Umali vs. CA

BUENAFLOR C. UMALI, et. al vs. COURT OF APPEALS, BORMAHECO, INC. and PHILIPPINE MACHINERY PARTS MANUFACTURING CO., INC
The Castillos are the owners of a parcel of land which was given as security for a loan from the DBP. However the same were foreclosed due to failure of payment. Santiago Rivera, nephew of Mauricia Castillo, proposed to them the conversion into subdivision of the 4 parcels of land adjacent to the mortgaged property to raise the necessary fund. It was accepted by the Castillos and a MOA was executed by and between Slobec Realty and Development, Inc., represented by its President Santiago Rivera and the Castillo family. Rivera promised to pay the Castills P70,000.00 after the execution of the agreement and an additional P400,000 after it has been converted. Rivera purchased from Mr. Modesto Cervantes, President of Bormaheco 2 tractors.
Bormaheco, Inc. and Slobec represented by Rivera, executed a Sales Agreement over 1 unit of Caterpillar Tractor. Slobec, through Rivera, executed in favor of Bormaheco a Chattel Mortgage over the said equipment as security for the payment of a remaining balance of P180k. As further security of the balance, Slobec obtained from Insurance Corporation of the Phil. a Surety Bond. The surety bond was secured by an Agreement of Counter-Guaranty with Real Estate Mortgage executed by Rivera as president of Slobec and Mauricia Castillo and her children, as mortgagors and ICP as mortgagee. In giving the bond, ICP required that the Castillos mortgage to them the properties in question.
Meanwhile, for violation of the terms and conditions of the Counter-Guaranty Agreement, the properties of the Castillos were foreclosed by ICP As the highest bidder. ICP sold to PM Parts the 4 parcels of land. .
On 1976, Buenaflor M. Castillo Umali as the appointed administratrix of the properties in question filed an action for annulment of title. Plaintiffs impleaded Santiago M. Rivera as a party plaintiff. They contended that all the transactions are void for being entered into in fraud and without the consent and approval of the Court of First Instance of Quezon, before whom the administration proceedings has been pending.
ISSUE: Whether or not the veil of corporate fiction should be pierced.
RULING: NO. (If na discuss na to sa unang cases, so you can skip this part na.) Under the doctrine of piercing the veil of corporate entity, when valid grounds exist, the legal fiction that a corporation is an entity with a juridical personality separate and distinct from its members or stockholders may be disregarded. In such cases, the corporation will be considered as a mere association of persons. The members or stockholders of the corporation will be considered as the corporation, that is, liability will attach directly to the officers and stockholders. The doctrine applies when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or defend crime, or when it is made as a shield to confuse the legitimate issues or where a corporation is the mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.
In this case piercing the veil of corporate entity is not the proper remedy in order that the foreclosure proceeding may be declared a nullity under the circumstances obtaining in the legal case at bar.
First, the legal corporate entity is disregarded only if it is sought to hold the officers and stockholders directly liable for a corporate debt or obligation. Petitioners do not seek to impose a claim against the individual members of the corporations involved; on the contrary, it is these corporations which desire to enforce an alleged right against petitioners. Assuming that petitioners were indeed defrauded by private respondents in the foreclosure of the mortgaged properties, this fact alone is not, under the circumstances, sufficient to justify the piercing of the corporate fiction, since petitioners do not intend to hold the officers and/or members of respondent corporations personally liable therefor. Petitioners are merely seeking the declaration of the nullity of the foreclosure sale, which relief may be obtained without having to disregard the aforesaid corporate fiction attaching to respondent corporations. Secondly, petitioners failed to establish by clear and convincing evidence that private respondents were purposely formed and operated, and thereafter transacted with petitioners, with the sole intention of defrauding the latter.
The mere fact that the businesses of two or more corporations are interrelated is not a justification for disregarding their separate personalities, absent sufficient showing that the corporate entity was purposely used as a shield to defraud creditors and third persons of their rights.