Digest.docx

BOARD OF LIQUIDATORS V. HEIRS OF KALAW Facts: The National Coconut Corporation (NACOCO, for short) was chartered as a non-profit governmental organization on avowedly for the protection, preservation and development of the coconut industry in the Philippines. On August 1, 1946, NACOCO's charter was amended [Republic Act 5] to grant that corporation the express power to buy and sell copra. The charter amendment was enacted to stabilize copra prices, to serve coconut producers by securing advantageous prices for them, to cut down to a minimum, if not altogether eliminate, the margin of middlemen, mostly aliens. General manager and board chairman was Maximo M. Kalaw; defendants Juan Bocar and Casimiro Garcia were members of the Board; defendant Leonor Moll became director only on December 22, 1947. NACOCO, after the passage of Republic Act 5, embarked on copra trading activities. An unhappy chain of events conspired to deter NACOCO from fulfilling the contracts it entered into. Nature supervened. Four devastating typhoons visited the Philippines in 1947. When it became clear that the contracts would be unprofitable, Kalaw submitted them to the board for approval. It was not until December 22, 1947 when the membership was completed. Defendant Moll took her oath on that date. A meeting was then held. Kalaw made a full disclosure of the situation, apprised the board of the impending heavy losses. No action was first taken on the contracts but

not long thereafter, that is, on January 30, 1948, the board met again with Kalaw, Bocar, Garcia and Moll in attendance. They unanimously approved the contracts hereinbefore enumerated. As was to be expected, NACOCO but partially performed the contracts. The buyers threatened damage suits, some of which were settled. But one buyer, Louis Dreyfus & Go. (Overseas) Ltd., did in fact sue before the Court of First Instance of Manila. The cases culminated in an out-ofcourt amicable settlement when the Kalaw management was already out. With particular reference to the Dreyfus claims, NACOCO put up the defenses that: (1) the contracts were void because Louis Dreyfus & Co. (Overseas) Ltd. did not have license to do business here; and (2) the failure to deliver was due to force majeure, the typhoons. All the settlements sum up to P1,343,274.52. In this suit started in February, 1949, NACOCO seeks to recover the above sum of P1,343,274.52 from general manager and board chairman Maximo M. Kalaw, and directors Juan Bocar, Casimiro Garcia and Leonor Moll. It charges Kalaw with negligence under Article 1902 of the old Civil Code (now Article 2176, new Civil Code); and defendant board members, including Kalaw, with bad faith and/or breach of trust for having approved the contracts. By Executive Order 372, dated November 24, 1950, NACOCO, together with other government-owned corporations, was abolished, and the Board

of Liquidators was entrusted with the function of settling and closing its affairs. DECISION OF LOWER COURTS: 1. CFI-Manila: dismissed the complaint. Plaintiff was ordered to pay the heirs of Maximo Kalaw the sum of P2,601.94 for unpaid salaries and cash deposit due the deceased Kalaw from NACOCO. Issues: 1. Whether plaintiff Board of Liquidators has lost its legal personality to continue with this suit since the three year period has elapsed, the Board of Liquidators may not now continue with, and prosecute, the present case to its conclusion 2. Whether the case at bar is to be taken out of the general concept of the powers of a general manager, given the cited provision of the NACOCO by-laws requiring prior directorate approval of NACOCO contracts. Ruling: 1. No, the provision should be read not as an isolated provision but in conjunction with the whole. So reading, it will be readily observed that no time limit has been tacked to the existence of the Board of Liquidators and its function of closing the affairs of the various government owned corporations, including NACOCO. The President thought it best to do away with the boards of directors of the defunct corporations; at the same time, however, the

President had chosen to see to it that the Board of Liquidators step into the vacuum. And nowhere in the executive order was there any mention of the lifespan of the Board of Liquidators. 3 methods by which corporation may wind up it its affairs: 1. Voluntary dissolution, "such disposition of its assets as justice requires, and may appoint a receiver to collect such assets and pay the debts of the corporation; 2. Corporate existence is terminated - "shall nevertheless be continued as a body corporate for three years after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and of enabling it gradually to settle and close its affairs, to dispose of and convey its property and to divide its capital stock, but not for the purpose of continuing the business for which it was established;" 3. The corporation, within the three year period just mentioned, " is authorized and empowered to convey all of its property to trustees for the benefit of members, stockholders, creditors, and others interested Corpus Juris Secundum likewise is authority for the statement that "[t]he dissolution of a corporation ends its existence so that there must be statutory authority for prolongation of its life even for purposes of pending litigation Board of Liquidators escapes from the operation thereof for the reason that "[o]bviously, the complete loss of plaintiff's

corporate existence after the expiration of the period of three (3) years for the settlement of its affairs is what impelled the President to create a Board of Liquidators, to continue the management of such matters as may then be pending." The Board of Liquidators thus became the trustee on behalf of the government. It was an express trust. The legal interest became vested in the trustee — the Board of Liquidators. The beneficial interest remained with the sole stockholder — the government. At no time had the government withdrawn the property, or the authority to continue the present suit, from the Board of Liquidators. If for this reason alone, we cannot stay the hand of the Board of Liquidators from prosecuting this case to its final conclusion. The provisions of Section 78 of the Corporation Law — the third method of winding up corporate affairs — find application.

2. The movement of the market requires that sales agreements be entered into, even though the goods are not yet in the hands of the seller. Known in business parlance as forward sales, it is concededly the practice of the trade. Above all, NACOCO's limited funds necessitated a quick turnover. Copra contracts then had to be executed on short notice — at times within twenty-four hours. To be appreciated then is the difficulty of calling a formal meeting of the board So pleased was NACOCO's board of directors that, on December 5, 1946, in Kalaw's absence, it voted to grant him a special bonus "in recognition of the signal

achievement rendered by him in putting the Corporation's business on a self-sufficient basis within a few months after assuming office, despite numerous handicaps and difficulties." These previous contract it should be stressed, were signed by Kalaw without prior authority from the board. Existence of such authority is established, by proof of the course of business, the usage and practices of the company and by the knowledge which the board of directors has, or must be presumed to have, of acts and doings of its subordinates in and about the affairs of the corporation. If the by-laws were to be literally followed, the board should give its stamp of prior approval on all corporate contracts. But that board itself, by its acts and through acquiescence, practically laid aside the bylaw requirement of prior approval. Under the given circumstances, the Kalaw contracts are valid corporate acts. Bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of wrong; it means breach of a known duty thru some motive or interest or ill will; it partakes of the nature of fraud. Applying this precept to the given facts herein, we find that there was no "dishonest purpose," or "some moral obliquity," or "conscious doing of wrong," or "breach of a known duty," or "Some motive or interest or ill will" that "partakes of the nature of fraud."

GONZALES V. CLIMAX MINING LTD.

Facts: Petitioner Jorge Gonzales, as claimowner of mineral deposits located within the Addendum Area of Influence in Didipio, in the provinces of Quirino and Nueva Vizcaya, entered into a co-production, joint venture and/or production-sharing letteragreement designated as the May 14, 1987 Letter of Intent with Geophilippines, Inc, and Inmex Ltd. Under the agreement, petitioner, as claimowner, granted to Geophilippines, Inc. and Inmex Ltd. collectively, the exclusive right to explore and survey the mining claims for a period of thirty-six (36) months within which the latter could decide to take an operating agreement on the mining claims and/or develop, operate, mine and otherwise exploit the mining claims and market any and all minerals that may be derived therefrom. On 28 February 1989, the parties to the May 14, 1987 Letter of Intent renegotiated the same into the February 28, 1989 Agreement whereby the exploration of the mining claims was extended for another period of three years. On 9 March 1991, petitioner Gonzales, Arimco Mining Corporation, Geophilippines Inc., Inmex Ltd., and Aumex Philippines, Inc. signed a document designated as the Addendum to the May 14, 1987 Letter of Intent and February 28, 1989 Agreement with Express Adhesion Thereto (hereafter, the Addendum Contract). Under the Addendum Contract, Arimco Mining Corporation would apply to the Government of the Philippines for permission to mine the claims as the

Government’s contractor under a Financial and Technical Assistance Agreement (FTAA). On 20 June 1994, Arimco Mining Corporation obtained the FTAA and carried out work under the FTAA. Respondents executed the Operating and Financial Accommodation Contract (between Climax-Arimco Mining Corporation and Climax Mining Ltd., as first parties, and Australasian Philippines Mining Inc., as second party) dated 23 December 1996 and Assignment, Accession Agreement (between Climax-Arimco Mining Corporation and Australasian Philippines Mining Inc.) dated 3 December 1996. Respondent Climax Mining Corporation (Climax) and respondent Australasian Philippines Mining Inc. (APMI) entered into a Memorandum of Agreement dated 1 June 1991 whereby the former transferred its FTAA to the latter. On 8 November 1999, petitioner Gonzales filed before the Panel of Arbitrators, Region II, Mines and Geosciences Bureau of the Department of Environment and Natural Resources, against respondents ClimaxArimco Mining Corporation (ClimaxArimco), Climax, and APMI, a Complaint seeking the declaration of nullity or termination of the Addendum Contract, the FTAA, the Operating and Financial Accommodation Contract, the Assignment, Accession Agreement, and the Memorandum of Agreement. Petitioner Gonzales prayed for an unspecified amount of actual and exemplary damages plus attorney’s fees and for the issuance of a temporary restraining order and/or writ of preliminary injunction to restrain or enjoin respondents from further implementing the

questioned agreements. He sought said releifs on the grounds of "FRAUD, OPPRESSION and/or VIOLATION of Section 2, Article XII of the CONSTITUTION perpetrated by these foreign RESPONDENTS, conspiring and confederating with one another and with each other….". Issue: Whether or not it was proper for the RTC, in the proceeding to compel arbitration under R.A. No. 876, to order the parties to arbitrate even though the defendant therein has raised the twin issues of validity and nullity of the Addendum Contract and, consequently, of the arbitration clause therein as well Held: Yes. Disputes do not go to arbitration unless and until the parties have agreed to abide by the arbitrators decision. Necessarily, a contract is required for arbitration to take place and to be binding. R.A. No. 876 recognizes the contractual nature of the arbitration agreement. The doctrine of separability, or severability as other writers call it, enunciates that an arbitration agreement is independent of the main contract. The arbitration agreement is to be treated as a separate agreement and the arbitration agreement does not automatically terminate when the contract of which it is part comes to an end. The separability of the arbitration agreement is especially significant to the determination of whether the invalidity of the main contract also nullifies the arbitration clause. Indeed, the doctrine denotes that the invalidity of the main

contract, also referred to as the container contract, does not affect the validity of the arbitration agreement. Irrespective of the fact that the main contract is invalid, the arbitration clause/agreement still remains valid and enforceable. The separability of the arbitration clause is confirmed in Art. 16(1) of the UNCITRAL Model Law and Art. 21(2) of the UNCITRAL Arbitration Rules. The proceeding in a petition for arbitration under R.A. No. 876 is limited only to the resolution of the question of whether the arbitration agreement exists. Second, the separability of the arbitration clause from the Addendum Contract means that validity or invalidity of the Addendum Contract will not affect the enforceability of the agreement to arbitrate. Thus, Gonzales petition for certiorari should be dismissed. This brings us back to G.R. No. 161957. The adjudication of the petition in G.R. No. 167994 effectively modifies part of the Decision dated 28 February 2005 in G.R. No. 161957. Hence, we now hold that the validity of the contract containing the agreement to submit to arbitration does not affect the applicability of the arbitration clause itself. A contrary ruling would suggest that a parties mere repudiation of the main contract is sufficient to avoid arbitration. That is exactly the situation that the separability doctrine, as well as jurisprudence applying it, seeks to avoid. We add that when it was declared in G.R. No. 161957 that the case should not be brought for arbitration, it should be clarified that the case referred to is the case actually filed by Gonzales before the DENR Panel of

Arbitrators, which was for the nullification of the main contract on the ground of fraud, as it had already been determined that the case should have been brought before the regular courts involving as it did judicial issues. REPUBLIC V. SANDIGANBAYAN Facts: This is a petition for review assailing the Resolutions of the Sandiganbayan dated December 6, 1996 and March 17, 1997 in Civil Case No. 0009, entitled "Republic of the Philippines, Plaintiff versus Jose L. Africa, et al., Defendants, which upheld the sale by Universal Molasses Corporation (UNIMOLCO) of its shares of stock in Eastern Telecommunications Philippines, Inc. (ETPI), to Smart Communications. Petitioner contends that the sale violated its preemptive right as stockholder of ETPI, which is guaranteed in the Articles of Incorporation. ETPI was one of the corporations sequestered by the Presidential Commission on Good Government (PCGG). Among its stockholders were Roberto S. Benedicto and UNIMOLCO. Sometime in 1990, PCGG and Benedicto entered into a compromise agreement whereby Benedicto ceded to the government 204,000 shares of stock in ETPI, representing his fifty-one percent (51%) equity therein. The other forty-nine percent (49%), consisting of 196,000 shares of stock, were released from sequestration and adjudicated by final judgment to Benedicto and UNIMOLCO. Furthermore, the government agreed to withdraw the cases

filed against Benedicto and free him from further criminal prosecution. In a written notice received on April 24, 1996 by Melquiades Gutierrez, the President and Chairman of the Board of ETPI, UNIMOLCO offered to sell to ETPI its 196,000 shares of stock therein. Meanwhile, on motion of petitioner, through the PCGG, the Sandiganbayan issued a Resolution, dated May 7, 1996, authorizing the entry in the Stock and Transfer Book of ETPI of the transfer of ownership of 204,000 shares of stock to petitioner, to be taken out of the shareholdings of UNIMOLCO. On June 5, 1996, Benedicto filed a Manifestation and Motion with the Sandiganbayan, praying that the Resolution dated May 7, 1996 be modified such that the entry of the 204,000 shares of stock of petitioner in ETPI be taken out of the shareholdings of UNIMOLCO and/or Roberto S. Benedicto. On June 21, 1996, PCGG issued Resolution No. 96-142 enjoining all stockholders of ETPI from selling shares of stock therein without the written conformity of the PCGG. Subsequently, on July 24, 1996, UNIMOLCO and Smart Communications executed a Deed of Absolute Sale whereby UNIMOLCO sold its 196,000 shares of stock in ETPI to Smart. Prior to the sale, Smart was not a stockholder of ETPI. Thus, on August 8, 1996, petitioner filed with the Sandiganbayan a Motion to Cite Defendant Benedicto and the Parties to the Sale of UNIMOLCO Shares in ETPI in Contempt of Court and to Rescind and/or

Annul Said Sale. Petitioner alleged that the sale of the 196,000 shares of stock of UNIMOLCO to Smart was in defiance of the May 7, 1996 Resolution of the Sandiganbayan, which provided that the 204,000 shares of the government shall come from the shareholdings of UNIMOLCO, and it interfered with the proceedings thereon. In support of its prayer for the rescission and annulment of the sale, petitioner argued that the same violated its right of first refusal to purchase shares of stock in ETPI. The right of first refusal is contained in Article 10 of the Articles of Incorporation of ETPI, which states: ARTICLE TENTH: In the event any stockholder (hereinafter referred to as the Offeror) desires to dispose, transfer, sell or assign any shares of stock of the Corporation (hereinafter referred to as the Offered Stock), except in the case of any disposal, transfer, sale or assignment between or among the incorporators or to corporation controlled by the incorporators, the Offeror shall give a right of first refusal to the Corporation and, thereafter in the event that the Corporation shall refuse or fail to accept all of the Offered Stock to all then stockholders of record of the Corporation (except the Offeror) to purchase the Offered Stock pro rata, at a price and upon terms and conditions specified by the Offeror based upon a firm, bona fide, written cash offer from a bona fide purchaser. The Corporation shall be entitled to exercise its right of first refusal with respect to all, but not less than all, of the Offered

Stock for a period (hereinafter referred to as the First Period) of thirty (30) days, from the receipt by it of a written offer to sell from the Offeror. If the Corporation shall fail or refuse within the First Period to accept the offer for all of the Offered Stock, then on or before the end of such First Period, the Secretary of the Corporation shall transmit by registered mail and by telegram or cable a copy of such offer to each stockholder of record (other than the Offeror) at his/its address appearing on the books of the Corporation and shall also notify each stockholder of the expiry date of such offer (such expiry date being thirty (30) days after the end of the First Period). All then stockholders of record of the Corporation, other than the Offeror, shall be entitled for a period (hereinafter referred to as the Second Period) ending thirty (30) days after the First Period to exercise their rights of first refusal with respect to all or any portion of the Offered Stock for which they have a right of first refusal and may in addition offer to purchase any shares thereof not subscribed for by the other stockholders pursuant to rights of first refusal. Such shares shall be allocated among stockholders offering to purchase such shares, pro rata, up to the limits, if any, specified by such purchasing stockholders. Each such purchasing stockholder shall transmit to the Corporation with his/its acceptance cash, or a certified check or checks drawn on a Philippine bank or banks, in an amount sufficient to meet the terms of the offer corresponding to such number of shares of Offered Stock specified in his/its acceptance.

Issue: Whether or not the petitioner’s right of first refusal was seasonably exercised Ruling: Therefore, we sustain the Sandiganbayan’s ruling that petitioners right of first refusal was not seasonably exercised. Even on the assumption that petitioner exercised its right of first refusal on time, it nonetheless failed to follow the requirement in the Articles of Incorporation that payment must be tendered in cash or certified checks or checks drawn on a Philippine bank or banks. The set-off or compensation it proposed does not fall under any of the recognized modes of payment in the Articles. In order that compensation may be proper, Article 1279 of the Civil Code requires: (1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; (2) That both debts consist in a sum of money, or if the things are consumable, they be of the same kind, and also of the same quality if the later has been stated; (3) That the two debts be due; (4) That they demandable, and

be

liquidated

and

(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor.

Petitioner sought the offsetting of the price of the shares of stock with assets of respondent Benedicto, whom it claimed was indebted to it for certain lands and dividends due to it under their Compromise Agreement. Benedicto was only a stockholder of UNIMOLCO, the Offeror. While he may be the majority stockholder, UNIMOLCO cannot be said to be liable for Benedictos supposed obligations to petitioner. To be sure, Benedicto and UNIMOLCO are separate and distinct persons. On the basis of this alone, there can be no valid set-off. Petitioner and UNIMOLCO are not principal debtors and creditors of each other. Petitioner counters that UNIMOLCOs corporate fiction should be pierced since it is also owned by Benedicto. However, mere majority ownership of the stocks of a corporation is not per se a cause for piercing the corporate veil. There was no evidence that UNIMOLCOs corporate entity was used by respondent Benedicto to commit fraud or to do wrong on petitioner; neither was it shown that the corporate entity was merely a farce and that it was used as an alter ego, business conduit or instrumentality of a person or another entity or that piercing the corporation fiction is necessary to achieve justice or equity. Only in these instances may the fiction be pierced and disregarded. Being the party that invoked it, petitioner has the burden of substantiating by clear and convincing evidence that UNIMOLCOs corporate veil must be pierced. Besides, petitioner’s claims on the lands and dividends allegedly due it from

respondent Benedictos other business holdings are not enforceable in court. Only liquidated debts are enforceable in court, there being no apparent defenses inherent in them. For compensation to take place, a distinction must be made between a debt and a mere claim. A debt is a claim which has been formally passed upon by the highest authority to which it can in law be submitted and has been declared to be a debt. A claim, on the other hand, is a debt in embryo. It is mere evidence of a debt and must pass through the process prescribed by law before it develops into what is properly called a debt. There being no two debts for which either party may be said as principally bound to each other, again, there can be no set-off. Y-I LEASURE PHILIPPINES V. YU Facts: Mt. Arayat Development Co. Inc. (MADCI) was a real estate development corporation, which was registered4 on February 7, 1996 before the Security and Exchange Commission (SEC). On the other hand, respondent James Yu (Yu) was a businessman, interested in purchasing golf and country club shares. Sometime in 1997, MADCI offered for sale shares of a golf and country club located in the vicinity of Mt. Arayat in Arayat, Pampanga, for the price of P550.00 per share. Relying on the representation of MADCI's brokers and sales agents, Yu bought 500 golf and 150 country club shares for a total price of P650,000.00 which he paid by installment with fourteen (14) Far East Bank and Trust Company (FEBTC)

Upon full payment of the shares to MADCI, Yu visited the supposed site of the golf and country club and discovered that it was non-existent. In a letter, dated February 5, 2000, Yu demanded from MADCI that his payment be returned to him.6 MADCI recognized that Yu had an investment of P650,000.00, but the latter had not yet received any refund. On August 14, 2000, Yu filed with the RTC a complaint8 for collection of sum of money and damages with prayer for preliminary attachment against MADCI and its president Rogelio Sangil (Sangil) to recover his payment for the purchase of golf and country club shares. In his transactions with MADCI, Yu alleged that he dealt with Sangil, who used MADCI's corporate personality to defraud him. In his Answer, Sangil alleged that Yu dealt with MADCI as a juridical person and that he did not benefit from the sale of shares. He added that the return of Yu's money was no longer possible because its approval had been blocked by the new set of officers of MADCI, which controlled the majority of its board of directors. In its Answer, MADCI claimed that it was Sangil who defrauded Yu. It invoked the Memorandum of Agreement11 (MOA), dated May 29, 1999, entered into by MADCI, Sangil and petitioner Yats International Ltd. (YIL). Under the MOA, Sangil undertook to redeem MADCI proprietary shares sold to third persons or settle in full all their claims for refund of payments. Thus, it was MADCI's position that Sangil should be ultimately liable to refund the payment for shares purchased.

After the pre-trial, Yu filed an Amended Complaint, wherein he also impleaded YIL, Y-I Leisure Phils., Inc. (YILPI) and Y-I Club & Resorts, Inc. (YICRI). According to Yu, he discovered in the Registry of Deeds of Pampanga that, substantially, all the assets of MADCI, consisting of one hundred twenty (120) hectares of land located in Magalang, Pampanga, were sold to YIL, YILPI and YICRI. The transfer was done in fraud of MADCI's creditors, and without the required approval of its stockholders and board of directors under Section 40 of the Corporation Code. Yu also alleged that Sangil even filed a case in Pampanga which assailed the said irregular transfers of lands. In their Answer, YIL, YILPI and YICRI alleged that they only had an interest in MADCI in 1999 when YIL bought some of its corporate shares pursuant to the MOA. This occurred two (2) years after Yu bought his golf and country club shares from MADCI. As a mere stockholder of MADCI, YIL could not be held responsible for the liabilities of the corporation. As to the transfer of properties from MADCI to YILPI and subsequently to YICRI, they averred that it was not undertaken to defraud MADCI's creditors and it was done in accordance with the MOA. In fact, it was stipulated in the MOA that Sangil undertook to settle all claims for refund of third parties. During the trial, the MOA was presented before the RTC. It stated that Sangil controlled 60% of the capital stock of MADCI, while the latter owned 120 hectares of agricultural land in Magalang, Pampanga, the property intended for the development of a golf course; that YIL was

to subscribe to the remaining 40% of the capital stock of MADCI for a consideration of P31,000,000.00; that YIL also gave P500,000.00 to acquire the shares of minority stockholders; that as a condition for YIL's subscription, MADCI and Sangil were obligated to obtain several government permits, such as an environmental compliance certificate and land conversion permit; that should MADCI and Sangil fail in their obligations, they must return the amounts paid by YIL with interests; that if they would still fail to return the same, YIL would be authorized to sell the 120 hectare land to satisfy their obligation; and that, as an additional security, Sangil undertook to redeem all the MADCI proprietary shares sold to third parties or to settle in full all their claims for refund. Sangil then testified that MADCI failed to develop the golf course because its properties were taken over by YIL after he allegedly violated the MOA. The lands of MADCI were eventually sold to YICRI for a consideration of P9.3 million, which was definitely lower than their market price. Unfortunately, the case assailing the transfers was dismissed by a trial court in Pampanga. The president and chief executive officer of YILPI and YICRI, and managing director of YIL, Denny On Yat Wang (Wang), was presented as a witness by YIL. He testified that YIL was an investment company engaged in the development of real estates, projects, leisure, tourism, and related businesses. He explained that YIL subscribed to. the shares of MADCI because it was interested in its golf course

development project in Pampanga. Thus, he signed the MOA on behalf of YIL and he paid P31.5 million to subscribe to MADCI's shares, subject to the fulfilment of Sangil's obligations. Wang further testified that the MOA stipulated that MADCI would execute a special power of attorney in his favor, empowering him to sell the property of MADCI in case of default in the performance of obligations. Due to Sangil's subsequent default, a deed of absolute sale over the lands of MADCI was eventually executed in favor of YICRI, its designated company. Wang also stated that, aside from its lands, MADCI had other assets in the form of loan advances of its directors. Issue: Whether or not the court of appeals erred in ruling that petitioners Yats group should be held jointly and severally liable to respondent Yu despite the absence of fraud in the sale of assets and bad faith on the part of petitioners Yats group Ruling: The petition lacks merit. To recapitulate, respondent Yu bought several golf and country club shares from MADCI. Regrettably, the latter did not develop the supposed project. Yu then demanded the return of his payment, but MADCI could not return it anymore because all its assets had been transferred. Through the acts of YIL, MADCI sold all its lands to YILPI and, subsequently to YICRI. Thus, Yu now claims that the petitioners inherited the obligations of MADCI. On the

other hand, the petitioners counter that they did not assume such liabilities because the transfer of assets was not committed in fraud of the MADCI's creditors.

Hence, the issue at hand presents a complex question of law - whether fraud must exist in the transfer of all the corporate assets in order for the transferee to assume the liabilities of the transferor. To resolve this issue, a review of the laws and jurisprudence concerning corporate assumption of liabilities must be undertaken. I n the 1965 case of Nell v. Pacific Farms, Inc., the Court first pronounced the rule regarding the transfer of all the assets of one corporation to another (hereafter referred to as the Nell Doctrine) as follows: Generally, where one corporation sells or otherwise transfers all of its assets to another corporation, the latter is not liable for the debts and liabilities of the transferor, except: 1. Where the purchaser expressly or impliedly agrees to assume such debts; 2. Where the transaction amounts to a consolidation or merger of the corporations; 3. Where the purchasing corporation is merely a continuation of the selling corporation; and 4. Where the transaction is entered into fraudulently in order to escape liability for such debts.

The Nell Doctrine states the general rule that the transfer of all the assets of a corporation to another shall not render the latter liable to the liabilities of the transferor. If any of the above-cited exceptions are present, then the transferee corporation shall assume the liabilities of the transferor. To reiterate, Section 40 refers to the sale, lease, exchange or disposition of all or substantially all of the corporation's assets, including its goodwill.39 The sale under this provision does not contemplate an ordinary sale of all corporate assets; the transfer must be of such degree that the transferor corporation is rendered incapable of continuing its business or its corporate purpose.40cralawrednad Section 40 suitably reflects the businessenterprise transfer under the exception of the Nell Doctrine because the purchasing or transferee corporation necessarily continued the business of the selling or transferor corporation. Given that the transferee corporation acquired not only the assets but also the business of the transferor corporation, then the liabilities of the latter are inevitably assigned to the former. It must be clarified, however, that not every transfer of the entire corporate assets would qualify under Section 40. It does not apply (1) if the sale of the entire property and assets is necessary in the usual and regular course of business of corporation, or (2) if the proceeds of the sale or other disposition of such property and assets will be appropriated for the conduct of its remaining business. 41 Thus, the litmus test to determine the applicability of Section 40

would be the capacity of the corporation to continue its business after the sale of all or substantially all its assets. UNITED COCONUT PLANTERS BANK V. PLANTERS PRODUCT Facts: Multi Agri-Forest and Community Development Cooperative4 (respondent) is a registered credit cooperative wherein Lylith Fausto (Lylith), Jonathan Fausto (Jonathan), Rico Alvia (Rico), Arsenia Tocloy (Arsenia), Lourdes Adolfo (Lourdes) and Anecita Mancita (Anecita)5 (collectively, the petitioners) are active members. On September 10, 1998, Lylith obtained a loan from the respondent in the amount of P80,000.00, with due date on January 8, 1999.7 Subsequently, she secured another loan in the amount of P50,000.00 which will fall due on March 14, 1999.8 Shortly thereafter, she procured a third loan from the respondent also in the amount of P50,000.00.9 All of the mentioned transactions were evidenced by separate promissory notes, with Anecita and Lourdes signing as co-makers in the first and second loans, and Rico and Glicerio Barce (Glicerio) in the third loan. Similarly, on October 27, 1998, Jonathan obtained a loan from the respondent in the amount of P60,000.00 to fall due on February 24, 1999, with Lylith and Glicerio as co-makers.10 Thereafter, on December 10, 1998, he obtained a second loan in the amount of P100,000.00, with Lylith and Arsenia as his co-makers.11 All five loans obtained by Lylith and Jonathan

were imposed with an interest of 2.3% per month, with surcharge of 2% in case of default in payment of any installment due. Lylith and Jonathan, however, failed to pay their loans despite repeated demands. Thus, on December 12, 2000, the respondent, through its Acting Manager Ma. Lucila G. Nacario (Nacario), filed five separate complaints12 for Collection of Sum of Money before the Municipal Trial Court in Cities (MTCC) of Naga City against the petitioners. After the respondent rested its case, Rico, Glicerio, Lourdes, Arsenia and Anecita filed a motion to dismiss by way of a demurrer to evidence on the ground of lack of authority of Nacario to file the complaints and to sign the verification against forum shopping. They likewise claimed that the complaints were prematurely filed since no demand letters were sent to them. The respondent filed an opposition to the demurrer to evidence alleging that the petitioners expressly waived the need for notice or demand for payment in the promissory notes. It likewise averred that there was a subsequent board resolution confirming the authority of Nacario to file the complaints on behalf of the respondent. In an Order dated July 24, 2009, the MTCC of Naga City, Branch 1 denied the petitioners' demurrer to evidence for lack of merit. It pointed out that the petitioners failed to raise the supposed lack of authority of Nacario in their Answer; hence, the said defense was deemed waived. As regards the lack of notice, it noted that the

promissory notes evidencing the loans stipulated a waiver on the need for notice or demand in case of default in payment of any installment due, in which case the entire balance immediately becomes due and payable. Subsequently, in a Decision16 dated August 1, 2011, the MTCC ruled in favor of the respondent and held the petitioners liable for the payment of specified amount of loans, which include interests, penalties and surcharges, plus 12% interest thereon. The petitioners appealed the foregoing decision with the Regional Trial Court (RTC) of Naga City. After the parties submitted their respective memoranda, the RTC rendered a Joint Decision18 dated December 12, 2011, affirming with modification the decision of the MTCC. It reverted the liability of the petitioners to the original amount of the loan stated in the promissory notes and reduced the interest and surcharge to 12% per annum, respectively. Issue: Whether or not Board of Directors ratified the acts of Nacario Ruling: Yes, the BOD ratified the acts of Nacario The petitioners asseverate that Nacario has no authority to file the complaints on behalf of the respondent. They argue that it is only by the authority of a board resolution that Nacario may be able to validly pursue acts in representation of

the cooperative. They also contend that the applicable law is R.A. No. 6938 or the Cooperative Code of the Philippines (Cooperative Code), and not the Corporation Code of the Philippines (Corporation Code). That the applicable law should be the Cooperative Code and not the Corporation Code is not sufficient to warrant a different resolution of this case. Verily, both codes recognize the authority of the BOD, through a duly-issued board resolution, to act and represent the corporation or the cooperative, as the case maybe, in the conduct of official business. In Section 23 of the Corporation Code, it is provided that all corporate powers of all corporations formed under the Code shall be exercised by the BOD. All businesses are conducted and all properties of corporations are controlled and held by the same authority. In the same manner, under Section 39 of the Cooperative Code, the BOD is given the power to direct and supervise the business, manages the property of the cooperative and may, by resolution, exercise all such powers of the cooperative. The BOD, however, may authorize a responsible officer to act on its behalf through the issuance of a board resolution attesting to its consent to the representation and providing for the scope of authority. The lack of authority of a corporate officer to undertake an action on behalf of the corporation or cooperative may be cured by ratification through the subsequent issuance of a board resolution, recognizing the validity of the action or the authority of the concerned officer.

In this case, the respondent expressly recognized the authority of Nacario to file the complaints in Resolution No. 47, Series of 2008, in which the BOD resolved to recognize, ratify and affirm as if the same were fully authorized by the BOD, the filing of the complaints before the MTCC of Naga City by Nacario. In a similar issue raised in Swedish Match Philippines, Inc. v. The Treasurer of the City of Manila, the Court upheld the subsequent issuance of a board resolution recognizing the authority of the corporation's finance manager as sufficient to acknowledge the authority of the said officer to file a petition with the RTC on behalf of the corporation. It ratiocinated that, by virtue of the issuance of the board resolution, the corporation ratified the authority of the concerned corporate officer to represent it in the petition filed before the RTC and consequently to sign the verification and certification of non-forum shopping on behalf of the corporation. Here, considering that Nacario's authority had been ratified by the BOD, there is no reason for the Court not to uphold said authority.