A.M. No. 12-6-18-SC - Re: Contracts with Artes International, Inc.

Andrea C. Gutierrez Vda. de Gutierrez (Gutierrez) was registered owner of Lot 861, Tala Estate (25 ha), under TCT No. 5779, later subdivided into five 5 ha lots (TCT Nos. 7123–7127).
On December 21, 1964, Gutierrez sold four lots (TCT Nos. 7124–7127) to Cardale Financing and Realty Corporation (Cardale) for ₱800,000; Cardale paid ₱171,000 down and agreed to pay the ₱629,000 balance within five years at 9% p.a. interest. Titles to those lots were re-issued to Cardale as TCT Nos. 7531–7534. To secure the balance, Cardale mortgaged three lots (TCT Nos. 7531–7533; 15 ha) in favor of Gutierrez, who retained the owner’s duplicates.

On August 26, 1968, Gutierrez sued Cardale for rescission in RTC Quezon City (Civil Case No. Q-12366). She died on October 20, 1969; respondent Rita C. Mejia was substituted. Plaintiff rested in 1971; Cardale, represented by petitioner Adalia B. Francisco (its VP/Treasurer), lost interest and the case lay dormant for ~14 years.
The mortgaged lots (7531–7533) incurred real estate tax arrears (₱89,231.37 on 7531; ₱102,300 on 7532–7533) and were levied and sold at public auction on September 1 and 12, 1983. Merryland Development Corporation (Merryland), whose President and majority shareholder is Francisco, was the highest bidder. A memorandum of sale was annotated on original TCTs.

On August 13, 1984, Mejia filed a Motion for Decision in Q-12366. Francisco filed a Motion for Postponement on August 16, 1984—signed as “officer-in-charge”—but did not disclose the tax sale. The one-year redemption period expired.
Merryland filed petitions for consolidation of title (LRC Reg. Case Nos. 8563 & C-2640). By orders (Nov 7–28, 1983) and a decision (Nov 12, 1984), RTC cancelled Cardale’s TCTs 7531–7533 and issued new, lien-free TCTs in Merryland’s name.

On January 14, 1987, Mejia, as executrix, sued Francisco, Merryland and the Register of Deeds (Civil Case No. Q-49766) for damages, alleging fraud in causing tax default and sale.
On April 15, 1988, RTC dismissed the case, finding no evidence that Cardale was solvent, no proof that Francisco controlled both corporations, and held that Mejia “slept on her rights” by not actively pursuing Q-12366. The court awarded defendants attorney’s fees.

On April 13, 1999, the Court of Appeals reversed, holding that Francisco used Cardale and Merryland as “dummies,” committed fraud by concealing tax delinquencies and sale, and pierced the corporate veil to hold Francisco and Merryland solidarily liable for ₱4,314,271.43 plus interest.
Petitioners filed this certiorari, arguing no duty to inform mortgagee of tax delinquencies, no proof of capacity to pay, no control over corporations, and that the RTC decision in Q-12366 is res judicata.

Whether Francisco, as Cardale’s officer, owed a duty to inform the mortgagee and the court of the tax delinquencies and auction sale of the mortgaged properties.
Whether Francisco committed fraud and bad faith by concealing the tax arrears and sale, thus depriving the mortgagee of its redemption rights.
Whether the corporate veil of Cardale and Merryland may be pierced to hold Francisco and Merryland liable for the mortgage debt.
Whether Merryland is Francisco’s alter ego or mere instrumentality, such that its separate juridical personality must be disregarded.
Whether the RTC decision in Civil Case No. Q-12366 constitutes res judicata in the present action for damages.