June 2012 Philippine Supreme Court Decisions on Commercial Law

Here are select June 2012 rulings of the Supreme Court of the Philippines on commercial law:

Banks; diligence required.  Republic Act No. 8971, or the General Banking Law of 2000, recognizes the vital role of banks in providing an environment conducive to the sustained development of the national economy and the fiduciary nature of banking; thus, the law requires banks to have high standards of integrity and performance. The fiduciary nature of banking requires banks to assume a degree of diligence higher than that of a good father of a family. In the case at bar, petitioner itself was negligent in the conduct of its business when it extended unsecured loans to the debtors. Worse, it was in serious breach of its duty as the trustee of the MTI. It was not able to protect the interests of the parties and was even instrumental in violating the terms of the MTI, to the detriment of the parties thereto. Thus, petitioner has only itself to blame for being left with insufficient recourse against petitioner under the assailed MTI. Metropolitan Bank and Trust Company vs. Centro Development Corp., et al., G.R. No. 180974, June 13, 2012.

Corporation; corporate approval for appointment of trustee.  Reading carefully the Secretary’s Certificate, it is clear that the main purpose of the directors’ Resolution was to appoint petitioner as the new trustee of the previously executed and amended MTI. Going through the original and the revised MTI, we find no substantial amendments to the provisions of the contract. We agree with petitioner that the act of appointing a new trustee of the MTI was a regular business transaction. The appointment necessitated only a decision of at least a majority of the directors present at the meeting in which there was a quorum, pursuant to Section 25 of the Corporation Code.  Metropolitan Bank and Trust Company vs. Centro Development Corp., et al., G.R. No. 180974, June 13, 2012.

Corporation; derivative suits. The requisites for a derivative suit are as follows:

a)  the party bringing suit should be a shareholder as of the time of the act   or transaction complained of, the number of his shares not being material;

b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of directors for the appropriate relief but the latter has failed or refused to heed his plea; and

c)      the cause of action actually devolves on the corporation, the wrongdoing or harm having been, or being caused to the corporation and not to the particular stockholder bringing the suit.

In this case, petitioners, as members of the Board of Directors of the condominium corporation before the election in question, filed a complaint against the newly-elected members of the Board of Directors for the years 2004-2005, questioning the validity of the election held on April 2, 2004, as it was allegedly marred by lack of quorum, and praying for the nullification of the said election.

As stated by the Court of Appeals, petitioners’ complaint seek to nullify the said election, and to protect and enforce their individual right to vote. Petitioners seek the nullification of the election of the Board of Directors for the years 2004-2005, composed of  herein respondents, who pushed through with the election even if petitioners had adjourned the meeting allegedly due to lack of quorum.  Petitioners are the injured party, whose rights to vote and to be voted upon were directly affected by the election of the new set of board of directors. The party-in-interest are the petitioners as stockholders, who wield such right to vote. The cause of action devolves on petitioners, not the condominium corporation, which did not have the right to vote. Hence, the complaint for nullification of the election is a direct action by petitioners, who were the members of the Board of Directors of the corporation before the election, against respondents, who are the newly-elected Board of Directors. Under the circumstances, the derivative suit filed by petitioners in behalf of the condominium corporation in the Second Amended Complaint is improper.

The stockholder’s right to file a derivative suit is not based on any express provision of The Corporation Code, but is impliedly recognized when the law makes corporate directors or officers liable for damages suffered by the corporation and its stockholders for violation of their fiduciary duties, which is not the issue in this case. Legaspi Towers 300, Inc., Lilia Marquinez Palanca, et al. vs. Amelia P. Muer, Samuel M. Tanchoco, et al., G.R. No. 170783. June 18, 2012.

Corporations; solidary liability of corporate officers. Go may have acted in behalf of EEMI but the company’s failure to operate cannot be equated to bad faith. Cessation of business operation is brought about by various causes like mismanagement, lack of demand, negligence, or lack of business foresight. Unless it can be shown that the closure was deliberate, malicious and in bad faith, the Court must apply the general rule that a corporation has, by law, a personality separate and distinct from that of its owners.  As there is no evidence that Go, as EEMI’s President, acted maliciously or in bad faith in handling their business affairs and in eventually implementing the closure of its business, he cannot be held jointly and solidarily liable with EEMI. Ever Electrical Manufacturing, Inc. (EEMI) and Vicente Go vs. Samahang Manggagawa ng Ever Electrical/NAMAWU Local 224 represented by Felimon Panganiban, G.R. No. 194795. June 13, 2012.

Corporation; piercing the corporate veil. This Court sustains the ruling of the LA as affirmed by the NLRC that Miramar and Mar Fishing are separate and distinct entities, based on the marked differences in their stock ownership. Also, the fact that Mar Fishing’s officers remained as such in Miramar does not by itself warrant a conclusion that the two companies are one and the same. As this Court held in Sesbreño v. Court of Appeals, the mere showing that the corporations had a common director sitting in all the boards without more does not authorize disregarding their separate juridical personalities.

Neither can the veil of corporate fiction between the two companies be pierced by the rest of petitioners’ submissions, namely, the alleged take-over by Miramar of Mar Fishing’s operations and the evident similarity of their businesses. At this point, it bears emphasizing that since piercing the veil of corporate fiction is frowned upon, those who seek to pierce the veil must clearly establish that the separate and distinct personalities of the corporations are set up to justify a wrong, protect a fraud, or perpetrate a deception. This, unfortunately, petitioners have failed to do. Vivian T. Ramirez, et al. vs. Mar Fishing Co., Inc,. et al., G.R. No. 168208, June 13, 2012.

Corporation; piercing the corporate veil. the RTC had sufficient factual basis to find that petitioner and Travel and Tours Advisers, Inc. were one and the same entity, specifically:– (a) documents submitted by petitioner in the RTC showing that William Cheng, who claimed to be the operator of Travel and Tours Advisers, Inc., was also the President/Manager and an incorporator of the petitioner; and (b) Travel and Tours Advisers, Inc. had been known in Sorsogon as Goldline. Gold Line Tours, Inc. vs. Heirs of Maria Concepcion Lacsa, G.R. No. 159108, June 18, 2012.

Crossed check. The checks that Interco issued in favor of SSPI were all crossed, made payable to SSPI’s order, and contained the notation “account payee only.”  This creates a reasonable expectation that the payee alone would receive the proceeds of the checks and that diversion of the checks would be averted.  This expectation arises from the accepted banking practice that crossed checks are intended for deposit in the named payee’s account only and no other.  At the very least, the nature of crossed checks should place a bank on notice that it should exercise more caution or expend more than a cursory inquiry, to ascertain whether the payee on the check has authorized the holder to deposit the same in a different account.  It is well to remember that “[t]he banking system has become an indispensable institution in the modern world and plays a vital role in the economic life of every civilized society.  Whether as mere passive entities for the safe-keeping and saving of money or as active instruments of business and commerce, banks have attained an [sic] ubiquitous presence among the people, who have come to regard them with respect and even gratitude and, above all, trust and confidence.  In this connection, it is important that banks should guard against injury attributable to negligence or bad faith on its part.  As repeatedly emphasized, since the banking business is impressed with public interest, the trust and confidence of the public in it is of paramount importance.  Consequently, the highest degree of diligence is expected, and high standards of integrity and performance are required of it.”

Equitable did not observe the required degree of diligence expected of a banking institution under the existing factual circumstances.

The fact that a person, other than the named payee of the crossed check, was presenting it for deposit should have put the bank on guard.  It should have verified if the payee (SSPI) authorized the holder (Uy) to present the same in its behalf, or indorsed it to him.  Considering however, that the named payee does not have an account with Equitable (hence, the latter has no specimen signature of SSPI by which to judge the genuineness of its indorsement to Uy), the bank knowingly assumed the risk of relying solely on Uy’s word that he had a good title to the three checks.  Such misplaced reliance on empty words is tantamount to gross negligence, which is the “absence of or failure to exercise even slight care or diligence, or the entire absence of care, evincing a thoughtless disregard of consequences without exerting any effort to avoid them. Equitable Banking Corporation vs. Special Steel Products, Inc. and Augusto L. Pardo, G.R. No. 175350, June 13, 2012.

Manager’s check; delivery.  An ordinary check refers to a bill of exchange drawn by a depositor (drawer) on a bank (drawee), requesting the latter to pay a person named therein (payee) or to the order of the payee or to the bearer, a named sum of money.  The issuance of the check does not of itself operate as an assignment of any part of the funds in the bank to the credit of the drawer. Here, the bank becomes liable only after it accepts or certifies the check. After the check is accepted for payment, the bank would then debit the amount to be paid to the holder of the check from the account of the depositor-drawer.

There are checks of a special type called manager’s or cashier’s checks. These are bills of exchange drawn by the bank’s manager or cashier, in the name of the bank, against the bank itself.  Typically, a manager’s or a cashier’s check is procured from the bank by allocating a particular amount of funds to be debited from the depositor’s account or by directly paying or depositing to the bank the value of the check to be drawn. Since the bank issues the check in its name, with itself as the drawee, the check is deemed accepted in advance. Ordinarily, the check becomes the primary obligation of the issuing bank and constitutes its written promise to pay upon demand.

Nevertheless, the mere issuance of a manager’s check does not ipso facto work as an automatic transfer of funds to the account of the payee. In case the procurer of the manager’s or cashier’s check retains custody of the instrument, does not tender it to the intended payee, or fails to make an effective delivery, we find the following provision on undelivered instruments under the Negotiable Instruments Law applicable:

Sec. 16. Delivery; when effectual; when presumed. – Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. As between immediate parties and as regards a remote party other than a holder in due course, the delivery, in order to be effectual, must be made either by or under the authority of the party making, drawing, accepting, or indorsing, as the case may be; and, in such case, the delivery may be shown to have been conditional, or for a special purpose only, and not for the purpose of transferring the property in the instrument. But where the instrument is in the hands of a holder in due course, a valid delivery thereof by all parties prior to him so as to make them liable to him is conclusively presumed. And where the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved. (Emphasis supplied.)

Petitioner acknowledges that the Manager’s Check was procured by respondents, and that the amount to be paid for the check would be sourced from the deposit account of Hi-Tri. When Rosmil did not accept the Manager’s Check offered by respondents, the latter retained custody of the instrument instead of cancelling it. As the Manager’s Check neither went to the hands of Rosmil nor was it further negotiated to other persons, the instrument remained undelivered. Petitioner does not dispute the fact that respondents retained custody of the instrument.

Since there was no delivery, presentment of the check to the bank for payment did not occur. An order to debit the account of respondents was never made. In fact, petitioner confirms that the Manager’s Check was never negotiated or presented for payment to its Ermita Branch, and that the allocated fund is still held by the bank. As a result, the assigned fund is deemed to remain part of the account of Hi-Tri, which procured the Manager’s Check. The doctrine that the deposit represented by a manager’s check automatically passes to the payee is inapplicable, because the instrument – although accepted in advance – remains undelivered. Hence, respondents should have been informed that the deposit had been left inactive for more than 10 years, and that it may be subjected to escheat proceedings if left unclaimed. Rizal Commercial Banking Corporation vs. Hi-Tri Development Corporation and Luz R. Bakunawa, G.R. No. 192413, June 13, 2012.

Trust receipts; definition.  There are two obligations in a trust receipt transaction.  The first is covered by the provision that refers to money under the obligation to deliver it (entregarla) to the owner of the merchandise sold.  The second is covered by the provision referring to merchandise received under the obligation to return it (devolvera) to the owner.  Thus, under the Trust Receipts Law, intent to defraud is presumed when (1) the entrustee fails to turn over the proceeds of the sale of goods covered by the trust receipt to the entruster; or (2) when the entrustee fails to return the goods under trust, if they are not disposed of in accordance with the terms of the trust receipts.

In all trust receipt transactions, both obligations on the part of the trustee exist in the alternative – the return of the proceeds of the sale or the return or recovery of the goods, whether raw or processed. When both parties enter into an agreement knowing that the return of the goods subject of the trust receipt is not possible even without any fault on the part of the trustee, it is not a trust receipt transaction penalized under Section 13 of P.D. 115; the only obligation actually agreed upon by the parties would be the return of the proceeds of the sale transaction.  This transaction becomes a mere loan, where the borrower is obligated to pay the bank the amount spent for the purchase of the goods.

Based on these premises, we cannot consider the agreements between the parties in this case to be trust receipt transactions because (1) from the start, the parties were aware that ACDC could not possibly be obligated to reconvey to LBP the materials or the end product for which they were used; and (2) from the moment the materials were used for the government projects, they became public, not LBP’s, propertyLand Bank of the Philippines vs. Lamberto C. Perez, et al., G.R. No. 166884. June 13, 2012.

(Hector thanks Rommell D. Lumagui for his assistance to Lexoterica.)