Lipat vs. Pacific Banking Corporation

The corporate veil may be pierced under the instrumentality rule (alter ego doctrine) when the corporation is so controlled and its affairs are conducted that it becomes a mere instrumentality or adjunct of another person or entity, such that the separate corporate personality should be disregarded to prevent injustice or fraud. A continuing real estate mortgage that by its terms secures original and future credit accommodations validly subjects the mortgaged property to all subsequent loans obtained by the mortgagor or debtor, including those of an alter ego corporation. Matters not alleged in the complaint cannot be raised for the first time on appeal.

Estelita Burgos Lipat and Alfredo Lipat owned “Bela’s Export Trading” (BET), a single proprietorship engaged in garment manufacturing. Estelita executed a special power of attorney in favor of her daughter Teresita to obtain loans and execute mortgages for BET. In April 1979, Teresita secured a loan of ₱583,854.00 from Pacific Banking Corporation, secured by a real estate mortgage over the Lipats’ property on Aurora Boulevard. That mortgage contract also covered all future credit accommodations. Later that year, BET was incorporated as Bela’s Export Corporation (BEC), a family corporation where the Lipats held the great majority of shares; Estelita became president and Teresita vice-president and general manager. The original loan was restructured in BEC’s name, and subsequent promissory notes, trust receipts, and export bills were obtained by BEC under the same mortgage security. BEC defaulted, the property was foreclosed, and a certificate of sale was issued to respondent Eugenio D. Trinidad as the highest bidder. The Lipats then sought to annul the mortgage, the foreclosure, and the certificate of sale.

• The Sole Proprietorship and the Special Power of Attorney: Spouses Alfredo and Estelita Lipat owned “Bela’s Export Trading” (BET), a single proprietorship engaged in garment manufacturing. Estelita Lipat also owned “Mystical Fashions” in the United States, which imported goods from BET. On December 14, 1978, Estelita executed a special power of attorney appointing her daughter Teresita B. Lipat as attorney-in-fact to obtain loans and execute mortgage contracts on properties owned or co-owned by her as security for obligations to be extended by Pacific Banking Corporation (Pacific Bank), including renewals and extensions.

• The Original Loan and Real Estate Mortgage: In April 1979, Teresita, acting under the special power of attorney, secured a loan of ₱583,854.00 from Pacific Bank for BET. As security, the Lipat spouses, represented by Teresita, executed a Real Estate Mortgage over their property at No. 814 Aurora Blvd., Cubao, Quezon City. The mortgage contract expressly provided that it secured not only the original loan but also “other additional or new loans, discounting lines, overdrafts and credit accommodations, of whatever amount, which the Mortgagor and/or Debtor may subsequently obtain from the Mortgagee as well as any renewal or extension… including interest and expenses or other obligations… whether directly, or indirectly, principal or secondary, as appears in the accounts, books and records of the Mortgagee.”

• Incorporation of Bela’s Export Corporation (BEC): On September 5, 1979, BET was incorporated into a family corporation named Bela’s Export Corporation (BEC). The incorporators included the Lipat spouses, who together owned 300 of the 420 subscribed shares, and Teresita Lipat, who held 20 shares. Estelita Lipat was named president; Teresita became vice-president and general manager. BEC engaged in the same garment manufacturing and export business, using the same machineries and equipment previously used by BET, and operated at the same address.

• Subsequent Credit Accommodations: The original loan was restructured in the name of BEC, and subsequent loans were obtained by BEC. Promissory notes were executed by Teresita on behalf of BEC. A letter of credit was opened by Pacific Bank in favor of a supplier upon BEC’s request, with BEC executing the corresponding trust receipt. Export bills were also executed in favor of Pacific Bank for additional finances. All these credit accommodations were secured by the same real estate mortgage over the Lipats’ property.

• Default and Foreclosure: BEC defaulted on its obligations. After receiving demand letters, Estelita Lipat requested additional time to settle the obligations but failed to do so. The real estate mortgage was extrajudicially foreclosed; the property was sold at public auction. On January 31, 1989, a certificate of sale was issued to respondent Eugenio D. Trinidad as the highest bidder.

• The Complaint: On November 28, 1989, the spouses Lipat filed a complaint for annulment of the real estate mortgage, the extrajudicial foreclosure, and the certificate of sale. They alleged that the promissory notes, trust receipt, and export bills were ultra vires acts of Teresita because they lacked a board resolution from BEC’s board of directors. They further argued that even if those acts were valid, the obligations were solely those of BEC, which had a personality distinct and separate from the spouses. They also claimed that the mortgage secured only the original ₱583,854.00 loan of BET.

• Defenses: Pacific Bank and Trinidad countered that the Lipats and BEC were one and the same, BEC being a family corporation; that Trinidad was a buyer in good faith and for value; and that the Lipats were estopped from denying BEC’s existence after holding themselves out as a corporation.

• Piercing the Corporate Veil – Absence of Fraud: Petitioners maintained that the doctrine of piercing the veil of corporate fiction could not apply because there was no clear showing of fraud on their part in organizing or operating BEC.

• Extent of Mortgage Liability – Limited to Original Loan: Petitioners contended that the mortgaged property should not be held liable for the subsequent loans and credit lines incurred by BEC because the mortgage contract covered only the original loan of ₱583,854.00, which they claimed had already been paid. They asserted that the subsequent obligations were secured without any board resolution authorizing Teresita to act for BEC, rendering them invalid and not binding on the property. They further argued that Pacific Bank was negligent in not requiring such a board resolution before extending credit.

• Attorney’s Fees – Raised for the First Time on Appeal: Petitioners assailed the imposition of 15% attorney’s fees, insisting the issue was properly raised and should be resolved.

• Liability of Alfredo Lipat: Petitioners argued that Alfredo Lipat could not be held liable for the promissory notes, dollar accommodations, and trust receipts because he had not signed any of those instruments, and they were therefore not valid or binding as to him.

• Motion for Reconsideration: Petitioners contended that the Court of Appeals erred in denying their motion for reconsideration and in characterizing it as an unauthorized motion and a mere scrap of paper.

• Application of the Alter Ego Doctrine: Respondents countered that the trial and appellate courts correctly pierced the corporate veil based on clear and convincing evidence that BEC was organized as a mere business conduit for the benefit of the Lipats, making them and the corporation one and the same.

• Extent of Mortgage Coverage: Respondents argued that the mortgage contract, by its explicit terms, covered not only the original loan but all subsequent credit accommodations, and that the property was therefore fully liable for the outstanding obligations of BEC.

• Validity of Teresita’s Acts: Respondents asserted that the loans were validly obtained and secured. They pointed to the special power of attorney granted by Estelita to Teresita, the fact that Teresita managed both BET and BEC and decided business matters, and the corporation’s by-laws, which permitted such conduct even without a formal board resolution. They invoked estoppel, arguing that the Lipats could not deny Teresita’s authority after clothing her with apparent authority and benefiting from the transactions.

• Procedural Bar on Attorney’s Fees: Respondents maintained that the issue of attorney’s fees could not be raised for the first time on appeal because it was never disputed in the complaint.

• Piercing the Corporate Veil – Instrumentality Rule: Whether the doctrine of piercing the veil of corporate fiction, specifically the instrumentality rule or alter ego doctrine, was properly applied to disregard the separate juridical personality of BEC and hold the Lipats’ mortgaged property liable for the corporation’s obligations.

• Extent of Mortgage Liability: Whether the mortgaged property could be held liable not only for the original loan of ₱583,854.00 but also for the full value of the subsequent promissory notes, trust receipts, and export bills incurred by BEC, considering the terms of the mortgage contract and the alleged lack of board authorization for the subsequent transactions.

• Attorney’s Fees: Whether the issue of the 15% attorney’s fees stipulated in the deed of real estate mortgage could be raised and resolved when it was not alleged or disputed in the complaint and was raised for the first time on appeal.

• Piercing the Corporate Veil – Instrumentality Rule: The instrumentality rule was correctly applied. The record demonstrated that BEC was a mere alter ego and business conduit of the Lipats. Estelita and Alfredo Lipat were the majority stockholders of BEC; Estelita exercised full control over its activities and decided business matters; both BET and BEC were managed by their daughter Teresita; both firms engaged in the same garment business supplying Estelita’s U.S. firm; they operated from the same building; corporate funds were held by Estelita and BEC had no visible assets; no business or stockholders’ meetings were conducted and no board resolutions were ever passed; and Estelita Lipat personally benefited from the loans obtained from Pacific Bank. These circumstances established such domination of finances, policies, and practices that BEC had no separate mind, will, or existence of its own. The invocation of the separate corporate personality to evade obligations under the mortgage contract was precisely the mischief the alter ego doctrine seeks to prevent. Proof of fraud was not necessary where the instrumentality rule applied.

• Extent of Mortgage Liability: The mortgaged property was liable for the full value of the subsequent credit accommodations. The mortgage contract itself was a continuing security that explicitly covered “other additional or new loans, discounting lines, overdrafts and credit accommodations, of whatever amount,” subsequently obtained by the mortgagor or debtor. As BEC was merely the alter ego and successor of BET, the property secured BEC’s obligations under the same contract. Petitioners’ unsupported claim that the original loan had been paid could not overcome the disputable presumptions that a person takes ordinary care of his concerns and that things happen according to the ordinary course of nature; if the loan had been paid, petitioners would logically have demanded a cancellation of the mortgage. The absence of a board resolution authorizing Teresita to secure the subsequent loans did not render them invalid. BEC had no board resolutions because it never held board meetings; Estelita and/or Teresita decided all business matters. More fundamentally, Pacific Bank dealt with Teresita in good faith based on the special power of attorney executed by Estelita and on the apparent authority Teresita had been clothed with as manager of both BET and BEC. A corporation may be estopped from denying the authority of an officer when it knowingly permits that officer to act within the scope of an apparent authority and a third party relies on that authority in good faith. The benefit of the loans flowed to Estelita’s business, reinforcing the conclusion that the bank was justified in relying on Teresita’s authority. Alfredo Lipat’s liability for the subsequent credit lines was sustained on the ground that he never disputed the validity of the real estate mortgage for the original loan and could not now dispute the subsequent loans obtained under the same continuing mortgage contract.

• Attorney’s Fees: The Court of Appeals correctly declined to take cognizance of the attorney’s fees issue. It is a settled rule that matters not raised in the complaint cannot be raised for the first time on appeal. A close perusal of the complaint revealed no allegation disputing the attorney’s fees imposed under the mortgage contract, and petitioners could not argue that they had impliedly disputed the fees merely by seeking the annulment of the contract.

• Instrumentality Rule (Alter Ego Doctrine) — The separate juridical personality of a corporation may be disregarded when it is so organized and controlled and its affairs are so conducted that it is, in fact, a mere instrumentality or adjunct of another. The control necessary is not simply majority or complete stock ownership, but such domination of finances, policies, and practices that the controlled corporation has no separate mind, will, or existence of its own and is but a conduit for its principal. The doctrine is applied to prevent the corporate fiction from being used to defeat public convenience, justify wrong, protect fraud, or defend crime. In this case, the Court found that BEC met the standard: it had no separate mind or will; its business and finances were indistinguishable from Estelita Lipat’s; and the Lipats were using the corporate form to evade their mortgage obligations.

• Continuing Real Estate Mortgage — A real estate mortgage that expressly secures not only a specific existing loan but also “other additional or new loans, discounting lines, overdrafts and credit accommodations, of whatever amount” that the mortgagor or debtor may subsequently obtain is a continuing security. The mortgaged property answers for all future obligations within the contractual terms, without need for a new mortgage instrument. The Court applied this principle to hold the property liable for the promissory notes, trust receipt, and export bills incurred by BEC after the original loan.

• Apparent Authority and Estoppel of Corporations — A corporation may be bound by the acts of its officers or agents performed within the scope of an apparent authority. Apparent authority is derived from (1) the general manner in which the corporation holds out the officer or agent as having the power to act, or (2) the corporation’s acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof. If a corporation knowingly permits an officer or agent to act within the scope of an apparent authority and a third party deals with the corporation through that agent in good faith, the corporation is estopped from denying the agent’s authority. The Court applied this doctrine to bind BEC and the Lipats to the loans obtained by Teresita.

• Procedural Bar – Issues Raised for the First Time on Appeal — An issue not raised in the complaint or at trial cannot be raised for the first time on appeal. The rule ensures that the opposing party is given fair opportunity to address the issue and that the trial court can rule on it. The Court applied this rule to bar the challenge to attorney’s fees.

• Disputable Presumptions under Rule 131 — The disputable presumptions that a person takes ordinary care of his concerns (Rule 131, Sec. 3[d]) and that things have happened according to the ordinary course of nature and the ordinary habits of life (Rule 131, Sec. 3[y]) may operate to defeat a self-serving, unsupported claim. Here, the absence of any evidence that petitioners demanded cancellation of the mortgage supported the inference that the original loan had not been paid.

• “Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the ‘instrumentality’ may be disregarded. The control necessary to invoke the rule is not majority or even complete stock control but such domination of finances, policies and practices that the controlled corporation has, so to speak, no separate mind, will or existence of its own, and is but a conduit for its principal.”

• “Apparent authority … is derived not merely from practice. Its existence may be ascertained through (1) the general manner in which the corporation holds out an officer or agent as having the power to act or, in other words, the apparent authority to act in general, with which it clothes him; or (2) the acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, whether within or beyond the scope of his ordinary powers.”

• “It is a familiar doctrine that if a corporation knowingly permits one of its officers or any other agent to act within the scope of an apparent authority, it holds him out to the public as possessing the power to do those acts; thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agent’s authority.”

• Concept Builders, Inc. v. NLRC, G.R. No. 108734, 29 May 1996, 257 SCRA 149 — Followed; cited for the definition and elements of the instrumentality rule in piercing the corporate veil.

• Cagayan Valley Enterprises, Inc. v. Court of Appeals, G.R. No. 78413, 8 November 1989, 179 SCRA 218 — Followed; affirmed the principle that the separate personality of a corporation may be disregarded when it is a mere alter ego or business conduit.

• People’s Aircargo and Warehousing Co., Inc. v. Court of Appeals, G.R. No. 117847, 7 October 1998, 297 SCRA 170 — Followed; relied upon for the doctrine of apparent authority of corporate officers and agents, including the two-fold test for ascertaining such authority and the principle of estoppel.

• Orosa v. Court of Appeals, G.R. No. 111080, 5 April 2000, 329 SCRA 652 — Followed; cited for the rule that matters not raised in the complaint cannot be raised for the first time on appeal.

• Milestone Realty and Co., Inc. and William L. Perez v. CA, G.R. No. 135999, 19 April 2002 — Followed; referenced for the principle that findings of fact of the Court of Appeals are final and conclusive when supported by substantial evidence.

• Revised Rules of Court, Rule 131, Sec. 3(d) and (y) — These provisions establish disputable presumptions that a person takes ordinary care of his concerns and that things have happened according to the ordinary course of nature and the ordinary habits of life. The Court applied these presumptions against the petitioners’ unsubstantiated claim that the original loan had already been paid, noting that if true, they would have taken steps to cancel the mortgage.

Justices Josue N. Bellosillo, Ma. Alicia Austria-Martinez, and Romeo J. Callejo, Sr. concurred.