Case Summary (G.R. No. 117416)
Factual Background
The corporate history showed that Commercial Credit Corporation (CCC) organized and promoted local franchise companies in several localities, with petitioners acquiring majority equity while CCC retained minority holdings and provided management under written contracts. Management agreements furnished for each franchise required CCC’s resident manager to run operations, fixed a management fee of ten percent of net profit before taxes, assigned most operating expenses to the franchise company, authorized CCC to set discounting rates, and required each investor to sign a continuing guaranty for bad accounts arising from discounting. When Section 1326 of the Central Bank’s regulations posed an obstacle to CCC’s application for quasi-banking status, CCC divested its franchise shareholdings and organized CCC Equity to administer the franchises while CCC (later renamed GCC) continued to provide discounting lines through CCC Equity. Thereafter, petitioners alleged discovery of dissipation of franchise assets. They alleged schemes by GCC, including assignment of uncollectible notes, creation of spurious commercial papers to manufacture revenues, release of collateral in connivance with unauthorized loans, and an irregular offset of receivables with Resource and Finance Corporation.
Initial Administrative Proceedings and Hearing Officer Ruling
Petitioners filed a complaint before the SEC on February 24, 1984 praying for receivership, solidary liability of GCC and CCC Equity to compensate petitioners and depositors, and nullification of the agreement between GCC and RFC. The hearing officer denied motions to dismiss and denied a motion for receivership, and on February 23, 1990 ordered that GCC, CCC Equity, and the franchise companies be treated as one corporation by "piercing the corporate veil." The hearing officer also declared that the franchise companies and the individual petitioners were not liable for bad accounts assigned to and discounted by GCC, and that GCC was not liable to individual petitioners for their investments; the hearing officer dismissed claims against RFC and the named individuals.
SEC En Banc Reversal and Court of Appeals Affirmation
The SEC en banc reviewed the hearing officer’s findings and, in an October 6, 1992 decision, reversed the hearing officer in part. The SEC applied the instrumentality or alter-ego doctrine as stated in Fletcher Cyclopedia and formulated the three-element test: (1) complete domination of finances and policy such that the subsidiary had no separate mind or will for the transaction attacked; (2) use of that control to commit fraud, wrong, or breach of legal duty; and (3) proximate causation of the plaintiff’s injury by the control and breach. The SEC concluded that petitioners failed to prove the second element — that control by GCC was used to perpetrate fraud or wrongdoing to petitioners’ prejudice — and that the evidence did not reasonably support dissipation of franchise assets. The Court of Appeals affirmed the SEC in a decision dated October 8, 1993 and denied reconsideration on September 22, 1994.
Issues Presented to the Supreme Court
Petitioners sought review raising three principal issues: whether the Court of Appeals erred in failing to rule that GCC’s fraud and mismanagement warranted piercing the veil of corporate fiction among GCC, CCC Equity, the franchise companies and RFC; whether only the SEC had jurisdiction to determine liability of individual petitioners under the continuing guaranties executed for bad accounts discounted by GCC; and whether the Supreme Court should reverse and set aside the October 6, 1992 SEC decision.
Petitioners’ Contentions
Petitioners argued that GCC was the alter ego of CCC Equity and the franchise companies, that GCC created CCC Equity to evade the Central Bank DOSRI regulation embodied in Section 1326, and that GCC mismanaged and looted the franchise companies. They sought either direct piercing of corporate identities to hold the respondent corporations and guarantors liable, or reinstatement of the hearing officer’s decree absolving the individual investors from liability on their continuing guaranties if the corporations were treated as a single entity.
Respondents’ Position and Jurisdictional Argument
Respondents and the SEC maintained that the presumption of separate corporate personality applied and that petitioners bore the burden of proving fraud by clear and convincing evidence. The SEC held that mere domination or control without proof of use of control to commit fraud did not satisfy the instrumentality test. The SEC and the Court of Appeals further held that questions whether individual petitioners were liable under their continuing guaranties were matters of ordinary contract and suretyship law appropriate for adjudication by regular courts, not necessarily within exclusive SEC competence; the validity and enforcement of promissory notes and guaranty contracts could be determined in collection suits that private respondents had filed.
Legal Basis and Reasoning of the Supreme Court
The Supreme Court agreed with the SEC and the Court of Appeals. It reiterated the settled principle that corporate personality is respected unless sufficient reason appears to disregard it, and that disregard is justified only to prevent defeat of public convenience, perpetration of fraud, or other inequity; proof of wrongdoing must be clear and convincing and cannot be presumed. The Court endorsed the Fletcher Cyclopedia formulation accepted by the SEC: the three-part instrumentality test requiring proof of control amounting to complete domination, use of that control to perpetrate fraud or violate a legal duty, and proximate causation of injury. The Court found that petitioners failed to prove the requisite use of control to commit fraud or wrong. The Court also agreed that liability under the continuing guaranties arose out of private contractual relations executed by petitioners in their personal capacities and that such liabilities did not
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Case Syllabus (G.R. No. 117416)
Parties and Posture
- AVELINA G. RAMOSO, RENATO B. SALVATIERRA, BENEFRIDO M. CRUZ, LETICIA L. MEDINA, PELAGIO PASCUAL, DOMINGO P. SANTIAGO, AMADO S. VELOIRA, CONCEPCION F. BLAYLOCK, IN THEIR OWN BEHALF AND IN BEHALF OF NUMEROUS OTHER PERSONS SIMILARLY SITUATED are the individual petitioners and investor-shareholders in the franchise companies.
- Commercial Credit Corporation of North Manila, Commercial Credit Corporation of Cagayan Valley, Commercial Credit Corporation of Olongapo City, and Commercial Credit Corporation of Quezon City are the franchised corporate petitioners.
- General Credit Corporation (formerly Commercial Credit Corporation), CCC Equity Corp., Resource and Finance Corp., Generoso G. Villanueva, Leonardo B. Alejandrino, the Court of Appeals, and the Securities and Exchange Commission are the respondents in this petition for review on certiorari.
- The petition assails the Court of Appeals decision affirming the SEC en banc modification of the hearing officer's order in SEC Case No. 2581.
Key Facts
- Commercial Credit Corporation was registered on March 11, 1957 as a general financing and investment corporation.
- Commercial Credit Corporation proposed and assisted in organizing local franchise companies using the trade name "Commercial Credit Corporation" with locality designations.
- The petitioning investors acquired majority shares in the franchise companies while Commercial Credit Corporation retained minority holdings under management contracts.
- Investors executed continuing guaranty agreements to guarantee bad accounts that might arise from discounting activities.
- In 1974 Commercial Credit Corporation sought a quasi-banking license but was impeded by Section 1326 of CB's "Manual of Regulations for Banks and Other Financial Intermediaries".
- To address the regulatory impediment, Commercial Credit Corporation divested its shareholdings in the franchise companies and incorporated CCC Equity to assume administrative control while Commercial Credit Corporation continued to provide discounting lines through CCC Equity.
- Commercial Credit Corporation later changed its corporate name to General Credit Corporation (GCC).
- Adverse media reports in 1981 led petitioners to allege dissipation of franchise assets and schemes including assignment of uncollectible accounts, issuance of spurious commercial papers, release of collateral in connivance with unauthorized loans, and a questionable offset arrangement with Resource and Finance Corporation.
- On February 24, 1984 petitioners filed a complaint seeking receivership, recovery of losses from GCC and CCC Equity, and nullification of the agreement between GCC and RFC.
Management Terms
- The resident manager of each franchise company was to be Commercial Credit Corporation's appointed resident manager.
- The franchise companies were to pay a management fee equal to ten percent of net profit before taxes to Commercial Credit Corporation.
- All operating expenses were to be borne by the franchise companies except the salary of the resident manager and the cost of credit investigation.
- Commercial Credit Corporation retained the power to set prime rates for discounting or rediscounting receivables.
Procedural History
- Respondents, except CCC Equity, filed a motion to dismiss on June 6, 1984 claiming lack of SEC jurisdiction and that petitioners were not real parties in interest.
- The hearing officer denied the motions and, on February 23, 1990, ordered piercing the corporate veil and declared GCC, CCC-Equity, and the franchised companies to be one corporation while absolving certain franchise companies and individual petitioners from liability on bad accounts.
- The SEC en banc reversed the hearing officer in an October 6, 1992 en banc decision and modified the relief ordered.
- The Court of Appeals affirmed the SEC en banc decision on October 8, 1993 and denied petitioners' motion for reconsideration on September 22, 1994.