Philippine National Bank vs. Ritratto Group Inc.

A corporation acting as a mere attorney-in-fact for a subsidiary cannot be sued for the nullification of the subsidiary's loan contract absent a showing of fraud or alter ego justifying the piercing of the corporate veil.

PNB-IFL, a Hong Kong subsidiary of PNB, extended a letter of credit to respondents, secured by real estate mortgages over Makati properties. Upon respondents' default, PNB, acting as attorney-in-fact for PNB-IFL pursuant to the mortgage terms, initiated foreclosure proceedings and scheduled a public auction.

• The Credit Facility: On May 29, 1996, PNB-IFL extended a letter of credit in favor of respondents in the amount of US$300,000.00, secured by real estate mortgages over four parcels of land in Makati City. The credit facility was subsequently increased to US$1,425,000.00 by February 1997, with respondents remitting repayments to their loan account with PNB-IFL in Hong Kong.
• Default and Foreclosure: As of April 30, 1998, respondents' outstanding obligation stood at US$1,497,274.70. Pursuant to the mortgage terms, PNB-IFL, through its attorney-in-fact PNB, notified respondents of the foreclosure of the mortgages and scheduled a public auction on May 27, 1999.
• The Injunction Suit: On May 25, 1999, respondents filed a complaint for injunction to restrain the foreclosure, alleging that the credit facility was void for violating the principle of mutuality of contracts due to stipulations allowing the unilateral determination and modification of interest rates by the bank.

• Cause of Action: Petitioner argued that no cause of action exists against it because it is not a real party-in-interest, being a mere attorney-in-fact authorized to enforce an ancillary contract and not a privy to the loan agreements entered into by respondents and PNB-IFL.
• Excess of Jurisdiction: Petitioner maintained that the trial court acted in excess of its jurisdiction by issuing a writ of preliminary injunction over and beyond what was prayed for in the complaint, contravening established jurisprudence.

• Real Party in Interest: Respondent countered that PNB is the proper party-in-interest in the injunction application because it is the entity tasked with committing the acts of foreclosing respondents' properties.
• Mutuality of Contracts: Respondent argued that the entire credit facility is void for containing stipulations that violate the principle of mutuality of contracts, specifically the unilateral determination and modification of interest rates.
• Piercing the Veil: Respondent maintained that PNB is merely an alter ego or business conduit of PNB-IFL, justifying the application of the doctrine of piercing the veil of corporate identity.

• Cause of Action: Whether respondents have a cause of action against PNB, a mere attorney-in-fact, for the nullification of a loan contract and re-computation of interest rates agreed upon with its principal.
• Piercing the Corporate Veil: Whether the corporate veil between PNB and PNB-IFL should be pierced to hold PNB liable based solely on their parent-subsidiary relationship.
• Preliminary Injunction: Whether the writ of preliminary injunction was properly issued given the absence of a cause of action against the petitioner and the lack of a clear legal right to be protected.

• Cause of Action: No cause of action exists against PNB. As a mere agent with limited authority under a special power of attorney, PNB is not privy to the loan contracts entered into by respondents and PNB-IFL. Consequently, PNB has no power to recompute the interest rates set forth in the principal's contract. A suit against an agent cannot, without compelling reasons, be considered a suit against the principal.
• Piercing the Corporate Veil: The doctrine of piercing the corporate veil finds no application. Mere ownership by the parent corporation of all or most of the capital stock of the subsidiary, taken alone, is insufficient to disregard their separate personalities. None of the indicative factors of an alter ego relationship are present, nor is there any demonstration of fraud, tax evasion, or wrongdoing that the doctrine seeks to prevent.
• Preliminary Injunction: The writ must be lifted. A preliminary injunction is a mere provisional remedy adjunct to the main suit; the dismissal of the principal action necessarily results in the denial of the injunctive prayer. Furthermore, respondents failed to establish a clear legal right worthy of protection, having admitted their indebtedness and the encumbrance of their properties, and having questioned the contract's validity only upon the initiation of foreclosure proceedings.

• Piercing the Veil of Corporate Fiction / Alter Ego Doctrine An equitable doctrine applied when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or defend crime, or when the corporation is a mere alter ego or instrumentality of another. The three-element test requires: (1) complete domination of finances, policy, and business practice such that the corporate entity has no separate mind, will, or existence; (2) use of such control to commit fraud or wrong or a violation of a legal duty; and (3) proximate causation of the injury or unjust loss complained of. The absence of any one element prevents the application of the doctrine. Applied: The doctrine was not applied because mere parent-subsidiary relationship and stock ownership do not equate to the complete domination or fraud required to pierce the corporate veil.
• Real Party in Interest Every action must be prosecuted or defended in the name of the real party-in-interest, defined as the party who stands to be benefited or injured by the judgment in the suit, or the party entitled to the avails of the suit. Applied: PNB, as a mere attorney-in-fact, is not the real party-in-interest to a suit seeking to nullify the principal's contract and recompute interest rates.
• Preliminary Injunction as Ancillary Remedy A writ of preliminary injunction is an ancillary or preventive remedy that may only be resorted to protect or preserve rights during the pendency of the principal action. The dismissal of the principal action results in the denial or lifting of the injunction. Applied: Since the underlying complaint against PNB was dismissed for lack of cause of action, the injunction was necessarily lifted.

• "The mere fact that a corporation owns all of the stocks of another corporation, taken alone is not sufficient to justify their being treated as one entity."
• "A suit against an agent cannot without compelling reasons be considered a suit against the principal."
• "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 the operation."

• Koppel Phil. Inc. vs. Yatco, 77 Phil. 496 (1946) — Distinguished. The corporate veil was pierced in Koppel because the subsidiary was formed merely to evade the payment of higher taxes. No such fraudulent intent or wrongdoing was demonstrated in the present case.
• Concept Builders, Inc. v. NLRC, 257 SCRA 149 (1996) — Followed. Provided the three-element test for determining the applicability of the doctrine of piercing the veil of corporate fiction, which the Court applied to find the doctrine inapplicable.
• Garrett vs. Southern Railway Co., 173 F. Supp. 915 (E.D. Tenn. 1959) — Cited. Outlined the common circumstances or indicia useful in determining whether a subsidiary is a mere instrumentality of the parent corporation, such as common directors, grossly inadequate capital, and failure to observe formal legal requirements.

• Rule 3, Section 2, Rules of Court — Requires that every action be prosecuted in the name of the real party-in-interest. Applied to emphasize that PNB, as a mere agent, is not the real party-in-interest to be sued for the nullification of PNB-IFL's contract.
• Rule 3, Section 7, Rules of Court — Mandates the joinder of parties-in-interest without whom no final determination can be had. Applied to stress that PNB-IFL, the principal, is an indispensable party that was improperly excluded from the suit.
• Section 3, Rule 58, 1997 Rules of Civil Procedure — Enumerates the grounds for the issuance of a preliminary injunction. Applied to demonstrate that respondents failed to establish that they are entitled to the relief demanded, given their admission of indebtedness and the valid mortgage contract.

Puno, Pardo, and Santiago, JJ. (Davide, Jr., C.J., on official leave).