View full case

BIBIANO O. REYNOSO v. CA

FACTS:

The Commercial Credit Corporation (CCC) organized franchise companies in the 1960s, including the Commercial Credit Corporation of Quezon City (CCC-QC), with petitioner Bibiano O. Reynoso, IV as its resident manager. CCC-QC entered into a management contract with CCC but was discontinued due to the DOSRI Rule. CCC then formed CCC Equity Corporation (CCC-Equity), a subsidiary, to which it transferred its equity in CCC-QC. Petitioner became an employee of CCC-Equity but continued as the resident manager of CCC-QC. He received his salary from CCC-Equity and became a member of the Commercial Credit Corporation Employees Pension Plan. Petitioner oversaw operations at CCC-QC, which involved accepting funds and loaning them to borrowers. CCC-QC filed a complaint against petitioner for embezzling funds, but the trial court dismissed it. Both parties appealed, but CCC-QC's appeal was dismissed. Petitioner filed a motion for an alias writ of execution, examination of judgment debtor, and to bring financial records to court. CCC-QC opposed the motion, claiming that CCC had taken possession of its premises and records.

Petitioner filed a complaint against CCC and General Credit Corporation for the collection of a sum of money. CCC-QC filed an answer stating that it was not a party to the case, and petitioner's claim should be directed against CCC-QC. Petitioner invoked a decision of the Securities and Exchange Commission (SEC) declaring that General Credit Corporation, CCC-Equity, and other franchised companies were one corporation.

The Regional Trial Court of Quezon City issued an alias writ of execution, and General Credit Corporation filed an omnibus motion alleging that the levy on its properties was erroneous because SEC Case No. 2581 was pending appeal. The court denied the omnibus motion and directed the issuance of an alias writ of execution. General Credit Corporation filed a complaint in the Regional Trial Court of Pasig seeking to nullify the levy on its land. The court did not issue a temporary restraining order. General Credit Corporation filed petitions for certiorari with the Court of Appeals.

The Court of Appeals declared that the refusal to issue a restraining order was moot and provided injunctive relief to prohibit auction sales and levying on General Credit Corporation's properties. It nullified and set aside the order of the Regional Trial Court of Quezon City. Petitioner filed a petition for review with the Supreme Court challenging the decision of the Court of Appeals.

ISSUES:

  1. Whether or not the judgment in favor of the petitioner may be executed against respondent General Credit Corporation.

  2. Whether or not the doctrine of piercing the veil of corporate entity applies to hold General Credit Corporation liable for the obligations of CCC-QC.

  3. Whether CCC-QC and CCC are considered separate legal entities.

  4. Whether CCC-QC is an instrumentality or agency of CCC.

  5. Whether or not the corporate fiction should be appreciated in favor of CCC.

  6. Whether or not the corporate veil of CCC should be pierced.

RULING:

  1. The Supreme Court ruled in favor of the petitioner. It held that the judgment in favor of the petitioner may be executed against respondent General Credit Corporation. The doctrine of piercing the veil of corporate entity applies in this case to hold General Credit Corporation liable for the obligations of CCC-QC.

  2. The corporate fiction between CCC-QC and CCC is pierced, and they are considered as a single entity. The organization of subsidiary corporations is usually done for legitimate purposes such as the aggrupation of capital and decentralization of activities. However, when the corporate device is used to avoid liability for obligations and perpetrate fraud or promote injustice, the law steps in to remedy the problem. In this case, CCC had dominant control of CCC-QC's operations, evidenced by an exclusive management contract, the appointment of CCC's employee as the resident manager of CCC-QC, and the sharing of funds and office space. The complaint in this case was even verified by the director-representative of CCC. Therefore, CCC-QC is considered an instrumentality or agency of CCC.

  3. The claim of CCC, now General Credit Corporation, that the corporate fiction should be appreciated in its favor is without merit. The financial obligations of CCC-QC were not satisfied, and CCC-QC cooperated in its own closure, leading to obvious fraud of its creditors. Thus, the corporate fiction is pierced to remedy the injustice.

  4. The court ruled that the corporate fiction should not be appreciated in favor of CCC and that the corporate veil of CCC should be pierced. The decision of the Court of Appeals was reversed and set aside. The injunction against the holding of an auction sale for the execution of the decision in Civil Case No. Q-30583 of properties of General Credit Corporation, as well as the levying upon and selling on execution of other properties of General Credit Corporation, was lifted.

PRINCIPLES:

  • A corporation is an artificial being created by operation of law, separate and distinct from its members and other legal entities.

  • The doctrine of piercing the veil of corporate entity may be applied when the corporate fiction is used to perpetrate a fraud, evade an existing obligation, defraud creditors, or shield the corporation from the effects of a court decision.

  • The defense of separateness will be disregarded when a subsidiary corporation is so controlled by the mother corporation that it becomes an instrument or agent of its parent.

  • The legal fiction of a corporation being a separate entity with distinct and separate personality should not be used as a subterfuge to commit injustice and circumvent the law.

  • The corporate fiction may be pierced when it is used to avoid liability for obligations and perpetrate fraud or promote injustice.

  • Subsidiary corporations may be considered as instrumentality or agency of the mother corporation if there is dominant control over their operations and shared funds, office space, and personnel.

  • Cooperation of a subsidiary corporation in its own closure to the detriment of its creditors can be considered as fraud, justifying the piercing of the corporate fiction.

  • The corporate fiction should not be appreciated when it is deliberately and maliciously designed to evade financial obligations.

  • The corporate veil may be pierced when it is used as a handy deception to avoid a judgment debt and work an injustice.

  • Courts have the duty to put an end to controversy and further litigation should not be encouraged when the issue can be determined based on the records.