Pacific Rehouse Corporation vs. Court of Appeals

The doctrine of piercing the veil of corporate fiction applies only to determine established liability and not to confer jurisdiction over a party not impleaded in the case; consequently, a parent corporation cannot be held liable under an alias writ of execution for the judgment obligations of its wholly-owned subsidiary when the parent corporation was never impleaded as a party and was not served with summons nor voluntarily appeared in the proceedings.

The case stems from a complaint filed by Pacific Rehouse Corporation and other stockholders against EIB Securities, Inc. (E-Securities) for the unauthorized sale of 32,180,000 DMCI shares. After the Regional Trial Court rendered judgment on the pleadings ordering E-Securities to return the shares—a decision affirmed by the Supreme Court and which became final—the stockholders sought to enforce the judgment against Export and Industry Bank, Inc. (Export Bank), the parent company of E-Securities, by invoking the doctrine of piercing the veil of corporate fiction during the execution stage.

• Pacific Rehouse Corporation, Pacific Concorde Corporation, Mizpah Holdings, Inc., Forum Holdings Corporation, and East Asia Oil Company, Inc. (stockholders) filed a complaint against EIB Securities, Inc. (E-Securities) with the Makati City RTC, Branch 66, for the unauthorized sale of 32,180,000 DMCI shares.
• The RTC rendered judgment on the pleadings on October 18, 2005, ordering E-Securities to return the 32,180,000 DMCI shares to the plaintiffs, and directing the plaintiffs to reimburse E-Securities the amount of P10,942,200.00 representing the buy-back price of 60,790,000 KPP shares.
• The Supreme Court affirmed this decision, which became final and executory.
• When the Writ of Execution was returned unsatisfied, the stockholders moved for the issuance of an alias writ of execution to hold Export and Industry Bank, Inc. (Export Bank) liable, alleging that E-Securities is a wholly-owned, controlled, and dominated subsidiary of Export Bank and is merely its alter ego and business conduit.
• The stockholders attached a sworn statement by Atty. Ramon F. Aviado, Jr., former corporate secretary of both corporations, to support their alter ego theory, alleging that Export Bank provided working capital, shared office space, and had common directors and lawyers with E-Securities.
• On July 29, 2011, the RTC granted the motion, concluding that E-Securities is a mere business conduit or alter ego of Export Bank, and issued an Alias Writ of Execution against both E-Securities and Export Bank.
• The RTC held that service of notices upon E-Securities constituted sufficient notice to Export Bank, and that being one and the same entity, jurisdiction over the subsidiary bestowed jurisdiction over the parent.
• On August 26, 2011, the RTC denied Export Bank's Omnibus Motion (Ex Abundanti Cautela) and ordered the garnishment of P1,465,799,000.00 (based on the closing price of P45.55 per share) against both E-Securities and Export Bank to acquire the DMCI shares.
• Export Bank filed a petition for certiorari with the CA, arguing that it has a separate corporate personality distinct from E-Securities and that the RTC acted with grave abuse of discretion.
• The CA issued a TRO and writ of preliminary injunction, and eventually nullified the RTC orders, holding that the alter ego theory cannot be sustained merely on ownership grounds and that Export Bank was not a party to the case.

• The petitioners argued that the CA committed grave abuse of discretion in granting Export Bank's application for a writ of preliminary injunction in G.R. No. 199687.
• They contended that the CA Resolution granting the preliminary injunction was invalid due to lack of concurrence of Associate Justice Socorro B. Inting who was on official leave, violating Section 5, Rule VI of the Internal Rules of the CA.
• They argued that the Special Division of Five was improperly constituted to grant a preliminary injunction rather than to decide the case on the merits.
• In G.R. No. 201537, petitioners argued that the CA committed reversible error in ruling that Export Bank may not be held liable for the final judgment against E-Securities through piercing the veil of corporate fiction.
• They maintained that the alter ego doctrine is applicable because E-Securities is 100% owned by Export Bank, shares common directors and officers, operates in the same building as the parent company, uses the same lawyers, and was reactivated solely to serve as the securities brokerage arm of Export Bank.
• They asserted that as an alter ego, there is no need for a finding of fraud or illegality before the doctrine can be applied.
• They claimed that Export Bank had actual knowledge of the litigation as the lawyers representing E-Securities were also lawyers of Export Bank.

• Export Bank argued that the CA did not commit grave abuse of discretion and that the petitions should be dismissed.
• It contended that it was never impleaded as a party in the original case and was never served with summons, thus the RTC never acquired jurisdiction over it.
• It maintained that piercing the veil of corporate fiction applies only to determine established liability and not to confer jurisdiction over a non-party, citing Kukan International Corporation v. Reyes.
• It argued that the alter ego doctrine requires proof of complete domination, use of control to commit fraud or wrong, and proximate causation of injury, none of which were present.
• It asserted that mere ownership of subsidiary stock and existence of interlocking directorates are insufficient grounds to disregard corporate personality in the absence of fraud or other public policy considerations.
• It emphasized that the corporate fiction was not misused to commit injustice or fraud, and that E-Securities acted in furtherance of its legitimate corporate purpose.

• Procedural Issues:
  • Whether the CA committed grave abuse of discretion in granting the writ of preliminary injunction in G.R. No. 199687.
  • Whether the CA Decision was invalid for lack of signature by the Chairperson of the Special Division of Five.
• Substantive Issues:
  • Whether the RTC may enforce an alias writ of execution against Export Bank for the judgment obligations of its subsidiary E-Securities by piercing the veil of corporate fiction.
  • Whether the alter ego doctrine is applicable to hold Export Bank liable.

• Procedural:
  • The petition in G.R. No. 199687 was dismissed as moot and academic because the CA had already rendered its Decision on the merits on April 26, 2012, rendering the challenge to the preliminary injunction resolutions nugatory.
  • The Court held that the lack of signature of the Chairperson on the copies of the CA Decision sent to the parties was remedied by the CA's Resolution dated May 7, 2012, which explained the inadvertence and directed the furnishing of signed copies.
• Substantive:
  • The Court held that the doctrine of piercing the veil of corporate fiction applies only to determine established liability and cannot be used to confer jurisdiction over a corporation not impleaded in the case.
  • The Court ruled that jurisdiction over the defendant is acquired only upon valid service of summons or voluntary appearance; since Export Bank was neither served with summons nor voluntarily appeared, the RTC had no jurisdiction over it.
  • The Court distinguished the cases of Violago and Arcilla, noting that in those cases the individuals held liable were parties to the case, unlike Export Bank which was never impleaded.
  • The Court held that the alter ego doctrine requires the concurrence of three elements: (1) complete domination of finances, policy, and business practice; (2) use of such control to commit fraud or wrong; and (3) proximate causation of injury.
  • The Court found that while Export Bank owned 99.999% of E-Securities' stocks and there were interlocking directorates, these circumstances alone, raised for the first time during execution, were insufficient to establish the alter ego relationship without proof of fraud or wrongdoing.
  • The Court emphasized that control by itself, without fraudulent intent or illegal purpose, does not justify piercing the veil of corporate fiction.
  • The petition in G.R. No. 201537 was denied for lack of merit, and the CA Decision was affirmed.

• Piercing the Veil of Corporate Fiction — A judicial remedy that allows the court to disregard the separate juridical personality of a corporation to hold the persons behind it liable for corporate obligations; however, it applies only to determine established liability and not to confer jurisdiction over a party not impleaded in the original suit.
• Alter Ego Doctrine (Instrumentality Rule) — A three-pronged test requiring: (1) control, not mere majority stock control, but complete domination of finances, policy, and business practice 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, perpetuate violation of statutory duty, or dishonest act; and (3) proximate causation between the control/breach of duty and the injury or unjust loss.
• Jurisdiction over the Person — Jurisdiction over a defendant is acquired either through valid service of summons or voluntary appearance; a judgment rendered without jurisdiction over the person of the defendant is null and void.

• "On the scales of justice precariously lie the right of a prevailing party to his victor's cup, no more, no less; and the right of a separate entity from being dragged by the ball and chain of the vanquished party."
• "The principle of piercing the veil of corporate fiction, and the resulting treatment of two related corporations as one and the same juridical person with respect to a given transaction, is basically applied only to determine established liability; it is not available to confer on the court a jurisdiction it has not acquired, in the first place, over a party not impleaded in a case."
• "Elsewise put, a corporation not impleaded in a suit cannot be subject to the court's process of piercing the veil of its corporate fiction."
• "This is so because the doctrine of piercing the veil of corporate fiction comes to play only during the trial of the case after the court has already acquired jurisdiction over the corporation."
• "While the courts have been granted the colossal authority to wield the sword which pierces through the veil of corporate fiction, concomitant to the exercise of this power, is the responsibility to uphold the doctrine of separate entity, when rightly so; as it has for so long encouraged businessmen to enter into economic endeavors fraught with risks and where only a few dared to venture."

• Kukan International Corporation v. Reyes — Controlling precedent establishing that piercing the veil of corporate fiction applies only to determine liability, not jurisdiction, and cannot be used against a corporation not impleaded in the suit.
• Sps. Violago v. BA Finance Corp. — Distinguished; held that non-inclusion of the corporation as defendant does not preclude recovery from the individual defendant who is a party to the case, but did not make the non-party corporation liable.
• Arcilla v. Court of Appeals — Distinguished; the individual defendant was held personally liable as alter ego, but the corporation itself (CMRI) was not made liable as it was not a party.
• Concept Builders, Inc. v. National Labor Relations Commission — Cited for the three-pronged control test for the alter ego doctrine.
• Philippine National Bank v. Hydro Resources Contractors Corporation — Cited for the proposition that mere ownership or interlocking directorates are insufficient to pierce the veil without fraud or other public policy considerations.
• Limkaichong v. Commission on Elections — Cited regarding the requirement that decisions must be signed by justices who took part in the deliberation.

• Rule 39, Section 10(a) of the Rules of Court — Governs the issuance of writs of execution and garnishment.
• Rule 65 of the Rules of Court — Governs petitions for certiorari, prohibition, and mandamus.
• Rule 45 of the Rules of Court — Governs petitions for review on certiorari to the Supreme Court.
• Batas Pambansa Bilang 129, Section 11 — Provisions on quorum and voting requirements in the Court of Appeals, including the formation of Special Divisions of Five.
• Section 7, Rule 133 of the Rules on Evidence — Cited by the RTC regarding evidence on motion (Bravo vs. Borja).

• Associate Justice Vicente S.E. Veloso — Penned a Separate Concurring Opinion in the CA Decision (cited in footnotes but not detailed in the text provided).

• Associate Justice Magdangal M. De Leon and Associate Justice Socorro B. Inting — Penned a Dissenting Opinion in the CA Decision (cited in footnotes but specific reasoning not detailed in the text provided).