Umali vs CA (189 SCRA 529)

Umali vs Court of Appeals
189 SCRA 529 [GR No. 89561 September 13, 1990]

Facts: Plaintiff Santiago Rivera is the nephew of plaintiff Mauricia Mur Vda. de Castillo. The Castillo family are the owners of parcel of land located in Lucena City which was given as security for a loan from the development Bank of the Philippines (DBP) for their failure to pay the amortization, foreclosure of the said property was about to be initiated. This problem was made known to Santiago Rivera, who proposed to them the conversion into subdivision of the four parcels of land adjacent to the mortgaged property to raise the necessary fund. The idea was accepted by the Castillo family and to carry out the project, a memorandum of agreement was executed by and between Slobec Realty and Development Inc. represented by its president Santiago Rivera and Castillo family. In this agreement, Santiago Rivera obliged himself to pay the Castillo family the sum of P70,000 immediately after the execution of the agreement and to pay additional amount of P40,000 after the property has been converted into a subdivision. Rivera, with agreement approached Mr. Modesto Cervantes, president of defendant Bormaheco and proposed to purchase from Bormaheco two tractors model D7 and D8 subsequently a sales agreement was executed on December 28, 1970. On January 3, 1971, Slobec, through Rivera, executed in favor of Bormaheco a chattel mortgage over the said equipment as security for the payment of the aforesaid balance of P180,000. As further security of the aforementioned unpaid balance, Slobec obtained from insurance corporation of the Philippines a security bond, with Insurance Corporation of the Philippines (ICP) as surety and Slobec as principal, in favor of Bormaheco, as borne out of by Exhibit 8. The aforesaid surety bond was in turn secured by an agreement of counter-guaranty with real estate mortgage executed by Rivera as President of Slobec and Mauricia Mur Vda. de Castillo, Buenaflor Castillo Umali, Bertilla Castillo-Rada, Victoria Castillo, Marietta Castillo and Leovina Castillo Jalbuena as mortgagors and insurance corporation of the Philippines as mortgagee. In this agreement, ICP guaranteed the obligation of Slobec with Bormaheco in the amount of P180,000. In giving the bond, ICP required that the Castillos mortgage to them the properties in question, namely, four parcels of land covered by TCT in the name of the aforementioned mortgagors, namely TCT no. 13114, 13115, 13116, and 13117 all of the Register of Deeds of Lucena City. Meanwhile, for violation of the terms and conditions of the counter-guaranty agreement, the properties of the Castillos were foreclosed by ICP as the highest bidder with a bid of P285,212, a certificate of sale was issued by the provincial sheriff of Lucena City and TCT over the subject parcels of land were issued.

Issue: Whether or not the foreclosure is proper so as to apply the doctrine of piercing the veil of corporate entity.

Held: No. Under the doctrine of piercing the veil of corporate entity, when valid grounds therefore exists, the legal fiction that a corporation is an entity with a juridical personality separate and distinct from its members or stockholders may be disregarded. In such cases, the corporation will be considered as a mere association of persons. The members or stockholders of the corporation will be considered as the corporation, that is, liability will attach directly to the officers and stockholders. The doctrine applies when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or defend crime, on when it is made as a shield to confuse the legitimate issues or where a corporation is the mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.

In the case at bar, petitioners seek to pierce the veil of corporate entity of Bormaheco, ICP and PM parts, alleging that these corporations employed fraud in causing the foreclosure and subsequent sale of the real properties belonging to petitioners while we do not discount the possibility of existence of fraud in the foreclosure proceeding, neither are we inclined to apply the doctrine invoked by petitioners in granting the relief sought. It is our considered opinion that piercing the veil of corporate entity is not the proper remedy in order that the foreclosure proceeding may be declared a nullity under the circumstances obtaining in the legal case at bar.

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

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