[G.R. No. L-28398. August 6, 1975.] outstanding shares of said stockholder’s estate until they were fully paid.
er’s estate until they were fully paid. the declaration of said
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. JOHN L. MANNING, W.D.
McDONALD, E.E. SIMMONS and THE COURT OF TAX APPEALS, Respondents.
Solicitor General Antonio P. Barredo, Solicitor Lolita O. Gal-lang and Special Attorney
Virgilio J. Saldajena for Petitioner.
Manuel O. Chan for Private Respondents.
SYNOPSIS
Under a trust agreement, Julius Reese who owned 24,700 shares of the 25,000 common shares
of MANTRASCO, and the three private respondents who owned the rest, at 100 shares each,
deposited all their shares with the Trustees. The trust agreement provided that upon Reese’s
death MANTRASCO shall purchase Reese’s shares. The trust agreement was executed in view
of Reese’s desire that upon his death the Company would continue under the management of
respondents. Upon Reese’s death and partial payment by the company of Reeses’s share, a
new certificate was issued in the name of MANTRASCO, and the certificate indorsed to the
Trustees. Subsequently, the stockholders reverted the 24,700 shares in the Treasury to the
capital account of the company as stock dividends to be distributed to the stockholders. When
the entire purchase price of Reese’s interest in the company was paid in full by the latter, the
trust agreement was terminated, and the shares held in trust were delivered to the company.
The Bureau of Internal Revenue concluded that the distribution of the 24,700 shares of Reese
as stock dividends was in effect a distribution of the "assets or property of the corporation." It
therefore assessed respondents for deficiency income taxes as well as for fraud penalty and
interest charges. The Court of Tax Appeals absolved respondent from any liability for receiving
the questioned stock dividends on the ground that their respective one-third interest in the
Company remained the same before and after the declaration of the stock dividends and only
the number of shares held by each of them had changed.
On a petition for review, the Supreme Court held that the newly acquired shares were not
treasury shares; their declaration as treasury stock dividends was a complete nullity and that the
assessment by the Commissioner of fraud penalty and the imposition of interest charges
pursuant to the provision of the Tax Code were made in accordance with law.
Judgment of the Court of Tax Appeals se aside.
SYLLABUS
1. PRIVATE CORPORATIONS; SHARES OF STOCKS; TREASURY; SHARES. — Treasury
shares are stocks issued and fully paid for and re-acquired by the corporation either by
purchase, donation, forfeiture or other means. They are therefore issued shares, but being in the
treasury they do not have the status of outstanding shares. Consequently, although a treasury
share, not having been retired by the corporation re-acquiring it, may be re-issued or sold again,
such share, as long as it is held by the corporation as a treasury share, participates neither in
dividends, because dividends cannot be declared by the corporation to itself, nor in the meetings
of the corporations as voting stock, for otherwise equal distribution of voting powers among
stockholders will be effectively lost and the directors will be able to perpetuate their control of the
corporation though it still represent a paid — for interest in the property of the corporation.
2. ID.; ID.; ID.; DECLARATION OF QUESTIONED SHARES AS TREASURY STOCK
DIVIDENDS, A NULLITY. — Where the manifest intention of the parties to the trust agreement
was, in sum and substance, to treat the shares of a deceased stockholder as absolutely
shares as treasury stock dividend was a complete nullity and plainly violative of public policy.
3. ID.; ID.; STOCK DIVIDEND PAYABLE ONLY FROM RETAINED EARNINGS. — A stock
dividend, being one payable in capital stock, cannot be declared out of outstanding corporate
stock, but only from retained earnings.
4. ID.; ID.; PURCHASE OF HOLDING RESULTING IN DISTRIBUTION OF EARNINGS
TAXABLE. — Where by the use of a trust instrument as a convenient technical device,
respondents bestowed unto themselves the full worth and value of a deceased stockholder’s
corporate holding acquired with the very earnings of the companies, such package device which
obviously is not designed to carry out the usual stock dividend purpose of corporate expansion
reinvestment, e.g., the acquisition of additional facilities and other capital budget items, but
exclusively for expanding the capital base of the surviving stockholders in the company, cannot
be allowed to deflect the latter’s responsibilities toward our income tax laws. The conclusion is
ineluctable that whenever the company parted with a portion of its earnings "to buy" the
corporate holdings of the deceased stockholders, it was in ultimate effect and result making a
distribution of such earnings to the surviving stockholders. All these amounts are consequently
subject to income tax as being, in truth and in fact, a flow of cash benefits to the surviving
stockholders.
5. ID.; ID.; ID.; COMMISSIONER ASSESSMENT BASED ON THE TOTAL ACQUISITION COST
OF THE ALLEGED TREASURY STOCK DIVIDENDS, ERROR. — Where the surviving
stockholders, by resolution, partitioned among themselves, as treasury stock dividends, the
deceased stockholder’s interest, and earnings of the corporation over a period of years were
used to gradually wipe out the holdings therein of said deceased stockholder, the earnings
(which in effect have been distributed to the surviving stockholders when they appropriated
among themselves the deceased stockholder’s interest), should be taxed for each of the
corresponding years when payments were made to the deceased’s estate on account of his
shares. In other words, the Tax Commissioner may not asses the surviving stockholders, for
income tax purposes, the total acquisition cost of the alleged treasury stock dividends in one
lump sum. However, with regard to payment made with the corporation’s earnings before the
passage of the resolution declaring as stock dividends the deceased stockholder’s interest
(while indeed those earnings were utilized in those years to gradually pay off the value of the
deceased stockholder’s holdings), the surviving stockholders should be liable (in the absence of
evidence that prior to the passage of the stockholder’s resolution the contributed of each of the
surviving stockholder rose corresponding), for income tax purposes, to the extent of the
aggregate amount paid by the corporation (prior to such resolution) to buy off the deceased
stockholder’s shares. The reason is that it was only by virtue of the authority contained in said
resolution that the surviving stockholders actually, albeit illegally, appropriated and petitioned
among themselves the stockholders equity representing the deceased stockholder’s interest.
6. TAXATION; INCOME TAX; ASSESSMENT OF FRAUD PENALTY AND IMPOSITION OF
INTEREST CHARGES IN ACCORDANCE WITH LAW DESPITE NULLITY OF RESOLUTION
AUTHORIZING DISTRIBUTION OF EARNINGS. — The fact that the resolution authorizing the
distribution of earnings is null and void is of no moment. Under the National Internal Revenue
Code, income tax is assessed on income received from any property, activity or service that
produces income. The Tax Code stands as an indifferent, neutral party on the matter of where
the income comes from. The action taken by the Commissioner of assessing fraud penalty and
imposing interest charges pursuant to the provisions of the Tax Code is in accordance with law.
 DECISION
CASTRO, J.:
This is a petition for review of the decision of the Court of Tax Appeals, in CTA case 1626, which
set aside the income tax assessments issued by the Commissioner of Internal Revenue against
John L. Manning, W.D. McDonald and E.E. Simmons (hereinafter referred to as the
respondents), for alleged undeclared stock dividends received in 1958 from the Manila Trading
and Supply Co. (hereinafter referred to as the MANTRASCO) valued at P7,973,660.
In 1952 the MANTRASCO had an authorized capital stock of P2,500,000 divided into 25,000
common shares; 24,700 of these were owned by Julius S. Reese, and the rest, at 100 shares
each, by the three respondents.
On February 29, 1952, in view of Reese’s desire that upon his death MANTRASCO and its two
subsidiaries, MANTRASCO (Guam), Inc. and the Port Motors, Inc., would continue under the
management of the respondents, a trust agreement on his and the respondents’ interests in
MANTRASCO was executed by and among Reese (therein referred to as OWNER),
MANTRASCO (therein referred to as COMPANY), the law firm of Ross, Selph, Carrascoso and
Janda (therein referred to as TRUSTEES), and the respondents (therein referred to as
MANAGERS).
The trust agreement pertinently provides as follows:jgc:chanrobles.com.ph
"1. Upon the execution of this agreement the OWNER shall deposit with the TRUSTEES, duly
endorsed and ready for transfer Twenty-Four Thousand Seven Hundred (24,700) shares of the
capital stock of the COMPANY, these shares being all shares of the capital stock of the
COMPANIES belonging to him . . .
"2. Upon the execution of this Agreement the MANAGERS shall deposit with the TRUSTEES,
duly endorsed and ready for transfer, all shares of the capital stock of the COMPANIES
belonging to any of them.
"3. (a) The OWNER and the MANAGERS, and each of them, agree that if any of them shall at
any time during the life of this trust acquire any additional shares of stock of any of the
COMPANIES, or of any successor company, or any shares in substitution, exchange or
replacement of the shares subject to this agreement, they shall forthwith endorse and deposit
such shares with the TRUSTEES hereunder and such additional or other shares shall become
subject to this agreement; shares deposited by the OWNER and shares received by the
TRUSTEES as stock dividends on, or in substitution, exchange or replacement of, such shares
so deposited under this agreement being MANAGERS’ SHARES.
"(b) All shares deposited under paragraphs 1, 2 and 3(a) hereof shall, during the life of the
OWNER, remain in the name of and shall be voted by the respective parties making the deposit
...
"4. (a) Upon the death of the OWNER and the receipt by the TRUSTEES of the initial payment
from the company purchasing the OWNER’S SHARES, the TRUSTEES shall cause the
OWNER’S SHARES to be transferred into the name of such company and such company shall
thereupon transfer such shares into the name of the TRUSTEES and the TRUSTEES shall hold
such shares until payment for all such shares shall have been made by the company as
provided in this agreement.
x x x purchase price:jgc:chanrobles.com.ph
"(c) The TRUSTEES shall vote all stock standing in their name or the name of their nominees at
all meetings and shall be in all respects entitled to all the rights as owners of said shares,
subject, however, to the provisions of this agreement of trust.
"(d) Any and all dividends paid on said shares after the death of the OWNER shall be subject to
the provisions of this agreement.
x x x
"5. (b) It is expressly agreed and understood, however, that the declaration of dividends and
amount of earnings transferred to surplus shall be subject to the approval of the TRUSTEES and
the TRUSTEES shall participate to such extent in the affairs of the COMPANIES as they deem
necessary to insure the carrying out of this agreement and the discharge of the obligations of the
COMPANIES and each of them and of the MANAGERS hereunder.
"(c) The TRUSTEES shall designate one or more directors of each of the COMPANIES as they
shall consider advisable and corresponding shares shall be transferred to such directors to
qualify them to act.
x x x
"8. (a) Upon the death of the OWNER, the COMPANIES or any one or more of them shall
purchase the OWNER’S SHARES; it being the intent that any of the COMPANIES shall
purchase all or a proportionate part of the OWNER’S SHARES . . .
"(b) The purchase price of such shares shall be the book value of such share computed in
United States dollars . . .
x x x
"(d) All dividends paid on stock that had been OWNER’S SHARES, from the time of the transfer
of such shares by one or more of the COMPANIES to the TRUSTEES as provided in Article 4
until payment in full for such OWNER’S SHARES shall have been made by each of the
COMPANIES which shall have purchased the same, shall be credited as payments on account
of the purchase price of such shares and shall be a prepayment on account of the next due
installment or installments of such purchase price.
x x x
"12. The TRUSTEES may from time to time increase or decrease the unpaid balance of the
purchase price of the shares being purchased by any COMPANY or COMPANIES should they in
their exclusive discretion determine that such increase or decrease would be necessary to carry
out the intention of the parties that the Estate and heirs of the OWNER shall receive the fair
value of the shares deposited in Trust as such value existed at the date of the death of the
OWNER. . .
"13. Should the said COMPANIES or any of them be unable or unwilling to comply with their
obligations hereunder when due, the TRUSTEES may terminate this agreement and dispose of
all the shares of stock deposited hereunder, whether or not payment shall have been made for
part of such stock, applying the proceeds of such sale or disposition to the unpaid balance of the
"(a) If, upon any such sale or disposition of the stock, the TRUSTEES shall receive an amount in
excess of the unpaid balance of the purchase price agreed to be paid by the COMPANIES for
the OWNER’S SHARES such excess, after deducting all expenses, charges and taxes, shall be
paid to the then MANAGERS.
x x x trustees delivered to MANTRASCO all the shares which they were holding in trust.
"17. Until the delivery to him of the shares purchased by him, no MANAGER, shall sell, assign,
mortgage, pledge, transfer or in anywise encumber or hypothecate such shares or his interest in
this agreement.
x x x estate by virtue of the trust agreement, to wit:chanrob1es virtual 1aw library
"19. After the death of the OWNER and during the period of this trust the COMPANIES shall pay
no dividends except as may be authorized by the TRUSTEES. Dividends on MANAGER’S
SHARES shall, so long as they shall not be in default under this agreement, be paid over by the
TRUSTEES to the MANAGERS. Dividends on OWNER’S SHARES shall be applied in
liquidation of the COMPANIES’ liabilities hereunder as provided in Article 8(d).
x x x
"26. The TRUSTEES may, after the death of the OWNER and during the life of this trust, vote
any and all shares held in trust, at any general and special meeting of stockholders for all
purposes, including but not limited to wholly or partially liquidating or reducing the capital of any
COMPANY or COMPANIES, authorizing the sale of any or all assets, and election of directors . .
. 1961 3,811,387.69 38,332.45
x x x On the basis of their examination, the BIR examiners concluded that the distribution of Reese’s
"28. The COMPANIES and each of them undertake and agree by proper corporate act to reduce
their capitalization, sell or encumber their assets, amend their articles of incorporation,
reorganize, liquidate, dissolve and do all other things the TRUSTEES in their discretion
determine to be necessary to enable them to comply with their obligations hereunder and the
TRUSTEES are hereby irrevocably authorized to vote all shares of the COMPANIES and each
of them at any general or special meeting for the accomplishment of such purposes. . . ."cralaw
virtua1aw library
On October 19, 1954 Reese died. The projected transfer of his shares in the name of
MANTRASCO could not, however, be immediately effected for lack of sufficient funds to cover
initial payment on the shares.
On February 2, 1955, after MANTRASCO made a partial payment of Reese’s shares, the
certificate for the 24,700 shares in Reese’s name was cancelled and a new certificate was
issued in the name of MANTRASCO. On the same date, and in the meantime that Reese’s
interest had not been fully paid, the new certificate was endorsed to the law firm of Ross, Selph,
Carrascoso and Janda, as trustees for and in behalf of MANTRASCO.
On December 22, 1958, at a special meeting of MANTRASCO stockholders, the following
resolution was passed:jgc:chanrobles.com.ph
"RESOLVED, that the 24,700 shares in the Treasury be reverted back to the capital account of
the company as a stock dividend to be distributed to shareholders of record at the close of
business on December 22, 1958, in accordance with the action of the Board of Directors at its
meeting on December 19, 1958 which action is hereby approved and confirmed."cralaw
virtua1aw library
On November 25, 1963 the entire purchase price of Reese’s interest in MANTRASCO was
finally paid in full by the latter, On May 4, 1964 the trust agreement was terminated and the
Meanwhile, on September 14, 1962, an examination of MANTRASCO’s books was ordered by
the Bureau of Internal Revenue. The examination disclosed that (a) as of December 31, 1958
the 24,700 shares declared as dividends had been proportionately distributed to the
respondents, representing a total book value or acquisition cost of P7,973,660; (b) the
respondents failed to declare the said stock dividends as part of their taxable income for the year
1958; and (c) from 1956 to 1961 the following amounts were paid by MANTRASCO to Reese’s
Amounts
Year Liabilities Paid
1956 P5,830,587.86 P 2,143,073.00
1957 5,317,137.86 513,450.00
1958 4,824,059.28 493,078.58
1959 4,319,420.14 504,639.14
1960 3,849,720.14 469,700.00
shares as stock dividends was in effect a distribution of the "asset or property of the corporation
as may be gleaned from the payment of cash for the redemption of said stock and distributing
the same as stock dividend." On April 14, 1965 the Commissioner of Internal Revenue issued
notices of assessment for deficiency income taxes to the respondents for the year 1958, as
follows:chanrob1es virtual 1aw library
J.L. Manning W.D. McDonald E.E. Simmons
Deficiency Income Tax P1,416,469.00 P1,442,719.00 P1,450,434.00
Add 50% surcharge* 723,234.50 721,359.507 25,217.00
1/2% monthly interest from
6-20-59 to 6-20-62 260,364.42 259,689.42 261,078.12
———— ———— ————
TOTAL AMOUNT DUE
& COLLECTIBLE P2,430,067.92 P2,423,767.92 2,436,729.12
The respondents unsuccessfully challenged the foregoing assessments and, failing to secure a
favorable reconsideration, appealed to the Court of Tax Appeals.
On October 30, 1967 the CTA rendered judgment absolving the respondents from any liability
for receiving the questioned stock dividends on the ground that their respective one-third interest
in MANTRASCO remained the same before and after the declaration of stock dividends and only
the number of shares held by each of them had changed.
Hence, the present recourse.
All the parties rely upon the same provisions of the Tax Code and internal revenue regulations to
bolster their respective positions. These are:chanrob1es virtual 1aw library
A. National Internal Revenue Code
"SEC. 83. Distribution of dividends or assets by corporations — (a) Definition of Dividends —
The term ‘dividends’ when used in this Title means any distribution made by a corporation to its
shareholders out of its earnings or profits accrued since March first, nineteen hundred and
thirteen, and payable to its shareholders, whether in money or in other property.
"Where a corporation distributes all of its assets in complete liquidation or dissolution the gain
realized or loss sustained by the stockholder, whether individual or corporate, is a taxable
income or deductible loss, as the case may be.
"(b) Stock dividend. — A stock dividend representing the transfer of surplus to capital account
shall not be subject to tax. However, if a corporation cancels or redeems stock issued as a
dividend at such time and in such manner as to make the distribution and cancellation or
redemption, in whole or in part, essentially equivalent to the distribution of a taxable dividend,
the amount so distributed in redemption or cancellation of the stock shall be considered as
taxable income to the extent that it represents a distribution of earnings or profits accumulated
after March first, nineteen hundred and thirteen."cralaw virtua1aw library
B. B.I.R. Regulations
"SEC. 251. Dividends paid in property. — Dividends paid in securities or other property (other
than its own stock), in which the earnings of the corporation have been invested, are income to
the recipients to the amount of the full market value of such property when receivable by
individual stockholders . . .
"SEC. 252. Stock dividend. — A stock dividend which represents the transfer of surplus to
capital account is not subject to income tax. However, a dividend in stock may constitute taxable
income to the recipients thereof notwithstanding the fact that the officers or directors of the
corporation (as defined in section 84) choose to call such distribution as a stock dividend. The
distinction between a stock dividend which does not, and one which does, constitute income
taxable to the shareholders is the distinction between a stock dividend which works no change in
the corporate entity, the same interest in the same corporation being represented after the
distribution by more shares of precisely the same character, and a stock dividend where there
either has been change of corporate identity or a change in the nature of the shares issued as
dividends whereby the proportional interest of the shareholder after the distribution is essentially
different from the former interest. A stock dividend constitutes income if it gives the shareholder
an interest different from that which his former stockholdings represented. A stock dividend does
not constitute income if the new shares confer no different rights or interests than did the old —
the new certificate plus the old representing the same proportionate interest in the net assets of
the corporation as did the old."cralaw virtua1aw library
The parties differ, however, on the taxability of the "treasury" stock dividends received by the
respondents.
The respondents anchor their argument on the same basis as the Court of Tax Appeals;
whereas the Commissioner maintains that the full value (P7,973,660) of the shares redeemed
from Reese by MANTRASCO which were subsequently distributed to the respondents as stock
dividends in 1958 should be taxed as income of the respondents for that year, the said
distribution being in effect a distribution of cash. The respondents’ interests in MANTRASCO, he
further argues, were only .4% prior to the declaration of the stock dividends in 1958, but rose to
33 1/3% each after the said declaration.
In submitting their respective contentions, it is the assumption of both parties that the 24,700
shares declared as stock dividends were treasury shares. We are however convinced, after a
careful study of the trust agreement, that the said shares were not, on December 22, 1958 or at
anytime before or after that date, treasury shares. The reasons are quite plain.
Although authorities may differ on the exact legal and accounting status of so-called "treasury
shares," 1 they are more or less in agreement that treasury shares are stocks issued and fully
paid for and re-acquired by the corporation either by purchase, donation, forfeiture or other
means. 2 Treasury shares are therefore issued shares, but being in the treasury they do not
have the status of outstanding shares. 3 Consequently, although a treasury share, not having
been retired by the corporation re-acquiring it, may be re-issued or sold again, such share, as
long as it is held by the corporation as a treasury share, participates neither in dividends,
because dividends cannot be declared by the corporation to itself, 4 nor in the meetings of the
corporation as voting stock, for otherwise equal distribution of voting powers among
stockholders will be effectively lost and the directors will be able to perpetuate their control of the
corporation, 5 though it still represents a paid-for interest in the property of the corporation. 6
The foregoing essential features of a treasury stock are lacking in the questioned shares. Thus,
(a) under paragraph 4(c) of the trust agreement, the trustees were authorized to vote all stock
standing in their names at all meetings and to exercise all rights "as owners of said shares" —
this authority is reiterated in paragraphs 26 and 28 of the trust agreement;
(b) under paragraph 4(d), "Any and all dividends paid on said shares after the death of the
OWNER shall be subject to the provisions of this agreement;"
(c) under paragraph 5(b), the amount of retained earnings to be declared as dividends was
made subject to the approval of the trustees of the 24,700 shares;
(d) under paragraph 5(c), the choice of corporate directors was delegated exclusively to the
trustees who were also given the authority to transfer qualifying shares to such directors; and
(e) under paragraph 19, MANTRASCO and its two subsidiaries were expressly prohibited from
paying "dividends except as may be authorized by the TRUSTEES;" in the same paragraph
mention was also made of "dividends on OWNER’S SHARES" which shall be applied to the
liquidation of the liabilities of the three companies for the price of Reese’s shares.
The manifest intention of the parties to the trust agreement was, in sum and substance, to treat
the 24,700 shares of Reese as absolutely outstanding shares of Reese’s estate until they were
fully paid. Such being the true nature of the 24,700 shares, their declaration as treasury stock
dividend in 1958 was a complete nullity and plainly violative of public policy. A stock dividend,
being one payable in capital stock, cannot be declared out of outstanding corporate stock, but
only from retained earnings: 7
Of pointed relevance is this useful discussion of the nature of a stock dividend: 8
"‘A stock dividend always involves a transfer of surplus (or profit) to capital stock.’ Graham and
Katz, Accounting in Law Practice, 2d ed. 1938, No. 70. As the court said in United States v.
Siegel, 8 Cir., 1931, 52 F 2d 63, 65, 78 ALR 672: ‘A stock dividend is a conversion of surplus or
undivided profits into capital stock, which is distributed to stockholders in lieu of a cash dividend.’
Congress itself has defined the term ‘dividend’ in No. 115(a) of the Act as meaning any
distribution made by a corporation to its shareholders, whether in money or in other property, out
of its earnings or profits. In Eisner v. Macomber, 1920, 252 US 189, 40 S Ct 189, 64 L Ed 521, 9
ALR 1570, both the prevailing and the dissenting opinions recognized that within the meaning of
the revenue acts the essence of a stock dividend was the segregation out of surplus account of
a definite portion of the corporate earnings as part of the permanent capital resources of the
corporation by the device of capitalizing the same, and the issuance to the stockholders of
additional shares of stock representing the profits so capitalized."cralaw virtua1aw library

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

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

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

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

ACCORDINGLY, the judgment of the Court of Tax Appeals absolving the respondents from any
deficiency income tax liability is set aside, and this case is hereby remanded to the Court of Tax
Appeals for further proceedings. More specifically, the Court of Tax Appeals shall recompute the
income tax liabilities of the respondents in accordance with this decision and with the Tax Code,
and thereafter pronounce and enter judgment accordingly. No costs.

G.R. No. L-43350 December 23, 1937
CAGAYAN FISHING DEVELOPMENT CO., INC., plaintiff-appellant,
vs.
TEODORO SANDIKO, defendant-appellee.
Arsenio P. Dizon for appellant.
Sumulong, Lavides and Sumulong for appellee.
LAUREL, J.:
This is an appeal from a judgment of the Court of First Instance of Manila absolving the
defendant from the plaintiff's complaint.
Manuel Tabora is the registered owner of four parcels of land situated in the barrio of Linao,
town of Aparri, Province of Cagayan, as evidenced by transfer certificate of title No. 217 of the
land records of Cagayan, a copy of which is in evidence as Exhibit 1. To guarantee the payment
of a loan in the sum of P8,000, Manuel Tabora, on August 14, 1929, executed in favor of the
Philippine National Bank a first mortgage on the four parcels of land above-mentioned. A second
mortgage in favor of the same bank was in April of 1930 executed by Tabora over the same
lands to guarantee the payment of another loan amounting to P7,000. A third mortgage on the
same lands was executed on April 16, 1930 in favor of Severina Buzon to whom Tabora was
indebted in the sum of P2,9000. These mortgages were registered and annotations thereof
appear at the back of transfer certificate of title No. 217.
On May 31, 1930, Tabora executed a public document entitled "Escritura de Transpaso de
Propiedad Inmueble" (Exhibit A) by virtue of which the four parcels of land owned by him was
sold to the plaintiff company, said to under process of incorporation, in consideration of one peso
(P1) subject to the mortgages in favor of the Philippine National Bank and Severina Buzon and,
to the condition that the certificate of title to said lands shall not be transferred to the name of the
plaintiff company until the latter has fully and completely paid Tabora's indebtedness to the
Philippine National Bank.
The plaintiff company filed its article incorporation with the Bureau of Commerce and Industry on
October 22, 1930 (Exhibit 2). A year later, on October 28, 1931, the board of directors of said
company adopted a resolution (Exhibit G) authorizing its president, Jose Ventura, to sell the four
parcels of lands in question to Teodoro Sandiko for P42,000. Exhibits B, C and D were
thereafter made and executed. Exhibit B is a deed of sale executed before a notary public by the
terms of which the plaintiff sold ceded and transferred to the defendant all its right, titles, and
interest in and to the four parcels of land described in transfer certificate in turn obligated himself
to shoulder the three mortgages hereinbefore referred to. Exhibit C is a promisory note for
P25,300. drawn by the defendant in favor of the plaintiff, payable after one year from the date
thereof. Exhibit D is a deed of mortgage executed before a notary public in accordance with
which the four parcels of land were given a security for the payment of the promissory note,
Exhibit C. All these three instrument were dated February 15, 1932.
The defendant having failed to pay the sum stated in the promissory note, plaintiff, on January
25, 1934, brought this action in the Court of First Instance of Manila praying that judgment be
rendered against the defendant for the sum of P25,300, with interest at legal rate from the date
of the filing of the complaint, and the costs of the suits. After trial, the court below, on December
18, 1934, rendered judgment absolving the defendant, with costs against the plaintiff. Plaintiff
presented a motion for new trial on January 14, 1935, which motion was denied by the trial court
on January 19 of the same year. After due exception and notice, plaintiff has appealed to this
court and makes an assignment of various errors.
In dismissing the complaint against the defendant, the court below, reached the conclusion that
Exhibit B is invalid because of vice in consent and repugnancy to law. While we do not agree
with this conclusion, we have however voted to affirm the judgment appealed from the reasons
which we shall presently state.
The transfer made by Tabora to the Cagayan fishing Development Co., Inc., plaintiff herein, was
affected on May 31, 1930 (Exhibit A) and the actual incorporation of said company was affected
later on October 22, 1930 (Exhibit 2). In other words, the transfer was made almost five months
before the incorporation of the company. Unquestionably, a duly organized corporation has the
power to purchase and hold such real property as the purposes for which such corporation was
formed may permit and for this purpose may enter into such contracts as may be necessary
(sec. 13, pars. 5 and 9, and sec. 14, Act No. 1459). But before a corporation may be said to be
lawfully organized, many things have to be done. Among other things, the law requires the filing
of articles of incorporation (secs. 6 et seq., Act. No. 1459). Although there is a presumption that
all the requirements of law have been complied with (sec. 334, par. 31 Code of Civil Procedure),
in the case before us it can not be denied that the plaintiff was not yet incorporated when it
entered into a contract of sale, Exhibit A. The contract itself referred to the plaintiff as "una
sociedad en vias de incorporacion." It was not even a de facto corporation at the time. Not being
in legal existence then, it did not possess juridical capacity to enter into the contract.
Corporations are creatures of the law, and can only come into existence in the manner
prescribed by law. As has already been stated, general law authorizing the formation
of corporations are general offers to any persons who may bring themselves within
their provisions; and if conditions precedent are prescribed in the statute, or certain
acts are required to be done, they are terms of the offer, and must be complied with
substantially before legal corporate existence can be acquired. (14 C. J., sec. 111, p.
118.)
That a corporation should have a full and complete organization and existence as an
entity before it can enter into any kind of a contract or transact any business, would
seem to be self evident. . . . A corporation, until organized, has no being, franchises or
faculties. Nor do those engaged in bringing it into being have any power to bind it by
contract, unless so authorized by the charter there is not a corporation nor does it
possess franchise or faculties for it or others to exercise, until it acquires a complete
existence. (Gent vs. Manufacturers and Merchant's Mutual Insurance Company, 107
Ill., 652, 658.)
Boiled down to its naked reality, the contract here (Exhibit A) was entered into not between
Manuel Tabora and a non-existent corporation but between the Manuel Tabora as owner of the
four parcels of lands on the one hand and the same Manuel Tabora, his wife and others, as
mere promoters of a corporations on the other hand. For reasons that are self-evident, these
promoters could not have acted as agent for a projected corporation since that which no legal
existence could have no agent. A corporation, until organized, has no life and therefore no
faculties. It is, as it were, a child in ventre sa mere. This is not saying that under no
circumstances may the acts of promoters of a corporation be ratified by the corporation if and
when subsequently organized. There are, of course, exceptions (Fletcher Cyc. of Corps.,
permanent edition, 1931, vol. I, secs. 207 et seq.), but under the peculiar facts and
circumstances of the present case we decline to extend the doctrine of ratification which would
result in the commission of injustice or fraud to the candid and unwary.(Massachusetts rule,
Abbott vs. Hapgood, 150 Mass., 248; 22 N. E. 907, 908; 5 L. R. A., 586; 15 Am. St. Rep., 193;
citing English cases; Koppel vs. Massachusetts Brick Co., 192 Mass., 223; 78 N. E., 128;
Holyoke Envelope Co., vs. U. S. Envelope Co., 182 Mass., 171; 65 N. E., 54.) It should be
observed that Manuel Tabora was the registered owner of the four parcels of land, which he
succeeded in mortgaging to the Philippine National Bank so that he might have the necessary
funds with which to convert and develop them into fishery. He appeared to have met with
financial reverses. He formed a corporation composed of himself, his wife, and a few others.
From the articles of incorporation, Exhibit 2, it appears that out of the P48,700, amount of capital
stock subscribed, P45,000 was subscribed by Manuel Tabora himself and P500 by his wife,
Rufina Q. de Tabora; and out of the P43,300, amount paid on subscription, P42,100 is made to
appear as paid by Tabora and P200 by his wife. Both Tabora and His wife were directors and
the latter was treasurer as well. In fact, to this day, the lands remain inscribed in Tabora's name.
The defendant always regarded Tabora as the owner of the lands. He dealt with Tabora directly.
Jose Ventura, president of the plaintiff corporation, intervened only to sign the contract, Exhibit
B, in behalf of the plaintiff. Even the Philippine National Bank, mortgagee of the four parcels of
land, always treated Tabora as the owner of the same. (See Exhibits E and F.) Two civil suits
(Nos. 1931 and 38641) were brought against Tabora in the Court of First Instance of Manila and
in both cases a writ of attachment against the four parcels of land was issued. The Philippine
National Bank threatened to foreclose its mortgages. Tabora approached the defendant Sandiko
and succeeded in the making him sign Exhibits B, C, and D and in making him, among other
things, assume the payment of Tabora's indebtedness to the Philippine National Bank. The
promisory note, Exhibit C, was made payable to the plaintiff company so that it may not attached
by Tabora's creditors, two of whom had obtained writs of attachment against the four parcels of
land.

If the plaintiff corporation could not and did not acquire the four parcels of land here involved, it
follows that it did not possess any resultant right to dispose of them by sale to the defendant,
Teodoro Sandiko.

Some of the members of this court are also of the opinion that the transfer from Manuel Tabora
to the Cagayan Fishing Development Company, Inc., which transfer is evidenced by Exhibit A,
was subject to a condition precedent (condicion suspensiva), namely, the payment of the
mortgage debt of said Tabora to the Philippine National Bank, and that this condition not having
been complied with by the Cagayan Fishing Development Company, Inc., the transfer was
ineffective. (Art. 1114, Civil Code; Wise & Co. vs. Kelly and Lim, 37 Phil., 696; Manresa, vol. 8,
p. 141.) However, having arrived at the conclusion that the transfer by Manuel Tabora to the
Cagayan Fishing Development Company, Inc. was null because at the time it was affected the
corporation was non-existent, we deem it unnecessary to discuss this point.lawphil.net

The decision of the lower court is accordingly affirmed, with costs against the appellant. So
Ordered.

G.R. No. L-28113 March 28, 1969
THE MUNICIPALITY OF MALABANG, LANAO DEL SUR, and AMER MACAORAO
BALINDONG, petitioners,
vs.
PANGANDAPUN BENITO, HADJI NOPODIN MACAPUNUNG, HADJI HASAN
MACARAMPAD, FREDERICK V. DUJERTE MONDACO ONTAL, MARONSONG ANDOY,
MACALABA INDAR LAO. respondents.
L. Amores and R. Gonzales for petitioners.
Jose W. Diokno for respondents.
CASTRO, J.:
The petitioner Amer Macaorao Balindong is the mayor of Malabang, Lanao del Sur, while the
respondent Pangandapun Bonito is the mayor, and the rest of the respondents are the
councilors, of the municipality of Balabagan of the same province. Balabagan was formerly a
part of the municipality of Malabang, having been created on March 15, 1960, by Executive
Order 386 of the then President Carlos P. Garcia, out of barrios and sitios 1 of the latter
municipality.
The petitioners brought this action for prohibition to nullify Executive Order 386 and to restrain
the respondent municipal officials from performing the functions of their respective office relying
on the ruling of this Court in Pelaez v. Auditor General 2 and Municipality of San Joaquin v.
Siva. 3
In Pelaez this Court, through Mr. Justice (now Chief Justice) Concepcion, ruled: (1) that section
23 of Republic Act 2370 [Barrio Charter Act, approved January 1, 1960], by vesting the power to
create barrios in the provincial board, is a "statutory denial of the presidential authority to create
a new barrio [and] implies a negation of the bigger power to create municipalities," and (2) that
section 68 of the Administrative Code, insofar as it gives the President the power to create
municipalities, is unconstitutional (a) because it constitutes an undue delegation of legislative
power and (b) because it offends against section 10 (1) of article VII of the Constitution, which
limits the President's power over local governments to mere supervision. As this Court summed
up its discussion: "In short, even if it did not entail an undue delegation of legislative powers, as
it certainly does, said section 68, as part of the Revised Administrative Code, approved on
March 10, 1917, must be deemed repealed by the subsequent adoption of the Constitution, in
1935, which is utterly incompatible and inconsistent with said statutory enactment."
On the other hand, the respondents, while admitting the facts alleged in the petition,
nevertheless argue that the rule announced in Pelaez can have no application in this case
because unlike the municipalities involved in Pelaez, the municipality of Balabagan is at least
a de facto corporation, having been organized under color of a statute before this was declared
unconstitutional, its officers having been either elected or appointed, and the municipality itself
having discharged its corporate functions for the past five years preceding the institution of this
action. It is contended that as a de facto corporation, its existence cannot be collaterally
attacked, although it may be inquired into directly in an action for quo warranto at the instance of
the State and not of an individual like the petitioner Balindong.
It is indeed true that, generally, an inquiry into the legal existence of a municipality is reserved
to the State in a proceeding for quo warranto or other direct proceeding, and that only in a few
exceptions may a private person exercise this function of government. 4 But the rule disallowing
collateral attacks applies only where the municipal corporation is at least a de
facto corporations. 5 For where it is neither a corporation de jure nor de facto, but a nullity, the
rule is that its existence may be, questioned collaterally or directly in any action or proceeding by
any one whose rights or interests ate affected thereby, including the citizens of the territory
incorporated unless they are estopped by their conduct from doing so. 6
And so the threshold question is whether the municipality of Balabagan is a de
facto corporation. As earlier stated, the claim that it is rests on the fact that it was organized
before the promulgation of this Court's decision in Pelaez. 7
Accordingly, we address ourselves to the question whether a statute can lend color of validity
to an attempted organization of a municipality despite the fact that such statute is subsequently
declared unconstitutional.lawphi1.ñet
This has been a litigiously prolific question, sharply dividing courts in the United States. Thus,
some hold that a de facto corporation cannot exist where the statute or charter creating it is
unconstitutional because there can be no de facto corporation where there can be no de
jure one, 8 while others hold otherwise on the theory that a statute is binding until it is condemned
as unconstitutional. 9
An early article in the Yale Law Journal offers the following analysis:
It appears that the true basis for denying to the corporation a de facto status lay in
the absence of any legislative act to give vitality to its creation. An examination of the
cases holding, some of them unreservedly, that a de facto office or municipal
corporation can exist under color of an unconstitutional statute will reveal that in no
instance did the invalid act give life to the corporation, but that either in other valid acts
or in the constitution itself the office or the corporation was potentially created....
The principle that color of title under an unconstitutional statute can exist only where
there is some other valid law under which the organization may be effected, or at least
an authority in potentia by the state constitution, has its counterpart in the negative
propositions that there can be no color of authority in an unconstitutional statute that
plainly so appears on its face or that attempts to authorize the ousting of a de
jure or de facto municipal corporation upon the same territory; in the one case the fact
would imply the imputation of bad faith, in the other the new organization must be
regarded as a mere usurper....
As a result of this analysis of the cases the following principles may be deduced
which seem to reconcile the apparently conflicting decisions:
I. The color of authority requisite to the organization of a de facto municipal
corporation may be:
1. A valid law enacted by the legislature.
2. An unconstitutional law, valid on its face, which has either (a)
been upheld for a time by the courts or (b) not yet been declared
void; provided that a warrant for its creation can be found in some
 other valid law or in the recognition of its potential existence by
the general laws or constitution of the state.
II. There can be no de facto municipal corporation unless either directly or
potentially, such a de jurecorporation is authorized by some legislative fiat.
III. There can be no color of authority in an unconstitutional statute alone,
the invalidity of which is apparent on its face.
There is then no basis for the respondents' apprehension that the invalidation of the executive
order creating Balabagan would have the effect of unsettling many an act done in reliance upon
the validity of the creation of that municipality. 14
ACCORDINGLY, the petition is granted, Executive Order 386 is declared void, and the
respondents are hereby permanently restrained from performing the duties and functions of their
respective offices. No pronouncement as to costs.

IV. There can be no de facto corporation created to take the place of an existing de
jure corporation, as such organization would clearly be a usurper. 10

In the cases where a de facto municipal corporation was recognized as such despite the fact
that the statute creating it was later invalidated, the decisions could fairly be made to rest on the
consideration that there was some other valid law giving corporate vitality to the organization.
Hence, in the case at bar, the mere fact that Balabagan was organized at a time when the
statute had not been invalidated cannot conceivably make it a de factocorporation, as,
independently of the Administrative Code provision in question, there is no other valid statute to
give color of authority to its creation. Indeed, in Municipality of San Joaquin v. Siva, 11 this Court
granted a similar petition for prohibition and nullified an executive order creating the municipality
of Lawigan in Iloilo on the basis of thePelaez ruling, despite the fact that the municipality was
created in 1961, before section 68 of the Administrative Code, under which the President had
acted, was invalidated. 'Of course the issue of de facto municipal corporation did not arise in that
case.

In Norton v. Shelby Count, 12 Mr. Justice Field said: "An unconstitutional act is not a law; it
confers no rights; it imposes no duties; it affords no protection; it creates no office; it is, in legal
contemplation, as inoperative as though it had never been passed." Accordingly, he held that
bonds issued by a board of commissioners created under an invalid statute were unenforceable.

Executive Order 386 "created no office." This is not to say, however, that the acts done by the
municipality of Balabagan in the exercise of its corporate powers are a nullity because the
executive order "is, in legal contemplation, as inoperative as though it had never been passed."
For the existence of Executive, Order 386 is "an operative fact which cannot justly be ignored."
As Chief Justice Hughes explained in Chicot County Drainage District v. Baxter State Bank: 13

The courts below have proceeded on the theory that the Act of Congress, having
been found to be unconstitutional, was not a law; that it was inoperative, conferring no
rights and imposing no duties, and hence affording no basis for the challenged decree.
Norton v. Shelby County, 118 U.S. 425, 442; Chicago, I. & L. Ry. Co. v. Hackett, 228
U.S. 559, 566. It is quite clear, however, that such broad statements as to the effect of
a determination of unconstitutionality must be taken with qualifications. The actual
existence of a statute, prior to such a determination, is an operative fact and may have
consequences which cannot justly be ignored. The past cannot always be erased by a
new judicial declaration. The effect of the subsequent ruling as to invalidity may have
to be considered in various aspects — with respect to particular relations, individual
and corporate, and particular conduct, private and official. Questions of rights claimed
to have become vested, of status of prior determinations deemed to have finality and
acted upon accordingly, of public policy in the light of the nature both of the statute
and of its previous application, demand examination. These questions are among the
most difficult of those which have engaged the attention of courts, state and federal,
and it is manifest from numerous decisions that an all-inclusive statement of a
principle of absolute retroactive invalidity cannot be justified.

G.R. No. L-58028 April 18, 1989
CHIANG KAI SHEK SCHOOL, petitioner,
vs.
COURT OF APPEALS and FAUSTINA FRANCO OH, respondents.
CRUZ, J.:
An unpleasant surprise awaited Fausta F. Oh when she reported for work at the Chiang Kai
Shek School in Sorsogon on the first week of July, 1968. She was told she had no assignment
for the next semester. Oh was shocked. She had been teaching in the school since 1932 for a
continuous period of almost 33 years. And now, out of the blue, and for no apparent or given
reason, this abrupt dismissal.
Oh sued. She demanded separation pay, social security benefits, salary differentials, maternity
benefits and moral and exemplary damages. 1 The original defendant was the Chiang Kai Shek
School but when it filed a motion to dismiss on the ground that it could not be sued, the
complaint was amended. 2 Certain officials of the school were also impleaded to make them
solidarily liable with the school.
The Court of First Instance of Sorsogon dismissed the complaint. 3 On appeal, its decision was
set aside by the respondent court, which held the school suable and liable while absolving the
other defendants. 4 The motion for reconsideration having been denied, 5 the school then came
to this Court in this petition for review on certiorari.
The issues raised in the petition are:
1. Whether or not a school that has not been incorporated may be sued by reason alone of its
long continued existence and recognition by the government,
2. Whether or not a complaint filed against persons associated under a common name will justify
a judgment against the association itself and not its individual members.
3. Whether or not the collection of tuition fees and book rentals will make a school profit-making
and not charitable.
4. Whether or not the Termination Pay Law then in force was available to the private respondent
who was employed on a year-to-year basis.
5. Whether or not the awards made by the respondent court were warranted.
We hold against the petitioner on the first question. It is true that Rule 3, Section 1, of the Rules
of Court clearly provides that "only natural or juridical persons may be parties in a civil action." It
is also not denied that the school has not been incorporated. However, this omission should not
prejudice the private respondent in the assertion of her claims against the school.
As a school, the petitioner was governed by Act No. 2706 as amended by C.A. No. 180, which
provided as follows:
Unless exempted for special reasons by the Secretary of Public Instruction,
any private school or college recognized by the government shall be
incorporated under the provisions of Act No. 1459 known as the Corporation
Law, within 90 days after the date of recognition, and shall file with the
Secretary of Public Instruction a copy of its incorporation papers and by-
laws.
Having been recognized by the government, it was under obligation to incorporate under the
Corporation Law within 90 days from such recognition. It appears that it had not done so at the
time the complaint was filed notwithstanding that it had been in existence even earlier than 1932.
The petitioner cannot now invoke its own non-compliance with the law to immunize it from the
private respondent's complaint.
There should also be no question that having contracted with the private respondent every year
for thirty two years and thus represented itself as possessed of juridical personality to do so, the
petitioner is now estopped from denying such personality to defeat her claim against it.
According to Article 1431 of the Civil Code, "through estoppel an admission or representation is
rendered conclusive upon the person making it and cannot be denied or disproved as against
the person relying on it."
As the school itself may be sued in its own name, there is no need to apply Rule 3, Section 15,
under which the persons joined in an association without any juridical personality may be sued
with such association. Besides, it has been shown that the individual members of the board of
trustees are not liable, having been appointed only after the private respondent's dismissal. 6
It is clear now that a charitable institution is covered by the labor laws 7 although the question
was still unsettled when this case arose in 1968. At any rate, there was no law even
then exempting such institutions from the operation of the labor laws (although they were
exempted by the Constitution from ad valorem taxes). Hence, even assuming that the petitioner
was a charitable institution as it claims, the private respondent was nonetheless still entitled to
the protection of the Termination Pay Law, which was then in force.
While it may be that the petitioner was engaged in charitable works, it would not necessarily
follow that those in its employ were as generously motivated. Obviously, most of them would not
have the means for such charity. The private respondent herself was only a humble school
teacher receiving a meager salary of Pl80. 00 per month.
At that, it has not been established that the petitioner is a charitable institution, considering
especially that it charges tuition fees and collects book rentals from its students. 8 While this
alone may not indicate that it is profit-making, it does weaken its claim that it is a non-profit
entity.
The petitioner says the private respondent had not been illegally dismissed because her
teaching contract was on a yearly basis and the school was not required to rehire her in 1968.
The argument is that her services were terminable at the end of each year at the discretion of
the school. Significantly, no explanation was given by the petitioner, and no advance notice
either, of her relief after teaching year in and year out for all of thirty-two years, the private
respondent was simply told she could not teach any more.
The Court holds, after considering the particular circumstance of Oh's employment, that she had
become a permanent employee of the school and entitled to security of tenure at the time of her
dismissal. Since no cause was shown and established at an appropriate hearing, and the notice
then required by law had not been given, such dismissal was invalid.
The private respondent's position is no different from that of the rank-and-file employees
involved in Gregorio Araneta University Foundation v. NLRC, 9 of whom the Court had the
following to say:
We find that the private respondent was arbitrarily treated by the petitioner, which has shown no
cause for her removal nor had it given her the notice required by the Termination Pay Law. As
the respondent court said, the contention that she could not report one week before the start of
classes is a flimsy justification for replacing her. 13 She had been in its employ for all of thirty-
two years. Her record was apparently unblemished. There is no showing of any previous
strained relations between her and the petitioner. Oh had every reason to assume, as she had
done in previous years, that she would continue teaching as usual.

Undoubtedly, the private respondents' positions as deans and department

It is easy to imagine the astonishment and hurt she felt when she was flatly and without warning
heads of the petitioner university are necessary in its usual business.
told she was dismissed. There was not even the amenity of a formal notice of her replacement,
Moreover, all the private respondents have been serving the university from
with perhaps a graceful expression of thanks for her past services. She was simply informed she
18 to 28 years. All of them rose from the ranks starting as instructors until
was no longer in the teaching staff. To put it bluntly, she was fired.
they became deans and department heads of the university. A person who
has served the University for 28 years and who occupies a high
administrative position in addition to teaching duties could not possibly be a For the wrongful act of the petitioner, the private respondent is entitled to moral damages. 14 As
temporary employee or a casual. a proximate result of her illegal dismissal, she suffered mental anguish, serious anxiety,
wounded feelings and even besmirched reputation as an experienced teacher for more than
three decades. We also find that the respondent court did not err in awarding her exemplary
The applicable law is the Termination Pay Law, which provided:
damages because the petitioner acted in a wanton and oppressive manner when it dismissed
her. 15
SECTION 1. In cases of employment, without a definite period, in a
commercial, industrial, or agricultural establishment or enterprise, the
The Court takes this opportunity to pay a sincere tribute to the grade school teachers, who are
employer or the employee may terminate at any time the employment with
always at the forefront in the battle against illiteracy and ignorance. If only because it is they who
just cause; or without just cause in the case of an employee by serving
open the minds of their pupils to an unexplored world awash with the magic of letters and
written notice on the employer at least one month in advance, or in the case
numbers, which is an extraordinary feat indeed, these humble mentors deserve all our respect
of an employer, by serving such notice to the employee at least one month
and appreciation.
in advance or one-half month for every year of service of the employee,
whichever, is longer, a fraction of at least six months being considered as
one whole year. WHEREFORE, the petition is DENIED. The appealed decision is AFFIRMED except for the
award of separation pay, which is reduced to P2,880.00. All the other awards are approved.
Costs against the petitioner.
The employer, upon whom no such notice was served in case of termination
of employment without just cause may hold the employee liable for
damages. This decision is immediately executory.

The employee, upon whom no such notice was served in case of SO ORDERED.
termination of employment without just cause shall be entitled to
compensation from the date of termination of his employment in an I amount
equivalent to his salaries or wages correspond to the required period of
notice. ... .

The respondent court erred, however, in awarding her one month pay instead of only one-half
month salary for every year of service. The law is quite clear on this matter. Accordingly, the
separation pay should be computed at P90.00 times 32 months, for a total of P2,880.00.

Parenthetically, R.A. No. 4670, otherwise known as the Magna Carta for Public School
Teachers, confers security of tenure on the teacher upon appointment as long as he possesses
the required qualification. 10 And under the present policy of the Department of Education,
Culture and Sports, a teacher becomes permanent and automatically acquires security of tenure
upon completion of three years in the service. 11

While admittedly not applicable to the case at bar, these I rules nevertheless reflect the attitude
of the government on the protection of the worker's security of tenure, which is now guaranteed
by no less than the Constitution itself. 12
 its corporate existence in any action leading out of or involving such contract or dealing, unless
its existence is attacked for cause which have arisen since making the contract or other dealing
relied on as an estoppel and this applies to foreign as well as to domestic corporations. (14 C. J.,
227; Chinese Chamber of Commerce vs. Pua Te Ching, 14 Phil., 222.)

G.R. No. 22106 September 11, 1924

The defendant having recognized the corporate existence of the plaintiff by making a promissory
note in its favor and making partial payments on the same is therefore estopped to deny said
ASIA BANKING CORPORATION, plaintiff-appellee, plaintiff's corporate existence. It is, of course, also estopped from denying its own corporate
vs. existence. Under these circumstances it was unnecessary for the plaintiff to present other
STANDARD PRODUCTS, CO., INC., defendant-appellant. evidence of the corporate existence of either of the parties. It may be noted that there is no
evidence showing circumstances taking the case out of the rules stated.
Charles C. De Selms for appellant.
Gibbs & McDonough and Roman Ozaeta for appellee. The judgment appealed from is affirmed, with the costs against the appellant. So ordered.

OSTRAND, J.:

This action is brought to recover the sum of P24,736.47, the balance due on the following
promissory note:

P37,757.22

MANILA, P. I., Nov. 28, 1921.

MANILA, P. I., Nov. 28, 1921.

On demand, after date we promise to pay to the Asia Banking Corporation, or order,
the sum of thirty-seven thousand seven hundred fifty-seven and 22/100 pesos at their
office in Manila, for value received, together with interest at the rate of ten per cent per
annum.

No. ________ Due __________

THE STANDARD PRODUCTS CO., INC.

By (Sgd.) GEORGE H. SEAVER

By President

The court below rendered judgment in favor of the plaintiff for the sum demanded in the
complaint, with interest on the sum of P24,147.34 from November 1, 1923, at the rate of 10 per
cent per annum, and the costs. From this judgment the defendant appeals to this court.

At the trial of the case the plaintiff failed to prove affirmatively the corporate existence of the
parties and the appellant insists that under these circumstances the court erred in finding that
the parties were corporations with juridical personality and assigns same as reversible error.

There is no merit whatever in the appellant's contention. The general rule is that in the absence
of fraud a person who has contracted or otherwise dealt with an association in such a way as to
recognize and in effect admit its legal existence as a corporate body is thereby estopped to deny

G.R. No. L-11442 May 23, 1958
MANUELA T. VDA. DE SALVATIERRA, petitioner,
vs.
HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First Instance of
Leyte, Branch II, and SEGUNDINO REFUERZO, respondents.
Jimenez, Tantuico, Jr. and Tolete for petitioner.
Francisco Astilla for respondent Segundino Refuerzo.
FELIX, J.:
This is a petition for certiorari filed by Manuela T. Vda. de Salvatierra seeking to nullify the order
of the Court of First Instance of Leyte in Civil Case No. 1912, dated March 21, 1956, relieving
Segundino Refuerzo of liability for the contract entered into between the former and the
Philippine Fibers Producers Co., Inc., of which Refuerzo is the president. The facts of the case
are as follows:
Manuela T. Vda. de Salvatierra appeared to be the owner of a parcel of land located at
Maghobas, Poblacion, Burauen, Teyte. On March 7, 1954, said landholder entered into a
contract of lease with the Philippine Fibers Producers Co., Inc., allegedly a corporation "duly
organized and existing under the laws of the Philippines, domiciled at Burauen, Leyte,
Philippines, and with business address therein, represented in this instance by Mr. Segundino Q.
Refuerzo, the President". It was provided in said contract, among other things, that the lifetime of
the lease would be for a period of 10 years; that the land would be planted to kenaf, ramie or
other crops suitable to the soil; that the lessor would be entitled to 30 per cent of the net income
accruing from the harvest of any, crop without being responsible for the cost of production
thereof; and that after every harvest, the lessee was bound to declare at the earliest possible
time the income derived therefrom and to deliver the corresponding share due the lessor.
Apparently, the aforementioned obligations imposed on the alleged corporation were not
complied with because on April 5, 1955, Alanuela T. Vda, de Salvatierra filed with the Court of
First Instance of Leyte a complaint against the Philippine Fibers Producers Co., Inc., and
Segundino Q. Refuerzo, for accounting, rescission and damages (Civil Case No. 1912). She
averred that sometime in April, 1954, defendants planted kenaf on 3 hectares of the leased
property which crop was, at the time of the commencement of the action, already harvested,
processed and sold by defendants; that notwithstanding that fact, defendants refused to render
an accounting of the income derived therefrom and to deliver the lessor's share; that the
estimated gross income was P4,500, and the deductible expenses amounted to P1,000; that as
defendants' refusal to undertake such task was in violation of the terms of the covenant entered
into between the plaintiff and defendant corporation, a rescission was but proper.
As defendants apparently failed to file their answer to the complaint, of which they were
allegedly notified, the Court declared them in default and proceeded to receive plaintiff's
evidence. On June 8, 1955, the lower Court rendered judgment granting plaintiff's prayer, and
required defendants to render a complete accounting of the harvest of the land subject of the
proceeding within 15 days from receipt of the decision and to deliver 30 per cent of the net
income realized from the last harvest to plaintiff, with legal interest from the date defendants
received payment for said crop. It was further provide that upon defendants' failure to abide by
the said requirement, the gross income would be fixed at P4,200 or a net income of P3,200 after
deducting the expenses for production, 30 per cent of which or P960 was held to be due the
plaintiff pursuant to the aforementioned contract of lease, which was declared rescinded.
No appeal therefrom having been perfected within the reglementary period, the Court, upon
motion of plaintiff, issued a writ of execution, in virtue of which the Provincial Sheriff of Leyte
caused the attachment of 3 parcels of land registered in the name of Segundino Refuerzo. No
property of the Philippine Fibers Producers Co., Inc., was found available for attachment. On
January 31, 1956, defendant Segundino Refuerzo filed a motion claiming that the decision
rendered in said Civil Case No. 1912 was null and void with respect to him, there being no
allegation in the complaint pointing to his personal liability and thus prayed that an order be
issued limiting such liability to defendant corporation. Over plaintiff's opposition, the Court a
quo granted the same and ordered the Provincial Sheriff of Leyte to release all properties
belonging to the movant that might have already been attached, after finding that the evidence
on record made no mention or referred to any fact which might hold movant personally liable
therein. As plaintiff's petition for relief from said order was denied, Manuela T. Vda. de
Salvatierra instituted the instant action asserting that the trial Judge in issuing the order
complained of, acted with grave abuse of discretion and prayed that same be declared a nullity.
From the foregoing narration of facts, it is clear that the order sought to be nullified was issued
by tile respondent Judge upon motion of defendant Refuerzo, obviously pursuant to Rule 38 of
the Rules of Court. Section 3 of said Rule, however, in providing for the period within which such
a motion may be filed, prescribes that:
SEC. 3. WHEN PETITION FILED; CONTENTS AND VERIFICATION. — A petition
provided for in either of the preceding sections of this rule must be verified, filed within
sixty days after the petitioner learns of the judgment, order, or other proceeding to be
set aside, and not more than six months after such judgment or order was entered, or
such proceeding was taken; and must be must be accompanied with affidavit showing
the fraud, accident, mistake, or excusable negligence relied upon, and the facts
constituting the petitioner is good and substantial cause of action or defense, as the
case may be, which he may prove if his petition be granted". (Rule 38)
The aforequoted provision treats of 2 periods, i.e., 60 days after petitioner learns of the
judgment, and not more than 6 months after the judgment or order was rendered, both of which
must be satisfied. As the decision in the case at bar was under date of June 8, 1955, whereas
the motion filed by respondent Refuerzo was dated January 31, 1956, or after the lapse of 7
months and 23 days, the filing of the aforementioned motion was clearly made beyond the
prescriptive period provided for by the rules. The remedy allowed by Rule 38 to a party
adversely affected by a decision or order is certainly an alert of grace or benevolence intended
to afford said litigant a penultimate opportunity to protect his interest. Considering the nature of
such relief and the purpose behind it, the periods fixed by said rule are non-extendible and never
interrupted; nor could it be subjected to any condition or contingency because it is of itself
devised to meet a condition or contingency (Palomares vs. Jimenez,* G.R. No. L-4513, January
31, 1952). On this score alone, therefore, the petition for a writ of certiorari filed herein may be
granted. However, taking note of the question presented by the motion for relief involved herein,
We deem it wise to delve in and pass upon the merit of the same.
Refuerzo, in praying for his exoneration from any liability resulting from the non-fulfillment of the
obligation imposed on defendant Philippine Fibers Producers Co., Inc., interposed the defense
that the complaint filed with the lower court contained no allegation which would hold him liable
personally, for while it was stated therein that he was a signatory to the lease contract, he did so
in his capacity as president of the corporation. And this allegation was found by the Court a quo
to be supported by the records. Plaintiff on the other hand tried to refute this averment by
contending that her failure to specify defendant's personal liability was due to the fact that all the
time she was under the impression that the Philippine Fibers Producers Co., Inc., represented
by Refuerzo was a duly registered corporation as appearing in the contract, but a subsequent
inquiry from the Securities and Exchange Commission yielded otherwise. While as a general
rule a person who has contracted or dealt with an association in such a way as to recognize its
existence as a corporate body is estopped from denying the same in an action arising out of
such transaction or dealing, (Asia Banking Corporation vs. Standard Products Co., 46 Phil., 114;
Compania Agricola de Ultramar vs. Reyes, 4 Phil., 1; Ohta Development Co.; vs. Steamship
Pompey, 49 Phil., 117), yet this doctrine may not be held to be applicable where fraud takes a
part in the said transaction. In the instant case, on plaintiff's charge that she was unaware of the
fact that the Philippine Fibers Producers Co., Inc., had no juridical personality, defendant
Refuerzo gave no confirmation or denial and the circumstances surrounding the execution of the
contract lead to the inescapable conclusion that plaintiff Manuela T. Vda. de Salvatierra was
really made to believe that such corporation was duly organized in accordance with law.

There can be no question that a corporation with registered has a juridical personality separate
and distinct from its component members or stockholders and officers such that a corporation
cannot be held liable for the personal indebtedness of a stockholder even if he should be its
president (Walter A. Smith Co. vs. Ford, SC-G.R. No. 42420) and conversely, a stockholder or
member cannot be held personally liable for any financial obligation be, the corporation in
excess of his unpaid subscription. But this rule is understood to refer merely to registered
corporations and cannot be made applicable to the liability of members of an unincorporated
association. The reason behind this doctrine is obvious-since an organization which before the
law is non-existent has no personality and would be incompetent to act and appropriate for itself
the powers and attribute of a corporation as provided by law; it cannot create agents or confer
authority on another to act in its behalf; thus, those who act or purport to act as its
representatives or agents do so without authority and at their own risk. And as it is an
elementary principle of law that a person who acts as an agent without authority or without a
principal is himself regarded as the principal, possessed of all the rights and subject to all the
liabilities of a principal, a person acting or purporting to act on behalf of a corporation which has
no valid existence assumes such privileges and obligations and comes personally liable for
contracts entered into or for other acts performed as such, agent (Fay vs. Noble, 7 Cushing
[Mass.] 188. Cited in II Tolentino's Commercial Laws of the Philippines, Fifth Ed., P. 689-690).
Considering that defendant Refuerzo, as president of the unregistered corporation Philippine
Fibers Producers Co., Inc., was the moving spirit behind the consummation of the lease
agreement by acting as its representative, his liability cannot be limited or restricted that
imposed upon corporate shareholders. In acting on behalf of a corporation which he knew to be
unregistered, he assumed the risk of reaping the consequential damages or resultant rights, if
any, arising out of such transaction.

Wherefore, the order of the lower Court of March 21, 1956, amending its previous decision on
this matter and ordering the Provincial Sheriff of Leyte to release any and all properties of
movant therein which might have been attached in the execution of such judgment, is hereby set
aside and nullified as if it had never been issued. With costs against respondent Segundino
Refuerzo. It is so ordered.

[G.R. No. 119002. October 19, 2000.]
INTERNATIONAL EXPRESS TRAVEL & TOUR SERVICES, INC., Petitioner, v. HON. COURT
OF APPEALS, HENRI KAHN, PHILIPPINES FOOTBALL FEDERATION, Respondents.
DECISION
KAPUNAN, J.:
On June 30 1989, petitioner International Express Travel and Tour Services, Inc., through its
managing director, wrote a letter to the Philippine Football Federation (Federation), through its
president private respondent Henri Kahn, wherein the former offered its services as a travel
agency to the latter. 1
The offer was accepted.chanrob1es virtua1 1aw 1ibrary
Petitioner secured the airline tickets for the trips of the athletes and officials of the Federation to
the South East Asian Games in Kuala Lumpur as well as various other trips to the People’s
Republic of China and Brisbane. The total cost of the tickets amounted to P449,654.83. For the
tickets received, the Federation made two partial payments, both in September of 1989, in the
total amount of P176,467.50. 2
On 4 October 1989, petitioner wrote the Federation, through the private respondent a demand
letter requesting for the amount of P265,894.33. 3 On 30 October 1989, the Federation, through
the Project Gintong Alay, paid the amount of P31,603.00. 4
On 27 December 1989, Henri Kahn issued a personal check in the amount of P50,000 as partial
payment for the outstanding balance of the Federation. 5 Thereafter, no further payments were
made despite repeated demands.chanrob1es virtua1 1aw 1ibrary
This prompted petitioner to file a civil case before the Regional Trial Court of Manila. Petitioner
sued Henri Kahn in his personal capacity and as President of the Federation and impleaded the
Federation as an alternative defendant. Petitioner sought to hold Henri Kahn liable for the
unpaid balance for the tickets purchased by the Federation on the ground that Henri Kahn
allegedly guaranteed the said obligation. 6
Henri Kahn filed his answer with counterclaim. While not denying the allegation that the
Federation owed the amount P207,524.20, representing the unpaid balance for the plane
tickets, he averred that the petitioner has no cause of action against him either in his personal
capacity or in his official capacity as president of the Federation. He maintained that he; did not
guarantee payment but merely acted as an agent of the Federation which has a separate and
distinct juridical personality. 7
On the other hand, the Federation failed to file its answer, hence, was declared in default by the
trial court. 8
In due course, the trial court rendered judgment and ruled in favor of the petitioner and declared
Henri Kahn personally liable for the unpaid obligation of the Federation. In arriving at the said
ruling, the trial court rationalized:chanrob1es virtual 1aw library
Defendant Henri Kahn would have been correct in his contentions had it been duly established
that defendant Federation is a corporation The trouble, however, is that neither the plaintiff nor
the defendant Henri Kahn has adduced any evidence proving the corporate existence of the
defendant Federation. In paragraph 2 of its complaint, plaintiff asserted that "defendant
Philippine Football Federation is a sports association . . ." This has not been denied by
defendant Henri Kahn in his Answer. Being the President of defendant Federation, its corporate
existence is within the personal knowledge of defendant Henri Kahn. He could have easily
denied specifically the assertion of the plaintiff that it is a mere sports association if it were a
domestic corporation. But he did not.
x x x
A voluntary unincorporated association, like defendant Federation has no power to enter into, or
to ratify, a contract. The contract entered into by its officers or agents on behalf of such
association is not binding on, or enforceable against it. The officers or agents are themselves
personally liable.
x x x9
The dispositive portion of the trial court’s decision reads:chanrob1es virtual 1aw library
WHEREFORE, judgment is rendered ordering defendant Henri Kahn to pay the plaintiff the
principal sum of P207,524.20, plus the interest thereon at the legal rate computed from July 5,
1990, the date the complaint was filed, until the principal obligation is fully liquidated; and
another sum of P15,000.00 for attorney’s fees.chanrob1es virtua1 1aw 1ibrary
The complaint of the plaintiff against the Philippine Football Federation and the counterclaims of
the defendant Henri Kahn are hereby dismissed.
With the costs against defendant Henri Kahn. 10
Only Henri Kahn elevated the above decision to the Court of Appeals. On 21 December 1994,
the respondent court rendered a decision reversing the trial court, the decretal portion of said
decision reads:chanrob1es virtual 1aw library
WHEREFORE, premises considered, the judgment appealed from is hereby REVERSED and
SET ASIDE and another one is rendered dismissing the complaint against defendant Henri S.
Kahn. 11
In finding for Henri Kahn, the Court of Appeals recognized the juridical existence of the
Federation. It rationalized that since petitioner failed to prove that Henri Kahn guaranteed the
obligation of the Federation, he should not be held liable for the same as said entity has a
separate and distinct personality from its officers.
Petitioner filed a motion for reconsideration and as an alternative prayer pleaded that the
Federation be held liable for the unpaid obligation. The same was denied by the appellate court
in its resolution of 8 February 1995, where it stated that:chanrob1es virtua1 1aw 1ibrary
As to the alternative prayer for the Modification of the Decision by expressly declaring in the
dispositive portion thereof the Philippine Football Federation (PFF) as liable for the unpaid
obligation, it should be remembered that the trial court dismissed the complaint against the
Philippine Football Federation, and the plaintiff did not appeal from this decision. Hence, the
Philippine Football Federation is not a party to this appeal and consequently, no judgment may
be pronounced by this Court against the PFF without violating the due process clause, let alone
the fact that the judgment dismissing the complaint against it, had already become final by virtue
of the plaintiff’s failure to appeal therefrom. The alternative prayer is therefore similarly DENIED.
12
Petitioner now seeks recourse to this Court and alleges that the respondent court committed the
following assigned errors: 13
A. THE, HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER HAD
DEALT WITH THE PHILIPPINE FOOTBALL FEDERATION (PFF) AS A CORPORATE ENTITY
AND IN NOT HOLDING THAT PRIVATE RESPONDENT HENRI KAHN WAS THE ONE, WHO
REPRESENTED THE PFF AS HAVING CORPORATE PERSONALITY.
B. THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING PRIVATE
RESPONDENT HENRI KAHN PERSONALLY LIABLE FOR THE OBLIGATION OF THE
UNINCORPORATED PFF, HAVING NEGOTIATED WITH PETITIONER AND CONTRACTED
THE OBLIGATION IN BEHALF OF THE PFF, MADE A PARTIAL PAYMENT AN ASSURED
PETITIONER OF FULLY SETTLING THE OBLIGATION.
C. ASSUMING ARGUENDO THAT PRIVATE RESPONDENT KAHN IS NOT PERSONALLY
LIABLE, THE HONORABLE COURT OF APPEALS ERRED IN NOT EXPRESSLY DECLARING
IN ITS DECISION THAT THE PFF IS SOLELY LIABLE FOR THE OBLIGATION.chanrob1es
virtua1 1aw 1ibrary
The resolution of the case at bar hinges on the determination of the existence of the Philippine
Football Federation as a juridical person. In the assailed decision, the appellate court recognized
the existence of the Federation. In support of this, the CA cited Republic Act 3135, otherwise
known as the Revised Charter of the Philippine Amateur Athletic Federation, and Presidential
Decree No. 604 as the laws from which said Federation derives its existence.chanrob1es virtua1
1aw 1ibrary
As correctly observed by the appellate court, both R.A. 3135 and P.D. No. 604 recognized the
juridical existence of national sports associations. This may be gleaned from the powers and
functions granted to these associations. Section 14 of R.A. 3135 provides:chanrob1es virtual
1aw library
SECTION 14. Functions, powers and duties of Associations. — The National Sports’ Association
shall have the following functions, powers and duties:chanrob1es virtual 1aw library
1. To adopt a constitution and by-laws for their internal organization and government.
2. To raise funds by donations benefits, and other means for their purposes.
3. To purchase, sell, lease or otherwise encumber property both real and personal, for the
accomplishment of their purpose;
4. To affiliate with international or regional sports’ Associations after due consultation with the
executive committee;
x x x
13. To perform such other acts as may be necessary for the proper accomplishment of their
purposes and not inconsistent with this Act.
Section 8 of P.D. 604, grants similar functions to these sports associations:chanrob1es virtual
1aw library
SECTION. 8. Functions, Powers, and Duties of National Sports Association. — The National
sports associations shall have the following functions, powers, and duties:chanrob1es virtual
1aw library
1. Adopt a Constitution and By-Laws for their internal organization and government which shall
be submitted to the Department and any amendment hereto shall take effect upon approval by
the Department: Provided, however, That no team, school, club, organization or entity shall be
admitted as a voting member of an association unless 60 per cent of the athletes composing
said team, school, club, organization or entity are Filipino citizens.
2. Raise funds by donations, benefits, and other means for their purpose subject to the approval
of the Department;
3. Purchase, sell, lease, or otherwise encumber property, both real and personal, for the
accomplishment of their purpose;
4. Conduct local, interport, and international competitions, other than the Olympic and Asian
Games, for the promotion of their sport;
5. Affiliate with international or regional sports associations after due consultation with the
Department;
x x x
13. Perform such other functions as may be provided by law.
The above powers and functions granted to national sports associations clearly indicate that
these entities may acquire a juridical personality. The power to purchase, sell, lease and
encumber property are acts which may only be done by persons, whether natural or artificial,
with juridical capacity. However, while we agree with the appellate court that national sports
associations may be accorded corporate status, such does not automatically take place by the
mere passage of these laws.chanrob1es virtua1 1aw 1ibrary
It is a basic postulate that before a corporation may acquire juridical personality, the State must
give its consent either in the form of a special law or a general enabling act. We cannot agree
with the view of the appellate court; and the private respondent that the Philippine Football
Federation came into existence upon the passage of these laws. Nowhere can it be found in
R.A. 3135 or P.D. 604 any provision creating the Philippine Football Federation. These laws
merely recognized the existence of national sports associations and provided the manner by
which these entities may acquire juridical personality. Section 11 of R.A. 3135
provides:chanrob1es virtual 1aw library
SECTION 11. National Sports’ Association; organization and recognition. — A National
Association shall be organized for each individual sports in the Philippines in the manner
hereinafter provided to constitute the Philippine Amateur Athletic Federation. Applications for
recognition as a National Sports’ Association shall be filed with the executive committee together
with, among others, a copy of the constitution and by-laws and a list of the members of the
proposed association, and a filing fee of ten pesos.
The Executive Committee shall give the recognition applied for if it is satisfied that said
association will promote the purposes of this Act and particularly section three thereof. No
application shall be held pending for more than three months after the filing thereof without any
action having been taken thereon by the executive committee. Should the application be
rejected, the reasons for such rejection shall be clearly stated in a written communication to the
applicant. Failure to specify the reasons for the rejection shall not affect the application which
shall be considered as unacted upon: Provided however, That until the executive committee
herein provided shall have been formed, applications for recognition shall be passed upon by the
duly elected members of the present executive committee of the Philippine Amateur Athletic
Federation. The said executive committee shall be dissolved upon the organization of the
executive committee herein provided: Provided, further, That the functioning executive
committee is charged with the responsibility of seeing to it that the National Sports’ Associations
are formed and organized within six months from and after the passage of this Act.chanrob1es
virtua1 1aw 1ibrary

Section 7 of P.D. 604, similarly provides:chanrob1es virtual 1aw library

SECTION 7. National Sports Associations: — Application for accreditation or recognition as a

national sports association for each individual sport in the Philippines shall be filed with the
Department together with, among others, a copy of the Constitution and By-Laws and a list of
the members of the proposed association.

The Department shall give the recognition applied for if it is satisfied that the national sports
association to be organized will promote the objectives of this Decree and has substantially
complied with the rules and regulations of the Department: Provided, That the Department may
withdraw accreditation or recognition for violation of this Decree and such rules and regulations
formulated by it.

The Department shall supervise the national sports association: Provided, That the latter shall
have exclusive technical control over the development and promotion of the particular sport for
which they are organized.

Clearly the above cited provisions require that before an entity may be considered as a national
sports association, such entity must be recognized by the accrediting organization, the
Philippine, Amateur Athletic Federation under R.A. 3135, and the Department of Youth and
Sports Development under P.D. 604.

This fact of recognition, however, Henri Kahn failed to substantiate. In attempting to prove the
juridical existence of the Federation, Henri Kahn attached to his motion for reconsideration
before the trial court a copy of the constitution and by-laws of the Philippine, Football Federation.
Unfortunately, the same does not prove that said Federation has indeed been recognized and
accredited by either the Philippine Amateur Athletic Federation or the Department of Youth and
Sports Development. Accordingly, we rule that the Philippine Football Federation is not a
national sports association within the purview of the aforementioned laws and does not have
corporate existence of its own.chanrob1es virtua1 1aw 1ibrary

Thus being said, it follows that private respondent Henry Kahn should be held liable for the
unpaid obligations of the unincorporated Philippine Football Federation. It is a settled principal in
corporation law that any person acting or purporting to act on behalf of a corporation which has
no valid existence assumes such privileges and becomes personally liable for contract entered
into or for other acts performed as such agent. 14 As president of the Federation, Henri Kahn is
presumed to have known about the corporate existence or non-existence of the Federation. We
cannot subscribe to the position taken by the appellate court that even assuming that the
Federation was defectively incorporated, the petitioner cannot deny the corporate existence of
the Federation because it had contracted and dealt with the Federation in such a manner as to
recognize and in effect admit its existence. 15 The doctrine of corporation by estoppel is
mistakenly applied by the respondent court to the petitioner. The application of the doctrine
applies to a third party only when he tries to escape liabilities on a contract from which he has
benefited on the irrelevant ground of defective incorporation. 16 In the case at bar, the petitioner
is not trying to escape liability from the contract but rather is the one claiming from the contract.

WHEREFORE, the decision appealed from is REVERSED and SET ASIDE. The decision of the
Regional Trial Court of Manila, Branch 35, in Civil Case No. 90-53595 is hereby REINSTATED.

SO ORDERED.

G.R. No. 109272 August 10, 1994
GEORG GROTJAHN GMBH & CO., petitioner,
vs.
HON. LUCIA VIOLAGO ISNANI, Presiding Judge, Regional Trial Court, Makati, Br. 59;
ROMANA R. LANCHINEBRE; and TEOFILO A. LANCHINEBRE, respondents.
A.M. Sison, Jr. & Associates for petitioner.
Pedro L. Laso for private respondents.
PUNO, J.:
Petitioner impugns the dismissal of its Complaint for a sum of money by the respondent judge
for lack of jurisdiction and lack of capacity to sue.
The records show that petitioner is a multinational company organized and existing under the
laws of the Federal Republic of Germany. On July 6, 1983, petitioner filed an application, dated
July 2, 1983, 1 with the Securities and Exchange Commission (SEC) for the establishment of a
regional or area headquarters in the Philippines, pursuant to Presidential Decree No. 218. The
application was approved by the Board of Investments (BOI) on September 6, 1983.
Consequently, on September 20, 1983, the SEC issued a Certificate of Registration and License
to petitioner. 2
Private respondent Romana R. Lanchinebre was a sales representative of petitioner from 1983
to mid-1992. On March 12, 1992, she secured a loan of twenty-five thousand pesos
(P25,000.00) from petitioner. On March 26 and June 10, 1992, she made additional cash
advances in the sum of ten thousand pesos (P10,000.00). Of the total amount, twelve thousand
one hundred seventy pesos and thirty-seven centavos (P12,170.37) remained unpaid. Despite
demand, private respondent Romana failed to settle her obligation with petitioner.
On July 22, 1992, private respondent Romana Lanchinebre filed with the Arbitration Branch of
the National Labor Relations Commission (NLRC) in Manila, a Complaint for illegal suspension,
dismissal and non-payment of commissions against petitioner. On August 18, 1992, petitioner in
turn filed against private respondent a Complaint for damages amounting to one hundred twenty
thousand pesos (P120,000.00) also with the NLRC Arbitration Branch (Manila). 3 The two cases
were consolidated.
On September 2, 1992, petitioner filed another Complaint for collection of sum of money against
private respondents spouses Romana and Teofilo Lanchinebre which was docketed as Civil
Case No. 92-2486 and raffled to the sala of respondent judge. Instead of filing their Answer,
private respondents moved to dismiss the Complaint. This was opposed by petitioner.
On December 21, 1992, respondent judge issued the first impugned Order, granting the motion
to dismiss. She held, viz:
Jurisdiction over the subject matter or nature of the action is conferred by
law and not subject to the whims and caprices of the parties.
Under Article 217 of the Labor Code of the Philippines, the Labor Arbiters
shall have original and exclusive jurisdiction to hear and decide, within thirty
(30) calendar days after the submission of the case by the parties for
decision, the following cases involving all workers, whether agricultural or
non-agricultural:
(4) claims for actual, moral, exemplary and other forms of damages arising
from an employer-employee relations.
xxx xxx xxx
(6) Except claims for employees compensation, social security, medicare
and maternity benefits, all other claims arising from employer-employee
relations, including those of persons in domestic or household service,
involving an amount exceeding five thousand pesos (P5,000.00) regardless
of whether or not accompanied with a claim for reinstatement.
In its complaint, the plaintiff (petitioner herein) seeks to recover alleged cash
advances made by defendant (private respondent herein) Romana
Lanchinebre while the latter was in the employ of the former. Obviously the
said cash advances were made pursuant to the employer-employee
relationship between the (petitioner) and the said (private respondent) and
as such, within the original and exclusive jurisdiction of the National Labor
Relations Commission.
Again, it is not disputed that the Certificate of Registration and License
issued to the (petitioner) by the Securities and Exchange Commission was
merely "for the establishment of a regional or area headquarters in the
Philippines, pursuant to Presidential Decree No. 218 and its implementing
rules and regulations." It does not include a license to do business in the
Philippines. There is no allegation in the complaint moreover that (petitioner)
is suing under an isolated transaction. It must be considered that under
Section 4, Rule 8 of the Revised Rules of Court, facts showing the capacity
of a party to sue or be sued or the authority of a party to sue or be sued in a
representative capacity or the legal existence of an organized association of
persons that is made a party must be averred. There is no averment in the
complaint regarding (petitioner's) capacity to sue or be sued.
Finally, (petitioner's) claim being clearly incidental to the occupation or
exercise of (respondent) Romana Lanchinebre's profession, (respondent)
husband should not be joined as party defendant. 4
On March 8, 1993, the respondent judge issued a minute Order denying petitioner's Motion for
Reconsideration.
Petitioner now raises the following assignments of errors:
I
THE TRIAL COURT GRAVELY ERRED IN HOLDING THAT THE
REGULAR COURTS HAVE NO JURISDICTION OVER DISPUTES
BETWEEN AN EMPLOYER AND AN EMPLOYEE INVOLVING THE
APPLICATION PURELY OF THE GENERAL CIVIL LAW.
 II
THE TRIAL COURT GRAVELY ERRED IN HOLDING THAT PETITIONER
HAS NO CAPACITY TO SUE AND BE SUED IN THE PHILIPPINES
DESPITE THE FACT THAT PETITIONER IS DULY LICENSED BY THE
SECURITIES AND EXCHANGE COMMISSION TO SET UP AND
OPERATE A REGIONAL OR AREA HEADQUARTERS IN THE COUNTRY
AND THAT IT HAS CONTINUOUSLY OPERATED AS SUCH FOR THE
LAST NINE (9) YEARS.
III
THE TRIAL COURT GRAVELY ERRED IN HOLDING THAT THE
ERRONEOUS INCLUSION OF THE HUSBAND IN A COMPLAINT IS A
FATAL DEFECT THAT SHALL RESULT IN THE OUTRIGHT DISMISSAL
OF THE COMPLAINT.
IV
THE TRIAL COURT GRAVELY ERRED IN HOLDING THAT THE
HUSBAND IS NOT REQUIRED BY THE RULES TO BE JOINED AS A
DEFENDANT IN A COMPLAINT AGAINST THE WIFE.
There is merit to the petition.
Firstly, the trial court should not have held itself without jurisdiction over Civil Case No. 92-2486.
It is true that the loan and cash advances sought to be recovered by petitioner were contracted
by private respondent Romana Lanchinebre while she was still in the employ of petitioner.
Nonetheless, it does not follow that Article 217 of the Labor Code covers their relationship.
Not every dispute between an employer and employee involves matters that only labor arbiters
and the NLRC can resolve in the exercise of their adjudicatory or quasi-judicial powers. The
jurisdiction of labor arbiters and the NLRC under Article 217 of the Labor Code is limited to
disputes arising from an employer-employee relationship which can only be resolved by
reference to the Labor Code, other labor statutes, or their collective bargaining agreement. In
this regard, we held in the earlier case of Molave Motor Sales, Inc. vs. Laron, 129 SCRA 485
(1984), viz:
Before the enactment of BP Blg. 227 on June 1, 1982, Labor Arbiters, under
paragraph 5 of Article 217 of the Labor Code had jurisdiction over "all other
cases arising from employer-employee relation, unless expressly excluded
by this Code." Even then, the principal followed by this Court was that,
although a controversy is between an employer and an employee, the Labor
Arbiters have no jurisdiction if the Labor Code is not involved. In Medina vs.
Castro-Bartolome, 116 SCRA 597, 604 in negating jurisdiction of the Labor
Arbiter, although the parties were an employer and two employees, Mr.
Justice Abad Santos stated:
The pivotal question to Our mind is whether or not the
Labor Code has any relevance to the reliefs sought by
plaintiffs. For if the Labor Code has no relevance, any
discussion concerning the statutes amending it and
whether or not they have retroactive effect is
unnecessary.
xxx xxx xxx
And in Singapore Airlines Limited vs. Paño, 122 SCRA 671, 677, the
following was said:
Stated differently, petitioner seeks protection under the
civil laws and claims no benefits under the Labor Code.
The primary relief sought is for liquidated damages for
breach of a contractual obligation. The other items
demanded are not labor benefits demanded by workers
generally taken cognizance of in labor disputes, such
as payment of wages, overtime compensation or
separation pay. The items claimed are the natural
consequences flowing from breach of an obligation,
intrinsically a civil dispute.
xxx xxx xxx
In San Miguel Corporation vs. NLRC, 161 SCRA 719 (1988), we crystallized the doctrines set
forth in the Medina, Singapore Airlines, and Molave Motors cases, thus:
. . . The important principle that runs through these three (3) cases is that
where the claim to the principal relief sought is to be resolved not by
reference to the Labor Code or other labor relations statute or a collective
bargaining agreement but by the general civil law, the jurisdiction over the
dispute belongs to the regular courts of justice and not to the Labor Arbiter
and the NLRC. In such situations, resolutions of the dispute requires
expertise, not in labor management relations nor in wage structures and
other terms and conditions of employment, but rather in the application of
the general civil law. Clearly, such claims fall outside the area of
competence or expertise ordinarily ascribed to Labor Arbiters and the NLRC
and the rationale for granting jurisdiction over such claims to these agencies
disappears.
Civil Case No. 92-2486 is a simple collection of a sum of money brought by petitioner, as
creditor, against private respondent Romana Lanchinebre, as debtor. The fact that they were
employer and employee at the time of the transaction does not negate the civil jurisdiction of the
trial court. The case does not involve adjudication of a labor dispute but recovery of a sum of
money based on our civil laws on obligation and contract.
Secondly, the trial court erred in holding that petitioner does not have capacity to sue in the
Philippines. It is clear that petitioner is a foreign corporation doing business in the Philippines.
Petitioner is covered by the Omnibus Investment Code of 1987. Said law defines "doing
business," as follows:
. . . shall include soliciting orders, purchases, service contracts, opening
offices, whether called "liaison" offices or branches; appointing
representatives or distributors who are domiciled in the Philippines or who in
any calendar year stay in the Philippines for a period or periods totalling one
hundred eighty (180) days or more; participating in the management,
supervision or control of any domestic business firm, entity or corporation in
 the Philippines, and any other act or acts that imply a continuity of person contracting with a foreign corporation from later taking advantage of
commercial dealings or arrangements and contemplate to that extent the its noncompliance with the statutes chiefly in cases where such person has
performance of acts or works, or the exercise of some of the functions received the benefits of the contract, . . . (Citations omitted.)
normally incident to, and in progressive prosecution of, commercial gain or
of the purpose and object of the business organization. 5
Finally, the trial court erred when it dismissed Civil Case No. 92-2486 on what it found to be the
misjoinder of private respondent Teofilo Lanchinebre as party defendant. It is a basic rule that
There is no general rule or governing principle as to what constitutes "doing" or "engaging in" or "(m)isjoinder or parties is not ground for dismissal of an action." 8 Moreover, the Order of the trial
"transacting" business in the Philippines. Each case must be judged in the light of its peculiar court is based on Section 4(h), Rule 3 of the Revised Rules of Court, which provides:
circumstances. 6 In the case at bench, petitioner does not engage in commercial dealings or
activities in the country because it is precluded from doing so by P.D. No. 218, under which it
A married woman may not . . . be sued alone without joining her husband,
was established. 7 Nonetheless, it has been continuously, since 1983, acting as a supervision,
except . . . if the litigation is incidental to the profession, occupation or
communications and coordination center for its home office's affiliates in Singapore, and in the
business in which she is engaged,
process has named its local agent and has employed Philippine nationals like private
respondent Romana Lanchinebre. From this uninterrupted performance by petitioner of acts
pursuant to its primary purposes and functions as a regional/area headquarters for its home Whether or not the subject loan was incurred by private respondent as an incident to her
office, it is clear that petitioner is doing business in the country. Moreover, private respondents profession, occupation or business is a question of fact. In the absence of relevant evidence, the
are estopped from assailing the personality of petitioner. So we held in Merrill Lynch Futures, issue cannot be resolved in a motion to dismiss.
Inc. vs. Court of Appeals, 211 SCRA 824, 837 (1992):
IN VIEW WHEREOF, the instant Petition is GRANTED. The Orders, dated December 21, 1992
The rule is that a party is estopped to challenge the personality of a and March 8, 1993, in Civil Case No. 92-2486 are REVERSED AND SET ASIDE. The RTC of
corporation after having acknowledged the same by entering into a contract Makati, Br. 59, is hereby ordered to hear the reinstated case on its merits. No costs.
with it. And the "doctrine of estoppel to deny corporate existence applies to
foreign as well as to domestic corporations;" "one who has dealth with a
corporation of foreign origin as a corporate entity is estopped to deny its SO ORDERED.
corporate existence and capacity." The principle "will be applied to prevent a