Francisco vs. Mejia

A corporate officer who uses the corporate fiction to defraud a third party, or who acts negligently, maliciously, or in bad faith, may be held personally liable for the corporate obligation involved; however, mere ownership by a single stockholder of all or nearly all of the capital stock of a corporation is not by itself sufficient ground for disregarding the separate corporate personality of that corporation.

Andrea Cordova Vda. de Gutierrez was the registered owner of a twenty-five-hectare parcel of land in Caloocan City, later subdivided into five lots of five hectares each. On 21 December 1964, she sold four of these lots to Cardale Financing and Realty Corporation under a Deed of Sale with Mortgage for ₱800,000.00, with the unpaid balance secured by a mortgage on three of the four parcels. Petitioner Adalia B. Francisco served as Vice-President and Treasurer of Cardale and, separately, as President, director, and controlling stockholder of Merryland Development Corporation. Respondent Rita C. Mejia is the executrix of the testate estate of Gutierrez, who died on 20 October 1969 during the pendency of the rescission action.

Andrea Cordova Vda. de Gutierrez was the registered owner of a twenty-five-hectare parcel of land in Camarin, Caloocan City, covered by TCT No. 5779. The property was subdivided into five lots of five hectares each, and TCT No. 5779 was cancelled and replaced by TCT Nos. 7123 to 7127, all in Gutierrez's name. On 21 December 1964, Gutierrez and Cardale Financing and Realty Corporation executed a Deed of Sale with Mortgage over the lots covered by TCT Nos. 7124, 7125, 7126, and 7127 for ₱800,000.00. Cardale paid ₱171,000.00 upon execution, with the balance of ₱629,000.00 payable in installments within five years at nine percent per annum interest on successive unpaid principal balances. Gutierrez's titles were cancelled and TCT Nos. 7531 to 7534 were issued in favor of Cardale. To secure the unpaid balance, Cardale mortgaged three of the four parcels — those covered by TCT Nos. 7531, 7532, and 7533, encompassing fifteen hectares. The mortgage was annotated on both the original and owner's duplicate certificates of title, the latter being retained by Gutierrez.

On 26 August 1968, owing to Cardale's failure to settle its mortgage obligation, Gutierrez filed a complaint for rescission with the Quezon City RTC, docketed as Civil Case No. Q-12366. On 20 October 1969, during the pendency of the case, Gutierrez died and was substituted by her executrix, respondent Rita C. Mejia. In 1971, plaintiff's presentation of evidence was terminated, but Cardale, represented by petitioner Adalia B. Francisco in her capacity as Vice-President and Treasurer, lost interest in presenting its evidence, and the case remained inactive for approximately fourteen years.

In the meantime, the mortgaged parcels became delinquent in real estate taxes — ₱102,300.00 for those covered by TCT Nos. 7532 and 7533, and ₱89,231.37 for that covered by TCT No. 7531 — culminating in their levy and auction sale on 1 and 12 September 1983. The highest bidder for all three parcels was Merryland Development Corporation, whose President and majority stockholder is Francisco. Final notices from the City Treasurer of Caloocan, dated 9 July 1982, demanding payment within ten days and warning of public auction, had been sent to Cardale care of Merryland at Francisco's address in White Plains, Quezon City. Francisco did not inform the estate of Gutierrez, the executrix Mejia, or the trial court in Civil Case No. Q-12366 of the tax delinquencies or the impending auction sale.

On 13 August 1984, before the expiration of the one-year redemption period, Mejia filed a Motion for Decision in Civil Case No. Q-12366. Francisco, signing as "officer-in-charge" of Cardale, filed a Motion for Postponement claiming Cardale needed time to hire new counsel, again making no mention of the tax sale. The redemption period thereafter expired, and Francisco, acting for Merryland, filed petitions for consolidation of title, resulting in orders decreeing the cancellation of Cardale's TCT Nos. 7531 to 7533 and the issuance of new titles in Merryland's name "free from any encumbrance or third-party claim whatsoever." The new titles did not bear the mortgage lien in favor of Gutierrez. Only sometime in June 1985, after the redemption period had lapsed, did Francisco file a Manifestation in Civil Case No. Q-12366 disclosing the tax delinquency sale — but without revealing that Merryland was the purchaser. The trial court dismissed the rescission case as moot and academic.

On 14 January 1987, Mejia filed a complaint for damages with preliminary attachment against Francisco, Merryland, and the Register of Deeds of Caloocan City, docketed as Civil Case No. Q-49766. The RTC dismissed the complaint on 15 April 1988, finding no fraud and no basis to pierce the corporate veil, and attributing the loss to Mejia's failure to actively pursue the rescission case. The Court of Appeals reversed on 13 April 1999, piercing the corporate veil of both Cardale and Merryland and holding Francisco and Merryland solidarily liable for ₱4,314,271.43. Petitioners elevated the case to the Supreme Court via petition for review by certiorari.

• No Duty to Inform Mortgagee: Petitioners argued that there is no law requiring the mortgagor to inform the mortgagee of tax delinquencies on the mortgaged properties.
• No Fraud in Non-Payment of Taxes: Petitioners claimed that Cardale's failure to pay realty taxes does not per se constitute fraud, since it was not proven that Cardale was financially capable of paying the taxes at the time.
• Respondent's Neglect: Petitioners contended that Mejia, as executrix, was remiss in her duty to pursue Civil Case No. Q-12366; had she not slept on her rights, she could have learned of the tax delinquencies and auction sale and redeemed the properties or availed of other remedies. They further argued that Mejia could have annotated a notice of lis pendens on the titles but failed to do so.
• No Control Over Both Corporations: Petitioners maintained that respondent adduced no proof that Francisco controlled both Cardale and Merryland or used them to perpetrate fraud, noting that apart from Francisco's shares, the stockholdings of both corporations comprised other different shareholders.
• Res Judicata: Petitioners insisted that the trial court's decision in Civil Case No. Q-12366 constitutes res judicata as to the present case.

• Piercing the Corporate Veil — Cardale: Whether the corporate veil of Cardale may be pierced to hold its officer, Francisco, personally liable for the corporate obligation to Gutierrez's estate.
• Piercing the Corporate Veil — Merryland: Whether Merryland's separate corporate personality may be disregarded to hold it solidarily liable with Francisco.
• Bad Faith of Corporate Officer: Whether Francisco acted in bad faith such as to warrant personal liability for the consequences of her corporate acts.
• Res Judicata: Whether the trial court's dismissal of Civil Case No. Q-12366 constitutes res judicata barring the present action for damages.

• Piercing the Corporate Veil — Cardale: Yes. The totality of Francisco's actions as an officer of Cardale — concealing tax delinquencies, the auction sale, and Merryland's acquisition from the estate and the trial court until after the redemption period expired — constituted bad faith and fraud warranting the lifting of the corporate veil as to her personally.
• Piercing the Corporate Veil — Merryland: No. Merryland was absolved. The only act imputable to Merryland was purchasing the properties at public auction, which is not per se fraudulent. No evidence established that Merryland was a mere alter ego or business conduit of Francisco, and mere ownership of all or nearly all capital stock by one person is not alone sufficient to disregard separate corporate personality.
• Bad Faith of Corporate Officer: Yes. Francisco, as Vice-President and Treasurer of Cardale, was charged with paying realty taxes, received the final notices at her address, and deliberately concealed the tax delinquency, levy, and auction from the estate and the court, thereby depriving the estate of its right of redemption as mortgagee.
• Res Judicata: No. The dismissal of Civil Case No. Q-12366 was not a judgment on the merits but was premised on the transfer of the properties to a corporation not party to that case, with the trial court itself directing the parties to ventilate their issues in another action.

• Piercing the Corporate Veil — Cardale: The general rule is that a corporation possesses a juridical personality separate and distinct from its stockholders and officers. However, when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or defend crime, courts will pierce the veil. With specific regard to corporate officers, an officer is not personally liable for corporate acts performed in good faith within the scope of authority; but if the officer uses the corporate fiction to defraud a third party, or acts negligently, maliciously, or in bad faith, the veil is lifted and personal liability attaches. Here, Francisco was Vice-President and Treasurer of Cardale and was the officer charged with paying realty taxes. She received the final notices of tax delinquency at her own address as early as 1982, yet did not inform the Gutierrez estate or the trial court in the pending rescission case. When Mejia filed a Motion for Decision before the redemption period expired, Francisco filed a Motion for Postponement still concealing the tax sale. Only after the redemption period lapsed did she disclose the sale, without revealing that Merryland — a corporation in which she was President and controlling stockholder — was the purchaser. She then caused the issuance of new titles in Merryland's name free of the mortgage lien. The totality of these actions betrayed a clear intention to conceal the proceedings from the estate until recovery was impossible, constituting fraud and bad faith sufficient to pierce the veil as to Francisco.

• Piercing the Corporate Veil — Merryland: The Court disagreed with the Court of Appeals' holding that Merryland should be solidarily liable with Francisco. The only act imputable to Merryland was its purchase of the properties at the public auction, which by itself is not a fraudulent or wrongful act. No evidence was adduced to establish that Merryland was a mere alter ego or business conduit of Francisco. Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself a sufficient ground for disregarding separate corporate personality. Neither was it alleged or proven that Merryland was so organized and controlled as to make it merely an instrumentality, agency, conduit, or adjunct of Cardale. Even assuming the businesses of Cardale and Merryland were interrelated, this alone does not justify disregarding their separate personalities absent any showing that Merryland was purposely used as a shield to defraud creditors and third persons. Merryland's separate juridical personality was therefore upheld.

• Bad Faith of Corporate Officer: Francisco's bad faith was established through the convergence of several circumstances: (1) she was the officer responsible for paying Cardale's realty taxes and personally received the final notices of delinquency at her address; (2) she did not inform the Gutierrez estate, the executrix, or the trial court of the tax arrears or the impending auction despite the pending rescission case directly affecting the mortgaged properties; (3) she filed a Motion for Postponement in the rescission case without disclosing the tax sale, thereby deferring Mejia's Motion for Decision until after the redemption period expired; (4) she disclosed the tax sale only after the redemption period lapsed, and even then concealed that Merryland was the purchaser; (5) she personally filed the petitions for consolidation of title and secured for Merryland titles free of the mortgage lien; and (6) Cardale was subsequently dissolved, and Merryland subdivided and sold the properties on installment. These acts collectively demonstrated a deliberate scheme to deprive the Gutierrez estate of its mortgage security.

• Res Judicata: The dismissal of Civil Case No. Q-12366 did not constitute res judicata because it was not a judgment on the merits. The trial court dismissed the case on the premise that since the properties had been transferred to Merryland, which was not a party to the rescission case, the action would not prosper. The trial court itself expressly stated that the parties should ventilate their issues in another action. A dismissal that is not on the merits cannot operate as res judicata.

• Doctrine of Piercing the Corporate Veil — When the legal fiction of separate corporate personality is used to defeat public convenience, justify wrong, protect fraud, or defend crime, or when the corporation is made a mere alter ego, business conduit, instrumentality, agency, or adjunct of a person or another corporation, courts will disregard the corporate fiction and treat the corporation as a mere association of persons, with liability attaching directly to the officers and stockholders. In this case, the veil was pierced as to Cardale's officer Francisco, who used her corporate position to conceal tax delinquency proceedings from the mortgagee estate, but not as to Merryland, absent proof of alter-ego status.

• Personal Liability of Corporate Officers for Bad Faith — The general rule is that a corporate officer cannot be held personally liable for the consequences of acts performed for and on behalf of the corporation within the scope of authority and in good faith. However, if the officer uses the corporate fiction to defraud a third party, or acts negligently, maliciously, or in bad faith, the corporate veil is lifted and the officer is held personally liable for the particular corporate obligation involved. Francisco was held personally liable because her deliberate concealment of the tax sale and manipulation of the rescission proceedings constituted bad faith and fraud.

• Insufficiency of Mere Stock Ownership to Disregard Corporate Personality — Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not by itself a sufficient ground for disregarding the separate corporate personality. There must be a showing that the corporation was purposely used as a shield to defraud creditors and third persons, or that it is so organized and controlled as to be a mere instrumentality, agency, conduit, or adjunct of another. Merryland was absolved because no such showing was made.

• "However, if it is proven that the officer has used the corporate fiction to defraud a third party, or that he has acted negligently, maliciously or in bad faith, then the corporate veil shall be lifted and he shall be held personally liable for the particular corporate obligation involved." — This passage states the controlling rule on personal liability of corporate officers, articulating the exception to the general rule of non-liability and forming the ratio decidendi for holding Francisco personally liable.

• "It is exceedingly apparent to the Court that the totality of Francisco's actions clearly betray an intention to conceal the tax delinquencies, levy and public auction of the subject properties from the estate of Gutierrez and the trial court in Civil Case No. Q-12366 until after the expiration of the redemption period when the remotest possibility for the recovery of the properties would be extinguished." — This passage summarizes the Court's finding of bad faith, tying the factual circumstances to the legal conclusion that justified piercing the corporate veil as to Francisco.

• "The only act imputable to Merryland in relation to the mortgaged properties is that it purchased the same and this by itself is not a fraudulent or wrongful act. No evidence has been adduced to establish that Merryland was a mere alter ego or business conduit of Francisco." — This passage defines the boundary for piercing the veil as to a purchasing corporation, distinguishing Merryland's position from Francisco's and explaining why solidary liability was not warranted.

• United States vs. Milwaukee Refrigerator Transit Co., 142 Fed. 247 (1905) — Cited as one of the earliest formulations of the doctrine of piercing the corporate veil, providing the canonical statement that a corporation will be regarded as a legal entity unless the notion is used to defeat public convenience, justify wrong, protect fraud, or defend crime.
• Umali vs. Court of Appeals, 189 SCRA 529 (1990) — Cited as a leading Philippine formulation of the piercing doctrine, enumerating the circumstances under which the corporate fiction may be disregarded, including when the corporation is a mere alter ego, business conduit, instrumentality, agency, or adjunct of another.
• Pabalan vs. NLRC, 184 SCRA 495 (1990) — Cited for the proposition that mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock is not by itself sufficient ground for disregarding separate corporate personality.
• Palay, Inc. vs. Clave, 124 SCRA 638 (1983) — Cited for the rule that if a corporate officer uses the corporate fiction to defraud a third party, the veil may be lifted and personal liability attaches.
• Diatagon Labor Federation Local 110 of the ULGWP vs. Ople, 101 SCRA 534 (1980) — Cited for the principle that even if the businesses of two corporations are interrelated, this alone is not justification for disregarding their separate personalities absent any showing of fraudulent use as a shield.

• Section 78, Presidential Decree No. 464 (Real Property Tax Code) — Provides that the delinquent taxpayer and, in his absence, any person holding a lien or claim over the property shall have the right to redeem the property within one year from the date of registration of the sale. Applied to establish that the Gutierrez estate, as mortgagee, had the right to redeem the mortgaged properties within the one-year period — a right that Francisco's concealment effectively frustrated.
• Section 80, Presidential Decree No. 464 (Real Property Tax Code) — Provides that if the delinquent taxpayer or any person holding a lien or claim fails to redeem the property within the time provided, the purchaser acquires the property "free from any encumbrance or third party claim whatsoever." Applied to explain the consequence of the estate's failure to redeem: Merryland acquired the properties free of the mortgage lien, which was the intended result of Francisco's fraudulent concealment.

Melo, Vitug, Panganiban, and Sandoval-Gutierrez, JJ., concurred.