Case Summary (G.R. No. 202454)
Procedural History
ATSI filed a Complaint for Sum of Money (Civil Case No. 69735) in November 2003 to recover unpaid rentals for a Prodopak machine leased to CMCI. The Regional Trial Court (RTC), Branch 268, Pasig City, rendered judgment in favor of ATSI ordering CMCI to pay P443,729.39 (unpaid rentals) with legal interest from the date of extrajudicial demand, 30% of the judgment as attorney’s fees, and costs of litigation. On appeal, the Court of Appeals (CA) affirmed the RTC’s liability finding but deleted the award of attorney’s fees for lack of factual and legal justification, leaving costs of litigation. CMCI filed a Petition for Review on Certiorari to the Supreme Court, which was decided on April 25, 2017.
Core Facts
In August 2001 CMCI leased from ATSI a Prodopak machine for packaging 20-ml pouches at P98,000 per month, exclusive of tax. ATSI delivered the machine on 8 August 2001. CMCI paid rents consistently until June 2003, after which it defaulted. ATSI alleged unpaid rentals for June–September 2003 and sent billing statements and an extrajudicial demand. CMCI asserted as its defense that legal compensation extinguished ATSI’s claim because CMCI had a separate, outstanding claim against PPPC arising from a P4,000,000 mobilization fund advanced in 2000 for the transfer of processing operations. CMCI relied on corporate interrelationships, letters from Felicisima Celones proposing set-off arrangements (letter dated 30 July 2001) and a 16 September 2003 letter in which she purportedly represented authority to request offsetting.
RTC Findings and Ruling
The RTC found that legal compensation did not apply because ATSI, PPPC, and the Spouses Celones were distinct juridical persons and CMCI failed to show that corporate separateness had been abused. The trial court held there was no board resolution or other proof showing corporate authorization for Felicisima’s proposed set-off. Consequently, CMCI’s obligation to pay ATSI’s rentals remained intact. The RTC awarded P443,729.39 plus legal interest, 30% of the judgment as attorney’s fees, and costs.
Court of Appeals Ruling
The CA affirmed the RTC’s finding that legal compensation had not set in, emphasizing the lack of mutuality of parties and rejecting the attempt to pierce the corporate veil. The appellate court applied the high standard required to disregard corporate personality—clear and convincing proof of misuse to commit fraud or evade obligations—and found CMCI had not met it. The CA also observed that Felicisima’s 30 July 2001 letter was limited to PPPC’s obligations and did not bind ATSI. The CA deleted the RTC’s attorney’s fees award for lack of factual and legal support in the judgment’s body but ordered CMCI to pay costs of litigation.
Issue Presented to the Supreme Court
Whether the CA erred in affirming the RTC’s ruling that legal compensation between ATSI’s claim against CMCI and CMCI’s claim against PPPC had not set in, and whether CMCI proved grounds to pierce the corporate veil and treat ATSI and PPPC as one for purposes of set-off.
Standard of Review and Legal Tests Applied
The Supreme Court reiterated that piercing the corporate veil and alter ego determinations are questions of fact requiring clear and convincing evidence; in a petition for review on certiorari the Court’s review is limited to errors of law unless factual findings are unsupported or plainly erroneous. The Court recited the three basic applications of the doctrine (defeat of public convenience/evasion of obligation, fraud, and alter ego) and the instrumentality/control test, which requires proof of complete domination of finances, policy, and business practice so that the corporation has no separate mind, will, or existence at the time of the transaction. The Court cited governing precedents and emphasized caution in disregarding corporate personality.
Supreme Court’s Analysis of CMCI’s Evidence
The Court found CMCI’s evidence insufficient to pierce the corporate veil or to establish mutuality necessary for legal compensation. Although the Spouses Celones were incorporators, directors, and majority stockholders of both ATSI and PPPC, mere common ownership was insufficient. CMCI failed to show that either PPPC controlled ATSI’s financial policies or business practices with respect to the transactions in question, or that ATSI had used its corporate form to perpetrate fraud or evade obligations to CMCI. The letters from Felicisima did not demonstrate corporate authorization binding ATSI; at the time of the July 2001 proposal ATSI had no transaction with CMCI and CMCI’s lease from ATSI began only in August 2001. The Court also noted that CMCI had paid ATSI rents for approximately two years before defaul
...continue readingCase Syllabus (G.R. No. 202454)
Procedural History
- Petition for Review on Certiorari filed with the Supreme Court assails the Court of Appeals (CA) Decision in CA-G.R. CV No. 94409 which denied the appeal of California Manufacturing Company, Inc. (CMCI) from the Regional Trial Court (RTC) of Pasig City, Branch 268 Decision in Civil Case No. 69735.
- RTC rendered judgment in favor of Advanced Technology Systems, Inc. (ATSI) ordering CMCI to pay unpaid rentals and additional reliefs; CMCI appealed to the CA.
- CA affirmed the RTC’s decision but deleted the award of attorney’s fees for lack of factual and legal basis and ordered CMCI to pay the costs of litigation.
- CMCI filed a Motion for Reconsideration before the CA, which was denied. CMCI then filed the present petition before the Supreme Court.
- Respondent ATSI did not file a Comment in this Court despite several notices; the Court deemed its right to file a Comment waived and directed elevation of the records (Resolutions and notices referenced with dates and return receipts).
Antecedent Facts
- Petitioner: California Manufacturing Company, Inc. (CMCI), a domestic corporation engaged in food and beverage manufacturing.
- Respondent: Advanced Technology Systems, Inc. (ATSI), a domestic corporation that fabricates and distributes food processing machinery, equipment, spare parts, and allied products.
- In August 2001, CMCI leased a Prodopak machine from ATSI for packing 20-ml pouches at a monthly rental of P98,000 exclusive of tax.
- ATSI received an open purchase order on 6 August 2001 and delivered the machine to CMCI’s plant at Gateway Industrial Park, General Trias, Cavite on 8 August 2001.
- ATSI filed a Complaint for Sum of Money in November 2003 to collect unpaid rentals for June, July, August, and September 2003, alleging consistent payments until June 2003 when CMCI defaulted, and alleging that CMCI ignored billing statements and demand letter.
- ATSI sought, in addition to unpaid rentals, contingent attorney’s fees equivalent to 30% of the judgment award.
Pleadings and Contentions of the Parties
- ATSI’s claim: unpaid rentals totaling P443,729.39 (as determined by the trial court) plus legal interest from the date of extrajudicial demand, and attorney’s fees of 30% of judgment.
- CMCI’s defense: raised extinguishment of obligation through legal compensation, asserting that ATSI was one and the same with Processing Partners and Packaging Corporation (PPPC), a toll packer of CMCI products, and that CMCI had a separate claim/credit against PPPC that offset ATSI’s claim.
- CMCI submitted copies of Articles of Incorporation and General Information Sheets (GIS) purporting to show common incorporators, interlocking officers, and ATSI’s stockholdings in PPPC.
- CMCI alleged advances to PPPC: CMCI advanced P4 million as mobilization fund at PPPC’s request, with an alleged agreement that PPPC President/CEO would repay in 12 equal installments starting October 2000.
- CMCI relied on a 30 July 2001 letter from Felicisima Celones proposing set-off of PPPC’s obligation with rentals for Prodopak machines, and a 16 September 2003 letter in which she allegedly represented authority to request offsetting with ATSI’s receivable from CMCI.
- CMCI claimed PPPC’s debt had grown to P10,766,272.24 by the time ATSI filed suit and argued legal compensation had set in such that ATSI should be liable for the balance after offset.
RTC Decision (Trial Court)
- The RTC dismissed CMCI’s motion to dismiss (which was based on legal compensation) and ordered CMCI to file an Answer; later, after trial, the RTC rendered judgment for ATSI.
- Dispositive portion of the RTC Decision ordered CMCI to pay:
- Php443,729.39 representing unpaid rental for the Prodopak machine plus legal interest from the date of extrajudicial demand (October 13, 2003) until satisfaction;
- 30% of the judgment award as attorney’s fees; and
- costs of litigation.
- RTC reasoned legal compensation did not apply because PPPC had a separate legal personality from its individual stockholders (the Spouses Celones) and ATSI.
- RTC found no board resolution or proof showing that Felicisima’s proposal to set off PPPC’s unpaid mobilization fund with CMCI’s rentals to ATSI was authorized by either corporation.
- RTC ruled CMCI’s financial obligation to ATSI stood and CMCI’s claim against PPPC could be pursued in a proper proceeding upon payment of docket fees.
Court of Appeals Decision
- CA affirmed the RTC’s ruling that legal compensation had not set in because of lack of mutuality of parties.
- CA sustained trial court’s refusal to pierce the corporate veil, holding that clear and convincing proof is required to show that Spouses Celones used ATSI or PPPC to commit fraud or wrong, which was not present.
- CA observed absence of a board resolution by ATSI and noted the 30 July 2001 letter was clearly limited to PPPC’s obligation and did not bind ATSI.
- CA rejected CMCI’s estoppel argument: there was no evidence ATSI created any appearance of a false fact; estoppel also did not apply to PPPC because PPPC was not a party to the case.
- CA deleted the award of attorney’s fees and costs of litigation in favor of ATSI because the trial court’s decision lacked discussion in the body of the decision of the factual and legal justification for such award.
- CMCI’s Motion for Reconsideration before CA was denied for lack of merit.
Issue Presented to the Supreme Court
- Whether the Court of Appeals erred in affirming the RTC’s ruling that legal compensation between ATSI’s claim against CMCI and CMCI’s claim against PPPC had not set in, i.e., whether legal compensation applies by reason of alleged identity or alter ego relationship between ATSI and PPPC (and control by the Spouses Celones).