Case Summary (G.R. No. L-23893)
Petitioner and Respondent
• Petitioner (Third-Party Plaintiff): Pangasinan Transportation Co., Inc.
• Respondent (Third-Party Defendant): Jose M. Villarama
• Other Parties: Villa Rey Transit, Inc. (Plaintiff-Appellant), Eusebio E. Ferrer (Defendant-Appellant), PSC (dismissed below)
Key Dates
• January 8, 1959 – Villarama sells two CPCs to Pantranco for ₱350,000, with a ten-year non-competition clause.
• March 6 & 10, 1959 – Formation of Villa Rey Transit, Inc. (SEC registration March 10).
• April 7, 1959 – Villa Rey Transit, Inc. purchases five CPCs and 49 buses from Fernando for ₱249,000; applies to PSC for approval.
• July 7–16, 1959 – Sheriff levies on two CPCs under execution against Fernando; holds public auction; Ferrer acquires them.
• July 22, 1959 – PSC grants provisional operating authority to Pantranco pending final approval of competing applications.
• November 4, 1959 – Villa Rey Transit, Inc. sues to annul sheriff’s sale and PSC orders.
• October 29, 1968 – Supreme Court decision.
Applicable Law
• 1935 Philippine Constitution (in force at decision)
• Public Service Act (Com. Act No. 146) – Sections on PSC approval and sale of CPCs
• Civil Code – Articles on contracts (notably Article 19 on good faith) and on sale of movables (Article 1544)
• Rules of Court – Rules on secondary evidence (Rule 130, Section 5) and execution (Rule 39)
Procedural History
The Court of First Instance of Manila declared the sheriff’s sale of the two CPCs in favor of Ferrer null and void, upheld Villa Rey Transit, Inc. as owner of those CPCs, and awarded attorney’s fees. Both defendants and Villa Rey Transit, Inc. appealed; Pantranco filed a third-party complaint against Villarama.
Facts and Chronology
- Villarama operated 32 buses under two PSC-issued CPCs.
- He sold those two CPCs to Pantranco on January 8, 1959, including a ten-year covenant not to “apply for any TPU service identical or competing with the buyer.”
- On March 6, 1959, Villa Rey Transit, Inc. was incorporated with ₱500,000 capital (₱105,000 paid up; ₱85,000 of that by Villarama’s personal check).
- On April 7, 1959, Villa Rey Transit, Inc. bought five CPCs and 49 buses from Fernando for ₱249,000, subject to PSC approval; it received a provisional permit May 19, 1959.
- Before final PSC action, a Pangasinan court execution against Fernando led to levy and sheriff’s public auction July 16, 1959; Ferrer acquired two CPCs and sold them to Pantranco, which obtained provisional PSC authority July 22, 1959.
- Villa Rey Transit, Inc. secured a Supreme Court provisional operating order pending ownership resolution; it then filed suit in Manila to annul the sheriff’s sale and related PSC orders.
Issues Presented
- Does the ten-year non-competition stipulation cover existing lines or only new applications?
- If it covers existing lines, is the stipulation valid and enforceable under law?
- If valid, did it bind Villa Rey Transit, Inc. as Villarama’s alter ego?
Corporate Veil and Alter Ego Doctrine
• Evidence showed Villarama financed and controlled Villa Rey Transit, Inc.’s capitalization and assets, co-mingled corporate and personal funds, and directed corporate transactions without Board resolutions.
• Photostatic copies of vouchers and bank records (Exhs. 6–19, 22) were properly admitted under Rule 130, Sec. 5 as secondary evidence of lost originals.
• Preponderance of evidence established the corporation as Villarama’s alter ego, warranting piercing the corporate veil to enforce his contractual obligations.
Interpretation of the Restrictive Covenant
• The phrase “shall not … apply for any TPU service identical or competing with the buyer” was construed broadly to prohibit any PSC application—whether for new or transferred CPCs—that would compete on the same routes.
• Limiting the clause to only new line applications would defeat its purpose, enabling evasion by acquiring existing CPCs through third parties.
Validity of the Stipulation
• A restraint ancillary to a legitimate sale, limited in scope (competing routes only), duration (ten years), and territory (lines covered by the two CPCs), is reasonable, enforceable, and not against public policy.
• Jurisprudence permits partial restraints of trade incident to business transfer when necessary to protect the purchaser’s investment and goodwill, subject to reasonableness and PSC supervision.
Ownership of the Certificates
• Under the doctrine of caveat emptor and Article 1544, the sheriff’s sale conveyed only Fernando’s interest as of the levy date.
• Villa Rey Transit,
Case Syllabus (G.R. No. L-23893)
Factual Chronology
- Prior to 1959, Jose M. Villarama operated under Villa Rey Transit as a sole proprietor with two PSC certificates (Nos. 44213, 104651) authorizing 32 bus units.
- January 8, 1959: Villarama sold those two certificates to Pangasinan Transportation Co., Inc. (“Pantranco”) for ₱350,000, agreeing not to apply for any identical or competing service for ten years.
- March 6–10, 1959: Villa Rey Transit, Inc. (the “Corporation”) was organized with ₱500,000 capital stock, ₱200,000 subscribed, ₱105,000 paid-in (₱85,000 by Villarama’s check).
- April 7, 1959: The Corporation contracted to buy five PSC certificates (Nos. 59494, 63780, and three others), forty-nine buses, tools and equipment from Valentin Fernando for ₱249,000, subject to PSC approval and staggered payment.
- May 19, 1959: PSC granted provisional authority to the Corporation pending approval of sale.
- July 7–16, 1959: Sheriff levied and auctioned two certificates (Nos. 59494, 63780) under writ of execution in favor of Eusebio Ferrer; Ferrer became high bidder and secured a certificate of sale.
- Thereafter, Ferrer sold the same two certificates to Pantranco, and both parties filed for PSC approval and provisional operation.
Procedural History
- July 22, 1959: PSC provisionally assigned operation of the two disputed certificates to Pantranco during pendency of competing sale applications.
- Supreme Court interim relief: Pending ownership determination, PSC ordered the Corporation to operate the lines.
- November 4, 1959: The Corporation sued in CFI Manila (Civil Case No. 41845) to annul the sheriff’s sale to Ferrer and the subsequent transfer to Pantranco, and to declare itself the lawful owner. PSC was also named but later dismissed.
- Pantranco filed a third-party complaint against Jose M. Villarama, asserting enforcement of the ten-year non-compete clause.
- CFI decision: Declared the sheriff’s sale and Ferrer-Pantranco transfer null and void; confirmed the Corporation as owner of the two certificates; awarded the Corporation ₱5,000 attorney’s fees; dismissed PSC.
- All parties appealed to the Supreme Court with a joint record on appeal.
Issues Presented
- Does the restrictive stipulation in the January 8, 1959 sale (“shall not for ten years… apply for any TPU service identical or competing with the buyer”) cover existing lines as well as new applicatio