Martinez vs. Court of Appeals

A person who merely co-signs signature cards for money market placements, without evidence of ownership, control, or benefit from the funds, cannot be held jointly and solidarily liable for the corporation's obligations; and the corporate veil cannot be pierced absent clear and convincing proof of all three elements of the instrumentality or alter ego doctrine—complete domination, use of such control to commit fraud or wrong, and proximate causation of the injury complained of.

Respondent BPI International Finance (formerly Ayala Finance Hongkong, Ltd.) is a foreign corporation organized under the laws of Hong Kong, engaged in deposit-taking and investment banking, with offices at the Bank of America Tower in Central Hong Kong. Cintas Largas, Ltd. (CLL) was likewise a Hong Kong-based foreign corporation with a paid-up capital of HK$10,000, beneficially owned in equal shares by Ramon Siy, Ricardo Lopa, Wilfrido C. Martinez, and Miguel J. Lacson, with nominee shareholders on record. CLL's business consisted principally of importing molasses from the Philippines—mainly from Mar Tierra Corporation—and reselling it on the international market. Wilfrido C. Martinez served as president of Mar Tierra Corporation, while Blamar Gonzales was its executive vice-president; both managed the operations of CLL and Mar Tierra Corporation. Petitioner Ruben Martinez was the president of RJL Martinez Fishing Corporation (RJL), which owned approximately 42% of the capital stock of Mar Tierra Corporation. RJL was majority-owned by Ruben Martinez and his brothers, Jose and Luis Martinez, and 68% of Ruben Martinez's total assets were in RJL.

In 1979, respondent BPI International Finance (then AIFL) granted CLL a letter of credit facility in the amount of US$3,000,000, which Wilfrido C. Martinez signed on behalf of CLL. Under the arrangement, CLL would purchase molasses from the Philippines—principally from Mar Tierra Corporation—using letters of credit, and then resell the molasses to foreign buyers, also through letters of credit. Profits from these transactions were deposited into either CLL's deposit account or Money Market Placement Account Nos. 063 and 084 (MMP Nos. 063 and 084), depending on instructions from Wilfrido Martinez and Gonzales. On January 24, 1979, CLL opened MMP No. 063 with an initial placement of US$390,000, and on March 25, 1980, it opened MMP No. 084 with an initial placement of US$68,768.60 transferred from MMP No. 063. The authorized signatory for both CLL accounts was Wilfrido C. Martinez, with some instructions also coming from Gonzales, to be confirmed by Martinez.

On March 21, 1980, petitioner Ruben Martinez, his son Wilfrido C. Martinez, and Miguel J. Lacson affixed their signatures on two signature cards furnished by the respondent, which became MMP Nos. 063 and 084. On the face of the cards, the signatories appeared as joint account holders. The petitioner would later testify that he signed the cards in blank upon the request of his son, without realizing the import or significance of his act. On May 19, 1980, CLL and the respondent executed a letter-agreement extending and increasing the back-to-back credit facility to US$5,000,000, to be secured by, among other things, a joint and several suretyship signed by Wilfrido Martinez, Lacson, Lopa, and Siy. The facility was designed to finance CLL's molasses purchases from the Philippines for re-export.

As of late September 1980, the balances stood at US$1,025,052.06 for CLL's deposit account, US$312,708.43 for MMP No. 063, and US$768,258.24 for MMP No. 084. On October 10, 1980, Gonzales sent the respondent a telex confirming a telephone conversation requesting the transfer of US$340,000 to Account No. FCD SA 18402-7 at Philippine Banking Corporation, registered in the name of Mar Tierra Corporation, with specific instructions that there should be no mention of Wilfrido Martinez or Mar Tierra Corporation, that the telex instruction should be signed only by Wilfrido Martinez and sent only through Mar Tierra Corporation's telex machine, and that final confirmation should be made by telephone. On October 13, 1980, the respondent's Michael Sung informed Gonzales of the balances in the various accounts and confirmed that approximately US$340,000 was available. On October 14 and 21, 1980, Wilfrido Martinez sent telexes confirming the request for transfer of US$340,000 to the same account.

The respondent complied with the request and remitted US$340,000 as instructed. However, instead of deducting the amount from CLL's deposit account or MMP Nos. 063 and 084, the respondent merely posted the US$340,000 as an account receivable of CLL, because the money market placements had not yet matured. When the placements matured, the respondent did not collect the US$340,000 from them; instead, it allowed CLL and Wilfrido Martinez to withdraw the bulk of the funds in the deposit account and MMP Nos. 063 and 084 up to July 3, 1981, thereby failing to secure reimbursement. The documentary evidence showed that all withdrawals from these accounts after the remittance were for the account of CLL and/or Wilfrido Martinez, with no evidence that the petitioner withdrew any amount or personally benefited from the funds.

The respondent demanded payment of the US$340,000 from CLL, Wilfrido Martinez, Lacson, Gonzales, and the petitioner. The petitioner denied knowledge of the remittance and any liability therefor. An audit conducted by Jacinto, Belano, Castro & Co. found that CLL alone owed the respondent US$340,000; the petitioner's name was not mentioned in the audit report. On June 17, 1983, the respondent filed a complaint for collection of US$340,000 with a plea for a writ of preliminary attachment against CLL, Wilfrido Martinez, Lacson, Gonzales, and the petitioner, alleging two alternative causes of action: first, that CLL was a mere alter ego or business conduit of its beneficial shareholders, and second, that the petitioner, Wilfrido Martinez, and Lacson were joint account holders of MMP Nos. 063 and 084 who held the erroneously paid amount in trust for the respondent. The trial court found all defendants jointly and severally liable, piercing the corporate veil of CLL and relying on the petitioner's status as a joint account holder. The Court of Appeals affirmed, exonerating only Gonzales.

• Lack of Stockholder Status and Involvement: Petitioner asserted that he was not a stockholder of Mar Tierra Corporation or of CLL, and was not involved in any way in the operations of either corporation.
• No Participation in the Remittance: Petitioner maintained that he did not participate in any manner in the remittance of funds from the respondent to the FCD account at Philippine Banking Corporation, and was not aware of any transactions between the respondent, Wilfrido Martinez, and Gonzales concerning the US$340,000 remittance.
• No Benefit Received: Petitioner argued that there was no evidence that he benefited, directly or indirectly, from the remittance, the money market placements, or any deposits in or withdrawals from the accounts.
• Signature Cards Signed in Blank: Petitioner contended that he was made to sign blank forms concerning the opening of money market placements sometime in 1980, and did not realize the import or significance of his act; he never had any involvement in the management or disposition of the accounts.
• Respondent's Own Negligence: Petitioner argued that the respondent was guilty of gross negligence in failing to deduct the US$340,000 from CLL's accounts and in allowing the funds to be withdrawn, and that the alleged erroneous payment was manipulated by the respondent's own employees without connivance or collusion on his part.
• Estoppel or Laches: Petitioner maintained that the respondent was guilty of estoppel or laches by making it appear that the funds were "free and available" and by not acting within a reasonable time to correct the alleged mistake.
• Defective Complaint: Petitioner argued that the complaint failed to state the facts constituting the "mistake" regarding the respondent's failure to obtain reimbursement from MMP Nos. 063 and 084, and failed to attach documents showing the petitioner's obligations as a "joint account holder."

• Alter Ego Doctrine: Respondent alleged that CLL was a mere reinvoicing or paper company with nominee shareholders in Hong Kong, and that its real and beneficial shareholders were Lacson and Wilfrido C. Martinez, who used CLL as an alter ego or business conduit for their sole benefit or to defeat public convenience, such that any obligation of CLL was the obligation of its beneficial shareholders.
• Joint Account Holder Liability: Respondent argued that the petitioner, Wilfrido Martinez, and Lacson were joint account holders of MMP Nos. 063 and 084, which although nominally opened and maintained by said defendants were in reality for the account and benefit of all defendants, and that due to excusable mistake the respondent was unable to obtain reimbursement from those accounts, resulting in an overpayment or erroneous payment that the defendants held in trust for the respondent.
• Interlocking Corporate Relationships: Respondent relied on the interlocking relationships among the defendants—CLL's purchase of molasses from Mar Tierra Corporation, Wilfrido Martinez's presidency of Mar Tierra Corporation, the majority ownership of Mar Tierra Corporation by RJL (controlled by the petitioner and his brothers), and the commingling of funds controlled by Wilfrido Martinez and Gonzales—as bases for holding all defendants jointly and severally liable.

• Piercing the Corporate Veil: Whether the respondent adduced sufficient evidence to warrant piercing the veil of corporate entity of CLL, Mar Tierra Corporation, and RJL to hold the petitioner jointly and severally liable for the US$340,000.
• Joint Account Holder Liability: Whether the petitioner's mere signature on the signature cards for MMP Nos. 063 and 084 rendered him a joint and solidary obligor or creditor liable for the respondent's claim.
• Judicial Admissions: Whether the respondent's admissions in its complaint—that CLL, Gonzales, and Wilfrido Martinez bound themselves to repay the US$340,000—precluded holding the petitioner liable.
• Counterclaim: Whether the petitioner was entitled to his counterclaim based on the evidence on record.

• Piercing the Corporate Veil: No. The respondent failed to adduce the quantum of evidence necessary to prove any valid ground for piercing the veil of corporate entity of CLL, Mar Tierra Corporation, or RJL, none of the three elements of the instrumentality or alter ego doctrine having been established by clear and convincing proof.
• Joint Account Holder Liability: No. The mere act of affixing signatures on money market placement signature cards did not make the petitioner a joint and solidary creditor of the respondent or bind him to pay the US$340,000, absent evidence of the terms and conditions of the placements or of the rights and obligations of the signatories over the funds.
• Judicial Admissions: Yes, the respondent's judicial admissions in its complaint were binding and could not be contradicted absent a showing of palpable mistake, and they established that CLL, Gonzales, and Wilfrido Martinez—not the petitioner—were the parties who bound themselves to repay the US$340,000.
• Counterclaim: N/A. The decision did not address the counterclaim issue, the petition having been granted on the primary liability question.

• Piercing the Corporate Veil: The general rule is that a corporation possesses a personality separate and distinct from its stockholders and from other corporations to which it may be connected, such that the corporation may not be held liable for the obligations of its stockholders, nor the stockholders for the corporation's obligations. While this separate personality is a fiction that may be disregarded when used to defeat public convenience, justify wrong, protect fraud, or defend crime, or when the corporation is merely an adjunct, business conduit, or alter ego of another, the wrongdoing must be proven clearly and convincingly. The test for the instrumentality or alter ego doctrine requires three elements: (1) complete domination of finances, policy, and business practice with respect to the transaction attacked, such that the corporate entity had no separate mind, will, or existence of its own; (2) use of such control to commit fraud or wrong or a dishonest and unjust act in contravention of the plaintiff's legal rights; and (3) proximate causation of the injury or unjust loss complained of. The absence of any one element prevents piercing. Here, the mere fact that RJL was the majority stockholder of Mar Tierra Corporation, and that the petitioner and his brothers owned about 42% of RJL, did not constitute sufficient evidence of complete domination. There was no evidence that the petitioner had any involvement in the molasses purchases or sales, or that Mar Tierra Corporation or RJL was organized to defraud creditors. The close business relationship between CLL and Mar Tierra Corporation did not warrant finding the latter a conduit of the former. The respondent itself treated the two corporations as separate entities and considered them as one only when Wilfrido Martinez and Gonzales failed to pay the US$340,000. The mere interrelation of corporate businesses, absent a showing that the corporate entity was purposely used as a shield to defraud, is not justification for disregarding separate personalities.

• Joint Account Holder Liability: The petitioner affixed his signatures on the signature cards merely upon the request of his son, Wilfrido Martinez. The respondent failed to adduce any evidence—testimonial or documentary, including the relevant laws of Hong Kong where the placements were made—of the terms and conditions of the money market placements or of the rights and obligations of the signatories over the funds. Other than the signature cards, there was no shred of evidence establishing the nature of the petitioner's interest in the accounts. CLL and/or Wilfrido Martinez never surrendered ownership over the funds in favor of the petitioner; they retained complete control and dominion. The documentary evidence showed that all withdrawals from the accounts after the US$340,000 remittance were for the account of CLL and/or Wilfrido Martinez, with no evidence that the petitioner withdrew a single centavo or was personally benefited. The judicial admissions of Wilfrido Martinez in his answer to the complaint, upon which the trial court relied, were not binding on the petitioner pursuant to Section 28, Rule 130 of the Rules of Court. By merely signing the cards, the petitioner did not become a joint and solidary creditor of the respondent, nor did he bind himself to pay the US$340,000.

• Judicial Admissions: The respondent's own complaint admitted that the remittance was made upon the express instructions of Gonzales and Wilfrido Martinez acting for and in behalf of CLL, and that the remittance was "a just, binding and lawful obligation of the defendants GONZALES, WILFRIDO C. MARTINEZ and CINTAS." These were judicial admissions under Section 4, Rule 129 of the Rules of Court, which cannot be contradicted unless shown to have been made through palpable mistake or that no such admission was made. The respondent impleaded the petitioner only in its second alternative cause of action, solely on the allegation that he was a joint account holder. The audit report likewise found CLL alone liable, without mentioning the petitioner. The respondent's own witness, Michael Sung, testified that the respondent was supposed to deduct the US$340,000 from CLL's accounts but failed to do so, and instead allowed CLL and Wilfrido Martinez to withdraw the entirety of the deposits. The respondent had no one but itself to blame for its failure to secure reimbursement.

• Counterclaim: The decision did not separately address the counterclaim, as the grant of the petition and dismissal of the complaint rendered the issue moot.

• Instrumentality or Alter Ego Doctrine — The doctrine permits disregarding the separate juridical personality of a corporation when it is merely an instrumentality, agency, conduit, or adjunct of another corporation or person. The test requires three elements: (1) control—not mere majority or complete stock control, but complete domination of finances, policy, and business practice in respect to the transaction attacked, so that the corporate entity had at the time no separate mind, will, or existence of its own; (2) such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or a dishonest and unjust act in contravention of plaintiff's legal rights; and (3) the aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of. The absence of any one of these elements prevents piercing the corporate veil. In this case, the Court found that none of the three elements was satisfied: the petitioner's indirect stock ownership in Mar Tierra Corporation through RJL did not prove complete domination, there was no evidence of fraud or wrong, and the respondent's loss was caused by its own negligence, not by any control exercised by the petitioner.

• Separate Corporate Personality — A corporation is clothed with a personality separate and distinct from the persons composing it and from other corporations to which it may be connected. This personality may not be disregarded merely because of stock ownership, identity of incorporators, or interrelation of businesses, absent a clear and convincing showing that the corporate entity was purposely used as a shield to defraud creditors and third persons. The mere fact that the businesses of two or more corporations are interrelated is not a justification for disregarding their separate personalities.

• Judicial Admissions — Admissions made by a party in its pleadings are judicial admissions that cannot be contradicted unless there is a showing that they were made through palpable mistake or that no such admission was made (Section 4, Rule 129, Rules of Court). The respondent's admissions in its complaint that CLL, Gonzales, and Wilfrido Martinez were the parties bound to repay the US$340,000 were binding upon it and precluded holding the petitioner liable.

• Admissions of a Party Not Binding on Others — Under Section 28, Rule 130 of the Rules of Court, the admissions of a party are not binding on co-parties. The judicial admissions of Wilfrido Martinez in his answer to the complaint could not bind the petitioner.

• "The absence of any one of these elements prevents 'piercing the corporate veil.' In applying the 'instrumentality' or 'alter ego' doctrine, the courts are concerned with reality and not form, with how the corporation operated and the individual defendant's relationship to that operation." — This passage states the controlling formulation of the alter ego doctrine's three-element test and the principle that all three must concur, a formulation frequently cited in subsequent Philippine corporate law jurisprudence.

• "By merely affixing his signatures on the signature cards, the petitioner did not necessarily become a joint and solidary creditor of the respondent over the said placements. Neither did the petitioner bind himself to pay to the respondent the US$340,000 which was borrowed by the CLL and/or Wilfrido Martinez, and later remitted to FCD SA 18402-7." — This passage articulates the ratio decidendi on the joint account holder issue, establishing that mere co-signature on banking signature cards, without evidence of ownership, control, or benefit, does not create liability for the account's obligations.

• "The mere fact, therefore, that the businesses of two or more corporations are interrelated is not a justification for disregarding their separate personalities, absent sufficient showing that the corporate entity was purposely used as a shield to defraud creditors and third persons." — This passage defines the boundary between legitimate corporate interrelationships and grounds for veil-piercing, emphasizing that business interrelation alone is insufficient without proof of fraudulent purpose.

• "The respondent treated the CLL and Mar Tierra Corporation as separate entities and considered them as one and the same entity only when Wilfrido C. Martinez and/or Blamar Gonzales failed to pay the US$340,000 remitted by the respondent to FCD SA 18402-7." — This passage highlights the Court's rejection of the respondent's selective invocation of the alter ego doctrine, noting that the respondent itself dealt with the corporations as separate until it sought to recover its loss.

• Concept Builders, Inc. vs. NLRC, 257 SCRA 149 (1996) — Cited for the propositions that whether a corporation is a paper company or a sham is a question of fact, and as the source of the three-element test for the instrumentality or alter ego doctrine. The Court applied this test and found none of the elements satisfied.
• Heirs of Ramon Durano, Sr. vs. Uy, 344 SCRA 238 (2000) — Cited for the principle that whether a corporation is merely an alter ego is purely a question of fact, generally conclusive upon the Supreme Court, subject to recognized exceptions.
• Ruiz, Sr. vs. Court of Appeals, 362 SCRA 40 (2001) — Cited for the rule that factual findings of the trial court, as affirmed by the appellate court, are generally conclusive upon the Supreme Court, subject to exceptions including findings based on misapplication of facts or overlooking of material circumstances.
• Umali vs. Court of Appeals, 189 SCRA 529 (1990) — Cited for the grounds upon which the corporate veil may be lifted and for the principle that interrelated corporate businesses alone do not justify disregarding separate personalities absent proof of fraudulent purpose.
• Complex Electronics Employees Association vs. NLRC, 310 SCRA 403 (1999) — Cited for the rule that mere ownership by a single stockholder or another corporation of all or nearly all capital stock is not by itself sufficient to disregard separate corporate personality, and that wrongdoing must be proven clearly and convincingly.
• Padilla vs. Court of Appeals, 370 SCRA 208 (2001) — Cited for the general rule that a corporation has a personality separate and distinct from its stockholders.

• Section 4, Rule 129, Rules of Court — Provides that judicial admissions made by a party in his pleadings are conclusive and cannot be contradicted unless shown to have been made through palpable mistake or that no such admission was made. Applied to hold the respondent bound by its complaint's admissions that CLL, Gonzales, and Wilfrido Martinez were the parties obligated to repay the US$340,000.
• Section 28, Rule 130, Rules of Court — Provides that the rights of a party cannot be prejudiced by an act, declaration, or omission of another. Applied to hold that the judicial admissions of Wilfrido Martinez in his answer to the complaint were not binding on the petitioner.

Puno, Austria-Martinez (on official leave), Tinga, and Chico-Nazario (on leave) concurred.