G.R. No. 141617 – 415 Phil. 153 – Mercantile Law – Corporation Law – Piercing the Veil of Corporate Fiction – Fraud Test vs Alter Ego Test
Adalia Francisco was the Treasurer of Cardale Financing and Realty Corporation (Cardale). Cardale, through Francisco, contracted with Andrea Gutierrez for the latter to execute a deed of sale over certain parcels of land in favor of Cardale. It was agreed that Gutierrez shall hand over the titles to Cardale but Cardale shall only give a downpayment, and later on full payment in installment. As security, Gutierrez shall retain a lien over the properties by way of mortgage. Nonetheless, Cardale defaulted in its payment. Gutierrez then filed a petition with the trial court to have the Deed rescinded.
While the case was pending, Gutierrez died, and Rita Mejia, being the executrix of the will of Gutierrez took over the affairs of the estate.
The case dragged on for 14 years because Francisco lost interest in presenting evidence. And while the case was pending, Cardale failed to pay real estate taxes over the properties in litigation hence, the local government subjected said properties to an auction sale to satisfy the tax arrears. The highest bidder in the auction sale was Merryland Development Corporation (Merryland).
Apparently, Merryland is a corporation in which Francisco was the President and majority stockholder. Mejia then sought to nullify the auction sale on the ground that Francisco used the two corporations as dummies to defraud the estate of Gutierrez especially so that these circumstances are present:
- Francisco did not inform the lower court that the properties were delinquent in taxes;
- That there was notice for an auction sale and Francisco did not inform the Gutierrez estate and as such, the estate was not able to perform appropriate acts to remedy the same;
- That without knowledge of the auction, the Gutierrez estate cannot exercise their right of redemption;
- That Francisco failed to inform the court that the highest bidder in the auction sale was Merryland, her other company;
- That thereafter, Cardale was dissolved and the subject properties were divided and sold to other people.
ISSUE: Whether or not Merryland and Francisco shall be held solidarily liable.
HELD: No. Only Francisco shall be held liable to pay the indebtedness to the Gutierrez estate. What was only proven was that Francisco defrauded the Gutierrez estate as clearly shown by the dubious circumstances which caused the encumbered properties to be auctioned. By not disclosing the tax delinquency, Francisco left Gutierrez in the dark. She obviously acted in bad faith. Francisco’s elaborate act of defaulting payment, disregarding the case, not paying realty taxes (since as treasurer of Cardale, she’s responsible for paying the real estate taxes for Cardale), and failure to advise Gutierrez of the tax delinquencies all constitute bad faith. The attendant fraud and bad faith on the part of Francisco necessitates the piercing of the veil of corporate fiction in so far as Cardale and Francisco are concerned. Cardale and Francisco cannot escape liability now that Cardale has been dissolved. Francisco shall then pay Guttierez estate the outstanding balance with interest (total of P4.3 + million).
As regards Merryland however, there was no proof that it is merely an alter ego or a business conduit of Francisco. Merryland merely bought the properties from the auction sale and such per se is not a wrongful act or a fraudulent act. Time and again it has been reiterated that mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality. Hence, Merryland can’t be held solidarily liable with Francisco.
