Bustos vs. Millians Shoe, Inc.

Properties owned by stockholders of a corporation are not assets of the corporation and cannot be included in rehabilitation proceedings or subjected to stay orders covering corporate assets, absent proof that the corporation is a close corporation under Section 96 of the Corporation Code and that the specific conditions for personal liability under Section 100(5) (active engagement in management, corporate torts, and lack of adequate liability insurance) are satisfied. The doctrine of separate juridical personality and limited liability shields stockholders from personal liability for corporate debts, and the 10-day opposition period under Rule 4, Section 6 of the Interim Rules on Corporate Rehabilitation applies only to creditors of the debtor corporation, not to claimants against stockholders personally.

The case arises from the intersection of local government tax enforcement and corporate rehabilitation proceedings. A winning bidder at a tax delinquency sale sought to exclude the auctioned property from the coverage of a stay order issued in rehabilitation proceedings involving Millians Shoe, Inc. (MSI), arguing that the property belonged to the corporate stockholders (Spouses Cruz) and not to the corporation itself. The lower courts ruled against the bidder, characterizing the corporation as a close corporation and holding the stockholders personally liable for corporate debts, thereby including their personal property in the rehabilitation proceedings.

• Spouses Fernando and Amelia Cruz owned a 464-square-meter lot covered by Transfer Certificate of Title (TCT) No. N-126668.
• On 6 January 2004, the City Government of Marikina levied the property for nonpayment of real estate taxes, and the Notice of Levy was annotated on the title on 8 January 2004.
• On 14 October 2004, the City Treasurer of Marikina auctioned the property, with petitioner Joselito Hernand M. Bustos emerging as the winning bidder.
• On 25 October 2004, the Regional Trial Court, Imus, Cavite issued a Stay Order in SEC Corp. Case No. 036-04 (rehabilitation proceedings for Millians Shoe, Inc.), covering assets under rehabilitation; this was annotated on the title on 9 February 2005.
• On 13 July 2006, the Regional Trial Court, Marikina City, Branch 273 rendered a final and executory Decision ordering the cancellation of TCT No. N-126668 and the issuance of a new title under the name of petitioner.
• On 26 September 2006, petitioner moved to exclude the subject property from the Stay Order, claiming that the lot belonged to Spouses Cruz (mere stockholders and officers of MSI) and that since he won the bidding on 14 October 2004 (before the annotation on 9 February 2005), the property could no longer be part of the Stay Order.
• The RTC denied the motion, ruling that because the redemption period up to 15 October 2005 had not yet lapsed at the time of the issuance of the Stay Order on 25 October 2004, ownership had not yet been transferred to petitioner.
• The Court of Appeals affirmed the RTC, characterizing MSI as a close corporation and holding that Spouses Cruz, as stockholders, were personally liable for corporate debts and obligations, and further ruled that petitioner's prayer was time-barred by the 10-day reglementary period under Rule 4, Section 6 of the Interim Rules of Procedure on Corporate Rehabilitation.

• Spouses Cruz are not liable for the debts of MSI because they are mere stockholders, and the subject property is their personal property, not an asset of the corporation.
• The Stay Order undermines the taxing powers of the local government unit (Marikina City).
• The time-bar rule under Rule 4, Section 6 of the Interim Rules on Corporate Rehabilitation does not apply to him because he is not a creditor of MSI but a claimant against Spouses Cruz personally.

• Spouses Cruz are stockholders and officers of MSI, a close corporation, and as such are personally liable for its debts and obligations under Section 97 of the Corporation Code.
• The Rehabilitation Plan of MSI has already been approved, and petitioner can no longer assail the same.
• The property was still owned by Spouses Cruz at the time of the issuance of the Stay Order (as the redemption period had not lapsed), and since they are personally liable for MSI's debts, the property is properly included in the rehabilitation proceedings.

• Procedural Issues:
  • Whether the petitioner's claim to exclude the property from the Stay Order is time-barred under Rule 4, Section 6 of the Interim Rules of Procedure on Corporate Rehabilitation, which requires creditors to file an opposition within 10 days before the initial hearing.
• Substantive Issues:
  • Whether the subject property owned by Spouses Cruz can be included in the Stay Order covering the assets of MSI under rehabilitation.
  • Whether Spouses Cruz, as stockholders of a close corporation, are personally liable for the debts and obligations of MSI.

• Procedural:
  • The time-bar rule does not apply to petitioner. Rule 4, Section 6 of the Interim Rules on Corporate Rehabilitation directs creditors of the debtor to file an opposition within 10 days. Since the true owner of the subject property is not the corporation but Spouses Cruz, petitioner cannot be considered a creditor of MSI but merely a holder of a claim against respondent spouses personally. Therefore, he is not bound by the 10-day opposition period applicable to creditors of the debtor corporation.
• Substantive:
  • The Court set aside the rulings of the Court of Appeals and the Regional Trial Court for lack of basis.
  • The Court held that the CA erred in finding MSI to be a close corporation without evidentiary basis. Section 96 of the Corporation Code requires specific provisions in the Articles of Incorporation: (1) limitation of stockholders to not more than 20; (2) restrictions on transfer of shares; and (3) prohibition on listing in stock exchanges or public offerings. Neither the CA nor the RTC referred to the Articles of Incorporation of MSI; mere allegation by Spouses Cruz that it was a close corporation is not evidence and is not equivalent to proof.
  • The Court further held that the CA seriously erred in interpreting Section 97 of the Corporation Code. That provision states that stockholders are subject to all liabilities of directors, but it does not provide that stockholders are automatically liable for corporate debts and obligations. Only Section 100(5) explicitly provides for personal liability of stockholders of close corporations, and only to the extent that they are actively engaged in management or operation of the business, and only for corporate torts (unless the corporation has obtained reasonably adequate liability insurance). None of these requisites were alleged or proven in this case.
  • Applying the doctrine of separate juridical personality, the Court ruled that a corporation has a legal personality separate and distinct from its stockholders, who enjoy limited liability. Being an officer or stockholder of a corporation does not make one's property the property of the corporation.
  • Citing Situs Development Corp. v. Asiatrust Bank, the Court ruled that properties merely owned by stockholders cannot be included in the inventory of assets of a corporation under rehabilitation. Stay orders should only cover claims directed against corporations or their properties, against their guarantors, or their sureties who are not solidarily liable with them, to the exclusion of accommodation mortgagors or stockholders' personal properties.

• Doctrine of Separate Juridical Personality — A corporation has a legal personality separate and distinct from that of the people comprising it, and stockholders enjoy the principle of limited liability such that the corporate debt is not the debt of the stockholder. Applied to exclude the personal property of Spouses Cruz from the assets of MSI under rehabilitation.
• Definition of Close Corporation (Section 96) — A close corporation must have specific provisions in its Articles of Incorporation limiting stockholders to not more than 20, restricting transfer of shares, and prohibiting public offerings; mere narrow distribution of ownership does not suffice. Applied to reject the CA's conclusion that MSI was a close corporation based on mere allegation.
• Personal Liability in Close Corporations (Section 100(5)) — Stockholders of close corporations are personally liable for corporate torts only to the extent that they are actively engaged in management and only if the corporation lacks adequate liability insurance. Applied to reject the imposition of personal liability on Spouses Cruz for MSI's contractual debts.
• Scope of Rehabilitation Stay Orders — Claims in rehabilitation proceedings are limited to demands against the debtor or its property; properties of stockholders are excluded unless specific conditions for personal liability are met. Applied to remove the subject property from the coverage of the Stay Order.

• "A narrow distribution of ownership does not, by itself, make a close corporation."
• "However, mere allegation is not evidence and is not equivalent to proof."
• "Nowhere in that provision do we find any inference that stockholders of a close corporation are automatically liable for corporate debts and obligations."
• "By virtue of that doctrine, stockholders of a corporation enjoy the principle of limited liability: the corporate debt is not the debt of the stockholder."
• "Thus, being an officer or a stockholder of a corporation does not make one's property the property also of the corporation."

• San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals — Cited for the proposition that courts must look into the Articles of Incorporation to find provisions expressly stating the requirements for a close corporation under Section 96.
• Situs Development Corp. v. Asiatrust Bank — Analogous case holding that parcels of land owned by spouses who are stockholders of a corporation cannot be considered part of corporate assets subject to rehabilitation proceedings.
• De Jesus v. Guerrero III — Cited for the rule that mere allegation is not evidence and is not equivalent to proof.
• Heirs of Tan Uy v. International Exchange Bank — Cited for the doctrine of separate juridical personality.
• Philippine National Bank v. Hydro Resources Contractors Corp. — Cited for the principle of limited liability of stockholders.
• Traders Royal Bank v. Court of Appeals — Cited for the rule that stockholder property is not corporate property.
• Siochi Fishery Enterprises, Inc. v. Bank of the Philippine Islands — Cited for the scope of stay orders in rehabilitation proceedings.
• Asiatrust Development Bank v. First Aikka Development, Inc. — Cited for the scope of stay orders in rehabilitation proceedings.
• Pacific Wide Realty and Development Corp. v. Puerto Azul Land, Inc. — Cited for the exclusion of accommodation mortgagors from stay orders.
• Naguiat v. National Labor Relations Commission — Cited for the definition of "corporate tort" as a breach of legal duty.

• Corporation Code, Section 96 — Defines the requirements for a close corporation; requires specific provisions in the Articles of Incorporation.
• Corporation Code, Section 97 — Provides that stockholders of close corporations are subject to liabilities of directors; misinterpreted by the CA as creating automatic personal liability for corporate debts.
• Corporation Code, Section 100(5) — Provides the limited circumstances under which stockholders of close corporations may be personally liable (for corporate torts, if actively engaged in management, and absent adequate liability insurance).
• Interim Rules of Procedure on Corporate Rehabilitation, Rule 2, Section 1 — Defines "claim" as demands against the debtor or its property.
• Interim Rules of Procedure on Corporate Rehabilitation, Rule 4, Section 6 — Requires creditors to file opposition to rehabilitation petitions within 10 days; held inapplicable to petitioner as he was not a creditor of the corporation.