Corporation Law Case Digest

ARNOLD VS. WILLITS AND PATTERSON G.R. No. L-20214 March 17, 1923 Facts: Arnold, the plaintiff and the firm, Willits & Patterson in San Francisco entered into a (1 st) written contract by which the plaintiff was employed as the agent of the firm in the Philippine Islands for the operation of an oil mill for the period of five years at a minimum salary of $200 per month and travelling expenses. Aside from his minimum salary, it was also stated in the contract that he will receive a brokerage fee from all his sales and other profits. Also, if the business was at a loss, Arnold would receive $400 per month. When Patterson retired, Willits became the sole owner of its assets. Willits organized a new corporation by the same name in San Francisco. The new firm acquired all the assets of the former firm. He came to Manila and organized a corporation here known as Willits & Patterson, Ltd., in and to which he again subscribed for all of the capital stock except the nominal shares necessary to qualify the directors. In legal effect, the San Francisco corporation took over and acquired all of the assets and liabilities of the Manila corporation. Willits signed a (2nd) new contract in the form of a letter. The purpose of which was to more clearly define and specify the compensation which the plaintiff was to receive for his services. An accounting was done and it showed that the corporation was due and owing the plaintiff under Exhibit B the sum of P106, 277.50. The San Francisco corporation became involved in financial trouble, and all of its assets were turned over to a "creditors' committee." Arnold filed a complaint and contended that the signing of the second contract in the manner and under the conditions in which it was signed, and through the subsequent acts and conduct of the parties, was ratified and, in legal effect, became and is now binding upon the defendant. Defendant contended that the second contract was signed but without authority. It also alleged that Arnold owed them some money. The Court of First Instance rendered a decision ordering Arnold to return the money to the corporation. Issue: WON the corporation is bound by the contracts. Held: YES. Ratio: “Where the stock of a corporation is owned by one person whereby the corporation functions only for the benefit of such individual owner, the corporation and the individual should be deemed to be the same.” In the case at bar, the corporations are under Willits. When the second contract was signed, Willits recognized that Arnold’s services were to be performed by its terms. When the new corporation was organized and created, it still treated Arnold as its agent in the same manner as the first one. Hence, the new corporation was bound by the contract made under the previous firm. Dispositive: The judgment of the lower court is reversed.

LA CAMPANA COFFEE FACTORY v KAISAHAN NG MANGGAGAWA G.R. L-5677, May 25, 1953 Facts: Tan Tong since 1932 has been engaged in the buying and selling gawgaw under the trade name La Campana Gawgaw Packing. In 1950, Tan Tong and members of his family organized the family corporation. La Campana Coffee Factory with its principal office located in Gawgaw Packing. Prior to said information, Tan Tong entered into a CBA with the labor union of La Campana Gawgaw. Later on, his employees formed Kaisahan ng mga Manggagawa ng La Campana with an authorization from the DOLE to become an affiliate of the larger union. Kaisahan with 66 members presented a demand for higher wages and more privileges to La Campana Starch and Coffee Factory. The demand was not granted and the DOLE certified the issue to the CIR. La Campana filed a motion to dismiss alleging that the action was directed against two different entities with distinct personalities. This was denied, hence this petition. Issue: W/N the CIR has jurisdiction over the case. Held: YES. La Compana Gawgaw and La Campana Factory are operating under one single management or as one business though with two trade names. The coffee factory is a corporation and by legal fiction, an entity separate and apart from the persons composing it namely, Tan Tong and his family. However, the concept of separate corporate personality cannot be extended to a point beyond reason and policy when invoked in support of an end subversive of this policy and will be disregarded by the courts. A subsidiary company which is created merely as an agent for the latter may sometimes be regarded as identical with the parent corporation especially if the stockholders or officers of the two corporations are substantially the same or their systems of operation unified. The facts showed that they had one management, one payroll prepared by the same person, laborers were interchangeable, there is only one entity as shown by the signboard ad in trucks, packages and delivery forms and the same place of business. The attempt to make the two factories appear as

two separate businesses when in reality they are but one, is but a device to defeat the ends of the law and should not be permitted to prevail. WHY PIERCE? So that La Campana cannot evade the jurisdiction of CIR since La Campana Gawgaw has only 14 employees and only 5 are members of Kaisahan.

CAGAYAN FISHING DEVELOPMENT CO., INC. vs. TEODORO SANDIKO G.R. No. L-43350. December 23, 1937 FACTS: Manuel Tabora is the registered owner of four parcels of land. To guarantee the payment of a loan in the sum of P8,000, Manuel Tabora executed in favor of the Philippine National Bank a first mortgage on the four parcels of land above-mentioned. A second mortgage in favor of the same bank was executed by Tabora over the same lands to guarantee the payment of another loan amounting to P7,000. A third mortgage on the same lands was executed in favor of Severina Buzon to whom Tabora was indebted in the sum of P2,9000. These mortgages were registered and annotations thereof appear at the back of transfer certificate of title No. 217. The board of directors of plaintiff adopted a resolution authorizing its president, Jose Ventura, to sell the four parcels of lands in question to Teodoro Sandiko for P42,000. The defendant having failed to pay the sum stated in the promissory note, plaintiff, brought this action in the Court of First Instance of Manila praying that judgment be rendered against the defendant for the sum of P25,300, with interest at legal rate from the date of the filing of the complaint, and the costs of the suits. ISSUE: Whether or not the transfers were valid. RULING: NO. The contract here was entered into not between Manuel Tabora and a non-existent corporation but between the Manuel Tabora as owner of the four parcels of lands on the one hand and the same Manuel Tabora, his wife and others, as mere promoters of a corporations on the other hand. For reasons that are self-evident, these promoters could not have acted as agent for a projected corporation since that which no legal existence could have no agent. A corporation, until organized, has no life and therefore no faculties. It is, as it were, a child in ventre sa mere. This is not saying that under no circumstances may the acts of promoters of a corporation be ratified by the corporation if and when subsequently organized. There are, of course, but under the peculiar facts and circumstances of the present case we decline to extend the doctrine of ratification which would result in the commission of injustice or fraud to the candid and unwary. If the plaintiff corporation could not and did not acquire the four parcels of land here involved, it follows that it did not possess any resultant right to dispose of them by sale to the defendant, Teodoro Sandiko. Some of the members of this court are also of the opinion that the transfer from Manuel Tabora to the Cagayan Fishing Development Company, Inc., which transfer is evidenced by Exhibit A, was subject to a condition precedent (condicion suspensiva), namely, the payment of the mortgage debt of said Tabora to the Philippine National Bank, and that this condition not having been complied with by the Cagayan Fishing Development Company, Inc., the transfer was ineffective. However, having arrived at the conclusion that the transfer by Manuel Tabora to the Cagayan Fishing Development Company, Inc. was null because at the time it was affected the corporation was non-existent, we deem it unnecessary to discuss this point.

RIZAL LIGHT & ICE CO., INC. vs. THE MUNICIPALITY OF MORONG, RIZAL and THE PUBLIC SERVICE COMMISSION G.R. No. L-20993.September 28, 1968 FACTS: The bulk of petitioner's arguments assailing the personality of Morong Electric dwells on the proposition that since a franchise is a contract, 23 at least two competent parties are necessary to the execution thereof, and parties are not competent except when they are in being. Hence, it is contended that until a corporation has come into being, in this jurisdiction, by the issuance of a certificate of incorporation by the Securities and Exchange Commission (SEC) it cannot enter into any contract as a corporation. The certificate of incorporation of the Morong Electric was issued by the SEC on October 17, 1962, so only from that date, not before, did it acquire juridical personality and legal existence. Petitioner concludes that the franchise granted to Morong Electric on May 6, 1962 when it was not yet in esse is null and void and cannot be the subject of the Commission's consideration. On the other hand, Morong Electric argues, and to which argument the Commission agrees, that it was a de facto corporation at the time the franchise was granted and, as such, it was not incapacitated to enter into any contract or to apply for and accept a franchise. Not having been incapacitated, Morong Electric maintains that the franchise granted to it is valid and the approval or disapproval thereof can be properly determined by the Commission. ISSUE: Whether the lack or corporate existence on the part of Morong rendered the franchise valid.

RULING: YES. The incorporation of (Morong) and its acceptance of the franchise as shown by this action in prosecuting the application filed with the Commission for approval of said franchise, not only perfected a contract between the municipality and Morong but also cured the deficiency pointed out by the petition. The fact that Morong did not have a corporate existence on the day the franchise was granted does not render the franchise invalid, as Morong later obtained its certificate of incorporation and accepted the franchise. The two decisions of the Public Service Commission, appealed from, should be, as they are hereby affirmed, with costs in the two cases against petitioner Rizal Light & Ice Co., Inc.

FERMIN Z. CARAM, JR. and ROSA O. DE CARAM vs. THE HONORABLE COURT OF APPEALS and ALBERTO V. ARELLANO G.R. No. L-48627. June 30, 1987 FACTS: The petitioners claim that this order has no support in fact and law because they had no contract whatsoever with the private respondent regarding the above-mentioned services. Their position is that as mere subsequent investors in the corporation that was later created, they should not be held solidarily liable with the Filipinas Orient Airways, a separate juridical entity, and with Barretto and Garcia, their co-defendants in the lower court, ** who were the ones who requested the said services from the private respondent. ISSUE: Whether or not the petitioners should be held liable. RULING: NO. The petitioners were not involved in the initial stages of the organization of the airline. They were merely among the financiers whose interest was to be invited and who were in fact persuaded, on the strength of the project study, to invest in the proposed airline. There was no showing that the Airline was a fictitious corporation and did not have a separate juridical personality to justify making the petitioners, as principal stockholders thereof, responsible for its obligations. As a bona fide corporation, the Airline should alone be liable for its corporate acts as duly authorized by its officers and directors. Granting that the petitioners benefited from the services rendered, such is no justification to hold them personally liable therefor. Otherwise, all the other stockholders of the corporation, including those who came in late, and regardless of the amount of their shareholdings, would be equally and personally liable also with the petitioner for the claims of the private respondent. Petitioners cannot be held personally liable for the compensation claimed by the private respondent for the services performed by him in the organization of the corporation. To repeat, the petitioners did not contract such services. It was only the results of such services that Barretto and Garcia presented to them and which persuaded them to invest in the proposed airline. The most that can be said is that they benefited from such services, but that surely is no justification to hold them personally liable therefor. A promoter could not have acted as agent for a corporation that had no legal existence. A corporation, until organized, has no life therefore no faculties. The corporation had no juridical personality to enter into a contract. SEVENTH DAY ADVENTIST CONFERENCE CHURCH OF SOUTHERN PHILIPPINES, INC. petitioners vs. NORTHEASTERN MINDANAO MISSION OF SEVENTH DAY ADVENTIST, INC. Respondents G.R. No. 150416 July 21, 2006 FACTS: This case involves two supposed transfers of the lot previously owned by the spouses Cosio. The first transfer was a donation to petitioners’ alleged predecessors-in-interest in 1959 while the second transfer was through a contract of sale to respondents in 1980. A TCT was later issued in the name of respondents. Claiming to be the alleged donee’s successors-in-interest, petitioners filed a case for cancellation of title, quieting of ownership and possession, declaratory relief and reconveyance with prayer for preliminary injunction and damages against respondents. Respondents, on the other hand, argued that at the time of the donation, petitioners’ predecessors-in-interest has no juridical personality to accept the donation because it was not yet incorporated. Moreover, petitioners were not members of the local church then. The RTC upheld the sale in favor of respondents, which was affirmed by the Court of Appeals, on the ground that all the essential requisites of a contract were present and it also applied the indefeasibility of title. ISSUE: Whether or not the donation was void. HELD: Yes, the donation was void because the local church had neither juridical personality nor capacity to accept such gift since it was inexistent at the time it was made.

The Court denied petitioners’ contention that there exists a de facto corporation. While there existed the old Corporation Law (Act 1459), a law under which the local church could have been organized, petitioners admitted that they did not even attempt to incorporate at that time nor the organization was registered at the Securities and Exchange Commission. Hence, petitioners obviously could not have claimed succession to an entity that never came to exist. And since some of the representatives of petitioner Seventh Day Adventist Conference Church of Southern Philippines, Inc. were not even members of the local church then, it necessarily follows that they could not even claim that the donation was particularly for them.

LIM TONG LIM vs. PHILIPPINE FISHING GEAR INDUSTRIES, INC. 1999 Nov 3, G.R. No. 136448 FACTS: On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao entered into a Contract for the purchase of fishing nets of various sizes from the Philippine Fishing Gear Industries, Inc. They claimed that they were engaged in a business venture with Petitioner Lim Tong Lim, who however was not a signatory to the agreement. They, however, failed to pay; hence, private respondent filed a collection suit against Chua, Yao and Petitioner Lim Tong Lim with a prayer for a writ of preliminary attachment. The suit was brought against the three in their capacities as general partners, on the allegation that "Ocean Quest Fishing Corporation" was a nonexistent corporation Yao and Chua admitted liability while Lim filed his answer. Trial court rendered decision ruling that Philippine Fishing Gear Industries was entitled to the Writ of Attachment and that Chua, Yao and Lim, as general partners, were jointly liable to pay respondent. ISSUE: Whether or not Lim should be made jointly liable with Yao and Chua. RULING: YES. Lim asserts that he should not be made liable because there was no partnership existing between them. The court ruled that there exist a partnership between them. It is clear that Chua, Yao and Lim had decided to engage in a fishing business, which they started by buying boats worth P3.35 million, financed by a loan secured from Jesus Lim who was petitioner's brother. In their Compromise Agreement, they subsequently revealed their intention to pay the loan with the proceeds of the sale of the boats, and to divide equally among them the excess or loss. These boats, the purchase and the repair of which were financed with borrowed money, fell under the term "common fund" under Article 1767. The contribution to such fund need not be cash or fixed assets; it could be an intangible like credit or industry. That the parties agreed that any loss or profit from the sale and operation of the boats would be divided equally among them also shows that they had indeed formed a partnership. Moreover, it is clear that the partnership extended not only to the purchase of the boat, but also to that of the nets and the floats. The fishing nets and the floats, both essential to fishing, were obviously acquired in furtherance of their business. It would have been inconceivable for Lim to involve himself so much in buying the boat but not in the acquisition of the aforesaid equipment, without which the business could not have proceeded.

PIONEER INSURANCE & SURETY CORPORATION vs. THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY EQUIPMENT, INC., (BORMAHECO), CONSTANCIO M. MAGLANA and JACOB S. LIM G.R. No. 84197. July 28, 1989 FACTS: In 1965, Jacob S. Lim, owner-operator of Southern Airlines (SAL), a single proprietorship entered into a sales contract with regarding Japan Domestic Airlines (JDA) regarding 2 DC-#A type aircrafts, 1 set of necessary spare parts where a Total of $ 190,000 in instalments are to be paid. Pioneer Insurance and Surety Corp. as surety executed its surety bond in favor of JDA on behalf of its principal Lim. Border Machinery and Heavy Equipment Co, Inc. of Francisco and Modesto Cervantes and Constancio Maglana contributed funds for the transaction based on the misrepresentation of Lim that they will form a new corporation to expand his business. Lim as owner operator for SAL executed in favor of Pioneer a deed of chattel mortgage as security. A restructuring of obligation to change the maturity was done twice without the knowledge of other defendants made the surety of JDA prescribed so not entitled to reimbursement. Upon default on the 2/8 payments, Pioneer paid for him and filed a petition for the foreclosure of chattel mortgage as security. CA affirmed Trial of Merits: Only Lim is liable to pay ISSUE: Whether or not there is failure of respondents to incorporate leading to a de facto partnership. RULING: NO.

Partnership inter se does not necessarily exist, for ordinarily CANNOT be made to assume the relation of partners as between themselves, when their purpose is that no partnership shall exists. It should be implied only when necessary to do justice between the parties (i.e. only pretend to make others liable). Lim never intended to form a corporation.

Magsaysay-Labrador, et. al. vs. Court of Appeals [GR 58168, 19 December 1989] Facts: On 9 February 1979, Adelaida Rodriguez-Magsaysay, widow and special administratix of the estate of the late Senator Genaro Magsaysay, brought before the then Court of First Instance of Olongapo an action against Artemio Panganiban, Subic Land Corporation (SUBIC), Filipinas Manufacturer's Bank (FILMANBANK) and the Register of Deeds of Zambales, for the annulment of the Deed of Assignment executed by the late Senator in favor of SUBIC (as a result of which TCT 3258 was cancelled and TCT 22431 issued in the name of SUBIC), for the annulment of the Deed of Mortgage executed by SUBIC in favor of FILMANBANK (dated 28 April 1977 in the amount of P 2,700,000.00), and cancellation of TCT 22431 by the Register of Deeds, and for the latter to issue a new title in her favor. On 7 March 1979, Concepcion Magsaysay-Labrador, Soledad Magsaysay-Cabrera, Luisa Magsaysay-Corpuz, Felicidad Magsaysay, and Mercedes Magsaysay-Diaz, sisters of the late senator, filed a motion for intervention on the ground that on 20 June 1978, their brother conveyed to them 1/2 of his shareholdings in SUBIC or a total of 416,566.6 shares and as assignees of around 41 % of the total outstanding shares of such stocks of SUBIC, they have a substantial and legal interest in the subject matter of litigation and that they have a legal interest in the success of the suit with respect to SUBIC. On 26 July 1979, the trial court denied the motion for intervention, and ruled that petitioners have no legal interest whatsoever in the matter in litigation and their being alleged assignees or transferees of certain shares in SUBIC cannot legally entitle them to intervene because SUBIC has a personality separate and distinct from its stockholders. On appeal, the Court of Appeals found no factual or legal justification to disturb the findings of the lower court. The appellate court further stated that whatever claims the Magsaysay sisters have against the late Senator or against SUBIC for that matter can be ventilated in a separate proceeding. The motion for reconsideration of the Magsaysay sisters was denied. Hence, the petition for review on certiorari. Issue: Whether the Magsaysay sister, allegedly stockholders of SUBIC, are interested parties in a case where corporate properties are in dispute. Held: Viewed in the light of Section 2, Rule 12 of the Revised Rules of Court, the Magsaysay sisters have no legal interest in the subject matter in litigation so as to entitle them to intervene in the proceedings. To be permitted to intervene in a pending action, the party must have a legal interest in the matter in litigation, or in the success of either of the parties or an interest against both, or he must be so situated as to be adversely affected by a distribution or other disposition of the property in the custody of the court or an officer thereof. Here, the interest, if it exists at all, of the Magsaysay sisters is indirect, contingent, remote, conjectural, consequential and collateral. At the very least, their interest is purely inchoate, or in sheer expectancy of a right in the management of the corporation and to share in the profits thereof and in the properties and assets thereof on dissolution, after payment of the corporate debts and obligations. While a share of stock represents a proportionate or aliquot interest in the property of the corporation, it does not vest the owner thereof with any legal right or title to any of the property, his interest in the corporate property being equitable or beneficial in nature. Shareholders are in no legal sense the owners of corporate property, which is owned by the corporation as a distinct legal person.

PHILIPPINE TRUST COMPANY, as assignee in insolvency of "La Cooperativa Naval Filipina" vs. MARCIANO RIVERA G.R. No. L-19761. January 29, 1923 FACTS: In 1918 the Cooperativa Naval Filipina was duly incorporated under the laws of the Philippine Islands, with a capital of P100,000, divided into one thousand shares of a par value of P100 each. Among the incorporators of this company was numbered the defendant Mariano Rivera, who subscribed for 450 shares representing a value of P45,000, the remainder of the stock being taken by other persons. In the course of time the company became insolvent and went into the hands of the Philippine Trust Company, as assignee in bankruptcy; and by it this action was instituted to recover one-half of the stock subscription of the defendant, which admittedly has never been paid. The reason given for the failure of the defendant to pay the entire subscription is a meeting of its stockholders occurred, at which a resolution was adopted to the effect that the capital should be reduced by 50 per centum and the subscribers released from the obligation to pay any unpaid balance of their subscription in excess of 50 per centum of the same.

ISSUE: Whether or not the reduction of the company’s capital by 50 per centum and the subscribers released from the obligation to pay any unpaid balance of their subscription in excess of 50 per centum is valid. RULING: NO. The Court ruled that defendant was still liable for the unpaid balance of his subscription. It is established doctrine that subscription to the capital of a corporation constitute a find to which creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its debts. A corporation has no power to release an original subscriber to its capital stock from the obligation of paying for his shares, without a valuable consideration for such release; and as against creditors a reduction of the capital stock can take place only in the manner an under the conditions prescribed by the statute or the charter or the articles of incorporation. Moreover, strict compliance with the statutory regulations is necessary. In the case before us the resolution releasing the shareholders from their obligation to pay 50 per centum of their respective subscriptions was an attempted withdrawal of so much capital from the fund upon which the company's creditors were entitled ultimately to rely and, having been effected without compliance with the statutory requirements, was wholly ineffectual.

PHILIPPINE NATIONAL BANK, plaintiff vs. BITULOK SAWMILL INC., defendant G.R. Nos. L-24177-85 June 29, 1968 FACTS: The Philippine Lumber Distributing Agency, Inc., according to the lower court, "was organized sometime in the early part of 1947 upon the initiative and insistence of the late President Manuel Roxas of the Republic of the Philippines who for the purpose, had called several conferences between him and the subscribers and organizers of the Philippine Lumber Distributing Agency, Inc." The purpose was praiseworthy, to insure a steady supply of lumber, which could be sold at reasonable prices to enable the war sufferers to rehabilitate their devastated homes. At the beginning, the lumber producers were reluctant to organize the cooperative agency as they believed that it would not be easy to eliminate from the retail trade the alien middlemen who had been in this business from time immemorial, but because the late President Roxas made it clear that such a cooperative agency would not be successful without a substantial working capital which the lumber producers could not entirely shoulder, and as an inducement he promised and agreed to finance the agency by making the Government invest P9.00 by way of counterpart for every peso that the members would invest therein." Accordingly, "the late President Roxas instructed the Hon. Emilio Abello, then Executive Secretary and Chairman of the Board of Directors of the Philippine National Bank, for the latter to grant said agency an overdraft in the original sum of P250,000.00 which was later increased to P350,000.00, which was approved by said Board of Directors of the Philippine National Bank on July 28, 1947, payable on or before April 30, 1958, with interest at the rate of 6% per annum, and secured by the chattel mortgages on the stock of lumber of said agency." The Philippine Government did not invest the P9.00 for every peso coming from defendant lumber producers. The loan extended to the Philippine Lumber Distributing Agency by the Philippine National Bank was not paid. ISSUE: Whether or not the non-compliance with a plain statutory command, considering the persuasiveness of the plea that defendants-appellees would "not have subscribed to the capital stock" of the Philippine Lumber Distributing Agency "were it not for the assurance of the then President of the Republic that the Government would back it up by investing P9.00 for every peso" subscribed, a condition which was not fulfilled, such commitment not having been complied with, be justified. RULING: NO. It would be unwarranted to ascribe to the late President Roxas the view that the payment of the stock subscriptions, as thus required by law, could be condoned in the event that the counterpart fund to be invested by the Government would not be available. Even if such were the case, however, and such a promise were in fact made, to further the laudable purpose to which the proposed corporation would be devoted and the possibility that the lumber producers would lose money in the process, still the plain and specific wording of the applicable legal provision as interpreted by this Court must be controlling. It is a well-settled principle that with all the vast powers lodged in the Executive, he is still devoid of the prerogative of suspending the operation of any statute or any of its terms.