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CALIFORNIA MANUFACTURING COMPANY v. ADVANCED TECHNOLOGY SYSTEM

FACTS:

The petitioner, California Manufacturing Company, Inc. (CMCI), leased a Prodopak machine from the respondent, Advanced Technology Systems, Inc. (ATSI), in August 2001. The monthly rental fee was agreed upon as P98,000. In November 2003, ATSI filed a complaint for the sum of money against CMCI, claiming unpaid rentals for the months of June, July, August, and September 2003. ATSI alleged that CMCI defaulted on its obligation without just cause and ignored the billing statements and demand letter. ATSI sought payment for 30% of the judgment award as attorney's fees.

CMCI moved for the dismissal of the complaint, claiming that legal compensation had extinguished the obligation. The RTC ruled that trial on the merits was necessary to resolve the conflicting claims of the parties and dismissed the motion to dismiss. CMCI argued that ATSI was the same as Processing Partners and Packaging Corporation (PPPC), which was CMCI's toll packer. CMCI alleged that PPPC had a separate obligation to pay the mobilization fund advanced by CMCI, and this debt should be set off against the rentals for the Prodopak machine. CMCI argued that legal compensation had set in.

After trial, the RTC ruled in favor of ATSI, ordering CMCI to pay the unpaid rentals for the Prodopak machine, plus legal interest, attorney's fees, and costs of litigation. CMCI appealed the decision to the Court of Appeals (CA), which affirmed the ruling of the RTC. The CA held that legal compensation had not set in because the element of mutuality of parties was lacking. The CA also rejected CMCI's argument to pierce the corporate veil and found no indication of estoppel. However, the CA deleted the award of attorney's fees and costs of litigation for lack of justification.

CMCI filed a motion for reconsideration, but the CA denied the motion. Hence, CMCI filed a petition for review with the Supreme Court. The main issue raised in the petition is whether the CA erred in affirming the ruling of the RTC that legal compensation had not occurred.

ISSUES:

  1. Whether the circumstances presented by CMCI justify the piercing of the corporate veil between ATSI and PPPC.

  2. Whether the courts a quo erred in finding that ATSI is distinct and separate from PPPC.

  3. Failure of CMC to honor its agreement with PPC anent the pickling machinery

  4. Pre-termination of toll packing agreement for KLS Spaghetti Sauce without just cause

  5. Unpaid rentals for the lease of machinery from Advanced Technology Systems, Inc.

RULING:

  1. The claim that ATSI is merely an alter ego of PPPC and that the circumstances presented justify piercing the corporate veil is a question of fact. The Supreme Court's jurisdiction is limited to reviewing errors of law, and there is no showing that the factual findings of the lower courts are devoid of support or glaringly erroneous. Thus, the petition is denied.

  2. The court reviewed the evidence on record and found no compelling reason to disturb the findings of the lower courts that ATSI is distinct and separate from PPPC. Any piercing of the corporate veil must be done with caution and must be clearly and convincingly established. The alter ego theory presented by CMCI based on interlocking boards of directors and stock ownership was rejected, as mere ownership by a single stockholder does not suffice to disregard the corporate veil. The instrumentality or control test requires complete domination of finances, policy, and business practice with respect to the transaction in question, which CMCI failed to prove. Thus, the CA's ruling is sustained.

  3. The Supreme Court affirmed the decision of the Court of Appeals, ruling that there is no basis to apply legal compensation to justify CMCI's non-payment of rentals for the lease of machinery. CMCI failed to present credible proof or exact computation of the supposed debt of PPPC. The uncertainty in the alleged debt negates CMCI's invocation of legal compensation.

PRINCIPLES:

  • The piercing of the corporate veil must be done with caution and must be clearly and convincingly established.

  • The alter ego doctrine applies in cases where a corporation is merely an instrumentality, agency, conduit, or adjunct of another corporation.

  • Mere majority or complete stock control does not automatically justify piercing the corporate veil.

  • The separate personality of a corporation will be disregarded when it is misused or necessary in the interest of justice.

  • The alter ego theory requires complete domination of finances, policy, and business practice with respect to the transaction in question. Mere interlocking boards of directors and stock ownership are not sufficient grounds to disregard the corporate veil.

  • The alter ego doctrine requires a showing of control and domination of the subsidiary by the parent corporation, unjust, fraudulent, or wrongful conduct by the parent corporation, and a causal connection between the conduct and the injury suffered by the plaintiff.

  • Legal compensation, as provided under Article 1279 of the Civil Code, requires that the debts be liquidated and demandable. Liquidated debts are those whose exact amounts have already been determined.