University of the Philippines College of Law | Corporation Law | D2021

Topic Piercing the veil of corporate fiction > grounds for application of doctrine
Case Name Villa Rey Transit v. Ferrer
Case No. & Date G.R. No. L-23893 October 29, 1968
Ponente Angeles, J.
Petitioners VILLA REY TRANSIT, INC., plaintiff-appellant, vs.
Respondents EUSEBIO E. FERRER, PANGASINAN TRANSPORTATION CO., INC. and PUBLIC SERVICE
COMMISSION, defendants.

EUSEBIO E. FERRER and PANGASINAN TRANSPORTATION CO., INC., defendants-appellants.

Summary (recit- Jose Villarama was an operator of a bus transportation with 2 CPCs from PSC. He sold these to PANTRANCO,
friendly) with the CONDITION that he shall not operate a service identical with a buyer for 10 years. Barely 3 months
after, Villa Rey Transit, Inc. (CORPORATION) was organized, with his wife as one of the incorporators. After
registration with SEC, CORPORATION bought 5 CPCs and 49 buses from FERNANDO. The Sheriff of manila,
levied on 2 of the 5 CPCs in favor of FERRER, judgment creditor of FERNANDO. FERRER was the highest bidder
in the public sale.

FERRER sold 2 CPCs to PANTRANCO. CORPORATION filed against FERRER, PANTRANCO, and PSC for
annulment of the sheriff’s sale. PANTRANCO alleged that VILLA REY (CORPORATION) was disqualified from
operating the CPCs in question by virtue of the CONDITION, alleging that JOSE VILLARAMA used the
CORPORATION to circumvent the agreement.
Doctrine/s The doctrine that a corporation is a legal entity distinct and separate from the members and stockholders
who compose it is recognized and respected in all cases which are within reason and the law. When the
fiction is urged as a means of perpetrating a fraud or an illegal act or as a vehicle for the evasion of an
existing obligation, the circumvention of statutes, the achievement or perfection of a monopoly or generally
the perpetration of knavery or crime, the veil with which the law covers and isolates the corporation from
the members or stockholders who compose it will be lifted to allow for its consideration merely as an
aggregation of individuals.

RELEVANT FACTS

1. Jose Villarama was an operator of a bus transportation pursuant to two certificates of public convenience granted him by
the Public Service Commission (PSC). The licenses authorized him to operate 32 units on various routes from Pangasinan to
Manila, and vice-versa.
2. He sold the CPCs to Pangasinan Transportation Company, Inc. (PANTRANCO) for P350K
a. with the CONDITION that the seller (Villarama) "shall not for a period of 10 years, apply for any TPU service
identical or competing with the buyer (PANTRANCO)."
3. Barely three months thereafter, a corporation called Villa Rey Transit, Inc. (the CORPORATION) was organized
a. Capital stock of P500,000.00 divided into 5,000 shares of the par value of P100.00 each; P200,000.00 was the
subscribed stock.
b. Natividad Villarama (wife of Jose Villarama) was one of the incorporators, and she subscribed for P1,000.00; the
balance of P199,000.00 was subscribed by the brother and sister-in-law of Jose Villarama; of the subscribed capital
stock, P105,000.00 was paid to the treasurer of the corporation, Natividad.
4. In less than a month after its registration with the SEC, the Corporation bought 5 CPCS and 49 buses from one Valentin
Fernando.
5. The very same day that the contract of sale was executed, the parties thereto immediately applied with the PSC for its
approval, with a prayer for the issuance of a provisional authority in favor of the vendee Corporation to operate the service
therein involved. PSC granted the provisional permit with the condition that it can be modified or revoked by the PSC at any
time.
6. However, before the PSC could take final action on the application for approval of sale, the Sheriff of Manila levied on 2 of
the 5 CPCS, in favor of Eusebio Ferrer, judgment creditor, against Fernando, judgment debtor. This was pursuant to a Writ
of Execution issued by CFI Pangasinan in a separate civil case.
7. A public sale was conducted by the Sheriff on the 2 certificates. Ferrer was the highest bidder. Ferrer sold the two CPCs to
PANTRANCO.
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8. CORPORATION filed a complaint against Ferrer, Pantranco and the PSC for the annulment of the sheriff’s sale.
a. Pantranco, on its part, filed a third-party complaint against Villarama, alleging that Villarama and/or the
Corporation was disqualified from operating the two certificates in question by virtue of the CONDITION.
9. The trial court declared null and void the sheriff's sale of the 2 CPCs in favor of Ferrer and the subsequent sale thereof by
the latter to Pantranco and declaring Villa Rey Transit, Inc., to be the lawful owner of the said certificates of public
convenience.
10. Arguments:
a. Pantranco disputes the correctness of the decision insofar as it holds that Villa Rey Transit, Inc. (Corporation) is a
distinct and separate entity from Jose M. Villarama; that the restriction clause in the contract of January 8, 1959
between Pantranco and Villarama is null and void; that the Sheriff's sale of July 16, 1959, is likewise null and void;
and the failure to award damages in its favor and against Villarama.
b. Ferrer, for his part, challenges the decision insofar as it holds that the sheriff's sale is null and void; and the sale of
the two certificates in question by Valentin Fernando to the Corporation, is valid. He also assails the award of
P5,000.00 as attorney's fees in favor of the Corporation, and the failure to award moral damages to him as prayed
for in his counterclaim.
c. The Corporation, on the other hand, prays for a review of that portion of the decision awarding only P5,000.00 as
attorney's fees, and insisting that it is entitled to an award of P100,000.00 by way of exemplary damages.

ISSUE AND RATIO DECIDENDI

Issue Ratio
Does the stipulation between  The intention of the parties was to eliminate the seller as a competitor of the buyer
Villarama and Pantranco, as for ten years. To apply the prohibition only to the acquisition of new certificates of
contained in the deed of sale, that public convenience through an application with the PSC, is to allow the seller just
the former "SHALL NOT FOR A the same to compete with the buyer as long as his authority to operate is only
PERIOD OF 10 YEARS FROM THE acquired through transfer or sale from a previous operator, thus defeating the
DATE OF THIS SALE, APPLY FOR purpose or intention of the parties.
ANY TPU SERVICE IDENTICAL OR
COMPETING WITH THE BUYER,"
apply to new lines only or does it
include existing lines?;Only to new
lines

Assuming that said stipulation  Analyzing the characteristics of the questioned stipulation, We find that although it
covers all kinds of lines, is such is in the nature of an agreement suppressing competition, it is, however, merely
stipulation valid and enforceable?; ancillary or incidental to the main agreement which is that of sale. The suppression
YES or restraint is only partial or limited: first, in scope, it refers only to application for
TPU by the seller in competition with the lines sold to the buyer; second, in
duration, it is only for ten (10) years; and third, with respect to situs or territory,
the restraint is only along the lines covered by the certificates sold. In view of these
limitations, coupled with the consideration of P350,000.00 for just two certificates
of public convenience, and considering, furthermore, that the disputed stipulation
is only incidental to a main agreement, the same is reasonable and it is not harmful
nor obnoxious to public service. It does not appear that the ultimate result of the
clause or stipulation would be to leave solely to Pantranco the right to operate
along the lines in question, thereby establishing monopoly or predominance
approximating thereto. We believe the main purpose of the restraint was to
protect for a limited time the business of the buyer.

In the affirmative, that said  The restrictive clause in the contract entered into by the Villarama and Pantranco
stipulation is valid, did it bind the is also enforceable and binding against the said Corporation.
Corporation? YES [RELEVANT  The evidence further shows that the initial cash capitalization of the corporation
PART] was mostly financed by Villarama; he supplied the organization expenses and the
assets of the Corporation, such as trucks and equipment; there was no actual
payment by the original subscribers of the amounts of P95,000.00 and P100,000.00
as appearing in the books; Villarama made use of the money of the Corporation
and deposited them to his private accounts; and the Corporation paid his personal
accounts.
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 The evidence has disclosed that Villarama, albeit was not an incorporator or
stockholder of the Corporation, alleging that he did not become such, because he
did not have sufficient funds to invest, his wife, however, was an incorporator with
the least subscribed number of shares, and was elected treasurer of the
Corporation. The finances of the Corporation which, under all concepts in the law,
are supposed to be under the control and administration of the treasurer keeping
them as trust fund for the Corporation, were, nonetheless, manipulated and
disbursed as if they were the private funds of Villarama, in such a way and extent
that Villarama appeared to be the actual owner-treasurer of the business without
regard to the rights of the stockholders.
 Villarama's explanation on the matter of his involvement with the corporate affairs
of the Corporation only renders more credible Pantranco's claim that his control
over the corporation, especially in the management and disposition of its funds,
was so extensive and intimate that it is impossible to segregate and identify which
money belonged to whom. The interference of Villarama in the complex affairs of
the corporation, and particularly its finances, are much too inconsistent with the
ends and purposes of the Corporation law, which, precisely, seeks to separate
personal responsibilities from corporate undertakings. It is the very essence of
incorporation that the acts and conduct of the corporation be carried out in its own
corporate name because it has its own personality.
 The doctrine that a corporation is a legal entity distinct and separate from the
members and stockholders who compose it is recognized and respected in all
cases which are within reason and the law. When the fiction is urged as a means of
perpetrating a fraud or an illegal act or as a vehicle for the evasion of an existing
obligation, the circumvention of statutes, the achievement or perfection of a
monopoly or generally the perpetration of knavery or crime, the veil with which
the law covers and isolates the corporation from the members or stockholders
who compose it will be lifted to allow for its consideration merely as an
aggregation of individuals.
 Upon the foregoing considerations, We are of the opinion, and so hold, that the
preponderance of evidence have shown that the Villa Rey Transit, Inc. is an alter
ego of Jose M. Villarama, and that the restrictive clause in the contract entered
into by the latter and Pantranco is also enforceable and binding against the said
Corporation. For the rule is that a seller or promisor may not make use of a
corporate entity as a means of evading the obligation of his covenant. Where the
Corporation is substantially the alter ego of the covenantor to the restrictive
agreement, it can be enjoined from competing with the covenantee.

PREMISES CONSIDERED, the judgment appealed from is hereby modified as follows:

1. The sale of the two certificates of public convenience in question by Valentin Fernando to Villa Rey Transit, Inc. is declared
preferred over that made by the Sheriff at public auction of the aforesaid certificate of public convenience in favor of Eusebio Ferrer;

2. Reversed, insofar as it dismisses the third-party complaint filed by Pangasinan Transportation Co. against Jose M. Villarama,
holding that Villa Rey Transit, Inc. is an entity distinct and separate from the personality of Jose M. Villarama, and insofar as it
awards the sum of P5,000.00 as attorney's fees in favor of Villa Rey Transit, Inc.;

3. The case is remanded to the trial court for the reception of evidence in consonance with the above findings as regards the amount
of damages suffered by Pantranco; and

4. On equitable considerations, without costs. So ordered.