CORPORATION LAW

Doctrine of Piercing the veil of corporate entity – alter ego case

ESTELITA BURGOS LIPAT and ALFREDO LIPAT, petitioners

G.R. No. 142435

Ponente: Quisumbing, J.

This petition for review on certiorari seeks the reversal of the Decision dated October 21, 1999
of the Court of Appeals in CA-G.R. CV No. 41536 which dismissed herein petitioners’ appeal
from the Decision dated February 10, 1993 of the Regional Trial Court (RTC) of Quezon City,
Branch 84, in Civil Case No. Q-89-4152. The trial court had dismissed petitioners’ complaint for
annulment of real estate mortgage and the extrajudicial foreclosure thereof. Likewise brought
for our review is the Resolution dated February 23, 2000 of the Court of Appeals which denied
petitioners’ motion for reconsideration.

Facts:
Petitioners, the spouses Alfredo Lipat and Estelita Burgos Lipat, owned “Bela’s Export
Trading” (BET), a single proprietorship with principal office at No. 814 Aurora Boulevard, Cubao,
Quezon City. BET was engaged in the manufacture of garments for domestic and foreign
consumption. The Lipats also owned the “Mystical Fashions” in the United States, which sells
goods imported from the Philippines through BET. Mrs. Lipat designated her daughter, Teresita
B. Lipat, to manage BET in the Philippines while she was managing “Mystical Fashions” in the
United States.
On December 14, 1978, Estelita Lipat executed a special power of attorney appointing
Teresita Lipat as her attorney-in-fact to obtain loans and other credit accommodations from
respondent Pacific Banking Corporation (Pacific Bank). She likewise authorized Teresita to
execute mortgage contracts on properties owned or co-owned by her as security for the
obligations to be extended by Pacific Bank including any extension or renewal thereof.
Sometime in April 1979, Teresita, by virtue of the special power of attorney, was able to
secure for and in behalf of her mother, Mrs. Lipat and BET, a loan from Pacific Bank amounting
to P583,854.00 to buy fabrics to be manufactured by BET and exported to “Mystical Fashions”
in the United States. As security therefor, the Lipat spouses, as represented by Teresita,
executed a Real Estate Mortgage over their property located at No. 814 Aurora Blvd., Cubao,
Quezon City.
On September 5, 1979, BET was incorporated into a family corporation named Bela’s
Export Corporation (BEC) in order to facilitate the management of the business. BEC was
engaged in the business of manufacturing and exportation of all kinds of garments of whatever
kind and description and utilized the same machineries and equipment previously used by BET.
Its incorporators and directors included the Lipat spouses who owned a combined 300 shares
out of the 420 shares subscribed, Teresita Lipat who owned 20 shares, and other close relatives
and friends of the Lipats. Estelita Lipat was named president of BEC, while Teresita became the
vice-president and general manager.
Eventually, the loan was later restructured in the name of BEC and subsequent loans
were obtained by BEC with the corresponding promissory notes duly executed by Teresita on
behalf of the corporation. A letter of credit was also opened by Pacific Bank in favor of A. O.
Knitting Manufacturing Co., Inc., upon the request of BEC after BEC executed the corresponding
trust receipt therefor. Export bills were also executed in favor of Pacific Bank for additional
finances.
These transactions were all secured by the real estate mortgage over the Lipats’ property.
The promissory notes, export bills, and trust receipt eventually became due and
demandable. Unfortunately, BEC defaulted in its payments. Consequently, the real estate
mortgage was foreclosed and after the compliance with the requirements of the law the
mortgaged property was sold at public auction. On January 31, 1989, a certificate of sale was
issued to respondent Eugenio D. Trinidad as the highest bidder.
Spouses Lipat filed before the Quezon City RTC a complaint for annulment of the real
estate mortgage, extrajudicial foreclosure and the certification of sale issued over the property
against Pacific Bank and Eugenio D. Trinidad.

Spouses Lipat’s contention- The promissory notes, trust receipt, and export bills were all ultra
vires acts of Teresita as they were executed without the requisite board resolution of the
Board of Directors of BEC. The Lipats also averred that assuming said acts were valid and
binding on BEC, the same were the corporation’s sole obligation, it having a personality
distinct and separate from spouses Lipat. It was likewise pointed out that Teresita’s authority
to secure a loan from Pacific Bank was specifically limited to Mrs. Lipat’s sole use and benefit
and that the real estate mortgage was executed to secure the Lipats’ and BET’s P583,854.00
loan only.

Pacific Bank and Trinidad’s contention- Lipat cannot evade payment of the value of the
promissory notes, trust receipt, and export bills with their property because they and the BEC
are one and the same, the latter being a family corporation.

RTC and CA both dismissed the case for lack of merit. Hence, this petition.

Issue:

1. Whether or not the doctrine of piercing the veil of corporate fiction is applicable in this
case.
2. Whether or not petitioners’ property under the real estate mortgage is liable not only
for the amount of 538,854.00 but also for the value of the promissory notes, trust
receipt, and export bills subsequently incurred by BEC.

Held:
 1. YES. The doctrine of piercing the veil of corporate fiction is applicable in this case. Upon
careful reading of the judgment of the RTC and the resolution of the appellate court, the
SC agrees that both courts relied upon the alter ego doctrine or instrumentality rule,
rather than fraud in piercing the veil of corporate fiction. When the corporation is the
mere alter ego or business conduit of a person, the separate personality of the
corporation may be disregarded. This is commonly referred to as the “instrumentality
rule” or the alter ego doctrine, which the courts have applied in disregarding the
separate juridical personality of corporations. Based on the evidence presented, in the
Court’s view, BEC is a mere continuation and successor of BET, and petitioners cannot
evade their obligations in the mortgage contract secured under the name of BEC on
the pretext that it was signed for the benefit and under the name of BET. We are thus
constrained to rule that the Court of Appeals did not err when it applied the
instrumentality doctrine in piercing the corporate veil of BEC.

2. YES. The petitioners’ property under the real estate mortgage is liable not only for the
amount of 538,854.00 but also for the value of the promissory notes, trust receipt, and
export bills subsequently incurred by BEC. As noted earlier, BEC merely succeeded BET
as petitioners’ alter ego; hence, petitioners’ mortgaged property must be held liable
for the subsequent loans and credit lines of BEC.

In sum, the court finds no reversible error of law committed by the Court of Appeals in
rendering the decision and resolution herein assailed by petitioners.
WHEREFORE, the petition is DENIED. The Decision dated October 21, 1999 and the
Resolution dated February 23, 2000 of the Court of Appeals in CA-G.R. CV No. 41536 are
AFFIRMED. Costs against petitioners.