Villa Rey Transit, Inc. vs. Ferrer

A corporation that is the alter ego of an individual covenantor is bound by the covenantor's restrictive agreement not to compete, and a partial restraint of trade ancillary to a lawful sale—limited in scope, duration, and territory—is valid and enforceable.

Jose M. Villarama operated a bus transportation business under certificates of public convenience granted by the Public Service Commission (PSC), authorizing him to operate thirty-two units on various Pangasinan–Manila routes. On January 8, 1959, he sold two certificates to Pangasinan Transportation Co., Inc. (Pantranco) for P350,000, subject to a stipulation that he would not apply for any TPU service identical or competing with Pantranco for ten years. Barely three months later, Villa Rey Transit, Inc. was organized—incorporated by Villarama's wife and relatives—and shortly thereafter purchased five certificates of public convenience from Valentin Fernando, including two that were subsequently levied upon and sold at sheriff's auction to Eusebio Ferrer, who then sold them to Pantranco. The dispute centered on whether the corporation was a genuine independent entity or merely Villarama's vehicle to evade his non-competition covenant.

Prior to 1959, Jose M. Villarama operated a bus transportation business under the name Villa Rey Transit, pursuant to certificates of public convenience granted by the Public Service Commission in Cases Nos. 44213 and 104651, authorizing him to operate thirty-two units on various routes from Pangasinan to Manila and vice-versa. On January 8, 1959, he sold the two certificates to Pangasinan Transportation Co., Inc. (Pantranco) for P350,000, with a stipulation that the seller "shall not for a period of 10 years from the date of this sale, apply for any TPU service identical or competing with the buyer."

Barely three months thereafter, on March 6, 1959, a corporation called Villa Rey Transit, Inc. (the Corporation) was organized with a capital stock of P500,000 divided into 5,000 shares of par value P100 each. Villarama's wife, Natividad R. Villarama, was one of the incorporators, subscribing for P1,000, and was elected treasurer; the balance of P199,000 was subscribed by Villarama's brother and sister-in-law. Of the subscribed capital stock, P105,000 was paid to Natividad as treasurer. Less than a month after registration with the SEC on March 10, 1959, the Corporation on April 7, 1959 bought five certificates of public convenience, forty-nine buses, tools, and equipment from one Valentin Fernando for P249,000, of which P100,000 was paid upon signing, P50,000 upon final PSC approval, P49,500 one year after approval, and the balance of P50,000 to be paid by the buyer to Fernando's suppliers.

The very same day the contract of sale was executed, the parties applied with the PSC for approval, with a prayer for provisional authority to operate. On May 19, 1959, the PSC granted the provisional permit, valid only during the pendency of the application. Before the PSC could take final action, however, the Sheriff of Manila, on July 7, 1959, levied on two of the five certificates—those issued under PSC Cases Nos. 59494 and 63780—pursuant to a writ of execution issued by the CFI of Pangasinan in Civil Case No. 13798, in favor of Eusebio Ferrer against Valentin Fernando. The levy was entered in the PSC records. On July 16, 1959, a public auction was conducted, Ferrer was the highest bidder, and a certificate of sale was issued in his name. Ferrer thereafter sold the two certificates to Pantranco, and both jointly submitted their contract of sale to the PSC for approval.

The competing applications for approval of sale—that of Fernando and the Corporation (PSC Case No. 124057) and that of Ferrer and Pantranco (PSC Case No. 126278)—were scheduled for joint hearing. On July 22, 1959, the PSC ordered that Pantranco provisionally operate the service under the two certificates during the pendency of the cases. The Corporation contested this ruling and elevated the matter to the Supreme Court, which decreed that the Corporation should provisionally operate the lines until ownership was finally settled. On November 4, 1959, the Corporation filed a complaint in the CFI of Manila for annulment of the sheriff's sale and the subsequent sale to Pantranco. Pantranco, in turn, filed a third-party complaint against Villarama, alleging that Villarama and the Corporation were one and the same, and that Villarama was disqualified from operating the two certificates by virtue of the non-competition clause in the January 8, 1959 deed of sale.

The trial court found the Corporation to be a distinct entity from Villarama, declared the restrictive clause null and void, annulled the sheriff's sale, declared the Corporation the lawful owner of the certificates, and awarded P5,000 in attorney's fees. All parties appealed.

• Corporate Veil Should Not Be Pierced: Villa Rey Transit, Inc. (plaintiff-appellant) contended that it was entitled to P100,000 in exemplary damages and insisted that the P5,000 attorney's fees awarded by the lower court was insufficient, arguing that the "tortious acts" of Pantranco and Ferrer in acquiring the certificates despite knowledge of the prior sale necessitated a higher award.
• Scope of Restrictive Clause: The Corporation argued that even if it were one and the same as Villarama, the restrictive clause applied only to applications for new lines and did not cover the purchase of existing lines from a previous operator.
• Restrictive Clause Invalid: The Corporation maintained that the stipulation was illegal and void as an unreasonable restraint of trade.
• Sheriff's Sale Valid: Ferrer (defendant-appellant) argued that the Corporation had no valid title to the certificates because the sale from Fernando was subject to the suspensive condition of PSC approval, which had not yet been fulfilled, making the sheriff's levy and auction sale valid and regular, and vesting Pantranco with a superior right.
• Restrictive Clause Enforceable Against Corporation: Pantranco (defendant-appellant / third-party plaintiff-appellant) contended that Villarama and the Corporation were one and the same entity, that the restrictive clause was valid and binding, that the sheriff's sale was valid, and that it was entitled to damages from Villarama for breach of the non-competition covenant.
• Moral Damages: Ferrer claimed entitlement to moral, exemplary damages and attorney's fees by reason of the filing of the annulment action.

• Scope of Restrictive Clause: Whether the stipulation that Villarama "shall not for a period of 10 years from the date of this sale, apply for any TPU service identical or competing with the buyer" applies to new lines only or includes existing lines.
• Validity of Restraint of Trade: Whether the restrictive stipulation, assuming it covers all kinds of lines, is valid and enforceable.
• Binding Effect on Corporation: Whether the restrictive stipulation, if valid, binds Villa Rey Transit, Inc.

• Scope of Restrictive Clause: The stipulation covers all kinds of lines—both new and existing. The word "apply" as broadly used refers to any service by the seller on lines or routes that would compete with the buyer, whether the authority to operate is acquired through a new application or through transfer or sale from a previous operator.
• Validity of Restraint of Trade: Yes. The stipulation is a valid and reasonable ancillary restraint of trade, being limited in scope (only lines competing with those sold), in duration (ten years), and in territory (only along the lines covered by the certificates sold), and being merely incidental to the main agreement of sale.
• Binding Effect on Corporation: Yes. Villa Rey Transit, Inc. is the alter ego of Jose M. Villarama, and a seller or promisor may not use a corporate entity as a means of evading the obligation of his covenant.

• Scope of Restrictive Clause: The word "apply" in the clause must be read in context. The intention of the parties was to eliminate the seller as a competitor for ten years along the lines covered by the certificates sold. In Philippine jurisdiction, prior authorization from the PSC is needed before anyone can operate a TPU service, whether the service consists of a new line or an old one acquired from a previous operator. If the prohibition were limited to new applications, the seller could evade it by having a representative or dummy apply and later transfer the certificate by sale, defeating the parties' evident intention. The re-wording of earlier drafts did not narrow the scope; the final stipulation, while briefer, was just as broad and comprehensive. The evident purpose was to eliminate Villarama as a competitor, given the goodwill he had already gained from the riding public and his proficiency in the trade.

• Validity of Restraint of Trade: Jurisprudence establishes that a contract in restraint of trade is valid if there is a limitation upon either time or place. The modern test is whether the restraint is reasonably necessary to protect the interests of the contracting parties. The questioned stipulation is merely ancillary or incidental to the main agreement of sale. The restraint is partial and limited in three respects: in scope (only TPU applications competing with the lines sold), in duration (ten years), and in territory (only along the lines covered by the certificates sold). The consideration of P350,000 for just two certificates, much of which compensated Villarama for not competing while Pantranco built up the service, supports the reasonableness of the restraint. The clause does not establish monopoly, as the PSC closely supervises public utilities, including price controls and service standards. The lower court's reliance on Red Line Transportation Co. vs. Bachrach was misplaced, as that case involved a division of territory between two operators—a principal restraint, not an ancillary one. Similarly, Pampanga Bus Co. vs. Enriquez and Red Line Transportation Co. vs. Gonzaga were distinguished: in the former, the restraint was the principal objective, not ancillary; in the latter, the restraint was a condition imposed in the certificate itself, not an agreement between parties.

• Binding Effect on Corporation: The preponderance of evidence showed that the Corporation was Villarama's alter ego. Villarama financed the initial capitalization—P85,000 of the P105,000 paid-up capital was covered by his personal check. He mingled corporate funds with his own, deposited corporate money in his personal accounts, paid corporate obligations with personal checks, and used corporate funds to pay his personal bills—all without board authorization. His wife, the treasurer, turned over corporate funds to him, and he admitted treating his and his wife's money as one. The accountant testified that book entries showing P95,000 and P100,000 as paid-in subscriptions were fictitious—no money actually changed hands. Villarama purchased trucks for the Corporation with personal checks and made gasoline purchases in his own name. Photostatic copies of vouchers and ledger entries (Exhibits 6–19 and 22) showing commingling of funds were properly admitted as secondary evidence, the originals having been lost and the requisites of Section 5, Rule 130 having been satisfied. Villarama admitted every act relied upon, offering only excuses. His control over the corporation's management and disposition of funds was so extensive and intimate that it was impossible to segregate and identify which money belonged to whom—fundamentally inconsistent with the purposes of corporation law. The doctrine of separate corporate personality yields when the fiction is used to evade an existing obligation. A seller or promisor may not use a corporate entity to evade his covenant; where the corporation is substantially the alter ego of the covenantor, it can be enjoined from competing with the covenantee.

• Piercing the Corporate Veil (Alter Ego Doctrine) — The doctrine that a corporation is a legal entity distinct and separate from its members and stockholders is recognized in all cases within reason and the law. However, when the fiction of corporate personality is urged as a means of perpetrating fraud or an illegal act, evading an existing obligation, circumventing statutes, achieving monopoly, or perpetrating knavery or crime, the corporate veil will be lifted to allow consideration of the corporation merely as an aggregation of individuals. In this case, the Court found that Villarama financed the corporation's capitalization, commingled personal and corporate funds, controlled corporate finances without board authorization, and used the corporation as a vehicle to evade his non-competition covenant with Pantranco. The corporation was thus his alter ego, and the restrictive clause was binding upon it.

• Reasonable Ancillary Restraint of Trade — A contract in restraint of trade is valid if there is a limitation upon either time or place. The modern test is whether the restraint is reasonably necessary to protect the interests of the contracting parties. A covenant incidental to the sale and transfer of a trade or business, binding the seller not to engage in the same business in competition with the purchaser, is lawful and enforceable where the restraint is partial or limited in scope, duration, and territory, and does not stifle competition generally or injure the public. In this case, the ten-year non-competition clause was valid because it was (1) limited in scope—only TPU service competing with the lines sold; (2) limited in duration—ten years; (3) limited in territory—only along the lines covered by the certificates sold; and (4) merely ancillary to the main agreement of sale.

• Caveat Emptor in Sheriff's Sale — In a sheriff's sale of personalty, the vendee at auction merely steps into the shoes of the judgment debtor and acquires only the right, interest, or participation that the judgment debtor had in the property on the day of the sale. Ferrer acquired only whatever right Fernando had in the certificates, which was subordinate to the Corporation's prior purchase in good faith and for value, pursuant to Article 1544 of the Civil Code governing double sale of movable property.

• PSC Approval Not a Suspensive Condition — Under Section 20(g) of the Public Service Act, the requisite approval of the PSC is not a condition precedent for the validity and consummation of a sale of certificates of public convenience. The proviso expressly states that nothing therein shall be construed to prevent the transaction from being negotiated or completed before its approval. Thus, the sale between Fernando and the Corporation was consummated and valid even pending PSC approval.

• "When the fiction is urged as a means of perpetrating a fraud or an illegal act or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, the achievement or perfection of a monopoly or generally the perpetration of knavery or crime, the veil with which the law covers and isolates the corporation from the members or stockholders who compose it will be lifted to allow for its consideration merely as an aggregation of individuals." — This passage states the canonical formulation of the alter ego doctrine as applied in Philippine corporation law, articulating the grounds upon which the corporate veil may be pierced.

• "A contract, however, which restrains a man from entering into business or trade without either a limitation as to time or place, will be held invalid. ... If the contract is reasonably necessary to protect the interest of the parties, it will be upheld." — This passage articulates the test for validity of contracts in restraint of trade, balancing public welfare against the contracting parties' need for protection, and was applied to uphold the ten-year non-competition clause as reasonable.

• "For the rule is that a seller or promisor may not make use of a corporate entity as a means of evading the obligation of his covenant. Where the Corporation is substantially the alter ego of the covenantor to the restrictive agreement, it can be enjoined from competing with the covenantee." — This passage establishes the principle that a restrictive covenant binds not only the covenantor but also a corporation that is merely the covenantor's alter ego, preventing evasion of contractual obligations through corporate vehicles.

• Borja vs. Vasquez, 74 Phil. 56 — Cited for the general doctrine that a corporation is a legal entity distinct and separate from its members and stockholders, recognized in all cases within reason and the law.
• Koppel Phil. vs. Yatco, 77 Phil. 496 — Cited as authority for piercing the corporate veil when the fiction of corporate personality is used to evade obligation or perpetrate fraud.
• Del Castillo vs. Richmon, 45 Phil. 683 — Cited for the jurisprudential rule on contracts in restraint of trade, establishing that a restraint limited as to time or place is valid, and that the modern test is reasonable necessity to protect the contracting parties.
• Red Line Transportation Co. vs. Bachrach, 67 Phil. 577 — Distinguished. The agreement therein was a division of territory between two operators, constituting a principal restraint rather than an ancillary one, and was therefore invalid. The Court found this case inapplicable to the ancillary restraint at bar.
• Pampanga Bus Co. vs. Enriquez, 66 Phil. 645 — Distinguished. The restraint there was the principal objective of the undertaking, not an ancillary or incidental agreement, making it inapplicable to the instant case.
• Red Line Transportation Co. vs. Gonzaga, G.R. No. L-10834, April 28, 1960 — Distinguished. The restraint there was a condition imposed in the certificate of public convenience itself, not an agreement between the parties.
• National Coal Co. vs. Public Utility Commission, 47 Phil. 356 — Cited for the principle that when one devotes property to a use in which the public has an interest, he grants to the public an interest in that use, subjecting it to reasonable regulation by the Public Utility Commission.

• Article 19, Civil Code — "Every 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." Applied to emphasize that contractual stipulations must be construed in light of the parties' good faith and honest intentions, supporting the broad reading of the restrictive clause.
• Article 1544, Civil Code — Governs double sale of movable and immovable property, providing that if the same thing is sold to different vendees, ownership transfers to the person who first took possession in good faith in case of movable property. Applied to uphold the Corporation's prior purchase of the certificates over Ferrer's acquisition at the sheriff's sale.
• Section 20(g), Public Service Act (Commonwealth Act No. 146) — Requires PSC approval for the sale, alienation, mortgage, encumbrance, or lease of a public service's property, franchise, certificates, or rights, but provides that nothing therein shall prevent the transaction from being negotiated or completed before its approval. Applied to hold that PSC approval is not a suspensive condition for the validity of the sale.
• Sections 15 and 18, Commonwealth Act No. 146 — Require prior authorization before anyone can operate a TPU service. Applied to support the interpretation that "apply" in the restrictive clause encompasses both new and existing lines, since prior authorization is needed regardless of whether the service is new or acquired from a previous operator.
• Section 5, Rule 130, Rules of Court — Sets forth the requisites for admissibility of secondary evidence when the original document is in the custody of the adverse party: (1) opponent's possession of the original; (2) reasonable notice to produce; (3) satisfactory proof of its existence; and (4) failure or refusal to produce. Applied to admit the photostatic copies of vouchers and ledger entries showing commingling of funds.
• Sections 25 and 26, Rule 39, Rules of Court — Govern the effect of a sheriff's sale, providing that the vendee at auction acquires only the right, interest, or participation of the judgment debtor in the property. Applied to hold that Ferrer acquired only Fernando's subordinate right in the certificates.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Castro, and Fernando, JJ., concurred.