Dulay Enterprises vs. Court of Appeals

In a close corporation, a board resolution authorizing the sale or mortgage of corporate property is not necessary to bind the corporation for the action of its president, and corporate action taken without proper call or notice is deemed ratified by an absent director who fails to promptly file a written objection with the secretary. The veil of corporate fiction may be pierced when the corporate entity is used as an alter ego or business conduit of a person to defeat public convenience, justify wrong, protect fraud, or defend crime.

Manuel R. Dulay Enterprises, Inc. was a domestic close family corporation whose board of directors consisted primarily of Manuel R. Dulay and his family members—his children Virgilio, Linda, and Celia, along with Atty. Plaridel C. Jose as the sole non-relative director. The corporation owned a 689-square-meter property in Pasay City known as the Dulay Apartment, consisting of sixteen apartment units, covered by TCT No. 17880. Manuel Dulay served as president, treasurer, and general manager, exercising near-absolute control over the corporation's business affairs. The corporation had obtained various loans for a hotel project, including borrowings from Virgilio Dulay, who in turn occupied one of the apartment units and managed the property. The dispute arose from Manuel Dulay's sale of the corporate property to the Veloso spouses, the subsequent mortgage and foreclosure by Torres, and the corporation's attempt to invalidate these transactions on the ground that the authorizing board resolution was defective.

Manuel R. Dulay Enterprises, Inc. was a domestic close family corporation whose board of directors comprised Manuel R. Dulay (19,960 shares; president, treasurer, and general manager), Atty. Virgilio E. Dulay (10 shares; vice-president), Linda E. Dulay (10 shares), Celia Dulay-Mendoza (10 shares), and Atty. Plaridel C. Jose (10 shares; secretary). The corporation owned a 689-square-meter property at Seventh Street (now Buendia Extension) and F.B. Harrison Street, Pasay City, covered by TCT No. 17880 and known as Dulay Apartment, consisting of sixteen apartment units. Manuel Dulay had obtained various loans for the construction of a hotel project, including borrowings from his son Virgilio, who consequently occupied one apartment unit since 1973 and managed the Dulay Apartment.

On December 23, 1976, Manuel Dulay, by virtue of Board Resolution No. 18 of the corporation, sold the subject property to private respondents spouses Maria Theresa and Castrense Veloso for ₱300,000.00, as evidenced by a Deed of Absolute Sale. TCT No. 17880 was cancelled and TCT No. 23225 was issued to Maria Theresa Veloso. Subsequently, Manuel Dulay and the Veloso spouses executed a Memorandum to the Deed of Absolute Sale dated December 9, 1977, granting Manuel Dulay two years or until December 9, 1979 to repurchase the property for ₱200,000.00, though this memorandum was not annotated on either title. On December 24, 1976, Maria Veloso, without Manuel Dulay's knowledge, mortgaged the property to private respondent Manuel A. Torres for a loan of ₱250,000.00, which was duly annotated as Entry No. 68139 on TCT No. 23225.

Upon Maria Veloso's failure to pay Torres, the property was sold at extrajudicial foreclosure sale on April 5, 1978, with Torres as the highest bidder. On July 20, 1978, Maria Veloso executed a Deed of Absolute Assignment of the Right to Redeem in favor of Manuel Dulay, assigning her right to repurchase the property from Torres. Neither Maria Veloso nor her assignee Manuel Dulay was able to redeem the property within the one-year statutory period. Torres then filed an Affidavit of Consolidation of Ownership, and TCT No. 24799 was issued to him on April 23, 1979. On October 1, 1979, Torres filed a petition for a writ of possession in LRC Case No. 1742-P, but when the trial court ordered him to implead the corporation as an indispensable party—Virgilio Dulay never having been authorized by the corporation to sell or mortgage the property—Torres moved for dismissal, which was granted on April 8, 1980.

Torres and his administrator Edgardo Pabalan then filed Civil Case No. 8198-P on June 20, 1980 for recovery of possession, sum of money, and damages against the corporation, Virgilio Dulay, and tenant Nepomuceno Redovan. The corporation countered by filing Civil Case No. 8278-P on July 21, 1980 for cancellation of the Certificate of Sheriff's Sale and TCT No. 24799. Meanwhile, in Civil Case No. 38-81 before the Metropolitan Trial Court of Pasay City, Pabalan and Torres filed an ejectment suit against tenants Manalastas with the corporation as intervenor, resulting in a decision on April 25, 1985 ordering the defendants to vacate and pay rentals. The corporation and Virgilio Dulay then filed Civil Case No. 2880-P on May 17, 1985 for annulment of that MeTC decision. The three cases were jointly tried, and the trial court rendered a consolidated decision in favor of private respondents, dismissing the corporation's petitions and ordering it to surrender possession of the property to Torres as owner and Pabalan as administrator, to account for rentals, and to pay damages and attorney's fees. The Court of Appeals affirmed in full on October 23, 1989, and denied reconsideration on January 26, 1990. During the pendency of the Supreme Court petition, Torres died on April 3, 1991, naming Torres-Pabalan Realty & Development Corporation as his heir in a holographic will dated October 31, 1986.

• Validity of Board Resolution No. 18: Petitioners contended that the sale of the subject property between the Veloso spouses and Manuel Dulay had no binding effect on the corporation because Board Resolution No. 18, which authorized the sale, was resolved without the approval of all members of the board of directors and was prepared by a person not designated by the corporation to be its secretary.
• Torres's Lack of Ownership: Petitioners argued that private respondent Torres never acquired ownership over the subject property because he was never in actual possession of the property nor was the property ever delivered to him.
• Procedural Error in Denying Reconsideration: Petitioners asserted that the Court of Appeals erred in denying their motion for reconsideration despite private respondents' failure to submit the comment required by the appellate court.

• Close Corporation Governance: Whether a board resolution authorizing the sale of corporate property is necessary to bind a close corporation for the action of its president, and whether corporate action taken without proper call or notice is valid.
• Piercing the Veil of Corporate Fiction: Whether the veil of corporate fiction may be pierced to hold the corporation bound by its president's sale of corporate property.
• Foreclosure Purchaser's Right to Possession: Whether prior physical delivery or possession is required for a foreclosure purchaser to acquire ownership and the right to possession of the property.
• Denial of Motion for Reconsideration: Whether the Court of Appeals erred in denying petitioners' motion for reconsideration without the private respondents' comment.

• Close Corporation Governance: No. A board resolution authorizing the sale or mortgage of corporate property is not necessary to bind a close corporation for the action of its president; corporate action taken without proper call or notice is deemed ratified by an absent director who fails to promptly file a written objection with the secretary.
• Piercing the Veil of Corporate Fiction: Yes, the veil was properly pierced. The corporation was a close family corporation where the president exercised near-absolute control, and Virgilio Dulay had actual knowledge of the transactions and failed to make any prompt written objection.
• Foreclosure Purchaser's Right to Possession: No, prior physical delivery is not required. Under Article 1498 of the Civil Code, the execution of a deed of sale in a public instrument is equivalent to delivery, and a foreclosure purchaser becomes absolute owner upon consolidation of title.
• Denial of Motion for Reconsideration: No, the Court of Appeals did not err. The comment was required merely to aid the court, and requiring it would unnecessarily clog the dockets; courts are as much interested as the parties in the early disposition of cases.

• Close Corporation Governance: Section 101 of the Corporation Code governs actions by directors of a close corporation taken without a meeting. Such actions are deemed valid if, among other conditions, all directors have express or implied knowledge of the action and none makes prompt objection in writing, or if the directors are accustomed to take informal action with the express or implied acquiescence of all stockholders. Petitioner corporation was classified as a close corporation, making these provisions applicable. Even if a board meeting was held without proper call or notice, the action taken within corporate powers is deemed ratified by a director who failed to attend, unless he promptly files a written objection with the secretary. Virgilio Dulay failed to do so despite having knowledge of the transactions, as evidenced by his June 24, 1975 affidavit attesting that he was a signatory witness to the execution of the post-dated Deed of Absolute Sale in favor of Torres. The Court of Appeals found his protestations of innocence difficult to believe, noting he was an incorporator, director, and son of the president in a family corporation where four-fifths of the incorporators were close relatives.

• Piercing the Veil of Corporate Fiction: While a corporation possesses a personality distinct and separate from its stockholders, the veil of corporate fiction may be pierced when it is used to defeat public convenience, justify wrong, protect fraud, or defend crime. The privilege of separate personality is confined to legitimate uses. When the corporation is used merely as an alter ego or business conduit of a person, the law regards the corporate act as the act of that person. The Court has repeatedly disregarded the separate personality of the corporation where the corporate entity was used to annul a valid contract executed by one of its members. Here, Manuel Dulay was not only president and treasurer but also general manager of a closed family corporation where the only non-relative director, Atty. Plaridel C. Jose, appeared on paper as secretary while Maria Socorro R. Dulay at times acted as secretary. Manuel Dulay had near-absolute control over the business and affairs of the corporation, making the sale a corporate act rather than a personal transaction. The trial court's findings, affirmed by the appellate court, were not disturbed, as appellate courts will not overturn trial court findings unless plainly overlooked facts of substance that might affect the result—which was not present here.

• Foreclosure Purchaser's Right to Possession: Article 1498, paragraph 1, of the New Civil Code provides that when a sale is made through a public instrument, the execution thereof is equivalent to delivery of the thing object of the contract, unless the contrary appears or can clearly be inferred from the deed. The mere execution of the deed of sale in a public document is thus equivalent to delivery. Additionally, a buyer in a foreclosure sale becomes the absolute owner of the property if it is not redeemed within one year after registration of the sale. As such, the purchaser is entitled to possession and can demand it at any time following consolidation of ownership and issuance of a new transfer certificate of title. Torres consolidated ownership and obtained TCT No. 24799 on April 23, 1979, after neither Maria Veloso nor Manuel Dulay redeemed the property within the statutory period. Prior physical delivery or possession was therefore not legally required.

• Denial of Motion for Reconsideration: The Court of Appeals required the private respondents' comment on the motion for reconsideration merely to aid the court in its disposition. The failure to submit the comment did not prevent resolution of the motion. Courts are as much interested as the parties in the early disposition of cases, and to require otherwise would unnecessarily clog the dockets. The denial was therefore not erroneous.

• Doctrine of Piercing the Veil of Corporate Fiction — The separate and distinct personality of a corporation may be disregarded when the corporate entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime. When the corporation is used merely as an alter ego or business conduit of a person, the law will regard the corporation as the act of that person. In this case, the Court applied the doctrine because Manuel R. Dulay Enterprises, Inc. was a close family corporation where the president exercised near-absolute control, and the corporate entity was being used to annul a valid contract executed by its president.

• Close Corporation Informal Action (Section 101, Corporation Code) — In a close corporation, any action by the directors without a meeting is deemed valid if: (1) written consent is signed by all directors before or after the action; (2) all stockholders have actual or implied knowledge and make no prompt written objection; (3) the directors are accustomed to take informal action with the express or implied acquiescence of all stockholders; or (4) all directors have express or implied knowledge and none makes prompt written objection. If a directors' meeting is held without call or notice, an action taken within corporate powers is deemed ratified by a director who failed to attend, unless he promptly files a written objection with the secretary. The Court applied this provision to hold that Virgilio Dulay's failure to promptly object in writing ratified the corporate action authorizing the sale.

• Execution of Public Instrument as Delivery (Article 1498, Civil Code) — When a sale is made through a public instrument, the execution thereof is equivalent to the delivery of the thing object of the contract, unless the contrary appears or can clearly be inferred from the deed. The Court applied this rule to hold that prior physical delivery was not required for the foreclosure purchaser to acquire ownership and the right to possession.

• Foreclosure Purchaser's Right of Possession — A buyer in a foreclosure sale becomes the absolute owner of the property if it is not redeemed during the one-year period after registration of the sale. As absolute owner, the purchaser is entitled to possession and can demand it at any time following consolidation of ownership and issuance of a new transfer certificate of title. No bond is required after the redemption period if the property is not redeemed.

• "the veil of corporate fiction may be pierced when it is used to defeat public convenience justify wrong, protect fraud or defend crime." — This passage states the canonical formulation of the doctrine of piercing the veil of corporate fiction, articulating the grounds upon which the separate personality of a corporation may be disregarded.

• "When the corporation is used merely as an alter ego or business conduit of a person, the law will regard the corporation as the act of that person." — This defines the alter ego or business conduit principle as a basis for piercing the corporate veil, applied here to a close family corporation controlled by its president.

• "It is settled that the buyer in a foreclosure sale becomes the absolute owner of the property purchased if it is not redeemed during the period of one year after the registration of the sale." — This passage articulates the rule on the foreclosure purchaser's right to possession upon consolidation of ownership, relied upon to hold that prior physical delivery was unnecessary.

• Good Earth Emporium, Inc. vs. Court of Appeals, 194 SCRA 544 [1991] — Cited for the principle that a corporation has a personality distinct and separate from its individual stockholders or members, establishing the baseline rule before the exceptions for piercing the veil.
• Philippine Veterans Investment Development Corporation vs. Court of Appeals, 181 SCRA 678 [1990] — Cited for the grounds upon which the veil of corporate fiction may be pierced—defeating public convenience, justifying wrong, protecting fraud, or defending crime.
• Cagayan Valley Enterprises, Inc. vs. Court of Appeals, 179 SCRA 218 [1989] — Cited for the alter ego or business conduit principle: when the corporation is used merely as an alter ego of a person, the law regards the corporation as the act of that person.
• F. David Enterprises vs. Insular Bank of Asia and America, 191 SCRA 516 [1990] — Cited for the rule that a foreclosure purchaser becomes absolute owner upon failure of redemption within one year and is entitled to possession upon consolidation of ownership and issuance of a new title.
• People vs. Pirreras, 179 SCRA 33 [1989] — Cited for the principle that appellate courts will not disturb the findings of the trial judge unless plainly overlooked facts of substance that might affect the result.

• Section 101, Corporation Code of the Philippines — Governs when board meetings are unnecessary or improperly held in close corporations. Provides that actions by directors without a meeting are deemed valid under specified conditions, including when all directors have express or implied knowledge and none makes prompt written objection. Applied to hold that the corporation was bound by its president's sale despite defects in the board resolution authorizing it.
• Article 1498, New Civil Code — Provides that when a sale is made through a public instrument, the execution thereof is equivalent to delivery of the thing object of the contract, unless the contrary appears or cannot clearly be inferred from the deed. Applied to hold that prior physical delivery was not required for the foreclosure purchaser's right to possession.
• Section 7, Act No. 3135 (as amended) — Referenced in connection with the foreclosure purchaser's right to demand possession even during the redemption period upon posting a bond, which is no longer required after the redemption period if the property is not redeemed.

Narvasa, C.J., Padida, and Regalado, JJ., concurred.