Case 19 (san Juan V. Motorich).docx

Case No. 19. SAN JUAN STRUCTURAL AND STEEL FABRICATORS, INC., petitioner, vs. COURT OF APPEALS, MOTORICH SALES CORPORATION, NENITA LEE GRUENBERG, ACL DEVELOPMENT CORP. and JNM REALTY AND DEVELOPMENT CORP., respondents G.R. No. 129459 September 29, 1998 Facts: Plaintiff-appellant San Juan Structural (San Juan) entered into an agreement with defendant-appellee Motorich Sales Corporation (Motorich) for the transfer to it of a 414 sqm parcel of land in Quezon City. San Juan paid the down payment of P100k, with the understanding that the balance is to be paid on March 2, 1989. On March 1, 1989, Mr. Andres T. Co, president of San Juan, wrote a letter to Motorich requesting for a computation of the balance to be paid, that said letter was coursed through defendant-appellees broker, Linda Aduca, who wrote the computation of the balance. On March 2, 1989, plaintiff-appellant was ready with the amount corresponding to the balance covered by a check payable to Motorich. The parties were supposed to meet at the office of Motorich, however, the meeting did not materialize due to the failure of Motorich’s treasurer, Nenita Gruenberg, to appear. Despite repeated demands, Motorich refused to execute the transfer of rights/deed of assignemt in favor of San Juan, prompting San Juan to file a case against Motorich. In its answer, Motorich interposed as affirmative defense that the President and Chairman of Motorich did not sign the agreement. The signature of the treasurer, Nenita Gruenberg, on the agreement is inadequate to bind Motorich because the signature of Reynaldo Gruenberg, President and Chairman of Motorich, is required. Motorich further alleges that the San Juan this from the very beginning as it was presented a copy of the Transfer of Rights at the time the agreement was signed. RTC Issue: (1) W/N San Juan had the right to compel defendants to execute a deed of absolute sale in accordance with the agreement? Held: No. There is no evidence to show that defendant Nenita Lee Gruenberg was indeed authorized by defendant corporation, Motorich Sales, to dispose of that property. Since the property is clearly owned by the corporation, Motorich Sales, then its disposition should be governed by the requirement laid down in Sec. 40, of the Corporation Code of the Philippines, to wit: Sec. 40, Sale or other disposition of assets. Subject to the provisions of existing laws on illegal combination and monopolies, a corporation may by a majority vote of its board of directors xxx sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets, including its goodwill xxx when authorized by the vote of the stockholders representing at least two third (2/3) of the outstanding capital stock x x x. No such vote was obtained by defendant Nenita Lee Gruenberg for that proposed sale[;] neither was there evidence to show that the supposed transaction was ratified by the corporation. Plaintiff should have been on the look out under these circumstances.

CA Issue: Same with RTC. Held: Ca affirmed RTC decisions. Supreme Court Issues: (1) W/N there is a valid contract of sale between San Juan and Motorich? (2) W/N the doctrince of piercing the veil of corporate fiction be applied to Motorich? Held: No to the first issue. True, Gruenberg and Co signed on February 14, 1989, the Agreement according to which a lot owned by Motorich Sales Corporation was purportedly sold. Such contract, however, cannot bind Motorich, because it never authorized or ratified such sale. A corporation is a juridical person separate and distinct from its stockholders or members. Accordingly, the property of the corporation is not the property of its stockholders or members and may not be sold by the stockholders or members without express authorization from the corporation’s board of directors.[10] Section 23 of BP 68, otherwise known as the Corporation Code of the Philippines, provides: SEC. 23. The Board of Directors or Trustees. -- Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year and until their successors are elected and qualified. Indubitably, a corporation may act only through its board of directors, or, when authorized either by its bylaws or by its board resolution, through its officers or agents in the normal course of business. Thus, this Court has held that a corporate officer or agent may represent and bind the corporation in transactions with third persons to the extent that the authority to do so has been conferred upon him, and this includes powers which have been intentionally conferred, and also such powers as, in the usual course of the particular business, are incidental to, or may be implied from, the powers intentionally conferred, powers added by custom and usage, as usually pertaining to the particular officer or agent, and such apparent powers as the corporation has caused persons dealing with the officer or agent to believe that it has conferred. Unless duly authorized, a treasurer, whose powers are limited, cannot bind the corporation in a sale of its assets.[14] In the case at bar, Respondent Motorich categorically denies that it ever authorized Nenita Gruenberg, its treasurer, to sell the subject parcel of land.[15] Consequently, petitioner had the burden of proving that Nenita Gruenberg was in fact authorized to represent and bind Motorich in the transaction. Petitioner failed to discharge this burden. Its offer of evidence before the trial court contained no proof of such authority.[16] It has not shown any provision of said respondents articles of incorporation, bylaws or board resolution to prove that Nenita Gruenberg possessed such power.

No to the second issue.

True, one of the advantages of a corporate form of business organization is the limitation of an investors liability to the amount of the investment.[30] This feature flows from the legal theory that a corporate entity is separate and distinct from its stockholders. However, the statutorily granted privilege of a corporate veil may be used only for legitimate purposes. [31] On equitable considerations, the veil can be disregarded when it is utilized as a shield to commit fraud, illegality or inequity; defeat public convenience; confuse legitimate issues; or serve as a mere alter ego or business conduit of a person or an instrumentality, agency or adjunct of another corporation.[32] Thus, the Court has consistently ruled that [w]hen the fiction is used 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.[33] We stress that the corporate fiction should be set aside when it becomes a shield against liability for fraud, illegality or inequity committed on third persons. The question of piercing the veil of corporate fiction is essentially, then, a matter of proof. In the present case, however, the Court finds no reason to pierce the corporate veil of Respondent Motorich.Petitioner utterly failed to establish that said corporation was formed, or that it is operated, for the purpose of shielding any alleged fraudulent or illegal activities of its officers or stockholders; or that the said veil was used to conceal fraud, illegality or inequity at the expense of third persons, like petitioner. Petitioner claims that Motorich is a close corporation. We rule that it is not. Section 96 of the Corporation Code defines a close corporation as follows: SEC. 96. Definition and Applicability of Title. -- A close corporation, within the meaning of this Code, is one whose articles of incorporation provide that: (1) All of the corporations issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20); (2) All of the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall be deemed not a close corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code. xxx. The articles of incorporation[34] of Motorich Sales Corporation does not contain any provision stating that (1) the number of stockholders shall not exceed 20, or (2) a preemption of shares is restricted in favor of any stockholder or of the corporation, or (3) listing its stocks in any stock exchange or making a public offering of such stocks is prohibited. From its articles, it is clear that Respondent Motorich is not a close corporation.[35] Motorich does not become one either, just because Spouses Reynaldo and Nenita Gruenberg owned 99.866% of its subscribed capital stock. The [m]ere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personalities.[36] So too, a narrow distribution of ownership does not, by itself, make a close corporation.