Power Homes Unlimited Copr., vs SEC G.R. No. 164182 February 26, 2008 [Case Digest]

Power Homes Unlimited Copr., vs SEC

G.R. No. 164182             February 26, 2008

Facts:

            The scheme of the [petitioner] corporation requires an investor to become a Business Center Owner (BCO) who must fill-up and sign its application form. The Terms and Conditions printed at the back of the application form indicate that the BCO shall mean an independent representative of Power Homes, who is enrolled in the company’s referral program and who will ultimately purchase real property from any accredited real estate developers and as such he is entitled to a referral bonus/commission. Paragraph 5 of the same indicates that there exists no employer/employee relationship between the BCO and the Power Homes Unlimited, Corp.

The BCO is required to pay US$234 as his enrollment fee. His enrollment entitles him to recruit two investors who should pay US$234 each and out of which amount he shall receive US$92. In case the two referrals/enrollees would recruit a minimum of four (4) persons each recruiting two (2) persons who become his/her own down lines, the BCO will receive a total amount of US$147.20 after deducting the amount of US$36.80 as property fund from the gross amount of US$184. After recruiting 128 persons in a period of eight (8) months for each Left and Right business groups or a total of 256 enrollees whether directly referred by the BCO or through his down lines, the BCO who receives a total amount of US$11,412.80 after deducting the amount of US$363.20 as property fund from the gross amount of US$11,776, has now an accumulated amount of US$2,700 constituting as his Property Fund placed in a Property Fund account with the Chinabank. This accumulated amount of US$2,700 is used as partial/full down payment for the real property chosen by the BCO from any of [petitioner’s] accredited real estate developers.

 

Issue:

            Whether Power Homes engage in the sale of security?

 

Held:

            Yes; an investment contract is a "contract, transaction or scheme (collectively ‘contract’) whereby a person invests his money in a common enterprise and is led to expect profits primarily from the efforts of others."

            Our definition of an investment contract traces its roots from the 1946 United States (US) case of SEC v. W.J. Howey Co. In this case, the US Supreme Court was confronted with the issue of whether the Howey transaction constituted an "investment contract" under the Securities Act’s definition of "security." The US Supreme Court, recognizing that the term "investment contract" was not defined by the Act or illumined by any legislative report, held that "Congress was using a term whose meaning had been crystallized" under the state’s "blue sky" laws in existence prior to the adoption of the Securities Act. Thus, it ruled that the use of the catch-all term "investment contract" indicated a congressional intent to cover a wide range of investment transactions. It established a test to determine whether a transaction falls within the scope of an "investment contract." Known as the Howey Test, it requires a transaction, contract, or scheme whereby a person (1) makes an investment of money, (2) in a common enterprise, (3) with the expectation of profits, (4) to be derived solely from the efforts of others. Although the proponents must establish all four elements, the US Supreme Court stressed that the Howey Test "embodies a flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits." Needless to state, any investment contract covered by the Howey Test must be registered under the Securities Act, regardless of whether its issuer was engaged in fraudulent practices.

            After Howey came the 1973 US case of SEC v. Glenn W. Turner Enterprises, Inc. et al. In this case, the 9^th Circuit of the US Court of Appeals ruled that the element that profits must come "solely" from the efforts of others should not be given a strict interpretation. It held that a literal reading of the requirement "solely" would lead to unrealistic results. It reasoned out that its flexible reading is in accord with the statutory policy of affording broad protection to the public. Our R.A. No. 8799 appears to follow this flexible concept for it defines an investment contract as a contract, transaction or scheme (collectively "contract") whereby a person invests his money in a common enterprise and is led to expect profits not solely but primarily from the efforts of others. Thus, to be a security subject to regulation by the SEC, an investment contract in our jurisdiction must be proved to be: (1) an investment of money, (2) in a common enterprise, (3) with expectation of profits, (4) primarily from efforts of others.

            Prescinding from these premises, we affirm the ruling of the public respondent SEC and the Court of Appeals that the petitioner was engaged in the sale or distribution of an investment contract. Interestingly, the facts of SEC v. Turner are similar to the case at bar. In Turner, the SEC brought a suit to enjoin the violation of federal securities laws by a company offering to sell to the public contracts characterized as self-improvement courses. On appeal from a grant of preliminary injunction, the US Court of Appeals of the 9^th Circuit held that self-improvement contracts which primarily offered the buyer the opportunity of earning commissions on the sale of contracts to others were "investment contracts" and thus were "securities" within the meaning of the federal securities laws. This is regardless of the fact that buyers, in addition to investing money needed to purchase the contract, were obliged to contribute their own efforts in finding prospects and bringing them to sales meetings. The appellate court held:

It is apparent from the record that what is sold is not of the usual "business motivation" type of courses. Rather, the purchaser is really buying the possibility of deriving money from the sale of the plans by Dare to individuals whom the purchaser has brought to Dare. The promotional aspects of the plan, such as seminars, films, and records, are aimed at interesting others in the Plans. Their value for any other purpose is, to put it mildly, minimal.

Once an individual has purchased a Plan, he turns his efforts toward bringing others into the organization, for which he will receive a part of what they pay. His task is to bring prospective purchasers to "Adventure Meetings."

 

The business scheme of petitioner in the case at bar is essentially similar. An investor enrolls in petitioner’s program by paying US$234. This entitles him to recruit two (2) investors who pay US$234 each and out of which amount he receives US$92. A minimum recruitment of four (4) investors by these two (2) recruits, who then recruit at least two (2) each, entitles the principal investor to US$184 and the pyramid goes on.

We reject petitioner’s claim that the payment of US$234 is for the seminars on leverage marketing and not for any product. Clearly, the trainings or seminars are merely designed to enhance petitioner’s business of teaching its investors the know-how of its multi-level marketing business. An investor enrolls under the scheme of petitioner to be entitled to recruit other investors and to receive commissions from the investments of those directly recruited by him. Under the scheme, the accumulated amount received by the investor comes primarily from the efforts of his recruits.

Ong vs. Senate, G.R. Nos. 257401/ 257916, March 28, 2023 [Case Digest]

 

Ong vs. Senate,

G.R. Nos. 257401/ 257916, March 28, 2023

Facts:

            Following the COA Report, the Committee resolved to conduct an investigation in aid of legislation pertaining in particular to DOH's expenditures in relation to the "fight against COVID." Consequently, it sent invitations via electronic mail to resource persons, referring to them

matters subject of the inquiry and requesting them to attend the hearings.

            On August 18, 2021, the Committee conducted its first hearing.  In the course thereof, it found out that Pharmally, the incorporators of which were identified to have personal links with Yang, was able to secure a total of P8.868 Billion worth of contracts from the Procurement Service of the Department of Budget and Management (PS-DBM).

            On August 31, 2021, the Committee sent a Subpoena Ad Testificandum directing Yang to attend the September 7, 2021 hearing. Similar subpoenas were sent on September 4, 2021 to Ong and Mago.

            On September 7, 2021, Ong, Mago, Yang, and other Pharmally officials failed and/or refused to appear at the hearing. Accordingly, the Committee issued Orders24 citing Ong, Mago, Mohit, Twinkle, and Yang in contempt for failure to appear in the scheduled hearings. It ordered their arrest and detention at the Office of the Senate Sergeant-at-Arms (OSAA) until such time that they appear and give their testimony, or otherwise purge themselves of the contempt.

            According to Ong, he learned from the media reports on September 7, 2021 that he was among those cited in contempt and ordered arrested and detained for "refusing to appear, despite notice" at the Committee hearings of August 27, 2021 and September 7, 2021. He alleged that he did not receive any subpoena or invitation from the Committee. Still, he voluntarily attended the online videoconferencing hearing on September 10, 2021.

            In the course of his examination during the hearing, the Committee again cited Ong in contempt and ordered his arrest and detention for "testifying falsely and evasively."

            On September 21, 2021, the OSAA arrested Ong, who was attending the online Committee hearings remotely at his residence, and detained him 1mder its custody at the Senate Complex, Pasay City on authority of the assailed Contempt Order.

            On September 22, 2021, Ong filed a Respectful Manifestation and Motion for House Arrest. However, the Committee did not act on the manifestation and motion.

            On September 24, 2021, the Committee continued with its hearings with Ong in attendance through videoconference. In the course of Ong's examination, Sen. Franklin M. Drilon (Sen. Drilon) moved, seconded by Sen. Francis Pangilinan (Sen. Pangilinan), to transfer Ong to the Pasay City Jail.

            On November 12, 2021, Ong filed his Motion to Resolve Prayer for Status Quo Ante Order or Temporary Restraining Order. On November 29, 2021, the Committee transferred Ong, together with Mohit, to the Pasay City Jail.

 

Issue:

            Whether the Committee committed grave abuse of discretion in failing to accord petitioners their Constitutional right to due process relative to the conduct of its proceedings.

 

Held:

            Yes; time and again, the Court has affirmed the power of the Legislature to conduct investigation. The Legislature's power of inquiry, being broad, encompasses everything that concerns the administration of existing laws as well as proposed or possibly needed statutes.

            The power of the Legislature and its committees to conduct inquiries in aid of legislation has been upheld in The Senate Blue Ribbon Committee v. Hon. Majaducom, Senate of the Philippines v. Exec. Sec. Ermita (Ermita), In the Matter of the Petition for Issuance of Writ of Habeas Corpus of Sabio v. Senator Gordon (Sabio), Standard Chartered Bank v. Senate Committee on Banks79 (Standard Chartered Bank), Neri v. Senate Committee on Accountability of Public Officers and Investigations (Neri), and Romero II v. Senator Estrada.  This means that the mechanisms available to both the Senate and the House of Representatives, in order that they may effectively perform their legislative functions, are also available to their respective committees.

            Concomitant to the power of the Legislature to conduct inquiries in aid of legislation is its power of contempt impliedly provided under the 1987 Constitution. Unlike the Legislature's power to make investigations in aid of legislation, there is no provision in the 1987 Constitution expressly granting either the Senate or the House of Representatives with the authority or process to enforce this power of inquiry. Nevertheless, it must be emphasized that the Legislature's power of contempt is inherent and arises by implication.  This coercive process is essential to the Legislature's discharge of its functions. This power permits either House

Of the Legislature to perform its duties without impediment as it enables the Senate or the House of Representatives to legislate wisely or effectively because they have the power to compel the availability of information necessary in shaping legislation.

            Indeed, the exercise of the contempt power by the Legislature is anchored on the principle of self-preservation.  As that branch of the government vested with the legislative power, it can assert its authority and punish contumacious acts against it independently of the Judicial Branch. Such power of the Legislature is sui generis as it "attaches not to the discharge of legislative functions per se but to the character of the Legislature as one of the three independent and coordinate branches of government."

            Power to Arrest Concomitant to the Senates Contempt Power. Strictly speaking, the power to arrest a witness is not specified under the Senate Rules of Procedure. Such Rules only cite the explicit

power of the Senate to detain a witness. The Court, however, views that an arrest is necessary to carry out the coercive process of compelling attendance, testimony, and production of documents relevant and material in a legislative inquiry.

            As observed in Arnault, "[experience has shown that mere requests for [relevant] information are often unavailing, and also that information which is volunteered is not always accurate or complete; so some means of compulsion is essential to obtain what is needed." Indeed, the power of the Legislature to conduct inquiries in aid of legislation is intended to be full and complete,90 according it the processes necessary to carry out its core function of legislation. The Senate, or the Congress as a whole, may effectively and wisely legislate for as long as it may compel the availability of information which in turn will be basis of a proposed law emanating from the proceedings in aid of legislation. The Congress is not precluded from causing the appearance of a resource person who is not before it. As long as the testimony of a resource person is primordial in the Legislature's inquiry in aid of legislation, then any House of Congress or its committees may compel, by way of an arrest, his or her appearance in the inquiry proceedings. Necessarily, compelled testimony connotes truthful declaration by a resource person subject of the legislative inquiry.

            In Arnault, the Court stressed the power of the Senate to conduct investigations along with necessary processes to enforce it. Being inherent and necessary for it to effectively perform its function of inquiry in aid of legislation, this power to compel attendance, testimony, and production of documents relevant and necessary in a legislative inquiry need not find textual basis in the Senate Rules of Procedure Governing Inquiries in Aid of Legislation. As the grant of legislative power which includes the power to conduct inquiries in aid of legislation is intended to be complete, i.e., without need to resort to judicial process in order that the Legislature may be able to perform its function, it follows that the Legislature likewise has the power to resort to mechanisms to obey its processes. Indeed, depriving the Senate of this inherent and necessary power to compel a witness to appear, give a truthful testimony and produce documents before it will amount to a serious handicap to its Constitutional function to gather information relevant and material to its legislative inquiries.

            As provided in Section 21, Article VI of the 1987 Constitution, however, the power of legislative investigation is subject to three imitations: (1) the inquiry must be "in aid of legislation;" (2) the inquiry must be conducted in accordance with its duly published rules of procedure; and (3) "[t]he rights of persons appearing in or affected by such inquiries shall be respected. " Also, where there is factual basis for the contempt, the resource person's detention should only last until the termination of the legislative inquiry.

            First Limitation: The subject hearings were conducted in aid of legislation. As earlier mentioned, PSR Nos. 858, 859, and 880, together with the privilege speech of Sen. Hontiveros, were filed and referred to the Committee which called for the conduct of an inquiry in aid of legislation.

            The Court finds proper the Senate's explanation that because the National Expenditure Program (NEP) for 2022 had not yet been released by the DBM to the Legislature when the subject COA Report came out in July 2021, it was fitting that the Committee hear and investigate the finding; in the COA Report on the DOH, as early as August 18, 2021. This Was necessary to determine if the funds appropriated under Republic Act Nos. (RA) 11469 and 11494 for the COVID-19 pandemic were properly utilized. The inquiry of the Committee was necessary as the COA Report seemed to point out severe underutilization of funds, malfeasance, misfeasance and nonfeasance by government officials in the use of; the DOH funds.

            Second Limitation: The assailed rules are compliant with the publication requirement of Section 21 Article VI of the 1987 Constitution.

            Third Limitation: The Committee failed to accord petitioners their Constitutional right to due process relative to the conduct of its proceedings. The Contempt Order dated September JO, 2021 finding that Ong and Yang testified falsely and evasively lacks factual basis.

            These rights refer to no other than those enshrined under the Bill of Rights, more particularly to the right to due process and the right against unreasonable seizures under Sections 1 and 2, Article III of the 1987 Constitution. The violation and disregard of petitioners' rights were brought about by the Senate's exercise of its power of contempt punishing the act of "testifying falsely or evasively."

            Evidently, the Committee was fixated on the fact that Pharmally had no capacity to pay the initial order of 54 million pesos, it having a paid-up capital of 625,000.00 pesos only at the beginning of the year 2020. As can be gleaned from his testimony, however, Ong was able to subsequently aver that they had other funds sourced from the savings of the incorporators, and that they also borrowed money from friends. He even manifested his willingness to cooperate with the Anti-Money Laundering Council to explain where his friends got the funds.

            Further, that Ong may have shown hesitancy in giving direct answers as regards the documents pertaining to the supplies of PPEs does not conclusively establish that he was evasive. The totality of his responses evince that he was mindful of his right against self-incrimination. Again, he manifested his willingness to cooperate in the investigation by committing to produce and submit documents required by the Committee.

            As keenly observed by Senior Associate Justice Marvic M.V.F. Leonen, even inconsistent answers were equated by the Committee with "testifying evasively."  As he aptly pointed out, "[whether a witness genuinely did not know or did not recall the answer, or was evasive in answering a question is largely a matter of judgment or opinion."  He further pointed out that "falsely or evasively" should be understood as "false" which means "not genuine, intentionally untrue, adjusted or made so as to deceive, intended or tending to mislead, not true, based on mistaken ideas, inconsistent with the facts."  This determination requires "an assessment of the totality of the evidence presented to determine whether a witness speaks truthfully or merely trying to evade answering the question directly." Surely, this determination could not have been made on the basis of his testimony given in the hearing of September 10, 2021 alone.

            Evidently, Sen. Lacson's series of repetitive questions as regards Yang's knowledge of Pharmally evoked different answers. However, the fact that Yang made inconsistent or incomplete answers in the course of his testimony does not conclusively establish that he was evasive within the context of contempt, that is, there was refusal or unwillingness to testify on his part. While Yang initially tried to avoid giving any leading information as regards his connection with Pharmally, he was able to subsequently aver in the course of the proceedings that he introduced the suppliers of facemasks and PPEs to Ong. Again, the Committee immediately surmised on the incredulity of his testimony, thus citing him in contempt and ordering his arrest on the ground that he gave inconsistent or incomplete answers.

            It bears underscoring that the purpose of the Committee's proceedings is to conduct an inquiry or investigation to aid the Senate in crafting relevant legislation, and not to conduct a trial or make an adjudication. Legislative inquiries do not share the same goals as the criminal trial process, and "cannot be punitive in the sense that they cannot result in legally binding deprivation of a person's life, liberty or property."  Thus, punishment for legislative contempt, albeit sui generis in character, must similarly observe the minimum requirements of due

process.

            As succinctly pointed out by Chief Justice Alexander G. Gesmundo, witnesses who are charged by Congress with "giving false or evasive testimony" must be accorded stricter due process requirements, such as the opportunity to explain one's side before being penalized, consistent with the due process safeguards used in criminal proceedings. Considering the broad definition of "giving false or evasive testimony," the witness must, at the very least, given a chance to explain why his or her testimony is not false or evasive.

            In the case, the Committee's grave abuse of discretion lay in its precipitate act of citing petitioners Ong and Yang in contempt and ordering their arrests without giving them the opportunity to be heard.

Philippine National Bank vs. Hydro Resources Contractors Corp. G.R. Nos. 167530/61; 167603; March 13, 2013 [Case Digest]

 

Philippine National Bank vs. Hydro Resources Contractors Corp.

G.R. Nos. 167530/61; 167603; March 13, 2013.

First Division [LEONARDO-DE CASTRO, J.]

Facts:

            Sometime in 1984, petitioners DBP and PNB foreclosed on certain mortgages made on the properties of Marinduque Mining and Industrial Corporation (MMIC). As a result of the foreclosure, DBP and PNB acquired substantially all the assets of MMIC and resumed the business operations of the defunct MMIC by organizing NMIC. DBP and PNB owned 57% and 43% of the shares of NMIC, respectively, except for five qualifying shares. As of September 1984, the members of the Board of Directors of NMIC, namely, Jose Tengco, Jr., Rolando Zosa, Ruben Ancheta, Geraldo Agulto, and Faustino Agbada, were either from DBP or PNB.

                Subsequently, NMIC engaged the services of Hercon, Inc., for NMIC’s Mine Stripping and Road Construction Program in 1985 for a total contract price of ₱35,770,120. After computing the payments already made by NMIC under the program and crediting the NMIC’s receivables from Hercon, Inc., the latter found that NMIC still has an unpaid balance of ₱8,370,934.74. Hercon, Inc. made several demands on NMIC, including a letter of final demand dated August 12, 1986, and when these were not heeded, a complaint for sum of money was filed in the RTC of Makati, Branch 136 seeking to hold petitioners NMIC, DBP, and PNB solidarily liable for the amount owing Hercon, Inc.

                Subsequent to the filing of the complaint, Hercon, Inc. was acquired by HRCC in a merger. This prompted the amendment of the complaint to substitute HRCC for Hercon, Inc.

                Thereafter, on December 8, 1986, then President Corazon C. Aquino issued Proclamation No. 50 creating the APT for the expeditious disposition and privatization of certain government corporations and/or the assets thereof. Pursuant to the said Proclamation, on February 27, 1987, DBP and PNB executed their respective deeds of transfer in favor of the National Government assigning, transferring and conveying certain assets and liabilities, including their respective stakes in NMIC. In turn and on even date, the National Government transferred the said assets and liabilities to the APT as trustee under a Trust Agreement. Thus, the complaint was amended for the second time to implead and include the APT as a defendant.

                In its answer, NMIC claimed that HRCC had no cause of action. It also asserted that its contract with HRCC was entered into by its then President without any authority. Moreover, the said contract allegedly failed to comply with laws, rules and regulations concerning government contracts. NMIC further claimed that the contract amount was manifestly excessive and grossly disadvantageous to the government. NMIC made counterclaims for the amounts already paid to Hercon, Inc. and attorney’s fees, as well as payment for equipment rental for four trucks, replacement of parts and other services, and damage to some of NMIC’s properties.

                For its part, DBP’s answer raised the defense that HRCC had no cause of action against it because DBP was not privy to HRCC’s contract with NMIC. Moreover, NMIC’s juridical personality is separate from that of DBP. PNB’s answer also invoked lack of cause of action against it. It also raised estoppel on HRCC’s part and laches as defenses, claiming that the inclusion of PNB in the complaint was the first time a demand for payment was made on it by HRCC. PNB also invoked the separate juridical personality of NMIC and made counterclaims for moral damages and attorney’s fees.

            RTC pierced the corporate veil of NMIC and held DBP and PNB solidarily liable with NMIC. The business of NMIC was then also being conducted and controlled by both DBP and PNB. In fact, it was Rolando M. Zosa, then Governor of DBP, who was signing and entering into contracts with third persons, on behalf of NMIC.

            CA affirmed the piercing of the veil of the corporate personality of NMIC and held DBP, PNB, and APT solidarily liable with NMIC. It is indubitable that [NMIC] was owned by appellants DBP and PNB to the extent of 57% and 43% respectively; that said two (2) appellants are the only stockholders, with the qualifying stockholders of five (5) consisting of its own officers and included in its charter merely to comply with the requirement of the law as to number of incorporators; and that the directorates of DBP, PNB and [NMIC] are interlocked.

 

Issue:

            Whether or not there is sufficient ground to pierce the veil of corporate fiction.

 

Held:

            No; a corporation is an artificial entity created by operation of law. It possesses the right of succession and such powers, attributes, and properties expressly authorized by law or incident to its existence. It has a personality separate and distinct from that of its stockholders and from that of other corporations to which it may be connected. As a consequence of its status as a distinct legal entity and as a result of a conscious policy decision to promote capital formation, a corporation incurs its own liabilities and is legally responsible for payment of its obligations. In other words, by virtue of the separate juridical personality of a corporation, the corporate debt or credit is not the debt or credit of the stockholder. This protection from liability for shareholders is the principle of limited liability.

            Equally well-settled is the principle that the corporate mask may be removed or the corporate veil pierced when the corporation is just an alter ego of a person or of another corporation. For reasons of public policy and in the interest of justice, the corporate veil will justifiably be impaled only when it becomes a shield for fraud, illegality or inequity committed against third persons.

            The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: 1) defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion of an existing obligation; 2) fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime; or 3) alter ego cases, where a corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.

                        In this connection, case law lays down a three-pronged test to determine the application of the alter ego theory, which is also known as the instrumentality theory, namely:

            (1) Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own;

            (2) Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff’s legal right; and

            (3) The aforesaid control and breach of duty must have proximately caused the injury or unjust loss complained of.

            The first prong is the "instrumentality" or "control" test. This test requires that the subsidiary be completely under the control and domination of the parent. It examines the parent corporation’s relationship with the subsidiary. It inquires whether a subsidiary corporation is so organized and controlled and its affairs are so conducted as to make it a mere instrumentality or agent of the parent corporation such that its separate existence as a distinct corporate entity will be ignored. It seeks to establish whether the subsidiary corporation has no autonomy and the parent corporation, though acting through the subsidiary in form and appearance, "is operating the business directly for itself."

            The second prong is the "fraud" test. This test requires that the parent corporation’s conduct in using the subsidiary corporation be unjust, fraudulent or wrongful. It examines the relationship of the plaintiff to the corporation. It recognizes that piercing is appropriate only if the parent corporation uses the subsidiary in a way that harms the plaintiff creditor. As such, it requires a showing of "an element of injustice or fundamental unfairness."

            The third prong is the "harm" test. This test requires the plaintiff to show that the defendant’s control, exerted in a fraudulent, illegal or otherwise unfair manner toward it, caused the harm suffered. A causal connection between the fraudulent conduct committed through the instrumentality of the subsidiary and the injury suffered or the damage incurred by the plaintiff should be established. The plaintiff must prove that, unless the corporate veil is pierced, it will have been treated unjustly by the defendant’s exercise of control and improper use of the corporate form and, thereby, suffer damages.

                        To summarize, piercing the corporate veil based on the alter ego theory requires the concurrence of three elements: control of the corporation by the stockholder or parent corporation, fraud or fundamental unfairness imposed on the plaintiff, and harm or damage caused to the plaintiff by the fraudulent or unfair act of the corporation. The absence of any of these elements prevents piercing the corporate veil.

            Philippine National Bank vs. Hydro Resources Contractors Corp.

G.R. Nos. 167530/61; 167603; March 13, 2013.

First Division [LEONARDO-DE CASTRO, J.]

Facts:

            Sometime in 1984, petitioners DBP and PNB foreclosed on certain mortgages made on the properties of Marinduque Mining and Industrial Corporation (MMIC). As a result of the foreclosure, DBP and PNB acquired substantially all the assets of MMIC and resumed the business operations of the defunct MMIC by organizing NMIC. DBP and PNB owned 57% and 43% of the shares of NMIC, respectively, except for five qualifying shares. As of September 1984, the members of the Board of Directors of NMIC, namely, Jose Tengco, Jr., Rolando Zosa, Ruben Ancheta, Geraldo Agulto, and Faustino Agbada, were either from DBP or PNB.

            Subsequently, NMIC engaged the services of Hercon, Inc., for NMIC’s Mine Stripping and Road Construction Program in 1985 for a total contract price of ₱35,770,120. After computing the payments already made by NMIC under the program and crediting the NMIC’s receivables from Hercon, Inc., the latter found that NMIC still has an unpaid balance of ₱8,370,934.74. Hercon, Inc. made several demands on NMIC, including a letter of final demand dated August 12, 1986, and when these were not heeded, a complaint for sum of money was filed in the RTC of Makati, Branch 136 seeking to hold petitioners NMIC, DBP, and PNB solidarily liable for the amount owing Hercon, Inc.

            Subsequent to the filing of the complaint, Hercon, Inc. was acquired by HRCC in a merger. This prompted the amendment of the complaint to substitute HRCC for Hercon, Inc.

            Thereafter, on December 8, 1986, then President Corazon C. Aquino issued Proclamation No. 50 creating the APT for the expeditious disposition and privatization of certain government corporations and/or the assets thereof. Pursuant to the said Proclamation, on February 27, 1987, DBP and PNB executed their respective deeds of transfer in favor of the National Government assigning, transferring and conveying certain assets and liabilities, including their respective stakes in NMIC. In turn and on even date, the National Government transferred the said assets and liabilities to the APT as trustee under a Trust Agreement. Thus, the complaint was amended for the second time to implead and include the APT as a defendant.

            In its answer, NMIC claimed that HRCC had no cause of action. It also asserted that its contract with HRCC was entered into by its then President without any authority. Moreover, the said contract allegedly failed to comply with laws, rules and regulations concerning government contracts. NMIC further claimed that the contract amount was manifestly excessive and grossly disadvantageous to the government. NMIC made counterclaims for the amounts already paid to Hercon, Inc. and attorney’s fees, as well as payment for equipment rental for four trucks, replacement of parts and other services, and damage to some of NMIC’s properties.

            For its part, DBP’s answer raised the defense that HRCC had no cause of action against it because DBP was not privy to HRCC’s contract with NMIC. Moreover, NMIC’s juridical personality is separate from that of DBP. PNB’s answer also invoked lack of cause of action against it. It also raised estoppel on HRCC’s part and laches as defenses, claiming that the inclusion of PNB in the complaint was the first time a demand for payment was made on it by HRCC. PNB also invoked the separate juridical personality of NMIC and made counterclaims for moral damages and attorney’s fees.

            RTC pierced the corporate veil of NMIC and held DBP and PNB solidarily liable with NMIC. The business of NMIC was then also being conducted and controlled by both DBP and PNB. In fact, it was Rolando M. Zosa, then Governor of DBP, who was signing and entering into contracts with third persons, on behalf of NMIC.

            CA affirmed the piercing of the veil of the corporate personality of NMIC and held DBP, PNB, and APT solidarily liable with NMIC. It is indubitable that [NMIC] was owned by appellants DBP and PNB to the extent of 57% and 43% respectively; that said two (2) appellants are the only stockholders, with the qualifying stockholders of five (5) consisting of its own officers and included in its charter merely to comply with the requirement of the law as to number of incorporators; and that the directorates of DBP, PNB and [NMIC] are interlocked.

 

Issue:

            Whether or not there is sufficient ground to pierce the veil of corporate fiction.

 

Held:

            No; a corporation is an artificial entity created by operation of law. It possesses the right of succession and such powers, attributes, and properties expressly authorized by law or incident to its existence. It has a personality separate and distinct from that of its stockholders and from that of other corporations to which it may be connected. As a consequence of its status as a distinct legal entity and as a result of a conscious policy decision to promote capital formation, a corporation incurs its own liabilities and is legally responsible for payment of its obligations. In other words, by virtue of the separate juridical personality of a corporation, the corporate debt or credit is not the debt or credit of the stockholder. This protection from liability for shareholders is the principle of limited liability.

            Equally well-settled is the principle that the corporate mask may be removed or the corporate veil pierced when the corporation is just an alter ego of a person or of another corporation. For reasons of public policy and in the interest of justice, the corporate veil will justifiably be impaled only when it becomes a shield for fraud, illegality or inequity committed against third persons.

            The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: 1) defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion of an existing obligation; 2) fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime; or 3) alter ego cases, where a corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.

                        In this connection, case law lays down a three-pronged test to determine the application of the alter ego theory, which is also known as the instrumentality theory, namely:

            (1) Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own;

            (2) Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff’s legal right; and

            (3) The aforesaid control and breach of duty must have proximately caused the injury or unjust loss complained of.

            The first prong is the "instrumentality" or "control" test. This test requires that the subsidiary be completely under the control and domination of the parent. It examines the parent corporation’s relationship with the subsidiary. It inquires whether a subsidiary corporation is so organized and controlled and its affairs are so conducted as to make it a mere instrumentality or agent of the parent corporation such that its separate existence as a distinct corporate entity will be ignored. It seeks to establish whether the subsidiary corporation has no autonomy and the parent corporation, though acting through the subsidiary in form and appearance, "is operating the business directly for itself."

            The second prong is the "fraud" test. This test requires that the parent corporation’s conduct in using the subsidiary corporation be unjust, fraudulent or wrongful. It examines the relationship of the plaintiff to the corporation. It recognizes that piercing is appropriate only if the parent corporation uses the subsidiary in a way that harms the plaintiff creditor. As such, it requires a showing of "an element of injustice or fundamental unfairness."

            The third prong is the "harm" test. This test requires the plaintiff to show that the defendant’s control, exerted in a fraudulent, illegal or otherwise unfair manner toward it, caused the harm suffered. A causal connection between the fraudulent conduct committed through the instrumentality of the subsidiary and the injury suffered or the damage incurred by the plaintiff should be established. The plaintiff must prove that, unless the corporate veil is pierced, it will have been treated unjustly by the defendant’s exercise of control and improper use of the corporate form and, thereby, suffer damages.

            This Court finds that none of the tests has been satisfactorily met in this case.

            In applying the alter ego doctrine, the courts are concerned with reality and not form, with how the corporation operated and the individual defendant’s relationship to that operation. With respect to the control element, it refers not to paper or formal control by majority or even complete stock control but actual control which amounts to "such domination of finances, policies and practices that the controlled corporation has, so to speak, no separate mind, will or existence of its own, and is but a conduit for its principal." In addition, the control must be shown to have been exercised at the time the acts complained of took place.

            While ownership by one corporation of all or a great majority of stocks of another corporation and their interlocking directorates may serve as indicia of control, by themselves and without more, however, these circumstances are insufficient to establish an alter ego relationship or connection between DBP and PNB on the one hand and NMIC on the other hand, that will justify the puncturing of the latter’s corporate cover. This Court has declared that "mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality." This Court has likewise ruled that the "existence of interlocking directors, corporate officers and shareholders is not enough justification to pierce the veil of corporate fiction in the absence of fraud or other public policy considerations."

Zambrano vs. Philippine Carpet Manufacturing Corporation G.R. No. 224099, June 21, 2017 [Case Digest]

 

Zambrano vs. Philippine Carpet Manufacturing Corporation

G.R. No. 224099, June 21, 2017

Second Division, [Mendoza, J.,]

Facts:

            The petitioners averred that they were employees of private respondent Philippine Carpet Manufacturing Corporation (Phil Carpet). On January 3, 2011, they were notified of the termination of their employment effective February 3, 2011 on the ground of cessation of operation due to serious business losses. They were of the belief that their dismissal was without just cause and in violation of due process because the closure of Phil Carpet was a mere pretense to transfer its operations to its wholly owned and controlled corporation, Pacific Carpet Manufacturing Corporation (PacificCarpet). They claimed that the job orders of some regular clients of PhilCarpet were transferred to Pacific Carpet; and that from October to November 2011, several machines were moved from the premises of Phil Carpet to Pacific Carpet. They asserted that their dismissal constituted unfair labor practice as it involved the mass dismissal of all union officers and members of the Philippine Carpet Manufacturing Employees Association (PHILCEA).

                In its defense, Phil Carpet countered that it permanently closed and totally ceased its operations because there had been a steady decline in the demand for its products due to global recession, stiffer competition, and the effects of a changing market. Thus, in order to stem the bleeding, the company implemented several cost-cutting measures, including voluntary redundancy and early retirement programs. In 2007, the car carpet division was closed. Moreover, from a high production capacity of about 6,000 square meters of carpet a month in 2002, its final production capacity steadily went down to an average of 350 square meters per month for 2009 and 2010. Subsequently, the Board of Directors decided to approve the recommendation of its management to cease manufacturing operations. The termination of the petitioners' employment was effective as of the close of office hours on February 3, 2011. Phil Carpet likewise faithfully complied with the requisites for closure or cessation of business under the Labor Code. The petitioners and the Department of Labor and Employment (DOLE) were served written notices one (1) month before the intended closure of the company. The petitioners ·were also paid their separation pay and they voluntarily executed their respective Release and Quitclaim before the DOLE officials.

                Labor Arbiter (LA) dismissed the complaints for illegal dismissal and unfair labor practice. It ruled that the termination of the petitioners' employment was due to total cessation of manufacturing operations of Phil Carpet because it suffered continuous serious business losses from 2007 to 2010. The LA further found that the petitioners voluntarily accepted their separation pay and other benefits and eventually executed their individual release and quitclaim in favor of the company. Finally, it declared that there was no showing that the total closure of operations was motivated by any specific and clearly determinable union activity of the employees.

                NLRC affirmed the findings of the LA. CA ruled that the total cessation of Phil Carpet's manufacturing operations was not made in bad faith because the same was clearly due to economic necessity. It determined that there was no convincing evidence to show that the regular clients of Phil Carpet secretly transferred their job orders to Pacific Carpet; and that Phil Carpet's machines were not transferred to Pacific Carpet but were actually sold to the latter after the closure of business as shown by the several sales invoices and official receipts issued by Phil Carpet. The CA adjudged that the dismissal of the petitioners who were union officers and members of PHILCEA did not constitute unfair labor practice because Phil Carpet was able to show that the closure was due to serious business losses.

 

Issue 1:

            Whether the petitioners were dismissed from employment for a lawful cause.

 

Held:

            No; the petitioners were terminated from employment for an authorized cause. Article 298. Closure of establishment and reduction of personnel. -The employer may also terminate the employment of any employee due to the installation of labor-saving devices, redundancy, retrenchment to prevent losses or the closing or cessation of operations of the establishment or undertaking unless the closing is for the purpose of circumventing the provisions of this Title, by serving a written notice on the workers and the Department of Labor and Employment at least one (1) month before the intended date thereof. In case of termination due to the installation of labor-saving devices or redundancy, the worker affected thereby shall be entitled to a separation pay equivalent to at least one (1) month pay or to at least one (1) month pay for every year of service, whichever is higher. In case of retrenchment to prevent losses and in cases of closure or cessation of operations of establishment or undertaking not due to serious business losses or financial reverses, the separation pay shall be equivalent to at least one (1) month pay or at least one-half (1/2) month pay for every year of service, whichever is higher. A fraction of at least six (6) months shall be considered as one (1) whole year.

            Closure of business is the reversal of fortune of the employer whereby there is a complete cessation of business operations and/or an actual locking-up of the doors of establishment, usually due to financial losses. Closure of business, as an authorized cause for termination of employment, aims to prevent further financial drain upon an employer who cannot pay anymore his employees since business has already stopped. In such a case, the employer is generally required to give separation benefits to its employees, unless the closure is due to serious business losses.

 

Issue 2:

            Whether the petitioners’ termination from employment constitutes unfair labor practice.

 

Held:

            No; the dismissal of the petitioners did not amount to unfair labor practice. Unfair labor practice refers to acts that violate the workers' right to organize. There should be no dispute that all the prohibited acts constituting unfair labor practice in essence relate to the workers' right to self-organization. Thus, an employer may only be held liable for unfair labor practice if it can be shown that his acts affect in whatever manner the right of his employees to self-organize.

            The general principle is that one who makes an allegation has the burden of proving it. Although there are exceptions to this general rule, in the case of unfair labor practice, the alleging party has the burden of proving it. Moreover, good faith is presumed and he who alleges bad faith has the duty to prove the same.

            The petitioners miserably failed to discharge the duty imposed upon them. They did not identify the acts of Phil Carpet which, they claimed, constituted unfair labor practice. They did not even point out the specific provisions which Phil Carpet violated. Thus, they would have the Court pronounce that Phil Carpet committed unfair labor practice on the ground that they were dismissed from employment simply because they were union officers and members. The constitutional commitment to the policy of social justice, however, cannot be understood to mean that every labor dispute shall automatically be decided in favor of labor.

 

Issue 3:

            Whether Pacific Carpet may be held liable for Phil Carpet’s obligation.

 

Held:

            No; a corporation is an artificial being created by operation of law. It possesses the right of succession and such powers, attributes, and properties expressly authorized by law or incident to its existence. It has a personality separate and distinct from the persons composing it, as well as from any other legal entity to which may be related.

            Equally well-settled is the principle that the corporate mask may be removed or the corporate veil pierced when the corporation is just an alter ego of a person or of another corporation. For reasons of public policy and in the interest of justice, the corporate veil will justifiably be impaled only when it becomes a shield for fraud, illegality or inequity committed against third persons.

            Further, the Court's ruling in Philippine National Bank vs. Hydro Resources Contractors Corporation is enlightening, viz.: The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: 1) defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion of an existing obligation; 2) fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime; or 3) alter ego cases, where a corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.

                        In this connection, case law lays down a three-pronged test to determine the application of the alter ego theory, which is also known as the instrumentality theory, namely:

            (1) Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own;

            (2) Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiffs legal right; and

            (3) The aforesaid control and breach of duty must have proximately caused the injury or unjust loss complained of.

            The first prong is the "instrumentality" or "control" test. This test requires that the subsidiary be completely under the control and domination of the parent. It examines the parent corporation's relationship with the subsidiary. It inquires whether a subsidiary corporation is so organized and controlled and its affairs are so conducted as to make it a mere instrumentality or agent of the parent corporation such that its separate existence as a distinct corporate entity will be ignored. It seeks to establish whether the subsidiary corporation has no autonomy and the parent corporation, though acting through the subsidiary in form and appearance, "is operating the business directly for itself."

            The second prong is the "fraud" test. This test requires that the parent corporation's conduct in using the subsidiary corporation be unjust, fraudulent or wrongful.1âwphi1 It examines the relationship of the plaintiff to the corporation. It recognizes that piercing is appropriate only if the parent corporation uses the subsidiary in a way that harms the plaintiff creditor. As such, it requires a showing of "an element of injustice or fundamental unfairness."

            The third prong is the "harm" test. This test requires the plaintiff to show that the defendant's control, exerted in a fraudulent, illegal or otherwise unfair manner toward it, caused the harm suffered. A causal connection between the fraudulent conduct committed through the instrumentality of the subsidiary and the injury suffered or the damage incurred by the plaintiff should be established. The plaintiff must prove that, unless the corporate veil is pierced, it will have been treated unjustly by the defendant's exercise of control and improper use of the corporate form and, thereby, suffer damages.

            To summarize, piercing the corporate veil based on the alter ego theory requires the concurrence of three elements: control of the corporation by the stockholder or parent corporation, fraud or fundamental unfairness imposed on the plaintiff, and harm or damage caused to the plaintiff by the fraudulent or unfair act of the corporation. The absence of any of these elements prevents piercing the corporate veil.

                        The Court finds that none of the tests has been satisfactorily met in this case. Although ownership by one corporation of all or a great majority of stocks of another corporation and their interlocking directorates may serve as indicia of control, by themselves and without more, these circumstances are insufficient to establish an alter ego relationship or connection between Phil Carpet on the one hand and Pacific Carpet on the other hand, that will justify the puncturing of the latter's corporate cover.

            This Court has declared that "mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality." It has likewise ruled that the "existence of interlocking directors, corporate officers and shareholders is not enough justification to pierce the veil of corporate fiction in the absence of fraud or other public policy considerations."

            It must be noted that Pacific Carpet was registered with the Securities and Exchange Commission on January 29, 1999, such that it could not be said that Pacific Carpet was set up to evade Phil Carpet's liabilities. As to the transfer of Phil Carpet's machines to Pacific Carpet, settled is the rule that "where one corporation sells or otherwise transfers all its assets to another corporation for value, the latter is not, by that fact alone, liable for the debts and liabilities of the transferor. "

 

Issue 4:

            Whether the quitclaims signed by the petitioners are valid and binding.

 

Held:

            Yes; the quitclaims were valid and binding upon the petitioners.

            Where the person making the waiver has done so voluntarily, with a full understanding thereof, and the consideration for the quitclaim is credible and reasonable, the transaction must be recognized as being a valid and binding undertaking. Not all quitclaims are per se invalid or against policy, except (1) where there is clear proof that the waiver was wangled from an unsuspecting or gullible person, or (2) where the terms of settlement are unconscionable on their face; in these cases, the law will step in to annul the questionable transactions.

            In this case, the petitioners question the validity of the quitclaims they signed on the ground that Phil Carpet's closure was a mere pretense. As the closure of Phil Carpet, however, was supported by substantial evidence, the petitioners' reason for seeking the invalidation of the quitclaims must necessarily fail. Further, as aptly observed by the CA, the contents of the quitclaims, which were in Filipino, were clear and simple, such that it was unlikely that the petitioners did not understand what they were signing. Finally, the amount they received was reasonable as the same complied with the requirements of the Labor Code.