Piercing the Veil of corporate fiction

BUENAFLOR C. UMALI, MAURICIA M. VDA. DE CASTILLO, VICTORIA M. CASTILLO, BERTILLA C. RADA, MARIETTA C. ABAÑEZ, LEOVINA C. JALBUENA and SANTIAGO M. RIVERA vs. COURT OF APPEALS, BORMAHECO, INC. and PHILIPPINE MACHINERY PARTS MANUFACTURING CO., INC.

FACTS:

Petitioner Santiago Rivera is the nephew of petitioner Mauricia Meer Vda. de Castillo. The Castillo family are the owners of a parcel of land located in Lucena City which was given as security for a loan from the Development Bank of the Philippines. For their failure to pay the amortization, foreclosure of the said property was about to be initiated. This problem was made known to Santiago Rivera, who proposed to them the conversion into subdivision of the four (4) parcels of land adjacent to the mortgaged property to raise the necessary fund. The Idea was accepted by the Castillo family and to carry out the project, a Memorandum of Agreement was executed by and between Slobec Realty and Development, Inc., represented by its President Santiago Rivera and the Castillo family. In this agreement, Santiago Rivera obliged himself to pay the Castillo family the sum of P70K immediately after the execution of the agreement and to pay the additional amount of P400T after the property has been converted into a subdivision. Rivera, armed with the agreement, approached Mr. Modesto Cervantes, president of defendant Bormaheco, and proposed to purchase from Bormaheco two (2) tractors, Sales Agreement was executed on Dec. 28, 1970.

Bormaheco, Inc. and Slobec Realty and Development, Inc. executed a Sales Agreement over one unit of Caterpillar Tractor D-7. In the contract, the price was P230,000.00 of which P50,000.00 was to constitute a down payment, and the balance of P180,000.00 payable in eighteen monthly installments. On the same date, Slobec, through Rivera, executed in favor of Bormaheco a Chattel Mortgage over the said equipment as security for the payment of the aforesaid balance of P180,000.00. As further security of the aforementioned unpaid balance, Slobec obtained from Insurance Corporation of the Phil. a Surety Bond, with ICP as surety and Slobec as principal, in favor of Bormaheco. The surety bond was in turn secured by an Agreement of Counter-Guaranty with Real Estate Mortgage executed by Rivera as president of Slobec and Castillo family, as mortgagors and ICP as mortgagee. In this agreement, ICP guaranteed the obligation of Slobec with Bormaheco in the amount of P180,000.00. In giving the bond, ICP required that the Castillos mortgage to them the properties in question, namely, four parcels of land in the name of the aforementioned mortgagors.

Meanwhile, for violation of the terms and conditions of the Counter-Guaranty Agreement, the properties of the Castillos were foreclosed by ICP as the highest bidder, a Certificate of Sale was issued by the Provincial Sheriff of Lucena City and Transfer Certificates of Title over the subject parcels of land were issued by the Register of Deeds of Lucena City in favor of ICP. The mortgagors had one (1) year from the date of the registration of the certificate of sale, to redeem the property, but they failed to do so. Consequently, ICP consolidated its ownership over the subject parcels of land through the requisite affidavit of consolidation of ownership. Pursuant thereto, a Deed of Sale of Real Estate covering the subject properties was issued in favor of ICP.

Subsequently, ICP sold to Phil. Machinery Parts Manufacturing Co. (PM Parts) the four (4) parcels of land and by virtue of said conveyance, PM Parts transferred unto itself the titles over the lots in dispute.

Thereafter, PM Parts, through its President, Mr. Modesto Cervantes, sent a letter addressed to petitioner Mrs. Mauricia Meer Castillo requesting her and her children to vacate the subject property, who (Mrs. Castillo) in turn sent her reply expressing her refusal to comply with his demands.

The heirs of the late Felipe Castillo, petitioner Buenaflor M. Castillo Umali as the appointed administratrix of the properties filed an action for annulment of title before the then CFI of Quezon. Thereafter, they filed an Amended Complaint. Then petitioners filed their Second Amended Complaint, impleading Santiago M. Rivera as a party plaintiff. They contended that all the aforementioned transactions starting with the Agreement of Counter-Guaranty with Real Estate Mortgage, Certificate of Sale and the Deeds of Authority to Sell, Sale and the Affidavit of Consolidation of Ownership and the Deed of Sale are void for being entered into in fraud and without the consent and approval of the CFI of Quezon, before whom the administration proceedings has been pending. Petitioners pray that the 4 parcels of land be declared as owned by the estate of the late Felipe Castillo and that all Transfer Certificates of Title, as well as those appearing as encumbrances at the back of the certificates of title mentioned be declared as a nullity.

In their amended answer, the defendants (r

espondents herein) controverted the complaint and alleged, that the complaint did not state facts sufficient to state a cause of action against defendants; that petitioners are not entitled to the reliefs demanded; that they are estopped or precluded from asserting the matters set forth in the Complaint; that they are guilty of laches in not asserting their alleged right in due time; that respondent PM Parts is an innocent purchaser for value and relied on the face of the title before it bought the subject property.

The trial court rendered judgment in favor of petitioners and declared all said transactions as null and void for being fictitious, spurious and without consideration. The CA reversed said decision, hence this petition.

ISSUE:

W/N the doctrine of piercing the veil of corporate fiction is not applicable in this case.

HELD:

No. Under the doctrine of piercing the veil of corporate entity, when valid grounds therefore exist, the legal fiction that a corporation is an entity with a juridical personality separate and distinct from its members or stockholders may be disregarded. In such cases, the corporation will be considered as a mere association of persons. The members or stockholders of the corporation will be considered as the corporation, that is, liability will attach directly to the officers and stockholders. The doctrine applies: (1)when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or defend crime; (2) when it is made as a shield to confuse the legitimate issues; (3)where a corporation is the mere alter ego or business conduit of a person; (4)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 case at bar, petitioners seek to pierce the V621 Of corporate entity of Bormaheco, ICP and PM Parts, alleging that these corporations employed fraud in causing the foreclosure and subsequent sale of the real properties belonging to petitioners. While we do not discount the possibility of the existence of fraud in the foreclosure proceeding, neither are we inclined to apply the doctrine invoked by petitioners in granting the relief sought. It is our considered opinion that piercing the veil of corporate entity is not the proper remedy in order that the foreclosure proceeding may be declared a nullity.

In the first place, the legal corporate entity is disregarded only if it is sought to hold the officers and stockholders directly liable for a corporate debt or obligation. In the instant case, petitioners do not seek to impose a claim against the individual members of the three corporations involved; on the contrary, it is these corporations which desire to enforce an alleged right against petitioners. Assuming that petitioners were indeed defrauded by private respondents in the foreclosure of the mortgaged properties, this fact alone is not, under the circumstances, sufficient to justify the piercing of the corporate fiction, since petitioners do not intend to hold the officers and/or members of respondent corporations personally liable therefor. Petitioners are merely seeking the declaration of the nullity of the foreclosure sale, which relief may be obtained without having to disregard the aforesaid corporate fiction attaching to respondent corporations. Secondly, petitioners failed to establish by clear and convincing evidence that private respondents were purposely formed and operated, and thereafter transacted with petitioners, with the sole intention of defrauding the latter.

The mere fact, therefore, that the businesses of two or more corporations are interrelated is not a justification for disregarding their separate personalities, absent sufficient showing that the corporate entity was purposely used as a shield to defraud creditors and third persons of their rights.

Koppel v Yatco

(The subsidiary was so controlled by the parent that its separate identity was hardly discernible, and became a mere alter ego of the parent and was used to evade taxes)

Koppel Industrial and Car Company is a corporation organized and existing under the laws of the State of Pennsylvania. They are not licensed to do business in the RP, but do business through Koppel Phils, Inc, owning 995 out of 1000 shares of stock of the said company (the remaining 5 were owned by the 5 officers of Koppel Phils). Koppel Phils cabled Koppel Industrial for quotation desired by a prospective client. Koppel Phils however quoted a higher price for the buyer than that quoted by Koppel Industrial. Koppel Phils then cabled to ship the merchandise to Manila. Koppel Phils received a %age of the profits realized or its share of the losses on the transactions. Koppel also returned a sum allotted as payment of commercial broker’s tax of 4%.Koppel Industrial demanded from Koppel Phils the sum of P64,122.51 as merchant’s sales tax of 1 ½% of the share of Koppel Phils in the profits. Held: The Court said that the virtual control of the shareholdings of a corporation would lead to certain legal conclusions. It could not overlook the fact that in the practical working of corporate organizations of the class to which the two entities belonged, the holder or holders of the controlling part of the capital stock of the corporation, particularly where the control is determined by the virtual ownership of the totality of the shares, dominate not only the selection of the board of directors but more often than not, also the action of that board. It held that applying this to the case, it cannot be conceived how the Koppel Phils could effectively go against the policies, decisions, and desires of the American corporation… Neither can it be conceived how the Phil corporation could avoid following the directions of the American corporation in every other transaction where they had both to intervene, in view of the fact that the American

corporation held 99.5% of the capital stock of the Phil corporation… In so far as the sales are concerned, Koppel Phils and Koppel Industrial are for all intents and purposes one and the same, and the former is a mere branch, subsidiary, or agency of the latter. The ff are facts which led to the Court to conclude the above:

— share in the profits of Koppel Phils was left to the sole, unbridled control of Koppel Industrial

— Shares of stock of Koppel Phils are all owned by Koppel Industrial(overwhelming majority)

— Koppel Phils acted as agent and representative of Koppel Industrial

— Koppel Phils alone bore the incidental expenses for transactions, such as cable expenses

— Koppel Phils was fully empowered to instruct banks it deals with, if purchasers were not able to pay the bank drafts to the bank as payment for the purchases

— Koppel Phils makes good any deficiencies by deliveries from its own stock the application of the piercing doctrine is not a contravention of the principle that the corporate personality of a corporation cannot be collaterally attacked. When the piercing doctrine is applied against a corporation in a particular case, the court does not deny legal personality… for any and all purposes. The application of the piercing doctrine is therefore within the ambit of the principle of res judicata that binds only the parties to the case and only to the matters actually resolved therein.

— GR: separate personality

— Exception: cases where veil may be pierced

o There was a violation of rights or injury in all these cases where veil was pierced

o Elements of ownership, control, mgt in the corporate entity

Inevitable that these will exist

All elements have to be satisfied so the corporate veil can be pierced

What determines pierceability?

Motive/intention

Liability arising

Injury or damage or loss

— Estate planning:

o No impediment to use corporate as vehicle for estate planning

o Corporation can be put up by a single person

o Nothing prevents an individual from funding a corporation

o To meet requirements of code, assign nominal shares to persons

o If it is money, can be used to acquire assets; still corporate-owned

o Even a 99.9% owner cannot distribute the property, only the shares

— Cease: ideal, but there was a dispute

— Marvel had no compulsory heirs

— Delpher ruling on transfer is obiter

— Just defer: use corporate as a vehicle to distribute what appears to be the estate

O But: you still have to distribute the shares (dispose or donate)

O Mechanism to ensure that once you die, corporation is dissolved

Otherwise: Cease case

Exit mechanism for those who want out

RICARDO TANTONGCO, petitioner,

-versus-

KAISAHAN NG MGA MANGGAGAWA SA LA CAMPAN (KKM) AND THE HONORABLE COURT OF INDUSTRIAL RELATIONS, respondents

FACTS:

Tantongco was cited in contempt in relation to the orders issued by the CIR- the La Campana Starch and Coffee Factory or its manager or the person who has charge of the management, and the administrator of the Estate of Ramon Tantongco are hereby ordered to comply with said order, within five days from receipt hereof, particularly the following, to:

(a) To reinstate the persons named in the said Order of February 18, 1957;

(b) To deposit the amount of P65,534.01 with this Court.

With respect to possible back wages from August 28, 1957 as mentioned in the petition for contempt of August 30, 1957, the same shall first be determined.

The facts in this case may be briefly narrated thus: Sometime in June, 1951, members of the Kaisahan ng mga Manggagawa sa La Campana, a labor union to which were affiliated workers in the La Campana Starch Factory and La Campana Coffee Factory, two separate entities but under the one management, presented demands for higher wages, and more privileges and benefits in connection with their work. When the management failed and refused to grant the demands, the Department of Labor intervened; but failing to settle the controversy, it certified the dispute to the Court of Industrial Relations on July 17, 1951, where it was docketed as Case No. 584–V. On the theory that the laborers presenting the demands were only the ones working in the coffee factory, said company filed through the management a motion to dismiss claiming that inasmuch as there were only 14 of them in said factory, the Court of Industrial Relations had no jurisdiction to entertain and decide the case. The motion was denied by the Court of Industrial Relations, which said:

There was only management for the business of gawgaw and coffee with whom the laborers are dealing regarding their work. Hence, the filing of action against the La Campana Starch and Coffee Factory is proper and justified.

Petitioner contends on the other hand-obviously do not question the fact that the number of employees of the La Campana Gaugau Packing involved in the case is more than the jurisdictional number (31) required by law, contend that the industrial court has no jurisdiction to try case against La Campana Coffee Factory Co. Inc. because the latter has allegedly only 14 laborers and only five of these are members of respondent Kaisahan. This contention loses force when it is noted that, as found by the industrial court — and this finding is conclusive upon us — La Campana Gaugau Packing and La Campana Coffee Factory Co. Inc., are operating under one single management, that is, one business though with two trade names. True, the coffee factory is a corporation , and, by legal fiction, an entity existing separate and part from the persons composing it, that is, Tan Tong and his family. But is settled this fiction of law, which has been introduced as a matter of convenience and to subserve the ends of justice cannot be invoke to further an end subversive of that purpose.

ISSUE: Whether or not the court is correct in piercing the veil of corporate fiction of La Campana Co despite the death of Tantongco.

RULING: YES- we "pierced the veil of corporate existence", and held that the La Campana Starch and Coffee Factory and its owner, Ramon Tantongco, were one; so that with the death of Ramon, the La Campana entities ceased to exist, resulting in the loss of jurisdiction of the CIR to enforce its order against said entities. The reason we applied the so-called "piercing the veil of corporate existence" in G.R. No. L-5677 was to avoid the technicality therein advanced in order to defeat the jurisdiction of the CIR. We there found that although there were ostensibly two separate companies or entities, they were managed by the same person or persons and the workers in both were used interchangeably so that in order to determine whether or not the CIR had jurisdiction, the number of workers in both entitles, not in only one, was to be considered. However, we still believe that although the family of Ramon Tantongco was practically the owner of both the coffee factory and the starch factory, nevertheless these entities are separate from the personality of Ramon. The coffee factory is a stock corporation and the shares are owned not only by Ramon but also by others, such as petitioner Ricardo who not only is a stockholder and director and treasurer but also the management of the same Furthermore, petitioner is now estopped from claiming that the two entities in question and Ramon are one. Thus in Annex 3-CIR (par. 1 thereof) which is a complaint for injunction filed by La Campana Food Products, et al and La Campana Starch Packing against the consolidated Labor Organization of the Philippines, in civil Case No. P-25482 in the Court of First Instance of Rizal, petitioner admitted the existence and operation of said entities; in Annex 4—CIR where petitioner appeared as General Manager representing the two entities in its agreement with the La Campana Workers Union to resolve the dispute between the two entities and the laborers in case Nos. 1072-V and 1371-ULP, the existence of the two entities appears to have been admitted; and in Annex 5-A-CIR, an answer to the complaint of La Campana Workers Union in case No. 1471-ULP (Annex 5-CIR), petitioner admitted the allegation that said two factories were in existence and doing business with petitioner as manager of the same.

ROBLEDO vs. NLRC (Recognition and disregard of corporateness: Piercing the veil of corporate fiction)

238 SCRA 52( 1994)

FACTS:

The BASEC corporation was organized to be engaged in operating security agency, having as one of its incorporators, Bacani, who also had at that time a security agency operated as a single proprietorship. Later, Bacani closed down his operations and terminated his employees. His terminated employees sought to hold that BASEC corporation liable for unpaid overtime and legal holiday pays, contending that Bacani intentionally closed his operations to allow expansion of the business through BASEC. They contended that the Bacani family merely continued the operation of the business by creating BASEC in order to avoid the obligations of the former, contending that Bacani became an incorporator of BASEC together with his wife and daughter.

ISSUE:

Whether or not Bacani intentionally closed his operation to allow expansion of the business by creating BASEC and to avoid obligations of his former company.

HELD:

It would make the successor enterprise liable for debts of the previous enterprise on the basis of piercing doctrine scenario.

The doctrine of piercing the veil of corporate entity is used whenever a court finds that the corporate fiction is being used to defeat public convenience, justify wrong, protect fraud, or defend crime, or to confuse legitimate issues, or that a corporation is a mere alter ego or business conduit of a person or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely as an instrumentality, agency, conduit or adjunct of another corporation. The Court refused to make BASEC liable for the claims of the terminated employees since the facts showed that BASEC already existed prior to closure of Bacani of his operations; that Bacani was merely one of five incorporators with the lease number of shares in BASEC; and there was no showing that the assets of the single proprietorship were even transferred to BASEC.

A.)Fraud cases

GREGORIO ARANETA, INC. V TUAZON

G.R. No. L-2886, 22 AUGUST 1952

FACTS: Defendant Paz Tuzaon de Paterno is the registered owner of approximately 40,703 sqm. Parcel of land situated in Sta Mesa, Manila. Most of the lots were occupied by lessees who had contract of lease whish were to expire on 31 December 1953 with provision of right of first refusal. In 1940 and 1941, Paz Tuazon obtained several loans from Jose Vidal and was secured by the lot in question. In 1943, defendant decided to sell the entire property to plaintiff Gregorio Araneta Inc. the controversy arose when plaintiff corporation filed a complaint to compel defendant Tuazon to deliver to the plaintiff a clear title of the lots free from all lien and encumbrances which defendant Tuazon failed to comply because the mortgage she executed in favor of Vidal is still annotated in the title. Defendant in her defense claims that the sale between her and plaintiff corporation is not valid on the ground that Jose Araneta was her agent and at the same time the President of plaintiff corporation.

ISSUE: WON Jose Araneta is an agent of defendant Tuazon and WON there was a valid sale between defendant and plaintiff corporation.

RULING: The Court rules that corporate fiction will not be disregarded because the corporate entity was not used to perpetuate fraud nor circumvent the law and the disregard of the technicality would pave the way for the evasion of a legitimate and binding commitment, especially since defendant was fully aware of the position of Jose Araneta in the corporation at the time of the sale.

Jose Araneta was not an agent within the meaning as provided for by Article 1459 of the Civil Code. He was nothing more than a go between or middleman between the defendant and the purchaser, bringing them together to make the contract themselves.

The rule that the piercing doctrine cannot be applied in favor of a party who was not a “victim” of any alleged fraud committed, being fully aware of the circumstances that are being ventilated to show fraud.

Gregorio Palacio vs Fely Transportation

Facts: Alfredo Carillo was hired by the defendant corp. To be a driver of ac-787 owned and operated by defendant corp. On December 24, 1952, Carillo run over Mario Palacio (the son of herein plaintiff). Gregorio Palacio suffered moral damages because of the incident, according to him he used to earn more on his welding business but because of the incident he was forced to look upon his son in the hospital and he was forced to sell his equipments to support the hospital expenses. On the other hand, the Fely Transportation alleged that they do not own the AC-787 at the time of the incident happened, it was owned by Isabelo Calingasan and that the claim was already barred because there was already a judgment on the criminal case. Plaintiff Gregorio Palacio alleged that Calingasan was the president of the Fely Transportation Company together with other officers which is his wife and son, and that he is only hiding under the name of Fely Transporation Company.

Issue:

Whether or not piercing the veil of corporate fiction may be used in the instant case in order to determine if Calingasan is subsidiary liable.

Held:

The Court agrees with this contention of the plaintiffs. Isabelo Calingasan and defendant Fely Transportation may be regarded as one and the same person. It is evident that Isabelo Calingasan's main purpose in forming the corporation was to evade his subsidiary civil liability1 resulting from the conviction of his driver, Alfredo Carillo. This conclusion is borne out by the fact that the incorporators of the Fely Transportation are Isabelo Calingasan, his wife, his son, Dr. Calingasan, and his two daughters. We believe that this is one case where the defendant corporation should not be heard to say that it has a personality separate and distinct from its members when to allow it to do so would be to sanction the use of the fiction of corporate entity as a shield to further an end subversive of justice. (La Campana Coffee Factory, et al. v. Kaisahan ng mga Manggagawa, etc., et al., G.R. No. L-5677, May 25, 1953) Furthermore, the failure of the defendant corporation to prove that it has other property than the jeep (AC-687) strengthens the conviction that its formation was for the purpose above indicated.

And while it is true that Isabelo Calingasan is not a party in this case, yet, is held in the case of Alonso v. Villamor, 16 Phil. 315, this Court can substitute him in place of the defendant corporation as to the real party in interest. This is so in order to avoid multiplicity of suits and thereby save the parties unnecessary expenses and delay. (Sec. 2, Rule 17, Rules of Court; Cuyugan v. Dizon. 79 Phil. 80; Quison v. Salud, 12 Phil. 109.)

Issue: WON there is evasion of lawful obligations that warrants the piercing of the corporate fiction

Held: yes. The owner of the jeepney and the defendant company may be regarded as one and the same person. The incorporator’s main purpose in forming the corporation fely transportation company was to evade his subsidiary civil liability resulting from the conviction of his driver. This conclusion is borne out by the fact that the incorporators of said company are the jeepneys owner and his wife, son and 2 daughters. The court also took into consideration as part of the attempt to do fraud that the only property of the corpo was the jeep owned by the main SH involved in the accident.

The defendants and its president should be held subsidiarily liable.

Where the main purpose in forming the corpo was to evade ones subsidiary liability for damages in a criminal case. The corpo cannot claim that it has a personality separate and distinct from its members bec. To allow it to do so would be to sanction the use of the fiction of corporate entity as a shield to further end subversive justice

Palay Inc. and Albert Onstott vs Clave (Pres. EA, NHA)

Facts: Petitioner Palay Inc. through its President Albert Onstott executed a contract to sell of a parcel of land in favor of private respondent Nazario Dumpit. Their contract provided for automatic extrajudicial rescission upon default in payment of any monthly installment after the lapse of the 1 month grace period, w/o need of notice and with forfeiture of all installments paid. Respondent defaulted in payment and so when petitioner Palay Inc. rescinded their contract and resold the subject lot.

NHA found the rescission void in the absence of either judicial or notarial demand. It ordered Palay Inc. and Onstott to jointly and severally refund the amount paid by private respondents. The Office of the Pres. affirmed the said decision.

Issue: W/N petitioners were justified in cancelling the contract to sell w/o prior notice or demand upon respondent.

Held: SC ruled the rescission of the contract was ineffective and inoperative for lack of notice of resolution. The law provides that judicial action for the rescission of a contract is not necessary where the contract provides that it may be revoked and cancelled for violation of any of its terms and conditions however the act of a party in treating a contract as cancelled should be made know to the other.

It further held that Onstott cannot be held jointly and severally liable with Palay Inc for the refund of the amount paid by private respondent since no sufficient proof exists that Onstott used the corporation to defraud private respondent. Onstott cannot be made personally liable just because he appears to be the controlling stockholder. Mere ownership by a single stockholder or by another corporation is not of itself sufficient ground for disregarding the separate corporate personality

Issue: WON the doctrine of piercing the veil of corporate fiction is applicable

Held. NO. There is no badges of fraud on petitioner’s part. Unless sufficient proof exist on record that an officer (president and SH) has used the corpo to defraud respondent, he cannot be made personally liable just beacause he appears to be the controlling SH. Mere ownership by a single SH or by another corpo of all or nearly all of the capital stock of a corpo is not of itself sufficient ground for disregarding the separate corporate personality

PABALAN vs. NLRC

G.R. No. 89879

April 20, 1990

FACTS: Eighty-four (84) workers of the Philippine Inter-Fashion, Inc. (PIF) filed a complaint against the latter for illegal transfer simultaneous with illegal dismissal without justifiable cause and in violation of the provision of the Labor Code on security of tenure as well as the provisions of Batas Pambansa Blg. 130. After conducting the hearings and submitting all the necessary pleadings, the labor arbiter ordered the Philippine Inter-Fashion and its officers Mr. Jaime Pabalan and Mr. Eduardo Lagdameo to reinstate the workers to their former or equivalent position without loss of seniority rights and privileges and pay, jointly and severally, their back wages and other benefits from the time they were dismissed up to the time they are actually reinstated.

ISSUE: W/N Petitioners, as officers of the corporation could be jointly and severally held liable with the corporation in this case.

HELD: As a general rule, Corporation is vested by law with a personality separate and distinct from the persons composing it, including its officers as well as from that of any other legal entity to which it may be related. However, the legal fiction that a corporation has a personality separate and distinct from stockholders and members may be disregarded on the following instance: a) deliberately and maliciously designed to evade financial obligations to employees; b) used as a means to perpetrate fraud or an illegal act or c) circumvention of statutes.

In this case, the dismissed workers did not allege or show that petitioners, as officers of the corporation, did the instances mentioned above.

Thus, Petitioners cannot be held jointly and severally liable with the PIF Corporation.

NOTE: A.C. Ransom Labor Union-CCLU vs. NLRC case is not applicable in this case. A.C. Ransom was a family corporation and that during the strike the members of the family organized another corporation which was the Rosario Industrial Corporation to which all the assets of the A.C. Ransom Corporation were transferred to continue its business which acts of such officers and agents of A.C. Ransom Corporation were intended to avoid payment of its obligations to its employees.

-A company manager acting in good faith within the scope of his authority in terminating the services of certain employees cannot be held personally liable for damages. Mere ownership by a single SH or by another corpo of all or nearly all capital stocks of the corpo is not by itself sufficient ground for disregarding the separate corporate personality

FRANCISCO V. DEL ROSARIO vs. NLRC & LEONARDO V. ATIENZA

FACTS:

The Philippine Overseas Employment Administration (POEA) promulgated a decision dismissing the complaint for money claims for lack of merit. It was appealed to the NLRC which reversed the POEA decision and ordered Philsa Construction and Trading Co., Inc. (the recruiter) and Arieb Enterprises (the foreign employer) to jointly and severally pay private respondent his salary differentials and vacation leave benefits. The case was elevated to the Supreme Court, but the petition was dismissed and entry of judgment was made.

A writ of execution was issued by the POEA but it was returned unsatisfied as Philsa was no longer operating and was financially incapable of satisfying the judgment. Private respondent moved for the issuance of an alias writ against the officers of Philsa. This motion was opposed by the officers, led by petitioner, the president and general manager of the corporation. The POEA issued a resolution which ordered that an alias of execution be issued against the properties of petitioner and if insufficient, against the cash and/or surety bond of Bonding Company concerned for the full satisfaction of the judgment awarded.

Petitioner appealed to the NLRC. The NLRC dismissed the appeal on the theory that the corporate personality of Philsa should be disregarded because under the findings of POEA, it appeared that Philsa Construction & Trading Co., Inc., represented by Francisco V. del Rosario, President and General Manager, was formerly a registered construction contractor whose authority was originally issued on July 21, 1978 but was already delisted from the list of agencies/entities on August 15, 1986 for inactivity. And that another corporation, Philsa International Placement & Services Corp., composed of practically the same set of incorporators/stockholders, was registered as a licensed private employment agency whose license was issued on November 5, 1981, represented by the same Mr. Francisco V. del Rosario as its President/ General Manager.

Hence, this petition, alleging that the NLRC gravely abused its discretion. The Court issued a TRO enjoining the enforcement of the NLRC's decision.

Issue: Won the corporate fiction should be disregarded

Held: no. under the law a corporation is bestowed with juridical personality separate and distinct from its SH. But when the juridical personality of the corpo is used to defeat public convenience, justice wrong protect fraud or defend crime. The corpo shall be considered as a mere association of persons and its responsible officers and/or stockholders shall be liable for the obligations of a stockholders or a corpo and its successor in interest shall be considered as one and the liability of the former shall attach to the state.

But for the separate juridical personality of a corpo to be disregarded, the wrongdoing must clearly and convincingly established. It cannot be presumed. Likewise, substantial identity of the incorporators of the corporation does not necessarily implied fraud

Villa Rey Transit vs. Ferrer

25 SCRA 845

Facts:

Jose M. Villarama was an operator of bus transportation, under the business name of Villa Rey Transit. Villarama sold the two certificates of public convenience to the Pangasinan Transportation Company,

Inc. (PANTRANCO) with the condition that Villarama shall not for a period of 10 years from the date of this sale, apply for any TPU service identical or competing with the buyer. Three months after the sale a corporation called Villa Rey Transit, Inc. was organized wherein the wife, brother and sister-in-law of Villarama were officer and subscribers of the corporation. In less than a month after its registration in SEC five-certificate of public convenience were bought from Valentin Fernando. Valentine owed Ferrer sum of money and the 2 out of 5 certificates of public convenience sold to Villarama was subjected to auction sale by sheriff in the case of collection of sum of money.

Before the PSC approval of the sale, the sheriff sold the two certificates of public convenience in favor of Ferrer as the highest bidder which sold by the latter to Pantranco.

Pantranco, filed a third-party complaint against Jose M. Villarama, alleging that Villarama and the Corporation, are one and the same; that Villarama and/or the Corporation was disqualified from operating the two certificates in question by virtue of the agreement.

Issues:

1. Whether or not the stipulation between the parties for the sale of two certificates is valid?

2. Considering the agreement is valid, whether or not the stipulation binds the Corporation?

Held:

Taking account of the evidence, together with testimony, it would appear that Villarama supplied the organization expenses and the assets of the Corporation, such as trucks and equipment. Villarama himself admitted that he mingled the corporate funds with his own money.

The Court find that although it is in the nature of an agreement suppressing competition, it is, however, merely ancillary or incidental to the main agreement which is that of sale. The suppression or restraint is only partial or limited: first, in scope, it refers only to application for TPU by the seller in competition with the lines sold to the buyer; second, in duration, it is only for ten (10) years; and third, with respect to situs or territory, the restraint is only along the lines covered by the certificates sold. The disputed stipulation is only incidental to a main agreement, the same is reasonable and it is not harmful nor obnoxious to public service. It does not appear that the ultimate result of the clause or stipulation would be to leave solely to Pantranco the right to operate along the lines in question, thereby establishing monopoly or predominance approximating thereto. We believe the main purpose of the restraint was to protect for a limited time the business of the buyer.

The stipulation is valid and reasonable. Having arrived at this conclusion, and considering that the preponderance of the evidence have shown that Villa Rey Transit, Inc. is itself the alter ego of Villarama, that the said Corporation should, until the expiration of the 1-year period abovementioned, be enjoined from operating the line subject of the prohibition. For the rules is that a seller or promissory may not make use of a corporate entity as a means of evading the obligation of his covenant.

B.) Alter Ego cases

Arnold vs. Willits and Patterson, Ltd. (Alter Ego Case)

44 Phil 634 (1923)

Facts:

G.C. Arnold was in the employ of the International Banking Corporation of Manila. On July 31, 1916, C.D. Willits and I.L. Patterson were partners doing business in San Francisco, California under the name of Willits and Patterson. They entered into a written contract into which G.C. Arnold was employed as the agent of the firm in the Philippine Islands.

The business of the firm in the Philippines very rapidly increased. A dispute arose between the plaintiff and the firm as to the construction of the contract as to the amount which plaintiff should receive for his services.

Meanwhile, Patterson retired from the firm and Willits became the sole owner of his assets. A short time after that Willits came to Manila and organized a corporation known as Willits and Patterson, Ltd. In legal effect, the San Francisco Corporation took over and acquired all of the assets and liabilities of the Manila Corporation.

Another instrument was made between G.C. Arnold and Willits which defined and specified the compensation which the plaintiff received for his services. Willits received and confirmed this letter by signing the name of Willits and Patterson, By C.D. Willits.

The creditor’s committee of the corporation opposed the payment of compensation due the plaintiff, Arnold under a contract letter signed by Willits, the controlling stockholder, without board approval. The signing President was the controlling stockholder of the corporation.

Issue:

Whether or not the contract letter was valid?

Ruling:

The Court held the validity of the contract and “although the plaintiff was the president of the local corporation, the testimony is conclusive that both of them were what is known as a one man corporation, and Willits, as the owner of all the stocks, was the force and dominant power which controlled them.

The Court found that there was no fraud or collusion between plaintiff and Willits, and it is very apparent that the contract letter was to the mutual interests of both parties.

Where the stock of a corpo is owned by one person whereby the corporation functions only for the benefit of such individual owner, the corpo and the individual shareholders be the same

Monetary judgment was entered in favor of plaintiff

La Campana Coffee Factory, Inc. vs. Kaisahan ng mga Manggagawa sa La Campana (KKM) (Alter ego case)

93 PHIL 160 (1953)

Facts:

Petitioner Tan Tong since 1932 has been engaged in buying and selling gaugau under the trade name La Campana Gaugau Packing. On July 6, 1950, Tan Tong and his family as sole incorporators and

stockholders, organized the La Campana Coffee Factory Co., Inc., with its principal office located in the same place as that of La Campana Gaugau Packing.

A year before the formation of the corporation, Tan Tong entered into a collective bargaining agreement with the Philippine Legion of Organized Workers (PLOW), to which the union of Tan Tong’s employees headed by Manuel E. Sadde was then affiliated. Seceding, however, from the PLOW, Tan Tong’s employees later formed their own organization known as Kaisahan ng mga Manggagawa sa La Campana.

On July 19, 1951, Kaisahan, which, as of that date, counted with 66 members workers all of them both La Campana Gaugau Packing and La Campana Coffee Factory Co., Inc. – presented a demand for higher wages and more privileges, the demand being addressed to La Campana Starch and Coffee factory, by which name they sought to designate, so it appears, the La Campana Gaugau Packing and La Campana Coffee Factory Co., Inc.

As the demand was not granted, the Department of labor certified the dispute to the Court of Industrial Relations. Tan Tong alleges that the CR had no jurisdiction of the case because petitioner La Campana Coffee Factory, Inc. has only 14 employees, only 5 of whom are members of the respondent union and therefore the absence of the jurisdictional number (300 of workers as provided by sections 1 and 4 of Commonwealth Act No. 103.

Issue: WON La campana coffee factory inc and LA campana gaugau packing corpo are one and the same

Held: Yes. The piercing doctrine shall apply.

The 2 companies are operating as one business though with two trade names, the two companies are operating under 1 single mgt., office and payroll. The laborers of gaugau factory and the coffee factory were interchangeable, as they were sometimes transferred to the coffee factory and vice-versa. Their trucks carried both the gaugau and the coffee boxes for delivery.

Thus, the attempt to make the 2 factories appear as 2 separte businesses when in reality they are 1, is a device to defeat the ends of the law and should not be permitted

YUTIVO SONS HARDWARE COMPANY, petitioner,

vs.

COURT OF TAX APPEALS and COLLECTOR OF INTERNAL REVENUE, respondents

FACTS:

This is a petition for review of a decision of the Court of Tax Appeals ordering petitioner to pay to respondent Collector of Internal Revenue the sum of P1,266,176.73 as sales tax deficiency for the third quarter of 1947 to the fourth quarter of 1950; inclusive, plus 75% surcharge thereon, equivalent to P349,632.54, or a sum total of P2,215,809.27, plus costs of the suit.

Yutivo Sons and Hardware Co. engaged in business of importation of cars and trucks, which sold to Southern Motors Inc. Sales taxes were paid by Yutivo on this first sale. Southern Motors sold the vehicles to the Public. The Collecot of CIR sought to impose sales to Southern Motor’s but on Southern Motors’s higher sales to the public. Lower Court agreed, hence the appeal.

ISSUE:

Whether or not Yutivo and Southern Motors Inc. are alter ego to avoid tax collections so as to prejudice the Government.

Held: Yes. Although southern motors was organized to perpertuate fraud however, it was indeed actually owned and controlled by Yutivo as to make it a mere subsidiary or branch of the latter. Yutivo through common officers and directors exercised fill control over southern motors cash funds, policies expenditures and obligations. Shareholders of Sm are mere nominal SH holding the share for and in behalf of yutivo.

1. The founder of southern motors are closely related with yutivo either by blood or affinity and most of its SH are members of yutivo family

2. Records of disbursement,purchases for the account of southern motors are kept by yutivo and southern motors merely keeps a summary record on the basis of the information received from yutivo

The CTA correctly disregarded the alleged separate corporate personality of southern motors in order to arrive at the true tax liability of yutivo

Lidell Co. v. Collector of Internal Revenue

Facts: Facts: The case is an appeal from the decision of the Court of Tax Appeals imposing a tax deficiency liability of P1,317,629.61 on Liddell & Co., Inc.

The petitioner, Liddell & Co. Inc., (Liddell & Co. for short) is a domestic corporation establish in the Philippines on February 1, 1946. From 1946 until November 22, 1948 when the purpose clause of the Articles of Incorporation of Liddell & Co. Inc., was amended so as to limit its business activities to importations of automobiles and trucks, Liddell & Co. was engaged in business as an importer and at the same time retailer of Oldsmobile and Chevrolet passenger cars and GMC and Chevrolet trucks.

On December 20, 1948, the Liddell Motors, Inc. was organized and registered with the Securities and Exchange Commission with an authorized capital stock of P100,000 of which P20,000 was subscribed and paid for as follows: Irene Liddell wife of Frank Liddell 19,996 shares and Messrs. Marcial P. Lichauco, E. K. Bromwell, V. E. del Rosario and Esmenia Silva, 1 share each.

Beginning January, 1949, Liddell & Co. stopped retailing cars and trucks; it conveyed them instead to Liddell Motors, Inc. which in turn sold the vehicles to the public with a steep mark-up. Since then, Liddell & Co. paid sales taxes on the basis of its sales to Liddell Motors Inc. considering said sales as its original sales.

illustrate: a car with engine motor No. 212381 was sold by Liddell & Co. Inc. to Liddell Motors, Inc. on January 17, 1948 for P4,546,000.00 including tax; the price of the car was P4,133,000.23, the tax paid being P413.22, at 10%. And when this car was later sold (on the same day) by Liddell Motors, Inc. to P.V. Luistro for P5500, no more sales tax was paid.11 In this price of P5500 was included the P413.32 representing taxes paid by Liddell & Co. Inc. in the sale to Liddell Motors, Inc. Deducting P413.32 representing taxes paid by Liddell & Co., Inc. the price of P5500, the balance of P5,087.68 would have been the net selling price of Liddell & Co., Inc. to the general public (had Liddell Motors, Inc. not participated and intervened in the sale), and 15% sales tax would have been due. In this transaction, P349.68 in the form of taxes was evaded. All the other transactions (numerous) examined in this light will inevitably reveal that the Government coffers had been deprived of a sizeable amount of taxes.

The Collector of Internal Revenue argued that the Lidell Motors, Inc. was but an alter ego of Liddell & Co. and concluded that for sales tax purposes, those sales made by Liddell Motors, Inc. to the public were considered as the original sales of Liddell & Co. (LIDELL Motors then does not pay sales taxes) hence the imposition of tax deficiency.

Issue: WON liddell and co. inc and the liddell motors inc. are identical corporations the latter being merely the alter ego of the former

Ruling: yes. Frank owned both corporation as his wife could have had the money to pay her subscriptions. Such fact alone though not sufficient to warrant piercing, but under the proven facts, liddell motors was the medium created by liddell and company to reduce its tax liability. A taxpayer has the legal right to decrease, by means w/c the law permits, the amount of what otherwise would be his taxes or altogether avoid them. But a dummy corporation serving no business purposes other than as a blind will disregarded.

CIR, for sales tax purposes, those sales made by liddell motors inc to the public were considered as the original sales of liddell and company.

Liddell motors inc pursued no activities except to secure cars, trucks, and spare parts from liddell and company and then sell them to the general public

Ramirez Telephone Corporation vs. Bank of America (Pasensya na sa digest kasi most of the facts are in Spanish language and here is what i understand about the case)

Ramirez Telephone Corporation vs. Bank of America

Facts:

Ruben Ramirez was held liable in a civil case where he indebted money from Bank of America. He lost the case and a writ of garnishment of his property was ordered. However Ramirez has or might have deposit funds in Ramirez Telephone Inc. and such fund is sufficient to cover the amount owed to the bank. Ramirez, as a defense alleged that such fund cannot be garnished because he and the corporation has a separate and distinct personality.

Issue: Whether or not the fund may be garnished to satisfy the debts of Ramirez to the Bank.

Held:

Yes. Corporate bank account could be garnished despite the fact that

1. Ramirez himself leased herbosas premises bec although Ramirez was the tenant, the company in truth occupied the premises

2. Ramirez paid the rents with checks of the telephone company and3. 75% of the shares of the company belonged to Ramirez and his wife

Corporate personality may be disregarded where the defendant stockholder holds 75% of the stock corporation together with his wife. While respect for the corporate personality as such is the general rule, the veil of corporate fiction may be pierced and the funds of the corporation may be garnished to satisfy debts of a principal stockholder, TO ADMINISTER THE ENDS OF JUSTICE.

Guatson vs NLRC

Jolly M. Almoradie was first employed by Mercury Express International Courier Service, Inc. (MEREX Represented by its Vice-president and Manager Mr. Henry Ociers) in October, 1983 as Messenger receiving a monthly salary of P800.00. When it closed its operations, Almoradie was absorbed by MEREX's sister company Philippine Integrated Labor Assistance Corp. (Philac), likewise as Messenger with an increased salary of P1,200.00.

In September, 1986, Almoradie was transferred to Guatson Travel, allegedly also a sister company of MEREX and Philac, as Liaison Officer with a salary of P1,864.00. Thereafter, he was promoted to the position of Sales Representative sometime in April, 1988. On April 30, 1988, Almoradie received three separate memoranda requiring him to explain why he refused to act as salesman and for other different reasons. He filed his reply to said allegations, however Henry Ocier summon Almoradie to his office and ask him to resign, if not Ocier will file a case against him and that he has a very good lawyer to litigate the case. Almoradie was force to execute a resignation letter on his own handwriting. Thereafter, he filed an illegal dismissal case. He won the case, the NLRC decided that his resignation was not voluntary. However petitioner contends that Guatson Travel Company, Philac Merex have separate and distinct legal personalities such that the latter companies should not be held liable; assuming, for the sake of argument that private respondent was illegally dismissed.

Issue: Won liability attached to the 3 companies applying alter ego doctrine

Held: yes. The other affiliated corporations were also made liable by the NLRC for the separation pay and backwages for which a corporate employer was held liable.

In contesting the inclusion of the other corpo to the liability on the that they were separate and distinct legal personalities, the court took the following proven facts into consideration in piercing the veil of corporate fiction:

1. The 3 companies were owned by one family2. Majority of the officers of the companies are the same3. The companies are located in one bldg. and use the same messengerial service4. The terminated employee was not paid separation fee when he was absorbed by the other

affiliate company, nor was he made to resign from the first corporation

Concept builders inc vs NLRC

Petitioner Concept Builders, Inc., a domestic corporation, with principal office at 355 Maysan Road, Valenzuela, Metro Manila, is engaged in the construction business. Private respondents were employed by said company as laborers, carpenters and riggers. private respondents were served individual written notices of termination of employment by petitioner, effective on November 30, 1981. It was stated in the individual notices that their contracts of employment had expired and the project in which they were hired had been completed. Public respondent found it to be, the fact, however, that at the time of the termination of private respondent's employment, the project in which they were hired had not yet been finished and completed. Petitioner had to engage the services of sub-contractors whose workers performed the functions of private respondents. Aggrieved, private respondents filed a complaint for illegal dismissal, unfair labor practice and non-payment of their legal holiday pay, overtime pay and thirteenth-month pay against petitioner. The private respondents won the case and concept builders was order to pay the sum of P199,800.00. the amount was partially paid and when the Concept Builders was pursued for the remaining balance, the sheriff was surprised that the address of the Concept

Builders was now under Hydro Phils under Dennis Cuyegkeng. Cuyegkeng opposed the break open order by the NLRC. Private respondents alleged that Concept Builders and Hydro Phils has the same incorporators and stockholders evidenced by general information sheet of the two corporations. Petitioner alleges that the NLRC committed grave abuse of discretion when it ordered the execution of its decision despite a third-party claim on the levied property. Petitioner further contends, that the doctrine of piercing the corporate veil should not have been applied, in this case, in the absence of any showing that it created HPPI in order to evade its liability to private respondents. It also contends that HPPI is engaged in the manufacture and sale of steel, concrete and iron pipes, a business which is distinct and separate from petitioner's construction business. Hence, it is of no consequence that petitioner and HPPI shared the same premises, the same President and the same set of officers and subscribers.

Issue: Won the piercing doctrine shall apply

Held: Yes, while petitioner claimed that it ceased its business operation on april 29,1986 it filed an information sheet with the SEC stating the same address as the HPI. On the other hand, the HPI submitted on the same day a similar info sheet stating the same address. Both info sheets were filed by the secretary of both corporations, virgilio casino. Also both corpo had the same resident, the same BOD, same corporate officers, substantially same subscriber.

Clearly HPI is obviously a business conduit of petitioner corpo and its mergence was skillfully orchestrated to avoid financial liability that already attached to petitioner corpo.

Probative factors that will justify the application of doctrine:

1. stock ownership by one or common ownership of both corp2. Identity of directors and officers3. Manner of keeping corporate books and records4. Methods of conducting the business