Solidbank Corporation vs. Mindanao Ferroalloy Corporation

Corporate officers who sign loan documents in a representative capacity for and on behalf of a disclosed principal are not personally liable on the instrument, and solidary liability cannot be inferred absent an express stipulation, a legal mandate, or the nature of the obligation requiring it; however, an award of damages under Articles 19 to 21 of the Civil Code requires clear and convincing proof of malice or bad faith, and the mere erroneous impleading of parties in a suit does not per se constitute such bad faith.

Mindanao Ferroalloy Corporation ("Minfaco") was a joint venture between Maria Cristina Chemical Industries and three Korean corporations — Ssangyong Corporation, Pohang Iron and Steel Company, and Dongil Industries Company, Ltd. — with principal offices in Iligan City. Ricardo P. Guevara served as President and Chairman of the Board, while Jong-Won Hong (General Manager of Ssangyong Corporation) and Teresita R. Cu served as Vice-Presidents. Solidbank Corporation was the lending institution from which Minfaco sought and obtained credit facilities. The dispute arose from Minfaco's default on its loan obligations and Solidbank's subsequent attempt to hold the individual corporate officers and their spouses personally liable.

On November 26, 1990, the Board of Directors of Mindanao Ferroalloy Corporation ("Minfaco") approved a resolution authorizing its President and Chairman Ricardo P. Guevara, or Vice-President Teresita R. Cu acting together with Vice-President Jong-Won Hong, to negotiate with and secure an omnibus credit line of ₱30,000,000 from Solidbank Corporation. Minfaco commenced operations in April 1991, but its indebtedness soon ballooned to ₱200,453,686.69 against assets of only ₱65,476,000. On May 21 and May 28, 1991, Solidbank granted Minfaco two ordinary time loans of ₱3,200,000 and ₱1,800,000 respectively, both due in July 1991. The parties subsequently agreed to consolidate and restructure these loans into a single obligation of ₱5,160,000, payable on September 20, 1991, evidenced by Promissory Note No. 96-91-00865-6, which Cu and Hong signed above the printed name of the corporation on the space designated "Maker/Borrower."

To secure the consolidated loan, Minfaco — through Cu and Hong — executed a Deed of Assignment covering the entire proceeds of drafts drawn under an Irrevocable Letter of Credit opened with The Mitsubishi Bank Ltd. in Tokyo for the account of Ssangyong Japan Corporation, up to US$197,679. The corporation likewise executed a Quedan and a Trust Receipt Agreement as additional security, both covering ferrosilicon valued at US$197,679. Cu and Hong signed these instruments in their capacities as corporate officers. Shortly after executing these deeds, Minfaco ceased operations and failed to pay the loan. Solidbank sent demand letters on February 11 and November 23, 1992, the latter reflecting an outstanding balance of ₱7,283,913.33, but Minfaco did not comply.

On January 6, 1993, Solidbank filed a complaint for "Sum of Money" with a plea for a writ of preliminary attachment before the Regional Trial Court of Makati City, impleading not only Minfaco but also Cu, Hong, Guevara, and their respective spouses. Solidbank likewise filed a criminal complaint for violation of P.D. 115 (the Trust Receipts Law) against Guevara, Cu, and Hong, but the investigating prosecutor found no probable cause because the goods covered by the quedan were nonexistent. In their answers, the individual respondents denied personal liability: Guevara had not signed any of the loan documents, while Cu and Hong maintained they had signed in blank and merely as representatives of Minfaco. On June 20, 1994, Minfaco filed a petition for voluntary insolvency before the RTC of Iligan City, listing Solidbank among its creditors for ₱8,144,916.05. The trial court suspended proceedings against the corporation but allowed the case to proceed against the individual defendants.

The RTC ultimately dismissed the complaint against the individual respondents on December 10, 1999, finding that Solidbank had failed to adduce any evidence of their personal liability and had impleaded them solely to pressure the corporation to pay. The RTC awarded moral and exemplary damages and attorney's fees to the individual respondents. On February 28, 2000, the RTC rendered summary judgment against Minfaco, ordering it to pay ₱7,086,686.70 plus interest, penalties, and attorney's fees. Solidbank appealed the dismissal of the complaint against the individual respondents to the Court of Appeals, which affirmed the RTC's ruling in its December 21, 2001 Decision, sustaining both the non-liability of the individual respondents and the award of damages. Solidbank then elevated the case to the Supreme Court via a Petition for Review under Rule 45.

• Solidary Liability of Individual Respondents: Petitioner argued that the individual respondents were jointly or solidarily liable with Minfaco, either because their participation in the loan contract and loan documents made them comakers, or because they committed fraud and deception justifying the piercing of the corporate veil.
• Badges of Fraud: Petitioner contended that the individual respondents misrepresented the corporation as solvent and financially capable, knew that ferrosilicon prices were declining when they secured the loan, failed to pay a single centavo, and suspended operations shortly after the loan was granted — all constituting badges of fraud and evident bad faith.
• Joint Liability as Alternative: Petitioner argued that in the absence of solidary liability, the provisions of Article 1208 in relation to Article 1207 of the Civil Code providing for joint liability should apply.
• Judicial Notice of Bank Practices: Petitioner questioned whether bank practices could be the proper subject of judicial notice under Section 1 of Rule 129 of the Rules of Court.
• Impleading Spouses: Petitioner maintained that the inclusion of the respondents' spouses was proper under prevailing jurisprudence, as the conjugal partnerships had allegedly benefited from the loan proceeds.
• Award of Damages: Petitioner argued that there were insufficient bases for the award of various kinds and substantial amounts of damages, including attorney's fees.

• Representative Capacity: Respondents Cu and Hong argued that the loan was a corporate undertaking of Minfaco executed through its duly authorized representatives, and that they signed the Promissory Note, Deed of Assignment, Trust Receipt, and Quedan merely as representatives and not as comakers.
• Non-Signatory Status: Respondent Guevara alleged that he did not sign any of the documents in favor of Solidbank and was merely authorized to represent Minfaco in negotiating the loans.
• No Personal Liability: Respondents maintained that they were not personally liable to petitioner because they acted solely in their official capacities as corporate officers, within the scope of their authority and in good faith.
• Nonexistent Goods: Respondents pointed out that the goods subject of the Trust Receipt Agreement and Quedan had been found to be nonexistent, as determined by the investigating prosecutor in the criminal complaint for violation of P.D. 115.

• Personal Liability of Corporate Officers: Whether the individual respondents are liable, either jointly or solidarily, with Minfaco for the corporation's loan obligations.
• Piercing the Corporate Veil: Whether fraud and misrepresentation by the individual respondents justified disregarding the separate corporate personality of Minfaco.
• Judicial Notice of Bank Practices: Whether the Court of Appeals erred in taking judicial notice of the practice of banks in conducting background checks on borrowers and sureties.
• Award of Damages: Whether there were sufficient bases for the award of moral and exemplary damages and attorney's fees to the individual respondents.
• Impleading of Spouses: Whether the inclusion of the respondents' spouses in the complaint was proper.

• Personal Liability of Corporate Officers: No. The individual respondents were not personally liable, having signed the loan documents in their representative capacities as officers of Minfaco, a disclosed principal; solidary liability was neither expressly stipulated nor required by law or the nature of the obligation.
• Piercing the Corporate Veil: No. Fraud and bad faith were not clearly and convincingly established; the bank was in a position to verify the corporation's solvency and the existence of the collateral before granting the loans, and its failure to do so could not be attributed to respondents' deception.
• Judicial Notice of Bank Practices: No error. While not mandatory under Section 1 of Rule 129, a court may, in its discretion under Section 2 of the same Rule, take judicial notice of matters of public knowledge or ought to be known to judges by reason of their judicial functions, including the standard banking practice of investigating borrowers' credit standing and appraising collaterals.
• Award of Damages: No. The award of moral and exemplary damages and attorney's fees was deleted, respondents having failed to establish by clear and convincing evidence that Solidbank acted with malice or evident bad faith in impleading them.
• Impleading of Spouses: Erroneous but not malicious. While the impleading of the spouses was ultimately found to be without basis, Solidbank honestly believed the conjugal partnerships had benefited from the loan proceeds, which does not amount to evident bad faith or malice warranting damages.

• Personal Liability of Corporate Officers: A corporation possesses a personality separate and distinct from that of the persons composing or representing it, and corporate officers cannot be held personally liable for acts performed for and on behalf of the corporation, within the scope of their authority and in good faith. The factual findings of the trial and appellate courts — that Guevara did not sign any loan document and was merely authorized to negotiate the loans, and that Cu and Hong signed in their representative capacities — were final and conclusive, petitioner having shown no exceptional circumstance warranting their review. As to Cu and Hong, although their signatures on the Promissory Note appeared without the word "by," the inference of individual capacity was negated by several circumstances: the corporation's name and address appeared on the "Maker/Borrower" space; they had only one set of signatures when two would have been required if they intended to bind themselves individually in addition to their representative signatures; they did not sign under the "Co-maker" spaces; and they signed above the words "Authorized Representative" on the back of the note. Under Article 1207 of the Civil Code, solidary liability arises only when the obligation expressly so states, or when the law or the nature of the obligation requires it — neither condition being present. The alternative claim of joint liability was raised for the first time on appeal and was thus barred, and in any event, joint liability requires at least two debtors, whereas the evidence showed only one debtor: the corporation. Under Sections 19 and 20 of the Negotiable Instruments Law, agents signing for a disclosed principal with due authority are not personally liable on the instrument. The Promissory Note being a contract of adhesion prepared by Solidbank, it was construed against the bank as the party that prepared it.

• Piercing the Corporate Veil: The separate juridical personality of a corporation may be disregarded when the corporate identity is used to defeat public convenience, justify a wrong, protect a fraud, or defend a crime, or when the corporation acts as a mere alter ego or business conduit of a person. However, the wrongdoing must be clearly and convincingly established and cannot be presumed. Petitioner alleged that respondents misrepresented the corporation as solvent, knew ferrosilicon prices were declining, made no payment, and suspended operations shortly after the loan. Fraud — whether causal (dolo causante) or incidental (dolo incidente) — must be established by clear and convincing evidence, not mere preponderance. Petitioner failed to establish precisely how the alleged fraud was committed. Critically, the ₱5 million loan represented the consolidation of two loans granted before the execution of the Promissory Note, Trust Receipt Agreement, Quedan, or Deed of Assignment, so no words or machinations arising from those instruments could have been used prior to or simultaneous with the contract. Moreover, the bank was in a position to verify the corporation's solvency and the existence of the collateral; ordinary business prudence required it to do so before granting multimillion loans. To uphold petitioner's cry of fraud when it failed to verify the existence of the goods was to condone its own negligence.

• Judicial Notice of Bank Practices: While Section 1 of Rule 129 does not mandate judicial notice of banking practices, Section 2 of the same Rule permits a court, in its discretion, to take judicial notice of matters of public knowledge or those which ought to be known to judges by reason of their judicial functions. The Court had previously taken judicial notice of the uniform practice of banks and financial institutions to investigate, examine, and assess would-be borrowers' credit standing and the real estate or goods offered as security before approving loans. The appellate court's reliance on this practice was therefore proper.

• Award of Damages: Articles 19, 20, and 21 of the Civil Code — the human relations provisions — require clear and convincing evidence of malice or bad faith. Article 19 requires that a person act with justice, give everyone his due, and observe honesty and good faith in the exercise of rights and performance of duties; its abuse-of-rights principle requires the concurrence of three elements: a legal right or duty, its exercise in bad faith, and the sole intent of prejudicing or injuring another. To justify damages for malicious prosecution, both malice and want of probable cause must be proven. While petitioner was proven wrong in impleading the spouses, respondents failed to establish that the suit was so patently malicious as to warrant damages under Articles 19 to 21. With the presumption of good faith on petitioner's side and absent adequate proof of malice, the Court found that Solidbank impleaded the spouses because it honestly believed the conjugal partnerships had benefited from the loan proceeds. The adverse result of litigation per se neither makes the act wrongful nor subjects the actor to damages, as the law could not have meant to impose a penalty on the right to litigate. For the same reason, attorney's fees could not be granted, none of the enumerated grounds under Article 2208 of the Civil Code being present.

• Impleading of Spouses: The inclusion of the spouses was ultimately erroneous, as the women were not privy to any of the transactions between Solidbank and Minfaco. However, petitioner's honest belief that the conjugal partnerships had benefited from the loan proceeds, as stated in its complaint and subsequent pleadings, negated a finding of evident bad faith or malice. The erroneous impleading, without more, did not warrant the award of damages.

• Separate Corporate Personality — A corporation is vested by law with a personality separate and distinct from that of each person composing or representing it. Corporate officers cannot be held personally liable for the consequences of their acts, for as long as these are for and on behalf of the corporation, within the scope of their authority and in good faith. The separate corporate personality serves as a shield against the personal liability of corporate officers whose acts are properly attributed to the corporation. The Court applied this doctrine to hold that Cu, Hong, and Guevara were not personally liable for Minfaco's loan obligations.

• Personal Liability of Corporate Officers (Tramat Mercantile Doctrine) — Personal liability of a corporate director, trustee, or officer may validly attach only when: (1) he assents to a patently unlawful act of the corporation, or for bad faith or gross negligence in directing its affairs, or for conflict of interest resulting in damages; (2) he consents to the issuance of watered stocks or, having knowledge thereof, does not forthwith file his written objection; (3) he agrees to hold himself personally and solidarily liable with the corporation; or (4) he is made by a specific provision of law to personally answer for his corporate action. None of these circumstances was established against the individual respondents.

• Solidary Liability Not Lightly Inferred — Under Article 1207 of the Civil Code, there is a solidary liability only when the obligation expressly so states, or when the law or the nature of the obligation requires solidarity. Since solidary liability is not clearly expressed in the instrument and is not required by law or the nature of the obligation, no conclusion of solidary liability can be made.

• Piercing the Corporate Veil — The distinct and separate corporate personality may be disregarded when the corporate identity is used to defeat public convenience, justify a wrong, protect a fraud, or defend a crime, or when the corporation acts as a mere alter ego or business conduit of a person. However, the wrongdoing must be clearly and convincingly established; it cannot be presumed. The Court found no sufficient evidence of fraud or bad faith to justify piercing Minfaco's corporate veil.

• Abuse of Rights (Article 19, Civil Code) — A person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith. Three elements must concur for liability: (a) a legal right or duty, (b) its exercise in bad faith, and (c) the sole intent of prejudicing or injuring another. Absence of good faith must be sufficiently established by clear and convincing evidence. The Court found these elements absent on the part of Solidbank.

• Damages for Malicious Prosecution — To justify an award of damages for malicious prosecution, two elements must be proven: malice or sinister design to vex or humiliate, and want of probable cause. The adverse result of an act per se neither makes the act wrongful nor subjects the actor to the payment of damages, because the law could not have meant to impose a penalty on the right to litigate.

• Judicial Notice (Rule 129, Sections 1 and 2) — A court is not mandated to take judicial notice of certain matters under Section 1 of Rule 129, but may do so in its discretion under Section 2, which covers matters of public knowledge or those which ought to be known to judges because of their judicial functions. The uniform practice of banks to investigate borrowers' credit standing and appraise collaterals before approving loans falls within this discretionary judicial notice.

• "To justify an award for moral and exemplary damages under Articles 19 to 21 of the Civil Code (on human relations), the claimants must establish the other party's malice or bad faith by clear and convincing evidence." — This is the opening statement of the decision, articulating the controlling standard of proof for damages under the Civil Code's human relations provisions.

• "Solidary liability cannot be lightly inferred. Under Article 1207 of the Civil Code, 'there is a solidary liability only when the obligation expressly so states, or when the law or the nature of the obligation requires solidarity.'" — This passage states the canonical formulation of the rule on solidary obligations, central to the Court's rejection of personal liability for the corporate officers.

• "The adverse result of an act per se neither makes the act wrongful nor subjects the actor to the payment of damages, because the law could not have meant to impose a penalty on the right to litigate." — This passage articulates the principle protecting the right to litigate, which formed the basis for deleting the award of damages and attorney's fees despite the erroneous impleading of the individual respondents.

• "To disregard the separate juridical personality of a corporation, the wrongdoing must be clearly and convincingly established; it cannot be presumed." — This passage defines the evidentiary standard for piercing the corporate veil, a frequently cited formulation in subsequent jurisprudence.

• Tramat Mercantile vs. Court of Appeals, 238 SCRA 14 (1994) — Followed as the controlling authority enumerating the circumstances under which personal liability of a corporate director, trustee, or officer may validly attach. The four circumstances set forth in Tramat were applied to determine whether the individual respondents could be held personally liable; none was found present.
• Consolidated Bank and Trust Corporation (Solidbank) vs. CA, 356 SCRA 671 (2001) — Cited for the principle that the separate corporate personality is a shield against the personal liability of corporate officers whose acts are properly attributed to the corporation.
• ABS-CBN Broadcasting Corp. vs. CA, 361 Phil. 499 (1999) — Followed for the proposition that the adverse result of litigation per se neither makes the act wrongful nor subjects the actor to damages, and that damages under Articles 19 to 21 require proof of gross and evident bad faith.
• Marubeni Corporation vs. Lirag, 415 Phil. 29 (2001) — Cited for the principle that wrongdoing justifying the piercing of the corporate veil must be clearly and convincingly established and cannot be presumed.
• Metropolitan Waterworks and Sewerage System vs. Act Theater, Inc., 432 SCRA 418 (2004) — Followed for the three-element test for liability under the abuse-of-rights principle of Article 19 of the Civil Code.

• Article 1207, Civil Code — Provides that there is a solidary liability only when the obligation expressly so states, or when the law or the nature of the obligation requires solidarity. Applied to hold that no solidary liability could be inferred from the Promissory Note, which did not expressly stipulate it.
• Article 1208, Civil Code — Provides that if one of the debtors is not bound solidarily, the obligation is joint. Petitioner invoked this provision as an alternative basis for joint liability, but the claim was rejected as having been raised for the first time on appeal and because the evidence showed only one debtor.
• Articles 19, 20, and 21, Civil Code — The human relations provisions. Article 19 requires acting with justice, giving everyone his due, and observing honesty and good faith; Article 20 imposes liability on one who willfully or negligently causes damage contrary to law; Article 21 imposes liability on one who willfully causes loss or injury in a manner contrary to morals, good customs, or public policy. Applied to test whether Solidbank's impleading of the individual respondents warranted damages; the Court found the evidence insufficient.
• Article 2208, Civil Code — Enumerates the circumstances under which attorney's fees may be recovered in the absence of stipulation. The Court found none of the enumerated grounds present.
• Article 2229, Civil Code — Allows exemplary or corrective damages when the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. The lower courts relied on this provision, but the Supreme Court found no sufficient basis for the award.
• Sections 19 and 20, Negotiable Instruments Law — Section 19 allows agents or representatives to sign for a principal; Section 20 provides that a person signing for and on behalf of a disclosed principal in a representative capacity is not liable on the instrument if duly authorized. Applied to hold that Cu and Hong, having signed for Minfaco with due authority, were not personally liable on the Promissory Note.
• Sections 1 and 2, Rule 129, Rules of Court — Section 1 lists matters of which mandatory judicial notice may be taken; Section 2 allows discretionary judicial notice of matters of public knowledge or those which ought to be known to judges by reason of their judicial functions. Applied to uphold the appellate court's taking of judicial notice of standard banking practices.

Sandoval-Gutierrez, Corona, Carpio-Morales, and Garcia, JJ., concurred.