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 NEGOTIABLE INSTRUMENTS LAW

1. ISSUE IS DEFINED AS THE FIRST DELIVERY OF AN INSTRUMENT, COMPLETE IN FORM TO A

PERSON WHO TAKES IT AS A HOLDER
Section 191 of the Negotiable Instruments Law defines “issue” as the first delivery of an
instrument, complete in form, to a person who takes it as a holder. In fact, the Court has held in
the past that delivery is the final act essential to the negotiability of an instrument. (People v.
Ting, G.R. No. 221505, December 5, 2018)

INSURANCE LAW

2. LIABILITIES OF AN INSURER UNDER THE SURETY BOND ARE NOT EXTINGUISHED WHEN
THE MODIFICATIONS IN THE PRINCIPAL CONTRACT DO NOT SUBSTANTIALLY OR
MATERIALLY ALTER THE PRINCIPAL’S OBLIGATIONS
The surety is jointly and severally liable with its principal when the latter defaults from its
obligations under the principal contract. On the basis of petitioner’s own admissions, the
principal contract of the suretyship is the signed agreement. The surety, therefore, is presumed
to have acquiesced to the terms and conditions embodied in the principal contract when it issued
its surety bond. (People’s Trans-East Asia Insurance Corp. v. Doctors of New Millennium
Holdings, Inc., G.R. No. 172404, August 13, 2014)

3. LIABILITY OF A SURETY IS DETERMINED STRICTLY IN ACORDANCE WITH THE ACTUAL

TERMS OF THE PERFORMANCE BOND IT ISSUED
A performance bond is a kind of suretyship agreement. It is designed to afford the project owner
security that the contractor, will faithfully comply with the requirements of the contract and
make good on the damages sustained by the project owner in case of the contractor’s failure to
so perform. A surety’s liability is joint and several with the principal. Liability under a surety bond
is “limited to the amount of the bond” and is determined strictly in accordance with the particular
terms and conditions set out in this bond. It is, thus, necessary to look into the actual terms of the
performance bond. (FGU Insurance Corp. v. Spouses Roxas, G.R. No. 189526, August 9, 2017)

4. INSURED MAY BE COMPELLED TO ARBITRATION PURSUANT TO RULES WHICH WERE

INCORPORATED IN THE INSURANCE POLICY BY REFERENCE
An insured member may be compelled to arbitration pursuant to the Rules of the Protection and
Indemnity Club, which were incorporated in the insurance policy by reference. Where there are
multiple parties, the court must refer to arbitration the parties covered by the agreement while
proceeding with the civil action against those who were not bound by the arbitration agreement.
(Steamship Mutual Underwriting Association [Bermuda] Limited v. Sulpicio Lines, Inc., G.R.
No. 196072, September 20, 2017)

5. WHILE PROOF OF FRAUDULENT INTENT IS DISPENSED WITH IN CASES OF RESCISSION DUE

TO CONCEALMENT, IT IS NOT SO IN CASES OF RESCISSION DUE TO FALSE
REPRESENTATIONS WHERE SUCH FRAUDEULENT INTENT MUST BE PROVED BY CLEAR
AND CONVINCING EVIDENCE
The Insurance Code dispenses with proof of fraudulent intent in cases of rescission due to
concealment, but not so in cases of rescission due to false representations. When an abundance
of available documentary evidence can be referenced to demonstrate a design to defraud,
presenting a singular document with an erroneous entry does not qualify as clear and convincing
proof of fraudulent intent. Neither does belatedly invoking just one other document, which was

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 not even authored by the alleged miscreant. (Insular Life Assurance Co., Ltd. v. Heirs of Alvarez,
G.R. Nos. 207526 & 210156, October 3, 2018)

6. AS SUBROGEE, AN INSURANCE COMPANY MERELY STEPS INTO THE SHOES OF THE

INSURED AND MAY ONLY EXERCISE THOSE RIGHTS THAT THE INSURED MAY HAVE
AGAINST THE WRONGDOER WHO CAUSED THE DAMAGE
As subrogee, petitioner merely stepped into the shoes of the consignee and may only exercise
those rights that the consignee may have against the wrongdoer who caused the damage. “It can
recover only the amount that is recoverable by the assured.” And since the right of action of the
consignee is subject to a precedent condition stipulated in the Gate Pass, which includes by
reference the terms of the Management Contract, necessarily a suit by the insurer is subject to
the same precedent condition. (Oriental Assurance Corp. v. Ong, G.R. No. 189524, October 11,
2017)

7. FAILURE TO PAY IN FULL ANY OF THE SCHEDULED INSTALLMENTS ON OR BEFORE THE

DUE DATE SHALL RENDER THE INSURANCE POLICY VOID
If the insurer has granted the insured a credit term for the payment of the premium, it is an
exception to the general rule that premium must first be paid before the effectivity of an
insurance contract. Pare Association’s failure to pay on the first due date, resulted in a void and
ineffective policy. (Philam Insurance Co., Inc. v. Parc Chateau Condominium Unit Owners
Association, Inc., G.R. No. 201116, March 4, 2019)

TRANSPORTATION LAW

8. COMPULSORY PILOTAGE DOES NOT AUTOMATICALLY ABSOLVE OWNER FROM LIABILITY

The master of the vessel must exercise a degree of vigilance commensurate with the
circumstances. Where a compulsory pilot is in charge of a ship, the master being required to
permit him to navigate it, if the master observes that the pilot is incompetent or physically
incapable, then it is the duty of the master to refuse to permit the pilot to act. But if no such
reasons are present, then the master is justified in relying upon the pilot, but not blindly.
(Lorenzo Shipping Corp. v. National Power Corp., G.R. No. 181683, October 7, 2015)

9. EMPLOYER’S OWNERSHIP MUST BE PROVEN FIRST BEFORE PRESUMPTION UNDER ART.

2180 APPLIES
The plaintiff may first prove the employer’s ownership of the vehicle involved in a mishap by
presenting the vehicle’s registration in evidence. Thereafter, a disputable presumption that the
requirements for an employer’s liability under Article 2180 of the Civil Code have been satisfied
will arise. The burden of evidence then shifts to the defendant to show that no liability under
Article 2180 has ensued. (Caravan Travel and Torus International, Inc. v. Abejar, G.R. No.
170631, February 10, 2016)

10. CONTRACT OF CARRIAGE IMPOSES RECIPROCAL OBLIGATIONS ON BOTH AIRLINE AND

THE PASSENGER
Purchase of the contract of carriage binds the passenger and imposes reciprocal obligations on
both the airline and the passenger. The airline must exercise extraordinary diligence in the
fulfillment of the terms and conditions of the contract of carriage. The passenger, however, has
the correlative obligation to exercise ordinary diligence in the conduct of his or her affairs.
(Manay, Jr. v. Cebu Air, Inc., G.R. No. 210621, April 4, 2016)

11. AMBIGUITIES IN CONTRACTS OF CARRIAGE, WHICH ARE CONTRACTS OF ADHESION, MUST

BE INTERPRETED AGAINST THE COMMON CARRIER THAT PREPARED THESE CONTRACTS

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 The duty of common carriers to observe extraordinary diligence in shipping goods does not
terminate until delivery to the consignee or to the specific person authorized to receive the
shipped goods. Failure to deliver to the person authorized to receive the goods is tantamount to
loss of the goods, thereby engendering the common carrier’s liability for loss. Ambiguities in
contracts of carriage, which are contracts of adhesion, must be interpreted against the common
carrier that prepared these contracts. (Federal Express Corp. v. Antonino, G.R. No. 199455, June
27, 2018)

12. CONTRIBUTORY NEGLIGENCE OF DRIVERS DOES NOT BAR THE PASSENGERS OR THEIR
HEIRS FROM RECOVERING DAMAGES FROM THOSE WHO ARE AT FAULT
As long as it is shown that no control is exercised by the passenger in the concept of a master or
principal, the negligence of the driver cannot be imputed to the passenger and bar the latter from
claiming damages. (Rebultan v. Spouses Daganta, G.R. No. 197908, July 4, 2018)

13. THE CIVIL ACTION AGAINST A SHIPOWNER FOR BREACH OF CONTRACT OF CARRIAGE
DOES NOT PRECLUDE CRIMINAL PROSECUTION AGAINST ITS EMPLOYEES WHOSE
NEGLIGENCE RESULTED IN THE DEATH OF OR INJURIES TO PASSENGERS
In criminal cases for reckless imprudence, the negligence or fault should be established beyond
reasonable doubt because it is the basis of the action, whereas in breach of contract, the action
can be prosecuted merely by proving the existence of the contract and the fact that the common
carrier failed to transport his passenger safely to his destination. (People v. Go, G.R. No. 210854,
December 10, 2018)

14. IN THE EVENT THAT THE GOODS ARE LOST, DESTROYED OR DETERIORATED, IT IS
PRESUMED TO HAVE BEEN AT FAULT OR TO HAVE ACTED NEGLIGENTLY, UNLESS IT
PROVES THAT IT OBSERVED EXTRAORDINARY DILIGENCE
A common carrier’s extraordinary responsibility over the shipper’s goods lasts from the time
these goods are unconditionally placed in the possession of, and received by, the carrier for
transportation, until they are delivered, actually or constructively, by the carrier to the consignee,
or to the person who has a right to receive them. (Keihin-Everett Forwarding Co., Inc. v. Tokio
Marine Malayan Insurance Co., Inc., G.R. No. 212107, January 28, 2019)

15. TNC SUCH AS ANGKAS ARE CONSIDERED COMMON CARRIERS SUBJECT TO REGULATIONS
In other words, when they put themselves online, their services are bound for indiscriminate
public consumption. Article 1732 of the Civil Code defining common carriers “carefully avoids
making any distinction between a person or enterprise offering transportation service on a
regular or scheduled basis and one offering such service on an occasional, episodic, or
unscheduled basis. (Land Transportation Franchising and Regulatory Board v. Valenzuela,
G.R. No. 242860, March 11, 2019)

16. A COMMON CARRIER FAILS TO EXERCISE EXTRAORDINARY DILIGENCE WHEN SHE

NEGLECTED VETTING HER DRIVER OR PROVIDING SECURITY FOR THE CARGO AND
FAILING TO TAKE OUT INSURANCE ON THE SHIPMENT’S VALUE
Common carriers are obligated to exercise extraordinary diligence over the goods entrusted to
her. Her responsibility began from the time she received the soya beans from respondent’s
broker and would only cease after she has delivered them to the consignee or any person with
the right to receive them. The loss of the soya beans here was not attended by grave or irresistible
threat, violence, or force but instead, it was brought about by petitioner’s failure to exercise
extraordinary diligence when she neglected vetting her driver or providing security for the cargo

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 and failing to take out insurance on the shipment’s value. (Tan v. Great Harvest Enterprises,
Inc., G.R. No. 220400, March 20, 2019)

CORPORATE LAW

17. THE VEIL OF CORPORATE FICTION MAY BE PIERCED IF COMPLAINANT IS ABLE TO PROVE
THAT (1) THE OFFICER IS GUILTY OF NEGLIGENCE OR BAD FAITH, AND (2) SUCH
NEGLIGENCE OR BAD FAITH WAS CLEARLY AND CONVINCINGLY PROVEN
A director, officer or employee of a corporation is generally not held personally liable for
obligations incurred by the corporation. Nevertheless, this legal fiction may be disregarded if it
is used as a means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an existing
obligation, the circumvention of statutes, or to confuse legitimate issues. (Arco Pulp and Paper
Co., Inc. v. Lim, G.R. No. 206806, June 25, 2014)

18. BECAUSE A CORPORATION HAS A PERSONALITY SEPARATE AND DISTINCT FROM THAT OF
ITS INDIVIDUAL STOCKHOLDER, A STOCKHOLDER DOES NOT AUTOMATICALLY ASSUME
THE LIABILITIES OF THE CORPORATION OF WHICH HE IS A STOCKHOLDER
It is a settled precept in this jurisdiction that a corporation is invested by law with a personality
separate and distinct from those of the persons composing it as well as from that of any other
entity to which it may be related. Mere ownership by a single stockholder or by another
corporation of all or nearly all of the capital stock of a corporation is not in itself sufficient ground
for disregarding the separate corporate personality. A corporation’s authority to act and its
liability for its actions are separate and apart from the individuals who own it. (Aboitiz Equity
Ventures, Inc. v. Chiongbian, G.R. No. 197530, July 9, 2014)

19. IT IS A CONDITION SINE QUA NON THAT A CORPORATION BE IMPLEADED AS A PARTY IN A

DERIVATIVE SUIT
In citing the case of Asset Privatization Trust v. Court of Appeals that it is a condition sine qua
non that the corporation be impleaded as party in derivative suits. Not only is the corporation an
indispensable party, but it is also the present rule that it must be served with process. (Villamor,
Jr. v. Umale, G.R. Nos. 172843 & 172881, September 24, 2014)

20. IN CASES ALLEGING SOLIDARY LIABILITY WITH THE CORPORATION OR PRAYING FOR THE
PIERCING OF THE CORPORATE VEIL, PARTIES WHO ARE NORMALLY TREATED AS
DISTINCT INDIVIDUALS SHOULD BE MADE TO PARTICIPATE IN THE ARBITRATION
PROCEEDINGS IN ORDER TO DETERMINE IF SUCH DISTINCTION SHOULD INDEED BE
DISREGARDED AND, IF SO, TO DETERMINE THE EXTENT OF THEIR LIABILITIES
In ruling that petitioners may be compelled to submit to the arbitration proceedings, the basic
arbitration principle that only parties to an arbitration agreement may be compelled to submit
to arbitration is not overturned. Petitioners should be made parties to the arbitration
proceedings pursuant to the arbitration clause only for the purposes of determining if piercing of
the corporate veils is warranted, and if so, to determine the extent of their liabilities. (Lanuza, Jr.
v. BF Corp., G.R. No. 174938, October 1, 2014)

21. RTC HAS JURISDICTION OVER INTRA-CORPORATE CONTROVERSIES THAT PASS THE
RELATIONSHIP AND NATURE OF THE CONTROVERSY TESTS
Under the new rule, beginning July 1, 2000, the regular courts, particularly the RTC has
jurisdiction over intra-corporate controversies. Under the relationship test, an intra-corporate
dispute is between a corporation, partnership or association, and the state, the public, or its
stockholders, or one that is among stockholders themselves. Under the nature of the controversy

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 test, an intra-corporate controversy is one where an action involves the enforcement of corporate
rights and obligations. (Securities and Exchange Commission v. Subic Bay Golf and Country
Club, Inc., G.R. No. 179047, March 11, 2015)

22. WITHOUT FRAUD, CORPORATION REMAINS A SEPARATE ENTITY WITH A DISTINCT

PERSONALITY AND ITS OFFICERS MAY NOT BE HELD SOLIDARILY LIABLE THEREWITH
As a general rule, a corporation has a separate and distinct personality from those who represent
it. Its officers are solidarily liable only when exceptional circumstances exist, such as in the
application of the doctrine of piercing the veil of corporate fiction when there is fraud. (Pioneer
Insurance Surety Corp. v. Morning Star Travel & Tours, Inc., G.R. No. 198436, July 8, 2015)

23. DOING BUSINESS INCLUDES APPOINTING REPRESENTATIVES OR DISTRIBUTORS

OPERATING UNDER FULL CONTROL OF THE FOREIGN CORPORATION
Republic Act No. 7042 or the Foreign Investments Act of 1991 also provides guidance with its
definition of “doing business” with regard to foreign corporations. Section 3(d) of the law
enumerates the activities that constitute doing business: d. the phrase “doing business” shall
include soliciting orders, service contracts, opening offices, whether called “liaison” offices or
branches; appointing representatives or distributors domiciled in the Philippines or who in any
calendar year stay in the country for a period or periods totaling one hundred eighty (180) days
or more. (Air Canada v. Commissioner of Internal Revenue, G.R. No. 169507, January 11, 2016)

24. THE RELATIONSHIP BETWEEN A CORPORATION AND ITS REPRESENTATIVES IS

GOVERNED BY THE GENERAL PRINCIPLES OF AGENCY
Acts of an officer that are not authorized by the board of directors/trustees do not bind the
corporation unless the corporation ratifies the acts or holds the officer out as a person with
authority to transact on its behalf. (University of Mindanao v. Bangko Sentral ng Pilipinas, G.R.
Nos. 194964-65, January 11, 2016)

25. THE REAL PARTY IN INTEREST IN A DERIVATIVE SUIT IS THE CORPORATION SINCE A
DERIVATIVE SUIT CONCERNS A WRONG TO THE CORPORATION ITSELF
A derivative suit “is an action filed by stockholders to enforce a corporate action.” A derivative
suit, therefore, concerns “a wrong to the corporation itself.” The real party-in-interest is the
corporation, not the stockholders filing the suit. The stockholders are technically nominal parties
but are nonetheless the active persons who pursue the action for and on behalf of the corporation.
(Florete, Jr. v. Florete, Sr., G.R. Nos. 174909 & 177275, January 20, 2016)

26. MERGER DOES NOT OPERATE TO DISMISS CURRENT EMPLOYEES

The merger of a corporation with another does not operate to dismiss the employees of the
corporation absorbed by the surviving corporation. This is in keeping with the nature and effects
of a merger as provided under law and the constitutional policy protecting the rights of labor.
The employment of the absorbed employees subsists. Necessarily, these absorbed employees are
not entitled to separation pay on account of such merger in the absence of any other ground for
its award. (Philippine Geothermal, Inc. Employees Union v. Unocal Philippines, Inc., G.R. No.
190187, September 28, 2016)

27. INJUNCTION GENERALLY UNAVAILABLE FROM PREVENTING STOCKHOLDERS TO INSPECT

CORPORATION RECORDS
Injunctions to prevent actions from furthering are generally allowed by the law. However, this is
not sufficient to prevent stockholders from inspecting corporation records as a matter of right.
As such the injunction would be considered as just a useless scrap of paper. (Philippine
Associated Smelting and Refining Corp. v. Lim, G.R. No. 172948, October 5, 2016)

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28. PROPER VENUE FOR A PETITION FOR VOLUNTARY INSOLVENCY IS THE CITY WHERE THE
ISOLVENT DEBTOR HAS RESIDED IN THE LAST 6 MONTHS PRIOR TO FILING OF THE
PETITION
Section 14 of the Insolvency Law specifies that the proper venue for a petition for voluntary
insolvency is the Regional Trial Court of the province or city where the insolvent debtor has
resided in for six (6) months before the filing of the petition. If there is a conflict between the
place stated in the articles of incorporation and the physical location of the corporation’s main
office, the actual place of business should control. (Pilipinas Shell Petroleum Corp. v. Royal
Ferry Services, Inc., G.R. No. 188146, February 1, 2017)

29. BY ITS EXPRESS TERMS, THE CORPORATION CODE ALLOWS “THE SHORTENING (OR
LENGTHENING) OF THE PERIOD WITHIN WHICH TO SEND THE NOTICE TO CALL A SPECIAL
(OR REGULAR) MEETING”
Under PSI’s by-laws, notice of every regular or special meeting must be mailed or personally
delivered to each stockholder not less than five (5) days prior to the date set for the meeting. In
this case, the PSI’s by-laws providing only for a five (5)-day prior notice must prevail over the
two (2)-week notice under the Corporation Code. (Lao v. Yao Bio Lim, G.R. No. 201306, August 9,
2017)

30. A CONFLICT BETWEEN TWO STOCKHOLDERS OF A CORPORATION DOES NOT

AUTOMATICALLY RENDER THEIR DISPUTE AS INTRA-CORPORATE; THE NATURE OF THE
CONTROVERSY MUST ALSO BE EXAMINED
Applying the relationship test, this Court notes that both Belo and Santos are named shareholders
in Belo Medical Group’s Articles of Incorporation and General Information Sheet for 2007. The
conflict is clearly intra-corporate as it involves two (2) shareholders although the ownership of
stocks of one stockholder is questioned. Applying the nature of the controversy test, this is still
an intra-corporate dispute. (Belo Medical Group, Inc. v. Santos, G.R. No. 185894, August 30, 2017)

31. A CORPORATION IS ESTOPPED FROM DENYING ITS AGENT’S APPARENT AUTHORITY TO

INNOCENT THIRD PARTIES
When a corporation intentionally or negligently clothes its agent with apparent authority to act
in its behalf, it is estopped from denying its agent’s apparent authority as to innocent third parties
who dealt with this agent in good faith. (Calubad v. Ricarcen Development Corp., G.R. No.
202364, August 30, 2017)

32. THE PRESIDENT IS PRESUMED TO HAVE THE AUTHORITY TO ACT WITHIN THE DOMAIN
OF THE GENERAL OBJECTIVES OF ITS BUSINESS AND WITHIN THE SCOPE OF HIS OR HER
USUAL DUTIES
In the absence of a charter or by-law provision to the contrary, the president is presumed to have
the authority to act within the domain of the general objectives of its business and within the
scope of his or her usual duties. (Colegio Medico-Farmaceutico De Filipinas v. Lim, G.R. No.
212034, July 2, 2018)

33. ELECTION CONTEST; REGLEMENTARY PERIOD

The 15-day reglementary period within which to file an election contest under the Interim Rules
is meant to hasten the submission and resolution of corporate election controversies, so that the
state of uncertainty in the corporate leadership is settled; and that the said period not meant to
block suits questioning the unlawful acts of winning directors, including the legitimacy of their
authority. (Eizmendi, Jr. v. Fernandez, G.R. No. 215280, September 5, 2018)

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34. INTRA-CORPORATE DISPUTES
In order that the SEC (now the RTC) can take cognizance of a case, the controversy must pertain
to any of the following relationships: (a) between the corporation and the public; (b) between
the corporation and its stockholders; (c) between the corporation and the State as far as its
franchise, permit, or license to operate is concerned; and (d) among the stockholders themselves.
However, concurrent factors, such as the status or relationship of the parties, or the nature of the
question that is the subject of their controversy, must be considered in determining whether it
has jurisdiction over the controversy. (Tumagan v. Kairuz, G.R. No. 198124, September 12, 2018)

35. ACTS AND CONTRACTS OF THE AGENT WITHIN THE APPARENT SCOPE OF HIS AUTHORITY,
THOUGH NO ACTUAL AUTHORITY HAS BEEN CONFERRED, BIND THE PRINCIPAL
EGI’s grant of authority to Santos, however, falls under the doctrine of apparent authority. Under
this doctrine, acts and contracts of the agent, as are within the apparent scope of the authority
conferred on him, although no actual authority to do such acts or to make such contracts has been
conferred, bind the principal. Furthermore, the principal’s liability is limited only to third persons
who have been led reasonably to believe by the conduct of the principal that such actual authority
exists, although none was actually given. (Engineering Geoscience, Inc. v. Philippine Savings
Bank, G.R. No. 187262, January 10, 2019)

36. A CORPORATION WHERE THE GOVERNMENT OWNS MAJORITY OF THE OUTSTANDING

CAPITAL STOCK IS CONSIDERED A GOVERNMENT CONTROLLED CORPORATION
A GOCC is: (1) established by original charter or through the general corporation law; (2) vested
with functions relating to public need whether governmental or proprietary in nature; and (3)
directly owned by the government or by its instrumentality, or where the government owns a
majority of the outstanding capital stock. Possessing all three attributes is necessary to be
classified as a GOCC. As such, they are not governed by labor law and hence are not given the
rights to collective bargaining. (GSIS Family Bank Employees Union v. Villanueva, G.R. No.
210773, January 23, 2019)

37. PARTIES MAY STILL ENTER INTO A COMPROMISE AGREEMENT DESPITE THE CASE IS
PENDING FOR PETITION FOR REVIEW WITH THE SUPREME COURT
Parties may enter into a compromise agreement even if the case is already filed for petition for
review with the Supreme Court. A corporation may authorize a representative to represent it in
the signing of the Compromise Agreement. (Spouses Tio v. Bank of the Philippine Islands, G.R.
Nos. 193534 & 194091, January 30, 2019).

38. DOCTRINE OF CORPORATE JURIDICAL PERSONALITY

Debts incurred by these individuals, acting as such corporate agents, are not theirs but the direct
liability of the corporation they represent. As an exception, directors or officers are personally
liable for the corporation’s debts only if they so contractually agree or stipulate. (BDO Unibank,
Inc. v. Choa, G.R. No. 237553, July 10, 2019)

SECURITIES LAW

39. SECURITIES REGULATION CODE SECTIONS 26 AND 28

Respondent Price Richardson “has never been issued any secondary license to act as
broker/dealer in securities, investment house and dealer in government securities.” Petitioner
also certified that respondent Price Richardson “is not, under any circumstances, authorized or
licensed to engage and/or solicit investments from clients.” (Securities and Exchange
Commission v. Price Richard Corp., G.R. No. 197032, July 26, 2017)

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40. A MONEY MARKET PLACEMENT PARTAKES THE NATURE OF A LOAN
In money market placements, the investor is a lender who loans his money to a borrower through
a middleman or dealer. The issuer of a commercial paper necessarily knows in advance that it
would be expeditiously transacted and transferred to any investor/lender without need of notice
to said issuer. In practice, no notification is given to the borrower or issuer of the sale or transfer
to the investor. (Abacus Capital and Investment Corp. v. Tabujara, G.R. No. 197624, July 23,
2018)

BANKING LAWS

41. THE STANDARD OF DILIGENCE REQUIRED OF BANKS IS HIGHER THAN THE DEGREE OF
DILIGENCE OF A GOOD FATHER OF A FAMILY
Similar to common carriers, banking is a business that is impressed with public interest. It affects
economies and plays a significant role in businesses and commerce. The public reposes its faith
and confidence upon banks, such that “even the humble wage-earner has not hesitated to entrust
his life’s savings to the bank of his choice, knowing that they will be safe in its custody and will
even earn some interest for him.” This is why we have recognized the fiduciary nature of the
banks’ functions, and attached a special standard of diligence for the exercise of their functions.
(Philippine National Bank v. Santos, G.R. Nos. 208293 & 208295, December 10, 2014)

42. THE RELATIONSHIP BETWEEN A CORPORATION AND ITS REPRESENTATIVES IS

GOVERNED BY THE GENERAL PRINCIPLES OF AGENCY
Acts of an officer that are not authorized by the board of directors/trustees do not bind the
corporation unless the corporation ratifies the acts or holds the officer out as a person with
authority to transact on its behalf. (University of Mindanao v. Bangko Sentral ng Pilipinas, G.R.
Nos. 194964-65, January 11, 2016)

43. BANKS MUST SHOW THAT THEY EXERCISED THE REQUIRED DUE DILIGENCE BEFORE
CLAIMING TO BE MORTGAGEES IN GOOD FAITH OR INNOCENT PURCHASERS FOR VALUE
The rule on “innocent purchasers or [mortgagees] for value” is applied more strictly when the
purchaser or the mortgagee is a bank. Banks are expected to exercise higher degree of diligence
in their dealings, including those involving lands. Banks may not rely simply on the face of the
certificate of title. (Land Bank of the Philippines v. Musni, G.R. No. 206343, February 22, 2017)

44. BANKS ASSUME A DEGREE OF PRUDENCE AND DILIGENCE HIGHER THAN THAT OF A GOOD
FATHER OF A FAMILY
Banks assume a degree of prudence and diligence higher than that of a good father of a family,
because their business is imbued with public interest and is inherently fiduciary. The high degree
of diligence required of banks equally holds true in their dealing with mortgaged real properties,
and subsequently acquired through foreclosure, such as the Unit purchased by petitioner. Banks
are also “presumed to be familiar with the rules on land registration,” given that they are in the
business of extending loans secured by real estate mortgage. (Poole-Blunden v. Union Bank of
the Philippines, G.R. No. 205838, November 29, 2017)

45. A CLOSED BANK UNDER RECEIVERSHIP CAN ONLY SUE OR BE SUED THROUGH ITS
RECEIVER, THE PHILIPPINE DEPOSIT INSURANCE CORPORATION
As fiduciary of the insolvent bank, Philippine Deposit Insurance Corporation conserves and
manages the assets of the bank to prevent the assets’ dissipation. This includes the power to bring
and defend any action that threatens to dissipate the closed bank’s assets. Philippine Deposit
Insurance Corporation does so, not as the real party-in-interest, but as a representative party.

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 (Banco Filipino Savings and Mortgage Bank v. Bangko Sentral ng Pilipinas, G.R. No. 200678,
June 4, 2018)

46. A BANK THAT FAILS TO COMPLY WITH ITS OBLIGATION TO SECURE ACCOUNTS BY
ALLOWING ONLY THOSE WITHDRAWALS AUTHORIZED BY ITS DEPOSITOR IS GUILTY OF
NEGLIGENCE
It is basic that those who, in the performance of their obligations, are guilty of negligence, and
those who in any manner contravene the tenor thereof, are liable for damages. When BPI allowed
Dela Peña to make unauthorized withdrawals, it failed to comply with its obligation to secure said
accounts by allowing only those withdrawals authorized by respondent. In so doing, BPI violated
the terms of its contract of loan with respondent and should be held liable in this regard. (Bank
of the Philippine Islands v. Land Investors and Developers Corp., G.R. No. 198237, October 8,
2018)

47. COURT ORDER FOR THE RELEASE OF FUNDS FROM A JOINT FOREIGN CURRENCY DEPOSIT
ACCOUNT, WITHOUT SECURING THE CONSENT OF A CO-DEPOSITOR, CONSTITUTES TWO
VIOLATIONS OF THE LAW
It is apparent that in ordering the branch manager or any representative of BPI to release the
money contained in a foreign currency deposit account, the intestate court committed a violation
of the law, which expressly provides that all foreign currency deposits as defined by applicable
laws are not subject to any form of attachment, garnishment, or any other order or process of any
court, legislative body, government agency or any administrative body. The intestate court
likewise erred in allowing the withdrawal of funds sans the consent of a co-depositor. In an “and”
joint account, as in this case, the depositors are joint creditors of the bank and the signatures of
all depositors are necessary to allow withdrawal. (Intestate Estate of Pacioles v. Pacioles, Jr.,
G.R. No. 214415, October 15, 2018)

48. BANKS ARE REQUIRED TO EXERCISE THE HIGHEST DEGREE OF DILIGENCE IN ITS BANKING
TRANSACTIONS
Under the General Banking Act of 2000 demands of banks the highest standards of integrity and
performance. The Court ruled that banks are under obligation to treat the accounts of their
depositors with meticulous care. The Court ruled that the bank’s compliance with this degree of
diligence has to be determined in accordance with the particular circumstances of each case.
(Bank of the Philippine Islands v. Spouses Quiaoit, G.R. No. 199562, January 16, 2019)

49. THE BSP AND PNB ARE NOT OBLIGATED TO COMPENSATE SUGAR PRODUCERS FOR THEIR
LOSSES UNDER RA 7202
In a case involving the restitution for losses suffered in sugar farming operations due to the
actions of government-owned and controlled agencies, lending banks, such as the PNB, are not
obligated to compensate sugar producers for their losses. Restitution falls under the BSP, upon
the establishment of a sugar restitution fund. The BSP cannot effect the restitution since neither
the PCGG nor other government agencies have turned over funds to it for the sugar producers’
compensation. (Bangko Sentral ng Pilipnas v. Spouses Ledesma, G.R. Nos. 211176 & 211583,
February 6, 2019)

50. IN DEPOSIT SPLITTING, THERE IS A PRESUMPTION THAT THE TRANSFEREES HAVE NO

BENEFICIAL OWNERSHIP
In deposit splitting, there is a presumption that the transferees have no beneficial ownership
considering that the source account, which exceeded the maximum deposit insurance coverage,
was split into two or more accounts within 120 days immediately preceding bank closure. Even

11
 if the transfer into different accounts was not made within 120 days immediately preceding bank
closure, the grant of deposit insurance to an account found to have originated from another
deposit is not automatic because the transferee still has to prove that the transfer was for a valid
consideration through documents kept in the custody of the bank (Linsangan v. Philippine
Deposit Insurance Corp., G.R. No. 228807, February 11, 2019)

INTELLECTUAL PROPERTY LAW

51. NEWS SHALL BE COPYRIGHTABLE IF IT INVOLVES A WHOLE SPECTRUM OF VISUALS AND

EFFECTS, VIDEO AND AUDIO, INCLUDING FRAMING SHOTS, USING IMAGES, GRAPHICS AND
SOUND EFFECTS
News or the event itself is not copyrightable. However, an event can be captured and presented
in a specific medium. As recognized by this court in Joaquin, television “involves a whole
spectrum of visuals and effects, video and audio.” News coverage in television involves framing
shots, using images, graphics, and sound effects. It involves creative process and originality.
Television news footage is an expression of the news. (ABS-CBN Corp. v. Gozon, G.R. No. 195956,
March 11, 2015)

52. PATENT DEEMED ABANDONED IF IT FAILS TO PROSECUTE WITHIN 4 MONTHS FROM THE
DATE OF MAILING, NOT FROM ACTUAL NOTICE
A patent application is deemed abandoned if the applicant fails to prosecute the application
within four months from the date of the mailing of the notice of the last action by the Bureau of
Patents, Trademarks, and Technology Transfer, and not from applicant’s actual notice. Even
assuming that the 4-month period could be extended, petitioner was inexcusably negligent in the
prosecution of its patent application. Negligence is inexcusable if its commission could have been
avoided through ordinary diligence and prudence. It is also settled that negligence of counsel
binds the client as this “ensures against the resulting uncertainty and tentativeness of
proceedings if clients were allowed to merely disown their counsels’ conduct.” (E.I. Dupont De
Nemours and Co. v. Francisco, G.R. No. 174379, August 31, 2016)

53. IN ADMINISTRATIVE PROCEEDINGS, TECHNICAL RULES OF PROCEDURE AND EVIDENCE

ARE NOT STRICTLY APPLIED
In the Conduct of Hearing of Inter Partes Cases, the Rules of Court, unless inconsistent with these
rules, may be applied in suppletory character, provided, however, that the Director or Hearing
Officer shall not be bound by the strict technical rules of procedure and evidence therein
contained. (Palao v. Florentino III International, Inc., G.R. No. 186967, January 18, 2017)

54. THE COURT DISAGREES THAT A BANK OR ATM SERVICE IS MORE AKIN TO ORDINARY
HOUSEHOLD ITEMS THAN IT IS TO BRAND NAME JEANS IN TERMS OF HOW THEIR
CUSTOMERS CHOOSE THEIR PROVIDERS
This Court is at a loss to see how this supports petitioner’s claims that ATM users locate the
nearest ATMs and use them without reference to brand as long as the ATM accepts their cards. If
petitioner’s speculation is true, then bank branding is wholly irrelevant after the ATM service has
been secured. In any case, this Court simply cannot agree that a bank or ATM service is more akin
to ordinary household items than it is to brand name Jeans. (Citygroup Inc., v. Citystate Savings
Bank, Inc., G.R. No. 205409, June 13, 2018)

55. ALTHOUGH THERE IS A NOTICEABLE DIFFERENCE ON HOW THE TRADE NAME IS BEING
USED IN ITS PRODUCTS, IT DOES NOT PRECLUDE THAT THERE MAY BE A CONFUSION ON
THE ORIGIN OF THE PRODUCTS

12
 Although we see a noticeable difference on how the trade name of respondent is being used in its
products as compared to the trademark of petitioner, there could likely be confusion as to the
origin of the products. Thus, while there is confusion of goods when the products are competing,
confusion of business exists when the products are non-competing but related enough to produce
confusion of affiliation. (Asia Pacific Resources International Holdings, Ltd. v. Paperone, Inc.,
G.R. Nos. 213365-66, December 10, 2018)

INSOLVENCY LAWS

56. FAILURE TO ESTABLISH PARALYSIS IN BUSINESS OPERATION LEADS TO DENIAL OF

PRAYER FOR RECEVIERSHIP
Management committees and receivers are appointed when the corporation is in imminent
danger of (1) dissipation, loss, wastage or destruction of assets or other properties; and (2)
paralysation of its business operations that may be prejudicial to’ the interest of the minority
stockholders, parties-litigants, or the general public. (Villamor, Jr. v. Umale, G.R. Nos. 172843 &
172881, September 24, 2014)

57. THE INTERIM RULES DOES NOT REQUIRE A HEARING BEFORE THE ISSUANCE OF A STAY
ORDER
What it requires is an initial hearing before it can give due course to or dismiss a petition.
Nevertheless, while the Interim Rules does not require the holding of a hearing before the
issuance of a stay order, neither does it prohibit the holding of one. (Pryce Corp. v. China
Banking Corp., G.R. No. 172302, February 18, 2014)

58. RULE 3, SECTION 5 OF THE INTERIM RULES GOVERNS THE EFFECTIVITY OF ORDERS
ISSUED IN PROCEEDINGS RELATING TO THE REHABILITATION OF CORPORATIONS,
PARTNERSHIPS, AND ASSOCIATIONS
Thus, We entertain no doubt that Rule 3, Section 5 of the Interim Rules covered the trial court’s
October 1, 2003 Order dismissing the Petition for Rehabilitation and lifting the Stay Order The
same Order was thus immediately executory. xxx La Savoie’s creditors were then free to enforce
their claims. (Home Guaranty Corp. v. La Savoie Development Corp., G.R. No. 168616, January
28, 2015)

59. APPROVAL OF THE INSOLVENT COURT IS NECESSARY BEFORE A SECURED CREDITOR CAN
FORCLOSE THE MORTGAGE PROPERTY
After the mortgagor-debtor has been declared insolvent and the insolvency court has acquired
control of his estate, a mortgagee may not, without the permission of the insolvency court,
institute proceedings to enforce its lien. (Metropolitan Bank & Trust Co. v. S.F. Naguiat
Enterprises, Inc., G.R. No. 178407, March 18, 2015)

60. LOAN SALE AND PURCHASE AGREEMENT ENTITLES THE BUYER TO ALL THE RIGHTS AND
INTERESTS THAT THE SELLER HAD HAD AS CREDITOR
When petitioner entered into the Loan Sale and Purchase Agreement with Elite Union, the entire
obligation was transferred to Elite Union. The Loan Sale and Purchase Agreement entitled Elite
Union to all the rights and interests that petitioner had had as creditor of respondent G & P,
including the securities of the loan account. (Metropolitan Bank & Trust Co. v. G & P Builders,
Inc., G.R. No. 189509, November 23, 2015)

61. CREDITORS MUST BE IMPLEADED AS REPOSNDENTS IN A CORPORATE REHABILITATION

CASE

13
 A corporate rehabilitation case cannot be decided without the creditors’ participation. The
court’s role is to balance the interests of the corporation, the creditors, and the general public.
Impleading creditors as respondents on appeal will give them the opportunity to present their
legal arguments before the appellate court. The courts will not be able to balance these interests
if the creditors are not parties to a case. Ruling on petitioner’s appeal in the absence of its
creditors will not result in judgment that is effective, complete, and equitable. (Viva Shipping
Lines, Inc. v. Keppel Philippines Mining, Inc., G.R. No. 177382, February 17, 2016)

62. A CORPORATION THAT MAY SEEK CORPORATE REHABILITATION IS CHARACTERIZED NOT

BY ITS DEBT BUT BY ITS CAPACITY TO PAY THIS DEBT
Any debtor who foresees the impossibility of meeting its debts when they respectively fall due,
or any creditor or creditors holding at least twenty-five percent (25%) of the debtor’s total
liabilities, may petition the proper Regional Trial Court to have the debtor placed under
rehabilitation. (Metropolitan Bank & Trust Co. v. Liberty Corrugated Boxes Manufacturing
Corp., G.R. No. 184317, January 25, 2017)

63. PROPER VENUE FOR A PETITION FOR VOLUNTARY INSOLVENCY IS THE CITY WHERE THE
ISOLVENT DEBTOR HAS RESIDED IN THE LAST 6 MONTHS PRIOR TO FILING OF THE
PETITION
Section 14 of the Insolvency Law specifies that the proper venue for a petition for voluntary
insolvency is the Regional Trial Court of the province or city where the insolvent debtor has
resided in for six (6) months before the filing of the petition. If there is a conflict between the
place stated in the articles of incorporation and the (Pilipinas Shell Petroleum Corp. v. Royal
Ferry Services, Inc, G.R. No. 188146, February 1, 2017)

64. THE REMEDY OF REHABILITATION SHOULD BE DENIED TO CORPORATIONS WHOSE

INSOLVENCY APPEARS TO BE IRREVERSIBLE AND WHOSE SOLE PURPOSE IS TO DELAY THE
ENFORCEMENT OF ANY OF THE RIGHTS OF THE CREDITORS
The purpose of rehabilitation proceedings is not only to enable the company to gain a new lease
on life, but also to allow creditors to be paid their claims from its earnings when so rehabilitated.
the remedy of rehabilitation should be denied to corporations whose insolvency appears to be
irreversible and whose sole purpose is to delay the enforcement of any of the rights of the
creditors, which is rendered obvious by: (a) the absence of a sound and workable business plan;
(b) baseless and unexplained assumptions, targets, and goals; and (c) speculative capital infusion
or complete lack thereof for the execution of the business plan, as in this case. (Land Bank of the
Philippines v. Fastech Synergy Philippines, Inc., G.R. No. 206150, August 9, 2017)

65. CORPORATIONS WHOSE DEBTS ARE ALREADY DUE AND DEMANDABLE MAY STILL FILE A
PETITION FOR REHABILITATION
There is no reason why corporations with debts that may have already matured should not be
given the opportunity to recover and pay their debtors in an orderly fashion. The opportunity to
rehabilitate the affairs of an economic entity, regardless of the status of its debts, redounds to the
benefit of its creditors, owners, and to the economy in general. Thus, the condition that triggers
rehabilitation proceedings is not the maturation of a corporation’s debts but the inability of
the debtor to pay these. (Metropolitan Bank & Trust Co. v. Fortuna Paper Mill & Packaging
Corp., G.R. No. 190800, November 7, 2018)

14
 NEGOTIABLE INSTRUMENTS LAW

ISSUE IS DEFINED AS THE FIRST DELIVERY OF AN INSTRUMENT, COMPLETE IN FORM TO A

PERSON WHO TAKES IT AS A HOLDER

1. People v. Ting
G.R. No. 221505, December 5, 2018
Peralta, J.

FACTS:
Respondents, City Mayor Randolph S. Ting and City Treasurer Salvacion I. Garcia, both of Tuguegarao
City, were charged with violation of Section 261 (w)(b) of Batas Pambansa Bilang 81, otherwise
known as the Omnibus Election Code, for issuing a treasury warrant during the 45-day election ban
period as payment for 2 parcels of land to be used as a public cemetery for the city. Upon arraignment,
respondents entered a plea of not guilty to the offense charged. At the pre-trial, it was stipulated and
admitted that Ting, as representative of the City Government of Tuguegarao, entered into a Contract
of Sale with the Almazans for the purchase of 2 parcels of land. After the pre-trial, the prosecution
filed its Formal Offer of Evidence But instead of presenting their evidence, respondents filed a Motion
for Leave to File a Demurrer to Evidence and, subsequently, a Demurrer to Evidence the RTC granted
the same and acquitted the respondents. According to the RTC, while it is uncontested that the
treasury warrant or the Landbank check in issue bears the date “April 30, 2004,” which is well within
the prohibited period, the date of the instrument is not necessarily the date of issue. The Negotiable
Instruments Law provides that an instrument is issued by “the first delivery of the instrument,
complete in form, to a person who takes it as a holder.” But the prosecution failed to prove that the
subject check was delivered to the vendors of the lots within the prohibited period. In fact, the dorsal
side of the instrument bears “May 18, 2004” as the date of payment as annotated by the drawee bank,
which is beyond the said period.

The CA denied the Petition for Certiorari under Rule 65 of the Rules of Court filed by the Office of the
Solicitor General (OSG), and affirmed the RTC’s Order. Like the RTC, the CA cited the Negotiable
Instruments Law and held that every contract on a negotiable instrument is incomplete and
revocable until delivery of the instrument to the payee for the purpose of giving effect thereto.
Without initial delivery of the instrument from the drawer of the check to the payee, there can be no
valid and binding contract and no liability on the instrument. Also, without delivery, the instrument
cannot be deemed to have been issued. Thus, the date on the check, April 30, 2004, pertains to nothing
more than the date of the making or drawing of the instrument.

ISSUE:
Is the accused guilty of violating the Omnibus Election Code within the purview of the word “issue”
as defined under the Negotiable Instruments Law?

RULING:
No. Section 191 of the Negotiable Instruments Law defines “issue” as the first delivery of an
instrument, complete in form, to a person who takes it as a holder. In fact, the Court has held in the
past that delivery is the final act essential to the negotiability of an instrument. Note that the subject
provision of the Omnibus Election Code does not merely penalize a person who “issues” treasury
warrants or devices, but a person who “issues, uses or avails” of treasury warrants or devices. As
such, the term “issues” under the subject provision should not be construed in its restricted sense
within the meaning of Negotiable Instruments Law, but rather in its general meaning to give, to send,

15
or such other words importing delivery to the proper person. To the Court, this is more in keeping
with the intent of the law for basic statutory construction provides that where a general word follows
an enumeration of a particular specific word of the same class, the general word is to be construed
to include things of the same class as those specifically mentioned. Thus, for as long as the device is
issued, used, or availed of within the prohibited period to undertake the future delivery of money
chargeable against public funds, an election offense is committed.

16
 INSURANCE LAW

LIABILITIES OF AN INSURER UNDER THE SURETY BOND ARE NOT EXTINGUISHED WHEN THE
MODIFICATIONS IN THE PRINCIPAL CONTRACT DO NOT SUBSTANTIALLY OR MATERIALLY
ALTER THE PRINCIPAL’S OBLIGATIONS

2. People’s Trans-East Asia Insurance Corp. v. Doctors of New Millennium Holdings, Inc.
G.R. No. 172404, August 13, 2014
Leonen, J.

FACTS:
Doctors of New Millennium Holdings, Inc. entered into a construction and development agreement
with Million State Development Corporation, a contractor, for the construction of a 200-bed capacity
hospital in Cainta, Rizal.

According to the terms of the signed agreement, Doctors of New Millennium obliged itself to pay
P10,000,000.00 to Million State Development at the time of the signing of the agreement to
commence the construction of the hospital. Million State Development was to shoulder 95% of the
project cost and committed itself to secure P385,000,000.00 within 25 banking days from Doctors of
New Millennium’s initial payment, part of which was to be used for the purchase of the lot where the
hospital was to be constructed. Ed Million State Development submitted a surety bond of
P10,000,000.00 to Doctors of New Millennium. The surety bond was issued by People’s Trans-East
Asia Insurance Corporation, now known as People’s General Insurance Corporation. Doctors of New
Millennium, on the other hand, made the initial payment of P10,000,000.00.

Million State Development, however, failed to comply with its obligation to secure P385,000,000.00.
It faxed a letter to Doctors of New Millennium explaining its delay was caused by its foreign creditors’
delay in processing its application. Red Doctors of New Millennium sent a formal demand letter to
Million State Development. Doctors of New Millennium sent a demand letter on various dates to
People’s General Insurance for the return of its initial payment of P10,000,000.00, in accordance with
its surety bond. Due to Million State Development’s inaction, Doctors of New Millennium filed a
complaint for breach of contract with damages with prayer for the issuance of preliminary
attachment against Million State Development and People’s General Insurance.

People’s General Insurance, represented by its President, Manual Liboro, testified that its liability
was only limited to the construction of the hospital. Mr. Liboro also argued that the terms of the
surety bond were based on the Draft Construction and Development Agreement (draft agreement).
It alleged that without its knowledge and consent, Doctors of New Millennium and Million State
Development substantially altered the conditions of the draft agreement by inserting the clause “or
the Project Owner’s waiver,” which appeared in the signed agreement.

People’s General Insurance argues that Million State Development furnished it a copy of the draft
agreement with the assurance that the same terms and conditions would be embodied in the signed
agreement. It argues that when the parties inserted the clause “or the Project Owner’s waiver,” it
substantially altered the terms and conditions of the contract as “they exponentially increase[d] the
risk that petitioner was willing to take as surety.” It explains that under the draft agreement, Million
State Development “must hurdle certain stringent requirements”35 before the P10,000,000.00 initial
payment could be released to it.

17
ISSUE:
Was the surety bond guaranteeing respondent Doctors of New Millennium’s initial payment
impliedly novated by the insertion of a clause in the principal contract, which waived the conditions
for the initial payment’s release?

RULING:
On the basis of petitioner’s own admissions, the principal contract of the suretyship is the signed
agreement. The surety, therefore, is presumed to have acquiesced to the terms and conditions
embodied in the principal contract when it issued its surety bond. Accordingly, petitioner cannot
argue that the insertion of the clause in the signed agreement constituted an implied novation of the
obligation which extinguished its obligations as a surety since there was nothing to novate.

Respondent’s waiver of the conditions set forth under Article XIII of the agreement does not
substantially or materially alter petitioner’s obligation to guarantee the performance of its principal,
Million State Development.

Petitioner, as a surety, bound itself to guarantee the repayment of the initial price in the event that
Million State Development fails to perform not only the conditions under Article XIII but all its
obligations under the signed agreement.

The conditions under Article XIII of the signed agreement refer only to the conditions that Million
State Development was responsible for so that initial payment could be disbursed to them. Petitioner
failed to take into account that Article XIII must be read together

Article IX requires Million State Development to procure a surety bond to cover the initial payment
“upon the execution of the Agreement,” and not upon the fulfillment of the conditions under Article
XIII. Any waiver by respondent of the conditions for the release of the initial payment would not affect
the conditions by which the surety bond was issued.

Million State Development’s obligations under the contract subsist regardless of whether respondent
waives the conditions for the release of the initial payment. Its obligation upon the release of the
initial payment was for it to “make available the funds constituting the Balance Payment . . . [in] the
amount of THREE HUNDRED EIGHTY-FIVE MILLION PESOS (PhP385,000,000.00), within twenty-
five (25) banking days from payment by the Project Owner of the Initial Payment.” It is this
performance of this obligation that the surety primarily guarantees.

18
 INSURANCE LAW

LIABILITY OF A SURETY IS DETERMINED STRICTLY IN ACORDANCE WITH THE ACTUAL TERMS

OF THE PERFORMANCE BOND IT ISSUED

3. FGU Insurance Corp. v. Spouses Roxas

G.R. No. 189526, August 9, 2017
Leonen, J.

FACTS:
This is a Petition for Review seeking to reverse and set aside the Decision of the CA finding FGU
Insurance Corp. solidarily liable with Dominguez to spouses Roxas to the extent of P450,000.

Spouses Roxas entered into a Contract of Building Construction with Dominguez and Philtrust Bank
to complete the construction of their housing project. Philtrust Bank would finance the cost of
materials and while Dominguez would undertake the construction works. Pursuant to the Contract,
Dominguez secured a performance bond (Surety Bond), from FGU. FGU and Dominguez bound
themselves to jointly and severally pay Floro Roxas and Philtrust the agreed amount in the event of
Dominguez’s non-performance of his obligation under the Contract. Dominguez averred that he
requested an upward adjustment of the contract price from the Spouses Roxas due to the rising costs
of materials and supplies but the latter did not heed his request. Dominguez also asked Philtrust to
release the remaining balance of P24,000.00 but to no avail. Thus, Dominguez filed a Complaint
against the Spouses Roxas and Philtrust before RTC of Manila. In its Answer, Philtrust sought to
implead FGU for non-payment of P450,000 under its Surety Bond due to Dominguez’s non-
completion of the project within the stipulated period. RTC rendered judgment in favor of Dominguez
and ordered the cancellation of the Performance Bond of the FGU for P450,000. CA reversed the RTC
decision. It held that FGU, as surety, was obligated to pay the Spouses Roxas and Philtrust the full
amount of the Surety Bond amounting to P450,000 for Dominguez’s non-completion of the
construction project within the stipulated period.

FGU questions the CA Decision. It argues that the face amount of P450,000 only indicates its
maximum potential liability in case Dominguez does not comply with its obligation under the
Contract. FGU submits that it should only be liable for the actual damages that may have been
sustained by the Spouses or the cost that may have been incurred by them to finish the contracted
work. Since the Spouses Roxas failed to prove the added cost to them to finish the construction, FGU
argues that their claim for damages cannot be granted.

ISSUE:
Is the FGU, as a surety, liable to the Spouses for the full amount of the Surety Bond?

RULING:
Yes. From the terms of the bond, FGU guaranteed to pay the amount of P450,000 in the event of
Dominguez’s breach of his contractual undertaking.

Under the Insurance Code, a contract of suretyship is defined as an agreement where “a party called
the surety guarantees the performance by another party called the principal or obligor of an
obligation or undertaking in favor of a third party called the obligee.” A performance bond is a kind
of suretyship agreement. It is designed to afford the project owner security that the contractor, will
faithfully comply with the requirements of the contract and make good on the damages sustained by

19
the project owner in case of the contractor’s failure to so perform. A surety’s liability is joint and
several with the principal. Article 2047 of the Civil Code provides that suretyship arises upon the
solidary binding of a person deemed the surety with the principal debtor for the purpose of fulfilling
an obligation.

Liability under a surety bond is “limited to the amount of the bond” and is determined strictly in
accordance with the particular terms and conditions set out in this bond. It is, thus, necessary to look
into the actual terms of the performance bond. The specific condition in the FGU Surety Bond did not
clearly state the limitation of FGU’s liability. From the terms of this bond, FGU guaranteed to pay the
amount of P450,000.00 in the event of Dominguez’s breach of his contractual undertaking. Hence,
FGU was bound to pay the stipulated indemnity upon proof of Dominguez’s default without the
necessity of proof on the measure of damages caused by the breach.

Thus, FGU Insurance should be held liable for the full amount of the Surety Bond as stated under the
Bond.

20
 INSURANCE LAW

INSURED MAY BE COMPELLED TO ARBITRATION PURSUANT TO RULES WHICH WERE

INCORPORATED IN THE INSURANCE POLICY BY REFERENCE

4. Steamship Mutual Underwriting Association (Bermuda) Limited v. Sulpicio Lines, Inc.

GR. No. 196072, September 20, 2017
Leonen, J.

FACTS:
Petition for Review seeking to set aside the decision of the CA in denying Steamship’s Motion to
Dismiss and/or to Refer Case to Arbitration.

Steamship was a Bermuda-based Protection and Indemnity Club, managed outside London, England.
It insures its members-shipowners against “third party risks and liabilities”. Sulpicio insured its fleet
of inter-island vessels, one of which is the M/V Princess of the World, with Steamship for Protection
& Indemnity risks through local insurance agents, Pioneer Insurance or Seaboard-Eastern as
evidenced by a Certificate of Entry and Acceptance issued by Steamship. In 2005, M/V Princess of the
World was gutted by fire resulting in total loss of its cargoes.

Sulpicio claimed indemnity from Steamship under the insurance policy. Steamship denied the claim
on the ground that “Sulpicio was grossly negligent in maintaining the seaworthiness of its vessel.” In
2007, Sulpicio filed a Complaint with the RTC of Makati against Steamship and its local insurance
agents for specific performance and damages.

Steamship filed its Motion to Dismiss and/or to Refer Case to Arbitration pursuant to RA No. 9285
(ADR Law). RTC denied the motion to dismiss. Sulpicio accuses Steamship of indirect contempt that
without its knowledge or consent, Steamship initiated and “concluded” during the pendency of the
case an alleged “arbitration proceeding” in London for the “Arbitrator” there to “resolve” the very
dispute involved in this case.

CA affirmed the RTC Order denying referral of Sulpicio Lines, Inc.’s complaint to arbitration in
London in accordance with the 2005/2006 Club Rules.

Steamship contends that the arbitration agreement set forth in its Club Rules, which in turn is
incorporated by reference in the Certificate of Entry and Acceptance of M/V Princess of the World is
valid and binding upon Sulpicio. Sulpicio counters that CA was correct in ruling that there was no
arbitration agreement between the parties. The arbitration clause in the 2005/2006 Club Rules is
not valid and binding for failure to comply with Section 4 of the ADR Law, which requires that an
arbitration agreement be in writing and subscribed by the parties or their lawful agent.

ISSUES:
1. May the insured be compelled to arbitration pursuant to the Rules which were incorporated in
the insurance policy by reference?
2. Was the arbitration agreement in the 2005/2006 Club Rules not valid because it was not in
writing and signed by the parties?

RULING:

21
1. Yes. The contract between Sulpicio and Steamship is more than a contract of insurance between
a marine insurer and a shipowner. By entering its vessels in Steamship, Sulpicio not only obtains
insurance coverage for its vessels but also becomes a member of Steamship, and thus must
comply with its Rules.

Insurance Code defines an insurance policy as “the written instrument in which a contract of
insurance is set forth.” Section 50 of this Code provides that the policy, which is required to be in
printed form, “may contain blank spaces; and any word, phrase, clause, mark, sign, symbol,
signature, number, or word necessary to complete the contract of insurance shall be written on
the blank spaces.” Any rider, clause, warranty, or endorsement attached and referred to in the
policy by its descriptive title or name is considered part of this policy or contract of insurance
and binds the insured.

A contract of insurance is perfected between the parties upon Steamship’s issuance of the
Certificate of Entry and Acceptance. Sulpicio’s acceptance of the Certificate manifests its
acquiescence to all its provisions. The Certificate plainly provides that the protection and
indemnity coverage would be to the extent specified and in accordance with the Act, the By-Laws,
and the Rules of the Club in force at the time of the coverage.

Under Rule 47 of the Rules of the Club, any dispute concerning the insurance afforded by
Steamship must first be brought by a claiming member to the Directors for adjudication. If this
member disagrees with the decision of the Director, the dispute must be referred to arbitration
in London. This procedure must be complied with before the member can pursue legal
proceedings against Steamship. There is no ambiguity in the terms and clauses of the Certificate
of Entry Acceptance. Contrary to the ruling of the CA, the Certificate clearly incorporates the
entire Club Rules. The incorporation of the Club Rules in the insurance policy is without any
qualification. This includes the arbitration clause even if not particularly stipulated.

2. No. The arbitration agreement was valid despite it not being in writing and subscribed by the
parties.

A contract need not be contained in a single writing. It may be collected from several different
writings which do not conflict with each other and which, when connected, show the parties,
subject matter, terms and consideration, as in contracts entered into by correspondence. A
contract may be encompassed in several instruments even though every instrument is not signed
by the parties, since it is sufficient if the unsigned instruments are clearly identified or referred
to and made part of the signed instrument or instruments.

Thus, an arbitration agreement that was not embodied in the main agreement but set forth in
another document is binding upon the parties, where the document was incorporated by
reference to the main agreement. The arbitration agreement contained in the Club Rules, which
in turn was referred to in the Certificate of Entry and Acceptance, is binding upon Sulpicio even
though there was no specific stipulation on dispute resolution in this Certificate. Furthermore, as
stated earlier, Sulpicio became a member of Steamship by the very act of making a contract of
insurance with it. The Certificate of Entry and Acceptance issued by Steamship states that “[its]
name has been entered in the Register of Members of the Club as a Member.” Sulpicio admits its
membership and the entry of its vessels to Steamship.

22
 INSURANCE LAW

WHILE PROOF OF FRAUDULENT INTENT IS DISPENSED WITH IN CASES OF RESCISSION DUE TO

CONCEALMENT, IT IS NOT SO IN CASES OF RESCISSION DUE TO FALSE REPRESENTATIONS
WHERE SUCH FRAUDEULENT INTENT MUST BE PROVED BY CLEAR AND CONVINCING
EVIDENCE

5. Insular Life Assurance Co., Ltd. v. Heirs of Alvarez

G.R. Nos. 207526 & 210156, October 3, 2018
Leonen, J.

FACTS:
These consolidated Petitions for Review on Certiorari under Rule 45 brought by petitioners The
Insular Life Assurance Co., Ltd. (Insular Life) and Union Bank of the Philippines (UnionBank) seeks
to reverse the CA’s decision affirming the RTC decision which ruled in favor of the Heirs of Jose
Alvarez in their action for specific performance against petitioners. The RTC decision ordered
compliance with the insurance undertaking on the Group Mortgage Redemption Insurance covering
a loan obtained by Alvarez from UnionBank by applying its proceeds as payment for that loan.

Alvarez applied for and was granted a housing loan by UnionBank. This loan was secured by a
promissory note, a real estate mortgage over a residential lot owned by Alvarez and his wife, and a
mortgage redemption insurance taken on the life of Alvarez with UnionBank as beneficiary. When
Alvarez passed away, UnionBank filed with Insular Life a death claim under Alvarez’s name pursuant
to the Group Mortgage Redemption Insurance. However, Insular Life denied the claim after
determining that Alvarez was not eligible for coverage as he was supposedly more than 60 years old
at the time of his loan’s approval. With the claim’s denial, the monthly amortizations of the loan stood
unpaid, and the lot was foreclosed and sold at a public auction with UnionBank as the highest bidder.
The Heirs of Alvarez filed a Complaint for specific performance demanding Insular Life to fulfill its
obligation as an insurer under the Group Mortgage Redemption Insurance.

Insular Life maintains that Alvarez’s concealment of his age, whether intentional or unintentional,
entitles it to rescind the insurance contract. In support of its defense, Insular Life only presented
Alvarez’s Health Statement Form where Alvarez wrote “1942” as his birth year; and when the case
reached the SC, it also presented Alvarez’s Background Checking Report prepared by a Unionbank
employee.

ISSUES:
1. Did Alvarez commit concealment or misrepresentation?
2. Whether the documents presented by Insular Life are sufficient to prove fraudulent intent on
Alvarez’s part which would entitle it to rescind the contract?

RULING:
1. Section 26 defines concealment as “[a] neglect to communicate that which a party knows and
ought to communicate.” However, Alvarez did not withhold information on or neglect to state his
age. He made an actual declaration and assertion about it.

What this case involves, instead, is an allegedly false representation. Section 44 of the Insurance
Code states, “A representation is to be deemed false when the facts fail to correspond with its

23
 assertions or stipulations.” If indeed Alvarez misdeclared his age such that his assertion fails to
correspond with his factual age, he made a false representation, not a concealment.

2. No. The Insurance Code dispenses with proof of fraudulent intent in cases of rescission due to
concealment, but not so in cases of rescission due to false representations. When an abundance
of available documentary evidence can be referenced to demonstrate a design to defraud,
presenting a singular document with an erroneous entry does not qualify as clear and convincing
proof of fraudulent intent. Neither does belatedly invoking just one other document, which was
not even authored by the alleged miscreant.

A single piece of evidence hardly qualifies as clear and convincing. Its contents could just as easily
have been an isolated mistake. Alvarez must have accomplished and submitted many other
documents when he applied for the housing loan and executed supporting instruments like the
promissory note, real estate mortgage, and Group Mortgage Redemption Insurance. A design to
defraud would have demanded his consistency. He needed to maintain appearances across all
documents. Otherwise, he would doom his own ruse.

An erroneous statement’s dual occurrence in the Health Statement Form and the Background
Checking Report concededly reduces the likelihood of honest mistakes or overlooked
inaccuracies. However, in the context of so many other documents being available to ascertain
the error, a mere dual occurrence does not definitively establish a fraudulent scheme.

Hence, the Insular Life is obliged to pay Union Bank the balance of Jose H. Alvarez’s loan.

24
 INSURANCE LAW

AS SUBROGEE, AN INSURANCE COMPANY MERELY STEPS INTO THE SHOES OF THE INSURED
AND MAY ONLY EXERCISE THOSE RIGHTS THAT THE INSURED MAY HAVE AGAINST THE
WRONGDOER WHO CAUSED THE DAMAGE

6. Oriental Assurance Corp. v. Ong

G.R. No. 189524, October 11, 2017
Leonen, J.

FACTS:
This Petition for Review on Certiorari seeks a review of the CA decision affirming the RTC’s dismissal
of the complaint on the ground that the claim of petitioner Oriental Assurance Corporation (Oriental)
had already prescribed.

JEA Steel Industries, Inc. (JEA Steel) imported 72 aluminum-zinc-alloy-coated steel sheets in coils.
Upon arrival in Manila, the 72 coils were discharged and stored in Pier 9 under the custody of the
arrastre contractor, Asian Terminals, Inc. (Asian Terminals). From the storage compound of Asian
Terminals, the coils were loaded on the trucks of Manuel Ong (Ong) and delivered to JEA Steel’s plant
in June 2002. Eleven of these coils ‘‘were found to be in damaged condition, dented or their normal
round shape deformed.”

JEA Steel filed a claim with Oriental for the value of the 11 damaged coils, pursuant to a Marine
Insurance Policy. Oriental paid JEA Steel the sum of P521,530.16 and subsequently demanded
indemnity from Ong and Asian Terminals (respondents), but respondents refused to pay. Hence, in
March 2003, Oriental filed a Complaint before the RTC for sum of money.

One of Asian Terminals’ arguments was that Oriental’s claim was barred for the latter’s failure to file
a notice of claim within the 15-day period provided in the Gate Pass and the Management Contract
between the Philippine Ports Authority and Asian Terminals. The Gate Pass was signed by the JEA
Steel’s representative to acknowledge the delivery and receipt of the shipment.

ISSUE:
Is petitioner, who was not a party to the Gate Pass or Management Contract, bound by the 15-day
prescriptive period?

RULING:
Yes. The fact that Oriental is not a party to the Gate Pass and the Management Contract does not mean
that it cannot be bound by their provisions. Oriental is subrogated to the rights of the consignee
simply upon its payment of the insurance claim.

As subrogee, petitioner merely stepped into the shoes of the consignee and may only exercise those
rights that the consignee may have against the wrongdoer who caused the damage. “It can recover
only the amount that is recoverable by the assured.” And since the right of action of the consignee is
subject to a precedent condition stipulated in the Gate Pass, which includes by reference the terms of
the Management Contract, necessarily a suit by the insurer is subject to the same precedent
condition.

25
Petitioner’s assertion that the 15-day prescriptive period could not be enforced upon it to defeat its
claim since the Gate Pass was pro forma and it was not given notice of the Management Contract is
untenable.

As stated earlier, the dorsal side of the Gate Pass signed by the consignee’s representative upon
receipt of the cargo expressly refers to the Management Contract between the Philippine Ports
Authority and Asian Terminals. Hence, the consignee and its subrogee, petitioner insurance company,
are deemed to have notice of this Management Contract.

26
 INSURANCE LAW

FAILURE TO PAY IN FULL ANY OF THE SCHEDULED INSTALLMENTS ON OR BEFORE THE DUE
DATE SHALL RENDER THE INSURANCE POLICY VOID

7. Philam Insurance Co., Inc. v. Parc Chateau Condominium Unit Owners Association, Inc.
G.R. No. 201116, March 4, 2019
Reyes, Jr., J.

FACTS:
On October 7, 2003, petitioner Philam Insurance Co., Inc. (Philam) submitted a proposal to
respondent Parc Chateau Condominium Unit Owners Association, Inc. to cover fire and
comprehensive general liability insurance of its condominium building, Parc Chateau Condominium.
Respondent informed Philam, through a letter dated November 24, 2003, that Parc Association’s
board of directors selected it to provide the insurance requirements of the condominium.

After Philam appraised the condominium, it issued Fire and Lightning Insurance Policy for P900
million and Comprehensive General Liability Insurance Policy for P1 Million, both covering the
period from November 30, 2003 to November 30, 2004. This payment term was embodied in a Jumbo
Risk Provision, which further provided that the premium installment payments were due on
November 30, 2003, December 30, 2003, and January 30, 2004. The Jumbo Risk Provision also stated
that if any of the scheduled payments are not received in full on or before said dates, the insurance
shall be deemed to have ceased at 4 p.m. of such date, and the policy shall automatically become void
and ineffective. Parc Association found the terms unacceptable and did not pursue the transaction.
Since no premiums were paid, Philam made oral and written demands upon Parc Association, who
refused to do so alleging that the insurance agent had been informed of its decision not to take up the
insurance coverage.

Philam filed a complaint against Parc Association and Colet for recovery the unpaid premium MeTC
which ruled in favor of Parc Association. The RTC and CA affirmed the decision.

Philam avers that this case falls under the exception as explained in the Makati Tuscany case. The
Makati Tuscany case provides that if the insurer has granted the insured a credit term for the
payment of the premium, it is an exception to the general rule that premium must first be paid before
the effectivity of an insurance contract. Philam argues that the 90-day payment term is a credit
extension and should be considered as an exception to the general rule.

ISSUE:
Does the 4th exception in Sec. 77 of the Insurance Code which provides that “if the insurer has
granted the insured a credit term for the payment of the premium, then the general rule may not
apply” apply in this case?

RULING:
NO. The case of Makati Tuscany Condominium Corporation v. Court of Appeals provided an exception
to the general rule that the payment of premium must be made for the perfection of the insurance
contract.

It provides that if the insurer has granted the insured a credit term for the payment of the premium,
then the general rule may not apply. Philam argues that the 90-day payment term is a credit

27
extension. However, the CA emphasized that the Jumbo Risk Provision is clear that failure to pay each
installment on the due date automatically voids the insurance policy. Here, Parc Association did not
pay any premium, which resulted in a void insurance policy. Hence, the exception finds no
application.

The CA correctly determined that the Jumbo Risk Provision clearly indicates that failure to pay in full
any of the scheduled installments on or before the due date shall render the insurance policy void
and ineffective as of 4 p.m. of such date. Parc Association’s failure to pay on the first due date
(November 30, 2003), resulted in a void and ineffective policy as of 4 p.m. of November 30, 2003.
Hence, there is no credit extension to consider as the Jumbo Risk Provision itself expressly cuts off
the inception of the insurance policy in case of default.

28
 TRANSPORTATION LAW

COMPULSORY PILOTAGE DOES NOT AUTOMATICALLY ABSOLVE OWNER FROM LIABILITY

8. Lorenzo Shipping Corp. v. National Power Corp.

G.R. No. 181683, October 7, 2015
Leonen, J.

FACTS:
In these consolidated Petitions for Review on Certiorari, Lorenzo Shipping Corporation (Lorenzo
Shipping) challenges the CA decision finding it liable for damages caused to the Power Barge 104, a
non-propelled power plant barge, owned by National Power Corporation (NAPOCOR). On the other
hand, the latter seeks to recover actual damages.

Power Barge 104 was berthed and stationed in General Santos City when the MV Lorcon Luzon,
owned and operated by Lorenzo Shipping, hit and rammed into it. At the time of the incident, Captain
Villarias served as the Master of the MV. However, it was then under Captain Yape’s pilotage as it was
mandatory to yield navigational control to the Harbor Pilot while docking. The former recalled that
during the pilotage of Captain Yape, he always remained his side and affirmed that he heard and knew
of Captain Yape’s orders, because he had to repeat the order. As the MV Lorcon Luzon moved
precariously close to the wharf, Captain Yape ordered the vessel to move backward. Despite his
orders, the engine failed to timely respond. Thus, even when Captain Yape ordered the dropping of
the anchor, MV Lorcon Luzon rammed into Power Barge 104.

Marine protests where filed by the Plant Manager and Captain Villarias. NAPOCOR filed before the
Quezon City RTC a Complaint for Damages against Lorenzo Shipping. The RTC absolved Lorenzo
Shipping of liability, but the CA reversed the said decision. Lorenzo Shipping argues that no liability
could be attributed to it as the MV Lorcon Luzon was under compulsory pilotage and that National
Power Corporation assumed risk when it berthed a non-propelled vessel in the Makar Wharf.
NAPOCOR, on the other hand, maintains otherwise. Hence, these petitions.

ISSUE:
Is the compulsory pilotage of Captain Yape sufficient to absolve Lorenzo Shipping of liability?

RULING:
No, because compulsory pilotage does not automatically absolve the owner of the vessel from liability
as it requires demonstration of how the master exercised a degree of vigilance commensurate with
the circumstances. A master or captain, for purposes of maritime commerce, is one who has
command of a vessel. However, there are recognized instances when control of a vessel is yielded to
a pilot. Section 8 of Philippine Ports Authority (PPA) Administrative Order No. 03-85 provides for
Compulsory Pilotage Service. In such cases, Harbor Pilots are liable only to the extent that they can
perform their function through the officers and crew of the piloted vessel. Where there is failure by
the officers and crew to adhere to their orders, Harbor Pilots cannot be held liable. Where a
compulsory pilot is in charge of a ship, the master being required to permit him to navigate it, if the
master observes that the pilot is incompetent or physically incapable, then it is the duty of the master
to refuse to permit the pilot to act. But if no such reasons are present, then the master is justified in
relying upon the pilot, but not blindly.

29
Clearing Lorenzo Shipping of liability requires a demonstration of how the Master, Captain Villarias,
conducted himself in those moments when it became apparent that the vessel engine had stopped
and Captain Yape’s orders were not being heeded. Here, Captain Villarias admitted that about 6
minutes had passed before he even realized that there was an engine failure. As the vessel’s Master,
he has the duty to remain vigilant, to support and supplement Captain Yape’s orders, and to take
evasive and counter measures should Captain Yape’s attempts to safely berth prove to be ineffectual.
Six minutes were more than enough time for Captain Villarias to have done something to remedy the
situation. Both Captain Villarias and Captain Yape must be presumed to have been disciplined officers
who knew fully well how to conduct themselves in such a situation. The former admitted that he
repeated Captain Yape’s orders. The crew was, thus, properly disposed to heed instructions coming
from him. If at all, his failure to timely act despite the crew’s presumptive readiness to heed his
command only highlights his negligence.

Further, there is no basis for holding that Power Barge 104’s presence in the Makar Wharf was
improper and tantamount to an assumption of risk. Nowhere in any of its submissions to this court
did Lorenzo Shipping annex a copy of the appropriate regulation, if any, that restricts the use of Makar
Wharf to self-propelled vessels or absolutely prohibits NAPOCOR from using it as a berthing place
for a power barge. If at all, it is even more damaging to Lorenzo Shipping’s cause because there is a
presumption of fault against a moving vessel that strikes a stationary object such as a dock or
navigational aid.

Lastly, NAPOCOR failed to establish the precise amount of its pecuniary loss. However, it would be
improper to completely turn a blind eye to the loss it suffered and to deny it of any form of
recompense. Under these circumstances, the Court of Appeals’ award of temperate damages.

Hence, Lorenzo Shipping is still liable despite the compulsory pilotage.

30
 TRANSPORTATION LAW

EMPLOYER’S OWNERSHIP MUST BE PROVEN FIRST BEFORE PRESUMPTION UNDER ART. 2180
APPLIES

9. Caravel Travel and Tours International, Inc. v. Abejar

G.R. No. 170631, February 10, 2016
Leonen, J.

FACTS:
This Petition for Review on Certiorari, Caravel Travel and Tours International, Inc. (Caravan) prays
that the Decision dated October 3, 2005 and the Resolution dated November 29, 2005 of the CA-
Twelfth Division be reversed and set aside.

On July 13, 2000, Jesmariane R. Reyes (Reyes) was walking along the west-bound lane of Sampaguita
Street, United Parañaque Subdivision IV, Parañaque City. A Mitsubishi L-300 van with plate number
PKM 195 was travelling along the east-bound lane, opposite Reyes. To avoid an incoming vehicle, the
van swerved to its left and hit Reyes. Upon investigation, it was found that the registered owner of
the van was Caravan. Caravan is a corporation engaged in the business of organizing travels and
tours. Bautista was Caravan’s employee assigned to drive the van as its service driver. Caravan
shouldered the hospitalization expenses of Reyes. Despite medical attendance, Reyes died two (2)
days after the accident. Respondent Ermilinda R. Abejar (Abejar), Reyes’ paternal aunt filed before
the RTC-Parañaque a Complaint for damages against Bautista and Caravan. In her Complaint, Abejar
alleged that Bautista was an employee of Caravan and that Caravan is the registered owner of the van
that hit Reyes. Summons could not be served on Bautista. Thus, Abejar moved to drop Bautista as a
defendant. Motion was granted.

Trial ensued and RTC found that Bautista was grossly negligent in driving the vehicle and awarded
damages in favor of Abejar. Upon appeal, the CA affirmed the ruling with the following modification:
1. Moral Damages is REDUCED to Php 200,000.00;
2. Death Indemnity of Php 50,000.00 is awarded;
3. The Php 35,000.00 actual damages, Php 200,000.00 moral damages, Php 30,000.00 exemplary
damages and Php 50,000.00 attorney’s fees shall earn interest at the rate of 6% per annum
computed from 31 July 2003, the date of the [Regional Trial Court’s] decision; and upon finality
of this Decision, all the amounts due shall earn interest at the rate of 12% per annum, in lieu of
6% per annum, until full payment; and
4. The Php 50,000.00 death indemnity shall earn interest at the rate of 6% per annum computed
from the date of promulgation of this Decision; and upon finality of this Decision, the amount due
shall earn interest at the rate of 12% per annum, in lieu of 6% per annum, until full payment.

Hence, this petition.

ISSUES:
1. Is respondent Abejar a real party in interest who may bring an action for damages against
petitioner Caravan Travel and Tours International, Inc. on account of Jesmariane R. Reyes’ death?
2. Is Caravan as an employer of Bautista liable pursuant to Article 2180 of the Civil Code?

RULING:

31
1. YES. Ermilinda R. Abejar (Abejar), Reyes’ paternal aunt, is a real party in interest. Having
exercised substitute parental authority, respondent suffered actual loss and is, thus, a real party
in interest in this case. Article 233 of the Family Code provides for the extent of authority of
persons exercising substitute parental authority, that is, the same as those of actual parents. Both
of Reyes’ parents are already deceased. Reyes’ paternal grandparents are also both deceased. The
whereabouts of Reyes’ maternal grandparents are unknown. There is also no record that Reyes
has brothers or sisters. It was under these circumstances that respondent took custody of Reyes
when she was a child, assumed the role of Reyes’ parents, and thus, exercised substitute parental
authority over her. As Reyes’ custodian, respondent exercised the full extent of the statutorily
recognized rights and duties of a parent. To echo respondent’s words in her Complaint, she
treated Reyes as if she were her own daughter. Hence, a real party in interest on thr account of
Reyes’ death.

2. YES. The appropriate approach is that in cases where both the registered-owner rule and Article
2180 apply, the plaintiff must first establish that the employer is the registered owner of the
vehicle in question. Once the plaintiff successfully proves ownership, there arises a disputable
presumption that the requirements of Article 2180 have been proven. As a consequence, the
burden of proof shifts to the defendant to show that no liability under Article 2180 has arisen.
This disputable presumption, insofar as the registered owner of the vehicle in relation to the
actual driver is concerned, recognizes that between the owner and the victim, it is the former that
should carry the costs of moving forward with the evidence. The victim is, in many cases, a
hapless pedestrian or motorist with hardly any means to uncover the employment relationship
of the owner and the driver, or any act that the owner may have done in relation to that
employment. The registration of the vehicle, on the other hand, is accessible to the public.

Here, respondent presented a copy of the Certificate of Registration of the van that hit Reyes.
Consistent with the rule we have just stated, a presumption that the requirements of Article 2180
have been satisfied arises. It is now up to petitioner to establish that it has no liability by
presenting proof that it had no employment relationship with Bautista or that Bautista acted
outside the scope of his assigned tasks; or third, that it exercised the diligence of a good father of
a family in the selection and supervision of Bautista. But it failed to do so having admitted that
Bautista was its employee at the time of the accident and unable to prove that Bautista was not
acting within the scope of his assigned tasks at the time of the accident.

32
 TRANSPORTATION LAW

CONTRACT OF CARRIAGE IMPOSES RECIPROCAL OBLIGATIONS ON BOTH AIRLINE AND THE

PASSENGER

10. Manay, Jr. v. Cebu Air, Inc.

G.R. No. 210621, April 4, 2016
Leonen, J.

FACTS:
This resolves a Petition for Review on Certiorari assailing the Court of Appeals Decision4 dated
December 13, 2013 in CA-G.R. SP. No. 129817.

On June 13, 2008, Carlos S. Jose (Jose) purchased 20 Cebu Pacific round-trip tickets from Manila to
Palawan for himself and on behalf of his relatives and friends at Cebu Pacific’s branch office in
Robinsons Galleria. He alleged that he specified to “Alou,” the Cebu Pacific ticketing agent his
preferred date and time of departure on July 20, 2008 at 0820 (or 8:20 a.m.) and his preferred date
and time for their flight back should be on July 22, 2008 at 1615 (or 4:15 p.m.). He paid a total amount
of P42,957.00. Then after payment, Alou printed the tickets consisting of three (3) pages, and
recapped only the first page to him. Since the first page contained the details he specified to Alou, he
no longer read the other pages of the flight information.

On July 20, 2008, Jose and his 19 companions boarded the 0820 Cebu Pacific flight to Palawan and
had an enjoyable stay. However, on their way back, nine (9) of them were not admitted because their
tickets were for the earlier flight of 10:05am. They tried to rebook their tickets but it was more
expensive than purchasing new tickets amounting to P65,000.00. Still, they were not able to buy new
ones because the ground personnel insisted on cash payment and refused to accept credit card or
dollar payment. They were able to pooled cash enough only for five (5) tickets and the other four (4)
were left behind and had to spend the night at an inn, incurring additional expenses.

Thereafter, Jose went to Cebu Pacific’s ticketing office in Robinsons Galleria to complain about the
allegedly erroneous booking and the rude treatment that his group encountered. They also sent the
airline demand letters and a complaint before the Department of Trade and Industry. Unsatisfied, a
complaint for damages was later filed before the MTC-Mandaluyong praying for the amount of 42,
955.00 as actual damages, moral damages in the amount of P45,000.00, exemplary damages in the
amount of P50,000.00, and attorney’s fees.

The MTC rendered its Decision ordering Cebu Pacific to pay Jose and his companions P41,044.50 in
actual damages and P20,000.00 in attorney’s fees with costs of suit. RTC dismissed the appeal of Cebu
Pacific. However, the appellate court reversed the decision and ruled “it was incumbent upon the
passenger to exercise ordinary care in reviewing flight details and checking schedules.”

ISSUE:
Is Cebu Air liable for the issuance of plane ticket with erroneous flight details and consequent
damages suffered by its passengers?

RULING:
NO. Cebu Air is not liable. Purchase of the contract of carriage binds the passenger and imposes
reciprocal obligations on both the airline and the passenger. The airline must exercise extraordinary

33
diligence in the fulfillment of the terms and conditions of the contract of carriage. The passenger,
however, has the correlative obligation to exercise ordinary diligence in the conduct of his or her
affairs. The passenger is still expected to read through the flight information in the contract of
carriage before making his or her purchase.

Therefore, if he or she fails to exercise the ordinary diligence expected of passengers, any resulting
damage should be borne by the passenger.

34
 TRANSPORTATION LAW

AMBIGUITIES IN CONTRACTS OF CARRIAGE, WHICH ARE CONTRACTS OF ADHESION, MUST BE

INTERPRETED AGAINST THE COMMON CARRIER THAT PREPARED THESE CONTRACTS

11. Federal Express Corp. v. Antonino

G.R. No. 199455, June 27, 2018
Leonen, J.

FACTS:
Eliza was the owner of Unit 22-A (the Unit) in Allegro Condominium. In November 2003, monthly
common charges on the Unit became due.On December 15, 2003, Luwalhati and Eliza were in the
Philippines. As the monthly common charges on the Unit had become due, they decided to send
several Citibank checks to Veronica Z. Sison (Sison), who was based in New York. The package was
addressed to Sison who was tasked to deliver the checks payable to Maxwell-Kates, Inc. and to the
New York County Department of Finance. Sison allegedly did not receive the package, resulting in the
non-payment of Luwalhati and Eliza’s obligations and the foreclosure of the Unit.

On March 14, 2004, Luwalhati and Eliza, through their counsel, sent a demand letter to FedEx for
payment of damages due to the non-delivery of the package, but FedEx refused to heed their demand.
Hence, on April 5, 2004, they filed their Complaint for damages.

FedEx claimed that Luwalhati and Eliza “ha[d] no cause of action against it because [they] failed to
comply with a condition precedent, that of filing a written notice of claim within the 45 calendar days
from the acceptance of the shipment.” It added that it was absolved of liability as Luwalhati and Eliza
shipped prohibited items and misdeclared these items as “documents.” It pointed to conditions under
its Air Waybill prohibiting the “transportation of money (including but not limited to coins or
negotiable instruments equivalent to cash such as endorsed stocks and bonds).”

ISSUE:
May Federal Express Corporation be held liable for damages on account of its failure to deliver the
checks shipped by respondents Luwalhati R. Antonino and Eliza Bettina Ricasa Antonino to the
consignee Veronica Sison?

RULING:
Yes.

Petitioner disclaims liability because of respondents’ failure to comply with a condition precedent,
that is, the filing of a written notice of a claim for non-delivery or misdelivery within 45 days from
acceptance of the shipment. The Regional Trial Court found the condition precedent to have been
substantially complied with and attributed respondents’ non-compliance to FedEx for giving them a
run-around.

Given the circumstances in this case, the more reasonable conclusion is that the package was not
delivered. The package shipped by respondents should then be considered lost, thereby engendering
the liability of a common carrier for this loss. Petitioner cannot but be liable for this loss. It failed to
ensure that the package was delivered to the named consignee. It admitted to delivering to a mere
neighbor. Even as it claimed this, it failed to identify that neighbor.

35
The contract between petitioner and respondents is a contract of adhesion; it was prepared solely by
petitioner for respondents to conform to. Although not automatically void, any ambiguity in a
contract of adhesion is construed strictly against the party that prepared it. Accordingly, the
prohibition against transporting money must be restrictively construed against petitioner and
liberally for respondents. Viewed through this lens, with greater reason should respondents be
exculpated from liability for shipping documents or instruments, which are reasonably understood
as not being money, and for being unable to declare them as such.

36
 TRANSPORTATION LAW

CONTRIBUTORY NEGLIGENCE OF DRIVERS DOES NOT BAR THE PASSENGERS OR THEIR HEIRS
FROM RECOVERING DAMAGES FROM THOSE WHO ARE AT FAULT

12. Rebultan v. Spouses Daganta

G.R. No. 197908, July 4, 2018
Jardeleza, J.

FACTS:
At about 6:30 in the morning, along the National Highway, Cecilio Rebultan, Sr. (Rebultan, Sr.) and
his driver, Jaime Lomotos (Lomotos), were on board a Kia Ceres, on their way to report for work in
the Department of Environment and Natural Resources (DENR) in Masinloc, Zambales when they
figured in a vehicular accident with an Isuzu-powered passenger jeepney driven by Willie Viloria
(Viloria). The Kia Ceres was traveling northbound to Iba, Zambales, while the jeepney was traveling
southbound to Cabangan, Zambales. The powerful impact resulted in serious physical injuries to
Rebultan, Sr. and Lomotos, as well as physical damage to both vehicles. Rebultan, Sr., who was 60
years old at that time, later died from his injuries.

The heirs of Rebultan, Sr. (petitioners) filed a complaint for damages against Viloria, and Spouses
Edmundo and Marvelyn P. Daganta (spouses Daganta) as the owners of the jeepney (collectively,
respondents).

In their answer with counterclaims, respondents alleged that it was the driver of the Kia Ceres who
was negligent, and who should be held responsible for the death of Rebultan, Sr. and the damages to
the motor vehicles.

ISSUE:
Was Viloria negligent in driving the jeepney at the time of the collision?

RULING:
Yes.

It is apparent that it is the Kia Ceres which had the right of way. The jeepney driver making a turn on
the left had the duty of yielding to the vehicle on his right, the approaching Kia Ceres driven by
Lomotos. Nevertheless, we still find Lomotos negligent. Records show that Lomotos drove the Kia
Ceres at an unlawful speed. Traffic Accident Report No. 99002 supports that Lomotos was guilty of
“overspeeding,” and his error is listed as driving “too fast.”

It is apparent to this Court that the accident would have been avoided had Viloria, the jeepney driver,
carefully approached and made a left turn in the intersection, with due regard to the right of way
accorded in favor of Lomotos or anyone coming from the latter’s direction. Regardless of whether
Lomotos was overspeeding, Viloria ought to have exercised the prudence of a diligent driver in
making a turn at a danger zone. This omission on his part constituted negligence.

We find, however, that Viloria’s negligence contributed to the accident. The concurring negligence of
Lomotos, as the driver of the Kia Ceres wherein Rebultan, Sr. was the passenger, does not foreclose
the latter’s heirs from recovering damages from Viloria. Contributory negligence of drivers does not
bar the passengers or their heirs from recovering damages from those who were at fault.

37
As long as it is shown that no control is exercised by the passenger in the concept of a master or
principal, the negligence of the driver cannot be imputed to the passenger and bar the latter from
claiming damages

In sum, we hold that both drivers were negligent when they failed to observe basic traffic rules
designed for the safety of their fellow motorists and passengers. This makes them joint tortfeasors
who are solidarity liable to the heirs of the deceased.

38
 TRANSPORTATION LAW

THE CIVIL ACTION AGAINST A SHIPOWNER FOR BREACH OF CONTRACT OF CARRIAGE DOES
NOT PRECLUDE CRIMINAL PROSECUTION AGAINST ITS EMPLOYEES WHOSE NEGLIGENCE
RESULTED IN THE DEATH OF OR INJURIES TO PASSENGERS

13. People v. Go
G.R. No. 210854, December 10, 2018
Reyes, Jr., J.

FACTS:
On June 20, 2008, M/V Princess of the Stars (Stars), a passenger cargo owned and operated by
Sulpicio Lines, Inc. (SLI), was expected to depart at 8:00 p.m. from the Port of Manila for Cebu City.
At 11:00 a.m. of June 20, 2008, PAGASA issued SWB No. 7, raising Storm Warning Signal No. 1 over
Romblon, Marinduque, Southern Quezon, Cebu, Bohol, Panay Island, and Surigao del Norte. At 3:00
p.m., Captain Eugenio, SLI Manila Port Captain, met with Captain Marimon, Master of the vessel, to
discuss SWB No. 7. They decided to await the next PAGASA typhoon forecast, which was expected at
around 5:00 p.m., considering that based on SWB No.7, Stars’ regular route would not be affected by
Typhoon Frank.

At 4:45 p.m., PAGASA issued SWB No. 8, hoisting SWS No. 3 over Camarines Norte, Camarines Sur,
Burias Islands, Sorsogon, Catanduanes, Masbate, and the Samar provinces. It indicated that Typhoon
Frank, then located in the vicinity of Western Samar, had intensified and was forecasted to move west
northwest and cross Samar within the day and Camarines Sur in the afternoon of the following day,
June 21, 2008.

Prior to Stars’ departure, PO1 Sardan boarded the vessel to inspect the correctness of the entries in
the Master’s Oath of Safe Departure, and the soundness and sufficiency of the cargo hold, the life
saving devices, and all the navigational lights which found that the vessel’s documents were in order
and noted no deficiency in its safety equipment. PO1 Sardan informed Captain Marimon that SWS No.
3 was hoisted over Masbate, which was along the vessel’s regular route. In response, Captain
Marimon showed a new voyage plan which would not be affected by SWS No. 3. PO1 Sardan
immediately relayed the alternate route via text message to PCG Station Commander Balagtas who
approved it with the order that should SWS No. 3 affect the alternate route, the vessel should either
take shelter or return to the port of Manila for the safety of the passengers and the crew. SLI received
SWB No. 8 a few minutes prior to 8:00 p.m.

Stars departed at 8:04 p.m. for its regular Friday voyage to Cebu under Voyage No. 392 along its
regular route. On board the vessel were 709 passengers, 29 contractors and 111 crew members or a
total of 849 persons, which number was in compliance with the Minimum Safe Manning Certificate
and the PCG rules and regulations.

At around 11:20 p.m., Manila radio operator Gorillo received PAGASA’s SWB No. 9 which forecasted
that Typhoon Frank was moving northwest away from the vessel’s route which he relayed to Stars’
radio operator Doroy. At 5:00 a.m. of June 21, 2008, Gorillo and Captain Eugenio received SWB No.
10 indicating that for the past six hours, Typhoon Frank had been moving westward away from its
original northwest movement. At 7:05 a.m., Captain Marimon sent SLI Manila a telegram stating that
he was steering Stars away from its regular course, moving towards the south of Tablas to take
shelter and evade the center of Typhoon Frank. At 8:30 a.m., the vessel was within the vicinity of

39
Aklan Point where it was caught in the center of Typhoon Frank. At 9:00 a.m., communications with
the vessel were cut off. Then, at 11:30 a.m., Captain Ponteres, Cebu port captain, received a text
message from his nephew Labiada, then second mate in Stars, informing him that the vessel was
“listing to port 25-30 degrees.” At that point, Stars was within the vicinity of Aklan and was retreating
to San Fernando, Sibuyan. Captain Marimon informed Captain Ponteres that the vessel had listed and
he could no longer steer it and would instead adapt to the wind to keep the vessel stable and upright.
Captain Ponteres communicated with Captain Marimon thrice between 11:30 a.m. and past 12 noon,
the last of which was Captain Marimon’s declaration that he had given the order to abandon ship via
the vessel’s public announcement system. Continuously pounded by heavy waves and buffeted by
strong winds, Stars eventually capsized and sank in the Sibuyan Sea at around 12:30 p.m. of June 21,
2008.

Respondent called the PCG to dispatch a rescue team and ordered that SLI’s cargo vessel Surcon 12
and its M/V Princess of Caribbean sail to the area to undertake rescue operations. Due to inclement
weather, immediate rescue efforts had to be deferred and it was only at noon time of June 23, 2008
that the rescue arrived at the site. Of the 849 persons on board, only 32 survived, 227 died and 592
were reported missing.

In an Investigation Report, the Board of Marine Inquiry stated that SLI and its senior officers failed
to ensure the safety of Stars, its passengers and its cargo because it did not assess the potential danger
of Typhoon Frank before the vessel departed on June 20, 2008 and while the vessel was in transit.

On September 2, 2008, the Volunteers Against Crime and Corruption and petitioners in G.R. No.
210854, who are some of the heirs of the passengers of Stars, instituted in the DOJ a complaint for
reckless imprudence resulting in multiple homicide, serious physical injuries, and damage to
property under Article 365 of the RPC against SLI, its officers and Captain Marimon. On June 22, 2009,
an Information for reckless imprudence was filed with the RTC of Manila. Aggrieved, respondent filed
a petition for review with the DOJ Secretary which was denied.

In a Decision dated March 22, 2013, the CA held that the charge for reckless imprudence against
respondent in Criminal Case No. 09-269169 must be dismissed. Hence, these consolidated petitions
for review which were initially denied by the Court in a Resolution but was granted in a subsequent
Resolution dated August 18, 2014.

ISSUE:
Is the shipowner’s liability based on the contract of carriage separate and distinct from the criminal
liability of those who may be found negligent?

RULING:
Yes. Under Article 1755 of the Civil Code, a common carrier is bound to carry the passengers safely
as far as human care and foresight can provide using the utmost diligence of very cautious persons
with due regard for all the circumstances. Moreover, under Article 1756 of the Civil Code, in case of
death or injuries to passengers, a common carrier is presumed to have been at fault or to have acted
negligently, unless it proves that it observed extraordinary diligence. In addition, pursuant to Article
1759 of the same Code, it is liable for the death of, or injuries to passengers through the negligence
or willful acts of the former’s employees. These provisions evidently refer to a civil action based not
on the act or omission charged as a felony in a criminal case, but to one based on an obligation arising
from other sources, such as law or contract. Thus, the obligation of the common carrier to indemnify
its passenger or his heirs for injury or death arises from the contract of carriage entered into by the
common carrier and the passenger.

40
On the other hand, “the essence of the quasi offense of criminal negligence under Article 365 of the
RPC lies in the execution of an imprudent or negligent act that, if intentionally done, would be
punishable as a felony. The law penalizes, thus, the negligent or careless act, not the result thereof.
The gravity of the consequence is only taken into account to determine the penalty; it does not qualify
the substance of the offense.”

Consequently, in criminal cases for reckless imprudence, the negligence or fault should be
established beyond reasonable doubt because it is the basis of the action, whereas in breach of
contract, the action can be prosecuted merely by proving the existence of the contract and the fact
that the common carrier failed to transport his passenger safely to his destination. The first punishes
the negligent act, with civil liability being a mere consequence of a finding of guilt, whereas the second
seeks indemnification for damages. Moreover, the first is governed by the provisions of the RPC, and
not by those of the Civil Code. Thus, it is beyond dispute that a civil action based on the contractual
liability of a common carrier is distinct from an action based on criminal negligence.

In this case, the criminal action instituted against respondent involved exclusively the criminal and
civil liability of the latter arising from his criminal negligence as responsible officer of SLI. It must be
emphasized that there is a separate civil action instituted against SLI based on culpa contractual
incurred by it due to its failure to carry safely the passengers of Stars to their place of destination.
The civil action against a shipowner for breach of contract of carriage does not preclude criminal
prosecution against its employees whose negligence resulted in the death of or injuries to passengers.

41
 TRANSPORTATION LAW

IN THE EVENT THAT THE GOODS ARE LOST, DESTROYED OR DETERIORATED, IT IS PRESUMED
TO HAVE BEEN AT FAULT OR TO HAVE ACTED NEGLIGENTLY, UNLESS IT PROVES THAT IT
OBSERVED EXTRAORDINARY DILIGENCE

14. Keihin-Everett Forwarding Co., Inc. v. Tokio Marine Malayan Insurance Co., Inc.
G.R. No. 212107, January 28, 2019
Reyes, Jr., J.

FACTS:
In 2005, Honda Trading ordered 80 bundles of Aluminum Alloy Ingots from PT Molten. PT Molten
loaded the goods in two container vans with Serial Nos. TEXU 389360-5 and GATU 040516-3 which
were, in turn, received in Jakarta, Indonesia by Nippon Express Co., Ltd. for shipment to Manila. Aside
from insuring the entire shipment with Tokio Marine & Nichido Fire Insurance Co., Inc. (TMNFIC)
under Policy No. 83-00143689, Honda Trading also engaged the services of Keihin-Everett to clear
and withdraw the cargo from the pier and to transport and deliver the same to its warehouse in
Laguna. Meanwhile, Keihin-Everett had an Accreditation Agreement with respondent Sunfreight
Forwarders whereby the latter undertook to render common carrier services for the former and to
transport inland goods within the Philippines.

The shipment arrived in Manila on November 3, 2005 and was, accordingly, offloaded from the ocean
liner and temporarily stored at the CY Area of the Manila International Port pending release by the
Customs Authority. On November 8, 2005, the shipment was caused to be released from the pier by
petitioner Keihin-Everett and turned over to respondent Sunfreight Forwarders for delivery to
Honda Trading. En route to the latter’s warehouse, the truck carrying the containers was hijacked
and the container van with Serial No. TEXU 389360-5 was reportedly taken away. It was
subsequently found in the vicinity of the Manila North Cemetery and later towed to the compound of
the MMDA. However, it appears that the contents thereof were no longer retrieved. As a consequence,
Honda Trading suffered losses in the total amount of P2,121,917.04, representing the value of the
lost 40 bundles of Aluminum Alloy Ingots.

Claiming to have paid Honda Trading’s insurance claim for the loss it suffered, Tokio Marine
commenced the instant complaint for damages against petitioner Keihin-Everett. Respondent Tokio
Marine maintained that it had been subrogated to all the rights and causes of action pertaining to
Honda Trading. Keihin-Everett denied liability for the lost shipment on the ground that the loss
thereof occurred while the same was in the possession of respondent Sunfreight Forwarders. Hence,
petitioner Keihin-Everett filed a third-party complaint against the latter, who, in turn, denied liability
on the ground that it was not privy to the contract between Keihin-Everett and Honda Trading.

RTC rendered a Decision finding petitioner Keihin-Everett and respondent Sunfreight Forwarders
jointly and severally liable to pay respondent Tokio Marine’s claim in the sum of P1,589,556.60. The
CA modified the decision and held Keihin-Everett liable for Tokio Marine’s claim in the sum of
P1,589,556.60, with right of reimbursement from Sunfreight Forwarders. Dissatisfied with the CA
Decision, petitioner Keihin-Everett filed the instant petition.

ISSUES:
1. Is Keihin-Everett liable for Tokio Marine’s claim?
2. Is Keihin-Everett liable for breach of contract of carriage?

42
3. Are Keihin-Everett and Sunfreight Forwarders solidarily liable?

RULING:
1. Yes. Keihin-Everett insisted that Tokio Marine is not the insurer but TMNFIC, hence, it argued
that Tokio Marine has no right to institute the present action. As it pointed out, the Insurance
Policy shows in its face that Honda Trading procured the insurance from TMNFIC and not from
Tokio Marine. While this assertion is true, Insurance Policy No. 83-00143689 itself expressly
made Tokio Marine as the party liable to pay the insurance claim of Honda Trading pursuant to
the Agency Agreement entered into by and between Tokio Marine and TMNFIC. As properly
appreciated by both the RTC and the CA, the Agency Agreement shows that TMNFIC had
subsequently changed its name to that of Tokio Marine. By agreeing to this stipulation in the
Insurance Policy, Honda Trading binds itself to file its claim from Tokio Marine and thereafter to
accept payment from it.

Since the insurance claim for the loss sustained by the insured shipment was paid by Tokio
Marine as proven by the Subrogation Receipt – showing the amount paid and the acceptance
made by Honda Trading, it is inevitable that it is entitled, as a matter of course, to exercise its
legal right to subrogation. The subrogation Receipt only proves the fact of payment. This fact of
payment grants Tokio Marine subrogatory right which enables it to exercise legal remedies that
would otherwise be available to Honda Trading as owner of the hijacked cargoes as against the
common carrier (Keihin-Everett). In other words, the right of subrogation accrues simply upon
payment by the insurance company of the insurance claim.

The payment by the insurer to the insured operates as an equitable assignment to the insurer of
all the remedies which the insured may have against the third party whose negligence or
wrongful act caused the loss. The right of subrogation is not dependent upon, nor does it grow
out of any privity of contract or upon payment by the insurance company of the insurance claim.
It accrues simply upon payment by the insurance company of the insurance claim. Consequently,
the payment made by Tokio Marine to Honda Trading operates as an equitable assignment to the
former of all the remedies which the latter may have against Keihin-Everett.

2. Yes. Notwithstanding that the cargoes were in the possession of Sunfreight Forwarders when
they were hijacked, Keihin-Everett is not absolved from its liability as a common carrier. Keihin-
Everett seems to have overlooked that it was the one whose services were engaged by Honda
Trading to clear and withdraw the cargoes from the pier and to transport and deliver the same
to its warehouse. In turn, Keihin-Everett accredited Sunfreight Forwarders to render common
carrier service for it by transporting inland goods. As correctly held by the CA, there was no
privity of contract between Honda Trading (to whose rights Tokio Marine was subrogated) and
Sunfreight Forwarders. Hence, Keihin-Everett, as the common carrier, remained responsible to
Honda Trading for the lost cargoes.

In this light, Keihin-Everett, as a common carrier, is mandated to observe, under Article 1733 of
the Civil Code, extraordinary diligence in the vigilance over the goods it transports according to
all the circumstances of each case. In the event that the goods are lost, destroyed or deteriorated,
it is presumed to have been at fault or to have acted negligently, unless it proves that it observed
extraordinary diligence. To be sure, under Article 1736 of the Civil Code, a common carrier’s
extraordinary responsibility over the shipper’s goods lasts from the time these goods are
unconditionally placed in the possession of, and received by, the carrier for transportation, until
they are delivered, actually or constructively, by the carrier to the consignee, or to the person
who has a right to receive them. Hence, at the time Keihin-Everett turned over the custody of the

43
 cargoes to Sunfreight Forwarders for inland transportation, it is still required to observe
extraordinary diligence in the vigilance of the goods. Failure to successfully establish this carries
with it the presumption of fault or negligence, thus, rendering Keihin-Everett liable to Honda
Trading for breach of contract.

It bears to stress that the hijacking of the goods is not considered a fortuitous event or a force
majeure. Nevertheless, a common carrier may absolve itself of liability for a resulting loss caused
by robbery or hijacked if it is proven that the robbery or hijacking was attended by grave or
irresistible threat, violence or force. In this case, Keihin-Everett failed to prove the existence of
the aforementioned instances.

3. No. The liability of Keihin-Everett and Sunfreight Forwarders are not solidary. There is solidary
liability only when the obligation expressly so states, when the law so provides, or when the
nature of the obligation so requires. Thus, under Article 2194 of the Civil Code, liability of two or
more persons is solidary in quasi-delicts. But in this case, Keihin-Everett’s liability to Honda
Trading (to which Tokio Marine had been subrogated as an insurer) stemmed not from quasi-
delict, but from its breach of contract of carriage. There was no direct contractual relationship
between Sunfreight Forwarders and Honda Trading. Accordingly, there was no basis to directly
hold Sunfreight Forwarders liable to Honda Trading for breach of contract. If at all, Honda
Trading can hold Sunfreight Forwarders for quasi-delict, which is not the action filed in the
instant case.

In the same manner, Keihin-Everett has a right to be reimbursed based on its Accreditation
Agreement with Sunfreight Forwarders. By accrediting Sunfreight Forwarders to render
common carrier services to it, Keihin-Everett in effect entered into a contract of carriage with a
fellow common carrier, Sunfreight Forwarders. It is undisputed that the cargoes were lost when
they were in the custody of Sunfreight Forwarders. Hence, under Article 1735 of the Civil Code,
the presumption of fault on the part of Sunfreight Forwarders (as common carrier) arose. Since
Sunfreight Forwarders failed to prove that it observed extraordinary diligence in the
performance of its obligation to Keihin-Everett, it is liable to the latter for breach of contract.
Consequently, Keihin-Everett is entitled to be reimbursed by Sunfreight Forwarders due to the
latter’s own breach occasioned by the loss and damage to the cargoes under its care and custody.

44
 TRANSPORTATION LAW

TNC SUCH AS ANGKAS ARE CONSIDERED COMMON CARRIERS SUBJECT TO REGULATIONS

15. Land Transportation Franchising and Regulatory Board v. Valenzuela

G.R. No. 242860, March 11, 2019
Perlas-Bernabe, J.

FACTS:
Before the Court is a petition for certiorari assailing the order rendered by respondent Judge Carlos
Valenzuela of the RTC Mandaluyong City, Branch 213 which directed the issuance of writ of
preliminary injunction in favor of private respondent DBDOYC enjoining petitioners LTFRB and
DOTr from regulating DBDOYC’s business operations conducted through Angkas mobile application.

In May 2016, DBDOYC registered its business with SEC and subsequently in December of 2016,
launched “Angkas,” an online application (Angkas or Angkas app) that pairs drivers of motorcycles
with potential passengers without however obtaining the mandatory certificate of TNC accreditation
from LTFRB. In this regard, DBDOYC accredited Angkas drivers and allowed them to offer their
transport services to the public despite the absence of CPCs.

LTFRB then issued a press release in January 2017 informing the riding public that DBDOYC, which
is considered Transport Network Company (TNC) cannot legally operate. Despite such warning,
DBDOYC continued to operate and offer its services to the riding public sans any effort to obtain a
certificate if TNC accreditation.

DBDOYC filed a petition with RTC for declaratory relief with application for Temporary Restraining
Order/Writ of Preliminary Injunction against petitioner alleging it is not a public transportation
provider since Angkas app is mere tool that connects the passenger and motorcycle driver and
Angkas and its drivers are not engaged in the delivery of public service.

RTC issued a TRO finding DBDOYC’s business not subject to any regulation nor prohibited under
existing law.

ISSUE:
Are Transport Network Vehicles and Companies such as Angkas are common carriers?

RULING:
YES.

As the DBDOYC itself describes, Angkas is a mobile application which seeks to “pair an available and
willing Angkas biker with a potential passenger, who requested for a motorcycle ride, relying on
geolocation technology. Accordingly, it appears that it is practically functioning as booking agent, or
at the very least, acts as a third-party liaison for its accredited bikers. Irrespective of the application’s
limited market scope, it remains that on the one hand, there bikers offer transportation services to
willing public consumers, and on the other hand, these services may be readily accessed by anyone
who chooses to download the Angkas app.

In other words, when they put themselves online, their services are bound for indiscriminate public
consumption. Article 1732 of the Civil Code defining common carriers “carefully avoids making any

45
distinction between a person or enterprise offering transportation service on a regular or scheduled
basis and one offering such service on an occasional, episodic, or unscheduled basis.

In the final analysis, the business of holding one’s self as a transportation service provider, whether
done through online platforms or not, appears to be one which is imbued with public interest and
thus, deserves appropriate regulation.

46
 TRANSPORTATION LAW

A COMMON CARRIER FAILS TO EXERCISE EXTRAORDINARY DILIGENCE WHEN SHE

NEGLECTED VETTING HER DRIVER OR PROVIDING SECURITY FOR THE CARGO AND FAILING
TO TAKE OUT INSURANCE ON THE SHIPMENT’S VALUE

16. Tan v. Great Harvest Enterprises Inc.

G.R. No. 220400, March 20, 2019
Leonen, J.

FACTS:
Before the Court is a petition for review on certiorari assailing the decision of CA upholding the RTC
decision in civil case granting Great Harvest Enterprises, Inc. (Great Harvest) complaint for sum of
money against Annie Tan.

On February 3, 1994, Great Harvest hired Annie Tan to transport 430 bags of soya beans from
Tacoma Integrated Port Services (Tacoma) in Port Area in Manila to Selecta Feess in Camarin,
Novaliches, Quezon City. That same day, the bags of soya were loaded into Tan’s hauling truck. Then,
Tan’s employee, Rannie Cabugutan (Cabugatan) delivered the goods to Selecta Feeds but the delivery
was rejected. Upon learning of the rejection, Good Harvest instructed Cabugatan to deliver and
unload the soya beans at its warehouse in Malabon. Yet, the truck and the shipment never reached
the warehouse.

Great Harvest asked Tan about the missing delivery to which the latter admitted that she could not
locate both her truck and the goods. Tan reported it to Western Police District Anti-carnapping Unit
and NBI. NBI then informed Tan that her missing truck that was cannibalized having no cargo in it
had been found in Cavite.

Great Harvest filed a complaint for sum of money against Tan for her refusal to pay the missing
shipment contending that she did not entered into a hauling contract with Great Harvest but instead,
she just accommodated it. Tan also pointed out that since Good Harvest instructed her to change the
point of delivery without her consent, Good Harvest should bear the loss brought about by its
deviation from the original unloading point.

Trial Court granted Great Harvest’s Complaint for sum of money. Tan appealed the decision with the
CA which dismissed the same.

ISSUE:
Is petitioner Annie Tan liable for the value of the stolen soya beans?

RULING:
YES. Petitioner, being a common carrier, should be liable for the loss of the soybeans.

Article 1732 of the Civil Code defines common carriers as “persons, corporations, firms or
associations engaged in the business of carrying or transporting passengers, or goods, or both, by
land, water or air, for compensation, offering their service to the public.” Civil Code also outlines the
degree of diligence required of common carriers in Articles 1733, 1755, and 1756. Article 1733
provides that common carriers, from the nature of their business and for reasons of public policy, are

47
bound to observe extraordinary diligence in the vigilance over the goods and for the safety of the
passengers transported by them, according to all the circumstances of each case.

Here, petitioner is a common carrier obligated to exercise extraordinary diligence over the goods
entrusted to her. Her responsibility began from the time she received the soya beans from
respondent’s broker and would only cease after she has delivered them to the consignee or any
person with the right to receive them.

Furthermore, Article 1734 of the Civil Code holds a common carrier fully responsible for the goods
entrusted to him or her, unless there is enough evidence to show that the loss, destruction, or
deterioration of the goods falls under any of the enumerated exceptions:
(1) Flood, storm, earthquake, lightning, or other natural disaster or calamity;
(2) Act of the public enemy in war, whether international or civil;
(3) Act or omission of the shipper or owner of the goods;
(4) The character of the goods or defects in the packing or in the containers;
(5) Order or act of competent public authority.

Nothing in the records shows that any of these exceptions caused the loss of the soya beans.
Petitioner failed to deliver the soya beans to respondent because her driver absconded with them.
She cannot shift the blame for the loss to respondent’s supposed diversion of the soya beans from the
loading point to respondent’s warehouse, as the evidence has conclusively shown that she had agreed
beforehand to deliver the cargo to respondent’s warehouse if the consignee refused to accept it.

Under Article 1745 (6) above, a common carrier is held responsible — and will not be allowed to
divest or to diminish such responsibility — even for acts of strangers like thieves or robbers, except
where such thieves or robbers in fact acted “with grave or irresistible threat, violence or force.” We
believe and so hold that the limits of the duty of extraordinary diligence in the vigilance over the
goods carried are reached where the goods are lost as a result of a robbery which is attended by
“grave or irresistible threat, violence[,] or force

The loss of the soya beans here was not attended by grave or irresistible threat, violence, or force.
Instead, it was brought about by petitioner’s failure to exercise extraordinary diligence when she
neglected vetting her driver or providing security for the cargo and failing to take out insurance on
the shipment’s value.

48
 CORPORATE LAW

THE VEIL OF CORPORATE FICTION MAY BE PIERCED IF COMPLAINANT IS ABLE TO PROVE

THAT (1) THE OFFICER IS GUILTY OF NEGLIGENCE OR BAD FAITH, AND (2) SUCH NEGLIGENCE
OR BAD FAITH WAS CLEARLY AND CONVINCINGLY PROVEN

17. Arco Pulp and Paper Co., Inc. v. Lim

G.R. No. 206806, June 25, 2014
Leonen, J.

FACTS:
This is a petition for review on certiorari assailing CA’s decision that Canida A. Santos is jointly and
severally liable with Arco Pulp and Paper Company, Inc. (Arco Pulp and Paper) to pay Lim, which
stemmed from a complaint filed in the RTC, for collection of sum of money.

Dan T. Lim delivered scrap papers worth 7,220,968.31 to Arco Pulp and Paper through its CEO and
President, Candida A. Santos. When Lim delivered the raw materials, Arco Pulp and Paper issued a
post-dated check in the amount of 1,487,766.68 as partial payment, with the assurance that the check
would not bounce. When Lim deposited the check, it was dishonored for being drawn against a closed
account.

On the other hand, Arco Pulp and Paper and a certain Eric Sy executed a memorandum of agreement
(MOA) where Arco Pulp and Paper bound themselves to deliver their finished products to Megapack
Container Corporation, owned by Eric Sy. According to the memorandum, the raw materials would
be supplied by Dan T. Lim. Santos claims that the MOA novated the original agreement of Arco Pulp
and Paper with Lim making Sy the debtor of the same.

Lim filed a complaint for collection of sum of money. Hence, this petition. Petitioners argue that there
is no legal basis to hold Santos personally liable for the transaction that Arco Pulp and Paper entered
into with Lim. Lim, on the other hand, argues that Santos was “the prime mover for such outstanding
corporate liability,” hence, solidarily liable.

ISSUE:
Is Santos solidarily liable with Arco Pulp and Paper for the sum of money claimed by Lim?

RULING:
Yes, Santos is solidarily liable with Arco Pulp and Paper.

A director, officer or employee of a corporation is generally not held personally liable for obligations
incurred by the corporation. Nevertheless, this legal fiction may be disregarded if it is used as a means
to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an existing obligation, the
circumvention of statutes, or to confuse legitimate issues.

Santos cannot be allowed to hide behind the corporate veil. When Arco Pulp and Paper’s obligation
to Lim became due and demandable, she not only issued an unfunded check but also contracted with
a Sy in an effort to shift Arco Pulp and Paper’s liability. She unjustifiably refused to honor Arco Pulp
and Paper’s obligations to Lim. These acts clearly amount to bad faith. In this instance, the corporate
veil may be pierced, and Santos may be held solidarily liable with Arco Pulp and Paper.

49
 CORPORATE LAW

BECAUSE A CORPORATION HAS A PERSONALITY SEPARATE AND DISTINCT FROM THAT OF ITS
INDIVIDUAL STOCKHOLDER, A STOCKHOLDER DOES NOT AUTOMATICALLY ASSUME THE
LIABILITIES OF THE CORPORATION OF WHICH HE IS A STOCKHOLDER

18. Aboitiz Equity Ventures, Inc. v. Chiongbian

G.R. No. 197530, July 9, 2014
Leonen, J.

FACTS:
Aboitiz Shipping Corporation (ASC), Carlos A. Gothong Lines, Inc. (CAGLI), and William Lines, Inc.
(WLI) entered into an agreement (the Agreement) in which ASC, CAGLI, and WLI merged their
shipping enterprises, with WLI (subsequently renamed WG&A, Inc.) as the surviving entity.

Annex SL-V of the Agreement is a contract between CAGLI and WLI (and excluded ASC), which
confirmed WLI’s commitment to acquire certain inventories, worth not more than 400 million, of
CAGLI. After examination, it was ascertained that the value of the transferred inventories was 558.89
million. Pursuant to Annex SL-V, WG&A paid CAGLI only 400 million.

Subsequently, a Share Purchase Agreement (SPA) was made in which Aboitiz Equity Ventures, Inc.
(AEV) agreed to purchase the Chiongbian and Gothong groups’ shares in WG&A’s issued and
outstanding stock. As a result of the SPA, AEV became a stockholder of WG&A. Subsequently, WG&A
was renamed Aboitiz Transport Shipping Corporation (ATSC).

CAGLI made demands to ATSC to return or pay for spare parts representing a value in excess of 400
million under Annex SL-V. Subsequently, CAGLI resorted to “shotgun approach” and directed
subsequent demand letters to AEV. AEV responded to CAGLI’s demands noting, among others, that it
was not a party to CAGLI’s claim as it had a personality distinct from WLI/WG&A/ATSC.

ISSUE:
Is AEV liable to CAGLI to return or pay for the spare parts representing a value in excess of 400
million?

RULING:
No, AEV is not liable to CAGLI to return or pay for the spare parts representing a value in excess of
400 million.

It is a settled precept in this jurisdiction that a corporation is invested by law with a personality
separate and distinct from those of the persons composing it as well as from that of any other entity
to which it may be related. Mere ownership by a single stockholder or by another corporation of all
or nearly all of the capital stock of a corporation is not in itself sufficient ground for disregarding the
separate corporate personality. A corporation’s authority to act and its liability for its actions are
separate and apart from the individuals who own it.

AEV’s status as ATSC’s stockholder is, in and of itself, insufficient to make AEV liable for ATSC’s
obligations. Moreover, the SPA does not contain any stipulation which makes AEV assume ATSC’s
obligations.

50
AEV was drawn into the present controversy on account of its having entered into the SPA. This SPA
made AEV a stockholder of WLI/WG&A/ATSC. Even then, AEV retained personality separate and
distinct from WLI/WG&A/ATSC. The SPA did not render AEV personally liable for the obligations of
the corporation whose stocks it held.

51
 CORPORATE LAW

IT IS A CONDITION SINE QUA NON THAT A CORPORATION BE IMPLEADED AS A PARTY IN A

DERIVATIVE SUIT

19. Villamor, Jr. v. Umale

G.R. Nos. 172843 & 172881, September 24, 2014
Leonen, J.

FACTS:
This case involves a petition for certiorari under Rule 45 assailing the decision of the CA which placed
the Pasig Printing Corporation (PPC) under receivership.

MC Home Depot occupied a Rockland area property in Pasig City which was part of the are owned by
Mid-Pasig Development Corporation (Mid-Pasig). Sometimes in 2004, PPC obtained an option to
lease portions of Mid-Pasig’s property, including the subject property. Later, PPC’s Board of Directors
issued a Resolution waiving all its rights, interests and participation in the option to lease contract in
favor of the law firm of Atty. Alfredo Villamor, Jr. without any consideration. Thereafter, PPC, as
represented by Villamor, entered in a MOA with MC Home Deport allowing them to continue
occupying the area as PPC’s sublessee for 4 years at a monthly rental of P4, 5000,000.00 plus goodwill
of P18,000,000.00. Thus, MC Home Deport issued 20 postdated checks for the rental payments for 1
year and the goodwill money giving them to Villamor who in turn did not turn over the said amount
to PPC. This prompted Hernando Balmaores, a stockholder and director of PPC, to inform the PPC’s
directors of the need to compel Villamor to deliver and account for MC Home Depot’s payments to
PPC. However, PPC BOD failed to act on Balmores’ letter which prompted the latter to file an intra-
corporate controversy with the RTC without impleading PPC as an indispensable party. Moreover,
Balmores also asked the court to place the PPC under receivership claiming that PPC’s assets were
not only in imminent danger, but have actually been dissipated, lost, wasted and destroyed. The RTC
denied Balmomres’ prayer, but this was reversed by the CA granting the derivative suit and ordering
that PPC be placed under receivership.

Petitioners now argue that the CA erred in characterizing the respondent’s Balmores’ suit as a
derivative suit because of his failure to implead PPC as party in the case. Further, they argued that
Balmores failed to prove that the assets of the corporation were in imminent danger of being
dissipated, thus, the court erred in placing them under receivership.

ISSUES:
1. Did the Court of Appeals err in characterizing Balmores’ action as a derivative suit?
2. Did the Court of Appeals err in placing PPC under receivership?

RULING:
1. Yes, the Court of Appeals erred in characterizing Balmores’ action as a derivative suit.

A derivative suit is an action filed by stockholders to enforce a corporate action.

Individual stockholders may be allowed to sue on behalf of the corporation whenever the
directors or officers of the corporation refuse to sue to vindicate the rights of the corporation or
are the ones to be sued and are in control of the corporation. This court explained in Asset
Privatization Trust v. Court of Appeals that it is a condition sine qua non that the corporation be
impleaded as party in derivative suits. Not only is the corporation an indispensable party, but it

52
 is also the present rule that it must be served with process. The reason given is that the judgment
must be made binding upon the corporation in order that the corporation may get the benefit of
the suit and may not bring a subsequent suit against the same defendants for the same cause of
action.

Here, Balmores’ act of informing the BOD of the PPC regarding the need to compel Villamor to
deliver and account for MC Home Depot’s payment did not amount to compliance with what the
law requires.

Thus, in this case Balmores filed an individual suit.

2. Yes, the court of Appeals erred in placing PPC under receivership.

Management committees and receivers are appointed when the corporation is in imminent
danger of (1) dissipation, loss, wastage or destruction of assets or other properties; and (2)
paralysation of its business operations that may be prejudicial to’ the interest of the minority
stockholders, parties-litigants, or the general public. Applicants for the appointment of a receiver
or management committee need to establish the confluence of these two requisites.

Here Balmores, however, failed to show that there was an imminent danger of paralysis of PPC’s
business operations. Apparently, PPC was- earning substantial amounts from its other sub-
lessees. Respondent Balmores did not prove otherwise. He, therefore, failed to show at least one
of the requisites for appointment of a receiver or management committee.

Thus, the PPC shall have not been ordered to be placed under receivership.

53
 CORPORATE LAW

IN CASES ALLEGING SOLIDARY LIABILITY WITH THE CORPORATION OR PRAYING FOR THE
PIERCING OF THE CORPORATE VEIL, PARTIES WHO ARE NORMALLY TREATED AS DISTINCT
INDIVIDUALS SHOULD BE MADE TO PARTICIPATE IN THE ARBITRATION PROCEEDINGS IN
ORDER TO DETERMINE IF SUCH DISTINCTION SHOULD INDEED BE DISREGARDED AND, IF SO,
TO DETERMINE THE EXTENT OF THEIR LIABILITIES

20. Lanuza, Jr. v. BF Corp.

G.R. No. 174938, October 1, 2014
Leonen, J.

FACTS:
This is a Rule 45 petition, assailing the Court of Appeals decision affirming the trial court’s decision
holding that petitioners, as director, should submit themselves as parties to the arbitration
proceedings between BF Corporation (BF) and Shangri-La Properties, Inc. (Shangri-La).

This case stemmed from a collection complaint filed by BF with the RTC against Shangri-La and
herein petitioners who are members of its board of directors. Shangri-La and private respondents
filed a motion to suspend the proceedings in view of BF’s failure to submit its dispute to arbitration,
in accordance with the arbitration clause provided in its contract. The dispute was submitted to
arbitration.

Petitioners prayed that they be excluded from the arbitration proceedings for being non-parties to
Shangri-La’s and BF’s agreement. BF, on the other hand, argues that the arbitration clearly
contemplated the inclusion of directors of the corporation. That while petitioners were not parties
to the agreement, they were still impleaded under Sec. 31 of the Corporation Code which makes
directors solidarily liable for fraud, gross negligence, and bad faith. BF argues that petitioners are not
really third parties to the agreement because they are being sued as Shangri-La’s representatives,
under Sec. 31. Petitioners countered that BF failed to establish fraud or bad faith on their part.

ISSUE:
Should petitioners be made parties to the arbitration proceedings pursuant to the arbitration clause
provided in the contract between BF Corporation and Shangri-La?

RULING:
Yes, petitioners should be made parties to the arbitration proceedings pursuant to the arbitration
clause only for the purposes of determining if piercing of the corporate veils is warranted, and if so,
to determine the extent of their liabilities.

In ruling that petitioners may be compelled to submit to the arbitration proceedings, the basic
arbitration principle that only parties to an arbitration agreement may be compelled to submit to
arbitration is not overturned.

In this case, the Arbitral Tribunal rendered a decision, finding that BF failed to prove the existence of
circumstances that render petitioners and the other directors solidarily liable. It ruled that
petitioners and Shangri-La’s other directors were not liable for the contractual obligations of
Shangri-La to BF. Hence, there is no need to pierce the veil of corporate fiction.

54
 CORPORATE LAW

RTC HAS JURISDICTION OVER INTRA-CORPORATE CONTROVERSIES THAT PASS THE

RELATIONSHIP AND NATURE OF THE CONTROVERSY TESTS

21. Securities and Exchange Commission v. Subic Bay Golf and Country Club, Inc.
G.R. No. 179047, March 11, 2015
Leonen, J.

FACTS:
Universal International Group Development Corporation (UIGDC) succeeded Universal International
Group of Taiwan (UIGT) in the development and management of the Binictican Valley Golf Course,
which was originally leased under a Development and Lease Agreement by the Subic Bay
Metropolitan Authority (SBMA) to UIGT.

UIGDC then later entered into a Deed of Assignment with Subic Bay Golf and Country Club, Inc.
(SBGCCI), retaining its status as the financer for the development of the golf course, but assigning all
the other aspects of the project to SBGCCI. Pursuant to the agreement, UIGDC received 1,530 shares
of stock from SBGCCI.

A couple of stockholders from UIGDC, however, demanded refund of the amount they paid to UIGDC
for investing in SBGCCI shares. The stockholders stated their investment was anchored on the
promise of UIGDC and SBGCCI to build a set of high-end facilities, which were not completed. This
then prompted the stockholders to write a letter to SEC, which also served as a complaint, regarding
the breach and the fraudulent representations.

ISSUE:
Does the SEC have jurisdiction over the herein mentioned complaint?

RULING:
NO—Under the new rule, beginning July 1, 2000, the regular courts, particularly the RTC has
jurisdiction over intra-corporate controversies. However, the Court noted that administrative
matters such as suspension or revocation of registration for violating rules remain to be within the
jurisdiction of the SEC.

Anyway, an intra-corporate dispute under the jurisdiction of the RTC is determined to be so by the
relationship test and the nature of the controversy test. The relationship test requires that the dispute
be between a corporation/partnership/association and the public; a corporation/partnership/
association and the state regarding the entity’s franchise, permit, or license to operate; a
corporation/partnership/association and its stockholders, partners, members, or officers; and
among stockholders, partners, or associates of the entity. Additionally, the nature of the controversy
test requires that the action involves the enforcement of corporate rights and obligations.

This case passes both the aforementioned tests as the matter pertains to corporation/stockholders
relations and involves the enforcement of the right of said stockholders to demand refund for their
investment in the corporation.

Hence, it is the RTC that has jurisdiction over the case, and not the SEC.

55
 CORPORATE LAW

WITHOUT FRAUD, CORPORATION REMAINS A SEPARATE ENTITY WITH A DISTINCT

PERSONALITY AND ITS OFFICERS MAY NOT BE HELD SOLIDARILY LIABLE THEREWITH

22. Pioneer Insurance Surety Corp. v. Morning Star Travel & Tours, Inc.
G.R. No. 198436, July 8, 2015
Leonen, J.

FACTS:
Petitioner Pioneer Insurance & Surety Corporation (Pioneer) filed a case for collection of sum of
money against respondent Morning Star Travel & Tours, Inc. (Morning Star) for the amounts Pioneer
paid the International Air Transport Association under its credit insurance policy.

Pioneer also filed the same case against Morning Stars’ shareholders and members of the board of
directors, Benny Wong, Estelita Wong, Arsenio Chua, Sonny Chua, and Wong Yan Tak.

ISSUE:
Can the doctrine of piercing the veil of corporate fiction be applied to hold individual respondents
liable in the present case?

RULING:
NO—As a general rule, a corporation has a separate and distinct personality from those who
represent it. Its officers are solidarily liable only when exceptional circumstances exist, such as the
application of the doctrine of piercing the veil of corporate fiction when there is fraud. Still, such
liability of the officers must be proven by evidence sufficient to overcome the burden of proof borne
by the plaintiff.

In the present case, it has not been shown that the individual respondents controlled Morning Star
Tour Planners, Inc. and that such control was used to commit fraud against petitioner. Neither have
the individual respondents been shown to be in bad faith or gross negligent in directing the affairs of
respondent Morning Star.

Hence, the doctrine of piercing the veil of corporate fiction cannot be applied to hold individual
respondents liable in this case.

56
 CORPORATE LAW

DOING BUSINESS INCLUDES APPOINTING REPRESENTATIVES OR DISTRIBUTORS OPERATING

UNDER FULL CONTROL OF THE FOREIGN CORPORATION

23. Air Canada v. Commissioner of Internal Revenue

G.R. No. 169507, January 11, 2016
Leonen, J.

FACTS:
Air Canada is a foreign corporation organized and existing under the laws of Canada. It was granted
an authority to operate as an offline carrier subject to certain conditions. Air Canada engaged the
services of Aerotel Ltd., Corp. as its general sales agent in the Philippines. Air Canada filed quarterly
and annual income tax returns on Gross Philippine Billings (GPB) in the amount of P5,185,676.77.
Then, Air Canda filed a written claim for refund of alleged erroneously paid taxes, saying that NIRC
imposes taxes on GPB for carriage by foreign corporations in a continuous and uninterrupted flight,
irrespective of the place of sale and payment of the ticket or passage document. CTA Division denied
the Petition for Review on the ground that Air Canada shall be taxed as a resident foreign since it has
a local agent in the Philippines; that even if it shall not be taxed on its GPB, it shall nevertheless be
subject to the regular corporate income tax of 32% for the income received from the sale of tickets in
the Philippines.

ISSUE:
Is Air Canada an offline a resident foreign corporation?

RULING:
Yes, Air Canada is a resident foreign corporation for income tax purposes.

Petitioner falls within the definition of resident foreign corporation under Section 28(A)(1) of the
1997 NIRC, thus, it may be subject to 32% tax on its taxable income. Republic Act No. 7042 or the
Foreign Investments Act of 1991 also provides guidance with its definition of “doing business” with
regard to foreign corporations. Section 3(d) of the law enumerates the activities that constitute doing
business, which includes appointing representatives or distributors domiciled in the Philippine or
who in any calendar year stay in the country for a period or periods totaling one hundred eighty days
or more. While Section 3(d) states that “appointing a representative or distributor domiciled in the
Philippines which transacts business in its own name and for its own account” is not considered as
“doing business,” the Implementing Rules and Regulations of Republic Act No. 7042 clarifies that
“doing business” includes “appointing representatives or distributors, operating under full control of
the foreign corporation, domiciled in the Philippines or who in any calendar year stay in the country
for a period or periods totaling one hundred eighty days or more.

Petitioner is undoubtedly “doing business” or “engaged in trade or business” in the Philippines.

Aerotel performs acts or works or exercises functions that are incidental and beneficial to the
purpose of petitioner’s business. The activities of Aerotel bring direct receipts or profits to petitioner.
There is nothing on record to show that Aerotel solicited orders alone and for its own account and
without interference from, let alone direction of, petitioner. On the contrary, Aerotel cannot “enter
into any contract on behalf of [petitioner Air Canada] without the express written consent of [the
latter,]” and it must perform its functions according to the standards required by petitioner. Through
Aerotel, petitioner is able to engage in an economic activity in the Philippines.

57
 CORPORATE LAW

THE RELATIONSHIP BETWEEN A CORPORATION AND ITS REPRESENTATIVES IS GOVERNED

BY THE GENERAL PRINCIPLES OF AGENCY

24. University of Mindanao v. Bangko Sentral ng Pilipinas

G.R. Nos. 194964-65, January 11, 2016
Leonen, J.

FACTS:
This is a petition for review on certiorari the CA Decision and Resolution which reversed the RTC’s
Decision to nullify the mortgage contracts with respondent Bangko Sentral ng Pilipinas (BSP)
involving the properties of petitioner University of Mindanao (UM).

UM is an educational institution and its Board of Trustees (BOT) was chaired by Guillermo Torres,
and his wife Dolores Torres as assistant treasurer. Before being part of the BOT, the spouses
incorporated and operated 2 thrift banks, First Iligan Savings and Loan Association, Inc. (FISLAI) and
Davao Savings and Loan Association, Inc. (DSLAI), the spouses were likewise officers of the banks.
Loans were obtained by both banks from BSP evidenced by promissory notes signed by the spouses.
Thereafter, UM’s VP for Finance, Saturnino Petalcorin (Petalcorin), executed real estate mortgage
contracts over UM’s property (in CDO and Iligan) for the loans obtained in favor of BSP. As proof of
authority, he showed a Secretary’s Certificate signed by UM’s Secretary, Aurora De Leon.

Then, FISLAI and DSLAI merged as a result of rehabilitation and later became known as Mindanao
Savings and Loan Association (MISLAI). MSLAI failed to recover from its losses and was liquidated.
BSP sent a letter to UM, informing that it would foreclose its properties if MSLAI’s outstanding
obligation remain unpaid. In its reply to BSP, UM denied that its properties were mortgaged that it
did not receive any load proceeds from BSP. Thus, it filed 2 complaints (RTC-CDO and RTC- Iligan)
for nullification and cancellation of mortgage.

UM alleged that the Sec Cert. was anomalous and it never authorized Petalcorin to execute real estate
mortgage contracts involving its properties to secure the banks debts and that it never ratified the
same. On its part, BSP asserted its reliance in good faith on the Sec Cert which clothed Petalcorin with
apparent and ostensible authority to execute the mortgage deed. The RTCs, both in CDO and Iligan
ruled in favor of UM. On appeal, the CA reversed the RTC’s decision. Hence, this petition.

ISSUE:
Is petitioner University of Mindanao bound by the real estate mortgage contracts executed by
Petalcorin?

RULING:
No. Being a juridical person, petitioner cannot conduct its business, make decisions, or act in any
manner without action from its Board of Trustees. The BOT must act as a body in order to exercise
corporate powers. Individual trustees are not clothed with corporate powers just by being a trustee.
Hence, the individual trustee cannot bind the corporation by himself or herself. The corporation may,
however, delegate through a board resolution its corporate powers or functions to a representative,
subject to limitations under the law and the corporation’s articles of incorporation.

58
Petalcorin’s authority to transact on behalf of petitioner cannot be presumed based on a Secretary’s
Certificate and excerpt from the minutes of the alleged board meeting that were found to have been
simulated. These documents cannot be considered as the corporate acts that held out Petalcorin as
petitioner’s authorized representative for mortgage transactions. They were not supported by an
actual board meeting. Further, the Secretary’s Certificate was void whether or not it was notarized.
While notarial acknowledgment attaches full faith and credit to the document concerned it does not
give the document its validity or binding effect. When there is evidence showing that the document
is invalid, the presumption of regularity or authenticity is not applicable.

Corporate acts that are committed outside the object for which a corporation is created are ultra
vires. Petitioner does not have the power to mortgage its properties in order to secure loans of other
persons. As an educational institution, it is limited to developing human capital through formal
instruction. It is not a corporation engaged in the business of securing loans of others.Securing loans
is not an adjunct of the educational institution’s conduct of business. It does not appear that securing
third party loans was necessary to maintain petitioner’s business of providing instruction to
individuals.

No ratification was likewise made. Even though the spouses were officers of both the thrift banks and
petitioner, their knowledge of the mortgage contracts cannot be considered as knowledge of the
corporation. The rule that knowledge of an officer is considered knowledge of the corporation applies
only when the officer is acting within the authority given to him or her by the corporation. The
knowledge was obtained in the interest of and as representatives of the thrift banks and not of the
petitioner.

There can be no apparent authority and the corporation cannot be estopped from denying the
binding affect of an act when there is no evidence pointing to similar acts and other circumstances
that can be interpreted as the corporation holding out a representative as having authority to
contract on its behalf.

Lastly, the banking institution is impressed with public interest. Thus, banks are required to exercise
the highest degree of diligence in their transactions. For its failure to exercise the degree of diligence
required of banks, respondent cannot claim good faith in the execution of the mortgage contracts
with Petalcorin.

59
 CORPORATE LAW

THE REAL PARTY IN INTEREST IN A DERIVATIVE SUIT IS THE CORPORATION SINCE A

DERIVATIVE SUIT CONCERNS A WRONG TO THE CORPORATION ITSELF

25. Florete, Jr. v. Florete, Sr.

G.R. Nos. 174909 & 177275, January 20, 2016
Leonen, J.

FACTS:
People’s Broadcasting, Inc. was incorporated on March 8, 1966. 25% of the corporation’s authorized
capital stock were subscribed to as follows: Marcelino Florete, Sr. had 250 shares; Salome Florete
had 100 shares; Ricardo Berlin had 50 shares; Pacifico Sudario had 50 shares; and Atty. Santiago
Divinagracia had 50 shares. Spouses Marcelino Florete, Sr. and Salome Florete had four children:
Marcelino Jr., Maria Elena Muyco, Rogelio Sr., and Teresita Menchavez. Berlin and Sudario resigned
from their positions as General Manager and Station Supervisor and each of them transferred 20
shares to Raul Muyco and Estrella Mirasol. Thereafter, Salome, Florete Sr. died, leaving their son
Rogelio Sr. to manage the affairs of People’s Broadcasting. People’s Broadcasting sought the services
of the accounting and auditing firm SGV & Co in order to determine the ownership of equity in the
corporation. SGV & Co submitted a report detailing the movements of the corporation’s shares from
November 23, 1967 to December 8, 1989. Even as it tracked the movements of shares, SGV & Co.
declined to give a categorical statement on equity ownership as People’s Broadcasting’s corporate
records were incomplete. The report of SGV & Co was approved. In the meantime, Rogelio Sr.
transferred a portion of his shareholdings to the members of his immediate family: Imelda, Rogelio
Jr., Margaret Ruth, as well as to Diamel Corporation, a corporation owned by Rogelio, Sr.’s family.

Marcelino Jr., Ma. Elena and Raul Muyco (Marcelino Jr Group) filed a complaint for declaration of
nullity for declaration of nullity of issuances, transfers and sale of shares against Diamel Corporation,
Rogelio, Sr., Imelda Florete, Margaret Florete and Rogelio Florete. The RTC dismissed the complaint
and held that the Marcelino Jr. Group did not have a cause of action.

ISSUE:
Is the dismissal of the complaint proper?

RULING:
Yes, the dismissal of the complaint is proper. Villamor, Jr. v. Umale explained that a derivative suit “is
an action filed by stockholders to enforce a corporate action.” A derivative suit, therefore, concerns
“a wrong to the corporation itself.” The real party-in-interest is the corporation, not the stockholders
filing the suit. The stockholders are technically nominal parties but are nonetheless the active
persons who pursue the action for and on behalf of the corporation.

The distinction between individual and class/repre-sen-tative suits on one hand and derivative suits
on the other is crucial. These are not discretionary alternatives. The fact that stockholders suffer from
a wrong done to or involving a corporation does not vest in them a sweeping license to sue in their
own capacity. The determination of the appropriate remedy hinges on the object of the wrong done.
When the object is a specific stockholder or a definite class of stockholders, an individual suit or
class/representative suit must be resorted to. When the object of the wrong done is the corporation
itself or “the whole body of its stock and property without any severance or distribution among
individual holders,” it is a derivative suit that a stockholder must resort to.

60
In this case, the Marcelino, Jr. Group anchored their Complaint on violations of and liabilities arising
from the Corporation Code, specifically: Section 23, Section 25, Sections 39 and 102, Section 62,
Section 63 and Section 65. The actions being assailed by the Marcelino, Jr. Group pertain to parties
that are not extraneous to People’s Broadcasting. They assail and seek to nullify acts taken by various
iterations of People’s Broadcasting’s Board of Directors. All these acts and incidents concern the
capital structure of People’s Broadcasting. These acts reconfigured, through redistribution and
enlargement, the structure of People’s Broadcasting’s equity ownership. The action should be a
proper derivative suit even if the assailed acts do not pertain to a corporation’s transactions with
third persons.

Hence, the complaint filed by the Marcelino Jr. Group is dismissed for having no cause of action.

61
 CORPORATE LAW

MERGER DOES NOT OPERATE TO DISMISS CURRENT EMPLOYEES

26. Philippine Geothermal, Inc. Employees Union v. Unocal Philippines, Inc.

G.R. No. 190187, September 28, 2016
Leonen, J.

FACTS:
Case is with the supreme court. Petitioners are Philippine Geothermal while Respondents are Unocal
Philippines. Philippine Geothermal, Inc. Employees Union is a legitimate labor union that stands as
the bargaining agent of the rank-and-file employees of Unocal Philippines.

On April 4, 2005, Unocal Corporation executed an Agreement and Plan of Merger (Merger
Agreement) with Chevron Texaco Corporation (Chevron) and Blue Merger Sub, Inc. (Blue Merger).
Under the Merger Agreement, Unocal Corporation merged with Blue Merger, and Blue Merger
became the surviving corporation. Chevron then became the parent corporation of the merged
corporations: After the merger, Blue Merger, as the surviving corporation, changed its name to
Unocal Corporation.

However, on October 20, 2006, the Union wrote Unocal Philippines asking for the separation benefits
provided for under the Collective Bargaining Agreement. According to the Union, the Merger
Agreement of Unocal Corporation, Blue Merger, and Chevron resulted in the closure and cessation of
operations of Unocal Philippines and the implied dismissal of its employees.

Unocal Philippines refused the Union’s request and asserted that the employee-members were not
terminated and that the merger did not result in its closure or the cessation of its operations.

ISSUE:
Does the Merger Agreement executed by Unocal Corporation, Blue Merger, and Chevron allow the
termination of the employment of petitioner’s members?

RULING:
No, the dismissal is not warranted and furthermore that the merger agreement does not affect.

A merger is a consolidation of two or more corporations, which results in one or more corporations
being absorbed into one surviving corporation. The separate existence of the absorbed corporation
ceases, and the surviving corporation “retains its identity and takes over the rights, privileges,
franchises, properties, claims, liabilities and obligations of the absorbed corporation(s).”

If respondent is a subsidiary of Unocal California, which, in turn, is a subsidiary of Unocal

Corporation, then the merger of Unocal Corporation with Blue Merger and Chevron does not affect
respondent or any of its employees. Respondent has a separate and distinct personality from its
parent corporation.

Nonetheless, if respondent is indeed a party to the merger, the merger still does not result in the
dismissal of its employees.

62
In this case, there is no dismissal of the employees on account of the merger. Petitioner does not deny
that respondent actually continued its normal course of operations after the merger, and that its
members, as employees, resumed their work with their tenure, salaries, wages, and other benefits
intact. Petitioner was even able to execute with respondent, after the merger, the Collective
Bargaining Agreement from which it anchors its claims.

63
 CORPORATE LAW

INJUNCTION GENERALLY UNAVAILABLE FROM PREVENTING STOCKHOLDERS TO INSPECT

CORPORATION RECORDS

27. Philippine Associated Smelting and Refining Corp. v. Lim

G.R. No. 172948, October 5, 2016
Leonen, J.

FACTS:
The present case resolves a petition assailing the issuance of the CA of an injunctive writ. Philippine
Associated Smelting (PASAR) is engaged in copper smelting and refining. The RTC initially granted
an injunction from demanding inspection of the confidential and inexistent records.

Respondents wrote another letter dated January 30, 2004 demanding again that they be allowed to
inspect, among others, the confidential records. On March 31, 2006, respondents wrote another letter
threatening to file criminal charges if they were not allowed to inspect the confidential records. They
stated that they wanted to ensure that petitioner complied with environmental laws in the operations
of its plant in Leyte.

Respondents Lim and Padilla wrote to demand that they be allowed to inspect the audited financial
statements for 2004 and 2005; the interim statements for the end of May 2006; and more detailed
records on finance, production, marketing, and purchasing.

ISSUE:
Is the injunction proper to prevent respondents from invoking their right to inspect?

RULING:
No, the injunction is not proper.

The Corporation Code provides that a stockholder has the right to inspect the records of all business
transactions of the corporation and the minutes of any meeting at reasonable hours on business days.
The stockholder may demand in writing for a copy of excerpts from these records or minutes, at his
or her expense. The right to inspect under Section 74 of the Corporation Code is subject to certain
limitations. However, these limitations are expressly provided as defenses in actions filed under
Section 74. Thus, this Court has held that a corporation’s objections to the right to inspect must be
raised as a defense.

For an action for injunction to prosper, the applicant must show the existence of a right, as well as
the actual or threatened violation of this right. Thus, an injunction must fail where there is no clear
showing of both an actual right to be protected and its threatened violation, which calls for the
issuance of an injunction. The clear provision in Section 74 of the Corporation Code is sufficient
authority to conclude that an action for injunction and, consequently, a writ of preliminary injunction
filed by a corporation is generally unavailable to prevent stockholders from exercising their right to
inspection.

Specifically, stockholders cannot be prevented from gaining access to the (a) records of all business
transactions of the corporation; and (b) minutes of any meeting of stockholders or the board of
directors, including their various committees and subcommittees.

64
 CORPORATE LAW

PROPER VENUE FOR A PETITION FOR VOLUNTARY INSOLVENCY IS THE CITY WHERE THE
ISOLVENT DEBTOR HAS RESIDED IN THE LAST 6 MONTHS PRIOR TO FILING OF THE PETITION

28. Pilipinas Shell Petroleum Corp. v. Royal Ferry Services, Inc

G.R. No. 188146, February 1, 2017
Leonen, J.

FACTS:
This case involves a petition for review on certiorari assailing the CA’s decision declaring Royal Ferry
Services, Inc. (Royal Ferry) insolvent.

Sometimes in 2005, Royal Ferry, a corporation duly organized and existing under the Philippine
Laws, filed a petition for Voluntary Insolvency before the RTC of Manila alleging that the company
suffered business losses. At the time the petition was filed, Royal Ferry was holding its principal
business office address in Bangkal Street, Makati City as indicated in its AOI, but holds its office at
Room 2013 at BF Condominium Building, Intramuros, Manila. RTC granted the petition. Later,
Pilipinas Shell Petroleum (PSP) filed before the RTC a Formal Notice of Claim and Motion to Dismiss
the petition for insolvency, claiming that the Royal Ferry owes them the amount of P2, 769,387.67
and the petition for insolvency was erroneously filed in the wrong venue. At first, RTC denied PSP’s
motion, but later on ordered the dismissal of the Petition for Voluntary Insolvency. CA reinstated the
Insolvency Proceedings.

PSP argued that in Insolvency Law, a petition for insolvency should be filed before the Court with the
territorial jurisdiction over the company’s residence; and that the residence of a corporation depends
on what is stated in its AOI, regardless of whether the corporation physically moved to a different
location. Thus, it is the RTC Makati which has jurisdiction over the same.

ISSUE:
Is RTC Manila the proper venue for the Petition for Voluntary Insolvency?

RULING:
Yes, the RTC of Manila is the proper venue of the Petition for Voluntary Insolvency.

Section 14 of the Insolvency Law specifies that the proper venue for a petition for voluntary
insolvency is the Regional Trial Court of the province or city where the insolvent debtor has resided
in for six (6) months before the filing of the petition. In citing Metropolitan Bank and Trust Company
v. S.F. Naguiat Enterprises, Inc., the court declared that requiring a corporation to go back to a place it
has abandoned just to file a case is the very definition of inconvenience. There is no reason why an
insolvent corporation should be forced to exert whatever meager resources it has to litigate in a city
it has already left.

Based on the allegations provided in Royal Ferry’s Complaint, it was incorporated on 18 October
1996 with principal place of business in 2521 A. Bonifacio Street, Bangkal, Makati City. At present
and during the past six months, [Royal Ferry] has held office in Rm. 203 BF Condo Building, Andres
Soriano cor. Solana St., Intramuros, Manila.

Thus, Royal Ferry properly filed its petition for voluntary insolvency in RTC Manila.

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 CORPORATE LAW

BY ITS EXPRESS TERMS, THE CORPORATION CODE ALLOWS “THE SHORTENING (OR
LENGTHENING) OF THE PERIOD WITHIN WHICH TO SEND THE NOTICE TO CALL A SPECIAL (OR
REGULAR) MEETING”

29. Lao v. Yao Bio Lim

G.R. No. 201306, August 9, 2017
Leonen, J.

FACTS:
In a petition under Rule 45 before the SC, petitioner Lydia Lao seeks to annul and set aside the
decision of CA affirming the decision of the RTC which annulled the elections of the board of directors
of Philadelphia School, Inc. (PSI) held on March 15, 2002 and the issuance of stock dividends and
transfer of shares of stock, and awarded damages to respondents Yao Bio Lim and Philip King.

Respondents were part of the newly elected board of the directors during the special stockholder’s
meeting wherein they were elected as President and Vice President respectively. However, petitioner
Lao refused to acknowledge the newly elected board of directors and issued a Secretary’s certificate
stating that a board meeting was held wherein the board of directors resolved to nullify the transfer
to King the shares owned by his father. King also discovered that a stockholder’s meeting was
conducted wherein certain personalities were elected as new members of the board prompting him
to file a petition before the SEC to enjoin said personalities from representing themselves as members
of the board to which the RTC because of the passage of RA No. 8799 took cognizance and ruled in
his favor. Meanwhile, a general stockholders’ meeting was held wherein said personalities were once
again elected as members of the board. Then, respondents filed a petition before the RTC seeking to
annul the elections held on the said meeting and the issuance of stock dividends and the illegal
transfer of stock.

Herein respondents alleged that the notice of meeting informing them about the general
stockholder’s meeting did not state the agenda or the purpose of the meeting. They also alleged that
they violated the previous order of the SEC and the RTC to use the 1997 General Information Sheet
as a basis for the elections held. Moreover, they had purportedly previously issued 300% stock
dividends to some stockholders without the approval of stockholders representing 2/3 of the
outstanding capital stock of PSI. On the other hand, petitioners claimed that the stockholders’
meeting and the elections held were conducted in accordance with the PSI’s by-laws and the
Corporation Code

ISSUES:
1. Was the election held in violation of the by-laws and the corporation code?
2. Was there a proper notice given?
3. Was there a violation on the distribution of stock dividends?

RULING:
1. No. Section 50 of the Corporation Code prescribes that “regular meetings of stockholders or
members shall be held annually on a date fixed in the by-laws.” Respondents do not dispute that
Article VIII (3) of the PSI’s by-laws fixed the annual meeting of stockholders on the third Friday
of March of every year. Furthermore, the agenda for the meeting, which includes the elections of
the new board of directors and ratification of acts of the incumbent board of directors and

66
 management, was the standard order of business in a regular annual meeting of stockholders of
a corporation. Thus, this Court holds that the annual stockholders’ meeting was a regular
meeting. Hence, the requirement to state the object and purpose in case of a special meeting as
provided for in Article VIII (5) of the PSI’s by-laws does not apply to the Notice for the annual
stockholders’ meeting held.

2. Yes. Under PSI’s by-laws, notice of every regular or special meeting must be mailed or personally
delivered to each stockholder not less than five (5) days prior to the date set for the meeting. In
this case, the PSI’s by-laws providing only for a five (5)-day prior notice must prevail over the
two (2)-week notice under the Corporation Code. By its express terms, the Corporation Code
allows “the shortening (or lengthening) of the period within which to send the notice to call a
special (or regular) meeting.”

3. Yes. The foregoing minutes alone would be insufficient to prove petitioners’ claim that the 300%
stock dividends were approved by the board of directors and ratified by the stockholders in the
March 22, 1997 meeting. The minutes did not provide any other detail that would convincingly
show that the 300% stock, dividends distributed in 2002 were the same stock dividends that
were ratified by the stockholders in 1997. Furthermore, while the minutes contain the names and
signatures of stockholders who were present at the meeting, the shares held by each were not
indicated. On its face, the minutes did not readily confirm how many shares were represented
and voted at the meeting, particularly on the stock dividends declaration.

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 CORPORATE LAW

A CONFLICT BETWEEN TWO STOCKHOLDERS OF A CORPORATION DOES NOT

AUTOMATICALLY RENDER THEIR DISPUTE AS INTRA-CORPORATE; THE NATURE OF THE
CONTROVERSY MUST ALSO BE EXAMINED

30. Belo Medical Group, Inc. v. Santos

G.R. No. 185894, August 30, 2017
Leonen, J.

FACTS:
In a petition under rule 45 before the SC, petitioner Belo Medical Group assails the RTC’s joint
resolution which granted respondent Santos’ motion to dismiss and petitioner’s Complaint for
interpleader and Supplemental Complaint for Declaratory Relief against herein respondents. The
trial court declared the case as an intra-corporate controversy but dismissed the Complaints. The
complaint could not flourish as petitioner failed to sufficiently allege conflicting claims of ownership
over the subject shares.

Respondent Santos sent to petitioner a request for the inspection of corporate records. Santos
claimed that he was a registered shareholder and a co-owner of Belo’s shares, as these were acquired
while they cohabited as husband and wife. He also sought explanation on the corporation’s failure to
inform him of the election of Henares as Corporate Secretary and of the 2007 and 2008 annual
meeting. Respondent Belo wrote to petitioner her objections on Santos’ attempt at inspecting
corporate books, she repudiate Santos’ co-ownership of her shares and his interest in the
corporation. She claimed that Santos held the 25 shares in his name merely in trust for her, as she,
and not Santos, paid for these shares. She also informed petitioner that Santos had a business in direct
competition with it, she suspected that Santos’ request to inspect the records of petitioner was a
means to obtain a competitor’s business information, and was, therefore, in bad faith. Belo further
argued that the proceedings should not have been classified as intra-corporate because while their
right of inspection as shareholders may be considered intra-corporate, “it ceases to be that and
become a full-blown civil law question if competing rights of ownership are asserted as the basis for
the right. Belo and petitioner corporation also reminded Santos of his majority share in The Obagi
Skin Health, Inc. the owner and operator of the House of Obagi clinics. Santos denied any conflict of
interest because petitioner’s products and services differed from House of Obagi’s. Petitioner’s
primary purpose was the management and operation of skin clinics while the House of Obagi’s main
purpose was the sale and distribution of high-end facial products. Because of the conflicting claims,
petitioner filed before the RTC a complaint for interpleader.

ISSUE:
Was there an intra-corporate controversy?

RULING:
Yes. Applying the relationship test, this Court notes that both Belo and Santos are named
shareholders in Belo Medical Group’s Articles of Incorporation and General Information Sheet for
2007. The conflict is clearly intra-corporate as it involves two (2) shareholders although the
ownership of stocks of one stockholder is questioned. Unless Santos is adjudged as a stranger to the
corporation because he holds his shares only in trust for Belo, then both he and Belo, based on official
records, are stockholders of the corporation. Applying the nature of the controversy test, this is still
an intra-corporate dispute. The Complaint for interpleader seeks a determination of the true owner

68
of the shares of stock registered in Santos’ name. Ultimately, however, the goal is to stop Santos from
inspecting corporate books. This goal is so apparent that, even if Santos is declared the true owner of
the shares of stock upon completion of the interpleader case, Belo Medical Group still seeks his
disqualification from inspecting the corporate books based on bad faith. Therefore, the controversy
shifts from a mere question of ownership over movable property to the exercise of a registered
stockholder’s proprietary right to inspect corporate books.

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 CORPORATE LAW

A CORPORATION IS ESTOPPED FROM DENYING ITS AGENT’S APPARENT AUTHORITY TO

INNOCENT THIRD PARTIES

31. Calubad v. Ricarcen Development Corp.

G.R. No. 202364, August 30, 2017
Leonen, J.

FACTS:
This resolves the Petition for Review on Certiorari filed by petitioner Arturo C. Calubad (Calubad),
assailing the Decision and Resolution of the Court of Appeals (CA) which upheld the Decision of the
Regional Trial Court (RTC).

Respondent Ricarcen Development Corporation (Ricarcen), a family corporation, headed by Marilyn

Soliman as its president, is engaged in renting out real estate. Marilyn, acting on Ricarcen’s behalf,
took out a total of P7,000,000 loan from Calubad, secured by a real estate mortgage (REM) over
Ricarcen’s Quezon City Property. To prove her authority to execute the mortgage contracts in
Ricarcen’s behalf, Marilyn presented a Board Resolution which empowers her to borrow money and
use the property as collateral for the loans. Marilyn also presented two Secretary’s Certificates.
However, after Ricarcen failed to pay its loan, Calubad initiated extrajudicial foreclosure proceedings
(EFM) and was eventually issued a Certificate of Sale. Upon learning of the foreclosure, Ricarcen filed
for Annulment of REM, EFM and Sale, claiming that it never authorized Marilyn to obtain the loans or
execute the REM. They also replaced Marilyn as president.

RTC ruled in favor of Ricarcen holding that when Marilyn failed to present a special power of
authority, it should have put Calubad on guard and required further evidence of Marilyn’s authority.
The CA affirmed the RTC’s decision in toto emphasizing that the rule on the presumption of validity
of a notarized board resolution and of a secretary’s certificate is not absolute and may be validly
overcome by contrary evidence.

ISSUE:
Is Recarcen estopped from denying or disowning the authority of Marilyn from entering into a
contract of loan and mortgage?

RULING:
Yes. As a corporation, Ricarcen exercises its powers and conducts its business through its board of
directors, as provided for by Section 23 of the Corporation Code. However, the board of directors may
validly delegate its functions and powers to its officers or agents. The general principles of agency
govern the relationship between a corporation and its representatives. Nonetheless, law and
jurisprudence recognize actual authority and apparent authority as the two (2) types of authorities
conferred upon a corporate officer or agent in dealing with third persons.

The doctrine of apparent authority provides that even if no actual authority has been conferred on
an agent, his or her acts, as long as they are within his or her apparent scope of authority, bind the
principal. However, the principal’s liability is limited to third persons who are reasonably led to
believe that the agent was authorized to act for the principal due to the principal’s conduct.

70
As the former president of Ricarcen, it was within Marilyn’s scope of authority to act for and enter
into contracts in Ricarcen’s behalf. Her broad authority from Ricarcen can be seen with how the
corporate secretary entrusted her with blank yet signed sheets of paper to be used at her discretion.
She also had possession of the owner’s duplicate copy of the land title covering the property
mortgaged to Calubad, further proving her authority from Ricarcen.

Ricarcen claimed that it never granted Marilyn authority to transact with Calubad or use the Quezon
City property as collateral for the loans, but its actuations say otherwise. It appears as if Ricarcen and
its officers gravely erred in putting too much trust in Marilyn. However, Calubad, as an innocent third
party dealing in good faith with Marilyn, should not be made to suffer because of Ricarcen’s
negligence in conducting its own business affairs.

71
 CORPORATE LAW

THE PRESIDENT IS PRESUMED TO HAVE THE AUTHORITY TO ACT WITHIN THE DOMAIN OF
THE GENERAL OBJECTIVES OF ITS BUSINESS AND WITHIN THE SCOPE OF HIS OR HER USUAL
DUTIES

32. Colegio Medico-Farmaceutico De Filipinas v. Lim

G.R. No. 212034, July 2, 2018
Del Castillo, J.

FACTS:
Before us is a Petition for Review on Certiorari filed under Rule 45 of the Rules of Court assailing the
Decision and Resolution of the Court of Appeals (CA).

Petitioner Colegio Medico Farmaceutico de Filipinas, Inc. (Colegio), a registered owner of a building
located in Sampaloc, Manila, entered a Contract of Lease with respondent Lily Lim (Lim), the
President/OIC of St. John Berchman School of Manila Foundation. After the expiration of the first
lease period, petitioner, thru its President, Dr. Virgilio C. Del Castillo, sent another Contract of Lease
to Lim, however, Lim failed to return the Contract of Lease. During a board meeting, Colegio informed
Lim of the decision of the Board not to renew the Contract of Lease and demanded the payment of
her back rentals and utility bills, with a request to vacate the property. Respondent refused to comply
with the demand, thus the filing of a Complaint for Ejectment with Damages.

The MeTC dismissed the Complaint for a lack of valid demand letter, ruling that the demand letter
given by Del Castillo as legally non-existent for failure of petitioner to show that Del Castillo was duly
authorized by the Board to issue the same. The RTC reversed the decision and ruled that the issuance
of the demand letter by done by Del Castillo in the usual course of business and that the issuance of
the same was ratified by Colegio when it passed the Board Resolution authorizing Del Castillo to file
a case against respondent. The CA reversed the RTC’s decision opining that Colegio’s failure to attach
a copy of the Board Resolution to the Complaint was a fatal defect.

ISSUE:
Is Del Castillo, as the President of Colegio, duly authorized to sign the verification and certification
without need of a board resolution?

RULING:
Yes. The president of a corporation may sign the verification and certification of non-forum shopping.
A corporation exercises its powers and transacts its business through its board of directors or
trustees. Accordingly, unless authorized by the board of directors or trustees, corporate officers and
agents cannot exercise any corporate power pertaining to the corporation. A board resolution
expressly authorizing the officers and agents is therefore required. However, in filing a suit,
jurisprudence has allowed the president of a corporation to sign the verification and the certification
of non-forum shopping even without a board resolution as said officer is presumed to have sufficient
knowledge to swear to the truth of the allegations stated in the complaint or petition.

In view of the foregoing jurisprudential exception, the CA gravely erred in dismissing the Complaint
on the mere failure of petitioner to present a copy of the Board Resolution. With or without the said
Board Resolution, Del Castillo, as the President of petitioner, was authorized to sign the verification
and the certification of non-forum shopping.

72
Another question to be resolved is whether there was a valid written demand upon Lim to pay the
unpaid rentals and vacate the subject property. In this case, the issuance of the demand letter dated
March 5, 2008 to collect the payment of unpaid rentals from respondent and to demand the latter to
vacate the subject property was done in the ordinary course of business, and thus, within the scope
of the powers of Del Castillo. In fact, it was his duty as President to manage the affairs of petitioner,
which included the collection of receivables.

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 CORPORATE LAW

ELECTION CONTEST; REGLEMENTARY PERIOD

33. Eizmendi, Jr. v. Fernandez

G.R. No 215280, September 5, 2018
Peralta, J.

FACTS:
This is a petition for review on certiorari under Rule 45 of the Rules of Court filed by petitioners
Francisco Eizmendi Jr. Et.al (petitioners) seeking to nullify and set aside the CA Decision granting the
petition in favor of respondent Teoderico Fernadez (Fernandez).

Fernandez filed a complaint on November 23, 2013 for Invalidation of Corporate Acts and
Resolutions with Application for Writ of Preliminary Injunction against the individual petitioners
Eizmendi Jr. Et. Al. who allegedly constituted themselves as new members of the Board of Directors
(BOD) of Valle Verde Country Club, Inc. (VVCI), despite lack of quorum during the February 23, 2013
annual members’ meeting. Fernandez asserted that since petitioner were not validly constituted as
the new BOD in the place of the hold-over BOD of VVCCI, they had no legal authority to act as such
BOD, to find him guilty and to suspend him as a member for less serious violations of the by-laws.
Fernandez added that he was not accorded due process as petitioners failed to give him opportunity
to defend himself by notifying him of the charge and the verdict against him. Fernandez likewise filed
an Urgent Motion or Request for Production/Copying of Documents. He cited Rule 27 of the Rules of
Court of Interim Procedure and requested that the VVCCI as owner and custodian of corporate
documents, to produce them and allow him to copy the documents in connection with the hearing of
his application for issuance of a writ of preliminary injunction.

The RTC denied the Urgent Motion or Request for Production/Copying of Documents. The RTC ruled
that the case is not an election contest since it was filed beyond the reglementary period under the
Interim Rules of Procedure Governing Intra-Corporate Controversies for election contests to be
brought to court, considering that the only issue that remains to be recovered is with respect to
whether due process was observed in suspending Fernandez.

Petitioners posit that while Fernandez asserts that he is not claiming the office as member of the BOD,
he is, in effect, attempting to unseat them as members thereof, which is in the nature of an election
contest. For his part, Fernandez counters that his cause of action is his wrongful suspension as
member of the VVCCI, and that he may question petitioners’ authority as a board to order his
suspension. He also insists that the case before the RTC is not an election contest as defined by
the Interim Rules.

The CA reversed the RTC and directed the judge to allow presentation of evidence in connection with
the election of the members of the BOD of VVCCI that was conducted during it annual members
meeting. Hence, this petition.

ISSUES:
1. Can Fernandez’s complaint be considered as an election contest within the purview of the Interim
Rules?
2. Can Fernandez question the authority of the petitioners to act as the BOD of VVCCI and approve
the board resolution suspending his club membership?

74
RULING:
1. Yes. Here, the allegation in Fernandez’s complaint for invalidation of corporate acts and
resolutions partly assails the authority of the BOD to suspend his membership on the ground that
despite the lack of quorum at the meeting, the individual petitioners proceeded to have
themselves constituted as the new members of the BOD of VVCCI. His complaint clearly raises an
issue on the validity of the election of the individual petitioners. Contrary to Fernandez’s claim
that the case before the lower court does not involve a claim or title to an elective office in VVCCI,
and that his objective is not to unseat the individual petitioners during the term for which they
were allegedly elected, the Court finds that a plain reading of the prayers in his complaint betrays
his cause. Verily, his complaint is partly an election contest as defined under Section 2, Rule 6 of
the Interim Rules, which refers to any controversy or dispute involving title or claim to any
elective office in a stock or non-stock corporation, the validation of proxies, the manner and
validity of elections, and the qualifications of candidates, including proclamation of winners, to
the office of director, trustees or other officer directly elected by the stockholders in a close
corporation or by members of a non-stock corporation where the article of incorporation so
provide.

The CA Correctly held that in order to fully resolve the issue regarding the legality of the
suspension of the Fernandez from VVCCI, it was also necessary for the trial court to admit pieces
of evidence which relate to the composition of the board of directors of VVCCI during the time
when the penalty of suspension from club membership was imposed upon petitioner.

2. No. To allow Fernandez to indirectly question the validity of the election would be a clear
violation of the 15-day reglementary period to file an election contest under the Interim
Rules. What the RTC correctly did was to dismiss the first cause of action because it is essentially
an election contest that was filed beyond the 15-day reglementary period under the Interim
Rules, and to limit the issue of the case to the second cause of action. To stress, the first cause of
action is in effect an election contest, inasmuch as Fernandez averred that the individual
petitioners had no legal authority to act as BOD of VVCCI, to find him guilty of any violation of the
by-laws and to suspend him on the ground of lack of quorum during the election wherein
petitioners constituted themselves as members of the BOD; whereas the second cause of action
pertains to his claim for damages for not having. been notified of his suspension, which led to an
embarrassing incident when he was refused services at the VVCCI complex in front of other club
members. Since Fernandez’s complaint is partly an election contest, and there being no provision
in VVCCI’s by-laws that lay down a procedure for resolution of the controversy from which the
15-day period to file such contest may be reckoned with, the first cause of action should be
dismissed for having been filed beyond the 15-day reglementary period from the date of the
election.

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 CORPORATE LAW

INTRA-CORPORATE DISPUTES

34. Tumagan v. Kairuz

G.R. No. 198124, September 12, 2018
Jardeleza, J.

FACTS:
This is a petition for review on certiorari assailing the decision of the Court of Appeals (CA) which
granted respondent Mariam Kairuz (Mariam)’s petition and reversed the decision of the Regional
Trial Court (RTC) in granting the dismissal of the complaint for ejectment on the ground of failure to
implead an indispensable party rendered by the Municipal Circuit Trial Court (MCTC).

Mariam filed a complaint for ejectment before the MCTC, alleging that petitioners took possession of
the Kairuz Spring (property) by force. Mariam is the spouse of the late Laurence Kairuz (Laurence),
who co-owned the property with his sisters. During his lifetime, Laurence entered into a MOA with
Balibago Waterworks System Incorporated and its affiliate PASUDECO, to establish a new
corporation, Bali Irisan Resources, Inc. (BIRI). Eventually, the Kairuz family sold the property to BIRI
according to the MOA. BIRI took full possession over the property with new certificates of title. BIRI
is 30% owned by the Kairuzes. Unfortunately, Mariam started to commit actions in conflict with the
best interest of BIRI. BIRI resorted to management decisions to post guards to secure the premises
of the corporate property, padlock the premises, and deny her access to the same due to her alleged
default on the provisions of the MOA. Mariam ignored their official communications, and instead filed
the ejectment complaint against petitioners. Petitioners moved that the case be dismissed because
the MCTC has no jurisdiction over the action because the same is an intra-corporate dispute under
RTC jurisdiction.

MCTC dismissed the case due to Mariam’s failure to implead BIRI. RTC upheld the dismissal. On a
petition for review before the CA, it reversed the decision, ruling that the remedy for failure to
implead an indispensable party is an order of the court on motion of the party or on its own initiative
at any stage of the action, and that Mariam was a co-owner unlawfully ousted who can file the case
for ejectment. Hence, this petition for review where petitioners argue that the CA gravely erred in
reversing the decisions of the lower courts.

ISSUE:
Does MCTC have jurisdiction over the case filed by BDO against Choa?

RULING:
No. In order that the SEC (now the RTC) can take cognizance of a case, the controversy must pertain
to any of the following relationships: (a) between the corporation and the public; (b) between the
corporation and its stockholders; (c) between the corporation and the State as far as its franchise,
permit, or license to operate is concerned; and (d) among the stockholders themselves. However,
concurrent factors, such as the status or relationship of the parties, or the nature of the controversy,
must be considered in determining whether it has jurisdiction over the controversy.

The true nature of the controversy is an intra-corporate dispute between BIRI and its shareholder,
Mariam, regarding the management of, and access to, the corporate property subject of the MOA.
MCTC never acquired jurisdiction over the ejectment case filed by Mariam. Also, the property has

76
already been transferred to BIRI and registered in its name. Shareholders are in no legal sense the
co-owners of corporate property, which is owned by the corporation as a distinct legal person.

Hence, the petition is granted, and the ejectment case set aside for lack of jurisdiction.

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 CORPORATE LAW

ACTS AND CONTRACTS OF THE AGENT WITHIN THE APPARENT SCOPE OF HIS AUTHORITY,
THOUGH NO ACTUAL AUTHORITY HAS BEEN CONFERRED, BIND THE PRINCIPAL

35. Engineering Geoscience, Inc. v. Philippine Savings Bank

G.R. No. 187262, January 10, 2019
Carpio, J.

FACTS:
This is a petition filed by Engineering Geoscience, Inc. (EGI) against Philippine Savings Bank (PSBank)
assailing the Decision and the Resolution promulgated by the Court of Appeals (CA) granting
PSBank’s petition for certiorari and prohibition and annulling the Orders of the RTC.

In 1990, EGI obtained a loan from PSBank in the principal amount of P24,064,000 as evidenced by a
Promissory Note and secured the loan, through its President, Jose Rolando Santos (Santos), a Real
Estate Mortgage over EGI’s two parcels of land. For EGI’s failure to comply with the loan obligation
and after the demand letter went unheeded, PSBank filed a petition for Extra-judicial Foreclosure of
Mortgage. Before the case materialized into a full-blown trial, PSBank and EGI submitted a Joint
Motion For Approval Of Compromise Agreement, which was approved by the trial court.

Notwithstanding the above court-approved compromise agreement, EGI still failed to comply with
the terms and conditions thereof. Thus, petitioner PSBank was constrained to file a Motion for
Execution of the trial court’s Decision on their compromise agreement. Accordingly, a Writ of
Execution was issued in favor of PSBank and eventually a Deed of Absolute Sale was executed. After
a series of denial of EGI’s motion, it was only in May 2005 that EGI raised for the first time the alleged
lack of authority of its former president, Jose Rolando Santos, to enter into the compromise
agreement reduced in the Decision dated January 12, 1993.

ISSUE:
Was the CA correct in approving the alleged Compromise Agreement entered into between PSBank
and Santos without the knowledge, consent and authority of the latter?

RULING:
Yes. A corporation, as a juridical entity, acts through its board of directors. The board exercises almost
all corporate powers, lays down all corporate business policies, and is responsible for the efficiency
of management. The general rule is that, in the absence of authority from the board of directors, no
person, not even its officers, can validly bind a corporation.

The records of the case show no evidence that EGI authorized Santos to file a Complaint and enter
into a Compromise Agreement on its behalf. Neither was there any showing that EGI’s By-Laws
authorize its President to do such acts. EGI’s grant of authority to Santos, however, falls under the
doctrine of apparent authority. Under this doctrine, acts and contracts of the agent, as are within the
apparent scope of the authority conferred on him, although no actual authority to do such acts or to
make such contracts has been conferred, bind the principal. Furthermore, the principal’s liability is
limited only to third persons who have been led reasonably to believe by the conduct of the principal
that such actual authority exists, although none was actually given. Apparent authority is determined
only by the acts of the principal and not by the acts of the agent.

78
EGI does not repudiate the act of Santos in signing the Promissory Notes; in fact, EGI made partial
payments, offering the authority of Santos to borrow and sign the Promissory Notes. EGI, however,
repudiates the act of Santos in entering into the Compromise Agreement extending the repayment of
the loan under the Promissory Notes, which extension is actually beneficial to EGI. In fact, the
Compromise Agreement bought time for EGI to pay the loan under the Promissory Notes but EGI still
failed to pay. Having availed of benefits under the Compromise Agreement, EGI is estopped from
repudiating it.

Since EGI’s Board of Directors questioned Santos’ authority to enter into a Compromise Agreement
only after 12 years, laches had already set in.

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 CORPORATE LAW

A CORPORATION WHERE THE GOVERNMENT OWNS MAJORITY OF THE OUTSTANDING

CAPITAL STOCK IS CONSIDERED A GOVERNMENT CONTROLLED CORPORATION

36. GSIS Family Bank Employees Union v. Villanueva

G.R. No. 210773, January 21, 2019
Leonen, J.

FACTS:
This is a petition for Certiorari, Prohibition, and Mandamus with the prayer that GSIS Family Bank be
declared outside the coverage of RA 10149, otherwise known as the GOCC Governance Act of 2011.

GSIS Family Bank was first known as the Royal Savings Bank. It was then renamed to Comsavings
Bank when it entered into a MOA for rehabilitation with the Commercial Bank of Manila, a wholly-
owned subsidiary of GSIS. After transferring its holdings from Commercial Bank of Manila to Boston
Bank, GSIS took over the control and management of Comsavings Bank. Another MOA was executed
where GSIS committed to infuse an additional capital of Php 2.5 billion in Comsavings Bank, the effect
of which is that GSIS effectively owned 99.55% of Comsavings Bank’s outstanding shares of stock.
The later then changed its name to GSIS Family Bank.

Pres. Aquino III signed into law RA 10149. Petitioner sought opinion from BSP as to whether it may
be considered as a GOCC or government bank under RA 10149. BSP clarified that petitioner is a
government financial institution under RA 10149. Petitioner then sought clarifications with the
Governance Commission on several issues which revolves around whether petitioners are allowed
to collectively bargain with its employees. The Governance Commission replied that petitioner was
unauthorized to enter into a CBA with its employees “based on the principle that the compensation
and position classification system is provided for by law and not subject to private bargaining.”

ISSUE:
Is the GSIS Family Bank a private bank?

RULING:
No, GSIS Family Bank is a GOCC since 99.55% of its outstanding capital stock is owned and controlled
by GSIS.

Despite the issue being moot and academic due to the closure of petitioner bank, there is still a need
to discuss on the nature of the petitioner bank as a GOCC. Based on the governing rules on GOCCS (PD
2029, EO 292, and RA 10149), a GOCC is: (1) established by original charter or through the general
corporation law; (2) vested with functions relating to public need whether governmental or
proprietary in nature; and (3) directly owned by the government or by its instrumentality, or where
the government owns a majority of the outstanding capital stock. Possessing all three attributes is
necessary to be classified as a GOCC.

Thus, employees of the GOCCs are governed by the Civil Service Law and not by the Labor Code. When
it comes to CBA and collective negotiation agreements in GOCCs, EO 203 unequivocally stated that
while it recognised the right of workers to organise, bargain and negotiate with their employees, “the
Governing Boards of all covered, whether Chartered or Non-Chartered, may not negotiate with their
officers and employees the economic terms of their CBAs.

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 CORPORATE LAW

PARTIES MAY STILL ENTER INTO A COMPROMISE AGREEMENT DESPITE THE CASE IS PENDING
FOR PETITION FOR REVIEW WITH THE SUPREME COURT

37. Spouses Tio v. Bank of the Philippine Islands

G.R. Nos. 193534 & 194091, January 30, 2019
Del Castillo, J.

FACTS:
This is a consolidation of two Petitions for Review on Certiorari filed under Rule 45 of the Rules of
Court.

In 1998, Goldstar Milling Corporation (Goldstar), a corporation engaged in the business of rice milling
and the buying and selling of corn and palay, together with spouses Tio, majority stockholders of
Goldstar, obtained several loans from BPI. To secure the loans, spouses Tio executed various
promissory notes and real estate mortgages over several properties.

When Goldstar and spouses Tio failed to pay the loan despite repeated demands, BPI instituted
foreclosure proceedings against the mortgaged properties. In return Goldstar and/or spouses Tio
filed before the RTC a Complaint for Annulment of Promissory Notes against BPI. These two cases
were elevated separately to the SC. The SC then issued a Resolution consolidating the two cases.

However, during the pendency of the case before the SC, BPI filed a Manifestation, Submission and/or
Motion for Judgment based on a Compromise Agreement entered by the parties. Spouses Tio affirmed
and confirmed the execution of the said Compromise Agreement in their Omnibus Comment.

ISSUE:
Should the compromise agreement be followed despite the case being at the stage of petition for
review with the Supreme Court?

RULING:
Yes, as the SC finds after reviewing the compromise agreement to be proper and in order.

In compliance with the Court’s Resolution, copies of: (1) the Board Resolution 3-14 of Goldstar
authorizing Manuel Tio to represent said corporation and to sign the Compromise Agreement; and
(2) the Corporate Secretary’s Certificate of BPI, authorizing Maureen Therese C. Santos to enter into
a compromise agreement, were submitted by the parties.

Accordingly, the Court hereby approves the same and renders judgment in accordance therewith,
and accordingly, orders the parties to comply with all the terms and stipulations contained therein.

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 CORPORATE LAW

DOCTRINE OF CORPORATE JURIDICAL PERSONALITY

38. BDO Unibank, Inc. v. Choa

G.R. No. 237553, July 10, 2019
Leonen, J.

FACTS:
This case is a Petition for Review on Certiorari under Rule 45 by petitioner BDO Unibank, Inc. (BDO)
assailing the decision of the Court of Appeals which affirmed the orders of the Regional Trial Court in
granting respondent Antonio Choa (Choa)’s Demurrer to Evidence.

BDO filed an Information before the RTC Pasig City against Choa, then president and general manager
of Camden Industries, Inc. (Camden) for violating Presidential Decree No. 115 (Trust Receipts Law).
BDO avers that Choa execute several Trust Receipt Agreements in favor of Equitable PCI Bank (now
Banco De Oro-EPCI, Inc.) in the sum of Php 7,875,904.96; that Choa misappropriated to his own
personal use the said goods and the proceeds of the sale thereof, and despite repeated demands,
failed and refused to account for and/or remit the proceeds of the sale thereof. The prosecution
witnesses testified that CAMDEN sued BDO in a different civil case and was awarded P90M plus, and
the case is now on appeal to the Court of Appeals. Choa filed a Motion for Leave (To file Demurrer to
Evidence), attached to which was his Demurrer to Evidence, arguing that CAMDEN, represented by
Choa, and BDO, are mutually creditors and debtors of each other and that their obligations are
extinguished proportionately by operation of law, so there can be no more basis for the alleged
violation.

RTC issued an Order granting Choa’s Demurrer to Evidence. The trial court found that: (1) the
amounts BDO and Camden owed each other—BDO’s P90 million judgment debt to Camden, and
Camden’s P20 million judgment debt to BDO—may be legally compensated. Thus, BDO filed before
the Court of Appeals a Petition for Certiorari, arguing that the trial court judge committed grave abuse
of discretion. However, the Petition was denied. Hence, this Petition.

BDO maintains that the civil case filed by CAMDEN against BDO was irrelevant to this case. It says it
did not know that the trial court would use the civil case judgment in ruling that the judgment debts
may be offset.

ISSUES:
1. Did the trial court judge commit grave abuse of discretion in granting the Demurrer to Evidence?
2. Was Choa correctly convicted for violation of PD No. 115?

RULING:
1. Yes. The Motion for Leave and the Demurrer to Evidence were filed beyond the reglementary
period. As a consequence, this Court will now resolve the merits of the case based on petitioner’s
evidence.

2. No. Although Choa signed the Trust Receipt Agreements, they do not show that he signed them
in his personal capacity. On the bottom right corner of the agreements are two (2) lines: one for
the “NAME OF CORPORATION,” and the other for “AUTHORIZED SIGNATURE.” In all agreements,
“Camden Inds.” was handwritten as the name of the corporation, while respondent’s signature

82
 appeared as the authorized signature. Clearly, respondent affixed his signature only as Camden’s
representative.

A corporation, being a juridical entity, may act only through its directors, officers, and employees.
Debts incurred by these individuals, acting as such corporate agents, are not theirs but the direct
liability of the corporation they represent. As an exception, directors or officers are personally
liable for the corporation’s debts only if they so contractually agree or stipulate.

Without any evidence that respondent personally bound himself to the debts of the company he
represented, this Court cannot hold him civilly liable under the Trust Receipt Agreements.

Thus, the Petition is denied.

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 SECURITIES LAW

SECURITIES REGULATION CODE SECTIONS 26 AND 28

39. Securities and Exchange Commission v. Price Richard Corp.

G.R. No. 197032, July 26, 2017
Leonen, J.

FACTS:
A former employee from Respondent Price Richardson Corporation, Michelle S. Avelino, (Avelino)
executed a sworn affidavit at the NBI’s Interpol Division, alleging that Price Richardson was “engaged
in boiler room operations, wherein the company sells non-existent stocks to investors using high
pressure sales tactics.” Whenever this activity was discovered, the company would close and emerge
under a new company name. Upon application of the NBI Interpol Division and the SEC on November
15, 2001, Branch 143, RTC, Makati City issued 3 search warrants against Capital International and
Price Richardson for violation of Section 2820 of the Securities Regulation Code.

The RTC ordered the seizure of Price Richardson’s and Capital International’s office equipment,
documents, and other items that were connected with the alleged violation. The SEC filed before the
DOJ for violation of Article 315(1)(b) of the RPC and Sections 26.325 and 28 of the SRC. The SEC
alleged that Price Richardson was neither licensed nor registered “to engage in the business of buying
and selling securities within the Philippines or act as salesman, or an associated person of any broker
or dealer.” As shown by the seized documents and equipment, Price Richardson engaged in seeking
clients for the buying and selling of securities, thereby violating Sections 26.3 and 28 of the SRC.

State Prosecutor Aristotle M. Reyes issued a Resolution, dismissing the SEC’s complaint “for lack of
probable cause.” Stating that, SEC failed to adduce evidence showing respondent Price’s alleged
unauthorized trading. While it is true that based on the certification issued by the SEC, respondent-
corporation has no license to buy or sell securities, it does not, however, follow, that said corporation
had indeed engaged in such business. It is imperative for complainant to prove the respondent-
corporation’s affirmative act of buying and selling securities to constitute the offense charged. It
cannot be established on the expedient reason that a corporation is not licensed or authorized to
trade securities. He who alleges a positive statement has the burden of proving the same.

ISSUE:
Is there probable cause to indict respondents for the violation of Sections 26.3 and 28 of the SRC

RULING:
Yes. Based on the Certification dated October 11, 2001 issued by the Market Regulation Department
of the Securities and Exchange Commission, respondent Price Richardson “has never been issued any
secondary license to act as broker/dealer in securities, investment house and dealer in government
securities.” Petitioner also certified that respondent Price Richardson “is not, under any
circumstances, authorized or licensed to engage and/or solicit investments from clients.” However,
the documents seized from respondent Price Richardson’s office show possible sales of securities.
Petitioner further supports its charges by submitting the complaint-affidavits and letters of
individuals who transacted with Price Richardson. The evidence gathered by petitioner and the
statement of respondent Price Richardson are facts sufficient enough to support a reasonable belief
that respondent is probably guilty of the offense charged.

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 SECURITIES LAW

A MONEY MARKET PLACEMENT PARTAKES THE NATURE OF A LOAN

40. Abacus Capital and Investment Corp. v. Tabujara

G.R. No. 197624, July 23, 2018
Tijam, J.

FACTS:
In this Petition for Review on Certiorari, the decision of the CA holding Abacus Capital and Investment
Corporation (Abacus) liable to Dr. Ernesto G. Tabujara (Tabujara) for the amount of his investment
is questioned.

Abacus is an investment house engaged in activities related to dealing in securities and other
commercial papers. In 2000, Tabujara engaged Abacus as his lending agent for purposes of investing
his money in the principal amount of P3 Million. Abacus, in turn, lent the 3 Million to Investors
Financial Services Corporation (IFSC) with a term of 32 days. To confirm the money placement,
Abacus issued a “Confirmation of Investment” slip to Tabujara. However, shortly after Tabujara
placed his investment, IFSC filed with the SEC a Petition for Declaration of Suspension of Payments
which was later treated as a petition for rehabilitation, suspending the payments. Tabujara gave
notice to Abacus and IFSC that he is opting to pre-terminate his money placement. Upon maturity of
the loan, he did not receive either the interest amount or the principal, but he received interest from
January 1, 2001 to December 31, 2001. It ceased to be paid come January 2002. Tabujara, then, filed
a complaint against Abacus and IFSC for collection of sum of money with damages.

Tabujara alleged that his investment was co-mingled with the monies of other investors to support
the credit line which Abacus issued in favor of IFSC. On the other hand, Abacus insisted that Tabujara
directly transacted with IFSC and that its involvement was limited only to acting as collecting and
paying agent for Tabujara.

ISSUE:
What is the nature of the transaction?

RULING:
The transaction is akin to money market placements. It partakes the nature of a loan because in
money market placements, the investor is a lender who loans his money to a borrower through a
middleman or dealer. The money market is a market dealing in standardized short-term credit
instruments (involving large amounts) where lenders and borrowers do not deal directly with each
other but through a middle man or dealer in the open market. It involves commercial papers
evidencing indebtedness issued, endorsed, sold or transferred to another, with or without recourse.
The issuer of a commercial paper in the money market necessarily knows in advance that it would
be expeditiously transacted and transferred to any investor/lender without need of notice to said
issuer. In practice, no notification is given to the borrower or issuer of commercial paper of the sale
or transfer to the investor.

In this case, Tabujara as the investor is the lender or the “funder” who loaned his 3 Million to IFSC
through Abacus. It is Abacus which was actually regarded as IFSC’s creditor in the rehabilitation plan.
This necessitates the assignment by Abacus of the proceeds to the actual source of funds, Tabujara
included, in proportion to his principal participation. Thus, when the loaned amount was not paid

85
together with the contracted interest, Tabajura may recover from Abacus the amount so invested
together with damages.

Hence, the CA decision holding Abacus liable to Tabujara is affirmed.

86
 BANKING LAWS

THE STANDARD OF DILIGENCE REQUIRED OF BANKS IS HIGHER THAN THE DEGREE OF

DILIGENCE OF A GOOD FATHER OF A FAMILY

41. Philippine National Bank v. Santos

G.R. No. 208293, December 10, 2014
Leonen, J.

FACTS:
This case is a petition for review of the Court of Appeals’ July 25, 2013 decision filed separately by
PNB and Aguilar.

Respondents are children of Angel C. Santos who died on 21 March 1991. In 1996, respondents
discovered that their father maintained a premium savings account with Philippine National Bank
(PNB), Sta. Elena-Marikina City Branch. Respondents went to PNB to withdraw their father’s deposit.
Lina B. Aguilar, the Branch Manager of PNB-Sta. Elena-Marikina, required them to submit the
following: (1) original or certified true copy of the Death Certificate of Angel C. Santos; (2) certificate
of payment of, or exemption from, estate tax issued by the Bureau of Internal Revenue (BIR); (3) Deed
of Extrajudicial Settlement; and (5) Surety bond effective for two years and in an amount equal to the
balance of the deposit to be withdrawn.

By April 1998, respondents had already obtained the necessary documents, however, when they
tried to withdraw, Aguilar informed them that the deposit had already “been released to a certain
Bernardito Manimbo (Manimbo) on 01 April 1997.” An amount of 1,882,002.05 was released upon
presentation of: (1) an affidavit of self-adjudication purportedly executed by one of the respondents,
Remye L. Santos; (2) a certificate of time deposit dated 14 December 1989 amounting to
1,000,000.00; and (3) the death certificate of Angel C. Santos, among others. A special power of
attorney was purportedly executed by Reyme L. Santos in favor of Manimbo and a certain Angel P.
Santos for purposes of withdrawing and receiving the proceeds of the certificate of time deposit.

Carmelita et al., filed before the RTC of Marikina a complaint for sum of money and damages against
PNB, Lina B. Aguilar, and a John Doe. The trial court found PNB and Aguilar negligent in releasing the
deposit to Manimbo as they failed to notify the depositor about the maturity of the time deposit and
the conversion of the time deposit into a premium savings account. Upon appeal to the Court of
Appeals, Aguilar contended that she merely implemented PNB’s Legal Department’s directive to
release the deposit to Manimbo. PNB, on the other hand, argued that the release of the deposit to
Manimbo was pursuant to existing policy. CA sustained the trial court’s findings of negligence in both
parties.

ISSUE:
Should PNB and Aguilar be held liable for negligently releasing the deposit to Benardito Manimbo?

RULING:
YES. PNB and Aguilar are liable, and they were negligent in releasing the deposit to Manimbo.

The contractual relationship between banks and their depositors is governed by the Civil Code
provisions on simple loan. Once a person makes a deposit of his or her money to the bank, he or she
is considered to have lent the bank that money. The bank becomes his or her debtor, and he or she

87
becomes the creditor of the bank, which is obligated to pay him or her on demand. The default
standard of diligence in the performance of obligations is “diligence of a good father of a family.”
Other industries, because of their nature, are bound by law to observe higher standards of diligence.
Common carriers, for example, must observe “extraordinary diligence in the vigilance over the goods
and for the safety of [their] passengers” because it is considered a business affected with public
interest. “Extraordinary diligence” with respect to passenger safety is further qualified as “carrying
the passengers safely as far as human care and foresight can provide, using the utmost diligence of
very cautious persons, with a due regard for all the circumstances.”

Similar to common carriers, banking is a business that is impressed with public interest. It affects
economies and plays a significant role in businesses and commerce. The public reposes its faith and
confidence upon banks, such that “even the humble wage-earner has not hesitated to entrust his life’s
savings to the bank of his choice, knowing that they will be safe in its custody and will even earn some
interest for him.” This is why we have recognized the fiduciary nature of the banks’ functions, and
attached a special standard of diligence for the exercise of their functions.

In this case, petitioners PNB and Aguilar released Angel C. Santos’ deposit to Manimbo without having
been presented the BIR-issued certificate of payment of, or exception from, estate tax. This is a legal
requirement before the deposit of a decedent is released. Presidential Decree No. 1158,98 the tax
code applicable when Angel C. Santos died in 1991, provides:

SEC. 118. Payment of tax antecedent to the transfer of shares, bonds, or rights. — There shall
not be transferred to any new owner in the books of any corporation, sociedad anonima,
partnership, business, or industry organized or established in the Philippines, any shares,
obligations, bonds or rights by way of gift inter vivos or mortis causa, legacy, or inheritance
unless a certification from the Commissioner that the taxes fixed in this Title and due thereon
have been paid is shown.

If a bank has knowledge of the death of a person who maintained a bank deposit account
alone, or jointly with another, it shall not allow any withdrawal from the said deposit
account, unless the Commissioner has certified that the taxes imposed thereon by this
Title have been paid; Provided, however, That the administrator of the estate or any one of
the heirs of the decedent may upon authorization by the Commissioner of Internal Revenue,
withdraw an amount not exceeding 10,000 without the said certification. For this purpose,
all withdrawal slips shall contain a statement to the effect that all of the joint depositors are
still living at the time of withdrawal by any one of the joint depositors and such statement
shall be under oath by the said depositors.

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 BANKING LAWS

THE RELATIONSHIP BETWEEN A CORPORATION AND ITS REPRESENTATIVES IS GOVERNED

BY THE GENERAL PRINCIPLES OF AGENCY

42. University of Mindanao v. Bangko Sentral ng Pilipinas

G.R. Nos. 194964-65, January 11, 2016
Leonen, J.

FACTS:
This is a petition for review on certiorari the CA Decision and Resolution which reversed the RTC’s
Decision to nullify the mortgage contracts with respondent Bangko Sentral ng Pilipinas (BSP)
involving the properties of petitioner University of Mindanao (UM).

UM is an educational institution and its Board of Trustees (BOT) was chaired by Guillermo Torres,
and his wife Dolores Torres as assistant treasurer. Before being part of the BOT, the spouses
incorporated and operated 2 thrift banks, First Iligan Savings and Loan Association, Inc. (FISLAI) and
Davao Savings and Loan Association, Inc. (DSLAI), the spouses were likewise officers of the banks.
Loans were obtained by both banks from BSP evidenced by promissory notes signed by the spouses.
Thereafter, UM’s VP for Finance, Saturnino Petalcorin (Petalcorin), executed real estate mortgage
contracts over UM’s property (in CDO and Iligan) for the loans obtained in favor of BSP. As proof of
authority, he showed a Secretary’s Certificate signed by UM’s Secretary, Aurora De Leon.

Then, FISLAI and DSLAI merged as a result of rehabilitation and later became known as Mindanao
Savings and Loan Association (MISLAI). MSLAI failed to recover from its losses and was liquidated.
BSP sent a letter to UM, informing that it would foreclose its properties if MSLAI’s outstanding
obligation remain unpaid. In its reply to BSP, UM denied that its properties were mortgaged that it
did not receive any load proceeds from BSP. Thus, it filed 2 complaints (RTC-CDO and RTC- Iligan)
for nullification and cancellation of mortgage.

UM alleged that the Sec Cert. was anomalous and it never authorized Petalcorin to execute real estate
mortgage contracts involving its properties to secure the banks debts and that it never ratified the
same. On its part, BSP asserted its reliance in good faith on the Sec Cert which clothed Petalcorin with
apparent and ostensible authority to execute the mortgage deed. The RTCs, both in CDO and Iligan
ruled in favor of UM. On appeal, the CA reversed the RTC decision. Hence, this petition.

ISSUE:
Is petitioner University of Mindanao bound by the real estate mortgage contracts executed by
Petalcorin?

RULING:
No. Being a juridical person, petitioner cannot conduct its business, make decisions, or act in any
manner without action from its Board of Trustees. The BOT must act as a body in order to exercise
corporate powers. Individual trustees are not clothed with corporate powers just by being a trustee.
Hence, the individual trustee cannot bind the corporation by himself or herself. The corporation may,
however, delegate through a board resolution its corporate powers or functions to a representative,
subject to limitations under the law and the corporation’s articles of incorporation.

89
Petalcorin’s authority to transact on behalf of petitioner cannot be presumed based on a Secretary’s
Certificate and excerpt from the minutes of the alleged board meeting that were found to have been
simulated. These documents cannot be considered as the corporate acts that held out Petalcorin as
petitioner’s authorized representative for mortgage transactions. They were not supported by an
actual board meeting. Further, the Secretary’s Certificate was void whether or not it was notarized.
While notarial acknowledgment attaches full faith and credit to the document concerned it does not
give the document its validity or binding effect. When there is evidence showing that the document
is invalid, the presumption of regularity or authenticity is not applicable.

Corporate acts that are committed outside the object for which a corporation is created are ultra
vires. Petitioner does not have the power to mortgage its properties in order to secure loans of other
persons. As an educational institution, it is limited to developing human capital through formal
instruction. It is not a corporation engaged in the business of securing loans of others. Securing loans
is not an adjunct of the educational institution’s conduct of business. It does not appear that securing
third party loans was necessary to maintain petitioner’s business of providing instruction to
individuals.

No ratification was likewise made. Even though the spouses were officers of both the thrift banks and
petitioner, their knowledge of the mortgage contracts cannot be considered as knowledge of the
corporation. The rule that knowledge of an officer is considered knowledge of the corporation applies
only when the officer is acting within the authority given to him or her by the corporation. The
knowledge was obtained in the interest of and as representatives of the thrift banks and not of the
petitioner.

There can be no apparent authority and the corporation cannot be estopped from denying the
binding affect of an act when there is no evidence pointing to similar acts and other circumstances
that can be interpreted as the corporation holding out a representative as having authority to
contract on its behalf.

Lastly, the banking institution is impressed with public interest. Thus, banks are required to exercise
the highest degree of diligence in their transactions. For its failure to exercise the degree of diligence
required of banks, respondent cannot claim good faith in the execution of the mortgage contracts
with Petalcorin.

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 BANKING LAWS

BANKS MUST SHOW THAT THEY EXERCISED THE REQUIRED DUE DILIGENCE BEFORE
CLAIMING TO BE MORTGAGEES IN GOOD FAITH OR INNOCENT PURCHASERS FOR VALUE

43. Land Bank of the Philippines v. Musni

G.R. No. 206343, February 22, 2017
Leonen, J.

FACTS:
This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, praying that the
assailed Decision dated February 29, 2012, and the Resolution dated March 12, 2013 of the Court of
Appeals in CA-GR. CV No. 92304 be nullified and set aside, and that judgment to the complaint against
petitioner be rendered dismissed. Petitioner likewise prays that the deleted award be reinstated
should the assailed Decision and Resolution be affirmed.

Lorenzo Musni (Musni) was the compulsory heir of Jovita Musni (Jovita), who was the owner of a lot
in Comillas, La Paz, Tarlac, under TCT No. 07043. Musni filed before RTC of Tarlac City a complaint
for reconveyance of land and cancellation of TCT No. 333352 against Spouses Nenita Sonza Santos
and Ireneo Santos (Spouses Santos), Eduardo Sonza (Eduardo), and Land Bank of the Philippines
(Land Bank).

Musni alleged that Nenita Sonza Santos (Nenita) falsified a Deed of Sale and caused the transfer of
title of the lot in her and her brother Eduardo’s names. He claimed that the Spouses Santos and
Eduardo mortgaged the lot to Land Bank as security for their loan of ₱1,400,000.00. He said that he
was dispossessed of the lot when Land Bank foreclosed the property upon Nenita and Eduardo’s
failure to pay their loan. Musni claimed that he filed a criminal case against Nenita and Eduardo for
falsification of a public document. The case was filed before the MTC of Tarlac and was docketed as
Criminal Case No. 4066-99. According to him, the municipal trial court rendered a decision finding
Nenita guilty of the imputed crime.

Land Bank filed its Amended Answer with Counterclaim and Cross-claim. It asserted that the transfer
of the title in its name was because of a decision rendered by the DARAB, Region III. It countered that
its transaction with the Spouses Santos and Eduardo was legitimate, and that it verified the
authenticity of the title with the Register of Deeds. Further, the bank loan was secured by another lot
owned by the Spouses Santos, and not solely by the lot being claimed by Musni. The trial court
rendered a Decision, in favor of Musni. It relied on the fact that Nenita was convicted of falsification
of the Deed of Sale. The trial court also found that Land Bank was not an “innocent purchaser for
value.” The institution of the criminal case against Nenita should have alerted the bank to ascertain
the ownership of the lot before it foreclosed the same. CA, affirmed RTC decision with some
modifications.

ISSUE:
Is Land Bank mortgagee in good faith and an innocent purchaser for value?

RULING:
NO. Petitioner is neither a mortgagee in good faith nor an innocent purchaser for value.

In Philippine Banking Corporation v. Dy, et al., this Court explained this concept in relation to banks:

91
 Primarily, it bears noting that the doctrine of “mortgagee in good faith” is based on the rule
that all persons dealing with property covered by a Torrens Certificate of Title are not
required to go beyond what appears on the face of the title. This is in deference to the public
interest in upholding the indefeasibility of a certificate of title as evidence of lawful ownership
of the land or of any encumbrance thereon. In the case of banks and other financial
institutions, however, greater care and due diligence are required since they are imbued with
public interest, failing which renders the mortgagees in bad faith. Thus, before approving a
loan application, it is a standard operating practice for these institutions to conduct an ocular
inspection of the property offered for mortgage and to verify the genuineness of the title to
determine the real owner(s) thereof. The apparent purpose of an ocular inspection is to
protect the “true owner” of the property as well as innocent third parties with a right, interest
or claim thereon from a usurper who may have acquired a fraudulent certificate of title
thereto.

Petitioner’s defense that it could not have known the criminal action since it was not a party to the
case and that there was no notice of lis pendens filed by respondent Musni, is unavailing. This Court
held in Heirs of Gregorio Lopez v. Development Bank of the Philippines:

The rule on “innocent purchasers or [mortgagees] for value” is applied more strictly when
the purchaser or the mortgagee is a bank. Banks are expected to exercise higher degree of
diligence in their dealings, including those involving lands. Banks may not rely simply on the
face of the certificate of title.

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 BANKING LAWS

BANKS ASSUME A DEGREE OF PRUDENCE AND DILIGENCE HIGHER THAN THAT OF A GOOD
FATHER OF A FAMILY

44. Poole-Blunden v. Union Bank of the Philippines

G.R. No. 205838, November 29, 2017
Leonen, J.

FACTS:
Poole-Blunden (petitioner) came across an advertisement for public auction of certain properties
placed by Union Bank in the Manila Bulletin sometime in March 2001. One of these properties was
Unit 2-C of T-Tower Condominium located at Makati City. The condominium unit was acquired by
Union Bank through foreclosure proceedings.

A week prior to the auction, petitioner visited the unit for inspection. He found that the unit had an
irregular shape, but didn’t doubt the unit’s area as advertised, the ceiling in a bad condition, and the
unit needed substantial repairs to be habitable. On the day of the auction, he also inspected the Master
Title of the project owner to the condominium. Petitioner won the bid and he entered to a Contract
to Sell with Union Bank. He started occupying the unit in June 2001 and by July 2003, he was able to
fully pay for the unit, paying a total amount of P 3,257,142.49.00.

Petitioner decided to construct two additional bedrooms in the unit. He noticed apparent problems
in its dimensions. He took a rough measurement and found that the floor area was just 70 sqm, not
95 sqm as advertised. He got in touch with an officer of Union Bank to raise the matter, but no action
was taken. He then wrote to Union bank to inform them of the discrepancy and asked for the
rescission of the Contract to Sell, along with the refund of the amounts he had paid. Union Bank
replied that upon inquiring with HLURB, the Homeowners’s Association of T-Tower, and its
appraisers, the unit was confirmed to be 95 sqm inclusive of the terrace and the common areas
surrounding it. The petitioner was not satisfied because according to the Master Title, “boundary of
each unit are the interior surfaces of the perimeter walls, floors, ceilings, windows and doors thereof.”
He hired an independent geodetic engineer, to survey the unit and measure its actual floor. It was
found out that the actual area was only 74.4 sqm and gave a copy of the certification to Union bank.
Petitioner filed for the rescission of the Contract to Sell with Damages/

ISSUE:
Did respondent Union Bank of the Philippines commit such a degree of fraud as would entitle
petitioner to the voiding of the Contract to Sell the condominium unit?

RULING:
Yes, Union Bank committed fraud which entitles petitioner to the voiding of the Contract to Sell the
condominium unit.

By definition, fraud presupposes bad faith or malicious intent. It transpires when insidious words or
machinations are deliberately employed to induce agreement to a contract. The bank was so grossly
negligent that its recklessness amounts to a wrongful willingness to engender a situation where any
buyer in petitioner’s shoes would have been insidiously induced into buying a unit with an actual
area so grossly short of its advertised space.

93
Banks assume a degree of prudence and diligence higher than that of a good father of a family,
because their business is imbued with public interest and is inherently fiduciary. Thus, banks have
the obligation to treat the accounts of its clients “meticulously and with the highest degree of care.”
The high degree of diligence required of banks equally holds true in their dealing with mortgaged
real properties, and subsequently acquired through foreclosure, such as the Unit purchased by
petitioner. In the same way that banks are “presumed to be familiar with the rules on land
registration,” given that they are in the business of extending loans secured by real estate mortgage,
banks are also expected to exercise the highest degree of diligence. This is especially true when
investigating real properties offered as security, since they are aware that such property may be
passed on to an innocent purchaser in the event of foreclosure.

Credit investigations are standard practice for banks before approving loans and admitting
properties offered as security. It entails the assessment of such properties: an appraisal of their value,
an examination of their condition, a verification of the authenticity of their title, and an investigation
into their real owners and actual possessors. Whether it was unaware of the unit’s actual interior
area; or, knew of it, but wrongly thought that its area should include common spaces, respondent’s
predicament demonstrates how it failed to exercise utmost diligence in investigating the Unit offered
as security before accepting it. This negligence is so inexcusable; it is tantamount to bad faith.

94
 BANKING LAWS

A CLOSED BANK UNDER RECEIVERSHIP CAN ONLY SUE OR BE SUED THROUGH ITS RECEIVER,
THE PHILIPPINE DEPOSIT INSURANCE CORPORATION

45. Banco Filipino Savings and Mortgage Bank v. Bangko Sentral ng Pilipinas
G.R. No. 200678, June 4, 2018
Leonen, J.

FACTS:
On December 11, 1991, the decision in Banco Filipino Savings & Mortgage Bank v. Monetary Board
and Central Bank of the Philippines, declared void the Monetary Board’s order for closure and
receivership of Banco Filipino Savings & Mortgage Bank (Banco Filipino). Central Bank of the
Philippines and the Monetary Board was directed to reorganize Banco Filipino and to allow it to
resume business under the comptrollership of both the Central Bank and the Monetary Board. On
June 14, 1993, Congress passed Republic Act No. 7653,7 providing for the establishment and
organization of Bangko Sentral as the new monetary authority, which allowed Banco Filipino to
resume its business.

On April 8, 2009, Banco Filipino submitted its 8th Revised Business Plan to Bangko Sentral for
evaluation.In this business plan, Banco Filipino requested, among others, a P25,000,000,000.00
income enhancement loan. Unable to come to an agreement, the parties constituted an Ad Hoc
Committee composed of representatives from both parties to study and act on the proposals. The Ad
Hoc Committee produced an Alternative Business Plan, which was accepted by Banco Filipino, but
was subject to the Monetary Board’s approval. The approval was also subject to certain terms and
conditions, among which was the withdrawal or dismissal with prejudice to all pending cases filed
by Banco Filipino against Bangko Sentral and its officials.

Banco Filipino filed a Petition for Certiorari and Mandamus with prayer for issuance of a temporary
restraining order and writ of preliminary injunction. It assailed the alleged “arbitrary, capricious and
illegal acts” of Bangko Sentral and of the Monetary Board in coercing Banco Filipino to withdraw all
its present suits in exchange of the approval of its Business Plan. Petitioner was placed under
receivership on March 17, 2011.

The authority of petitioner to file the petition was questioned. Petitioner points out that there was
nothing in the Philippine Deposit Insurance Corporation Charter that precludes its Board of Directors
from suing on its behalf. It adds that there was an obvious conflict of interest in requiring it to seek
PDIC’s authority to file the case considering that Philippine Deposit Insurance Corporation was under
the control of the respondent Monetary Board.

ISSUE:
Can petitioner Banco Filipino, placed under receivership, sue through its Board of Directors?

RULING:
No. A closed bank under receivership can only sue or be sued through its receiver, the Philippine
Deposit Insurance Corporation.

Under Republic Act No. 7653, when the Monetary Board finds a bank insolvent, it may “summarily
and without need for prior hearing forbid the institution from doing business in the Philippines and

95
designate the Philippine Deposit Insurance Corporation as receiver of the banking institution.” A
bank which had been ordered closed by the monetary board retains its juridical personality which
can sue and be sued through its liquidator. The only limitation being that the prosecution or defense
of the action must be done through the liquidator. Otherwise, no suit for or against an insolvent entity
would prosper. As fiduciary of the insolvent bank, Philippine Deposit Insurance Corporation
conserves and manages the assets of the bank to prevent the assets’ dissipation. This includes the
power to bring and defend any action that threatens to dissipate the closed bank’s assets. Philippine
Deposit Insurance Corporation does so, not as the real party-in-interest, but as a representative
party. As the fiduciary of the properties of a closed bank, the PDIC may prosecute or defend the case
by or against the said bank as a representative party while the bank will remain as the real party in
interest

Petitioner’s suit concerned its Business Plan, a matter that could have affected the status of its
insolvency. Philippine Deposit Insurance Corporation’s participation would have been necessary, as
it had the duty to conserve petitioner’s assets and to examine any possible liability that petitioner
might undertake under the Business Plan. When banks become insolvent, depositors are secure in
the knowledge that they can still recoup some part of their savings through Philippine Deposit
Insurance Corporation.

Thus, Philippine Deposit Insurance Corporation’s participation in all suits involving the insolvent
bank is necessary and imbued with the public interest.

96
 BANKING LAWS

A BANK THAT FAILS TO COMPLY WITH ITS OBLIGATION TO SECURE ACCOUNTS BY ALLOWING
ONLY THOSE WITHDRAWALS AUTHORIZED BY ITS DEPOSITOR IS GUILTY OF NEGLIGENCE

46. Bank of the Philippine Islands v. Land Investors and Developers Corp.
G.R. No. 198237, October 8, 2018
Tijam, J.

FACTS:
This is a petition for review on certiorari seeking to annul the CA decision reversing and setting aside
the RTC resolutions granting petitioner’s demurrer to evidence for failing to establish its gross
negligence.

Respondent Land Investors and Developers Corp. maintained savings and current accounts with the
Pamplona, Las Piñas Branch of Far East Bank & Trust Co., which later on merged with petitioner Bank
of the Philippine Islands (BPI). In its transactions with the bank, respondent authorized any two of
its employees Fariñas, Dela Peña, and Collas as bank signatories. Sometime later, Dela Peña, who was
convicted for estafa and was consequently dismissed from employment, was discovered to have
succeeded in unlawfully withdrawing various amounts from respondent’s deposit accounts.

Respondent alleged that BPI was negligent and violated its fiduciary duties when it allowed the
withdrawals in the total amount of P3,652,095.01 on the basis of Dela Peña’s lone signature or thru
the forged signatures of his co-signatories. Despite demand, BPI failed to heed respondent’s claims
prompting the latter to file a complaint for sum of money and damages against BPI and Dela Peña.

ISSUE:
Should BPI be held liable for the unauthorized withdrawals?

RULING:
YES, BPI should be held liable for its failure to comply with its obligation.

To emphasize, BPI’s liability proceeds from a breach of contract. Under Article 1980 of the Civil Code,
“fixed, savings, and current deposits of money in banks x x x shall be governed by the provisions
concerning simple loan[s].” By the contract of loan or mutuum, one party delivers money to another
upon the condition that the same amount shall be paid.

To recall, respondent was defrauded by several withdrawals from its deposit accounts being allowed
by BPI solely on the basis of Dela Peña’s signature despite specific instructions that withdrawals be
done only upon the signatures of any two of respondent’s authorized signatories, and additional
withdrawals being allowed on the basis of the forged signatures of respondent’s other authorized
signatory. It is basic that those who, in the performance of their obligations, are guilty of negligence,
and those who in any manner contravene the tenor thereof, are liable for damages. When BPI allowed
Dela Peña to make unauthorized withdrawals, it failed to comply with its obligation to secure said
accounts by allowing only those withdrawals authorized by respondent.

Thus, in so doing, BPI violated the terms of its contract of loan with respondent and should be held
liable in this regard.

97
 BANKING LAWS

COURT ORDER FOR THE RELEASE OF FUNDS FROM A JOINT FOREIGN CURRENCY DEPOSIT
ACCOUNT, WITHOUT SECURING THE CONSENT OF A CO-DEPOSITOR, CONSTITUTES TWO
VIOLATIONS OF THE LAW

47. Intestate Estate of Pacioles v. Pacioles, Jr.

G.R. No. 214415, October 15, 2018
Tijam, J.

FACTS:
This is a petition for review on certiorari assailing the decision and resolution of the CA affirming the
orders of the RTC for the release of funds from a joint foreign currency deposit account.

Miguelita left several properties, among which was a dollar account with BPI-San Francisco Del
Monte Branch under the names of Emilio (her husband) and Miguela (her daughter, now deceased)
or Emmanuel (her son). Emilio filed a motion to allow him to withdraw money from the subject BPI
account to defray the cost of property taxes due on the real properties of Miguelita’s estate, which,
notwithstanding the absence of Emmanuel’s consent, the intestate court granted.

ISSUE:
Was the RTC’s order for the release of funds from a joint foreign currency deposit account without
securing the consent of a co-depositor proper?

RULING:
NO, the RTC orders were not proper.

The rule on foreign currency deposits is embodied in Section 8 of Republic Act No. 6426, also known
as the Foreign Currency Deposit Act of the Philippines. It is apparent that in ordering the branch
manager or any representative of BPI to release the money contained in a foreign currency deposit
account, the intestate court committed a violation of the law, which expressly provides that all foreign
currency deposits as defined by applicable laws are not subject to any form of attachment,
garnishment, or any other order or process of any court, legislative body, government agency or any
administrative body.

Moreover, the subject BPI account is in the nature of a joint account. “[It] is one that is held jointly by
two or more natural persons, or by two or more juridical persons or entities. Under such setup, the
depositors are joint owners or co-owners of the said account, and their share in the deposits shall be
presumed equal, unless the contrary is proved.” In an “and” joint account, as in this case, the
depositors are joint creditors of the bank and the signatures of all depositors are necessary to allow
withdrawal. Thus, it is indispensable that all the persons named as account holders give their consent
before any withdrawal could be made. In its disposition, the intestate court simply deemed sufficient
the consent of Emilio to allow the withdrawal from the subject BPI account without further reasons
therefor. Thus, the intestate court likewise erred in allowing the withdrawal of funds sans the consent
of a co-depositor.

Therefore, the RTC’s order for the release of funds from a joint foreign currency deposit account
without securing the consent of a co-depositor improper.

98
 BANKING LAWS

BANKS ARE REQUIRED TO EXERCISE THE HIGHEST DEGREE OF DILIGENCE IN ITS BANKING
TRANSACTIONS

48. Bank of the Philippine Islands v. Spouses Quiaoit

G.R. No. 199562, January 16, 2019
Carpio, J.

FACTS:
This is a motion for reconsideration aiming to reverse the decision of the CA affirming the decision
of the RTC that BPI Greenhills did not follow the normal banking procedure in the encashment of the
check of Fernando V. Quiaoit through Merlyn Lambayong.

While abroad Quiaoit and his wife were placed in a shameful and embarrassing situation when
several banks in Madrid, Spain refused to exchange some of the US$100 bills because they were
counterfeit. They were also threatened to be taken to the police station after trying to purchase an
item in a shop with the dollar bills. Quiaoit filed a complaint against BPI alleging that the encashed
dollar bills by Lambayong involved in the aforementioned incidents which were placed in a large
Manila envelope were counterfeit. He argued that the bank was negligent in not informing him of the
dollar bills which were marked with its “chapa” and the bank did not issue any receipt containing the
serial number of the bills.

Upon investigation, BPI alleged that the US$100 bills surrendered by the spouses Quiaoit were not
the same as the dollar bills disbursed to Lambayong. The dollar bills did not bear the identiying
“chapa” from BPI Greenhills and as such, they came from another source.

The RTC ruled in favor of the spouses and was affirmed the CA which ruled that BPI did not follow
the normal banking procedure of listing the serial numbers of the dollar bills considering the
reasonable length of time from the time Fernando advised them of the withdrawal until Lambayong’s
actual encashment of the check.

ISSUE:
Did BPI exercise due diligence in handling the withdrawal of the US dollar bills alleged to be
counterfeit?

RULING:
NO. BPI failed to exercise due diligence in the transaction.

In Spouses Carbonell v. Metropolitan Bank and Trust Company, the Court emphasized that the General
Banking Act of 2000 demands of banks the highest standards of integrity and performance. The Court
ruled that banks are under obligation to treat the accounts of their depositors with meticulous care.
The Court ruled that the bank’s compliance with this degree of diligence has to be determined in
accordance with the particular circumstances of each case.

In this case, BPI failed to exercise the highest degree of diligence that is not only expected but
required of a banking institution. In releasing the dollar bills without listing down their serial
numbers, BPI failed to exercise the highest degree of care and diligence required of it. Likewise, BPI

99
had the last clear chance to prove that al the dollar bill it issued to the spouses Quiaoit were genuine
and that the counterfeit bills did not come from it if only it listed down the serial numbers of the bills

It is well-settled that the diligence required of banks is more than that of a good father of a family.
Banks are required to exercise the highest degree of diligence in its banking transactions.

100
 BANKING LAWS

THE BSP AND PNB ARE NOT OBLIGATED TO COMPENSATE SUGAR PRODUCERS FOR THEIR
LOSSES UNDER RA 7202

49. Bangko Sentral ng Pilipnas v. Spouses Ledesma

G.R. Nos. 211176 & 211583, February 6, 2019
Leonen, J.

FACTS:
These are consolidated appeals on the decision of the CA, reversing the Decision of the RTC
dismissing the complaint for Sum of Money filed by Spouses Juanito and Victoria Ledesma against
the Bangko Sentral ng Pilipinas and Philippine National Bank.

Spouses Juanito and Victoria Ledesma were engaged in sugar farming in Negros Occidental. They
were among those who suffered losses in sugar farming operations due to the actions of government-
owned and controlled agencies. Among these agencies were the BSP and the PNB. This was due to
the loan obtained by the spouses from the PNB which they paid in excess. PNB admitted the
overpayment. To recover this, the spouses instituted in the RTC an action for Sum of Money against
the PNB and the BSP. The Spouses argued that under RA 7202, the BSP and the PCGG should
compensate them for their losses and refund the excess payment from the sugar restitution fund.

The trial court dismissed the complaint for prematurity and lack of cause of action. The RTC held that
there was still no fund set up, and thus, no obligation arose from the provisions of RA 7202. On appeal
to the CA, the decision was reversed. The appellate court ratiocinated that RA 7202 mandated the
BSP to promulgate the IRR for the compensation of aggrieved sugar farmers. Thus, its obligation
existing, it must perform its obligation under the law. On the other hand, RA 7202 mandated the
lending banks to condone interests more than the 12% threshold. When the loan was recomputed, it
was found out that the spouses overpaid, such fact was even acknowledged by PNB. With these, the
CA found BSP and PNB liable under the law. Both BSP and PNB filed their respective Petitions for
Review on Certiorari which were later on consolidated.

ISSUE:
Are the BSP and PNB liable to the Spouses Ledesma under RA 7202 for the overpayment?

RULING:
NO. The compensation should come from the sugar restitution fund.

The CA erred in ruling that the BSP is mandated to pay the sugar producers. The money to be used to
compensate these sugar producers should come from the sugar restitution fund. Without the fund,
there is no restitution to speak of at all. BSP cannot effect the restitution since neither the PCGG nor
other government agencies have turned over funds to it for the sugar producers’ compensation.

PNB’s role was merely that of a lending bank. Under RA 7202 and its Implementing Rules and
Regulations, lending banks are not obligated to compensate sugar producers for their losses.
Restitution falls under the BSP, upon the establishment of a sugar restitution fund. There is no dispute
that respondents are covered under RA 7202. While this Court recognizes the plight of the thousands
of sugar producers and their right as beneficiaries, there is, sadly, no fund from where the money
should come.

101
The PNB has not violated any of its obligations toward respondents since it was never tasked by the
law to refund the claim for excess payments. As a private banking institution and as a publicly listed
company, it has no jurisdiction, control, or relation to the sugar restitution fund. Thus, the CA’s
Decision and Resolution are contrary to law and jurisprudence.

102
 BANKING LAWS

IN DEPOSIT SPLITTING, THERE IS A PRESUMPTION THAT THE TRANSFEREES HAVE NO

BENEFICIAL OWNERSHIP

50. Linsangan v. Philippine Deposit Insurance Corp.

G.R. No. 228807, February 11, 2019
Reyes, Jr., J.

FACTS:
This case is a petition for review on certiorari on the decision of the Court of Appeals which affirmed
the Philippine Deposit Insurance Corporation’s (PDIC’s) denial of petitioner Carlito B. Linsangan’s
deposit insurance claim on July 12, 2013.

On May 23, 2013, Bangko Sentral ng Pilipinas (BSP) ordered the closure of the Cooperative Rural
Bank of Bulacan, Inc. (CRBBI) and placed it under PDIC’s receivership. Petitioner filed a claim for
payment of deposit insurance for his Special Incentive Savings Account (SISA) No. 00-44-10750-9,
which had a balance of P400,000.00 at the time of CRBBI’s closure. Upon investigation, PDIC found
that petitioner’s account originated from the account of “Cornelio Linsangan or Ligaya Linsangan”.
PDIC then conducted a tracing of relationship and it discovered that petitioner is not a qualified
relative of Cornelio and Ligaya. Consequently, petitioner’s account was consolidated with the other
legitimate deposits of Cornelio and Ligaya for purposes of computing the insurable deposit. PDIC
considered the source account holders Cornelio and Ligaya as the real owners of the four resulting
accounts. Thus, they were only entitled to the maximum deposit insurance of P500,000.00.

Petitioner argues that the transfer of funds to his account is not deposit splitting because the transfer
took place more than 120 days prior to the closure of the bank

ISSUE:
Did the petitioners commit deposit splitting justifying the denial of their insurance claim?

RULING:
Petitioner’s argument is erroneous. In deposit splitting, there is a presumption that the transferees
have no beneficial ownership considering that the source account, which exceeded the maximum
deposit insurance coverage, was split into two or more accounts within 120 days immediately
preceding bank closure. On the other hand, in cases wherein the transfer into two or more accounts
occurred before the 120-day period, the PDIC does not discount the possibility that there may have
been a transfer for valid consideration, but in the absence of transfer documents found in the records
of the bank at the time of closure, the presumption arises that the source account remained with the
transferor. Consequently, even if the transfer into different accounts was not made within 120 days
immediately preceding bank closure, the grant of deposit insurance to an account found to have
originated from another deposit is not automatic because the transferee still has to prove that the
transfer was for a valid consideration through documents kept in the custody of the bank.

In this case, even if Cornelio donated the amount to petitioner, no document evidencing the donation
is in the custody of the bank upon takeover by PDIC. Thus, the PDIC properly relied on the records of
the bank which showed that Cornelio’s accounts remained in his name and for his account. Moreover,
even if the Court disregards the submission of transfer documents, petitioner could not be considered
the beneficial owner of the resulting deposit account because he is not a qualified relative of the

103
transferor. Being the son of Cornelio’s cousin, petitioner is already a 5th degree relative of the
transferor, far from the requirement that the transferee must be a relative within the second degree
of consanguinity or affinity.

104
 INTELLECTUAL PROPERTY LAW

NEWS SHALL BE COPYRIGHTABLE IF IT INVOLVES A WHOLE SPECTRUM OF VISUALS AND

EFFECTS, VIDEO AND AUDIO, INCLUDING FRAMING SHOTS, USING IMAGES, GRAPHICS AND
SOUND EFFECTS

51. ABS-CBN Corp. v. Gozon

G.R. No. 195956, March 11, 2015
Leonen, J.

FACTS:
ABS-CBN “conducted live audio-video coverage of and broadcasted the arrival of Angelo dela Cruz at
the Ninoy Aquino International Airport (NAIA) and the subsequent press conference.” ABS-CBN
allowed Reuters Television Service (Reuters) to air the footages it had taken earlier under a special
embargo agreement. ABS-CBN alleged that under the special embargo agreement, any of the footages
it took would be for the “use of Reuter’s international subscribers only, and shall be considered and
treated by Reuters under ‘embargo’ against use by other subscribers in the Philippines “no other
Philippine subscriber of Reuters would be allowed to use ABS-CBN footage without the latter’s
consent.”

GMA-7 subscribes to both Reuters and Cable News Network (CNN). It received a live video feed of
the coverage of Angelo dela Cruz’s arrival from Reuters. GMA-7 immediately carried the live news
feed in its program “Flash Report,” together with its live broadcast. Allegedly, GMA-7 did not receive
any notice or was not aware that Reuters was airing footages of ABS-CBN. GMA-7’s news control
room staff saw neither the “No Access Philippines” notice nor a notice that the video feed was under
embargo in favor of ABS-CBN.
ABS-CBN filed the Complaint for copyright infringement under Sections 177 and 211 of the
Intellectual Property Code.

ISSUES:
1. Did the act constitute copyright infringement?
2. Should respondents be held liable for copyright infringement?

RULING:
1. Yes. It is true that under Section 175 of the Intellectual Property Code, “news of the day and other
miscellaneous facts having the character of mere items of press information” are considered
unprotected subject matter. However, the Code does not state that expression of the news of the
day, particularly when it underwent a creative process, is not entitled to protection. News or the
event itself is not copyrightable. However, an event can be captured and presented in a specific
medium. As recognized by this court in Joaquin, television “involves a whole spectrum of visuals
and effects, video and audio.” News coverage in television involves framing shots, using images,
graphics, and sound effects. It involves creative process and originality. Television news footage
is an expression of the news.

The act of respondents can be characterized as fair use. In determining fair use, several factors
are considered, including the nature of the copyrighted work, and the amount and substantiality
of the person used in relation to the copyrighted work as a whole. In the business of television
news reporting, the nature of the copyrighted work or the video footages, are such that, footage
created, must be a novelty to be a good report. Thus, when the Angelo dela Cruz footage was used

105
 by respondents, the novelty of the footage was clearly affected. Moreover, given that a substantial
portion of the Angelo dela Cruz footage was utilized by GMA-7 for its own, its use can hardly be
classified as fair use. Hence, respondents could not be considered as having used the Angelo dela
Cruz footage following the provisions on fair use.

2. Criminal liability of a corporation’s officers or employees stems from their active participation in
the commission of the wrongful act. The principle applies whether or not the crime requires the
consciousness of wrongdoing. It applies to those corporate agents who themselves commit the
crime and to those, who, by virtue of their managerial positions or other similar relation to the
corporation, could be deemed responsible for its commission, if by virtue of their relationship to
the corporation, they had the power to prevent the act.

Complainant failed to present clear and convincing evidence that the said respondents conspired
with Reyes and Manalastas. No evidence was adduced to prove that these respondents had an
active participation in the actual commission of the copyright infringement or they exercised
their moral ascendancy over Reyes and Manalastas in airing the said footage. It must be stressed
that, conspiracy must be established by positive and conclusive evidence. It must be shown to
exist as clearly and convincingly as the commission of the offense itself.

106
 INTELLECTUAL PROPERTY LAW

PATENT DEEMED ABANDONED IF IT FAILS TO PROSECUTE WITHIN 4 MONTHS FROM THE

DATE OF MAILING, NOT FROM ACTUAL NOTICE

52. E.I. Dupont De Nemours and Co. v. Francisco

G.R. No. 174379, August 31, 2016
Leonen, J.

FACTS:
Petitioner is a Delaware- based corporation. In 1987, petitioner filed an application for PH patent
before Bureau of Patents for Angiotensin II Receptor Blocking Imidazole (losartan), an invention
related to the treatment of hypertension and congestive heart failure. The product (under the
brandnames Cozaar and Hyzaar) was produced and marketed by Merck, Sharpe, and Dohme
Corporation, licensee of petitioner. The application was handled by a Filipino lawyer, Atty. Nicanor
Mapili.

In 2000, petitioner’s new counsel, Ortega, et al., sent the IPO a letter requesting that an office action
be issued on the petitioner’s patent application. On January 30, 2002, IPO Patent Examiner sent an
office action (Paper No. 2) stating that there were no documents shown that the authority to
prosecute the patent application was transferred from Atty. Mapili to Ortega, et al. Hence, an official
revocation of Power of Attorney of Atty. Mapili and appointment of Ortega, et al. by petitioner is
required before further action can be undertaken on the patent application. Also, it was noted by the
Examiner that the application was deemed abandoned since it took 13 years for petitioner to request
for an office action. On May 29, 2002, petitioner replied to Paper No. 2 by submitting a Power of
Attorney authorizing Ortega, et al. to handle its patent application.

Petitioner also filed petition for revival of its patent application. In its petition, they argued that it
was only in 1996 that they became aware of Atty. Mapili’s death when its senior-level lawyer visited
PH, and that it was only on January 30, 2002, that it received a notice of abandonment sent by IPO
(Paper No. 2).

On April 18, 2002, Director of Patents denied the petition for revival for having been filed out of time.
It ruled that although it appears that Atty. Mapili was remiss in his obligations as counsel for the
petitioner, the abandoned application cannot be revived because of the limitations provided in Rule
115 of Revised Rules of Practice.

Petitioner appealed to Director-General of IPO. On August 26, 2002, said appeal was denied.
Petitioner appealed to CA and was granted. CA believed that petitioner should be accorded some
relief from the gross negligence of its former counsel, Atty. Mapili.

IPO moved to reconsider. Meanwhile, Therapharma moved for leave to intervene arguing that CA’s
decision affected its “vested” rights to sell its own product. Therapharma alleged that it was granted
application by BFAD for a losartan product “Lifezar,” a medication for hypertension, and that prior
to its application, it made sure that no patent application for similar products exists and that
petitioner’s application was considered abandoned by the Bureau of Patents. In January 2006, CA
granted the motion for leave to intervene of Therapharma.

107
Petitioner moved to reconsider. CA reversed its decision ruling that the public interest would be
prejudiced by the revival of petitioner’s patent application. CA held that petitioner and Atty. Mapili
were inexcusably negligent. CA also found that Therapharma had already invested P20M to develop
its own losartan product.

Petitioner filed the present case. Petitioner argues that it was not negligent in the prosecution of its
patent application since it was Atty. Mapili or his heirs who failed to inform it of crucial developments
with regard to its patent application. It argues that as a client in a foreign country, it does not have
immediate supervision over its local counsel so it should not be bound by its counsel’s negligence.

ISSUE:
Should the patent application of petitioner be revived?

RULING:
Under Chapter VII, Section 111(a) of the 1962 Revised Rules of Practice, a patent application is
deemed abandoned if the applicant fails to prosecute the application within four months from the
date of the mailing of the notice of the last action by the Bureau of Patents, Trademarks, and
Technology Transfer, and not from applicant’s actual notice.

According to the records of the Bureau of Patents, Trademarks, and Technology Transfer Chemical
Examining Division, petitioner filed Philippine Patent Application No. 35526 on July 10, 1987. It was
assigned to an examiner on June 7, 1988. An Office Action was mailed to petitioner’s agent, Atty.
Mapili, on July 19, 1988. Because petitioner failed to respond within the allowable period, the
application was deemed abandoned on September 20, 1988. Under Section 113, petitioner had until
January 20, 1989 to file for a revival of the patent application. Its Petition for Revival, however, was
filed on May 30, 2002, 13 years after the date of abandonment.

Even if the delay was unavoidable, or the failure to prosecute was due to fraud, accident, mistake, or
excusable negligence, or the petition was accompanied by a complete proposed response, or all fees
were paid, the same would still be denied since these regulations only provide a 4-month period
within which to file for the revival of the application. The rules do not provide any exception that could
extend this four (4)-month period to 13 years. Petitioner’s patent application, therefore, should not be
revived since it was filed beyond the allowable period.

Even assuming that the 4-month period could be extended, petitioner was inexcusably negligent in
the prosecution of its patent application. Negligence is inexcusable if its commission could have been
avoided through ordinary diligence and prudence. It is also settled that negligence of counsel binds
the client as this “ensures against the resulting uncertainty and tentativeness of proceedings if clients
were allowed to merely disown their counsels’ conduct.

Petitioner’s resident agent, Atty. Mapili, was undoubtedly negligent in failing to respond to the Office
Action sent by the Bureau of Patents, Trademarks, and Technology Transfer on June 19, 1988.
Because of his negligence, petitioner’s patent application was declared abandoned. He was again
negligent when he failed to revive the abandoned application within 4 months from the date of
abandonment.

The four (4)-month period in Section 111 of the 1962 Revised Rules of Practice, however, is not
counted from actual notice of abandonment but from mailing of the notice. Since it appears from the
Intellectual Property Office’s records that a notice of abandonment was mailed to petitioner’s
resident agent on July 19, 1988, the time for taking action is counted from this period. Petitioner’s

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patent application cannot be revived simply because the period for revival has already lapsed and no
extension of this period is provided for by the 1962 Revised Rules of Practice.

Public interest will be prejudiced if, despite petitioner’s inexcusable negligence, its Petition for
Revival is granted. Even without a pending patent application and the absence of any exception to
extend the period for revival, petitioner was already threatening to pursue legal action against
respondent Therapharma, Inc. if it continued to develop and market its losartan product, Lifezar.
Once petitioner is granted a patent for its losartan products, Cozaar and Hyzaar, the loss of
competition in the market for losartan products may result in higher prices. For the protection of
public interest, Philippine Patent Application No. 35526 should be considered a forfeited patent
application.

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 INTELLECTUAL PROPERTY LAW

IN ADMINISTRATIVE PROCEEDINGS, TECHNICAL RULES OF PROCEDURE AND EVIDENCE ARE

NOT STRICTLY APPLIED

53. Palao v. Florentino III International, Inc.

G.R. No. 186987, January 18, 2017
Leonen, J.

FACTS:
This case resolves a Petition for Review on Certiorari filed by Divina Palao (Palao) praying that the
CA resolution reinstating respondent Florentino III International, Inc.’s (Florentino) appeal from the
Bureau of Legal Affairs (BLA) of the IPO be reversed and set aside.

The IPO issued Letters Patent No. UM-7789 in favor of Palao. Florentino filed a petition for
cancellation, but was denied by the BLA. Florentino appealed to the Office of the Director General.
The appeal’s Verification and Certification of Non-Forum Shopping was signed by Atty. Maximo of
the firm Balgos and Perez. However, Florentino failed to attach to its appeal a secretary’s certificate
or board resolution authorizing Balgos and Perez to sign the Verification and Certification of Non-
Forum Shopping. The Office of the Director General then issued an order requiring Florentino to
submit proof that Atty. Maximo was authorized to sign the same. Despite compliance, his appeal was
dismissed because apparently, the certificate he submitted to comply with the order failed to
establish the authority of Florentino’s counsel to sign the Verification and Certification of Non-Forum
Shopping as of the date of the filing of Florentino’s appeal. On appeal, the CA reversed Director
General’s decision and faulted him for an overly strict application of procedural rules.

ISSUE:
Was Court of Appeals wrong in reversing the decision of the Director General and in reinstating
respondent Florentino’s appeal?

RULING:
No, the Court of Appeals was justified in its decision to reinstate Florentino’s appeal.

Sec. 4(e) of the IPO’s Uniform Rules on Appeal specifies the need for a certification of non-forum
shopping in appeals taken to the Director General. Rule 2, Sec. 6 of the Rules of Procedure to be
Followed in the Conduct of Hearing of Inter Partes Cases provides that the Rules of Court, unless
inconsistent with these rules, may be applied in suppletory character, provided, however, that the
Director or Hearing Officer shall not be bound by the strict technical rules of procedure and evidence.
In conformity with this liberality, Section 5(b) of the Intellectual Property Office’s Uniform Rules on
Appeal expressly enables appellants, who failed to comply with Section 4’s formal requirements, to
subsequently complete their compliance.

Given these premises it was an error for the Director General of the Intellectual Property Office to
have been so rigid in applying a procedural rule and dismissing respondent’s appeal. As pointed out
by the Court of Appeals, Atty. Maximo has been representing respondent (and signing documents for
it) since the [original] Petition for Cancellation was filed.” Thus, its act of signing for respondent, on
appeal before the Director General of the Intellectual Property Office, was not an aberration. It was a
mere continuation of what it had previously done.

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 INTELLECTUAL PROPERTY LAW

THE COURT DISAGREES THAT A BANK OR ATM SERVICE IS MORE AKIN TO ORDINARY
HOUSEHOLD ITEMS THAN IT IS TO BRAND NAME JEANS IN TERMS OF HOW THEIR CUSTOMERS
CHOOSE THEIR PROVIDERS

54. Citygroup Inc., v. Citystate Savings Bank, Inc.

G.R. No. 205409, June 13, 2018
Leonen, J.

FACTS:
This resolves a Petition for Review on Certiorari filed by petitioner Citigroup, Inc. (Citigroup)
assailing the decision of the CA which ruled that parties’ trademarks were not confusingly similar.

Respondent applied for registration of its trademark “CITY CASH WITH GOLDEN LION’S HEAD” for
its ATM service with the Intellectual Property Office. Petitioner filed an opposition to Citystate’s
application. Petitioner claimed that the “CITY CASH WITH GOLDEN LION’S HEAD” mark is
confusingly similar to its own “CITI” marks.

Petitioner argues that there was a confusing similarity between the trademark that respondent
applied for and petitioner’s own trademarks. Furthermore, it asserted that when the dominancy test
is applied to the Court of Appeals’ findings of fact, the necessary result is a finding of confusing
similarity. Moreover, petitioner avers that customers do not select ATM services after cautious
evaluation, and that ATM services are marketed to ordinary consumers. On the other hand,
respondent argues that its mark is not confusingly similar to petitioner’s. It disputes petitioner’s
claims on ATM services and the kind of caution exercised prior to obtaining an ATM card, asserting
that before customers may avail of ATM services, they have to open an account with the bank offering
them.

ISSUE:
Was there a confusing similarity between petitioner’s and respondent’s mark?

RULING:
No, there was no confusing similarity between the aforementioned marks.

To aid in determining the similarity and likelihood of confusion between marks, our jurisprudence
has developed two (2) tests: the dominancy test and the holistic test.

With these guidelines in mind, this Court considered “the main, essential, and dominant features” of
the marks in this case, as well as the contexts in which the marks are to be used. Applying the
dominancy test, this Court sees that the prevalent feature of respondent’s mark, the golden lion’s
head device, is not present at all in any of petitioner’s marks. The only similar feature between
respondent’s mark and petitioner’s collection of marks is the word “CITY” in the former, and the
“CITI” prefix found in the latter. A visual comparison of the marks reveals no likelihood of confusion.
Furthermore, this Court is at a loss to see how this supports petitioner’s claims that ATM users locate
the nearest ATMs and use them without reference to brand as long as the ATM accepts their cards. If
petitioner’s speculation is true, then bank branding is wholly irrelevant after the ATM service has
been secured. In any case, this Court simply cannot agree that a bank or ATM service is more akin to
ordinary household items than it is to brand name Jeans.

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 INTELLECTUAL PROPERTY LAW

ALTHOUGH THERE IS A NOTICEABLE DIFFERENCE ON HOW THE TRADE NAME IS BEING USED
IN ITS PRODUCTS, IT DOES NOT PRECLUDE THAT THERE MAY BE A CONFUSION ON THE
ORIGIN OF THE PRODUCTS

55. Asia Pacific Resources International Holdings, Ltd. v. Paperone, Inc.

G.R. Nos. 213365-66, December 10, 2018
Gesmundo, J.

FACTS:
Petitioner is engaged in the production, marketing, and sale of pulp and premium wood free paper.
It alleged that it is the owner of a well-known trademark, PAPER ONE. The said trademark enjoyed
legal protection in different countries worldwide and enjoyed goodwill and high reputation because
of aggressive marketing and promotion. Petitioner claimed that the use of PAPERONE in
respondent’s corporate name without its prior consent and authority was done in bad faith and
designed to unfairly ride on its good name and to take advantage of its goodwill. It was calculated to
mislead the public into believing that respondent’s business and/or products were manufactured,
licensed or sponsored by petitioner.

Respondent, on its part, averred that it had no obligation to secure prior consent or authority from
petitioner to adopt and use its corporate name. The Department of Trade and Industry (DTI) and the
SEC had allowed it to use Paperone, Inc., thereby negating any violation on petitioner’s alleged prior
rights. Respondent was registered with the SEC, having been organized and existing since March 30,
2001. Respondent, on its part, averred that it had no obligation to secure prior consent or authority
from petitioner to adopt and use its corporate name. The Department of Trade and Industry (DTI)
and the SEC had allowed it to use Paperone, Inc., thereby negating any violation on petitioner’s alleged
prior rights. Respondent was registered with the SEC, having been organized and existing since
March 30, 2001
Bureau of Legal Affairs (BLA) Director, Intellectual Property Office, found respondent liable £or
unfair competition. But this was reversed by the CA upon appeal.

ISSUE:
Is respondent liable for unfair competition?

RULING:
Yes. The essential elements of an action for unfair competition are: (1) confusing similarity in the
general appearance of the goods, and (2) intent to deceive the public and defraud a competitor. Unfair
competition is always a question of fact.

Relative to the first issue on confusion of marks and trade names, jurisprudence has noted two types
of confusion, viz.: (1) confusion of goods (product confusion), where the ordinarily prudent purchaser
would be induced to purchase one product in the belief that he was purchasing the other; and (2)
confusion of business (source or origin confusion), where, although the goods of the parties are
different, the product, the mark of which registration is applied for by one party, is such as might
reasonably be assumed to originate with the registrant of an earlier product; and the public would
then be deceived either into that belief or into the belief that there is some connection between the
two parties, though inexistent. Thus, while there is confusion of goods when the products are

112
competing, confusion of business exists when the products are non-competing but related enough to
produce confusion of affiliation.

This case falls under the second type of confusion. Although we see a noticeable difference on how
the trade name of respondent is being used in its products as compared to the trademark of
petitioner, there could likely be confusion as to the origin of the products. Thus, a consumer might
conclude that PAPER ONE products are manufactured by or are products of Paperone, Inc.
Additionally, although respondent claims that its products are not the same as petitioner’s, the goods
of the parties are obviously related as they are both kinds of paper products.

113
 INSOLVENCY LAWS

FAILURE TO ESTABLISH PARALYSIS IN BUSINESS OPERATION LEADS TO DENIAL OF PRAYER

FOR RECEVIERSHIP

56. Villamor, Jr. v. Umale

G.R. Nos. 172843 & 172881, September 24, 2014
Leonen, J.

FACTS:
This case involves a petition for certiorari under rule 45 assailing the decision of the CA which placed
the Pasig Printing Corporation (PPC) under receivership.

MC Home Depot occupied a Rockland area property in Pasig City which was part of the are owned by
Mid-Pasig Development Corporation (Mid-Pasig). Sometimes in 2004, PPC obtained an option to
lease portions of Mid-Pasig’s property, including the subject property. Later, PPC’s Board of Directors
issued a Resolution waiving all its rights, interests and participation in the option to lease contract in
favor of the law firm of Atty. Alfredo Villamor, Jr. without any consideration. Thereafter, PPC, as
represented by Villamor, entered in a MOA with MC Home Deport allowing them to continue
occupying the area as PPC’s sublessee for 4 years at a monthly rental of P4, 5000,000.00 plus goodwill
of P18,000,000.00. Thus, MC Home Deport issued 20 post dated checks for the rental payments for 1
year and the goodwill money giving them to Villamor who in turn did not turn over the said amount
to PPC. This prompted Hernando Balmaores, a stockholder and director of PPC, to inform the PPC’s
directors of the need to compel Villamor to deliver and account for MC Home Depot’s payments to
PPC. However, PPC BOD failed to act on Balmores’ letter which prompted the latter to file an intra-
corporate controversy with the RTC without impleading PPC as an indispensable party. Moreover,
Balmores also asked the court to place the PPC under receivership claiming that PPC’s assets were
not only in imminent danger, but have actually been dissipated, lost, wasted and destroyed. The RTC
denied Balmomres’ prayer, but this was reversed by the CA granting the derivative suit and ordering
that PPC be placed under receivership.

Petitioners now argue that the CA erred in characterizing the respondent’s Balmores’ suit as a
derivative suit because of his failure to implead PPC as party in the case. Further, they argued that
Balmores failed to prove that the asset of the corporation were in imminent danger of being
dissipated, thus, the court erred in placing them under receivership.

ISSUES:
1. Did the Court of Appeals err in characterizing Balmores’ action as a derivative suit?
2. Did the Court of Appeals err in placing PPC under receivership?

RULING:
1. Yes, the Court of Appeals erred in characterizing Balmores’ action as a derivative suit.

A derivative suit is an action filed by stockholders to enforce a corporate action.

Individual stockholders may be allowed to sue on behalf of the corporation whenever the
directors or officers of the corporation refuse to sue to vindicate the rights of the corporation or
are the ones to be sued and are in control of the corporation. This court explained in Asset
Privatization Trust v. Court of Appeals that it is a condition sine qua non that the corporation be
impleaded as party in derivative suits. Not only is the corporation an indispensable party, but it

114
 is also the present rule that it must be served with process. The reason given is that the judgment
must be made binding upon the corporation in order that the corporation may get the benefit of
the suit and may not bring a subsequent suit against the same defendants for the same cause of
action.

Here, Balmores’ act of informing the BOD of the PPC regarding the need to compel Villamor to
deliver and account for MC Home Depot’s payment did not amount to compliance with what the
law requires.

Thus, in this case Balmores filed an individual suit.

2. Yes, the court of Appeals erred in placing PPC under receivership.

Management committees and receivers are appointed when the corporation is in imminent
danger of (1) dissipation, loss, wastage or destruction of assets or other properties; and (2)
paralysation of its business operations that may be prejudicial to’ the interest of the minority
stockholders, parties-litigants, or the general public. Applicants for the appointment of a receiver
or management committee need to establish the confluence of these two requisites.

Here Balmores, however, failed to show that there was an imminent danger of paralysis of PPC’s
business operations. Apparently, PPC was- earning substantial amounts from its other sub-
lessees. Respondent Balmores did not prove otherwise. He, therefore, failed to show at least one
of the requisites for appointment of a receiver or management committee.

Thus, the PPC shall have not been ordered to be placed under receivership.

115
 INSOLVENCY LAWS

THE INTERIM RULES DOES NOT REQUIRE A HEARING BEFORE THE ISSUANCE OF A STAY
ORDER

57. Pryce Corp. v. China Banking Corp.

G.R. No. 172302, February 18, 2014
Leonen, J.

FACTS:
The present case originated from a petition for corporate rehabilitation filed by petitioner Pryce
Corporation with the RTC. The rehabilitation court eventually appointed Gener T. Mendoza as
rehabilitation receiver, who did not approve of the rehabilitation plan as submitted by petitioner.
The plan was amended and eventually approved by the court. Respondent China Banking
Corporation (CBC) questioned the rehabilitation plan, specifically that it impaired the obligations of
contracts, that the commercial courts have no power to render without force and effect contractual
stipulations, and that such plan also violated the mutuality of contracts. The CA ruled in favor of CBC.
The first division of the SC affirmed the CA’s decision with modifications. A second motion for
reconsideration was filed by petitioner praying that the CA decision be set aside. This second MR was
to be resolved by the En Banc en consulta.

Petitoner and respondent however filed a joint manifestation to suspend proceedings, requesting the
Court to defer its ruling, to enable said parties to come to an amicable settlement, which however did
not materialize.

The Court then decided to rule on petitioner’s motion, arguing: 1) that the issue on the validity of the
rehabilitation order dated January 17, 2005 is now res judicata in light of the BPI v Pryce Corporation
case being in contradiction to the present case; and 2) that Rule 4 Section 6 of the Interim Rules of
Procedure on Corporate Rehabilitation does not require the rehabilitation court to hold a hearing
before issuing a stay order.

ISSUES:
1. Is this present case barred by reason of res judicata by virtue of the BPI v. Pryce Corp. case?
2. Does the rehabilitation court need to hold a hearing before issuance of a stay order?

RULING:
1. Yes.

BPI v. Pryce Corporation docketed as G.R. No. 180316 rendered the issue on the validity of the
rehabilitation court’s January 17, 2005 order approving the amended rehabilitation plan as res
judicata. In BPI v. Pryce Corporation, the Court of Appeals set aside initially the January 17, 2005
order of the rehabilitation court. On reconsideration, the court set aside its original decision and
dismissed the petition. On appeal, this court denied the petition filed by BPI with finality. An entry
of judgment was made for BPI v. Pryce Corporation on June 2, 2008. In effect, this court upheld
the January 17, 2005 order of the rehabilitation court.

The elements of res judicata through bar by prior judgment are present in this case.

2. No.

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We now proceed to the second issue on whether the rehabilitation court is required to hold a
hearing to comply with the “serious situations” test laid down in Rizal Commercial Banking Corp.
v. IAC before issuing a stay order. However, this case had been promulgated prior to the effectivity
of the Interim Rules that took effect on December 15, 2000.

Section 6 of the Interim Rules states explicitly that “[i]f the court finds the petition to be sufficient
in form and substance, it shall, not later than five (5) days from the filing of the petition, issue an
Order (a) appointing a Rehabilitation Receiver and fixing his bond; (b) staying enforcement of all
claims x x x.” Nowhere in the Interim Rules does it require a comprehensive discussion in the stay
order on the court’s findings of sufficiency in form and substance. Neither does the Interim Rules
require a hearing before the issuance of a stay order. What it requires is an initial hearing before
it can give due course to or dismiss a petition.

Nevertheless, while the Interim Rules does not require the holding of a hearing before the
issuance of a stay order, neither does it prohibit the holding of one. Thus, the trial court has ample
discretion to call a hearing when it is not confident that the allegations in the petition are
sufficient in form and substance, for so long as this hearing is held within the five (5)–day period
from the filing of the petition — the period within which a stay order may issue as provided in
the Interim Rules. Petition granted.

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 INSOLVENCY LAWS

RULE 3, SECTION 5 OF THE INTERIM RULES GOVERNS THE EFFECTIVITY OF ORDERS ISSUED
IN PROCEEDINGS RELATING TO THE REHABILITATION OF CORPORATIONS, PARTNERSHIPS,
AND ASSOCIATIONS

58. Home Guaranty Corp. v. La Savoie Development Corp.

G.R. No. 168616, January 28, 2015
Leonen, J.

FACTS:
This is a Petition for Review on Certiorari praying that the assailed Decision of the CA be reversed
and set aside. In the alternative, it prays that certain properties supposedly conveyed by respondent
La Savoie Development Corporation to petitioner Home Guaranty Corporation be excluded from the
rehabilitation plan of La Savoie Development Corporation, should its Petition for Corporate
Rehabilitation be given due course.

La Savoie Development Corporation (La Savoie) is a domestic corporation, engaged in the business
of “real estate development, subdivision and brokering.” It later found itself unable to pay its
obligations to its creditors, prompting it to file a petition for the declaration of state of suspension of
payments with approval or proposed rehabilitation plan under the Interim Rules. The RTC Judge
Estela Perlas-Bernabe issued a Stay Order, staying the enforcement of all claims against La Savoie.

Petitioner Home Guaranty Corporation (Home Guaranty) filed an opposition, although it was not a
creditor of La Savoie. It asserted that it had a “material and beneficial interest in the . . . Petition, in
relation to the interest of Philippine Veterans Bank (PVB), Planters Development Bank (PDB), and
Land Bank of the Philippines (LBP), which are listed as creditors of Petitioner vis-a-vis certain
properties or assets that might have been taken cognizance of, and placed under the custody of the
RTC and/or the appointed Rehabilitation Receiver.”

Home Guaranty Corporation argued that it and the investors on the LSDC certificates had
“preferential rights” over the properties making up the Asset Pool as these “were conveyed as
security or collaterals for the redemption of the [LSDC certificates]. Thus, they should be excluded
from the coverage of La Savoie’s Petition for Rehabilitation. La Savoie on the other hand argued that
the assignment of assets to the Asset Pool was not absolute and subject to certain conditions.
Specifically, it asserted that for the assignment to take effect, Home Guaranty Corporation had to first
pay the holders of the LSDC certificates. Thus, La Savoie claimed that the properties comprising the
Asset Pool remained to be its assets.

ISSUE:
Should the properties comprising the Asset Pool be excluded from the proceedings on La Savoie
Development Corporation’s Petition for Rehabilitation?

RULING:
NO. It is not disputed that La Savoie defaulted in the redemption and in the payment of interest on
the LSDC certificates. It is also settled that a call was made on Home Guaranty Corporation to pay for
the LSDC certificates, pursuant to the provisions of the Trust Agreement and the Contract of
Guaranty. However, as acknowledged by Home Guaranty Corporation, any payment that it could have

118
made was “overtaken” by the filing of La Savoie’s Petition for Rehabilitation. The RTC then issued a
Stay Order.

With the issuance of this Stay Order, the claims of La Savoie’s creditors, including, those of the holders
of the LSDC certificates, were barred from being enforced. From the point of view of La Savoie and
“its guarantors and sureties not solidarity liable with it,” no payment could have been made by them.
Thus, for as long as the Stay Order was in effect, certificate holders were barred from insisting on and
receiving payment, whether from the principal debtor, La Savoie, or from the guarantor, Home
Guaranty Corporation. Conversely, La Savoie and Home Guaranty Corporation were barred from
paying certificate holders for as long as the Stay Order was in effect.

What is notable, however, is what transpired in the interim. Sometime between La Savoie’s filing of
its Appellant’s Brief and Home Guaranty Corporation’s filing of its Appellee’s Brief -- Home Guaranty
Corporation approved and processed the call that was made, prior to the commencement of
rehabilitation proceedings, on its guaranty and proceeded to pay the holders of LSDC certificates a
total amount of P128.5 million as redemption value. In consideration of this and pursuant to Section
13.2 of the Contract of Guaranty, Planters Development Bank executed in favor of Home Guaranty
Corporation a Deed of Assignment and Conveyance in which Planters Development Bank “absolutely
assign[ed], transferred[ed], convey[ed] and deliver[ed] to the HGC, its successor and assigns the
possession and ownership over the entire Asset Pool Project.”

Rule 3, Section 5 of the Interim Rules governs the effectivity of orders issued in proceedings relating
to the rehabilitation of corporations, partnerships, and associations. Thus, We entertain no doubt
that Rule 3, Section 5 of the Interim Rules covered the trial court’s October 1, 2003 Order dismissing
the Petition for Rehabilitation and lifting the Stay Order The same Order was thus immediately
executory.

Thus, the October 1, 2003 Order, lifting the restrictions on the payment of claims against La Savoie,
remained in effect. La Savoie’s creditors were then free to enforce their claims. Conversely, La Savoie
and “its guarantors and sureties not solidarity liable with it” were no longer restrained from effecting
payment.

Petition is denied.

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 INSOLVENCY LAWS

APPROVAL OF THE INSOLVENT COURT IS NECESSARY BEFORE A SECURED CREDITOR CAN

FORCLOSE THE MORTGAGE PROPERTY

59. Metropolitan Bank & Trust Co. v. S.F. Naguiat Enterprises, Inc.
G.R. No. 178407, March 18, 2015
Leonen, J.

FACTS:
This is a Petition for Review under Rule 45 seeking to reverse and set aside Decision of the Court of
Appeals that dismissed Metropolitan Bank and Trust Company’s Petition for Certiorari and
Mandamus.

On March 3, 2005, S.F. Naguiat obtained a loan from Metrobank in the amount of P1,575,000.00. The
loan was secured by a real estate mortgage. On July 7, 2005, S.F. Naguiat filed a Petition for Voluntary
Insolvency with Application for the Appointment of a Receiver pursuant to Insolvency Law (Act No.
1956), as amended, before the RTC. Among the assets declared in the Petition was the property
covered by TCT No. 58676. Presiding Judge Irin Zenaida S. Buan issued and order declaring S.F.
Naguiat insolvent and forbidding payment of any debts due, delivery of properties, and transfer of
any of its properties. Pending the appointment of a receiver, Metrobank filed a Manifestation and
Motion informing the court of Metrobank’s decision to withdraw from the insolvency proceedings
because it intended to extrajudicially foreclose the mortgaged property to satisfy its claim against
S.F. Naguia. S.F. Naguiat defaulted in paying its loan. Thereafter, Metrobank instituted an extrajudicial
foreclosure proceeding against the mortgaged property covered by TCT No. 58676 and sold the
property at a public auction. A Certificate of Sale was submitted for approval of Executive Judge
Bernardita Gabitan-Erum who refused to approved the same in view of the order issued by the
insolvency court. Metrobank then filed a Petition for certiorari and mandamus before the CA which
was dismissed on the basis of Metrobank’s failure to “obtain the permission of the insolvency court
to extrajudicially foreclose the mortgaged property.”

Petitioner contends that the Court of Appeals decided questions of substance in a way not in accord
with law. Petitioner argues that nowhere in Act No. 1956 does it require that a secured creditor must
first obtain leave or permission from the insolvency court before said creditor can foreclose on the
mortgaged property.

ISSUE:
Is the approval and consent of insolvency court required before a secured creditor like petitioner can
proceed with the extrajudicial foreclosure of the mortgage property necessary under Act No. 1956,
otherwise known as Insolvency Law?

RULING:
YES. Act No. 1956 impliedly requires a secured creditor to ask the permission of the insolvent court
before said creditor can foreclose the mortgaged property. Section 18 of Insolvency Law provides
that upon receipt of the petition, the court shall issue an order declaring the petitioner insolvent, and
directing the sheriff to take possession of and safely keep, until the appointment of a receiver or
assignee, all the debtor’s real and personal property, except those exempt by law from execution. The
order also forbids the transfer of any property by the debtor. With the declaration of insolvency of
the debtor, insolvency courts “obtain full and complete jurisdiction over all property of the insolvent

120
and of all claims by and against it.” It follows that the insolvency court has exclusive jurisdiction to
deal with the property of the insolvent. Consequently, after the mortgagor-debtor has been declared
insolvent and the insolvency court has acquired control of his estate, a mortgagee may not, without
the permission of the insolvency court, institute proceedings to enforce its lien. In so doing, it would
interfere with the insolvency court’s possession and orderly administration of the insolvent’s
properties. Furthermore, explicitly under Section 59 and as a necessary consequence flowing from
the exclusive jurisdiction of the insolvency court over the estate of the insolvent, the mortgaged
property must first be formally delivered by the court or the assignee (if one has already been
elected) before a mortgagee-creditor can initiate proceedings for foreclosure.

Here, the foreclosure and sale of the mortgaged property of the debtor, without leave of court,
contravene the provisions of Act No. 1956 and violate the Order of the insolvency court which
declared S.F. Naguiat insolvent and forbidden from making any transfer of any of its properties to
any person. Thus, the extrajudicial foreclosure of the mortgaged property initiated by
petitioner without leave of insolvency court would effectively exclude the assignee’s right to
participate in the public auction sale of the property and to redeem the foreclosed property to the
prejudice of all the other creditors of the insolvent.

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 INSOLVENCY LAWS

LOAN SALE AND PURCHASE AGREEMENT ENTITLES THE BUYER TO ALL THE RIGHTS AND
INTERESTS THAT THE SELLER HAD HAD AS CREDITOR

60. Metropolitan Bank & Trust Co. v. G & P Builders, Inc.

G.R. No. 189509, November 23, 2015
Leonen, J.

FACTS:
This is a Petition for Review under Rule 45 which assails the Court of Appeals in reversing the Order
of the rehabilitation court, which allowed the withdrawal of the P15,000,000.00 deposit with
petitioner Metropolitan Bank & Trust Company.

On March 17, 2003, respondent G & P Builders, Incorporated filed a Petition for Rehabilitation with
the RTC. Among the allegations in the Petition is that G & P “obtained a loan from Metrobank and
mortgaged twelve (12) parcels of land as collateral. While the rehabilitation proceedings were
pending, Metrobank and G & P executed a Memorandum of Agreement, where the parties agreed that
4 out of the 12 parcels of land mortgaged would be released and sold. The sale of the parcels of land
amounted to P15,000,000.00. Pursuant to the first MOA, the amount was deposited with Metrobank
“for subsequent disposition and application in conformity with the Court approved Rehabilitation
Plan. Metrobank entered into a Loan Sale and Purchase Agreement with Elite Union Investments
Limited. Metrobank sold G & P’s loan account for P10,419,000.00. thereafter, Elite Union sold all its
rights, titles, and interests over G & P’s account to Spouses Victor and Lani Paras for the amount of
P10,419,000.00. G & P filed a Motion for the Release of Unapplied Deposit with Metrobank. It cited
the September 26, 2003 Order, which approved the first MOA between G & P and Metrobank and
provided that the P15,000,000.00 proceeds of the sale of real properties that secured the loan
obligation be deposited with Metrobank. It cited the Order which approved the first MOA between G
& P and Metrobank and provided that the P15,000,000.00 proceeds of the sale of real properties that
secured the loan obligation be deposited with Metrobank. Metrobank opposed the Motion and
claimed that the deposit was not covered by the contract transferring G & P’s loan obligation to Elite
Union. According to Metrobank, the release of titles was conditioned on the understanding that the
proceeds would “be applied exclusively in favor of Metrobank. Furthermore, Metrobank had the free
use of the deposit with only “the obligation of crediting the account of interest due. The rehabilitation
court granted G & P’s Motion and ordered the release of unapplied deposit with Metrobank.
Metrobank appealed to the CA. The CA reversed and set aside the order of the rehabilitation court.
According to the CA, G & P has no interest nor personality in asking for the release of the deposit since
the loan account was finally sold to Spouses Victor and Lani Paras. Nevertheless, the CA found that
Metrobank sold the entire obligation of G & P to Elite Union, hence, Metrobank was not entitled to
the P15,000,000.00 deposit.

Petitioner herein avers that it is entitled to the P15,000,000.00 deposit. That the CA erred in ruling
that the Loan Sale and Purchase Agreement included the P15,000,000.00 deposit in the obligation
transferred to Elite Union and, subsequently, to Spouses Victor and Lani Paras.

ISSUE:
Does an agreement between a secured creditor and a third party, which transferred to the third party
all of the creditor’s rights and interests over the debtor’s loan obligation and was executed during the

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pendency of corporate rehabilitation proceedings, covers the P15,000,000.00 proceeds of the sale of
mortgaged properties deposited with the creditor?

RULING:
Yes. In the case of Bautista v. Court of Appeals, the Court ruled that where the language of a written
contract is clear and unambiguous, the contract must be taken to mean that which, on its face, it
purports to mean, unless some good reason can be assigned to show that the words should be
understood in a different sense. The first MOA between petitioner and respondent G & P, as approved
by the trial court, is clear that the application of the P15,000,000.00 deposit would be subject to the
court-approved rehabilitation plan. Nowhere in the first MOA is it qualified that the P15,000,000.00
shall be applied only to the interests and penalties forming part of the total outstanding obligation.
The first MOA is clear that the P15,000,000.00 deposit shall be applied to respondent G & P’s
obligation with petitioner. Furthermore, if it were petitioner’s intention to remain a creditor of
respondent G & P with respect to the P15,000,000.00 deposit, then it should have provided
unequivocally so in the Loan Sale and Purchase Agreement it entered into with Elite Union. Nowhere
in this Agreement did petitioner reserve its right to the P15,000,000.00 deposit. When petitioner
entered into the Loan Sale and Purchase Agreement with Elite Union, the entire obligation was
transferred to Elite Union. The Loan Sale and Purchase Agreement entitled Elite Union to all the rights
and interests that petitioner had had as creditor of respondent G & P, including the securities of the
loan account.

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 INSOLVENCY LAWS

CREDITORS MUST BE IMPLEADED AS REPOSNDENTS IN A CORPORATE REHABILITATION CASE

61. Viva Shipping Lines, Inc. v. Keppel Philippines Mining, Inc.

G.R. No. 177382, February 17, 2016
Leonen, J.

FACTS:
This is a Petition for Review on Certiorari assailing the resolution of the Court of Appeals.

Viva Shipping Lines, Inc. filed a Petition for Corporate Rehabilitation before the RTC which was
initially denied for failure to comply with the requirements in Rule 4, Sections 2 and 3 of the Interim
Rules of Procedure on Corporate Rehabilitation. In the Amended Petition, Viva Shipping Lines
declared its total properties’ assessed value at about P45,172,790.00. During the initial hearing,
Pilipinas Shell Petroleum Corporation filed its Comment/Opposition with Formal Notice of Claim.
Luzviminda C. Cueto, a former employee of Viva Shipping Lines, also filed a Manifestation and
Registration of Monetary Claim stating that Viva Shipping Lines owes her separation and 13th month
pay. RTC dismissed Viva Shipping Lines’ Amended Petition for failure to show the company’s viability
and the feasibility of rehabilitation. The Regional Trial Court found that Viva Shipping Lines’ assets
all appeared to be non-performing. Further, it noted that Viva Shipping Lines failed to show any
evidence of consent to sell real properties belonging to its sister company. Aggrieved, Viva Shipping
Lines filed a Petition for Review under Rule 43 of the Rules of Court before the Court of Appeals. It
did not implead any of its creditors neither impleaded nor served a copy of the Petition on its former
employees or their counsels. The CA dismissed Viva Shipping Lines’ Petition for its failure to comply
with procedural requirements under Rule 43. The CA ruled that due to the failure of Viva Shipping
Lines to implead its creditors as respondents, “there are no respondents who may be required to file
a comment on the petition, pursuant to Section 8 of Rule 43.

ISSUE:
Is the dismissal of the petition proper for petitioner’s failure to comply with Rule 43 of the Rules of
Court?

RULING:
Yes. In the case of New Frontier Sugar Corporation v. Regional Trial Court, the Court ruled that an
appeal from a final order or decision in corporate rehabilitation proceedings may be dismissed for
being filed under the wrong mode of appeal. This doctrine requires compliance with the procedural
rules for appealing corporate rehabilitation decisions. Rule 43 prescribes the mode of appeal for
corporate rehabilitation cases. Under Section 6 of the said Rule, the petition for review shall state the
full names of the parties to the case, without impleading the court or agencies either as petitioners
or respondent.

Petitioner did not comply with some of these requirements. First, it did not implead its creditors as
respondents. Instead, petitioner only impleaded the Presiding Judge of the Regional Trial Court,
contrary to Section 6(a) of Rule 43. Second, it did not serve a copy of the Petition on some of its
creditors, specifically, its former employees. Finally, it did not serve a copy of the Petition on the
Regional Trial Court. The first rule breached by petitioner is the failure to implead all the
indispensable parties. Petitioner did not even interpose reasons why it should be excused from
compliance with the rule to “state the full names of the parties to the case, without impleading the

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court... as ... respondents.” Petitioner did exactly the opposite. It failed to state the full names of its
creditors as respondents. Instead, it impleaded the Presiding Judge of the originating court. A
corporate rehabilitation case cannot be decided without the creditors’ participation. The court’s role
is to balance the interests of the corporation, the creditors, and the general public. Impleading
creditors as respondents on appeal will give them the opportunity to present their legal arguments
before the appellate court. The courts will not be able to balance these interests if the creditors are
not parties to a case. Ruling on petitioner’s appeal in the absence of its creditors will not result in
judgment that is effective, complete, and equitable. Thus, the dismissal of the petition is proper.

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 INSOLVENCY LAWS

A CORPORATION THAT MAY SEEK CORPORATE REHABILITATION IS CHARACTERIZED NOT BY

ITS DEBT BUT BY ITS CAPACITY TO PAY THIS DEBT

62. Metropolitan Bank & Trust Co. v. Liberty Corrugated Boxes Manufacturing Corp.
G.R. No. 184317, January 25, 2017
Leonen, J.

FACTS:
This is a Petition for Review on certiorari assailing the Court of Appeal’s decision when it approved
Liberty Corrugated Boxes Manufacturing Corp.’s rehabilitation plan.

Respondent Liberty is a domestic corporation that produces corrugated packaging boxes. It obtained
various credit accommodations and loan facilities from petitioner Metrobank. To secure its loans,
Liberty mortgaged to Metrobank 12 lots. Liberty defaulted on the loans. Thus, Liberty filed a
Petition for corporate rehabilitation before the RTC. Liberty claimed that it could not meet its
obligations to Metrobank because of the Asian Financial Crisis, which resulted in a drastic decline in
demand for its goods, and the serious sickness of its Founder and President, Ki Kiao Koc.Liberty’s
rehabilitation plan consisted of: (a) a debt moratorium; (b) renewal of marketing efforts; (c)
resumption of operations; and (d) entry into condominium development, a new business. 10The
Regional Trial Court, finding the Petition sufficient in form and substance, issued a Stay Order11 and
set an initial hearing for the Petition.

Metrobank filed its opposition, argued that Liberty was not qualified for corporate rehabilitation;
that Liberty’s Petition for rehabilitation and rehabilitation plan were defective; and that
rehabilitation was not feasible. It also claimed that Liberty filed the Petition solely to avoid its
obligations to the bank. The Regional Trial Court gave due course to the Petition and referred the
rehabilitation plan to the Rehabilitation Receiver. Rehabilitation Receiver Rafael Chris F. Teston
recommended the approval of the plan, provided that Liberty would initiate construction on the
property in Valenzuela within 12 months from approval.

In its Order, the Regional Trial Court approved the rehabilitation plan. The trial court found that
Liberty was capable of being rehabilitated and that the rehabilitation plan was feasible and viable.
The Court of Appeals affirmed the Regional Trial Court’s finding that debtor corporations could still
avail themselves of the remedy of rehabilitation under the Interim Rules of Procedure on Corporate
Rehabilitation (Interim Rules) even if they were already in default. It held that even insolvent
corporations could still file a petition for rehabilitation. The Court of Appeals stressed that the
purpose of rehabilitation proceedings is to enable the distressed company to gain a new lease on life
and to allow the creditors to be paid their claims. It held that the approval of the Regional Trial Court
was precisely “‘to effect a feasible and viable rehabilitation’ of ailing corporations[,]” as required by
Presidential Decree No. 902-A.Metrobank moved for reconsideration, but the Motion was denied.
Hence, this Petition was filed.

ISSUE:
Is respondent, as a debtor in default, qualified to file a petition for rehabilitation under Presidential
Decree No. 902-A and Rule 4, Section 1 of the Interim Rules?

RULING:

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Yes. A corporation that may seek corporate rehabilitation is characterized not by its debt but by its
capacity to pay this debt.

Rule 4, Section 1 of the Interim Rules provides that any debtor who foresees the impossibility of
meeting its debts when they respectively fall due, or any creditor or creditors holding at least twenty-
five percent (25%) of the debtor’s total liabilities, may petition the proper Regional Trial Court to
have the debtor placed under rehabilitation.

Philippine Bank of Communications v. Basic Polyprinters and Packaging Corporation reiterates the
purpose of rehabilitation, which is to provide meritorious corporations an opportunity for recovery:

Under the Interim Rules, rehabilitation is the process of restoring “the debtor to a position of
successful operation and solvency, if it is shown that its continuance of operation is
economically feasible and its creditors can recover by way of the present value of payments
projected in the plan more if the corporation continues as a going concern that if it is
immediately liquidated.” It contemplates a continuance of corporate life and activities in an
effort to restore and reinstate the corporation to its former position of successful operation
and solvency. (Citations omitted)

As stated by the Court of Appeals in Philippine Bank of Communications, rehabilitation is in line with
the State’s objective to promote a wider and more meaningful equitable distribution of wealth.

In line with this objective, the Interim Rules provide for a liberal construction of its provisions that
these Rules shall be liberally construed to carry out the objectives of Sections 5(d), 6(c) and 6(d) of
Presidential Decree No. 902-A, as amended, and to assist the parties in obtaining a just, expeditious,
and inexpensive determination of cases. Where applicable, the Rules of Court shall apply suppletorily
to proceedings under these Rules.

To adopt petitioner’s interpretation would undermine the purpose of the Interim Rules. There is no
reason why corporations with debts that may have already matured should not be given the
opportunity to recover and pay their debtors in an orderly fashion. The opportunity to rehabilitate
the affairs of an economic entity, regardless of the status of its debts, redounds to the benefit of its
creditors, owners, and to the economy in general. Rehabilitation, rather than collection of debts from
a company already near bankruptcy, is a better use of judicial rewards.

A.M. No. 08-8-10-SC further describes the remedy initiated by a petition for rehabilitation:
[A] petition for rehabilitation, the procedure for which is provided in the Interim Rules of
Procedure on Corporate Recovery, should be considered as a special proceeding. It is one that
seeks to establish the status of a party or a particular fact. As provided in section 1, Rule 4 of
the Interim Rules on Corporate Recovery, the status or fact sought to be established is
the inability of the corporate debtor to pay its debts when they fall due so that a
rehabilitation plan, containing the formula for the successful recovery of the corporation, may
be approved in the end. It does not seek a relief from an injury caused by another party.
(Emphasis supplied)

Thus, the condition that triggers rehabilitation proceedings is not the maturation of a corporation’s
debts but the inability of the debtor to pay these.

In this case, the phrase “any debtor who foresees the impossibility of meeting its debts when they
respectively fall due” in Rule 4, Section 1 of the Interim Rules need not refer to a specific period or

127
point in time when the debts mature. It may refer to the debtor corporation’s general realization that
it will not be able to fulfill its obligations a realization that may come before default. Construing the
phrase “when they respectively fall due” to mean that the debtor must already be in default defeats
the clear purpose of the lawmakers. It unjustly limits rehabilitation to corporations with matured
obligations.

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 INSOLVENCY LAWS

PROPER VENUE FOR A PETITION FOR VOLUNTARY INSOLVENCY IS THE CITY WHERE THE
ISOLVENT DEBTOR HAS RESIDED IN THE LAST 6 MONTHS PRIOR TO FILING OF THE PETITION

63. Pilipinas Shell Petroleum Corp. v. Royal Ferry Services, Inc

G.R. No. 188146, February 1, 2017
Leonen, J.

FACTS:
This case involves a petition for review on certiorari assailing the CA’s decision declaring Royal Ferry
Services, Inc. (Royal Ferry) insolvent.

Sometimes in 2005, Royal Ferry, a corporation duly organized and existing under the Philippine
Laws, filed a petition for Voluntary Insolvency before the RTC of Manila alleging that the company
suffered business losses. At the time the petition was filed, Royal Ferry was holding its principal
business office address in Bangkal Street, Makati City as indicated in its AOI, but holds its office at
Room 2013 at BF Condominium Building, Intramuros, Manila. RTC granted the petition. Later,
Pilipinas Shell Petroleum (PSP) filed before the RTC a Formal Notice of Claim and Motion to Dismiss
the petition for insolvency, claiming that the Royal Ferry owes them the amount of P2, 769,387.67
and the petition for insolvency was erroneously filed in the wrong venue. At first, RTC denied PSP’s
motion, but later on ordered the dismissal of the Petition for Voluntary Insolvency. CA reinstated the
Insolvency Proceedings.

PSP argued that in Insolvency Law, a petition for insolvency should be filed before the Court with the
territorial jurisdiction over the company’s residence; and that the residence of a corporation depends
on what is stated in its AOI, regardless of whether the corporation physically moved to a different
location. Thus, it is the RTC Makati which has jurisdiction over the same.

ISSUE:
Is RTC Manila the proper venue for the Petition for Voluntary Insolvency?

RULING:
Yes, the RTC of Manila is the proper venue of the Petition for Voluntary Insolvency.

Section 14 of the Insolvency Law specifies that the proper venue for a petition for voluntary
insolvency is the Regional Trial Court of the province or city where the insolvent debtor has resided
in for six (6) months before the filing of the petition. In citing Metropolitan Bank and Trust Company
v. S.F. Naguiat Enterprises, Inc., the court declared that requiring a corporation to go back to a place it
has abandoned just to file a case is the very definition of inconvenience. There is no reason why an
insolvent corporation should be forced to exert whatever meager resources it has to litigate in a city
it has already left.

Based on the allegations provided in Royal Ferry’s Complaint, it was incorporated on 18 October
1996 with principal place of business in 2521 A. Bonifacio Street, Bangkal, Makati City. At present
and during the past six months, [Royal Ferry] has held office in Rm. 203 BF Condo Building, Andres
Soriano cor. Solana St., Intramuros, Manila.

Thus, Royal Ferry properly filed its petition for voluntary insolvency in RTC Manila.

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 INSOLVENCY LAWS

THE REMEDY OF REHABILITATION SHOULD BE DENIED TO CORPORATIONS WHOSE

INSOLVENCY APPEARS TO BE IRREVERSIBLE AND WHOSE SOLE PURPOSE IS TO DELAY THE
ENFORCEMENT OF ANY OF THE RIGHTS OF THE CREDITORS BY SPECULATIVE CAPITAL
INFUSION OR COMPLETE LACK THEREOF FOR THE EXECUTION OF THE BUSINESS PLAN, AS IN
THIS CASE

64. Land Bank of the Philippines v. Fastech Synergy Philippines, Inc.

G.R. No. 206150, August 9, 2017
Leonen, J.

FACTS:
This is a Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil Procedure
pertaining to the rehabilitation of respondent corporations (Fastech Synergy Philippines, et al.)
which filed a Joint Petition for corporate rehabilitation.

Due to financial losses, the respondents assets would not be enough to pay their peso and dollar debts
from the following creditors. The Rehabilitation Court acted on the Rehabilitation Petition by issuing
a Commencement Order with Stay Order. It appointed Atty. Rosario Bernaldo (Atty. Bernaldo) as
Rehabilitation Receiver. Atty. Bernaldo submitted her Preliminary Report and opined that the
Fastech Corporations’ original Rehabilitation Plan was viable. She stated that the Fastech
Corporations “may be successfully rehabilitated, considering the sufficiency of their assets to cover
their liabilities and the underlying assumptions, financial projections and procedures to accomplish
said goals in their Rehabilitation Plan.

However, the Rehabilitation Court issued a Resolution dismissed the Rehabilitation Petition on the
ground among others that (a) Petitioners miserably failed to demonstrate before this court that they
will have a better future business financial results [sic] of operation after their failures to meet the
various restructuring plans they have secured from these creditors’ banks. (b) The new way of doing
business, i.e. niche manner of manufacturing its products or customers built design and needs, will
be experimental, hence it will be completely and entirely dependent upon the number of customers
petitioners may have. There is a great deal of competition in the petitioners’ field of business, hence
such new business venture becomes unreliable and uncertain, and (c) the possibility of success is
quite uncertain, hence it is not feasible.

LandBank filed an ex parte petition for the issuance of a Writ of Posession which was enjoined by a
TRO issued by the Court of Appeals. Thereafter, the CA reversed the RTC finding that the
rehabilitation of the Fastech Corporations feasible. Hence, this appeal.

ISSUE:
Is a rehabilitation plan based on the development and sale of a niche and experimental product
feasible?

RULING:
No. The Rehabilitation Plan failed to comply with the minimum requirements under Section 18, Rule
3 of the 2008 Rules of Procedure on Corporate Rehabilitation (Rules), which Rules were in force at
the time respondents’ rehabilitation petition was filed on April 8, 2011:

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 Section 18. Rehabilitation Plan. — The rehabilitation plan shall include (a) the desired
business targets or goals and the duration and coverage of the rehabilitation; (b) the terms
and conditions of such rehabilitation which shall include the manner of its implementation,
giving due regard to the interests of secured creditors such as, but not limited, to the non-
impairment of their security liens or interests; (c) the material financial commitments to
support the rehabilitation plan; (d) the means for the execution of the rehabilitation plan,
which may include debt to equity conversion, restructuring of the debts, dacion en pago or
sale or exchange or any disposition of assets or of the interest of shareholders, partners or
members; (e) a liquidation analysis setting out for each creditor that the present value
of payments it would receive under the plan is more than that which it would receive
if the assets of the debtor were sold by a liquidator within a six-month period from the
estimated date of filing of the petition; and (f) such other relevant information to enable a
reasonable investor to make an informed decision on the feasibility of the rehabilitation plan.
(Emphases supplied)

In the present case, Rehabilitation Plan failed to comply with the minimum requirements:
(a) material financial commitments to support the rehabilitation plan; and
(b) a proper liquidation analysis

A material financial commitment becomes significant in gauging the resolve, determination,

earnestness, and good faith of the distressed corporation in financing the proposed rehabilitation
plan. This commitment may include the voluntary undertakings of the stockholders or the would-be
investors of the debtor-corporation indicating their readiness, willingness, and ability to contribute
funds or property to guarantee the continued successful operation of the debtor-corporation during
the period of rehabilitation.

In this case, respondents’ Chief Operating Officer, Primo D. Mateo, Jr., in his executed Affidavit of
General Financial Condition dated April 8, 2011, averred that respondents will not require the
infusion of additional capital as he, instead, proposed to have all accrued penalties, charges, and
interests waived, and a reduced interest rate prospectively applied to all respondents’ obligations, in
addition to the implementation of a two (2)-year grace period. Thus, there appears to be no concrete
plan to build on respondents’ beleaguered financial position through substantial investments as the
plan for rehabilitation appears to be pegged merely on financial reprieves. Anathema to the true
purpose of rehabilitation, a distressed corporation cannot be restored to its former position of
successful operation and regain solvency by the sole strategy of delaying payments/waiving accrued
interests and penalties at the expense of the creditors.

The purpose of rehabilitation proceedings is not only to enable the company to gain a new
lease on life, but also to allow creditors to be paid their claims from its earnings when so
rehabilitated. Hence, the remedy must be accorded only after a judicious regard of all stakeholders’
interests; it is not a one-sided tool that may be graciously invoked to escape every position of distress.
Thus, the remedy of rehabilitation should be denied to corporations whose insolvency appears to be
irreversible and whose sole purpose is to delay the enforcement of any of the rights of the creditors,
which is rendered obvious by: (a) the absence of a sound and workable business plan; (b) baseless
and unexplained assumptions, targets, and goals; and (c) speculative capital infusion or complete
lack thereof for the execution of the business plan, as in this case.

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 INSOLVENCY LAWS

CORPORATIONS WHOSE DEBTS ARE ALREADY DUE AND DEMANDABLE MAY STILL FILE A
PETITION FOR REHABILITATION

65. Metropolitan Bank & Trust Co. v. Fortuna Paper Mill & Packaging Corp.
G.R. No. 190800, November 7, 2018
Reyes, A., Jr., J.

FACTS:
MBTC is a domestic banking corporation organized and existing under the laws of the Republic of the
Philippines, and who extended various credit accommodations and loan facilities to Fortuna. The
credit accommodations and loan facilities extended by MBTC to Fortuna principally amounted to Php
259,981,915.33. In order to secure these obligations, Fortuna mortgaged to MBTC its real and
movable properties as well as several pieces of realty owned by several sister companies. Fortuna
eventually ended up defaulting on its obligations to MBTC, and failed to pay said indebtedness along
with the interests and penalties despite repeated demands on the part of MBTC. Instead of paying
the overdue obligations to MBTC, Fortuna filed on June 21, 2007 a Petition for Corporate
Rehabilitation (Rehabilitation Petition) with the RTC of Malabon, Branch 74. Attached therein was
Fortuna’s proposed Rehabilitation Plan. RTC found the Rehabilitation Plan as feasible and viable, this
was affirmed by the CA upon appeal. Hence the present petition.

Petitioner alleges that a corporation may petition that it be placed under rehabilitation only if it is in
the financial condition of a debtor who foresees the majority of its debts and its failure to meet them.
Thus, this element of foresight is allegedly wanting where a debtor has already failed to meet its debts
that have fallen due, such as in the case of Fortuna. And that the lower courts have overlooked many
glaring and patent deficiencies of Fortuna’s Rehabilitation Plan, which include the alleged absence of
material financial commitments to support it.

ISSUES:
1. Can a corporation petition for rehabilitation even if its obligations are already due?
2. Is the Rehabilitation Plan of respondent viable?

RULING:
1. Yes. Section 1, Rule 4 of the Interim Rules on the Procedure on Corporate Rehabilitation provides:

Sec. 1. Who May Petition. - Any debtor who foresees the impossibility of meeting its debts when
they respectively fall due, or any creditor or creditors holding at least twenty-five percent (25%)
of the debtor’s total liabilities, may petition the proper Regional Trial Court to have the debtor
placed under rehabilitation. A plain reading of the provision shows that the Interim Rules does
not make any distinction between a corporation which is already in debt and a corporation which
foresees the possibility of debt, or which would eventually yet surely fall into the same, but may
at present be free from any financial liability. Thus, since the statute is clear and free from
ambiguity, it must be given its literal meaning and applied without attempted interpretation.

There is no reason why corporations with debts that may have already matured should not be
given the opportunity to recover and pay their debtors in an orderly fashion. The opportunity to
rehabilitate the affairs of an economic entity, regardless of the status of its debts, redounds to the

132
 benefit of its creditors, owners, and to the economy in general. Rehabilitation, rather than
collection of debts from a company already near bankruptcy, is a better use of judicial rewards.

Thus, the condition that triggers rehabilitation proceedings is not the maturation of a
corporation’s debts but the inability of the debtor to pay these. Where the law does not
distinguish, neither should this Court. Because the definition under the Interim Rules is
encompassing, there should be no distinction whether a claim has matured or otherwise.

2. From a perusal of the Rehabilitation Plan that the process is heavily, if not completely predicated
on speculative business proposals as well as the contingent entry of the potential foreign
investor, Polycity. It is emphasized that the entry of Polycity is wholly predicated on conditions
imposed on Fortuna by the former.

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
investing public that obligations will be reasonably paid. It is considered state policy to encourage
debtors, both juridical and natural persons, and their creditors to collectively and realistically
resolve and adjust competing claims and property rights. Rehabilitation 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 assets of these debtors, recognize creditor rights and
respect priority of claims, and ensure equitable treatment of creditors who are similarly situated.
x x x The rationale in corporate rehabilitation is to resuscitate businesses in financial distress
because “assets x x x 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. It does not make sense to hold, suspend, or continue to devalue outstanding credits of
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.

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