Case Summary (G.R. No. 173333)
Issuance and Dissolution of Writ of Preliminary Attachment
On October 7, 1998, the RTC granted the attachment upon Ong’s posting of a ₱390,000 bond. Spouses Magaling moved to discharge the writ under Rule 57, Section 13, contending that the debt was purely corporate and that they bore no personal liability. Without conducting a hearing, the court granted the motion on February 19, 1999, noting that (1) the obligation was corporate; (2) the checks bore corporate signatures only; and (3) fraud, if any, related to 1998 check renewals, not at contract inception.
First RTC Decision Against the Corporation
In its June 23, 1999 decision, the RTC ruled in favor of Ong and against Termo Loans alone, ordering payment of ₱350,000 principal, 2.5% interest from default, attorney’s fees, litigation expenses, and costs. Execution was returned unsatisfied after Termo Loans dissolved.
RTC Judgment on Spouses’ Liability
On February 5, 2001, the RTC dismissed Ong’s complaint as to Spouses Magaling, emphasizing the separate corporate personality of Termo Loans, the corporate nature of the promissory note and checks, and the absence of personal undertakings by the spouses.
Court of Appeals’ Reversal and Piercing the Corporate Veil
On appeal, the Court of Appeals reversed on August 31, 2005, holding that the spouses should be personally liable. It found that as president and incorporator, Reynaldo Magaling grossly neglected the affairs of Termo Loans: he failed to supervise operations, did not inform investors of insolvency, produced no financial statements, and left no successor upon resignation. The court deemed these facts sufficient to pierce the corporate veil under the doctrine of gross negligence. In an amended decision on June 28, 2006, it also set aside the RTC’s dissolution of the attachment for lack of hearing, declaring the writ still effective.
Arguments in the Petition for Review
Spouses Magaling argued that (1) personal liability was raised for the first time on appeal; (2) Ong never pled or proved gross negligence or bad faith; (3) corporate solvency was not in issue; and (4) negligence is not a ground for attachment under Rule 57. Ong countered that he raised negligence in his RTC memorandum, and that the spouses failed to object or present contrary evidence when negligence emerged from Reynaldo’s cross-examination.
Standard for Piercing the Corporate Veil
Under the Corporation Code and jurisprudence, corporate officers are personally liable only if they commit patently unlawful acts, act in bad faith or with gross negligence, have conflicts of interest, contractually assume personal liability, or are made liable by specific law. Bad faith requires conscious wrongdoing; gross negligence denotes a willful indifference to consequences and must be proven by clear and convincing evidence.
Evidence of Gross Negligence by the President
Reynaldo Magaling’s own testimony revealed his lack of oversight: he managed multiple lending companies, failed to monitor Termo Loans’ financial condition, did not inform investors of the company’s insolvency, lacked financial records, and left no successor after resigning. His indifference to investors’ interests and corporate collapse demonstrated the want of even slight care.
Supreme Court’s Ruling on Personal Liability
The Supreme Court held that, while no bad faith was shown, Reynaldo’s gross negligenc
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Facts
- In December 1994, Reynaldo Magaling, as President of Termo Loans and Credit Corporation (“Termo Loans”), induced Peter Ong to extend a loan/investment of ₱350,000 at 2.5% monthly interest, representing that the corporation could pay.
- By September 1997, the outstanding principal stood at ₱350,000; interest due was ₱8,750 per month.
- Defendants issued postdated checks (Nos. 0473400–0473406) drawn on Planters Bank for interest and principal: only checks 0473400 and 0473401 cleared; check 0473402 bounced then replaced in cash; the rest remained unpaid.
- Despite demands, no further payments were made; by June 30, 1998, the debt was ₱389,043.96 (principal plus accrued interest).
Procedural History
- On September 30, 1998, Ong filed a complaint in the RTC, Lipa City, for ₱389,000 plus interest, attorney’s fees, costs, and prayed for a writ of preliminary attachment against Spouses Reynaldo and Lucia Magaling and Termo Loans (alleging use of the corporation as alter ego to evade payment).
- RTC issued the writ of preliminary attachment on October 7, 1998, upon bond of ₱390,000.
- Ong filed an amended complaint (correcting “Lucila” to “Lucia”) on October 29; RTC admitted it on November 9, 1998.
- Spouses Magaling answered on November 12, 1998, denying personal liability and alleging Ong’s voluntary investment. Termo Loans defaulted; RTC admitted Ong’s ex parte evidence.
- Sheriff attached two parcels titled in the spouses’ names (T-109347 and T-75559) on November 27, 1998.
- Spouses moved to discharge attachment; RTC granted it on February 19, 1999, holding the debt corporate, checks unsigned by spouses, and fraud alleged only upon renewal of obligations.
- On June 23, 1999, RTC rendered its first decision: Termo Loans ordered to pay ₱350,000 principal, 2.5% monthly interest, ₱20,000 attorney’s fees, litigation expenses, costs.
- Writ of execution issued March 1, 2000; returned unsatisfied April 26, 2000,