Case Digest: WPM International Trading, Inc. et al. v. Labayen, 735 SCRA 297, September 17, 2014

Corporation Law | Piercing the Veil of Corporate Fiction

• Fe Corazon Labayen owns H.B.O. Systems Consultants, a management firm.
• WPM International Trading, Inc. (WPM) is a restaurant business; Warlito P. Manlapaz is its president.
• WPM contracted Labayen to manage Quickbite restaurant.
• Labayen engaged CLN Engineering Services to renovate Quickbite-Divisoria for ₱432,876.02, paid only ₱320,000.00.
• CLN sued Labayen and Manlapaz for the unpaid balance, Labayen was found liable by the RTC.
• Labayen sued WPM and Manlapaz for reimbursement, citing her limited role in the agreement.
• Manlapaz claims limited involvement and denies liability.
• RTC: Held Manlapaz liable, considering WPM as an extension of Manlapaz.
• CA: Affirmed the RTC’s decision, stating Manlapaz and WPM were essentially one entity.
• Petitioners appeal, arguing against piercing the corporate veil and limitation of liability to the original sum owed.

WoN WPM is a mere instrumentality, alter-ego, and business conduit of Manlapaz and Manlapaz is jointly and severally liable with WPM to the respondent for reimbursement, damages and interest. NO

The rule is settled that a corporation has a personality separate and distinct from the persons acting for and in its behalf and, in general, from the people comprising it. Following this principle, the obligations incurred by the corporate officers, or other persons acting as corporate agents, are the direct accountabilities of the corporation they represent, and not theirs. Thus, a director, officer or employee of a corporation is generally not held personally liable for obligations incurred by the corporation; it is only in exceptional circumstances that solidary liability will attach to them.

Incidentally, the doctrine of piercing the corporate veil applies only in three (3) basic instances, namely: 

a) when the separate and distinct corporate personality defeats public convenience, as when the corporate fiction is used as a vehicle for the evasion of an existing obligation; 

b) in fraud cases, or when the corporate entity is used to justify a wrong, protect a fraud, or defend a crime; or

 c) is used in alter ego cases, i.e., where a corporation is essentially a farce, since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.

Piercing the corporate veil based on the alter ego theory requires the concurrence of three elements, namely:

(1) Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own;

(2) Such control must have beenused by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff’s legal right; and

(3) The aforesaid control and breach of duty must have proximately caused the injury or unjust loss complained of.

The absence of any of these elements prevents piercing the corporate veil.

In the present case, the attendant circumstances do not establish that WPM is a mere alter ego of Manlapaz.

Aside from the fact that Manlapaz was the principal stockholder of WPM, records do not show that WPM was organized and controlled, and its affairs conducted in a manner that made it merely an instrumentality, agency, conduit or adjunct of Manlapaz. As held in Martinez v. Court of Appeals, the mere ownership by a singlestockholder of even all or nearly all of the capital stocks of a corporation is not by itself a sufficient ground to disregard the separate corporate personality. To disregard the separate juridical personality of a corporation, the wrongdoing must be clearly and convincingly established.

Likewise, the records of the case do not support the lower courts’ finding that Manlapaz had control or domination over WPM or its finances. That Manlapaz concurrently held the positions of president, chairman and treasurer, or that the Manlapaz’s residence is the registered principal office of WPM, are insufficient considerations to prove that he had exercised absolute control over WPM.

In this connection, we stress that the control necessary to invoke the instrumentality or alter ego rule is not majority or even complete stock control but such domination of finances, policies and practices that the controlled corporation has, so to speak, no separate mind, will or existence of its own, and is but a conduit for its principal. The control must be shown to have been exercised at the time the acts complained of took place. Moreover, the control and breach of duty must proximately cause the injury or unjust loss for which the complaint is made.

Here, the respondent failed to prove that Manlapaz, acting as president, had absolute control over WPM. Even granting that he exercised a certain degree of control over the finances, policies and practices of WPM, in view of his position as president, chairman and treasurer of the corporation, such control does not necessarily warrant piercing the veil of corporate fiction since there was not a single proof that WPM was formed to defraud CLN or the respondent, or that Manlapaz was guilty of bad faith or fraud.

On the contrary, the evidence establishes that CLN and the respondent knew and acted on the knowledgethat they were dealing with WPM for the renovation of the latter’s restaurant, and not with Manlapaz. That WPM later reneged on its monetary obligation to CLN, resulting to the filing of a civil case for sum of money against the respondent, does not automatically indicate fraud, in the absence of any proof to support it.

This Court also observed that the CA failed to demonstrate how the separate and distinct personalityof WPM was used by Manlapaz to defeat the respondent’s right for reimbursement. Neither was there any showing that WPM attempted to avoid liability or had no property against which to proceed.

Since no harm could be said to have been proximately caused by Manlapaz for which the latter could be held solidarily liable with WPM, and considering that there was no proof that WPM had insufficient funds, there was no sufficient justification for the RTC and the CA to have ruled that Manlapaz should be held jointly and severally liable to the respondent for the amount she paid to CLN. Hence, only WPM is liable to indemnify the respondent.

Finally, we emphasize that the piercing of the veil of corporate fiction is frowned upon and thus, must be done with caution. It can only be done if it has been clearly established that the separate and distinct personality of the corporation is used to justify a wrong, protect fraud, or perpetrate a deception. The court must be certain that the corporate fiction was misused to such an extent that injustice, fraud, or crime was committed against another, in disregard of its rights; it cannot be presumed.

On the Award of Moral Damages

On the award of moral damages, we find the same in order in view of WPM's unjustified refusal to pay a just debt. Under Article 2220 of the New Civil Code, moral damages may be awarded in cases of a breach of contract where the defendant acted fraudulently or in bad faith or was guilty of gross negligence amounting to bad faith.

In the present case, when payment for the balance of the renovation cost was demanded, WPM, instead of complying with its obligation, denied having authorized the respondent to contract in its behalf and accordingly refused to pay. Such cold refusal to pay a just debt amounts to a breach of contract in bad faith, as contemplated by Article 2220. Hence, the CA's order to pay moral damages was in order.

WHEREFORE, in light of the foregoing, the decision dated September 28, 2007 of the Court of Appeals in CA-G.R. CV No. 68289 is MODIFIED and.that petitioner Warlito P. Manlapaz is ABSOLVED from any liability under the renovation agreement.