2017 RE BILITATION Viva Shipping Lines, Inc. v. Keppel Philippine, Inc. 784 SCRA 173 © Corporate rehabilitation is a remedy for corporations, partnerships, and associations “who [foresee] the impossibility of meeting [their] debts when they respectively fall due.” A corporation under rehabilitation continues with its corporate life and activities to achieve solvency, or a position where the corporation is able to pay its obligations as they fall due in the ordinary course of business. Solvency is a state where the businesses’ liabilities are less than its assets. Corporate rehabilitation is a type of proceeding available to a business that is insolvent. In general, insolvency proceedings provide for predictability that commercial obligations will be met despite business downturns. Stability in the economy results when there is assurance to the investigating public that obligations will be reasonably paid. It is considered state policy to creditors to collectively and realistically resolve and adjust competing claims and property rights[.]... [Rlehabilitation or liquidation shall be made with a view to ensure or maintain certainty and predictability in commercial affairs, preserve and maximize the value of the claims, and ensure equitable treatment of creditors who are similarly situated. When rehabilitation is not feasible, it is in the interest of the State to facilitate a speedy and orderly liquidation of these debtor's assets and the settlement of their obligations. © The rationale in corporate rehabilitation is to resuscitate businesses in financial distress because “assets . . . are often more valuable when so maintained than they would be when liquidated.” Rehabilitation assumes that assets are still serviceable to meet the purposes of the business. The corporation receives assistance from the court and a disinterested rehabilitation receiver to balance the interest to recover and continue ordinary business, all the while attending to the interest of its creditors to be paid equitably. These interests are also referred to as the rehabilitative and the equitable purposes of corporate rehabilitation. © The publics interest lies in the court’s ability to effectively ensure that the obligations of the debtor, whe has experienced severe economic difficulties, are fairly and equitably served. The alternative might be a chaotic rush by all creditors to file separate cases with the possibility of different trial courts issuing various writs competing for the same assets, Rehabilitation is a means to temper the effect of a business downturn experienced for whatever reason. In the process, it gives entrepreneurs a second chance. Not only is it a humane and equitable relief, it encourages efficiency and ‘maximizes welfare in the economy. Clearly then, there are instances when corporate rehabilitation can no longer be a Agachieved. When rehabilitation will not result in a better present value recovery r the creditors, the more appropriate remedy is liquidation. @ It does not make sense to hold, suspend, or continue to devalue outstanding, a business that has no chance of recovery. In such cases, the optimum economic welfare will be achieved if the corporation is allowed to wind up its affairs in an orderly manner. Liquidation allows the corporation to wind up its affairs and equitably distribute its assets among its creditors. Liquidation is diametrically opposed to rehabilitation, Both cannot be undertaken at the same time. In rehabilitation, corporations have to maintain their assets to continue business operations, In liquidation, on the other hand, corporations preserve their assets in order to sell them. Without these assets, business operations are effectively discontinued. The proceeds of the sale are distributed equitably among creditors, and surplus is divided or losses are reallocated. REHABILITATION PROCEEDINGS HAVE A TWO-PRONGED PURPOSE: (A) TO EFFICIENTLY AND EQUITABLY DISTRIBUTE THE ASSETS OF THE INSOLVENT DEBTOR TO ITS CREDITORS; AND (B) TO PROVIDE THE DEBTOR WITH A FRESH START Rehabilitation proceedings in our jurisdiction have equitable and rehabilitative purposes. On the one hand, they attempt to provide for the efficient and equitable distribution of an insolvent debtor's remaining assets to its creditors; and on the other, to provide debtors with a “fresh start” by relieving them of the weight of their outstanding debts and permitting them to reorganize their affairs. The purpose of rehabilitation proceedings is to enable the company to gain a new lease on life and thereby allow creditors to be paid their claims from its earnings. Consequently, the basic issues in rehabilitation proceedings concem the viability and desirability of continuing the business operations of the petitioning corporation. The determination of such issues was to be carried out by the court-appointed rehabilitation receiver. (Philippine Bank of Communications v. Basic Poluprinters and Packaging Corporation, 738 SCRA 561] THE RTC, ACTING AS REHABILITATION COURT, HAS NO JURISDICTION OVER THE SUBJECT MATTER OF THE INSURANCE CLAIM OF STEEL CORPORATION OF THE PHILIPPINES (SCP) AGAINST ITS INSURERS © The RIC, acting as rehabilitation court, has no jurisdiction over the subject matter of the insurance claim of SCP against its insurers. SCP must file a separate action for collection where its insurers can properly thresh out their defenses, SCP cannot simply file with the RTC a motion to direct insurers to pay insurance proceeds. Section 3 of Republic Act No. 10142 states that rehabilitation proceedings are “summary and non-adversarial” in nature. They do not include 2: 20172017 adjudication of claims that require full trial on the merits, like SCP's insurance claim against its insurers, The insurers are not claiming or demanding any money oF property from SCP. In other words, the insurers are not creditors of SCP. The insurers are contingent debtors of SCP because they may possibly be, subject to proof during trial, liable to SCP. Thus, the RTC is devoid of jurisdiction to pass upon the insurance claim of SCP against the insurers. SCP must file a separate action against the insurers to recover whatever claim it may have against them. [Steel Corporation of the Philippines v. MAPFRE Insular Insutrance Corporation, et al., 707 SCRA 601, 16 October 2013} THE STAY ORDER DOES NOT SUSPEND THE FORECLOSURE OF A MORTGAGE CONSTITUTED OVER THE PROPERTY OF THIRD-PARTY MORTGAGOR ‘The enforcement of the mortgage lien cannot be considered as a claim against a guarantor or a surety not solidarily liable with the debtor corporation. While spouses Chua executed Continuing Guaranty and Comprehensive Surety in favor of Allied Bank, the bank did not proceed against them as individual guarantors or sureties. Rather, by initiating extrajudicial foreclosure proceedings, the bank was directly proceeding against the property mortgaged to them by the spouses as security. ‘The undertaking of spouses Chua with respect to the loans of petitioner corporation is properly that of a third-party mortgagor or an accommodation mortgagor, whereby one mortgages property to stand as security for the indebtedness of another. Thus, the issuance of a Stay Order cannot suspend the foreclosure of accommodation mortgages. [Situs Development Corporation v. Asiatrust Bank, 677 SCRA 495, 25 July 2012] ‘THE SUSPENSION OF “ALL CLAIMS” AS AN INCIDENT TO A “CORPORATE REHABILITATION DOES NOT CONTEMPLATE THE, SUSPENSION OF CRIMINAL CHARGES FILED AGAINST THE CORPORATE OFFICERS OF THE DISTRESSED CORPORATION ‘The rehabilitation of SIHI and the settlement of claims against the corporation is not a legal ground for the extinction of corporate officers’ criminal liabilities. There is no reason why criminal proceedings should be suspended during, corporate rehabilitation, more 50, since the prime purpose of the criminal action .e offender in order to deter him and others from committing the same or similar offense, to isolate him from society, reform and rehabilitate him or in general, to maintain social order. It would be absurd that one who has engaged in criminal conduct could escape punishment by the mere filing of a a is to punish thpetition for rehabilitation by the corporation of which he isan officer, [Panlifio v. Regional Trial Court, Branch 51, City of Manila, 641 SCRA 438, 2 February 2011] LIABILITY OF CORPORATE OFFIC Guillermo v. L 785 SCRA 5; © A corporation is sti an artificial being invested by law with a personality separate and distinet from that of its stockholders and from that of other corporations to which it may be connected. It is not in every instance of inability to collect from a corporation that the veil of corporate fiction is pierced, and the responsible officials are made liable, Personal liability attaches only when, as enumerated by the s: on 31 of the Corporation Code, there is a wilfull and knowing assent to patently unlawful acts of the corporation, there is gross negligence or bad faith in directing the affairs of the corporation, or there is a conflict of interest resulting in damages to the corporation. The dactrine of piercing the corporate veil is held to apply only in three (8) basic areas, namely: (1) defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion of an existing obligation; (2) fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime; or (3) alter ego cases, where a corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation. In the absence of malice, bad faith, or a specific provision of law making a corporate officer liable, such corporate officer cannot be made personally liable for corporate liabilities. Indeed, the conferment of liability on officers for a corporation's obligations to labor is held to be an exception to the general doctrine of separate personality of a corporation. ‘® Italso bears emphasis that in cases where personal liability attaches, not even all officers are made accountable. Rather, only the “responsible officer,” i.e, the person directly responsible for and who “acted in bad faith” in committing the illegal dismissal or any act violative of the Labor Code, is held solidarily liable, in cases wherein the corporate veil is pierced, In other instances, such as cases of 50- called corporate tort of a close corporation, it is the person “actively engaged” in the management of the corporation who is held liable. In the absence of a clearly identifiable officer(s) directly responsible for the legal infraction, the Court considers the president of the corporation as such officer. © The common thread running among the aforementioned cases, however, is that the veil of corporate fiction can be pierced, and responsible corporate directors and officers or even a separate but related corporation, may be impleaded and held answerable solidarily in a labor case, even after final judgment and on ‘execution, so long as it is established that such persons have deliberately used2017 the corporate vehicle to unjustly eva ion, or have resorted le the jud to Fraud, bad faith or malice in doing so, When the shield of a separate corporate dlentity is sed to commit wrongdoing and opprobriously elude responsibility, the courts and the legal authorities in a labor case have not hesitated to step in wid shatter the said shield and deny the us protections to the offending, party, ree of fraud, malice or bad faith, Bad faith, in this instance, docs not connote bad judgment or negligence but imparts \d conscious doing of wrong it means breach of a known duty through some motive or interest or ill will; it partakes of the nature of fraud even after final judgment, The key element «the pro dlishons 1 purpose or some moral obliquity 1k OF SHARES OF STOCK; OF TRANSFERREE 1 Resources Corporation v. Securities Specialist, Ine. 792 SCRA 155 - Under Section 63 of the Corporation Code, no transfer of shares of stock shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation so as to show the names of the parties to the transaction, the date ‘of the transfer, the number of the certificate or certificates and the number of ihares transferred, Hence: [A] transfer of shares of stock not recorded in the stock nnd transfer book of the corporation is non-existent as far as the corporation is concerned, As between the corporation on the one hand, and its shareholders and third persons on the other, the corporation looks only to its books for the purpose of determining, who its shareholders are. It is only when the transfer has been recorded in the stock and transfer book that a corporation may rightfully regard the transferee as one of its stockholders, From this time, the consequent obligation on the part of the corporation to recognize such rights as it is Jed by law to recognize arises. ULTRA VIRES ACT; EXCEPTION Magallanes Watercraft Association, Inc. v. Auguis 791 SCRA 445, Section 45 of the Corporation Code provides for the powers possessed by a corporation, to wit: Sec, 45, Ultra vires acts of corporations. — No corporation under this code shall possess or exercise any corporate powers except those conferred by this Code or by its articles of incorporation and except such as are necessary or incidental tot he exercise of the powers so conferred. From a reading of the saicl prqviaion, itis clear that a corporation has: (1) express powers, which are da cercd upon by law or its articles of incorporation; and (2) necessary. or incidental powers to the exercise of those, expressly conferred. An act whichunnot fall uncer a corporation's express or necessary or incidental powers is © In University of Mindanao, Inc, v. Bangko Sentral ng Pilipinas, 778 SCRA 458 (2016), the Court wrote that corporations were not limited to the express powers enumerated in their charters, but might also perform powers necessary or incidental thereto, to wit: A corporation may exercise its powers only within those definitions. Corporate acts that are outside those express definitions under the law or articles of incorporation or those “committed outside the object for which a corporation is created” are ulira vires. The only exception to this rule is when acts are necessary and incidental to carry out a corporation's purposes, and to the exercise of powers conferred by the Corporation Code and under a corporation's articles of incorporation. CORPORATION IS NOT ENTITLED, TO MORAL DAMAGES Ren Transport Corp. v. National Labor Relations Commission (2 Division) 794 SCRA 498 © A corporation is not, as a general rule, entitled to moral damages, Being a mere artificial being, it is incapable of experiencing physical suffering or sentiments like wounded feelings, serious anxiety, mental anguish or moral shock, Although this Court has allowed the grant of moral damages to corporations in certain situations, it must be remembered that the grant is not automatic. The claimant must still prove the factual basis of the damage and the causal relation to the defendant's acts. In this case, while there is a showing of bad faith on the part of the employer in the commission of acts of unfair labor practice, there is no evidence establishing the factual basis of the damage on the part of SMART, PIERCING THE VEIL OF CORPORATE FICTION Republic v. Mega Pacific eSolutions, Inc. 794 SCRA 414 © Veil-piercing in fraud cases requires that the legal fiction of separate juridical personality is used for fraudulent or wrongful ends. Red flags of fraudulent schemes in public procurement, strongly indicate. that MPEI was a sham corporation formed merely for the purpose of perpetrating a fraudulent scheme, ‘The red flags are as follows: (1) overly narrow specifications; (2) unjustified recommendations and unjustified winning bidders; (3) failure to meet the terms of the contract; and (4) shell or fictitious company, © ‘The Handbook regards a shell or fictitious company as a “serious ni concept that it elaborates upon: Fictitious companies are by definition fy and may also serve as fronts for government officials, The typical 1 flag,” a ‘audulent IL schemeovernment officials creating, a fictitious company that will serve as a “vehicle” to secure contract awards. Often, the fictitious ~ or ghost - company will subcontract work to lower cost and sometimes unqualified firms The fictitious company may also utilize designated losers as subcontractors to deliver the work, thus indicating collusion, Shell companies have no significant assets, staff or operational capacity. They pose a serious red flag as a bidder on Public contracts, because they often hide the interests of project or government Cfficials, concealing a conflict of interest and opportunities for money laundering. Also, by definition, they have no experience. MPEI qualifies as a shell or fictitious company. It was non-existent at the time of the invitation to bid; to be precise, it was incorporated only 11 days before the bidding. It was a newly formed corporation and, as such, had no track record to speak of. involves corrupt CORPORATION LAW * GRANDFATHER RULE NARRA NICKEL MINING AND DEVELOPMENT CORP. v, REDMONT CONSOLIDATED MINES CORP. 722 SCRA 382 Redmont Consolidated Mines Corp. (Redmont) took interest in mining and exploring certain areas of the province of Palawan. After inquiring with the Department of Environment and Natural Resources (DENR), it learned that the areas where it wanted to undertake exploration and mining activities were already covered by Mineral Production Sharing Agreement (MPSA) applications of Narra Corp., Tesoro Inc, and McArthur Inc, which were all domestic corporations, Redmont however questioned these applications for MPSA arguing that at least 60% of the capital stock of these three corporations were owned and controlled by MBMI Resources, Inc. (MBMI), a 100% Canadian corporation, which was disqualified from engaging in mining activities reserved only for Filipino citizens. Narra, Tesoro and McArthur on the other hand insisted that they were “qualified persons” under Section 3(aq) of Republic Act No. (RA) 7942 or the Philippine Mining Act of 1995 which provided that: . "Qualified person" means ‘any citizen of the Philippines with capacity to contract, or a corporation, partnership, association, or cooperative organized or authorized for the purpose of engaging in mining, with technical and financial capability to undertake mineral resources development and duly registered in accordance with law at least sixty per cent (60%) of the capital of which is owned by citizens of the Philippines: Provided, That a legally organized foreign-owned corporation shall be deemed a qualified person for purposes of 2017 ‘4 ranting an exploration permit, financial or technical assistance agreement or nit mineral processing per They stated that their nationality as applicants is immaterial because they also lied for Financial or Technical Assistance Agreements (FTAA) which are granted to foreign-owned corporations. Nevertheless, they claimed that the issue on nationality should not be raised since they are in fact Philippine Nationals as 60% of their capital is owned by citizens of the Philippines, They claimed that the control test must be applied to determine their nationality «Are Narra, Tesoro and McArthur Filipino corporations? NO. A grave violation of the Constitution, specifically Section 2 of Article XI, is being committed by a foreign corporation right under our country’s nose through a myriad of corporate layering under different, allegedly, Filipino corporations Basically, there are two acknowledged tests in determining the nationality of a corporation: the contro! test and the grandfather rule. Paragraph 7 of DOJ Opinion No, 020, Series of 2005, adopting the 1967 SEC Rules which implemented the requirement of the Constitution and other laws pertaining to the controlling interests in enterprises engaged in the exploitation of natural resources owned by Filipino citizens, provides: “Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality, but if the percentage of Filipino ownership in the corporation or partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as of Philippine nationality.” The first part of paragraph 7, DO] Opinion No. 020, stating "shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality,” pertains to the control test or the liberal rule. On the other hand, the second part of the DOJ Opinion which provides, “if the percentage of the Filipino ownership in the corporation or partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as Philippine nationality," pertains to the stricter, more stringent grandfather rule, Under the liberal Control Test, there is no need to further trace the ownership of the 60% (or more) Filipino stockholdings of the Investing Corporation since a corporation which is at least 60% Filipino-owned is considered as Filipino, Under the Strict Rule or Grandfather Rule Proper, the combined totals in the Investing Corporation and the Investee Corporation must be traced (.e., grandfathered") to determine the total percentage of Filipino ownership. Moreover, the ultimate Filipino ownership of the shares must first be traced to the level of the 2017Rvesting Corporation and added to the shares directly owned in the Investee Corporation, Which of the two tests must be applied? A perusal of the deliberations in the Records of the 1986 Constitutional Commission reveals that the’ grandfather rule mut be applied in cases where corporate layering, as in this case, is present. When the 60-40 Hiipino-foreign equity ownership-is in doubt, the grandfather rule must be applied Thus, to establish the actual ownership, interest or participation of MBMI in each of the corporate structures of Narra, Tesoro and McArthur, they have to be "grandfathered," McArthur’s corporate structure McArthur acquired its MPSA ay Filipino corporation. (Such aj Marie Mining, however, ipplication from Madridejos Mining Corp, a pplication was transferred to Madridejos Mining by Sara Inc] Madridejos Mining is a major investor of McArthur. MMBI, is a major investor of both Madridejos Mining and McArthur. Interesting too, another major stockholder of Madridejos Mining is Olympic Mines which entered into a joint venture with no less than MMBI. The records show that MMBI holds 60% interests in said joint venture. Thus, when McArthur is "grandfathered, layering was utilized by MBMI to gain control over McArthur. It is apparent that MBM has more than 60% or more equity interest in McArthur (taking into account its controlling shares in Madridejos Mining and Olympic Mines), making McArthur a foreign corporation. it can be deduced that company ‘Tesoro’s corporate structure ‘Tesoro acquired its MPSA application from Sarah Ma: structures of McArthur and ‘Tesoro are similar. They have th shareholders, except for Sarah Marie Mining. the same up to the last centavo. wie Mining. The corporate e same major and nominal The amount of their investment is exactly Delving deeper, MMBI is also a major stockholder of Sarah Another major player in Sarah Marie Mining is Olympic Mines, which as previously Stated is in a joint venture arrangement with MBMI. Accordingly, after “grandfathering”" Tesoro and factoring in Olympic Mines’ participation in Sarah Marie Mining, it is clear that MBM is in control of Tesoro and owns 60% or more equity interest in Tesoro, This makes Tesoro a non-Filipino corporation and, thus, disqualifies it to participate in the exploitation, utilization and development of our natural resources, Marie Mining, ‘Narra’s corporate structure Narra acquired its MPSA from Alpha Resources and Development Corporation and Patricia Louise Mining & Development Corporation. ‘The corporate structure and 2017atiatly: he wanne an thal of MeArtiiae and Wore, MMI jn 9 ventory of Naren ta nul Nnajor stockhaktor in both Nava and Batiioha Loulaw Mag) Minin, 1 may bw sour Looking tte the eorporate stricture of Patilela Louth wor ty Palawan Alpha, jal Like Hy joint venti with Olympic Minwy, Mat its major i ro with Palawan Alpha, anid holly directly and MME onterodt nto a joint ve alinectly 60% Intoreaty ln ptiel venture, uf facto, HL in quile wafer to way that MeAvthuy, Coneluding from the aboven Tesoro andl Natra are net Liliphio aiice MIMI, 4 100% Canadian corporation, evens 60) SF more of thelr equity interety, Sueh conclusion in derived from yranafathering, thelr Cotporate owners, namely: Madridejox Minny, Sarah Maris Mining and Matriela Lowiie further and adding te the pletara, MMI entered Inte Joint venture with Olymple and Palawan Alpha, Noticeably, te ownwrahlp of the boils own to MBMI practically exerelsing, majority eontral aver nod. In effect, whether looking at the capital structure oF the Hone, MeArtivur, Tesoro and gn wince 60% oF more of Mining, ¢ ayered” corporat the corporations: ment underlying, relationship Narra are NOT Pilipi their capital stocks or equity inter between and among the eorpor ynatlonaly and mut be considered fc An are owned by MIMI + RULES ON MERC BANK OF COMMERCE y, RADIO PIILIPPINIS NETWORK, INC, 722 SCRA 820 (IRB) proposed to sell to Bank of Comme In late 2001 the Traders Royal f if business consisting Of specified aviein wid (Bancommerce) for 210.4 billion its bankiny Habilties, Bancommerce agreed upon approval by th Hangko Sentral ny Filipina (BSP) of their Purchase and Assumption (P de A) Agreement. The BSP nitrated ‘ths, set up an escrow fund of P5O million with another bank to cover ‘TID abiiltion fey contingent claims that may subsequently be adjudged against It, which abilities wey excluded from the purchase. TRB complied with this BSI mandatw and. placed ts million in-escrow with Metrobank to answer for claims and linbilitios that were excluded from the P & A Agreement and remained with TRU, Shortly after or on October 10, 2002, acting in Gilt, 198510, ‘haclers Royal Banke v Radio Philippines Network (RPN), Ine, the Supreme Court ordered ‘THB to pay Kh Intercontinental Broadcasting Corporation, and Banahaw Brondcosting, Conperaticy (collectively, RPN, etal) actual damages of more than 29 Million plus 12% loyal Intenon and some amounts. Based on this decision, RPN, et al, filed 4 motion for moniin, against TRB before the RTC of Quezon City, But rather than pursue a levy of the corresponding amounts on escrow with Motrobink, PN, et al, thet n Supplemental Motion for Execution where they deveribed ‘TID ax ‘iow Bank gt Commerce" based on the assumption that TRB had been merged Into Bancommnerey ‘The RTC granted the Motion for Execution reasoning that what transpired butwoen tHe 2017 10.and Bancommerce was a merger, and thus, the latter should be held liable for the liabilities of TRB. Did TRH merge with Bancommerce? NO. Merge niza consolidating into a single eorpor 11 of two of more corporations that results in their tion, which is one of the constituent corporations, one disappearing or dissolving and the other s absorption of one or more corporations by another existing corporation, which retains its identity and takes over the rights, privileges, franchises, properties, claims, liabilities and obligations of the absorbed corporation(s). The absorbing corporation continues its existence while the life or lives of the other corporation(s) is or are terminated. rviving, To put it another way, merger is the The Corporation Code requires the following steps for merger or consolidation: (1) The board of each corporation draws up a plan of merger or consolidation. Such plan must include any amendment, if necessary, to the articles of incorporation of the surviving corporation, or in case of consolidation, all the statements required in the articles of incorporation of a corporation. 2) Submission of plan to stockholders or members of each corporation for approval. A meeting must be called and at least two (2) weeks’ notice must be sent to all stockholders or members, personally or by registered mail. A summary of the plan must be attached to the notice. Vote of two-thirds of the members ov of stockholders representing two thirds of the outstanding capital stock will be needed, Appraisal rights, when proper, must be respected, (@) Execution of the formal agreement, referred to as the articles of merger oft] consolidation, by the corporate officers of each constituent corporation, These take the place of the articles of incorporation of the consolidated corporation, amend the articles of incorporation of the surviving corporation. (4) Submission of said articles of merger or consolidation to the SEC for approv, (6) If necessary, the SEC shall set a hearing, at least two weeks before, (6) Issuance of certificate of merger or consolitiation, al notifying all corporations concerned Indubitably, it is clear that no merger took place between Bancommerce and TRE as the requirements and procedures for a merger were absent. A merger does not become effective upon the mere agreement of the constituent corporations. All the requirements specified in the law must be complied with in order for merger to take effect, Section 79 of the Corporation Code further provides that the merger shall be effective only upon the issuance by the Securities and Exchange Commission (SEC) of « certificate of merger, Here, Bancommerce and TRB remained séparate corporations with distinct corporate personalities. What happened is that TRB sold and Bancommerce purchased identified recorded assets of TRB in consideration of Bancommerce'’s assumption of 2017 onidentified recorded liabilitie 8 of TRB including booked contingent accounts. There is no WY that prohibits this kind of transaction especially when it is done openly and with seeyePtiate government approval, In strict sense, no merger oF consolidation took place § the records do not show any plan or articles of merger or consolidation, Move i™Portantly, the SEC did not issue any certificate of merger or consolidation, Dida le facto merger take place between the parties? NO. A de & acto merger can be pursued by one corporation acquiring all or substantially all of the properties of another corporation in exchange of shares of stock of the acquiring corporation. The aequiting corporation would end up with the business TuterPrise of the target corporation; whereas, the target corporation would end up with basically its only remaining assets being the shares of stock of the acquizing corporation, No de facto merger took place in the present case simply because the TRB owners did not get in exchange for the bank's assets and liabilities an equivalent value in Bancommerce shares of stock. Bancommerce and TRB agreed with BSP approval to exclude from the sale TRB's contingent judicial liabilities, including those owing to RPN, etal Indubitably, since the transaction between TRB and Bancommerce was neither a merger nor a de facto merger but a mere "sale of assets with assumption of liabilities” the next question before the Court is whether or not the RTC could regard Bancommerce as RPN, et al.’s judgment debtor, Since there had been no merger, Bancommerce cannot be considered as ‘TRB's successor-in-interest ancl against which the Court's Decision of October 10, 2002 in GR. 138510 may be forced. Bancommerce did not hold the former TRBs assets in trust for it as to subject them to garnishment for the satisfaction of the latter’s liabilities to RPN, et al, Bancommerce bought and acquired those assets and thus, became their absolute owners. + WINDING UP PERIOD: THREE YEARS FROM CORPORATE DISSOLUTION ALABANG DEVELOPMENT CORPORATION v. ALABANG HII,LS VILLAGE ASSOCIATION 724 SCRA 321 On October 19, 2006, Alabang Development Corporation] (ADC) sued. Alabang His Village Association, Inc. (AHVAD and Rafael Tinio (Tinio), President of AFIVAL The Complaint alleged that ADC is the developer of Alabang Hills Village and still tain parcels of land therein that are yet to Ve sold, as well as those considered cei spaces that have not yet been donated to the local government of Muntinlupa City open: oP case s Association. Sometime in September 2006, ADC learned that or the Homeowner's Associa 12 2017AHVAL started the construction of a multi-purpose hall and a swimming pool on one of the parcels of land still owned by ADC without the latter's consent and approval, and that despite demand, AHVAI failed to desist from constructing the said improvements. For its part, AHIVAI denied ADC's asseverations and claimed that the latter has No legal capacity to sue since its existence as a registered corporate entity was revoked by SEC on May 26, 2003. The RTC dismissed the complaint ruling that it was filed when ADC was already defunct and, as such, it no longer had capacity to file the suit. Does ADC possess the legal personality to sue? NO. ADC's corporate registration was revoked on May 26, 2003. It had three years, or until May 26, 2006, to prosecute or defend any suit by or against it. The subject complaint, however, was filed only on October 19, 2006, more than three years after such revocation. ADC lacks capacity to sue because it no longer possesses juridical personality by reason of its dissolution and lapse of the three-year grace period provided under Section 122 of the Corporation Code: "SEC, 122. Corporate liquidation Every corporation whose charter expires by its own limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any other manner, shall nevertheless be continued as a body corporate for three (3) years after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the business for which it was established. At any time during said three (3) years, said corporation is authorized and empowered to convey all of its property to trustees for the benefit of stockholders, members, creditors, and other persons in interest. From and after any such conveyance by the corporation of its property in trust for the benefit of its stockholders, members, creditors and others in interest, all interest which the corporation had in the property terminates, the legal interest vests in the trustees, and the beneficial interest in the stockholders, members, creditors or other persons in interest. Upon winding up of the coxporate affairs, any asset distributable to any creditor or stockholder or member who is unknown or cannot be found shall be Secheated to the city or municipality where such assets are located. Except by decrease of capital stock and as otherwise allowed by this Code, ation shall distribute any of its assets or property except upon lawful a yyiment of all its debts and liabilities." dissolution and after pa “13 2017It is clear that at the time capacity to sue as a corpor pursue it until final judgmer Purpose of liquidating its of the Corporation Code of the filing of the subject complaint ADC lacks the ‘ation. To allow ADC to initiate the subject complaint and ‘nt, on the ground that such complaint was filed for the sole assets, would be to circumvent the provisions of Section 122 DOCTRINE OF PIERCING CORPORATE VEIL; EFFECT ON LIABILITY OF OFFICERS LIVESEY v. BINSWANGER PHILIPPINES, INC. 719 SCRA 433 Eric Godfrey Stanley Livesey filed a complaint for illegal dismissal with money claims against CBB Philippines Strategic Property Services, Inc. (CBB) and Paul Dwyer, CBB was a domestic corporation engaged in real estate brokerage and Dwyer was its President. ‘The Labor Arbiter ruled that there was illegal dismissal and that Livesey was entitled to his monetary claims. Livesey and CBB entered into a compromise agreement whereby CBB agreed to pay the former US$31,000.00 in three installments. As it happened, CBB paid the first installment, but not the next two as the company has ceased operations. This prompted Livesey to move for the issuance of a writ of execution. The writ was issued but was not enforced. He learned that CBB has organized another corporation, Binswanger Philippines, Inc. He claimed that there was evidence showing that CBB and Binswanger Philippines, Inc, were one and the same corporation, pointing out that CBB stands for Chesterton Blumenauer Binswanger. Invoking the doctrine of piercing the veil of corporate fiction, Livesey prayed that an alias writ of execution be issued against respondents Binswanger and Keith Elliot, CB's former President, and now Binswanger’s President and Chief Executive Officer (CEO). Should the veil of corporate fiction be pierced? YES. The law vests a corporation with a personality distinct and separate from its stockholders or members, In the same vein, a corporation, by legal fiction and convenience, is an entity shielded by a protective manttle and imbued by law with a character alien to the persons comprising it. Nonetheless, the shield is not at all time: impenetrable and cannot be extended to a point beyond its reason and policy. Circumstances might deny a claim for corporate personality, under the piercing the veil of corporate fiction.” “doctrine of Piercing the veil of corporate fiction is an equitable doctrine developed to address situations where the separate corporate personality of a corporation is abused or used for wrongful purposes. Under the doctrine, the corporate existence may be disregarded where the entity is formed or used for non-legitimate purposes, such as to 2017 “4evade a just and due obi carry out similar or in, which case, the two corpor ‘Ration, or to justify a wrong, to shield or perpetrate fraud or to fiction na bl® considerations, other unjustifiable aims or intentions,’ in at Heit be disregarded and the individuals composing it and the ations will be treated as identical In the Present case, Binswange, : * we see an indubitable link between CBB's closure and Person of Binswe oTtiom: CBB ceased to exist only in name; it re-emerged in the installmonts of ie nae oh UBeNt purpose — to avoid payment by CBB of the last two liabilities, Freed oy moNtY obligation to Livesey, as well as its other financial continue, acy got CBBS liabilities, especially that owing to Livesey, Binswanger can ‘hue, as it did continue, CBB's real estate brokerage business. Livesey’s evidence CBB to Binswanger. It wa: line of business CBB emb: converged to show this continuity of business operations from. ' not just coincidence that Binswanger is engaged in the same arked on: (1) it even holds office in the very same building and on the very same floor where CBB once stood; (2) CBB's key officers, Elliot, no less, and Catral moved over to Binswanger, performing the tasks they were doing at CBB; (2) notwithstanding CBB's closure, Binswanger’s Web Editor (Young), in an e-mail correspondence, supplied the information that Binswanger is “now known” as either CBB (Chesterton Blumenauer Binswanger or as Chesterton Petty, Ltd, in the Philippines; (4) the use of Binswanger of CBB's paraphernalia (receiving stamp) in connection with a labor case where Binswanger was summoned by the authorities, although Elliot claimed that he bought the item with his own money; and (5) Binswanger's takeover of CBB’s project with the PNB. While the ostensible reason for Binswanger's establishment is to continue CBB‘s business operations in the Philippines, which by itself is not illegal, the close proximity between CBB's disestablishment and Binswanger’s coming into existence points to an unstated but urgent consideration which, as we earlier noted, was to evade CBB’s unfulfilled financial obligation to Livesey under the compromise agreement. ‘This underhanded objective, it must be stressed, can only be attributed to Elliot as it was apparent that Binswanger’s stockholders had nothing to do with Binswanger’s operations. Elliot was well aware of the compromise agreement between Livesey and CBB, as he “agreed and accepted” the terms of the agreement for CBB. He was also well aware that the last two installments of CBB's obligation to Livesey were. These installments were not met and the reason is that after the alleged sale of the majority of CBB's shares of stock, it closed down., With CBB’s closure, Livesey asked why people would buy into a corporation and simply close it down immediately thereafter? ‘The answer — to pave the way for CBB's reappearance as Binswanger. Elliot’s “guiding hand,” as Livesey puts it, is very much evident in CB's demise and Binswanger’s creation. Elliot knew that CBB had not fully complied with its financial obligation under the compromise agreement. He made sure that it would not be fulilled when he allowed CBB's closure. This wrongful intent we cannot and must not condone, for it will give a premium to an iniquitous business 15+ 2017strategy where a corporation i evades just aaa Poration is formed or used for a non-legitimate purpose, such as to CBB Ted oblige S8tOR. We, therefore, find Eliot as Hable as Binswanger for S unfulfilled obligation to Livesey, cans 1 SPE IGHT TO INSPECT BOOKS: 74, CORPORATION CODE YUJUICO V. QUIAMBAO 724 SCRA 262 ivvest a RADEC is a domestic corporation operating as a business development and ‘ompany. A dispute between outgoing and newly elected directors ensued Mhen the group of Quiambao (outgoing directors) allegedly refused to turnover STRADECS corporate records and stock and transfer book. These were supposedly {rmoved in the office of STRADEC and transferred in a safety deposit box. The group of “ujuico insists that this violates their right, as stockholders, directors and officers, to inspect such records and book under Section 74 of the Corporation Code. For such violation, they assert that the group of Quiambao may be held criminally liable Pursuant to Section 144 of the Corporation Code. Is the removal of the books from the offices of STRADEC punishable under Secs, 74, in relation to Sec, 144 of the Corporation Code? NO. Sec. 74, in relation to Sec. 144 of the Corporation Code punishes any officer or agent of the corporation who shall refuse to allow any director, trustees, stockholder ‘or member of the corporation to examine and copy excerpts from its records or minutes. Section 74 contemplates a situation wherein a corporation, acting thru one of its officers or agents, denies the right of any of its stockholders to inspect the records, minutes and the stock and transfer book of such corporation. The group of Yujuico failed to establish that the group of Quiambao were acting on behalf of STRADEC. Quite the contrazy, the scenario painted is that the group of Quiambao are merely outgoing officers of STRADEC who, for some reason, withheld and refused to turn-over the company records of STRADEC; that it is the group of Yuijuico who are actually acting on behalf of STRADEC; and that STRADEC is actually merely trying to récover custody of the withheld records. In other words, the group of Yuijuico are not actually invoking their right to inspect the records and the stock and transfer book of STRADEC under the second and fourth paragraphs of Section 74, What they seek to enforce is the proprietary right of STRADEC to be in possession of such records and book, Such right, though certainly legally enforceable by other means, cannot be enforced by a eriminal prosecution base! ‘ona violation of the second and fourth paragraphs of Section 74. That is simply not the situation contemplated by the second and fourth paragraphs of Section 74 of the Corporation Code. 2017 “16.SPITE T TECHNOLOGIES, INC, v. MAPUA 720 SCRA 743, Enumerate instance. Personally liable for the mln n Corporate directors/trustees or officers may be held isation of the corporation. It is hornbook office eho hee Wohon aes &B8t Personal lability of corporate directors, trustees or or when they are guilty arin ley Assent to’ patently unlaw®ul act of the corporation, there is a conflict o} fF interose aith oF gross negligence in directing its affairs, or when, other persons; (b) they con getting in damages to the corporation, its stockholders or knowledge of stich ins n ent f the issuance of watered down stocks or when, having, written objection’ Teen tte do not forthwith file with the corporate secretary their the corporation; o © they agree to hold themselves personally and solidarily liable with for their ieee pot are made by specific provision of law personally answerable MIRANT (PHILIPPINES) CORPORATION v. CARO 3 723 SCRA 465 In a case for illegal dismissal, may a corporate officer be held personally liable for the monetary liabilities of the corporation? NO. A cozporation has a personality separate and distinct from its officers and board of directors who may only be held personally liable for damages if it is proven that they acted with malice or bad faith in the dismissal of an employee. Absent any evidence on record that an officer acted maliciously or in bad faith in effecting the termination of an employee, plus the apparent lack of allegation in the pleadings of the employee that the officer acted in such manner, the doctrine of coxporate fiction dictates that only the corporation should be held liable for the illegal dismissal of the employee. NEGOTIABLE INSTRUMENTS LAW, METROPOLITAN BANK AND TRUST COMPANY v. CHIOK: 742 SCRA 435 Manager's and cashier's checks are not subject to thé condition that the payee thereof should comply with his obligations to the purchaser of the checks, he ts check and a cashier's check are the same, A al effects of a manager's ched * Sheck, like a cashier's check, is an order of the bank to pay, drawn eran re, committing in effect its total resources, integrity, and honor behind ee ‘By its pecuiliar character and general use in commerce, a manager's its issuance. By its2017 check or a cashier's check is regarded substantially to be as good as the money it Tepresents, Manager's and cashier’ checks are still the subject of clearing to ensure that the same have not been materially altered or otherwise completely counterfeited. However, manager's and cashier's checks are pre-accepted by the mere issuance thereof by the bank, which is both its drawer and drawee. Thus, while manager's and cashier's checks are still subject to clearing, they cannot be countermanded for being drawn against a closed account, for being drawn against insufficient funds, or for similar reasons such as a condition not appearing on the face of the check. Long-standing and accepted banking practices do not countenance the countermanding of manager's and cashier's checks on the basis of a mere allegation of failure of the payee to comply with its obligations towards the purchaser. On the contrary, the accepted banking practice is that such checks are as good as cash. REQUISITES OF NEGOTIABILITY; LEGAL RATE OF INTEREST RIVERA v. SPOUSES SALVADOR CHUA, - 746 SCRA 1 Rivera obtained a loan from Spouses Chua as evidenced by the following: PROMISSORY NOTE 120,000.00 FOR VALUE RECEIVED, I, RODRIGO RIVERA promise to pay spouses SALVADOR C. CHUA and VIOLETA SY CHUA, the sum of One Hundred ‘Twenty Thousand Philippine Currency (120,000.00) on December 31, 1995. It is agreed and understood that failure on my part to pay the amount of (P120,000.00) One Hundred Twenty Thousand Pesos on December 31, 1995. (sic) I agree to pay the sum equivalent to FIVE PERCENT (5%) interest monthly from the date of default until the entire obligation is fully paid for. Should this note be referred to a lawyer for collection, I agree to pay the further sum equivalent to twenty percent (20%) 6f the total amount due and payable as and for attorney's fees which in no case shall be less than 5,000.00 and to pay in addition the cost of suit and other incidental litigation expense. Any action which may arise in connection with this note shall be brought in the proper Court of the City of Manila. Manila, February 24, 1995.(SGD.) RODRIGO RIVERA. Later, Rivera denied his indebtedness and insisted tat '? signature in the Promissory Note was forged. Is the abovequoted instrument negotiable? NO. The "Promissory Note” in thi = made out to specific persons, herein Spouses Chua, and not to order or to bearer, of to the order of the SENET (Chua as Payees, It failed to comply with one of the requisites of negotability under Sec ee NIL, arg IIL, and thus, it may not be considered as negotiable. May Rivera be held liable to pay the loan? YES. Rivera failed to prove his defense of forgery: The abovequoted a Es nay not be anegotiable nstrement but it ea clear evidence of Rivera's indebiedness REQUISITES OF NEGOTIABILITY; BILL OF EXCHANGE THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED- PHILIPPINE BRANCHES v. COMMISSIONER OF INTERNAT REVENUE, 724 SCRA 499 ‘The investor-clients of HSBC maintain Philippine peso and/or foreign currO™ey accounts, which are managed by HSBC through instructions given through electronic messages. ‘The said instructions are standard forms known in the banking industry as SWIFT, or “Society for Worldwide Interbank Financial ‘Telecommunication.” In, purchasing shares of stock and other investment in secuAites: the investor-clients would rd electronic messages from abroad instructing HSBC to debit their local or foreign currency accounts and to pay the purchase price therefor upon receipt of the securities. che CIR imposed documentary stamp tax (DST) against HSBC reasoning that the stax Code imposes DST on the acceptance or payment of a bill of exchange oF order for the payment of money. The CIR considered these electronic messages as bills of exchange. Is the SWIFT/electronic message considered a bill of exchange? NO. A bill of exchange is an tinconditional order in writing addressed by one person to another, signed by the person giving i requiring the person to whom it is roared to pay on demand or ata fixed or determinable future time a sum certain in money to order or to bearer. she electronic messages of HSBC Investorzctients contsining iaimuctions to | or foreign currency accounts in the Philippines and pay a debit their respective local c yesiding in the Philippines are parallel to an automatic certain named recipient also 2017 “19bank transfer of local funds from a savings account to a checking account maintained by a depositor in one bank. These electronic messages cannot be considered negotiable instruments as they lack the feature of negotiability, which, is the ability to be transferred” and that the said electronic messages are “mere memoranda” of the transaction consisting of the “actual debiting of the investor-client’s local or foreign currency account in the Philippines.” The requisites of negotiability under Section 1 of the NIL: “Sec. 1. Form of negotiable instruments. An instrument to be negotiable must conform to the following requirements: (a) Te must be in writing and signed by the maker or drawer; (©) Must contain an unconditional promise or order to pay a. sum certain in (©) Must be payable on demand, or at a fixed or determinable future time; (@) Must be payable to order or to bearer; and (e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty.” L ‘The electronic messages are not signed by the investor-clients as supposed drawers of a bill of exchange; they do not contain an unconditional order to pay a sum certain in money as the payment is supposed to come from a specific fund or account of the investor-clients; and, they are not payable to order or bearer but to a specifically designated third party. Thus, the electronic messages are not bills of exchange. As there was no bill of exchange or order for the payment drawn abroad and made payable here in the Philippines, there could have been no acceptance or payment that will trigger the imposition of the DST. SEC. 14, NIL: INCOMPLETE AND DELIVERED INSTRUMENT; PERSONAL DEFENSE; SEC. 52: HOLDER IN DUE COURSE ALVIN PATRIMONIO y. NAPOLEON GUTIERREZ, 724 SCRA 636 - Patrimonio and Gutierrez entered into a business venture under the name of Slam Dunk Corporation (Slam Dunk), a production outfit that produced mini-concerts and shows related to basketball. Patrimonio was already then a decorated professional basketball player while Gutierrez was a well-known sports columnist. In the course of their business, Patrimonio pre-signed several checks to answer for the expenses of Slam Dunk. Although signed, these checks had no payee's name, date or amount. The blank checks were entrusted to Gutierrez with the specific instruction not to fill them out without previous’ notification to and approval by Patrimonio. According to Patrimonio, the arrangement was made so that he could verify the validity of the payment and make the proper arrangements to fund the account. 2017 $20:Without Patrimonio's knowledge and consent, Gutierrez went to Octavio Marasigan (Patrimonio’s former teammate), to secure a loan in the amount ef ®200,000.00 on the excuse that Patrimonio needed the money for the construction of Bi Kei Ai rich contemplation and taking into account his relationship with fatrimonio and Gutierrez, Marasigan ace 0 Gutierrez’ request and gave checks that Patrimonio pre-signed, with the blank portions filled out with the words Cash’ "Two Hundred Thousand Pesos Only", and the amount of "P200,000.00". Later, Marasigan deposited the check but it was dishonored for the reason "ACCOUNT CLOSED." It was later revealed that Patrimonio’s account with the bank had been closed. Marasigan sought recovery from Gutierrez, to no avail. Patrimonio completely denied authorizing the loan or the check’s negotiation, and asserted that he was not privy to the parties’ loan agreement. Is Patrimonio liable for the value of the check? NO. There is no legal basis to hold Patrimonio liable both under the contract and loan and under the check because: first, the subject check was not completely filled out strictly under the authority he has given and second, Marasigan was not a holder in due course, Sec. 14 of the NIL provides: “Where the instrument is wanting in any material particular, the person in possession thereof has a prima facie authority to complete it by filling up the blanks therein. And a signature on a blank paper delivered by the person making the signature in order that the paper may be converted into a negotiable instrument operates as a prima facie authority to fill it up as such for any amount, In order, however, that any such instrument when completed may be enforced against any person who became a party thereto prior to its completion, it must be filled up strictly in accordance with the authority given and within a reasonable time. But if any such instrument, after completion, is negotiated to a holder in due course, it is valid and effectual for all purposes in his hands, and he may enforce it as if it had been filled up strictly in accordance with the authority given and within a reasonable ‘This provision applies to an incomplete but delivered iristrument. Under this rule, if the maker or drawer delivers a pre-signed blank paper to another person for the purpose of converting it into a negotiable instrument, that person is deemed to have prima facie authority to fill it up. Tt merely requires that the instrument be in the possession of a person. other than the drawer or maker and from such possession, together with the fact that the instrument is wanting in a material particular, the law presumes agency to fill up the blanks. 2017In order however that one instrument againet fare Sie whs is not a holder in due course can enforce the exist: (1) that the blanks meee toe ge instruments completion, two requisites must and 2) it must be tilled we fled strictly in accordance with the authority given; within a reasonable time, the up strictly in accordance with the authority given and ability. Howoves, if ne emake? can set this up as a personal defense and avoid y Sy Uf the holder is a holder in due course, there is @ conclusive Presumption that authority to fi cordate hority to fill it up had been given and that the same was not in Pattionle Bo nee that Gutierrez, exceeded his authority in completing the check. he could only use aan Pre-signed checks to be used in their business provided that Gutierrez’ scdrant en SPO" his approval. His instruction could not be any clearer as business, and. on yr limited to the use of the checks for the operation of their Cauca ‘© condition that Patrimonio’s prior approval be first secured. ‘errez exceeded his authority when he used the check to pay the loan he supposedly contracted for the construction of Patrimonio's house, Is Marasigan a holder in due course? NO. The NIL defines a holder in due course: “Sec. 52 — A holder in due course is a holder who has taken the instrument under the following conditions: (a) That it is complete and regular upon its face; (b) That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact; (c) That he took it in good faith and for value; (d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it” ; Section 52(c) of the NIL states that a holder in due course is one who takes the instrument "in good faith and for value." It also provides in Section 52(d) that in order that one'may be a holder in due course, it is necessary that at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. . Marasigan’s knowledge that Patrimonio is not a party ot a privy to the contract of Joan, and correspondingly had no obligation or liability to him, renders him dishonest, hence, in bad faith, He knew that the underlying obligation was not actually for Patrimonio. Fis inaction and failure to verify, despite knowledge that Patrimonio was * not a party to the loan, may be construed as gross negligence amounting to bad faith. Considering that Marasigan is not a holder in due course, Patrimonio can validly set up the personal defense that the blanks were not filled tip in accordance with the 2017authority he gave, Consequently, Mar Patrimonio and the latter cannot be gan has no right to enforce payment against obliged to pay the face value of the check, LIABILITY OF DRAWEE BANK AND COLLECTING BANK IN CASE OF MATERIAL ALTERATION 24 HOUR CLEARING RULE AREZA v. EXPRESS SAVINGS BANK, INC. 734 SCRA 588 __Cesarand Lolita Areza maintained two bank deposits with Express Savings Bank’s Sinan branch, They were engaged in the business of “buy and sell” of brand new and econd-hand motor vehicles. On 2 May 2000, they received an order from a certain Gerry Mambuay (Mambuay) for the purchase of a second-hand Mitsubishi Pajero and a brand-new Honda CRY. The buyer, Mambuay, paid the Arezas with nine (9) Philippine Veterans Affairs Office (PVAO) checks payable to different payees and drawn against the Philippine Veterans Bank (drawee), each valued at P200,000.00 for a total of P18 Million. . Express Savings Bank was present during this transaction and even offered its services in clearing the checks. Thus, the Arezas deposited the said checks in their savings account with Express Savings Bank which in turn, deposited the chiecks with its depositary bank, Equitable-PCI Bank, which presented the checks to the drawee, the Philippine Veterans Bank. The latter bank honored the checks in May 2000. The entire amount of P1.8 Million was credited to the account of the Arezas who then released the two cars to the buyer, Sometime in July 2000, the subject checks were returned by PVAO to the Philippine Veterans Bank on the ground that the amount on the face of the checks was altered from the original amount of P4,000.00 to P200,000.00, The Philippine Veterans Bank returned the checks to Equitable-PCI Bank, In August 2000, Express Savings Bank was informed by Equitable-PCI Bank that Philippine Veterans Bank dishonored the checks on the ground of material alterations. Equitable-PCI Bank initially filed a protest with the Philippine Clearing House. In February 2001, the latter ruled in favor of the drawee Philippine Veterans Bank. Equitable-PCI Bank, in turn, debited the deposit account of Express Savings Bank in the amount of P1.8 Million. Express Savings Bank insisted that they informed the Arezas of said developments in August 2000, but the Arezas maintained that they were never informed of these incidents. In 2001, the Arezas issued a check in the amount of 500,000.00. Said check was dishonored by Express Savings Bank for the reason “Deposit Under Hold.” According to the Arezas, the Bank unilaterally and unlawfully put their account on hold, Express Savings Bank then closed the Special Savings ‘Account of the Arezas with a balance of P1,179,659.69 and transferred said amount to its 2017 223.Express Savings Bank also withdrew the amount of P18 Million representing the returned checks from the Arezas’ savings account Discuss the respective ri ‘; the respective rights ands liabilities of the parties. LIABILITY OF TI DRAWEE BANK (PHILIPPINE VETERANS BANK) ection 124 of the NIL, states that a material alteration avoids an instrument except as against an assenting party and subsequent indorsers, but a holder in due course may enforce payment according to its original tenor. Thus, when the drawee bank pays a materially altered check, it violates the terms of the check, as well as its duty to charge its client's account only for bona fide disbursements he had made: If the drawee did not Pay according to the original tenor of the instrument, as directed by the drawer, then it has no right to claim reimbursement from the drawer, much less, the right to deduct the erroneous payment it made from the drawer’s account which it was expected to treat with utmost fidelity, The drawee, however, still has recourse to recover its loss. Tt may pass the liability back to the collecting bank which is what the drawee bank exactly did in this case. It debited the account of Equitable-PCI Bank for the altered amount of the checks, LIABILITY OF DEPOSITARY BANK AND COLLECTING BANK Express Savings Bank and Equitable-PCI Bank are both depositary and collecting banks. A depositary bank is the first bank to take an item even though it is also the payor bank, unless the item is presented for immediate payment over the counter. It is also the bank to which a check is transferred for deposit in an account at such bank, even if the check is physically received and indorsed first by another bank. A collecting bank is defined as any bank handling an item for collection except the bank on which the check is drawn. ‘A depositary/colleeting bank where a check is deposited, and which endorses the check upon presentment with the drawee bank, is an endorser. Under Section 66 of the NIL, an endorser warrants “that the instrament is genuine and in all respects what it purports to be; that he has good title to it; that all prior parties had capacity to contract; And that the instrument is at the time of his endorsement valid and subsisting.” It has been repeatedly held that in check transactions, the depositary/collecting bank or last endorser generally suffers the loss because it has the duity to ascertain the genuineness of all prior endorsements considering’ that the act of presenting the check for payment to the drawee is an assertion that the party making the presentment has done its duty to ascertain the genuineness of the endorsements. If any of the warranties made by the depositary/collecting bank turns out to be false, then the drawee bank may zecover from it up to the amount of the check. ‘The law imposes a duty of diligence on the cbllecting bank to scrutinize checks deposited with it for the purpose of determining their genuineness and regularity. The 2017 24.