Francisco Motors Corporation vs. Court of Appeals

The doctrine of piercing the veil of corporate fiction cannot be invoked to hold a corporation liable for the personal obligations of its individual directors, officers, and incorporators when the services giving rise to the obligation were rendered to them in their personal capacity and did not involve any corporate business; the doctrine is intended to reach individuals hiding behind the corporate form, not to impose individual liabilities upon the corporation.

Francisco Motors Corporation (FMC) is a corporation whose incorporators, directors, and officers are members of the Francisco family, heirs of the late Benita Trinidad. Private respondent Gregorio Manuel was employed as FMC's Assistant Legal Officer. Members of the Francisco family solicited Manuel's services to represent them in Special Proceedings No. 7803, the intestate estate proceedings of their deceased mother, Benita Trinidad. After the termination of those proceedings, Manuel's legal services were not compensated despite repeated demands, prompting him to file a permissive counterclaim for unpaid attorney's fees when FMC sued the Manuels for the unpaid balance on a jeep body purchase and repair costs.

On January 23, 1985, Francisco Motors Corporation (FMC) filed a complaint against spouses Gregorio and Librada Manuel before Branch 135 of the Regional Trial Court of Makati, Metro Manila, to recover three amounts: P3,412.06 representing the balance of a jeep body purchased by the Manuels, P20,454.80 for the unpaid cost of repair of the vehicle, and P6,000.00 for costs of suit and attorney's fees. The Manuels had purchased a jeep body from FMC and incurred additional repair costs, both of which remained partially unpaid.

In their answer, the Manuels interposed a permissive counterclaim for unpaid legal services rendered by Gregorio Manuel. Manuel alleged that while he was FMC's Assistant Legal Officer, he had been solicited by the incorporators, directors, and officers of FMC — who were also members of the Francisco family and heirs of the late Benita Trinidad — to represent them in Special Proceedings No. 7803, the intestate estate proceedings of their deceased mother. After the termination of those proceedings, his services were not compensated despite repeated demands. He therefore sought to collect P50,000.00 in unpaid attorney's fees from FMC by way of counterclaim against the corporation's collection suit.

FMC failed to answer the counterclaim. The trial court declared FMC in default on the counterclaim and received ex parte evidence thereon. The trial court found that Manuel indeed rendered legal services to the Francisco family in the estate proceedings and that those services were not compensated despite repeated demands. It ordered FMC to pay Manuel P50,000.00. Court records showed that FMC's former counsel, Nicanor G. Alvarez, received a copy of the answer with counterclaim two days prior to his withdrawal as counsel. When FMC's new counsel, Jose N. Aquino, entered his appearance, three days still remained within the period to file an answer to the counterclaim. FMC nevertheless failed to do so.

Both parties appealed to the Court of Appeals. FMC raised three issues: that the trial court never acquired jurisdiction over its person because no summons was validly served with the counterclaim; that FMC was not the real party in interest to the permissive counterclaim; and that there was no failure to answer the counterclaim. The Court of Appeals, on April 15, 1991, sustained the trial court's decision. It held that under Section 4, Rule 11 of the Rules of Court, a counterclaim must be answered within ten days and that nothing in the Rules requires a party to be summoned anew when a counterclaim is filed against him. The appellate court further ruled that the veil of corporate fiction should be pierced because FMC was composed of the heirs of Benita Trinidad as directors and incorporators for whom Manuel rendered legal services, and that equity and justice demanded the corporation's veil be pierced to compensate Manuel.

• Improper Application of Piercing the Veil: Petitioner argued that the Court of Appeals erred in applying the doctrine of piercing the veil of corporate entity because the transaction concerned only respondent Gregorio Manuel and the heirs of Benita Trinidad in their personal capacity. Petitioner maintained that there was no cause of action by Manuel against the corporation, that personal concerns of the heirs should be distinguished from corporate affairs, and that the present case does not fall among the instances where courts may look beyond the distinct personality of a corporation.
• Lack of Jurisdiction Over the Counterclaim: Petitioner contended that the trial court did not acquire jurisdiction over it because no summons was validly served together with the copy of the answer containing the permissive counterclaim. Petitioner argued that a permissive counterclaim is an independent action requiring separate summons, since it does not arise out of nor is necessarily connected with the opposing party's claim.
• Corporation Not Real Party in Interest: Petitioner stressed that the personality of the corporation is separate and distinct from the individual persons who hired Manuel's services, and that the liability of those individuals did not become an obligation chargeable against the corporation.

• Propriety of Piercing the Veil: Respondents maintained that both the trial and appellate courts found that Manuel was employed as assistant legal officer of FMC and that his services were solicited by the incorporators, directors, and members to handle the estate proceedings. They asserted that the members of FMC took advantage of their positions by not compensating Manuel after the termination of the estate proceedings despite repeated demands. They argued that the corporate veil may be disregarded when used to defeat public convenience, justify wrong, protect fraud, defend crime, or where the corporate entity is used as an alter ego, adjunct, or business conduit for the sole benefit of stockholders.
• No Separate Summons Required: Respondents disputed petitioner's claim that its right to due process was violated. They argued that no provision in the Rules of Court requires service of summons upon a defendant in a counterclaim, and that when petitioner filed its complaint it voluntarily submitted to the court's jurisdiction, making issuance of summons unnecessary. They asserted that the answer with counterclaim was served on petitioner's former counsel two days before his withdrawal, and that the present petition was a dilatory tactic to offset petitioner's obligations by running up more interest.

• Piercing the Veil of Corporate Fiction: Whether the Court of Appeals erred in applying the doctrine of piercing the veil of corporate entity to hold FMC liable for the personal attorney's fees owed by its individual directors, officers, and incorporators.
• Jurisdiction Over the Counterclaim: Whether the trial court acquired jurisdiction over petitioner with respect to the permissive counterclaim despite the absence of a separate service of summons.

• Piercing the Veil of Corporate Fiction: No. The doctrine was erroneously invoked, as it was being used to make the corporation answer for the personal liabilities of its individual directors and officers rather than to reach individuals hiding behind the corporate form.
• Jurisdiction Over the Counterclaim: Yes. No separate summons was required because the plaintiff in the original complaint had already voluntarily submitted to the court's jurisdiction; moreover, petitioner was estopped from questioning jurisdiction after filing a motion for reconsideration seeking relief from the order of default.

• Piercing the Veil of Corporate Fiction: The basic principle in corporation law is that a corporation has a personality separate and distinct from its stockholders. The doctrine of piercing the veil of corporate entity allows this separate personality to be disregarded when the corporate identity is used to defeat public convenience, justify wrong, protect fraud, defend crime, or where the corporation is a mere alter ego or business conduit of a person. In such cases, courts treat the corporation as a mere aggrupation of persons and attach liability directly to them. However, in this case, the situation was reversed: instead of holding individuals responsible for a corporate act, the corporation was being ordered to answer for the personal liability of individual directors, officers, and incorporators. Manuel's services were solicited to represent members of the Francisco family in intestate proceedings that did not involve any business of FMC. Whatever obligation the incorporators, directors, and officers incurred was incurred in their personal capacity. When directors and officers are unable to compensate a party for a personal obligation, it is far-fetched to allege that the corporation is perpetrating fraud or promoting injustice. Imposing such liability on the corporation could prejudice the corporation itself, its own creditors, and even other stockholders. Every action — including a counterclaim — must be prosecuted or defended in the name of the real party in interest, and it was plainly erroneous to lay Manuel's claim for legal fees at the door of FMC rather than the individual members of the Francisco family.

• Jurisdiction Over the Counterclaim: Section 4, Rule 11 of the Rules of Court provides that a counterclaim or cross-claim must be answered within ten days from service. Nothing in the Rules requires that summons first be served on the defendant before an answer to a counterclaim must be made. The purpose of a summons is to enable the court to acquire jurisdiction over the person of the defendant. Although a counterclaim is treated as an entirely distinct and independent action, the defendant in the counterclaim — being the plaintiff in the original complaint — has already submitted to the jurisdiction of the court. Under Rule 9, Section 3 of the 1997 Rules of Civil Procedure, if a defendant fails to answer the counterclaim, the defendant may be declared in default upon motion of the plaintiff. Moreover, when petitioner filed a motion for reconsideration seeking to set aside the order of default, it effectively submitted itself to the court's jurisdiction and was thereby estopped from assailing that jurisdiction.

• Piercing the Veil of Corporate Fiction — The separate juridical personality of a corporation may be disregarded when the corporate identity is used to defeat public convenience, justify wrong, protect fraud, defend crime, or where the corporation is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs so conducted as to make it merely an instrumentality, agency, conduit, or adjunct of another. In such circumstances, courts treat the corporation as a mere aggrupation of persons and liability attaches directly to them. The doctrine's rationale is to remove the barrier between the corporation and the persons comprising it to thwart fraudulent and illegal schemes of those who use the corporate personality as a shield. In this case, the Court held the doctrine inapplicable because it was being invoked in reverse — to make the corporation liable for the personal debts of its directors and officers, rather than to reach individuals hiding behind the corporate form. The Court emphasized that courts must be careful in assessing the milieu where the doctrine may be applied, lest an injustice result from its erroneous application.

• Real Party in Interest — Every action, including a counterclaim, must be prosecuted or defended in the name of the real party in interest. A corporation cannot be made the real party in interest for a claim arising from personal legal services rendered to its individual directors, officers, and incorporators in their personal capacity.

• Jurisdiction by Voluntary Submission and Estoppel — A party who has voluntarily submitted to the jurisdiction of the court by filing pleadings seeking affirmative relief — such as a motion for reconsideration of an order of default — is estopped from thereafter assailing the court's jurisdiction. The filing of the original complaint constitutes voluntary submission to the court's jurisdiction, rendering separate service of summons unnecessary for a counterclaim filed against the plaintiff.

• "However, in the case at bar, instead of holding certain individuals or persons responsible for an alleged corporate act, the situation has been reversed. It is the petitioner as a corporation which is being ordered to answer for the personal liability of certain individual directors, officers and incorporators concerned. Hence, it appears to us that the doctrine has been turned upside down because of its erroneous invocation." — This passage articulates the ratio decidendi on the improper application of the piercing doctrine: the doctrine is meant to reach individuals behind the corporate form, not to impose individual liabilities upon the corporation.

• "When directors and officers of a corporation are unable to compensate a party for a personal obligation, it is far-fetched to allege that the corporation is perpetuating fraud or promoting injustice, and be thereby held liable therefor by piercing its corporate veil." — This defines the boundary of the piercing doctrine in the context of personal obligations of corporate officers, clarifying that mere inability to pay does not constitute fraud or injustice warranting piercing.

• "Although a counterclaim is treated as an entirely distinct and independent action, the defendant in the counterclaim, being the plaintiff in the original complaint, has already submitted to the jurisdiction of the court." — This states the controlling rule on jurisdiction over counterclaims: the plaintiff's voluntary appearance through the original complaint suffices, and no separate summons is required.

• Sulo ng Bayan, Inc. vs. Araneta, Inc., 72 SCRA 347 — Cited by the Court of Appeals for the proposition that the separate personality of a corporation is a fiction created by law for convenience and may be disregarded when used as a cloak for illegality or to work injustice. The Supreme Court did not disturb this principle but held it inapplicable on the facts.
• Chemplex Philippines, Inc. vs. Pamatian, 57 SCRA 408 — Cited by the Court of Appeals for the principle that the legal fiction of separate corporate personality is not a shield for the commission of injustice and inequity. The Supreme Court acknowledged the principle but found the facts did not warrant its application.
• Soriano vs. Palacio, 12 SCRA 447 — Cited for the rule that a party is considered to have submitted to the court's jurisdiction when it files a motion for reconsideration seeking relief from the court.
• Tejones vs. Gironella, 159 SCRA 100 — Cited for the principle that a party is estopped from assailing the jurisdiction of a court after voluntarily submitting to its jurisdiction.
• Balais vs. Balais, 159 SCRA 37 — Cited for the proposition that estoppel is a bar against any claims of lack of jurisdiction.
• Concept Builder's Inc. vs. NLRC, 257 SCRA 149 (1996) — Cited for the basic principle that a corporation has a separate personality distinct from its stockholders and from other corporations to which it may be connected.
• De Leon vs. Court of Appeals, 277 SCRA 478 (1997) — Cited in connection with the requirement under Section 2, Rule 3 of the Rules of Court that every action must be prosecuted or defended in the name of the real party in interest.

• Section 4, Rule 11, Rules of Court — Provides that a counterclaim or cross-claim must be answered within ten (10) days from service. Applied to hold that petitioner was required to answer the counterclaim within the prescribed period and that no separate summons was necessary.
• Section 3, Rule 9, 1997 Rules of Civil Procedure — Provides that if a defending party fails to answer a counterclaim, the defending party may be declared in default upon motion of the claiming party. Applied to uphold the trial court's declaration of petitioner in default on the counterclaim.
• Section 2, Rule 3, Rules of Court — Requires that every action, including a counterclaim, be prosecuted or defended in the name of the real party in interest. Applied to hold that FMC was not the real party in interest to Manuel's claim for legal fees, which should have been directed against the individual members of the Francisco family.

Bellosillo, Puno, Mendoza, and Buena, JJ., concurred.