Case Summary (G.R. No. 141617)
Facts — ownership, sale, mortgage and litigation
Andrea Cordova Vda. de Gutierrez (Gutierrez) owned Lot 861 (25 hectares), which was subdivided into five 5-hectare lots and replaced by separate Torrens titles in her name. On 21 December 1964 Gutierrez sold four of those lots to Cardale Financing and Realty Corporation (Cardale) under a Deed of Sale with Mortgage for P800,000, with P171,000 paid and a balance of P629,000 payable in installments with 9% interest. Titles were transferred to Cardale (TCT Nos. 7531–7534), and a mortgage to secure the unpaid balance was annotated on three of those titles. Gutierrez filed an action for rescission against Cardale in 1968 (Civil Case No. Q‑12366); Gutierrez died in 1969 and was substituted by her executrix Mejia.
Facts — tax delinquencies, tax sale, and post-sale events
During protracted litigation, the mortgaged parcels became tax‑delinquent. Notices demanding payment were issued (final notices dated 9 July 1982 addressed to Cardale c/o Merryland and to Francisco’s address). The properties were levied and sold at public auction in September 1983 to satisfy tax arrears; Merryland was the highest bidder. Before the one‑year statutory redemption period expired, Mejia filed a Motion for Decision in the rescission case (13 August 1984). Cardale, through Francisco, filed a Motion for Postponement (16 August 1984) without disclosing the tax sale; subsequently Merryland secured titles free of encumbrances via consolidation proceedings and the Register of Deeds issued new Torrens titles not bearing the mortgage memoranda.
Procedural history — damage suit and lower court rulings
Mejia filed a complaint for damages (Civil Case No. Q‑49766) against Francisco, Merryland, and the Register of Deeds on 14 January 1987. The trial court dismissed the complaint on 15 April 1988, finding plaintiff failed to prove that Francisco controlled the corporations or that there was deliberate fraud in causing Cardale to default on taxes. The court emphasized Mejia’s laches (sleeping on her rights and failing to pursue the rescission action diligently) as contributing to loss of the mortgage security. The Court of Appeals reversed on 13 April 1999, finding that Francisco used Cardale and Merryland as dummies to perpetrate fraud, and held Francisco and Merryland solidarily liable to the estate.
Issues presented for review
- Whether the corporate veil of Cardale and Merryland should be pierced to hold Francisco and Merryland personally and solidarily liable for the estate’s loss of mortgage security.
- Whether the acts and omissions of Francisco constitute bad faith, fraud or conduct that justifies disregarding corporate separateness.
- Whether Merryland can be held liable on the same basis as Francisco.
- Whether the trial court’s earlier disposition in the rescission case operates as res judicata in the present action.
Legal principles applied by the courts
The courts applied the established doctrine that corporate personality is generally respected but may be disregarded when the corporate form is abused to defeat public convenience, justify wrong, protect fraud, or defend crime. The line of jurisprudence cited (e.g., United States v. Milwaukee Refrigerator Transit Co., Umali v. Court of Appeals and other Philippine precedents) delineates circumstances for piercing the veil, and recognizes that corporate officers ordinarily are not personally liable for acts done for the corporation in good faith and within authority, unless they use the corporate fiction to defraud third parties or act negligently, maliciously, or in bad faith.
Supreme Court analysis — Francisco’s knowledge, responsibility and conduct
The Supreme Court reviewed the totality of circumstances and concluded that Francisco acted in bad faith. Key points relied upon were: Francisco’s capacity as Cardale’s treasurer (the officer charged with paying real property taxes); receipt of final notices advising of tax arrears and impending auction (sent to her address); failure to notify the estate or the trial court of the tax delinquency and auction despite Gutierrez’s mortgage interest and the pendency of the rescission action; filing a postponement motion that concealed the tax sale during the critical redemption period; Merryland’s acquisition of the properties at the tax sale (Merryland being a corporation where Francisco was President and majority stockholder); and Francisco’s participation in consolidation proceedings that resulted in titles issued to Merryland free of the mortgage memoranda. The Court concluded that these acts demonstrated an intent to conceal and an overall scheme that deprived the estate of its mortgage rights.
Supreme Court conclusion on piercing the corporate veil as to Francisco
Applying the doctrine and the facts, the Court pierced the corporate veil to the extent necessary to hold Francisco personally liable. The Court reasoned that Francisco used corporate offices and transactions to effect a course of conduct that frustrated the mortgagee’s rights (concealment, deliberate non‑disclosure to the estate and to the court, procurement of titles free of liens), thereby justifying disregard of the corporate fiction as to her personal liability for the estate’s loss.
Supreme Court conclusion on Merryland’s liability
The Court declined to affirm the Court of Appeals’ imposition of solidary liability on Merryland. It held that Merryland’s act of purchasing properties at a tax sale, by itself, was not shown to be fraudulent or wrongful. The Court found insufficient proof that Merryland was a mere alter ego, business conduit or instrumentality of Francisco or Cardale. Mere common stock ownership or interrelation of business is not enough to pierce corporate separateness. Accordingly, Merryland’s separate juridical personality was upheld and it was absolved from liability.
Damages, interest and monetary relief awarded
The Court affirmed the award in favor of the estate in the amount of P4,314,271.43, representing the unpaid balance
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Facts
- Andrea Cordova Vda. de Gutierrez (Gutierrez) was the registered owner of a 25-hectare parcel in Camarin, Caloocan City, originally covered by TCT No. 5779 (Tala Estate).
- The property was subdivided into five (5) lots of five hectares each and TCT No. 5779 was cancelled. Five new TCTs were issued in Gutierrez’s name: TCT Nos. 7123 (Lot 861-A), 7124 (Lot 861-B), 7125 (Lot 861-C), 7126 (Lot 861-D), and 7127 (Lot 861-E).
- On 21 December 1964, Gutierrez and Cardale Financing and Realty Corporation (Cardale) executed a Deed of Sale with Mortgage covering the lots corresponding to TCT Nos. 7124, 7125, 7126 and 7127 for P800,000.00; Cardale paid P171,000.00 and agreed to pay the P629,000.00 balance in installments within five years at nine percent (9%) per annum on successive unpaid principal balances.
- The titles of Gutierrez were cancelled and in lieu thereof TCT Nos. 7531 to 7534 were issued in favor of Cardale. To secure payment of the balance, Cardale constituted a mortgage on three of the four parcels covered by TCT Nos. 7531, 7532 and 7533 (fifteen hectares). The encumbrance was annotated on the certificates of title and the owner’s duplicates were retained by Gutierrez.
- On 26 August 1968 Gutierrez filed a complaint for rescission of the contract in the Quezon City RTC (Civil Case No. Q-12366). Gutierrez died on 20 October 1969 and was substituted by her executrix, Rita C. Mejia (Mejia).
- In 1971 plaintiff’s presentation of evidence was terminated. Cardale, represented by Adalia B. Francisco (Francisco) as Vice-President and Treasurer, lost interest in proceeding and the case lapsed into an inactive status for about fourteen years.
- The mortgaged parcels under TCT Nos. 7532 and 7533 became delinquent in real estate taxes in the amount of P102,300.00; the parcel under TCT No. 7531 was delinquent in the amount of P89,231.37. These tax delinquencies led to levy and auction sales on 1 and 12 September 1983.
- The highest bidder for the three parcels at the tax delinquency sales was Merryland Development Corporation (Merryland); a memorandum based on the certificate of sale was made on the original copies of TCT Nos. 7531 to 7533.
- Adalia Francisco is President and majority stockholder of Merryland Development Corporation.
Procedural History
- During the pendency of Civil Case No. Q-12366, Mejia filed a Motion for Decision on 13 August 1984 before the expiration of the one-year redemption period after the tax sale.
- Francisco, signing a Motion for Postponement dated 16 August 1984 in her capacity as “officer-in-charge” of Cardale, sought deferral of the hearing, without disclosing the tax delinquencies or the tax sale in favor of Merryland.
- After expiration of the redemption period, Merryland, through Francisco, filed petitions for consolidation of title which resulted in orders cancelling Cardale’s TCT Nos. 7531-7533 and issuing new TCTs in Merryland’s name “free from any encumbrance or third-party claim whatsoever.” The Register of Deeds of Caloocan issued the new TCTs without memorandum of the mortgage liens.
- In June 1985 Francisco filed an undated Manifestation in Civil Case No. Q-12366 asserting the mortgaged properties had been levied upon and sold at a tax delinquency sale; the trial court, accepting the contention that the properties were no longer subject to the suit and that Merryland was not a party, dismissed the rescission case as moot and academic.
- On 14 January 1987 Mejia filed Civil Case No. Q-49766 in the RTC of Quezon City: a complaint for damages with prayer for preliminary attachment against Francisco, Merryland and the Register of Deeds of Caloocan City.
- On 15 April 1988 the trial court rendered judgment dismissing Mejia’s complaint for damages and held that she failed to establish by clear and convincing evidence that Francisco controlled Cardale and Merryland or employed fraud to cause Cardale’s tax default so Merryland could acquire the properties. The trial court found that Mejia “slept on her rights” in failing to actively pursue Civil Case No. Q-12366.
- The trial court ordered dismissal of the complaint, denied the motion for reconsideration, and awarded attorney’s fees and litigation expenses of P20,000.00 each to Merryland and the Register of Deeds and another P20,000.00 to Francisco, plus costs.
- The Court of Appeals, in a decision promulgated 13 April 1999, reversed the trial court and held that the corporate veil of Cardale and Merryland must be pierced, finding that Francisco used both corporations as dummies to perpetrate fraud and frustrate Gutierrez’s rights as mortgagee.
- The Court of Appeals awarded P4,314,271.43 in favor of the Gutierrez estate as the unpaid balance of the purchase price (computed as of December 1988), and directed payment of interest pursuant to the agreement.
- Petitioners filed a petition for review by certiorari with the Supreme Court seeking to set aside the Court of Appeals’ decision and its resolution.
Issues Presented
- Whether the corporate veil of Cardale and Merryland should be pierced to hold Francisco and Merryland personally and solidarily liable for fraud and for depriving Gutierrez’s estate of its mortgage rights.
- Whether Cardale’s failure to pay realty taxes, standing alone, constitutes fraud requiring piercing the corporate veil.
- Whether Mejia’s alleged failure to pursue Civil Case No. Q-12366 or to annotate lis pendens on the titles constitutes contributory negligence that bars relief.
- Whether the trial court’s dismissal of Civil Case No. Q-12366 constitutes res judicata as to the issues raised in the damage suit (Civil Case No. Q-49766).
- Whether Merryland, as purchaser at the tax sale and recipient of new TCTs, may be held solidarily liable with Francisco.
Trial Court Findings and Rationale
- The trial court found plaintiff Mejia failed to prove by clear and convincing evidence that Francisco controlled Cardale and Merryland or that Francisco employed fraud to cause Cardale’s tax default so Merryland could buy the properties.
- The court emphasized there was no evidence Cardale was financially capable of paying the taxes at the time; failure to pay taxes does not per se constitute fraud or evasion of an existing obligation without clear showing of deliberate nonpayment despite solvency.
- The court articulated circumstances in which the corporate fiction may be disregarded (illegal acts by all members; use of corporation as dummy to commit fraud; agency relationship; sole ownership by one person) and found none applied.
- The trial court faulted the plaintiff for “sleeping on her rights” and not actively pursuing Civil Case No. Q-12366, thus failing to protect the estate’s interests such as redeeming the properties within the one-year redemption period.
- The trial court dismissed the complaint for damages and awarded attorney’s fees and costs against Mejia.
Court of Appeals Findings and Rationale
- The Court of Appeals reversed, holding that the corporate veil must be pierced to hold Francisco and Merryland solidarily liable because the corporations were used as dummies by Francisco who employed fraud.
- The appellate court’s findings of fraud were premised on several circumstances summarized as follows:
- Francisco, as Vice-President and Treasurer of Cardale, knew Cardale had an outstanding obligation to Gutierrez (accounting as of December 1988 of P4,414,271.43) and that Gutierrez held a mortgage lien on the properties.
- Francisco knew the properties were the subject of Civil Case No. Q-12366 (action for rescission and recovery).
- Notices dated 9 July 1982 from the City Treasurer of Caloocan demanding payment of tax arrears, sent to “Cardale Financing & Realty Corporation c/o Merryl