Zaragoza v. Tan

A corporation not impleaded in a suit cannot be subject to the court's process of piercing the veil of corporate fiction, and a corporate officer not party to the case cannot be held personally liable for the corporation's debts, because the court must first acquire jurisdiction over the party before the doctrine may be applied.

Rogel N. Zaragoza was employed as Area Sales Manager of Consolidated Distillers of the Far East, Inc. (Condis) in the Bicol Region. Condis was engaged in the manufacturing, selling, and marketing of Emperador Brandy and other liquor products. In 2006, Emperador Distillers, Inc. (EDI) was incorporated, and on January 16, 2007, it entered into an Asset Purchase Agreement with Condis, acquiring all of Condis's assets in the manufacturing and selling of Emperador Brandy. On the same date, the two companies executed a Services Agreement under which Condis's employees would provide assistance to EDI until the latter was capable of operating independently. Katherine L. Tan served as President of Condis. Winston Co, formerly Senior Vice-President of Condis, signed the Asset Purchase Agreement and the letter terminating the Services Agreement as Managing Director of EDI.

Rogel N. Zaragoza was the Area Sales Manager of Consolidated Distillers of the Far East, Inc. (Condis) in the Bicol Region. On December 3, 2007, he was dismissed from employment. On February 18, 2008, he filed an illegal dismissal case with money claims against Condis, Winston Co, and Dominador D. Hidalgo. The Labor Arbiter, in a Decision dated March 3, 2009, found that Zaragoza was illegally dismissed and ordered his reinstatement without loss of seniority rights, the payment of full backwages amounting to ₱362,692.25, monetary benefits of ₱36,043.69, moral and exemplary damages of ₱100,000, and nominal damages of ₱50,000. On May 11, 2009, Condis filed a Manifestation alleging that Zaragoza could no longer be reinstated because his former sales position no longer existed, there was no equivalent position available, and the Services Agreement between Condis and Emperador Distillers, Inc. (EDI) — the company that bought Condis's manufacturing and sales business — had been terminated on June 1, 2008.

Condis and Hidalgo appealed to the NLRC, which affirmed the Labor Arbiter's decision with modification on April 13, 2010, deleting the award of nominal damages and reducing moral and exemplary damages to ₱50,000. Their petition for certiorari with the Court of Appeals was partly granted on November 22, 2010; the CA absolved Hidalgo of liability and deleted the award of moral and exemplary damages. Condis filed a petition for review with the Supreme Court, which denied it on June 22, 2011, with the denial of the motion for reconsideration on January 18, 2012. The Resolution became final and executory on March 30, 2012, and an entry of judgment was made. By that time, Zaragoza had already received a total of ₱454,986.98.

Zaragoza then filed a motion for the issuance of an alias writ of execution with notice of appearance, arguing that he was entitled to accrued salaries by reason of the order of reinstatement, which as of December 3, 2012 amounted to ₱2,294,897.47. He prayed that Katherine L. Tan, as President of Condis, be held personally liable for the awards, and that EDI be held jointly and solidarily liable with Condis, contending that the transfer of Condis's manufacturing business to EDI was done in bad faith to evade payment of the judgment award, warranting the piercing of the veil of corporate fiction. On August 3, 2013, the Labor Arbiter issued a Resolution directing the issuance of an alias writ of execution against Condis and EDI, jointly and severally, and in the alternative against Tan, for ₱2,135,256.45 representing backwages and reinstatement salaries from December 3, 2007 to August 3, 2013. The Labor Arbiter found that the execution of the Asset Purchase Agreement and the termination of the Services Agreement were purposely done to defraud Zaragoza, citing the fact that the agreements were signed by Co as Managing Director of EDI when he had been Condis's Senior Vice-President, that both companies were represented by the same lawyer, and that Condis raised the issue of cessation of operation and separate corporate personality only during execution proceedings.

Respondents Tan and EDI filed a Petition for Annulment of the Labor Arbiter's Resolution with the NLRC. On January 17, 2014, the NLRC granted the petition and declared the August 3, 2013 Resolution null and void, finding that respondents were never made parties in the illegal dismissal case and were merely dragged into the proceedings when Zaragoza filed his motion for alias writ of execution. The NLRC held that an order of execution can only be issued against a party and not against one who did not have his day in court. Zaragoza's motion for reconsideration was denied on February 28, 2014. He filed a petition for certiorari with the CA, which dismissed the petition on January 27, 2016 and affirmed the NLRC decision. The motion for reconsideration was denied on May 26, 2016.

• Enforcement Against Non-Parties: Petitioner argued that the monetary award in his favor in the illegal dismissal case could still be enforced against respondent Tan, as President of Condis, and against respondent EDI, even though they were not impleaded in said labor case.
• Piercing the Corporate Veil: Petitioner contended that there was valid justification to pierce the corporate veil of Condis and EDI, as found by the Labor Arbiter, because the corporate maneuverings of Condis — selling its manufacturing and sales business to EDI through the Asset Purchase Agreement — were done to evade full satisfaction of the award in the labor case.
• Personal Liability of Corporate President: Petitioner maintained that respondent Tan, as President of Condis, could be held solidarily liable for the judgment award despite not being impleaded, relying on the ruling in A.C. Ransom Labor Union-CCLU vs. NLRC.

• Lack of Party Status: Respondents countered that they were never made parties in the illegal dismissal case filed by petitioner and were merely dragged into the proceedings when petitioner filed his motion for issuance of alias writ of execution.
• Due Process: Respondents argued that an order of execution can only be issued against a party to the action and not against one who, not being a party, has not had his day in court.
• No Jurisdiction for Veil Piercing: Respondents maintained that the Labor Arbiter never acquired jurisdiction over them, as they were neither summoned nor did they voluntarily appear, and therefore the Labor Arbiter could not subject them to the process of piercing the veil of corporate fiction or determine bad faith to make an officer personally liable.

• Execution Against Non-Parties: Whether the monetary award in favor of petitioner in the illegal dismissal case can still be enforced against respondent Tan, as President of Condis, and against respondent EDI, even though they were not impleaded in said labor case.
• Piercing the Veil of Corporate Fiction: Whether the factual bases found by the Labor Arbiter sufficiently justify the application of the doctrine of piercing the veil of corporate fiction against respondents.
• Personal Liability of Corporate Officers: Whether respondent Tan may be held personally liable for the corporation's debts under Article 212(e) of the Labor Code and the ruling in A.C. Ransom.

• Execution Against Non-Parties: No. The alias writ of execution against respondents who were not parties to the case was a deprivation of property without due process of law, as a writ of execution must conform to the judgment it seeks to enforce and may not vary or exceed its terms.
• Piercing the Veil of Corporate Fiction: No. The factual bases cited by the Labor Arbiter were insufficient to justify piercing, and, more fundamentally, the Labor Arbiter never acquired jurisdiction over respondents, precluding any application of the doctrine.
• Personal Liability of Corporate Officers: No. Article 212(e) of the Labor Code does not, by itself, make a corporate officer personally liable for corporate debts; personal liability attaches only under Section 31 of the Corporation Code, requiring allegation and clear and convincing proof of bad faith or unlawful acts — neither of which was established since Tan was never impleaded.

• Execution Against Non-Parties: The final and executory decision in the illegal dismissal case made only Condis liable to petitioner. The Labor Arbiter's Resolution dated August 3, 2013, which directed the issuance of an alias writ of execution against respondents Tan and EDI, had the effect of amending that final and executory decision — which cannot be done. A writ of execution must conform to the judgment it seeks to enforce; it may not vary the terms of the judgment nor go beyond them. Where execution is not in harmony with the judgment and exceeds it, it has pro tanto no validity. Moreover, respondents were never mentioned in any of the proceedings from the Labor Arbiter level up to the Supreme Court; the party-respondents in the illegal dismissal case were Condis, Co, and Hidalgo. It is basic that no person shall be affected by any proceeding to which he is a stranger, and strangers to a case are not bound by judgments rendered therein. Execution of a judgment can only be issued against one who is a party to the action, and may only be effected against the property of the judgment debtor. The Labor Arbiter's order against non-parties thus constituted a deprivation of property without due process of law.

• Piercing the Veil of Corporate Fiction: The principle of piercing the veil of corporate fiction is basically applied only to determine established liability; it is not available to confer on a court a jurisdiction it has not acquired over a party not impleaded in a case. A corporation not impleaded in a suit cannot be subject to the court's process of piercing the veil of its corporate fiction. The court must first acquire jurisdiction over the parties through valid service of summons or voluntary appearance, and only then may evidence be presented for or against piercing. Since respondents were never impleaded, never served with summons, and never voluntarily appeared, the Labor Arbiter never acquired jurisdiction over them. Even if the factual bases had been sufficiently proven, the doctrine could not be validly applied for want of jurisdiction. On the factual merits, the reasons cited by the Labor Arbiter were also insufficient: EDI was incorporated in 2006 and entered into the Asset Purchase Agreement with Condis on January 16, 2007 — both before petitioner's dismissal on December 3, 2007 and the Labor Arbiter's Decision of March 3, 2009. Hence, it could not be alleged that EDI was organized to evade Condis's obligations to petitioner. Where one corporation sells or transfers all its assets to another for value, the latter is not, by that fact alone, liable for the debts of the transferor. The Asset Purchase Agreement expressly contained a non-assumption of liability clause. The existence of interlocking directors, officers, and shareholders, without more, is not enough to pierce the veil absent fraud or other public policy considerations. The wrongdoing must be clearly and convincingly established and cannot be presumed.

• Personal Liability of Corporate Officers: Petitioner's reliance on A.C. Ransom was misplaced. In A.C. Ransom, the officers and agents were already named individual respondents in the case and were held liable in the final and executory decision. Here, respondents were included only in petitioner's motion for issuance of alias writ of execution. Moreover, Article 212(e) of the Labor Code, by itself, does not make a corporate officer personally liable for the debts of the corporation. The governing law on personal liability of directors, trustees, or officers is Section 31 of the Corporation Code. Personal liability attaches only when (1) they assent to patently unlawful acts of the corporation, or are guilty of bad faith or gross negligence in directing its affairs, or incur conflict of interest resulting in damages; (2) they consent to issuance of watered-down stocks; (3) they agree to hold themselves personally and solidarily liable; or (4) they are made by specific provision of law personally answerable for their corporate action. Two requisites must concur to hold a director or officer personally liable: (1) the complainant must allege in the complaint that the director or officer assented to patently unlawful acts or was guilty of gross negligence or bad faith; and (2) the complainant must clearly and convincingly prove such unlawful acts, negligence, or bad faith. Since Tan was never impleaded, her participation in petitioner's dismissal was never established, and it was never shown that she assented to patently unlawful acts or was guilty of gross negligence or bad faith.

• Doctrine of Piercing the Veil of Corporate Fiction and Jurisdiction — The principle of piercing the veil of corporate fiction is basically applied only to determine established liability, not to confer jurisdiction on a court over a party not impleaded in a case. A corporation not impleaded in a suit cannot be subject to the court's process of piercing the veil of its corporate fiction. The court must first acquire jurisdiction over the parties — through valid service of summons or voluntary appearance — before the doctrine may be applied. The Court applied this doctrine by holding that the Labor Arbiter never acquired jurisdiction over respondents EDI and Tan, who were never impleaded in the illegal dismissal case, and therefore could not subject them to the process of piercing the corporate veil.

• Writ of Execution Must Conform to Judgment — A writ of execution must conform to the judgment which is to be executed; it may not vary the terms of the judgment nor go beyond them. Where execution is not in harmony with the judgment and exceeds it, it has pro tanto no validity. The Court applied this rule by holding that the Labor Arbiter's alias writ of execution, which directed payment by non-parties not mentioned in the final and executory decision, effectively amended that decision — which cannot be done.

• Personal Liability of Corporate Officers (Section 31, Corporation Code) — Personal liability of corporate directors, trustees, or officers attaches only when (1) they assent to patently unlawful acts of the corporation, or are guilty of bad faith or gross negligence in directing its affairs, or incur conflict of interest resulting in damages; (2) they consent to issuance of watered-down stocks; (3) they agree to hold themselves personally and solidarily liable; or (4) they are made by specific provision of law personally answerable for their corporate action. Two requisites must concur: (1) the complainant must allege in the complaint that the director or officer assented to unlawful acts or was guilty of gross negligence or bad faith; and (2) the complainant must clearly and convincingly prove such unlawful acts, negligence, or bad faith. Article 212(e) of the Labor Code does not, by itself, make a corporate officer personally liable for corporate debts. The Court applied this doctrine by holding that Tan was never impleaded, so her participation was never established, and no allegation or proof of bad faith or unlawful acts existed.

• Transfer of Corporate Assets — Where one corporation sells or otherwise transfers all its assets to another corporation for value, the latter is not, by that fact alone, liable for the debts and liabilities of the transferor. The Court applied this principle by noting that the Asset Purchase Agreement between Condis and EDI expressly contained a non-assumption of liability clause, and the transfer occurred before any adverse decision against Condis.

• "The principle of piercing the veil of corporate fiction, and the resulting treatment of two related corporations as one and the same juridical person with respect to a given transaction, is basically applied only to determine established liability; it is not available to confer on the court a jurisdiction it has not acquired, in the first place, over a party not impleaded in a case." — This passage, quoted from Pacific Rehouse Corporation vs. Court of Appeals and adopted by the Court, articulates the fundamental rule that veil-piercing is a doctrine of liability, not jurisdiction, and cannot substitute for the court's failure to acquire jurisdiction over a non-party.

• "The writ of execution must conform to the judgment which is to be executed, as it may not vary the terms of the judgment it seeks to enforce. Nor may it go beyond the terms of the judgment which is sought to be executed. Where the execution is not in harmony with the judgment which gives it life and exceeds it, it has pro tanto no validity." — This passage states the controlling rule on the limits of execution proceedings, explaining why the Labor Arbiter's alias writ against non-parties was invalid.

• "To hold a director or officer personally liable for corporate obligations, two requisites must concur: (1) complainant must allege in the complaint that the director or officer assented to patently unlawful acts of the corporation, or that the officer was guilty of gross negligence or bad faith; and (2) complainant must clearly and convincingly prove such unlawful acts, negligence or bad faith." — This passage sets out the two-part test for personal liability of corporate officers, a high-priority formulation for bar review.

• Pacific Rehouse Corporation vs. Court of Appeals, 730 Phil. 325 (2014) — Controlling precedent on the relationship between jurisdiction and piercing the veil of corporate fiction. The Court adopted its ruling, which itself relied on Kukan International Corporation vs. Reyes, that piercing the veil applies only to determine liability, not to confer jurisdiction over a non-impleaded party.
• A.C. Ransom Labor Union-CCLU vs. NLRC, 226 Phil. 199 (1986) — Distinguished. Petitioner relied on this case to argue that a corporate president could be held personally liable without being impleaded. The Court found the reliance misplaced because in A.C. Ransom, the officers and agents were already named individual respondents in the final and executory decision, unlike in the instant case where respondents were included only in a motion for alias writ of execution.
• Carag vs. NLRC, 548 Phil. 581 (2007) — Followed. The Court cited Carag for the proposition that Article 212(e) of the Labor Code does not, by itself, make a corporate officer personally liable for corporate debts, and that the governing law remains Section 31 of the Corporation Code.
• McLeod vs. NLRC, 541 Phil. 214 (2007) — Followed. Cited within Carag for the enumeration of circumstances under which personal liability of corporate directors, trustees, or officers attaches, and for the rule that the doctrine of piercing the corporate veil applies only when corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or defend crime.
• China Banking Corporation vs. Dyne Sem Electronics Corporation, 527 Phil. 74 (2006) — Followed. Cited for the rule that where one corporation sells or transfers all its assets to another for value, the latter is not, by that fact alone, liable for the debts and liabilities of the transferor.
• QBE Insurance Phils., Inc. vs. Judge Lavina, 562 Phil. 355 (2007) — Followed. Cited for the rule that a writ of execution must conform to the judgment it seeks to enforce and may not vary or exceed its terms.
• National Housing Authority vs. Evangelista, 497 Phil. 762 (2005) — Followed. Cited for the principle that no person shall be affected by any proceeding to which he is a stranger, and strangers to a case are not bound by judgments rendered therein.

• Article 212(e) [now 212(e)], Labor Code — Defines "employer" as including any person acting in the interest of an employer, directly or indirectly. The Court clarified that this provision does not, by itself, make a corporate officer personally liable for the debts of the corporation; it merely defines who is considered an employer for labor law purposes.
• Section 31, Corporation Code (Batas Pambansa Blg. 68) — Governs the personal liability of directors, trustees, or officers who willfully and knowingly vote for or assent to patently unlawful acts of the corporation, or who are guilty of gross negligence or bad faith. The Court held that this provision, not Article 212(e) of the Labor Code, is the governing law on personal liability of corporate officers for corporate debts, and that two requisites — allegation and clear and convincing proof of bad faith or unlawful acts — must concur.
• Article 273 (now 272), Labor Code — Referenced in Carag vs. NLRC as another provision that does not expressly make any corporate officer personally liable for the debts of the corporation.

Carpio (Chairperson), Perlas-Bernabe, Caguioa, and Reyes, Jr., JJ., concurred.