Tramat Mercantile, Inc. and David Ong vs. Court of Appeals and Melchor de la Cuesta

A corporate officer cannot be held personally and solidarily liable for corporate obligations unless he falls under any of the exceptional circumstances enumerated by law — such as assenting to a patently unlawful act, acting in bad faith or with gross negligence, consenting to the issuance of watered stocks, agreeing to hold himself personally liable, or being made personally answerable by a specific provision of law. In this case, because David Ong acted merely as an officer of Tramat, a corporation with a distinct and separate personality, only the corporation could properly be made liable on the transaction.

Melchor de la Cuesta, doing business under the name "Farmers Machineries," sold a tractor to Tramat Mercantile, Inc., a corporation engaged in the resale of equipment. David Ong was Tramat's president and manager. The transaction involved the sale of a HINOMOTO TRACTOR Model MB 1100D, which Tramat subsequently resold, together with a lawn mower it fabricated, to the Metropolitan Waterworks and Sewerage System. The dispute arose from the buyer's refusal to pay for the tractor and lawn mower due to alleged defects, which led to the stop payment of the check issued to de la Cuesta.

On 09 April 1984, Melchor de la Cuesta, doing business under the name "Farmers Machineries," sold to Tramat Mercantile, Inc. one unit of HINOMOTO TRACTOR Model MB 1100D powered by a 13 H.P. diesel engine. In payment, David Ong, Tramat's president and manager, issued a check for P33,500.00, which apparently replaced an earlier postdated check for P33,080.00. Tramat, in turn, sold the tractor, together with an attached lawn mower fabricated by it, to the Metropolitan Waterworks and Sewerage System for P67,000.00.

David Ong caused a "stop payment" of the check when NAWASA refused to pay for the tractor and lawn mower after discovering that, aside from some stated defects of the attached lawn mower, the engine sold by de la Cuesta was a reconditioned unit. On 28 May 1985, de la Cuesta filed an action for the recovery of P33,500.00, as well as attorney's fees of P10,000.00, and the costs of suit. Ong, in his answer, averred that de la Cuesta had no cause of action; that the questioned transaction was between plaintiff and Tramat Mercantile, Inc., and not with Ong in his personal capacity; and that the payment of the check was stopped because the subject tractor had been priced as a brand new, not as a reconditioned unit.

The Court of Appeals found that the contract between de la Cuesta and Tramat was one of absolute, not conditional, sale. The appellate court reasoned that if the perfection of the sale was dependent upon acceptance by the MWSS, the appellants would not have issued a check in payment to the appellee, and long after MWSS had complained about the defective tractor engine, the appellants still drew and delivered a replacement check for the increased amount of P33,500.00. The appellate court also found that the appellants did not reveal to the appellee the true purpose for which the tractor would be used, and that the lawn mower as fabricated by the appellants was the root of the parties' problems. The appellate court concluded that the engine malfunctioned not necessarily because it was a reconditioned unit, but because it was made to do what it simply could not.

• Conditional Sale: Petitioners argued that the sale was conditional, dependent upon acceptance by the MWSS of the subject tractor.
• Warranty Violation: Petitioners argued that de la Cuesta should have been held liable for the tractor's alleged hidden defects, as the engine was a reconditioned unit and not brand new.
• Personal Liability: Petitioner David Ong argued that de la Cuesta had no cause of action against him in his personal capacity, as the questioned transaction was between the plaintiff and Tramat Mercantile, Inc., and not with Ong personally.

• Absolute Sale: Respondent argued that the contract was one of absolute sale, as evidenced by the issuance of the check in payment and the subsequent delivery of a replacement check for an increased amount even after the MWSS had complained about the tractor engine.
• No Implied Notice: Respondent argued that the appellants did not reveal the true purpose for which the tractor would be used, and that informing the seller of a resale to the MWSS would not constitute the required implied notice to the seller.
• No Hidden Defects: Respondent argued that the engine malfunctioned not because it was reconditioned, but because the fabricated lawn mower placed too much burden on the engine, causing it to overheat and damage its gaskets.

• Nature of the Sale: Whether the contract between de la Cuesta and Tramat was one of absolute or conditional sale.
• Warranty Liability: Whether de la Cuesta violated any warranty on the sale of the tractor to Tramat.
• Personal Liability of Corporate Officer: Whether David Ong could be held jointly and severally liable with Tramat for the obligation.

• Nature of the Sale: No. The contract was one of absolute, not conditional, sale. The issuance of the check in payment and the subsequent delivery of a replacement check for an increased amount negated the claim that the sale was conditional.
• Warranty Liability: No. De la Cuesta did not violate any warranty on the sale of the tractor. The engine malfunctioned because the fabricated lawn mower placed too much burden on it, not because the engine was reconditioned.
• Personal Liability of Corporate Officer: No. David Ong could not be held personally liable, as he acted not in his personal capacity but as an officer of a corporation with a distinct and separate personality. None of the exceptional circumstances under the Corporation Code were present.

• Nature of the Sale: The Court found no reason to reverse the factual findings of both the trial court and the appellate court. The appellate court adequately explained that the issuance of a check in payment, and the subsequent delivery of a replacement check for an increased amount even after the MWSS had complained, argued against the claim that the sale was conditional. The additional amount covered the cost of replacing the oil gasket of the tractor engine, not freight charges, as the tractor was transported from Isabela to Metro Manila as early as April 1984, and the repairs were done in Quezon City.

• Warranty Liability: The Court sustained the trial court's finding that at the time of purchase, the appellants did not reveal to the appellee the true purpose for which the tractor would be used. The Court agreed that the lawn mower as fabricated by the appellants was the root of the parties' problems. Having had no previous experience in the manufacture of lawn mowers of the same type, the appellants' product might have proved too much for the subject tractor to power, causing the engine to overheat and damage its gaskets. The engine malfunctioned not necessarily because it was reconditioned, but because it was made to do what it simply could not.

• Personal Liability of Corporate Officer: The Court held that it was an error to hold David Ong jointly and severally liable with TRAMAT. Ong had acted not in his personal capacity but as an officer of a corporation with a distinct and separate personality. 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 to the corporation, its stockholders or other persons; (2) he consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; (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. In this case, there was no indication that Ong could be held personally accountable under any of these circumstances.

• Doctrine of Corporate Personality — A corporation has a distinct and separate personality from its officers and stockholders. When a corporate officer acts on behalf of the corporation, only the corporation, not the person acting for and on its behalf, can properly be made liable on the transaction. The Court applied this doctrine in setting aside the joint and several liability of David Ong, holding that he acted as an officer of Tramat and not in his personal capacity.

• Personal Liability of Corporate Officers — A corporate director, trustee, or officer may be held personally and solidarily liable with the corporation only in exceptional cases: (1) when he assents to a patently unlawful act of the corporation, or acts in bad faith or with gross negligence in directing its affairs, or has a conflict of interest resulting in damages to the corporation, its stockholders or other persons; (2) when he consents to the issuance of watered stocks or, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; (3) when he agrees to hold himself personally and solidarily liable with the corporation; or (4) when he is made, by a specific provision of law, to personally answer for his corporate action. The Court applied this doctrine in finding that none of these circumstances were present in the case at bench.

• "It was, nevertheless, an error to hold David Ong jointly and severally liable with TRAMAT to de la Cuesta under the questioned transaction. Ong had there so acted, not in his personal capacity, but as an officer of a corporation, TRAMAT, with a distinct and separate personality. As such, it should only be the corporation, not the person acting for and on its behalf, that properly could be made liable thereon." — This passage states the ratio decidendi for the Court's modification of the lower courts' decision, articulating the doctrine of corporate personality and its application to the case.

• "Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may so validly attach, as a rule, only when — 1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith, or gross negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons; 2. He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; 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." — This passage enumerates the exceptional circumstances under which a corporate officer may be held personally liable, which is the controlling doctrine in this case.

• "The engine malfunctioned not necessarily because the engine, as alleged by the appellants, had been a reconditioned, and not a brand new, one. It malfunctioned because it was made to do what it simply could not." — This passage explains the Court's finding that de la Cuesta did not violate any warranty on the sale of the tractor, attributing the engine malfunction to the burden placed on it by the fabricated lawn mower.

• RCPI vs. Court of Appeals, 143 SCRA 657 — Cited as authority for the proposition that a corporation has a distinct and separate personality from its officers, and that only the corporation can be made liable for transactions entered into on its behalf.
• De Asis & Co., Inc. vs. Court of Appeals, 136 SCRA 599 — Cited in connection with the exceptional circumstance where a corporate officer agrees to hold himself personally and solidarily liable with the corporation.

• Section 31, Corporation Code — Cited as the provision governing the personal liability of corporate directors, trustees, or officers who assent to a patently unlawful act of the corporation, or act in bad faith or with gross negligence in directing its affairs, or have a conflict of interest resulting in damages to the corporation, its stockholders or other persons.
• Section 65, Corporation Code — Cited as the provision governing the personal liability of corporate officers who consent to the issuance of watered stocks or who, having knowledge thereof, do not forthwith file with the corporate secretary their written objection thereto.
• Article 144, Corporation Code — Cited as an example of a specific provision of law that makes a corporate officer personally answer for his corporate action.
• Section 13, Presidential Decree 115 (Trust Receipts Law) — Cited as another example of a specific provision of law that makes a corporate officer personally answer for his corporate action.

Bidin, Romero, and Melo, JJ., concurred. Feliciano, J., was on leave.