Francisco Motors Corporation vs. CA

FRANCISCO MOTORS CORPORATION, petitioner,
vs.
COURT OF APPEALS and SPOUSES GREGORIO and LIBRADA MANUEL, respondents.

G.R. No. 100812
25 June 1999

Facts: 

On 23 January 1985, Francisco Motors Corp. filed a complaint against Spouses Gregorio and Librada Manuel to recover P3,412.06, representing the balance of the jeep body purchased by the Manuels from Francisco Motors; an additional sum of P20,454.80 representing the unpaid balance on the cost of repair of the vehicle; and P6,000.00 for cost of suit and attorney’s fees. To the original balance on the price of jeep body were added the costs of repair.

In their answer, the Manuel spouses interposed a counterclaim for unpaid legal services by Gregorio Manuel in the amount of P50,000 which was not paid by the incorporators, directors and officers of Francisco Motors. The trial court decided the case on 26 June 1985, in favor of Francisco Motors in regard to its claim for money, but also allowed the counter-claim of the Manuel spouses.

Both parties appealed.

On 15 April 1991, the Court of Appeals sustained the trial court’s decision.

Hence, the present petition for review on certiorari.  

Issue:

Whether the Francisco Motors Corporation should be liable for the legal services of Gregorio Manuel rendered in the intestate proceedings over Benita Trinidad’s estate (of the Francisco family).  

Held:

Basic in corporation law is the principle that a corporation has a separate personality distinct from its stockholders and from other corporations to which it may be connected. However, under the doctrine of piercing the veil of corporate entity, the corporation’s separate juridical personality may be disregarded, for example, when the corporate identity is used to defeat public convenience, justify wrong, protect fraud, or defend crime. Also, where the corporation is a 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, then its distinct personality may be ignored. In these circumstances, the courts will treat the corporation as a mere aggrupation of persons and the liability will directly attach to them.

The legal fiction of a separate corporate personality in those cited instances, for reasons of public policy and in the interest of justice, will be justifiably set aside.

Herein, however, given the facts and circumstances of this case, the doctrine of piercing the corporate veil has no relevant application. The rationale behind piercing a corporation’s identity in a given case is to remove the barrier between the corporation from the persons comprising it to thwart the fraudulent and illegal schemes of those who use the corporate personality as a shield for undertaking certain proscribed activities. In the present case, instead of holding certain individuals or persons responsible for an alleged corporate act, the situation has been reversed.

It is the Francisco Motors Corporation (FMC) as a corporation which is being ordered to answer for the personal liability of certain individual directors, officers and incorporators concerned. Hence, the doctrine has been turned upside down because of its erroneous invocation. In fact, the services of Gregorio Manuel were solicited as counsel for members of the Francisco family to represent them in the intestate proceedings over Benita Trinidad’s estate. These estate proceedings did not involve any business of FMC. Manuel’s move to recover unpaid legal fees through a counterclaim against FMC, to offset the unpaid balance of the purchase and repair of a jeep body could only result from an obvious misapprehension that FMC’s corporate assets could be used to answer for the liabilities of its individual directors, officers, and incorporators. Such result if permitted could easily prejudice the corporation, its own creditors, and even other stockholders; hence, clearly inequitous to FMC.

Furthermore, considering the nature of the legal services involved, whatever obligation said incorporators, directors and officers of the corporation had incurred, it was incurred in their personal capacity. When directors and officers of a corporation are unable to compensate a party for a personal obligation, it is far-fetched to allege that the corporation is perpetuating fraud or promoting injustice, and be thereby held liable therefor by piercing its corporate veil. While there are no hard and fast rules on disregarding separate corporate identity, we must always be mindful of its function and purpose.

A court should be careful in assessing the milieu where the doctrine of piercing the corporate veil may be applied. Otherwise an injustice, although unintended, may result from its erroneous application. The personality of the corporation and those of its incorporators, directors and officers in their personal capacities ought to be kept separate in this case. The claim for legal fees against the concerned individual incorporators, officers and directors could not be properly directed against the corporation without violating basic principles governing corporations.

Moreover, every action — including a counterclaim — must be prosecuted or defended in the name of the real party in interest. It is plainly an error to lay the claim for legal fees of private respondent Gregorio Manuel at the door of FMC rather than individual members of the Francisco family.