresaw, and which our Congress likewise wished to prevent in enacting R.A.
No. 165. 178

The patent holder’s proprietary right over the patent only lasts for three (3) years from the grant of
the patent, after which any person may be allowed to manufacture, use or sell the invention subject
to the payment of royalties:

The right to exclude others from the manufacturing, using or vending an invention relating to food
or medicine should be conditioned to allowing any person to manufacture, use or vend the same
after a period of three years from the date of the grant of the letters patent. After all, the patentee
is not entirely deprived of any proprietary right. In fact, he has been given the period of three years
of complete monopoly over the patent. Compulsory licensing of a patent on food or medicine
without regard to the other conditions imposed in Section 34 is not an undue deprivation of
proprietary interests over a patent right because the law sees to it that even after three years of
complete monopoly something is awarded to the inventor in the form of a bilateral and workable
licensing agreement and a reasonable royalty to be agreed upon by the parties and in default of
such agreement, the Director of Patent may fix the terms and conditions of the license.179

A patent is a monopoly granted only for specific purposes and objectives. Thus, its procedures
must be complied with to attain its social objective. Any request for leniency in its procedures
should be taken in this context. Petitioner, however, has failed to convince this court that the
revival of its patent application would have a significant impact on the pharmaceutical industry.

Hypertension, or high blood pressure, is considered a "major risk factor for cardiovascular disease"
180 such as "heart disease, stroke, kidney failure and blindness." 181 In a study conducted by the
World Health Organization, 25% of adults aged 21 years and older in the Philippines suffer from
high blood pressure. 182 According to the Department of Health, heart disease remains the leading
cause of mortality in the Philippines. 183 Angiotensin II Receptor Blocking Imidazole or
"losartan" is one of the medications used for the treatment ofhypertension. 184

In a study conducted by the Philippine Institute for Development Studies, "affordability of drugs
remains a serious problem" 185 in the Philippines. It found that because of the cost of drugs,
accessibility to drugs become prohibitive for the lowest-earning households and are "even more
prohibitive for the u:nemployed and indigent." 186 Several measures have been enacted by the
government to address the high costs of medicine, among them, parallel drug importation187 and
the passage of Republic Act No. 9502, otherwise known as the Universally Accessible Cheaper
and Quality Medicines Act of 2008. 188 Figures submitted by respondent Therapharma, Inc.,
however, also show that the presence of competition in the local pharmaceutical market may
ensure the public access to cheaper medicines.

According to respondent Therapharma, Inc., the retail price of petitioner's losartan product,
Cozaar, decreased within one (1) month of respondent Therapharma, Inc.' s entry into the market:
189
 BRAND TRADER RETAIL PRICE RETAIL PRICE Within
As of Lifezar's first entry one month from
into the market on June Lifezar's entry or by July
4, 2004 4, 2004

LIFEZAR Therapharma 50 mg - P20.20 50 mg - P20.20

COZAAR Merck 50 mg - P39.50 50 mg - P39.50
100 mg - P55.00 100 -P44.00

Respondent Therapharma, Inc. also presented figures showing that there was a 44% increase in
the number of losartan units sold within five (5) months of its entry into the market. 190 More
Filipinos are able to purchase losartan products when there are two (2) different players providing
competitive prices in the market.

Lifezar, and another of respondent Therapharma, Inc.'s products, Combizar, have also been
recommended as cheaper alternative losartan medication, since they were priced "50 percent less
than foreign brands." 191

Public interest will be prejudiced if, despite petitioner's inexcusable negligence, its Petition for
Revival is granted.1awp++i1 Even without a pending patent application and the absence of any
exception to extend the period for revival, petitioner was already threatening to pursue legal action
against respondent Therapharma, Inc. if it continued to develop and market its losartan product,
Lifezar. 192 Once petitioner is granted a patent for its losartan products, Cozaar and Hyzaar, the
loss of competition in the market for losartan products may result in higher prices. For the
protection of public interest, Philippine Patent Application No. 35526 should be considered a
forfeited patent application.

WHEREFORE, the Petition is DENIED. The Resolution dated January 31, 2006 and the
Amended Decision dated August 30, 2006 of the Court of Appeals are AFFIRMED.

SO ORDERED.

G.R. No. 186967

DIVINA PALAO, Petitioner

vs.
FLORENTINO INTERNATIONAL, INC., Respondent

DECISION

LEONEN, J.:

This resolves a Petition for Review on Certiorari 1 filed by petitioner Divina Palao (Palao) praying
that the assailed January 8, 2009 Decision2 and the March 2, 2009 Resolution3 of the Court of
Appeals in CA-G.R. SP No. 105595 be reversed and set aside.
In its assailed Decision, the Court of Appeals reversed and set aside the September 22, 2008 Order4
of Intellectual Property Office Director General Adrian S. Cristobal, Jr. and reinstated respondent
Florentino III International, Inc.'s (Florentino) appeal from Decision No. 2007-31,5 dated March
5, 2007, of the Bureau of Legal Affairs of the Intellectual Property Office.

Decision No. 2007-31 denied Florentino's Petition for Cancellation of Letters Patent No. UM-
7789, which the Intellectual Property Office had issued in favor of Palao. 6

Letters Patent No. UM-7789 pertained to "A Ceramic Tile Installation on Non-Concrete Substrate
Base Surfaces Adapted to Form Part of Furniture, Architectural Components and the Like."7

In its Petition for Cancellation, Florentino claimed that the utility model covered by Letters Patent
No. UM-7789 was not original, new, or patentable, as it had been publicly known or used in the
Philippines and had even been the subject of several publications.8 It added that it, as well as many
others, had been using the utility model well before Palao' s application for a patent.9

In its Decision No. 2007-31,10 the Bureau of Legal Affairs of the Intellectual Property Office
denied Florentino's Petition for Cancellation. It noted that the testimony and pictures, which
Florentino offered in evidence, failed to establish that the utility model subject of Letters Patent
No. UM-7789 was publicly known or used before Palao' s application for a patent. 11

In its Resolution No. 2008-1412 dated July 14, 2008, the Bureau of Legal Affairs of the Intellectual
Property Office denied Florentino' s Motion for Reconsideration.

On July 30, 2008, Florentino appealed to the Office of the Director General of the Intellectual
Property Office. 13 This appeal's Verification and Certification of Non-Forum Shopping was
signed by Atty. John Labsky P. Maximo (Atty. Maximo) of the firm Balgos and Perez. 14
However, Florentino failed to attach to its appeal a secretary's certificate or board resolution
authorizing Balgos and Perez to sign the Verification and Certification of Non-Forum Shopping.
15 Thus, on August 14, 2008, the Office of the Director General issued the Order requiring
Florentino to submit proof that Atty. Maximo or Balgos and Perez was authorized to sign the
Verification and Certification ofNon-Forum Shopping. 16

On August 19, 2008, Florentino filed a Compliance. 17 It submitted a copy of the Certificate
executed on August 15, 2008 by Florentino's Corporate Secretary, Melanie Marie A. C. Zosa-Tan,
supposedly showing its counsel's authority to sign. 18 This Certificate stated:

[A]t a meeting of the Board of Directors of the said corporation on 14 August 2008, during which
a majority of the Directors were present, the following resolution was unanimously adopted:

'RESOLVED, as it is hereby resolved, that BALGOS & PEREZ, or any of its associates, be, as
they are hereby, authorized to sign for and on behalf of the corporation, the Verification and
Certification on NonForum Shopping and/or all other documents relevant to the Appeal filed by
the Corporation with the Office of the Director General of the Intellectual Property Office entitled
"Philippine Chambers of Stonecraft Industries, Inc. and Florentino III International, Inc. vs. Divina
Palao".'
IN WITNESS WHEREOF, I have hereunto set my hand on these presents, this 15 August 2008 in
Cebu City, Cebu. 19

In his Order dated September 22, 2008, Intellectual Property Office Director General Adrian S.
Cristobal, Jr. (Director General Cristobal) dismissed Florentino's appeal.20 He noted that the
Secretary's Certificate pertained to an August 14, 2008 Resolution issued by Florentino' s Board
of Directors, and reasoned that the same Certificate failed to establish the authority of Florentino's
counsel to sign the Verification and Certification of Non-Forum Shopping as of the date of the
filing of Florentino's appeal (i.e., on July 30, 2008).21

Florentino then filed before the Court of Appeals a Petition for Review under Rule 43 of the 1997
Rules of Civil Procedure. In its assailed January 8, 2009 Decision,22 the Court of Appeals faulted
Director General Cristobal for an overly strict application of procedural rules. Thus, it reversed
Director General Cristobal's September 22, 2008 Order and reinstated Florentino' s appeal. 23

In its assailed March 2, 2009 Resolution,24 the Court of Appeals denied Palao's Motion for
Reconsideration.

Hence, this Petition was filed.

For resolution is the sole issue of whether the Court of Appeals erred in reversing the September
22, 2008 Order of Intellectual Property Office Director General Adrian S. Cristobal, Jr., and in
reinstating respondent Florentino III International, Inc.' s appeal.

We deny the Petition and sustain the ruling of the Court of Appeals.

The need for a certification of non-forum shopping to be attached to respondent's appeal before
the Office of the Director General of the Intellectual Property Office is established.

Section 3 of the Intellectual Property Office's Uniform Rules on Appeai25 specifies the form
through which appeals may be taken to the Director General:

Section 3. Appeal Memorandum. - The appeal shall be perfected by filing an appeal memorandum
in three (3) legible copies with proof of service to the Bureau Director and the adverse party, if
any, and upon payment of the applicable fee, Reference Code 127 or 128, provided in the IPO Fee
Structure.

Section 4(e) specifies the need for a certification of non-forum shopping. Section 4 reads in full:

Section 4. Contents of the Appeal Memorandum. - The appeal memorandum shall:

a) State the full name or names, capacity and address or addresses of the appellant or appellants;

b) Indicate the material dates showing that it was filed on time;

c) Set forth concisely a statement of the matters involved, the issues raised, the specification of
errors of fact or law, or both, allegedly committed by the Bureau Director and the reasons or
arguments relied upon for the allowance of the appeal;

d) Be accompanied by legible copies of the decision or final order of the Bureau Director and of
the material portions of the record as would support the allegations of the appeal; and

e) Contain a certification of non-forum-shopping. (Emphasis supplied)

These requirements notwithstanding, the Intellectual Property Office's own Regulations on Inter
Partes Proceedings (which governs petitions for cancellations of a mark, patent, utility model,
industrial design, opposition to registration of a mark and compulsory licensing, and which were
in effect when respondent filed its appeal) specify that the Intellectual Property Office "shall not
be bound by the strict technical rules of procedure and evidence. "26

Rule 2, Section 6 of these Regulations provides:

Section 6 Rules of Procedure to be Followed in the Conduct of Hearing of Inter Partes Cases

In the conduct of hearing of inter partes cases, the rules of procedure herein contained shall be
primarily applied. The Rules of Court, unless inconsistent with these rules, may be applied in
suppletory character, provided, however, that the Director or Hearing Officer shall not be bound
by the strict technical rules of procedure and evidence therein contained but may adopt, in the
absence of any applicable rule herein, such mode of proceedings which is consistent with the
requirements of fair play and conducive to the just, speedy and inexpensive disposition of cases,
and which will give the Bureau the greatest possibility to focus on the technical grounds or issues
before it. (Emphasis supplied)

This rule is in keeping with the general principle that administrative bodies are not strictly bound
by technical rules of procedure:

[A]dministrative bodies are not bound by the technical niceties of law and procedure and the rules
obtaining in courts of law. Administrative tribunals exercising quasi-judicial powers are unfettered
by the rigidity of certain procedural requirements, subject to the observance of fundamental and
essential requirements of due process in justiciable cases presented before them. In administrative
proceedings, technical rules of procedure and evidence are not strictly applied and administrative
due process cannot be fully equated with due process in its strict judicial sense.27

In conformity with this liberality, Section 5(b) of the Intellectual Property Office's Uniform Rules
on Appeal expressly enables appellants, who failed to comply with Section 4' s formal
requirements, to subsequently complete their compliance:

Section 5. Action on the Appeal Memorandum - The Director General shall:

a) Order the adverse party if any, to file comment to the appeal memorandum within thirty (30)
days from notice and/or order the Bureau Director to file comment and/or transmit the records
within thirty (30) days from notice; or

b) Order the appellant/appellants to complete the formal requirements mentioned in Section 4

hereof;

c) Dismiss the appeal for being patently without merit, Provided, that the dismissal shall be outright
if the appeal is not filed within the prescribed period or for failure of the appellant to pay the
required fee within the period of appeal. (Emphasis supplied)

Given these premises, it was an error for the Director General of the Intellectual Property Office
to have been so rigid in applying a procedural rule and dismissing respondent's appeal.

Petitioner-in her pleadings before this Court-and Director General Cristobal-in his September 2,
2008 Order-cite Decisions of this Court (namely: Philippine Public School Teachers Association
v. Heirs of lligan28 and Philippine Airlines, Inc. v. Flight Attendants & Stewards Association of
the Philippines29) to emphasize the need for precise compliance with the rule on appending a
certification of non-forum shopping.

Philippine Public School Teachers Association states:

Under Section 3 of the same Rule, failure to comply shall be sufficient ground for the dismissal of
the petition. The rule on certification against forum shopping is intended to prevent the actual filing
of multiple petitions/complaints involving identical causes of action, subject matter and issues in
other tribunals or agencies as a form of forum shopping. This is rooted in the principle that a party-
litigant should not be allowed to pursue simultaneous remedies in different forums, as this practice
is detrimental to orderly judicial procedure. Although not jurisdictional, the requirement of a
certification of non-forum shopping is mandatory. The rule requires that a certification against
forum shopping J should be appended to or incorporated in the initiatory pleading filed before the
court. The rule also requires that the party, not counsel, must certify under oath that he has not
commenced any other action involving the same issue in the court or any other tribunal or agency.

The requirement that the certification of non-forum shopping should be executed and signed by
the plaintiff or principal means that counsel cannot sign said certification unless clothed with
special authority to do so. The reason for this is that the plaintiff or principal knows better than
anyone else whether a petition has previously been filed involving the same case or substantially
the same issues. Hence, a certification signed by counsel alone is defective and constitutes a valid
cause for dismissal of the petition. In the case of natural persons, the Rule requires the parties
themselves to sign the certificate of non-forum shopping. However, in the case of the corporations,
the physical act of signing may be performed, on behalf of the corporate entity, only by specifically
authorized individuals for the simple reason that corporations, as artificial persons, cannot
personally do the task themselves. It cannot be gainsaid that obedience to the requirements of
procedural rules is needed if we are to expect fair results therefrom. Utter disregard of the rules
cannot justly be rationalized by harking on the policy of liberal construction.30
Philippine Airlines, for its part, states that:

The required certification of non-forum shopping must be valid at the time of filing of the petition
.. An invalid certificate cannot be remedied by the subsequent submission of a Secretary's
Certificate that vests authority only after the petition had been filed. 31

As pointed out by the Court of Appeals, 32 however, the strict posturing of these Decisions are not
entirely suitable for this case. Both Philippine Public School Teachers Association and Philippine
Airlines involved petitions filed before the Court of Appeals, that is, petitions in judicial
proceedings. What is involved here is a quasi-judicial proceeding that is "unfettered by the strict
application of the technical rules of procedure imposed in judicial proceedings."33

In any case, even in judicial proceedings, this Court has rebuked an overly strict application of the
rules pertaining to certifications of non-forum shopping.1âwphi1

In Pacquing v. Coca-Cola Philippines, Inc.:34

[T]he rules on forum shopping, which were designed to promote and facilitate the orderly
administration of justice, should not be interpreted with such absolute literalness as to subvert its
own ultimate and legitimate objective. Strict compliance with the provision regarding the
certificate of non-forum shopping underscores its mandatory nature in that the certification cannot
be altogether dispensed with or its requirements completely disregarded. It does not, however,
prohibit substantial compliance therewith under justifiable circumstances, considering especially
that although it is obligatory, it is notjurisdictional.35

Thus, in Pacquing, this Court held that while, as a rule, "the certificate of non-forum shopping
must be signed by all the plaintiffs in a case and the signature of only one of them is insufficient,"36
still, "when all the petitioners share a common interest and invoke a common cause of action or
defense, the signature of only one of them in the certification against forum shopping substantially
complies with the rules."37

Likewise, in Peak Ventures Corp. v. Heirs of Villareal, 38 we did not consider as fatally defective
the fact that a petition for review on certiorari's verification and certification of non-forum
shopping was dated November 6, 2008, while the petition itself was dated November 10, 2008.39
We state:

With respect to the requirement of a certification of non-forum shopping, "[t]he fact that the
[Rules] require strict compliance merely underscores its mandatory nature that it cannot be
dispensed with or its requirements altogether disregarded, but it does not thereby interdict
substantial compliance with its provisions under justifiable circumstances. "40

Even petitioner's own cited case, Philippine Public School Teachers Association v. Heirs of
lligan,41 repudiates her position. The case involved a petition for review filed before the Court of
Appeals by the Philippine Public School Teachers Association.42 The verification and
certification of nonforum shopping of the petition was signed by a certain Ramon G. Asuncion, Jr.
without an accompanying board resolution or secretary's certificate attesting to his authority to
sign. The petition for review was dismissed by the Court of Appeals "for being 'defective in
substance,' there being no proof that Asuncion had been duly authorized by [the Philippine Public
School Teachers Association] to execute and file a certification of nonforum shopping in its
behalf."43

This Court acknowledged that, in the strict sense, the Court of Appeals was correct: "The ruling
of the [Court of Appeals] that [the Philippine Public School Teachers Association] was negligent
when it failed to append in its petition a board resolution authorizing petitioner Asuncion to sign
the certification of non-forum shopping in its behalf is correct.'44

However, this Court did not end at that. It went on to state that "a strict application of [the rule] is
not called for": 45

We have reviewed the records, however, and find that a strict application of Rule 42, in relation to
Section 5, Rule 7 of the Revised Rules of Court is not called for. As we held in Huntington Steel
Products, Inc. v. National Labor Relations Commission, while the requirement of strict compliance
underscores the mandatory nature of the rule, it does not necessarily interdict substantial
compliance with its provisions under justifiable circumstances. The rule should not be interpreted
with such absolute literalness as to subvert its own ultimate and legitimate objective which is the
goal of all rules of procedure, that is, to achieve justice as expeditiously as possible. A liberal
application of the rule may be justified where special circumstances or compelling reasons are
present.

Admittedly, the authorization of petitioner PPSTA's corporate secretary was submitted to the
appellate court only after petitioners received the comment of respondents. However, in view of
the peculiar circumstances of the present case and in the interest of substantial justice, and
considering further that petitioners submitted such authorization before the [Court of Appeals]
resolved to dismiss the petition on the technical ground, we hold that, the procedural defect may
be set aside pro hac vice. Technical rules of procedure should be rules enjoined to facilitate the
orderly administration of justice. The liberality in the application of rules of procedure may not be
invoked if it will result in the wanton disregard of the rules or cause needless delay in the
administration of justice. Indeed, it cannot be gainsaid that obedience to the requirements of
procedural rule is needed if we are to expect fair results therefrom.46 (Emphasis supplied)

The "peculiar circumstances"47 in Philippine Public School Teachers Association pertained to a

finding that the signatory of the verification and certification of non-forum shopping, Ramon G.
Asuncion, Jr., was "the former Acting General Manager"48 of the Philippine Public School
Teachers Association and was, thus, previously "authorized to sign a verification and certification
of non-forum shopping"49 on behalf of the Association. By the time the Association actually filed
its petition before the Court of Appeals, however, his authority as the Acting General Manager had
ceased, and the Association's Board of Directors needed to give him specific authority to sign a
certification of non-forum shopping:

We agree with respondents' contention that when they filed their complaint in the MTC, they
impleaded petitioner Asuncion as party defendant in his capacity as the Acting General Manager
of petitioner PPST A. As such officer, he was authorized to sign a verification and certification of
non-forum shopping. However, he was no longer the Acting General Manager when petitioners
filed their petition in the CA, where he was in fact referred to as "the former Acting General
Manager." Thus, at the time the petition was filed before the CA, petitioner Asuncion's authority
to sign the verification and certification of non-forum shopping for and in behalf of petitioner
PPSTA ceased to exist. There was a need for the board of directors of petitioner PPS TA to
authorize him to sign the requisite certification of non-forum shopping, and to append the same to
their petition as Annex thereof. 50

We find this case to be attended by analogous circumstances. As pointed out by the Court of
Appeals, respondent's counsel, Balgos and Perez, has been representing respondent (and signing
documents for it) "since the [original] Petition for Cancellation of Letter Patent No. UM-7789 was
filed." 51 Thus, its act of signing for respondent, on appeal before the Director General of the
Intellectual Property Office, was not an aberration. It was a mere continuation of what it had
previously done.

It is reasonable, therefore-consistent with the precept of liberally applying procedural rules in

administrative proceedings, and with the room allowed by jurisprudence for substantial
compliance with respect to the rule on certifications of non-forum shopping-to construe the error
committed by respondent as a venial lapse that should not be fatal to its cause. We see here no
"wanton disregard of the rules or [the risk of] caus[ing] needless delay in the administration of
justice."52 On the contrary, construing it as such will enable a full ventilation of the parties'
competing claims. As with Philippine Public School Teachers Association, we consider it
permissible to set aside, pro hac vice, the procedural defect. 53 Thus, we sustain the ruling of the
Court of Appeals.

WHEREFORE, the Petition is DENIED. The assailed January 8, 2009 Decision and the March
2, 2009 Resolution of the Court of Appeals in CA-G.R. SP No. 105595 are AFFIRMED.

SO ORDERED.

G.R. No. 188996

SERI SOMBOONSAKDIKUL, Petitioner

vs.
ORLANE S.A., Respondent

DECISION

JARDELEZA, J.:

Assailed in this petition is the Decision1 of the Court of Appeals (CA) in CA-G.R. SP No. 105229
dated July 14, 2009 which affirmed the decision of the Director General of the Intellectual Property
Office (IPO) denying the application for the mark "LOLANE."

Facts
On September 23, 2003, petitioner Seri Somboonsakdikul (petitioner) filed an application for
registration2 of the mark LOLANE with the IPO for goods3 classified under Class 3 (personal
care products) of the International Classification of Goods and Services for the Purposes of the
Registration of Marks (International Classification of Goods).4 Orlane S.A. (respondent) filed an
opposition to petitioner's application, on the ground that the mark LOLANE was similar to
ORLANE in presentation, general appearance and pronunciation, and thus would amount to an
infringement of its mark.5 Respondent alleged that: (1) it was the rightful owner of the ORLANE
mark which was first used in 1948; (2) the mark was earlier registered in the Philippines on July
26, 1967 under Registration No. 129961 for the following goods:6

x x x perfumes, toilet water, face powders, lotions, essential oils, cosmetics, lotions for the hair,
dentrifices, eyebrow pencils, make-up creams, cosmetics & toilet preparations under Registration
No. 12996.7

and (3) on September 5, 2003, it filed another application for use of the trademark on its additional
products:

x x x toilet waters; revitalizing waters, perfumes, deodorants and body deodorants, anti-
perspiration toiletries; men and women perfume products for face care and body care; face, eye,
lips, nail, hand make-up products and make-up removal products, towels impregnated with
cosmetic lotions; tanning and instant tanning sunproducts, sunprotection products, (not for medical
use), after-suncosmetic products; cosmetic products; slimming cosmetic aids; toiletries; lotions,
shampoos and hair care products; shave and after shave products, shaving and hair removing
products; essential oils; toothpastes; toiletry, cosmetic and shaving kits for travel, filled or fitted
vanity-cases[.]8

Respondent adds that by promotion, worldwide registration, widespread and high standard use, the
mark had acquired distinction, goodwill, superior quality image and reputation and was now well-
known.9 Imputing bad faith on the petitioner, respondent claimed that LOLANE' s first usage was
only on August 19, 2003.10

In his answer,11 petitioner denied that the LOLANE mark was confusingly similar to the mark
ORLANE. He averred that he was the lawful owner of the mark LOLANE which he has used for
various personal care products sold worldwide. He alleged that the first worldwide use of the mark
was in Vietnam on July 4, 1995. Petitioner also alleged that he had continuously marketed and
advertised Class 3 products bearing LOLANE mark in the Philippines and in different parts of the
world and that as a result, the public had come to associate the mark with him as provider of quality
personal care products.12

Petitioner maintained that the marks were distinct and not confusingly similar either under the
dominancy test or the holistic test. The mark ORLANE was in plain block upper case letters while
the mark LOLANE was printed in stylized word with the second letter L and the letter A co-joined.
Furthermore, the similarity in one syllable would not automatically result in confusion even if used
in the same class of goods since his products always appear with Thai characters while those of
ORLANE always had the name Paris on it. The two marks are also pronounced differently. Also,
even if the two marks contained the word LANE it would not make them confusingly similar since
the IPO had previously allowed the co-existence of trademarks containing the syllable "joy" or
"book" and that he also had existing registrations and pending applications for registration in other
countries.13

The Bureau of Legal Affairs (BLA) rejected petitioner's application in a Decision14 dated
February 27, 2007, finding that respondent's application was filed, and its mark registered, much
earlier.15 The BLA ruled that there was likelihood of confusion based on the following
observations: (1) ORLANE and LOLANE both consisted of six letters with the same last four
letters - LANE; (2) both were used as label for similar products; (3) both marks were in two
syllables and that there was only a slight difference in the first syllable; and (4) both marks had the
same last syllable so that if these marks were read aloud, a sound of strong similarity would be
produced and such would likely deceive or cause confusion to the public as to the two
trademarks.16

Petitioner filed a motion for reconsideration but this was denied by the Director of the BLA on
May 7, 2007.17 The BLA ruled that the law did not require the marks to be so identical as to
produce actual error or mistake as the likelihood of confusion was enough. The BLA also found
that the dominant feature in both marks was the word LANE; and that the marks had a strong
visual and aural resemblance that could cause confusion to the buying public. This resemblance
was amplified by the relatedness of the goods.18

On appeal, the Director General of the IPO affirmed the Decision of the BLA Director. Despite
the difference in the first syllable, there was a strong visual and aural resemblance since the marks
had the same last four letters, i.e., LANE, and such word is pronounced in this jurisdiction as in
"pedestrian lane."19 Also, the mark ORLANE is a fanciful mark invented by the owner for the
sole purpose of functioning as a trademark and is highly distinctive. Thus, the fact that two or more
entities would accidentally adopt an identical or similar fanciful mark was too good to be true
especially when they dealt with the same goods or services.20 The Director General also noted
that foreign judgments invoked by petitioner for the grant of its application are not judicial
precedents.21

Thus, petitioner filed a petition for review22 before the CA arguing that there is no confusing
similarity between the two marks. Petitioner maintained that LANE is not the dominant feature of
the mark and that the dominancy test did not apply since the trademarks are only plain word marks
and the dominancy test presupposes that the marks involved are composite marks.23 Petitioner
pointed out that the IPO had previously allowed the mark GIN LANE under Registration No. 4-
2004-006914 which also involved products under Class 3.24 While petitioner admitted that foreign
judgments are not judicial precedents, he argued that the IPO failed to recognize relevant foreign
judgments, i.e., the Australian Registrar of Trademarks and the IPO of Singapore which ruled that
there was no confusing similarity between the marks LOLANE and ORLANE.25 Lastly, the
Director General should have deferred to the findings of the Trademark Examiner who made a
substantive examination of the application for trademark registration, and who is an expert in the
field and is in the best position to determine whether there already exists a registered mark or mark
for registration. Since petitioner's application for registration of the mark LOLANE proceeded to
allowance and publication without any adverse citation of a prior confusingly similar mark, this
meant that the Trademark Examiner was of the view that LO LANE was not confusingly similar
to ORLANE.26

The CA Ruling

The CA denied the petition and held that there exists colorable imitation of respondent's mark by
LOLANE.27

The CA accorded due respect to the Decision of the Director General and ruled that there was
substantial evidence to support the IPO's findings of fact. Applying the dominancy test, the CA
ruled that LOLANE' s mark is confusingly or deceptively similar to ORLANE. There are
predominantly striking similarities in the two marks including LANE, with only a slight difference
in the first letters, thus the two marks would likely cause confusion to the eyes of the public. The
similarity is highlighted when the two marks are pronounced considering that both are one word
consisting of two syllables. The CA ruled that when pronounced, the two marks produce similar
sounds.28 The CA did not heed petitioner's contention that since the mark ORLANE is of French
origin, the same is pronounced as "ORLAN." Filipinos would invariably pronounce it as "OR-
LEYN."29 The CA also noted that the trademark ORLANE is a fanciful name and petitioner was
not able to explain why he chose the word LOLANE as trademark for his personal care products.
Thus, the only logical conclusion is that he would want to benefit from the established reputation
and goodwill of the ORLANE mark.30

The CA rejected petitioner's assertion that his products' cheaper price and low-income market
eliminates the likelihood of confusion. Low-income groups, and even those who usually purchased
ORLANE products despite the higher cost, may be led to believe that LOLANE products are low-
end personal care products also marketed by respondent.31

The CA upheld the applicability of the dominancy test in this case. According to the CA, the
dominancy test is already recognized and incorporated in Section 155.1 of Republic Act No. 8293
(RA 8293), otherwise known as the Intellectual Property Code of the Philippines.32 Citing
McDonald's Corporation v. MacJoy Fastfood Corporation,33 the CA ruled that the dominancy
test is also preferred over the holistic test. This is because the latter relies only on the visual
comparison between two trademarks, whereas the dominancy test relies not only on the visual, but
also on their aural and connotative comparisons, and their overall impressions created.34
Nonetheless, the CA stated that there is nothing in this jurisdiction dictating that the dominancy
test is applicable for composite marks.35

The CA was not swayed by the alleged favorable judgment by the IPO in the GIN LANE
application, ruling that in trademark cases, jurisprudential precedents should be applied only to a
case if they are specifically in point.36 It also did not consider the ruling of the IPOs in Australia,
South Africa, Thailand and Singapore which found no confusing similarity between the marks
LOLANE and ORLANE, stating that foreign judgments do not constitute judicial precedent in this
jurisdiction.37

Finally, the CA did not give merit to petitioner's contention that the Director General should have
deferred to the findings of the Trademark Examiner. According to the CA, the proceedings before
the Trademark Examiner are ex-parte,38 and his findings are merely prima facie. Whatever his
decision may be is still subject to review and/or appeal.39

The Petition40

Petitioner maintains that the CA erred in its interpretation of the dominancy test, when it ruled that
the dominant feature of the contending marks is the suffix "LANE."41 The CA failed to consider
that in determining the dominant portion of a mark, significant weight must be given to whether
the buyer would be more likely to remember and use one part of a mark as indicating the origin of
the goods.42 Thus, that part which will likely make the most impression on the ordinary viewer
will be treated as the dominant portion of conflicting marks and given greater weight in the
comparison.43

Petitioner argues that both LOLANE and ORLANE are plain word marks which are devoid of
features that will likely make the most impression on the ordinary viewer. If at all, the very word
marks themselves, LOLANE and ORLANE are each to be regarded as dominant features.44
Moreover, the suffix LANE is a weak mark, being "in common use by many other sellers in the
market. "45 Thus, LANE is also used in the marks SHELLANE and GIN LANE, the latter covering
goods under Class 3. Moreover, the two marks are aurally different since respondent's products
originate from France and is read as "OR-LAN" and not "OR-LEYN."46

Petitioner also claims that the CA completely disregarded the holistic test, thus ignoring the
dissimilarity of context between LOLANE and ORLANE. Assuming that the two marks produce
similar sounds when pronounced, the differences in marks in their entirety as they appear in their
respective product labels should still be the controlling factor in determining confusing
similarity.47

Besides, there has been no explicit declaration abandoning the holistic test.48 Thus, petitioner
urges us to go beyond the similarities in spelling and instead consider how the marks appear in
their respective labels, the dissimilarities in the size and shape of the containers, their color, words
appearing thereon and the general appearance,49 hence: (1) the commonality of the marks
ORLANE and LOLANE starts from and ends with the four-letter similarity-LANE and nothing
else;50 (2) ORLANE uses "safe" or conventional colors while LOLANE uses loud or psychedelic
colors and designs with Thai characters;51 and (3) ORLANE uses the term "Paris," indicating the
source of origin of its products.52

Petitioner likewise claims that consumers will be more careful in their choice because the goods
in question are directly related to personal hygiene and have direct effects on their well-being,
health and safety.53 Moreover, with the huge price difference between ORLANE and LOLANE
products, relevant purchasers are less likely to be confused.54

Finally, petitioner notes that respondent has neither validly proven nor presented sufficient
evidence that the mark ORLANE is in actual commercial use in the Philippines. Respondent failed
to allege in any of its pleadings submitted to the IPO's BLA and the IPO Director General the
names of local outlets that products bearing the mark ORLANE are being marketed or sold to the
general consuming public.55
Respondent's Comment56

Respondent reiterates the decisions of the CA and the IPO.57 It maintains that ORLANE is entitled
to protection under RA 8293 since it is registered with the IPO with proof of actual use.58
Respondent posits that it has established in the world59 and in the Philippines an image and
reputation for manufacturing and selling quality beauty products. Its products have been sold in
the market for 61 years and have been used in the Philippines since 1972.60 Thus, to allow
petitioner's application would unduly prejudice respondent's right over its registered trademark.61
Lastly, respondent argues that decisions of administrative agencies such as the IPO shall not be
disturbed by the courts, absent any showing that the former have acted without or in excess of their
jurisdiction, or with grave abuse of discretion.62

Issue

We resolve the issue of whether there is confusing similarity between ORLANE and LOLANE
which would bar the registration of LOLANE before the IPO.

Our Ruling

We find that the CA erred when it affirmed the Decision of the IPO.

While it is an established rule in administrative law that the courts of justice should respect the
findings of fact of administrative agencies, the courts may not be bound by such findings of fact
when there is absolutely no evidence in support thereof or such evidence is clearly, manifestly and
patently insubstantial; and when there is a clear showing that the administrative agency acted
arbitrarily or with grave abuse of discretion or in a capricious and whimsical manner, such that its
action may amount to an excess or lack of jurisdiction.63 Moreover, when there is a showing that
the findings or conclusions, drawn from the same pieces of evidence, were arrived at arbitrarily or
in disregard of the evidence on record, they may be reviewed by the courts.64 Such is the case
here.

There is no colorable imitation between the marks LOLANE and ORLANE which would lead to
any likelihood of confusion to the ordinary purchasers.

A trademark is defined under Section 121.1 of RA 8293 as any visible sign capable of
distinguishing the goods. It is susceptible to registration if it is crafted fancifully or arbitrarily and
is capable of identifying and distinguishing the goods of one manufacturer or seller from those of
another.65 Thus, the mark must be distinctive.66 The registrability of a trademark is governed by
Section 123 of RA 8293. Section 123.1 provides:

Section 123. Registrability. -

123 .1. A mark cannot be registered if it:

xxx
d. Is identical with a registered mark belonging to a different proprietor or a mark with an earlier
filing or priority date, in respect of:

i. The same goods or services, or

ii. Closely related goods or services, or

iii. If it nearly resembles such a mark as to be likely to deceive or cause confusion;

e. Is identical with, or confusingly similar to, or constitutes a translation of a mark which is

considered by the competent authority of the Philippines to be well-known internationally and in
the Philippines, whether or not it is registered here, as being already the mark of a person other
than the applicant for registration, and used for identical or similar goods or services: Provided,
That in determining whether a mark is well-known, account shall be taken of the knowledge of the
relevant sector of the public, rather than of the public at large, including knowledge in the
Philippines which has been obtained as a result of the promotion of the mark;

xxx

In Mighty Corporation v. E. & J Gallo Winery,67 we laid down the

requirements for a finding of likelihood of confusion, thus:

There are two types of confusion in trademark infringement. The first is "confusion of goods"
when an otherwise prudent purchaser is induced to purchase one product in the belief that he is
purchasing another, in which case defendant's goods are then bought as the plaintiffs and its poor
quality reflects badly on the plaintiffs reputation. The other is "confusion of business" wherein the
goods of the parties are different but the defendant's product can reasonably (though mistakenly)
be assumed to originate from the plaintiff, thus deceiving the public into believing that there is
some connection between the plaintiff and defendant which, in fact, does not exist.

In determining the likelihood of confusion, the Court must consider: [a] the resemblance
between the trademarks; [b] the similarity of the goods to which the trademarks are
attached; [c] the likely effect on the purchaser and [d] the registrant's express or implied
consent and other fair and equitable considerations. (Citations omitted, emphasis supplied.)68

While Mighty Corporation enumerates four requirements, the most essential requirement, to our
mind, for the determination of likelihood of confusion is the existence of resemblance between the
trademarks, i.e., colorable imitation. Absent any finding of its existence, there can be no likelihood
of confusion. Thus we held:

Whether a trademark causes confusion and is likely to deceive the public hinges on "colorable
imitation" which has been defined as "such similarity in form, content, words, sound, meaning,
special arrangement or general appearance of the trademark or trade name in their overall
presentation or in their essential and substantive and distinctive parts as would likely mislead or
confuse persons in the ordinary course of purchasing the genuine article." (Citations omitted.)69
We had the same view in Emerald Garment Manufacturing Corporation v. Court of Appeals,70
where we stated:

Proceeding to the task at hand, the essential element of infringement is colorable imitation.
This term has been defined as "such a close or ingenious imitation as to be calculated to deceive
ordinary purchasers, or such resemblance of the infringing mark to the original as to deceive an
ordinary purchaser giving such attention as a purchaser usually gives, and to cause him to purchase
the one supposing it to be the other."

Colorable imitation does not mean such similitude as amounts to identity. Nor does it require that
all the details be literally copied. x x x (Citation omitted, emphasis supplied.)71

In determining colorable imitation, we have used either the dominancy test or the holistic or totality
test. The dominancy test considers the similarity of the prevalent or dominant features of the
competing trademarks that might cause confusion, mistake, and deception in the mind of the
purchasing public. More consideration is given on the aural and visual impressions created by the
marks on the buyers of goods, giving little weight to factors like process, quality, sales outlets, and
market segments.72 On the other hand, the holistic test considers the entirety of the marks as
applied to the products, including the labels and packaging, in determining confusing similarity.
The focus is not only on the predominant words but also on the other features appearing on the
labels.73

The CA's use of the dominancy test is in accord with our more recent ruling in UFC Philippines,
Inc. (now merged with Nutria-Asia, Inc. as the surviving entity) v. Barrio Fiesta Manufacturing
Corporation.74 In UFC Philippines, Inc., we relied on our declarations in McDonald's
Corporation v. L.C. Big Mak Burger, Inc.,75 Co Tiong Sa v. Director of Patents,76 and Societe
Des Produits Nestle, S.A. v. Court of Appeals77 that the dominancy test is more in line with the
basic rule in trademarks that confusing similarity is determined by the aural, visual and connotative
and overall impressions created by the marks. Thus, based on the dominancy test, we ruled that
there is no confusing similarity between "PAPA BOY & DEVICE" mark, and "PAPA
KETSARAP" and "PAPA BANANA CATSUP."

While there are no set rules as what constitutes a dominant feature with respect to trademarks
applied for registration, usually, what are taken into account are signs, color, design, peculiar shape
or name, or some special, easily remembered earmarks of the brand that readily attracts and catches
the attention of the ordinary consumer.78 In UFC Philippines, Inc., what we considered as the
dominant feature of the mark is the first word/figure that catches the eyes or that part which appears
prominently to the eyes and ears.79

However, while we agree with the CA's use of the dominancy test, we arrive at a different
conclusion. Based on the distinct visual and aural differences between LOLANE and ORLANE,
we find that there is no confusing similarity between the two marks.

The suffix LANE is not the dominant feature of petitioner's mark. Neither can it be considered as
the dominant feature of ORLANE which would make the two marks confusingly similar.
First, an examination of the appearance of the marks would show that there are noticeable
differences in the way they are written or printed as shown below:80

As correctly argued by petitioner in his answer before the BLA, there are visual differences
between LOLANE and ORLANE since the mark ORLANE is in plain block upper case letters
while the mark LOLANE was rendered in stylized word with the second letter L and the letter A
co-joined.81

Second, as to the aural aspect of the marks, LOLANE and ORLANE do not sound alike. Etepha
v. Director of Patents, et al.82 finds application in this case. In Etepha, we ruled that there is no
confusing similarity between PERTUSSIN and ATUSSIN. The Court considered among other
factors the aural differences between the two marks as follows:

5. As we take up Pertussin and Atussin once again, we cannot escape notice of the fact that the
two words do not sound alike-when pronounced. There is not much phonetic similarity between
the two. The Solicitor General well-observed that in Pertussin the pronunciation of tbe prefix "Per",
whether correct or incorrect, includes a combination of three letters

P, e and r; whereas, in Atussin the whole starts with the single letter A added to suffix
"tussin".1âwphi1 Appeals to the ear are dissimilar. And this, because in a word combination, the
part that comes first is the most pronounced. An expositor of the applicable rule here is the decision
in the Syrocol-Cheracol controversy. There, the ruling is that trademark Syrocol (a cough medicine
preparation) is not confusedly similar to trademark Cheracol (also a cough medicine preparation).
Reason: the two words "do not look or sound enough alike to justify a holding of trademark
infringement", and the "only similarity is in the last syllable, and that is not uncommon in names
given drug compounds". (Citation omitted, emphasis supplied.)83

Similar to Etepha, appeals to the ear in pronouncing ORLANE and LOLANE are dissimilar. The
first syllables of each mark, i.e., OR and LO do not sound alike, while the proper pronunciation of
the last syllable LANE-"LEYN" for LOLANE and "LAN" for ORLANE, being of French origin,
also differ. We take exception to the generalizing statement of the Director General, which was
affirmed by the CA, that Filipinos would invariably pronounce ORLANE as "ORLEYN." This is
another finding of fact which has no basis, and thus, justifies our reversal of the decisions of the
IPO Director General and the CA. While there is possible aural similarity when certain sectors of
the market would pronounce ORLANE as "ORLEYN," it is not also impossible that some would
also be aware of the proper pronunciation--especially since, as respondent claims, its trademark
ORLANE has been sold in the market for more than 60 years and in the Philippines, for more than
40 years.84

Respondent failed to show proof that the suffix LANE has registered in the mind of consumers
that such suffix is exclusively or even predominantly associated with ORLANE products. Notably
and as correctly argued by petitioner, the IPO previously allowed the registration of the mark GIN
LANE for goods also falling under Class 3, i.e., perfume, cologne, skin care preparations, hair care
preparations and toiletries.85

We are mindful that in the earlier cases of Mighty Corporation and Emerald, despite a finding that
there is no colorable imitation, we still discussed the nature of the goods using the trademark and
whether the goods are identical, similar, competing or related. We need not belabor a similar
discussion here considering that the essential element in determining likelihood of confusion, i.e.,
colorable imitation by LO LANE of the mark ORLANE, is absent in this case. Resemblance
between the marks is a separate requirement from, and must not be confused with, the requirement
of a similarity of the goods to which the trademarks are attached. In Great White Shark Enterprises,
Inc v. Caralde, Jr.,86 after we ruled that there was no confusing similarity between Great White
Shark's "GREG NORMAN LOGO" and Caralde's "SHARK & LOGO" mark due to the visual and
aural dissimilarities between the two marks, we deemed it unnecessary to resolve whether Great
White Shark's mark has gained recognition as a well-known mark.

Finding that LOLANE is not a colorable imitation of ORLANE due to distinct visual and aural
differences using the dominancy test, we no longer find it necessary to discuss the contentions of
the petitioner as to the appearance of the marks together with the packaging, nature of the goods
represented by the marks and the price difference, as well as the applicability of foreign judgments.
We rule that the mark LOLANE is entitled to registration.

WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals dated July 14,
2009 is REVERSED and SET ASIDE. Petitioner's application of the mark LOLANE for goods
classified under Class 3 of the International Classification of Goods is GRANTED.

SO ORDERED.

G.R. No. 197482

FORIETRANS MANUFACTURING CORP., AGERICO CALAQUIAN and ALVIN

MONTERO, Petitioners
vs
DAVIDOFF ET. CIE SA & JAPAN TOBACCCO, INC. (represented by SYCIP SALAZAR
HERNANDEZ & GATMAITAN LAW OFFICE thru ATTY. RONALD MARK LLENO),
Respondents

DECISION

JARDELEZA, J.:

This is a Petition for Review on Certiorari1 assailing the March 31, 2011 Decision2 and July 5,
2011 Resolution3 of the Court of Appeals (CA) in CA-G.R. SP No. 94587.4 The CA reversed and
set aside the February 10, 20065 and March 27, 20066 Resolutions of the Secretary of Justice
which found no probable cause to charge petitioners for the crimes of infringement and false
designation of origin.
I

Davidoff Et. Cie SA (Davidoff) and Japan Tobacco, Inc. (JTI) [collectively, respondents] are non-
resident foreign corporations organized and existing under the laws of Switzerland and Japan,
respectively.7 They are represented in the Philippines by law firm SyCip Salazar Hernandez &
Gatmaitan (SyCip Law Firm). It is authorized under a special power of attorney to maintain and
prosecute legal actions against any manufacturers, local importers and/or distributors, dealers or
retailers of counterfeit products bearing Davidoff s and JTI' s trademarks or any products infringing
their trademarks.8 Respondents also retained Business Profiles, Inc. (BPI) as their private
investigator in the Philippines.9

Meanwhile, petitioner Forietrans Manufacturing Corporation (FMC) is a domestic corporation

with principal address at Lots 5 and 7, Angeles Industrial Park, Special Economic Zone, Barangay
Calibutbut, Bacolor, Pampanga.10

BPI reported to respondents that "there were counterfeit Davidoff and JTI products, or products
bearing colorable imitation of Davidoff and JTI products, or which are confusingly or deceivingly
similar to Davidoff and JTI registered trademarks, being manufactured and stored" in FMC' s
warehouses.11 SyCip Law Firm then sought the assistance of the Criminal Investigation and
Detection Group (CIDG) of the Philippine National Police in securing warrants to search the
warehouses. Upon investigation, the CIDG confirmed the report of BPI. On August 4, 2004, PSI
Joel L. De Mesa (PSI De Mesa) of the CIDG filed four separate applications for search warrant
before the Regional Trial Court (RTC) of San Fernando, Pampanga. The applications were
docketed as Search Warrant (SW) Case Nos. 044, 045, 046, and 047 and raffled to Branch 42
presided by Judge Pedro M. Sunga, Jr. (Judge Sunga).12

In the applications, PSI De Mesa alleged that "he had been informed, concluded upon
investigation, and believed that [FMC] and/or its proprietors, directors, officers, employees, and/or
occupants of its premises stored counterfeit cigarettes" bearing: (a) the name "DAGETA

International" purported to be made in Germany; and (b) the name "DAG ET A" which was
confusingly similar to the Davidoff trademark, a product of Imperial Tobacco, Inc. Thus, he asked
the RTC to issue search warrants authorizing any peace officer to take possession of the subject
articles and bring them before the court.13

The RTC granted the applications. In the same afternoon of August 4, 2004, PSI Nathaniel Villegas
(PSI Villegas) and PSI Eric Maniego (PSI Maniego) implemented SW Nos. 044 and 046, while
PSI De Mesa implemented SW Nos. 045 and 047. During their separate raids, the CIDG teams
seized several boxes containing raw tobacco, cigarettes, cigarette packs, and cigarette reams
bearing the name DAGETA and DAGETA International. They also secured machineries,
receptacles, other paraphernalia, sales invoices and official receipts. Petitioner Agerico Calaquian,
president of FMC, was allegedly apprehended at the premises along with four Chinese nationals.14

With the seized items as evidence, three separate Complaint-Affidavits were filed before the Office
of the Provincial Prosecutor of San Fernando, Pampanga charging FMC and its employees· with
violation of Republic Act No. 8293, or the Intellectual Property Code of the Philippines (IP
Code).17 The charges are as follows:

1. LS. No. OCPSF-04-H-204718 (Davidoff infringement case) - Infringement under Section 155
in relation to Section 170 of the IP Code for the illegal manufacture of cigarettes bearing the DA
GET A label, with packaging very similar to the packaging of Davidoff's products and the script
"DAGETA" on the packs being deceivingly or confusingly similar to the registered mark
"DAVIDOFF."19

2. LS. No. OCPSF-04-H-2048 (False Designation of Origin) - False Designation of Origin under
Section 169 in relation to Section 170 of the IP Code for the illegal manufacture and/or storage of
cigarettes bearing the "DA GET A" label with an indication that such cigarettes were "MADE IN
GERMANY" though they were actually processed, manufactured and packaged in FMC's office
in Bacolor, Pampanga.20

3. LS. No. OCPSF-04-H-2226 (JTI infringement case)- Infringement under Section 155 in relation
to Section 170 of the IP Code for illegally manufacturing cigarettes which are deceivingly or
confusingly similar to, or almost the same as, the registered marks of JTI, which are the "MILD
SEVEN" and "MILD SEVEN LIGHTS" trademarks.21

Calaquian denied the charges against him and FMC. He countered that during the August 4, 2004
raid, the CIDG did not find counterfeit cigarettes within FMC's premises as nobody was there at
the time. He claimed that what the CIDG found were boxes of genuine Dageta and Dageta
International cigarettes imported from Germany for re-export to Taiwan and China. Calaquian
asserted that FMC is an eco-zone export enterprise registered with the Philippine Economic Zone
Authority (PEZA), and is duly authorized by the National Tobacco Administration to purchase,
import and export tobacco. FMC would not have passed PEZA's strict rules and close monitoring
if it had engaged in trademark infringement. Calaquian also denies that the CIDG made arrests on
the occasion of the raid.22

In a Joint Resolution23 dated September 12, 2005, Second Assistant Provincial Prosecutor Otto
B. Macabulos (Prosecutor Macabulos) dismissed the criminal complaints. Prosecutor Macabulos
found the affidavit of Jimmy Trocio (Trocio ), the informant/witness presented by PSI De Mesa in
his application for search warrants, clearly insufficient to show probable cause to search FMC's
premises for fake JTI or Davidoff products. Trocio did not even testify that FMC is manufacturing
fake Dageta cigarettes. The CIDG also did not find Dageta cigarettes during the raid, much less
fake JTI or Davidoff products. This should have been reason enough to quash the warrant.24
Further, Prosecutor Macabulos held that there is no confusing similarity between the Dageta and
Davidoff brands. Thus, he found the complaints for the Davidoff infringement and False
Designation of Origin to be without menit.25

Prosecutor Macabulos also expressed disbelief over the allegation that Mild Seven and Mild Seven
Lights were seized at FMC' s premises. He averred that the Joint Affidavit of Arrest/Seizure dated
August 6, 2004 never mentioned those cigarettes as among the items seized. Furthermore, there
was no proof that FMC manufactured fake Mild Seven cigarettes.26 Hence, he also dismissed the
JTI infringement case.
Respondents thereafter filed a Petition for Review before then Secretary of Justice Raul M.
Gonzalez (Secretary Gonzalez).

In his Resolution dated February 10, 2006, Secretary Gonzalez affirmed the ruling of Prosecutor
Macabulos. He opined that the seizure of Dageta and Dageta International cigarettes from FMC's
premises does not prove the commission of trademark infringement and false designation of origin.
It cannot be said that there is confusing similarity between Davidoff cigarettes, and Dageta and
Dageta International cigarettes. The difference in their names alone belies the alleged confusing
similarity.27

Secretary Gonzalez also affirmed the dismissal of the charge of false designation of origin. He
ruled that respondents failed to establish the falsity of the claim indicated in the labels of Dageta
and Dageta International cigarettes that they were made in Germany.28

In addition, Secretary Gonzalez declared that the alleged discovery and seizure of Mild Seven and
Mild Seven Lights in FMC's premises during the August 4 and 5, 2004 raids did not actually
happen. He agreed with Calaquian that if indeed the officers and employees of FMC were found
manufacturing or assisting or supervising the manufacture of Mild Seven and Mild Seven Lights
during the raids, surely the raiding team would have arrested them then and there; but as it was, no
arrest was apparently made. Secretary Gonzalez also agreed with Prosecutor Macabulos'
observation that Mild Seven and Mild Seven Lights cigarettes were never mentioned among the
items seized in the Joint Affidavit of Arrest/Seizure.29

Respondents moved for reconsideration. This, however, was denied with finality by Secretary
Gonzalez in his Resolution dated March 27, 2006. Respondents elevated the case to the CA via a
petition for certiorari.30

The CA reversed the resolutions of Secretary Gonzalez. It adjudged that Secretary Gonzalez acted
with grave abuse of discretion in affirming Prosecutor Macabulos' finding that no probable cause
exists against FMC.

The CA explained that Secretary Gonzalez assumed the function of the trial judge of calibrating
the evidence on record when he ruled that:

a. The seizure of Mild Seven and Mild Seven Lights during the raid did not happen as the arresting
officer failed to state in their Joint Affidavit that they seized the said cigarettes and if it were true
that they seized these cigarettes, the raiding team would have arrested Mr. Calaquian and four
Chinese nationals present during the raid; and

b. The seizure of Dageta and Dageta International cigarettes does not prove that FMC violated the
provisions on infringement of trademark and false designation of origin under the IP Code.31

According to the CA, the foregoing involve evidentiary matters which can be better resolved in
the course of the trial, and Secretary Gonzalez was not in a competent position to pass judgment
on substantive matters.32 Petitioners filed a partial motion for reconsideration, but this was denied
by the CA. Hence, this petition.
Petitioners fault the CA for interfering with the valid exercise by Prosecutor Macabulos and
Secretary Gonzalez of the executive power to determine the existence or non-existence of probable
cause in a preliminary investigation.33 Heavily relying on the Joint Resolution issued by
Prosecutor Macabulos, they allege that respondents did not present any proof to show probable
cause to indict them for the crimes of infringement and false designation of origin.34 They contend
that Secretary Gonzalez affirmed the Joint Resolution and dismissed the criminal complaints based
on insufficiency of evidence since there was no proof that FMC manufactured counterfeit Davidoff
or Mild Seven cigarettes. Petitioners also insist that no court can order the prosecution of a person
against whom the prosecutor does not find sufficient evidence to support at least aprimafacie
case.35

In their Comment, respondents counter that the petition should be dismissed for failure to show
any special and important reason for this Court to exercise its power of review. They claim that
the petition is a mere rehash of FMC's arguments before the CA.36 In any case, respondents aver
that the CA correctly reversed the Resolutions of Secretary Gonzalez. Secretary Gonzalez acted
without or in excess of jurisdiction and with grave abuse of discretion when he completely
disregarded the evidence attached to the criminal complaints and wrongfully assumed the function
of a trial judge in passing upon factual or evidentiary matters which are best decided after a full-
blown trial on the merits.37

We are now asked to resolve whether the CA erred in ruling that Secretary Gonzalez committed
grave abuse of discretion in finding no probable cause to charge petitioners with trademark
infringement and false designation of origin.

II

We deny the petition.

Probable cause, for purposes of filing a criminal acti01i, is defined as such facts as are sufficient
to engender a well-founded belief that a crime has been committed and that respondent is probably
guilty thereof.38 It does not require an inquiry into whether there is sufficient evidence to procure
conviction. Only prima facie evidence is required or that which is, on its face, good and sufficient
to establish a given fact, or the group or chain of facts constituting the party's claim or defense;
and which, if not rebutted or contradicted, will remain sufficient.39

The task of determining probable cause is lodged with the public prosecutor and ultimately, the
Secretary of Justice. Under the doctrine of separation of powers, courts have no right to directly
decide matters over which full discretionary authority has been delegated to the Executive Branch
of the Government. Thus, we have generally adopted a policy of non-interference with the
executive determination of probable cause.40 Where, however, there is a clear case of grave abuse
of discretion, courts are allowed to reverse the Secretary of Justice's findings and conclusions on
matters of probable cause.41

By grave abuse of discretion is meant such capricious and whimsical exercise of judgment as is
equivalent to lack of jurisdiction. The abuse of discretion is grave where the power is exercised in
an arbitrary or despotic manner by reason of passion or personal hostility and must be so patent
and gross as to amount to an evasion of positive duty or to a virtual refusal to perform the duty
enjoined by or to act at all in contemplation of the law.42

In Unilever Philippines, Inc. v. Tan, we have ruled that the dismissal of the complaint by the
Secretary of Justice, despite ample evidence to support a finding of probable cause, clearly
constitutes grave error and warrants judicial intervention and correction.43

Here, we find that Secretary Gonzalez committed grave abuse of discretion when he disregarded
evidence on record and sustained the Joint Resolution of Prosecutor Macabulos dismissing the
criminal complaints against petitioners.

Preliminarily, we find that Secretary Gonzalez should have set aside the Joint Resolution on the
ground that Prosecutor Macabulos did not undertake to determine the existence or non-existence
of probable cause for the purpose of filing a criminal case. Nowhere in the Joint Resolution is it
stated that the criminal complaints were dismissed on account of lack of probable cause for the
filing of a case against petitioners. Instead, Prosecutor Macabulos attacked Judge Sunga's finding
of probable cause for the issuance of search warrants in SW Nos. 044, 045, 046, 047 and 048. The
pertinent portions of the Joint Resolution read:

As can be seen supra, Trocio's affidavit was clearly insufficient to show probable cause to search
FMC's premises and look for fake JTI or [Davidoff] products.

Xxx

It would seem that reason had taken leave of the senses. The undeniable fact, standing out like a
sore thumb, is that the applicants never presented a single shred of proof to show probable cause
for the issuance of a search warrant. It would have been laughable if not for the fact that persons
were arrested and detained and properties were confiscated. As can be seen, what began as a search
for fake JTI and [Davidoff] products changed into a search for fake Dageta International cigarettes,
then shifted to a sea[r]ch for fake Dageta cigarettes confusingly similar to Davidoff and finally
shifted to fake mislabeled Dageta cigarettes. One can only wonder why the applications were
granted without a shred of proof showing probable cause. The exception against unreasonable
searches and seizures became the very weapon to commit abuses that the provision was designed
to prevent.44 (Emphasis supplied.)

The determination of probable cause by the judge .should not be confused with the determination
of probable cause by the prosecutor. The first is made by the judge to ascertain whether a warrant
of arrest should be issued against the accused, or for purposes of this case, whether a search warrant
should be issued. The second is made by the prosecutor during preliminary investigation to
determine whether a criminal case should be filed in court. The prosecutor has no power or
authority to review the determination of probable cause by the judge, just as the latter does not act
as the appellate court of the former.45 Here, as correctly argued by respondents, Prosecutor
Macabulos focused on the evidence submitted before Judge Sunga to support the issuance of
search warrants.46 He lost sight of the fact that as a prosecutor, he should evaluate only the
evidence presented before him during the preliminary investigation. With his preconceived notion
of the invalidity of the search warrants in mind,

Prosecutor Macabulos appeared to have completely ignored the evidence presented by respondents
during preliminary investigation.

The records show that a prima facie case for trademark infringement and false designation of origin
exists against petitioners.1âwphi1 Section 155 of the IP Code enumerates the instances when
infringement is committed, viz.:

Sec. 155. Remedies; Infringement. - Any person who shall, without the consent of the owner of
the registered mark:

15 5 .1. Use in commerce any reproduction, counterfeit, copy, or colorable imitation of a registered
mark or the same container or a dominant feature thereof in connection with the sale, offering for
sale, distribution, advertising of any goods or services including other preparatory steps necessary
to carry out the sale of any goods or services on or in connection with which such use is likely to
cause confusion, or to cause mistake, or to deceive; or

155.2. Reproduce, counterfeit, copy or colorably imitate a registered mark or a dominant feature
thereof and apply such reproduction, counterfeit, copy or colorable imitation to labels, signs,
prints, packages, wrappers, receptacles or advertisements intended to be used in commerce upon
or in connection with the sale, offering for sale, distribution, or advertising of goods or services on
or in connection with which such use is likely to cause confusion, or to cause mistake, or to
deceive, shall be liable in a civil action for infringement by the registrant for the remedies
hereinafter set forth: Provided, That the infringement takes place at the moment any of the acts
stated in Subsection 155.1 or this subsection are committed regardless of whether there is actual
sale of goods or services using the infringing material.

The essential element of infringement is that the infringing mark is likely to cause confusion.47 In
this case, the complaint-affidavit for the Davidoff infringement case alleged confusing similarity
between the cigarette packs of the authentic Davidoff cigarette and the sample Dageta cigarette
pack seized during the search of FMC's premises. Respondents submitted samples of the Davidoff
and Dageta cigarette packs during the preliminary investigation. They noted the following
similarities:48

Davidoff (Exhibit 1) Dageta (Exhibit 2)

Octagonal designed pack Octagonal designed pack ·

Black and red covering Black and red covering

Silver coloring of the tear tape and Silver coloring of the tear tape and
printing printing
 "Made in Germany by Reemtsman "Made m Germany under license of
under license of Davidoff & CIE SA, DAGETA & Tobacco LT"
Geneva"

Manufacturing Code imprinted on the Manufacturing Code imprinted on the

base of the pack base of the pack

Writing at the back says: "These
carefully selected tobaccos have been
skillfully blended to assure your
pleasure" with the signature of Zino
Davidoff
Writing at the back says: "These
specifically selected tobaccos have been
professionally blended to ensure highest
quality" with Chinese letters underneath
the name Dageta

Both Prosecutor Macabulos and Secretary Gonzalez disregarded the foregoing evidence of
respondents and confined their resolutions on the finding that there is an obvious difference
between the names "Davidoff' and "Dageta." Petitioners likewise rely on this finding and did not
bother to refute or explain the alleged similarities in the packaging of Davidoff and Dageta
cigarettes. While we agree that no confusion is created insofar as the names "Davidoff' and
"Dageta" are concerned, we cannot say the same with respect to the cigarettes' packaging. Indeed
there might be differences when the two are compared. We have, in previous cases, noted that
defendants in cases of infringement do not normally copy but only make colorable changes. The
most successful form of copying is to employ enough points of similarity to confuse the public,
with enough points of difference to confuse the courts.49

Similarly, in their Complaint-Affidavit in the JTI infringement case, respondents aver that JTI is
the registered owner of the Mild Seven and Mild

Seven Lights trademarks; and that FMC manufactures cigarettes deceivingly or confusingly
similar to, or almost the same as, the registered marks of JTJ. They asserted that FMC is not
authorized to manufacture, pack, distribute or otherwise deal in products using JTI' s trademarks.
Respondents also submitted authentic Mild Seven and Mild Seven Lights cigarettes and samples
of the cigarettes taken from FMC's premises.50

When Secretary Gonzalez dismissed respondents' complaint, he made a factual determination that
no Mild Seven and Mild Seven Lights were actually seized from FMC's premises. He cited
Prosecutor Macabulos' observation that the Joint Affidavit of Arrest/Seizure dated August 6, 2004
never mentioned the foregoing cigarettes as among the items seized. The CA, on the other hand,
reversed the dismissal of the complaint and declared that the issue of whether or not there was an
actual seizure of Mild Seven and Mild Seven Lights during the raid is evidentiary in character.

We concur with the CA. The validity and merits of a party's defense or accusation, as well as the
admissibility of testimonies and evidence, are better ventilated during trial proper than at the
preliminary investigation level.51 Further, the presence or absence of the elements of the crime is
evidentiary in nature and a matter of defense that may be passed upon only after a full-blown trial
on the merits.52
In Metropolitan Bank & Trust Co. v. Gonzales,53 we ruled that:

x x x [T]he abuse of discretion is patent in the act of the Secretary of Justice holding that the
contractual relationship forged by the parties was a simple loan, for in so doing, the Secretary of
Justice assumed the function of the trial judge of calibrating the evidence on record, done only
after a full-blown trial on the merits. The fact of existence or non-existence of a trust receipt
transaction is evidentiary in nature, the veracity of which can best be passed upon after trial on the
merits, for it is virtually impossible to ascertain the real nature of the transaction involved based
solely on the self-serving allegations contained in the opposing parties' pleadings. Clearly, the
Secretary of Justice is not in a competent position to pass judgment on substantive matters. The
bases of a part[ie]'s accusation and defenses are better ventilated at the trial proper than at the
preliminary investigation.54 (Emphasis supplied.)

In this case, Secretary Gonzalez found no probable cause against petitioners for infringement of
the JTI trademarks based on his conclusion that no fake Mild Seven and Mild Seven Lights were
seized from FMC's premises during the raid. He already passed upon as authentic and credible the
Joint Affidavit of Arrest/Seizure presented by petitioners which did not list Mild Seven and Mild
Seven Lights cigarettes as among those items seized during the raid. In so doing, Secretary
Gonzalez assumed the function of a trial judge, determining and weighing the evidence submitted
by the parties.

Meanwhile, the Complaint-Affidavit in the JTI infringement case shows that, more likely than not,
petitioners have committed the offense charged. FMC, alleged to be without authority to deal with
JTI products, is claimed to have been manufacturing cigarettes that have almost the same
appearance as JTI' s Mild Seven and Mild Seven Lights cigarettes.

As to the crime of False Designation of Origin, Section 169 of the IP Code provides:

Sec. 169. False Designations of Origin; False Description or Representation. -

169 .1. Any person who, on or in connection with any goods or services, or any container for
goods, uses in commerce any word, term, name, symbol, or device, or any combination thereof,
or any false designation of origin, false or misleading description of fact, or false or misleading
representation of fact, which:

(a) Is likely to cause confusion, or to cause mistake, or to deceive as to the affiliation, connection,
or association of such person with another person, or as to the origin, sponsorship, or approval of
his or her goods, services, or commercial activities by another person; or

(b) In commercial advertising or promotion, misrepresents the nature, characteristics, qualities, or

geographic origin of his or her or another person's goods, services, or commercial activities, shall
be liable to a civil action for damages and injunction provided in Sections 156 and 157 of this Act
by any person who believes that he or she is or is likely to be damaged by such act.

xxx
Respondents alleged in their Complaint-Affidavit that petitioners illegally manufactured and/or
stored cigarettes bearing the "DAGETA" label with an indication that these cigarettes were made
in Germany even if they were actually processed, manufactured and packed in the premises of
FMC. To support their claim, respondents submitted samples and attached a copy of the
receipt/inventory of the items seized during the August 4, 2004 raid. These included cigarettes
bearing the infringing DAGETA trademark and various machineries, receptacles, boxes and other
paraphernalia used in the manufacturing and packing of the infringing products.55

Petitioners, for their part, disputed respondents' claim and maintained that the items seized from
their warehouse were genuine Dageta and Dageta International cigarettes imported from Germany.
In dismissing the charge,

Secretary Gonzalez ruled that respondents failed to establish the falsity of the claim indicated in
the cigarettes' labels that they were made in Gennany without providing the factual or legal basis
for his conclusion. He also brushed aside the allegations that (1) machines intended for
manufacturing cigarettes and (2) cigarettes' bearing the label "Made in Germany" were found and
seized from FMC's warehouse in the Philippines. To our mind, however, these circumstances are
enough to excite the belief that indeed petitioners were manufacturing cigarettes in their warehouse
here in the Philippines but misrepresenting the cigarettes' origin to be Germany. The CA, therefore,
did not err in reversing the Resolution of the Secretary of Justice.

In fine, we see no compelling reason to disturb the ruling of the CA finding probable cause against
petitioners for trademark infringement and false designation of origin.

WHEREFORE, the petition is DENIED for lack of merit. The Decision dated March 31, 2011
and Resolution dated July 5, 2011 of the Court of Appeals in CA-G.R. SP No. 94587 are
AFFIRMED. The Provincial Prosecutor of Pampanga is thus DIRECTED to file Informations
against petitioners for violations of:

(a) Section 155 (Infringement), in relation to Section 170 of the IP Code in LS. No. OCPSF-04-
H-2047;

(b) Section 169 (False Designation of Origin), in relation to Section 170 of the IP Code in LS. No.
OCPSF-04-H-2048; and

(c) Section 155 (Infringment), in relation to Section 170 of the IP Code in LS. No. OCPSF-04-H-
2226.

SO ORDERED.

G.R. No. 186088

WILTON DY and/or PHILITES ELECTRONIC & LIGHTING PRODUCTS, Petitioner

vs
KONINKLIJKE PHILIPS ELECTRONICS, N.V., Respondent
DECISION

SERENO, CJ.:

This Petition for Review on Certiorari1 filed by petitioner Wilton Dy and/or Philites Electronic &
Lighting Products ("PHILITES") assails the Decision2 and Resolution3 of the Court of Appeals
(CA) in CA-G.R. SP No. 103350. The appellate court reversed and set aside the Decision4 of the
IPP Office of the Director General (IPP-DG), which affirmed the Decision5 of the Intellectual
Property Philippines Bureau of Legal Affairs (IPP-BLA) upholding petitioner's trademark
application.

THE ANTECEDENT FACTS

On 12 April 2000, petitioner PHILITES filed a trademark application (Application Serial Number
4-2000-002937) covering its fluorescent bulb, incandescent light, starter and ballast. After
publication, respondent Koninklijke Philips Electronics, N .V. ("PHILIPS") filed a Verified Notice
of Opposition on 17 March 2006, alleging the following:

(a) The approval of Application Serial No. 4-2000-002937 is contrary to the following provisions
of Republic Act No. [RAJ 8293 or the Intellectual Property Code of the Philippines (IP Code):
Sections 123.l(d), (i) and (iii), 123.l(e), 147, and 168.

(b) The approval of Application Serial No. 4-2000-002937 will cause grave and irreparable
damage and injury to oppose.

(c) The use and registration of the applied for mark by [petitioner] will mislead the public as to the
origin, nature, quality, and characteristic of the goods on which it is affixed;

(d) [Petitioner's] application for registration is tantamount to fraud as it seeks to register and obtain
legal protection for an identical or confusingly similar mark that clearly infringes upon the
established rights of the [respondent] over its registered and internationally well-known mark.

(e) The registration of the trademark PHILITES & LETTER P DEVICE in the name of the
[petitioner] will violate the proprietary rights and interests, business reputation and goodwill of the
[respondent] over its trademark, considering that the distinctiveness of the trademark PHILIPS
will be diluted.

(t) The registration of the applied for mark will not only prejudice the Opposer, but will also cause
[petitioner] to unfairly profit commercially from the goodwill, fame and notoriety of Opposer's
trademark and reputation.

(g) [Petitioner's] registration and use of the applied for mark in connection with goods under Class
11 will weaken the unique and distinctive significance of mark PHILIPS and will tarnish, degrade
or dilute the distinctive quality of Opposer's trademark and will result in the gradual attenuation or
whittling away of the value of Opposer's trademark, in violation of Opposer's proprietary rights.6
On 8 August 2006, petitioner filed a Verified Answer, stating that its PHILITES & LETTER P
DEVICE trademark and respondent's PHILIPS have vast dissimilarities in terms of spelling, sound
and meaning.7

At the conclusion of the hearing, on 9 November 2006, IPP-BLA Director Estrellita Beltran-
Abelardo rendered a Decision8 denying the Opposition filed by respondent PHILIPS. The
dispositive portion of the Decision reads:

WHEREFORE, premises considered the OPPOSITION filed by Koninklijke Philips

Electronics, N.V. is hereby DENIED. Accordingly, Application Serial no. 4-2000-002937 filed
by Respondent-Applicant, Wilton Dy and/or Philites Electronic & Lighting Products on 12 April
2000 for the mark "PHILITES & LETTER P DEVICE" used on fluorescent bulb, incandescent
light starter, ballast under class 11, is as it is, hereby GRANTED.

Let the filewrapper of "PHILITES & LETTER P DEVICE," subject matter of this case together
with this Decision be forwarded to the Bureau of Trademarks (BOT) for appropriate action.

SO ORDERED.

In upholding petitioner's trademark application, the IPP-BLA stated that assuming respondent's
mark was well-known in the Philippines, there should have been prior determination of whether
or not the mark under application for registration was "identical with, or confusingly similar to, or
constitutes a translation of such well-known mark in order that the owner of the well-known mark
can prevent its registration."9 From the evidence presented, the IPP-BLA concluded that the
PHILIPS and PHILITES marks were so unlike, both visually and aurally. It held that no confusion
was likely to occur, despite their contemporaneous use, based on the following observations:

The Philips shield mark has four stars in different sizes located at the north east and south west
portions inside a circle within the shield. There are three wavy lines dissecting the middle of the
circle. None of these appear in the respondent's mark.

[Respondent] declares that the word Philips is the surname of the brothers who founded the Philips
company engaged in manufacturing and selling lighting products. [Petitioner] on the other hand
has testified that the word Philites is coined from the word 'Philippines' and 'lights,' hence 'Philites.'
This Bureau finds that there is no dictionary meaning to the [petitioner's] mark. It is a coined and
arbitrary word capable of appropriation as a trademark. x x x
Moreover, by mere pronouncing the two marks, the phonetic sounds produced when each mark is
uttered are not the same. The last syllable of respondent's mark is uttered in a long vowel sound,
while the last vowel of the opposer's mark is not.

x x x. This Bureau believes that opposer has no monopoly over the color or diameter or shape of
a light bulb or packaging shape unless registrations were secured to protect the same. The images
of the packages are reproduced below for reference.

x x x. For one, respondent adopts a yellow to light yellow dominant color while the oppose uses
an orange yellow hue. The mark "Philites" is printed in yellow with light blue background as
compared to the "Philips" mark typed in white against a black background.

It is fundamental in trademark jurisprudence that color alone, unless displayed in an arbitrary

design docs not function as a trademark.

Secondly, there appears to be other advertising slogans that appear in respondent's package such
as the words, "new", "prolong lite life", "E-coat finished" and "with additional 35% more than
ordinary". These phrases are absent in opposer's package. These phrases can be considered in the
nature of descriptive terms that can be appropriated by anyone.10

Upon appeal, the IPP-DG rendered a Decision11 on 16 April 2008, affirming the ruling of the IPP-
BLA as follows:

WHEREFORE, premises considered, that instant appeal is hereby DISMISSED for lack of merit.
Accordingly, Decision No. 2006-125 of the Director of the Bureau of Legal Affairs dated 09
November 2006, is hereby AFFIRMED.

Let a copy of this Decision as well as the trademark application and records be furnished and
returned to the Director of Bureau of Legal Affairs for appropriate action. Further, let also the
Directors of the Bureau of Trademarks, the Administrative, Pinancial and Human Resources
Development Services Bureau, and the library of the Documentation, Information and Technology
Transfer Bureau be furnished a copy of this Decision for information, guidance and records
purposes.

SO ORDERED.

In so ruling, the IPP-DG noted that "[t]he dominant feature of the [respondent's] trademark is
'PHILIPS' while that of the [petitioner's] trademark is 'PHILITES.' While the first syllables of the
marks are identical - 'PHI' - the second syllables are not. The differences in the last syllable
accounted for the variance of the trademarks visually and aurally."12 Moreover, there were
"glaring differences and dissimilarities in the design and general appearance of the Philips shield
emblem mark and the letter 'P' of Philites mark."13 Thus, "even if the [petitioner's] products
bearing the trademark PHILIPS are placed side by side with other brands, the purchaser would not
be confused to pick up the [petitioner's] product if this is his choice or preference, unless the
resemblance in the appearance of the trademarks is so glaring which [it] is not in this case."14

As regards the issue of petitioner submitting a trademark drawing different from that used in the
packaging, the IPP-DG noted that this case involved an opposition to the registration of a mark,
while labels and packaging were technically not a part thereof.15 At best, respondent supposedly
had the remedy of filing a case for trademark infringement and/or unfair competition.16

Upon intermediate appellate review, the CA rendered a Decision 17 on 7 October 2008. The
dispositive portion herein reads:

WHEREFORE, premises considered, the Petition for Review is GRANTED. The Decision dated
16 April 2008 of the Director General of the Intellectual Property Office in Appeal No. 14-06-28;
IPC No. 14-2006- 00034 is REVERSED and SET ASIDE. The application for trademark
registration (Application Serial Number 4-2000-002937) of respondent Wilton Dy and/or Philites
Electronic & Lighting Products is DISMISSED. Costs against respondent.

SO ORDERED.

In so ruling, the CA reasoned that the "drawing of the trademark submitted by [petitioner] has a
different appearance from that of [petitioner's] actual wrapper or packaging that contain the light
bulbs, which We find confusingly similar with that of [respondent's] registered trademark and
packaging."18 Moreover, it found to be "self-serving [petitioner's] asseveration that the mark
'PHILITES' is a coined or arbitrary mark from the words 'Philippines' and 'lights.' Of all the marks
that [petitioner] could possibly think of for his light bulbs, it is odd that [petitioner] chose a mark
with the letters 'PHILI,' which are the same prevalent or dominant five letters found in
[respondent's] trademark 'PHILIPS' for the same products, light bulbs."19 Hence, the appellate
court concluded that petitioner had intended to ride on the long-established reputation and goodwill
of respondent's trademark.20

On 25 October 2008, petitioner filed a Motion for Reconsideration, which was denied in a
Resolution21 issued by the CA on 18 December 2008.
Hence, this petition.

Respondent filed its Comment22 on 23 June 2009, and petitioner filed its Reply23 on 10
November 2009.

THE ISSUES

From the foregoing, we reduce the issues to the following:

1. Whether or not respondent's mark is a registered and well-known mark in the Philippines; and

2. Whether or not the mark applied for by petitioner is identical or confusingly similar with that of
respondent.

OUR RULING

The Petition is bereft of merit.

A trademark is "any distinctive word, name, symbol, emblem, sign, or device, or any combination
thereof, adopted and used by a manufacturer or merchant on his goods to identify and distinguish
them from those manufactured, sold, or dealt by othcrs."24 It is "intellectual property deserving
protection by law,"25 and "susceptible to registration if it is crafted fancifully or arbitrarily and is
capable of identifying and distinguishing the goods of one manufacturer or seller from those of
another."26

Section 122 of the Intellectual Property Code of the Philippines (IPC) provides that rights to a
mark shall be acquired through registration validly done in accordance with the provisions of this
law.27 Corollary to that rule, Section 123 provides which marks cannot be registered.

Respondent opposes petitioner's application on the ground that PHILITES' registration will
mislead the public over an identical or confusingly similar mark of PHILIPS, which is registered
and internationally well-known mark. Specifically, respondent invokes the following provisions
of Section 123:

Section 123. Registrability. - 123 .1. A mark cannot be registered if it:

xxx

(d) Is identical with a registered mark belonging to a different proprietor or a mark with an earlier
filing or priority date, in respect of:

(i) The same goods or services, or

(ii) Closely related goods or services, or

(iii) If it nearly resembles such a mark as to be likely to deceive or cause confusion;

(e) Is identical with, or confusingly similar to, or constitutes a translation of a mark whid1 is
considered by the competent authority of the Philippines to be well-known internationally and in
the Philippines, whether or not it is registered here, as being already the mark of a person other
than the applicant for registration, and used for identical or similar goods or services: Provided,
That in determining whether a mark is well-known, account shall be taken of the knowledge of the
relevant sector of the public, rather than of the public at large, including knowledge in the
Philipines which has been obtained as a result of the promotion of the mark.28

Respondent's mark is a registered and well-known mark in the

Philippines

There is no question that respondent's mark PHILIPS is already a registered and well-known mark
in the Philippines.

As we have said in Fredco Manufacturing Corporation v. Harvard University,29 "[i]ndeed,

Section 123.l(e) of R.A. No. 8293 now categorically states that 'a mark which is considered by the
competent authority of the Philippines to be well-known internationally and in the Philippines,
whether or not it is registered here,' cannot be registered by another in the Ph iii ppines. "30

Rule l00(a) of the Rules and Regulations on Trademarks, Service Marks, Tradenames and Marked
or Stamped Containers defines "competent authority" in the following manner:

(c) "Competent authority" for purposes of determining whether a mark is well-known, means the
Court, the Director General, the Director of the Bureau of Legal Affairs, or any administrative
agency or office vested with quasi-judicial or judicial jurisdiction to hear and adjudicate any action
to enforce the rights to a mark.

We thus affirm the following findings of the CA, inasmuch as the trademark of PHILIPS is a
registered and well-known mark, as held in the Supreme Court Decision in Philips Export B. V, v.
CA:31

Petitioner (PHILIPS) is the registered owner in the Philippines of the "PHILIPS" and "PHILIPS
SHIELD EMBLEM" trademarks, as shown by Certificates of Registration Nos. 42271 and 42270.
The Philippine trademark registrations of petitioner's "PHILIPS" and "PHILIPS SHIELD
EMBLEM" are also evidenced by Certificates of Registration Nos. R- 1651, R-29134, R-1674,
and R-28981. The said registered trademarks "PHILIPS" and "PHILIPS SHIELD EMBLEM"
cover classes 7, 8, 9, 10, 11, 14, and 16. The assailed Decision itself states that "(T)he Appellant's
trademark is already registered and in use in the Philippines". It also appears that worldwide,
petitioner has thousands of trademark registrations x x x in various countries. As found by the
High Court in Philips Export B.V. vs Court of Appeals, PHILIPS is a trademark or trade name
which was registered as far back as 1922, and has acquired the status of a well-known mark in the
Philippines and internationally as well.32

Petitioner seeks to register a mark

nearly resembling that of respondent,
which may likely to deceive or cause
confusion among consumers.

Despite respondent's diversification to numerous and varied industries,33 the records show that
both parties are engaged in the same line of business: selling identical or similar goods such as
fluorescent bulbs, incandescent lights, starters and ballasts.

In determining similarity and likelihood of confusion, jurisprudence has developed two tests: the
dominancy test, and the holistic or totality test.34

On one hand, the dominancy test focuses on "the similarity of the prevalent or dominant features
of the competing trademarks that might cause confusion, mistake, and deception in the mind of
the purchasing public. Duplication or imitation is not necessary; neither is it required that the mark
sought to be registered suggests an effort to imitate. Given more consideration are the aural and
visual impressions created by the marks on the buyers of goods, giving little weight to factors like
prices, quality, sales outlets, and market segments. "35

On the other hand, the holistic or totality test necessitates a "consideration of the entirety of the
marks as applied to the products, including the labels and packaging, in determining confusing
similarity. The discerning eye of the observer must focus not only on the predominant words, but
also on the other features appearing on both labels so that the observer may draw conclusion on
whether one is confusingly similar to the other."361âwphi1

Applying the dominancy test to this case requires us to look only at the mark submitted by
petitioner in its application, while we give importance to the aural and visual impressions the mark
is likely to create in the minds of the buyers. We agree with the findings of the CA that the mark
"PHILITES" bears an uncanny resemblance or confusing similarity with respondent's mark
"PHILIPS," to wit:

Applying the dominancy test in the instant case, it shows the uncanny resemblance or confusing
similarity between the trademark applied for by respondent with that of petitioner's registered
trademark. An examination of the trademarks shows that their dominant or prevalent feature is the
five-letter "PHILI", "PHILIPS" for petitioner, and "PHILITES" for respondent. The marks are
confusingly similar with each other such that an ordinary purchaser can conclude an association
or relation between the marks. The consuming public does not have the luxury of time to ruminate
the phonetic sounds of the trademarks, to find out which one has a short or long vowel sound. At
bottom, the letters "PHILI'' visually catch the attention of the consuming public and the use of
respondent's trademark will likely deceive or cause confusion. Most importantly, both trademarks
are used in the sale of the same goods, which are light bulbs.37

The confusing similarity becomes even more prominent when we examine the entirety of the
marks used by petitioner and respondent, including the way the products are packaged. In using
the holistic test, we find that there is a confusing similarity between the registered marks PHILIPS
and PHILITES, and note that the mark petitioner seeks to register is vastly different from that
which it actually uses in the packaging of its products. We quote with approval the findings of the
CA as follows:
Applying the holistic test, entails a consideration of the entirety of the marks as applied to the
products, including the labels and packaging, in determining confusing similarity. A comparison
between petitioner's registered trademark "PHILIPS'' as used in the wrapper or packaging of its
light bulbs and that of respondent's applied for trademark "PHILITES" as depicted in the container
or actual wrapper/packaging of the latter's light bulbs will readily show that there is a strong
similitude and likeness between the two trademarks that will likely cause deception or confusion
to the purchasing public. The fact that the parties' wrapper or packaging reflects negligible
differences considering the use of a slightly different font and hue of the yellow is of no moment
because taken in their entirety, respondent's trademark "PHILITES" will likely cause confusion or
deception to the ordinary purchaser with a modicum of intelligence.38

WHEREFORE, in view of the foregoing, the Petition for Review on Certiorari is hereby
DENIED. The 7 October 2008 Decision and 18 December 2008 Resolution of the Court of
Appeals in CA-G.R. SP No. 103350 are hereby AFFIRMED.

SO ORDERED.

G.R. No. 221717

MANG INASAL PHILIPPINES, INC., Petitioner

vs.
IFP MANUFACTURING CORPORATION, Respondent

DECISION

VELASCO, JR., J.:

Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court of the
Resolutions dated June 10, 2015 1 and December 2, 2015 2 of the Court of Appeals (CA) in CA-
G.R. SP No. 139020.

The Facts

The Trademark Application and the Opposition Respondent IFP Manufacturing Corporation is a
local manufacturer of snacks and beverages.

On May 26, 2011, respondent filed with the Intellectual Property Office (IPO) an application 3 for
the registration of the mark "OK Hotdog Inasal Cheese Hotdog Flavor Mark" (OK Hotdog Inasal
mark) in connection with goods under Class 30 of the Nice Classification.4 The said mark, which
respondent intends to use on one of its curl snack products, appears as follows:
The application of respondent was opposed 5 by petitioner Mang Inasal Philippines, Inc.

Petitioner is a domestic fast food company and the owner of the mark "Mang Inasal, Home of
Real Pinoy Style Barbeque and Device" (Mang Inasal mark) for services under Class 43 of the
Nice Classification. 6 The said mark, which was registered with the IPO in 2006 7 and had been
used by petitioner for its chain of restaurants since 2003, 8 consists of the following Insignia:
Petitioner, in its opposition, contended that the registration of respondent's OK Hotdog Inasal mark
is prohibited under Section 123.l (d)(iii) of Republic Act No. (RA) 8293. 9 Petitioner averred that
the OK Hotdog Inasal mark and the Mang Inasal mark share similarities-both as to their appearance
and as to the goods or services that they represent which tend to suggest a false connection or
association between the said marks and, in that regard, would likely cause confusion on the part
of the public. 10 As petitioner explained:

1. The OK Hotdog Inasal mark is similar to the Mang Inasal mark. Both marks feature the same
dominant element-i.e., the word "INASAL"-printed and stylized in the exact same manner, viz:

a. In both marks, the word "INASAL" is spelled using the same font style and red color;

b. In both marks, the word "INASAL" is placed inside the same black outline and yellow
background; and

c. In both marks, the word "INASAL" is arranged in the same staggered format.

2. The goods that the OK Hotdog Inasal mark is intended to identify (i.e., curl snack products) are
also closely related to the services represented by the Mang Inasal mark (i.e., fast food restaurants).
Both marks cover inasal or inasal-flavored food products.

Petitioner's opposition was referred to the Bureau of Legal Affairs (BLA) of the IPO for hearing
and disposition.

Decisions of the IPO-BLA and the IPO-DG

On September 19, 2013, after due proceedings, the IPO-BLA issued a Decision 11 dismissing
petitioner's opposition. The dispositive portion of the Decision reads:

WHEREFORE, premises considered, the instant opposition is hereby DISMISSED. Let the
filewrapper [sic] of Trademark Application Serial No. 4-2011-006098 be returned, together with
a copy of this Decision, to the Bureau of Trademarks for further information and appropriate
action.

SO ORDERED.

Aggrieved, petitioner appealed the Decision of IPO-BLA to the Director General (DG) of the IPO.
12

On December 15, 2014, the IPO-DG rendered a Decision 13 dismissing the appeal of petitioner.
The fallo of the Decision accordingly reads:

Wherefore, premises considered, the appeal is hereby dismissed. Let a copy of this Decision be
furnished to the Director of Bureau of Legal Affairs and the Director of Bureau of Trademarks for
their appropriate action and information. Further, let a copy of this Decision be furnished to the
library of the Documentation, Information and Technology Transfer Bureau for records purposes.

SO ORDERED.

Both the IPO-BLA and the IPO-DG were not convinced that the OK Hotdog Inasal mark is
confusingly similar to the Mang Inasal mark. They rebuffed petitioner's contention, thusly:

1. The OK Hotdog Inasal mark is not similar to the Mang !nasal mark. In terms of appearance, the
only similarity between the two marks is the word "INASAL." However, there are other words like
"OK," "HOTDOG," and "CHEESE' and images like that of curls and cheese that are found in the
OK Hotdog Inasal mark but are not present in the Mang Inasal mark. 14

In addition, petitioner cannot prevent the application of the word "INASAL" in the OK Hotdog
Inasal mark. No person or entity can claim exclusive right to use the word "INASAL" because it is
merely a generic or descriptive word that means barbeque or barbeque products. 15

Neither can the underlying goods and services of the two marks be considered as closely related.
The products represented by the two marks are not competitive and are sold in different channels
of trade. The curl snack products of the OK Hotdog Inasal mark are sold in sari-sari stores, grocery
stores and other small distributor outlets, whereas the food products associated with the Mang
Inasal mark are sold in petitioner's restaurants. 16

Undeterred, petitioner appealed to the CA.

Resolutions of the CA and the Instant Appeal

On June 10, 2015, the CA issued a Resolution 17 denying the appeal of petitioner. Petitioner filed
a motion for reconsideration, but this too was denied by the CA through its Resolution18 dated
December 2, 2015. The CA, in its Resolutions, simply agreed with the ratiocinations of the
IPOBLA and IPO-DG.

Hence, the instant appeal.

Here, petitioner prays for the reversal of the CA Resolutions. Petitioner maintains that the OK
Hotdog Inasal mark is confusingly similar to the Mang Inasal mark and insists that the trademark
application of respondent ought to be denied for that reason.

Our Ruling

We have examined the OK Hotdog Inasal and Mang Inasal marks under the lens of pertinent law
and jurisprudence. And, through it, we have determined the justness of petitioner's claim. By our
legal and jurisprudential standards, the respondent's OK Hotdog Inasal mark is, indeed, likely to
cause deception or confusion on the part of the public. Hence, contrary to what the IPO-BLA, IPO-
DG, and the CA had ruled, the respondent's application should have been denied.

We, therefore, grant the appeal.

The Proscription: Sec. 123.l(d)(iii) of RA 8293

A mark that is similar to a registered mark or a mark with an earlier filing or priority date (earlier
mark) and which is likely to cause confusion on the part of the public cannot be registered with
the IPO. Such is the import of Sec. 123.l(d)(iii) of RA 8293:

SECTION 123. Registrability. –

123. 1. A mark cannot be registered if it:

xxxx

d. xxx:

1. x x x

11. x x x

iii. ... nearly resembles [a registered mark belonging to a different proprietor or a mark with an
earlier filing or priority date] as to be likely to deceive or cause confusion.
The concept of confusion, which is at the heart of the proscription, could either refer to confusion
of goods or confusion of business. In Skechers U.S.A., Inc. v. Trendworks International
Corporation, 19 we discussed and differentiated both types of confusion, as follows:

Relative to the question on confusion of marks and trade names, jurisprudence has noted two (2)
types of confusion, viz.: (1) confusion of goods (product confusion), where the ordinarily prudent
purchaser would be induced to purchase one product in the belief that he was purchasing the other;
and (2) confusion of business (source or origin confusion), where, although the goods of the parties
are different, the product, the mark of which registration is applied for by one party, is such as
might reasonably be assumed to originate with the registrant of an earlier product, and the public
would then be deceived either into that belief or into the belief that there is some connection
between the two parties, though inexistent.

Confusion, in either of its forms, is, thus, only possible when the goods or services covered by
allegedly similar marks are identical, similar or related in some manner. 20

Verily, to fall under the ambit of Sec. 123. l(d)(iii) and be regarded as likely to deceive or cause
confusion upon the purchasing public, a prospective mark must be shown to meet two (2) minimum
conditions:

1. The prospective mark must nearly resemble or be similar to an earlier mark; and

2. The prospective mark must pertain to goods or services that are either identical, similar
or related to the goods or services represented by the earlier mark.

The rulings of the IPO-BLA, IPO-DG, and the CA all rest on the notion that the OK Hotdog Inasal
mark does not fulfill both conditions and so may be granted registration.

We disagree.

II

The OK Hotdog Inasal Mark Is Similar to the Mang Inasal Mark

The first condition of the proscription requires resemblance or similarity between a prospective
mark and an earlier mark. Similarity does not mean absolute identity of marks. 21 To be regarded
as similar to an earlier mark, it is enough that a prospective mark be a colorable imitation of the
former. 22 Colorable imitation denotes such likeness in form, content, words, sound, meaning,
special arrangement or general appearance of one mark with respect to another as would likely
mislead an average buyer in the ordinary course of purchase. 23

In determining whether there is similarity or colorable imitation between two marks, authorities
employ either the dominancy test or the holistic test.24 In Mighty Corporation v. E. & J. Gallo
Winery,25 we distinguished between the two tests as follows:
The Dominancy Test focuses on the similarity of the prevalent features of the competing
trademarks which might cause confusion or deception, and thus infringement. If the competing
trademark contains the main, essential or dominant features of another, and confusion or deception
is likely to result, infringement takes place. Duplication or imitation is not necessary; nor is it
necessary that the infringing label should suggest an effort to imitate. The question is whether the
use of the marks involved is likely to cause confusion or mistake in the mind of the public or
deceive purchasers.

On the other hand, the Holistic Test requires that the entirety of the marks in question be considered
in resolving confusing similarity. Comparison of words is not the only determining factor. The
trademarks in their entirety as they appear in their respective labels or hang tags must also be
considered in relation to the goods to which they are attached. The discerning eye of the observer
must focus not only on the predominant words but also on the other features appearing in both
labels in order that he may draw his conclusion whether one is confusingly similar to the other.
(citations omitted and emphasis supplied)

There are currently no fixed rules as to which of the two tests can be applied in any given case. 26
However, recent case law on trademark seems to indicate an overwhelming judicial preference
towards applying the dominancy test. 27 We conform.

Our examination of the marks in controversy yielded the following findings:

1. The petitioner's Mang Inasal mark has a single dominant feature-the word "INASAL" written in
a bold red typeface against a black outline and yellow background with staggered design. The
other perceptible elements of the mark-such as the word "MANG" written in black colored font at
the upper left side of the mark and the phrase "HOME OF REAL PINOY STYLE BARBEQUF'
written in a black colored stylized font at the lower portion of the mark-are not as visually
outstanding as the mentioned feature.

2. Being the sole dominant element, the word "INASAL," as stylized in the Mang Inasal mark, is
also the most distinctive and recognizable feature of the said mark.

3. The dominant element "INASAL," as stylized in the Mang Inasal mark, is different from the term
"inasal' per se. The term "inasal" per se is a descriptive term that cannot be appropriated. However,
the dominant element "INASAL," as stylized in the Mang Inasal mark, is not. Petitioner, as the
registered owner of the Mang Inasal mark, can claim exclusive use of such element.

4. The respondent's OK Hotdog Inasal mark, on the other hand, has three (3) dominant features:
(a) the word "INASAL" written in a bold red typeface against a black and yellow outline with
staggered design; (b) the word "HOTDOG" written in green colored font; and (c) a picture of three
pieces of curls. Though there are other observable elements in the mark-such as the word "OK''
written in red colored font at the upper left side of the mark, the small red banner overlaying the
picture of the curls with the words "CHEESE HOTDOG FLAVOR" written on it, and the image of
a block of cheese beside the picture of the curls-none of those are as prevalent as the two features
aforementioned.
5. The dominant element "INASAL" in the OK Hotdog Inasal mark is exactly the same as the
dominant element "INASAL" in the Mang Inasal mark. Both elements in both marks are printed
using the exact same red colored font, against the exact same black outline and yellow background
and is arranged in the exact same staggered format.

6. Apart from the element "INASAL," there appear no other perceivable similarities between the
two marks.

Given the foregoing premises, and applying the dominancy test, we hold that the OK Hotdog Inasal
mark is a colorable imitation of the Mang Inasal mark.

First. The fact that the conflicting marks have exactly the same dominant element is key. It is
undisputed that the OK Hotdog Inasal mark copied and adopted as one of its dominant features the
"INASAL" element of the Mang Inasal mark. Given that the "INASAL" element is, at the same time,
the dominant and most distinctive feature of the Mang Inasal mark, the said element's incorporation
in the OK Hotdog Inasal mark, thus, has the potential to project the deceptive and false impression
that the latter mark is somehow linked or associated with the former mark.

Second. The differences between the two marks are I trumped by the overall impression created
by their similarity. The mere fact that there are other elements in the OK Hotdog Inasal mark that
are not present in the Mang Inasal mark actually does little to change the probable public
perception that both marks are linked or associated.1âwphi1 It is worth reiterating that the OK
Hotdog Inasal mark actually brandishes a literal copy of the most recognizable feature of the Mang
Inasal mark. We doubt that an average buyer catching a casual glimpse of the OK Hotdog Inasal
mark would pay more attention to the peripheral details of the said mark than it would to the mark's
more prominent feature, especially when the same invokes the distinctive feature of another more
popular brand.

All in all, we find that the OK Hotdog Inasal mark is similar to the Mang Inasal mark.

III

The Goods for which the Registration of the OK Hotdog Inasal Mark Is Sought Are Related to the
Services Being Represented by the Mang Inasal Mark

The second condition of the proscription requires that the prospective mark pertain to goods or
services that are either identical, similar or related to the goods or services represented by the
earlier mark. While there can be no quibble that the curl snack product for which the registration
of the OK Hotdog Inasal mark is sought cannot be considered as identical or similar to the
restaurant services represented by the Mang Inasal mark, there is ample reason to conclude that
the said product and services may nonetheless be regarded as related to each other.

Related goods and services are those that, though non-identical or non-similar, are so logically
connected to each other that they may reasonably be assumed to originate from one manufacturer
or from economically-linked manufacturers. 28 In determining whether goods or services are
related, several factors may be considered. Some of those factors recognized in our jurisprudence
are: 29

1. the business (and its location) to which the goods belong;

2. the class of product to which the goods belong;

3. the product's quality, quantity, or size, including the nature of the package, wrapper or container;

4. the nature and cost of the articles;

5. the descriptive properties, physical attributes or essential characteristics with reference to their
form, composition, texture or quality;

6. the purpose of the goods;

7. whether the article is bought for immediate consumption, that is, day-to-day household items;

8. the fields of manufacture;

9. the conditions under which the article is usually purchased, and

10. the channels of trade through which the goods flow, how they are distributed, marketed,
displayed and sold.

Relative to the consideration of the foregoing factors, however, Mighty Corporation 30

significantly imparted:

The wisdom of this approach is its recognition that each trademark infringement case presents its
own unique set of facts. No single factor is preeminent, nor can the presence or absence of one
determine, without analysis of the others, the outcome of an infringement suit. Rather, the court is
required to sift the evidence relevant to each of the criteria. This requires that the entire panoply
of elements constituting the relevant factual landscape be comprehensively examined. It is a
weighing and balancing process. With reference to this ultimate question, and from a balancing of
the determinations reached on all of the factors, a conclusion is reached whether the parties have
a right to the relief sought.

A very important circumstance though is whether there exists a likelihood that an appreciable
number of ordinarily prudent purchasers will be misled, or simply confused, as to the source of the
goods in question. The "purchaser" is not the "completely unwary consumer" but is the "ordinarily
intelligent buyer" considering the type of product involved he is accustomed to buy, and therefore
to some extent familiar with, the goods in question. The test of fraudulent simulation is to be found
in the likelihood of the deception of some persons in some measure acquainted with an established
design and desirous of purchasing the commodity with which that design has been associated. The
test is not found in the deception, or the possibility of deception, of the person who knows nothing
about the design which has been counterfeited, and who must be indifferent between that and the
other. The simulation, in order to be objectionable, must be such as appears likely to mislead the
ordinary intelligent buyer who has a need to supply and is familiar with the article that he seeks to
purchase. (citations omitted and emphasis supplied)

Mindful of the foregoing precepts, we hold that the curl snack product for which the registration
of the OK Hotdog Inasal mark is sought is related to the restaurant services represented by the
Mang !nasal mark, in such a way that may lead to a confusion of business. In holding so, we took
into account the specific kind of restaurant business that petitioner is engaged in, the reputation of
the petitioner's mark, and the particular type of curls sought to be marketed by the respondent,
thus:

First. Petitioner uses the Mang Inasal mark in connection with its restaurant services that is
particularly known for its chicken inasal, i.e., grilled chicken doused in a special inasal marinade.
31 The inasal marinade is different from the typical barbeque marinade and it is what gives the
chicken inasal its unique taste and distinct orange color. 32 Inasal refers to the manner of grilling
meat products using an inasal marinade.

Second. The Mang Inasal mark has been used for petitioner's restaurant business since 2003. The
restaurant started in Iloilo but has since expanded its business throughout the country. Currently,
the Mang Inasal chain of restaurants has a total of 464 branches scattered throughout the nation's
three major islands. 33 It is, thus, fair to say that a sizeable portion of the population is
knowledgeable of the Mang Inasal mark.

Third. Respondent, on the other hand, seeks to market under the OK Hotdog Inasal mark curl snack
products which it publicizes as having a cheese hotdog inasal flavor. 34

Accordingly, it is the fact that the underlying goods and services of both marks deal with inasal
and inasal-flavored products which ultimately fixes the relations between such goods and services.
Given the foregoing circumstances and the aforesaid similarity between the marks in controversy,
we are convinced that an average buyer who comes across the curls marketed under the OK Hotdog
Inasal mark is likely to be confused as to the true source of such curls. To our mind, it is not
unlikely that such buyer would be led into the assumption that the curls are of petitioner and that
the latter has ventured into snack manufacturing or, if not, that the petitioner has supplied the
flavorings for respondent's product. Either way, the reputation of petitioner would be taken
advantage of and placed at the mercy of respondent.

All in all, we find that the goods for which the registration of the OK Hotdog Inasal mark is sought
are related to the services being represented by the Mang Inasal mark.1âwphi1

IV
Conclusion

The OK Hotdog Inasal mark meets the two conditions of the proscription under Sec. 123.l(d)(iii)
of RA 8293. First, it is similar to the Mang Inasal mark, an earlier mark. Second, it pertains to
goods that are related to the services represented by such earlier mark. Petitioner was, therefore,
correct; and the IPO-BLA, IPO-DG, and the CA's rulings must be reversed. The OK Hotdog Inasal
mark is not entitled to be registered as its use will likely deceive or cause confusion on the part of
the public and, thus, also likely to infringe the Mang Inasal mark. The law, in instances such as
this, must come to the succor of the owner of the earlier mark.

WHEREFORE, premises considered, the petition is hereby GRANTED. We hereby render a

decision as follows:

1. REVERSING and SETTING ASIDE the Resolutions dated June 10, 2015 and December 2,
2015 of the Court of Appeals in CA-G.R. SP No. 139020;

2. SETTING ASIDE the Decision dated December 15, 2014 of the Director General of the
Intellectual Property Office in Appeal No. 14-2013-0052;

3. SETTING ASIDE the Decision dated September 19, 2013 of the Director of the Bureau of
Legal Affairs of the Intellectual Property Office in IPC No. 14-2012-00369; and

4. DIRECTING the incumbent Director General and Director of the Bureau of Legal Affairs of
the Intellectual Property Office to DENY respondent's Application No. 4-2011-006098 for the
registration of the mark "OK Hotdog Inasal Cheese Hotdog Flavor Mark"

SO ORDERED.

G.R. No. 193069

NSC HOLDINGS (PHILIPPINES), INC., Petitioner

vs
TRUST INTERNATIONAL PAPER CORPORATION (TIPCO) and ATTY. MONICO
JACOB, Respondents

DECISION

SERENO, CJ.:

This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, assailing the
Decision1 and the Resolution2 of the Court of Appeals (CA). The CA upheld the validity of the
assailed Omnibus Order3 issued by the Regional Trial Court (RTC), Branch 42, City of San
Fernando, Pampanga. The RTC denied the motion of NSC Holdings (Phils.) Inc. (NSC) to revise
the approved rehabilitation plan.

THE ANTECEDENT FACTS

Trust International Paper Corporation (TIPCO) is a pulp and paper manufacturing company
organized and existing under the laws of the Republic of the Philippines.4 On 29 July 2005, TIPCO
filed a "Petition for Corporate Rehabilitation with Prayer for Suspension of Payments"5 before the
RTC.

The trial court subsequently issued a Stay Order directing, among others, the appointment of
respondent Atty. Monico Jacob as the rehabilitation receiver (Receiver).6

NSC filed its "Comment with Motion,"7 alleging that certain receivables, as well as the authority
to collect payments for these receivables, were being held by TIPCO for and on behalf of NSC as
its agent. This was pursuant to a Trade Receivables Purchase and Sale Agreement (TRPSA)8
entered into by both parties.9

NSC claimed that under the TRPSA, it entered into a Certificate of Assignment with TIPCO. In
that agreement, the latter sold and assigned receivables to NSC in the total amount of
₱l55,380,590.10 There was supposedly a stipulation therein designating TIPCO as servicing agent
with the obligation to enforce the rights and interests of NSC over the purchased receivables, as
well as to hold the collections in trust for the latter.11

In light of the TRPSA, NSC claimed that it was a trustor, not a creditor, of TIPCO. As such, it
moved that TIPCO be directed to segregate the receivables held by the latter on behalf of NSC.
These receivables would thereby be excluded from TlPCO's list of assets and payables that would
be subject to the rehabilitation plan. NSC likewise prayed that TIPCO be ordered to directly remit
any collection or payment to the former as soon as practicable.12

During the initial hearing, the Court summarily heard NSC's contentions13 as well as TIPCO's
counter-argument that the true agreement was really one of a loan.14 Afterwards, the RTC issued
an Order15 holding that both parties had "agreed to submit the issue that receivables transferred
to NSC should not be included as TIPCO's assets for the resolution of the Court-appointed
Rehabilitation Receiver, subject to the Court's approval."16

On 20 January 2006, the Receiver submitted to the RTC his "Evaluation and Recommendation
Report" (Report) which addressed NSC's contentions.17 He stated therein that after a review of
the documents, he found that NSC was an unsecured creditor,18 and that the receivables were
covered by the rehabilitation plan.19

First Order

Through an Order20 dated 31 January 2006 (First Order), the RTC approved TIPCO's proposed
rehabilitation plan as amended and modified by the "Evaluation and Recommendation Report."21
NSC received a copy of the Order on 9 February 2006.

On 2 February 2006, unaware that the RTC had already approved the proposed rehabilitation plan
in the First Order, NSC filed a Motion22 praying for the suspension of the approval of the plan. In
this Motion, it claimed that it had called the Receiver's attention to the fact that the Report lacked
legal and factual basis insofar as its claim was concerned. NSC alleged that, as a result, the
Receiver manifested at the hearing on 23 January 2006 that he was amenable to a further discussion
of its claim and subsequently submitting his report thereon to the trial court.23
Second Order

The RTC then issued an Omnibus Order24 dated 21 February 2006 (Second Order), which treated
NSC's prior Motion as a motion for reconsideration. Consequently, it denied the Motion for being
a prohibited pleading. Neve1iheless, it directed the Receiver to comment on the nature of NSC's
claim.25

Meanwhile, prior to its receipt of the Second Order but after it had finally received a copy of the
First Order, NSC filed another Motion.26 It stated therein that it had received the First Order and
held a meeting with the Receiver. It then reiterated its contentions and asked that the Receiver be
directed to submit its report. By that submission, NSC sought the resolution of its claims and the
revision of the approved rehabilitation plan.

The Receiver filed a "Manifestation"27 stating that he had a meeting with the parties' respective
counsels on 7 February 2006. In that meeting, the parties insisted on their respective positions with
respect to the nature of TIPCO's obligation to NSC. Both counsels exhibited pieces of documentary
evidence to support their respective allegations.

The Receiver rendered the opinion that the issue raised in that meeting needed to be litigated
separately, as to make a recommendation thereon was not within his competence. He also said that
the approval of the rehabilitation plan need not be affected, pmiicularly since the plan also called
for the payment of TIPCO's obligation to NSC.28

Third Order

The RTC agreed with the Receiver's recommendations in its assailed Omnibus Order29 dated 9
March 2006 (Third Order), in which it held as follows:

The court finds the Receiver's position, namely, that the issues involved would require a full blown
litigation, justified. Considering the seriousness of the issues and the legal implications of a
resolution thereon, the Court rules that it is not within the competence of a Rehabilitation

Receiver to adjudicate and resolve the said issues.

xxxx

Considering that the rehabilitation plan calls for the payment of the obligation of petitioner to NSC,
the implementation of the rehabilitation plan shall not be suspended because of the pendency of
this issue. xxx While the parties may decide to elevate the matter for determination in an
appropriate court, the rehabilitation plan shall continue to be implemented without prejudice to a
final and executory decision on such issue.30

Aggrieved, petitioner NSC appealed the Third Order before the CA. The former argued that there
was no legal or jurisprudential basis for the RTC's ruling that the Receiver was not competent to
determine whether the receivables should be excluded from TIPCO's assets. Petitioner further
alleged that it was not a creditor of TIPCO, since the latter merely held the purchased receivables
in trust as evidence by the TRPSA.31

The CA dismissed NSC's appeal and affirmed the Third Order in toto. According to the appellate
court, petitioner essentially moved to amend the approved rehabilitation plan in the latter's petition.
Hence, petitioner should have appealed the First, and not the Third Order of the RTC, as it was the
First Order that had approved the rehabilitation plan.32 The failure to appeal the First Order
supposedly rendered it final and executory and effectively prevented NSC from challenging the
recommendations made by the Receiver.33

For the CA, NSC could no longer insist that the receivables be excluded from TIPCO's assets. The
appellate court held that this matter had already been addressed and resolved by the RTC when the
latter approved the rehabilitation plan in its First Order.34

Upon the denial of its Motion for Reconsideration,35 NSC is now assailing the CA's ruling before
this Court by raising the following arguments: (a) the CA erred in holding that the NSC should
have appealed the First Order; (b) the CA erred in affirming the RTC's finding that the matters
presented by NSC were beyond the scope of the rehabilitation receiver's authority, and; (c) the CA
erred in affirming the inclusion of NSC as a creditor of TIPCO in the approved rehabilitation plan.

ISSUE

Given the recital of facts, it is apparent that petitioner's Motion subsequent to the First Order was
actually a move to modify the approved rehabilitation plan. Notably, the Motion of NSC is based
on the same assertions it presented to the RTC and the Receiver at the start of the rehabilitation
proceedings.

Therefore, the threshold issue to be resolved is whether or not petitioner could still raise the issue
before the CA of its inclusion as a creditor in the approved rehabilitation plan, considering that the
RTC had already resolved this issue in the First Order.

THE COURT'S RULING

We deny the petition.

The issues raised by petitioner center on its inclusion as a creditor in the approved rehabilitation
plan. We agree with the CA ruling that it was the First, not the Third Order, that should have been
appealed by NSC; and that the latter's failure to appeal the First Order barred it from insisting that
it be excluded from the rehabilitation plan as a creditor.

For reasons as follows, the First Order is valid, final, and executory.

NSC is barred from raising before

the CA the issue of its inclusion as a
creditor in the approved
rehabilitation plan.
Certain fundamental principles must be considered. First, a court order is final in character if it
puts an end to the particular matter resolved or definitely settles the matter disposed therein, such
that no further questions can come before the court except the execution of that order.36

Second, it is an established rule that the perfection of an appeal within the period and in the manner
prescribed by law is jurisdictional. Noncompliance with such legal requirements is fatal and has
the effect of rendering the judgment final and executory.37 As explained by this Court in Pascual
v. Robles:38

The failure to perfect an appeal as required by the rules has the effect of defeating the right to
appeal of a party and precluding the appellate court from acquiring jurisdiction over the case. The
right to appeal is not a natural right nor a part of due process; it is merely a statutory privilege, and
may be exercised only in the manner and in accordance with the provisions of the law. The party
who seeks to avail of the same must comply with the requirement of the rules. Failing to do so, the
right to appeal is lost. The reason for rules of this nature is because the dispatch of business by
courts would be impossible, and intolerable delays would result, without rules governing practice.
Public policy and sound practice demand that judgments of courts should become final and
i1Tevocable at some definite date fixed by law. Such rules are a necessary incident to the proper,
efficient and orderly discharge of judicial functions. Thus, we have held that the failure to perfect
an appeal within the prescribed reglementary period is not a mere technicality, but jurisdictional.
Just as a losing party has the privilege to file an appeal within the prescribed period, so does the
winner also have the correlative right to enjoy the :finality of the decision. Failure to meet the
requirements of an appeal deprives the appellate court of jurisdiction to entertain any appeal.39

In the present case, the RTC in its First Order determined that NSC was a creditor whose claims
must be paid in accordance with the approved rehabilitation plan. It must be emphasized that this
determination was made after addressing NSC's contentions and TIPCO's counter-allegations with
respect to the receivables in the initial hearing as well as in the Receiver's

Report which we find to be credible.

It must also be noted that after the initial hearing, the RTC issued an Order40 stating that both
parties had "agreed to submit the issue that receivables transferred to NSC should not be included
as TIPCO's assets for the resolution of the Court-appointed Rehabilitation Receiver, subject to the
Court's approval."41 Accordingly, the trial court adopted the findings of the Receiver in his Report.
It approved the inclusion of NSC in the plan as a creditor and the payment of the latter's claims
over the receivables in accordance with the approved rehabilitation plan. Definitely, the RTC was
able to resolve the issue of the inclusion of NSC as a creditor in the plan. Thus, the latter was
wrong in its contention that the First Order did not resolve its contentions. On the contrary, it is an
order that definitely settled the issue.

This makes it a final order with respect to that issue. Therefore, pursuant to the Interim Rules of
Procedure on Corporate Rehabilitation (Interim Rules),42 petitioner should have ventilated its
discontent with the First Order via a Rule 43 petition for review before the CA, and not through a
mere motion before the RTC.43 However, the records show that NSC failed to file such a petition
before the CA within 15 days from the former's receipt of the First Order. Instead, it filed a motion
before the RTC. That motion, however, did not stop the First Order from lapsing into finality.

Clearly, NSC availed of the wrong remedy and the issue on its inclusion as a creditor in the
approved rehabilitation plan has already lapsed into finality. Therefore, the CA was correct in
denying its appeal. We cannot allow petitioner to benefit from its negligence in failing to find out
what its remedies were and to promptly avail itself of any of them. As ruled by the CA, there is no
compelling reason for this Court to relax the rules on appeal only to accommodate petitioner's
contentions.44

NSC argues that the First Order was not final insofar as its claims were concerned. This contention
is based on its allegation that prior to the issuance of the First Order, specifically during the hearing
held on 23 January 2006, the Receiver manifested a willingness to study petitioner's contentions
further and to submit a report thereafter.45 To NSC, this manifestation prior to the issuance of the
First Order had the effect of explicitly setting aside the issue for study, evaluation, and
recommendation.46

Unfortunately, petitioner failed to support this allegation with any proof. The records are bereft of
any clear indication that the Receiver indeed made the alleged manifestation. What is clear from
the records is that the RTC issued an Order dated 23 January 2006.47 The trial court stated that
after holding a hearing on even date and listening to the parties' remarks on the Receiver's Report,
it considered the proposed rehabilitation plan and the Report "submitted for approval." Notably,
NSC never questioned the latter Order.

If the Receiver indeed made the purported manifestation, NSC should have immediately appealed
the Order dated 23 January 2006. It should have done so upon realizing that the Order did not
reflect what it alleged to have really happened during that hearing. The allegation, therefore,
appears to be a mere afterthought.

The Second and the Third Orders did

not modify or reverse the First
Order.

It cannot be said that it is the Second or Third Orders that should be appealed by petitioner.

The Second and the Third Orders were acts of the RTC that were distinct and separate from the
First Order. They did not reverse or modify it. Nowhere did the foregoing orders modify the
validity, content, or immediate enforceability of the First Order or the approved rehabilitation plan.

In view of the foregoing and the finding that petitioner's Motion subsequent to the First Order was
in reality a motion to revise the approved plan, the Third Order had the effect of simply denying
NSC's Motion and clarifying the First Order. We take note of the fact that the RTC did not order
the parties to initiate the suggested separate action, but left it to their discretion. As the trial court
pronounced in its Third Order, "[w]hi le the parties may decide to elevate the matter for
determination in an appropriate court, the rehabilitation plan shall continue to be implemented
without prejudice to a final and executory decision on such issue." (emphasis supplied)48
The terms of the approved rehabilitation plan were therefore not conditioned on the results of the
separate litigation. The plan stands on its own, whether or not a separate action was initiated by
the parties. Should they opt to initiate such action and a decision be issued on the issue, only then
will the RTC resolve the effect of the decision on the approved rehabilitation plan. Until then, the
matter remains beyond the appellate jurisdiction of this Court.

NSC would have us believe that what the RTC granted with one hand, it denied with the other.
The fact remains, however, that the approved rehabilitation plan, uncontested, is the final will of
the trial court.

The motion to
rehabilitation plan
denied by the RTC.

In view of our conclusion that the Third Order was essentially a denial of NSC's motion to revise
the approved rehabilitation plan, we find this course of action to be in line with the law. The motion
to revise the plan had no basis in law.

Section 26 of the Interim Rules allows the modification and alteration of the approved
rehabilitation plan, if these steps are necessary to achieve the desired targets or goals set forth
therein. As explained by this Court in Victoria-Aquino v. Pacific Plans,49 the Interim Rules allow
the modification of the plan, precisely because of conditions that may supervene or affect its
implementation subsequent to its approval.50

In this case, NSC based its motion to revise the approved plan on its persistent contention that it
was a trustor, not a creditor, of TIPCO. However, this contention is not a supervening event that
warrants the modification of the rehabilitation plan under Section 26 of the Interim Rules. The
facts clearly show that this issue was raised at the start of the rehabilitation proceedings, considered
by the Receiver in his Report, and accordingly resolved by the RTC in its First Order as extensively
discussed above. Therefore, petitioner's contention could not have been a supervening matter that
arose only after the approval of the rehabilitation plan and would thereby affect its implementation.
As discussed above, it was a matter that should have been timely raised before the CA via a Rule
43 Petition for Review. Hence, the denial of the motion to revise was proper.

In view of the foregoing conclusion, we find no need to resolve the other issues raised.

WHEREFORE, the Petition for Review on Certiorari under Rule 45 is DENIED for lack of
merit. The Court of Appeals Decision51 and Resolution52 in CA-G.R. SP No. 93873 are hereby
AFFIRMED.

SO ORDERED.

G.R. No. 211287, April 17, 2017

LAND BANK OF THE PHILIPPINES, Petitioner, v. WEST BAY COLLEGES, INC., PBR
MANAGEMENT AND DEVELOPMENT CORPORATION AND BCP TRADING CO.,
INC., Respondents.

RESOLUTION

REYES, J.:

This resolves a petition for review on certiorari1 filed by Land Bank of the Philippines (Land
Bank), assailing the Decision2 dated September 30, 2013 and Resolution3 dated February 10, 2014
of the Court of Appeals (CA) in CA-G.R. SP No. 127897.

Facts

West Bay Colleges, Inc. (West Bay) is a domestic corporation engaged in the operation of an
educational institution; while PBR Management and Development Corporation (PBR) and BCP:
Trading Company, Inc. (BCP) are domestic corporations engaged in the business of real estate and
construction, respectively. Together, West Bay, PBR and BCP form the Chiongbian Group of
Companies (CGC) (respondents).4

In June 1996, West Bay applied for an interim financing with Land Bank for the construction of a
school building, which was approved in the amount of P125 Million. On December 22, 1997, PBR
availed of a P100-Million Term Loan from Land Bank for the construction of condominium
buildings.5

On January 22, 1998, West Bay, as an accommodation mortgagor, executed a Real and Chattel
Mortgage over its training vessel to secure the loan of PBR with Land Bank. The vessel was
insured with First Lepanto Taisho Insurance Corporation in the amount of P26 Million,
representing the mortgagee Land Bank's insurable interest in the vessel.6

On November 3, 2000, the mortgaged vessel sank during the typhoon Seniang.7 By agreement of
the parties, insurance proceeds in the amount of P21,980,000.00 net of shared expenses were
released to Land Bank on account of PBR's loan.8

To resolve its financial difficulties, West Bay proposed a restructuring of its debts with Land Bank,
which the latter accepted through a letter9 dated March 25, 2002.10 It was provided therein that
Land Bank will reimburse West Bay with the insurance proceeds that it had previously received.
Subsequently, on May 10, 2002, West Bay and PBR executed their respective Restructuring
Agreements11 with Land Bank.

But on June 28, 2002, the respondents filed a petition for corporate rehabilitation with a prayer for
suspension of payments before the Regional Trial Court (RTC) of Muntinlupa City. 12 The RTC
Branch 256 issued a Stay Order13 dated July 10, 2002 directing, among others, a stay in the
enforcement of all claims against West Bay, its guarantors and sureties not solidarily liable with
it, particularly, PBR and BCP.14
The RTC approved the rehabilitation plan on September 10, 2002 which provided, inter alia, that
the P21,980,000.00 insurance proceeds received by Land Bank shall instead be applied to the loan
of West Bay.15

On January 31, 2003, the respondents filed an amended rehabilitation plan transferring the
application of the insurance proceeds from West Bay to PBR and BCP's obligations.16

In the subsequent years, the rehabilitation plan underwent several amendments which were
approved by the RTC on the following dates: November 17, 2003, June 7, 2004, March 29, 2006
and September 1, 2008.17 The updated Rehabilitation Plans consistently provided for the
application of the P21,980,000.00 insurance proceeds to the loan accounts of PBR and BCP.18

While the rehabilitation proceedings were pending, Land Bank filed a motion to be substituted by
Philippine Distressed Asset Asia Pacific (PDAAP), a special purpose vehicle. The motion was
granted by the RTC in its Order19 dated November 5, 2010.20

In November 2011, the respondents filed an Amended Rehabilitation Plan, indicating that PDAAP
did not agree to the application of P21,980,000.00 insurance proceeds to the outstanding
obligations of PBR.21

On March 13, 2012, West Bay filed an Urgent Motion22 with the RTC praying for the issuance of
an order directing Land Bank to reimburse to it the amount of P21,980,000.00 representing the
insurance proceeds. West Bay reasoned that the reimbursement was provided for in the
restructuring plan previously approved by Land Bank in the letter dated March 25, 2002 but was
not complied with. It alleged that although the RTC approved the rehabilitation plans authorizing
the application of the insurance proceeds to the obligations of West Bay, it was never implemented.

In its Comment/Opposition,23 Land Bank explained that the insurance proceeds were applied
(value-dated) in January and June 2002 to West Bay's and PBR's outstanding loan obligation as
follows:

a. For payment of documentary stamp tax (DST) on the restructuring of the account
of [West Bay] and [PBR] in the amount of P651,277.00; and
b. In partial settlement of the loan of PBR under Promissory Notes Nos. P&C-2841
in the total amount of P21,328,723.00.24

Land Bank averred that it was prompted to apply the insurance proceeds to West Bay's and PBR's
outstanding loans due to West Bay's failure to comply with the terms and conditions of the
Restructuring Agreement dated May 10, 2002, as well as the filing of the petition for corporate
rehabilitation. Further, Land Bank claimed that it sold all its rights, credits and receivables relative
to the West Bay and PBR accounts to PDAAP, net of the insurance proceeds.25

Ruling of the RTC

In the assailed Order26 dated August 31, 2012, the RTC denied the Urgent Motion as it found no
justifiable reason for the reimbursement of the insurance proceeds to West Bay. It also observed
that West Bay did not comply with the terms and conditions of the restructuring agreement.
Finally, PBR signed promissory notes which stated that, "[t]he Borrower hereby authorizes and
empowers the Bank, without need of notice to the Borrower, and irrespective of the date of
maturity, to deduct, set-off and apply any funds, securities or assets of the Borrower with the Bank
or any of its branches, on deposit or otherwise, in reduction of amounts due under this Note."27

On December 18, 2012, the respondents filed a petition for certiorari and mandamus with the CA,
challenging the RTC Order dated August 31, 2012.28

Ruling of the CA

On September 30, 2013, the CA promulgated a Decision,29 setting aside the RTC order. Per the
CA's findings, Land Bank did not apply the insurance proceeds to the remaining obligations of
West Bay, PBR or BCP as there was no statement of the settlement of the insurance proceeds in
the context of the restructured loan. Granting that West Bay and PBR failed to comply with the
requirements of the restructured loan, it was because they were prohibited from paying any of their
outstanding liabilities when the Stay Order took effect.30 The dispositive portion of the decision
reads:

WHEREFORE, the petition is GRANTED. The Order dated August 31, 2012 of the
Rehabilitation Court is ANNULLED and SET ASIDE. The Rehabilitation Court is ORDERED
to DIRECT the [Land Bank] to REIMBURSE the P21,980,000.00 insurance proceeds, plus
interest, to [West Bay].

SO ORDERED.31

Land Bank filed a motion for reconsideration, which the CA denied in its Resolution32 dated
February 10, 2014.

Undeterred, Land Bank filed the present petition for review on certiorari, raising the following
issues:

A. WHETHER WEST BAY IS ENTITLED TO THE REIMBURSEMENT OF THE

P21,980,000.00 INSURANCE PROCEEDS; and

B. WHETHER THE RIGHT OF WEST BAY TO BE REIMBURSED WITH THE

P21,980,000.00 INSURANCE PROCEEDS HAS BEEN CLEARLY AND FULLY
ESTABLISHED IN THE MODIFIED REHABILITATION PLAN SO AS TO BE
COMPELLABLE BY MANDAMUS.33

Ruling of the Court

The Court denies giving due course to the petition for failure of Land Bank to show any reversible
error in the assailed decision as to warrant the exercise of the Court's discretionary appellate
jurisdiction.

It should be noted at the outset that under Rule 45 of the 1997 Rules of Civil Procedure, only
questions of law may be raised by the parties and passed upon by the Court. The Court is not a
trier of facts and is not duty bound to analyze and weigh again the evidence considered in the
proceedings below.34 This rule, however, admits of certain exceptions:

(1) when the inference made is manifestly mistaken, absurd or impossible; (2) when there is grave
abuse of discretion; (3) when the findings are grounded entirely on speculations, surmises or
conjectures; (4) when the judgment of the CA is based on misapprehension of facts; (5) when the
findings of fact are conflicting; (6) when the CA, in making its findings, went beyond the issues
of the case and the same is contrary to the admissions of both appellant and appellee; (7) when the
findings of fact are conclusions without citation of specific evidence on which they are based; (8)
when the CA manifestly overlooked certain relevant facts not disputed by the parties and which,
if properly considered, would justify a different conclusion; and (9) when the findings of fact of
the CA are premised on the absence of evidence and are contradicted by the evidence on record.35
(Citation omitted and emphasis ours)

In the instant case, the RTC and the CA have conflicting pronouncements, which necessitates a
review of their factual findings.

After a judicious review of the records, the Court finds that there is no reversible error on the part
of the CA in ordering the reimbursement of P21,980,000.00 which is the amount of the insurance
proceeds previously received by Land Bank.

As the CA pointed out, despite several amendments to the rehabilitation plan which repeatedly
provided for the application of the insurance proceeds to the debts of West Bay, then to PBR and
BCP, there is no showing that Land Bank applied the amount thereof to the aforementioned loans.36
The Court is inclined to uphold this finding – for if Land Bank had in fact deducted the amount of
the insurance proceeds from the loan obligations of either West Bay or PBR and BCP, this
information would have reflected on the rehabilitation plans of the CGC. In other words, if the
insurance proceeds were indeed applied to West Bay's and PBR's account in January and June
2002 as Land Bank espoused, then P21,980,000.00 should have been subtracted from the
obligations of the said companies. Verily, Land Bank negated its own claim when it failed to
present evidence of reduction in the outstanding balances of the respondents, whether singly or
collectively.

Also, a belated application of the insurance proceeds to the obligations of West Bay or PBR and
BCP would violate the Stay Order dated July 10, 2002 issued by the RTC. Section 6 of Rule 4 of
the 2000 Interim Rules of Procedure on Corporate Rehabilitation, which was in force at the time
of the filing of the petition for corporate rehabilitation, provides:
SEC. 6. Stay Order. - If the court finds the petition to be sufficient in form and substance, it shall,
not later than five (5) days from the filing of the petition, issue an Order (a) appointing a
Rehabilitation Receiver and fixing his bond; (b) staying enforcement of all claims, whether for
money or otherwise and whether such enforcement is by court action or otherwise, against the
debtor, its guarantors and sureties not solidarily liable with the debtor; (c) prohibiting the debtor
from selling, encumbering, transferring, or disposing in any manner any of its properties except in
the ordinary course of business; (d) prohibiting the debtor from making any payment of its
liabilities outstanding as at the date of filing of the petition; (e) prohibiting the debtor's suppliers
of goods or services from withholding supply of goods and services in the ordinary course of
business for as long as the debtor makes payments for the services and goods supplied after the
issuance of the stay order; (f) directing the payment in full of all administrative expenses incurred
after the issuance of the stay order; (g) fixing the initial hearing on the petition not earlier than
forty-five (45) days but not later than sixty (60) days from the filing thereof; (h) directing the
petitioner to publish the Order in a newspaper of general circulation in the Philippines once a week
for two (2) consecutive weeks; (i) directing all creditors and all interested parties (including the
Securities and Exchange Commission) to file and serve on the debtor a verified comment on or
opposition to the petition, with supporting affidavits and documents, not later than ten (10) days
before the date of the initial hearing and putting them on notice that their failure to do so will bar
them from participating in the proceedings; and (j) directing the creditors and interested parties to
secure from the court copies of the petition and its annexes within such time as to enable
themselves to file their comment on or opposition to the petition and to prepare for the initial
hearing of the petition.

Lastly, the Court deems it proper to impose interest on the amount of the insurance proceeds in the
concept of actual and compensatory damages. Article 2209 of the Civil Code provides that if the
obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity
for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed
upon, and in the absence of stipulation, the legal interest, which is six percent (6%) per annum.

In the case of loans or forbearances of money, the rate of legal interest used to be twelve percent
(12%) per annum pursuant to Central Bank Circular No. 905-82, which took effect on January 1,
1983.37 "The term 'forbearance', within the context of usury law, has been described as a
contractual obligation of a lender or creditor to refrain, during a given period of time, from
requiring the borrower or debtor to repay the loan or debt then due and payable."38

But effective on July 1, 2013, under Bangko Sentral ng Pilipinas Monetary Board Circular No.
799, the rate of interest is now back at six percent (6%) per annum for the loan or forbearance of
any money, goods or credits and in judgments, in the absence of an express contract as to such rate
of interest.39 In view of this amendment, the Court, in Nacar v. Gallery Frames, et al.,40 modified
the guidelines laid down in Eastern Shipping Lines, Inc. v. Court of Appeals,41 as follows:

II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:
 1. When the obligation is breached, and it consists in the payment of a sum of money,
i.e., a loan or forbearance of money, the interest due should be that which may have
been stipulated in writing. Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded. In the absence of stipulation, the
rate of interest shall be 6% per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the provisions of Article 1169
of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached,

an interest on the amount of damages awarded may be imposed at the discretion
of the court at the rate of 6% per annum. No interest, however, shall be adjudged
on unliquidated claims or damages, except when or until the demand can be
established with reasonable certainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the time
the claim is made judicially or extrajudicially (Art. 1169, Civil Code), but when
such certainty cannot be so reasonably established at the time the demand is made,
the interest shall begin to run only from the date the judgment of the court is made
(at which time the quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the computation of legal interest shall,
in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 6% per annum from such finality until its satisfaction,
this interim period being deemed to be by then an equivalent to a forbearance of
credit.42 (Emphasis ours)

Since the obligation of Land Bank to reimburse the amount of insurance proceeds does not
constitute a forbearance of money, the interest rate of six percent (6%) is applicable. The
pronouncement of the Court in Sunga-Chan, et aL. v. CA, et al.,43 on this matter is enlightening:
For transactions involving payment of indemnities in the concept of damages arising from
default in the performance of obligations in general and/or for money judgment not involving
a loan or forbearance of money, goods, or credit, the governing provision is Article. 2209 of the
Civil Code prescribing a yearly six percent (6%) interest.44

As to the reckoning period for the commencement of the running of the legal interest, it shall be
subject to the condition "that the courts are vested with discretion, depending on the equities of
each case, on the award of interest."45 Applying the guidelines in Nacar, another six percent (6%)
interest shall be imposed from the finality of this Resolution until its satisfaction as the interim
period, is considered to be, by then, equivalent to a forbearance of credit.

WHEREFORE, the petition is DENIED. The Decision dated September 30, 2013 and Resolution
dated February 10, 2014 of the Court of Appeals in CA-G.R. SP No. 127897 are AFFIRMED.
The Land Bank of the Philippines is DIRECTED to reimburse West Bay Colleges, Inc. the amount
of P21,980,000.00 representing the insurance proceeds plus six percent (6%) interest thereon from
the issuance of the Stay Order on July 10, 2002 up to the date of finality of this Resolution by way
of actual or compensatory damages. From finality until full satisfaction, the total amount due now
compounded with interest due from July 10, 2002 up to finality, shall likewise earn interest at six
percent (6%) per annum until fully paid.

SO ORDERED.

G.R. No. 224764

BUREAU OF INTERNAL REVENUE, ASSISTANT COMMISSIONER ALFREDO V.

MISAJON, GROUP SUPERVISOR ROLANDO M. BALBIDO, and EXAMINER
REYNANTE DP. MARTIREZ, Petitioners,
vs.
LEPANTO CERAMICS, INC., Respondent.

DECISION

PERLAS-BERNABE,, J.:

This is a direct recourse to the Court from the Regional Trial Court (RTC) of Calamba City,
Province of Laguna, Branch 35 (RTC Br. 35), through a petition for review on certiorari, 1 raising
a pure question of law. In particular, petitioners Bureau of Internal Revenue (BIR), Assistant
Commissioner Alfredo V. Misajon (Misajon), Group Supervisor Rolando M. Balbido (Balbido ),
and Examiner Reynante DP. Martirez (Martirez; collectively, petitioners) assail the Decision2
dated June 1, 2015 and the Order3 dated October 26, 2015 of the RTC Br. 35 in Civil Case No.
4813- 2014-C, which found Misajon, Balbido, and Martirez (Misajon, et al.) guilty of indirect
contempt and, accordingly, ordered them to pay a fine of ₱5,000.00 each.

The Facts

On December 23, 2011, respondent Lepanto Ceramics, Inc. (LCI) - a corporation duly organized
and existing under Philippine Laws with principal office address in Calamba City, Laguna - filed
a petition 4 for corporate rehabilitation pursuant to Republic Act No. (RA) 10142, 5 otherwise
known as the "Financial Rehabilitation and Insolvency Act (FRIA) of 2010," docketed before the
RTC ofCalamba City, Branch 34, the designated Special Commercial Court in Laguna
(Rehabilitation Court). Essentially, LCI alleged that due to the financial difficulties it has been
experiencing dating back to the Asian financial crisis, it had entered into a state of insolvency
considering its inability to pay its obligations as they become due and that its total liabilities
amounting to ₱4,213 ,682, 715. 00 far exceed its total assets worth ₱1,112,723,941.00. Notably,
LCI admitted in the annexes attached to the aforesaid Petition its tax liabilities to the national
government in the amount of at least ₱6,355,368.00.6

On January 13, 2012, the Rehabilitation Court issued a Commencement Order,7 which, inter alia:
(a) declared LCI to be under corporate rehabilitation; (b) suspended all actions or proceedings, in
court or otherwise, for the enforcement of claims against LCI; (c) prohibited LCI from making any
payment of its liabilities outstanding as of even date, except as may be provided under RA 10142;
and (d) directed the BIR to file and serve on LCI its comment or opposition to the petition, or its
claims against LCI. 8 Accordingly, the Commencement Order was published in a newspaper of
general circulation and the same, together with the petition for corporate rehabilitation, were
personally served upon LCI's creditors, including the BIR.9

Despite the foregoing, Misajon, et al., acting as Assistant Commissioner, Group Supervisor, and
Examiner, respectively, of the BIR's Large Taxpayers Service, sent LCI a notice of informal
conference10 dated May 27, 2013, informing the latter of its deficiency internal tax liabilities for
the Fiscal Year ending June 30, 2010. In response, LCI's court-appointed receiver, Roberto L.
Mendoza, sent BIR a letter-reply, reminding the latter of the pendency of LCI's corporate
rehabilitation proceedings, as well as the issuance of a Commencement Order in connection
therewith. Undaunted, the BIR sent LCI a Formal Letter of Demand11 dated May 9, 2014,
requiring LCI to pay deficiency taxes in the amount of P567,519,348.39. 12 This prompted LCI to
file a petition 13 for indirect contempt dated August 13, 2014 against petitioners before RTC Br.
35. In said petition, LCI asserted that petitioners' act of pursuing the BIR's claims for deficiency
taxes against LCI outside of the pending rehabilitation proceedings in spite of the Commencement
Order issued by the Rehabilitation Court is a clear defiance of the aforesaid Order. As such,
petitioners must be cited for indirect contempt in accordance with Rule 71 of the Rules of Court
in relation to Section 16 of RA 10142.14

For their part, petitioners maintained that: (a) RTC Br. 35 had no jurisdiction to cite them in
contempt as it is only the Rehabilitation Court, being the one that issued the Commencement
Order, which has the authority to determine whether or not such Order was defied; (b) the instant
petition had already been mooted by the Rehabilitation Court's Order15 dated August 28, 2014
which declared LCI to have been successfully rehabilitated resulting in the termination of the
corporate rehabilitation proceedings; (c) their acts do not amount to a defiance of the
Commencement Order as it was done merely to toll the prescriptive period in collecting deficiency
taxes, and thus, sanctioned by the Rules of Procedure of the FRIA; (d) their acts of sending a
Notice of Informal Conference and Formal Letter of Demand do not amount to a "legal action or
other recourse" against LCI outside of the rehabilitation proceedings; and (e) the indirect contempt
proceedings interferes with the exercise of their functions to collect taxes due to the govemment.16

The RTC Br. 35 Ruling

In a Decision17 dated June 1, 2015, the RTC Br. 35 found Misajon, et al. guilty of indirect
contempt and, accordingly, ordered them to pay a fine of ₱5,000.00 each. 18 Preliminarily, the
RTC Br. 35 ruled that it has jurisdiction over LCI's petition for indirect contempt as it is docketed,
heard, and decided separately from the principal action. 19 Going to petitioners' other contentions,
the RTC found that: (a) the supervening termination of the rehabilitation proceedings and the
consequent lifting of the Commencement Order did not render moot the petition for indirect
contempt as the acts complained of were already consummated; (b) petitioners' acts of sending
LCI a notice of informal conference and Formal Letter of Demand are covered by the
Commencement Order as they were for the purpose of pursuing and enforcing a claim for
deficiency taxes, and thus, are in clear defiance of the Commencement Order; and (c) petitioners
could have tolled the prescriptive period to collect deficiency taxes without violating the
Commencement Order by simply ventilating their claim before the rehabilitation proceedings,
which they were adequately notified of. In this relation, the RTC Br. 35 held that while the BIR is
a juridical entity which can only act through its authorized intermediaries, it cannot be concluded
that it authorized the latter to commit the contumacious acts complained of, i.e., defiance of the
Commencement Order. Thus, absent any contrary evidence, only those individuals who performed
such acts, namely, Misajon, et al., should be cited for indirect contempt of court.20

Aggrieved, Misaj on, et al. moved for reconsideration, 21 which was, however, denied in an
Order22 dated October 26, 2015; hence, this petition.

The Issue Before the Court

The issue for the Court's resolution is whether or not the RTC Br. 35 correctly found Misajon, et
al. to have defied the Commencement Order and, accordingly, cited them for indirect contempt.

The Court's Ruling

The petition is without merit.

Section 4 (gg) of RA 10142 states:

Section 4. Definition of Terms. - As used in this Act, the term:

xxxx

(gg) Rehabilitation shall refer to the restoration of the debtor to a condition of successful operation
and solvency, if it is shown that its continuance of operation is economically feasible and its
creditors can recover by way of the present value of payments projected in the plan, more if the
debtor continues as a going concern than if it is immediately liquidated.

xxxx

"[C]ase law has defined corporate rehabilitation as an attempt to conserve and administer the assets
of an insolvent corporation in the hope of its eventual return from financial stress to solvency. It
contemplates the continuance of corporate life and activities in an effort to restore and reinstate
the corporation to its former position of successful operation and liquidity."23

Verily, the inherent purpose of rehabilitation is to find ways and means to minimize the expenses
of the distressed corporation during the rehabilitation period by providing the best possible
framework for the corporation to gradually regain or achieve a sustainable operating form. 24 "[It]
enable[s] the company to gain a new lease in life and thereby allow creditors to be paid [t]heir
claims from its earnings. Thus, rehabilitation shall be undertaken when it is shown that the
continued operation of the corporation is economically more feasible and its creditors can recover,
by way of the present value of payments projected in the plan, more, if the corporation continues
as a going concern than if it is immediately liquidate d.25
In order to achieve such objectives, Section 16 of RA 10142 provides, inter alia, that upon the
issuance of a Commencement Order - which includes a Stay or Suspension Order - all actions or
proceedings, in court or otherwise, for the enforcement of "claims" against the distressed company
shall be suspended.26 Under the same law, claim "shall refer to all claims or demands of whatever
nature or character against the debtor or its property, whether for money or otherwise, liquidated
or unliquidated, fixed or contingent, matured or unmatured, disputed or undisputed, including, but
not limited to; (1) all claims of the government, whether national or local, including taxes,
tariffs and customs duties; and (2) claims against directors and officers of the debtor arising from
acts done in the discharge of their functions falling within the scope of their authority: Provided,
That, this inclusion does not prohibit the creditors or third parties from filing cases against the
directors and officers acting in their personal capacities."27

To clarify, however, creditors of the distressed corporation are not without remedy as they may
still submit their claims to the rehabilitation court for proper consideration so that they may
participate in the proceedings, keeping in mind the general policy of the law "to ensure or maintain
certainty and predictability in commercial affairs, preserve and maximize the value of the assets
of these debtors, recognize creditor rights and respect priority of claims, and ensure equitable
treatment of creditors who are similarly situated."28 In other words, the creditors must ventilate
their claims before the rehabilitation court, and any "[a]ttempts to seek legal or other resource
against the distressed corporation shall be sufficient to support a finding of indirect contempt of
court."29

In the case at bar, it is undisputed that LCI filed a petition for corporate rehabilitation. Finding the
same to be sufficient in form and substance, the Rehabilitation Court issued a Commencement
Order30 dated January 13, 2012 which, inter alia: (a) declared LCI to be under corporate
rehabilitation; (b) suspended all actions or proceedings, in court or otherwise, for the enforcement
of claims against LCI; (c) prohibited LCI from making any payment of its outstanding liabilities
as of even date, except as may be provided under RA 10142; and (d) directed the BIR to file and
serve on LCI its comment or opposition to the petition, or its claims against LCI. It is likewise
undisputed that the BIR - personally and by publication - was notified of the rehabilitation
proceedings involving LCI and the issuance of the Commencement Order related thereto. Despite
the foregoing, the BIR, through Misajon, et al., still opted to send LCI: (a) a notice of informal
conference31 dated May 27, 2013, informing the latter of its deficiency internal tax liabilities for
the Fiscal Year ending June 30, 2010; and (b) a Formal Letter of Demand32 dated May 9, 2014,
requiring LCI to pay deficiency taxes in the amount of P567,5 l 9,348.39, notwithstanding the
written reminder coming from LCI's court-appointed receiver of the pendency of rehabilitation
proceedings concerning LCI and the issuance of a commencement order. Notably, the acts of
sending a notice of informal conference and a Formal Letter of Demand are part and parcel of the
entire process for the assessment and collection of deficiency taxes from a delinquent taxpayer,33
- an action or proceeding for the enforcement of a claim which should have been suspended
pursuant to the Commencement Order. Unmistakably, Misajon, et al. 's foregoing acts are in clear
defiance of the Commencement Order.

Petitioners' insistence that: (a) Misajon, et al. only performed such acts to toll the prescriptive
period for the collection of deficiency taxes; and (b) to cite them in indirect contempt would unduly
interfere with their function of collecting taxes due to the government, cannot be given any
credence. As aptly put by the RTC Br. 35, they could have easily tolled the running of such
prescriptive period, and at the same time, perform their functions as officers of the BIR, without
defying the Commencement Order and without violating the laudable purpose of RA 10142 by
simply ventilating their claim before the Rehabilitation Court.34 After all, they were adequately
notified of the LCI's corporate rehabilitation and the issuance of the corresponding
Commencement Order. In sum, it was improper for Misajon, et al. to collect, or even attempt to
collect, deficiency taxes from LCI outside of the rehabilitation proceedings concerning the latter,
and in the process, willfully disregard the Commencement Order lawfully issued by the
Rehabilitation Court. Hence, the RTC Br. 35 correctly cited them for indirect contempt.35

WHEREFORE, the petition is DENIED. The Decision dated June 1, 2015 and the Order dated
October 26, 2015 of the Regional Trial Court of Calamba City, Province of Laguna, Branch 35 in
Civil Case No. 4813-2014- C are hereby AFFIRMED.

SO ORDERED.