Tan Boon Bee & Co., Inc. vs. Jarencio

A corporation's separate juridical personality may be disregarded when it is used as a cloak for fraud or injustice, or when the corporation is merely an adjunct, business conduit, or alter ego of another corporation, and a trial court's failure to pierce the veil under such circumstances is correctable by certiorari, not a mere error of judgment reviewable only by appeal.

Petitioner Tan Boon Bee & Co., Inc., doing business as Anchor Supply Co., was a supplier of paper products that sold goods on credit to Graphic Publishing, Inc. (GRAPHIC). Philippine American Drug Company (PADCO) was a related corporation whose board of directors and officers were identical to GRAPHIC's and which held 50% of GRAPHIC's stock. PADCO claimed ownership of a printing machine found in GRAPHIC's premises, asserting it had purchased the machine from Capitol Publishing and leased it to GRAPHIC. The dispute arose when the sheriff levied upon that machine to satisfy the judgment against GRAPHIC, and PADCO sought to nullify the sale on the ground that the machine belonged to it, not to the judgment debtor.

Petitioner Tan Boon Bee & Co., Inc., doing business under the name and style of Anchor Supply Co., sold paper products on credit to Graphic Publishing, Inc. (GRAPHIC) amounting to ₱55,214.73. On December 20, 1972, GRAPHIC made partial payment by check in the amount of ₱24,848.74, and on December 21, 1972, a promissory note was executed to cover the balance of ₱30,365.99, stipulating monthly installments and providing that failure to pay any installment would render the entire amount immediately demandable with 12% interest per annum. When GRAPHIC failed to pay any installment, petitioner filed Civil Case No. 91857 for a Sum of Money on September 6, 1973 with the Court of First Instance of Manila, Branch XXIII, presided over by respondent Judge Hilarion U. Jarencio. GRAPHIC was declared in default for failure to file an answer within the reglementary period, and petitioner was allowed to present evidence ex parte.

In a Decision dated January 18, 1974, the trial court ordered GRAPHIC to pay petitioner ₱30,365.99 with 12% interest from March 30, 1973 until fully paid, plus costs. A writ of execution was issued on motion of petitioner, but it expired without the sheriff finding any property of GRAPHIC. An alias writ of execution was issued on July 2, 1974. Pursuant to that alias writ, the executing sheriff levied upon one unit printing machine identified as an "Original Heidelberg Cylinder Press," Type H 222, NR 78048, found in the premises of GRAPHIC. The machine was scheduled for auction sale on July 26, 1974 at 14th St., Cor. Atlanta St., Port Area, Manila. On July 19, 1974, however, private respondent Philippine American Drug Company (PADCO) informed the sheriff by letter that the printing machine was its property and not GRAPHIC's, and accordingly advised the sheriff to cease and desist from carrying out the scheduled auction sale.

Notwithstanding PADCO's letter, the sheriff proceeded with the auction sale, sold the property to petitioner as the highest bidder, and issued a Certificate of Sale in petitioner's favor. More than five hours after the auction sale and the issuance of the certificate of sale, PADCO filed an Affidavit of Third-Party Claim with the Office of the City Sheriff. On July 30, 1974, PADCO filed with the CFI a Motion to Nullify Sale on Execution with prayer for injunction, which petitioner opposed. Respondent judge, in an Order dated March 26, 1975, ruled in favor of PADCO, setting aside the sale and the levy and ordering the sheriff to return the machinery to its owner, PADCO. Petitioner's Motion for Reconsideration and an Addendum thereto were denied for lack of merit in an Order dated August 13, 1975, prompting the instant petition.

Evidence established that PADCO was never engaged in the printing business; that the board of directors and the officers of GRAPHIC and PADCO were the same; and that PADCO held 50% of GRAPHIC's stock. The printing machine had been in GRAPHIC's premises since May 1965, long before PADCO allegedly acquired title on July 11, 1966 from Capitol Publishing. The alleged lease by PADCO to GRAPHIC was dated January 24, 1966, even before PADCO purchased the machine from Capitol Publishing on July 11, 1966 — a chronological impossibility that, according to petitioner, showed PADCO's claim of ownership was farce and sham.

• Jurisdiction of the Trial Court: Petitioner argued that respondent judge gravely exceeded, if not acted without, jurisdiction in acting upon PADCO's motion, because Section 17, Rule 39 of the Rules of Court was not complied with, and because PADCO, not being a party to the case, could not have litigated its claim in the same proceeding but in an independent civil action.
• Piercing the Corporate Veil: Petitioner maintained that respondent judge gravely abused his discretion in refusing to pierce PADCO's corporate identity, despite abundant evidence showing that PADCO was conveniently shielding under the theory of corporate personality to protect GRAPHIC's assets from execution.

• Error of Judgment, Not Error of Jurisdiction: Respondent PADCO argued that if respondent judge erred in not piercing the veil of its corporate fiction, the error was merely an error of judgment correctable by appeal and not an error of jurisdiction correctable by certiorari.

• Jurisdiction over Third-Party Claims: Whether respondent judge gravely exceeded or acted without jurisdiction in acting upon PADCO's motion to nullify the sheriff's sale, given that Section 17, Rule 39 of the Rules of Court was not complied with and PADCO was not a party to the case.
• Piercing the Corporate Veil: Whether respondent judge gravely abused his discretion in refusing to pierce PADCO's corporate identity despite evidence showing that PADCO was merely shielding under the theory of corporate personality.

• Jurisdiction over Third-Party Claims: The contention was well-taken — third-party claims over properties levied upon should be decided in a separate action, not in the execution proceeding — but petitioner was barred from raising the jurisdictional defect because it had voluntarily participated in the trial despite having initially questioned jurisdiction.
• Piercing the Corporate Veil: Yes. Respondent judge should have pierced PADCO's veil of corporate identity, the evidence having established that PADCO was never engaged in the printing business, shared the same directors and officers with GRAPHIC, held 50% of GRAPHIC's stock, and that its claim of ownership was sham and chronologically impossible. The argument that the failure to pierce was a mere error of judgment correctable only by appeal was rejected as a mere technicality.

• Jurisdiction over Third-Party Claims: The Court agreed with petitioner that under Section 17, Rule 39 of the Revised Rules of Court, the rights of third-party claimants over properties levied upon by the sheriff should not be decided in the action where the third-party claims were presented, but in a separate and independent action instituted by the claimants. The Court cited Bayer Philippines, Inc. vs. Agana, which held that the court issuing a writ of execution is supposed to enforce authority only over properties of the judgment debtor, and that a third party's claim should be the subject of a separate action, as intervention would inject confusion into the issues and retard the prompt dispatch of the controversy. However, the Court found that petitioner was barred from raising this jurisdictional defect because, although it had questioned the court's jurisdiction during the initial hearing, it nevertheless actively participated in the trial. Citing Philippine National Bank vs. Intermediate Appellate Court, the Court held that a party who voluntarily participated in the trial cannot later raise the issue of the court's lack of jurisdiction.

• Piercing the Corporate Veil: The Court affirmed the fundamental principle that a corporation is invested with a personality separate and distinct from that of its stockholders and from any other legal entity to which it may be related, citing Yutivo & Sons Hardware Company vs. Court of Tax Appeals and Emilio Cano Enterprises, Inc. vs. CIR. However, this separate personality is merely a fiction created by law for convenience and to promote justice, and may be disregarded where the corporate form is used as a cloak or cover for fraud or illegality, to work an injustice, or where the corporation is merely an adjunct, business conduit, or alter ego of another corporation. Applying these principles, the Court found that petitioner's evidence established that PADCO was never engaged in the printing business; that the board of directors and officers of GRAPHIC and PADCO were the same; that PADCO held 50% of GRAPHIC's stock; and that the printing machine had been in GRAPHIC's premises since May 1965, before PADCO allegedly acquired title on July 11, 1966. The alleged lease from PADCO to GRAPHIC dated January 24, 1966 preceded PADCO's purchase of the machine on July 11, 1966, rendering the ownership claim unbelievable and sham. Accordingly, respondent judge should have pierced PADCO's veil of corporate identity. As to PADCO's argument that the failure to pierce was a mere error of judgment correctable only by appeal, the Court rejected this as a mere technicality, citing Rubio vs. Mariano for the principle that litigations should be decided on their merits and not on technicality, and that every party-litigant must be afforded the amplest opportunity for the proper and just determination of his cause.

• Piercing the Veil of Corporate Fiction — A corporation possesses a juridical personality separate and distinct from that of its stockholders and from any other legal entity to which it may be related. This separate personality is a fiction created by law for convenience and to promote justice, and may be disregarded when the corporate form is used as a cloak or cover for fraud or illegality, to work an injustice, where necessary to achieve equity or protect creditors, or when the corporation is merely an adjunct, business conduit, or alter ego of another corporation. In this case, the Court applied the doctrine to hold that PADCO's veil should have been pierced because it shared the same directors and officers with GRAPHIC, held 50% of GRAPHIC's stock, was never engaged in the printing business, and its claim of ownership over the printing machine was chronologically impossible and sham.

• Third-Party Claims in Execution Proceedings (Section 17, Rule 39) — The rights of third-party claimants over properties levied upon by the sheriff to satisfy a judgment should not be decided in the action where the third-party claims were presented, but in a separate and independent action instituted by the claimants. The court issuing a writ of execution has authority only over properties of the judgment debtor; a third party's claim should be the subject of a separate action, as intervention would inject confusion and retard the prompt dispatch of the controversy. The Court acknowledged this rule but found petitioner estopped from invoking it due to voluntary participation in the proceedings.

• Estoppel from Questioning Jurisdiction — A party who voluntarily participated in the trial cannot later raise the issue of the court's lack of jurisdiction. Although petitioner had questioned jurisdiction during the initial hearing, its active participation in the trial barred it from subsequently challenging the court's jurisdiction over PADCO's motion.

• "However, this separate and distinct personality is merely a fiction created by law for convenience and to promote justice. Accordingly, this separate personality of the corporation may be disregarded, or the veil of corporate fiction pierced, in cases where it is used as a cloak or cover for fraud or illegality, or to work an injustice, or where necessary to achieve equity or when necessary for the protection of creditors." — This passage articulates the canonical formulation of the doctrine of piercing the corporate veil, enumerating the recognized grounds for disregarding separate corporate personality, and was the ratio decidendi for the Court's ruling that PADCO's veil should have been pierced.

• "In other words, constitution, Section 17 of Rule 39 of the Revised Rules of Court, the rights of third-party claimants over certain properties levied upon by the sheriff to satisfy the judgment should not be decided in the action where the third-party claims have been presented, but in the separate action instituted by the claimants." — This quotation, drawn from Bayer Philippines, Inc. vs. Agana and adopted by the Court, states the procedural rule governing third-party claims in execution proceedings and explains why the trial court exceeded its jurisdiction in adjudicating PADCO's claim within the execution case.

• "Litigations should, as much as possible, be decided on their merits and not on technicality." — This passage underpins the Court's rejection of PADCO's argument that the error in failing to pierce the corporate veil was a mere error of judgment correctable only by appeal, affirming the principle that certiorari may lie when technical objections would deny a party the opportunity for adjudication on the merits.

• Bayer Philippines, Inc. vs. Agana, 63 SCRA 355 (1975) — Controlling precedent on the procedural rule that third-party claims in execution proceedings must be litigated in a separate and independent action, not in the execution proceeding itself. The Court adopted its reasoning to acknowledge that the trial court exceeded jurisdiction in adjudicating PADCO's claim.
• Philippine National Bank vs. Intermediate Appellate Court, 143 SCRA (1986) — Followed for the doctrine that a party who voluntarily participates in a trial is barred from later questioning the court's lack of jurisdiction.
• Yutivo & Sons Hardware Company vs. Court of Tax Appeals, 1 SCRA 160 (1961) — Cited for the principle that a corporation has a juridical personality separate and distinct from that of the persons composing it and from any other legal entity.
• Commissioner of Internal Revenue vs. Norton & Harrison, 11 SCRA 714 (1964) — Cited for the proposition that where a corporation is merely an adjunct, business conduit, or alter ego of another corporation, the fiction of separate and distinct corporate entities should be disregarded.
• Rubio vs. Mariano, 52 SCRA 338 (1973) — Cited for the principle that litigations should be decided on their merits and not on technicality, supporting the Court's rejection of PADCO's procedural objection to the certiorari petition.

• Section 17, Rule 39, Revised Rules of Court — Governs the treatment of third-party claims over properties levied upon by the sheriff in execution proceedings. The Court held that under this provision, third-party claims should be the subject of a separate and independent action, not adjudicated within the execution proceeding itself. Although the Court acknowledged the trial court's failure to comply with this rule, petitioner was estopped from raising it due to voluntary participation.

Yap, C.J., Melencio-Herrera, Padilla, and Sarmiento, JJ., concurred.