BIBIANO O. REYNOSO, IV vs. HON. COURT OF APPEALS

BIBIANO O. REYNOSO, IV vs. HON. COURT OF APPEALS and GENERAL CREDIT CORPORATION

G.R. Nos. 116124-25. November 22, 2000

Facts:

1.      The Commercial Credit Corporation (CCC) decided to organize franchise companies in different parts of the country, wherein it shall hold thirty percent (30%) equity.

2.      Employees of the CCC were designated as resident managers of the franchise companies.

3.      Petitioner Bibiano O. Reynoso, IV was designated as the resident manager of the franchise company in Quezon City, known as the Commercial Credit Corporation of Quezon City (CCC-QC).

4.      CCC-QC entered into an exclusive management contract with CCC whereby the latter was granted the management and full control of the business activities of the former. Under the contract, CCC-QC shall sell, discount and/or assign its receivables to CCC.

5.       Subsequently, this discounting arrangement was discontinued pursuant to the so-called DOSRI Rule, prohibiting the lending of funds by corporations to its directors, officers, stockholders and other persons with related interests therein.

6.      On account of the new restrictions imposed by the Central Bank policy by virtue of the DOSRIRule, CCC decided to form CCC Equity Corporation, (CCC-Equity), a wholly-ownedsubsidiary, to which CCC transferred its thirty (30%) percent equity in CCC-QC, together with twoseats in the latter’s Board of Directors.

7.      Under the new set-up, several officials of Commercial Credit Corporation, including petitionerReynoso, became employees of CCC-Equity. While petitioner continued to be the ResidentManager of CCC-QC, he drew his salaries and allowances from CCC-Equity. Furthermore,although an employee of CCC-Equity, petitioner, as well as all employees of CCC-QC, becamequalified members of the Commercial Credit Corporation Employees Pension Plan.

8.      As Resident Manager of CCC-QC, petitioner oversaw the operations of CCC-QC andsupervised its employees. The business activities of CCC-QC pertain to the acceptance of fundsfrom depositors who are issued interest-bearing promissory notes. The amounts deposited arethen loaned out to various borrowers. Petitioner, in order to boost the business activities of CCCQC,deposited his personal funds in the company. In return, CCC-QC issued to him its interest bearing promissory notes.

9.      On August 15, 1980, a complaint for sum of money with preliminary attachment,CCC-QCagainst petitioner, who had in the meantime been dismissed from his employment by CCC-Equity.

10.  The complaint alleged that petitioner embezzled the funds of CCC-QCamounting to P1,300,593.11. Out of this amount, at least P630,000.00 was used for the purchase of a house and lot. The property wasmortgaged to CCC, and was later foreclosed.

11.  The Trial Court finds the complaint without merit. The complaint is dismissed

12.  The appeal of CCC-QC was dismissed for failure to pay docket fees. Petitioner, on theother hand, withdrew his appeal.

13.  Hence, the decision became final and, accordingly, a Writ of Execution was issued.

14.  Meanwhile, in 1983, CCC became known as the General Credit Corporation.

15.  However, the judgment remained unsatisfied, prompting petitioner to file a Motion forAlias Writ of Execution, Examination of Judgment Debtor, and to Bring Financial Records forExamination to Court.

16.  General Credit Corporation filed a Special Appearance and Opposition on December 2, 1991, alleging that it was not a party to the case, and therefore petitioner should direct his claim againstCCC-QC and not General Credit Corporation.

Issue:

Whether or not the judgment in favor of petitionermay be executed against respondent General Credit Corporation

Ruling:

            A corporation is an artificial being created by operation of law, having the right of successionand the powers, attributes, and properties expressly authorized by law or incident to its existence.It is an artificial being invested by law with a personality separate and distinct from those of the persons composing itas well as from that of any other legal entity to which it may be related. It was evolved to make possible theaggregation and assembling of huge amounts of capital upon which big business depends. It also has the advantage of Non-dependence on the lives of those who compose it even as it enjoys certain rights and conducts activities of naturalpersons.

Any piercing of the corporate veil has to be done with caution. However, the Court will nothesitate to use its supervisory and adjudicative powers where the corporate fiction is used as anunfair device to achieve an inequitable result, defraud creditors, evade contracts and obligations,or to shield it from the effects of a court decision. The corporate fiction has to be disregarded whennecessary in the interest of justice.

The Supreme Court has pierced the veil of corporate fictionin numerous cases where it was used, among others, to avoid a judgment credit, to avoidinclusion of corporate assets as part of the estate of a decedent; to avoid liability arising from debt; when made use of as a shield to perpetrate fraud and/or confuse legitimate issues; or topromote unfair objectives or otherwise to shield them.

The defense of separateness will be disregarded where the business affairs of a subsidiary corporation are so controlled by the mother corporation to the extent that it becomes an instrument or agent of its parent. But even when there is dominance over the affairs of the subsidiary, the doctrine of piercing the veil of corporate fiction applies only when such fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime.

It is obvious that the use by CCC-QC of the same name of Commercial Credit Corporation was intended to publicly identify it as a component of the CCC group of companies engaged in one and the same business, i.e., investment and financing. Aside from CCC-Quezon City, other franchise companies were organized such as CCC-North Manila and CCC-Cagayan Valley. The organization of subsidiary corporations as what was done here is usually resorted to for the aggrupation of capital, the ability to cover more territory and population, the decentralization of activities best decentralized, and the securing of other legitimate advantages. But when the mother corporation and its subsidiary cease to act in good faith and honest business judgment, when the corporate device is used by the parent to avoid its liability for legitimate obligations of the subsidiary, and when the corporate fiction is used to perpetrate fraud or promote injustice, the law steps in to remedy the problem. When that happens, the corporate character is not necessarily abrogated. It continues for legitimate objectives. However, it is pierced in order to remedy injustice, such as that inflicted in this case.

Factually and legally, the CCC had dominant control of the business operations of CCC-QC. The exclusive management contract insured that CCC-QC would be managed and controlled by CCC and would not deviate from the commands of the mother corporation. In addition to the exclusive management contract, CCC appointed its own employee, petitioner, as the resident manager of CCC-QC.

There are other indications in the record which attest to the applicability of the identity rule in this case, namely: the unity of interests, management, and control; the transfer of funds to suit their individual corporate conveniences; and the dominance of policy and practice by the mother corporation insure that CCC-QC was an instrumentality or agency of CCC.